Coronavirus: Asia’s manufacturing hubs face ‘tougher times ahead’, even after dreadful March

Su-Lin Tan

Parts of Asia and Europe were drenched in a bloodbath of manufacturing data on Wednesday, but economists warned that an even greater pummelling lies ahead, as the coronavirus pandemic paralyses global demand.

Surveys released on Wednesday painted a dire picture of some of the world’s key manufacturing hubs, while tumbling sentiment in the Eurozone, home to many companies sourcing parts from East Asia, laid bare the demand shock facing the region.

“It is very clear that we have a demand shock and supply shock simultaneously, but demand shocks are likely to become stronger in the coming months as Asia’s top customers, Europe and the US, are affected by measures to contain the virus,” said Trinh Nguyen, senior emerging Asia economist at Natixis.

“In other words, the sub-components foreshadow tougher times ahead for Asian manufacturers in quarter two of 2020, as they face a world with suppressed demand.”

The day after the World Bank slashed its growth forecast for China and predicted rising poverty in East Asia due to the coronavirus’ economic impact, a slew of new numbers revealed a widespread crash in business confidence.

The Bank of Japan’s Tankan survey showed that sentiment among big companies sunk to a seven-year low in the first quarter of the year, the manufacturing purchasing managers’ index (PMI – a survey of business conditions among factory owners) for the Association of Southeast Asian Nations (Asean) dipped to an all-time low in March, while the Eurozone manufacturing PMI fell to its lowest point since 2009 last month.

“Asean manufacturers reported their worst month on record in March,” read a statement from IHS Markit, which conducted the survey. “Operating conditions deteriorated at the sharpest pace since the survey began in July 2012 amid record declines of output, new orders, inventories and employment.”

Individual manufacturing PMIs plunged across Asia, except for Taiwan and China, both of which outperformed expectations.

The biggest declines were in places imposing aggressive Covid-19 containment efforts, such as the Philippines, where the island of Luzon – responsible for 70 per cent of the national gross domestic product (GDP) – is on strict lockdown. Its manufacturing index collapsed to 39.7 from 52.3 in February. A number above 50 signifies growth, while the further below 50 it goes, the deeper the expected contraction

Vietnam has also pursued an increasingly strict containment policy and has even taken to banning rice exports in a bid to protect the food supply. Its PMI plunged to a record low of 41.9, from 49.0 in February.

The South Korean reading of 44.2 was the worst since January 2009, even though it has pursued a widespread “test and trace” policy in place of a nationwide lockdown. Korean trade data for March, also released on Wednesday, was worse than expected.

Exports fell 0.2 per cent from a year earlier, dragged down by weak shipments of goods including semiconductors, which more than offset the increase in chip demand driven by more people working from home, said Lloyd Chan at Oxford Economics. Imports fell 0.3 per cent because of the lower cost of oil imports.

Alongside a sharp fall in external demand in Europe and the US, quarter two growth is set to be worse than quarter one.

Khoon Goh, ANZ

The regional picture does not bode well for China, a major trading partner, while the continued rise in infections around Asia could depress things further, said Khoon Goh, head of Asia research at ANZ.

“Outside China and Korea, which are seeing their active cases decline, the rest of Asia is seeing an increase in infections,” Goh said. “Alongside a sharp fall in external demand in Europe and the US, quarter two growth is set to be worse than quarter one.”

Taiwan was able to buck the wider Asian trend, with its manufacturing PMI rising to 50.4 in March from 49.9 in February. This was mainly due to its quick response to the coronavirus outbreak, which helped keep infections to a minimum and allowed businesses to largely operate as normal, economists said.

Despite its proximity to China, where the outbreak was first detected, there had been just 329 infections and five deaths as of Wednesday.

“Even so, we expected some deterioration in conditions due to the worsening external environment and would be surprised if this resilience lasted,” said Alex Holmes, Asia economist at Capital Economics.

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