PMI Surveys in Asia were heterogeneous in August as it can be seen on Chart 1
In China there was a little improvement. The two PMI indices were up but still very close to 50 that shows stability in economic activity. The official index, which represents large public companies, was at 51 in August versus 50.3 in July. The private sector index was just at 50.1 after 47.7 in July.
These numbers reduce the downside risk that was perceived last spring. We know that GDP growth will probably remain in the range 7-8% for the years to come due to the rebalancing of the growth process. Last spring after the central bank intervention there was a risk a stronger control on the credit and on the shadow banking sector. This would have created a specific risk on credit distribution and on growth. Some economists thought that growth number could fall below 4%.
These 2 surveys do not say too much on the medium run but they say that in the short-term the downside risk is mildly lower now. In other words, growth will continue in the 7-8 % range in the coming months. We could add that this mild improvement comes from some internal impetus and not from outside (see charts 2 and 3) The government does not want to take too much risks and has given support to the internal demand (incentives on investment). That strategy will not increase specific downside risks in emerging markets.
In Japan, Abenomics’ momentum continues after a stop in July. We see that the internal market is currently the source of the Japanese economy as at in can be seen on chart 3 the flow of new export orders is vanishing. This is not a validation of Abe strategy because this latter is more complex than a monthly reading of a companies’ survey (see here)
Nevertheless the Japanese situation is supportive for Asia.
In Taiwan the synthetic index is back to 50. This index is usually a lagging indicator of a combination of the two Chinese PMI indices. This is usually the case also for South Korea. We see on Chart 1 that South Korea is still lagging. Nevertheless there are adjustments in the South Korean economy as the New Orders to Inventories is improving. This means that if the Chinese situation remains healthy (above 50) then South Korea will improve.
We cannot say that from India. The index dropped rapidly in August going below the 50 threshold for the first time since 2009. We saw last Friday with the GDP number that there were problems associated with the manufacturing sector. In Q2 GDP growth was only 4.4% (weakest number since 2005 except in Q1 2009) and the manufacturing sector was a drag as its contribution to annual growth was negative.
There is a lack of competitiveness in the Indian economy as there were too little investments in infrastructures. The weakness of the Indian economy is not just the effect of the new US monetary policy. There is a need to structural reforms and to strong investment.
In fact the long slide of the Indian index in the first chart is just a way to look at the Indian economy fragility. We see that the slide began before Bernanke testimony at the congress. (read this to better understand the emerging countries situation).
Four points to keep in mind from these surveys:
1 – the downside risk on the Chinese economy has receded in the short run (but this does not mean strong growth). The indices should remain close to 50 as the government wants to stabilize growth and does not want to take the risk of a break.
2 – Taiwan and South Korea later will follow Chinese profile.
3 – Japan is in a complicated situation but as far as economic activity is still growing as it is currently the case in this survey the idea of Abenomics will remain.
4 – India is in a very weak position. The New Orders to Inventories ratio dropped below 1 in August meaning that inventories are increasing as new orders falter. I’m not sure that the government strategy to control expenditures is the good one as it will reduce demand addressed to companies. There is a real risk of recession.
Chart 1 – PMI surveys – Synthetic Indices
What is bothering is that this region was the engine of world growth before the crisis. Now all these indices are close to 50 showing a lack of impulse.
Chart 3 – New Export Orders indices
As we can see on the right part of the Chart, all the indices are close or below 50. There is no impetus coming from external trade. This is an element showing that the environment has changed dramatically in Asia. Before the crisis and for a long period before it, trade between Asian countries was the real engine of development. There was a strong common dynamics. It seems that it is no longer the case. This means that the growth model for Asia is changing.