China is teetering on the brink of deflation amid
mounting concerns about the health of the world’s second largest economy.
Consumer price inflation (CPI) fell to zero in the year to June after a sharp fall in pork prices. The official figure was the weakest reading since February 2021 and below economists’ estimates of a 0.2pc annual rise in CPI.
Producer prices also fell by 5.4pc in June, marking the ninth straight monthly decline and the steepest fall since the end of 2015.
China has struggled to break out of
an economic malaise caused by draconian zero-Covid policiesthat were only scrapped at the end of last year.
Heightening tensions between Beijing and Washington have also weighed as Western companies increasingly shift investment away from China.
Youth unemployment in the country stands at 20.8pc as record numbers of graduates struggle to find jobs.
Duncan Wrigley, chief China economist at Pantheon Macroeconomics, said: “Insipid consumer inflation is an indication of the soggy consumer spending recovery, especially for goods, as well as excess production capacity.”
Several of China’s internet giants reported disappointing sales figures at a major shopping event earlier this month.
Economists expect the People’s Bank of China to respond to the country’s weakening economy with cuts to interest rates.
Analysts at Barclays said in a client note: “We think the more challenging deflation environment and sharp slowdown in growth momentum support our view that the PBOC has entered a rate-cutting cycle.”
Some economists believe Beijing will have to supplement rate cuts with tax reductions or increased spending to boost activity.
However, Mr Wrigley said Beijing was unlikely to be forthcoming with a massive fiscal stimulus.
He said: “So far the public information points towards a targeted, limited stimulus, which will largely be funnelled into support for industry, technology upgrades and private firms, rather than a significant consumer handout.”
Looming deflation in China stands in sharp contrast to continued bouts of inflation seen elsewhere in the world.
Britain’s inflation rate stood at 8.7pc in May, forcing the Bank of England into its most aggressive round of rate rises in decades.
Beijing risks slipping into a low growth rut
www.telegraph.co.uk