Price is the result, but also the reason
Overall, China's prices continue to experience negative growth, but industrial production and real GDP are both increasing, leading to a "temperature difference" in macro and micro perceptions. The author believes that price signals may be malfunctioning, but looking globally, countries like Japan have also experienced situations where prices were negative while economic growth was positive. Japan took measures to stimulate supply rather than expand demand, which ended up exacerbating the downward trend in prices and becoming a core reason for Japan's economic downturn. The author suggests that in order to achieve an annual economic growth target of around 5%, China should strengthen counter-cyclical policies, using prices as an anchor and demand as a priority to reverse micro expectations
Key Points:
1. Price, the basic signal regulating market supply and demand. Over a period of time, overall prices in China have been continuously negative. Despite this signal, industrial production and even real GDP have shown significant positive growth. With the GDP target likely to be achieved, countercyclical policies are expected to remain steadfast. In this way, there is inevitably a "temperature difference" in macro and micro perceptions. Going back to the roots, is the price signal really malfunctioning?
2. Looking globally, countries like Japan have also experienced a brief "positive" situation of economic growth against the trend of negative price growth in the early stages. Due to the lack of experience with negative price growth, micro subjects mistakenly believe that they have gone through a market clearing process, and the reversal of the traditional economic cycle can be expected as scheduled. This leads to overly optimistic sentiments in price predictions, industrial production, and other aspects.
3. At the same time, Japanese policymakers attempted to assist companies facing price difficulties, but the main measures taken were supply-side stimuli rather than demand expansion. The end result was contrary to expectations, as overly aggressive industrial policies exacerbated the downward pressure on prices from the supply side. As a result, for a long time, the solidification of expectations of low prices became a core reason for the weakness of the Japanese economy.
4. Looking ahead, in order to achieve an annual economic growth target of around 5%, China's countercyclical policies are expected to be strengthened, especially considering the significant inertia of economic slowdown in the second quarter. In the longer term, the key to reversing micro expectations lies in macro policies that "anchor prices" and "focus on demand," and implementing them in a coherent manner. International experiences have provided ample evidence.
Main Text:
Over a period of time, overall prices in China have been continuously negative. Despite this signal, industrial production and even real GDP have shown significant positive growth. In this way, there is inevitably a "temperature difference" in macro and micro perceptions. Going back to the roots, is the price signal really malfunctioning?
1. Has the price signal malfunctioned?
Looking globally, countries like Japan have also experienced a brief "positive" situation of economic growth against the trend of negative price growth in the early stages.
Figure 1. Prices Down, Economy Up?
Note: Prices are GDP deflators. China's GDP for 2021 and 2023 is at a compound growth rate.
Due to the lack of experience with negative price growth, Japanese micro subjects mistakenly believed that they had gone through a market clearing process, and expected the traditional economic cycle to reverse as scheduled, leading to overly optimistic sentiments. Producers may still actively produce, "increasing quantity to compensate for price" to expand market share, hoping to gain an advantage when the cycle restarts. Faced with discounted goods, consumers naturally increase their purchases in the initial period. In the short term, the economy shows a situation of "quantity rising while prices falling."
Figure 2. Underestimated Downward Pressure on Prices
Note: Prices are based on the average of CPI and PPI.
At the same time, Japanese policymakers are trying to help businesses trapped in a price dilemma, but the main measure taken is supply-side stimulus rather than demand expansion. The end result was contrary to expectations, as overly aggressive industrial policies exacerbated price declines from the supply side. As a result, for a long time, the solidification of low price expectations became a core reason for the weakness of the Japanese economy.
Figure 3. Strengthening the Supply Side: Helping Prices Stabilize?
Note: GDP is the annual average.
II. Prices Will Eventually Not Fail
Looking ahead for the year, in order to achieve the annual economic growth target of around 5%, China's countercyclical policies are expected to be strengthened, especially considering the significant inertia of economic slowdown in the second quarter.
Taking a longer-term view, prices are the result, but also the cause. To truly break free from negative price growth, macroeconomic policy goals of "anchoring with prices" and "focusing on demand", and implementing them in a consistent manner, are key to reversing micro expectations. International experience has provided ample evidence.
Figure 4. The Earlier the Price Target is Clarified, the Better
Authors of this article: Wu Ge, Yu Tao, Cao Haiwei, Gao Tong, Source: Wu Ge Economic Notes, Original Title: "Prices are the Result, but also the Cause"