Delta variant threatens retail sales growth potential in China

Consumer confidence will not take a hit, but offline stores might become less attractive.

China’s retail sector is expected to benefit from a growth in domestic consumption over 2021, but the outbreak of the COVID-19 Delta variant threatens to dampen consumer confidence and retail sales in the country, according to a Fitch Solutions report.

Retail sales in the country grew by double-digits over the second quarter, owing to the lowered urban unemployment rate of 5% in June and a rise in the average number of hours worked per week of 47.6 during the same month.

Fitch believes that there will still be more room for growth in domestic consumption over the year, with bouts of pent up demand expected as the country vaccinates its population and gradually lifts movement restrictions.

However, China saw a new COVID-19 outbreak that has spread to 13 cities in five provinces, including Beijing. By 2 August, the outbreak, caused by the fast-spreading Delta variant, had reached more than 20 cities and grown to more than 1,000 cases.

“Currently, local lockdowns, mass testing and travel restrictions are being enforced in cities with infections which may dampen consumer confidence and subsequently retail sales,” the report stated.

As of 11 August, authorities in China have imposed new travel and movement restrictions, which has resulted in local lockdowns, mass testing, and travel restrictions as the government stuck to its aggressive containment playbook despite the high vaccination level.

“These restrictions do make bricks and mortar shopping less attractive, with consumers limiting the number of times they go shopping or avoiding crowded areas, such as shopping malls and restaurants,” the report stated.

A full recovery of China's consumer and retail sector is expected to take place in 2021, while more conventional spending patterns are tipped to return in 2022. Meanwhile, real household spending is projected to expand at 7.1% in 2022.

Much like for the rest of the world, recovery in consumer spending in China will rely on vaccinating enough people for the government to gradually lift restrictions, which will boost consumer confidence and retail sales.

Fortunately, China has been a first-mover on the vaccination front, having approved several domestically produced vaccines and has been actively acquiring other vaccines, Fitch said.