Goldman Sachs – Virus Controls Put Damper on China’s Holidays, Economic Recovery
China’s efforts to control the recent resurgence of Covid-19 are undercutting a recovery which has been one of the bright spots in the global economy.
The first official data for January showed economic activity expanded at a much slower pace compared to December, with the services sector markedly weaker. The manufacturing purchasing managers’ index fell to 51.3, while the non-manufacturing gauge dropped to 52.4 from 55.7 in December, according to data released Sunday by the National Bureau of Statistics.
Activity usually slows ahead of the Lunar New Year holiday which begins next week, but curbs on travel this year to try and stop the spread of the coronavirus mean many people won’t be able to return to their hometowns. That will limit spending on travel, restaurants and gifts, but could lead to an increase in industrial output as some companies look to work through the holidays to keep up with demand.
“The economy extended its expansion in January but lost speed more abruptly than expected,” Chang Shu, chief Asia economist at Bloomberg Economics, wrote in a report. “The slowdown was sharper in services than manufacturing, reflecting a heavier impact of the winter surge in virus cases and increase in containment measures on consumption than production.”
The government restrictions this year will radically change the new year migration, which normally sees people making 1.7 billion trips as millions travel from the cities back home to spend time with family. A Ministry of Transport official said earlier in January that there would be 40% fewer trips this year than in 2019, but high-frequency data so far indicates the contraction may be much greater than that.
There were 18.1 million trips made last Friday, according to official data. That’s a decline of more than 70% compared to the same period before the new year in 2019 or 2020, according to calculations by Bloomberg.
Dining, accommodation, entertainment and transportation services “fell meaningfully” in the January PMI data, Goldman Sachs Group Inc. economists led by Helen Hu wrote in a report after the data was released. The employment sub-index also dropped due to travel restrictions and people going home earlier than usual, likely because of quarantine requirements, they wrote.
Despite the unexpectedly weak results, the data showed the continued resilience of the economy, especially the industrial sector. China’s recovery from the pandemic gathered pace toward the end of 2020, fueled by an export boom for medical and electronic goods, and the manufacturing sector continued to expand in January, albeit at a slower pace.
While the sub-index for new export orders for factories fell to 50.2 and the index showing new orders was lower at 52.3, both were above the 50 level that separates expansion and contraction.
The weak numbers may provide some good news for financial markets, which in January were roiled by a cash crunch and worries that the central bank and government will tighten credit further.
“Bad news on PMIs could be good for sentiment on policies,” Nomura Holdings Inc. chief China economist Lu Ting wrote after the data was released. “Markets have in the past week been worried about a potentially sharp shift in Beijing’s policy stance, but today’s relatively poor news on PMIs could convince Beijing that now is not the time to make such a sharp shift in its policies and may also assuage those market concerns.”
Lu estimated last week that the Covid-19 prevention measures in place will cut 1 percentage point from gross domestic product growth this quarter due to the drag on services.
— With assistance by James Mayger, and Lin Zhu