A relaxed growth rate of wages may stifle consumption in China and then act as a drag on the country’s economic momentum, according to a recent report by Goldman Sachs. The report opposes views suggesting that China ease salary growth to sustain the nation’s competitive edge.
Consumption has become a major drive for China’s economy, contributing 73.4% to the country’s GDP for the first half of 2016, or up 13.2% YoY, mainly thanks to a fast growth of wages. During 2007-08, the average wage in China has increase by 16% YoY.
However, since 2012, the figure has gone all the way down to 7.3% as of 2016’s first quarter. The report expects that China’s salary growth rate would be slowed to 6.7% next year and the slide would spread to household consumptions.
The report also points out that the Chinese government may roll out more favorable policies to stimulate consumption.
According to Goldman Sachs, China’s unemployment rate is expected to hit 6.5% this year, roughly 1.5 percent points’ higher than the official forecast.
The study also shows that China’s salary growth rate is negatively correlated with the lagged unemployment ratio, namely referring to every 1% increase in lagged unemployment rate leading to a 1.4% decrease in actual salary growth rate.