A regional analysis: Omicron and exports—I

The fastest-spreading virus known to humankind till today — Omicron — is not only hitting the global population but also the global economy. The newly emerged strain of Covid-19 virus was first detected in Southern Africa in late November 2021 and is on its way towards a further debilitation of the already crippled world economy. The world economists have a widespread agreement amongst themselves that the virus which is here for over two years now has severe negative impacts on the global economy by impacting global stock markets, affecting industries, disturbing travel and tourism, influencing oil prices, and most importantly jolting the international trade, which is highly dependent upon supply chain spanning the globe.

Previously, Covid-19 obstructed international trade considerably and in several ways. The upshot of the damage in an importing country was principally due to a decline in the aggregate demand in that importing country. The reduction in demand occurred due to a reduction in people’s earnings and also their visits to retail outlets due to restriction on movement. On the other hand, in the case of exporting countries, the subsequent damage exhibited as a drop in the production scale and the export stock in that particular country. The main cause of this was that in exporting industries such as textiles, where remote work is less or not feasible at all, exports fell consequently. This is because the governmental response included introducing lockdowns to curb the spread of the virus. Such phenomenon can be backed up by conclusions of various research studies such as that of Meier and Pinto (2020) which concluded that American industries with a hefty coverage to intermediate goods imported from China incurred a great loss in manufacturing sector. This, however, doesn’t stop here as the continual emergence of different strains and their sub-strains are disturbing the global economy and the latest, most contagious strain Omicron is no different. Different countries are facing different economic issues with regard to it and are using different economic policy measures to curb the impacts.

China, the epicenter of the virus, succeeded in controlling the pandemic and downward sloping economic growth quickly by its “zero-Covid tolerance policy” which it still holds on to. This meant quite stringent lockdown measures. The second-largest economy, documented the first contraction in decades due to the epidemic in the first quarter of 2020. Until now, policy easing persisted with a rate cut. However, an official growth target may or may not be published in March. According to Capital Economics, as of now, it is not clear yet that how the new variant will impact China’s manufacturing sector. Meanwhile, the country will review its policies regarding issues and difficulties faced by foreign trade companies in a timely manner through scientific ways as it has done previously.

The clothing factories and gas deliveries around one of China’s biggest seaports in Ningbo have already started facing shutdowns due to the increased outbreak of the new variants in the country, directly affecting the exports in the near future. The main hub of exports production, Guangdong, is also getting affected causing lockdowns in Beijing which is on its way towards organizing the Winter Olympics. China continues to follow its zero-Covid tolerance policy as the vaccinations are not considered effective enough to deal with the accelerating infection rate, the country’s hospital capacity is also lower. However, equally important is the fact that another nationwide lockdown coupled with a real estate sector slowdown, is expected to leave a negative impact on the country’s economy by dampening the growth rate. Economists predict that China’s zero-tolerance policy is expected to do more bad then good in the current fiscal year. For example, Goldman Sachs has just slashed its forecast for Chinese economic growth in 2022 from 4.8% to 4.3% which is coarsely equivalent to half of last year’s growth rate. Morgan Stanley is of the similar opinion.

Interestingly, as a response to this, the leaders are ensuring that economic outlook is stabilized through easing out the policy stance for the upcoming important Party Congress in October 2022 whereby the Chinese President Xi Jinping is also extensively anticipated to pursue a historic third term in office, emphasizing the prerequisite of stability in the meantime.

The easing out of policy stance includes an easing of monetary policy e.g. marginally lowering various interest rates along with cutting banks’ reserve requirements. The central bank has also proclaimed additional set of rate cuts. The lack of electricity has also eased since the onset of October 2021. Consequently, so far, there doesn’t seem to have been a long-term effect on trade. Customs data show that the China’s trade surplus was $676 billion in 2021 which was an all-time high indicating that China’s strategy might actually be aiding. According to Pinpoint Asset Management, a possible reason for this can be a shift of export orders to China from other developing countries. To wrap up, the country does not seem to have any tangible exit strategy from the pandemic.

China’s neighbor, Vietnam, has taken fewer heavy-handed policy actions so far, but like China has levied some of the stringent Covid-related policy measures as revealed by the University of Oxford through its Covid-19 stringency index. The Southeast Asian nation ensured that its factories keep running in the course of its deadliest COVID wave last year. This included lodging workers on site. It is probable that it will do alike in the most recent wave. Since, it is estimated that Omicron variant could augment further burden on supply chains disrupted by the pandemic, Vietnam is also imposing updated border controls to seal themselves off in an attempt to curb the spread.

Quite recently, it has admonished millions of its workers to relinquish trips home during the Lunar New Year holiday due to qualms that mass travel will increase the infections and consequently lead to a probable shutdown of factories in one of the world’s key manufacturing powerhouses. The country is a linchpin in the global supply chain while being a pertinent manufacturing base for top companies such as Intel and Samsung, and with a large export turnover from the textile sector the local governments are trying hard to keep the factories open.

(To be continued)

Copyright Business Recorder, 2022