Factory activity in a range of Asia economies saw some weakness in March even though there was a rebound in China’s lacklustre domestic demand. Outlook for Asian economies worsened if we take clues from the Asia’s factory activity data. Reuters reported that there was some weakness in factory activity in several Asian economies in March.
That being said, there were some brighter signs in China and South Korea, which offers a mixed picture about the outlook for global economy.
Which countries showed some optimism in their factory activity data?
China’s Caixin/S&P Global manufacturing purchasing managers’ index (PMI) went up to 51.1 in March 2024, exhibiting a rise from 50.9 seen in previous month. As a result, this exhibits that there has been an expansion at fastest pace in ~13 months as business confidence touched 11-month high.
Apart from this data, an official PMI survey which was released on Sunday showcased that China’s factory activity saw an expansion for first time in ~6 months. Rebound in China, an economy which continues to struggle for a strong economic revival mainly because of protracted property crisis, gave some relief to Beijing and investors.
Elsewhere, separate data exhibited that South Korea’s exports went up by ~3.1% in March year-on-year. This data marks 6th straight month of rise as a result of strong and resilient demand for chips.
Which countries saw brunt of economic slowdown?
While outlook for Asian economies worsened, several leading Asian economies saw contraction in their activity data. This has raised concerns for economic slowdown. Manufacturing activity remained weak in several parts of Asia which includes export powerhouses Japan and South Korea, together with Taiwan, Malaysia and Vietnam.
Japan’s factory activity for the month of March saw some contraction for 10th consecutive month, even though decline was least pronounced in ~4 months. This was because there were softer contractions in terms of output and orders.
Japan’s final au Jibun Bank PMI came in at ~48.2 in March, marking highest level since the month of November and seeing some recovery from February’s ~47.2. This marks the fastest pace of contraction in more than 3 – 1/2 years.
Activity saw some contraction for 10th straight month because new export orders declined. This exhibits souring sentiments in some of the critical markets such as China and North America. South Korea’s manufacturing activity weakened in March. This was because slowing domestic demand mitigated the increased overseas sales. PMI declined to ~49.8 in March in comparison to ~50.7 in February.
Why a rebound in China still a matter of worry?
Despite some improved momentum in Chinese economy, experts continue to believe that outlook for Asian economies worsened. Chief economist at Dai-ichi Life Research Institute presented their views. It has been stated that China’s exports are gaining momentum because they continue to supply cheaper goods.
Therefore, it exhibits that several other Asian countries are required to compete with China for that demand which is not growing. Since there is no clear enabler of global growth, it is very difficult to believe that Asian economies are their path to economic recovery.
In January 2024, IMF released updated forecasts in which the global agency expected that Asia economy will be able to expand ~4.5% this year. This growth should be able to stem from strong US demand and boost from stimulus measures launched in China.
However, IMF also highlighted that recovery is expected to be divergent throughout economies with Japan anticipating to see growth declining to ~0.9%. In contrast, India should be able to expand by 6.5%.
A recent report by PIMCO highlighted that post major developed market (DM) economies showing unexpected resilience in 2023, experts believe that there will be a downshift toward stagnation or mild contraction for the year ending 2024. DM (Developed markets) inflation appears to be finally easing, hiking cycles are expected to end soon and attention has now shifted to timing and frequency of interest rate cuts.
In Asia Pacific, a region where markets seem to be diverse just as their cultures, outlook for each economy tends to vary. Economies with more interest-rate-sensitive, variable-rate debt markets, like Australia and New Zealand, might slow at a quicker pace. This will be mainly because of weaker consumption growth.
Final Thoughts
On the other hand, in emerging Asia, strong domestic demand and the US Fed’s planned cuts are expected to support sustained, but moderated growth. Finally, Japan seems to be headed for potential hikes, with the economy departing from 25 years of deflation.
With major banks in other developed markets pausing rate increases or planning cuts this year, global experts believe that Bank of Japan (BOJ) will abolish negative interest rate policy. This will be followed by slightest policy rate increase from ~-0.1% – ~0.25%.
With inflation expected to remain persistent as a result of strong wage growth, conditions for exiting negative interest rate policy should provide some support.