Morgan Stanley said on Monday that deflationary pressures caused by China’s economic slowdown are beginning to have an impact on global markets, especially through falling commodity prices, affecting the United States and the euro zone.
The investment banking firm said in its latest report titled “China’s Deflation Spillover” that despite recent policy measures aimed at stabilizing the situation, China’s long-term deflation is exacerbating the overcapacity problem that has not been seen since the 20th century. The worst since the 1990s.
The spillover effect was most pronounced in core goods industries, especially on clothing and electronics, which led to a slight decrease in core inflation rates of about 0.1% in the United States and the euro area, mainly due to the sharp decline in core goods inflation. Morgan Stanley pointed out that it is about 0.5%.
Morgan Stanley added: “While the overall impact remains relatively small, it provides additional leeway for central banks such as the Federal Reserve and the European Central Bank to consider monetary easing measures throughout the year.”
Morgan Stanley analysts noted that China’s dominance in global merchandise exports magnified its role as a deflationary exporter. They added that this has wider implications for industries that rely on imported goods, such as the U.S. apparel market, whose CPI component could fall by up to 0.3% due to lower import prices from China.
Looking ahead, Morgan Stanley expects China’s inflation outlook to continue to face challenges, with the Producer Price Index (PPI) expected to recover slowly and exiting deflationary territory only in the second half of 2025.
Morgan Stanley said that this cautiously optimistic attitude is consistent with the forecast that China’s nominal GDP growth will remain sluggish in the next few years, staying below 5%.
Morgan Stanley economists warned that despite China’s efforts to stimulate manufacturing investment, persistent deflationary pressures may persist unless China’s economic policy shifts significantly to a consumption-driven growth strategy.
