Posted by: Bruce Einhorn on February 11, 2008
That’s the conclusion of a team of commodities analysts from Lehman Bros. who have just come out with a report on the economic impact of China’s big freeze. While many readers of this blog seem to think that the international media have overstated the extent of the crisis, the Lehman analysts call the country’s winter crisis “perhaps the most under-reported but most significant event for global commodities this year.” For instance, Chinese demand for gas and diesel will be falling significantly, they say, because of the winter storms. While analysts were expecting a 13% increase in the number of people traveling this Chinese New Year (on top of the 150 million who traveled during the holiday in 2007), “growth now looks flat.” The Lehman report goes on to look at the impact on production of aluminum as well as agricultural production. “The Ministry of Agriculture reports enormous crop losses, and about 10% of agricultural land will not be harvested this year.”
One issue that I hadn’t considered before: The connection between the winter storms and the summer Olympics. The January chaos is likely to slam the economy in the first quarter of the year, fueling inflation and trimming GDP growth by as much as 2 full percentage points. Optimists point out that the impact will be short-term and the economy will rebound quickly. But later in the year the economy might suffer yet another sudden slowdown, this one from man-made causes. The Chinese government is anxious to avoid the disaster of a smog-filled Beijing during the summer games and might shut down factories in order to keep the air clear. According to Lehman, “the government [is] weighing a two-month holiday on industrial production” around the time of the Olympics. The combination of the January storms and the August slowdown could result in stagflation, they warn.