While the UK and The US are struggling with high inflation and increasing cost of living, China is heading in the other direction towards deflation. Consumer prices are lower than the previous year, and it is battling high unemployment as one in five people aged between 16 and 24 cannot find work. Will this affect investors and economies around the world?
“China’s economic trajectory has been a focal point of global attention for decades, with its staggering growth and transformation capturing the world’s imagination,” says Nigel Green, CEO deVere. “But the recent emergence of serious deflationary pressures in the world’s second-largest economy is triggering concerns that extend well beyond its borders.
“Deflation is the opposite of inflation, where overall price levels decline instead of rise over time. It seems good for consumers, but could cause significant economic problems. If consumers believe prices are dropping, they will delay purchasing goods until they are cheaper. Consumer spending is the life force of an economy. If spending falls, businesses may have to reduce employees, cut salaries, or even close. This leads to unemployment and stagnation.
China’s deflation is being influenced by lower spending on food and travel. People are eating out and travelling less.
This could affect other global economies as many countries import goods from China. With prices lower, more competition arises as other exporters need to lower their prices to compete. Also, the reduced demand for raw materials due to economic slowdown, could likely lead to a decrease in global commodity prices.
If you are unsure how China’s deflation may affect your portfolio, chat with a financial advisor to help diversify your investments to lower risk.