The Chinese economy is running out of steam: Is the crisis inevitable?

China's economy is vacillating between stagnation and decline, revealing lasting structural flaws. In December, the consumer price index increased by only 0.1% year-on-year, confirming deflationary pressure which is intensifying despite the government's repeated attempts to revive growth. The fall in prices of food (-0.5%) and consumer goods (-0.2%) illustrates the lack of dynamism in domestic demand, while households remain cautious and businesses are hesitant to invest. Thus, the real estate crisis, coupled with the ineffectiveness of previous recovery measures, fuels uncertainties. This slowdown goes beyond a cyclical phase. It calls into question the resilience of the Chinese economic model and its short-term prospects.

Sluggish inflation and the threat of a prolonged slowdown

The year 2024 ended on a gloomy note for the Chinese economy, marked by almost non-existent inflation. In December, the consumer price index increased by only 0.1% year-on-year, after a meager increase of 0.2% in November, according to the National Bureau of Statistics (NBS). This stagnation reflects a slowdown in domestic demand, particularly visible in the food sector, where prices fell by -0.5%, and in consumer goods, down by -0.2%. “Deflationary pressure persists”, notes Zhiwei Zhang, chief economist of Pinpoint Asset Management. He adds that the current dynamic is not enough to reverse the trend.

This drop in prices takes place in a context of economic fragility. For several months, China has struggled to get rid of the specter of deflation, the consequence of sluggish consumption and a climate of uncertainty which weighs on investments. Over the year as a whole, average inflation was limited to 0.2%, a historically low level which accentuates concerns. This phenomenon goes beyond a simple slowdown in prices. It directly threatens the country's growth. Prolonged deflation reduces business margins, slows consumption and increases the burden of debts through the increase in their real value. Such a configuration is reminiscent of Japan's deflationary trap in the 1990s, a period during which the archipelago fell into sluggish growth and a spiral of falling prices.

Insufficient recovery measures in the face of economic uncertainties

Faced with critical economic indicators, Beijing has stepped up its efforts to stem the slowdown. The government has adopted a series of measures, including interest rate cuts, relaxations for property purchases and an increase in debt limits for local governments. The objective is clear: to stimulate consumption and encourage investment. However, these initiatives struggle to produce the expected effects. Households remain cautious in the face of economic uncertainty and businesses are still hesitant to invest. Domestic demand remains fragile, which is slowing the recovery.

Faced with this inertia, Beijing announced an “even more active” budgetary policy for 2025, and is banking on an increase in public spending and a widening of the budget deficit. This strategy aims to support the economy by offsetting the weakness of private consumption. However, its effectiveness raises questions. Many economists believe that a more targeted recovery, particularly in favor of households, would be necessary to trigger a real rebound. The idea of ​​directly stimulating purchasing power has been mentioned for a long time, but Beijing remains reluctant to adopt this type of measure.

Some economic forecasts do not argue in favor of a rapid return to growth. The International Monetary Fund (IMF) anticipates growth in Chinese GDP limited to 4.8% in 2024, followed by a slowdown to 4.5% in 2025. If these estimates are confirmed, China could enter a phase prolonged sluggish growth, a scenario that would test the solidity of its economic model. Added to this is the increased crisis in the real estate sector, an essential pillar of activity, whose recovery is slow to materialize. For Beijing, the challenge now is to find a credible stimulus lever without further compromising its budgetary and financial balances.

China finds itself at a decisive crossroads. Despite ambitious recovery measures, domestic demand remains fragile and growth is struggling to take off again. The effectiveness of the fiscal policy announced for 2025 remains uncertain, while economic projections suggest lasting slowdown. If Beijing fails to restore the confidence of households and businesses, the second world power could sink into prolonged stagnation, which would threaten its development model and its overall economic influence.