By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
China’s first activity survey for Q3 was disappointing. The official manufacturing PMI1(Purchasing Managers Index) dropped back into contraction zone (49.0) after spending just 1 month above 50.0, and the services PMI moderated more than expected (53.8). Details show that the deterioration was wide-spread – all manufacturing PMIsub-indices except two were in contraction territory, including large companies, employment, imports, and new orders. An uptick in the number of COVID cases is one plausible explanation, especially as regards services. The weaker consumer sentiment due to the on-going uncertainty in the housing market is another likely reason.
Global Growth Headwinds
Many commentators also drew attention to growth headwinds created by weaker global demand. This narrative was corroborated by the fact that China’s new export orders PMI moved deeper into contraction zone (47.4). South Korea’s daily export growth – an often-used global activity gauge – also showed virtually no signs of a sequential rebound after a very weak print in June. Further, the latest batch of activity surveys in DM (developed markets) was generally weaker than expected. And, finally, there are signs of an H2 growth “cliff” in parts of EM (emerging markets), with a sharp deterioration in July PMIs in Poland, the Czech Republic, Mexico, and Turkey.
China Policy Stimulus
One – by now traditional – question to ask when China’s activity surprises to the downside is whether we are going to see additional policy stimulus. The latest signal from the Politburo is “not necessarily”. The numerical growth target (of around 5.5%) is being replaced by “a reasonable” growth range, with a seemingly different set of priorities (the zero-COVID policy topping the list). Another consideration here is that the infrastructure package might be bringing results – the construction PMI surged from 52.2 in May to 56.6 in June and further to 59.2 in July (see chart below). This might not generate a stratospheric rebound in H2, but we can easily see stronger growth that will be less balanced (i.e. driven by investments/infrastructure rather than consumption), but nevertheless no longer heading south. Stay tuned!
Chart at a Glance: China Growth – Construction to the Rescue?
Source: Bloomberg LP
Originally published by VanEck on August 1, 2022.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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