China is heading towards a deflationary crisis: what does it mean and what effects can it cause on the world economy?
China bucking the trend on current economic issues: his problem is having too low inflation.
While central bankers in the Western world fret about their long and complex battle against sticky core prices, policymakers in China are facing a very different problem: a clear risk of deflation.
Official data released on Monday showed the nation’s consumer price index was unchanged in June from a year earlier, below expectations for an overall annual inflation rate of 0.2%, as recorded in May. Core inflation, which excludes energy and food, fell from 0.6% to 0.4%, while producer prices fell 5.4% year-over-year, the biggest drop since December 2015.
The data add to a growing body of evidence that China’s post-Covid recovery is severely stalled, with consumers keeping their wallets closed amid worries about economic growth and asset prices, particularly in the pressured real estate sector.
What could this mean for China and the global economy as a whole?
China towards deflation: what does it mean and what happens?
Consumer inflation in China flattened in June after two months of poor growth. This stoked fears among economists and investors that the world’s second-largest economy was on the verge of slipping into deflation.
The country’s manufacturing sector, already in deflation, has seen factory prices fall at the fastest pace in more than seven years, the National Bureau of Statistics reported on Monday, reflecting weak internal and overseas demand.
The data is the latest evidence of the dual toll on the Chinese economy of a stalled recovery after China’s reopening and interest rate hikes by central banks in the West that have reduced consumer spending.
Economists fear that the large drop in prices will weigh on already fragile confidence in the country, leaving the economy stuck in a vicious circle where weak demand and lower prices reinforce each other.
In China, the weak inflation data is pushing for more efforts and a turnaround on shorting sluggish sentiment, finally boosting demand.
“A holistic approach and concerted policy efforts to stabilize the housing market and boost consumer and business confidence are needed to break the spiral of disinflation or deflation”, wrote Jian Chang, China’s chief economist at Barclays in a note to customers in May.
There is only one problem, according to strategists: the shockwave stimulus that the economy seems to need is not arriving. While Chinese officials have been saying all the right things — just last week, Premier Li Qiang spoke with Chinese economists about the need for potential stimulus measures — real action has largely been limited to rate cuts of interest which have had little impact due to the simple fact that tariffs are already very low.
Falling inflation in China: why it’s worrying
The prospect of deflation) emerging is now a real concern. While economists in the West continue to be cowed by expectations of rising inflation, leading to a spiral in prices and wages, there are also fears that deflation in China is creating a negative cycle.
This would happen if consumers held back from making purchases in the expectation that prices would be lower in the future, with consumption likely to continue to weaken, further weighing on prices. And on international trade, with less Chinese demand for foreign products.
However, it should also be noted that falling prices in China may relieve central bankers battling inflation in the US and other developed economies. Lower prices for goods charged at the factory entrance in China translate into lower import costs of Chinese goods for retailers in the West, while subdued consumer inflation also curbs China’s appetite for raw materials. Raw materials from iron ore to crude oil, which helps curb inflation elsewhere, economists say.
Considering, however, that in the perspective of lower commodity prices due to a slowdown in demand, investments in raw materials crucial for the energy transition could also slow down.
Original article published on Money.it Italy 2023-07-10 13:03:41. Original title: Cina sull’orlo della deflazione: cosa significa e perché preoccuparsi
