According to analysts, the current deflation in China is entering a dangerous phase. Experts warn about looming economic woes. Bloomberg reported that the deflation recorded in China in 2023 has been worsening this year. So, the world’s second-largest economy is in jeopardy.

Recent data logged almost no increase in consumer prices in China’s economy. However, household incomes are steadily declining.

According to Bloomberg Economics and bank analysts, including BNP Paribas SA, a key indicator, the GDP deflator, is expected to carry on falling until 2025. This will be the longest deflationary period in China since 1993.

For the time being, China’s economy is not only going through deflation but is also entering its second phase, Robin Xing, Chief China Economist at Morgan Stanley commented on the state of affairs. He is convinced that the longer the deflation lasts, the more stimulus the economy will need to combat it.

The danger for China’s economy is that deflation could snowball. In this context, households suffering from falling wages prefer to cut spending. In turn, corporate revenues are also declining, which leads to dwindling investments and further wage cuts, experts warn.

Meanwhile, headline inflation in China dropped in August to its lowest level in three years. Weak inflationary pressure is mirrored in China’s nominal GDP growth, which accelerated by only 4% in the second quarter of 2024. This is way below the target for real economic growth of 5%.

Actual inflation in the country was weaker than projected, rising only 0.6% in August, mainly due to a 2.8% increase in food prices. Core inflation in China inched up by just 0.3% last month, but it remains below 1%.

According to official data, commodity prices and producer output prices in China saw a significant decline in the last month of summer, while costs for companies providing services and engaged in construction dropped at the fastest rate since April 2020.

In the meantime, consumer confidence in China is at a record low. Households report a growing desire to save. A mode of saving rather than spending is becoming prevalent across the country. Curiously, Chinese officials are not rushing to revitalize production or take measures to address weak demand.