Industrial output to aid China economic growth but COVID-19 resurgence may act as dampener, says GlobalData

Following today’s release that the purchasing managers’ index (PMI) for China’s manufacturing sector came in at 50.9 in June 2021 in the backdrop of recovery of economic activities;

Gargi Rao, Economic Research Analyst at GlobalData, a leading data and analytics company, offers her view:

“Despite the resurgence of COVID-19 cases in the major export province along with sky-rocketing shipping fees for goods and global shortage of semiconductors, China’s factory activity remained above the 50-mark, indicating sustained increase in manufacturing output, but at a slower rate compared to previous month. New exports order index continued to rise, with the sub index rising to 51.5 in June 2021 from 51.3 in previous month. GlobalData forecasts overall exports of China to rise by 5.4% and real GDP by 8.6% in 2021.

“The non-manufacturing PMI index and services PMI exhibited rising trend over the last year. Although both indices dipped in January and February 2021 due to lower export orders amid the reimposition of lockdown restrictions, it rebounded sharply in March and April due to the reopening initiatives globally. However, non-manufacturing PMI dropped to 53.5 in June 2021 from 55.2 in May, indicating slowdown but remained above 50-mark.

“The unemployment rate declined from 5.5% in February 2021 to 5% in May 2021. New export demand has led to job creation, but more hiring comes with higher costs of production for the firms. The manufacturing employment sub index settled at 49.2 as of June 2021.

“Judicious policy measures, including ‘Made in China 2025’, are expected to help upgrade China’s industrial sector, whereas employment first policy will aid its target of creating 11 million new jobs in 2021. GlobalData forecasts unemployment rate to decline to 3.81% in 2021 compared to 3.98% in 2020. Higher employment opportunities are expected to increase purchasing power of households and consumption is forecasted to grow by 9.1% in 2021 compared to 3.3% in 2020. With the revival of demand and increased production activities, GlobalData forecasts the economy to grow by 8.6% in 2021 and by 5.7% in 2022.

“However, inflationary pressure is an area of concern. The measure for output prices and export prices rose amid rising transportation costs. The rapidly increasing commodity prices may disrupt the economy as firms began to hoard goods, while some other firms witnessed raw materials shortage. The path to steady recovery may be deterred due to the re-emergence of new variants in its major export province Guangdong and the consequent trade restrictions, and spike in raw materials cost.

“The People’s Bank of China must continue with prudent monetary policy to maintain ample liquidity, which will aid investments. The recent ratification of the regional comprehensive economic partnership (RCEP) is also expected to provide trade opportunities for China, which will in turn boost manufacturing output further in the coming years.”

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