China’s economy has kicked off the year of the rabbit with a bounce worthy of its sprightly zodiac avatar. That raises the probability of stronger global growth this year, and higher oil prices, too—although the biggest effects are likely to show up in the second half of 2023.
The January and February Chinese purchasing managers indexes are always worth watching because they are one of the few pieces of concrete data to emerge from China in late winter and early spring. And the February PMIs, released on Wednesday, were strong indeed. Both the official and privately compiled Caixin manufacturing indexes jumped, with the former reaching 52.6, its highest since 2012. Services, construction, export orders and overall employment all bounced back sharply, too.
Still, there are some important caveats.
First and most obviously, the big month-on-month bounce—which is what PMIs measure—is still coming from a low base thanks to the disastrous Covid-related lockdowns in late 2022. The rebound in the construction PMI probably reflects a surge of infrastructure spending as local governments take advantage of a first-quarter special project bond quota, which is a full 50% higher than last year, according to Capital Economics.
But more granular indicators of housing construction—the bigger overall driver of commodities demand—still look shaky. Weekly steel production in late February was roughly even with February 2022’s depressed level, data from
shows, but far below 2021 levels. A 30-city average of daily housing space sold also remained well below both 2019 and 2021 levels.
The recovery in the service sector—the part of the economy most battered by the “zero-Covid” policy—also looks a bit less impressive on closer examination. In contrast to manufacturing and construction, where employment shot up, the PMI showed non-construction services continuing to shed jobs in February, albeit at a much slower pace.
Moreover, some measures of rebounding consumer activity look like they may already have peaked. Traffic congestion and subway ridership in major cities, as well as daily domestic flights, all edged back down in late February after sharp increases early in the year, according to Goldman. Some of that might be seasonal effects related to the end of the Lunar New Year. But it still raises questions, particularly in combination with the services employment data.
The key things to watch now are still housing and employment. If the labor market recovery keeps broadening out from industry and construction into services, that raises the probability of very strong growth in 2023 and less structural scarring of the labor market—particularly since exports and factory employment could face stronger headwinds later this year if the U.S. and Europe struggle economically. And a big surge in Chinese commodities demand still awaits a much healthier housing market. That is probably still several months away.
Write to Nathaniel Taplin at nathaniel.taplin@wsj.com
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