Asia's factories struggle for momentum amid patchy recovery

Sluggish global demand remains major challenge for top exporters.

TOKYO (Reuters) – Factories in Asia’s largest economies stepped up a gear in May as supply chain problems eased, business surveys showed on Thursday, but sluggish global demand remained a major challenge for many of the region’s big exporters.

Purchasing managers’ indexes (PMIs) for China and Japan showed swings in factory activity to growth in the month, in contrast to weak indicators from South Korea, Vietnam and Taiwan where declines continued.

India’s factory activity expanded at the quickest pace since October 2020, a sign strong demand and output were supporting Asia’s third-largest economy.

The patchy set of PMIs pointed to an uneven recovery from the pandemic, particularly in China, the world’s second-largest economy, and clouds the outlook for growth in the region, but still provided some cause for optimism.

“The PMI surveys suggest that China’s economic recovery was still ongoing in May, albeit at a slower pace. Waning fiscal support weighed on construction activity,” said Julian Evans-Pritchard, analyst at Capital Economics.

“But manufacturing output ticked up and the service sector is still seeing decent gains, suggesting that Q2 GDP growth may not be as bad as many fear.”

China’s Caixin/S&P Global manufacturing PMI rose to 50.9 in May from 49.5 in April, above the 50-point index mark that separates growth from contraction.

The reading surpassed expectations of 49.5 in a Reuters poll, a stark contrast to a deeper contraction activity seen in the official PMI released on Wednesday.

“Current economic growth lacks internal drive and that market entities lack sufficient confidence, highlighting the importance of expanding and restoring demand,” said Wang Zhe, Senior Economist at Caixin Insight Group. But China’s business confidence for the coming 12 months fell to a seven-month low amid concerns over global economic prospects, the Caixin survey showed. Japan’s final au Jibun Bank PMI rose to 50.6 in May, its first reading above the 50.0 threshold since October, as the economy’s delayed re-opening from pandemic curbs lifted demand.

But separate data released on Wednesday showed Japanese factory output unexpectedly fell in April. While a survey of manufacturers forecast a 1.9% increase in May, a government official said weak overseas demand heightens the risk of a downward adjustment in their plans.

Elsewhere in Asia, South Korea’s PMI stood at 48.4 in May, slightly up from 48.1 in April but slumping into its longest spell of contractionary readings in 14 years, as slowing global demand hit output and orders.

Vietnam, Malaysia and Taiwan also saw factory activity shrink in May, while that of the Philippines expanded, the surveys showed.

Asia’s economy is heavily reliant on the strength of China’s recovery, which has been uneven with services spending outperforming activity in export-oriented sectors.

In forecasts released in May, the International Monetary Fund said it expects Asia’s economy to expand 4.6% this year after a 3.8% gain in 2022, contributing around 70% of global growth.

But it cut next year’s Asian growth forecast to 4.4%, and warned of risks to the outlook such as stickier-than-expected inflation, slowing global demand as well as the impact of US and European banking-sector stress.