Asia’s factories feel the chill as U.S., Europe cool

Thursday, 2 June 2011 00:00 -     - {{hitsCtrl.values.hits}}

SINGAPORE (Reuters) - Factory growth slowed in major Asian countries, surveys released on Wednesday showed, feeding concerns that the world’s strongest economic engines are cooling down as the United States and Europe curtail orders.

China’s official purchasing managers’ index touched a 9-month low and a private survey hit its lowest mark in 10 months, held back by power shortages and a clamp-down on credit.

Business surveys for South Korea, India and Taiwan also showed the pace of manufacturing activity easing. U.S. and European figures later on Wednesday are expected to show a slowdown for May as well.

Some slackening was expected as quake-damaged Japan struggled to churn out parts for the automotive and high-tech industries. Lacklustre growth and consumption in the United States and Europe has also restrained demand.

But investors are nervously watching for any evidence that Asia’s slowdown is worsening as central bankers tighten credit conditions to try to tame inflation. China’s PMI readings were slightly below economists’ forecasts, and new orders declined sharply, suggesting more weakness to come.

If there was a silver lining, it was that factory cost inflation declined in most of the surveys, easing pressure on central bankers to ratchet up inflation-fighting measures.

Many economists trimmed growth forecasts for China after a recent rash of weaker-than-expected Chinese economic data, which heightened worries that the world’s second-biggest economy was heading for a hard landing.

But economists draw a distinction between China’s current slowdown and the 2008 slump when the financial crisis decimated global trade.

“It is important to point out that China is experiencing an economic slowdown, not a collapse like in the aftermath of Lehman’s bankruptcy,” said Dong Tao, a Credit Suisse economist.

Qu Hongbin, an economist at HSBC, which helps compile the private PMI data, said China was experiencing a “moderation rather than a meltdown in growth, so there is no need to worry about over-tightening (of monetary policy).”

HSBC’s China PMI dipped to 51.6 in May from April’s 51.8, holding above the 50-point level which is the dividing line between growth and contraction.

The government’s data told a similar story. New export orders dipped to 51.1, suggesting demand was weakening as China’s biggest export destinations -- Europe and the United States -- grapple with slowing economic growth.

Credit Suisse expects China’s weak PMI survey readings to persist for at least the next few months as the country deals with power and labour supply shortages as well as a credit crunch that has hit small- and medium-sized firms particularly hard.

Data from South Korea added to evidence that global demand was fading. Exports for May rose 23.5 percent from a year earlier, shy of the 27.4 percent gain that economists polled by Reuters had predicted.

The HSBC/Markit PMI index for South Korea fell to a seasonally adjusted 51.24 from April’s 51.69, the lowest since November. Taiwan’s PMI dropped to 54.9 from 58.2.

“With overseas demand cooling, Korea’s highly trade dependent economy will likely expand at a below-trend pace in the second quarter,” said Frederic Neumann, co-head of Asian economic research at HSBC.

The figures showed a drop in input prices, a welcome development for policymakers under the gun to contain inflation without crushing growth.

India was a key exception as price pressures showed no sign of easing, leading economists to predict the central bank will continue on its tightening course. India’s PMI dipped to 57.5 in May from 58.0 in April.

Data due later on Wednesday is expected to show the pace of U.S. and European factory growth slackened in May.