Grappling with a property-driven slowdown, China has introduced several stimulative measures this year. Most have been aimed at the supply side.
“Policy aimed at stoking demand to boost confidence among China’s consumers is likely required in addition to the supply-side measures,” said Grant Feng, a Vanguard senior economist who studies the Asia-Pacific region. “People won’t spend on goods and services if they expect that prices will be lower next month. That would mean further downward pressure on prices and a harder road back toward potential growth.”
Lessons for China in experiences of the U.S. and Japan
Notes: “T” represents a trough in M2 money in circulation. Increments before and after the troughs are in months. M2 is a broad measure of money in circulation that includes all aspects of M1 (such as physical currency and checking and savings accounts) plus other highly liquid assets such as certificates of deposit and money market accounts.
Sources: Vanguard calculations, based on data from CEIC Data through July 31, 2024.
Our chart reflects a relatively swift return to previous M2 money-in-circulation levels in the United States following the global financial crisis, which was aided by timely consumer-focused stimulus. “A quick and decisive policy response is critical to fighting deflationary risk,” said Qian Wang, Vanguard chief economist for the Asia-Pacific region. “The U.S. after the global financial crisis offers a good example of this, whereas Japan in the 1980s and 1990s lacked a swift and sufficient response. There is a good lesson for China in these experiences.”
We have forecasts for the performance of major asset classes, based on the June 30, 2024, running of the Vanguard Capital Markets Model®. Detailed projections, including annualized return and volatility estimates covering both 10- and 30-year horizons, are available in interactive charts and tables.
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of September 19, 2024.
The Federal Reserve cut its policy interest rate by 0.5 percentage point on September 18, to a range of 4.75%–5%, but did so in the context of economic resilience rather than concerns about a material slowdown. We expect:
On September 4, for a third consecutive meeting, central bank policymakers cut their overnight interest rate target by 0.25 percentage point. We expect:
On September 12, the central bank announced the second cut to its policy interest rate of the new policy cycle that began in June. We expect:
Although services inflation, pay growth, and GDP data have all recently undershot expectations, an 8-1, September 19 vote by central bank policymakers to maintain their 5% policy interest rate acknowledged that risks to resurgent inflation remained. We expect:
Japan imported inflation through higher food and energy prices during the COVID-19 pandemic. The result has been a virtuous cycle of higher prices and even faster-rising wages in a country that had struggled through decades of little to no inflation and even deflation. We expect:
Sluggish domestic demand highlights the risk that China’s target of 5% economic growth this year may not be met. Increased government loan issuance in August provides hope, but more of the same will likely be required in the months ahead. We expect:
The economy is growing at its slowest pace in decades, but inflation that is falling only gradually is likely to keep the central bank from cutting its policy interest rate this year. We expect:
Services inflation remains sticky in most emerging markets, but that hasn’t stopped a cycle of interest rate cuts as broader inflation readings approach central bank targets. Since our economic survey last month, policy rates have been reduced by 0.25 percentage point in such markets as Chile, the Philippines, the Czech Republic, and Mexico.
A notable exception is Brazil, where the central bank raised its policy rate to 10.75% on September 18, reversing a cutting cycle that began in August 2023. Brazil’s currency, the real, has depreciated by 13% against the U.S. dollar since the start of the year, through September 17.
In Mexico, we expect:
Notes:
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