International | Mar 04 2009
By Chris Shaw
Purchasing Manufacturers Index (PMI) data for China, India, Hong Kong and Singapore all turned higher in January, the first piece of good news for Asian economies since markets dived last year. But as ANZ Banking Group chief economist for Asia, Paul Gruenwald points out the improvement appears to be more of an inflection point than a signal a recovery is underway.
The PMI is a measure of five indicators – new orders, inventory levels, production, supplier deliveries and employment levels and as Gruenwald notes each is customised for a particular economy. The baseline for the index is set at 50, so any reading above that level indicates an improvement in business conditions while a number below 50 is a signal conditions are getting worse.
Looking back at the last quarter of last year, Gruenwald notes emerging Asia experienced a sharp decline in exports, industrial activity and consumption, with the rate of decline across a number of indicators the steepest in many years. PMI was one of the indicators to fall but in January it rebounded in a number of markets, with China experiencing the strongest bounce.
Closer examination of the data leads Gruenwald to conclude new orders in China, India and Singapore are now slowing less quickly than was the case late last year as domestic orders appear to be strengthening somewhat, but reported exports are still weaker than in October last year.
Gruenwald suggests what this means is parts of domestic demand are firm or improving, thus increasing the share of total production destined for domestic demand. Such an outcome makes sense in his view as while consumption has been flat or contracting, manufacturing has slowed more sharply as trade volumes have collapsed.
Another factor helping explain the January bounce in PMI in Gruenwald’s view is when economies turned down sharply in the last few months of last year, companies responded quickly by cutting orders and production. This led to a fall in stocks of finished goods, one that had gone far enough by January to cause some production to restart and force companies to again purchase some necessary materials.
The other factor playing a role is fiscal stimulus measures by governments and here Gruenwald uses China as an example. The traded goods sector is still at distressed PMI levels given the economic downturn and its impact on exports, but the primary consumption and retail trade PMI indicators are holding up fairly well, showing consumption is the only solid pillar of GDP growth at present for the Chinese economy.
What this means, in Gruenwald’s view, is the January upturn in PMI indicators in a number of Asian economies shows only that the rate of decline is slowing rather than turning around as the below 50 readings mean manufacturing conditions are continuing to deteriorate.
Given it remains early days Gruenwald would like to see signs of a more sustained turnaround before becoming more confident in predicting a turnaround is underway. While China is likely to be able to stimulate its own economic growth, the rest of Asia will require a recovery in the US and Europe before a fully fledged economic recovery can take hold in his view.
In terms of specific economies, Gruenwald sees the decline in GDP growth in China as levelling off at present but he continues to expect growth will be below the 8% comfort level for a large part of this year. Hong Kong is likely to experience tough conditions even allowing for a further government stimulus package, while a lack of fiscal policy flexibility at present means further cuts to interest rates are the main policy option for Indian authorities and this will limit the nation’s growth prospects in the current year.
While Indonesia is one of the least exposed nations with respect to trade and enjoys strong consumption, the global slowdown is impacting on growth. ANZ sees domestic demand continuing to contract in coming months and it therefore expects additional expenditure measures by the government as it attempts to stimulate demand. A stimulus package recently introduced in Malaysia is expected to have only limited benefits and with some concerns about political stability at present, the bank expects growth to remain under pressure.
The Philippines have performed relatively well to date during the downturn thanks to strong domestic demand and modest export pressures. ANZ Bank expects growth will remain well supported, the key uncertainty being the potential for external remittances to fall given economic pressures in other nations.
Singapore on the other hand will find the going much tougher this year as both domestic and external demand have fallen sharply, a trend showing few signs of letting up in the bank’s view, even on the back of various stimulatory policy measures from the government. South Korea’s economic indicators suggest growth will decline by around 3% this year but in the bank’s view by the fourth quarter of 2009 there could be some early signs of a recovery emerging.
Similarly, Taiwan appears to be enduring a poor start to the calendar year after a record fall in GDP in 2008. ANZ Bank expects government spending will be the only growth option for much of 2009. Additional stimulus measures are also expected in Thailand, but these won’t be enough to prevent growth from falling to the 1-2% range this year in the bank’s view.
In contrast, Vietnam should do better and record growth of around 5% this year as growth continues to be domestically-led and the economy is less exposed to the global economy. Inflation has also fallen in recent months and ANZ Bank notes this is giving policymakers some scope to ease monetary conditions to stimulate growth.