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Asia's Manufacturing Sector Confronts Sluggish Demand, Pointing to Impending Growth Obstacles

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Sluggish Demand in Asia's Factories Reflects Weak Global Economy

Manufacturing Activity Contracts in Asia's Major Producers

Factories in Asia reported sluggish demand in July as new domestic and global orders slumped at the start of the third quarter, underscoring the lingering weak momentum in the global economy. Six out of the nine private surveys released Tuesday showed that manufacturing activity in Asia's major producers again contracted in July. The reading for China unexpectedly slipped into contraction for the first time in three months. In addition to China, readings for Japan, South Korea, Malaysia, Taiwan, and Vietnam also signaled contraction in manufacturing activity. Only those for India, Indonesia, and the Philippines pointed to expansion.

Weakening External Demand and Subdued Factory Activity

"Manufacturing PMIs remained in contractionary territory across most of Emerging Asia last month and the underlying data point to further weakness ahead," Shivaan Tandon, emerging Asia economist with Capital Economics, wrote in a note Tuesday. "Falling new orders, bleak employment prospects, and high inventory levels point to subdued factory activity in the coming months," he added. "The data reaffirm our view that external demand will constitute a headwind to growth in the second half of 2023." Weak demand also partly contributed to reduced production costs, which may alleviate inflationary pressures and eventually lead to looser monetary policy in some emerging Asian economies.

Taiwan's Manufacturing PMI Plunges to Lowest Level

The manufacturing purchasing managers' index reading for Taiwan was particularly dire, slipping to 44.1 in July from 44.8 in June, according to S&P. The pace of decline was the sharpest recorded since November 2022. New export business in Taiwan — a leading global producer of semiconductors — contracted at the steepest rate for six months, S&P said in its July PMI release for Taiwan. Firms surveyed pointed to reduced demand across a variety of markets, including Europe, Japan, mainland China, and the United States. Rates of contraction in Vietnamese output, new orders, and employment in July were either the weakest or joint-weakest since March.

China's PMI Contracts for the First Time in Three Months

In China, the Caixin/S&P PMI reading fell to 49.2 in July from 50.5 the previous month. It was the first contraction in three months and lower than the median forecast for 50.3 in a Reuters poll. This was driven by a fall in new businesses received by China's producers in July, which contrasted with rising sales volumes in the preceding two months, Caixin/S&P said. New export business also contracted at a solid pace that was the fastest since September last year, according to the survey.

Reduced Production Costs and Softening Inflation

The weak demand for Asia's factory output, though, helped reduce production costs. In Japan, manufacturers signaled that input price inflation continued to decline at the start of the third quarter, "with the latest increase in operating expenses the slowest in close to two-and-a-half years and broadly in line with the long-run series average." South Korea's input prices in July fell at the fastest pace since July 2017, while those in Taiwan fell by the second-sharpest since May 2020. Taiwanese manufacturers cited competitive pricing strategies and price negotiations with clients and improved material availability in July. They were then able to often pass on cost savings on to customers as sale prices were cut at the quickest pace in over three years, S&P said. "Sub-indices for both input and output prices stood near multi-year lows and point to further falls in inflation in the near-term," Capital Economics' Tandon said, referring to emerging East Asian economies. As it stands, the latest official government data showed inflation in South Korea slowed to 2.7% in June from a 6.3% peak about a year ago, while inflation in Taiwan stood at almost 1.8% in June from a peak about a year ago. "The latest data support our view that price pressures are likely to soften steadily in the near-term and, with growth set to struggle and remain well below-trend, central banks in the region are likely to start cutting interest rates soon," he added.

Implications for New Businesses

Challenging Times Ahead in the Global Manufacturing Landscape

The sluggish demand and contraction in manufacturing activity across major producers in Asia highlight the prevailing weak global economy. For new businesses entering the manufacturing sector, these conditions present considerable challenges and careful considerations.

Anticipating Weakened External Demand and Factory Activity

With falling new orders and bleak employment prospects, emerging Asian economies are expected to experience subdued factory activity in the coming months. This suggests that startups in these regions may face a tough market environment, characterized by reduced demand and potentially stronger competition. It is crucial for new businesses to undertake thorough market research and develop robust strategies to navigate these conditions successfully.

Opportunities in Reduced Production Costs

As weak demand contributes to reduced production costs, new businesses can potentially benefit from more favorable operating expenses and decreased inflationary pressures. This may create opportunities for startups to input competitive pricing strategies and negotiate deals with clients, enabling them to offer more attractive value propositions to customers. However, maintaining a balance between cost reduction and maintaining profitability remains crucial for sustainable growth.

Potential Monetary Policy Changes

Given the anticipated softening of inflation and below-trend growth, central banks in the region may potentially implement interest rate cuts. This could have implications for new businesses, such as easier access to financing and lower borrowing costs. Startups should stay informed about any potential policy changes that could impact their financial planning and decision-making.

In summary, entering the manufacturing sector during a period of sluggish demand and contracting manufacturing activity in Asia poses challenges for new businesses. However, it also presents opportunities for cost efficiencies and potentially more favorable monetary policies. Entrepreneurs must carefully analyze market conditions, adapt their strategies accordingly, and leverage available opportunities to navigate this complex landscape successfully.

Article First Published at: https://www.cnbc.com/2023/08/01/asia-july-pmi-factory-activity-economy.html

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