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A broad array of Chinese data on Tuesday highlighted intensifying pressure on the economy from multiple fronts, prompting Beijing to cut key policy rates to shore up activity but analysts say more support is needed to revitalize growth.

Just before the release of a batch of July data, China’s central bank unexpectedly chopped one set of key interest rates and followed it with cuts on other rates hours later, underlining the rapid loss of the post-COVID economic rebound that has shaken global financial markets.

Tuesday’s data released by the National Bureau of Statistics (NBS), which comes on top of a raft of weak indicators from last week, showed retail sales, industrial output and investment all growing at a slower than expected pace – indicating the engines of business and consumption in the world’s second biggest economy were severely underpowered.

Additionally, China suspended publishing youth jobless data, which hit a record high of 21.3% in June. 

“All the main activity indicators undershot consensus expectations in July, with most either stagnant or barely expanding in month-on-month terms,” said Julian Evans-Pritchard, economist at Capital Economics.

“And with financial troubles at developers such as Country Garden likely to weigh on the housing market in the near-term, there is a real risk of the economy slipping into a recession unless policy support is ramped up soon.”

Nomura analysts were equally downbeat on China’s economic outlook.

“We believe the Chinese economy is faced with an imminent downward spiral with the worst yet to come, and the rate cut this morning will be of limited help,” they said.

Most economists see downside risk to Chinese growth, but they do not expect a recession.

Industrial output grew 3.7% from a year earlier, slowing from the 4.4% pace seen in June, the NBS data showed, and was below expectations for a 4.4% increase in a Reuters poll of analysts.

Retail sales, a gauge of consumption, rose 2.5%, down from a 3.1% increase in June and missed analysts’ forecasts of 4.5% growth despite the summer travel season.

It was the slowest growth since December 2022, showing how much of a challenge authorities face as they try to make consumption the key driver of future economic growth.

More stimulus

Asian stocks stalled at one-month lows, the yuan hit a 9-month nadir while the dollar held broadly firm after the weak Chinese data and latest policy easing measures.

Following the first rate cuts, China’s major state-owned banks were seen selling U.S. dollars and buying yuan in a bid to stem rapid declines in the currency, three people with direct knowledge of the matter said. Sovereign bond yields fell to three-year lows, and benchmark stock indexes were down.

Record-low credit growth and rising deflation risks in July necessitated more monetary easing measures to arrest the slowdown, market watchers said, while default risks at some housing developers and missed payments by a private wealth manager also soured market confidence.

Nie Wen, an economist at Hwabao Trust, expects special bonds to be introduced urgently and said the probability of a reserve requirement ratio (RRR) cut in the short run is relatively large.

Policymakers last month released a batch of stimulus measures, from boosting auto and home appliances consumption, relaxing some property restrictions to pledging support to the private sector, as a post-COVID rebound rapidly lost steam since the second quarter.

The catering sector, which reaped benefits from the COVID reopening, saw slower revenue growth in July from June.

Investment in the private sector shrank 0.5% in the first seven months, extending 0.2% decline in the first half of 2023.

Structural pains

The persistent drag in the property sector, mounting local government debt pressure, high youth jobless rate and cooling foreign demand continue to be major impediments to fostering a sustainable economic revival.

China is undergoing a painful transition to a less debt-fueled, less property-centric and more consumer-driven economy, said Robert Carnell, Asia-Pacific head of research at ING.

“We will continue to see weak macro data for the foreseeable future. It is a necessary part of the adjustment and is far preferable to resurrecting the debt-fueled property model that propelled growth previously. But we do need to lower our expectations for China’s growth.”

Other data on Tuesday showed fixed asset investment expanded 3.4% in the first seven months of 2023 from the same period a year earlier, versus expectations for a 3.8% rise. It grew 3.8% in the January-June period.

Investment in the property sector tumbled 8.5% year-on-year in January-July, after shrinking 7.9% in January-June, extending its fall for the 17th consecutive month.

The nationwide survey-based jobless rate climbed slightly to 5.3% from 5.2% in June. Among OECD members, the average unemployment rate was 4.8%, with youth joblessness around 10%.

China set its 2023 growth target at around 5%, but Nomura analysts warn the country could miss the goal again as it did last year.

“We also see bigger downside risk to our 4.9% y-o-y growth forecast for both Q3 and Q4, and it is increasingly possible that annual GDP growth this year will miss the 5.0% mark.”
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The Russian ruble on Monday reached its lowest value since the early weeks of the war in Ukraine as Moscow increases military spending and Western sanctions weigh on its energy exports.

It led Russia’s central bank to announce it will hold an emergency meeting Tuesday to review its key interest rate, opening the possibility of an increase in borrowing costs that would support the flagging ruble.

The Russian currency passed 101 rubles to the dollar, continuing a more than 25% decline in its value since the beginning of the year and hitting the lowest level in almost 17 months. The ruble recovered slightly after the central bank’s announcement.

The meeting was set after President Vladimir Putin’s economic adviser, Maksim Oreshkin, blamed the weak ruble on “loose monetary policy” in an op-ed Monday for state news agency Tass. He said a strong ruble is in the interest of the Russian economy and that a weak currency “complicates economic restructuring and negatively affects people’s real incomes.”

Oreshkin said Russia’s central bank has “all the tools necessary” to stabilize the situation and said he expected normalization shortly.

Bank deputy director Alexei Zabotkin told reporters Friday that it is adhering to a floating exchange rate because “it allows the economy to effectively adapt to changing external conditions.”

Analysts say the weakening of the ruble is being driven by increased defense spending — leading imports to rise — and falling exports, particularly in the oil and natural gas sector. Importing more and exporting less means a smaller trade surplus, which typically weighs on a country’s currency.

The Russian economy is now “working on different types of state orders related to the war, such as textile enterprises, pharmaceuticals and the food industry,” said Alexandra Prokopenko, nonresident scholar at the Carnegie Russia Eurasia Center and a former Russian central bank official.

Pivoting the entire economy to a war footing not only drives up imports but also raises the prospect of worsening inflation, she said.

To help lessen that prospect, the central bank said last week that it would stop buying foreign currency on the domestic market until the end of the year to try to prop up the ruble and reduce volatility.

Russia typically sells foreign currency to counter any shortfall in revenue from oil and natural gas exports and buys currency if it has a surplus.

The central bank also enacted a big increase of 1% to its key interest rate last month, saying inflation is expected to keep rising and the fall in the ruble is adding to the risk. The next meeting to discuss Russia’s key interest rate was planned for 15 September.

On Monday, some Russians in Moscow appeared concerned about the weakening currency.

“Prices will rise, which means that the standard of living will fall. It has already fallen, and it will fall even more — there are definitely more poor people,” said Vladimir Bessosedny, 63, a retired teacher.

Others hoped the fall of the ruble was temporary and that it would stabilize.

In January, the ruble traded at about 66 to the dollar but lost about a third of its value in subsequent months.

After Western countries imposed sanctions after the invasion of Ukraine in February 2022, the ruble plunged as low as 130 to the dollar, but the central bank enacted capital controls that stabilized its value. By last summer, it was in the 50-60 range to the dollar.

Zabotkin said Friday that international sanctions had cut off a significant amount of imports to Russia, contributing to the ruble’s fall, but he dismissed speculation that capital flight from Russia also was to blame, saying the idea was “not substantiated.”
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The post-pandemic travel boom and the high ticket prices that come with it show no signs of slowing well into next year, despite economic uncertainty and dwindling household savings.

While questions linger about how much longer consumers will continue to indulge, airlines, hotels and analysts say travel has remained a top priority instead of the “nice to have” purchase as in years past.

International travel reached around 90% of pre-pandemic levels this year, according to the International Air Transport Association. The rebound was led by visitors to Southern Europe from cooler climates despite soaring temperatures and included swaths of American tourists flying overseas.

TUI, one of the world’s biggest holiday firms, on Wednesday reported its first post-pandemic net profit on the back of robust bookings and travel demand in the three months to the end of June.

“In the wake of the pandemic, a number of folks have reset their priorities and have focused on splurging on travel,” said Dan McKone, a senior partner at strategy consultancy L.E.K. Consulting.

That desire may even strengthen next year, according to travel tech firm Amadeus, whose recent survey showed that 47% of respondents said international travel was a high-priority discretionary spending category for 2023 and 2024, compared with 42% who ranked it as such the previous year. Amadeus sampled travelers from Britain, France, the United States, Germany and Singapore.

Those trends lifted quarterly earnings of travel companies, with cruise operators like Royal Caribbean reporting record results in recent weeks. Travel operators Booking Holdings and Airbnb said revenue was up 27% and 18%, respectively, and air carrier Delta and hotel giant Marriott International forecast strong future demand.

German carrier Lufthansa said that bookings for the rest of the year currently exceed 90% of the pre-pandemic level and that the summer season is extending into October. United Airlines is expanding Pacific coverage this autumn with new flights to Manila, Hong Kong, Taipei and Tokyo.

Overall, global passenger demand is estimated to grow 22% year-on-year in 2023 and 6% in 2024, Moody’s investor service said on Tuesday. Ticket prices, which in some cases have increased by double-digit percentages since the pandemic, are unlikely to plummet.

“Everyone is pricing against demand, and this is the basic economic equation,” Jozsef Varadi, CEO of budget carrier Wizz Air, told Reuters. “We are in a high-input cost environment. So, that puts pressure on pricing.”

Travelers to Europe and Asia are not expected to see substantial price relief this autumn, said Hayley Berg, lead economist at online travel agency Hopper.

She expects air fares on long-haul international routes to remain high until supply outpaces pre-pandemic levels, demand normalizes and jet fuel prices decline further.

The weak spot is U.S. domestic travel, as the end of COVID-19 testing restrictions has unleashed pent-up demand by Americans to take vacations overseas.

“They said earlier in the year, ‘Look, I’m going to do that international trip that we’ve been meaning to do,’ and that’s created a lot of crowded places with Americans in Europe,” Booking Holdings CEO Glenn Fogel told Reuters.

International inbound travel to the United States in May rose 26% year over year to 5.37 million visitors but is still about 20% lower than pre-pandemic visitor volumes reported in May 2019, according to the U.S. National Travel and Tourism Office.

Average domestic airfare is currently $246 round-trip, down 8% from 2022, according to travel booking app Hopper.

Executives said U.S. hotel rooms may become more expensive due to lack of supply, but softening demand may moderate that effect.

“Growth is expected to remain higher internationally than in the U.S. and Canada, where we’re seeing a return to more normal seasonal patterns,” said Marriott CFO Kathleen Oberg.

Looking ahead, some airline groups like British Airways owner IAG said it is unclear whether demand can be sustained. Analysts have said dwindling consumer savings could cause a downturn in spending if inflation fails to let up.
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A forensic audit into Lebanon’s central bank by a New York-based company has revealed yearslong misconduct by the bank’s former governor and $111 million in “illegitimate commissions,” according to a report by the company.

It’s the latest chapter in the saga of Lebanon’s embattled former central bank governor Riad Salameh, 73, who ended his 30-year career as governor last month under a cloud of investigation and blame for his country’s economic meltdown.

A copy of the 331-page document by Alvarez & Marsal, seen by The Associated Press, was given to parliament on Friday. The audit was among key demands by the international community and the International Monetary Fund, which over the years increasingly lost confidence in crisis-hit Lebanon.

Lebanon’s government and Alvarez & Marsal signed a contract in September 2021, but the audit subsequently stalled. It covers the period between 2015 and 2020; Lebanon’s economic meltdown began in October 2019.

Alvarez & Marsal said the central bank’s “refusal to provide direct access to its systems and to allow work to be conducted” on its premises had “significantly delayed and slowed” the audit.

The report in one section focuses, among other things, on the practice of so-called financial engineering that started in 2015 and was used by the central bank to allow local lenders to attract dollar deposits from abroad and then encourage the banks to deposit the dollars at the central bank. In return, the lenders were given interest rates higher than international market rates.

“Financial engineering was costly,” the report said.

The central bank’s foreign currency shortage grew dramatically from a foreign currency surplus of $7.2 billion at the end of 2015, to a shortage of $50.7 billion at the end of 2020. The report says this was driven by a 119% increase in foreign currency denominated deposits, fueled by the central bank.

On Thursday, the United States, United Kingdom and Canada sanctioned Salameh and a handful of his close relatives and associates over corruption allegations.

Also, France, Germany and Luxembourg are investigating Salameh and several close associates over alleged financial crimes, including illicit enrichment and the laundering of $330 million. Paris and Berlin issued Interpol notices for Salameh in May. Lebanon, however, does not hand over its citizens to foreign countries.

The report also highlights illegitimate commissions during the 2015-2020 period, totaling $111 million, and said they appeared to be a scheme that’s being investigated by Lebanese and international prosecutors — an apparent reference to the former governor’s brother, Raja Salameh.

Reports have circulated that the Lebanese central bank had hired Forry Associates Ltd., a brokerage firm owned by Raja Salameh, to handle government bond sales from which the firm received $330 million in commissions.
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After months of concern that the Chinese economy was teetering on the brink of potentially damaging deflation, Beijing’s National Bureau of Statistics this week made it official, reporting that overall prices had declined in July by 0.3% compared to a year earlier.

As much of the world struggles with the difficult phenomenon of price inflation, the news about deflation in China comes after months of reports showing stagnating price levels there, rising unemployment and slowing domestic production.

Chinese officials characterized the decline in prices as transitory and said the year-over-year comparison is somewhat skewed by higher-than-usual levels of price appreciation in 2022. NBS chief statistician Dong Lijuan said, “With the impact of a high base from last year gradually fading, the CPI [consumer price index] is likely to rebound gradually.”

Economic struggles

The Chinese economy has been struggling for more than a year as officials have tried to navigate a way out of a downturn caused by multiple problems. The most prominent was a heavy-handed zero-COVID policy that saw entire cities shut down, sometimes for weeks at a time, in an effort to prevent the spread of the coronavirus.

However, the Chinese economy has also been enduring other difficulties. The property sector, which in recent years accounted for between 20% and 30% of GDP, has suffered a severe slowdown, with a number of major developers unable to service their debts, and many projects left incomplete. The banking sector is also burdened by bad loans, many of which were made to local government agencies that have experienced sharp declines in revenue.

Increasing unemployment among younger workers is also a problem, with the official jobless rate for people ages 16 to 24 at 21%, and some experts expressing concern that the real number is significantly higher.

One data point

Loren Brandt, the Noranda chair professor of economics at the University of Toronto, told VOA in an email exchange that it’s important to be careful about extrapolating from a single month’s data.

However, he added, “It is a signal of continued weakness in the economy that has deeper roots. The drop in external demand and exports only adds to these problems. We tell all kinds of stories of how deflation adversely affects the economy by itself, but at the core are a deeper set of issues. We learned this in the case of Japan.”

Japan, China’s neighbor to the east, has endured decades of price deflation that experts attribute to a wide variety of economic and societal factors, including a low birth rate and high rates of personal savings.

Global impact

William T. Dickens, a professor of economics and social policy at Northeastern University, told VOA he is concerned that deflation is likely to persist in China.

“The Chinese economy appears ripe for continuing deflation,” he wrote in an email exchange. “Both internal and external demand is weak, and inflation has been low even before this slip into deflation. The situation looks bad to me, and a lot will depend on what the Chinese government is able to accomplish to restore demand. I’m not optimistic.”

As the world’s second-largest economy, China’s troubles could have a global impact if deflation persists, Dickens said.

“My biggest worry is for developing countries that depend on China to purchase their raw materials,” he wrote. “A lot of these countries are already stressed by the debts they owe — to China in particular. As China falters, these countries will see a falloff in their demand exports. This will make it hard for them to keep paying their creditors.”

Widespread defaults, he added, could trigger “financial instability” that extends beyond China and heavily indebted countries.

Impacts of deflation

Consumers might initially see price deflation as a positive development, as it makes it cheaper to purchase goods and services. However, it also has serious potential negative effects.

Lower prices drive down business revenues, leading to lower profits, less investment, and potentially higher unemployment as companies pare back on production in the face of decreased demand.

Deflation can also make it relatively more expensive for consumers and businesses to service debt — especially debt incurred at interest rates prevalent before deflation sets in. In times of deflation, the relative purchasing power of every dollar spent on debt repayment is higher than it was before prices began falling.

‘Deflationary spiral’

Economists also warn of a possible “deflationary spiral,” in which expectations of future price declines influence consumer behavior.

When inflation began rising in the U.S. in 2021, economists warned that if consumers came to expect prices to keep rising, they might lead to an inflationary spiral, in which consumers concerned about rising prices accelerated their timetable for major purchases, driving up demand and inadvertently triggering even higher inflation.

A deflationary spiral in China would have the opposite effect. If Chinese consumers believe prices may keep falling, they could delay major purchases in the expectation of better deals in the future. The resulting slowdown in demand could exacerbate deflationary pressure.  
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