(Bloomberg) -- China’s services activity accelerated in March, a private survey showed, adding to expectations that stronger demand will bolster the economy’s recovery this year. 

The Caixin China services purchasing managers’ index rose to 57.8 in March, the strongest level since November 2020, Caixin and S&P Global said in a statement Thursday. That was higher than economists’ expectations the data would match February’s reading of 55.

Any reading over 50 indicates an expansion from the prior month, while a number below that suggests contraction.

Strong services readings indicate “consumption remains solid and will continue to take the driving seat for the economic recovery,” said Zhou Hao, chief economist at Guotai Junan International Holdings.

The country’s economic rebound has shown encouraging signs in recent weeks, with official gauges of activity gathering pace and home sales rising in March for a second month. Key now to the growth outlook this year is whether household and business confidence will continue to pick up, given how much the recovery is likely to rely on sustainable improvement in jobs, income and demand. 

The Caixin survey focuses on smaller firms compared to the official services PMI, which last week jumped to 56.9 — the highest on record. The overall official non-manufacturing index, which measures activity in services and the construction sector, topped 58.2, the strongest level since May 2011.

What Bloomberg Economics Says ...

“The end of Covid Zero restrictions has unleashed a recovery — but progress is patchy. We still think China’s growth will pick up and beat the government’s conservative 5% target for 2023. But confidence must improve. Households and businesses appear reluctant to put too much faith in the government’s recent pro-private business pivot, although they no longer must worry about virus lockdowns.”

— Chang Shu and Eric Zhu, economists

Read the full report here.

“Services supply and demand expanded rapidly last month,” said Wang Zhe, senior economist at Caixin Insight Group, in a statement accompanying the Caixin data. “The market returned to normal quickly after the most recent wave of Covid-19 infections subsided, fueling both supply and demand.”

Several sub-gauges in the Caixin survey showed improvement in March, with those for business activity and total new business expanding to reach their highest levels since November 2020. 

A measure for new export orders logged the best reading since records began in September 2014, Caixin said in a statement, as international travel restrictions eased. 

Consumer Sentiment

In another clue for the direction of the recovery, a central bank survey released this week showed Chinese consumers reported an increase in their incomes for the first time in a year. 

The People’s Bank of China’s index of income sentiment — a measure of whether household incomes grew — was at 50.7 in the first quarter, climbing above the 50 mark that signaled an expansion. The data is based on a poll of 20,000 depositors across the country.

That level was still below pre-pandemic rates, though, suggesting the economy’s recovery needs more policy support. And while households’ experience of the job market was better than the previous quarter, that gauge in the PBOC survey remained below 50 — suggesting a worsening outlook overall.

The labor market’s outlook remains subdued as well. The official employment PMI for March released last week showed a contraction in businesses’ hiring sentiment. 

Separately, the PBOC’s business profitability index, based on a survey of 5,000 firms, fell to its weakest level since the onset of the pandemic in 2020.

“With ongoing labor market pressures, policymakers will need to keep the foot on the gas in terms of policy support,” economists at HSBC Holdings Plc wrote earlier in a note on the PMI data.

--With assistance from Fran Wang.

(Updates to include details from the PBOC’s survey this week.)

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