The latest economic data from China shows persistent deflation.
Prices have now fallen for 10 consecutive quarters. Typically, declining prices cause consumers to delay spending as they expect further price drops, which lowers overall demand in the economy.
Though we believe Beijing’s target of 5% GDP growth this year remains within reach – even if inflation-adjusted GDP were to grow by only 4.5% in Q4 2025 – high frequency indicators are still pointing to feeble growth momentum with potential downside risk.
Notably, the official purchasing managers index for the manufacturing sector fell further to 49.0 in October from 49.8 in September, pointing to contraction in this part of the economy.
Beijing’s recent policy push boosted services activity, but on the manufacturing side, construction has remained in the doldrums.
The latest truce in China’s trade war with the US should help sentiment and reinforce recent signs of economic improvement, one of which has been the recovery of core (ex food and energy) inflation. Core consumer price inflation has inched higher for a few months now as money supply grows.
Historically, the recovery of these two indicators has provided a reliable early sign of improving business activity in the months ahead.
