Momentum maintained in household consumption
While fixed-investment in China showed some signs of softening in August, household consumption is improving steadily. Nominal retail sales growth was still negative in July (-1.1% y-o-y, up from -1.8% in June), but the growth in passenger car sales accelerated in August, rising 8.9% y-o-y, up from 7.9% the previous month. This points to further improvement in overall retail sales in August as well (Chart 4).
As in many other economies, the recovery of services has lagged behind industry. However, some encouraging signs are emerging. Even for some of the most heavily-hit services, things are improving.
Restaurants and catering services, for example, have staged a sharp rebound after reaching a trough in March. In July, large restaurants and catering services providers reported a y-o-y contraction in receipts of 11.0%, an improvement from -15.2% in June and -18.9% in May (Chart 5A).
Movie theatres (along with many other entertainment venues) were allowed to re-open in most parts of China in mid-July, and this has led to a quick rebound of box office revenues from virtually zero to levels similar to the 2018-19 average (Chart 5B).
Online sales of services, including items such as air tickets, travel packages and gaming, returned to positive growth in July (0.2% y-o-y) for the first time since December 2019 (Chart 6A). With people starting to travel again, the transportation sector is gradually moving up from the covid slump. Domestic air traffic is recovering faster than other means of transportation, but was still down by 34% y-o-y in July in terms of total number of passengers. However, the improvement appears firm and steady (Chart 6B).
Services have been playing an increasingly important role in the grand transition of the Chinese economy, and now account for over half of the entire economy (54% of GDP in Q2 2020, to be precise). If the recovery of the services sector maintains its current momentum—which looks possible given the government seems to have the coronavirus quite firmly under control—then our current GDP forecast of 1.8% for China in 2020 could be subject to some upside risk.