(Bloomberg) — 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 Covid Zero.
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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 Covid Zero 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 second-worst annual performance since 1990, excluding 2020 when the pandemic battered the economy and pushed the growth rate to 2.2%.
“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.
The Nomura economists also lowered their growth forecast for the three months through June to 1.8% from 3.4%, though added they still see “much higher risk on the downside than on the upside” for that quarter and the second half of the year.
The government has been trying to stabilize the supply chain and inject liquidity through various measures intended to help the economy. But doubts about the effectiveness of such policies as President Xi Jinping have made clear he’s sticking with Covid Zero has led several economists to downgrade annual growth forecasts for China to 5% or less, well below the government’s target of about 5.5%.
Achieving Covid Zero is now “way more costly and difficult,” the Nomura analysts wrote, since omicron is much more contagious than previous variants. And 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.
Investors aren’t buying the government’s bullish rhetoric and promises of support for the economy, either. The benchmark CSI 300 Index has tumbled about 18% so far this year and remains in a bear market while bond yields have risen, underscoring concerns Beijing may not be doing enough to arrest slowing growth. The Chinese currency also slipped to its weakest level in six months.
Even though conventional policies such as credit easing may help, “the real growth bottlenecks remain,” the Nomura analysts said. “Adjustments to the Zero Covid Strategy are key to a growth recovery in coming months.”
(Updates with additional details.)
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