Food, the switch and the wardrobe

Retail sales in a country, dependent on the collective habits and budgets of millions of households, tend to be quite stable: Imagine an upward-sloping straight line (called the trend line), and monthly sales move along it like a creeper plant along a string. It is only during shocks like the financial crisis of 2008 or the pandemic-driven lockdowns last year that they move far away from the trend line. They then quickly come back to trend, often a different one due to the shock. Global retail sales of goods, after dipping last year, have recovered rapidly, aided by record levels of fisc.....
Retail sales in a country, dependent on the collective habits and budgets of millions of households, tend to be quite stable: Imagine an upward-sloping straight line (called the trend line), and monthly sales move along it like a creeper plant along a string. It is only during shocks like the financial crisis of 2008 or the pandemic-driven lockdowns last year that they move far away from the trend line. They then quickly come back to trend, often a different one due to the shock.

Global retail sales of goods, after dipping last year, have recovered rapidly, aided by record levels of fiscal stimulus given by governments in the developed world.

Production resumption, on the other hand, takes longer, as supply-chains are geographically spread out, complex, and vulnerable to disruptions, either pandemic-related (like at China’s Yantian port a month back or currently in Malaysia’s technology supply-chain) or accidental (like the week-long blockage of the Suez Canal or power outages in Texas). As production lagged the revival in sales, inventory depletion created shortages, exacerbating bullwhip-effects that make apparent demand for inputs seem much higher than the underlying real demand.

However, this situation is now changing. The global goods production is now recovering, and while specific product segments may be affected by shortages of some critical components like semiconductors, Credit Suisse economists expect output by the end of this calendar year to be running 9 per cent higher than at end-2019, faster than the growth in retail sales at that point. Investment-driven demand for goods at a global level remains subdued.

Global sales are currently meaningfully above the pre-pandemic trend, and having almost caught up on the sales lost during the lockdowns last year, we expect them to fall back to trend by the year-end. We expect goods demand in the US to moderate, the EU and UK have mostly caught up on pent-up demand, and China is expected to remain weak. These three regions together account for more than two-thirds of global goods demand.

Retail sales in the US are currently nearly 15 per cent above trend, which is a level reached only once in many decades, and unlikely to sustain. While US households have accumulated significant financial savings in the past year, helped by government handouts, it is likely that as activity restrictions are  eased, spending would switch back to services, where consumption is currently much below trend. Goods demand has also more than caught up on lost sales last year, with even the 15-month average (this includes the lockdown-affected months last year) being significantly above normal.

Illustration: Binay Sinha
Sales in China, on the other hand, are not only much below even a weaker trend visible after 2016 (the trend before that was stronger), but at an aggregate level there is also no evidence of catch-up on lost sales last year, with the 15-month trailing average cumulatively nearly 8 per cent below trend. Recent data suggests continuing weakness, with smartphone and television sales in June 2021 being  lower versus June last year.

This divergence between the US and China is mostly explained by their different fiscal responses: While the US has handed out money to its residents, China has not, with some commentators ascribing this reticence to their fear of hyper-inflation experienced by some parts of China in the 1940s.

As nearly all of the strength in global goods demand is flowing from the US, category-wise trends there can provide insights on possible developments going forward. We find that grocery sales had surged even during the early months of the lockdowns when all other major categories had seen a dip, and have been elevated even after that. As it is unlikely that Americans ate so much more last year, likely reasons are more home-cooking, as restaurants were closed, and pantry stocking.

One of the perplexing themes over the past year has been the surprisingly strong demand for food globally, with prices of traded commodities like palm oil, corn and soya rising sharply despite supply being largely intact. One factor was the replenishment of hog count in China after the culling forced by the African Swine Fever  outbreak in 2019. During the 8- to 9-month period in which the 3kg piglet grows into a 120kg pig, it consumes calories, but does not add to food availability for humans. In a sign that hog stocks are now excessive, prices have fallen by nearly 60 per cent in China this year. The other was a possible buffer-stock accumulation  in Chinese warehouses. The build-up of food inventory in US households as shown by excessive demand for groceries is a third factor. That these trends could be reversing may explain the fall in global palm oil, soya and corn prices in the last two months, though they are still much higher than in prior years.

Some other segments like technology hardware could also see demand fade from current elevated levels: PC and tablet sales are nearly 30 per cent higher than pre-pandemic levels given the rise in work-from-home and online education. As offices and schools restart, demand for new devices may not sustain. Similarly, sales of building materials have been high cumulatively, and may fade now that people can start moving about.

Even as US demand normalises from current elevated levels, in some categories it may take a few months for inventories to normalise, given low inventory-to-sales ratios currently. Indicators of inventories in Europe too are at the lowest levels seen in a decade. The need for restocking is the strongest in the automotive supply chain, where absolute inventories are at multi-decade lows. In other segments the low ratios appear to be driven by above-normal sales though, and may not need much re-stocking. One goods segment where demand is likely to strengthen in developed markets and elsewhere is apparel, where 15-month averages in the US are much below normal: Stuck-at-home, people had fewer occasions to wear new clothes. As activity restrictions lift, wardrobe restocking could be as robust as the earlier pantry stocking.

Extrapolating from these observations, one can expect to see strength going forward in manufacturers of automotive components and apparel exporters, but in several other segments incremental demand could disappoint. By the end of the year, concerns may shift from the current overwhelming fear of shortages and the seemingly incessant rise in prices of hard commodities, to the sustainability of demand for goods.

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