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China—Worsening deflation adds to economic troubles
Growing concerns that deflation is becoming entrenched will challenge this year’s GDP growth target of around 5%. Core inflation, which excludes volatile food and energy prices, rose 0.3% year-on-year in August, the lowest rate since March 2021. Producer prices fell for a 23rd consecutive month—by 1.8% year-on-year in August, steeper than July’s 0.8% decline. Deflation pressures are reflected in weak consumer confidence and spending—retail sales grew 2.1% year-on-year in August, the weakest since COVID-19 lockdowns—and low import growth. The drivers include high youth unemployment (17.1% in July) and an accelerating property market slump. An inability to raise prices amid weak demand is weighing on the profits of local (Chart) and foreign-owned businesses. The American Chamber of Commerce reports that just 66% of surveyed US firms in China were profitable in 2023, a record low.
Experience from Japan suggests that deflation costs more to fix the longer it lasts. Past stimulus has helped boost manufacturing production and exports—which rose at the fastest annual pace in 17 months in August. But stimulus has also raised production of consumer goods at a time of weak demand, worsening deflation. Former People’s Bank of China governor Yi Gang suggests Beijing focus on “proactive fiscal policy” and “accommodative monetary policy” to end deflation. Morgan Stanley estimates China must spend up to CNY10 trillion (US$1.4 trillion, 7.5% of GDP) over two years to reflate the economy—equivalent to 2.5 times the size of the 2008 GFC stimulus package. But any new stimulus is likely to be modest given authorities concern about stoking financial instability.
China’s economic challenges heighten risks to Australian exports. Weak consumer demand poses headwinds for services exports while challenges in property construction are contributing to declining prices for resources exports, including iron ore, coking coal and copper.
