China's economy showed continued signs of weakness in July, with the official manufacturing purchasing managers' index (PMI) dropping to 49.2. This marks the first contraction since February and is below the 50-point threshold that separates expansion from contraction. The new orders sub-index, a key component, fell to its lowest point in 38 months, highlighting a significant decline in domestic demand. This unexpected contraction follows a four-month period where factory activity had been at or above 50, partly boosted by exporters rushing shipments ahead of US tariff increases.
The slowdown extended beyond manufacturing, with the construction PMI hitting a record low of 47.0 and the services gauge reaching its weakest level since the initial COVID-19 lockdowns. The composite PMI also dropped to 49.3, the lowest since the pandemic ended in 2022. Officials attributed some of this weakness to typhoons that disrupted production. This widespread deceleration reinforces concerns about the health of the world's second-largest economy, which is grappling with a deepening supply-demand imbalance.
Industrial output grew by 4.5% year-on-year in July, a decrease from 5.3% in June and missing Reuters' forecast of 4.8%. Retail sales also slowed significantly, achieving only 0.6% growth compared to 1% in June, falling short of the estimated 1.5%. Urban fixed-asset investment contracted 6.7% as of the end of July, worsening from a 5.7% decline in the first half of the year. The urban unemployment rate slightly increased to 5.2% from 5% in June.
Analysts like Julian Evans-Pritchard of Capital Economics noted that domestic weakness appears largely to blame for the poor performance. The disappointing data, following second-quarter growth that cooled to a three-and-a-half-year low, renews pressure on policymakers to intensify stimulus measures. While firms' expectations for future output remained somewhat optimistic, potentially anticipating stronger fiscal policy, economists like Zhiwei Zhang of Pinpoint Asset Management are increasing their expectations for an interest-rate cut by the People's Bank of China to address the "further downside risks."
Despite the economic headwinds, some analysts, such as Sheana Yue of Oxford Economics, expect only a modest pick-up in the second half of the year, maintaining their growth forecast at 4.8%. This cautious outlook suggests that while fiscal execution may accelerate following the July Politburo meeting, the immediate impact on activity might be limited. The government has acknowledged the "difficulties and challenges facing the economy" and pledged to accelerate fiscal spending and implement "incremental policies" to shore up growth.
