In June, China experienced the fastest decline in producer prices in over seven years, while consumer prices were on the brink of deflation. This highlights the need for policymakers to implement more stimulus measures to stimulate sluggish demand and revive the economy.
The continuous deflation in factory-gate prices and the potential deflation of consumer prices, for the first time since February 2021, pose significant challenges to China’s economic growth. The momentum of China’s post-pandemic recovery has slowed down considerably, with weakening demand for both industrial and consumer products, raising concerns about the health of the world’s second-largest economy.
Economists at Barclays expressed their belief that the challenging deflation environment and the sharp slowdown in growth momentum indicate that the People’s Bank of China (PBOC) has entered a rate-cutting cycle. They foresee a greater need for rate cuts to stimulate the economy.
According to the National Bureau of Statistics (NBS), the producer price index (PPI) fell for the ninth consecutive month in June, declining by 5.4% compared to the previous year. This marked the steepest decline since December 2015, surpassing analysts’ expectations of a 5.0% fall predicted in a Reuters poll.
On the other hand, the consumer price index (CPI) remained unchanged year-on-year, driven by a faster fall in pork prices. This contradicted expectations of a 0.2% rise, marking the slowest pace since February 2021.
Nomura predicts a 0.5% year-on-year decrease in consumer prices for July, even considering a potential rise in service inflation during the summer holiday season.
The unexpected inflation readings had a negative impact on financial markets, causing the yuan to fall and Asian stocks to dip.
Economists at Capital Economics believe that headline inflation will likely rise to approximately 1% by the end of the year, which although soft, will not hinder the PBOC’s ability to further loosen monetary policy. They anticipate that most of the support will come through fiscal policy, with only a slight 10 basis points reduction in policy rates expected this year.
Beijing’s target for average consumer inflation in 2023 is around 3%, as prices rose by 2% year-on-year in 2022. To boost liquidity and promote household consumption, China implemented policy rate cuts last month.
The energy, metals, and chemicals industries faced the most significant year-on-year declines in producer prices, as both domestic and foreign demand weakened. Chief economist at Jones Lang Lasalle, Bruce Pang, attributed the accelerating decline in the PPI to the weak real estate and construction sectors, as well as the strength of industrial production. However, Pang believes that the year-on-year decline in the PPI is likely to have already reached its lowest point and expects a gradual narrowing in the second half of the year.
Analysts at Shanghai Securities, like Hu Yuexiao, predict that China’s central bank will further cut lending rates and reduce the reserve requirements ratio in the second half of the year. However, economists highlight that small rate cuts may not have a significant impact on loan demand, as families and businesses focus on repairing their balance sheets damaged by the COVID pandemic. Consequently, Beijing will have to rely on fiscal stimulus and other means to stimulate demand.
– Reuters
Credit: The Star : Business Feed
