As the world’s second-largest economy reopens, analysts are trying to determine how its economy will affect the trend of global inflation. Paul Hannon reports for The Wall Street Journal:
China’s abandonment of its zero-Covid policy is good news for global economic growth but it could give a fresh boost to inflation in Europe, European Central Bank President Christine Lagarde said on Friday.
“The change of this Covid policy will revive the economy,“ said Ms. Lagarde. “That is positive for the rest of the world, but there will be more inflationary pressure.”
The comments add to recent signals that the ECB will stay firm in its effort to combat inflation through higher interest rates despite recent signs that price pressure is moderating in the eurozone. Higher borrowing costs and the likelihood of more rate rises are among the main factors weighing on Europe’s growth prospects, with the economic fallout from Russia’s war in Ukraine being less negative than feared just a few months ago.
In an abrupt change of course, China lifted many of its zero-tolerance pandemic controls in early December. While that led to an increase in infections and deaths, it also opened the door to a sharp economic rebound in the world’s second-largest economy, which suffered its weakest expansion in four decades in 2022.
As a result, economists have quickly upgraded their forecasts for China’s economic growth this year. Earlier this month, Capital Economics raised its forecast to 5.5% from 3%, citing signs that the Chinese economy is rebounding much earlier in the year than previously expected.
With the global economy on the brink of recession, a Chinese rebound is welcome news for many businesses and commodity-exporting nations in particular. But Ms. Lagarde and other policy makers speaking at the final session of the World Economic Forum’s annual meeting in Davos also highlighted one downside: The prospect that stronger Chinese demand will slow the expected fall in inflation rates.
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