Pantheon with the note.
The Metric Chinese Policymakers Care About Most is Yet to Recover
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China’s PMIs staged a rebound in May, with both official and Caixin surveys bouncing back from April’s zero-Covid induced weakness. But economic activity remains in dire straits, as we noted here, with sub-50 prints implying that growth slowed month-on-month in May. Worse, for China’s policymakers, is the performance of employment. The decline in output may be moderating, but three of the four PMIs pointed to an accelerating deterioration in Chinese labour markets for May.
Only the official manufacturing PMI showed any improvement in the employment subindex, as shown in our chart below. Even then, employment remained below 50, suggesting more firms were firing than hiring in the sector in May. The situation looks particularly dire in the official non-manufacturing index, likely reflecting the continued collapse of China’s property market, alongside the zero-Covid hit to the services sector.
Official unemployment data for China is sketchy at best. But even on the official measure of urban unemployment, China has seen a clear, and sharp, deterioration this year. The PMIs suggest worse is yet to come, as shown in our chart above. This measure
conceals the worst of the damage, as it ignores the situation for rural workers, particularly the migrant labour force, which acts as the first shock absorber for labour market stress. Youth unemployment has now hit 18.2%, the highest since records began in 2018.
Employment is the key economic variable of concern for policymakers in China, for all that the macro conversation tends to be dominated by discussions of the GDP growth target. Growth is pursued as a means to the end of providing jobs, and raising the standard of living, ultimately bestowing legitimacy on a non-democratic government. The risk of unrest rises as the labour market stalls, and the implicit social contract breaks down.
Discontent among workers has been on the rise since the middle of 2021, when the economy began to slow, thanks to a growing drag from property market restrictions, an energy crisis, and occasional disruptions from zero-Covid policy tightening. Unrest—as measured by strikes and calls for help— seems to have moderated since March, as shown in our chart above. But we think this calm is a mirage, brought about by stringent lockdowns across swathes of China.
Whether by accident or design, the imposition of mobility restrictions, workplace closures, and stay at home orders in April and May would have made it much harder for workers to organise. We think a rebound in worker unrest is likely as restrictions ease, to accompany the more welcome rebound in economic activity. The official manufacturing PMI pointed to continued distress among smaller firms, and the reopening bounce will likely come too late for many of them, with unfortunate consequences for their employees. This will add to pressure on local governments to provide further fiscal relief.
We expect yet another extension of existing policies—reductions in taxes, fees, and social security contributions—to keep employers on their feet. This will add to the disinflationary pressures discussed here, but also risks inflaming tensions anew around Chinese industrial policy, just as the U.S. mulls reductions in trade tariffs.
Chinese price pressures remain muted
The PMIs for May pointed to slower goods price inflation, but an acceleration in services inflation, consistent with reopening dynamics elsewhere in the world. Composite PMI output price indices, however, fell in May, suggesting a pullback in core inflation, and a downside risk to our inflation forecast, which expects stable core inflation of 0.9% year-over-year in May.
We think headline inflation edged higher in May, to 2.2% year-over-year, thanks to larger contributions from energy and food prices. Domestic fuel subsidies are still being reduced—a symptom of the fiscal pressure facing local governments—and policymakers
have intervened to prop up pork prices, which were heading back to record lows and threatening long term food security. Inflation should then climb further until Q4, as high producer price inflation is belatedly passed on, but we expect it to peak at a little over the target rate of 3%. The PBoC can safely treat current pressures as transitory.