China, the world’s second largest economy, has fallen into deflation for the first time in more than two years, as weak domestic demand and a housing slump weigh on its post-pandemic recovery. This has sparked concerns about the spillover effects for the global economy and the UK housing market, which has also seen a drop in asking prices last month.
China’s consumer prices decline for the first time since 2021
According to the official data released by the National Bureau of Statistics, China’s consumer price index (CPI), a measure of inflation, fell by 0.3% in July 2023 from a year earlier, before edging up 0.1% in August. This was the first year-on-year decline in consumer prices since February 2021, when the country was hit by the coronavirus outbreak.
The main drivers of the deflation were the falling prices of pork, which accounts for a large share of the Chinese diet, and automobiles, which have seen a slump in sales due to the global chip shortage and environmental regulations. The weak housing market also contributed to the deflation, as rental costs declined along with home prices.
Analysts said that the deflation risk in China reflects the lack of domestic demand, especially consumption, which has been lagging behind production and investment in the country’s economic rebound. Moreover, households have been maintaining high precautionary savings amid an uncertain economic outlook and rising unemployment, especially among the young.
China’s deflation pressures spill over to the global economy
China’s deflation has implications for the global economy, as the country is a major producer and exporter of goods and services. China’s declining export prices could translate into lower import prices for other countries, contributing to near-term global disinflation.
This could pose a challenge for the central banks of the developed countries, which have been trying to boost inflation and stimulate growth through ultra-loose monetary policies. If inflation remains below their targets, they may have to delay the tapering of their asset purchases and the hiking of their interest rates, which could have negative consequences for financial stability and debt sustainability.
On the other hand, China’s deflation could also have some positive effects for the global economy, as it could help to curb the rising costs of commodities and energy, which have been driven by the strong demand from the post-pandemic reopening. This could ease the inflationary pressures and supply chain bottlenecks in some sectors and regions, and support the recovery of consumption and investment.
UK housing market cools down amid China’s deflation woes
The UK housing market, which has been one of the bright spots of the country’s economic recovery, has also shown signs of cooling down amid China’s deflation woes. According to the latest survey from RICS, the Royal Institution of Chartered Surveyors, the UK property sector saw another drop in sales and prices in November 2023, as the demand-supply imbalance eased and the uncertainty over the Omicron variant of Covid-19 increased.
The survey showed that the net balance of surveyors reporting a rise in house prices fell to -5% in November, down from +9% in October and +76% in May. This was the first negative reading since June 2020, indicating that more surveyors saw a fall than a rise in house prices. The net balance of surveyors reporting a rise in sales also turned negative, falling to -13% in November, down from +1% in October and +32% in May.
The surveyors attributed the slowdown in the UK housing market to several factors, including the fading of the stamp duty holiday, the tightening of mortgage lending standards, the rising cost of living, and the impact of China’s deflation on the global economy. However, they also suggested that the downturn may be bottoming out, as the supply of new listings improved and the buyer enquiries stabilised in November.
