Pantheon with a nice note. Hoocoodnode?
Reality Reasserts Itself in China, as the Reopening Rebound Fades
There are 1477 words left in this subscriber-only article.
Get your first month for $1
China’s reopening boost is already fading, and although stimulus is coming through in the data, it doesn’t seem to be enough to offset the many headwinds plaguing China’s economy. We should still see an improvement in Q3, relative to Q2, but it is clear that the rebound will be a modest one. The global economy cannot count on China to save it from recession this time.
Manufacturing surveys showed slower growth or even declining output growth in July, after a healthy bounce in June. The official manufacturing PMI fell to 49.0, from 50.2, and the Caixin survey dropped to 50.4, from 51.7. The relaxation of zero-Covid restrictions drove a short-lived recovery in May and June, propelled by the backlog of orders built up during lockdown. As those backlogs are cleared—with the official PMI’s subindex falling to its lowest since February 2020—the support for output falls away.
The clearing of order backlogs has coincided with a drop in new orders, both domestically and\ externally. In part, this reflects fading global demand, as energy costs and rate hikes take their toll on major trade partners. But it also reflects the fading of the reopening bounce, as supply chains normalise.
The hit to manufacturing is not the result of rising Covid cases, in our view, at least not primarily. Supply stresses look minimal. Input and output prices fell sharply in July, particularly official input prices, which plunged to 40.4, from 52.0. This looks like a chiefly demand-driven story.
The other tailwind for growth at the moment is meant to be fiscal stimulus, but it is falling short. NBS commentary revealed that some manufacturing sectors did better in July, with the autos sector among them. Support from subsidies and tax cuts for car purchases must receive some of the credit. But clearly it is insufficient to offset other headwinds facing the manufacturing sector.
Stimulus is also being overwhelmed in the nonmanufacturing data. The official non-manufacturing PMI fell to 53.8, from 54.7 in June, despite further gains in the construction subindex, to 59.2, from 56.6, which suggests infrastructure spending is feeding through. The headline PMI was dragged lower by services, which likely reflects the renewed tightening of zero-Covid restrictions in July, as cases climb.
The latest stimulus announcements have been underwhelming, as discussed here. Policymakers even seem to be managing policy and growth expectations lower, with a focus instead on containing the spread of Covid. A sharp turnaround in the economic data is unlikely, until that stance changes.
Global demand is fading
Fading Chinese and global demand was also suggested by Korean data for July. Exports to China fell 2.5% year-over-year in July, down from a 0.8% fall in June. Total export growth apparently recovered, but this was deceptive. June suffered from a loss of working days, so a bounce was always on the cards.
Even so, growth of 9.4% year-over-year, from 5.2% in June, was still the second lowest reading since February 2021. Worse, strip out petroleum and ships, and export growth was just 3.5% in July, from 2.7% in June. The downtrend in Korean exports, and by implication in global trade, is painfully clear.
Korea’s manufacturing PMI points to further declines ahead. New export orders fell to 46.9, from 48.0. China’s fading reopening boost is also visible here, with work backlogs continuing to fall from their May peak, and both output and new orders dipping in July. The second half of 2022 should give a cleaner picture of the state of global demand.
One silver lining, as in the Chinese PMI, was that supply chain disruptions look minimal, particularly in comparison with the chaos that followed the early Covid lockdowns. Supplier delivery times improved to 44.4 in July, from 39.4, in the best reading in four months, following three months of deterioration. Input and output prices also declined, so supply does not look stretched at this point.
Still, the main message from Monday’s data is a downbeat one. Global demand is crumbling, and the illusion of growth in China is fading fast.
Global central banks may be able to ease off on their hawkish messaging, and provide some hope to markets, because the data look pretty deflationary to us. But that’s about as positive as we can get.