December 24, 2014 11:29 am
The consequences of China’s deflation problems are ubiquitous and spilling into the rest of the world. Slower economic growth and a steady decline in the economy’s commodity intensity is already affecting commodity producers from Perth to Peru, with negative multiplier effects arising from lower revenues and reduced capital spending by resource companies. Moreover, as Chinese companies cut prices to clear excess supply, global competitive pressures intensify, forcing foreign manufacturers to do so too.
Further, the shift in China’s growth and its economic development model has led to an abrupt drop in import demand. After a fourfold rise between 2006 and 2012, imports have been treading water. At the end of 2014 they were about 15 per cent lower than at the start of the year. This is affecting not just commodity exporters but also Asian countries in China’s supply chains, and an array of advanced and emerging countries that have prioritised selling goods to China.
Additional deflationary pressures may yet be transmitted into the global economy in 2015 through depreciation of the renminbi. The combination of deflationary economic headwinds, looser monetary policy and a rising US dollar are likely to result in a weaker currency. The 50 per cent depreciation of the Japanese yen, so far, could yet be consequential, too. It is starting to lead to weakness in other Asian currencies, and it would be surprising if the renminbi were not allowed to weaken to compensate.
China’s structural deflation, along with factors such as excess debt and rapid ageing, will continue to have repercussions for monetary policy in advanced economies. Nine European countries, including Italy and France, are already experiencing mild deflation, and others may soon join them. Japan has won only a brief deflation respite from the fall in the yen, and by mid-2015 “lowflation” in the US and the UK could have dropped to zero.
The US Federal Reserve and other western central banks have failed to anticipate this deflation environment, persistently undershoot their inflation targets and appear powerless to reverse the trend. At some point, we will probably wonder if it is time for the anti-deflation baton to pass to governments.
The writer is a senior independent economic adviser to UBS