China: Two Consecutive Months of Deflation

China is once again grappling with deflation as it is now in the middle of a trade war. However, lower energy prices over the past month have been a major driver in bringing down inflation, while the transportation and telecommunication category was down 2.6% year-over-year in March. The food component, which is usually used as an indicator of domestic demand, has also dropped 1.2% since March 2024. That said, core inflation, which excludes food and energy, was back into positive territory, providing a ray of hope.

As for the producer price index, March's decrease is the 30th consecutive decline since September 2022. In an escalating trade war, Chinese businesses could end up with unsold inventories, which would further weigh on production prices. It is still too early to assess to what extent Chinese companies and American consumers will absorb the tariffs, but it seems clear that both will have to make significant concessions. There will also be strong pressure on Chinese producers to focus not only on other export markets, but also on their local market.

Although the drop in energy prices largely explains the decline in prices in March, the persistence of deflation reminds us that the Chinese economy remains fragile. The stabilization of the property market and the central government's stimulus measures continue to be hampered by a deeply stagnant domestic market. Additionally, the significant tariffs between China and the United States will inevitably have a substantial impact on both economies. In this context, the Chinese government is likely to announce new stimulus measures in the coming weeks, but this is unlikely to prevent a slowdown in real GDP growth in 2025.