Main Topic: China's inflation data for July
Key Points:
1. Consumer price index (CPI) fell by 0.3% in July from a year ago, but was up by 0.2% compared to June.
2. Producer price index (PPI) fell by 4.4% in July from a year ago, better than the decline in June.
3. Both CPI and PPI are in deflation territory, indicating weakening economic momentum and lacklustre domestic demand.
### Summary
The Chinese economy has slipped into deflationary mode, with retail sales, industrial production, and exports all missing forecasts. Shrinking domestic demand and a debt-fueled housing crisis are the main causes behind this slowdown.
### Facts
- 📉 Retail sales in July grew by 2.5% year-on-year, compared to 3.1% in June.
- 🏭 Value-added industrial output expanded by 3.7% y-o-y, slowing from 4.4% growth in June.
- 📉 China's exports fell by 14.5% in July compared to the previous year, and imports dropped 12.4%.
- 💼 Overall unemployment rate rose to 5.3% in July, with youth unemployment at a record 21.3% in June.
- 📉 Consumer Price Index-based inflation dropped to (-)0.3%, indicating a deflationary situation.
- 🏢 China's debt is estimated at 282% of GDP, higher than that of the US.
### Causes of the slowdown
- The debt-fueled housing sector collapse, which contributes to 30% of China's GDP.
- Stringent zero-Covid strategy and lockdown measures that stifled the domestic economy and disrupted global supply chains.
- Geopolitical tensions and crackdowns on the tech sector, resulting in revenue losses and job cuts.
### Reaction of global markets
- The S&P 500 fell 1.2% following the grim Chinese data.
- US Treasury Secretary warns China's slowing economy is a risk factor for the US economy.
- Japanese stocks and the Indian Nifty were also impacted.
- China's central bank cut its benchmark lending rate, but investors were hoping for more significant stimulus measures.
### Global market concerns
- China's struggle to achieve the 5% growth target may impact global demand.
- China is the world's largest manufacturing economy and consumer of key commodities.
- A slowdown in China could affect global growth, with the IMF's forecast of 35% growth contribution by China seeming unlikely.
### Impact on India
- India's aim to compete with China in the global supply chain could benefit if Chinese exports decline.
- However, if China cuts back on commodity production due to slowing domestic demand, it may push commodity prices higher.
Japan's exports fell in July for the first time in nearly 2-1/2 years, driven by weak demand for light oil and chip-making equipment and raising concerns about a global recession as the demand in key markets such as China weakens.
Consumer inflation in Tokyo grew at a slower pace than expected in August, but the core figure, which excludes fresh food and energy costs, remained at its highest level in over 40 years, indicating that inflationary conditions in Japan remain high and putting pressure on the Bank of Japan to eventually tighten policy.
Japan's factory output fell more than expected in July, indicating a challenging start to the second half of the year for manufacturers amid concerns about China's growth and the global economy. Output declined 2.0% in July from the previous month, driven by decreased domestic and overseas orders, particularly in the electronic parts and production machinery sectors. However, car production rose 0.6% due to improved supply chain conditions.
If China were to slip into a deflationary spiral like Japan in the 1990s, it could lead to a decrease in consumer spending, a weakened economy, and negative consequences for the rest of the world, including a slowdown in imports for the US and adverse effects on developing economies reliant on Chinese exports and investment.
British factories in August experienced their weakest month since the start of the COVID-19 crisis due to shrinking orders caused by rising interest rates, according to a survey, resulting in a decline in purchasing activity, inventory holdings, and staffing levels. However, the slowdown in domestic and export demand has alleviated inflation pressures, potentially leading to a decrease in goods price inflation. With the economy showing signs of a slowdown, the Bank of England is expected to raise rates for the 15th consecutive time, despite concerns that it may lead to a recession.
South Korea's annual consumer inflation accelerated to 3.4% in August, the fastest rate since early 2017, raising concerns for policymakers.
Philippine inflation unexpectedly quickened in August due to higher food and transport costs, putting pressure on the central bank to maintain its hawkish stance, and the government may consider reducing rice tariffs to help lower domestic costs.
The US economy grew modestly in July and August, with signs of consumers relying more on borrowing to support spending after depleting their savings, while inflation slowed due to decreasing price pressures in the goods sector, according to the Federal Reserve's Beige Book report.
Annual core inflation in Mexico slowed to a 20-month low in August, below market forecasts, as the central bank maintains high interest rates to curb price increases.
Japan's economy grew less than expected in Q2 and wages fell in July, raising doubts about the country's recovery and the effectiveness of the central bank's projections for domestic demand.
Japanese real wages continued to decline for the 16th consecutive month in July, posing a challenge for the Bank of Japan's efforts to stimulate inflation and economic growth.
China's consumer prices rose slightly and the decline in factory-gate prices slowed in August, indicating easing deflation pressures and signs of stabilization in the economy, although more policy support is needed to boost consumer demand.
Japan's annual wholesale inflation slowed for the eighth consecutive month in August, providing relief for households and retailers affected by previous increases in raw material imports.
Japan's exports to China declined for the ninth consecutive month in August, dropping 11%, due to weak demand and the suspension of seafood imports following the Fukushima Daiichi nuclear plant incident.
Asia-Pacific markets fell as the Bank of Japan kept rates unchanged and noted a "moderate recovery" in the economy, while Japan's private sector activity expanded at its slowest pace since February and the country's August inflation rate remained above the BOJ's target for the 17th straight month.
Japan's core inflation remained steady in August, staying above the central bank's 2% target for the 17th consecutive month, signaling broadening price pressure and potentially increasing the case for an exit from ultra-easy monetary policy.
Japanese consumer inflation grew above expectations in August, potentially signaling a move away from negative interest rates as the Bank of Japan meets to discuss its monetary policy.
Despite predictions of higher unemployment and dire consequences, the Federal Reserve's rate hikes have succeeded in substantially slowing inflation without causing significant harm to the job market and economy.
Singapore's consumer price index inflation eased slightly in August, largely due to softer services and food prices, although increased fuel prices continued to support inflation; however, the Monetary Authority of Singapore (MAS) expects core inflation to further moderate in the coming months.
Germany's inflation rate in September slowed to the lowest level since Russia invaded Ukraine, potentially leading the European Central Bank to reconsider its interest rate hikes.
Consumer spending in the US increased by 0.4% in August, while core inflation fell below 4.0% for the first time in over two years, potentially reducing the likelihood of an interest rate hike by the Federal Reserve.
China's factory and services sectors experienced slower growth in September due to weak external demand, despite an increase in output, with the property slump, falling exports, and high youth unemployment clouding the economic outlook.
Japan's factory activity fell at the fastest pace in seven months in September, reflecting weakening global economic conditions and a decline in new export orders.
China is facing a "grinding" economic slowdown with a narrow path for policymakers to prevent further decline, as its property sector and growth rate enter into structural decline and stimulus measures can only partially offset the weakening consumption and investment. However, it is unlikely to experience a Japan-like stagnation but rather a "Sinification" scenario with 3%-4% GDP growth over the next few years.
Japan's service sector experienced the slowest expansion in September since the beginning of the year, as shown by a private survey, indicating potential challenges for the country's economic recovery heavily reliant on domestic demand.
The September CPI report showed slow and lumpy progress in inflation, with headline CPI growing at 3.7% year-over-year and core inflation decelerating to 4.1% growth, while the US Treasury Department's auction of Thirty Year Bonds resulted in disappointing results due to an imbalance in the equilibrium between demand and supply for US paper, causing disruptions in financial markets.
China's consumer price index remained flat in September, indicating the ongoing risk of deflation and the need for policy support to sustain economic recovery. The decline in food price inflation and energy price deflation were identified as the main factors contributing to the flat CPI. Additionally, China's producer price index fell by 2.5% in September, marking the 12th consecutive month of decline, but the deflationary pressure eased due to a pickup in global oil and commodity prices. Core inflation remained steady, while policy support is expected to be necessary to maintain recovery momentum.
China's exports and imports declined at a slower pace in September, indicating a gradual stabilization in the economy, although challenges remain in the face of deflationary pressure, a property crisis, global slowdown, and geopolitical tensions.
Japan's overall consumer prices rose 3% in September, slightly lower than the previous month but still above the Bank of Japan's target, while consumer inflation excluding food and energy increased by 4.2%.
Japan's factory activity contracted for the fifth consecutive month in October, while the service sector experienced its slowest growth this year, indicating growing uncertainty about the country's economic outlook.
Tokyo's core consumer inflation unexpectedly accelerated in October, indicating broader price pressures and raising expectations of a near-term end to ultra-low interest rates, which may lead the Bank of Japan to revise up its inflation forecasts.
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