The Caixin Purchasing Managers’ Index, a closely watched gauge of economic conditions, fell to 36.2 in April from 42 in March, according to a survey released Thursday by IHS Markit. A reading below 50 indicates contraction, while anything above indicates expansion.
The service sector accounts for more than half of the country’s GDP and over 40% of its employment. And with survey data showing China’s manufacturing sector also contracted over the past month, the world’s second-biggest economy contracted in April.
While conditions could improve this month as Covid infection rates ease and officials try to limit the damage to the economy, much of Beijing has just been placed under tighter restrictions and some economists are now forecasting Chinese second-quarter GDP will go back.
The country’s capital has effectively closed its largest district, Chaoyang, suspended transportation within it and encouraged 3.5 million residents to work from home as part of its latest effort to curb Covid-19 cases, locals said authorities announced on Wednesday. The nearly 6-point drop in services activity in April was second only to the collapse February 2020, when China’s economy nearly ground to a halt as it struggled to contain the first coronavirus outbreak that started from Wuhan. This month, the PMI for Caixin services fell to 26.5 from 51.8 in January.
Businesses in the world’s second largest economy were already grappling with rising energy and commodity costs as Covid lockdowns further hampered their operations.
The impact of Covid restrictions on customer demand has also made it more difficult for businesses to pass on the higher prices to consumers. This has led to even less employment.
“Some companies hit by the drop in orders laid off workers to cut costs,” Wang said. The service sector employment measure has been below 50 for four straight months, the poll found.
The data came just hours after China reported a sharp drop in tourist spending for the Labor Day national holiday.
Tourist spending during the five-day holiday was just 64.7 billion yuan ($9.8 billion), down 43% from the same period last year, according to a statement from the Ministry of Culture and Tourism late Wednesday.
People took 160 million domestic tourist trips during the holiday, down 30% year-on-year.
The data highlights once again how China’s zero-Covid policy has weighed heavily on its economy.
On Saturday, government PMI surveys showed both Factory and non-manufacturing activity slumped in April to its lowest level since February 2020.
“Recent mobility trends suggest China’s growth momentum deteriorated significantly in April,” analysts at Fitch Ratings wrote on Tuesday. They expect GDP to contract in the second quarter before manufacturing recovers in the second half.
Analysts at Nomura also warned last month of a rising risk of a “recession” in the second quarter as lockdowns, a shrinking housing sector and slowing exports hit the economy hard.
As the highly transmissible Omicron variant spreads rapidly in China, the country is grappling with its worst outbreak in more than two years. So far, at least 27 Chinese cities are under full or partial lockdown, which could affect up to 185 million residents across the country, according to CNN’s latest calculation.
This includes Shanghai – the nation’s leading financial center and a major manufacturing and shipping hub. The city has been in lockdown since March 28. Although authorities began lifting some restrictions last month, more than 8 million residents are still restricted from leaving their residential areas.
The Chinese government is still sticking to its strict zero-Covid policy more than two years after the initial outbreak – at a time when the rest of the world is learning to live with Covid. The policy includes mandatory mass testing and strict lockdowns to curb the spread of the virus.
But the economic costs are increasing.
Many economists have downgraded their Chinese GDP growth targets for this year, citing risks from the zero-Covid policy. Last month, the International Monetary Fund cut its growth forecast for China to 4.4%, well below the government’s official target of around 5.5%. In recent days, Chinese leaders have repeatedly tried to reassure the public that the economy should be fixed. President Xi Jinping last week called for a spending spree on infrastructure to spur growth. And the Communist Party’s Politburo on Friday promised “concrete measures” to support the internet economy.