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SPI Management Newsletter 02.06.23

Updated: Jun 9, 2023

Chinese Economic Rebound Stalls as Factory and Services Sectors Falter

In May, the manufacturing activity gauge dipped to 48.8, a further decline into contraction territory, despite a relaxation of three-year-long, stringent zero-Covid measures. The Purchasing Managers Index (PMI), stuck under the crucial 50-point mark for a second month, fell short of expectations, signaling contraction rather than expansion.

Meanwhile, the services sector, currently driving China's economic rebound, also showed signs of deceleration. The nonmanufacturing PMI, covering services and construction, retreated to 54.5 in May from 56.4 in April, despite an encouraging surge in tourism during the month's national holiday. These weaker than expected factory and services activity numbers suggest a tepid and brief post-Covid economic rebound, which is concerning, given significant structural issues like debt burdens and demographic challenges that could impact long-term growth potential.

Despite an impressive GDP growth of 4.5% in Q1, China faces numerous hurdles, such as unprecedented youth unemployment and lethargic property investment. The slowdown adds pressure to the global economy, which is grappling with persistently high inflation and interest rates in developed countries, along with repercussions from the conflict in Ukraine. One imminent question is whether China can sufficiently boost domestic demand to counterbalance the expected continuing decline in overseas orders impacting factory output. Manufacturers report that post-zero Covid euphoria is absent.

Furthermore, despite leading the recovery in 2022, the services sector also showed a decline in activity. Economists are subsequently reducing their growth forecasts. For instance, Nomura cut its full-year estimate from 5.9% to 5.5%, and Barclays lowered its prediction to 5.3% from 5.6%.

The ongoing economic slowdown has reignited debates about potential economic stimulus from Beijing. Despite sluggish housing market performance and increasing calls for a proactive fiscal policy and monetary easing, the People's Bank of China, the country's central bank, has refrained from reducing benchmark interest rates so far. Thus, the path forward for China's economic recovery remains uncertain.


Bipartisan Deal on Debt Ceiling Passes in US Senate, Averting Potential Economic Crisis


The US Senate has endorsed a fiscal agreement, put together by the White House and GOP lawmakers, thus concluding a protracted political stalemate concerning the debt ceiling. This decision averted a potential first-time default for the world's top economy. With robust bipartisan endorsement, 63 Senators voted in favor of the bill, while 36 voted against. Following approval from the House of Representatives on Wednesday, the bill is now poised for President Biden's ratification. On the brink of a potential economic crisis, with just four days left before the forecasted a depletion of funds for the bill is a significant relief. Biden expressed his gratitude towards Senators from both parties by emphasizing that the US is a nation that meets its commitments and pays its bills.

This consensus not only raises the US borrowing limit until 2025 but also establishes a ceiling on government expenditures for the subsequent two years. This sets some constraints on US fiscal policy till at least the next presidential elections. Senate Majority Leader, Chuck Schumer, lauded this bipartite collaboration as a crucial move to prevent a default.


The approval wraps up weeks of intense negotiations between Biden's team and GOP House Speaker Kevin McCarthy, culminating in an agreement. This was followed by concerted efforts from Biden and Congressional leaders to urge members to expedite the voting process amid a highly polarized political atmosphere. The resolution of the current debt ceiling dispute has also resulted in considerable relief across American businesses. However, the bill's passage was not without opposition, particularly from the GOP, who saw it as a missed opportunity to rein in government expansion. Notwithstanding these objections, Treasury Secretary Janet Yellen emphasized that the legislation was indispensable to preserving the United States' fiscal reputation and ensuring economic growth and stability.


Adapted from WSJ, FT, Nomura, Barclays

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