China’s consumer inflation rate is expected to remain weak in the near future on persistently weak domestic demand, raising worries about the risk of deflation as the nation’s economic recovery struggles to gain traction.
This comes as the country’s consumer price index (CPI) rose by a mere 0.3% year-on-year in May, unchanged from April and well below the government’s 3% target.
“Amid still-weak domestic demand, we expect CPI inflation to stay slightly
above zero in the near term and producer price index (PPI) inflation to be slightly less negative on a low base,” Japan’s Nomura Global Markets Research said in a note.
“The deflation in the fourth quarter of 2023 will provide a low base for CPI to rebound more strongly in the last quarter of the year,” Ho said.
UOB’s full-year forecast for China’s headline inflation is at 0.7% for 2024, compared with 0.2% in 2023, “but current trajectory suggests that the risk is to the downside”, she added.
Meanwhile, factory gate prices continued their downward spiral, with the PPI falling for the 20th consecutive month in May.
The PPI declined by 1.4% year on year in May, a slight improvement from the 2.5% drop in April.
“The pace of PPI deflation is expected to ease but this had been slower than expected as oil prices stayed muted and overcapacity in some industries weighed on the prices of manufactured goods,” Ho said.
“Increasing tariffs imposed on Chinese goods may further delay the price recovery.”
The persistent low inflation is a stark contrast to the high inflation plaguing Western economies, further fueling fears of deflation as China grapples with sluggish consumer spending – a key obstacle to the country’s uneven recovery from the pandemic.
While inflation is likely to remain low in the second quarter, it should begin to pick up in the second half of the year, Dutch banking and financial information services provider ING said in a note.
“Although inflation is set to pick up this year as the drag from falling food prices fades, it is anticipated to remain well below target amid slowing consumption and weak demand pressures,” the World Bank said in its June Global Economic Prospects report released on 11 June.
“Producer price pressures are also set to remain weak in the context of subdued activity and softening prices for commodities, particularly energy and metals.”
China’s economic growth is projected to ease to 4.8% in 2024, down from 5.2 percent in 2023, as activity is expected to soften in the latter half of this year, according to World Bank estimates.
While a potential uptick in goods exports and industrial activity, bolstered by a global trade recovery, is anticipated, this will likely be counterbalanced by weaker domestic consumption, it added.
“We expect domestic and external demand to continue diverging over the near term, as the property fallout sustains and the economy rebalances itself,” Nomura said.
“Export growth is likely to remain resilient in the near term, thanks to a low base, the resilient US economy, the global tech upswing, the price advantage of Chinese products and some front-loading ahead of scheduled or threatened tariff hikes.”