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Contraction in China factory activity extends into a fourth month

The sunset glow is seen over buildings and a ferris wheel on May 13, 2022 in Beijing, China.

Vcg | Visual China Group | Getty Images

China's factory activity contracted for a fourth consecutive month in July, while non-manufacturing activity slowed to its weakest this year as the world's second-largest economy struggles to revive growth momentum in the wake of soft global demand.

The official manufacturing purchasing managers' index came in at 49.3 in July — compared with 49.0 in June, 48.8 in May and 49.2 in April — according to data from the National Bureau of Statistics released on Monday. July's reading was slightly better than the 49.2 median forecast in a Reuters poll.

Monday's figures also showed China posting its weakest official non-manufacturing PMI reading this year, coming in at 51.5 in July — compared with 53.2 in June, 54.5 in May and 56.4 in April. A PMI reading above 50 points to an expansion in activity, while a reading below that level suggests a contraction.

"Although China's manufacturing PMI rebounded to 49.3% this month, some enterprises in the survey reported that the current external environment is complicated and severe, overseas orders have decreased, and insufficient demand is still the main difficulty facing enterprises," Zhao Qinghe, a senior NBS official, wrote in an accompanying statement Monday.

These readings for July point to the "tortuous" economic recovery that China's top leaders described last Monday, which the Politburo attributed to insufficient domestic demand, difficulties in the operation of some enterprises, many risks and hidden dangers in key areas and a grim and complex external environment.

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Employment sub-indexes for both manufacturing and non-manufacturing sectors declined in July, pointing to lingering softness as youth unemployment hit successive record highs in China. The service industry — a major sector that hires young workers — sub-index slowed 1.3 percentage points in July from the previous month, according to the NBS.

More worryingly, business expectation among the non-manufacturing sectors declined from the previous month.

A similar production and business activity expectation index for manufacturing sectors, though, saw an increase of 1.7 percentage points from the previous month, which the NBS attributed to policy support to grow private enterprises and expand domestic demand.

The NBS said construction activity, which declined 4.5 percentage points in July from the month before, was hit by extreme weather conditions.

"Downward pressure on manufacturing eased slightly. But this was more than outweighed by a sharp deceleration in construction and cooling services activity," said Julian Evans-Pritchard, head of China at Capital Economics.

"Policy support should drive a turnaround later this year. But with officials taking a restrained approach to stimulus, any reacceleration in growth is likely to be modest," he added.

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Still, there were some nascent green shoots.

There were month-on-month improvements in the new orders and raw materials inventory sub-indexes, which helped underpin the slightly better-than-expected manufacturing PMI reading.

The purchase price index and ex-factory price index of major raw materials saw meaningful increases from the previous month, the NBS said, pointing to an improvement in pricing power.

Correction: This story was updated to correct the month for the latest PMI data.

Services PMI jumps to 62.3 in July, highest in more than 13 years

India's services activity spiked sharply to 62.3 in July from a Purchasing Managers' Index (PMI) of 58.5 in June, according to data released by S&P Global on August 3.

At 62.3, the July services PMI is the highest print in over 13 years. The last time it was higher was in June 2010. It has also stayed above the key level of 50 that separates expansion in activity from a contraction for 24 months in a row.

The PMI is a survey-based indicator based on the responses of around 400 service companies. The sectors it covers includes non-retail consumer services, transport, information, communication, finance, insurance, real estate, and business services. An index is calculated for each sector, all of which are then combined to provide an overall PMI figure.

Given that the PMI measures change in activity from the previous month and is seasonally adjusted, it is seen as a good indicator of the momentum in economic activity. Further, it is the most immediately available data point – the PMI for any given month, both for the services and manufacturing sectors, is released in the first week of the subsequent month.

In comparison, official data on economic activity – such as the Index of Industrial Production or the index of eight core industries – are released with a lag of a month or more. As such, PMI data is seen as a lead indicator of the state of the economy and policymakers often rely on it to inform their decisions.

The latest services PMI data comes two days after S&P Global said the manufacturing PMI eased slightly to 57.7 in July from 57.8 in June. As a result of the significant increase in the services PMI, the composite PMI - which is a combination of the manufacturing and services indices - rose to 61.9 from 59.4 in June.

July services activity

The sharp up-turn in the services PMI in July was down to stronger demand conditions, which boosted new orders. As per S&P Global's survey, the improvement in demand for Indian services in July was the most in more than 13 years during July, with around 29 percent of respondents reporting higher intakes of new business.

International orders also picked up and posted the second-highest increase since the series started in September 2014, with demand growing the most in Bangladesh, Nepal, Sri Lanka, and the United Arab Emirates.

"The broad increases in sales across the domestic and international markets are particularly welcoming news, especially in light of the challenging global economic scenario," noted Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.

Even though pressure on service providers' capacities only increased slightly in July, S&P Global said its survey showed staff hiring continued at a pace "broadly similar" to that in May and June.

Price pressures

While policymakers will be enthused by the rising activity levels, higher prices will be a dampener. In July, services providers' input costs rose at the fastest pace in 13 months, with food, labour, and transportation costs being noteworthy.

However, while prices charged to customers were also increased, they rose at the slowest rate in three months.

"Anecdotal evidence highlighted cautious pricing strategies among survey members, owing to efforts aimed at preventing any negative impact on new business," S&P Global said.

The sharpest increase in input costs was seen in consumer services, while real estate and business services saw the highest rise in prices charged to customers.

The Reserve Bank of India (RBI), which will announce its next interest rate decision exactly one week later on August 10, has left the policy repo rate unchanged at 6.5 percent so far in 2023-24.

Also Read: Nomura pushes back RBI rate cut call by 4 months, hikes FY24 inflation forecast by 50 bps

However, headline retail inflation has broken its falling streak and is expected to crash past the upper-bound of the central bank's 2-6 percent tolerance band in July, data for which will be released on August 14, on the back of wildly higher vegetable prices, particularly of tomatoes. As such, while the Monetary Policy Committee is not expected to increase the repo rate again - it had done so by 250 basis points in 2022-23 - calls for a rate cut are being pushed back by some economists.