At the bottom of the economic cycle, the superimposed epidemic rebounded, and both manufacturing and non manufacturing industries contracted, driving the significant decline of comprehensive PMI. In March, manufacturing PMI fell 0.7 percentage points to 49.5% month on month, lower than market expectations (49.8%), ending four months of continuous expansion. In March, the business activity index of construction industry increased slightly by 0.5 percentage points to 58.1%, and the business activity index of service industry decreased by 3.8 percentage points to 46.7%. Under the combined influence of the two, the PMI of non manufacturing industry decreased by 3.2 percentage points to 48.4% compared with the previous period, lower than the market expectation (50.3%). The comprehensive PMI ended the six-month expansion, from 51.2% in the early stage to 48.8% in March. We believe that under the background of the bottoming out of the economy in the first quarter, the epidemic spread to many coastal provinces, increasing the downward range of manufacturing PMI; Fiscal expenditure driven infrastructure continued to support the recovery of the construction industry. The service industry was obviously dragged down by the epidemic and the recovery stalled.
Demand dropped significantly, and there were signs of passive inventory replenishment in the manufacturing industry. From January to February this year, the financing demand of enterprises was relatively cold, reflecting that the investment in fixed assets needs to be improved. Due to the impact of the epidemic, we believe that domestic demand will remain depressed: in March, the new order index of manufacturing industry decreased by 1.9 percentage points to 48.8%, returning below the boom and bust line. In terms of external demand, the recovery of overseas production gradually replaced China's export orders, and the new export order index of the manufacturing industry continued to decline, from 49.0% in the previous period to 47.2% in March. In the context of weak overall demand, the inventory index of raw materials and finished products in the manufacturing industry showed differentiation: in March, the inventory index of raw materials decreased by 0.8 percentage points to 47.3%, and the inventory index of finished products rebounded by 1.6 percentage points to 48.9%, reflecting the slowdown of destocking caused by weak demand and the signs of passive inventory replenishment in the manufacturing industry.
Manufacturing inventory pressure pulled down production, superimposed the impact of the rebound in commodity prices, and there was a phenomenon of "falling volume and rising price" in procurement. In March, the inventory balance between new orders and finished products reversed, falling from 3.4 percentage points in the previous period to - 0.1 percentage points, indicating the rising inventory pressure in the manufacturing industry. Inventory pressure led to the anti seasonal weakening of manufacturing production, and the production index decreased from 50.4% in the previous period to 49.5% in March. In March, manufacturing production slowed down, adding the negative impact of epidemic prevention and control on Logistics (manufacturing supplier delivery time index fell to 46.5%), manufacturing procurement volume index (48.7%) and import index (46.9%) decreased by 2.2 and 1.7 percentage points respectively compared with the previous period. Driven by geopolitical factors and overseas economic recovery, commodity prices rebounded as a whole: in March, the prices of nickel ore (+ 29.8%), natural gas (+ 27.3%), iron ore (+ 14.1%) and oil (+ 12.6%) increased significantly. Affected by this, the purchase price index of main raw materials in the manufacturing industry rose from 60.0% in the previous period to 66.1% in March, and the ex factory price index rose from 54.1% in the previous period to 56.7% in March. We expect this to push up the month on month growth rate of PPI in March by about 0.4 percentage points.
The drop in demand has a significant impact on medium-sized manufacturing enterprises, and the contraction trend of small enterprises has improved. In March, the PMI of large enterprises decreased by 0.5 percentage points to 51.3%, the lowest value this year; The PMI of medium-sized enterprises decreased by 2.9 percentage points to 48.5%, the lowest since February 2020; PMI of small enterprises rebounded by 1.5 percentage points to 46.6%, the highest value this year. The recovery trend of enterprises of different sizes is mainly affected by the demand side, which is consistent with the change range of new order index of various types of enterprises in March: large enterprises (- 1.6 percentage points), medium-sized enterprises (- 5.3 percentage points) and small enterprises (+ 2.3 percentage points).
The pressure of "weakening expectations" is still on, and the premise of steady growth is to stabilize expectations. In March, the expected indexes of construction industry (60.3%), manufacturing industry (55.7%) and service industry (53.6%) were still on the rise and fall line, but decreased by 5.7, 3.0 and 6.0 percentage points respectively compared with the previous period. As we pointed out in the 2022 government work report - "take the initiative to act" and stabilize not only growth, adjusting expectations is of great importance in macro policies, because expectations have self-fulfilling prophecy. If the unbalanced expectations are not adjusted in time, the effectiveness of macro policies will be reduced. We still emphasize the importance of domestic demand in boosting economic growth in 2022: whether credit expansion promotes investment improvement or ensuring consumption recovery while stabilizing the epidemic, it will provide support for stable expectations and steady growth.
