Products from China, which are already normally competitive, became even cheaper, making it difficult for competitors around the world to raise prices. In Brazil, the situation is no different. China has become an additional force to the downward trend in consumer goods inflation, adding to the effects of expensive credit on demand, more stable exchange rate behavior and the normalization of supply after overcoming production bottlenecks.
According to Warren Investimentos, inflation for industrial goods – a group that covers durable and semi-durable products, as well as construction materials – was 1.09% in 2023, the lowest rate in five years, with prices falling. , that is, they marked deflation in June (-0.57%), September (-0.20%) and November (-0.54%).
Over the past year, household appliances such as refrigerators, washing machines and TVs, electronic devices such as video games and personal computers, and some clothing items, such as dresses and children’s clothing, as well as tires and bicycles, have become cheaper.
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According to Andréa Angelo, economist at Warren, the behavior of goods prices is very benign and is mainly related to exchange rate and external inflation. “The short-term trend is that goods inflation will continue to slow down”, predicts the economist.
China influences inflation behavior not only through direct competition from final products that are on store shelves, or that can be imported directly on foreign e-commerce platforms. The country is also a large supplier of inputs used by various industries, such as smartphone parts, electronic components and steel. Lower prices in China thus help to alleviate the cost of national products.
Finished or intermediate industrial products account for practically everything Brazil imports from China.
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Last year, prices charged by producers (PPI) fell by 3% in China, following inflation of 4.1% in 2022. Behind this figure are the internal and external difficulties of the Chinese industry. In the domestic market, the recovery in post-pandemic consumption is not happening as expected, reflecting the caution associated with the drop in property prices, which makes the Chinese prefer to save rather than consume.
Abroad, the country is losing sales in its main commercial destinations – including the United States, Japan and Germany – due to the cooling of trade due to higher interest rates and the replacement of China by other partners in nearshoring movements – that is , the search for geographically closer suppliers – and friendshoring – that is, the exchange for geopolitical allies.
Even with the relaxation of the strict restrictions of the zero covid policy, China was no longer able to repeat the use of its industrial capacity as before. Excess capacity in the manufacturing industry, which three years previously was at 21.6%, reached 24% in the latest reading, referring to the fourth quarter of 2023.
China thus began to “export deflation”, contributing to central banks in the rest of the world in controlling inflation. Chinese aid is even more valuable for emerging economies, where goods have a greater weight in inflation rates compared to rich countries.
Economists heard by the Broadcast (Grupo Estado’s real-time news system), including former directors of the Central Bank (BC), understand, however, that the Chinese contribution to the monetary authorities’ next steps will be limited. In other words, it should not be decisive for accelerating interest cuts in economies like Brazil, or for bringing forward the start of a monetary easing cycle in the USA and Europe.
This expectation is based on central banks’ focus on services inflation, which is more resilient and whose behavior is more determined by domestic variables.
For Bruno Serra, former director of Monetary Policy at the BC and currently manager of Itaú Asset’s Janeiro funds, China will have a relevant role in keeping industrial goods inflation low and helping with general disinflation throughout this year and next. It will not be enough reason, however, to lead to more aggressive Selic cuts, as family consumption continues to surprise in Brazil, driven by the heated job market.
“The impact of this [consumo] on services inflation, where we begin to see some first signs that disinflation has come to an end. We need the disinflation of goods coming from China plus a well-behaved exchange rate to be able to carefully achieve the market’s expectations for the Selic, between 9% and 9.5%”, comments Serra.
According to Robert Sockin, global economist at Citi, the sharp drop in the prices of products exported by China has been contributing to the global disinflation of goods, which was already happening due to the migration of spending to consumption, along with the normalization of production chains. “As long as inflationary pressures within China remain subdued, the Chinese economy will likely continue to contribute to downward pressure on global goods prices.”
However, Sockin adds, even if it is an ally of the rest of the world in the convergence of inflation to the goals pursued by central banks, it is unlikely that China will guide the global monetary cycle. “Central banks are less focused on the prices of goods because they are already largely normalized”, comments the global economist at Citi.
The Asian giant has also become less influential on price dynamics in developed economies, as rich countries decentralize their sources of supply to reduce dependence on China.
Economists are not unaware that movements such as nearshoring and friendshoring also have disinflationary effects, as they lead to an increase in global supply through the duplication of chains in important sectors – that is, the production in new markets of products that will continue to be made by China.
Former BC Tony Volpon notes, however, that in the USA, for example, replacement occurs with suppliers from Mexico, India or Vietnam, which are not always as competitive as China. “So there is a transition cost [nos rearranjos das cadeias]so that, for the USA, the impact of disinflation due to China is smaller than in emerging markets”, comments Volpon, who is now an adjunct professor at Georgetown University, in Washington.
Tensions in geopolitics
There is also an important concern among central banks about geopolitical risks, the most recent being the conflict in the Red Sea, which is once again putting stress on maritime cargo transport and raising freight prices. This limits the potential for a more significant reduction in product inflation.
“The biggest concern, for me, is the various risks of disruption in the international geopolitical scenario, such as the blockade in the Red Sea, the presidential election in Taiwan [vencida por partido contrário à unificação com a China]the war in Ukraine and the great chance of greater instability in the Middle East”, says economist Luís Eduardo Assis, former director of Monetary Policy at the BC.