Chinese economy expected to have slipped into deflation as recovery falters | China

The Chinese economy is expected to have slipped into deflation amid signs of a faltering post-pandemic recovery, according to market forecasters.

Chinese consumer price inflation data is due to be released on Wednesday, and a Reuters poll of economists suggests it will show that prices fell by 0.4% year-on-year in July, having been flat on an annual basis in June.

That would be China’s first negative inflation reading since early 2021, when prices were weaker as the Covid-19 pandemic hit demand, and pork prices fell.

Chinese retailers have been hit by a slowdown in sales this summer. This means retailers who stocked up on goods expecting a surge in demand after pandemic restrictions were lifted are now under pressure to cut prices.

The cost of cars has also fallen, after price cuts from Tesla triggered a price war, with other brands lowering their prices too.

China’s factories are already charging less for their goods, as they react to weakening demand after commodity prices fell. China’s producer price inflation, which tracks prices at the factory gate, was -5.4% year-on-year in June.

Homin Lee, senior macro strategist at Lombard Odier, predicted July’s CPI inflation report could show “outright deflation”, with prices slightly lower than a year ago.

“In the July numbers, for sure, the CPI inflation will be negative in our view. Factory prices are deeply negative, that’s going to affect the goods numbers,” he told CNBC.

He also warned that the geopolitical environment will get worse next year as the US enters a presidental election season.

Falling prices may sound attractive to consumers in the west, where inflation hit its highest levels in decades last year. In the UK, consumer prices were 7.9% higher than a year ago in June, as households suffered a long run of falling real incomes.

But deflation can hurt economic growth, as consumers will delay purchasing products if they think they will be cheaper in future. This leads companies to cut back on investment as their profits shrink.

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Trade data released on Tuesday showed that China’s imports and exports both fell more sharply than expected in July, adding to concerns over the world’s second-largest economy.

Exports fell by 14.5% year on year, while imports tumbled 12.4%, partly due to the lower cost of raw materials such as crude oil.

Chinese authorities have reportedly put pressure on high-profile local economists to avoid discussing negative trends in the economy, including deflation, the Financial Times reported.

Jim Reid, strategist at Deutsche Bank, said the trade data highlighted that the Chinese economy is being “dragged lower by weakness in global demand and a domestic slowdown”.

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