In recent economic reports as cited on BBC, China has entered a phase of deflation with consumer prices registering a drop in July, a first in over two years.
The government-issued consumer price index, an indicator of inflation, experienced a 0.3% decrease in comparison to the same month last year.
Expert analysts believe this surge in economic pressure will necessitate the government to adopt measures to rejuvenate demand in the global economy’s second largest power.
This alarming development is subsequent to weak figures in import and export records, instigating doubts about the speed of China’s recuperation process post the pandemic.
The country concurrently addresses the escalating local government debt issue and complications within the housing market. The record-high youth unemployment is under close scrutiny as an unprecedented 11.58 million university graduates are projected to join the Chinese job market within the year.
Declining prices increase the difficulty for China in reducing its debt. This leads to additional issues, including a decelerated growth rate, as per the analysts’ perspective.
Daniel Murray, a representative from the investment firm EFG Asset Management, asserts that there is no magic formula available to boost inflation. He proposes a basic combination of increased government expenditure and tax reduction, coupled with a more lenient monetary policy.
When did the decline in prices begin?
A surge in customer spending was observed in most developed nations following the termination of pandemic-related constraints. Individuals who had amassed savings suddenly found themselves in a position to spend, while businesses grappled to satisfy the escalating demand.
The dramatic surge in demand for limited supply goods, amplified by escalating energy prices in the aftermath of Russia’s incursion into Ukraine, resulted in price inflation.
This scenario, however, did not play out in China, where the lifting of the world’s most severe COVID-19 restrictions did not lead to a similar inflationary trend. The most recent decline in consumer prices occurred in February 2021.
In fact, Chinese prices have hovered on the brink of deflation for several months, having stagnated earlier this year due to weak demand. The prices imposed by Chinese manufacturers, commonly referred to as factory gate prices, have likewise been on a downward trajectory.
Issues with deflation, an analysis focusing on China
China is a global powerhouse, and is responsible for manufacturing a significant percentage of goods sold worldwide.
One possible benefit from a prolonged deflationary phase in China might be its potential to control inflation in other global areas, such as the UK.
However, an influx of discounted Chinese commodities in the global business arena could negatively influence manufacturers in other countries. It has the potential to cut down investments and may severely impact employment.
Furthermore, an extended period of falling prices in China could adversely affect company revenues and curtail consumer expenditure. It could potentially lead to increased unemployment rates.
Such a deflationary phase could also prompt a decrease in China’s demand – being the globe’s largest consumer base – for essentials such as energy, raw materials and food. This diminution in demand could negatively impinge on global exports.
[sourcelink link=”https://www.foxbusiness.com/economy/chinas-economy-misses-growth-forecasts-raising-odds-more-support-for-tepid-recovery”]
