Asia: Weak PMIs across the region – Westpac

Simon Murray, Research Analyst at Westpac, explains that PMIs decelerated for a second consecutive month in Japan, India and Indonesia in July and the fall was driven by slower output and new order expansion in Japan, while both series contracted in India and Indonesia.

Key Quotes

“A divide between the developed world – where most PMIs are well above 50, signalling manufacturing expansion – and the developing world is becoming more evident. Indeed the ASEAN PMI aggregate is now also contracting.”

“The Japanese PMI fell 0.3pts to 52.1 in July as a sharp slowing in export orders led to reduced total new orders and output. But, in recent months, the trend in export orders has been very positive. July’s drop therefore is potentially a false signal, particularly as PMIs across the broader developed world remain strong.”

“India’s PMI plunged 3.1pts to 47.9 in the first PMI read following the introduction of the GST. The sharp drop leaves the headline PMI, output and new orders at lows not seen since the financial crisis. Anecdotes from the survey suggest that the tiered structure of the GST and the removal of previous taxes has caused confusion in negotiating prices and billing systems. Firms’ forward outlook remains positive, so it is likely that, as they adjust, manufacturing will recover.”

“Indonesia’s PMI dropped 1.0pt to 48.6 in July, a level not seen since early 2016. Contraction was evident across all production metrics, with domestic demand lacklustre as foreign demand waned.”

“Japan’s employment sub-index eased, but firms are still increasing employment at a high rate. India’s jobs sub-index fell marginally below 50, but given the disruption to business, the July result is insignificant. Employment in Indonesia contracted at a quicker rate in July, but the trend over 3 months is still positive.”

“Input price inflation slowed in Japan and Indonesia but was relatively unchanged in India. Relative to historic norms, manufacturing costs are increasing at a quicker pace in Japan, which has seen a similar move in the output price index. That said, downstream, both headline and core CPI inflation remains flat over the year.”

“Output price inflation was broadly similar except in India where anecdotes point to discounting in order to boost sales during the GST disruption. Also relevant is that, while India’s GST results in a lower tax rate in aggregate, the tiered structure (ranging from 0-28%) means variation across industries is large. Inflation in India has declined in recent periods. Combined with slower activity growth, this has seen the RBI cut the repo rate by 25bps.”