Recovery Dampened by Weak Consumer Demand
China’s post-COVID economic recovery has been dampened by weak consumer demand, leading to sales falling short of forecasts. This trend poses challenges for companies operating in China, despite efforts by Beijing to stimulate economic growth. The consumer demand remains weak even as the economy tries to regain its footing.
Nike Reports Weaker-than-Expected Sales in China
In its fiscal second-quarter report, Nike reported weaker-than-expected sales in China. While the sports apparel giant beat earnings views, its revenue gain of 1% to $13.39 billion fell short of the forecasted $13.43 billion. Greater China sales rose by 4% to $1.86 billion, but this growth was below expectations, signaling a slowdown from the previous quarter.
Challenges Faced by Nike and Rivals
The disappointing sales figures from Nike have had a domino effect on its rivals. Nike stock declined more than 10%, while Adidas and Under Armour fell 5% and 3% respectively. Foot Locker, which relies on Nike products in their stores, also experienced a 4% decline in its shares. These results highlight the challenges faced by companies operating in the Chinese market.
Consumer Demand and Apple’s Experience
Apple, the technology giant, also experienced a decline in quarterly revenue in China. The revenue in China, its third-largest market, fell 2.2% to $15.1 billion, well below the Wall Street expectation of $17 billion. Apple has had to contend with flagging consumer demand as well as Beijing’s decision to ban the use of iPhones by government employees. Additionally, domestic customers are opting for local Chinese tech brands over foreign names.
China’s Languishing Economy and Concerns
The warnings from Nike and Apple indicate that China’s economy continues to languish even after the removal of strict COVID-19 policies. Despite the central government’s stimulus efforts, key headwinds persist, particularly in the indebted property sector. Concerns have been raised about a potential “Lehman” moment, which has led to decreased consumer confidence, less spending, and increased precautionary savings. Signs of deflation are also emerging.
Implications for US Companies and Potential Gain
Bank of America strategists have warned about the risks posed to a range of US companies due to China’s stalling economy. These companies include Applied Materials, Broadcom, Wynn Resorts, and Qualcomm. However, China’s economic struggles could benefit the US economy, potentially reducing inflationary pressure. Market veteran Ed Yardeni suggests that China’s weak economy contributes to moderating goods inflation without triggering a recession in the US, referring to it as “immaculate disinflation.”