Chinese economy has slipped into deflation as consumer prices declined in the last months, the first time in two years. The weak import and export data indicate a decline in the country's post-COVID-19 recovery.
The official consumer price index of the country fell by 0.3% last month from last year, potentially increasing pressure on the world's second largest economy to revive demand, BBC reported. Official data also shows that Chinese exports fell by 14.5% in July from 2022 and imports dropped by 12.4%, in what is the biggest slump recently.
These figures have forecasted that the Chinese economic growth could further slow down this year. Foreign demand for Chinese goods has also weakened due to geopolitical tensions between China and the US and others, which led to international firms shifting investments out of the country.
China is also facing growing local government debt and housing market challenges, along with a record-high unemployment rate of over 21% among Chinese youth. As per analysts, falling prices will make it harder for Beijing to lower its debt and curb the slower rate of growth.
What problems can deflation cause for China?
If Chinese goods at lower prices flood global markets, it can have a negative impact on manufacturers from other countries, affecting businesses and employment. Moreover, this could affect company profits and consumer spending.
Global exports will also be impacted as demand for Chinese goods like energy and raw materials is likely to decline due to deflation. This is a big worrying sign for China as it is one of the largest producers of goods sold across the world.
The recent deflation is not an unexpected outcome, as prices of Chinese goods have not increased since COVID-19 restrictions, in sharp contrast with other developed economies. Consumer prices had declined as early as February 2021, a sign that is recovering much slower than expected from the pandemic.
"Deflation will not help China. Debt will become more heavy. All of this is not good news," said Alicia Garcia-Herrero, a professor at the Hong Kong University of Science and Technology.
In the midst of all this, China has been reassuring the public that everything is under control, but is yet to announce mesaures to revive economic growth. China's weakening economy can have significant repercussions on the global economy as well.