July saw China's first deflation since February 2021: How will it influence global economy and common people?

China's economy entered deflation in July for the first time since February 2021, when consumer prices fell. Due to a prolonged period of strict Covid-19 pandemic-induced lockdown, the second-largest economy in the globe, located in East Asia, experienced a substantial decline in economic growth.

The official consumer price index, a measure of inflation, fell 0.3% from a year ago to last month, according to reports. China's exports decreased by 14.5% in July compared to the same month the previous year, while imports decreased by 12.2%.

In China, the cost of food, transportation, and household products all decreased in July, according to a CNN report. In particular, pork prices fell 26%, and vegetable prices fell 1.5%, according to the news source.

What is Deflation?

Deflation refers to a phenomenon in which there is a general decline in the prices of goods and services throughout the whole economy, resulting in an increase of consumers' buying power. Deflation, in contrast to inflation, can be regarded as unfavourable to a nation as it may indicate an economic downturn, potentially resulting in a recession or depression.

What kind of effects does this deflation have?

President Joe Biden signed an executive order on Wednesday to stop and control high-tech investments from the U.S. going to China. The government said this was a targeted move, but it also shows how the competition between the world's two biggest powers is getting worse.

Not a result, but an effect: AFP reported that e-commerce giant Alibaba revealed a 14 percent year-over-year increase in quarterly sales, which came as a surprise after a few hard years and in spite of a general slowdown in the economy.

As the operator of a massive online shopping platform, Alibaba plays a significant role in China's vast digital economy.

How does China's deflation impact the global economy?

The extended era of deflation in China may potentially contribute to moderating inflationary pressures in certain regions globally, such as the United Kingdom. As China continues to maintain its position as one of the leading global producers of goods.

Conversely, the reduced pricing of items manufactured in China may have an impact on employment due to the potential decrease in company investment. As with reduced prices and shrinking profit margins, investors or producers gets discouraged investing in their business.

A potential decline in pricing within the Chinese market may have adverse effects on both corporate earnings and consumer expenditure. According to the BBC, this might potentially result in an increase in unemployment rates.

Hence, the reduction in costs, while initially advantageous for consumers has the potential for creating an unfavorable cycle of diminishing economic activity. A decline demand resulting from a consistent trend of decreasing prices would lead to a decrease in output, a reduction in corporate earnings, and an increase in unemployment. Consequently, this would further diminish consumer spending.

 How Deflation can affect Indian Economy?

In the event that reduced investment in the Chinese economy occurs due to its progressively decelerating growth rate and the emergence of deflation, there is a possibility that India may assume the role of the manufacturing hub for developed economies. Developed nations have been actively advocating for this measure as a means to mitigate China's dominant control over the manufacturing industry, resembling a monopoly.

If India were to speed up its economic reforms, it has the potential to emerge as a prominent manufacturing centre.

One notable adverse consequence is that China continues to maintain its position as one of the primary importers of iron ore from India. The East Asian nation imports over 70% of its iron ore from India. Consequently, a slowdown in China's economy would potentially result in a decline in the volume of imports into China, thereby posing a significant challenge to the Indian economy.

China has seen a decline in import and export figures, prompting inquiries over the nation's recovery in the aftermath of the pandemic.