China has its sights on economic growth of “around 5.5 per cent ” this year but could face a tough time meeting it. Even before the Ukraine crisis, Beijing was staring at major challenges with the world still not fully recovered from the Covid-19 pandemic, rising inflation risks and central banks on the brink of higher interest rates. The war in Ukraine has just made the economic headwinds a lot worse. Global economic confidence will take a hard hit as rampant rises in energy and commodity prices and the impact of trade sanctions on Russia bite. China, as the world’s leading export nation, could be vulnerable if global trade flows start to slide. A global economic slowdown could easily take Chinese growth below 5 per cent this year. The possibility of sub 4 per cent should not be ruled out in the worst-case scenario of a deepening crisis in Europe. Maintaining economic stability is Beijing’s top priority. However, 5.5 per cent growth, alongside an inflation goal of 3 per cent and a projected 2022 budget deficit of around 2.8 per cent of GDP seems at odds if Beijing stays committed to easier monetary policy to support domestic demand in the face of growing global uncertainties. The narrative has changed dramatically owing to the Ukraine crisis . Beijing might need to step in with careful countermeasures to ensure growth stays on target and inflation is kept close to the 3 per cent target. A more expansionary fiscal policy might be needed to boost domestic growth, while higher interest rates and a firmer renminbi exchange rate policy could be necessary to keep a firm lid on inflation risks. With so much in flux and economic uncertainties growing by the day, global policy responses will need to be flexible and responsive to the fast-changing situation. The biggest stumbling blocks for the global economy will be the spectre of inflation rising higher than anticipated and a slowdown in world trade. Inflation risks were already aggravated by the global supply chain disruptions following the Covid-19 crisis, but the Ukraine war has taken inflation expectations into the danger zone. The sharp jump in natural gas and crude oil prices in recent months will filter down into a major squeeze on consumer spending power and trigger much higher production costs for manufacturers. Growth momentum will suffer in the process. Higher prices and increased uncertainty will be a drag on consumer demand, and corporate plans for output, investment and new hiring will be much more guarded. The net effect will be reduced domestic demand , weaker international trade and sub-par global growth. In its January forecast, the International Monetary Fund anticipated global GDP to expand by 4.4 per cent this year, down from 5.9 per cent in 2021. However, the odds are that the forecast will be pared back to take into account of the changing economic fortunes. The Ukraine crisis has wide international implications for global business activity, and China is unlikely to be spared from the fallout. On the positive side, China’s inflation fundamentals seem relatively subdued for now, with consumer prices up only 0.9 per cent from a year ago in February and the core CPI inflation rate fairly benign at 1.1 per cent. The key is what’s building in the pipeline and whether government action can intercede with price constraints in the coming months to protect consumers. With China’s consumers accounting for more than half of total GDP, it is vital that Beijing keeps consumer optimism upbeat, encouraged by the prospect of more tax cuts and increased government spending ahead. Beijing might be pencilling in a budget deficit worth around 2.8 per cent of GDP, but a wider deficit heading back towards 2020’s 3.7 per cent shortfall could be on the cards. China won’t be immune to the impact of slower world trade but, fortunately, Beijing has already taken steps to shift the economic focus towards domestic-driven expansion and away from export-led growth. Even so, China’s export growth running at 16.3 per cent year on year in January is a boon for the time being. Hitting the GDP growth target of around 5.5 per cent this year is not impossible. However, Beijing will have to go the extra mile to come close. David Brown is the chief executive of New View Economics