A festival of fireworks will light up the New Year across the world in the next few hours. For China, it could herald the start of a challenging 12 months.

On Monday, the curtain came down on 2018 with another set of numbers illustrating the depth of the economic downturn as Beijing battles sluggish growth just weeks before crucial trade talks resume with the United States next month.

Factory activity in the country’s manufacturing sector contracted in December for the first time in more than two years, highlighting the problems ahead.

The official Purchasing Manager’s Index, or PMI, fell to 49.4 from November’s figure of 50.0, which separates expansion from contraction, data released by the National Bureau of Statistics showed.

“The slowdown will continue into next year,” Larry Hu, an economist at Macquarie Securities in Hong Kong, told Bloomberg. “The weak PMI could result in more government stimulus to shore up the economy.”

Last week, China’s Bureau of Statistics revealed that industrial profits fell 1.8% to 594.8 billion yuan (US$86.33 billion) in November compared to the same period in 2017. This was the first decline since December 2015.

But then, this has been a depressing fourth quarter for the world’s second-largest economy despite the trade war truce, which was thrashed out by US President Donald Trump and China’s head of state Xi Jinping at the Group of 20 summit in Buenos Aires earlier this month.

Consumer spending

Manufacturing activity has declined, consumer spending has shrunk and new car sales have stalled. A cooling property market has also been squeezed by tighter credit restrictions.

At least growth in China’s services industry picked up this month with the official non-manufacturing PMI edging higher to 53.8 from 53.4 in November.

Still, more pain could be on the way as the delayed shocks from multi-billion-dollar, tit-for-tat tariffs, which were rolled out in the summer, kick in.

“With tariffs, we haven’t seen the direct impact, but we’ll see that next year,” Tom Rafferty, the principal economist for China, at The Economist Intelligence Unit, said.

“The risk here [is] it’s going to slow down pretty clear into 2019. Global demand is going to shift down a notch or two,” he added.

Yet one positive development will be the resumption of trade talks in January.

The signs are encouraging after Trump tweeted at the weekend that he had a “long and very good call” with Xi, and that discussions were heading in the right direction.

“Just had a long and very good call with President Xi,” Trump said on Twitter. “Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!”

China’s state-run media was just as bullish.

‘New Year’s gift’

In an editorial, Global Times stressed that the prospects of a breakthrough to end the 10-month long conflict were “good.”

“It can be seen as a New Year’s gift from the two leaders to the people of the two countries and the world,” the English-language tabloid, which is run by the official newspaper of the ruling Communist Party, the People’s Daily, said.

Global Times concluded:

“It is sincerely hoped that the power of logic is stronger than that of uncertainty. It is better for Chinese people to trust the government with the trade talks because it will surely do its due diligence and endeavor to get the best results.

“Also, Chinese people need to be patient over progress in the Sino-US talks as that is one of the significant hallmarks of citizens of a rising power like China.”

While Beijing has made all the right noises, Washington will want a detailed blueprint about its future trading relationship.

This will include a timeline for change before the 90-day ceasefire expires on March 1 after putting increased tariffs on Chinese imports worth nearly $250 billion on hold.

A statement from China’s Foreign Ministry underlined the tough road ahead.

“The two sides should view each other’s strategic intentions in a rational and objective manner, step up strategic communication, enhance strategic mutual trust and avoid strategic misjudgment,” Lu Kang, a ministerial spokesman, said in a statement.

“The two sides should respect each other’s sovereignty, security and development interests, and properly manage differences in an effort to avoid disturbing the general picture of bilateral ties,” he added.

In short, no verbal fireworks.