China’s Economy Takes Hit from Delta Virus as Services Contract
China’s economy took a knock from the delta virus outbreak in August, adding to signs of a slowdown in growth in the second half of the year and fueling speculation of more central bank support.
The official purchasing managers surveys showed the services industry contracted for the first time since February 2020 as consumers cut back on spending and travel amid new virus curbs. The manufacturing purchasing managers’ index fell slightly to 50.1 from 50.4 in July, partly due to supply-chain disruptions.
Beyond the virus outbreaks, China’s recovery is also showing signs of faltering in the wake of recent regulatory crackdowns and weak demand at home. The central bank has signaled it may provide more targeted support -- such as cutting the reserve requirement ratio for some lenders -- while the government has pledged to accelerate fiscal spending in the second half of the year, helping to cushion growth.
“The service sector was shocked by the delta variant, extending the ongoing theme of uneven recovery,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd in Hong Kong. “It is pretty clear that the authorities would still support growth. We still pencil in another RRR cut before the end of 2021, October the earliest.”
China’s equity benchmark, the CSI 300 Index, dropped as much as 1.5% to its lowest since Aug. 20 on Tuesday.
What Bloomberg Economics Says...
The plunge in China’s non-manufacturing PMI into contraction in August shows the delta outbreak impact was much more severe than expected. The tumble was driven by weakness in services, even as policy support buoyed construction. A relatively mild slowdown in the manufacturing PMI -- which remained in expansion -- offered some reassurance about the health of the broader recovery.
Chang Shu, chief Asia economist
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The government imposed stringent measures, including travel curbs, mass testing and quarantines, for about a month to bring a new wave of Covid cases under control, the most widespread outbreak since the initial flareup in 2020. Confidence among smaller businesses in the month weakened and consumers cut back on spending. The partial closure of China’s second-biggest container port also disrupted trade.
“Today’s data again reflected the outsized and asymmetric shock on the service sector from Covid-related restrictions,” said Liu Peiqian, China economist at Natwest Markets in Singapore. While there’s room for a rebound in services PMI in coming months as the outbreak is now under control, any future Covid outbreak domestically will continue to weigh on the sector, she said.
Weaker demand weighed on manufacturing with the sub-index measuring new orders dropping below 50 for the first time since February 2020, signaling a contraction.
Exports also took a knock despite some overseas buyers placing their Christmas orders earlier than in previous years, worried about the risk of delayed shipments. The new export orders sub-index declined to 46.7 in August from 47.7 in July. Exporters have faced a number of challenges this year, like container shortages and excessive freight charges.
Other key highlights from the PMI data:
- Sub-index for manufacturing jobs was unchanged at 49.6; non-manufacturing employment decreased to 47
- Construction sub-index rose to 60.5 from 57.5 in July
- Price pressures on manufacturers eased in the month, with input and output prices declining slightly
- The sub-indexes tracking large and medium manufacturers stayed above the 50-mark, indicating relatively stable operations, while the sub-index for small enterprises contracted for the fourth straight month in August
- For a breakdown of the PMI data, click on this table
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