China’s reopening to increase global GDP by 1%

According to a recent report by Goldman Sachs, the reopening of China’s economy and a full recovery in its domestic demand are expected to have a positive impact on global output. The report estimates that this may result in a one percent increase in 2023.

The authors of the report, Joseph Briggs and Devesh Kodnani, stated that China’s reopening will boost demand for commodities, particularly oil. A recovery to trend is expected to increase Brent oil prices by $15 per barrel, with a more aggressive reopening scenario resulting in a rise of up to $21 per barrel, a 20% increase from the current level.

The International Monetary Fund (IMF) has forecasted China, the world’s second-largest economy, to expand by 5.2% this year, after experiencing a 3% acceleration in 2022. Meanwhile, the World Bank has acknowledged that China’s growth outlook faces significant risks, such as the uncertain trajectory of the Covid-19 pandemic, evolving policies, and macroeconomic and financial spillovers from the real estate sector. External risks include the global growth prospects, tightening in financial conditions, and geopolitical tensions.

The report by Goldman Sachs predicts that increased oil prices from the reopening of China’s economy will lead to a rise in GDP in Canada and Latin America, but a decline in output in other economies. The increased domestic demand in China is expected to boost goods exports from other economies, with a moderate boost in GDP in most Asia-Pacific economies, and smaller effects elsewhere. The report also suggests that a recovery in Chinese demand for foreign services, particularly international travel, will provide a modest boost to global growth.

The reopening of China’s economy is also expected to contribute to global inflation, with reopening-led oil price increases expected to add 0.5 to 0.6 percentage points to inflation in most emerging markets, and roughly half that in the US. The report warns that a stronger growth may result in higher inflation and force central banks to hike rates further than expected to control inflation. According to the IMF, global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, which are still above pre-pandemic levels.