Asian producer prices are showing signs of declining. Is that a sign of a slowing economy?
China’s producer prices flat-lined in June 2019, showing no rise from a year earlier. That was below economists’ estimates of a 0.3% rise and down from the 0.6% gain in May. Cue a flurry of doom-laden articles from the financial media about the state of the Chinese economy and what that may mean for global growth. South Korean producer price growth is also heading towards negative and Japan is already there, with the latest reading showing a 0.10% annualized decline.
Whilst declining producer prices, or “factory-gate deflation” as it is sometimes called, can be a sign of a slowing economy, it doesn’t have to be. The chart below shows that Chinese and Japanese producer prices have experienced a number of periods of producer price deflation over the past 22 years. During the Chinese producer price deflation of 2001 to 2002 for instance, Chinese GDP growth was accelerating. In fact, one could argue, as Philipp Bagus does in his book “In Defense of Deflation,” that it should be natural for prices to fall in a growing economy. In simple terms, more stuff is being produced relative to demand and that should lead to downward pressure on prices. In reality, producer prices in particular are at the mercy of fluctuations in global commodity markets such as oil.
Nevertheless, producer price deflation is certainly worth noting given that the MSCI World stock market index is still below its January 2018 top. It’s the stock market, driven by social mood, that leads the economy and so, in this context, declining producer prices may well be a symptom of a slowdown.