E-commerce has boomed throughout the pandemic period, but growth stalled over the course of 2021 due to weakened demand. March saw online retail sales drop to near-zero levels. During the Jan-Feb 2022 period, online retail sales rallied somewhat and grew at 10.2 percent y-o-y, but growth fell to 0.5 percent in March. E-commerce has generally performed better than overall retail sales, but both have been following the same downward patten over the past 12 months. Weak domestic demand, COVID restrictions, and the global economic slowdown will continue to drag on consumption, both online and offline. On-going re-regulation of the “platform economy” also factors in here in the form of less aggressive marketing by the major players.
In-person consumer services continue to flail amidst recurring COVID flareups across China. A near-term recovery is unlikely. The ongoing lockdown of much of Shanghai and mobility restrictions in other affected areas continue to wreak havoc on in-person consumer retail and services. Catering sales growth, which is roughly 10 percent of retail and is an important driver of job creation, plunged to -16.4 percent in March 2022. “Zero COVID” containment measures –comprising lockdowns, business shutdowns, quarantines, mass testing, and mobility controls –look set to remain firmly in effect for the foreseeable future.
We expect inflation in consumer prices to continue climbing in the coming months; the CPI (consumer price index) is facing mounting upward pressure from both global commodity price hikes and domestic COVID lockdown-induced supply disruptions. In March, the CPI rose 1.5 percent y-o-y, up from 0.9 percent in February. Rising grain and fuel prices in global markets are driving up Chinese consumer costs. Concern over food price inflation is growing, especially for items like grains, oils, vegetables, and eggs. Panic purchasing amidst COVID lockdowns will push food prices up further. While the headline CPI reading remains in the mid-range of the government’s target, persistently elevated fuel and food prices will further dampen consumer sentiment.
Chinese consumers have become more cautious, and we see no indication of change in this sentiment in the near-term. The COVID pandemic has shifted previous household spending patterns away from discretionary spending towards non-discretionary necessities. In Q1 2022, only spending on food and clothing registered positive growth compared with the previous quarter, whereas the growth rates for discretionary spending categories plummeted with most turning negative.
The housing market hasn’t bottomed out yet. Policy is expected to keep stepping up until the market stabilizes. This arguably remains a big “if”. In March, y-o-y growth of the three key indicators for China’s residential housing market all turned negative. The strong decline in home sales will drag on sales in correlated retail categories including home appliances, furniture, and decoration materials. More than 100 cities have adopted supportive policies to boost local housing markets. However, there is a lag effect and fundamentally weakening demand persists due to the slowdown in overall economic activity. Whether stepped up government support will revive consumer confidence in the appreciation potential of Chinese real estate remains an open question.
New energy vehicles (NEV) sales were a consumption bright spot in 2021 and this continued in Q1 2022. Total passenger car sales grew 9.1 percent y-o-y in Q1, thanks to strong growth in the Jan-Feb period. But March data show a clear slump, with sales declining by -0.5 percent y-o-y. Demand for NEVs has been resilient, with y-o-y sales growth of 118 percent in March, whereas traditional car sales tumbled -15.6 percent. Both weakening demand and rising energy prices are dragging down traditional (ICE) car purchases. A key concern over the coming months is whether and when COVID-related production disruptions can be rectified.
Key Drivers of Weakening Consumer Spending:
- Household expenditure growth continued to slow further. Household income growth recovered slightly in Q1 2022 but remains well below pre-pandemic growth. A key driver here is labor market weakness. This, in turn, is constraining household expenditure. Per capita expenditure y-o-y growth slowed to 6.9 percent in Q1 2022, down from 8.6 percent in Q4 2021.
- Labor market weakness persists. New job creation regained some momentum in 2021, but Q1 2022 data, especially March, underscore that sluggish job growth persists. The Purchasing Manager Index (PMI) employment sub-index remains in contractionary territory and both indicators continue to decline. Urban unemployment, especially among young job seekers, continues to rise. Weak job growth is mainly caused by slower economic growth and thus less hiring, but also deeper structural problems of jobs/skills mismatches. Labor market strength won’t return until physical retail and consumer services rebound, and with that the job creation they provide.
