The case against a balance sheet recession
Start with precautionary savings. China’s soft consumption numbers evoke Keynes’ paradox of thrift, in which precautionary high savings in a downturn hurt demand further, encouraging still more savings. Wolfe thinks “zero-Covid PTSD”, including the lethally abrupt reopening process, has pushed up the savings rate, hurting demand, especially for durable goods.
Christopher Beddor and Thomas Gatley of Gavekal Dragonomics take a similar line in a recent note. They point out that consumer, but not business, confidence is worse than what economic fundamentals would predict, probably reflecting lingering pandemic effects. Their chart below shows that while sentiment in central bank survey data usually tracks real activity, the two have come apart lately:
The most likely reason [for poor sentiment] is simply that China’s economy continues to be volatile; if it records several months of consistent improvement, confidence will further normalise and households will revert to earlier consumption and savings rates, as well as deploy those savings in a less risk-averse manner.
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