Consumption was underwhelming in 2020, but for sustained growth in 2021, more support from consumption will be needed

China’s economic recovery has been on the way since the second quarter of 2020 and more growth is expected in 2021, especially in the first half of the year with the support from the base effect. However, the recovery so far has relied heavily on external demand as well as investment (especially in the property sector) while consumption seems to have been lagging (Chart 1). Even the last quarter of 2020 did not manage to bring consumption back to its pre-crisis level as it did for GDP growth rate as a whole.

The still relatively low consumption growth is more concerning if we consider that the labor market has improved quite rapidly lately. After the initial shock, household income growth has already moved back to more than 7% YoY in Q4 2020, and unemployment rate declined significantly to 5.2% at the year end. The question, thus, is what other factors may be delaying consumption rebound.

Zooming into the breakdown of household consumption and retail sales data, consumption of services seems to be the key factor behind such sluggishness. First, the “education, culture and entertainment” and “residence” activities, which are important components of service consumption, continued to keep a lower growth rate in Q4 2020 than their average growth level before the pandemic (Chart 2). Second, not only the consumption of necessity goods has bounced back more quickly but also several other types of goods, when compared with services, have shown more recovery. For example, retail sales of cars and communication appliances have recovered in the last three months of 2020, but the “transport and telecommunication” consumption which includes related services is still stagnant. Also, the “medical care” sector witnessed sluggish consumption growth in Q4 2020 while the retail sales of medicines came back rapidly.

All in all, China’s economic recovery has leaned much less on the recovery of consumption over the past year. The main reason is the dragging recovery of service consumption. The reliance on investment and exports for China to grow reminds us of China’s old growth model. A shock as huge as a pandemic is probably not the best moment to be picky about the sources of growth but we should be aware of the medium-term consequences of such a growth model with increasingly lower return on investment and, thereby, lower potential growth.

So far, the Chinese government has offered some ideas about how to promote consumption, but as long as the uncertainty about the Covid-19 is still not fully cleared, consumption, especially that of services, could remain subpar. The recent measures to contain mobility surrounding the Chinese New Year does not bode well to determine when uncertainty will be fully lifted, nor does the uncertainties around the rollout of the vaccine down the road. All in all, without additional demand policies oriented towards lifting consumption, it could be challenging to bring consumption back to the normal trajectory in 2021.

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