CHINESE RECOVERY IS UNEVEN AND DEFLATION PERSISTS
Details of the GDP data reflected an uneven recovery in the Chinese economy, which raises concerns if the current growth is sustainable.
In recent quarters, the manufacturing industry emerged as a key growth driver and construction activity was robust, while the real estate sector continued to shrink. All this is supported by government efforts to direct more financing to the industrial and infrastructure sectors and less to the housing market.
The agriculture and animal husbandry sectors have declined in the past two quarters as there was an excess of supply, leading to price discounts for some food items, such as vegetables and livestock meat, which were the main drivers of deflation.
Average consumer prices fell in the second half of 2023 because of lower prices for food and consumer goods. With consumer demand still subdued and confidence yet to meaningfully recover, deflationary pressures will continue to persist.
What then does deflation mean for businesses and consumers? Falling prices aren’t always a good thing.
It means lower revenue for companies and pushes up debt servicing costs which makes it harder for businesses to invest.
If a Chinese consumer was eyeing a new expensive appliance but believes that it will become cheaper in the coming months, they may hold back on purchases. If more consumers do this, the boost in domestic consumption China is banking on will keep being pushed down the road, causing prices to fall due to oversupply.
