It is China, which is having the opposite problems to those of Western countries: prices are not growing and this is not good news
There is a country that is not having inflation problems: it is China, where on average prices in June have not increased compared to the same month in 2022. It might seem like an ideal condition, especially for all those countries that have been they are dealing with a constant and persistent increase in the cost of living, which puts all those who have a fixed income in great difficulty. In reality, the failure to increase prices is a symptom of a series of very serious problems for the Chinese economy and is a worrying sign for the global economy, which is strongly connected to China. It indicates that consumption is very weak and that the economic recovery after the end of the restrictions and the zero Covid strategy has essentially little momentum.
According to theChina Bureau of Statistics, consumer prices in China actually fell by 0.2 percent in June compared to the previous month. The most consistent drops were observed in the prices of meat, especially pork which is an essential ingredient of Chinese cuisine, as well as in transport and petrol prices.
This trend is quite consistent with the producer price trend, i.e. the costs that companies incur in producing the goods. These prices have been falling for months: in June they fell by 5.4 percent compared to June 2022 and by 0.8 percent compared to last month.
In the last two years, however, China has never experienced the inflation that occurred in Western countries: while the West has been hit particularly hard by the increase in energy and foodstuff prices caused by the war in Ukraine, state controls on energy prices in China have essentially protected it from price increases. Now China finds itself in the opposite situation to that of other countries because it is at risk of deflation, which is practically the opposite of inflation: it is a generalized and sustained reduction in the level of prices.
Deflation is another sign that things are not going too well for the Chinese economy. The vast majority of analysts had high expectations for the growth China could have after abandoning the zero Covid strategy, but things turned out differently.
After restrictions were lifted in December, China’s Gross Domestic Product grew in early 2023 faster than expected. But then China had begun to record increasingly disappointing results on consumption, investments and the real estate market. And in the second quarter of the year the Chinese GDP he had grown up only by 0.8 percent compared to the previous quarter, much less than expected.
– Read also: The Chinese economy is not growing as it should
Analysts blame much of China’s slowdown on negative trends in the real estate sector, which has driven China’s growth for decades and is worth about a quarter of the country’s GDP. The sector is still struggling to recover after the serious crisis that began in 2021. One of the most notable phenomena was, for example, at the end of 2021 the crisis of Evergrande, a huge Chinese group that turned out to be the most indebted real estate development company in the world. world.
This crisis has had significant effects on the whole economy: unemployment has increased, especially among young people (one in five young people in urban areas is unemployed, who, despite being less than unemployment in Italy this is an unusual figure for China), households and businesses have preferred to keep their money stationary, with the result that consumption and investments are not growing.
The Chinese government has already implemented a series of measures to try to revive the economy: tax breaks have been introduced for small businesses and the Chinese central bank has reduced interest rates to encourage households to spend more on their money instead of saving it (as opposed to what is happening in the West, where central banks are increasing them to counter inflation).
From the point of view of those who deal every month with significant increases in prices (for example, in Italy in June inflation was 6.4 per cent) the reduction in prices could seem like good news: families spend less to buy same things as before, becoming in fact a little richer. In reality, deflation is a very bad sign for the economy.
When prices fall it means that the economy is in a weak condition: consumption is not sustained enough and those who sell products or services find themselves in the position of lowering prices in order to be able to sell. And over time people start to lose their jobs, they generally get poorer, they stop spending and the economy finds itself in a vicious circle that is hard to get out of. In addition, there is a general feeling of distrust of growth: people tend to save not only as a precaution but also because they think that prices will substantially continue to fall. On an individual level they make sense, but on a collective level this reasoning is very harmful to the economy.
There is no preferable condition between high inflation and high deflation: both produce distortions and side effects, but economic theory predicts that the most desirable situation is one in which prices grow moderately. So much so that some central banks, such as the European Central Bank, have a target to reach in terms of inflation, usually set at around 2 percent. If prices rise at this rate, it means that things are going pretty well: the economy is growing, employing workers with increasingly higher wages, as are prices. It’s a virtuous circle, which remains so until the economy overheats and consumers start to demand more goods and services than companies can produce.
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2023-07-17 14:31:22
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