Deflation in the pet category (Part 1): China

In contrast to the general trend of inflation around the world, things are moving slightly differently in China. The Asian market is experiencing deflation—a general decline in the price of goods and services.

Experts say a price decline may seem like a warm welcome at first glance. However, it could actually be detrimental to the economy if it continues for an extended period of time.

Why is it happening?

One of the main causes of this situation is the weaker demand experienced in some sectors like energy, metals and chemicals.

Following the drop in demand, prices have decreased, which has affected the overall deflation trend. Furthermore, Antonello Germano, Marketing Manager at Daxue Consulting, highlights China’s zero-Covid policy as influencing consumer behavior, leading to a higher saving rate.

“This has reduced consumer spending due to higher savings, further dampening demand and putting downward pressure on prices,” says Germano.

Lower prices, more demand

There is evidence that China’s pet industry remained one of the strongest sectors during the pandemic.

A report by PricewaterhouseCoopers International highlighted that the industry delivered an annual growth rate of 18% from 2019 to 2021, hitting ¥131 billion in 2021 ($950.8M/€‎843.9M).

Regarding short-term impacts, Germano stresses that pet parents “could benefit from lower prices as pet-related expenses become more affordable.” Considering this effect, there could also be a rise in demand for pet products like food, toys and accessories.

However, if China’s deflation continues and leads to a general economic downturn, consumer purchasing power may decline. “This would mean reduced spending on non-essential items, including pet-related products and services,” warns Germano.

Is deflation likely to persist?

While the future remains uncertain, recent indications of the significant decline in producer prices coupled with the proximity of consumer prices to deflationary levels are raising concerns about the country’s economic growth.

For this reason, Daxue Consulting’s analyst believes policymakers “may consider rate cuts to address this deflationary environment.” However, there are ongoing efforts by households and businesses to reduce debt, Germano states, adding that the impact on loan demand may be constrained.

Moving forward, it is vital to monitor the economic indicators to be “able to assess the likelihood and extent of deflation in consumer prices,” he concludes.