By Ulf Bergman
At the same time as the Chinese economy is showing some signs of plateauing, the OECD has upgraded its projections for global economic growth. The parallel events highlight the widely expected shift in post-pandemic growth, with the focus moving away from China to other parts of the world.
The official Chinese purchasing managers’ index (PMI) for May was released on Monday and at 51.0 was only just below April’s disappointing reading of 51.1. The latest PMI also failed to meet economists’ expectations, but only marginally. Nevertheless, the headline number is suggesting the Chinese economy is still expanding, albeit at a more leisurely pace. The modest headline reading of the index is unlikely to disappoint the Chinese leadership, which has frequently in recent months signaled its preference for sustainable economic growth levels rather than spectacular ones. However, the positive sentiment provided by the stable headline number is obscuring the continued uneven nature of the post-pandemic economic landscape in China.
The activity in the manufacturing sector fell slightly in May, partially due to factory closures during the seven days of the Golden Week holiday during the early parts of the month, which was offset by a slight rise in non-manufacturing sectors boosted by consumer activity during the break. The non-manufacturing PMI, which gauges the confidence in the services and construction sectors, rose to 55.2 in May from 54.9 in April and was slightly above expected. Beyond the effects of the Golden Week, the Chinese economy faces multiple challenges in the shape of high commodity prices, microchip shortages, uncertainty over the strength of the yuan and a resurgence of the coronavirus in some provinces. Additionally, the demand for Chinese goods in many export markets is under pressure, as consumers are changing their habits when their economies are emerging from the hold of the pandemic. A sub-index of new export orders for factories also fell into contraction territory, at 48.3 in May compared to 50.4 in the preceding month
May was also the month of extensive efforts by Beijing to rein in on the soaring commodity prices, with iron ore being singled out for special treatment. The initiatives, to a great extent aimed at the steel mills, paid some dividends with iron ore prices retreating from their highs. However, iron prices at the end of May were still above where they began the month. Despite being at the receiving end of the Chinese government’s measures, the sub-index for China’s steel purchasing managers bucked the trend and improved in May to 46.1 after declining during the preceding two months. The reversal of the trend may suggest that expectations of declining Chinese iron ore demand are somewhat premature.
Iron Ore (USD/tonne)
Like the headline number for the Chinese PMI, the upward revision of the global economic growth by the OECD is good news on an aggregate level. There are however considerable differences between countries and how quickly they will return to their pre-pandemic levels, with China and the US making swift recoveries while countries such as Spain and Argentina may face several years of struggles. The OECD has also downgraded its projections for the Indian economy, in light of the recent severe COVID19-outbreak. Despite the downgrade, the organization still expects India to be the best-performing economy in the year that began with the second quarter. The OECD is now expecting the Indian economy to grow by 9.9 per cent, which is in line with the broader consensus of ten per cent according to a Bloomberg survey.
A generally more positive outlook for the global economy is unlikely to aid the Chinese leadership’s quest to control the rising commodity prices. While the efforts may be appreciated in some quarters, resurgent industrial activities and stimulus-driven construction projects will keep supporting strong global demand for commodities and prices are unlikely to head far south any time soon. One illustrious investment bank recently also suggested that China was losing the pricing power for commodities, but it is probably a bit premature to assume that the country will abdicate from its dominant position in the commodity markets. However, with the Chinese economy looking set to plateau, although at healthy growth rates, the country’s continued demand for commodities is likely to provide fewer surprises and become more of a known quantity. Hence, in a market dominated by tight supplies, increasing demand in other parts of the world could have a considerable impact on many commodity prices.