Purchasing Manager Index and Manufacturing Outlook for Asia in 2023

In December 2022, the Composite PMI for the Asia-Pacific region dropped to 49.3, its lowest since May 2020, marking the third consecutive month below the critical 50-point mark, indicating contraction. This widespread downturn affected various economic sectors, with new orders, output, and employment falling sharply. The region faced significant challenges in 2022, including soaring inflation that eroded business profits and consumer purchasing power, persistent supply chain disruptions, and ongoing COVID-19 uncertainties that undermined confidence.

As a key engine of global growth, the Asia-Pacific region's slowdown, reflected in contracting PMI data and an IMF growth forecast downgrade, posed risks to global demand and major economies, including the United States and Europe. As 2022 ended, the region confronted a "triple threat" of rising inflation, slowing growth, and escalating debt, entering 2023 on precarious footing with a challenging path to recovery.

2023 PMI Outlook for Asia

Analogous to 2022, the first four months of 2023 showed slight to no improvements in the manufacturing of PMI, indicating contraction, which could primarily to the dwindling demand.

In May, China's factory activity contracted more rapidly than anticipated due to diminishing demand, thereby increasing pressure on policymakers to strengthen an inconsistent economic recovery and resulting in declines in Asian financial markets. The National Bureau of Statistics (NBS) announced that the official manufacturing purchasing managers' index (PMI) dropped to a five-month low of 48.8, a decline from 49.2 in April. This is beneath the critical 50-point threshold that differentiates expansion from contraction, contradicting expectations for an increase to 49.4.

Additionally, in May, service sector activity grew at the slowest rate in four months, with the official non-manufacturing PMI falling to 54.5 from 56.4. This data negatively impacted Asian markets, leading to a decline in the value of the yuan as well as the Australian and New Zealand dollars, and causing a significant fall in regional stocks.

Bruce Pang, chief economist at Jones Lang LaSalle, interpreted the PMI data as suggesting that China might be on a path towards K-shaped recovery. Pang expressed concerns that sluggish domestic demand could hinder China's sustained growth, unless effective policy measures are introduced to foster a widespread recovery.

Furthermore, the PMI reports for May were consistent with weak factory data from other parts of Asia, as Japan noted an unexpected drop in output, and South Korea observed weakening production. Despite emerging from three years of pandemic lockdowns, the recovery of the world's second-largest economy remains uneven, with spending in services outpacing activity in factory, property, and export-oriented sectors.  In contrast, the services sector, notably rail and air transport, accommodation, and catering sectors, continued to expand due to robust May Labor Day travel, although real estate activity declined.

In light of these weaknesses, China's post-pandemic stock market rally is showing signs of faltering, as small investors are growing increasingly pessimistic about equities and are shifting their focus towards more secure assets. Zhiwei Zhang, chief economist at Pinpoint Asset Management, observed that the sentiment in the financial market is currently quite bearish. Zhang noted the lack of clarity regarding the government's interpretation of the present economic condition and mentioned that there is no indication of an imminent policy response, suggesting that the government might maintain a "wait and see" approach for the time being.

In July, South Korea's protracted manufacturing slump began to ease, sparking hope for a more resilient economic recovery, according to a private business survey released on Tuesday. The Purchasing Managers' Index (PMI) for South Korean manufacturers, compiled by S&P Global, improved to 49.4 in July from 47.8 in June on a seasonally adjusted basis. Although this sub-50 reading indicates that manufacturing activity continued to contract, it marked the 13th straight month of contraction at a significantly slower rate.

A critical highlight from the survey is the new export orders sub-index, which rose to 50.2 after 16 months below 50, signaling a revival in demand from key markets, notably the Asia-Pacific region and Europe. This rebound was especially prominent in automotive products and semiconductors. As a result, the overall decline in orders was the narrowest in 12 months, with the sub-index surging to 48.7 from 45.0, and output also increased to 47.2 from 46.5.

Responding to these positive signs, firms began preparing for a prospective uplift in demand by hiring additional staff and raising purchasing activity in July. Employment increased at the most significant rate in 17 months, and purchases rose for the first time in a year, while stocks of finished goods saw their steepest decline in 18 months, corresponding sub-indexes revealed.

Additionally, the survey indicated a favorable turn on the inflation front, with input prices falling for the first time since June 2020 and output prices experiencing the steepest decline since August 2020. Amid these developments, manufacturers' optimism for future output notably increased to 56.2 in July from a six-month low of 52.4 in June. Despite these positive indicators, weaker consumer and business spending has intensified calls for the central bank to consider loosening its restrictive monetary policy, as South Korea's economy in Q2 grew faster than expected.

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