For Global Growth Outlook, O’Neill Says Look to China’s Consumer

(Bloomberg) -- Anyone looking for reasons why the global economy is slowing and what can be done about it needs to understand the outlook for China’s consumers, says Jim O’Neill.

The former Goldman Sachs Group Inc. chief economist and coiner of the BRICs acronym is worried about the drag from Chinese consumption after retail sales tumbled to the slowest pace in 16 years last year, car sales fell in 2018 for the first time since the early 1990s, and companies from Apple Inc. to Jaguar Land Rover Automotive Plc said slowing China sales are hurting business.

“I cannot emphasize enough how the importance of the Chinese consumer matters,” says O’Neill, also a former commercial secretary to the U.K. Treasury. “Other challenges, such as excessive debt growth, pollution, trade disputes” are all important but matter much less than the strength of the consumer, he said in a recent email interview.

For more than two decades, O’Neill says he’s been more optimistic than many economists about prospects for global growth, in large part because he saw the Chinese consumer becoming more important. But now, sentiment has plunged to the lowest level in a decade and O’Neill says that’s a big risk for the world economy.

Measures to support slowing growth unveiled this month in Premier Li Keqiang’s annual work report offered few sweeteners for consumers, and there was no target for retail sales growth after last year’s goal of about 10 percent expansion was missed by a percentage point. In January, the International Monetary Fund cut its forecast for global expansion this year to 3.5 percent from 3.7 percent; O’Neill says it’ll take a comeback from Chinese consumption to push it back toward 4 percent.

Here are excerpts from the recent conversation:

How important is the Chinese consumer to global growth?

Any way you look at it, it has become so obviously the most important influence in the world economy. For the decade to 2017 -- as we don’t have all 2018 numbers yet -- China has generated around 49 percent of all global nominal U.S. dollar-denominated GDP, much bigger than the U.S. What few realize is just how important their consumer had become. About one half of this, or one quarter of all nominal GDP decade to date, has come from the Chinese consumer. Of their own GDP total, the private Chinese consumer has become around 40 percent, slowly rising from 36 percent at the start of the decade. If this were to go into reverse, permanently, world GDP would lose its main growth engine. Look no further than German GDP in the second half of 2018. I suspect China slowing, and its consumer slowing, might be the biggest reason.

How concerned should China be about its consumers?

Might I even raise the possibility for the Chinese Communist Party that if their consumer doesn’t continue to rise in the way it has this decade, then the peculiar social compact between the leadership and its citizens, who enjoy rising affluence, could face significant challenges.

How can the government halt the consumer slowdown?

It needs to ensure real income growth continues, Chinese consumers don’t start to raise their savings rate, and other policies don’t have an undesired knock-on effect on the consumer. I can’t really see why the U.S. trade dispute necessarily should but I could see how the government crackdown on corruption and perhaps the attempts to rein back excessive credit growth might inadvertently. These side effects need to be averted.

The time has come for the government to abandon its two-tier policy between urban and migrant workers in order that the latter reduce their precautionary savings, which would help the overall savings rate decline, and help boost consumption. The government worries considerably about the social consequences of such a step in major cities such as Beijing, but I don’t believe it is sustainable from a long-term perspective to maintain such a two-tier society when others show such vast income, wealth and health gains, but migrant workers can’t.

To contact Bloomberg News staff for this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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