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Nikkei Flash Japan Manufacturing PMI remains in contraction
territory as production and order books fall at steepest rates
since mid-2016
Decline led by steepening export downturn
GDP expected to grow by just 0.7% in 2019
Japan's manufacturing economy remained stuck in its deepest
downturn since mid-2016 in March, adding to gloomy prospects for
the economy in 2019.
The latest Nikkei PMI survey data indicate that the
manufacturing sector continued to struggle primarily in the face of
a deteriorating external environment at the end of the first
quarter. Factory production, order books and exports all contracted
at increased rates in March.
Steeper declines in output and new orders
The flash Nikkei Manufacturing PMI for March remained unchanged
at 48.9 in March, registering below the 50.0 no change level for a
second successive month to indicate an ongoing downturn in the
goods-producing sector. The latest readings are the lowest recorded
since June 2016.
Among the various survey sub-indices, the output index signalled
a third consecutive monthly fall in manufacturing production, with
the rate of decline accelerating to the fastest since May 2016. The
drop in production was the third largest seen since 2012.
As with other PMI surveys in developed economies such as Japan,
a drop below 50 for the output index is significant. Importantly,
while the official measure of production often falls into decline,
the downturns prove to be short-lived (often linked to one-off
factors or industry specific events) with the exceptions of
occasions when the PMI has also fallen below 50. The recent
weakening of the headline PMI therefore suggests the manufacturing
sector is at risk of entering a period of marked decline. Current
PMI readings are consistent with production dropping by
approximately 2% in the first quarter.
The decline in output was fuelled by a third straight month of
falling new orders, which in turn contracted at the sharpest pace
since June 2016.
New export orders remained a key area of demand weakness,
dropping for a fourth month in a row to register the
second-steepest downturn in overseas sales for over two-and-a-half
years.
With inflows of new work falling, companies relied on eating
into backlogs of work to support production. The latest reduction
in outstanding business was the quickest since December 2012.
Capacity cuts loom
Such a steep drop in backlogs bodes ill for employment. While
sustained hiring was recorded by the March survey, headcounts will
inevitably come under pressure unless demand revives in coming
months. Marked falls in the backlogs of work index are usually soon
followed by a decline in the survey's employment index.
Other survey indices corroborated the downbeat assessment. The
forward-looking new orders to inventory ratio remained negative,
and firms' input buying declined at a rate not seen since mid-2016.
Firms' optimism about the coming 12 months meanwhile ticked
marginally higher than in February but remained among the lowest
since 2012, adding to the gloomier picture.
Increased pessimism with regard to the future production trend
was often blamed on the impact of trade wars and slower demand from
key export markets such as China and the EU. Particular stress was
seen in the auto industry. Japan is the world's third largest
producer of autos, but the sector has seen the downturn worsen in
recent months.
Detailed sector PMI data showed that global auto sector new
orders dropped at the fastest rate for over six years in February,
leading to the sharpest drop in output since data were first
available in 2009.
Outlook
The flash manufacturing PMI raises a red warning light as to the
health of the economy in the first quarter. The manufacturing
output index exhibits an 80% correlation with the quarterly rate of
change in the official manufacturing production data compiled by
the Ministry of Economy, Trade and Industry. With the PMI acting
with a two-month lead on the official data, and avoiding some of
the undue noise and volatility in the official data, the survey
provides a good gauge of the underlying growth momentum and
suggests that forthcoming GDP releases could disappoint.
With manufacturing already in decline, the biggest concerns
surround the extent of continued repercussions from US-China trade
tensions. A further drop in exports would likely restrain capital
spending plans and wage increases.
However, while downside risks are increasing, a recession is not
yet the baseline forecast. IHS Markit expects Japan's GDP to grow
by just 0.7% in 2019 - principally in response to the deteriorating
external environment. To achieve this, much will therefore depend
on the extent to which the service sector can act as a buffer to
the headwind of dampened external demand. More will become evident
with the publication of the final PMI data in early April.
However, even this modest expansion is predicated on consumers
stepping up their spending ahead of a twice-deferred planned hike
in the sales tax from 8% to 10% in October 2019. Pay-back comes in
2020, when we expect economic growth to slow to 0.5% as consumer
spending fades again.
For more information about the PMI surveys and the Nikkei PMI
for Japan, please contact economics@ihsmarkit.com.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
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.
