This One Big Change in the Global Economy Deserves More Attention

One of the biggest changes in the global economy in 2024 is something that lots of Americans might not realize: China is struggling. The Chinese economy is going through a real estate downturn, a slowdown in consumer spending, and is now experiencing deflation. Instead of experiencing high inflation like America had in 2021–2022, China is going through the opposite problem: "deflation" means falling prices.

Let's look at why China's deflation is happening, and what it might mean for your personal finances in 2024.

What deflation means for China's economy

With an economy going through deflation, that means everything is getting cheaper. That might sound like a good deal at first -- lower prices for all! The truth is, deflation is a big problem for economies. It means people have stopped spending because they're afraid of the future and they want to hold onto their money.

When businesses can't sell their products, they lower their prices. But if prices keep getting lower, people have less incentive to spend -- they say to themselves, "I'll just wait until next month when the price is even lower." This can become a downward spiral or "deflationary spiral" that causes the entire economy to get worse.

Too much inflation can be bad, and no one likes paying higher prices for food and car insurance. But some inflation, at a manageable level, can be good. When prices go up a little, year after year, it's like built-in fuel for the economy. A healthy amount of inflation gives consumers an incentive to keep spending, and employers an incentive to keep offering pay raises.

Deflation is not healthy; it's a sign of weakness in the economy. If deflation continues for too long, it can make everyone's incomes go down and make everyone poorer over time.

Why China's economic problems could be good for your wallet

If you're an American, unless you work for a company that does business in China, the recent deflation in the Chinese economy could potentially be good news for your bank account. That's because lower prices in China might lead to lower prices in other countries -- including America.

For example, Chinese people are buying significantly less pork during their recent economic uncertainty. This is driving down pork prices in China. Since the U.S. exports a significant amount of pork to China, lower demand for pork in China could help drive lower prices for pork at U.S. grocery stores.

Chinese car prices have gone down, Chinese companies are using less energy, and Chinese factories are also cutting the prices of their products, due to slow demand in China. This means that any manufactured goods that come to the U.S. from China might also see lower prices. Oil prices all over the world could go down a bit because of slower demand from Chinese buyers. As an American shopper, your grocery prices, gasoline prices, and the price of anything you buy that's made in China, or has parts made in China, could get cheaper in 2024.

How China's economy could help the Fed cut interest rates in 2024

One of the biggest debates in the U.S. financial industry in recent months has been, "When will the Federal Reserve cut interest rates?" Lower interest rates would reduce Americans' cost of borrowing and potentially help new homeowners. Cutting interest rates in 2024 would be a signal from the Fed that America's economy is ready to grow, that investors can take risks with greater confidence, and that the post-pandemic time of inflation and "vibecession" is over.

China's deflation could actually make it more likely for the Fed to cut interest rates in 2024. That's because, if everything is getting cheaper in China, China's economy has weak demand for commodities like pork, steel, lumber, and oil, and Chinese consumers are reluctant to spend money, then China will not only be exporting manufactured goods -- China's economy will be exporting deflation.

The sheer size and power of China's economy can create spillover effects throughout the world. When China is having trouble with deflation, this can (ironically) help undo some of the inflation that is happening in other countries. It's like a safety valve that relieves pricing pressure, like a rebalancing of the global economy.

If China's deflation continues into mid-2024, it could help drive down global prices enough to reduce America's inflation -- and give the Fed confidence to cut interest rates as soon as June 2024.

Bottom line

No one knows for sure what will happen next in the global economy. China's economic troubles are painful for Chinese people and international companies that operate in China. But China's deflation could be arriving at just the right moment to be a bit of good news for American consumers, borrowers, and stock market investors.