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China PMI surveys point to slower growth momentum and weakening demand
05 September 2018Bernard Aw
Caixin Composite PMI Output Index at five-month low in
August
New business growth weakest in just over two years
Export sales remain in decline amid trade frictions
The Chinese economy lost some momentum midway through the third
quarter amid signs of softer client demand, which suggests that
business activity may slow further in coming months. The survey
also brought further evidence that escalating trade frictions had
weighed on demand, particularly in the manufacturing sector.
Softer economic growth
The Caixin China Composite PMI™ Output Index (which covers
both manufacturing and services) fell from 52.3 in July to 52.0 in
August, its lowest level for five months. The latest reading
signalled a modest improvement in the health of the economy.
Most concerning was that new business growth fell to the lowest
in just over two years, hinting at a further slowing in output
growth in coming months. While the PMI's gauge of business
confidence, the Future Output Index, improved, it remained below
the average seen over the first half of 2018.
The latest PMI data underscored the need for the recent rollout
of fiscal measures (including company tax cuts) designed to boost
economic activity. The government has pledged to use proactive
fiscal policy amid slower growth momentum and ongoing structural
reforms.
Manufacturing concerns
Sector-wise, manufacturing continued to signal weakening overall
conditions. Although factory output growth rose to a seven-month
high, several survey indicators pointed to a softening trend in the
sector. New orders expanded at the weakest pace since May 2017,
with export sales falling for a fifth straight month.
While the outlook remained positive, with the number of
companies expecting to see activity rise in the coming year
outnumbering those expecting a decline, business expectations
towards factory production in the year ahead remained below the
historical average. The accompanying panel member reports showed
further evidence that rising trade tensions were a key concern
among Chinese firms.
Supply constraints were another source of worry, as highlighted
by delays in the receipt of purchased inputs. There has been no
improvement in suppliers' delivery times for two years, meaning the
recent supply chain trend is the worst recorded by the PMI since
April 2012. Anecdotal evidence suggested that anti-pollution
regulations that restrict production of certain raw materials, such
as steel, were partly responsible for input shortages.
In services, business activity expanded at the slowest pace
since October last year, which was also well below the historical
average. Growth in new business remained modest and the level of
backlogs was broadly unchanged in August, indicative of a softening
trend in demand for services.
Greater margin pressures
Input price inflation meanwhile accelerated in August, with
firms citing higher prices for commodities such as steel, plastics
and petroleum. In response to higher costs, companies raised
selling prices, albeit at a noticeably lower rate than that of cost
inflation. August data saw a widening of the differential between
input cost and output price inflation rates, implying greater
pressure on profit margins.
Posted 05 September 2018 by Bernard Aw, Principal Economist, Economic Indices, IHS Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
