SINGAPORE (ICIS)--Manufacturing conditions in southeast Asia deteriorated for the first time this year in July, with the region’s purchasing managers index (PMI) falling below threshold for expansion amid weakening overseas demand.
The ASEAN manufacturing PMI slipped to 49.3 in July from 50.0 in June, based on joint readings by Japanese media group Nikkei and financial information services provider IHS Markit.
The PMI is a barometer of an economy's manufacturing performance, with a reading of 50 and above indicating expansion.
But the southeast Asian region remains on track to post solid economic growth this year, according to analysts.
ASEAN’s economy “continued to jog along” in the second quarter of 2017, based on preliminary estimates of regional GDP growth, Spain-based FocusEconomics said.
“FocusEconomics analysts raised ASEAN’s outlook after four months of unchanged prospects. After a 4.6% expansion in 2016, our panel sees GDP increasing 4.9% this year, which is up 0.1 percentage point from last month’s forecast, as the region slowly gains steam,” the research firm said in its August Consensus Forecast Report.
Weighing on the ASEAN manufacturing economy were declines in both total new orders and output, which in turn weighed on staff hiring, according to Nikkei.
The Nikkei PMI data for July showed five of the seven countries being tracked in the region had readings below 50, compared with three in June. (Please see interactive map below)
“Survey data indicated that demand for ASEAN manufactured goods weakened at the start of the third quarter,” Nikkei said.
“Lower volumes of total new business led factories to cut back on production in July. The fall in output was the first so far this year, with the rate of contraction the steepest since November 2015,” it said.
Weaker demand was not only limited to the domestic market, but foreign orders as well, as indicated by decline in new export sales in July after posting expansion throughout the second quarter, it said.
In northeast Asia, manufacturing activities in China and Japan weakened in July from the previous month, but remained in expansionary mode, based on Nikkei’s PMI readings. Taiwan’s PMI edged higher while South Korea’s PMI fell below 50, it said.
China’s official manufacturing PMI fell to 51.4 in July from 51.7 in June, while the Caixin PMI reading for the economy was slightly higher at 51.1. (Please see interactive chart below)
“The July official PMI and our proprietary indices suggest growth momentum is losing steam after the rebound in June,” analysts at Japanese brokerage Nomura said in a note.
“We expect growth of industrial production, investment, and consumption to moderate slightly in July,” they said.
China’s growth rates for both exports and imports are expected to moderate but should remain in double digits, the Nomura analysts.
The Philippines and Vietnam remained the top two regional performers in July and were the only countries to see manufacturing sector conditions improve in southeast Asia, although the rate of improvement in their PMI readings were more moderate compared with the previous month.
For Thailand and Singapore, Nikkei’s July PMI readings below 50.
Indonesia, the biggest economy in the region, recorded a second consecutive month of worsening business conditions, with the rate of deterioration the quickest seen in a year.
Malaysia continued to signal contraction in manufacturing output in July, but its PMI reading in July was off lows hit in June.
“Weaker demand had an impact on production volumes and backlogs, which in turn harmed employment prospects,” IHS Markit economist Bernard Aw said.
“Moreover, business optimism remained below the historical average, reflecting uncertainties over manufacturing growth across the region,” Aw said.
Based on FocusEconomics’s forecasts, Indonesia’s economy will expand at a rate of 5.2%, with the Malaysian and Thai economies logging in a 4.9% growth and a 3.4% growth, respectively.
Myanmar will be the region’s fastest-growing economy this year, with growth projected at 7.4%, followed by Cambodia, it said.
On the other end of the spectrum, Brunei will grow a tepid 1.1% and the more mature economy of Singapore is seen expanding at a 2.4% rate.
Picture: Women work at Sritex textile factory in Solo, Central Java Province, Indonesia (ZUMA/REX/Shutterstock)
Focus article by Nurluqman Suratman