China's economic state has a direct impact on the United States and the euro area, warranting close attention. According to analysts at Morgan Stanley, deflation caused by a slowdown in China's economic growth is affecting international markets, particularly the US and the eurozone, leading to lower prices for various goods.
The world’s second-largest economy is currently grappling with a prolonged period of deflation, the most severe since the 1990s. This is exacerbating the issue of excess production capacities. While the Chinese government is making every effort to stabilize the situation, success has yet to be achieved.
The negative effects of deflation are most pronounced in the goods-producing sectors, particularly light manufacturing and electronics. This situation has contributed to a slight decline in core inflation rates by 0.1% in both the US and the euro area, primarily due to a 0.5% decrease in core goods inflation, Morgan Stanley estimated.
Given China's role as a major global exporter, its influence as a source of deflation cannot be overstated. This situation has far-reaching implications for industries dependent on imported goods. For instance, the US apparel market could see a decline of up to 0.3% in Consumer Price Index (CPI) components due to lower prices for goods imported from China, the bank anticipates.
Morgan Stanley forecasts that Chinese authorities will soon have to address the issue of inflationary pressures. However, experts predict a slow recovery, with the Producer Price Index (PPI) remaining in deflationary territory until the second half of 2025.
The cautious optimism of Morgan Stanley analysts is in line with projections that China's nominal GDP growth will be limited, not exceeding 5%. However, they warn that deflationary pressures could persist despite the government's efforts to boost investment in manufacturing. China could see positive changes in case of a significant shift in the country’s economic approach towards policies that stimulate consumer spending, experts assume.
