GDP deflator likely to turn positive in Q2

China's second-quarter GDP deflator is likely to turn positive for the first time in more than three years, sending the clearest signal yet that the country's price dynamics are improving, helping support corporate earnings and consumer confidence, analysts and executives said.

The GDP deflator is a tool that is used to measure price changes of all goods and services produced in an economy over time.

Ahead of the release of China's economic data for the first half of the year on Wednesday, the projection comes amid improving sentiment about the Chinese market among global enterprises and investors, even as additional policy support is seen as necessary in the second half to reinforce domestic demand and address structural pressures in the economy.

The GDP deflator is closely watched by economists as the broadest gauge of economy-wide inflation, covering prices across all goods and services. Broadly speaking, it reflects the gap between nominal GDP growth, which includes price changes, and inflation-adjusted real GDP growth.

A positive reading signals rising prices across the economy, while a negative reading could point to deflationary pressure. China's GDP deflator has remained negative for 12 consecutive quarters through the first quarter of this year, when it stood at about -0.1 percent, weighing on the income growth of businesses and households as prices trended down.

Sun Xuegong, director-general of the department of policy study and consultation at the Chinese Academy of Macroeconomic Research, an academy affiliated with the National Development and Reform Commission, said China's GDP deflator has likely turned positive in the second quarter.

"Such a change would help improve the profitability of market entities, help lift their expectations and make the on-the-ground experience of businesses and households more in line with the growth in macroeconomic data," Sun said.

Sun added that stronger nominal growth would also help boost the share of China's economy in the world total and enable the country to move faster toward high-income economy status.

Su Jian, director of Peking University's National Center for Economic Research, said the second-quarter GDP deflator may turn positive at around 1.9 percent, helped by a low comparison base, higher prices of some global commodities, and firmer domestic prices of some consumer durables such as home appliances and furniture.

"A positive GDP deflator would suggest that the imbalance between supply and demand has eased and deflationary pressure is moderating. Improving price dynamics would support corporate profitability, thus help restore household and business expectations, and in turn reinforce the recovery in domestic demand," Su said.

Such a recovery in price dynamics can be seen in the consumer price index. Using the prices of a basket of consumer goods to gauge inflation, China's CPI has maintained a growth of at least 1 percent year-on-year for five consecutive months as of June, official data showed.

Looking ahead, Robin Xing, chief China economist at Morgan Stanley, has raised the forecast for China's full-year GDP deflator to 0.5 percent. Combined with the United States' investment bank's 4.8 percent real GDP growth forecast, that would imply the first time in four years that annual nominal growth would return above 5 percent.

"Nominal GDP is what companies care about, as it is closely related to their revenue and profits," Xing said.

The improving earnings are bolstering global investors' interest in China's capital market, with UBS expecting 11 percent earnings growth for all A shares in 2026, up from 3.9 percent in 2025, and remaining positive on China's artificial intelligence tech hardware names for the rest of the year amid strong earnings momentum.

Multinational companies are also reinforcing their commitment to the Chinese market. Joe Bao, president for China at Kone, said the Finnish elevator manufacturer is further strengthening its supply chain resilience and responsiveness in the Chinese market, having established its Southern China headquarters in Shenzhen, Guangdong province, early this year to drive digital innovation and strengthen service capabilities across the region.

Analysts, however, cautioned that the foundation for a rebound in prices remains fragile as the current recovery was bolstered more by international energy prices than domestic demand, expecting signals from a high-level mid-year meeting to strengthen macroeconomic policy support in the rest of the year.

Sun from the Chinese Academy of Macroeconomic Research said policymakers should continue to strengthen countercyclical adjustments in the second half, make full use of existing policy measures and roll out incremental support when appropriate to keep the economy on a stable footing.

The People's Bank of China, the country's central bank, has vowed to enhance the forward-looking, flexibility and targeted nature of policy at the second-quarter monetary policy committee meeting, acknowledging the challenges of weak demand, structural divergence and external shocks.

Zhang Di, chief macro analyst at China Galaxy Securities, said monetary policy may move earlier and more proactively than other macro tools, with the third quarter an important window for possible cuts in interest rates and banks' reserve requirement ratio.