China has entered a period of deflation for the first time in over two years in July, indicating a slowdown in domestic spending and impacting the post-Covid economic rebound. The country recently faced its largest decline in exports since the pandemic’s early stages, coupled with declining imports due to weakening domestic and global demand.
The Consumer Price Index (CPI), a key measure of inflation, decreased by 0.3% in July, according to the National Bureau of Statistics. While slightly better than the anticipated 0.4% decline, this marked the first decrease since the beginning of 2021 and raises pressure on authorities to provide essential economic support.
Deflation, characterized by falling prices of goods and services, poses risks despite appearing to enhance purchasing power. It can discourage consumer spending as people delay purchases in anticipation of further price drops. This reduction in demand prompts companies to cut production, hiring, and offer discounts to clear inventory, leading to reduced profitability.
China experienced a brief deflationary phase in late 2020 and early 2021, primarily due to plummeting pork prices, a staple meat. The last significant deflationary period was in 2009.
Analysts are concerned that this deflationary trend may persist longer due to the stalling of China’s main growth drivers and a record-high youth unemployment rate exceeding 20%. Economic troubles in the real estate sector, which historically contributes a quarter of China’s economy, are cited as a major source of the current deflationary pressure.
The recent disappointing export figures, coupled with declining domestic activity, have impacted numerous export-focused Chinese businesses, leading to slower operations.
Although China has set a five percent growth target for the year, the grim data suggests achieving this goal could be challenging. The country’s second-largest economy saw only 0.8% growth between the first and second quarters of 2023. Many economists advocate for a substantial recovery plan to stimulate economic activity. While the government has declared support for the private sector, concrete actions have been limited so far.
The latest deflationary figures could potentially compel the government to reconsider its approach and implement more substantial measures to address the economic challenges at hand.
