The economic consequences of the coronavirus pandemic have been radically different across countries, a dynamic that sets the world up for trade trouble, especially between China, the U.S., and Europe.
In China, consumer spending has failed to recover even as industrial production and fixed asset investment have reached new highs. The problem is that everything that is produced must eventually be consumed, so if Chinese households aren’t buying what their businesses are selling, someone else must be. So far, American and European shoppers have been bailing out Chinese producers even as their own manufacturers have struggled.
After the coronavirus first emerged in China, retail spending plunged about 25% on a seasonally adjusted basis between December 2019 and February 2020, while manufacturing output dropped about 20%. That’s almost exactly what happened in the U.S. between the economy’s peak in February and the bottom in April. (Production and consumption both dropped 30% in Europe.)
Yet the recoveries in the world’s three major economies have been substantially different. The latest data show that Americans and Europeans have gone back to spending as much as they did on physical goods as they did before the pandemic—if not more—even as their manufacturers operate well below capacity.
But in China, retail spending remains well below pre-pandemic levels even as the manufacturing sector powers ahead. In fact, retail spending in July seems to have fallen slightly relative to June when compared to the pre-pandemic trends on a seasonally adjusted basis.
This divergence reflects government policy choices, particularly the restrictions on social benefits available to the hundreds of millions of urban Chinese workers who came from the countryside. Rather than getting jobless benefits, for example, rural migrants leave the cities for their subsistence farms. At the same time, Chinese businesses receive subsidies from the state to keep producing regardless of whether it’s economical to do so.
The result is that total Chinese spending on imports of goods and services in April-June was just under $530 billion, compared to $606 billion in the second quarter of 2019 and almost $640 billion in the second quarter of 2018.
By contrast, the value of Chinese exports of manufactured goods in the second quarter was essentially unchanged over the past several years. China’s overall trade surplus has soared thanks to the combination of reduced domestic demand and sustained production. (Lower energy prices and fewer Chinese traveling abroad have also helped.)
Europe’s manufacturing trade balance has moved the other direction. While imports are down, exports have dropped far more. Europe’s surplus in manufactured goods in the second quarter was €50 billion ($60 billion), compared to a pre-pandemic average of about €110 billion. (Europe’s trade surplus is caused by underconsumption and underinvestment that harms Europeans and non-Europeans alike, but the right way to fix that is through higher imports, not lower exports.)
Similarly, the U.S. trade data show that exports have fallen far more than imports, although the gap narrowed somewhat in June thanks to rising exports.
This helps explain why the U.S. manufacturing sector’s rebound has been so restrained. With the notable exception of meatpacking plants and the motor-vehicle sector, which have enjoyed genuinely V-shaped recoveries in output, most sectors remain well below where they were in February, with minimal improvements in the past few months.
Unfortunately, the problem of weak consumer demand is likely to spread from China to the rest of the world. Tens of millions of Americans have seen their incomes slashed with the expiration of Pandemic Unemployment Compensation benefits. And European governments that temporarily helped businesses keep workers on payrolls are debating how soon they should end these furlough programs.
The global economic pie is set to get smaller, which means companies—and the governments supporting them—will be forced to fight even harder just to prevent their sales from falling. That’s sure to exacerbate the conflicts over trade that were threatening the global economy even before the pandemic.
Write to Matthew C. Klein at matthew.klein@barrons.com
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August 20, 2020
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China’s Weak Consumer Recovery Is Bad for China—And World Trade - Barron's
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