Cyclical and structural challenges as consumption patterns change.
Zhennan Li, Senior Asia Economist, Pictet Wealth Management.
The recovery in household consumption in China has been relatively sluggish since the pandemic and spending is still well below the pre-covid trend in nominal terms. This primarily reflects price effects, as in real terms the gap between pre-covid trends is much smaller. This is in stark contrast with other major economies, where nominal consumption is above the pre-covid trend, but real consumption is still below (with the possible exception of the US).
Currently, household income, which is closely correlated with GDP growth, is the main drag on consumption in China, with the savings ratio roughly back to pre-covid levels. In addition, a significant downturn in the equity and property markets and the government’s fiscal difficulties have weighed on households’ income from assets and transfer income. The divergence from the pre-covid trend for both these sources of income is significant.
Consumption patterns have also been changing. With a relatively slow recovery in personal income and worsening income inequality, discretionary consumption has underperformed essential spending significantly for some time now. This may to some extent reflect changes in consumer behaviour beyond cyclical factors. Declining momentum in discretionary spending while spending on essential items holds up could remain a trend for a while yet as Chinese consumers become more price sensitive and engage less in impulse buying.
Structurally, the ratio of household consumption to GDP in China is still the lowest among major economies. This can be explained by: 1) a high propensity to save; 2) elevated income inequality; and 3) a low ratio of household disposable income to GDP. To increase household spending as a share of GDP, the government needs to further push urbanisation and labour market reforms, improve public spending on social insurance and subsidies for lower-income groups, and facilitate the development of services sectors etc. Cyclically, the outlook remains challenging for household spending in China.
