Asian factory activity increases but Ukraine crisis darkens outlook

Employees wearing face masks work at a factory of component maker SMC during a government-organized tour of its facilities following the coronavirus disease (COVID-19) outbreak, in Beijing, China , May 13, 2020. REUTERS/Thomas Peter

TOKYO, March 1 (Reuters) – Asian factories rebounded quickly in February as the coronavirus had less of an impact on business, but the Ukraine crisis quickly emerged as a new risk that could disrupt supply chains and exacerbate cost pressures.

Strong international sanctions against Russia in response to its invasion of Ukraine have rattled markets and driven up oil prices, adding to the headaches of Asian economies and businesses already reeling from rising input costs . Read more

“The war in Ukraine is a major new source of uncertainty,” Reserve Bank of Australia Governor Philip Lowe said on Tuesday after his bank kept interest rates at a record high. Read more

With the conflict in Eastern Europe now emerging as a significant risk to the global economy, February indicators showed that conditions had gradually improved before the crisis escalated significantly.

Surveys of Chinese factories, both public and private, showed activity remained in expansion territory, underscoring the resilience of the world‘s second-largest economy despite cost pressures.

Manufacturing activity also expanded in Malaysia, Vietnam and the Philippines as they gradually reopened their economies even as Omicron infections continued to spread, surveys show.

But growth in factory activity in Japan slowed to a five-month low in February due to continued COVID-19 restrictions and rising input costs.

Business expansion also slowed in Taiwan and Indonesia, a sign of the lingering impact of supply chain disruptions caused by the pandemic.

Polls indicate the fragility of the recovery in Asia even before the Ukraine crisis.

“The most immediate hit from the crisis will come from rising oil prices, which will deal a severe blow to many Asian economies,” said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute in Tokyo.

“Russia is a big exporter of gas, rare metals and other goods essential for chip production. This means the crisis could worsen supply chain disruptions, which would be bad news for countries. such as Japan, South Korea and Taiwan”.

INFLATION RISKS

Chinese factory activity returned to growth in February on the back of rising new orders, a private survey showed on Tuesday, although employment remained mired in contraction. Read more

Elsewhere, the official Purchasing Managers’ Index (PMI) for China’s manufacturing sector rose to 50.2 in February, remaining above the 50-point mark that separates growth from contraction. It picked up from a reading of 50.1 in January and confounded analysts’ estimate of a slowdown to 49.9. Read more

Despite the recovery, China’s official PMI remains well below its pre-pandemic average, said Julian Evans-Pritchard, senior China economist at Capital Economics.

“The result is that the Chinese economy appears to have struggled to find momentum so far this year,” he said.

Japan’s PMI slipped to 52.7 in February from 55.4 in January, marking the slowest expansion since September last year. Read more

The spike in commodity prices caused by Russia’s invasion of Ukraine could support inflation and complicate the policies of Asian central banks, as they balance the need to stop an undesirable rise in inflation with support growth.

Malaysia, for its part, will wait until the third quarter before raising rates by a record high to support an uneven economic recovery, according to analysts in a Reuters poll. Read more

Reporting by Leika Kihara; Editing by Sam Holmes

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