Index > Briefing
Thursday, June 04, 2020
The Pace of Consumption Recovery

After the Covid-19 outbreak, the world is facing the task of reviving the economy. From the perspective of pandemic prevention and control cycle, China is the first country to get rid of the state of emergency and enter the stage of comprehensive economic recovery. The pandemic has not completely abated in Europe and the United States, but these countries appear to have re-opened their economies to varying degrees. It is clear that prolonged lockdown and social distancing are too economically damaging.

Recovery of consumption is crucial to economic recovery after the pandemic. The recovery of production activities is also undoubtedly important, but the impact of the pandemic has caused widespread disruption to the global supply chain. As "the world's factory", China's manufacturing industry and the international market have been significantly affected. The "manufacturing + supply chain" model is expected to be affected over a longer period of time as major countries restart their economies at different paces. In fact, this situation is the inevitable result of the trend of anti-globalization and the impact of the pandemic.

The situation highlights the importance of consumption in the economic recovery. Consumption activities have the characteristics of "on the ground", that is, activities completed on the spot under the specific location and environment. Although the emergence of the Internet and e-commerce has expanded the scope and modes of consumption activities, the vast majority of consumption activities still cannot be separated from the "ground" market. This means that the more space an economy has in its internal market, the more bargaining power it has in the global economy. Indeed, ANBOUND has repeatedly emphasized the importance of "market space", which in certain sense refers to the consumer market space.

As a large country with 1.4 billion people, China has a huge consumer market. Many people have high hopes for the recovery of consumption after the pandemic. But how will consumption recover after the outbreak? What are the conditions for consumption to recover? What are the rules and patterns for the recovery? How to promote the relevant policies? From the perspective of public policy, rational analysis, and research are needed. Seeing this from the angle of the rigidity of consumer demand, we can divide consumer demand into two categories. The first is the "basic consumption" that meets basic survival and life needs; this type of consumption has strong rigidity. The second is non-essential or luxurious "non-basic consumption", which has certain elasticity. "Basic consumption" reflects the resilience of the economy, while consumption prosperity requires "non-basic consumption" to add icing on the cake.

When China emerged from the pandemic, its domestic market had unrealistic expectations of a recovery in consumption, with the expectation that there would be an immediate "retaliatory rebound" in domestic consumption once the pandemic was over. However, since the lockdown of Wuhan city was lifted on April 8, while domestic consumption has picked up, the "retaliatory rebound" expected by the market has not happened. Comparing the recovery of consumption and the recovery of the industry in the first four months of this year, we can clearly see that under the impact of the pandemic, even though domestic industrial production began returning to positive growth, the pace of recovery of consumption still lags behind that of industry, and is still in negative growth.

A comparison between the growth of total retail sales of consumer goods and the growth of industrial added value above designated size from April 2019 to April 2020.

The growth of total retail sales of consumer goods (%)
The growth of industrial added value above designated size (%)

Source: National Bureau of Statistics of China. Illustration: ANBOUND

According to data from the People's Bank of China, before consumption rebounded, what appeared first was "retaliatory deposits". According to first-quarter figures released by the People's Bank of China, household deposits in China increased by RMB 6.47 trillion in the first quarter. On an average basis, the household deposits rose by more than RMB 70 billion a day and RMB 2 trillion a month in the first quarter. Data on savings accounts also show that the post-90s generation, who used to spend as much as they could, have joined the ranks of savers. These changes make "retaliatory consumption" less likely. April data released by People's Bank of China showed that household deposits fell by RMB 799.6 billion in April, while bank deposits fell by RMB 26.6 billion a day. Household loans became active in the same period, increasing by RMB 666.9 billion in April. Regarding the change in this data, the domestic economic community believes that the so-called "retaliatory deposits" in the first quarter, is the normal economic activity at a standstill. The fall in savings in April was not the result of "retaliatory consumption", but rather a return to normal economic activity. Misjudging the performance of these two data sets could affect policy adjustments.

How to treat the slowness and lag of domestic consumption recovery? ANBOUND’s researchers believe that it is clear that the recovery of consumption has its own rules and pace, we should have an objective and rational understanding of this. The characteristics of Covid-19 pandemic have an important impact on people's consumption habits and willingness. The specific manifestations are as follows: First, after a long period of social isolation, the recovery of people's social activities will only proceed gradually, and significantly lagging behind that of production activities. Second, the pandemic may change people's consumption habits. Consumption activities will adapt to the state of "basic consumption" for a long time. Third, the deterioration of economy leads to the reduction of people's income growth expectations and the increased willingness to save, which will significantly affect people's willingness to consume. Fourth, the rising unemployment rate has realistically hit people's spending power and consumption activity.

Therefore, in terms of personal consumption, the recovery of consumption will show a slow pace, while in terms of basic consumption that is closely related to life, it will gradually recover and follow the order of “minimum consumption - basic consumption - recovery consumption - luxury consumption”.

In addition, many service sectors, such as travel, hotel, and entertainment, will not be fully restored as long as there are continued restrictions on pandemic prevention and control policies. Domestic consumption will remain low for a long time. In terms of government consumption, expanding public consumption has been the focus of the policy. On the one hand, the proportion of government consumption is not high, and the consumption structure is very different from individual consumption. On the other hand, under the pressure of tight fiscal conditions, government spending will be significantly reduced this year, and it will face significant constraints and restraints.

Final analysis conclusion:

On the whole, the recovery of consumption is very important for economic recovery after the pandemic. However, the process of consumption recovery will be slow, and it will take a longer time for the economy to recover. From policy perspective, systematic and sustained policy support, as well as guidance should be provided for the recovery of consumption, rather than being rushed in pursuit of short-term results.

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