Bloomberg News

Asia’s ‘Soft Patch’ Jars With Price Gains, Posing Rates Dilemma

August 01, 2011

Aug. 1 (Bloomberg) -- Asian manufacturing is cooling even as accelerating inflation puts pressure on officials to keep tightening monetary policy, adding to headwinds for the global economy after recoveries faltered in the U.S. and Europe.

Manufacturing in China, Australia and Taiwan weakened in July, purchasing managers’ indexes released today showed. South Korea’s inflation quickened to the fastest pace since March, Thailand’s held above 4 percent for a fourth month and a gauge of Australian prices exceeded the central bank’s target ceiling.

Europe’s debt crisis and a struggling U.S. recovery have cut demand for Asian goods and complicated the task for central banks in a region that’s enacted the world’s steepest interest- rate increases since the start of 2010. Failure to keep tightening would risk exacerbating inflation that’s already breached or is approaching official targets in many Asia nations.

“We still see a need to continue with the tightening bias because ultimately, inflation is the dominant concern in emerging Asia,” said Leif Eskesen, a Singapore-based economist at HSBC Holdings Plc who previously worked at the International Monetary Fund. At the same time, the risk that it “may take a little longer for global growth to pick up again from the soft patch we’re seeing” could lead Asian central banks to pause temporarily, he said.

Price pressures have prompted China, India and Thailand to raise rates in recent weeks, while policy makers in Malaysia, the Philippines and Indonesia opted to keep borrowing costs unchanged. China’s consumer price gains quickened in June to the fastest pace since 2008. In Vietnam, they exceeded 22 percent last month, the highest in the world after Venezuela.

China Rate Increases

The Purchasing Managers’ Index from the China Federation of Logistics and Purchasing fell to the lowest level since February 2009, while a separate gauge by HSBC contracted for the first time in a year.

“We believe the July PMI data will not alter the policy track Beijing has set for” the second half of 2011, said Dong Tao, Hong Kong-based chief regional economist at Credit Suisse Group AG. “Interest rates are likely to rise further, perhaps up more frequently than the required reserve ratio. In case the economy slows down more than expected, we think that it would be fiscal stimulus rather than monetary easing that would come to the rescue.”

The Australian Industry Group’s manufacturing index was at the lowest since June 2009 as new orders and exports shrank. It was the fourth time in five months the index was below 50, the dividing line between expansion and contraction.

Australia ‘Headwinds’

The Reserve Bank of Australia board meets tomorrow to decide rate policy, and most economists surveyed by Bloomberg News predict it will leave the official cash rate unchanged for an eighth straight meeting.

“The Australian economy is facing an array of headwinds and the lack of business and consumer confidence is resulting in a slowdown in activity,” said Savanth Sebastian, a Sydney-based economist at Commonwealth Bank of Australia. “It is looking likely that interest rates will remain on hold. Until the data flow improves the Reserve Bank is unlikely to jump on the interest rate trigger.”

In South Korea, consumer prices rose 4.7 percent in July from a year earlier after a 4.4 percent increase in June, the country’s statistics department said today. The Bank of Korea’s board will meet on Aug. 11 to discuss whether to raise borrowing costs after a report last month showed that economic growth slowed in the second quarter on weaker exports.

Thailand’s inflation in July held close to a 32-month high, with the Bank of Thailand saying last week inflation risks exceed threats to economic growth. In contrast, Indonesia’s inflation slowed for a six straight month in July.

Indian Output

A measure of India’s manufacturing output fell to 53.6 in July from 55.3 in June, according to the Purchasing Managers’ Index compiled by HSBC and Markit Economics. Price gains prompted the Reserve Bank of India on July 26 to increase rates for the 11th time since the start of 2010.

India’s central bank needs to continue tightening its monetary policy as inflation is likely to stay at about 9 percent in the months from July to October, C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said today. The economy is likely to expand 8.2 percent in the year ending March 31, slowing from 8.5 percent last year, he said.

Asia still relies on U.S. and European demand for its goods, even as Group of 20 nations push to rebalance the world economy so the region’s growth depends more on domestic demand.

Gross domestic product in the U.S. expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed last week.

U.S. manufacturing probably expanded in July at a slower pace, according to the median estimate of 63 economists surveyed by Bloomberg News. The Institute for Supply Management’s manufacturing index is due today.

--Editors: Sunil Jagtiani, Chris Anstey

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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