Entering winter, China is experiencing another round of COVID-19 outbreaks in several regions. At the same time, case numbers are also increasing across Europe. As a result, there are rising concerns that a combination of inflationary pressure and health risks could damage consumer confidence and the recovery. However, our analysis shows that the impact of these new outbreaks should be moderate, and global recovery resilient.

Since the beginning of November, 997 new COVID-19 cases have been reported in mainland China. The most centralized infections happened in Dalian, a major port city in Northern China, where 262 local infection cases were reported in the 10 days to November 14. Since the cases in Dalian originated from the cold chains (the cold storage and transportation of frozen goods), the processing of imported goods was disrupted. The high-risk regions with new cases are subject to strict mobility control measures, and all travellers from these regions undergo government-mandated quarantine at their destinations. 

This new wave of cases is smaller than that in the first half of August, when 1,274 new cases were reported in mainland China. However, against the backdrop of weakening domestic growth, there are concerns that this would add to downward pressure on consumption. In August, the growth rate of Chinese retail sales slid to 2.5% year-over-year from the previous reading of 8.5%, and remained low at 4.9% in October. Consumer sentiment might dip again as a result of the lockdown measures.

Moreover, the Chinese government may maintain the tight mobility controls until after the Winter Olympics in February next year. Meanwhile the “stay local” advice may be reinstated during the 2022 Chinese New Year holidays. In the past, this strategy has weighed on domestic services sectors, while sales of goods and industrial production benefitted.

The differentiated impacts on consumption and production might suggest the overall impact of the recent outbreak could be moderate. Furthermore, domestic credit growth is expected to pick up as the central bank loosens credit growth to real estate sector. This could stabilize Chinese domestic investment in the first half of 2022 and offset some pressure from the consumption side. 

Beyond China, the consumer also plays a critical role in the economic recovery, especially in developed markets where household consumption usually accounts for over half of the economy. The surge in prices of many pandemic-related goods, and now in some services as economies reopen, is testament to the power of the consumer. However, prices that rise too fast can weigh on the economic outlook if it leads to a squeeze on household disposable income and reduces demand. Wage growth that increases with the rate of the inflation would offset some of this squeeze but in most developed economies the pace of inflation is outstripping wage gains. If combined with a rise in COVID-19 case numbers, this could further dampen consumer confidence and curb consumption. 

EXHIBIT 1: DAILY INCREASE IN CASES (REGION)
7-DAY MOVING AVERAGE, PER MILLION PEOPLE Source: Johns Hopkins University, World Bank – World Development Indicators, J.P. Morgan Asset Management. North America includes U.S. and Canada; Europe includes France, Germany, Italy, Spain, UK; Asia includes Australia, China, Hong Kong, India, Japan, Singapore, South Korea and Taiwan. Population numbers are based on World Bank data as of 31/12/20.
Data reflect most recently available as of 16/11/21.

The U.S. consumer confidence report for November highlights some of the risk around the reliance on the consumer and how persistently high inflation could erode confidence and a willingness to spend. The University of Michigan consumer sentiment index dropped to 66.8 in November, lower than during the height of the pandemic when the high number of COVID-19 cases weighed on the economic outlook.

Meanwhile, case numbers have risen sharply across Europe, driven not only by rising cases in Germany and Greece, but also in eastern European economies of Romania, Poland and Hungary. Germany present the largest risk given its economic importance to the region, and here the seven-day moving average of new COVID-19 cases is back to levels last seen in April. The rising case numbers are a function of the onset of colder whether and easier transmission, lower vaccination rates in some of these economies, as well as demographic factors—more cases among school-age children. 

As in China, the economic impact of another COVID-19 wave is limited given there is limited political will to enforce the strict social restrictions used in the past. Meanwhile, consumers are looking somewhat protected from rising prices given tighter labor markets and rising wage growth, as well as elevated savings rates which can be drawn down. 

Investment implications

Despite the recent increase in cases in China and the developed economies, the global recovery should remain on track. In China, consumption of goods, industrial production and export might remain resilient in the first quarter of 2022 as the government maintains zero-COVID-19 policies till the end of Winter Olympics. The continuous recovery, plus marginal credit easing by the central bank, could support the performance of domestic stocks.

In developed economies, supported by rising wages and high savings rates, consumptions could remain resilient, which is essential for sustained recovery. Corporate earnings are expected to edge up in 2022, though the growth momentum might slow down and return to the long-term trend. Under these circumstances, cyclical sectors and value stocks could be the major beneficiaries.  

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