How will deflation in China impact the global economy?
Deflation in China could aid near-term global disinflation, as declining export prices out of China translate into lower import prices for trading partner countries. J.P. Morgan Research estimates China’s deflation will lower global core goods inflation (ex-China) by 70 bp (basis points) over the second half of 2023.
“China plays a significant role in global goods disinflation. In 2021 and 2022, as much of the world recovered from the pandemic, China went into lockdown and a large positive shock to global goods demand coincided with a negative supply shock and broad disruptions to domestic supply chains,” said Nora Szentivanyi, Senior Economist at J.P. Morgan. “Then, earlier in 2023 when China reopened, the rest of the world was slowing down and the boost to global demand from China’s reopening bounce was outweighed by the boost to global supply. This dynamic of excess supply has driven China’s domestic and export prices into deflation.”
China’s export prices have fallen at a pace of 18%ar (annual rate) in the three months leading to July as exporters slash prices to boost demand. The declines, initially led by processed raw materials, have since broadened to other key exports. “The fall in upstream prices has lowered costs for China’s downstream producers, and as a result, export price declines are now substantial not just in processed materials such as metals and chemicals, but also in lower-end consumer goods. This enhances the near-term spillover for the rest of the world,” Szentivanyi said. Indeed, this is facilitating the disinflation process for major trading partners: for instance, U.S. import prices from China fell -4.1%ar in the three months to July, while the Euro area saw a decline of -15%ar.
In addition, the depreciation of the yuan over the past year has magnified China’s disinflationary impulse on global import prices. With roughly two-thirds of China’s goods trade transacted in dollars and the rest in CNY, the appreciation of most major currencies against the CNY is driving down import prices in local currency terms, especially in Latin America and Europe.
“Overall, China’s export price deflation combined with the fall in China’s trade-weighted currency is likely reinforcing the slide in global core goods inflation currently under way,” Szentivanyi said. “Taken together with other near-term disinflationary forces including the continued fading of supply bottlenecks, Chain’s excess supply is likely to weaken the pricing power and profit margins of goods producers elsewhere.”
