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China’s weakening economy might be the key to pushing inflation down in the US without a recession

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People in Hong Kong dining at a dim sum restaurant.
People in Hong Kong dining at a dim sum restaurant.China News Service/Getty Images
  • Disinflationary trends in the US are taking hold partly because of China’s weakening economy, according to Ed Yardeni.
  • Yardeni said on Thursday that the US could continue to see lower inflation without a recession.
  • China’s aging demographic profile and weak consumer spending is disinflationary for the US, Yardeni said.

If the US manages to get inflation back down to the Federal Reserve’s long-term target of 2% without triggering a recession, it might have to partly thank China, according to market veteran Ed Yardeni.

Yardeni highlighted in a Thursday note to clients that certain economic forces in China are having a disinflationary impact on the US, and that could ultimately pave the way for a soft landing in the US economy.

“Something is definitely wrong with China’s economy,” Yardeni said, alluding to the fact that months after the Chinese government lifted its strict COVID-19 lockdown measures, its economy hasn’t picked up accordingly.

That has flipped the economic narrative on its head, as many economists had expected at the start of this year that a reopening of China’s economy would help lift the global economy while also putting upside pressure on inflation.

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But Chinese exports fell in June and the country’s imports have remained flat since mid-2021, Yardeni highlighted, and that’s leading to lower prices for goods.

“Confirming the weakness in China’s economy is that the country’s PPI fell 5.4% year-over-year through June, while the CPI was unchanged over the same period,” Yardeni said. “China’s PPI inflation rate tends to be a leading indicator for the US PPI for finished goods, which fell 2.8% year-over-year in June.”

China’sweak economy is exporting disinflationary trends to other countries, and that’s a welcome sign for the US Fed, which was likely encouraged by the Wednesday release of the June CPI report, which showed the lowest inflation levels in more than two years. The Producer Price Index for the month released on Thursday was also lower, solidifying the disinflation narrative.

“China’s economy has been weakened by the bursting of its property bubble. Its rapidly aging demographic profile is also weighing on consumer spending as China is becoming the world’s largest nursing home. This is all deflationary for China and disinflationary for the US,” Yardeni explained.

“Bottom line: Inflation can come down in the US without a recession in the US!” Yardeni said.

 

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Economy

Fed has low odds of achieving a soft landing because the economy is still too strong to entirely cool inflation, former central bank officials say – Fortune

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Germany went from envy of the world to the worst-performing major developed economy. What happened? – Euronews

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Weak Euro-Area PMI Data Suggest Economy Facing Contraction

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(Bloomberg) — Private-sector activity in the euro area has continued to shrink in September, suggesting the economy contracted in the current quarter.

An index based on surveys of purchasing managers by S&P Global showed a fourth consecutive month of falling output, hitting 47.1. While that’s a slight improvement on August, the reading is clearly below the 50 level which indicates contraction. Economists had predicted a drop to 46.5.

“We expect the euro zone to enter a contraction in the third quarter,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “Our nowcast, which incorporates the PMI indices, points to a drop of 0.4% compared to the second quarter.”

 

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Despite dodging a recession in the wake of Russia’s invasion of Ukraine, the euro region is struggling under the weight of higher energy prices, a surge in borrowing costs and waning demand in export markets like China. While there’s agreement that the currency bloc is going through a rough patch, the European Central Bank’s latest forecasts still see the third quarter as a stagnation — not a contraction — and the economist consensus is for 0.1% growth.

 

Speaking on Friday, ECB Chief Economist Philip Lane said that “the overall environment remains not fragile.”

 

“Because of the pandemic, household’s balance sheets look in better shape than normal, same for corporates — so, that toxic mix you need in order to trigger a deep recession is not present,” he told Yahoo Finance in an interview. “We do expect to see a pickup next year and the year after which will bring the European economy to grow.”

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