6 Jan 2016
China: The main disinflationary source at the global level – Deutsche Bank
FXStreet (Delhi) – Research Team at Deutsche Bank, suggests that China rather than Europe was the main disinflationary source at the global level in the last year.
Key Quotes
“In contrast to Europe, credit growth remains relatively high, long-term real rates are above 4%, the GDP deflator is in negative territory and the currency has appreciated close to 30% and is now overvalued on some metrics. Our economists are positive on the short-term outlook for growth and China’s ability/desire to maintain a relatively stable currency.”
“However, they also recognize the secular decline in growth. Putting it all together, China could continue to exert background disinflationary pressures, but without creating a significant financial shock. Relative to this scenario, the risks would come from a more aggressive adjustment and/or policy response. For instance, a more aggressive devaluation would increase the disinflationary pressures that would be exported to the rest of the world, while enabling a rebuild of FX reserves.”
“Both factors would contribute to a flattening of the curve and would likely lead to more dovish ECB and Fed. Conversely, a more aggressive domestic easing (fiscal and monetary policy) while maintaining the currency stable is likely to reduce disinflationary forces while at the same time putting more pressure on FX reserves. Both factors would lead to steeper core curves.”
Key Quotes
“In contrast to Europe, credit growth remains relatively high, long-term real rates are above 4%, the GDP deflator is in negative territory and the currency has appreciated close to 30% and is now overvalued on some metrics. Our economists are positive on the short-term outlook for growth and China’s ability/desire to maintain a relatively stable currency.”
“However, they also recognize the secular decline in growth. Putting it all together, China could continue to exert background disinflationary pressures, but without creating a significant financial shock. Relative to this scenario, the risks would come from a more aggressive adjustment and/or policy response. For instance, a more aggressive devaluation would increase the disinflationary pressures that would be exported to the rest of the world, while enabling a rebuild of FX reserves.”
“Both factors would contribute to a flattening of the curve and would likely lead to more dovish ECB and Fed. Conversely, a more aggressive domestic easing (fiscal and monetary policy) while maintaining the currency stable is likely to reduce disinflationary forces while at the same time putting more pressure on FX reserves. Both factors would lead to steeper core curves.”