With China trying to tackle a surge in Covid-19 cases and grappled with the ongoing shipping crisis, the economy of the country slowed down in August.
An official survey denoting manufacturing activity dropped to 50.1 in August compared to 50.4 in July. The number was above the 50 point mark which marks growth while numbers below that denotes contraction. However, the expansion in manufacturing was the slowest growth since the beginning of the pandemic.
The number for the service sector of the economy – which now accounts for a larger proportion of the gross domestic product (GDP) of the country, was even worse. The non-manufacturing Purchasing Managers’ Index dropped to below 50 at 47.5 compared to 53.3 in July which denoted the first contraction for the sector since February 2020.
Throughout 2020, the Chinese economy recovered from the initial pandemic hit much faster than any other major economy in the world and recorded GDP growth last year while al;l of the peer economies contracted.
However, rising Covid-19 cases caused by the Delta variant of the coronavirus and the zero Covid-19 approach of the country has stalled business activity in recent weeks.
Authorities were prompted to take dramatic steps to prevent spreading of infections following the worst coronavirus outbreak in a year in the country. Cities were locked down, flights were cancelled and trade was suspended. While the strategy of strict restrictions has managed to contain the pandemic resurgence, the economy has taken a hit.
“The latest surveys suggest that China’s economy contracted last month as virus disruptions weighed heavily on services activity,” Julian Evans-Pritchard, senior China economist at Capital Economics, wrote in a Tuesday research note.
The disruption in the services sector was entirely responsible for the the non-manufacturing PMI plunge as “movement restrictions were reimposed and consumers became more cautious amid the renewed virus flare-up”, he added.
Matters have been worsened by the ongoing issues with the global supply chain. Even as manufacturing and consumer demand picked up significantly, the supply chain chaos has disrupted global trade for months now. And container shortages, coronavirus induced factory closures in Vietnam and the lingering impact of closure of port in China has further upended global supply chains.
After a dock worker tested positive for Covid-19, authorities shut down a terminal at the Ningbo-Zhoushan Port south of Shanghai for weeks, which piled on to an existing backlog that was caused earlier by a shutdown in southern China, where some of the busiest container ports of te world are located.
“There continues to be signs of supply shortages in the survey breakdown, with delivery times lengthening further while firms continued to draw down their inventories of raw materials,” Evans-Pritchard wrote.
Jeffrey Halley, senior market analyst for Asia Pacific at Oanda, wrote in a note on Monday that regulatory clampdowns in China — particularly in the tech and education sector — “are impacting both employment concerns in those affected and broader consumer confidence as fears of wider interventions rise.”
The weak report for August is expected to be reversed in September, according to Evans-Pritchard, as China had controlled Covid-19 cases. However, he pointed to tight credit conditions and noted it as posing a “growing drag.”
“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,” he added.
(Adapted from CNN.com)