Shipping containers are stacked at a port in Lianyungang, Jiangsu province, China, Jan. 14, 2021.
One of the key pillars of the general bullishness for 2021 is the recovery of the Chinese economy, thanks to optimistic estimates of growth in (Chinese) services and exports.
Details in the official (Communist Party of China) Purchasing Managers’ Index (PMI) for February show a different picture. Chinese economic data, especially for services and exports, seem to be at odds with the 6% GDP growth rate most analysts expect for 2021.
The February data was surprisingly weak, especially because most economists, already expected a slowdown due to the (Chinese New Year) holiday. One consensus is that we should not be worried about this as the PMI reflects the expected seasonal weakness as well as the impact of increased cases ahead of the Yellow New Year. However, these two factors are already included in the average market estimate.
In February, the official Chinese manufacturing PMI fell to 50.6 from 51.3 in January. above 50 means expansion, below 50 means contraction. It is worrisome that the manufacturing sector, a key driver of economic recovery in 2020, is close to contracting even in the official data. This is a very large drop, significantly below the general average market forecast of 51.0 and at the low end of economists’ forecasts.
The non-manufacturing PMI, which includes construction and services, fell to 51.4, below the prevailing forecast of 52.0 and the lowest since the economy reopened from the embargo in March 2020.
What caused the recession? A slump in construction and very poor new export orders data. Weak manufacturing and construction data suggest that the “virtual” celebrations of the Yellow New Year holiday had a bigger negative impact than estimated this year.
When an export-oriented economy experiences a sharp decline in orders during the global recovery, something is wrong. The new export orders index contracted for the first Time since September 2020.
Two factors influencing the weakness in export orders are the relative strength of the yuan, which has reduced orders for lower value-added products, and the rise in the input and output price PMIs, indicating that inflationary pressures are still rising. We can also conclude that the risk of a double recession in Europe has affected orders.
Even if we assume that some of these factors are temporary, one data point should raise alarms. Both the manufacturing and non-manufacturing employment components are contracting, which indicates that jobs are being lost. A temporary and allegedly inconsequential dip in an economy’s PMI should not reflect an employment phase-out.
An unemployment-style recovery (i.e., an economic phenomenon in which a country’s economy experiences recovery and growth momentum while unemployment remains high) is an important risk globally. We have seen a significant rebound in gross domestic product (GDP) in many economies, but the numbers for job creation and real wage growth are not only disappointing, but worrisome.
Why is that? Because if employment and disposable income do not recover more quickly, it will be difficult to see the big consumer boom that so many economists are relying on to justify strong economic growth in 2021.
The weakness in China goes far beyond the depression of the Yellow New Year celebrations. It suggests that the recovery in 2020 is more fragile than most commentators believe.
Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of Freedom or Equality, Escape from the Central Bank Trap, and Life in the Financial Markets.