Fears of global recession increase as manufacturing sector shrinks in Asia

HONG KONG (Reuters) – Industrial activity has contracted in most Asian countries last month, as the intensification of the trade war between Washington and Beijing was raising fears of a serious economic crisis. a global economic slowdown and exerting intense pressure on policymakers in the region and beyond to further stimulate them.

These growth indicators are expected to deteriorate further in the coming months as trade rates rise and global trade declines and business and consumer confidence declines, resulting in job losses. and delays in investment decisions.

Some economists predict a global recession and a further decline in interest rates if trade tensions do not abate at the Group of 20 summit held in Osaka (Japan) in late June , when Presidents Donald Trump and Xi Jinping could meet.

In China, the Caixin / Markit Manufacturing Purchasing Managers' Index (PMI) posted a modest 50.2% expansion, providing investors with short-term relief after a contraction official Friday.

The outlook, however, remained gloomy, as output growth slowed, factory prices stagnated, and companies were less optimistic about production since the start of the series of surveys in April 2012.

The PMI indices were below 50 points between the contraction of expansion in Japan, South Korea, Malaysia and Taiwan, below expectations in Vietnam and slightly improving in the Philippines.

"The additional shock caused by the escalating trade tensions will not be beneficial for global trade and if demand in the US, China and Europe continues to moderate, which is very likely, it bodes badly for Asia as a whole, "said Aidan. Yao, Senior Emerging Markets Economist at AXA Investment Managers.

"As for the response of monetary policy, the race will be almost everywhere down."

Australian and Indian central banks are expected to lower their rates this week, and others around the world are expected to do the same in the coming weeks and months. Jingyang Chen, an economist at HSBC, said the PMI figures could mean that "Beijing will double its easing for the private sector".

(Graph: Global Activity and Trade PMI – tmsnrt.rs/2WzqeyD)

Eurozone activity is also expected to contract, while US manufacturing is expected to grow steadily, although economists expect the global malaise to affect the US economy. Federal rate futures are now almost fully reducing rates by September, with a 50% chance that rates will change between July 30th and July 31st.

JP Morgan expects the Federal Reserve to cut rates twice this year, which is a major shift from previous expectations that rates would remain unchanged until the end of 2020.

(Graph: Asian interest rates, click on tmsnrt.rs/1U5hc2W)

DIVERTS COMMERCIAL FLOWS

In India, where growth depends largely on domestic demand, the manufacturing sector has grown at its fastest pace in three months, fueled by the dramatic electoral victory of Prime Minister Narendra Modi. But other economic reforms will be crucial, as the president said Friday. data showing that the economy experienced the weakest growth in more than four years in January-March.

Expansion in the Philippines reflects strong domestic demand and less reliance on trade, while for Vietnam, it reflects a diversion of business flows and trade flows due to tariffs.

Societe Generale analysis shows that in the industries affected by the tariffs put in place – such as capital goods and some electronic products – Germany, Mexico, South Korea and Taiwan have each gained more business in the USA.

Vietnam has been the main beneficiary of industries where tariffs are a threat, such as smartphones, and is also seeing investments from companies that are relocating their production out of China.

"The countries of Southeast Asia, especially Vietnam and Thailand, are often cited as the first choice and seem ready," said a Société Générale analyst in a note released Friday.

South Korean exports – seen as an indicator of global growth – fell 9.4% in May, which is worse than a median forecast of a 5.6% decline, revealed published data on Saturday.

(Graphic: Manufacturing activity in Asia – tmsnrt.rs/2WEzX6W)

Fears of recession

The trade dispute between China and the United States has suddenly intensified last month when Trump increased tariffs on hundreds of billions of Chinese imports from 10% to 25%, and threatened to levy taxes on all Chinese products.

If that happens, and China reacts, "we could end up in a (global) three-quarter recession," said Chetan Ahya, Morgan Stanley's director of the global economy.

Washington's new tariff threats against Mexico last week also contributed to fears of a global recession, with stock markets tumbling around the world. The 10-year US Treasury yield fell to 2.121%, a nadir last observed in September 2017.[MKTS/GLOB]

Over the weekend, tensions between China and the United States have resumed over trade, technology and security.

Chinese Defense Minister Wei Fenghe warned the United States not to interfere in security disputes over Taiwan and the South China Sea, while US Secretary of Defense Patrick Shanahan said Washington would "no longer hold" on Chinese behavior in Asia.

On Friday, China also threatened to unveil an unprecedented list of "unreliable" foreign companies, groups and individuals that undermine the interests of Chinese companies. This is what happened after Washington placed last month Huawei on a blacklist that effectively prevents US companies from dealing with the Chinese giant telecommunications equipment.

"We take this seriously. This means that the trade war has not only become a technology war, but also a large-scale commercial war. China will multiply retaliatory measures, especially in the technology sector, "said Iris Pang, ING economist for Greater China, adding that the tensions in Taiwan were a source of concern rather than an urgent concern.