Covid Zero Policy: Goldman Sachs Reduces China’s Growth Forecast on Covid by 4%

Goldman Sachs Group Inc. China has cut its economic growth forecast for China to 4% this year as the government has doubled its Covid Zero policy, which has forced major cities like Shanghai to lockdown for weeks.

Investment Bank cut its GDP growth forecast to 4.5% from earlier, and cut its second-quarter forecast to 1.5% year-on-year from 4% forecast. Full-year growth is based on the assumption that Covid will remain largely in control, property markets will improve and the government will increase infrastructure spending, Goldman’s economists, including Hui Shan, wrote in a note.

In order for the government to reach anywhere near its target of 5.5%, it is essential to “keep Kovid in check and avoid a severe lockdown of major economic centers such as Shanghai,” economists say. The provinces that were affected by the Covid this spring “performed significantly less,” they said, citing a 7.9% contraction in the first queue in Jilin, our business artery, which locked major cities in March.

To meet growth targets, the government could rely on “statistical smoothing,” economists say. Deviations from previous year’s GDP or “deviations from current measures of economic activity to current year GDP growth can sometimes take place in a year of solid growth,” they say.

The downward correction of 8.1% GDP growth of 2021, for example, would “reduce the base and mechanically increase the growth of 2022 evenly,” they wrote.

However, weaker-than-expected official data in April, which was found to track the trends of high frequency indicators, suggests that statistical smoothing is “less important, like the experience of 2020, now that it is too large to smooth out negative covid shocks,” economists wrote.

China’s move to conduct regular, mandatory tests of the population as a precondition for reopening would be costly, depending on how extensive it is. For the rest of the year, it would cost 2.5 trillion yuan ($ 371 billion) to test 70% of the population once every two days, or 2.2% of last year’s GDP.

Covering 30% of the population and restricting testing to big cities would reduce costs to 200 billion yuan, or 20 basis points of GDP.

Goldman also points to a number of lessons learned from the Omicron outbreak, including the reduction of policy stimulus effectiveness during the lockdown.

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