China’s Deflation Pressures Ease, More Steps Expected to Spur Demand

A woman shops at a shoes shop in Beijing, China, 07 September 2023. (EPA)
A woman shops at a shoes shop in Beijing, China, 07 September 2023. (EPA)
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China’s Deflation Pressures Ease, More Steps Expected to Spur Demand

A woman shops at a shoes shop in Beijing, China, 07 September 2023. (EPA)
A woman shops at a shoes shop in Beijing, China, 07 September 2023. (EPA)

China's consumer prices returned to positive territory in August while factory-gate price declines slowed, data showed on Saturday, as deflation pressures ease amid signs of stabilization in the economy.

But analysts say more policy support is needed to shore up consumer demand in the world's second-biggest economy, with a labor market recovery slowing and household income expectations uncertain.

The consumer price index (CPI) rose 0.1% in August from a year earlier, the National Bureau of Statistics said, slower than the median estimate for a 0.2% increase in a Reuters poll. CPI fell 0.3% in July.

Core inflation, which excludes food and fuel prices, was unchanged at 0.8% in August.

The producer price index (PPI) fell 3.0% from a year earlier, in line with expectations, after a drop of 4.4% in July. The drop in factory prices was the smallest in five months.

"There is a bit of improvement in the inflation profile. In the meantime, the PPI deflation appears to be narrowing, pointing to a slow and moderate restoring process," said Zhou Hao, chief economist at Guotai Junan International.

"In general, the inflation (rate) still points to weak demand and requires more policy support for the foreseeable future."

Food prices fell 1.7% on year while non-food costs rose 0.5% - led by rising costs linked to tourism, the bureau said.

Recent floods have damaged corn and rice crops in China's key northern grain-producing belt, sparking domestic food inflation fears as consumers worldwide face tightening food supplies caused by the war in Ukraine.

"Both CPI and PPI are likely to show modest improvements in the fourth quarter," said Luo Yunfeng, an economist at Huajin Securities.

Deflation pressures

Compared with the previous month, CPI rose 0.3%, picking up from 0.2% in July, the statistics bureau said.

Factory-gate deflation moderated in August due to improving demand for some industrial products and rising international crude oil prices, the statistics bureau said.

China's anemic price changes contrast sharply with the surging inflation most other major economies have seen since the COVID-19 pandemic waned, forcing their central banks to rapidly raise interest rates.

China in July became the first of the Group of 20 wealthy nations to report a year-on-year decline in consumer prices since Japan's last negative headline CPI reading in August 2021.

August trade data showed China's exports and imports both narrowing their declines, joining a run of other indicators showing a possible stabilization in the economic downturn, as policymakers seek to spur demand and fend off deflation.

"With early signs of growth stabilization, we see deflationary pressures easing, a trend reflected in higher commodity prices in August," ANZ analysts said in a note.

Beijing has announced a series of measures in recent months to shore up growth, including mortgage rate cuts and the easing of borrowing rules last week by the authorities to aid home-buyers.

China's central bank could continue to cut interest rates and bank reserve requirement ratios, said Bruce Pang, chief economist at Jones Lang Lasalle.

Premier Li Qiang said this week that China is expected to achieve its 2023 growth target of around 5%, but some analysts believe the target could be missed due to a worsening property slump, weak consumer spending and tumbling credit growth.



IMF Forecasts 4% Rebound for MENA Region Next Year

Jihad Azour, the Fund’s director for the Middle East and Central Asia department, at the launch of an IMF Regional Economic Outlook (IMF/File)
Jihad Azour, the Fund’s director for the Middle East and Central Asia department, at the launch of an IMF Regional Economic Outlook (IMF/File)
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IMF Forecasts 4% Rebound for MENA Region Next Year

Jihad Azour, the Fund’s director for the Middle East and Central Asia department, at the launch of an IMF Regional Economic Outlook (IMF/File)
Jihad Azour, the Fund’s director for the Middle East and Central Asia department, at the launch of an IMF Regional Economic Outlook (IMF/File)

The International Monetary Fund (IMF) forecasted on Thursday that growth in the Middle East and North Africa region is expected to rebound to 4% next year, but will hinge on a phase out of oil production cuts and headwinds subsiding, including from conflicts.
The IMF also stated that any discussions to further increase the overall program size in Egypt are premature.
At the launch of the IMF’s latest Regional Economic Outlook, Jihad Azour, the Fund’s director for the Middle East and Central Asia department, told reporters in Dubai that “the economic outlook is fraught with risks.
“Hence, our 2025 forecasts come with important caveats,” he said.
Growth in the region will remain “sluggish” at 2.1% in 2024, lower than earlier projections as geopolitical and macroeconomic factors weigh.
For 2024, growth is projected at 2.1%, a downgrade revision of 0.6% from the April WEO forecast, and this is largely due to the impact of the conflict and the prolonged OPEC+ production cuts.
To the extent that these gradually abate, the IMF anticipates stronger growth of 4% in 2025. However, uncertainty about when these factors will ease is still very high, Azour said.
Meanwhile, the economic growth of MENA oil-exporting countries is expected to increase from 2.3% in 2024 to 4% in 2025, if the voluntary oil output cuts end.
The IMF has estimated that growth among GCC members will reach 8.1% this year, accelerating to 2.4% next year compared to 4.2% and 9.4% in its previous forecast in April. Inflation rates are projected to average 8.1% this year and 9.1% next year.
In MENA emerging markets, growth is also expected to accelerate from 2.4% this year to 3.8% in 2025, assuming a decline in the intensity of conflicts.
Similarly, improved growth in low-income countries (LICs) depends, to a large extent, on the easing of conflict in Sudan, according to Azour.
He explained that the Fund’s forecasts were prepared in mid-September and therefore do not reflect the impact of recent developments in the region.
“We are closely monitoring the situation and assessing the potential economic impacts. Overall, the impact will depend on the severity of any potential escalation,” Azour said.
He noted that the conflict could impact the region through multiple channels.
“Beyond the impact on output, other key channels of transmissions could include tourism, trade, potential refugee and migration flows, oil and gas market volatility, financial markets and social unrest,” Azour added.
He also warned that concern is also high about the possibility of prolonged conflict in Sudan, increased geoeconomic fragmentation, volatility in commodity prices, especially for the oil exporting countries, high debt and financing needs for emerging markets and recurrent climate shocks.
Egypt
Azour said the IMF’s $8 billion program for Egypt is making progress, stating that any discussions to further increase the overall program size are premature.
Asked whether he was confident Egypt would meet its program targets, Azour said that economic conditions in Egypt were expected to improve and that it was too early to discuss any changes to its size.
“The program is moving in the right direction and is gradually achieving its targets, both in terms of growth recovery and gradual decline in inflation, and a normal functioning of the foreign exchange market,” Azour said.
“Building buffers or strengthening the buffers of Egypt is the first line of defense that could help the Egyptian economy withstand any additional external shock,” he said.
Azour also said that Egypt was expected to save almost $800 million over the next six years on the back of recent reforms of the IMF's charges and surcharges policy, which would provide additional support.
The IMF's Egypt team is scheduled to travel to Cairo in November to prepare for the third review of the program. Managing Director Kristalina Georgieva also plans to visit to reaffirm the fund's support for Egypt.