In depth: China’s consumer spending could suffer a ‘long Covid’ contraction, economists warn

One of the most frequently asked questions by people in China and indeed all over the world is certainly: when will the Covid-19 pandemic end and will life finally return to normal? Unfortunately, the response from the experts is increasingly apparent that there is some free time left.

Indeed, just as medical researchers warn of new variants and long-term symptoms of people infected with the virus – obscurely dubbed “long Covid” – economists also say that despite the post-epidemic recovery in China, less of consumer spending and the economic ripple impact may be there for the long haul.

An increasingly familiar cycle of new Covid-19 outbreaks across the country, followed by strict closures and other travel restrictions, has slowed the pace of recovery from a post-pandemic recovery and has heightened a sense of caution among Chinese consumers, whose spending accounted for 38% of the country’s GDP last year.

Another, perhaps more insidious, fallout of the pandemic is the exacerbation of existing long-term economic problems, such as slower income growth and widening income gaps (link in Chinese), wrote analysts at brokerage firm Guosheng Securities Co. Ltd. in a note last week.

Kunjoe Qiao, a documentary filmmaker in her thirties living in Beijing, is one example. Since the outbreak first broke last year, her income has declined, causing her to become more cautious about spending and buying less of the things she doesn’t really need. Today, she prefers to cook at home rather than eat out, because it is cheaper, not to say safer.

“For me, this change will probably be long term,” she told Caixin, adding that she may never fully revert to her spending habits before the pandemic, even after it is over.

One of the most striking examples of how Covid-19 is impacting consumers and may continue to do so in the future is the slowing growth in retail sales, a composite indicator of household spending, governments and businesses.

In August, retail sales increased by 2.5% year on year, a sharp drop from 8.5% the previous month, and well below the median forecast of 6.6% in a Caixin survey (link in Chinese) economists.

Some analysts said this was short-term and could be attributed to the cycle of more virulent Delta Variant outbreaks since late July, which triggered strict containment measures across large swathes of China, disrupting economic activity again and causing many people to avoid travel, shopping and dining.

A breakdown of retail sales for August clearly shows the impact of the restrictions, with food and beverage outlays down 4.5% year-on-year (link in Chinese) after an increase of 14.3% the previous month.

Government officials also see this as a short-term slowdown on the road to recovery.

“These shocks were still temporary and regional, and generally controllable,” said Chang Tiewei, an official with the National Development and Reform Commission, the main economic planning agency. a briefing (link in Chinese) last month. “Consumption will continue to recover with effective epidemic control and continued implementation of policies to promote it. “

However, there are more short-term signs that the downturn in consumption is far from over, with disruption of spending in some industries, such as the box office, extending to China’s week-long National Day, which began on October 1, a traditional “golden week” for shopping and travel.

Another sign that the impact of the pandemic on consumption may not be a short-term phenomenon is the weakness of online spending, although it has remained strong in previous outbreaks, economists at the bank. investment China International Capital Corp. Ltd. (601995.SH) wrote in a Remark (link in Chinese) last month.

The two-year compound annual growth rate of online retail sales in August was 10.6%, down 7.1 percentage points from July, they calculated.

This data is revealing, as previous outbreaks have generally suppressed offline consumer spending, while sending shoppers online. The weakness in August indicates that the recovery in consumption has lacked momentum. This could be attributed to the incomes of certain groups, such as the self-employed, migrant workers and workers in offline services, likely repeatedly reduced amid repeated outbreaks of Covid-19, they added.

Willingness to spend will weaken as growth in household disposable income slows, wrote economists at ICBC International Holdings Ltd. opinion piece (link in Chinese). Official surveys also show that consumers became more reluctant to open their wallets when they had a less positive view of their future income.

In August, the indicator of consumers’ willingness to spend was the second lowest in a year and the indicator measuring their earnings outlook fell to the lowest in 14 months, according to the National Bureau of Statistics (NBS).

Likewise, putting their money in banks instead of spending it has remained popular, with a central bank investigation (link in Chinese) showing that 49.4% of 20,000 city dwellers in the second quarter were inclined to increase their savings. That figure was lower than its peak of 53% in the first quarter of last year, but still higher than any figure before the pandemic.

Economists have long called for measures to increase household incomes, especially for low- and middle-income families, in order to boost aggregate consumption.

“A narrowing income gap is the key to growing household consumption,” said a report (link in Chinese) by the China Macroeconomy Forum think tank. Indeed, policymakers are committed to reducing the income gap between rich and poor as part of strategies to promote President Xi Jinping’s vision of “common prosperity” of distributing wealth more equitably.

Read more
In detail: what stands in the way of “common prosperity”?

While the lingering short-term disruption of the pandemic looks set to continue, some are indicating the government is moving away from tackling repeated outbreaks of the virus to find a way to live with it.

The government’s ‘zero tolerance’ Covid-19 strategy could be adjusted in the second half of next year because it is not sustainable over the long term, meaning that the impact of lockdowns and restrictions on spending outside line will gradually fade, Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd., said Caixin.

However, for young consumers stung by the profound impact of the pandemic on their lives and incomes, the change in consumption patterns can be lasting.

Young people are becoming more careful with their spending due to uncertainties caused by the pandemic, wrote economists at ICBC International.

“We believe that consumer trends and habits will not end after the pandemic,” they wrote.

Contact reporter Guo Yingzhe ([email protected]) and editor Lin Jinbing ([email protected])

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