Deflationary forces from China's economic slowdown are beginning to have noticeable effects on international markets, particularly the U.S. and the eurozone, with commodity prices falling, Morgan Stanley (NYSE:MS) said Monday.
The investment bank said in its latest analysis, titled “The Deflationary Implications of China,” that the extended period of falling prices in China, the most severe since the 1990s, is exacerbating the problem of unused production capacity, despite recent government policies being geared toward economic stability.
Morgan Stanley noted that the effects were particularly large in core commodity-producing sectors, such as clothing and electronics, which caused a slight decline in core inflation rates of about 0.1% in the US and the euro area, mainly due to a large decline in commodity inflation of about 0.5%.
“While the overall impact is still very small, this situation provides more flexibility for central banks like the Fed and the ECB to consider policies that make borrowing cheaper and increase money supply throughout the year,” Morgan Stanley commented.
Analysts at Morgan Stanley highlighted that China’s leading role in exporting goods worldwide increases its impact as a source of deflation. They added that this situation has broader implications for industries that rely on imported goods, for example, the US apparel market, where the components of the consumer price index could see a decline of up to 0.3% due to lower import costs from China.
Looking ahead, Morgan Stanley expects China's inflation situation to continue to struggle, estimating a gradual improvement with the producer price index (PPI) expected to emerge from deflation only in the latter half of 2025.
This cautious optimism is in line with expectations that China's nominal GDP growth will remain below 5% in the coming years, according to Morgan Stanley.
Morgan Stanley economists warn that persistent deflationary pressures could persist unless China significantly shifts its economic policy to focus more on consumer-spending-driven growth strategies, despite attempts to boost industrial investment.
