China’s factory activity shrinks in October, adding to global inflation woes

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China’s factory activity contracted more than expected in October, marking the second consecutive month of decline, as the world’s second-largest economy faced persistent challenges from high raw material costs, power shortages, and weak domestic and foreign demand.

The official manufacturing purchasing managers’ index (PMI) fell to 49.5 in October from 49.6 in September, according to data released by the National Bureau of Statistics on Monday1. The reading was below the 50-point mark that separates growth from contraction, and also lower than the median forecast of 49.7 in a Reuters poll of analysts2.

The PMI data showed that both output and new orders contracted further in October, indicating that the manufacturing sector was losing momentum amid a series of headwinds. The sub-index for production dropped to 49.2 from 49.5 in September, while the sub-index for new orders fell to 48.8 from 49.01.

The survey also revealed that manufacturers faced rising cost pressures and supply chain disruptions, as the sub-indexes for raw material prices and supplier delivery times both increased sharply in October1. The surge in input costs was partly driven by the global spike in energy prices, which also led to widespread power rationing across China in recent months3.

The power crunch not only affected industrial production, but also consumer spending and business confidence. The official non-manufacturing PMI, which covers the services and construction sectors, slowed to 50.6 in October from 51.7 in September, barely staying in expansion territory1. The composite PMI, which combines both manufacturing and non-manufacturing activity, edged down to 50.7 from 52.01.

The weak PMI data suggested that China’s economic recovery was losing steam in the fourth quarter, after a better-than-expected growth of 4.9% year-on-year in the third quarter4. The slowdown in China could have spillover effects on the global economy, as China is a major source of demand and supply for many countries.

In particular, China’s factory woes could add to the global inflation pressures that have been building up due to the pandemic-induced supply chain bottlenecks and strong consumer demand. The International Monetary Fund (IMF) warned last week that global inflation could persist longer than expected, posing risks to financial stability and growth5.

The IMF urged policymakers to adopt a flexible and pragmatic approach to deal with the inflation challenge, while also supporting the economic recovery and ensuring a more balanced and inclusive growth5. For China, this could mean more fiscal and monetary stimulus measures to boost domestic demand and ease credit conditions, as well as more structural reforms to improve energy efficiency and diversify supply sources.


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