China’s Economy Falls into Deflation as Consumer Prices Contract for the First Time in Two Years
China’s economy has experienced a significant setback as consumer prices contracted for the first time in over two years, signaling a challenging period for policymakers trying to stimulate consumption. In July, the consumer price index fell by 0.3% year-on-year, compared to no change in the previous month. Additionally, the producer price index, which measures prices as goods leave factory gates, plummeted by 4.4% in July.
Consumer prices in China had been on the brink of deflation for several months, reflecting the country’s struggle to regain economic momentum following the lifting of pandemic restrictions earlier this year. The move into deflation is likely to intensify calls for more government stimulus as policymakers already grapple with a slowdown in the property sector and trade weakness.
The latest data released on Tuesday highlights the severity of the situation. July exports dropped by a staggering 14.5% year-on-year, marking the sharpest decline since the beginning of the pandemic. Experts are now cautioning that the Chinese economy could be at serious risk of entering a deflationary episode, which could trigger a self-reinforcing downward spiral in growth and private sector confidence.
Eswar Prasad, a China finance expert at Cornell University, warned, “The Chinese economy is now at serious risk of sliding into a deflationary episode that could spark a self-reinforcing downward spiral in growth and private sector confidence.”
The Chinese government had set a target of achieving an average inflation rate of 3% by 2023, illustrating the growing disparity between official expectations and the actual economic climate. As policymakers face mounting pressure, it remains to be seen how they will navigate the challenges ahead and implement measures to revive the economy.
In the face of these economic developments, individuals can now receive free updates on the Chinese economy. By signing up for the myFT Daily Digest email, subscribers will receive a comprehensive roundup of the latest Chinese economy news every morning. This service aims to keep individuals informed about the ongoing developments and potential impacts on various sectors within the Chinese economy.
As the global community monitors China’s economic situation closely, it is imperative for policymakers to take swift and effective action to address the deflationary pressures and ensure sustainable economic growth in the country.