Retail sales growth slowed more visibly in the past few months, led by a deceleration in discretionary consumption growth. Meanwhile, mass consumption growth has been holding up. Headline retail sales growth declined to 8.8% YoY in July 2018 from 10.2% YoY in 2017 despite a mild pick-up in CPI, while the volume only recorded 6.5% YoY increase in July.

According to our analysis, in addition to slower cyclical momentum, which tends to have dampen overall discretionary consumption with a lag, we have identified a few other factors that may have exacerbated the ongoing deceleration of discretionary consumption growth –

Negative impact from a sharp slowdown in consumer loan growth has depressed the consumption demand, esp. for selected products.

Delayed impact of decelerated property sales volume growth in the past year may have dampened consumption demand for housing-related products.

Infrastructure investment growth plummeted year-to-date, which may have been a drag on related consumer demand such as catering and traveling.

The plunge in automobile sales, which among other factors, was affected by the “slump” in demand after the previous replacement cycle, also exerted substantial downward pressure on the headline retail sales growth.

In the near term, a stabilization/recovery of discretionary consumer demand hinges on the stabilization of the cyclical momentum. However, the lagged impact of the cyclical weakness, combined with a few other factors listed above, may continue to weigh on retail sales growth in the next few months. In addition, if the pressure for consumer loan tightening moderates, some of the downward pressure on consumption growth may be alleviated. The recent policy push towards rebooting infrastructure investment growth may help lift demand in related sectors. Meanwhile, apart from the cyclical factors, further price cut for automobiles may eventually help stabilize sales growth once the new “equilibrium” for price vs. sales volume is restored.

Over the long term, a meaningful reduction of the effective personal income tax burden and the social security contribution ratio will go a long way in boosting consumer demand. Meanwhile, on the macro level, demand growth driven by mass consumption upgrade may continue to be the bright spot, as the ongoing policy efforts towards improving income distribution will likely be sustained over time.