Will the world feel the pain of China’s recession?
Beijing’s economic woes have worsened over the past week after it emerged that China had fallen into a recession.
The news highlights how the country is struggling to meet expectations of a strong recovery after emerging from extended Covid lockdowns.
But will lower prices have an impact beyond China’s borders, where the greatest risk remains of a prolonged period of high inflation?
For now, economists say there is no cause for concern, but they have said things like:
China’s downturn is likely to be temporary
Deflation is a concern primarily when it is pervasive and results from companies desperate to sell to consumers who are unwilling or unable to buy because they have fallen on hard times, but this concept does not describe China’s economy or its price movements.
The economic recovery after reopening has been disappointing – the real estate sector remains a serious concern – but output is still growing and an expansion of close to 5% this year is still on the cards.
Referring to the country’s decades-long experience with lower prices, Duncan Wrigley, chief China economist at Pantheon Microeconomics, said: “China’s consumption recovery remains weak and uneven, but this is a far cry from Japan-style deflation.”
While Chinese consumer prices fell 0.3% in the year ending in July, there was also a slight decline in costs in 2021. Now as then, the downturn appears temporary, more from underlying effects than from any deep problems.
In July alone, prices rose by 0.2% and then increased by 0.5% in the first seven months of 2023. Then measured deflation arose because prices did not rise at the pace seen during 2022, when China suffered several major lockdowns.
“The rise in core inflation, which excludes food and energy and is seen as a better measure of underlying price pressures, from 0.4% in June to 0.8% in July showed a lack of entrenched deflation in China,” said Neil Shearing, chief economist at Capital Economics.
“This will happen in the core numbers to the extent that chronic demand weakness appears in the inflation data,” Shearing added.
Inflation is rarely as contagious as it seems
It seems that the world, with the exception of China, has been suffering from a spurt of inflation for the past two years. Although the pace of price hikes has been high in most countries, the reasons are markedly different.
Price increases caused by bottlenecks in global supply chains may be global, but in the US they have been amplified by very strong growth in consumer demand.
The surge in demand followed huge fiscal expansions in 2020 and 2021, when the Donald Trump and Joe Biden administrations sent large checks to households to combat the COVID-19 crisis.
Strong demand was far less important in Europe and the emerging economies, who had suffered much more from the Russian invasion of Ukraine.
In Europe, the crisis came from rising natural gas prices, while higher food and energy costs in poor countries led to a broader rise in the price level.
Paul Donovan, chief economist at UBS, said price pressures would likely prove “intensely local” in the event of a Chinese deflation.
While the price of Chinese imports was likely to drop as a result of the country’s economic woes, Donovan noted that “a lot happens” for exports before they reach their final destination.
“In general, most of the price for things made in China and sold in the United States will be paid to American workers,” he explained.
Chinese deflation may work in Europe
The big problem with inflation, especially in Europe and emerging economies, has been the rising cost of imports, lowering living standards and sparking a process in which domestic firms try to defend their profit margins by raising prices and workers struggle to catch up.
Chinese factory goods prices fell 4.4% in July compared to a year earlier, and this has a slight impact abroad.
European countries will benefit from a weak Chinese economy that places less competition for supplies as it adjusts to weaning itself off Russian supplies.
It would be wrong, of course, to suggest that everyone benefits – at least a little – from a weak Chinese economy.
China contributed 40% of the average
Global growth has declined over the past ten years, so any economic problems in Beijing will affect global output, according to Daval Joshi, chief strategist at BCA Research.
For now, however, the repercussions of China’s deflation seem manageable both for the country itself and for the rest of the world.
2023-08-19 15:35:00
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