The bright spot in a slowing dragon
Sticky consumption may be a bright spot in the gloomy China slowdown dialog, but will consumers remain optimistic without manufacturing and real estate?
Over the most recent Chinese national holiday households were not able to deliver the same pace of sales growth bucking last year’s trend as retail growth over the holiday was slightly down compared with that of 2011, some suggest this is due to rising precautionary savings stemming from China’s growth slowdown.
If true, slowing consumption growth could be a problem. China’s policymakers are banking on “stimulating consumption” as a means of rebalancing the economy toward the service sector, thus offsetting slowing output growth rates in manufacturing and real estate over the medium term (see Leading Indicators of Economic Rebalancing in China).
One of the critical assumptions in the process is that consumption growth will remain stable or even better, counter-cyclical, rising as a percentage of GDP as investment growth slows. Although it is too early to tell how well consumption growth will hold up if output growth continues to slow over the next decade as expected, there are some early signs that consumption may just be strong enough to stay above a slowing growth rate.
Even as China’s GDP growth has slowed down from 9.2 percent at the end of 2011 to 7.6 percent in the second quarter of 2012, consumption growth has remained sticky relative to a more rapid decline in demand for industrial goods.
Annualized growth in adjusted wholesale and retail sales of consumer goods vs. sales of industrial goods of above-scale enterprises
Source: National Bureau of Statistics; CEIC;
Although the use of above-scale industrial data and wholesale and retail sales data can often be misleading, it does offer some hints as to direction of consumer sectors relative to industrial sectors. Since the crisis at the end of 2008, the gap between the annualized growth rates of adjusted consumer good sales and industrial goods sales may have widened in favor of consumers. More recently, the annually adjusted sales growth of consumer goods has actually picked up in the last few months, while annual sales growth in industrial goods continued to decline – suggesting a counter-cyclical trend.
The more resilient consumer is also serving to buoy growth in the service sector. Fixed investment in consumer services remains the major bright spot in an otherwise gloomy portrait of fixed investment growth. Since the beginning of 2011, annually adjusted growth in consumer services sector investment has remained stable despite increasing anxiety over a slowdown created by the drop off in manufacturing, real estate, and infrastructure.
The trend in consumer services investment is strikingly similar to 2009. In 2009, consumer services investment and infrastructure investment growth picked up to mitigate some of the drag on fixed investment created by falling investment in real estate and manufacturing. It is even possible we could see resurgence in infrastructure investment (see Christmas Time for Local Infrastructure in China) partner with a more rapid expansion in consumer services investment to help stabilize China’s fixed investment growth, thus stabilize the decline in GDP growth next year.
Annualized growth in fixed investment by sector
Source: National Bureau of Statistics
Avoiding a precautionary trap
Continued consumer optimism may not always hold true. China’s consumption growth story is very much dependent on whether disposable income growth remains stable and households are willing to spend it. Over the past decade, China’s annual GDP growth rate has never decelerated below 9 percent, the closest near-term comparison is the fall to 9.2 percent growth in 2009. In 2009 and so far in 2012 we have seen disposable income growth fall at a slower rate than GDP growth, thus making China’s household consumption expenditure grew as a percentage of GDP, the effect has helped offset rising precautionary savings.
This could change if growth in the service sector does not increase enough to offset deterioration in manufacturing and real estate, consumers may grow worry about wage and employment, and decide to increase their rate of savings. Another factor could be the negative wealth impact created by a correction in the housing market could lead to slower consumption growth or even a fall in consumption (see Household Wealth and the Housing Market).
The good news so far is consumption growth has remained relatively stable despite several months of falling property prices and slower growth in manufacturing and real estate in 2012. More rapid growth in service sector investment and sticky consumer spending growth are signs that China is effectively navigating through the slower growth scenario. The most recent data released by the National Bureau of Statistics even shows a positive direction with a 500 basis point rise in household consumption as a percentage of GDP in 2011, the largest year to year increase since 1999 – albeit this was only an increase from an all-time low of 34.9 percent back up to the level of 2009 at 35.4 percent. Yet it remains to be seen whether consumption growth will remain stable, limiting the slowdown in China’s GDP and allowing consumption to continue to increase as a percentage of GDP even as growth in investment slows over the longer term.