China’s economy took a knock from the delta virus outbreak in August, adding to signs of a slowdown in growth in the second half of the year and fueling speculation of more central bank support.

The official purchasing managers surveys showed the services industry contracted for the first time since February 2020 as consumers cut back on spending and travel amid new virus curbs. The manufacturing purchasing managers’ index fell slightly to 50.1 from 50.4 in July, partly due to supply-chain disruptions.

Beyond the virus outbreaks, China’s recovery is also showing signs of faltering in the wake of recent regulatory crackdowns and weak demand at home. The central bank has signaled it may provide more targeted support — such as cutting the reserve requirement ratio for some lenders — while the government has pledged to accelerate fiscal spending in the second half of the year, helping to cushion growth.

“The service sector was shocked by the delta variant, extending the ongoing theme of uneven recovery,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd in Hong Kong. “It is pretty clear that the authorities would still support growth. We still pencil in another RRR cut before the end of 2021, October the earliest.”

High-frequency data tracked by Bloomberg’s early indicators also show the recovery is leveling off. Several economists have already downgraded their growth forecasts for this year, although the expansion is still expected to exceed the government’s modest target of above 6%.

China’s equity benchmark, the CSI 300 Index, dropped as much as 1.5% to its lowest since Aug. 20.

The government imposed stringent measures, including travel curbs, mass testing and quarantines, for about a month to bring a new wave of Covid cases under control, the most widespread outbreak since the initial flareup in 2020. Confidence among smaller businesses in the month weakened and consumers cut back on spending. The partial closure of China’s second-biggest container port also disrupted trade.

“Today’s data again reflected the outsized and asymmetric shock on the service sector from Covid-related restrictions,” said Liu Peiqian, China economist at Natwest Markets in Singapore. While there’s room for a rebound in services PMI in coming months as the outbreak is now under control, any future Covid outbreak domestically will continue to weigh on the sector, she said.

Source: Bloomberg