China’s vast factory sector flatlined last month as exports shrank and jobs were cut, a worrying trend evident across Asia that argues for yet more policy stimulus as doubts gather over the potency of measures taken so far.
The hard times signaled by a range of surveys was not what the world needed a week after Britain’s vote to leave the EU condemned that bloc to months, if not years, of political and economic instability.
Most of the responses from manufacturers also preceded the Brexit vote, suggesting that this month could be even tougher.
“The unimaginable has happened and the UK vote will cast a long shadow over the UK, Europe and global markets for some time to come,” Westpac Banking Corp’s head currency strategist Robert Rennie said. “A structurally weaker pound, a softer euro and weaker global growth beckons.”
Among the many surveys out yesterday, China’s official purchasing managers’ index (PMI) slipped a tick to 50 last month, dead on the level that is supposed to separate growth from contraction.
One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity.
More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month trough of 48.6 last month, from 49.2 in May.
“Panelists widely commented that poor market conditions and a drop in new work had led them to cut output,” Caixin reported. “Data suggested that part of the weakness stemmed from softer foreign client demand, with new export sales declining for the seventh month in a row.”
That had to be a disappointment to Beijing, which has resorted to ever-looser fiscal and monetary policy to support growth and jobs in the world’s second-largest economy.
It was a frustration likely shared by the Bank of Japan, which found major manufacturers in a morose mood despite all of its attempts at aggressive easing.
The reasons were clear in the Markit/Nikkei measure of Japan’s PMI which edged up slightly to 48.1 last month, but stayed in contractionary territory for the fourth straight month.
Government data were no better with household spending down for the third month in a row and core consumer prices suffering their biggest annual drop of 0.4 percent in May since 2013.
Markets reacted by driving Japanese government bond yields deeper into negative territory. Investors now pay 24 basis points for the privilege of lending Japan money for 10 years, a once unthinkable condition that is becoming standard fare.
The news from South Korea was relatively cheery as its PMI reached a six-month high, yet at 50.5 it was just barely into expansionary territory. Indeed, a separate report showed shipments from the world’s sixth-largest exporter fell for an 18th straight month.
India’s PMI did hit a three-month top of 51.7, but it remains an outlier in an Asian region which could face a whole new threat should the Brexit vote herald a wider retreat from free trade.
Vaninder Singh, an economist at Royal Bank of Scotland (RBS) Group PLC in Singapore, said the region had been the greatest beneficiary of globalization and any shift to trade barriers or closed borders would hurt Asia the most.
“Overall, what is clear to us is that the impact, will be limited in the near term, but much more significant in the medium term,” Singh said.
“We expect this event and what it represents to subtract as much as 0.3 percent from growth next year compared to our pre-event baseline and expect Asian central banks to respond with another round of easing,” he said.
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