Deflation, New Threat to Economic Growth in China

Consumer prices recorded a 0.5% contraction, while product prices are also falling

The world’s second largest economy, China, is slipping into deflation. Consumer and production prices are falling. Deflation is considered a very serious threat to the Chinese economy, with consumers of all categories tending to delay purchases in the hope of further declines. The lack of demand can trigger a sort of chain reaction, from production cuts to hiring freezes by companies and even mass layoffs. Inventories of unsold products in warehouses are piling up. The combination of these factors, which are very difficult to manage, threatens China’s economic growth, projected for 2023 at 5%.

Deflation in China accelerated in November, drawing attention to the difficulties of the Chinese national economy, especially in terms of reviving domestic demand, which is now being held back by deflation. Consumer prices recorded an annual decline of 0.5% in November, following a 0.2% decline in the previous month. The recorded decrease in food prices is the most significant since November 2020 and amounted to 4% and 4.2%, respectively, in October and November.

“Producer prices,” also reported National Statistics Office, “fell 3% for the year, much more than the -2.6% in October and the market forecast of -2.8%.” It was the 14th straight monthly decline and the “biggest since August,” as the economy worsens.

The data was publicized after Chinese President Xi Jinping said China’s post-pandemic economic recovery is “still at a critical stage” amid “increasing headwinds in the international political and economic situation.”