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The crisis 'Made In China' knocks on Europe's door. Record deflation since 2009, producers panic.


The crisis 'Made In China' knocks on Europe's door

Today's eagerly awaited inflation data from China turned out to be a significant, negative surprise for financial markets. Consumer prices dropped the most in 15 years. Producer prices have been falling for 16 consecutive months. More reasons to worry? Here are the figures from the Chinese National Bureau of Statistics (NBS).


Consumer prices fell for the fourth consecutive month in January. The reading of -0.8% marks the biggest drop since 2009, as reported by the Chinese statistical office.


Producer prices have been declining every month of the past year, and January was no exception. Businesses must cut prices to find buyers and stay afloat. It is expected that China's economic growth will slow down.



The lingering crisis in the real estate market (a key component of China's GDP) is choking consumer spending. China remains a key trading partner of Europe, and the crisis in the Middle Kingdom's economy could directly impact the economic situation on the Old Continent.


The Producer Price Index (PPI) dropped in January by... a whopping 2.5% compared to the previous year (a 2.6% decrease was estimated, in December the decline was 2.7%). Beijing aims to revive the world's second-largest economy.


The Producer Price Index in China fell by 2.5% in January compared to the previous year, according to the National Bureau of Statistics on Thursday, slightly better than the expected decline of 2.6%, following a 2.7% drop in December.



Analysts at GROW Investment Group pointed out that the market is not entirely surprised by the deflation data, as this pressure has been persisting for over a year now.


Pork prices fell by 17.3% – the market is struggling with oversupply after authorities took action to restore the supply of staple meat in China, following a tough battle with swine fever.


The core CPI excluding energy and food prices rose by 0.4% in January compared to the previous year, according to the bureau in a separate statement. On a monthly basis, this translated into a 0.3% increase in January compared to December.


However, the NBS reported that January's inflation data was negatively affected (deepening the inflation decline) by the high base effect associated with the Spring Festival or Lunar New Year, which fell in January last year. The country emerged from draconian zero inflation restrictions at the end of 2022 and has yet to recover.



China stands out among the world's largest economies, which are still struggling with stubbornly high inflation. It is the only one grappling with deflation.


The latest official and private surveys of manufacturing activity have shown that growing market competition has reduced the bargaining power of Chinese firms, lowering production prices.


Consumer confidence and broader growth in the Chinese economy have been severely affected. Additionally, sentiments surrounding China are declining due to, among other factors, growing concerns about the trajectory of globalization in the coming decades.


08.02.2024



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