China reopening may cool global inflation: Morgan Stanley report

China’s reopening – which could happen as soon as next Spring – is likely to ease global inflation, according to a Morgan Stanley report.

Great Wall of China / Image credit: Pixabay

With the country removing strict Covid-19 restrictions, Asia is likely to see a rise in economic performance. The continent is projected to see a growth in gross domestic product from 3.4% in the first quarter of 2023 to 4.6% in the second half of the year.

The report also stated that growth in developed markets is expected to soften, and China will be an important countertrend to promote global economic health.

According to the report, oil prices are also likely to rise again not because of supply bottlenecks but due to heightened demand. Demand for mobility, which has been limited amid lockdowns in the country, is also likely to recover, Morgan Stanley said. The report predicts that oil prices will rise back to above US$100 per barrel in H2 2023.

As the supplier of 15% of the world’s goods exports, China plays the most critical role in the global supply chain, and in the short term, there are likely to be disruptions due to Covid-19 infections among logistics workers, according to the report. However, after getting past this trend, it is likely that supply chain pressures will be restored to pre-Covid levels, the report said.

Disruptions have lessened amid decreased demand for goods, and China’s producer price indices have already deflated – affecting export prices, as well as the world’s core goods inflation, according to the report.

“As China reopens, there will be a simultaneous flow-through to better demand and stronger supply, effectively providing an offset to the stagflationary impulses that have been felt around the world in 2022,” the report stated.

China’s reopening is likely to help the US “disinflate,” the report stated. It also said that in the US, core personal consumption expenditure will decrease to 4% by mid-2023, and even lower by the last quarter of the year, to 2.9%.

Due to improving supply and deflating demand, fading core goods inflation will “more than offset the near-term upward inflation pressure from commodities prices.” As the biggest consumer goods importer in the US and a large part of the global autos supply chain, China will be a great influence on this.

Lastly, China’s reopening is likely to support the country’s growth and heighten flows into equities.

The country is still in the midst of its strict lockdown. The restrictions have caused delays in certain critical emergency services, leading to large-scale protests across 17 cities in the country.

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