(Yahoo!Finance) - China’s latest struggles to rein in COVID-19 pose ongoing risks to not just its own growth both but also to already distressed global supply chains.
Stocks traded choppily yesterday amid the specter of escalating restrictions in China’s capital. Media reports from the region detailed how Beijing residents were stockpiling essentials over the weekend in anticipation of stringent stay-in-place orders. These would come on top of weeks-long lockdowns in Shanghai, which first began in late March and have only just begun to ease in certain areas.
Decreased mobility in the world’s second-largest economy will continue to ripple across the globe, according to a number of analysts. According to data from Interos, more than 20,000 U.S. entities have direct relationships with tier-1 suppliers in and around Shanghai alone.
“Supply networks have yet to recover completely from the pandemic. If China remains committed to harsh lockdowns to combat virus outbreaks, production and distribution lines are likely to see further disruptions from stoppages of activity, as large portions of the population shelter at home,” Rubeela Farooqi, chief U.S. economist at High Frequency Economics, said in a note Monday. “Shortages of goods and parts are the most likely outcome from these disruptions, which will undoubtedly have implications for assembly lines and industrial output across the globe.”
And for China specifically, these lockdowns are poised to translate to an even steeper deceleration in economic activity. Bank of America China Economist Helen Qiao slashed her forecast for China’s gross domestic product (GDP) growth to 4.2% from 4.8% last week, even before the latest concerns out of Beijing had emerged. China’s economy grew at an estimates-topping 4.8% year-over-year rate in the first quarter, though before the pandemic in 2019, China's GDP had grown at a 6.0% rate.
While China’s growth exceeded expectations in the first quarter, more marked impacts from the shutdowns in Shanghai are set to appear in the second – both within and outside the country, Qiao said.
“A more severe impact on production and supply chains is likely to show up starting April, considering the Yangtze River Delta region surrounding Shanghai accounts for 21% of China’s industrial production and 36% of exports,” Qiao said. “These disruptions to supply chains will likely surface and ripple across the world in 3-6 weeks’ time and last at least until end-2Q.”
In other words, the full effect of the latest lockdown-related disruptions from China have yet to fully materialize here in the U.S.
But even in advance of this, some individual companies have already signaled their operations in China have been affected by the outbreaks.
“The lockdowns had two impacts in China for us,” Procter & Gamble (PG) Chief Financial Officer Andre Schulten said during the company’s earnings call last week. “One, on the supply side, we have two plants in the Shanghai area and the contract manufacturer – those obviously were shut down for now an extended period of time.”
“And we’re certainly seeing a significant impact in terms of consumer demand,” Schulten added. “About 25%, I think, was the Wall Street estimate of consumers [who] are somehow impacted by lockdowns. That is impacting our consumers’ ability to reach stores, grocery stores, department stores. Even online shopping is significantly constrained due to the inability to deliver.”
Likewise, Coca-Cola (KO) CEO James Quincey said during the company’s earnings call Monday that momentum in China “reversed” in February and March due to lockdowns and reduced consumer mobility. The beverage company ultimately ended the quarter with a decline in unit case volumes in the region.
“The key factor will be the degree of mobility,” Quincey said. “Depending on how big that is will make a huge difference to the level of results. I don’t think there’s anything to call from the early days of April, that’s different to what was happening at the back end of March.”
And while many agree that there will be an impact from China’s COVID outbreak, the questions over how deeply and for how long remain to be seen.
“The big X factor is, again, the duration of these lockdowns. If you’ve got one- to two-week lockdowns, and they move on because they’ve been easing COVID zero in a big way, then you’re going to have less stress,” Leland Miller, CEO of China Beige Book, told Yahoo Finance Live on Monday. “If you’re shutting down these major metropolises, if you’re shutting down the largest ports in China for multiple weeks, if not maybe months, then yea, you’re going to have a supply chain disaster on your hands.”
“That doesn’t mean it’s going to happen,” he added. “But it just means we have to be watching things so closely right now, in the data for April, for early May, because this is going to dictate the state of the world economy for the first half of the year. It’s really, really important stuff.”
What to watch today
Economy
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8:30 a.m. ET: Durable Goods Orders, March preliminary (1.0% expected, -2.1% during prior month)
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8:30 a.m. ET: Durable Goods Orders Excluding Transportation, March preliminary (0.6% expected, -0.6% during prior month)
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8:30 a.m. ET: Capital Goods Orders Nondefense Excluding Aircrafts, March preliminary (0.5% expected, -0.2% during prior month)
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9:00 a.m. ET: Capital Goods Shipments Nondefense Excluding Aircrafts, March preliminary (0.5% expected, 0.3% during prior month)
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9:00 a.m. ET: FHFA House Pricing Index, month-over-month, February (1.5% expected, 1.6% during prior month)
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9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, month-over-month, February (1.50% expected, 1.79% during prior month)
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9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, year-over-year, February (19.20% expected, 19.10% during prior month)
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9:00 a.m. ET: S&P CoreLogic Case-Shiller U.S. National Home Price Index, year-over-year, February (19.17% during prior month)
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10:00 a.m. ET: Conference Board Consumer Confidence, April (108.2 expected, 107.2 during prior month)
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10:00 a.m. ET: Conference Board Present Situation, April (153.0 during prior month)
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10:00 a.m. ET: Conference Board Expectations, April (76.6 during prior read)
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10:00 a.m. ET: Richmond Fed Manufacturing Index, April (9 expected, 13 during prior month)
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10:00 a.m. ET: New home sales, March (768,000 expected, 772,000 during prior month)
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10:00 a.m. ET: New home sales, month-over-month, March (-0.6% expected, -2.0% during prior month)
Earnings
Pre-market
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6:00 a.m. ET: UPS (UPS) is expected to report adjusted earnings of $2.88 per share on revenue of $23.80 billion
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6:00 a.m. ET: PepsiCo (PEP) is expected to report adjusted earnings of $1.23 per share on revenue of $15.57 billion
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6:00 a.m. ET: Centene (CNC) is expected to report adjusted earnings of $1.69 per share on revenue of $34.30 billion
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7:00 a.m. ET: Warner Bros. Discovery (WBD) is expected to report adjusted earnings of $0.57 per share on revenue of $3.17 billion
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General Electric (GE) is expected to report adjusted earnings of $0.20 per share on revenue of $17.04 billion
Post-market
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4:00 p.m. ET: General Motors (GM) is expected to report adjusted earnings of $1.69 per share on revenue of $37.39 billion
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4:10 p.m. ET: Chipotle (CMG) is expected to report adjusted earnings of $5.67 per share on revenue of $2.01 billion
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4:05 p.m. ET: Capital One (COF) is expected to report adjusted earnings of $5.46 per share on revenue of $8.03 billion
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Alphabet (GOOG, GOOGL) is expected to report adjusted earnings of $25.71 per share on revenue of $56.66 billion
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Microsoft (MSFT) is expected to report adjusted earnings of $2.19 per share on revenue of $49.04 billion
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Visa (V) is expected to report adjusted earnings of $1.66 per share on revenue of $6.84 billion
By Emily McCormick · Reporter
