The author of this article is Wu Ge, chief economist of Changjiang Securities
Key takeaways:
1. The economy is people-oriented. People are both supply and demand. There seems to be a consensus among all sectors that the trend of population ageing and declining birthrate, and the resulting downward "gravity" of potential growth. But what we don't necessarily know is whether this necessarily means a sustained downward trend in prices and expectations, and whether, or how, should countercyclical policies resist such gravity?
2. In the process of accelerating population adjustment, aggregate supply and aggregate demand will naturally slow down. In terms of micro perception, the supply is rigid in the short term, and its adjustment speed is significantly slower than the demand. At the macro level, the contradiction between supply and demand makes the overall price prone to downward pressure in the accelerated stage of aging and declining birthrate.
3. Countries are trying to adopt countercyclical policies to bridge the supply-demand gap. However, the intensity of policies varies widely from country to country, resulting in very different results. Countries that actively defy "gravity" and aim to match actual growth to potential tend to achieve price stability more quickly. In addition, preventing continued unilateral expectations of house prices is also a key element in getting out of the price downturn.
4. Looking ahead, actions such as equipment renewal and trade-in of consumer goods, coupled with the phased recovery of external demand, may contribute to the marginal rise of nominal GDP in the second and third quarters. However, from a longer-term perspective, if the overall economy wants to substantially get rid of negative price growth, it still depends on the real stabilization of real estate and aggregate policies such as real interest rates, rather than just partial structural policies.
Body:
There seems to be a consensus among all sectors that the trend of population ageing and declining birthrate, and the resulting downward "gravity" of potential growth. But what we don't necessarily know is whether this necessarily means a sustained downward trend in prices and expectations, and whether, or how, should countercyclical policies resist such gravity?
1. Is it possible to get rid of "gravity"?
In the process of accelerating population adjustment, both aggregate supply and aggregate demand will naturally slow down. In terms of micro perception, the supply is rigid in the short term, and its adjustment speed is significantly slower than the demand.
Figure 1. Demand adjusts faster than supply: an example from kindergartens
Source: WIND, the author calculates
At the macro level, in the accelerated stage of aging and declining birthrate, the contradiction between supply and demand makes the overall price prone to downward pressure. Compared with similar periods in Japan, South Korea, and Germany, the decline in the birth rate and the rise of aging in mainland China are faster, and the contradiction between supply and demand may be more prominent.
Figure 2. Demand adjusts faster than supply: evidence from falling prices
Source: WIND, the author calculates
2. How to resist "gravity"?
Countries are trying to adopt countercyclical policies to bridge the supply-demand gap. However, there are large differences in intensity between countries, resulting in very different results. The decline in the natural rate of interest following the accelerated population adjustment means that aggregate demand policies are needed to more significantly hedge the drag on the economy caused by population. Countries that actively defy "gravity" and aim to match actual growth to potential tend to achieve price stability more quickly.
Figure 3. Defying "gravity": differences from country to country
来源：CEIC，IMF，Krippner (2013)，WIND，美联储，日本央行，笔者测算
Note: The equilibrium interest rate fits according to the Taylor rule determined by the output gap and the price.
Preventing continued unilateral expectations of house prices is also a key element in getting out of the downturn. International experience shows that house prices tend to stabilize before overall prices. This is not only due to the important role of real estate in the national economy, but also because it accounts for a relatively large proportion of residents' stock wealth and bank collateral, and its asset price attribute is very important to the expectations of micro subjects. Of course, the improvement of external demand will help the nominal GDP to rise in stages, but it will not be able to drive the overall price out of the low level (e.g., Germany in 1998, Japan in 2000, South Korea in 2013, etc.).
Figure 4. Preventing Unilateral Expectations of House Prices: Why Does It Matter?
Source: OECD, the author estimates
III. Basic Conclusions
First, people are both supply and demand. In the process of accelerating population adjustment, both aggregate supply and aggregate demand will naturally slow down. From the perspective of micro perception, the supply is rigid in the short term, and its adjustment speed is significantly slower than the demand. At the macro level, the contradiction between supply and demand makes the overall price of each country prone to downward pressure.
Second, countries are trying to adopt countercyclical policies to make up for the above-mentioned supply-demand gap. However, the intensity of policies varies widely from country to country, resulting in very different results. Countries that actively defy "gravity" and aim to match actual growth to potential tend to achieve price stability more quickly. In addition, preventing continued unilateral expectations of house prices is also a key element in getting out of the price downturn.
Third, looking to the future, actions such as equipment renewal and trade-in of consumer goods, coupled with the phased recovery of external demand, may contribute to the marginal rise of nominal GDP in the second and third quarters. However, from a longer-term perspective, if the overall economy wants to substantially get rid of negative price growth, it still depends on the real stabilization of real estate and aggregate policies such as real interest rates, rather than just partial structural policies.
Risk warning: non-linear adjustment of real estate.
CBN
Editor: Xiang Yanhong