Deflation Concerns Rise in China as Main Sectors Struggle
China experienced a period of deflation between the years 2020 and 2021. However, experts are now concerned that this year’s decline in prices could be more severe due to issues in the country’s main sectors and high unemployment among young people, according to the AFP news agency.
Economist Andrew Batson attributes the main cause of the deflationary period to the crisis in the real estate sector. Significant declines were also observed in Chinese exports and imports in July. Prices in the education and healthcare sectors remained stagnant or grew only slightly.
In July, the Producer Price Index (PPI) recorded a significant monthly decline of 4.4 percent. This marks an improvement compared to June when the index experienced a year-on-year decline of 5.4 percent. However, analysts had predicted a slightly lower price decline of around 0.1 percent.
Deflation as an Economic Risk
Deflation, the opposite of inflation, refers to a general decline in price levels. Most economists consider deflation to be more dangerous for economic development than mildly rising prices. At first glance, consumers may benefit from paying less for goods and services. However, deflation usually puts pressure on company profits, leading to the risk of wage reductions or layoffs.
China has set a target for average consumer inflation of around three percent in 2023. Last year, prices increased by two percent.
No Japanese Scenario Expected
Economist Xia Chun expects the period of Chinese deflation to last approximately six to twelve months. It is not expected to follow the path of the Japanese economy, which has been experiencing a stagnant and mildly deflationary period for about two decades.
Currently, markets are awaiting the gradual reduction of interest rates by the Chinese central bank, as reflected in statistical data. Analysts are also observing how Chinese consumers will respond to government support measures aimed at boosting consumer demand. However, these measures have fallen short of expectations, contributing to a slower economic recovery in China after the COVID-19 pandemic than initially predicted by many experts.
Source: tradingeconomics.com
S&P Rating Agency also warns that the performance of the Chinese economy will be lower this year than originally forecasted by analysts. It is expected to grow by around 5.2 percent, which is three-tenths of a percentage point lower than the initial projection.
The situation is not helped by the Chinese labor market, as available data shows a gradual increase in unemployment among young people aged 16 to 24, reaching a level of twenty percent.
What are the key challenges in China’s main sectors that are contributing to a potential severity of deflation this year?
Owever, experts are still concerned about the potential severity of deflation in China this year. The decline in prices is expected to be exacerbated by challenges in the country’s main sectors, such as real estate, as well as high unemployment rates among young people.
According to economist Andrew Batson, the crisis in the real estate sector is a key factor contributing to deflation. The sector has been experiencing difficulties, which has had a ripple effect on other industries. Additionally, Chinese exports and imports saw significant declines in July, further impacting the economy.
While some sectors, like education and healthcare, saw stagnant or slight growth in prices, the overall deflationary trend remains a concern. In July, the Producer Price Index (PPI) recorded a significant monthly decline of 4.4 percent. Although this was an improvement compared to June’s 5.4 percent decline, experts are still worried about the potential impact on the economy.
Deflation can have negative effects on an economy, including reduced consumer spending and investment, as well as increased debt burdens. It can also lead to a cycle of declining prices and wages, creating economic stagnation.
To combat deflation, the Chinese government may consider implementing monetary or fiscal policies to stimulate economic growth, such as reducing interest rates or increasing government spending. However, the effectiveness of such measures remains to be seen.
Overall, concerns about deflation in China are rising due to issues in the country’s main sectors and high youth unemployment rates. The decline in prices, particularly in the real estate sector, along with significant decreases in exports and imports, paint a worrisome picture for the Chinese economy. The government will need to closely monitor the situation and take appropriate measures to prevent a prolonged period of deflation.
This article is very informative and highlights the potential dangers of deflation in China. It’s crucial for policymakers and economists to closely monitor the situation and take appropriate measures to prevent a prolonged economic downturn.