January 2, 2015 / 5:28 AM / 3 years ago

China factory slowdown a force for disinflation, Asia faces softer demand

An employee works at a machine manufacturing factory in Huaibei, Anhui province, September 1, 2014. REUTERS/Stringer

SYDNEY (Reuters) - China’s growth engine looks to have ended last year on a flat note as its massive factory sector sputtered in December, though ebbing price pressures also offered scope for more policy stimulus from Beijing and across much of Asia.

The tale was similar from Singapore to South Korea to Indonesia as manufacturers struggled with weak demand, both at home and abroad.

China’s official Purchasing Managers’ Index (PMI) slipped to 50.1 in December from November’s 50.3, its lowest level of the year and just above the 50-point level that is supposed to separate growth from contraction.

There was better news from China’s services sector, which accounts for close to half of the economy, where the PMI edged up to 54.1 in December from November’s 53.9.

Yet many analysts suspect economic growth for all of 2014 will undershoot the government’s 7.5 percent target, marking the weakest expansion in 24 years.

With factories able to make more than consumers wanted to buy, the pressure was intense to cut prices.

“The price measures show very strong disinflationary forces,” said analysts at Nomura.

“With no inflation pressure, we expect more policy easing in the first quarter, including a 50 basis-point cut in the bank reserve requirement ratio, to shore up domestic demand.”

INFLATION DEFLATES

Disinflation was a feature across much of the region.

India’s PMI showed input prices slumped to a near six-year low, even as overall manufacturing activity picked up to its fastest in two years.

The HSBC PMI, compiled by Markit, rose to 54.5 in December from 53.3, the 14th straight month above the 50-mark that separates growth from contraction.

Yet India’s annual inflation rate has slowed to only 4.38 percent, the lowest since the government started releasing the data in 2012 and potentially a green light for easing by the Reserve Bank of India (RBI).

    “With the disinflationary trend gaining ground, the RBI is expected to find space for some rate cuts in 2015,” said Pranjul Bhandari, chief India economist at HSBC.

In South Korea, consumer prices grew at the slowest clip in more than 15 years in December, opening the door for further rate cuts there.

Its version of the PMI contracted slightly but did show some improvement in December to stand at 49.9, from 49.0 in November.

Indonesia was not even that fortunate as its PMI slipped to 47.6 in December, the lowest since the survey began in April 2011 and a third consecutive month of contraction.

Singapore also disappointed as economic growth slowed more than expected in the fourth quarter and the manufacturing sector contracted in the face of erratic global demand, which could continue to weigh on Asia’s trade-reliant economies well into the new year.

The city-state’s gross domestic product expanded by an annualized 1.6 percent, well short of the 3.0 percent analysts expected and mainly due to a reversal in manufacturing.

“The external demand story remains very lackluster at this juncture,” said Selena Ling, an economist at Oversea-Chinese Banking Corp, adding that Japan, China and Europe were all slowing down.

“Unlike 2014, when we started on a strong note for the first half and after that the momentum tapered off, we could be starting 2015 on a relatively soft note, especially as people are looking forward to the Fed to normalize policy,” she added.

FED, ECB ON DIVERGING PATHS

Asian exporters will get some relief as the U.S. economy shifts into higher gear, though they did not benefit as much from the American recovery in 2014 as they had in the past.

The U.S. Federal Reserve has indicated it will start raising rates from zero later this year as long as the economy continues to improve and unemployment falls further.

The U.S. Institute for Supply Management’s measure of manufacturing is due later on Friday and is expected to show a still strong reading around 57.6 for December. ECONUS

In contrast, the December PMIs from the euro zone are seen staying subdued, which will only add to pressure for more aggressive action from the European Central Bank.

In an interview with German financial daily Handelsblatt published on Friday, ECB President Mario Draghi acknowledged the risk that inflation would stay too low for too long.

“We are in technical preparations to adjust the size, speed and compositions of our measures early 2015, should it become necessary to react to a too long period of low inflation,” he said. “There is unanimity within the Governing Council on this.”

The ECB council meets on Jan. 22 and markets are wagering heavily it will finally decide to start buying sovereign debt, a major reason the euro hit 29-month lows on Friday.

Editing by Kim Coghill

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