Sluggish growth in China is easing inflationary pressures, Rystad says

Decreasing energy and materials prices is providing 'welcome cost relief' for companies, consultancy says

Pedestrians pass shuttered stores in an underground passageway under the Shanghai Railway Station in Shanghai, China. Bloomberg

Sluggish economic growth in China, the world’s top manufacturing hub, is affecting materials and equipment costs, pushing prices lower and bringing relief from high inflation, according to Rystad Energy.

The world’s second-largest economy has officially fallen into deflation, with both consumer and producer prices declining in July compared with a year ago.

China’s economy, which rebounded after the lifting of Covid-19 restrictions at the start of the year, lost momentum in May, posting weaker retail sales and manufacturing output while registering a slowdown in the property sector.

“Given China’s role in the global economy, the country’s fortunes significantly impact materials and equipment pricing worldwide,” said Henrik Fiskadal, vice president at Rystad Energy.

The S&P GSCI Industrial Metals Index, which tracks the industrial metals sector through futures contracts, is down nearly 18 per cent from this year’s peak.

“With decreasing energy and materials prices, it is providing some welcome cost relief for companies struggling with inflation over the past few years,” Mr Fiskadal said.

“And for the time being, the chances of a reignition of the Chinese economy bringing any extraordinary cost pressures look slim in the short term.”

Gross domestic product in China expanded by an annual 6.3 per cent in the second quarter, after growing 4.5 per cent in the previous three months, according to the National Bureau of Statistics.

However, the pace of growth in the second quarter missed the 7.1 per cent estimate of economists polled by Bloomberg and the 7.3 per cent forecast of those surveyed by Reuters.

China's recovery has been weaker than expected due to sluggish domestic and international consumer demand in line with International Monetary Fund's expectations of a “rocky” recovery for the global economy as geopolitics, monetary tightening and inflation, although declining, continue to weigh on growth.

The IMF estimates China's economy will grow by 5.2 per cent in 2023, following a 3 per cent expansion in 2022, as it benefits from a full reopening this year.

Despite a slowdown in China, global supply chain bottlenecks have continued to ease, the Norway-based consultancy said.

The IFO shortage indicator, a survey of German manufacturers by the IFO economic institute, fell to 31.9 in June 2023 from 80.2 in March last year, marking a “significant” reduction, Rystad said.

The indicator shows the percentage of businesses acknowledging obstacles to production from raw material or intermediate product shortages.

“Elevated shortages remain prevalent across automotive, machinery manufacturing and electrical equipment sectors,” Mr Fiskadal said.

“However, industries such as metals and chemicals are down to more normal levels.”

While cost pressures are easing in many sectors, service price levels in most oil and gas industry segments are still 10 per cent to 15 per cent higher than pre-pandemic levels, Rystad said.

The consultancy expects rising labour costs to have a bigger impact over the next few years amid a surge in oil and gas activity.

Inflation in labour-intensive services segments in the oil and gas industry is set to outpace the segment for materials by more than 7 per cent in the coming year as wages catch up with activity and higher costs, according to Rystad.

In the North Sea, wages are estimated to increase by upwards of 7 per cent towards 2025, keeping service prices elevated over the next couple of years, the consultancy added.

The International Energy Forum has estimated that annual oil and gas upstream spending needs to increase to $640 billion by 2030, from $499 billion last year, to ensure adequate supplies.