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China’s economy slid into recession after consumer prices fell for the first time since early 2021, in one of the strongest indications of the challenges facing policymakers as they struggle to revive consumption.
The consumer price index fell 0.3 percent year-on-year in July, according to official statistics released on Wednesday, after registering no change in the previous month. The producer price index, a measure of the price of goods as they leave the factory gates, fell 4.4 percent in July.
Consumer prices, which fell into negative territory in February 2021, had been on the brink of deflation for several months as an expected recovery in consumer spending failed after the authorities lifted pandemic restrictions at the start of the year.
The transition to deflation is set to fuel calls for more government stimulus at a time when policymakers are also grappling with a slowing real estate sector and weak trade, all of which have dampened economic momentum.
“The Chinese economy is now in serious danger of slipping into a deflationary cycle that could lead to a self-reinforcing downward spiral in growth and private sector confidence,” said Eswar Prasad, a China finance expert at Cornell University. “The government needs to act quickly and decisively to stop growth and reduce deflation before things get out of control.”
China bucked the global inflationary trend of other large economies, many of which launched sweeping stimulus efforts during the pandemic. By contrast, Beijing has sought to control the virus with a three-year Covid-free policy.
Chinese policymakers have tried to project confidence in the economy since reopening, cutting some interest rates and offering tax incentives to businesses, but they have stopped short of a major stimulus. The ruling Communist Party’s Politburo acknowledged late last month that the recovery was making “zigzag progress” and said it would “actively expand domestic demand.”
The National Bureau of Statistics said on Wednesday that average consumer price inflation over the year so far has been just 0.5 percent, lagging behind the government’s average inflation target of 3 percent this year, highlighting the growing divergence between expectations and reality over the past year. the earth. .
Beijing’s GDP growth target of 5 percent for 2023, the lowest in decades, was originally seen as dovish, but months of persistently weak data has fueled broader pessimism about the growth outlook.
The economy expanded just 0.8 percent between the first and second quarters of the year, while data published on Tuesday showed July exports fell 14.5 percent year-on-year, the sharpest decline since the start of the pandemic. Imports fell 12.4 percent year-on-year in dollar terms, the sharpest drop since January.
Dan Wang, an economist at Hang Seng Bank in Shanghai, said inflation and trade figures were “a reflection of declining purchasing power and weak consumer confidence.”
More data next week will provide an overview of economic activity in July, including industrial production and retail sales.
China’s consumer prices have been hit hard in recent years by pork prices, which the National Bureau of Statistics said fell 26 percent in July year on year. Core inflation, which excludes more volatile food and energy prices, rose 0.8 percent.
Producer prices, which are heavily driven by the cost of commodities and raw materials, have been mired in negative territory for the past 10 months, while manufacturing activity has contracted for four straight months, reflecting weak demand for Chinese exports.
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