Morgan Stanley Slashes China GDP Forecast, Citi Warns of Risks

Morgan Stanley cut China’s 2022 economic growth forecast sharply, while Citigroup Inc. warned of risks to the second-quarter outlook as the nation sticks to a strict Covid Zero approach to combat infections.

Economists at Morgan Stanley led by Robin Xing downgraded their full-year forecast to 4.6% from 5.1% on Friday. China’s “strict adherence” to its no-tolerance policy is expected to stay in the coming months “despite the more transmissible omicron,” they said.

Citigroup economists said gross domestic product growth could take a hit of as much as 0.9 percentage points in the second quarter. On Friday, a private gauge of manufacturing activity dropped in March to the worst level since the pandemic’s onset.

Morgan Stanley cited low overall vaccination rates for third doses, especially among the elderly, as a reason why authorities will likely stick with Covid Zero policies for most of this year.

“Policy makers are likely to err on the side of taking up stricter lockdowns if necessary,” they wrote in a note. “This means all-out easing efforts would still be blunted by successive Covid outbreaks and related shutdowns.”

In their base case scenario, the economists expect the recovery to mostly happen in the last quarter of the year, given an expected political reshuffling and the time needed to vaccinate the nation’s elderly.

In a worst-case scenario, China could delay its exit from Covid Zero until the first half of 2023, “and recurring lockdowns could result in more severe supply chain disruption and merely 4% GDP growth,” they said.

Authors: Jill Elaine Disis, Cynthia Li, Bloomberg