Economists in Davos warn of reopening the “good news” for growth – but it could be inflationary

DAVOS, Switzerland – China’s economic reopening may boost global growth, but business leaders and policymakers at the World Economic Forum this week are a little concerned about its potential inflationary impact.

China’s decision to welcome back tourists as well as make it easier for those in the country to travel abroad were among the most discussed topics at the Davos gathering in the Swiss Alps.

Overall, this is seen as one of the most important economic events in 2023 and the business community is remarkably excited about striking new deals with the world’s second largest economy.

On the other hand, there are concerns about what this means for inflation and the cost of living.

“[If] Chinese demand for other commodities starts to recover, if that creates more pressure on commodity prices, for example, natural gas, a big problem in Europe, if Chinese demand for natural gas increases, because factories, their households demand more electricity, it will start To put pressure on Europe because natural gas are competing [in] The same as the LNG markets, Raghuram Rajan, former RBI central bank governor, told CNBC.

So he opened up China [is] Good news overall, but the inflationary impact is likely – there could be some.”

The International Energy Agency warned that European companies could face higher costs when looking to buy natural gas this year as there will be more competition for the commodity. One of the biggest challenges European citizens faced over the past year was inflation, mostly driven by high energy bills.

“I think opening up China will therefore increase consumption in global energy, and may cause some inflation,” said Satish Shankar, managing partner for Asia Pacific at consulting firm Bain & Company, speaking to a panel moderated by CNBC.

Felix Sutter, president of the Swiss-Chinese Chamber of Commerce said on the same committee, “Chinese energy needs and raw material needs will compete with European needs, global needs, so I see inflation slowing down now, [but] We will see more pressure on inflation in the third quarter.”

Some economists have warned that if this proves to be the case, the US Federal Reserve may be forced to continue raising interest rates. “In our view… China’s strength increases chances of a stubbornly hawkish Fed,” said Tavis McCourt, institutional equity strategist at Raymond James, in his 2023 outlook.

“With China, we need more of everything – if that leads to enough demand to bring commodity prices back to where they were in the spring of last year, then that puts the progress we’ve seen in inflation in a more precarious position,” he said.

China recently reported a growth rate of 3% for 2022, the second-slowest growth rate since 1976. However, short-term data has boosted expectations of a better-than-expected recovery with retail sales in December and industrial production above expectations.

Standard Chartered China is going to have a very good year and it will surprise to the upside, Chairman Jose Vinals told CNBC in Davos this week.

“The Chinese economy is going to catch fire, and that’s going to be very, very important to the rest of the world,” he said.

Meanwhile, Rio Tinto CEO Jacob Stockholm also sounded positive about the Chinese economy and its natural impact on global growth, telling CNBC in Davos that he was “absolutely convinced” that reopening China would help the global economy.

— CNBC’s Arjun Karpal and Jihi Lee contributed to this article.