Asia's factories show worst may be over as China demand picks up

SINGAPORE (BLOOMBERG) – Asia’s factory managers saw glimmers of hope in June, with the region’s purchasing managers indexes (PMIs) turning up across the board as demand from China picked up.

PMIs for Japan, South Korea, and Taiwan – the region’s manufacturing powerhouses – improved slightly, but stayed below 50, the dividing line between contraction and expansion. Factory output in Vietnam and Malaysia grew for the first time since January and December, before the virus spread in the region. Indonesia’s index surged almost 11 points, the biggest increase since at least 2011, while remaining below 50.

The signs of a turnaround follow a report earlier this week that showed an official gauge for China’s factory activity rose in June to 50.9 from 50.6 a month earlier. The non-manufacturing measure increased to 54.4.

Financial markets rallied in the second quarter, buoyed by optimism that reopenings globally would damp soaring unemployment and reinvigorate consumption. However, setbacks in controlling virus outbreaks in many countries, including the US, have curbed sentiment. Bloomberg Economics now expects a 4.7 per cent contraction in the global economy this year, down from a previous estimate of a 4 per cent contraction.

Bloomberg’s chief Asia economist Chang Shu said: “Asia’s June manufacturing purchasing managers’ indexes indicated most economies are recovering, though at varying speeds. China’s official PMI showed that the recovery accelerated, supported by external demand. Some economies such as Australia experienced an initial strong rebound as lockdowns were relaxed. Some others – notably Japan – remained deep in contraction.”

Analysis at Oxford Economics found that regional exports are headed for their worst outcome in years, even as the easing of lockdowns paves the way for a gradual recovery.

“The easing in global restrictions and improving Chinese demand are encouraging, but we expect regional exports to remain under pressure in the short term, given the ongoing global recession,” Oxford Economics analyst Sian Fenner wrote in a note before the PMI data.

In South Korea, a bellwether for global trade, exports continued to contract in June, but at a slower pace than in previous months. Shipments fell 10.9 per cent from a year ago, an improvement from the 23.6 per cent slump in May.

“Given the cyclical nature of South Korea’s export-oriented economy, it appears the chances of a slow recovery from the Covid-19 economic shock are rising,” said Joe Hayes, an economist at IHS Markit. “Without a sustained pickup in demand, manufacturing output levels will likely remain subdued.”

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