Raising household disposable incomes key to recovery
After several major shock waves of COVID-19 outbreaks since 2020, China’s economy has gradually recovered from the impact brought by the contagion, though recovery in household consumption has been relatively slow. There is still a certain gap between current household consumption levels and originally expected levels, or the trendline level for the sector. The gap is mainly attributable to some nonessential consumption sectors including education, entertainment, transportation and healthcare.
Trendlines are used to analyze the specific direction of a group of values or phenomena. There are two kinds of trendlines — uptrends and downtrends. Trendlines allow businesses to see differences at various points over a period of time. This helps foretell possible paths values might take in the future, and reveal performance, value and competitiveness factors of specific products and services, along with relevant business departments, such as sales.
The trendline hereafter mentioned is calculated based on data of total consumer spending collected through government surveys from 2013 to 2021.
Based on calculations using official data, we made a comparison between actual household consumption with calculated trendlines in the corresponding period and found that though the gap between household consumption in 2021 and the trendline is significantly narrower than that in 2020, the gap still exists, which stands at some 590 billion yuan ($92.6 billion).
If viewed from a consumption structure, among the eight major categories of consumer spending, the consumption of daily necessities, such as clothing, housing, food, tobacco and alcohol, in 2021 has basically returned to the trendline level shown before the COVID-19 outbreak. However, recovery in nonessential consumption sectors, such as durable goods and services, is slower than expected, with the gap between current consumption levels and the trendline level shown before the COVID-19 outbreak still relatively large. Among all sectors witnessing consumption gaps in 2021, education, culture and entertainment consumption make up the largest portions. Other nonessential — or optional — consumption sectors, though having seen narrower gaps, are still falling behind the trendline level, among which transportation and communication consumption makes up the major part, followed by education, culture and entertainment.
Based on the above information, it is obvious that there is still great potential for consumption recovery, and the key to unleashing that potential is to identify restrictive factors. Currently, there are two mainstream explanations surrounding the slow recovery in consumption. One is that the current COVID-19 situation is affecting the recovery of household consumption to a certain extent, especially that of services consumption. The other is that the slow recovery of consumption actually reflects that household incomes have not fully recovered.
The impact of COVID-19 situation on goods consumption is obviously much smaller than that on services, so if COVID-19 situation is the main factor restricting household consumption, we are supposed to have a clear view of a structural differentiation in commodities and services consumption — that is, commodity consumption gradually inching closer to the trendline level, while service consumption deviates significantly from its own.
However, according to our calculations based on official data since 2021, the gap of actual consumer goods consumption between its trendline level — which has been narrowing from the start of the year — has remained steady since July 2021, with no signs of further narrowing for the remainder of the year. The gap between services consumption and its trendline level is even larger, reflecting shocks of several rounds of domestic COVID-19 resurgences to the sector.
The analysis, together with the figures, tell us the significance of raising household disposable incomes in maintaining China’s stable growth this year. And it has also been seen in how the United States reacted vis-avis consumption amid the COVID-19 pandemic. The US government has provided large-scale financial subsidies for citizens to shore up their disposable incomes, and thereby stabilize their purchasing power. And when the impact brought by the COVID-19 pandemic dragged the US services sector down, its consumer goods consumption rebounded to trendline levels as early as June 2020, gaining back its driving role in the economy, and since then maintained high readings. However, so far, consumption of services in the US remains below the trendline level.
Household disposable consumption is not only the foundation for better livelihoods, but also a pillar for stable economic growth. The current relative sluggish consumption performance is certainly due to the pandemic, but a more important reason is the lack of disposable income. Therefore, increasing disposable income and shaping good income expectations are the basis of, and key to, promoting consumption.
Our first thought to this end is that macroeconomic policies should always focus on “steady growth”, as was highlighted in many recent top meetings. Continued efforts are needed to ensure a reasonable economic growth rate and full employment, and consolidate the economic foundation to improve household incomes. In this process, fiscal policy is particularly important. It is necessary to demonstrate a clear expansion in the level of fiscal expenditure growth while having clear visibility of the bottom line — the growth rate of fiscal expenditure cannot be lower than the nominal GDP growth rate.
Second, the structure of public spending should be continuously optimized. In addition to tax and fee reductions for the corporate sector, subsidies for low and middle-income groups should also be strengthened. During economic downturns, vulnerable families are the first to suffer. By issuing temporary subsidies to low-income groups, the elderly and infants, such a policy can help achieve two goals — protecting people’s livelihoods and helping boost consumption. A common concern is that subsidies will primarily translate into savings rather than consumption. It should be noted that if subsidies are mainly transformed into savings rather than consumption, there will be no pressure on inflation. No monetary and fiscal policy space will be consumed, and the policy cost will be very low.
Third, the government should implement more precise and powerful consumption stimulus policies based on prices and income elasticity of different consumer goods. The income and price elasticity of optional consumption sectors, such as education, entertainment, transportation and medical care, is relatively high, and these sectors are exactly where sluggish consumption is witnessed. Consumer coupons, consumption subsidies and other means of encouraging measures should focus on these sectors to obtain greater policy effect.
Last but not least it is important to alleviate the anxiety brought by the uncertainty of the COVID-19 pandemic for small and micro enterprises and self-employed business owners. These very market entities are all associated with mass employment, especially low- and middle-income earners. The government can set up a special fund to cover their expenses related to COVID-19 prevention, such as nucleic acid testing, quarantine costs and treatment.
Compensation measures for market players that have suffered from the COVID-19 pandemic should be formulated, and market players should be informed in advance that they may be compensated for their operating losses due to pandemic prevention and control work. Developing targeted capital support to help smaller enterprises resume operations is also helpful to this end. Such efforts will strengthen market players’ confidence in investment and operations, and enable them to play bigger roles in supporting the nation’s stable growth.
The writers are Zhu He, deputy director of the research department of the China Finance 40 Forum or CF40, a Chinese think tank in the field of finance and economics, and Sheng Zhongming, a research fellow at the CF40. The views don’t necessarily reflect those of China Daily.