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Slow pace: People walk along a pedestrian street surrounded by shops and shopping malls in Shanghai in this file photo. The nation’s widest measure of prices, the GDP deflator, will likely be negative in the final three months of the year. — AFP

SHANGHAI: China’s deflationary pressures just aren’t going away, underscoring the fragility of the economic recovery as 2023 enters the home stretch.

 

Data due Thursday will likely show Chinese consumer prices slid back into deflation in October, according to economists surveyed by Bloomberg. Producer prices also probably declined for a 13th consecutive month.

Consumer costs have been stubbornly weak this year. The consumer price index slipped into deflation in July and has since been teetering on and off the edge of negative year-on-year growth.

While the People’s Bank of China said in August that prices would rebound from the summer rough patch, another drop may prove that assessment was too optimistic.

Morgan Stanley sees China potentially facing a prolonged fight against falling prices in the next few years, writing recently that Beijing is “at the initial stage of the deflation battle” as it transitions away from an “overextended, credit-fuelled growth model”.

Weak inflation figures would add more uncertainty to the nation’s growth outlook following an unexpected contraction in factory activity and slowing growth in the services sector in October.

“China’s consumption demand is still weak,” said Larry Hu, head of China economics at Macquarie Group Ltd.

He said the nation’s widest measure of prices, the gross domestic product (GDP) deflator, will likely be negative in the final three months of the year.

It’s already declined for two consecutive quarters for the first time since 2015, according to Bloomberg estimates based on official data.

Other reports due in the coming days may provide additional clues about the trajectory of the economic recovery.

Export figures soon will likely show the drop narrowing in October on a yearly basis, though that’s partly because of a lower base of comparison with a month in 2022 when China was still grappling with pandemic-related lockdowns.

Credit data for last month may also be released, and will probably show overall financing picking up from a year ago as a deluge of government bonds hit the market.

Expectations are growing for the central bank to provide more liquidity support via a cut in the reserve requirement ratio – the amount of cash banks must keep in reserve.

Some analysts predicted the central bank may do so ahead of its monthly policy loan operations in the middle of November as a surge in government bond issuance pressures interbank liquidity.

Bloomberg Economics said it expects mixed signals.

“Credit growth will probably show recent incentives are working to encourage borrowing.

“Trade looks set to shrink less than in the prior month, but this would be due to statistical base effects – not a sign of demand perking up at home or abroad.

“Consumer price inflation will probably stay close to zero.”

Elsewhere, Federal Reserve (Fed) chair Jerome Powell and European Central Bank president Christine Lagarde are among policymakers from their institutions making dozens of public appearances. Central bankers in Australia are likely to hike interest rates, while those in Poland are expected to cut.

Meanwhile, Bloomberg’s New Economy Forum returns to Singapore Nov 8-10 as some of the world’s most influential leaders gather to address critical issues facing the global economy.

This year’s theme, “Embracing Instability,” focuses on underlying economic issues such as persistent inflation, geopolitical tensions, the rise of artificial intelligence or AI and the climate crisis.

With a lighter-than-usual US data calendar, the focus will be on Fed chief Powell. The US central bank chief is participating in a panel discussion Thursday on monetary policy challenges in the global economy.

Other Fed officials, after leaving rates unchanged on Nov 1, also returned to the speaking circuit. After a weaker-than-expected October jobs report on Friday investors marked down the chances of a rate increase in coming months and boosted bets on an earlier cut next year.

Dallas Fed president Lorie Logan and Kansas City Fed president Jeffrey Schmid address an energy conference today. Regional Fed bank heads Raphael Bostic and Tom Barkin will discuss survey data on Thursday.

Among economic releases in the coming week, the University of Michigan on Friday will issue its preliminary November consumer sentiment index.

Economists will also watch a report Thursday on weekly jobless claims for additional signs of softness in the labour market.

Further north, the Bank of Canada will publish a summary of the deliberations that led to its decision to hold rates steady at 5% last month due to a slowing economy, despite increased inflation risks.

The central bank will also release two surveys: one querying market participants, which will shed light on expectations for Canada’s growth, and another that collects information about lending practices of financial institutions.

The Reserve Bank of Australia (RBA) is expected to raise its borrowing costs to a 12-year high of 4.35% today as it ramps up the fight against inflation.

The meeting comes amid pay talks at the central bank that could result in a first ever strike by staff there. The RBA will follow up with a monetary policy statement on Friday.

Bank of Japan (BoJ) governor Kazuo Ueda may offer more clarity on the recent decision to allow more flexibility in bond yield movements when he speaks soon.

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