Juggling Dynamite

Consumer prices in the world’s second-largest economy fell 0.8% in January compared with a year earlier–the most significant deflation in over a decade.

With demand weak at home and inventories piling up, Chinese producers have the incentive to dump excess goods onto world markets, and they are.

Chinese export prices have dropped steadily since late 2022 and were -8.4% year-over-year in December (customs data, shown on the left).

China is the largest trading partner for many countries and tends to lead price trends in other exporters that compete for business. See Cheap Chinese Goods are Becoming a Costly Problem. Exhibit A: Hong Kong.

The opposite of what happened during the pandemic, deflating prices and weak demand for finished goods tend to reduce corporate profits.

As I have been pointing out…years of easy money and housing speculation have left Canada’s economy between a rock and a hard place. Shelter costs (28% of Canadian CPI) are inflating as mortgages come up for renewal month after month. Households are cutting spending significantly in response.

The result is stubborn shelter inflation and slowing economic growth with rising layoffs and spreading financial strife. While the Bank of Canada can cut short-term rates, there is no quick fix here. Cutting to zero quickly would signal panic and throw more fuel on price inflation. The mandate of price stability needs policy rates to stay well above the zero bound and in line with pre-GFC historic averages. And the masses are ill-prepared.

James Orlando, director and senior economist at TD Bank, joins BNN Bloomberg to talk about three scenarios for shelter inflation depending on when the BoC starts cutting rates. Here is a direct video link.

In 2023, the national office space vacancy rate reached 19.6%, above the 19.3% historic peak in 1991. The overcapacity, over-valuation and debt write-downs needed in commercial real estate are themes that will persist for some time. No quick fix.

Federal regulators in recent weeks have signaled concerns about commercial real estate, a financial sector that could spell economic trouble. A combination of decreased demand for office space and high interest rates has put pressure on leaseholders and smaller banks in particular. Economics correspondent Paul Solman reports from San Francisco. Here is a direct video link.