CHINA DEFLATION: WHAT LIES AHEAD

China reported "deflation" in July. Marquee business dailies in the West have termed this as a "warning sign for the global economy". We explain how this could compound the task of monetary policy managers, and twist the narratives so far on global growth and financial stability across nations

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Deflation, and China

DEFLATION IS PERSISTENT, generalised decline in price levels in an economy. While the other major economies are battling stagflation (low growth-high inflation) with monetary tightening and fiscal correction, China has started experiencing stagnation.

The recovery of the world's second-largest economy after its tight Covid curbs appeared quick initially, but has since proved to be slow. Consumer demand is tepid. Both the relevant indices-consumer price index (retail) & producer price index (factory gate)slipped to the deflationary zone in July, with y-o-y decline of 0.3% and 4.4%, respectively. For CPI, this is first fall since February 2021, while PPI has declined for the 10th month in a row. The Chinese economy grew 6.3% in Q22023, against 4.5% in Q1-but that was largely because of the base effect.

Consequences for China & likely policy reaction