China’s Service Sector Contracts Amid Covid-19 Pandemic

China’s services activity contracted in March, albeit at a slower pace, as the sector continued to face challenging conditions due to the ongoing impact of the coronavirus, or covid-19 outbreak, survey data from IHS Markit showed Friday.

The Caixin services Purchasing Managers’ Index rose to 43.0 in March from a record low 26.5 in February. However, a score below 50 indicates contraction. Moreover, this was the second-lowest level since the survey began in 2005.

The reduction was widely linked to the impact of restrictions related to covid-19, which led to store closures and restrictions around travel in recent months.

The pandemic weighed on customer demand, but the rate of contraction was notably softer than that seen in February. New orders from abroad also declined further at the end of March.

Service providers reduced staff for the second month. While some employees had left voluntarily, others mentioned the implementation of cost-cutting policies due to the challenging outlook.

Reflecting lack of new work, there was a renewed fall in outstanding businesses. The rate of backlog depletion was the quickest seen since September 2015.

After falling substantially in February, average input costs rose in March. Nonetheless, firms reduced their selling prices at the steepest rate since April 2009 to increase sales.

Business confidence picked up slightly from February’s record low but remained historically weak in March.

The Caixin composite output index advanced to 46.7 in March from 27.5 a month ago. But this was the second-lowest score in eleven years.

“The recovery of economic activity remained limited in March, although the domestic epidemic was contained,” Zhengsheng Zhong, chairman and chief economist at CEBM Group said.

In the first two months this year, China’s value-added industrial output and services output dropped 13.5 percent and 13 percent on a yearly basis, respectively. Estimates suggest their declines have not been as steep in March and the country’s first-quarter GDP is likely to have dropped significantly.

“Such a situation requires policymakers to cut this year’s GDP growth target and step up countercyclical efforts to support areas like consumption and infrastructure, particularly given the accelerated contraction in the service sector job market,” CEBM chief economist said.

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