Here’s What Another China Lockdown Could Mean For The U.S. Economy

The Federal Reserve mentioned the country's Covid-related lockdowns eight times at their most recent policy meeting.

Powell and others warned of a number of side risks, including larger-than- expected effects on economic growth from external factors such as Russia's invasion of Ukraine.

In an effort to contain the spread of the Omicron variant, China's "Zero- Covid" policy triggered near-total quarantines in several major cities earlier this year. The first domestic cases of the highly contagious BA.5 subvariant have been reported in China.

A second Chinese manufacturing center lock-up would stall the recovery of the global supply chain and give an additional push to prices paid by industry and consumers in the U.S., according to experts. Observers are not sure how bad the headaches will be. Some say the disruption will prove to be a blip in America's economic recovery, while others say it could reverse recent gains in getting back to more normal functioning.

Tim Uy, an economist at Moody's, says that the situation in China is a risk for the whole world.

The Chinese government's response to the resurgence of the virus and whether or not it remains committed to the Zero- Covid policy are important. The possibility of a new lockdown has begun to rattle China's stock market. Macau, which has seen more than 1,500 confirmed Covid infections since mid-June, said last week that it was temporarily closing its casinos for the first time in more than two years. Residents are not allowed to leave their homes for essential activities. The casino operators on the island are not expecting to make a lot of money in the future.

“The scenario that's playing out in China right now is obviously a risk — not just for China but also the rest of the world.”

Several major U.S. companies, including Apple andTesla, had supply-chain issues in China during the April and May lockdown. On the company's second-quarter earnings call, Musk admitted that he was concerned about the company's overall liquidity as it was not certain when the Covid lockdowns in China would end.

The economy of China as a whole suffered. The country's GDP grew by just 0.4% in the second quarter, a sharp decline from the 4.8% growth rate in the first quarter. According to analysts at Bank of America, fiscal revenue fell in both Jilin and Shanghai from April to May.

China is trying to limit the economic harm from another widespread containment while maintaining its Zero- Covid strategy. In an address last month, the president doubled down on the policy, saying that a shift in Covid strategy would be "unthinkably" bad. The leader of China said that the Zero- Covid policy is best for the country even if it temporarily affects economic growth.

The Chinese government is aware of the public's feelings. Brendan Ahern, chief investment officer at China-focused exchange traded fund provider KraneShares, said that people in Shanghai don't want to go through a similar lock down.

There is an argument that there has been a change in China's response after Shanghai. There have been recent outbreaks in several cities where authorities have implemented more micro-level restrictions targeting neighborhoods or apartment complexes. There is a very significant economic consequence to having a blanket response according to him.

The founder of Vital Knowledge says investors are anxious about more lockdowns. He says that suppressing cases to zero is going to be difficult because of the extreme spread of the new variant.

Uy says that China's economic picture is not as clear as it could be. He says that most experts had positive outlooks at the beginning of the year but have since revised them lower.

The Fed has been trying to bring down inflation. The Fed will likely become more aggressive when setting policy rates due to a more complicated picture and another headaches. They can put downward pressure on demand by fixing supply side factors.

According to the minutes from the central bank's June meeting, Fed officials indicated last month that the lockdowns in China were likely to increase supply chain disruptions, which in turn would affect the inflation outlook.

Data from the Federal Reserve Bank of New York suggests that the US is seeing an improved supply-and-demand balance, which could help moderate goods inflation.

It would be a blip in our current trajectory but I don't think it would derail the moderation of supply stresses.

According to Uy, most experts think there will be more moderate repercussions. It doesn't seem like China's hospitalizations and death rates are rising markedly in a way that would justify more lock downs. The Chinese government is likely to pursue a more targeted approach given the negative economic impact of previous lock down measures.

According to Uy, the impact will be more moderate as authorities try to keep as many businesses open as possible.

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