July 1, 2011 / 6:53 AM / 9 years ago

GLOBAL ECONOMY-Asia factory growth fades as new orders dry up

BEIJING, July 1 (Reuters) - Sagging export demand cooled Asian manufacturing activity in June, surveys released on Friday showed, reinforcing concerns that a slowdown in the United States and Europe was sapping world economic growth.

Purchasing managers’ indexes slid to multi-month lows in China, India, South Korea and Taiwan as factories fought a twin battle with weaker consumer demand overseas and tightening monetary policy at home.

This was the second consecutive month of disappointingly weak readings. Economists have blamed a combination of Japan’s devastating earthquake, a steep rise in oil prices, and Europe’s sovereign debt troubles for what they dub a “soft patch.”

Figures from Europe and the United States are due later on Friday, and both sets are expected to show growth in factory activity slowed from May.

While many economists predict a second-half recovery and argue that Asia is well positioned to weather the slowdown, both investor and consumer confidence have slumped in recent weeks in many regions.

Japan’s tankan survey of business confidence showed its first quarterly decline since the global financial crisis, although big manufacturers said they expected improvement in the coming months.

In China, the official PMI fell to a 28-month low of 50.9, indicating production grew only marginally from the previous month. The 50-point level demarcates expansion from contraction.

The pullback in China, which was slightly sharper than expected, led some analysts to predict Beijing may be less aggressive in tightening monetary conditions later this year.

“This will further depress markets which have been increasingly worried about a hard landing in China,” said Ting Lu, an economist at Bank of America-Merrill Lynch in Hong Kong.

He said Beijing could hold off on additional increases in its bank reserve ratio requirement, already at a record high of 21.5 percent, but argued China was more likely facing a soft landing where growth slows but doesn’t collapse.

Indian manufacturers also seemed to be under pressure, with the HSBC Markit PMI dropping more than two percentage points to a nine-month trough of 55.3.

South Korea’s index hit a seven-month low, while Taiwan’s fell below 50 for the first time since October. Both showed sluggish growth in new export orders.

HSBC said purchasing managers in Taiwan reported strong demand from China, but this was offset by declining orders from the United States and Europe.


While months of policy tightening in China and India no doubt contributed to the slower growth, it was clear that both emerging giants were also feeling the pinch from cautious shoppers in key export markets in the United States and Europe.

The official sub-index for new export orders in the China PMI fell to 50.5 in June as backlogs for new orders shrank for a second straight month.

In India, the PMI recorded its steepest monthly fall since November 2008, when global trade collapsed following Lehman Brothers’ bankruptcy. Output in June fell sharply, hurt by a decline in new orders and labour shortages.

Recent readings on retail sales out of Germany and Britain have looked weak, and U.S. consumption has tailed off since a strong finish to 2010. U.S. company executives at the Reuters Global Consumer & Retail Summit this week said they were ordering merchandise cautiously so as not to get stuck with unwanted inventory if consumer spending stays soft.


The fall-off in demand and the recent slump in oil prices helped ease inflation pressures somewhat in most of the countries surveyed — with India a notable exception. Still, inflation remains elevated throughout Asia, leaving policymakers in a tightening mode.

“Tight capacity and monetary tightening is constraining growth. However, inflation pressures are still firmly in place, calling for further policy rate hikes to anchor inflation expectations,” said Leif Eskesen, the chief economist for India & ASEAN at HSBC.

The Chinese official PMI survey showed prices climbing at a slower pace than in May. The input prices sub-index, a measure of how much factories pay for raw materials and intermediary goods, eased to 56.7 in June from May’s 60.3.

“I think it is too early to talk about loosening policy based on the current growth number as inflation is still a concern in the near term,” said Dongming Xie, an economist at OCBC Bank in Singapore. (Additional reporting by Jonathan Standing, Anooja Debnath, Zhou Xin, Kevin Yao, Yoo Choonsik; editing by Emily Kaiser)

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