China is heading for recession as efforts to fuel recovery falter

Customers pick tomatoes at a stall inside a morning market in Beijing, China on August 9, 2023. REUTERS/Tingshu Wang

  • The consumer price index fell at annual rates for the first time in two years
  • China is the first G20 economy to report a contraction since Japan in 2021
  • More direct policy incentives are needed

BEIJING (Reuters) – China’s consumer sector fell into recession and factory gate prices extended their slides in July as the world’s second-largest economy struggled to revive demand and pressure mounted on Beijing to launch more direct stimulus.

Concern is growing that China is entering an era of much slower economic growth akin to Japan’s “lost decades,” which saw consumer prices and wages stagnate for a generation, in stark contrast to the rapid inflation seen elsewhere.

China’s post-pandemic recovery has slowed after a brisk start in the first quarter as demand at home and abroad weakened and a series of policies to support the economy failed to support activity.

The National Bureau of Statistics said on Wednesday that its consumer price index (CPI) fell 0.3% year-on-year in July, compared to the median estimate for a 0.4% decline in a Reuters poll. This was the first decline since February 2021.

The Producer Price Index (PPI) fell for the 10th consecutive month, declining by 4.4% and faster than expectations, which fell by 4.1%.

Reuters graphics

China is the first G20 economy to record a year-on-year decline in consumer prices since Japan’s last major negative CPI reading in August 2021, and the weakness adds to concerns about hurting business among major trading partners.

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“For China, the divergence between manufacturing and services is looking increasingly clear, which means the economy will grow at two speeds in the rest of 2023, especially with the resurgence of the real estate problem,” said Gary Ng, chief Asia Pacific economist at Natixis. . It also shows that China’s slower-than-expected economic recovery is not strong enough to offset weak global demand and higher commodity prices.

The data comes a day after trade figures showed both exports and imports fell in July and follows a series of reports of more debt problems in China’s giant real estate sector. Anxious consumers and businesses are hoarding cash rather than spending or investing it, despite low interest rates.

Asian stocks were on the defensive on Wednesday as Chinese price data confirmed that their economic recovery is running out of steam.

mixed prospects

Anemic prices in China contrast sharply with the devastating inflation experienced in most other major economies, which has forced central banks elsewhere to quickly raise interest rates.

However, there are signs that global inflation may be peaking and in some cases reversing. Last week, Brazil cut interest rates for the first time in three years amid milder inflationary conditions.

Beijing has set a target for consumer inflation of around 3% this year, which will rise from 2% recorded in 2022. For now, authorities are playing down concerns about deflation.

Liu Guoqiang, deputy governor of the central bank, said last month that there would be no deflationary risks in China in the second half of the year, but noted that the economy needs time to return to normal after the epidemic.

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The decline in Chinese CPI in July was mainly due to an acceleration in pork prices falling to 26% from 7.2% due to a combination of weak consumption at a time of ample supplies. On a monthly basis, CPI actually rose 0.2%, defying expectations for a decline, driven by higher holiday travel.

Core inflation, which excludes food and fuel prices, rose to 0.8% year-on-year, from 0.4% in June.

Some analysts say this suggests comparisons with Japan may be premature.

Xia Chun, chief economist at Yintech Investment Holdings in Hong Kong, expects the downturn in China to last for six to 12 months, but it will not follow the history of Japan, where prices have stagnated for most of the past two decades.

In recent weeks, policymakers have announced measures to boost auto and appliance sales, while some cities have eased restrictions on real estate, but some market participants say more decisive stimulus is needed.

“There are still doubts about China’s plan to revive consumer spending,” Fitch Ratings said, noting that the plan will depend largely on a recovery in consumer confidence and the implementation of local governments’ policies, while details on the measures remain vague.

Investors were eagerly awaiting policymakers to inject stimulus after last month’s powerful Politburo meeting, with the stock market mostly frustrated by the lack of concrete action.

“Markets and companies need to get used to the ‘new normal’ in which the Chinese government avoids introducing significant stimulus,” said Tommy Wu, chief economist at Commerzbank.

“Instead, targeted stimulus will be implemented and most policy measures will focus on the supply side,” Wu said.

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Additional reporting by Liangping Gao, Ella Kao and Ryan Wu; Editing by Sam Holmes and Kim Coghill

Our standards: Thomson Reuters Trust Principles.

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