BEIJING, (Reuters) – China’s factory activity fell at its sharpest pace in over 23 months in January. This reflects the economic cost of the zero-COVID policy. The country’s surging cases, as well as tough containment measures, have weighed down on both output and demand. A private survey was conducted on Sunday.

In January, the Caixin/Markit Manufacturing Purchasing Managements’ Index (PMI), fell to 49.1. This is its lowest point since February 2020 when the country was still struggling from COVID-19 lockdowns.

A Reuters poll showed that economists expected the index would fall to 50.4, from December’s 50.9, but they still expect some growth. On a monthly basis, the 50-mark separates contraction from growth.

This unexpectedly poor reading will likely increase expectations in the markets that policymakers will continue to implement more supportive measures to help stabilize the economy. China’s central banks have already begun to reduce interest rates and inject more money into the financial sector in an effort to lower borrowing costs. Further easing actions are likely within weeks.

An index sub-index measuring factory output was at 48.4 in December. It had been 52.7 in December. The study showed that firms were reporting lower new business intakes, as well as the impact of a recent increase in COVID-19-related cases.

The decline in demand was also evident as both new orders and export orders decreased at their fastest pace since August. China’s exports were the only bright spot in last year’s second half.

The result was a renewed squeeze on the labor market with the employment gauge falling to the lowest point in nearly two years.

Wang Zhe of Caixin Insight Group, a senior economist, stated that “from December to January the resurgence in Covid-19 was found in many regions, including Xian, Beijing.”

It became clearer that China’s economy was suffering from the triple pressures of declining demand, weakening expectations and supply shocks.

Many auto- and chip maker operations were shut down by a sudden increase in COVID-19 incidences since December. Production has slowly returned to normal after the city was liberated from a lockdown.

The inflationary pressures rose in January as well, and manufacturers are more optimistic about the future. Firms remain confident that China will be able control COVID-19.

It started 2021 strong, recovering from the pandemic-induced depression of 2020. But it suffered a slowdown in the summer due to rising debt and COVID-19-related outbreaks, which have had a negative impact on consumer spending.

On Wednesday, the International Monetary Fund reduced its forecast for China’s growth in 2022 to 4.8% from 5.6%. This is due to the downturn in property and the impact of strict coronavirus restrictions on consumption.

From a year prior, 4.0% was recorded in the fourth quarter. It is also its lowest growth rate in just one-and-a half years.