China's industrial sector recoils to six‑month low. Is it time for a policy boost?
The official industrial PMI index in China slumped to 49 points, as the National Bureau of Statistics reported on Sunday. This is a weaker outcome than the median forecast of 49.6 points, projected by economists surveyed by Bloomberg. The PMI score was the same as in June; hence, the industrial sector's performance hasn't improved in the last six months.
10:46 AM EST, December 31, 2023
Economic activity in China declines
The service sector’s activity index provides a glimmer of hope with a rise to 50.4 in December, up from 50.2 in November. The agency attributed this rise to the expansion in the construction sector, mainly due to vigorous infrastructure investments initiated by the government in recent months. A score above 50 indicates expansion compared to the previous month, and a score below this threshold suggests contraction.
The PMI data signposts clear signs of a weakening Chinese economy towards the end of the year. This could force monetary and fiscal authorities into action. In 2024, China's leaders are committed to sustaining a growth-oriented approach.
Weak domestic demand and declining imports
In a discussion with Bloomberg, Xing Zhaopeng, a senior strategist at the Australia & New Zealand Banking Group, highlights how the "weaker than expected PMI data shows the momentum of economic growth is slowing again, influenced by the low season and winter weather." So, a central bank interest rate cut in early January is a real possibility.
"A decline in foreign orders plus insufficient domestic demand" were concerns flagged by some companies in the official PMI survey, argued NBS analyst Zhao Qinghe.
This demand and consumer confidence slump is also evident in the deepening deflation of consumer prices and dropping imports. Furthermore, experts predict a continuation of the crisis in the real estate market which will further curb demand for goods, from furniture to home appliances.
The new factory orders index, which slipped to 48.7, confirms the weakening demand. The new export orders index also contracted, falling to 45.8.
Europe trending towards stagnation
These less-than-ideal statistics from the Chinese economy are not a good sign for global economic health. Stagnation in China could lead to persistently low PMI readings for Europe. In December, the industrial PMI for the Eurozone was 44.2 points, unchanged from the previous month despite expectations of an increase.
"Economic activity in the euro area fell faster in December, ending the fourth quarter with the sharpest drop in 11 years (excluding the pandemic months of 2022). This decline was noted in both the manufacturing and services sectors. Despite a marked decline in new orders in both sectors, production backlogs are depleted. Employment fell for the second month consecutively, as companies downsized in response to a shrinking order book and ongoing poor forecasts for 2024," noted the S&P agency, which published the data.
