The Year of the Dragon officially began yesterday. It’s meant to be auspicious and lucky, so will it rub off on global inflation? Photo / 123rf
The Year of the Dragon officially began yesterday. It’s meant to be auspicious and lucky, so will it rub off on global inflation? Photo / 123rf
OPINION
The Year of the Dragon officially began yesterday. It’s meant to be auspicious and lucky, the pick of the menagerie when it comes to the Chinese Zodiac.
If you’ve ever seen the dragon dance at a New Year’s celebration, it’s not hard to see why the majestic beast soarsover the likes of the rat (sorry if you were born in 1972) or the pig (that’s me, in 1971).
People are so keen to have “dragon babies” that the year traditionally causes a spike in the birth rate through China and Southeast Asia.
Of course, I don’t believe astrology is real. But humans are an odd bunch and whether something is real doesn’t seem to have much to do with its impact in our lives.
People still watch professional wrestling and fight religious wars.
A lot of people don’t believe in business and consumer confidence surveys but that doesn’t mean our collective perception of the economy won’t affect what happens in it.
I’m hopeful that the Year of the Dragon may herald a morale boost for the Chinese economy. And the reason I’m hopeful is that the Chinese economy remains one of the biggest external influences on our domestic fortunes.
The Year of the Rabbit was not a good one for the Chinese economy.
We should take the fact that officials in Beijing delivered a 2023 GDP growth figure of 5.2 per cent with a grain of salt.
The real news is that the Chinese economy is deflating. On Thursday China’s annual Consumer Price Index inflation data was released. It was -0.8 per cent.
That means prices are falling, which always sounds good until you talk to an economist.
On the upside, China has won the war on inflation. It’s near the top of the pack on those inflation league tables that people get so upset about whenever New Zealand is behind Australia.
If you follow annual inflation numbers down the league table - from Argentina’s disastrous 211 per cent, through New Zealand at 4.7 per cent, Australia at 4.1 per cent, the US at 3.4 per cent and China at -0.8 per cent - you’ll eventually arrive at Afghanistan at -9.1 per cent.
It will surprise no one to hear the lack of inflation in Afghanistan has nothing to do with a highly focused and fiscally responsible Government.
The problem with deflation is that it is recessionary.
As prices fall, margins are squeezed, production falls and businesses contract. Jobs are lost and new jobs are not created. Wages fall and a negative spiral takes hold.
It is not a wild freefall like the market meltdown of the GFC.
We can instead look to Japan for a plausible example of what the world might face - stagnation, low growth and regular dips into recession.
But let’s stay with the good news for a bit. It seems likely China will be exporting its deflation to the world this year.
Not only were consumer prices down, but the producer price index also fell 2.5 per cent. That means the price of Chinese exports to the world fell.
CitiGroup analysts, reported in the Financial Times, warn this “could hasten interest rate cuts this year”, particularly for countries that consume relatively large shares of Chinese goods.
Hmm... at this point, astute business news readers will have noticed two things.
First, this isn’t really a column about what great fun Chinese New Year is, with its delicious dumplings and moon cakes. It’s about inflation (again)!
Secondly, I’m writing about the risk of deflation - even though the immediate problem facing the Reserve Bank (RBNZ) is still inflation.
On Friday, we had a warning from ANZ economists that the inflation fight isn’t over in New Zealand and the RBNZ may yet need to hike the official cash rate (OCR) in February and April.
Such is the gloomy nature of economics that we can worry about both these things in tandem.
I suspect issues like Chinese deflation go some way to explaining why markets are so confident that rate cuts are needed, as opposed to central bankers who keep saying they need to wait and see more data.
Market analysts and investors thrive on speculation and latch on to big narratives to try to predict the future.
Central bankers are required by law to be more cautious than that.
Reserve Bank Governor Adrian Orr speaks during an OCR review media conference in Wellington last year. Photo / Mark Mitchell
You’re not going to surprise anyone at the RBNZ with news that the Chinese economy is struggling. But they won’t set monetary policy or cut interest rates based on an external risk that can’t yet be quantified.
The RBNZ will simply change tack (or pivot as everyone likes to say these days) quickly when the facts change.
Despite all that, and regardless of what happens at the RBNZ’s next meeting in February, I think deflation is likely to be the prevailing impulse in the global economy over the coming years.
It already was until Covid-19 hit. The inflation spike of the past two years was the result of quite specific events. It was caused first and foremost by the loosening of the money supply as a policy response to pandemic lockdowns.
It was exacerbated by a supply shock caused by both the pandemic and the war in Ukraine.
Deflationary pressure, on the other hand, is coming from deeper, more structural forces.
New technology continues to apply downward price pressure on labour and production costs and demographics are slowing consumer spending.
Older populations save more and spend less. We’ve seen that in Japan and there are now very real fears that this is also playing out in China.
It will be fascinating to see if the Year of the Dragon still carries enough baby-making clout to overcome the deflationary pessimism that seems to have taken hold in China.
