The Caixin Purchasing Managers’ Index, a closely watched indicator for assessing the state of the economy, fell to 36.2 in April from 42 in March, according to a survey released Thursday by IHS Markit. A reading below 50 indicates contraction, while anything above this gauge indicates expansion.
The service sector represents more than half of the country’s GDP and more than 40% of its employment. And with survey data showing China’s manufacturing sector also shrank last month, the world’s second-largest economy shrank in April.
While conditions could improve this month as Covid infection rates decline and authorities try to limit damage to the economy, large parts of Beijing have just been put under longer restrictions. stringent and some economists now expect China’s GDP to shrink in the second quarter.
Companies in the world’s second-largest economy were already grappling with rising energy and raw material costs, when Covid lockdowns further crippled their operations.
It has also become more difficult for businesses to pass on higher prices to consumers, due to the impact of Covid restrictions on customer demand. This resulted in an even greater decline in employment.
“Some companies, affected by falling orders, have laid off workers to cut costs,” said Wang Zhe, senior economist for Caixin Insight Group. The service sector employment measure has been below 50 for four straight months, the survey showed.
The data came just hours after China reported a sharp drop in tourism spending for National Labor Day.
Spending by tourists was just 64.7 billion yuan ($9.8 billion) over the five-day holiday, down 43 percent from the same period last year, according to a press release from the Ministry of Culture and Tourism on Wednesday evening.
People made 160 million domestic tourist trips during the holidays, down 30 percent from a year earlier.
The data again highlights how China’s zero-Covid policy has weighed heavily on its economy.
On Saturday, government PMI surveys indicated that both industrial and non-manufacturing activities fell in April to their worst levels since February 2020.
“Recent mobility trends suggest that China’s growth momentum deteriorated significantly in April,” Fitch Ratings analysts wrote on Tuesday. They expect GDP to contract in the second quarter, before output picks up in the second half.
Nomura analysts also warned last month of a growing risk of a “recession” in the second quarter, as lockdowns, a shrinking real estate sector and slowing exports hit the economy hard.
As the highly transmissible variant of Omicron spreads rapidly in China, the country grapples with its worst outbreak in more than two years. So far, at least 27 Chinese cities are under full or partial lockdown, which could affect up to 185 million people across the country, according to CNN’s latest calculations.
The Chinese government is still adhering to its strict zero Covid policy more than two years after the initial outbreak – at a time when the rest of the world is learning to live with Covid. The policy involves mandatory mass testing and strict lockdowns to contain the spread of the virus.
But the economic costs are rising.