China was the first country to be afflicted by an epidemic that has since engulfed the entire world. It was also the first to have to manage its economy through a lockdown, and engineer a recovery from the disruption brought on by coronavirus. How it has fared carries lessons other countries would do well to heed.
Admittedly, western governments have so far taken a different approach to the economic fallout from the pandemic than Beijing. They have spent hundreds of billions of dollars on sustaining individual incomes — in Europe by covering salary costs for employers who keep workers employed, and in the US by radically boosting unemployment benefits. In contrast China’s response, heavy on cheap credit, public investment and construction spending, has focused to a much larger extent on helping businesses, not workers.
As a result, despite a recovery in output growth, private consumption demand and even private investment are lagging behind. While high earners have come largely unscathed through China’s first downturn since the 1970s, and are fuelling booming demand for luxury goods, that does not make up for steep cutbacks in spending by most ordinary consumers. Retail sales keep shrinking, in contrast with European economies where retail activity is now above the level of a year ago.
Here lies a warning for richer countries. Their furlough schemes and income support have gone a long way to mitigate the unequal economic consequences of the pandemic. But lower earners have generally still faced greater economic (and health) risks than higher earners. This disparity will become sharper when governments feel forced to wind down public subsidies, whether because of their cost or because they slow down workers’ return to their old jobs or switch to new ones. China’s struggle to boost consumption demand shows the macroeconomic risk of a botched exit strategy from extraordinary income support measures.
Beijing’s reliance on public credit and investment spending is also a longer-term problem for its own aim to rebalance the economy towards a consumption-led growth model. Its policymakers have long been aware that export-led growth has outlived its usefulness and that investment-intensive growth has created large financial risks. Without policies to improve purchasing power and confidence in large parts of the population, however, they have found themselves resorting to the old, outdated tools.
While this predicament seems, at first glance, unique to China, insufficient household consumption demand has increasingly become a long-term worry for western policymakers too. Especially in the US, long-stagnating incomes among the lower paid are often thought to be behind “secular stagnation” — sluggish productivity growth and an economy that can only secure full employment with ever looser financing conditions, and all the risks and distortions that this brings.
This year’s extraordinary policy actions in rich economies were urgent and necessary in the face of a pandemic. When they are wound down, governments must consider how to replace them by broader policy reforms to address long-term stagnant productivity growth. China’s current challenges show not just the risk of failing to sustain livelihoods through the immediate crisis, but also how stagnating household purchasing power can weaken an economy’s foundation in the long run. Those are lessons western governments should take to heart as their attention shifts from addressing an emergency to “building back better”.