China Consumption Outlook | Q3 2022

While China’s consumption slump appears to have bottomed in June, the outlook for the remainder of the year remains bleak. Recurring COVID flareups coupled with the government’s ‘dynamic Zero-COVID’ approach will lead to continuing economic disruption and consumer confidence weakness. See more below from our latest quarterly China Consumption Outlook. 

Current events sometimes change the outlook overnight. Expect updates to each quarterly Outlook as new economic data is released, domestic policy changes are announced, and geopolitical realities shift. 

Insights for What’s Ahead

• After three consecutive months of negative growth due to COVID-related restrictions, retail sales bounced back to positive territory in June, growing by 3.1 percent y-o-y.  While recent data suggest that China’s consumption slump may have bottomed, consumer confidence remains very weak. 

• Online retail sales have performed better than those made at bricks-and-mortar stores, with y-o-y growth of 4 percent in June. However, the outlook is uncertain: Weak domestic demand, COVID restrictions, and the global economic slowdown will continue to drag on Chinese consumption, both online and offline.

• In-person consumer services will remain hamstrung by recurring COVID flareups and thus continue to drag broadly on overall consumption. Catering sales growth, which is roughly 10 percent of retail and is an important driver of job creation, softened from -21.1 percent in May to -4 percent in June, but is still in negative territory. Near-term recovery to pre-COVID growth levels is unlikely, unless ‘dynamic Zero-COVID’ containment measures are lifted.

• We expect inflation in consumer prices to continue climbing moderately in the coming months. China’s official consumer price index (CPI) reached its highest point in two years, rising by 2.5 percent y-o-y in June. This was driven mainly by fuel and food prices. While the CPI remains within the government’s target, persistently volatile fuel and food prices will further dampen consumer sentiment.

• Chinese consumers have become more cautious, and we see no indication of this changing in the near-term. In Q2 2022, total household spending contracted by -2.4 percent y-o-y. This was driven by a -9.3 percent drop in discretionary spending. Going forward, we expect Chinese consumers to remain cautious about spending on non-essential items and increase their savings in the face of growing uncertainty about the economy.

• China’s real estate downcycle persists, exerting major downward pressure on consumption. In June, growth of real estate investment and new residential housing construction continued to deteriorate. The recent mortgage boycott is clearly undermining buyer confidence and works as a reminder about the seriousness of the liquidity crunch faced by developers and the deteriorating consumer confidence about the outlook for real estate.

• The strong performance of the auto market recently has been the key stabilizer of aggregate consumption. Passenger car sales rose 41.6 percent y-o-y in June to 2.22 million units. While we expect this trend to continue in H2 2022, we believe that car sales growth will moderate as soon as government stimulus measures wane. Spending incentives for cars will not work to counteract weak consumer confidence and a sickly jobs market. .

• Key drivers of weakening consumer spending: Household expenditure growth continued to slow; labor market weakness persists; weak consumer confidence may become entrenched.