Factories slide back into decline and prices fall in Mainland China as boost from reopening economy fades

April's PMI data pointed to a renewed decline of manufacturing activity in mainland China, as demand for goods showed signs of falling after a short-lived boost from the economy's reopening at the start of the year. Lower demand was met by near-stalled output and reduced employment.

The improvement in supply chains that has accompanied the relaxation of COVID-19 containment measures has meanwhile helped drive prices lower, both for inputs and goods leaving the factory gate - the latter dropping in April at the steepest rate since December 2015. Falling selling prices will add to speculation that global goods inflation will continue to cool as China exports lower priced goods.

Back in contraction

The Caixin China General Manufacturing PMI, compiled by S&P Global, fell from the no-change level of 50.0 in March to 49.5 in April. This signalled the first deterioration in the health of the manufacturing sector for three months to add to evidence that February's return to growth had been a short-lived improvement due to the economy reopening.

Factory production rose only marginally in April, the rate of increase weakening further from February's revival, when growth had hit an eight-month high. New orders meanwhile fell for the first time in three months, likewise losing momentum from February's demand spike, which had seen the steepest monthly rise in orders since May 2021. The renewed drop in demand was met by a further cut in factory payroll numbers, with the rate of job losses at the highest for three months.

Shortages of raw materials were meanwhile seldom reported, contrasting with the more widespread incidence of supply delays seen late last year. Suppliers' delivery times had quickened to the greatest extent for eight years in February thanks to the loosening of COVID-19 containment measures, with further improvements - albeit more modest - recorded in March and April.

These easing supply conditions have handed pricing power from the seller to the buyer, helping drive down input cost inflation.

Prices fall at fastest rate since 2015

Manufacturers consequently registered the first fall in average input prices for seven months in April, with the rate of decline the quickest seen since the start of 2016. Cost savings were often passed on to customers in the form of lower selling prices, which were cut at the fastest rate since December 2015.

Downside risks to outlook

While the steep rise in the manufacturing PMI in February - accompanied by a similar jump in the Caixin Services PMI - accurately forewarned of the upturn in China's GDP growth to 4.5% in the first quarter of 2023, up from 2.9% in the previous quarter, April's worsening picture for manufacturing hints at downside risks to second quarter GDP. However, April's service sector PMI data will be of greater importance in determining the near-term path of GDP, due to the sector's greater share of the economy and the role of resurgent consumer spending on services in the latest upturn.

On a brighter note, the drop in prices recorded by the survey suggests that mainland China does not seem to be exporting higher inflationary pressures to other economies.

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Chris Williamson, Chief Business Economist, S&P Global Market Intelligence

Tel: +44 207 260 2329

chris.williamson@spglobal.com

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Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global 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.

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