(Bloomberg) -- China's factory activity fell to its worst level since the pandemic's onset two years ago and a housing slump showed no sign of easing, darkening the outlook for the world's second-largest economy.
Covid lockdowns are taking a toll on growth, with Morgan Stanley cutting its 2022 forecast to 4.6% from 5.1%, citing China's “strict adherence” to eliminating infections. Citigroup Inc. economists said gross domestic product growth could take a hit of as much as 0.9 percentage points in the second quarter.
“The economy is already relatively weak at the starting point and further lockdowns will constrain consumption growth or even disrupt production activities, bringing attendant implications for the labor market,” Morgan Stanley economists including Robin Xing said in a note Friday.
The Caixin Manufacturing Purchasing Managers' Index fell to 48.1 in March from 50.4 the month before, breaching the 50-level that separates expansion from contraction. Separate data showed the 100 biggest companies in China's debt-ridden property industry saw a 53% drop in sales in March from a year earlier.
The slump in the PMI was worse than the median estimate of 49.9 in a Bloomberg survey of economists. It was also a bigger contraction than recorded in an official survey released Thursday.
The Caixin index focuses on smaller export-oriented businesses compared with the official PMI, suggesting a bigger fallout for small and mid-sized firms from the Covid restrictions even before the financial and trade hub Shanghai was locked down.
The outbreak is acute right now in Shanghai, which on Friday started part two of a phased lockdown intended to curb infections in the city. About 16 million people living in the western part of the city will be confined to their homes, after ending a four-day lockdown of the eastern half.
What Bloomberg Economics Says...
At the turn of the year it was clear China's economy was heading for a sharp slowdown in 2022. Covid lockdowns and the war in Ukraine now mean the outlook has darkened further, with growth likely to miss the government's 5.5% goal even with stronger policy support.
Virus-containment measures, including lockdowns in Shanghai and Shenzhen, will add to downward pressures from the property slump, regulatory crackdown on technology firms and energy constraints.
Chang Shu and David Qu
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The poor data underscores the disruptions to business activity from the persistent virus outbreaks and China's zero-tolerance approach to Covid.
A sub-index of suppliers' delivery times fell to 47.1 in March from 48 in February, which economists at Goldman Sachs Group Inc. said implies “slower delivery as a result of traffic controls to contain the spread of Covid.” Similar disruptions were also mentioned in the official survey, with the National Bureau of Statistics noting Thursday that disruptions have affected the “stability” of the manufacturing supply chain.
Read More: U.S. Firms Report Production, Supply Chain Disruptions in China
More than half of American companies said Covid outbreaks and lockdowns in China have dented production or disrupted supply chains, according to a joint survey conducted this week by two U.S. business lobby groups.
The slump in homes sales means added pressure on cash-strapped developers even as policy makers vow to support the property market. The downturn is in contrast to a rebound in developers' stocks and dollar bonds over the past two weeks.
“The rising mobility restrictions as a result of the omicron surge have weighed on property sales in March, exacerbating the impact from existing property curbs on property markets,” Nomura Holdings Inc. economists led by Lu Ting wrote in a research note Friday. Beijing “will stick to most of its major property curbs” even as local governments ease some measures, they said.
©2022 Bloomberg L.P.
With assistance from Bloomberg
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