Asia’s Factories Parched for Demand, Need Stimulus

Although China is taking the biggest hit, all Asian manufacturing industries are shrinking with it.

• China manufacturing PMI dips to 49.4, services to 53.5 in January
  
• Much of Asia’s manufacturing shrinking, Japan and India outperform
  
• Pressure mounts for more policy easing, competitive currencies
  

January updates on Asia’s mammoth factory sector released on Monday, 1 February, showed the new year began much as the old one ended – with too much capacity chasing too little demand. China was again the epicentre of disappointment as its official measure of manufacturing fell to the lowest since mid-2012, but the weakness also encompassed such bellwethers of high-tech trade as South Korea and Taiwan.

The dearth of demand and resulting downward pressure on inflation was why the Bank of Japan (BOJ) decided to cut interest rates below zero last week, and why many more are likely to ease further this year. The data are indicative of the European and US surveys later in the day, with growth in manufacturing activity likely to be static in the euro zone and contract across the Atlantic.

One risk is that developed world businesses pull back in the face of rising currencies, weak productivity, and sub-par emerging market demand. Central banks recognise these risks, and experience shows that they respond quickly to weakness in their industrial sectors, even when it isn’t a precursor to recession. Based on past experience, JPMorgan suspected the continued stagnation of manufacturing could result in a full percentage point of monetary easing in one form or other.

Bruce Kasman, Head of Economic Research, JPMorgan

The official version of China’s PMI survey for manufacturing slipped to 49.4 in January, from 49.7 the month before and short of forecasts of 49.6. While the miss was minor, the services index also disappointed by easing to 53.5 and challenged hopes consumption would take over from industry as the driving force for the world’s second-largest economy. A private survey, the Caixin/Markit China Manufacturing PMI, underscored the trend by showing factory activity shrinking for the 11th consecutive month.

More Demand Required

The news was relatively brighter in Japan where its factory barometer slipped only a tick to 52.3 in January as a pickup in exports helped keep activity expanding. Yet that export performance relied on the yen staying weak, hinting at another reason the BOJ acted so boldly when easing policy last week.

India also recorded an unexpected return to growth as its erratic PMI jumped to a four-month high of 51.1 in January, after slumping to a 28-month low of 49.1 in December. Other countries in the region were not so fortunate. South Korea’s manufacturing index eased into contractionary territory in January at 49.5, while the country’s exports suffered the sharpest annual fall since August 2009.

China is South Korea’s largest export market, taking about one-quarter of shipments, followed by the US and the European Union. Smartphones, cars, semiconductors and flat-screen displays all notched falls in January, boding ill for bellwether companies traditionally propping up the economy.

The story was much the same for another electronics hub, Taiwan, where factory growth slowed amid lacklustre demand. Steep falls in selling prices and input costs also underlined the risks of deflation across the region, and the need for yet more stimulus.