a man on a precipice

Fitch Ratings has cut its forecast for China’s GDP growth this year to 4.3% from 4.8%, citing the economic spillover of China’s efforts to combat Covid-19.

“Policies adopted by the authorities since mid-March to contain the spread of the omicron strain of Covid-19 have led to an extended lockdown in the important commercial hub of Shanghai, and a rise in public health and mobility restrictions across China more broadly,” Fitch said.

The economic fallout from these restrictions has become evident in a decline in March retail sales and slowing industrial production “as health and movement controls disrupted domestic supply chains and labour availability.”

More recent data on subway and traffic volumes suggest that China’s growth momentum “deteriorated significantly” in April, Fitch said, with these readings at their lowest level since the start of the pandemic.

As a result, GDP is expected to decline in the second quarter, on a quarterly basis, before reviving in the second half.

“Our forecast remains subject to downside risk if containment measures fail to bring new outbreaks under control quickly or if the easing of current restrictions is delayed, given our assumption that China will strictly adhere to ‘dynamic zero’ until 2023,” Fitch said.

The rating agency also nudged its 2023 growth forecast slightly higher to 5.2% from 5.1% on the assumption that the government will phase out its anti-Covid policy gradually next year.