Beijing January 16 2025: China has failed to break a deflationary cycle and is now on track for the longest streak of economy-wide price declines since the 1960s, analysts say, exposing a key vulnerability likely masked by a growth upswing at the end of last year.
Deflation persisted for the second straight year in 2024, official data due Friday is set to show, according to most economists. Some of the biggest Wall Street banks including JPMorgan Chase & Co. and Citigroup Inc. are predicting it will linger through 2025 — marking a stretch unseen since the end of Mao Zedong’s Great Leap Forward campaign, which plunged China into recession and caused a famine that killed tens of millions.
While growth is still expected to have expanded at a faster clip in real terms in the final quarter, the gross domestic product deflator — the broadest measure of price changes in an economy — will reach minus 0.2% in 2025, according to the median forecast of 15 analysts polled by Bloomberg. That compares with 3.4% on average in the decade before the pandemic.
“Stimulus, stimulus, stimulus, particularly on the fiscal side, is very much needed in China,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc in Hong Kong. “We’ve seen in other economies a big policy push is needed to permanently get out of disinflation. And that’s something we think will gradually happen in China, but very gradually indeed.”
A looming trade war with the US could make China’s plight worse if exporters have to find domestic buyers in the face of obstacles abroad. The data on Friday, which will also give a snapshot of the troubled property market and retail sector, comes just days before Donald Trump returns to the White House threatening tariffs as high as 60% that could decimate trade with the world’s No. 2 economy.
China is unable to emerge from its deflationary stupor largely as a consequence of a housing crisis that’s wiped out an estimated $18 trillion in wealth from households, prompting people to save rather than spend. Even so, surging exports and an improvement in home sales and retail spending probably provided enough of a spark to help meet Beijing’s growth target of around 5% last year.
Economists polled by Bloomberg estimate China’s real GDP growth reached 4.9% for the full year 2024, after sentiment began to shift in the last few months thanks to more stimulus from the government.
But in a reflection of a persistent imbalance between domestic production and weak demand, growth in industrial output probably outpaced a rebound in retail sales. Property investment has been in contraction for over two years and almost certainly plunged again to end 2024.
“One structural feature of China’s economy is that many firms are willing and able to maintain, or even expand, output and capacity in circumstance of low or negative profitability,” said Louis Kuijs, chief Asia-Pacific economist at S&P Global Ratings. “Things won’t quickly change on this front.”
The GDP deflator likely stayed in negative territory during the October-December period for the seventh straight quarter, matching the previous record set during the Asian Financial Crisis in the late 1990s.
The gauge, which measures the difference between China’s nominal and real GDP growth, is set to improve to 0.9% in 2026 and 1.4% in 2027, Bloomberg’s poll showed.
“A negative GDP deflator, or weak nominal GDP growth, will hurt the economy directly via weak corporate profits and weak fiscal revenue, and indirectly with weak income growth,” said Zhu Haibin, chief China economist at JPMorgan.
While the topic remains all but taboo among domestic analysts, fears of entrenched price declines have been on display in the Chinese bond market as yields slump to an all-time low.
And behind closed doors around Beijing and in public, economists are saying China needs to tackle low inflation or put more focus on prices and nominal growth.
Deflation can be a silent killer of commerce and consumption over the long haul. Even though cheaper goods may seem appealing, the danger is people could delay purchases because they expect prices to fall further.
Weaker consumer spending would then erode income for businesses, which in turn would reduce hiring and investment — resulting in a vicious cycle.
Officials have yet to show the kind of determination economists say is needed to combat deflation, even though they are preparing more expansionary policies this year including a wider budget deficit ratio and more interest rate cuts.
Top leaders only made a veiled acknowledgment of the problem last month when they pledged to keep prices “overall stable” in 2025 at an agenda-setting conference. Central bank Governor Pan Gongsheng called “low prices” a challenge in a speech this week.
While China has long set its annual inflation target at 3%, that’s regarded more as a ceiling than a serious goal. Consumer inflation, which ended 2024 with a mere 0.2% gain from a year earlier, could lose its cyclical support from pork prices that rose throughout last year, according to Citigroup.
A growing number of economists are calling on Beijing to set a binding target for inflation at 2%, and anchor its policies around achieving that aim. Such a practice, commonly adopted by advanced economies, would help shape the expectations of individuals and companies, Wu Ge, chief economist at Changjiang Securities, said at a public event last week.
Deflationary pressure has been most pronounced in housing and manufacturing so far this year, while sectors like hotels and catering saw price gains — an indication of more resilient services demand. Economists at Natixis predict the services sector could suffer more downward price pressure in 2025 because of slower wage growth.
Global commodities costs are also likely to be under strain, which would put a lid on producer prices in China after they declined for more than two years, according to BNP Paribas SA.
“Industries that have undergone brutal price competition will likely see some exits by weaker players this year. This will help profit margins and selling prices recover,” said Erica Tay, an economist with Maybank Investment Banking Group.
But “as long as domestic demand stays soft, the price recovery will be gradual,” she said.
