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Asia manufacturing performance on the line amid supply
constraints
Sustained supply and demand gap could lead to price
stickiness
The JPMorgan Global Manufacturing PMI, compiled by IHS Markit
from its proprietary business surveys, suggested that the
goods-producing sector extended its current run of expansion to
eleven months. Notably, the headline PMI rose from 55.9 in April to
56.0 in May, to hit the highest level in just over 11 years.
Digging deeper into the data, the PMI sub-indicators tell a
familiar story of supply side constraints in May, which continued
to contribute to soaring prices. Despite it being more than a year
following the initial economic upturn, the hiccups in the recovery
persist.
The persistent supply constraints are a phenomenon that
continues to elude global markets. Conventional wisdom following
the initial COVID-19 related disruption to global supply chains had
fuelled expectations that a gradual easing of the bottlenecks with
improving COVID-19 conditions and mass inoculations would enable
resumption of normal activities. Pent-up demand would subsequently
drive the increase in global output.
Although global manufacturing suppliers' delivery times did move
closer to stabilisation in mid-2020 to suggest some semblance of
easing supply strains, more recent PMI data suggested that lead
times lengthened to a degree comparable to the peak of 2020. The
consequent impact on prices globally had been one of rising
inflation, while the effect on regional performances were
mixed.
Asian manufacturing output growth lags peers amid supply
constraints and COVID-19 drag
To assess the severity of supply constraints on manufacturing
performance, it is useful to consider the difference between output
and delivery times sub-indicators. The rate at which delivery times
worsened was much faster than which output grew, and this was
consistent across both developed and emerging markets. Relative to
emerging markets, developed markets experienced more severe
conditions.
Drilling deeper into the different regions, one would see the
US, UK and eurozone suffering this phenomenon more severely
compared to Asia. Contributing to the significant output and
delivery times differentials for these key developed economies is
relatively stronger output growth and a steeper deterioration in
lead times.
The trend beckons one to consider how the recovery path may pan
out for Asian economies particularly with the region broadly
lagging western peers in terms of recovery momentum.
While US and European economies experienced more severe supply
constraints, their
output and orders growth were also more spectacular. Going
forward, these constraints may act as speed bumps in the recovery
from the pandemic, especially after the initial burst of demand
from the reopening of economies such as US and Europe.
For Asian markets that had barely started to recover and are
finding
a resurgence in COVID-19 cases affecting recent manufacturing
sector performance, output growth in the region could
potentially continue to lag these developed market outperformers.
It also leads one to consider the global growth picture without
Asia pulling its weight.
Price pressures intensify amid supply and demand
imbalance
Inflationary pressures are also a by-product of the economic
rebound. The surge in demand alongside the easing of COVID-19
restrictions in many countries while supply lagged has shifted the
pricing power to sellers, enabling average input prices to soar.
Downstream customers experienced the effects as well with output
charges in the manufacturing sector lifted by increasing cost
burdens.
As mentioned previously, the perseverance of supply constraints
continues to elude global markets. Using the case study of the
global semiconductor shortage as an example, the building of new
fabrication facilities would take more than a year. Even if current
operating capacity were boosted, it is still expected to last years
according to Intel CEO Pat Gelsinger in recent interviews.
Likewise for prices, the prolongment of the supply and demand
gap could see higher prices starting to stick and would carry with
it macroeconomic implications. This is especially important for
regions that have yet to see a full-fledged recovery from the
pandemic, such as Asia.
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.