Deflation pressure in China is easing, but there is little upside to come according to the Swiss Re Institute, as its forecasts low inflation for the country in 2024, which should contribute to the global disinflation process and support insurance markets.
China’s headline CPI returned to growth in February after four months of deflation, rising by 0.7% y-o-y and by 1% m-o-m, as well as core CPI, which went up by 1.2% y-o-y.
The period of deflation since October 2023 had raised concerns of the economy facing a Japan-style stagnation scenario of falling prices and low inflation expectations.
As deflationary pressures are expected to ease in 2024 analysts at the Swiss Re Institute forecast very slight inflation, of an average 0.5%, for the year.
This is the result from stable core CPI growth, higher food prices and greater policy leeway for the PBoC as the Fed ends its tightening cycle.
Yet q higher unemployment rate, slower income growth, and the real estate market downturn have led to very weak domestic demand, which is expected to remain.
Low inflation in China should contribute to the global disinflation process, primarily via lower exported manufactured goods. This would support insurance markets but may be controversial among producers in importing countries.
Global economic impacts could affect China more negatively if the country was to experience a Japan-like (Japanification) stagnation scenario, but the Swiss Re Institute sees the likelihood of this as low.
China has the world’s largest, and increasingly sophisticated, manufacturing sector, the world’s largest middle-income group, and the second-largest consumer market, which should all support steady core inflation, according to analysts.
Additionally, the country’s relatively healthy sovereign balance sheet and cross-border capital controls also make it more able to prevent a price-deflation spiral, a key phenomenon in Japan’s “lost decades”, the Swiss Re Institute concluded.
