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Today is Chinese New Year here in Hong Kong. Vietnamese New Years in Saigon and Korean New Years in Seoul too.
We celebrated the party as a family last night, as is traditional. My in-laws came for stew. But it was a tight-knit group of close relatives, just my wife’s sisters and their spouses. Our traditional walk to the flower market or the trip to see the fireworks along the Tsim Sha Tsui waterfront were out the window.
This is typically a boom time for restaurants and retailers. Much of mainland China takes two weeks off during the holidays, and the celebrations last well into the night, a time to return home for millions of migrant workers, who have very little free time to see their spouses, children and parents.
East Asian retailers are experiencing a quiet second lunar new year. Although the virus is largely contained in China, outbreaks still occur. The same is true in Japan, Korea and here in Hong Kong. Consumers also show great reluctance to spend. The disease may have abated, but household concerns about China’s economic base have not.
China’s remarkable economic recovery has been based on production, not consumption. China even went into deflation in January, the first time in a decade, with the Consumer Price Index falling 0.3%, a sharp slowdown from the 0.2% inflation seen in December. The fall was produced entirely by the weakness of the demand for services, with a fall in the prices of services of 0.7%, an element that dragged inflation into negative territory. It is the first time since 2009 and after the Western financial crisis that prices have fallen in China.
Month-to-month comparisons are a bit unusual for China this year. The Lunar New Year holiday is occurring quite late this year, in mid-February, having fallen on January 25, 2020. Therefore, economists caution that it is better to use joint January-February figures for most measurements.
The comparisons are disappointing for anyone expecting a quick economic rebound for Asian consumption.
“The series of local outbreaks of Covid-19 at the beginning of the year was definitely one of the main culprits for the fall in prices of services,” explain Société Générale economists Wei Yao and Michelle Lam in a research note. “Even though the outbreaks have been contained quickly, people across the country are still not encouraged to travel and go out during the Christmas season.”
Prices in China should return to positive territory, “although very gradually,” SocGen’s number analyzers conclude.
Producer prices have moved in the opposite direction, from a 0.4% drop in December to produce a 0.3% rise in January, the first trip into positive territory since the coronavirus crisis began. Strong demand for exports is driving much of that growth, supported by rising commodity prices. But those factors are highly dependent on external demand. The growing divergence between producer prices and consumer prices is a problem for Chinese manufacturers producing for their domestic market. They may not be able to translate higher producer prices into higher prices at the checkout, which would lower their profit margins.
The Lunar New Year is also often a boom time for the travel industry. The ski slopes of Japan and Korea are packed with Asian visitors. The beach resorts in Southeast Asia are full. Air fares are usually the highest of the year.
That is not happening. You cannot travel to most of Asia, and if you can, you will face heavy quarantine restrictions to go there and return home. In Bali, so dependent in normal times on the tourism industry, many travel and hotel-related employees have returned to their home villages to take on traditional tasks such as farming. The money is not that good.
Thailand receives more visitors from China than any other nation: it is the main destination for Chinese travelers heading outside the country’s borders. But a survey suggests that Lunar New Year spending in Bangkok is facing its biggest decline in 13 years.
In Japan, the percentage of households now shopping online has reached a record high, at 54.6% in December. That has skyrocketed from around 42% at the start of the Covid crisis, a huge shift in consumer behavior. More than two in five household appliances, clothing, cosmetics, movies, music and video games are now purchased online. Much of that spending is likely to stay online.
I explained earlier this week that the strong Asian stock gains are not being produced by local economies here. The Korean, Taiwanese and Chinese stock markets have gained more than a third in the past year. But these are all countries that are heavily reliant on exports, the gains in share price being driven by strong demands for the electronic components, semiconductors, telecommunications equipment and technology parts they manufacture.
“The popular narrative is that Asia is leading the recovery and pulling the world out of a big hole. This is not entirely correct,” Standard & Poor’s Asia economists Shaun Roache and Vishrut Rana write in their report. Asia, we have a demand problem. “Demand from the rest of the world is helping Asia out of the hole.”
Retail sales in Asia are still below levels seen before the region fell into the chaos of the virus. Sales of restaurants, recreational facilities, lodging and transportation are particularly dire.
Many retailers may have hoped to stay there for a great season this holiday season. But the Lunar New Year won’t come to the rescue this time. It is a quiet time, a family time, a time of renewal with bits of optimism in the spring. However, for many consumer-oriented companies across Asia, the recovery will not come soon enough.
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