What Is the Outlook for Consumption in China Post-zero-COVID?

The COVID pandemic, and the strict mobility restrictions imposed under China’s ‘dynamic zero-COVID’ strategy, have had a profound impact on domestic household spending. A weak labor market, lower disposable income growth, and the resulting weak consumer confidence and high precautionary savings rates have been holding back consumer spending, especially on discretionary items.

Insights for What's Ahead

• Barring pandemic-related developments that could force authorities to revert to large-scale restrictions and lockdowns, China’s consumer spending should rebound in 2023. The timing, strength, and sustainability of this rebound will depend, primarily, on a recovery in confidence levels, which in turn will be affected by the strength of China’s economic recovery and its effect on the job market and income growth. Also, as the current wave of COVID-19 infections subsides, we expect to see a release of pent-up demand. It is important to note, however, that because of the low base of comparison of 2022, year-on-year growth figures in 2023 will make the consumption recovery seem larger and faster than it actually is.
• The rapid rollback of zero-COVID restrictions since early December 2022 has led to a surge in new infections across the country which is negatively impacting industrial production, logistics, and consumption activities. Official data released on January 14 indicate that COVID infections may have peaked in late December/early January, but disruptions will likely last throughout Q1 2023, as the wave of infections is peaking first in large cities such as Beijing and Shanghai compared to lower-tier cities and rural areas, which means that the consumption recovery will be uneven across the country.
• Nevertheless, with mobility and activity restrictions mostly gone, we expect consumer services spending to start picking up in Q1, especially travel-related spending due to the Chinese Lunar Year holidays. A broader recovery in consumer service spending can be expected to start in late Q1 – early Q2 2023, depending on pandemic developments, policy support, and the general strength of the economy.