The economic headache caused by deflation in China – and the worldwide effects
Prices are falling in China. It’s an experience that may seem remote to Western economies currently grappling with rampantly high inflation.
Yet, the effects of deflation in China could soon ripple through to the rest of the world.
It should help to bring down some global prices because the country is a major exporter.
China is Britain’s largest import partner – we imported £63.6bn of goods from China in 2021 (13.3% of all goods imports to the UK). So cheaper Chinese goods should, in theory, help keep inflation in check.
However, it is important not to overstate any potential benefits. The inflation rate in the UK is running at 7.9%, almost four times the Bank of England’s 2% target.
But the items Britain imports from China are not at the heart of our inflation woes.
A slump in the price of electronics or furniture will only have a marginal impact on the overall price level in the UK. High food prices and an energy shock that is still feeding its way through the economy are our main concern.
Structural problems, such as our tight labour market, are also pushing up wages, which is having a knock-on effect on prices. Deflation in China won’t help with this.
At £27.5bn, machinery and transport equipment dominate Britain’s imports from China. This largely relates to office machinery, along with telecoms and sound equipment.
“These are segments that people are already pulling back from. Consumers loaded up on gadgets while working from home during the pandemic and are now pulling back.
“An additional fall in the price of a laptop isn’t going to make a huge difference to inflation in the UK,” said Duncan Wrigley, Chief China Economist at Pantheon Macroeconomics.
Across developed nations, economists believe the impact of deflation could be limited as imports from China make up a relatively small share of consumer spending in these countries.
It could also trigger wider issues.
While falling prices may sound like a good thing to consumers, they pose a headache for policymakers if deflation becomes entrenched.
This is because a prolonged period of deflation could incentivise consumers to put off spending (in the expectation that prices may fall further) and businesses to deter their investment plans. This is bad news for economic growth, both in China and globally.
China is a major exporter but the country’s consumers are playing an increasingly important role on the global stage, especially in markets such as luxury fashion.
A slowdown in China could hurt exporters in other parts of the world.
China is Britain’s sixth-largest export partner for goods. We exported £18.8bn of goods (5.8% of all goods exports from the UK).