Services Slowdown Adds Support To Recession Call

Following the article we published last week (see 'Consumer Not Immune As Downturn Intensifies', August 2), in which we stressed that consumer spending in China was in for a tough time in the near term as the economy entered a fully-fledged recession, we have seen the HSBC Services Index lend support to this view. The services index, which is much more reflective of consumer spending as opposed to the manufacturing index (which has a higher concentration of companies involved in producing investment goods), has been outperforming for a number of years. However, the index has undergone a sharp slowdown of late. The same is true of the official Non-Manufacturing Index, which too has been under pressure of late. Looking at the average of the two indices, it has fallen very close to the 50 level that denotes expansion and contraction, and we expect this level to be breached before a sustainable recovery is in place. The details of the HSBC report highlighted a deterioration in profit margins for the services sector, which is something we are seeing across the board in various industries. The inevitable result of this will be weaker capex and labour shedding, and in an effort to support the economy the People's Bank of China is likely to weaken the yuan over the coming months.

Creeping Towards 50
China - HSBC Services Index & Official Non-Manufacturing Index

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This article is tagged to:
Sector: Country Risk
Geography: China, China, China, China

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