The bad news is piling up for the Chinese economy: after foreign trade figures fell sharply on Tuesday August 8, the authorities announced, on Wednesday, the country’s entry into deflation. In July, prices fell by 0.3%, for the first time since 2021. In the present case, however, economists are more worried, because it could last: in June already, prices had not budged. On average, they only increased by 0.5% over the first seven months of the year, far from the target set at 3% for 2023.
This trend reflects low household consumption and the difficulty of the economy to recover, eight months after the abandonment of the zero Covid policy. While most countries in the world suffer from inflation, deflation is an equally painful phenomenon for the economy, as it can easily create a negative spiral: seeing prices fall, consumers tend to postpone their purchases.
“They are not spending because income growth has slowed and the economic outlook remains uncertain, analyze the economists of the consulting firm Trivium in a note. Until these issues are addressed, consumption will not pick up significantly. »
Gloomy context
The exit from the drastic zero Covid policy had nevertheless raised hopes of a recovery, but it never materialized. So far, the Chinese go out and travel, but they are reluctant to spend. After a slight rebound in growth in the first quarter, activity only increased by 0.8% in the second quarter compared to the previous one. In this gloomy context, young people are the most affected, with unemployment reaching 21.3% in July, a record.
On Tuesday, Chinese customs had already published worrying figures: the world’s largest exporter posted foreign sales down 14.5% in July, below the 12.5% expected by economists. Imports did little better, down 12.4%. This is the biggest fall since February 2020, at the start of the Covid pandemic.
The slowdown in the global economy largely explains this decline: Western countries are under inflationary pressure which they are trying to regulate by raising interest rates. Moreover, the effects of the policy of “risk reduction” vis-à-vis China, led by certain States, “begin to make themselves felt, said Alicia Garcia Herrero, chief economist for Asia at Natixis bank. There is a concern about Chinese exports in sectors like electric vehicles: everyone wants to diversify their supplies, and it is starting to show”.
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