China’s manufacturing sector unexpectedly contracted in July, with the official purchasing managers’ index (PMI) dropping to 49.2 from 50.3 in June, the National Bureau of Statistics reported on Friday. The reading, which fell well below the 50.1 expansion forecast by economists, marks the first time the gauge has slipped below the 50-point threshold separating growth from contraction in five months.

The decline was driven by a sharp deterioration in demand. The sub-index for new orders tumbled to 48.5, its lowest level since 2023, from 51.2 in June, while the production sub-index fell to 49.9 from 51.4. Weakness in domestic goods demand and building activity contributed to the slide, according to Capital Economics, and several typhoons that hit China in July may have also disrupted manufacturing. The non-manufacturing PMI, which covers services and construction, fell even more steeply to 49.0, its most pronounced contraction in more than three years.

Lynn Song, chief economist for Greater China at ING Bank, described the data as “an unpromising start to the first wave of economic data for the second half of the year.” The figures landed a day after President Xi Jinping acknowledged “difficulties and challenges” facing the economy and called for more effective macroeconomic policies and a focus on tapping domestic demand. Robust exports of electronics and AI hardware have provided a lifeline, but the economy grew at its slowest annual pace in more than three years in the second quarter, at 4.3%, falling short of the official full-year target of 4.5% to 5%.

Economists expect China to continue to rely on exports to support growth for the rest of the year, while Beijing has pledged to boost domestic consumption. The next milestone to watch will be whether the Politburo’s recent pledges translate into concrete stimulus measures that can arrest the slide in domestic demand.