China’s new lockdowns after a recent COVID outbreak could put a severe strain on the world’s economy. The stringent lockdown strategy for outbreaks in at least 17 provinces may mean shutting down residential compounds and the cancellation of public events, which could dampen China's consumer growth.

The Wall Street Journal on Tuesday noted how over the past week investment banks Goldman Sachs Group and Morgan Stanley cut full-year growth outlooks for China.

“The more transmissible nature of the variant and China’s Covid-zero approach indicate that economic impact is inevitable,” Morgan Stanley economists wrote.

China’s National Health Commission reported 143 new Covid cases, the highest number of daily infections since January. Last week, Chinese authorities imposed city-wide testing in Wuhan and imposed other restrictions in cities such as Beijing. The recent outbreak has cast doubt on the effectiveness of China’s “zero tolerance” policy towards the virus. Given the Delta variants’ more contagious nature it could prove harder to contain than the original strain of the virus.

Any disruption to the Chinese economy could easily affect the global market, disrupting supply chains and affecting international trade, increasing costs, and rising inflation expectations.

According to Reuters, exports in July rose 19.3% from last year, compared to a 32.2% gain in June.

“The pandemic worsened in other Asian developing countries, which may have led to a relocation of trade towards China. But leading suggests exports may weaken in the coming months,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

Chinese importers are also struggling with an ongoing global semiconductor shortage, logistics bottlenecks, and higher raw material and freight costs. Orders are still recovering but there are many uncertainties we are still facing such as how fast the virus spreads, the cost of raw materials, and foreign production capacity picking up.

Ken Cheung, chief Asian foreign exchange strategist at Japanese Bank Mizuho, says the global spread of the Delta variant “might have dented global demand, which would stand to affect Chinese exports.”

David Roche, president and global strategist of Independent Strategy, told CNBC that he expects China’s year-on-year growth in the fourth quarter to slow between 2% or 3% and the long-term would settle at 5% or 6%.

Roche expects a “big recovery” from China, which is ahead of the world and converges with a long-term growth trajectory that is lower than what many have come to expect.

Meanwhile, the research arm of BlackRock Inc., the largest money manager in the world, described a “real and broadening” restart of the global economy. In the note, it cited how the U.S. was “passing the baton” to Europe and other developed markets despite the threat of the Delta variant.

Coronavirus China