Dawn before the light, has the domestic economy hit bottom?

The National Bureau of Statistics has just released the macroeconomic data package for August. In terms of absolute growth rates, although domestic consumption remains weak, several key indicators (including social retail, CPI, PMI, and industrial added value) have shown a month-on-month improvement trend. Dolphin Research believes that the bottom of the domestic economic cycle in the short term may have already passed.

Moreover, in terms of policies, various regions across the country have successively announced a series of heavyweight support policies for the real estate sector. The central bank also unexpectedly lowered the reserve requirement ratio yesterday. The possibility of further improvement in domestic consumption and economic conditions is very high.

On the other hand, the relative risk may lie in the demand for travel and tourism activities, which are currently experiencing high levels of prosperity. It remains to be seen whether they can maintain their strength after the summer vacation and avoid becoming a drag on growth. The main points are as follows:

1. Overall consumption is starting to heat up: The total social retail sales in August reached nearly 3.8 trillion yuan, with a year-on-year growth rate of 4.6%. Excluding the impact of last year's base fluctuation, the compound growth rate since 2019 in August was 2.9%. Although it is still significantly weaker than the growth rate of over 4% at the beginning of the year, there are signs of marginal improvement compared to July. Among the largest single sub-items with a share of over 10%, the growth rate of automobile sales has significantly increased to over 5%, and the favorable policy of continued exemption of purchase tax for new energy vehicles has taken effect.

2. The growth rate of online penetration is slowing down, but it remains resilient: With the overall recovery of retail, the adjusted growth rate of online physical retail in August also rebounded slightly to 6.1%, achieving nearly 1 trillion yuan in retail sales for the quarter. The cumulative year-on-year growth rate from January to August was 9.5%, with the best performance in the clothing category related to offline and the worst performance in the food category.

However, the increase in online retail penetration in July and August has slowed down continuously, with increases of only 0.7% and 0.5% respectively, which is significantly lower than the levels of the same period in 2021 and 2022. This is also in line with Dolphin Research's expectation that after the offline recovery at the beginning of the year, the relative advantage of online would weaken. However, the actual situation is better than Dolphin Research's pessimistic expectation of zero or negative growth in online penetration before the year.

1. The booming offline consumption has cooled down slightly, and sustainability is the key: Since the May Day holiday ignited domestic travel and cultural tourism demand, the demand for various offline activities such as catering, hotel and travel, and movies/performances has remained high. This is consistent with our expectation that offline service consumption would be stronger than commodity consumption.

However, as the May Day and summer vacations have passed, it can be seen that the catering revenue in August was 421.2 billion yuan, with a month-on-month decline and a year-on-year growth rate of 12.4%, indicating a slight cooling down of offline catering consumption.

On the other hand, the growth rate of various service-oriented and non-physical consumption items such as tickets and transportation has reached 28.5%. Although the absolute growth rate is still high, it has slowed down by nearly 16 percentage points compared to July, indicating a slight decrease in the enthusiasm for offline travel. The sustainability of travel demand during the National Day and Spring Festival holidays will be the key.

1. In terms of different product categories, both in terms of absolute growth rates and changes in month-on-month trends, products with social and display attributes, represented by cosmetics and gold and silver jewelry, have performed the best. In addition, driven by the release of new Android devices, the growth rate of communication products in August also increased significantly. As for the performance of daily necessities and household appliances, it was relatively poor.

2. The real estate market is still bottoming out, but improvement is expected under the stimulus of major policies: In August, the area of new residential construction continued to decline slightly on a month-on-month basis, and although the sales amount of new houses stopped falling on a month-on-month basis, it was still less than 700 billion yuan, compared to a drastic reduction in scale in February and March. The scale of developer financing also decreased on a month-on-month basis. Various key indicators of the real estate market in August are still exploring the bottom.

However, since early September, both the central and local governments have successively introduced measures to reduce the down payment ratio for home purchases, lower mortgage loan interest rates, and implement stricter criteria for first-time homebuyers. In addition to the four first-tier cities, most cities have also relaxed their restrictions on home purchases. It can be said that this is another round of the most powerful stimulus since the "three arrows" of the real estate market last year. Subsequent marginal improvements are also basically certain.

In summary, from the macroeconomic data of this month, except for the high-end travel industry, which needs to pay attention to the sustainability of future demand, all other economic indicators have shown signs of marginal improvement. Moreover, the domestic economy cannot remain sluggish forever, and a subsequent recovery is inevitable and may already be underway.

The following is the main content:

1. Consumer sentiment is warming up, confirming the bottom of the domestic economy?

In terms of overall market data, the total social retail sales in China in August approached 3.8 trillion yuan, with a year-on-year growth rate of 4.6%, showing a significant rebound compared to the previous two months. Considering the significant fluctuations in the upper limit of the base in 2022, based on the compound growth rate since 2019, the compound growth of social retail in August increased by 2.9%, although it is still lower than the level in the first half of this year, it has shown signs of recovery compared to the compound growth of 2.7% in July.

When combined with the year-on-year or month-on-month growth rates of various indicators such as the PMI production index, CPI/PPI price index, and industrial added value in August, Dolphin Research believes that in the short to medium term, the lowest point of the domestic economic cycle has probably passed.

Among them, the highest proportion is the automobile retail sales, which accounts for more than 10%, and the year-on-year growth rate has rebounded to 5.1%, exceeding 410 billion yuan, which is one of the driving forces behind the recovery of social retail. However, excluding automobiles, the growth rate of other daily consumption still reached 4.6%.

1. Online retail follows the overall recovery, but the penetration rate is slowing down

With the overall recovery of social retail, the adjusted growth rate of online physical retail in August also rebounded slightly to 6.1%, achieving nearly 1 trillion yuan in retail sales for the quarter. The cumulative year-on-year growth rate from January to August was 9.5%, with growth rates of 8.4%, 10.9%, and 9.2% for the categories of food, clothing, and daily necessities, respectively. Among them, clothing-related categories performed the best, while food-related categories performed the worst. **

However, as we expected at the beginning of the year, due to the recovery of offline consumption, the growth rate of online retail penetration slowed down in July and August, after the promotion season in May and June, with only 0.7% and 0.5% respectively. It is clear that the increase in online penetration rate in each month of 2023 is significantly lower than that of 2021 and 2022.

But the slowdown is still an improvement. Compared with Dolphin Research's expectation of zero improvement or even marginal decline in online penetration rate before the year, the actual situation is more resilient than expected.

3. Offline sales slightly declined, sustainability is key

After the May Day holiday ignited domestic travel and cultural tourism demand, the demand for various offline activities such as catering, hotel and travel, and movies/shows continued to rise, which is consistent with our expectation that offline service consumption would be stronger than commodity consumption.

However, as the May Day holiday and summer vacation passed, it can be seen that the catering revenue in August was 421.2 billion yuan, a decrease from July, and the year-on-year growth rate also dropped to 12.4%, indicating a slight cooling down of offline catering consumption.

On the other hand, the growth rate of various service-oriented and non-physical consumption, such as tickets and transportation, was 28.5%. Although the growth rate is still high due to the low base of last year, it has slowed down by nearly 16% compared to July. This also indicates a slight decline in offline service consumption.

However, combining high-frequency data and guidance from relevant companies, the demand for cultural tourism travel in the third quarter remains strong, and the key is whether the demand can continue during the fourth quarter and the Chinese New Year period next year.

4. Social-oriented commodity consumption remains strong, daily necessities and home appliances are the weakest

In terms of product categories, both in terms of absolute growth rate and changes in MoM trend, optional products represented by cosmetics and jewelry with social display attributes performed the best. In addition, driven by the release of new Android devices, the growth rate of communication products in August also increased significantly. And daily necessities and home appliances have also shown some improvement on a MoM basis, but they are still the weakest.

5. Real Estate Still Bottoming Out in August, Awaiting the Effectiveness of Policies

As mentioned above, although the overall consumption in the country is still in a downturn, there is at least a marginal warming trend. However, the real estate sales, which are crucial to the overall economy and consumer confidence, remained at the bottom in August.

The newly started residential area in August was about 51 million square meters, which continued to decline slightly on a MoM basis. Although the sales amount of new houses has stopped falling on a MoM basis, the absolute value is less than 700 billion yuan, which is still a significant drop compared to the transaction volume in the first few months of this year. The good news is that the real estate-related data in August did not worsen further, but it still lingers at the historically lowest point.

However, since early September, both the central and local governments have successively introduced measures to reduce the down payment ratio for home purchases, lower mortgage interest rates, and implement stricter qualification standards for first-time homebuyers. In addition, except for the four first-tier cities, most cities have also relaxed their restrictions on home purchases.

Since the end of August, it has been the most significant round of real estate stimulus since the "three arrows" of real estate policies 22 years ago, and the subsequent real estate sales will inevitably show marginal improvement. In summary, whether it is consumption, inflation, industrial market, or real estate sales, it is highly likely that they have already hit the bottom. Even if a significant reversal is not expected in the future, there is a high probability that things will gradually improve.

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