13.01.2023 - As expected, a fall in global inflation is underway, but labour markets remain tight. Correspondingly, the dilemma for central banks has become extensively complex amid an unintended easing of financial conditions as investors have become increasingly optimistic that a monetary policy pivot will take shape in the next few months and China will re-emerge as an engine of the global economy.
China's V-shaped growth hopeChina's sudden and rapid relaxation of stringent Covid-related restrictions appears likely to deliver a deeper near-term contraction than expected as the unprecedented surge in infections has resulted in a notable hit to the economy. In the manufacturing sector, business confidence fell to 47 in December from 48 in November(1), suggesting activity shrank for the third consecutive month and at the sharpest pace in nearly three years. The nonmanufacturing confidence index fell to 41.6 from 46.7 in November, also marking the lowest reading since February 2020(2). In fact, the weeks before the Lunar New Year holiday will be challenging for the service sector as mobility could be negatively hit by people's fear of catching Covid. Surging infections could also cause temporary labour shortages and increased supply chaindisruptions, with global repercussions on price pressures.
However, new cases might peak in early February, directly after the holiday, and the economy would thus recover from Q2. Furthermore, the China Banking and Insurance Regulatory Commission has stepped up financial support to small and private businesses in the catering and tourism sectors that were hardest hit by the pandemic and, more broadly, policymakers have set out plans to expand domestic consumption and investment. That said, the export sector is still facing headwinds from weakening external demand on the back of growing global recession fears amid rising interest rates, inflation and the war in Ukraine.
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