Consumer Confidence Freefall

The worst of the “Zero COVID” economic shock may have happened in April, but the toll it has taken on consumer confidence is much more severe than China’s first COVID shock in Q1 2020. Therefore, the consumption recovery, when it comes, will likely be even slower this time around. As a reference, post Q1 2020, it took 14 months for consumption growth to reach pre-shock levels. To this day, employment growth has not fully recovered to pre-shock levels.

What’s happening?

• The official China Consumer Confidence Index (CCI) produced by the NBS plummeted to 86.7 in April, its lowest level since inception of the survey in 1990, and the first time ever it crossed substantially below the 100 mark (a reading below 100 indicates that overall consumer sentiment is more negative than positive).

• This extreme pessimism is directly reflected in China’s retail sales, which contracted by 11.1% in April y-o-y. In-person consumption, which is tracked by catering sales, suffered even more with a y-o-y decline of 22.7%. 

• During the height of the 2020 COVID outbreak in China, the CCI was 112.6 – still well into the positive territory, and nearly 26 points higher than this April’s reading.

What it means

• Amidst recurring COVID restrictions and shrinking income growth, Chinese consumers appear to be extremely cautious about big ticket purchases, especially housing and cars which contracted by 48.6% and 43.4% respectively y-o-y in April.

• The Chinese labor market is facing mounting pressure, especially for first-time job seekers. In April, the unemployment rate for 16–24-year-olds climbed to 18.2%, the highest mark since this data became available in 2018. 

What comes next?

• The CCI drop in April may be a bottom for the year, but May consumption data are likely to remain negative. 

• Chinese consumer confidence – and related consumption – faces two principal challenges: household income growth, a function of weak employment growth amidst economic slowdown; and rising consumer inflation, particularly for food, a function agricultural production and supply chain disruptions, both domestic and international. 

• Neither challenge will be easily nor quickly resolved. Chinese consumption is poised to remain weak in the meantime.