A sus­tained de­cline in Chi­nese con­sump­tion will af­fect global growth

It is very un­likely that any other coun­try could step in to drive con­sump­tion, at least not in the next decade

Hindustan Times (Noida) - - COMMENT -

For most of the past decade, the grow­ing spend­ing power of China’s ex­pand­ing mid­dle class has fu­elled the global econ­omy. Af­ter the 2008 fi­nan­cial cri­sis, I ar­gued that the United States and China would need to swap places — with the US sav­ing more and con­sum­ing less, and China do­ing the op­po­site. Un­til the past year, that is largely what had been hap­pen­ing. Not so any­more.

Last week, Ap­ple pub­lished a let­ter to share­hold­ers re­vis­ing down its ex­pected rev­enues for the first quar­ter of 2019, cit­ing an eco­nomic slow­down in China, which has be­come an in­creas­ingly im­por­tant mar­ket for iphone, Mac, and ipad sales. Though tech in­dus­try an­a­lysts are de­bat­ing whether in­ter­nal dy­nam­ics at Ap­ple might also ex­plain the change, the com­pany’s new guid­ance none­the­less adds to the ev­i­dence that Chi­nese con­sump­tion is slow­ing.

A sus­tained de­cline in Chi­nese con­sump­tion would be even more wor­ry­ing than the cur­rent Us-china trade dis­pute. Given that US trade poli­cies and other ex­ter­nal in­flu­ences should not have much ef­fect on do­mes­tic Chi­nese spend­ing, the prob­lem may be more deeply rooted in China’s eco­nomic model.

To un­der­stand what is at stake, con­sider all that has changed just within the past decade. At the end of 2010, do­mes­tic con­sump­tion ac­counted for around 35.6% of Chi­nese GDP, ac­cord­ing to of­fi­cial Chi­nese data. That was re­mark­ably low com­pared to most other economies, not least the US, where con­sump­tion ac­counted for al­most 70% of GDP. In nom­i­nal dol­lar terms, China’s do­mes­tic con­sump­tion thus was around $2.2 tril­lion, or al­most five times lower than that of the US ($10.5 tril­lion).

Yet China’s high over­all growth rate meant that Chi­nese con­sumers could po­ten­tially play a much larger role, with far-reach­ing ben­e­fits for global brands such as Ap­ple, BMW, Burberry, Ford, and many oth­ers. As of 2017, Chi­nese con­sump­tion as a share of GDP had risen to 39.1%, rep­re­sent­ing just over $5 tril­lion in nom­i­nal dol­lar terms. That is an in­crease of al­most $3 tril­lion in just seven years. And though Chi­nese con­sumer spend­ing still lagged far be­hind that of the US ($13.5 tril­lion in 2017), the gap has nar­rowed.

If China were to con­tinue on the same tra­jec­tory in terms of nom­i­nal GDP growth and do­mes­tic con­sump­tion, its con­sumer spend­ing could in­crease by an­other $2 tril­lion by 2020, putting it at around half that of the US. Chi­nese con­sumers would be more rel­e­vant to the global econ­omy than any­one ex­cept Amer­i­cans.

Look­ing ahead to the 2021-2030 pe­riod, an an­nual growth rate of 8% (com­pared to the 10% rate of the past decade), and a grad­ual in­crease of con­sump­tion to 50% of GDP, would trans­late into Chi­nese con­sumer spend­ing of $18.4 tril­lion per year by 2030. In this sce­nario, Chi­nese con­sump­tion would sur­pass that of the US in dol­lar terms.

The ques­tion at the start of 2019, then, is what it will mean for the global econ­omy if this sce­nario does not play out. If Ap­ple’s re­cent guid­ance points to an across-the­board, in­def­i­nite re­duc­tion in Chi­nese con­sump­tion, will Amer­i­can con­sumers be able to serve as the sole en­gine of the global econ­omy for yet an­other decade? If not, could any other coun­try fill this role, even par­tially?

The last 40 years have taught me never to write off the US. It is pos­si­ble that Amer­i­can con­sumers will keep plug­ging away, one way or the other. Yet con­sumer spend­ing is vul­ner­a­ble to a num­ber of fac­tors, in­clud­ing in­fla­tion, higher bor­row­ing costs, and pres­sures on the US to in­crease sav­ings. Be­sides, the risk of re­ly­ing too much on US con­sumers should be well known by now. As we saw in 2008, when Amer­ica sneezes, the rest of the world catches a cold.

It is very un­likely that any other coun­try could step in to drive con­sump­tion, at least not in the next decade. The larger de­vel­oped economies are all ex­pe­ri­enc­ing slow growth, and their con­sumer spend­ing has never mat­tered much for the rest of the world any­way.

Emerg­ing economies such as In­dia, In­done­sia, and Nige­ria cer­tainly could make up for de­clin­ing US or Chi­nese con­sump­tion 20 years from now; but none is in a po­si­tion to match the growth of Chi­nese con­sump­tion to­day, or even over the course of the next decade. For its part, In­dia’s nom­i­nal GDP could ex­ceed $3 tril­lion by 2020, which would make it the world’s fifth-largest econ­omy; but it will take far longer for In­dian con­sumers to match the spend­ing power of their Chi­nese coun­ter­parts.

Can the Chi­nese con­sumer be res­ur­rected?

I am cau­tiously op­ti­mistic. Chi­nese pol­i­cy­mak­ers will need to con­sider pro­vid­ing more di­rect fis­cal sup­port, as well as re­form­ing the hukou (house­hold reg­is­tra­tion) sys­tem, which cur­rently de­nies rights to mi­grant work­ers from the coun­try’s ru­ral ar­eas. With more eco­nomic se­cu­rity, this sig­nif­i­cant co­hort of the coun­try’s pop­u­la­tion will be more likely to save less and con­sume more. To be sure, these poli­cies will place ad­di­tional de­mands on the Chi­nese lead­er­ship. But with­out them, we could all find our­selves worse off.


@pro­ject­syn­di­cate Jim O’neill, for­mer chair­man of Gold­man Sachs As­set Man­age­ment and for­mer UK trea­sury min­is­ter, is chair of Chatham House. The views ex­pressed are per­sonal

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