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When Will the Consumer Return?

 

Assessing the Post Coronavirus Reopening in China & the United States

· Coronavirus,China,Consumer,Consumer Trends,Consumer Spending

When Will the Consumer Return?

Assessing the Post Coronavirus Reopening in China & the United States

While there have been many pandemics in the history of mankind, the Covid-19 crisis is not only unprecedented in scope but also control management. The pandemic has forced governments to multilaterally enact stringent quarantine measures and enforce shutdowns to prevent an over-saturation of the healthcare system.

The pandemic has halted the entire world with stay-at-home policies that will ostensibly result in a deep global economic depression, according to the International Monetary Fund.

As countries worldwide debate the tradeoff between economics and health, the “invisible enemy,” as President Trump refers to Covid-19, continues to spread.

And as governments conduct a cost-benefit analysis while also considering the moral implications of a re-opening, economic unpredictability continues.

As some states in the US prepare for a reopening this week, what can we anticipate consumer spending will look like in the following months based on what things have looked like in China?

The initial epicenter of the Covid-19 crisis, China reopened parts of the country in early March. Suffering from their first reported economic contraction since 1992, the fragile state of the Chinese economy and its recuperation can shed light on some aspects of the American recovery.

In early April, China’s economy contracted 6.8% in the first quarter of 2020.

China’s retail sales, an important contributor to economic growth recently, plummeted 15.8% in March, following a 20.5% decline in February. China is the world’s largest consumer market, with $5.8 trillion in retail sales last year. A growing segment in Chinese GDP, retail sales accounted for 80% of the economic growth last year.

Unlike the United States stimulus-package response to economic instability, Beijing has opted to boost the economy through fiscal and monetary policy aimed at infrastructure spending, tax cuts, lowering borrowing cost and easing credit lines for businesses.

Further, local governments throughout China have adopted government-issued vouchers to encourage spending at stores and online venues. The subsidies have largely been used on daily necessities rather than the substantial discretionary spending that has been a primary driver of growth for the Chinese economy recently.

As restaurants, supermarkets, and shopping malls welcomed Chinese customers, results have been mixed. Despite being open, the businesses still lack buyers.

According to the Wall Street Journal, a survey conducted by the People’s Bank of China suggests that depositors are more focused on saving their money rather than increasing their investment or spending.

Considering China already has one of the highest savings rates in the world, domestic consumer demand could remain weak into the foreseeable future.

The lack of consumer confidence in China may reflect what is going on in the United States. The U.S economy shrank 4.8% in the first quarter of 2020 for the first time since the last recession.

However, many analysts suggest that unlike China’s GDP contraction, which reflects the massive nationwide shutdown in January, the severity of the American shutdown will be better understood in the second quarter reports - as states implemented shutdown provisions in March.

The world’s largest economy is in flux.

Similar to the Chinese economy, the US saw consumer spending decline by 7.5% in March, according to the Bureau of Economic Analysis.

Consumer spending accounts for almost two-thirds of American GDP and had been strongly contributing to GDP growth prior to the Covid-19 crisis. Stunned after an 11-year economic expansion, the American economy requires a rise in consumption to initiate recovery mode.

The latest US Department of Labor figure reports 30 million Americans have filed initial unemployment claims since March.

This figure, however, only counts those who are eligible for unemployment benefits; therefore, the number of unemployed Americans is likely higher. Analysts suggest that unemployment levels will be akin to those from the Great Depression in the 1930s.

As personal incomes fell by 2% and a surge in joblessness continues to sweep the nation, the future of consumption, the primary driver in a capitalist economy, is in a precarious situation.

The $2 trillion CARES Act package, which included an expansion of existing unemployment benefits, included a one-time $1,200 stimulus check and a $600 extra weekly payment to unemployed Americans. Similar to the vouchers handed out in China, the stimulus received by households have been primarily allocated towards daily, non-discretionary, essential goods.

The CARES Act has provided economic relief rather than economic stimulus; the provisions under the CARES Act are directed towards affected households that can only do so much to spur consumer demand. As mortgage, rent, credit card, and car payments were due early this month, priorities for American households do not include consumer spending.

Federal Reserve Chairman Jerome Powell has said that despite state openings, consumers will still be reluctant to undertake their normal patterns of spending.

As states around the country lift restrictions and businesses open at limited capacity, the U.S. will most likely initially experience sluggish demand.But the 5% rebound between February and March in a large economy like China paints an optimistic picture for an American rebound soon.

The real challenge is to recuperate the high levels of consumer optimism that America enjoyed throughout the 11-year economic expansion in order to quickly enter recovery.

However, American sustained economic growth, low levels of unemployment, and all-time high-level consumer confidence before the coronavirus crisis places the country in a favorable recovery spot once the public health threat begins to dissipate.

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Written by Juan Agudelo, Edited by Alexander Fleiss, Bryan Xiao, Michael Ding & Jason Kauppila

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