China: Upbeat PMIs at odds with GDP forecasts – UOB

Economist Ho Woei Chen, CFA, at UOB Group, assessed the recent improvement of the key PMIs for the month of March.

Key Quotes

“China’s official Purchasing Manager’s Index (PMI) did a dramatic turnaround in March with both the manufacturing and non-manufacturing indexes surging as dramatically as they had plummeted a month earlier.”

“The manufacturing PMI rose 16.3 points to 52.0 in March from a record low of 35.7 in February. This was the highest reading since September 2017 and notably even better than the months prior to the COVID-19 outbreak.”

“Meanwhile, the non-manufacturing PMI rebounded a sharper 22.7 points to 52.3 in March from record low 29.6 in February.”

“With the global economy heading into a recession and with expectation of large job losses ahead as the COVID-19 pandemic continues its spread in the major economies, it is difficult to conclude from China’s PMI that we are now back in a business-as-usual environment. The initial euphoria from the return to a semblance of normality in China is likely to ease as other major economies take a bigger hit from the pandemic due to factors including lockdowns of cities. This could cause China’s PMIs to moderate lower in the months ahead until the pandemic tops out globally.”

“Looking ahead, we continue to expect a contraction in China’s 1Q20 GDP by -3.4% y/y (4Q19: 6.0%) when the data is released on 17 April. From there, we expect the economy to recover to +5.7% y/y in 2Q20.”