China's factory deflation deepens in May amid slow recovery

Beijing

CHINA'S factory deflation deepened in May and consumer price gains slowed, signalling that the recovery from the first quarter novel coronavirus slump remains uncertain.

The decline in the producer price index (PPI) widened to 3.7 per cent in the month from April's 3.1 per cent, the National Bureau of Statistics said on Wednesday. That compares to the median estimate of a 3.3per cent drop. The consumer price index (CPI) rose 2.4 per cent in May from a year earlier, following a 3.3 per cent gain in April, and missing the median forecast for a 2.7 per cent increase.

The deepening in factory gate deflation and the fall in consumer inflation both demonstrate that demand in the world's second-largest economy remains weak. That's despite recent government efforts to boost consumption at home and encourage export-oriented firms to tap the potential of the domestic market.

Factory gate deflation dropped to the lowest in almost four years, bad news for corporate profitability, investment and employment.

"China's output gap remains negative. It will take a longer while for the PPI to return to positive," said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong.

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Consumer inflation has been easing for the past four months. Gains in pork prices, which are a key element in the country's CPI basket, decelerated to just under 82 per cent in May. Core inflation, which excludes more volatile food and energy prices, however remained unchanged at 1.1 per cent. "CPI disinflation is very rapid," said Zhou Hao, an economist at Commerzbank AG in Singapore." If this trend continues, CPI will turn into deflation," possibly by the end of the third quarter, he said.

China's economy continued its slow recovery in May, the earliest indicators showed, with domestic demand gaining momentum even as the global picture remained sluggish.

However an official gauge of China's manufacturing activity slipped back in the month, exports fell and imports plunged 16.7 per cent, indicating that domestic demand is still weak.

"We believe falling CPI inflation and continued PPI deflation will provide Beijing with more space to implement policy stimulus to offset the impact of Covid-19 on the economy," Lu Ting, chief China economist at Nomura International in Hong Kong wrote in a note. BLOOMBERG