What Is the Impact of China's Reopening on Global Inflation?

China’s reopening will cause ripple effects of change around the globe, with impact on energy demand, inflation, and global growth.

Insights for What’s Ahead

• China’s economic recovery is expected to drive a large share of global growth in 2023. The economy is rebounding following nearly three years of lockdowns. Domestic demand is likely to drive the recovery, even as headwinds from the ongoing property market downturn and weak external demand constrain the strength of the rebound.
• Contrary to some theories, China’s reopening is not expected to dramatically lower global supply chain pressures. These pressures were already receding before China’s reopening due to slower growth in demand, particularly for goods. Furthermore, China’s services sector bore the brunt of the damage from the pandemic lockdowns over the last three years.
• However, China’s reopening could have significant inflationary effects on global energy markets. China is a large importer of oil, and even as the bulk of the recovery is in less-energy intensive service sector activities, a significant increase in Chinese oil demand in 2023 is expected.
• Global consumer price inflation may be 0.30 to 0.65 percentage point higher than current estimates due to China’s reopening. This depends on the strength of China’s reopening and subsequent oil demand.
• China’s reopening is expected to slow the disinflationary trajectory of the global economy. Increased inflationary pressures complicate monetary policy and may increase the risk of hard landings.

How Will China’s Reopening Affect Global Inflation?

Global real GDP is expected to grow by 2.3 percent in 2023, with China’s rebounding economy accounting for nearly half of the projected increase. Global real GDP grew by 3.3 percent in 2022, as the global economy continued to recover from the pandemic downturn of 2020. While we don’t expect a global recession in 2023, growth will likely weaken, mostly driven by mature economies and several emerging economies (e.g., Latin America). Nonetheless, emerging economies in Asia are expected to drive most of global growth in 2023. China alone is expected to account for 1 percentage point of 2.3 percent global growth this year. The last time China contributed to global economic growth by such a large degree was in 2009, when most of the world economy went into recession except for China.

Service sector industries will drive China’s economic recovery in 2023. As in 2021, when the Chinese economy rebounded from the pandemic downturn of 2020, we expect service sector activities to drive the recovery in 2023. While manufacturing industries were also impacted by the lockdowns, the brunt of the impact was largely felt by consumer-facing industries, including transport, retail trade, hotels, and restaurants. However, given a much weaker global growth environment combined with a continued property market downturn, the recovery of 2023 is not expected to be as strong as it was in 2021. In fact, some of the anticipated 5.3 percent rise in China GDP in 2023 is a function of base effects—a mechanical surge in the year-over-year figure from very low levels.

Figure 1

China is expected to lead global growth in 2023

Source: The Conference Board Global Economic Outlook (February 2023).

Source: The Conference Board calculations using NBS data for the years 2019-2022

Contrary to some theories, China’s reopening is not expected to dramatically lower global supply chain pressures. Choked up global supply chains were a key driver of surging inflation since 2021. Could a full reopening of China’s economy have a disinflationary impact? We posit the answer is “no” for several reasons. First, supply chain pressures were already fading towards the end of 2022 and into early 2023, indicated by improved global shipping rates and delivery times (Figure 2). This is likely related to the overall slowing in demand in large export markets (e.g., Europe and the US) combined with a shift in household consumption from goods to less trade-intensive services consumption, the latter of which was suppressed amid pandemic lockdowns. Consequently, goods exports from economies in Asia flagged in the second half of 2022 and were in negative territory heading into 2023. Second, manufacturing production in China did not suffer materially in 2022 as it grew by a healthy 3 percent. At the same time, several service sector industries contracted as they bore the brunt of the lockdowns. Finally, it is likely that a combination of disruptions from the ongoing war in Ukraine and labor shortages may be responsible for residual supply chain pressures.

Figure 2

Global supply chain pressures were already receding before China’s reopening

Source: Haver Analytics

However, China’s reopening could have significant inflationary effects on global energy markets. China is a large importer of energy, accounting for a fifth of global oil imports. In 2021, China imported volumes worth 12.7 million barrels of oil per day, similar to Europe’s imports volumes. Manufacturing industries are the most intensive users of oil in the Chinese economy, accounting in 2020 for 36 percent of oil demand but 26 percent of GDP. However, service sector activities, while less oil-intensive, account for an estimated 46 percent (in 2020) of oil demand due to their sheer size (Figure 3), with a significant contribution from transportation activities. Hence, the mostly services-sector driven recovery in China’s economic activity in 2023 will likely lead to a substantial increase in oil demand. Here we largely consider the impact on energy demand. Demand for other commodities may increase too, but given that much of the recovery is expected to come from service sector activities, we think the impact on energy will be bigger. Manufacturing activities, which consume most of China’s commodities imports, are not expected to expand in 2023 at a rate faster than that experienced in 2022.

Figure 3

The services sector accounts for nearly half of China oil demand

Notes: In 2020, over 99 percent of China's crude oil consumption was for refining. Meanwhile, China only imported a small amount of petroleum products, as the net imports equivalent to 0.6 percent domestic consumption. Based on these facts, it may be reasonable to assume that the demand for refining industry’s output by sector is proportional to the demand for crude oil; the pie chart displays China's sector-specific demand for petrol products (i.e., the output of refining industry as in 2020 IO table). In line with the aforementioned assumption, we take this as a proxy for the demand for crude oil by sector.

Source: Calculations by The Conference Board using the 2020 input-output table sourced from NBS

Global consumer price inflation may be 0.30 to 0.65 percentage point higher than current estimates due to China’s reopening. China’s oil demand jumped by 9.2 percent in 2021, fell by 2.4 percent in 2022, and is anticipated to rise again in 2023 (Figure 4). Given the great degree of uncertainty, we consider three scenarios for the rebound in China’s oil demand and the consequent effect on inflation in China and abroad. In the base case, we assume China’s oil demand may grow by roughly 5 percent. The low growth scenario calls for an approximate 2.5 percent rise and the high growth scenario about a 7.5 percent increase. Simulations using the Oxford Economics model, suggest that global oil prices might increase by 10, 15 or 20 US dollars per barrel, under the respective low, base, and high growth scenarios (Figure 5). The resulting increase in year-over-year global Consumer Price Index (CPI) inflation could range from 0.3 to 0.6 percentage point. The regional effect on CPI inflation will vary, with the upward pressure experienced most acutely in the US (0.40-0.83 ppt) and India (0.35-0.75 ppt), and to a lesser but still notable extent, the Euro Area (0.30-0.60 ppt). Among the largest global economic blocs, the rise in regional inflection in China is among the smallest (Figure 6).

Figure 4

China oil demand is expected bounce back in 2023 following 2022 lockdowns

Source: Data from Oxford Economics, calculations by The Conference Board

Figure 5

Three scenarios suggest global oil prices could rise by as much as US$20/barrel

Source: Data from Oxford Economics, calculations by The Conference Board

Figure 6

The US and India could experience the greatest increases in CPI inflation

Source: Data from Oxford Economics, calculations by The Conference Board

China’s reopening is expected to slow the disinflationary trajectory of the global economy. Inflation peaked in most economies in the middle or second half of 2022. While remaining elevated, global inflation has been trending downward. The relief largely reflects fading energy prices and fewer supply chain disruptions. Global energy prices increased by 43 percent in 2022, and even with China’s reopening another similar sized increase for 2023 is unlikely. However, our simulations suggest China’s reopening is likely to slow this disinflationary trend, holding all else equal.

Increased inflationary pressures complicate monetary policy and may increase the risk of hard landings. Central banks globally have raised policy rates in response to high inflation that started in 2021 and gained significant momentum in 2022. Since mid-2022, overall consumer inflation has slowed or even declined, due to a combination of declining commodity prices, reduced supply chain pressures, and fading base effects as high readings from the previous year drop out of the year-over-year print. However, price pressures remain elevated, and are expected to remain so. Factors include pass-through of earlier increases in input costs, stronger demand for services, and faster wage growth in many economies. To this list, we add China’s reopening. This means monetary policy will continue to be tight, or even more restrictive in many economies, leading to slower economic growth, and in some cases, longer and/or deeper recessions than anticipated.