China’s Dropping of COVID Restrictions May Boost Global Economy but Cause Inflation

Global growth may benefit from China’s abandonment of zero-tolerance COVID-19 policies. But leaders at January’s World Economic Forum (WEF) in Davos, Switzerland were concerned about its effect on inflation, according to CNBC.

The country’s reopening was a popular topic at the conference, and the business community is eager to embrace new dealmaking. But might China’s reentry cause inflation and boost the cost of living?

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″[If] Chinese demand for other goods starts picking up, if that creates a bigger pressure on commodity prices, for example, natural gas . . . then it’s going to put pressure on Europe because . . . they’re competing [in] the same markets for liquid natural gas,” Raghuram Rajan, former Governor of the Reserve Bank of India, told CNBC.

The International Energy Agency has warned of increased costs for European companies.

“Chinese energy needs and raw material needs will compete with the European needs, the global needs, so I see inflation relaxation right now, [but] we will see more pressure on inflation in Q3,” Felix Sutter, President of the Swiss-Chinese Chamber of Commerce, said on a CNBC panel.

Faced with this scenario, the U.S. Federal Reserve may not be able to limit hikes in interest rates, some economists have said.

“With China, we do need more of everything — if that drives enough demand to get commodity prices back up closer to where they were in the spring of last year, then that puts the progress we’ve seen on inflation in a much more tenuous position,” Tavis McCourt, Institutional Equity Strategist at Raymond James, said in his 2023 outlook.

China reported a growth rate of 3% for 2022, its second-slowest since 1976. But shorter-term data has boosted expectations of a better-than-expected recovery, with December retail sales and industrial production above predicted levels.