Where’s the consumption? China’s GDP growth surged to pre-pandemic levels of 6.5% in Q4, but household consumption has yet to make a full rebound due to pressure on the jobs market and slow income gains. For one, there has been an uneven jobs recovery. Construction jobs rebounded quicker due to faster growth in infrastructure and real estate, but PMI indices suggest jobs are still facing pressure in the manufacturing and services sectors. The hit to the services sector has been more acute, which impacts migrant workers particularly hard as over half of them are employed there. Secondly, income pressure has persisted as average income growth was only at 80% of pre-pandemic levels by Q4. There’s also increased pressure on new college graduates, reflected in elevated applications and enrolments for postgraduate studies as students defer entry to the labour market. Of those who enter, the higher job market competition has led to lower entry salaries relative to 2019.

What happens when spending starts? All this pressure on the labour market has led to elevated precautionary savings. Our analysis shows that given urban households tend to save more, we estimate the unwinding of all of that could result in a 1.7ppt boost to GDP versus just a 0.3ppt increase from rural households.

What does this mean for inequality? Signs of consumption normalization are there as discretionary-related and services-related buying returned to positive growth in Q4. However, urban income inequality has increased as more labour intensive positions were hit, meaning migrant workers were especially affected, while white collar workers were better able to preserve their jobs and incomes. This pressure will only dissipate with a full jobs recovery, particularly in low-level services jobs. A final point is while there are recent clusters of COVID-19, they aren’t of the scale seen at the peak last March, so consumer confidence should therefore stay generally buoyant.

What can be done? Policymakers will stay accommodative to bring back jobs by supporting private small and medium sized enterprises (SMEs), which account for over 85% of urban employment. Policymakers will likely keep the loan prime rate (LPR) on hold at 3.85% and instead take targeted measures such as extending favourable credit conditions and tax cuts to support SMEs. Structural reforms to level the playing field for companies can also increase business confidence and investment, which in turn will support job creation. Incentives to encourage consumers to upgrade their durable goods like home appliances can help unleash pent-up precautionary savings. Boosting domestic demand by facilitating urban-rural mobility and increasing household consumption through household (hukou) and land reform can also spur more consumption.