How China's zero-COVID policy threatens the US economy

Historic protests across China over its zero-COVID policy battered U.S. stocks on Monday, highlighting a close link between the contentious Chinese measures and domestic economic conditions that could help determine whether the U.S. enters a recession.

Residents in isolation in some regions say they've gone without sufficient food or medical care. Meanwhile, protests flared up after a fire on Thursday in an apartment building in the northwest city of Urumqi that killed at least 10 people, as some alleged that lockdowns obstructed the rescue of victims, while government officials denied any such impact.

Tension over COVID lockdowns in the world's second-largest economy coincides with a precarious U.S. economic outlook.

An aggressive series of interest rate hikes from the Federal Reserve aim to dial back sky-high inflation by slowing the economy and slashing demand. But the approach risks tipping the country in a downturn and putting millions out of work. Plus, ongoing disruption from the Russia-Ukraine war has exposed vulnerability in economies across the globe, including the U.S., experts said.

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COVID lockdowns in China have clogged supply chains in the manufacturing stalwart, extending pandemic-era bottlenecks that have contributed to inflation, analysts told ABC News. Meanwhile, the zero-COVID policy has stagnated the Chinese economy, hurting spending among Chinese customers and in turn pummeling U.S companies that depend on it, they said.

"When consumers are locked down in these different cities, it's a gut punch to the U.S. economy," Dan Ives, a managing director of equity research at Wedbush, an investment firm, told ABC News. "It has reached a fork in the road."

Here's what you need to know about how China's zero-COVID policy heightens the risk of a U.S. recession:

Zero-COVID policy contributes to US inflation

A key threat to U.S. economic performance is inflation, which remains highly elevated and owes in part to Chinese lockdowns.

Sky-high price hikes stem from the pandemic, when millions across the globe facing lockdowns replaced restaurant expenditures with couches and exercise bikes. But the surge in demand for goods far outpaced supply, as COVID-related bottlenecks slowed delivery times. When demand exceeded supply, prices skyrocketed.

Some supply bottlenecks have eased but others remain, including China's zero-COVID policy and its related lockdowns.

"The main effect of the zero-tolerance policy in China is interrupting some supply chains," David Dollar, a senior fellow at the Brookings Institution focused on U.S.-China economic relations, told ABC News.

"We still import a lot from China and those problems in supply chains means the products are not here and that contributes a little bit to inflationary pressure," he added.

For instance, China's zero-COVID policy has led to major iPhone shortages heading into the holidays, according to a report released by Ives on Monday. Shortages have reached as low as 35% of typical holiday inventory in some stores, causing overall iPhone demand to outstrip supply by a ratio of 3 to 1, he found.

The iPhone shortage is the "poster child" of a larger trend, Ives told ABC News. The zero-COVID policy continues to reduce the supply of goods from China by an estimated 10% to 20%, he said.

To be sure, analysts disagree about the extent to which supply shortages have contributed to inflation, as opposed to a flood of stimulus payments that juiced demand. "There's definitely some linkage but I would not exaggerate it," Dollar said.

Zero-COVID policy hurts Chinese consumers and US companies

In addition to clogging up supply, the Chinese lockdowns have suppressed consumer demand in the country, causing slowdowns at U.S. companies that operate a significant portion of their business in China.

Holiday spending during China's weeklong National Day break last month fell 56% compared to pre-pandemic levels, Bloomberg reported. Overall, China's gross domestic product grew 3.9% over three months ending in September, well below 4.9% growth seen over the same period last year.

"People are locked down at home a lot of the time, so they're not out spending money," said Dollar, of the Brookings Institution.

"If China were growing well, it'd be importing more from the U.S. and contributing to the profits of U.S. companies that operate there," he added. "That's all not happening this year."

Sluggish consumer demand in China contributed to the market sell off on Monday in response to civil unrest over the zero-COVID policy, Dollar said.

As of Monday afternoon, shares in Apple fell nearly 3%.

"A lot of big American companies listed in New York have serious business in China," he said. "If there's civil and political unrest, if the Chinese economy is slowing down, that creates uncertainty for a lot of American businesses."

"The market hates uncertainty."