Nomura Holdings Inc. cut its full-year economic growth forecast for China to 3.9% from 4.3%, one of its worst outcomes in decades, citing disruption caused by the country’s commitment to “zero-Covid” strategy.
The downgrade was due to “rapidly” worsening high-frequency data for April and logistics problems as a growing number of cities fully or partially lock down to contain the virus. Beijing has also shown no sign of a move away from its zero-Covid strategy soon, Nomura’s economists including Lu Ting wrote in a note Thursday.
If realized, the 3.9% expansion rate for 2022 would mark China’s worst annual performance since 1990, excluding 2020 when the pandemic battered the economy and pushed the growth rate to 2.2%. Nomura’s forecast for this year is more bearish than the 5% consensus in a Bloomberg survey of economists and far lower than the government’s target of about 5.5%.
Nomura expects China to provide more policy support this year by cutting the reserve requirement ratio by 25 basis points, along with a policy interest rate cut of 10 basis points, Lu told Bloomberg TV on Thursday. But he warned the economic recovery will still be hampered unless China modifies its strict approach to curbing infections.
Nomura also cut its growth forecast for the second quarter to 1.8% from 3.4%, though added a “much higher risk on the downside than on the upside” for that quarter and the second half of the year.
“We believe global markets still underestimate China’s slowdown because much attention has been focused on the Russian-Ukraine conflict and U.S. Fed rate hikes,” the Nomura analysts wrote, adding they expect more economists to cut their predictions in coming weeks.
Achieving Covid Zero is now “way more costly and difficult,” the Nomura analysts wrote, since omicron is much more contagious than previous variants. They pointed out the epicenter of the omicron wave is the Yangtze River Delta, the economic, financial and logistics center of China, containing some of the world’s largest factories and ports.
Consumers and private firms are also “worn out” after years of living through the pandemic, and may be forced to reduce spending due to drying-up savings, the economists said.
To make things worse, China’s export growth will decline as other nations fully reopen, they added, while foreign direct investment into the country may drop given the strict restrictions on travel, production and logistics.
