In May, PMI indices for the manufacturing sector lose their momentum. (Chart 1). All the indices are close to the 50 threshold
(The index shows an improvement in activity when it is above 50 or a deterioration when it is below 50).

Japan (51.5) and the Chinese official index (50.8) are stronger in May, gaining momentum. Taiwan (47.1) South Korea (51.1 after 52.6 in April) China (PMI/Markit/HSBC at 49.2) and India (50.1) follow a downward trend. Activity is shrinking in China and rapidly shrinking in Taiwan. In South Korea the index is milder than in previous months. Index in India shows stability in May compared to April.

This situation will not change rapidly as new orders index are everywhere on a downward trend (except in Chinese official index (which represents large public companies) (Chart 2). We cannot expect a surge in production later this spring or at the beginning of summer. New Orders to Inventories ratio dropped below unity in China (private index) and in Taiwan. This means that inventories are large enough to satisfy demand and there will be no need to increase production. Ratios are above one in Japan and in China (official index). The best picture is for Japan where the ratio follows an upward trend. In India the ratio is at 1 and for South Korea the index is above 1 but below April level, so the momentum is weaker.

When comparing with new exports orders (chart 3) we can see that this latter behave better than global orders. This means that internal situation is weakening almost everywhere. This is a sign of growth fragility for the region as it reflects uncertainty and then a risk on investment.

China’s rebalancing strategy has a strong impact on the region. China is the main trading partner for Taiwan, South Korea and Japan. Then with weaker momentum in China (due to the rebalancing strategy) the spillover is weaker. Each country has to find new benchmarks. May be the Japanese answer is the good one if it is expected that China will never have the same leading role than before the crisis.

For the Euro Area the Asian situation is important as a large part of German exports goes to Asia. Weaker momentum there will force Germany to feed its own internal market and the Euro Area. It’s the kind of message we’ve heard this week-end from Angela Merkel.

Chart 1

Chart 2
Chart 3