The official PMIs released on Friday had already pointed to a robust recovery at the start of Q3. But the Caixin index published today is even more upbeat and suggests that the pace of expansion in industry was the strongest in almost a decade last month.
Stimulus pushes index to nine-year high
- The official PMIs released on Friday had already pointed to a robust recovery at the start of Q3. But the Caixin index published today is even more upbeat and suggests that the pace of expansion in industry was the strongest in almost a decade last month.
- The Caixin manufacturing PMI rose from 51.2 in Jun to 52.8 in July (the Bloomberg consensus was 51.1 and our forecast was 51.5). (See Chart 1.) This is the highest reading in over nine years and points to a further acceleration in industrial output, even though year-on-year growth had already returned to its pre-virus trend by the end of Q2.
- Although the export order component rose on the back of recovering foreign demand, it remains low at 48.3. Most of the strength in overall new orders, which rose to 54.4, is due to the policy-driven rebound in domestic demand. (See Chart 2.) The output price component rose to its highest since mid-2018, a further sign that the disinflationary pressures caused by the COVID-19 downturn are now giving way to reinflationary pressures driven by stronger demand. (See Chart 3.) The survey also points to a further improvement in labour market conditions. (See Chart 4.)
- The survey data are consistent with our view that policy stimulus has paved the way for a period of above-trend growth in construction and industry during the second half of this year. In the near-term this should help offset continued weakness in consumption and services activity, which will take longer to fully recover, allowing the economy as a whole to return to its pre-virus trend by year-end.
Chart 1: Manufacturing PMIs
Chart 2: Caixin Manu. PMI – New Orders
Chart 3: PMI Output Prices & Producer Prices
Chart 4: Caixin Manu. PMI – Employment
Sources: CEIC, Markit, Capital Economics
Julian Evans-Pritchard, Senior China Economist, firstname.lastname@example.org