Chinese factory activity fell unexpectedly in July, according to new data – a sign that any economic rebound from the country’s disruptive covid lockdowns and its tumultuous real estate sector remains tenuous at best.
The official index of manufacturing purchasing managers slipped to 49.0 in July from 50.2 in June, well below what analysts had predicted in a Reuters poll. The 50 point mark separates growth from contraction on a monthly basis.
In addition to lower factory activity, moderating consumer spending and the ongoing housing crisis are also weighing on sentiment. Overall, China’s poor economic outlook adds to fears of a global slowdown. This is especially the case given that China is a key contributor to global growth.
Oil buyers spot a silver lining to China’s slowing growth
But the gloom is also helping to lower oil prices. Brent crude and West Texas Intermediate (WTI) crude futures fell 0.8% and 1.2% respectively just after 6 a.m. GMT on August 1. according to Reuters. A barrel of Brent is hovering around $103 while WTI slipped below $98 a barrel. An even deeper slowdown in China, the world’s largest crude importer, could drive oil prices down further.
chinese manufacturing July’s contraction was mainly driven by energy-intensive industries such as petroleum, coking coal and ferrous metals, according (link in Chinese) the country’s National Bureau of Statistics.
China Beige Book, an economic data tracking firm, says the contraction in Factory activity should come as no surprise.
“The illusion: there was NO significant recovery in June, even [though] everyone assumed there had to be a release from major lockdowns,” it said in a tweet. As businesses are “liberated” from the containment measures imposed in the spring, they “don’t want to invest, borrow or hire”, given the lingering uncertainties about China’s zero covid policies.
Meanwhile, Beijing has all but abandoned any illusions about its ability to meet its 5.5% growth target this year. Last week’s meeting of the Politburo, a top decision-making body of the Communist Party, made no mention of the growth target. There were also no indications of more aggressive fiscal and monetary stimulus, or a recalibration of zero covid restrictions.
For now, it looks like a big economic rebound in China is unlikely, and the best we can hope for is a slow and lame recovery. This, at least, will ease pressure on global energy and commodity prices.