China Facing Deflation Threat as Inflation Cools, Impact on Global Economy
As the world sees signs of cooling inflation, China is facing fears of entrenched deflation. In August, consumer price inflation in China rose, but concerns remain about the state of demand in the second-largest economy. Food prices were the main driver of the uptick, but core consumer inflation slowed to its lowest level in years. Producer prices also declined, accelerating the deflationary trend.
Prolonged deflation could have serious consequences, including declining paycheck sizes, lower spending, corporate revenues, and potential layoffs. Analysts warn of a possible "lost decades" scenario similar to Japan in the 1990s. To avoid this, China may need to implement costly measures to stem the deflationary cycle.
Efforts to boost the economy through industrial loans have not been effective, as they have increased consumer goods supply without boosting demand. China's goal of 5% real GDP growth by 2024 could be at risk due to deflationary pressures. Lawmakers may need to provide fiscal support to key sectors like housing and social welfare programs to counteract the effects of deflation.
However, analysts caution that significant policy changes may not be imminent. China's deflationary cycle also has global implications, as it exports disinflationary pressure to other countries. The US and eurozone have already seen a decrease in core inflation due to China's deflation, prompting central banks to consider interest rate reductions.
In conclusion, China's struggle with deflation could have far-reaching effects on the global economy. It is important for policymakers to address these challenges proactively to prevent a potential economic downturn.