China's consumer inflation remained low for the second year

[WORLD] China's economy continues to grapple with persistently low consumer inflation for the second consecutive year, raising concerns about the country's economic recovery and growth prospects. Despite efforts to stimulate consumption and boost domestic demand, the world's second-largest economy faces challenges in achieving its inflation targets and revitalizing its consumer sector.

Consumer Price Index Remains Sluggish

The latest data from China's National Bureau of Statistics reveals that the consumer price index (CPI), a key measure of inflation, rose by a mere 0.1% year-on-year in December 2024. This figure falls short of expectations and marks a slowdown from the 0.2% increase observed in November. The full-year CPI for 2024 increased by only 0.2%, matching the pace seen in the previous year and significantly below the official target of around 3%.

Despite efforts to promote spending, China's consumer price rise fell short of expectations in December, raising uncertainty about the world's second-largest economy's recovery prospects.

Factors Contributing to Low Inflation

Several factors have contributed to China's persistently low consumer inflation:

Weak Domestic Demand: The combination of job insecurity, a prolonged housing downturn, and high debt levels has dampened consumer spending.

Prolonged Property Sector Downturn: The ongoing challenges in the real estate market continue to weigh on consumer sentiment and overall economic growth.

Deflationary Pressures: The economy has been grappling with deflationary pressures since early 2023, with the CPI experiencing negative growth in some months.

Global Economic Uncertainties: External factors, including trade tensions and global economic slowdown, have impacted China's export-oriented sectors.

Producer Price Index Remains in Negative Territory

While consumer inflation remains low, the producer price index (PPI), which tracks factory-gate prices, has been in negative territory for an extended period. In December 2024, the PPI fell by 2.3% year-on-year, marking the 27th consecutive month of decline. This prolonged deflation in producer prices indicates ongoing challenges in the manufacturing sector and weak industrial demand.

Government Stimulus Efforts

In response to the economic challenges, the Chinese government has implemented various stimulus measures to boost consumption and revitalize the economy:

Consumer Trade-in Programs: The government has expanded initiatives aimed at encouraging consumers to trade in old products for new ones, particularly in sectors such as automobiles and home appliances.

Fiscal Stimulus: China has agreed on a record $411 billion worth of special treasury bond issuance to support economic growth.

Monetary Policy Easing: The central bank has implemented interest rate cuts and other supportive measures to enhance liquidity in the financial system.

Property Market Support: Authorities have introduced policies to stabilize the real estate sector and boost confidence among homebuyers.

Economic Outlook for 2025

As China enters 2025, economists and policymakers are closely monitoring the country's economic trajectory. The World Bank has upgraded its forecast for China's economic growth to 4.5% for 2025, indicating that government efforts are yielding some results. However, challenges remain in achieving a sustained recovery and addressing structural issues in the economy.

Louise Loo, lead economist at Oxford Economics, notes that "China's journey towards reflation is likely to fall short of most expectations due to the persistent weakness in consumer spending".

Implications for Global Economy

China's struggle with low inflation and sluggish consumer demand has implications beyond its borders. As a major driver of global economic growth, China's economic performance significantly impacts international trade, commodity prices, and financial markets.

The potential for new tariffs, particularly in the context of U.S.-China trade relations, poses additional challenges for China's export-oriented sectors. This could further exacerbate existing domestic issues and complicate efforts to stimulate economic growth.

Structural Reforms Needed

To address the underlying causes of low inflation and weak consumer demand, China may need to implement more comprehensive structural reforms. These could include:

Enhancing Social Safety Nets: Improving social security and healthcare systems to boost consumer confidence and encourage spending.

Labor Market Reforms: Addressing job insecurity and promoting wage growth to support household incomes.

Financial Market Liberalization: Further opening up of capital markets and improving the efficiency of resource allocation.

Innovation and Productivity Enhancement: Investing in research and development to drive technological advancements and increase productivity.

As China enters 2025, the persistence of low consumer inflation presents both challenges and opportunities for policymakers. While stimulus measures have provided some support, achieving a sustainable recovery and rebalancing the economy towards consumption-led growth will require continued efforts and potentially deeper economic reforms.

The coming year will be crucial in determining whether China can break free from the cycle of low inflation and weak consumer demand. The government's ability to navigate these challenges while maintaining stable growth will have significant implications not only for China but for the global economy as a whole.

As the world watches China's economic trajectory, the country's leadership faces the task of implementing effective policies that can stimulate domestic demand, boost consumer confidence, and drive sustainable economic growth in the face of both internal and external pressures.