A worker checks yogurt coming off a production line at a dairy in Beijing on Feb. 27.
Photo: Ng Han Guan/Associated PressSHANGHAI—China’s coronavirus epidemic is depressing its economic outlook, with new government readings on the manufacturing and service sectors validating informal indications that the country is struggling to get back to work.
A Chinese government index that tracks sentiment among purchasing managers at manufacturers fell to its lowest level on record in February, dropping deep into territory that indicates a contraction. China’s National Bureau of Statistics said Saturday that its 15-year-old index tumbled to 35.7 from 50.0 in January—below even the lowest level recorded during the global financial crisis.
A related index that tracks purchasing plans in services industries plunged to a record low of 29.6—deep below the 50 mark that separates expansion from contraction—suggesting weakness in construction, transportation, restaurants and tourism.
The reports are the first official economic checkpoints to be released during the crisis. They confirm a freeze that dates to late January, when authorities signaled the disease, now called Covid-19, was spreading faster than they thought. They then clamped down on countrywide transportation and business activity.
“Today’s PMI data suggest that things are really bad,” said Larry Hu of Macquarie Group in a note. It is even possible the government will report a first-quarter contraction for the first time since the end of the Cultural Revolution, he said.
The disease and China’s response hammered both production and demand, said Zhang Liqun, an analyst with a government-linked business organization, the China Federation of Logistics & Purchasing.
The statistics bureau, which releases the index together with the federation, predicted there would be some rebound next month as more manufacturers resume activity; authorities say the worst of the health crisis may have passed.
The fate of China’s economy is of crucial importance to a world with few solid drivers of growth. The country’s gross domestic product dipped to a three-decade low of 6.1% last year, yet that was still enough to power about 40% of the world’s economic expansion, according to the Organisation for Economic Co-operation and Development.
Many economists predict China’s GDP will fall in the first quarter from the fourth quarter’s pace and finish the year weak. After the purchasing managers’ survey was published, ANZ bank of Australia said China’s GDP would slide to 4.1% this year, including growth of just 2% in the first quarter from a year earlier.
Purchasing by manufacturers is a leading indicator of business activity because factories buy supplies in anticipation of demand. February’s index result fell well short of the median forecast of 43 by economists surveyed by The Wall Street Journal.
China officially went back to work from an extended Lunar New Year holiday on Feb. 10. But exhortations from President Xi Jinping and other officials to revive the economy have underscored concerns about what executives say are continued, widespread business outages.
Alternative indications of economic activity—including coal consumption by power plants, realtor data on home sales and congestion levels at ports—broadly suggest economic activity remains at low levels that are usually seen only during holidays.
In recent days, Mr. Xi said China will meet 2020 targets that include eliminating poverty and concluding a one-decade doubling of GDP.
Anticipating the jolt awaiting businesses, Mr. Xi and other government leaders have pledged to cut their costs. China’s cabinet on Tuesday cut taxes for small businesses and ordered state-owned banks to issue more cheap loans while offering longer grace periods for borrowers to repay. The central bank has reduced interest rates and pumped hundreds of billions of dollars into the domestic financial system to support banks.
Chinese President Xi Jinping and other officials have pledged to cut costs for businesses struggling due to the coronavirus epidemic.
Photo: Liu Bin/Associated PressProspects for a big hit to the economy and the spread of Covid-19 to dozens of countries have chilled financial markets, government planners and corporate executives. The Dow Jones Industrial Average fell 12.4% last week, its worst showing since the financial crisis, as fear built that the globalized epidemic will damage trade and pull the world economy toward recession.
One of the biggest challenges for businesses in China has been government limits on the movement of people and a reluctance to travel. Authorities late last month sought to slow the epidemic’s spread by closing venues like restaurants and cutting off whole regions, while monitors limited access to some neighborhoods and families shuttered themselves indoors. As of Saturday, 12 of China’s 31 provinces and municipalities retained emergency-level health advisories that limit travel, including Hubei province, where the outbreak was first detected. Beijing, Shanghai, Chongqing and the powerhouse manufacturing province of Zhejiang also remain on high alert.
As the government reported a leveling out in the number of infectious cases this week, provinces like Guangdong and Jiangsu relaxed health alerts and reported that the vast majority of businesses had reopened.
Other indicators suggest the rebound remains very limited. Subway ridership across eight major cities, including Guangzhou in Guangdong, was one-fifth of the usual on Thursday, according to a Wall Street Journal calculation using official numbers published by data provider Wind. The calculation doesn’t include the center of the outbreak, Wuhan, where a subway system that normally carries 3.4 million passengers a day has been closed for weeks.
China’s Commerce Ministry this week said 90% of the 7,000 exporters it surveyed reported difficulty shipping goods, as counterparts cancel contracts or don’t pay. The country’s largest steelworks, China Baowu Steel Group Corp., predicted a first-quarter loss of $428 million. Surveys produced by chambers of commerce that represent international companies in China show executives bracing for a negative hit to revenue due to the epidemic.
The manufacturing sector is particularly vulnerable due to its reliance on labor. About 290 million people in China work somewhere besides their hometown, including 75 million whose jobs are in a different province. It is clear that many who returned home for the Lunar New Year holiday in late January have stayed put.
“Most migrant workers are still not back from their hometowns,” said Yan Juanjuan, a recruiter at Sanhe Human Resources Market. And if they are back, local health rules in cities like Shenzhen—where the Sanhe recruitment center is based—crimp production by limiting how many people can be in one place.
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Just how much damage the epidemic does to China’s economy depends on how long it lasts, but restarting factories is only part of the challenge. “Even if the industrial production can be quickly resumed, it will take more time for the consumer service sector to recover,” according to Zhang Xiaobo, a researcher at Peking University and the Center for Global Development.
The index of factory purchasing managers had indicated contraction for most of 2019 before easing trade tensions, late in the year, helped it pop back above 50.
The purchasing manager index for January—50, neither expansion nor contraction—didn’t capture much impact from the outbreak because it wasn’t well known before the government survey concluded on Jan. 20.
China’s government appears to be bracing for hardship among smaller companies, which have less money to pay employees, cover debt payments and are less stable when it comes to revenue hiccups.
Just under a third of small- and medium-size businesses had resumed business by midweek, according to China’s Ministry of Industry and Information Technology, based information from 2.2 million of them. Smaller companies face challenges like paying staff salaries and other financial pressures, in addition to concerns that operational resumptions could spread the disease, a vice minister of the bureau, Zhang Kejiang, said this week.
China’s government says the slowdown will be brief, a view echoed by some economists and the International Monetary Fund, which forecasts the epidemic will reduce China’s economic growth this year by 0.4 percentage point to 5.6%.
Rosy predictions for a quick recovery align with China’s experience in 2003, when the country was hit by an outbreak of severe acute respiratory syndrome, or SARS. Yet the comparisons are limited, since China’s $14 trillion economy is far larger than it was back then and driven more by services and smaller companies that can’t expect state support.
“We all hope for a V-shaped, rapid recovery,” IMF Managing Director Kristalina Georgieva recently told global finance ministers, “but given the uncertainty, it would be prudent to prepare for more adverse scenarios.”
—Liyan Qi, Grace Zhu, Bingyan Wang and Raffaele Huang contributed to this article.
Write to James T. Areddy at james.areddy@wsj.com
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