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Flash PMI shows Japan on course for record downturn in second quarter
21 May 2020Bernard Aw
Flash Japan PMI remained well below 50 in May, indicating a
further sharp drop in output
Job losses intensified as firms face steep falls in sales
Export orders declined at record pace on global slump
Business expectations remained negative
The Japanese economy suffered a further substantial fall in
business activity during May, according to the latest flash PMI
results. The downturn reflected not only the extension of emergency
measures taken domestically to contain the COVID-19 pandemic but
also the collapse in global demand. The curbs on social and
business activities continued to weigh heavily on sales across both
manufacturing and service sectors.
Jobs were also cut at a rate unsurpassed for a decade as firms
faced dwindling sales and sought to contain costs. Forward-looking
survey indicators suggest a recovery in economic activity is still
far off.
Business activity collapsing
The headline au Jibun Bank flash Composite PMI, compiled by
IHS Markit and covering manufacturing and services, was up slightly
in May from 25.8 in April to 27.4, but by remaining well below the
neutral level of 50 nevertheless indicated a further substantial
decline after the record slump in April. The latest reading
signalled the second-largest monthly decline in business activity
since data were first available nearly 13 years ago.
The average PMI reading so far for the second quarter (26.6)
points to a much deeper downturn than seen in the first quarter
(44.4), and highlights the severity of the impact of COVID-19
measures, both home and globally, on Japanese economic
activity.
The service sector continued to lead the economic collapse as
restrictions on business operations and movements of residents
heavily affected services activities, demand for which slumped
further in May. While services output fell at a slightly slower
pace than April, the decline in manufacturing production
intensified during May, dropping at the fastest rate since the
height of the global financial crisis in February 2009. According
to panellists, output was constrained by material shortages and
rapidly weakening sales.
Demand hit further by export slump
Demand conditions weakened further midway through the second
quarter as COVID-19 measures continued to hold back spending from
consumers and firms. Total new business intakes fell heavily in
May, with the rate of decline exceeded in the survey history only
by that seen in April. Sales were also hindered by a further
deterioration of global trade demand, which led to a record fall in
export sales. Manufacturers in particular reported an accelerated
decline in overseas sales.
Job losses and falling prices
The survey data also showed worsening labour market conditions
during May, mainly in the service sector. Overall employment fell
for a third straight month, with the pace of decline accelerating
to the quickest for a decade. Service providers recorded a sharper
reduction of staff numbers. By contrast, manufacturers reported no
change to employment levels after falling steeply in April.
Deflationary pressures were evident, especially in the service
sector where rates of decline in both input costs and output prices
were steeper than those seen in manufacturing. Lower expenses were
primarily linked to reduced fuel prices and decreased wage
bills.
Outlook
The outlook for Japan's private sector economy remains dim. The
survey's future expectations gauge continued to signal downbeat
sentiments over the next 12 months, with firms expressing doubts of
a recovery.
Any return to growth will be challenging. Even as the global
economy is opening up, social distancing rules will be needed to
avoid triggering a second wave of new coronavirus cases. The rise
in unemployment and concerns over job security will dampen consumer
demand, while the damage to the finances of business from lost
sales - as well as uncertainty about the future - will constrain
business investment. Extended border restrictions and travel
controls will also hinder any meaning recovery in tourism.
Final manufacturing and services PMI data will be released
on 1st and 3rd of June respectively.
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
