Chinese inflation print disappoints, but trade data more hopeful

(Alliance News) - China's latest inflation figures point to an "uneven" and "gradual" consumer recovery, as soft trade data means more fiscal support is likely, according to Pantheon Macroeconomics.

Prices for goods and services remained unchanged compared to the same month last year, a warning signal of impending deflation. Analysts had expected a slight price increase of 0.2%, according to FXStreet-cited consensus.

In August, Chinese authorities reported that annual consumer prices in the second-largest economy rose slightly by 0.1%, but fell by 0.3% in July.

The key factor behind the cooler print was a drop in good prices, as pork prices dropped 22% year-on-year.

As Pantheon Macroeconomics noted, services inflation in September was unchanged at 1.3%, while goods prices fell 0.9%, after falling 0.7% in August.

"The divergence between goods and services inflation reflects the tepid, uneven consumer recovery, favouring services over big-ticket goods," Pantheon's Chief China+ economist, Duncan Wrigley noted.

He anticipates that China's consumer rebound is likely to "pick up only gradually", after household incomes still struggle from the hit from the pandemic, and Chinese citizens fret about the "shaky" jobs market.

"Policymakers are unlikely to shift their approach of deploying meaningful stimulus through infrastructure and manufacturing investment, rather than via big consumption handouts," he considered.

Whilst the inflation data underperformed against market expectations, the trade data painted a somewhat more positive picture.

"Chinese exports are probably past the worst, while import demand is gradually reviving," the Pantheon economist contended.

The National Bureau of Statistics said exports fell 6.2% annually in September, which was less severe than the FXStreet-cited market consensus of an 8.3% fall. It was also softer than the 8.8% decline seen in August.

Imports fell 6.2% from the year before, which was slightly worse than forecasts of 6.0%. Imports had fallen 7.3% in August.

"External demand is continuing to improve, albeit gradually," Wrigley commented, adding that the less pronounced drop in imports suggested domestic demand conditions were "stabilising".

"Chinese exports are likely to remain weak in Q4, due to still-sluggish demand from the US and EU. China's domestic demand is on the path of a slow recovery on the back of further targeted support, especially funding for infrastructure and manufacturing investment."

Wrigley predicts that more fiscal support is likely in the fourth quarter, as China seeks to offset downward pressures on growth from lacklustre exports and its struggling property sector.

By Elizabeth Winter, Alliance News senior markets reporter

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