New Delhi, March 22: A recent report highlights that the ongoing conflict between the United States and Iran may push China into a precarious inflation situation. While the country might evade deflation, it could face significant cost-push inflation due to rising global energy prices. This information comes from a report by Modern Diplomacy based in Europe.
According to the report, the increase in oil prices is driving up production costs in China, while domestic demand remains weak. Consequently, companies are unable to raise prices significantly.
The report indicates that the rising costs of energy and raw materials will further squeeze corporate profits. Instead of passing these increased costs onto consumers, companies may absorb them, potentially impacting wages and new hiring.
China’s manufacturing sector is already operating on thin margins. The report notes that nearly one-quarter of companies are currently running at a loss, attributed to excess production capacity and intense competition.
Additionally, the report states that income growth for individuals has slowed, with over half of employees not receiving salary increases last year. Some even faced pay cuts. Youth unemployment remains high, with many struggling to secure jobs despite submitting hundreds of applications.
Stagnant wages have led to decreased consumer spending, resulting in weak demand in China and limited growth opportunities for companies.
China’s economy has heavily relied on exports, but rising energy prices may dampen global demand, further impacting exports.
Economists believe that if oil prices continue to rise sharply, it could negatively affect China’s GDP growth, potentially leading to a decline.
However, investments in electric vehicles and renewable energy may provide China with some competitive advantages. Still, weakening global demand could diminish these benefits.
The ongoing conflict in the Middle East poses additional challenges for China, disrupting energy supplies and trade routes.
The report warns, “If this energy crisis persists, China could find itself in a situation characterized by neither full deflation nor healthy inflation, but rather a prolonged period of slow growth coupled with rising costs.”
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