Electricity crisis in China and India stokes anxiety over global growth

Severe power shortages in China and India, the two main engines of global growth, cloud Asia’s economic outlook and increase the risk that inflationary pressures will spill over into the region.

Several leading Chinese economists expect the growth of the world’s second-largest economy to slow significantly in the coming months, with power shortages affecting industrial production and the slowdown in the real estate sector further reducing activity.

“We have reduced our growth forecasts in China [in the fourth quarter] at 3.6% from 5% and for 2022 at 5.4% from 5.8%, ”said Louis Kuijs, head of the Asian economy at Oxford Economics. “This is despite our expectation of a change in economic policy in [the fourth quarter] to support growth.

Andrew Batson, director of Gavekal, a research firm, said: “China’s growth will slow in the coming months, given the deepening real estate slowdown and the spread of power shortages. . However, he expected strong exports and strong capital investments to provide some support.

Miao Ouyang and Helen Qiao, of Bank of America, said China suffered a drop in industrial production in September due to sharp production cuts in energy-intensive industries. They also expected gross domestic product growth to be affected.

China has contributed the largest share of global GDP growth for several years, and the IMF predicts that the country’s economy will grow by 8.1 percent this year. The Indian economy is expected to grow 9.5% this year, according to the IMF.

In a long-term forecast released before the pandemic, the IMF said that between 2019 and 2024, China will account for 28% of global growth and India 15%, identifying them as the two main engines of global growth, ahead of the United States in third place.

Coal-fired power plants produce 66% of India’s electricity © AFP via Getty Images

But India is also hit by a severe shortage of coal, which is crucial to generate the electricity that underpins growth. As of Oct. 3, India’s 135 thermal power plants had only four days of coal stocks, compared to 13 days on Aug. 1, the Energy Ministry said on Tuesday. The government said Coal India’s coal shipments were increasing after the delayed monsoon rains.

Economists have warned that widespread power cuts could hurt growth just as India’s industrial production finally hits pre-pandemic levels last seen in February 2020. The country is also gearing up for its annual festival season, when demand for electricity increases sharply.

“It’s not a very happy situation,” said Sunil Kumar Sinha, senior economist at India Ratings & Research. “After the second wave of Covid, the economy has started to normalize and growth is picking up. . . If at this point the country is hit by an electricity shortage, I fear it will have a very big impact on growth.

About 66% of India’s total electricity production comes from coal-fired power plants, up from 62% in 2019. Electricity production from hydropower, gas and nuclear has declined due to the rains monsoons, higher prices and maintenance of nuclear power plants. .

Unless the government can efficiently allocate scarce coal supplies, Sinha said India could face similar problems as China, with industries forced to shut down or rely on alternative energy. more expensive, like their own captive power plants.

The causes of China’s power shortage suggest that a quick resolution is unlikely. Alicia García Herrero, chief economist for Asia-Pacific at Natixis, attributed the crisis to a “triple whammy” of factors.

First, local governments are rushing to comply with Beijing’s emission targets and therefore have restricted coal-fired power generation. Second, there is a shortage of coal supply as the country switches to renewables. Third, the price cap for electricity means that demand is unaffected by rising costs of coal and other inputs.

All of this puts immense pressure on Beijing to release electricity prices – but it adds to the inflationary outlook. “The overrun of the policy caused the shutdown of too many power producers to avoid financial losses,” said Michael Gill, director Asia at Dragoman, a consultancy firm. “Freedom of pricing should solve this problem. “

China appears to be taking a gradual approach to raising electricity prices. In Guangdong province, for example, authorities enforced a 25 percent increase in electricity prices this month, but imposed it only during peak hours and only on industrial users, thus sparing households. Some other provinces could follow suit, analysts said.

Such an approach aims to curb consumer price inflation, even as producer prices – including coal, metals and other raw materials – soar. China’s producer price index jumped 9.5% in August, and BofA economists forecast a further rise to 10.5% for September.

The consumer price index, on the other hand, only rose 0.8% in August, and Bank of America predicts it could actually drop to 0.6% in September.

The battle over price pressures is crucial. If inflationary pressures get out of hand, Beijing could be forced to tighten monetary policy, which would further affect growth prospects in the coming months.

There will also be spinoffs for the rest of the world.

“Electricity shortages in China have global implications,” said Ting Lu, chief economist for China at Nomura. “Global markets will feel the effects of a shortage of supplies of textiles, toys and machine parts. . . [and] will most likely result in a shortage of goods for Thanksgiving and Christmas.

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