Asian factories lose some momentum in May on soft export demand

Factories across much of Asia ran into a soft patch in May as export demand slowed, but analysts said the weakness was likely to be temporary amid signs of steady improvement in the global economy.

The findings from private business surveys came a day after Moody's Investors Service painted an upbeat picture of global growth.

The readings add to signs that Asian economies generally remained buoyant in the second quarter, with manufacturing activity continuing to improve-albeit at a more modest pace, and business confidence remaining strong overall.

Still, there were mixed readings on regional powerhouse China, with official data showing steady growth fuelled by an ongoing construction boom but a private survey pointing to the first contraction in activity in 11 months.

Exports show rebound

After battling a multi-year trade recession, Asian exports have seen a strong rebound this year, led by electronics. The tailwinds from Chinese commodities and tech products demand, however, appear to fading.

Yet, Tim Condon, ING's chief Asia economist, says the growth outlook for the region remains positive as strengthening economies in the United States, Japan and Germany would support shipments from the region.

“May figures are just a blip. The hopes for cyclical recovery remains a positive theme, thanks to the strength of G3 economies,” he said.

Rapid growth of Japan’s economy

Data from Japan backed that assessment, as manufacturing activity grew at its fastest pace in three months in May.

The world's third-largest economy grew at its fastest pace in a year in the first quarter, marking the longest period of expansion in a decade.

An increase in capital expenditure in the first quarter also adds to a raft of recent data pointing to economic expansion.

The cheerful figures led to a 1 percent gain in Japan's Nikkei on Thursday.

MSCI's broadest index of Asia-Pacific shares outside Japan , however, was flat after four sessions of losses as investors took profits after stocks hit a two-year high last week.

China's main indexes fell after the more downbeat private PMI report. The blue-chip CSI300 index fell 0.1 percent, while the Shanghai Composite Index lost 0.5 percent.

Similar business surveys to be released in Europe and North America later in the day are expected to show solid growth.

Europe on a roll

Like Japan, Germany's economy is also on an upswing. Europe's biggest economy defied increased political risks to post the strongest quarterly growth rate in a year in the last quarter.

Overall, European growth has outpaced that of the United States, but the U.S. is rebounding after a soft start to the year.

With economic growth in the world's largest economy seen between 2.0-3.7 percent in the second quarter, up from 1.2 percent a quarter ago, the Federal Reserve is expected to raise interest rates later this month.

On Wednesday, Moody's said G20 economies, which account for 78 percent of the global economy, is expected to grow 3.1 percent on year in 2017 and 2018, faster than the 2.6 percent growth last year.

The agency also said the biggest risks to global growth, including protectionism and European Union exits, seemed to have subsided.

PMI below 50 points

China, however, is widely expected to slow over the year due to reduced property-related investment as liquidity tightening measures of the central bank, including limits on home mortgage lending, take effect.

The Caixin/Markit Manufacturing Purchasing Managers' index (PMI), which tends to focus on China's smaller firms, fell below the 50-point demarcating growth and contraction to 49.6 in May.

That was less than economists' forecast of 50.1 and extended a streak of declines to three months since 51.7 in February.

“China's manufacturing sector has come under greater pressure in May and the economy is clearly on a downward trajectory,” Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group.

Contradiction with official readings

The findings sharply contrasted with official readings a day earlier which showed steady manufacturing growth as government infrastructure spending boosts demand for construction materials from cement to steel.

The divergence may suggest that much of China's recent economic strength which remains strongly dependent on heavy industry and continued government stimulus, with other sectors facing more challenging conditions.

The Caixin survey focuses more on smaller firms, which may be benefitting less from the building boom and are more strained by rising financing costs.

Readings from Asia's No. 4 economy South Korea also had investors scratching their heads.

The business survey showed that factory activity shrank for a 10th straight month in May as output, new orders and employment fell further on persistently weak demand, particularly from the country's major global markets.

However, official data on Thursday showed the country's exports clocked a double-digit growth in May from a year earlier.

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