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With vaccine rollout, US ignites consumer spending, but China lags


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With vaccine rollout, US ignites consumer spending, but China lags

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Sales of retail and food services totaled $619.9 billion in April, an increase of 51.2% year over year but just $0.1 billion higher than in March.
Source: Robert Nickelsburg/Contributor via Getty Images North America.

As COVID-19 vaccinations accelerate worldwide, the U.S. is enjoying greater success than China in enticing customers back to shops and restaurants as the world's leading economies seek to reinvigorate consumer spending, a vital metric for growth.

The two countries reported surprisingly weak retail sales in April, with nearly no month-over-month increase in the U.S. and a drop in China. But with total U.S. vaccine doses at 82.4 per 100 people and China's rate lagging at 30.3, economists say the U.S. data tells the story of a fast-running economy pausing for breath, while the outlook for consumption in China is less assured.

"The virtuous circle needed for a sustainable consumption rebound starts with widespread immunity allowing for an (almost) full opening of the service sector as this is the engine of job creation in all the major economies," Shaun Roache, chief economist, Asia-Pacific at S&P Global Ratings, said in an email.

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Weak US data expected to be temporary

Sales of retail and food services in the U.S. totaled $619.9 billion in April. While this represented an increase of 51.2% year over year, the figure was only slightly higher than the $619.8 billion total in March, even as stimulus checks and increased employment were supposed to boost discretionary spending.

Consumer sentiment is also deteriorating. The preliminary headline index of the University of Michigan's consumer sentiment survey — a closely watched metric of consumer confidence in personal and broader economic health — fell unexpectedly in May, dropping 5.5 points — 6.2% month over month — to 82.8, short of the expected level of 90.

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Consumer spending is a fundamental component of the U.S. economy, accounting for 67.9% of GDP in 2020, according to the Organisation for Economic Co-operation and Development. Discretionary spending collapsed because of lockdowns and, while the restraints are easing as the vaccine program expands, the household savings rate remained elevated in the first quarter of 2021 at 20.5%.

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But the weak retail data is not expected to persist as long as more transmissible variants of COVID-19 do not reverse the progress the U.S. has made in reducing the spread of the virus. The seven-day moving average of daily new cases in the U.S. is down to 30,000 as of May 20, from a peak of 255,000 in mid-January.

"While North America and Europe will remain vulnerable on [the COVID-19] front in the coming months, steady vaccination drives there should put the consumption recoveries of these economies on a more solid footing, relatively speaking," Louis Kuijs, head of Asia economics at Oxford Economics, said in an email.

President Joe Biden aims to deliver at least one dose of the vaccine to 70% of U.S. adults by July 4.

Oxford Economics expects a "bumpy" recovery in U.S. data as demand rotates from goods to services, allowing restaurants and leisure services to reopen and expand, reducing supply bottlenecks and unemployment.

April data showed less spending on some goods and more on services, with dining out rising 2.9% month over month while general merchandise sales fell 4.9%.

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The consultancy forecasts real consumer spending will increase 16% year over year in the second quarter and rise 9.6% for the year, aided by the rapidly improving health situation and government stimulus checks.

China's consumers stay at home

In China, household spending contributes less than 40% to GDP, but the ruling Communist Party long has been determined to shift the country's economy away from its dependence on debt-driven investment and on to the spending power of its 1.3 billion-strong population.

A 17.7% year-over-year increase in retail sales in China in April fell short of the consensus expectation of 25% and marked a reversal from the prior month.

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"A slow vaccine rollout, a partial normalization (especially in the services sector), and limited stimulus targeted directly to households has knocked consumer confidence in Asia, in contrast to some other economies, especially the U.S.," Ratings' Roache said.

China has recorded just one official new case of COVID-19 in May so far as of May 20, according to Our World in Data, avoiding the fate of neighboring India, where daily new cases averaged almost 300,000 in the previous seven days.

Yet, Oxford Economics suggests China is on course to miss its target of 40% inoculations by June and, while the unemployment rate has dropped to its pre-pandemic level of 5.1%, there are still areas of weakness, notably among urban dwellers aged 16-24 suffering from the struggles of consumer-facing industries.

Virus variants could dampen recovery

Successful vaccine programs are offering rewards elsewhere. In the U.K., where total doses exceed the U.S. at 84.5 per 100 people, the Bank of England raised its growth forecast for 2021 to 7.5% from 5.5%, while consumer demand helped inflation to jump to 1.5% in April from 0.7% in March even as access to restaurants and leisure facilities remained limited.

"[Inflation] data already points to a healthy rise in consumer demand, even if it is too soon to detect a revival in hospitality," Derrick Dunne, CEO of Beaufort Investment, said in an email. Strength was driven by clothing, fuel and household utility prices, Dunne said.

Retail sales in the U.K. rose by 9.2% month over month in April, representing a 42.4% gain year over year. According to government figures, clothing stores and non-food stores reported strong month-on-month growth, rising 69.4% and 25.3%, respectively.

The U.S. and U.K. are not safe yet. Anthony Fauci, the leading U.S. infectious diseases expert, has warned that countries require up to 90% of the population to be vaccinated to achieve effective herd immunity. The potential of COVID-19 variants arriving in the U.K. led Prime Minister Boris Johnson to warn that the planned lifting of remaining restrictions on June 21 could be pushed back.

Such a move could lead to a slowdown in the U.K.'s recovery, but the threat is far greater for countries not as far down the road in their vaccination programs.

"The recent setbacks in many Asian economies — where we have seen new COVID outbreaks recently, followed by new restrictions and thus economic impact — show that, without mass vaccination, economies will remain vulnerable to new flare-ups and restrictions," said Kuijs at Oxford Economics.