Is Asia facing further downside risk?

For the first time since 2014, manufacturing in the region (excluding south-east Asian economies which are holding up well) is experiencing a synchronised slowdown. Data since the beginning of 2019 show manufacturing Purchasing Manager’s Indexes (PMIs) in several Asian economies have missed expectations. So has inflation.

"Manufacturing activity in China, South Korea, Taiwan and Malaysia is heading toward its weakest levels in nearly three years.”

For the first time since 2014, manufacturing in the region (excluding south-east Asian economies which are holding up well) is experiencing a synchronised slowdown. Data since the beginning of 2019 show manufacturing Purchasing Manager’s Indexes (PMIs) in several Asian economies have missed expectations. So has inflation.

Manufacturing activity in China, South Korea, Taiwan and Malaysia is heading toward the weakest levels in nearly three years - since the last trade recession in 2015-16.

Other indicators like new orders and the sales-to-inventory ratios point to further downside risk to gross domestic product growth. In the meantime, headline inflation has undershot by a large margin in most economies.

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After a number of rate hikes in 2018, real interest rates in Asia are now at their highest since 2009. Markets will likely remain volatile in the short term however outperformance is likely if the US takes a pause in rate hikes or recalibrates its balance sheet unwinding.

Trade talks between the US and China are a wildcard but a market rout and weakening data may nudge both parties towards a welcome deal - even if it is not a permanent fix.

Remember December

December PMIs of Asian economies show manufacturing activity in China, South Korea, Taiwan and Malaysia is currently in contractionary territory. Using GDP weights, Asia’s overall manufacturing activity is just a tad above the break-even mark.

If not for the Southeast Asian economies still in an expansionary zone (save for Malaysia) the region’s manufacturing activity could already have slid into contraction. The last time the region’s PMI was in negative territory was during the 2015-16 trade recession.

In terms of actual trade numbers, over half of the economies in Asia (South Korea, Taiwan, Hong Kong, Philippines, Thailand, Singapore and Indonesia) saw a contraction in exports while exports in the rest (China, India, Malaysia and Vietnam) posted low single-digit growth rates.

Overall the data point to downside risks to GDP growth in Asia in the coming quarters - similar to that seen in 2015.

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To learn more, read the full report on ANZ’s Institutional site.

Irene Cheung is Senior Strategist, Asia and Raymond Yeung is Chief Economist, Greater China at ANZ