Factory activity weakened across Asia last month as the US-China trade spat and a slowdown in Chinese demand hit production in most economies, strengthening the case for a pause in interest rate hikes in the region this year.
A series of purchasing managers’ indices (PMIs) for last month released yesterday mostly showed declines or slowdowns in manufacturing factory activity across the region.
In China, the Caixin/Markit PMI slipped into contraction territory for the first time in 19 months, broadly tracking an official survey released on Monday.
Photo: AFP
China’s weakness spilled over to other Asian economies, with Taiwan contracting to its lowest since September 2015 and Malaysia’s manufacturing activity shrinking to its weakest pace of expansion since it launched the survey in 2012.
Official economic data out of Singapore showed that its GDP grew slower than forecast in the fourth quarter as the city-state’s manufacturing sector contracted on a quarterly basis.
With growth slowing and inflation below or barely within target in most countries, Asian central banks are unlikely to continue their tightening cycle this year, barring any shocks in currency markets.
“We are really seeing a global slowdown into this year, and in Asia, particularly export-oriented countries are hurting,” said Irene Cheung, Asia strategist at Australia and New Zealand Banking Group.
“Our expectation for central banks is that most of them won’t change policy in 2019 and these numbers coming out on the weak side won’t change that outlook,” Cheung said.
The world’s two largest economies agreed on Dec. 1 to a 90-day truce following tit-for-tat tariffs that have disrupted the flow of hundreds of billions of dollars of goods between the two countries.
The two sides have pledged to hold frequent talks in the next two months, but uncertainty over whether they can bridge massive differences over commercial practices and intellectual property rights remains very high, despite US President Donald Trump noting “big progress” in a tweet.
Tariffs are not the only drag on China’s economy. Beijing’s sustained drive to reduce debt risks in the economy has cooled the property market and curbed credit flows to the private sector.
Meanwhile, the Chinese government’s intensified crackdown on pollution has dented industrial activity.
In a key annual conference last month, China’s top leaders said they would boost support for the economy this year by cutting taxes and keeping liquidity ample, while promising to continue negotiations with Washington.
“The People’s Bank of China may have to ease further to offset the impact of tariffs,” said Robert Michele, chief investment officer and head of fixed income at J.P. Morgan Asset Management.
China’s economic growth slowed to 6.5 percent in the third quarter of last year, the weakest since the global financial crisis.
Reuters reported that government advisers had recommended a growth target of 6 to 6.5 percent for this year at an annual meeting, although the final figure would not be made public until an annual parliament meeting in early March.
A sharp drop in the crude price at the end of last year has improved sentiment for Asia’s oil-importing economies, where trade deficits are a key vulnerability.
Indonesia’s PMI, although still weak historically, rose to 51.2 from November’s 50.4, a four-month high.
The Philippines’ PMI was 53.2.
However, Malaysia, which relies heavily on oil revenues, saw its weakest reading ever at 46.8.
Taiwan and South Korea, which are heavily focused on tech production, also saw their activity shrink.
The US-China trade spat affects chip orders and coincides with a slowdown in demand for smartphones globally.
The contraction in South Korean manufacturing activity continued last month, albeit at a slower pace, its PMI showed, with new export orders declining for a fifth consecutive month.
Vietnam’s PMI fell to 53.8 from November’s 56.5, but the index’s average last year was the highest since the survey’s debut in 2011.
The Southeast Asian economy is widely seen as benefiting from the trade friction as companies look to establish operations in the region to avoid the tariff crossfire.
Japan is to publish its PMIs tomorrow.
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