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China’s Zero Omicron Approach Hits the Economy

Supply chain disruptions are prolonged, mainly driven by China’s strict Zero-Covid policy. The bottlenecks have lasted for about a year now but are expected to ease in the early months of this year materially.  Beijing has imposed a strict Zero-Covid policy since the pandemic began in early 2020.

Bejing entails strict quarantines and travel restrictions, whether within a city or with other countries, to control outbreaks.  Restrictions containing Covid-19 have impacted manufacturing and shipping operations globally, exacerbating the supply chain crisis.There have been renewed concerns that the high infections omicron variant could also deal another blow to the shipping industry. China’s Zero-Covid policy does increase the downside risks for material improvement in supply chains.

The significant ramifications for inflation and central bank policy-making in the next couple of months.China, the world’s second-largest economy, last year shut down a key terminal at its Ningbo-Zhoushan port, the third busiest port in the world. It came after one worker was infected by Covid, and was the second time the country suspended operations at one of its key ports.Goldman Sachs cut its 2022 forecast for China’s economic growth to 4.3%, down from 4.8% previously.

The U.S. investment bank’s analysis was based on expectations that China may increase restrictions on business activity to contain the said omicron variant.The Zero-Covid policy means that the economic recovery is a bit more bumpy, particularly on the consumption side of things. She added this includes monetary policy moves such as ongoing liquidity injections and potential rate cuts

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