China’s Procyclical Consumption Outlook

One of the most surprising developments within China’s economy in 2018 was the slowdown in household consumption, coincident with a broader decline in industrial output. China’s consumption activity has tended to move in line with the economy as a whole in recent years. This counterintuitive finding suggests there is minimal separation between consumer spending within China’s “new economy” and cycles in traditional heavy industrial sectors, particularly in their effects on income and employment. In terms of the outlook for consumption:
Weakness in consumer spending from 2018 has extended early this year. Chinese New Year sales growth slowed, and output of some categories of consumer goods are still leading the broader downturn in industrial activity.

Policy support for the broader economy may benefit consumers early in 2019. As consumption growth appears pro-cyclical, limited improvements in activity and credit conditions may carry over to household spending starting around Q2 2019.

Longer-term structural changes will pressure consumer spending. As urbanization slows and demographic changes bite, urban consumers are increasingly burdened by mortgage debt and rising health care costs. Rural consumption growth may rise but will be insufficient to offset the slowdown in cities.

Posted February 27, 2019
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