Signs of severe recession as worse still to come for China’s economic data – Kevin Lings

China’s worse decline in its manufacturing and services PMI ever recorded shows the real impact of the coronavirus. And it would appear that China’s economic data are going to get a lot worse over the coming weeks.

By Kevin Lings*

China released its official February 2020 PMI manufacturing and non-manufacturing (services) index on Saturday. The manufacturing index plunged from 50 index points to 35.7, while the non-manufacturing crashed from 54.1 index points to 29.6 – both as a direct result of the coronavirus. The latest fall-off in the manufacturing as well as services PMI is the largest decline ever recorded and consistent with a severe recession. Although most analysts expected the PMIs to weaken sharply in February, the outcome was much worse than expected and likely to result in further downward revisions to China GDP growth estimate for Q1 2020.

The official PMI data in China is released by China’s National Bureau of Statistics.

The sharp weakening of China’s PMI in February was broad based – for example the construction PMI fell from 59.7 to 26.6, while there was pronounced weakness in manufacturing exports, supplier deliveries, and new orders. A similar pattern of weakness is evident in the services sector.

While China’s coronavirus data suggest that the rate of new infections has slowed (see chart), many parts of the country continue to experience severe travel restrictions, while some of China’s key trading partners in the region have reported a significant escalation in their own rates of new infections (see chart on South Korea).

Consequently, China is not able to quickly re-start factories, construction, retail etc. At this stage there is a clear risk that the sharp fall-off in China economic activity is extended in March, thereby further disrupting global supply chains.

Currently, there are two areas of intense focus as we try to assess the impact of the coronavirus on the world economy. Firstly, how quickly is China able to resume industrial, consumer and financial activity now that their rate of new infections appears to have stabilised? And secondly, is the global spread of the virus systematically getting out of control?

As at end of February 2020, a total of 7,616 people were infected with the coronavirus outside of mainland China. This compares with less than 1,000 on 18 February 2020. Furthermore, 66 countries are now reporting infections, which is up sharply from 40 countries on 26 February and 27 countries on 10 February.

It would appear that China’s economic data are going to get a lot worse over the coming weeks. But once the extremely low base of economic activity is reflected in the data, the pace of recovery could be very impressive assuming the other major economies have managed to control the spread of the virus in their economies.

  • Kevin Lings is chief economist at Stanlib. 
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