Global trade friction puts Asian economies at risk
Factory growth in Asia’s major manufacturing hubs showed signs of cooling last month as they braced for a rocky ride from rising global trade tensions, while the region’s key emerging markets grappled with accelerating inflation and a strong US dollar.
Economies in export-reliant Asia continued to benefit from a synchronized uptick in world growth, though US President Donald Trump’s moves to slap tariffs on some of the US’ largest trading partners have stoked uncertainty about the outlook and rattled financial markets.
China’s private Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) published yesterday was unchanged at 51.1 last month from April, indicating steady growth for factories in the world’s second-biggest economy, though new export orders fell for a second straight month.
A US trade delegation is in Beijing this weekend for a third round of talks between the two nations after Washington said it would impose tariffs on US$50 billion of Chinese imports.
The risk is that a full-blown Sino-US trade war would ripple through global supply chains, hurting economies from Europe to Mexico through to Australia and Japan.
That danger on Thursday was made all the more real when the US and its key allies announced tit-for-tat tariffs that sent a chill through financial markets, though some analysts said the tariff threats are likely a negotiating tactic.
JPMorgan Asset Management global market strategist Hannah Anderson said “it’s unlikely these tariffs remain in place for long.”
“The US strategy throughout this administration has been to make headline-grabbing moves in the lead up to negotiations and then settle on more modest moves after negotiations,” Anderson said.
All the same, the trade frictions put Asia’s export-dependent economies in a spot as the growth cycle is showing signs of fatigue.
The Markit/Nikkei Japan Manufacturing PMI fell to a seven-month low of 52.8 last month, from 53.8 in April, with domestic business growth slowing and only a modest pickup seen in export orders.
Other Japanese data yesterday also showed corporate capital expenditure rose at a slower pace in the first quarter from the fourth quarter last year, suggesting that any stress on the exports front would put more pressure on the economy which contracted at the start of the year.
South Korea yesterday reported factory activity contracted for a third straight month as new orders continued to decline, prompting companies to cut staff at the fastest pace in almost a decade, while Vietnamese factories saw record growth in new exports.
“A further escalation of trade tensions between the US and China is the main risk to the outlook,” for Asian manufacturers, Capital Economics Ltd Asia economist Krystal Tan (??) said in a note.
Higher oil prices and a rising US dollar have hammered emerging-market currencies globally of late, with trade friction and heightened geopolitical uncertainties around North Korea, Iran and Italy adding to the pressure.
In Asia, emerging economies are seeing inflation flare up, while their currencies have taken a hit, raising expectations for interest-rate hikes.
The Indonesian central bank has already raised rates this year, increasing them twice last month, with the second increase on Wednesday.
It has flagged more possible hikes as it looks to protect the fragile rupiah and contain capital outflows.