Western central banks are fighting persistent inflation. In China, on the other hand, there are growing concerns about deflation – a potentially dangerous downward spiral of falling prices.
In China, there are increasing warning signs that deflation could occur given a bumpy economic recovery after the Corona slump. The Beijing Bureau of Statistics said today that the consumer price index was flat year-on-year in June. In May it had only risen slightly by 0.2 percent. Inflation fell to its lowest level in two years.
Deflation is a broad-based fall in prices that can trigger a downward spiral of falling sales, wages and investment – with devastating consequences for the economy.
The current Chinese producer prices also indicate that the downward trend in consumer prices could continue. Producer prices are seen as a precursor to consumer prices. If they fall, this should also have a dampening effect on the overall price development.
Companies lower prices
Because of weak demand, Chinese companies lowered their prices in June more than they had in seven and a half years. Producer prices fell by a surprisingly strong 5.4 percent compared to the same month last year, the statistics office in Beijing said. This was not only the ninth decline in a row, but also the strongest since December 2015.
In the energy, metals and chemicals sectors in particular, companies were forced to cut prices as demand at home and abroad weakened.
“Difficult deflationary environment”
The economists at the finance house Barclay spoke of a “difficult deflation environment”. “The fact that consumer prices in the Middle Kingdom are only stagnating is fueling fears of a wave of deflation again,” agrees Jochen Stanzl, market analyst at CMC Markets.
If consumers rely on goods becoming cheaper, they hold back on their spending. As a result, companies are stuck with their products and ultimately have to lay off employees – which further depresses consumption. Deflation can make such a recession worse. Economists see loose monetary policy and interest rate cuts by central banks as a means of getting a grip on deflation. In theory, the economy should be stimulated again through cheaper credit.
Will China achieve the growth target?
Given the importance of the Chinese economy to the global economy, markets are closely monitoring the Asian country’s current economic situation. The concern is that the economic recovery is slowing, Heron Lim, an economist at Moody’s Analytics, told the Financial Times.
Market observers expect the Chinese central bank to take countermeasures – and lower interest rates again. The current Chinese growth target for this year is 5 percent. So far, experts assume that it is achievable. However, economists at major western banks had already lowered their economic forecasts for the country.
Important sales markets for Chinese corporations such as Germany and the euro zone as a whole are in recession. This in turn could have a negative impact on Chinese economic output.