FX.co ★ China's economy faces growing deflationary pressures

China's economy is struggling to stay afloat, but the outlook remains bleak. Producer prices in China have plunged more than expected due to weak demand.

Data from the National Bureau of Statistics showed that producer prices fell by 2.5% in November, compared to a 2.9% drop in the previous month. This has raised concerns about persistent deflation, which has lasted for 26 consecutive months. Notably, deflation has reached 2.1% since the beginning of 2024, signaling a worsening trend in recent months.

While consumer prices in China continue to rise, the 0.2% increase is the smallest since June and below expectations of 0.5%. In October, inflation came in at 0.3%. In November, the consumer price index fell by 0.6%, marking the worst result since March 2024.

Deflation remains a major challenge for Chinese authorities. Despite efforts in recent years, the government has been unable to combat it. The situation is exacerbated by falling prices, which are eroding the profits of Chinese manufacturers. In the long term, this could lead to financial instability, especially as businesses are unable to raise product prices due to overproduction and weak domestic demand.

Meanwhile, China’s stock market is experiencing significant volatility. Against this background, UBS analysts have revised their growth forecast for China's economy. They now expect China’s GDP to grow just 4% by the end of 2024. The bank also predicts that the country’s economy could face turbulence in 2025 and 2026.