Deflation is expected to end in 2024, but low inflation will probably remain throughout the year ahead. As Kavan Choksi Business Consultant says, China has been somewhat an outlier when it comes to inflation dynamics. As opposed to the common inflation challenges experienced by other countries subsequent to Covid-19 pandemic, China has been facing intensified deflationary pressure. As of January of 2024, the headline Consumer Price Index (CPI) of China fell 0.8% compared with the previous year and its PPI (Producer Price Index) was down 2.5%.
Kavan Choksi Business Consultant offers insight into deflation and consumption performance in China
Deflation is typically a result of multiple factors. In terms of the external front, global commodity prices were in a deflationary cycle subsequent to China’s reopening and fell 8.7% year-over-year in January 2024. On the other hand, domestically food prices were down 5.9% in January, largely due to vegetable and pork price declines.
The PPI of China is expected to climb out of deflation by the middle of 2024, with the full year average at around 0.0%. The energy price component in the CPI is not likely to be a drag any longer, as pork supply in the country has stabilized and prices are expected to bottom near current low levels. With the easing of pork price drags, headline CPI may turn positive in 2Q 2024. With global commodity prices moving higher, deflation is expected to end in 2024. The low inflation environment, however, is expected to continue into 2024.
As per Kavan Choksi Business Consultant, consumption performance in China has been fairly volatile since the Covid-19 pandemic. Consumption contributed an average of 61% to GDP growth in the pre-pandemic years. This contribution, however, turned negative in 2020. Subsequent to reopening, consumption was a primary growth driver in 2023 and contributed 82% to GDP growth. However, the four-year average contribution of 2.5 percentage points is much lower than in pre-pandemic years.
Retail sales are among the most important components of consumption, and it registered negative growth in 2020 and 2022. The average cumulative growth of retail sales in 2020-23 was just 3.7%, much lower than the average growth in 2018–19. This downshift in consumption has majorly weighed on the economic recovery of China.
The weak consumption growth in China is as much a cyclical issue as a structural one. China has historically maintained a household consumption-to-GDP ratio lower than that of comparable nations, with a standing of 56 % as opposed to 66 % in India and 67 % in Thailand. In contrast, most advanced economies typically have an average consumption-to-GDP ratio of around 80 %. This disparity is attributed, in part, to China’s catch-up policy implemented since its reforms in the 1980s. This policy aims to propel economic development by utilizing household savings to support entrepreneurs, thereby restraining overall consumption. The situation was made worse by the Covid-19 pandemic, which damaged the finances of several households. Youth unemployment in China has also gone up. Even with the increases in retail sales and services, the recovery of consumption of durable goods and big-ticket items remained sluggish in 2023.
