The services sector across China grew at a slower pace during the month of May, feeling some pressure from a dip in overseas demand even as the industry battled a surge in input costs. The Caixin China General Services PMI dropped from 56.3 in April to 55.1 in May, but stayed above the 50-threshold indicating expansion.

The significant dip came as China’s key trade partners registered a spike in fresh coronavirus infections, driving their demand for services lower amid restrictions and raised uncertainties. Export orders fell into contraction even as other elements of the survey registered positive readings indicating expansion.

Total new orders posted a decline but remained above the 50-mark while hiring activity across the services sector improved for the third consecutive month, even though the pace of growth eased lower since April. However, firms were pressured by soaring input costs amid supply chain challenges driving up the cost of raw materials, in addition to having to pay more for staff, energy as well as transport.

Senior economist at Caixin Insight Group, Dr. Wang Zhe, commented, “Inflationary pressure was enormous as price gauges continued to rise. Both the measures for input costs and the prices service providers charged rose to their highest points of the year. Surveyed enterprises attributed the rise in input costs to growth in raw material, energy, labor and transportation costs. The increased costs and strong demand pushed up the prices service companies charged.”