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It is a rare event when investor expectations about a major economic indicator, such as employment, are dramatically wrong. Yet that is what has happened in the United States. Last week, the government reported that only 266,000 new jobs were created in April. Investors had expected something in the neighborhood of one million. What went wrong? One possible explanation is that the numbers are simply wrong. After all, the government’s employment estimate is based on a survey of a sample of business establishments. The number will be revised as new information comes in. The reported number could, theoretically, be far removed from reality. But, for the sake of argument, let us assume that last week’s number is a reasonably accurate reflection of reality. Why, then, did employment growth decelerate so much? After all, most other indicators suggest that the US economy is firing on all cylinders. Here are some possible reasons.
First, some business leaders have complained that the enhanced unemployment insurance that was part of the last two stimulus bills has left millions of people receiving more money from the government than they can earn from returning to work. Thus, many have chosen not to work while they receive government benefits that are set to expire in September. This is likely true, but it probably only accounts for a small part of the problem.
Second, many women who dropped out of the labor force are reluctant to return so long as they continue to care for children at home. Millions of children have not yet returned to school full time. Female participation in the labor force, which had been declining for the last two decades, fell dramatically during the pandemic as women found it nearly impossible to work from home and take care of children at the same time. Indeed, this is seen as a larger and longer-term problem that goes beyond the pandemic. The Biden administration has included substantial government subsidies for childcare and early childhood education in its latest fiscal proposal. It is meant to allow women to be able to work even if they have young children at home. The United States, uniquely among developed countries, has seen a decline in female participation. It also is the only major developed economy that does not provide substantial subsidies for childcare. Meanwhile, some Republicans oppose the Biden proposal, saying that it will undermine the family and discourage women from being stay-at-home parents. Republican Senator Josh Hawley wrote: “Our public policies should promote the family rather than hurt it, and we can start by giving parents the power to raise their children as they see fit. Democrats try to make family life more affordable by pushing both parents into the full-time workforce while subsidizing commercial childcare.”
Third, it is likely that some people who left employment during the pandemic are wary of returning to jobs that involve social interaction so long as the virus remains a threat. The rate of infection has risen sharply in some states and remains relatively elevated in others. Thus, despite a high rate of vaccination, the virus is not yet defeated and is likely discouraging some people from working.
Fourth, there have been significant disruptions of supply chains involving shortages of transport capacity and key inputs. This has suppressed the ability to produce, transport, and distribute goods. It is possible that this situation, indicative of robust global demand, has stifled employment growth.
Finally, the structure of the economy is changing in response to the pandemic, with some sectors shrinking and others growing. This has affected the mix of jobs available and the mix of skills required of the labor force. It is possible that a skills mismatch is stifling hiring. That is, companies are finding it difficult to obtain people with the skills they need. It might also be the case that some companies are not boosting wages sufficiently to attract the labor they need. Indeed, four years ago, when there was full employment and some business leaders complained about labor shortages, a Federal Reserve official said, “If you’re not raising wages, then it just sounds like whining.”
To better understand what is happening, it helps to look at the numbers. The government releases two reports on employment: one based on a survey of establishments and the other based on a survey of households. Let’s first consider the establishment survey. It found that there were 266,000 new jobs in April, following an increase of 770,000 jobs in March (which was revised down from an initial estimate of 916,000). It was the slowest growth since January. The result is that, in April, employment remained about eight million jobs below the pre-pandemic level, yet about 14 million above the trough reached in April 2020. By sector, there were some substantial jobs losses that were offset by some big gains. As for losses, employment in automotive manufacturing fell 27,000; in grocery retailing fell 49,400; in courier and messenger services fell 77,400; in temporary help services fell 111,400; and in nursing care facilities fell 18,800. These big losses were offset by the following: employment was up 16,500 in real estate; 42,600 in professional and technical services; 89,600 arts/entertainment/recreation; 54,400 in hotels; 187,000 in restaurants; and 31,100 in local school districts. Most other categories experienced only small changes.
The separate survey of households reported a strong increase in labor-force participation, with the participation rate rising from 61.5% of the working age population in March to 61.7% in April. Because of this, and because job growth was slower than labor force growth, the unemployment rate increased modestly from 6.0% in March to 6.1% in April.
The report was a surprise, but was reasonably well received by investors. Equity prices increased moderately on the expectation that, because there remains considerable slack in the labor market, it is less likely that the Federal Reserve will have to tighten interest rates any time soon in order to fight inflation. Bond yields were steady.
As the global economy recovers, the critically important manufacturing sector appears to be on fire. The latest purchasing managers’ indices (PMIs) for manufacturing, published by IHS Markit, suggest as much. PMIs are forward-looking indicators meant to signal the direction of activity in the manufacturing sector. They are based on sub-indices on output, new orders, export orders, employment, pricing, inventories, pipelines, and sentiment. A reading above 50 indicates growing activity; the higher the number, the faster the growth. The global PMI increased from 55.0 in March to 55.8 in April, the highest reading since April 2010. It is a level reflective of strong growth of activity. Of the 24 nations surveyed by Markit, only three—namely, Mexico, Myanmar, and the Philippines—reported a PMI below 50, signaling declining activity. The fastest growth of activity was reported in Europe and the United States, where the manufacturing PMIs were both above 60, an unusually high number. This strength was due, in part, to the easing of economic restrictions as the threat of the virus recedes, as well as to government stimulus. That said, supply chain constraints held back growth and contributed to the biggest increase in input costs in a decade. That, in turn, led to higher output prices. Output of investment goods grew especially rapidly, boding well for an uptick in global business investment.
By country, the PMIs were notable. The PMIs for the United States (60.5), Eurozone (62.9), and Taiwan (62.4) were all above 60. The PMIs for the United States and Taiwan were at an 11-year high and that for the Eurozone was at a record high. The PMI for Japan (53.6) was at a three-year high. However, the PMI for China (51.9) was relatively modest, indicating that the manufacturing sector is growing at a modest pace. The high performing countries have a couple of things in common. They are all experiencing strong growth of output, new orders, and export orders. They are also experiencing supply-chain constraints, including shortages of key inputs that are inhibiting even faster growth. The fear of inflation that has consumed some pundits is largely due to the rising cost of inputs stemming from this disruption. Yet it is likely that the problems now experienced will be temporary and will not necessarily contribute to longer-term inflationary pressures.
Importantly, while manufacturing is strong, there will need to be an improvement in the performance of the larger service sector in order to assure a robust global economic recovery. It is reasonable to hope that, with vaccinations and easing of restrictions, many service enterprises could soon see an improvement in their performance.
Consumer-facing services have been, and continue to be, disrupted by the need for caution and by government restrictions on social interaction and travel. As vaccinations take place and outbreaks decline in some locations, a rebound in services will likely take place, leading to faster global economic growth. There is evidence that this is starting to happen. The latest PMI readings for services indicate strong global growth.
The global PMI for services increased from 54.8 in March to 56.3 in April, an 11-year high and a number indicating rapid growth of activity. The survey found strong growth of output, new orders, and expectations for the future. There was also, not unexpectedly, a big increase in input prices paid by service providers. The strength of the global industry was disproportionate due to very strong growth in the United States, United Kingdom, and Australia. In the United States, the services PMI hit a record high of 64.7 in April, partly attributed to the successful rollout of the vaccine. In the Eurozone, however, the services PMI in April was 50.5, indicating almost no growth. Of the countries surveyed, only Brazil experienced a decline in activity. Even in India, where a major virus outbreak is under way, there was relatively strong growth in service activity in April. The Indian services PMI in April was 54.0. As the crisis worsens, it would not be surprising if the May numbers turn out to be far worse.
Markit divides services into three categories: consumer, business, and financial. Interestingly, while the PMI for consumer services has improved in recent months, it still indicates no growth in activity globally. Rather, the strong global growth of services is entirely due to a rapid rebound in business and financial services. Given continued restrictions on travel and the persistence of lockdowns in some locations, it is not surprising that consumer services remain moribund. Going forward, the principal risk for services is the possibility of further outbreaks of new variants of the virus. Sadly, the current experience in India can happen elsewhere.
Michael Wolf, an economist with Deloitte Global, examines the factors that will determine the success or failure of the massive global tourism industry in the coming year.
The pandemic continues to create challenges for international tourism. Would-be tourists are forced to assess the health risks at the destination and to consider border policies, including testing and quarantining mandates, and domestic restrictions, such as the opening of restaurants and tourist sites. In addition, policymakers in tourist destinations have set restrictions on who can enter the country based on the perceived riskiness of the traveler. Changes in infection rates and the presence of variants add to the uncertainty when planning a trip abroad. Vaccine passports, typically digital codes certifying that the holder is a low risk, should help travelers navigate these issues, but there is no global standard for such passports, and determinations of who is low risk will vary. Given these challenges, it is no surprise that tourists remain hesitant when it comes to international travel. According to the Deloitte State of the Consumer Tracker, only 19% of respondents plan to board an international flight in the next three months. For context, that proportion was 18% in June 2020.
Small island nations that have historically relied heavily on international tourism are the most vulnerable. For example, international tourist receipts accounted for just shy of 60% of GDP and 85% of all export revenue for Maldives. However, larger countries are also vulnerable to weakness in international travel. More than 10% of GDP comes from international tourists in Croatia, Thailand, and Portugal. In Spain, Australia, New Zealand, the Philippines, and Turkey, more than 15% of all export revenue is from tourism.1 Vaccination rates at destination and departure countries, domestic tourism, and savings during the pandemic will largely determine which countries ultimately fare the best.
Countries with high vaccination rates that are reliant on tourism from countries that also have high vaccination rates are likely to be more resilient. For example, Israel was ahead of the curve in terms of its vaccination program and relies heavily on tourists from countries such as the United States, France, and the United Kingdom, all of which are inoculating their populations relatively quickly. Countries like Israel may be able to attract international tourists that would have traveled elsewhere had the global pandemic not happened. Popular tourist destinations in southern Europe may face similar benefits if their vaccine programs remain on track. On the flip side is Thailand where more than two thirds of international arrivals are from East Asia alone. Although much of East Asia has kept infection rates relatively low throughout the past year, they have been slow in terms of vaccine dissemination. In addition, Thailand recently implemented a mandatory 14-day quarantine for international arrivals after infection rates began to rise domestically, dealing another blow to tourism in the country. Other tourist destinations in Southeast Asia may face similar challenges.
While international tourism remains subdued, domestic tourism has the potential to supplement some of the lost revenue. For countries most reliant on international tourism, it will be difficult for domestic tourists to fill the entire gap left by foreigners. For example, foreign tourist spending in Greece is more than five times the amount Greek tourists spend in other countries. In Portugal and Thailand, it is more than four times higher, and in New Zealand it is more than two times higher.2 However, other tourist-reliant countries are in a better position. In the Philippines, foreign tourists actually spend less than Filipino tourists spend abroad, suggesting they can fully bridge the gap. Australian tourist spending abroad is equivalent to 90% of foreign tourist receipts domestically. In Colombia and the United States, tourists spend 85% and 72% as much as they take in from foreign tourists,3 respectively, making it more likely that domestic expenditures can make up for the loss of foreign spending.
For countries that are typically net importers of tourism, meaning their residents spend more for tourism abroad than foreigners spend coming to their country, weakness in international tourism presents an opportunity. Money that was previously spent traveling abroad can now be spent domestically. Several northern European countries fall into this category. For example, Norwegian tourists spend 2.6 times more than they take in from foreign tourists, while German tourists spend 1.7 times more. South Korea, Singapore, and Israel all stand to benefit as well.4
Large savings accumulation in many countries suggests that each traveler may be able to spend more money on a trip than they would have previously. Tourists from the United States and United Kingdom are particularly well positioned to spend significantly more per traveler. So far, there is not much evidence this extra savings has been spent on international tourism. For example, in Spain, average nonresident expenditure has been lower than a year earlier since the pandemic hit, apart from a modest uptick in February 2021. Other factors may be weighing on per capita spending. To avoid crowds and the risk of disease, more people may have opted to stay in homes rather than in hotels, eaten in rather than go out to restaurants, and chosen low-cost or free outdoor activities, such as hiking or going to the beach. However, per-traveler spending could rise as confidence over the economic outlook has improved along with the pace of vaccinations.
It is clear that international tourism will be restrained while the pandemic lingers. Pockets of variants and resurgence in infection rates will add to the industry’s challenges. Although many tourist-reliant countries will struggle, those that have access to more vaccines and can attract tourists from other highly vaccinated countries are best positioned to regain lost ground. Other countries could see large benefits as would-be international travelers opt for domestic tourism this year instead.
There is a debate taking place about the degree to which we will continue to work remotely after the pandemic. The latest contribution to the debate comes from several economists affiliated with the National Bureau of Economic Research. They conducted a massive monthly survey of workers and employers during the past year. In total, they collected over 30,000 responses in the United States. Based on survey responses, they have concluded that “20% of full workdays will be supplied from home after the pandemic ends, compared with just 5% before.” This is down from 60% at the height of the pandemic early last year. While 20% might not seem like much, the researchers note that such a shift will reduce spending in major city centers to 5% to 10% below the pre-pandemic level. That could be very disruptive to the economies of major cities. On the positive side, they say that this shift will boost productivity due to increased use of technology as well as due to the reduction in commuting time. In contrast, critics of the survey argue that workers who don’t directly interact with other human beings on a regular basis could become depressed and will not get the benefits of mentorship, thereby hurting productivity. Indeed, those workers who live alone are especially at risk of mental health issues resulting from constantly being alone.
The survey results are based on the responses of workers and employers when asked about their future intentions. It assumes that people will do what they say. Moreover, there is great variability among business executives with respect to their corporate intentions. Some companies intend to bring all workers back to the office, while others have determined that remote interaction works very well and should be continued.
Disruption of supply chains and shortages of key components continue to be a challenge. In Germany, nearly half of respondents in a survey of manufacturers reported disruption to their supply chains. This was the highest number so reporting in 30 years. Why is this? There are a number of factors contributing to disruption, including soaring global demand for consumer goods, restrictive supply chain practices meant to stifle spread of the virus, a shortage of container ships and air freight capacity, and even the lingering effects of the blockage of the Suez Canal. This disruption is hurting the recovery of the manufacturing sector, although in Germany the sector is doing remarkably well. Strong global demand is not surprising. The Conference Board reports that global consumer confidence “soared to record heights” in the first quarter of 2021. Confidence was especially high in the United States, China, India, Australia, and Canada.
Elsewhere, the story of supply chain disruption is similar. In China, a shortage of semiconductors has led to a surge in imports from neighboring Taiwan, despite the rising political tensions between the governments in Beijing and Taipei. In the first quarter of 2021, orders from China and Hong Kong for chips made in Taiwan were up 47% from a year earlier.
Meanwhile, it is reported that the global chip shortage is worsening due to rising global demand for consumer electronic goods, home appliances, and automobiles. In addition, it is reported that Chinese companies have been hoarding chips lest there’s a shortage. Moreover, it is believed that Chinese companies are concerned about the potential impact of future sanctions from the United States. The US government has expressed a desire to prevent China from advancing in certain technologies. The overall supply chain problem is likely to have a negative impact on the global supply of mobile telephones, automobiles, and home appliances, possibly leading to significantly higher prices. Already, some prices have begun to rise. Taiwan’s largest supplier of semiconductors says that the global shortage is not likely to be resolved until 2022. Meanwhile several Taiwanese producers are massively investing to boost capacity.
Will supply chain disruption and fraught global economic relationships ultimately lead to greater diversification of supply chains? There is evidence that this is starting to take place, although China’s footprint in global supply chains remains massive. A recent survey found that companies based in the United States and Europe have marginally reduced their reliance on China for sourcing over the last two years. Specifically, 96% of US-based companies reported in 2019 that China was one of their top three sourcing countries. By the first quarter of 2021, this number had fallen to 77%. For companies based in Europe this figure fell from 100% in 2019 to 80% in the first quarter of 2021. Despite this decline, China remains the number one sourcing location for the companies surveyed.
As companies have started to diversify, one country that has been a beneficiary has been Vietnam. It was listed as a top three sourcing location by one quarter of companies surveyed this year. For US-based companies, Vietnam was a top three location for 43% of respondents, about double the share just four years ago. For European companies, Vietnam was a top three source for 25% of respondents, up from 11% in 2019. In addition, 38% of US companies and 28% of European companies intend to shift some sourcing to Vietnam in the next 12 months. Only a very small share of companies intends to do more sourcing in China in the next year.
This survey tells us quantitatively what we already knew anecdotally. Diversification away from China is being driven by a combination of factors, including fear of trade disruption due to protectionist measures, pandemic-related evidence that supply chains are vulnerable, rising labor costs in China, and low labor costs in Vietnam and elsewhere. The survey shows, however, that China remains dominant player—something that is not likely to change soon.
The US economy grew at a robust pace in the first quarter, driven by consumer spending on goods, business investment in equipment, and a surge in nondefense Federal government purchases. These positive factors were offset by weak growth of consumer spending on services, a decline in business investment in structures, and a sharp decline in business inventories. For the first time in a year, real GDP exceeded the level from a year earlier, but remained below the pre-pandemic path. Finally, consumer incomes increased dramatically due to stimulus money as well as continued job growth. While consumer spending grew strongly, it is clear that consumers chose to save a large share of their increased income. Here are the details.
In the first, quarter, real GDP grew at an annualized rate of 6.4% and real GDP was up 0.4% from a year earlier. This was roughly in line with expectations. In response, equity prices increased modestly. However, US bond yields increased significantly as investors absorbed not only the GDP numbers but strong numbers regarding initial claims for unemployment insurance and an index of pending home sales.
Consumer spending increased at an annual rate of 10.7%, including a stunning 41.4% increase in spending on durable goods and a 14.4% increase for nondurable goods. Spending on services, however, increased a more modest 4.6%. Notably, although spending on goods was up strongly from a year earlier, with durables up 25.9% from a year ago, spending on services remained 3.2% below the level from a year ago. Thus, some consumers remained wary of returning to restaurants, airplanes, and hotels. Indeed, the hotel occupancy rate last week was still 17% below the rate in the same week of 2019. Also, real disposable personal income was up at an annual rate of 61.3% while consumer spending was up at a rate of 10.7%. In addition, the government reported that, in March, when the stimulus payments were sent to most households, the personal savings rate increased sharply to 27.6% of disposable income. Given that the personal income data indicates that consumers saved about 85% of the stimulus in March, and that a Federal Reserve survey found that households intend to save 75%, one might infer that further spending took place in April. If so, that suggests strong growth of spending in the second quarter and, consequently, strong economic growth in the second quarter.
Business investment (nonresidential fixed investment) grew at an annual rate of 9.9% in the first quarter. This included a strong 16.7% increase in investment in equipment (computers, telecoms equipment, transportation equipment, etc.) and a 4.8% decline in investment in structures (office buildings, shopping centers, oil wells, etc.). Investment in structures tends to lag other forms of investment, so the decline is not completely unexpected. However, there could be something else happening. That is, structural changes in the economy due to the pandemic could inhibit structures investment going forward. If large numbers of people continue to work remotely, that will reduce long-term demand for office space as well as demand for energy. That, in turn, will mean less investment in office buildings and oil wells. If people continue to shop remotely, then there will be less construction of shopping centers. That being said, if government efforts to stimulate development of renewable energy are successful, there could be an increase in investments meant to add windmills and solar panels to the electric grid as well as investments in electric charging stations. Moreover, if people continue to work and shop from home, there could be continued strong growth of investment in information technology, data warehouses, distribution centers, and transportation equipment. Supply chains that run from mines and farms to big box stores increasingly extend to people’s homes.
Investment in intellectual property (software, R&D, branding, etc.) was up a strong 10.1%. In fact, this kind of investment has been relatively immune to the pandemic. Going forward, digital transformation will have a positive impact on investment in intellectual property. At the same time, inventory accumulation fell sharply in the first quarter as businesses evidently sold more than they were able to produce. The decline in inventory investment reduced GDP growth by 2.6 percentage points. This bodes well for an increase in output in the months ahead. Finally, residential investment was up at an annual rate of 10.8%. This reflects the strong level of activity in the housing market.
After growing rapidly in the fourth quarter of 2020, exports declined in the first quarter at a rate of 1.1%. Imports were up strongly, rising 5.7% in the first quarter. Thus, trade had a net negative impact on GDP growth in the first. In addition, it means that the trade deficit widened. You can see commentary in the press to the effect that this was a bad thing. It was not. A trade deficit is not an indication of weakness. Rather, it is normal for trade deficits to widen when economies accelerate, and vice versa. Moreover, a trade deficit exists because investment exceeds saving. You’ll note that personal savings has surged dramatically. Yet overall savings have not due to massive government borrowing. Going forward, imports are likely to be strong so long as domestic demand is strong. As for exports, a further revival of the global economy will likely cause an acceleration in exports.
Where do we go from here? There is reason to expect that a strong rate of economic growth will continue for the remainder of 2021. Government spending has increased considerably, providing millions of households with additional funds available for increased spending throughout the year. In addition, vaccinations continue to reduce the threat of the virus, thereby enabling more consumers to engage in the kinds of social interaction that boost spending.
Some economists worry that the economy will become overheated and that inflation will become a problem. They point to shortages of inputs and transport services. In addition, there have been complaints that businesses cannot easily find workers to fill slots, despite the fact that employment remains far below the level from a year ago. One complaint is that the government’s enhanced unemployment insurance payments mean that many unemployed workers receive more money from the government than they could get working. This is likely true in many cases, although that level of government largesse is set to end later this year. Also, many women have dropped out of the labor force in order to care for children who are schooling remotely. As children return to school, many of those women will likely return to work. Finally, it is likely that many disrupted workers who lost jobs in consumer-facing services lack the skills needed for the jobs being offered. This skills mismatch could stifle the return to full employment and contribute to higher wages.
Given the strength of the economy, some observers have questioned why the Federal Reserve continues to operate an easy monetary policy characterized by historically low interest rates and large monthly purchases of assets. Some critics say that this continued boost to liquidity could spark inflation and that, at the least, it is already contributing to an equity price bubble. The counterargument is that, despite the strong economic growth in the first quarter, the economy still has plenty of room for further growth given considerable slack in the labor market. Plus, uncertainty about whether the virus is under control means that the Fed likely does not want to apply its foot to the brake until there is no longer a risk of a substantial renewal of the outbreak.
In the past year, a remarkable and unusual thing happened in the major developed economies. Consumers and businesses saved a very large share of their income, leading to a surge in bank deposits. This came about for a variety of reasons, including reduced spending opportunities for consumers due to social distancing requirements of the pandemic as well as lockdowns, reduced investment spending by businesses due to reduced need for structures, economic uncertainty, and massive infusions of cash from temporary government stimulus efforts. It is often the case that temporary disbursements of money are largely saved. Interestingly, in the United States, Canada, and Japan, government stimulus led to a surge in personal income even as there was a decline in personal spending. In Europe, however, cash disbursements were lower and, as a result, the increase in savings was not as pronounced. Still, saving increased dramatically in every developed economy during 2020, with the volume of saving up by 7% of income in the Eurozone to as high as 12.5% in Canada. The result is that, in 2020, household bank deposits increased by 12.5% of disposable income in the United States, Canada, and Japan, and by about 7% of disposable income in the Eurozone. Deposits were up by about 10% of disposable income in the United Kingdom.
Moreover, as 2021 unfolds, it is likely that, at least in some countries, there will be a further large increase in consumer financial balances, especially in the United States due to the recent fiscal stimulus. Some commentators say that, once the pandemic is truly over following mass vaccination, this massive pool of money will be spent with abandon, potentially setting off a new round of high inflation. Others, however, argue that there is a limit to how much can be spent. After all, how many restaurant meals and airplane rides can one purchase? Plus, it is argued that many consumers will be comfortable with a higher level of wealth, especially if it is eventually used to fund the down payment needed to purchase a home. Thus, a debate is under way about how this money will be used and what this will mean for the path of the world’s leading economies. If the money continues to be saved on a large scale, then worries about excess demand leading to ruinous inflation will turn out to be wrong.
During the pandemic, one way that China’s government boosted economic activity in order to offset the negative consequences of social distancing was to allow an acceleration in credit growth. For example, total social financing (TSF), which includes credit offered through both bank and nonbank entities, accelerated sharply during the pandemic, helping to fund property investments. However, in recent months, with the pandemic receding and the economy operating above the pre-pandemic level, the government has become more focused on the potential costs of excessive credit growth. As such, it has taken steps to reduce credit expansion. Although monetary policy has not changed, the government’s hand is evident in the recent deceleration in the growth of TSF, now growing at the slowest pace in more than a year. The government has specifically targeted the property market, fearful that excessive growth could ultimately lead to a sharp decline in prices. There is also a fear that excessive debt could become unsustainable. The deceleration in credit growth has led to a rise in long-term borrowing costs. The net effect is likely to be a deceleration in business investment and property investment, both of which have contributed significantly to economic growth in the past year.
To avoid a sharp slowdown in economic growth from reduced investment, the government is encouraging more consumer spending. The government has said it wants to “accelerate the recovery of consumption and unleash the spending potential.” The relatively strong performance of retail sales in March versus weaker performance of industrial production is evidence that the government’s effort may be having its intended an impact. Still, the first quarter GDP numbers indicate a sharp slowdown in quarter-to-quarter growth.
In the longer term, China faces some demographic problems that could inhibit economic growth. Much has been written about the sharp decline in births and the potential impact on the working-age population. The number of marriages in China fell sharply in 2020, down 13% from the previous year and down 40% from a peak in 2013. The marriage rate (marriages as a share of the population) hit an historic low. The decline in 2020 was likely related to the disruption of the pandemic. The longer-term decline could reflect rising costs of new homes as well as an excessive supply of men versus women. In addition, it appears that Chinese are marrying later in life, which will likely reduce the number of children they have.