China’s gigantic services sector has just contracted at the second-fastest pace on record as Covid lockdowns hit businesses hard.
The Caixin Purchasing Managers’ Index, a closely watched indicator for assessing the state of the economy, fell to 36.2 in April from 42 in March, according to a survey released Thursday by IHS Markit. A reading below 50 indicates contraction, while anything above this gauge indicates expansion.
The service sector represents more than half of the country’s GDP and more than 40% of its employment. And with survey data showing China’s manufacturing sector also shrank last month, the world’s second-largest economy shrank in April.
While conditions could improve this month as Covid infection rates decline and authorities try to limit damage to the economy, large parts of Beijing have just been put under longer restrictions. stringent and some economists now expect China’s GDP to decline in the second quarter.
Analyst: ‘Shanghai lockdown will shake China’s economy’
The nation’s capital has effectively shut down its largest district, Chaoyang, suspending transportation within it and encouraging 3.5 million residents to work from home as part of its latest efforts to tackle Covid-19 cases, reports said. local authorities announced on Wednesday.
The decline of nearly 6 points in service activity in April was only the second after the collapse of February 2020, when China’s economy nearly came to a standstill as it struggled to contain the initial coronavirus outbreak that started from Wuhan. During this month, the Caixin services PMI dipped to 26.5 from 51.8 in January.
Companies in the world’s second-largest economy were already grappling with rising energy and raw material costs, when Covid lockdowns further crippled their operations.
It has also become more difficult for businesses to pass on higher prices to consumers, due to the impact of Covid restrictions on customer demand. This resulted in an even greater decline in employment.
“Some companies, hit by falling orders, have laid off workers to cut costs,” said Wang Zhe, senior economist for Caixin Insight Group. The service sector employment measure has been below 50 for four straight months, the survey showed.
The data came just hours after China reported a sharp drop in tourism spending for National Labor Day.
Spending by tourists was only 64.7 billion yuan ($9.8 billion) over the five-day holiday, down 43% from the same period last year, according to a statement. of the Ministry of Culture and Tourism on Wednesday evening.
People made 160 million domestic tourist trips during the holidays, down 30 percent from a year earlier.
The data again highlights how China’s zero-Covid policy has weighed heavily on its economy.
On Saturday, government PMI surveys indicated that both industrial and non-manufacturing activities fell in April to their worst levels since February 2020.
“Recent mobility trends suggest that China’s growth momentum deteriorated significantly in April,” Fitch Ratings analysts wrote on Tuesday. They expect GDP to contract in the second quarter, before output picks up in the second half.
Nomura analysts also warned last month of a growing risk of a “recession” in the second quarter, as shutdowns, a shrinking real estate sector and slowing exports hit the economy hard.
As the highly transmissible variant of Omicron spreads rapidly in China, the country grapples with its worst outbreak in more than two years. So far, at least 27 Chinese cities are under full or partial lockdown, which could affect up to 185 million people across the country, according to CNN’s latest calculations.
This includes Shanghai, the country’s main financial center and a major manufacturing and shipping hub. The city has been closed since March 28. Although authorities began lifting some restrictions last month, more than 8 million residents are still banned from leaving their residential compounds.
The Chinese government is still adhering to its strict zero Covid policy more than two years after the initial outbreak – at a time when the rest of the world is learning to live with Covid. The policy involves mandatory mass testing and strict lockdowns to contain the spread of the virus.
But the economic costs are rising.
Many economists have lowered their Chinese GDP growth targets for this year, citing risks from the zero-Covid policy. Last month, the International Monetary Fund lowered its growth forecast for China to 4.4%, well below the government’s official target of around 5.5%.
In recent days, Chinese leaders have repeatedly tried to reassure the public about fixing the economy. Last week, President Xi Jinping called for an infrastructure spending spree to promote growth. And the Communist Party’s Politburo on Friday promised “specific measures” to support the internet economy.