The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
President Xi Jinping's administration is under intensifying pressure to address the downturn in China's consumer spending, which has emerged as a significant threat to global economic stability.
Alarming Economic Indicators
- Services Activity: A critical gauge of Chinese services activity, covering the retail sector, teetered on the edge of contraction in July for the first time since last year. This is part of a broader disappointing economic picture revealed by recent purchasing manager indexes.
- Deflationary Pressures: Persistent deflationary pressures are evident, not just in manufacturing but across various sectors.
Impact on Global Brands
- Consumption's Role: For the first time since late 2022, consumption contributed less than half to China’s US$17 trillion economy in the second quarter.
- Affected Brands: The consumer spending slump has hit global brands like Starbucks, L'Oréal, and Japan's Fast Retailing, leading to declining sales and stock valuations.
Economic and Political Reactions
- Consumer Spending Focus: The Politburo has vowed to make boosting consumer spending a greater policy focus for the rest of the year. However, there is skepticism among investors due to a lack of detailed plans.
- Manufacturing and Exports: Despite promises to boost consumption, manufacturing and exports remain vital to China’s economic recovery.
Contributing Factors
- Housing Slump: A prolonged housing slump has significantly impacted household budgets, leading to reduced spending.
- Wealth Tied to Real Estate: JPMorgan Chase & Co estimates that China’s urban middle class has about 60% of their wealth tied to real estate, further contributing to cautious spending habits.
Global Brands' Struggles
- Competition and Thrift: Global brands are grappling with sluggish demand and competition from cheaper, local alternatives. Thriftier habits among Chinese consumers have hurt profits and share prices.
- Starbucks: The coffee chain reported a faster-than-expected decline in same-store sales in China. It seeks a local partner to regain market share, having previously spent US$1.3 billion to buy back its domestic stores.
- Luckin Coffee: Meanwhile, Luckin Coffee, a top local competitor, has attracted consumers with cheaper options.
- L'Oréal: The French beauty-products giant posted a 2.4% sales drop in North Asia, marking the fourth consecutive quarter of falling sales in the region.
- McDonald's: The burger chain reported a decline in same-store sales, noting that Chinese consumers are increasingly deal-seeking.
Future Outlook
Despite the Politburo’s pledges, there is uncertainty about whether these promises will translate into effective measures to stimulate consumer spending.
- Investor Sentiment: Chinese consumer stocks soared following the Politburo’s announcements, but many investors remain unconvinced.
- Wealth Effect: "The wealth effect is under pressure in China," said Nelson Yan, co-chief investment officer at Fosun Wealth International in Hong Kong. "Consumer downgrading is still around."
China’s consumer spending slump presents a complex challenge with significant implications for both domestic and global markets.
Comments
Post a Comment