China’s economic recovery woes increase as services sector activity contracts

China’s services sector activity contracted in August to the second-lowest level on record, further adding to evidence of a slowing economy after the key indicator missed expectations.

The official non-manufacturing purchasing managers’ index (PMI) – which measures morale in the services and construction sectors – fell to 47.5 in August, from 53.3 in July, data from the National Bureau of Statistics (NBS) showed on Tuesday.

The figure was below the median forecast of a Bloomberg survey of analysts, which had predicted a fall to 51.9. It is the lowest figure since the index slumped to an all-time low of 29.6 in February 2020 after China began lockdowns to control the initial spread of the coronavirus pandemic.

The slowdown was driven by a steep fall in the services index from 52.5 to 45.2, attributed to coronavirus restrictions being reimposed and consumers becoming more cautious. The construction index, though, rebounded to 60.5 in August from 57.5.

A reading above 50 indicates growth in sector activity, while a reading below the mark represents contraction. The lower the reading is below 50, the faster the pace of contraction.

“This wave of [coronavirus] outbreaks in many provinces has dealt a significant blow to the service sector that is still on the way to recovery,” said Zhao Qinghe, a senior statistician at NBS.

Zhao, though, did point out that companies were optimistic about the recovery of the service sector in the near future as the outbreaks have been brought under control, while both the Mid-Autumn Festival in September and the National Day holiday in October are approaching.

The official manufacturing PMI – a survey of sentiment among factory owners – fell to 50.1 in August from 50.4 in July. The figure was also below exceptions in the Bloomberg survey which had predicted a fall to 50.2.

It is also the lowest figure since the index slumped to an all-time low of 35.7 in February last year as both the new orders and export orders components fell below 50. The output component also edged down slightly, hinting at slower growth in industry, while the survey also pointed towards signs of supply shortages.

NBS statistician Zhao, though, also said manufacturing companies held a positive view about the outlook as the impact of Delta variant outbreaks and floods are abating.

“The latest surveys suggest that China’s economy contracted [in the] last month as virus disruptions weighed heavily on services activity. Industry also continued to come off the boil as supply-chain bottlenecks worsened and demand softened,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

“Most of this weakness should reverse in September. With domestic virus cases now back in the low single digits, many regions have started to relax containment efforts. But we don’t think the latest drop in the PMIs should be entirely shrugged off as a temporary hit from the Delta wave.

“There were signs in the July data of a growing drag from tight credit conditions, which probably extended into August.

“Meanwhile, foreign demand for Chinese consumer goods appears to be coming off the boil. The upshot is that, even looking through the volatility caused by China’s recent virus flare-up, the economy looks to be coming back to Earth following a period of above-trend output.”

China’s economy had staged an impressive recovery from the lows of the coronavirus pandemic, growing by 7.9 per cent in the second quarter of 2021 compared with a year ago, while in the first half of the year, it grew by 12.7 per cent year on year.

But economists have since slashed their economic outlooks for China as the Delta variant spreads across the world’s second-largest economy after export, retail sales and industrial production growth all missed expectations in July.

Earnings at China’s industrial firms in July also slowed for the fifth straight month due to elevated raw-material prices and supply-chain constraints from extreme weather, as well as sporadic coronavirus cases.

The composite PMI, which includes both manufacturing and services activity, fell to 48.9 in August from 52.4 in July. Apart from last year’s lockdown, the reading was the weakest since November 2008.

Additional reporting by Orange Wang