China is facing its worst COVID-19 outbreak since the start of the pandemic, and the supply-side repercussions of the resulting lockdowns could throw even more gas on the United States’s inflationary fire.
While there are smatterings of local cases across most Chinese provinces, the cities of Changchun and the major technology hub of Shenzhen are under lockdown. China has been aggressive with how it approaches new cases of the virus, meaning that more than 26 million of its citizens are now under strict orders to not leave their homes.
Nonessential work has been forbidden in Shenzhen, which is often referred to as the Silicon Valley of China, meaning that major tech firms and factories have closed their doors.
“What’s occurring is that it’s already affecting supplies,” Demond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner on Monday, noting that major suppliers for companies such as Apple have a heavy presence in the region. He characterized the situation as “quite serious.”
SUITS OUT, SPORTS BRAS IN: UK ALTERS INFLATION GAUGE TO REFLECT SOCIETY CHANGING
Foxconn, which is a major assembler of iPhones, announced Monday that it was halting its operations pending guidance from Beijing.
“The operation of Foxconn in Shenzhen China has been suspended from March 14 onwards in compliance with the local government’s new COVID-19 policy,” the company told CNBC. “The date of factory resumption is to be advised by the local government.”
The company added that it is trying to increase production in other parts of the country to mitigate the production losses in Shenzhen.
Lachman said one indication that the situation might be even more serious than thought is that the Chinese stock market has tanked under fears of the virus’s spread.
The Hang Seng China Enterprises Index closed down 7.2% on Monday, the biggest tumble since the global financial crisis in 2008. The tech-heavy Hang Sang Tech Index cratered even more, down 11%.
The losses are a sign that Chinese investors are worrying that the situation is spinning out of control. If the virus, and subsequent lockdowns, begin spreading even more aggressively to other cities and production hubs around China, the U.S. could end up facing supply-side problems that might further contribute to inflationary pressures, Lachman said.
If producers are forced to cut back production at factories across China, the ripple effect could result in fewer goods getting to the U.S., and the resulting scarcity, coupled with U.S. demand, could raise prices.
The U.S. is already getting an energy-driven inflation shock from the war in Ukraine, meaning that several factors are now conspiring to send inflation even higher.
High and rising inflation has badly damaged President Joe Biden’s approval ratings and has undercut support for his spending agenda.
Inflation has been steadily increasing over the past year or so, and consumer prices just touched 7.9% for the 12 months ending in February, the fastest pace of inflation since 1982. While some of that headline inflation is being driven by energy price increases, products across the board are more expensive now than this time last year.
One upside to the supply-and-demand situation, though, is that as COVID-19 continues to wane and dissipate across the U.S., demand for goods will decrease and demand for services will grow, meaning that there is a bit of an offset to the supply-side pressure.
Tara Sinclair, an economist and professor at George Washington University, said it is at least better that the lockdowns within China’s economy are happening now rather than when the U.S. was under stricter COVID-19 restrictions and people were staying at home and ordering goods, much of which are sourced from China, rather than spending their money on services.
“I’m actually less concerned about a China lockdown now than if we were also in a lockdown,” she told the Washington Examiner.
While COVID-19 cases in China are rising, new cases in the U.S. are falling fast. COVID-19 has been in rapid decline since mid-January when new cases peaked at about 800,000 per day. New cases are now averaging just over 30,000 per day, a 48% decrease from two weeks ago. Hospitalizations and deaths have also declined by 43% and 31%, respectively, during that same period of time.
The Federal Reserve’s Federal Open Market Committee is set to meet Tuesday and Wednesday and is expected to hike interest rates for the first time in years.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
While some analysts had thought that the Fed would opt for an aggressive half-percentage-point hike right away, Fed Chairman Jerome Powell pushed back a bit on that speculation during a recent congressional hearing and suggested that the rate hike would end up being a traditional quarter-point increase. Markets are only pricing in 1.7% odds of the more aggressive hike.
While the developing COVID-19 outbreak in China is a factor Fed officials will weigh at this week’s meeting, it is just one of many short-term developments they must interpret. Powell and company have been cautious about overinterpreting such disruptions.
