China’s economy slowed further in August as weak domestic conditions, intensifying tensions with the US and worsening global trade all combined to undermine the outlook.
That can be seen in a Bloomberg Economics gauge aggregating the earliest available indicators from financial markets and businesses. Sentiment among sales managers and the mainland stock market fell, while a leading indicator of China’s exports continued to decline. However, small business confidence improved for the first time in five months, a sign that earlier pro-growth measures may be taking effect.
With trade tensions worsening and the currency weakening past 7 to the dollar, policy-makers have stepped up targeted measures to support the economy, including efforts to drive down the cost of borrowing money and another package to encourage consumption.
The first official data for August will be released on Saturday when the purchasing manager indexes are announced.
Economists currently expect the manufacturing gauge to continue to slow after weak industrial output growth in July.
“We expect August growth momentum to remain on the soft side after the visible pullback in July,” China International Capital Corp economists including Eva Yi wrote in a note. “A weaker credit cycle and falling nominal growth call for more decisive counter cyclical measures, especially those in the form of monetary loosening.”
Protracted trade tensions continued to weigh on China and nearby nations that supply goods to its factories. Outbound shipments from South Korea fell 13.3 perc ent in the first 20 days of August from a year earlier. Conditions reported by sales managers hit their lowest level in more than six years due to poor business confidence, slower growth of markets and sales, and shrinking profit margins, according to London-based World Economics Ltd.
“Pressure on the People’s Bank of China to ease monetary policy is increasing, according to an analysis by David Qu at Bloomberg Economics in Hong Kong. Industrial production and the unemployment rate entered ranges that point to a strong need for easing, and the return of factory deflation also indicates more support is needed, he wrote.
The picture wasn’t all bad, with an index of small businesses conditions rising to 54.5 this month from 53.8 in July, according to economists from Standard Chartered Plc. Domestically-focused small firms reported better conditions than export-oriented ones, with an overall rise in current performance and outlook in August, as pro-growth measures lifted domestic demand.
“Real activity showed signs of bottoming out in August,” Standard Chartered economists Shen Lan and Ding Shuang wrote in a note accompanying the data. “Domestic demand underpinned overall demand in August and the ‘new orders’ expectations reading improved, which suggests that the lagged effect of China’s pro-growth policy measures have started to feed through to the domestic economy.”
A lot of what will happen going forward depends on what steps the government takes.
“While acknowledging short-term downside risks from the US-China trade war, growth slowdown and yuan depreciation, we don’t want to be too negative on the market as the ultimate game-changer is nothing else but policy,” Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong, wrote in a note. “If things continue to get worse, we expect policy makers to escalate stimulus and de-escalate trade war.”