19 July 2023
On July 17, 2023, fears intensified regarding China’s economy, which appeared to be on the verge of deflation. The latest economic data showed underwhelming performance, causing concerns about stagnating growth and prompting calls for more significant policy intervention. Beijing announced that the country’s GDP growth for the second quarter was 6.3% year-on-year, falling short of market expectations of 7.3%. This marked a slower growth rate of 0.8% from the previous quarter’s 2.2% quarter-on-quarter pace.
Adding to the worries, China’s producer prices experienced a significant decline of 5.4% in June compared to the previous year, marking the ninth consecutive drop and the steepest decline since December 2015. Additionally, annual consumer price inflation remained flat in June, driven by a substantial 7.2% decrease in pork prices, which missed expectations.
Although the People’s Bank of China pushed back against the deflation narrative, some economists pointed to other indicators indicating a serious risk of deflation. Nominal GDP growth in Q2 was lower than real GDP growth for the first time since comparable data became available in Q4 2016, suggesting a significant risk of deflation.
The disappointing economic data led Wall Street banks, including Barclays, Citi, Morgan Stanley, and JP Morgan, to downgrade their forecasts for China’s annual growth. Forecasts now project China’s annual growth rate for the year to be around 5% or lower, reflecting a downward revision from previous expectations.