MNI: China Retail Sales Growth Likely To Slow In H2

China’s retail sales are likely to decelerate from the 5.0% year-on-year growth recorded in the first half, despite increased efforts to boost social welfare spending, with weaker income growth and reduced fiscal outlay in the second half set to weigh on domestic consumption, local chief economists told MNI.

Retail sales growth for July is projected to remain broadly in line with June’s 4.8% pace, which slowed from 6.4% in May, said Chim Li, senior China analyst at The Economist Intelligence Unit in Beijing. Pressure on consumption could intensify in the second half, Li warned, as slower export growth begins to affect jobs and incomes, after robust performance during the first six months driven by tariff-avoiding front-loading. 

Dan Wang, China director at Eurasia Group, said third-quarter growth faces a sharp slowdown from the 5.3% expansion over H1 which was driven by front-loaded exports. This will negatively impact consumption, she added.   

FISCAL SPENDING

Although authorities have increased social welfare spending on services such as child-care, estimated by Bloomberg Intelligence to have risen 6.4% year-on-year so far this year, these measures are unlikely to improve market sentiment or meaningfully stimulate consumption, Wang said.

She highlighted the continued drag on retail sales from the housing market, noting new home prices fell in June at their fastest pace in eight months. “Plans to stimulate household demand through a new personal consumer loan interest subsidy scheme will not revive consumption given the deflationary environment,” Wang said, arguing that consumers remain reluctant to finance overvalued assets with borrowed funds. Car prices, for instance, remain on a downward trend, she continued.

While some policy advisors have urged a more expansionary fiscal stance in H2 to bolster spending, Wang argued that current measures are primarily aimed at defending baselines, such as maintaining at least 4% GDP growth in the second half and containing financial risks, rather than actively stimulating the economy.

Fiscal constraints have also led some local governments to scale back consumption subsidies, while the central government notably delayed the latest funding tranche for its trade-in scheme until late July, Li added. (See: MNI: China’s Tax Revenue Fall Expected To Continue To Fall In H2)

HOT WEATHER

Record-breaking temperatures this summer have had mixed impacts on retail sales, according to Li. (See MNI INTERVIEW: China Power Surge Unlikely to Hit Industry) “Fewer people outdoors hurts foot traffic for brick-and-mortar shops, partially offset by stronger demand for air-conditioners and electric fans,” Li said, noting these products have also benefited from the government’s trade-in scheme. Catering revenues, another key driver of consumption, are likely to remain subdued after a 4.3% increase in the first half, partly due to stricter banqueting rules for government officials and state employees, Li added.

“China is experiencing its weakest summer for the catering industry since Covid, with profit margins sharply declining,” Wang agreed. Hot weather also reduces productivity and slows economic growth, Wang continued, noting a prolonged heatwave would further erode output and make it harder for the economy to stay on track without additional stimulus.

The National Bureau of Statistics will release July retail sales data on Aug 15.