China’s Reopening: A Double-Edged Sword for the Global Economy

The rapid reopening of China’s economy following the easing of Covid-19 restrictions is expected to have a significant impact on global economic growth. According to recent reports by Goldman Sachs Research, China’s GDP is projected to grow by 6.5% in 2023 on a Q4/Q4 basis. Furthermore, the recovery of Chinese domestic demand is predicted to contribute to a 1% increase in global GDP by the end of 2023.

Ripple Effects on Global Growth

The research conducted by Joseph Briggs and Devesh Kodnani highlights three direct channels through which China’s reopening will affect global growth:

1. Increased domestic demand: As China’s domestic demand grows by up to 5%, core goods exports among the country’s trade partners are expected to rise. Asia-Pacific economies are likely to benefit the most, with an estimated 0.4% boost to their GDP.
2. International travel: The resumption of international travel, anticipated to occur mainly in the second half of 2023, will result in increased demand for foreign services, thereby boosting foreign GDP.
3. Commodity demand: As demand for commodities such as oil rises, prices are expected to increase. While higher oil prices may hamper economic growth in some regions, net oil exporters like Canada and Latin American countries stand to benefit.

Inflation Worries Looming

However, China’s reopening also presents the risk of increased global inflation. Briggs and Kodnani predict that rising commodity prices will contribute to headline inflation, particularly in oil-dependent emerging markets. In many economies, China’s reopening could lead to a 0.5 percentage point boost in headline inflation.

Central banks may be forced to hike interest rates further to keep growth below potential and remain on track to tame inflation if stronger growth results in inflation surpassing expectations.