Chinese Inflation Eases as Beijing Ramps Up Support Measures

During this month’s WTFX we took a look at UK productivity, something perhaps worth considering for today’s Macro Monday…

Between 1946 and 1976, annual UK productivity grew at 3.6% ahead of subsiding to 2.3% in the thirty years between 1976 and 2007. Though, while the rate of growth in productivity was easing, productivity was still rising. Indeed, such growth in productivity meant that a typical worker in 2007 was producing twice as much each hour as that of typical worker in 1977.

In the 12-year period between 2007 and 2019 however, annual UK productivity fell 0.2%, with pronounced declines being seen between 2007 to 2012 when non-oil GVA fell 15%. 1

When accounting for the subsequent five-year period, UK productivity grew at just 0.2% each year Between 2007 and Q2 2024.

This trend has led to a gulf between the UK and other major economies. For example, according to the most recent data from the ONS (2023), UK productivity (accounting for purchasing power parity) lagged some 18% behind the US, while being 15% and 14% behind that of Germany and France, respectively.

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Chinese inflation missed expectations over the weekend, with CPI hitting 0.4% on an annualised basis for the month of September against a consensus which was pointing to a 0.6% print. On a monthly basis, prices were unmoved, down from the 0.4% print recorded last month.

While this marked the eighth consecutive month of inflation in China – a period which follows the four consecutive months of deflation recorded in China between October 2023 and January 2024 – it was nonetheless the lowest level of inflation since June. This came as house prices fell, amid wider concerns about the health of China’s property sector.

Meanwhile, China’s Producer Price Index came in negative, falling 1.3% an annualised basis for the month of September.

This recent data remains indicative of the headwinds facing the world’s second largest economy, as Beijing looks to stimulate demand through a combination of fiscal and monetary policy.

Such headwinds include downturn in consumption, fragility in local government debt and a precarious property sector. An increasingly tempestuous relationship between Washington and Beijing has also renewed concerns over the extent to which this could impact transpacific trade between the two economic powerhouses.

Given such concerns, in July the PBOC cut its 1-year loan prime rate to a record low of 3.35%. Meanwhile, over the weekend Chinese authorities announced that they would increase borrowing to assist the property market, in addition to providing a string of subsidies to low-income households. State banks have also been offered further support measures, though details remain inexact.

Oil prices fell following the inflation prints, as fears rose over the prospect of a lack of demand from the world’s largest importer of crude oil.

Business leaders are warning against alleged plans that the government could increase employer’s contributions to National Insurance.

With speculation continuing to mount on the nature of the forthcoming budget on 30 October, over the weekend, the business secretary Jonathan Reynolds suggested that while Labour’s pledge not to raise one of the big four taxes on working people does not necessarily extend to ruling out raising employers’ contributions to NI. This follows the PM declining to rule out such a tax increase during last week’s PMQs.

Speaking on the issue during Sunday with Laura Kuenssberg, the CEO of Lloyds Bank’s Charlie Nunn warned against the tax, saying that “anything that helps people continue to invest, and take appropriate risk” is “really important”, while “anything that does the opposite would be a handbrake on the economy”.