In recent years, both the United States and Europe have faced the pressing threat of elevated inflation rates. Central banks across the Atlantic have responded with a series of interest rate hikes, yet the impact of these measures appears to be less effective than anticipated. Ultimately, this situation can be traced back to the excessive monetary expansion that characterized the previous years, leaving these economies to grapple with the consequences.

Interestingly, discussions surrounding inflation often overshadow a potentially more pressing issue: deflation. In the context of China, it has been identified that the country too has seen significant monetary supply increases, having added around 31 trillion yuan to its economy over the past year. Yet, experts argue that the real concern may not be skyrocketing prices, but rather a looming deflation that could hinder economic growth.

At the forefront of these economic concerns is the concept of consumption downgrade, a phenomenon that illustrates a shift in consumer behavior and economic activity. Deflation is simply a decrease in the general price level of goods and services, which can lead to reduced consumer spending. When looking at Japan’s history, it becomes apparent how insidious deflation can be. Over the past three decades, Japan has struggled with low inflation, stagnant wages, and a society increasingly reluctant to spend. The results can be seen in the decreasing birth rates and the growing trend of individuals delaying significant life decisions such as home purchasing and starting families.

Japan’s never-ending battle with deflation has seen its economy lose a generation's worth of growth—a sobering reminder of what could await other nations. Comparatively, the effects of the pandemic have echoed across the globe, dampening consumer sentiment worldwide, with China not being an exception.

After enduring a protracted period of health crises, many individuals have started to dismiss their purchase intentions due to uncertainties about future economic conditions. While some may argue that the increased standard of living has made cooking at home more appealing—perceived as healthier and more hygienic—this behavior often masks a desire to save money. Amid economic uncertainty, many are opting to enjoy their meals at home rather than dining out, further contributing to a decline in consumer demand.

Evidence of this consumption downgrade can be found in the consumer confidence index, which indicated a staggering drop of nearly 30% year-on-year starting last April. Even as we moved into this year, the figures remained disheartening, with year-on-year declines hovering between 21% and 25% despite the initial drop last year.

Underlying this shift in consumer behavior is a growing concern over employment and income expectations. The employment rate has been on a downward trend in China, leading to widespread frustration among those grappling with an increasingly challenging job market. As educational levels have risen, so too has the bar for obtaining suitable employment. Recent graduates find themselves struggling to secure jobs because employers expect higher educational attainment than ever before.

Adding to these difficulties is the rapid advancement of technology that impacts existing job markets. The rise of artificial intelligence and automation has further exacerbated the problem, resulting in reduced job opportunities across various sectors. For instance, positions once deemed stable, like those at banks, have seen severe cuts in staff due to advancements in automation. Even what was once viewed as a secure “golden nest” job is no longer a safe haven.

In light of these conditions, the decline in retail sales data over the past several months is concerning. The last quarter of the previous year bore witness to three consecutive months of year-on-year negative growth. Fortunately, there is a glimmer of hope as early indicators suggest an increase in sales by 3.5% year-on-year for January and February following the easing of pandemic-related restrictions. Yet, a pressing question remains: how can this fragile growth be sustained?

Addressing deflation requires clear monetary stimulus strategies, but it is essential to ensure that money reaches those who need it most—the citizens. China has experienced substantial growth in its money supply, with a total increase of about 31 trillion yuan in the last year. However, the challenge lies in facilitating access to this liquidity for everyday people, as only when citizens feel financially secure will they be inclined to spend. Households must believe that money can reach their hands; otherwise, economic confidence will remain elusive.

Despite the extensive currency expansion, a significant amount remains trapped within financial systems, leading to concerns about economic bubbles and inefficiencies in the virtual economy. A noteworthy cautionary measure is to avoid channeling funds solely into real estate as a means of economic stimulus. Over the years, such strategies have largely suppressed consumption rather than invigorating it. True economic development hinges on real consumption growth across various sectors, fostering an environment where businesses can thrive and the economy can flourish.