China: What to make of the Spring Festival bounce?

Spring festival spending data showed consumer spending in China clearly now on an uptrend, but as we’ve argued before, this will not last. Much of the recent bounce reflects not just positive new year festivities-related spending and the initial release of pent-up demand from reopening over the holiday season, but also the catch-up of services consumption from a very low base.

What you will learn:

• Reported data on mobility, domestic tourism, and local services and entertainment segments show that all are growing at a healthy double-digit pace over the Lunar New Year holidays from 2022’s low base. But domestic tourism in particular is below the equivalent period in 2019, reflecting the stay-at-home nature of spending during this Spring festival season.
• All of this suggests that a services-led consumer recovery could be relatively strong to begin with, but momentum may not persist for long. During the pandemic, the shift in average household wallet share away from services has not been as high in China as in other Asian economies.
• Our baseline forecast is that overall household consumption won’t revert to trend this year, simply because of the mutually-reinforcing downward forces of weak consumer confidence, relatively muted income growth, a slow-recovering labour market, and lower excess savings. Household support and transfers, if implemented, are key upside risks to our forecasts.