China’s economy faces mounting difficulties in 2024 as both consumer and producer price indices indicate deflation risks and sluggish domestic demand. The recent governmental efforts to stimulate growth have yet to be fully defined, until they are the economic outlook looks bleak, with deeper structural challenges holding back recovery.
China’s export growth unexpectedly slowed in Sep and climbed just 2.4% y/y in USD terms to almost US$304 bn, the lowest level since May, the customs administration said on Mon. Shipments to key markets including Japan, South Korea and Taiwan all fell, while exports to the European Union and the US marked their slowest rise in at least four months.
According to Bloomberg’s calculations, financial institutions in China offered 1.6 tln yuan of new loans in Sep, below the median forecast of 1.9 trillion yuan while aggregate financing, a broad measure of credit, rose by CNY 3.8 tln, a tad above the median estimate of CNY 3.6tln.
China’s GDP deflator has been negative for the past five quarters, and it is very likely that the implied deflator will remain negative in the Q3 GDP report, due for release this week.
China’s core inflation rate has slowed to 0.1% year-over-year in September 2024, down from 0.3% in August, reflecting weak demand across services and other non-food sectors. Overall CPI declined to 0.4%, with falling energy and transportation costs contributing to the drop. Food prices remained buoyant with pork prices up 16% and veggies up almost 23%, but it was not enough to offset deflationary factors.
Producer Price Index (PPI) has been in deflation for 24 consecutive months. In September, the PPI contracted by -2.6% y/y, down from -1.8% registered in August. Consumer goods PPI was the weakest since 2009, with clothing and durables leading the decline.
China’s GDP deflator has been negative for the past five quarters, and it is very likely that the implied deflator will remain negative in the Q3 GDP report, due for release this week.
China faces a delicate balancing act. Immediate fiscal stimulus is needed to shore up demand and stave off deflation, while long-term structural reforms are needed to rebalance the economy towards consumption. The slowdown in 2014-2016 demonstrated that it takes time for structural reforms to have an impact. Without bold action, China risks falling into a deflationary trap that could have ripple effects across the global economy.
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