Perhaps China’s battle with deflation is far from over

The persistence of China’s deflationary forces highlights the vulnerability of the economic recovery as 2023 nears its conclusion.

Bloomberg questioned analysts who predict that data expected on Thursday would likely reveal that Chinese consumer prices fell back into deflation in October. It is also likely that producer prices fell for a record 13 months in a row.

This year’s consumer expenses have remained steadfastly low. After entering a state of deflation in July, the consumer price index has been flirting with negative year-over-year growth ever since. Even if the People’s Bank of China predicted in August that prices would recover from the summer’s downturn, a further decline may show the prediction was too optimistic.

China may have to fight dropping prices for a while, according to Morgan Stanley, which recently said that Beijing is “at the initial stage of the deflation battle” as it moves away from a “overextended, credit-fueled growth model.”

Poor inflation data would further cloud the country’s economic prospects in the wake of an unanticipated drop in manufacturing and a slowdown in service sector expansion in October.

China’s demand for consumption remains low, according to Larry Hu, Macquarie Group Ltd.’s head of China economics. He indicated that the last three months of the year would probably see a decline in the GDP deflator, the country’s most widely used indicator of pricing. For the first time since 2015, it has already decreased for two quarters in a row, according to Bloomberg calculations based on government statistics.

further reports that are scheduled to be released in the next several days could provide further information on how the economy is doing. Export data released on Tuesday is expected to show that October’s annual decline narrowed, although in part because to a smaller base of comparison with a month in 2022 when China was still dealing with lockdowns connected to the epidemic.

Credit statistics for the previous month may also be made public; it is likely to indicate that, with the influx of government bonds into the market, total funding has increased from a year earlier.

There is rising expectation that the reserve requirement ratio—the amount of cash banks must have in reserve—will be lowered by the central bank in order to promote increased liquidity. Because of the strain on interbank liquidity caused by the spike in the issue of government bonds, some experts think the central bank may act before its monthly policy loan operations in the middle of November.

According to Bloomberg Economics:

We anticipate conflicting cues. Credit growth will most likely demonstrate that the recent incentives are effective in promoting borrowing. Trade seems to be contracting less than it did the previous month, although this might be the result of statistical base effects rather than an increase in domestic or international demand. Inflation in consumer prices will most likely remain around zero.

Elsewhere, officials from various organizations are making several public appearances, including Christine Lagarde, president of the European Central Bank, and Jerome Powell, chair of the Federal Reserve. Australian central bankers are projected to raise rates, while Polish central bankers are anticipated to lower them.

In the meanwhile, some of the most powerful leaders in the world will be gathered in Singapore from November 8–10 for Bloomberg’s New Economy Forum, which will focus on important topics affecting the international economy. “Embracing Instability,” this year’s topic, focuses on fundamental economic problems including the climate catastrophe, rising AI, geopolitical conflicts, and ongoing inflation. Check out what’s approaching.
US and Canadian economies

Given the lighter-than-usual US data schedule, Fed Chairman Powell will be the main attraction. On Thursday, the head of the US central bank will take part in a panel discussion on the difficulties facing monetary policy in the global economy.

Following their November 1 rate hike, other Fed officials are back on the speaking tour. Investors downgraded the likelihood of a rate hike in the next months and increased their bets on an early fall in rates the following year after Friday’s worse-than-expected October employment data.

Tuesday’s energy conference is addressed by Kansas City Fed President Jeffrey Schmid and Dallas Fed President Lorie Logan. On Thursday, Tom Barkin and Raphael Bostic, the chiefs of regional Fed banks, will talk about the survey results.

The University of Michigan will release its preliminary November consumer mood index on Friday, one of the week’s economic reports. On Thursday, a data on weekly unemployment claims will be studied by economists in hopes of spotting any more indications of weakness in the labor market.

In the north, the Bank of Canada will provide an overview of the discussions that resulted in its decision last month to maintain rates at 5% in light of a weakening economy, even in the face of heightened inflationary threats.

Two surveys will also be released by the central bank: one will ask questions of market players and reveal forecasts about Canada’s economy, while the other will gather data regarding financial institutions’ lending policies.

Asia.

The Reserve Bank of Australia is anticipated to boost its borrowing rates to a 12-year high of 4.35% on Tuesday as it cranks up the battle against inflation. The gathering coincides with wage negotiations at the central bank that may lead to the institution’s first-ever worker strike. On Friday, the Reserve Bank of Australia will make a monetary policy announcement.

When he talks on Monday, Governor Kazuo Ueda of the Bank of Japan could provide further details about the recent decision to provide greater flexibility in bond yield movements. Data on wage growth, which is crucial in pushing the BOJ toward normalizing policy, is released the next day along with a summary of the views spoken at the meeting, which is expected on Thursday.

GDP data for the third quarter are anticipated to indicate a slowdown in Indonesia’s economy and a resurgence in the Philippines’ production elsewhere in the region. It is anticipated that price rise would decelerate in Thailand, the Philippines, and Taiwan based on their inflation statistics.

Africa, Middle East, and Europe

Germany’s industrial production numbers on Tuesday and factory output data on Monday are expected to show declines in September, signaling even more gloomy readings for the country’s economy.

President of the Bundesbank Joachim Nagel has been one of the German authorities defending his nation against the recent portrayal of it as the sick man of Europe. He will have plenty of chance to do so as he is scheduled to make public appearances every day for the next week.

Markets will be more interested in hearing Nagel’s opinions on the European Central Bank’s next actions. President Christine Lagarde and Chief Economist Philip Lane are among the twelve members of the Governing Council who are expected to speak.

The monthly poll of consumers’ inflation expectations is also released by the ECB.

The EU’s deficit rules, which are set to re-enter effect in 2024 but are subject to revision, will be discussed during a monthly meeting of finance ministers in the second part of the week.

Serbia, Romania, and Poland make rate choices. The former will likely follow through on a similar drop from October by reducing its benchmark rate by a quarter percent. Both of the other two will probably halt.

Numbers that are expected to be released on Friday in the UK are probably going to indicate a decline in the third quarter’s GDP. According to Bloomberg Economics, this will signal the beginning of the recession. Andrew Bailey, the governor of the Bank of England, and Huw Pill, the chief economist, are expected to talk.

On Thursday, investors will be observing if Egypt’s inflation increased to a new record high in October or whether it tapered down. September’s year-over-year rate of 38% highlighted the nation’s dilemma of rising living expenses. Although there is pressure on the central bank to weaken the pound once again, which might raise inflation in the near run, it is unlikely to happen before the December presidential elections.

South America

Brazil, Chile, Colombia, and Mexico, the four largest economies in the area, release inflation figures for October.

Disinflation will resume in all five countries with Brazil’s anticipated decline after a three-month spike from 3.16%; nevertheless, none is anticipated to return to goal by the end of 2024.

The minutes of Brazil’s central bank’s Nov. 1 decision to implement a third consecutive half-point decrease to 12.25% are made public on Tuesday.

In the post-decision communiqué, officials expressed caution about the multiplicity of economic headwinds and dangers while adhering to their direction, which called for 50 basis-point reductions at future meetings.

Amid strong economic growth and above-target inflation, Mexico’s central bank is almost set to keep the main rate at 11.25% at its meeting in November.

Of the five major central banks in the area that control inflation, Banxico is anticipated to be the latest to start lowering interest rates; nevertheless, a board member has hinted that they may not act until mid-2024.

In contrast, Banco Central de Reserva del Perú started to ease in September, and after a decline in consumer prices in October, a third consecutive quarter-point decrease to 7% is what is generally anticipated.