Concerns of Over-Deflation in China
Background:
- Deflation is the opposite of Inflation. It refers to a sustained and general decrease in the economy’s overall price levels of goods and services.
- In a deflationary environment, consumers can buy more goods and services for the same amount of money over time.
- However, deflation can occur for various reasons, such as reduced consumer demand, oversupply of goods, technological advancements that lower production costs, or tight monetary policies by central banks.
Linkage:
- The Chinese economy has been struggling for more than a year. The most prominent was a heavy-handed Zero-Covid policy that saw entire cities shut down, sometimes for weeks at a time, in an effort to prevent the spread of the coronavirus.
- The property sector, which in recent years accounted for between 20% and 30% of GDP (Gross Domestic Product), has suffered a severe slowdown, with a number of significant developers needing help to service their Debts, and many projects left incomplete.
- Increasing unemployment among younger workers is also a problem, with the official jobless rate for people ages 16 to 24 at 21%, and some experts expressing concern that the real number is significantly higher.
Current News:
- China’s National Bureau of Statistics reported that the Consumer Price Index (CPI) had declined in July 2023 by 0.3% compared to a year earlier, causing Deflation in the Country.
- If investment in the Chinese economy is lowered owing to the increasing slowing rate of their economy, and now deflation, India could potentially emerge and take over as the manufacturing hub for the developed economies
Impact:
- Policymakers around the world, including in India, would need to closely monitor these developments and formulate strategies to mitigate potential negative impacts.
- The implications of deflation can include increased debt burdens, altered consumer behaviour, reduced business investment, and challenges for monetary policy.
- Addressing deflation will require a combination of fiscal stimulus and monetary policy measures to boost demand and reignite economic growth.
