Asian exporters will face significant challenges as demand from major markets like the United States, Europe and China slows in the coming months, according to HSBC’s chief Asia economist.
European manufacturers are already shrinking quite significantly, especially in Germany, Frederic Neumann told CNBC’s “Squawk Box Asia” on Monday.
“Recall that Europe is a major export market for Asian exporters,” said the economist.
“We also essentially expect lower shipments in the second half of the year, which complements the pivot in US spending outside of goods. The slowdown in the US and Europe will be a headwind for Asian exporters “, he added.
China’s slowing economy will further compound the problems facing exporters in the region, Neumann said.
“Very clearly, the trade data…shows this weakness in domestic demand. China is the third major export market that we really need to hum – that too doesn’t really seem to be gaining momentum. From this perspective, a trade recession cannot be governed. at this point,” he added.
China’s slow growth
China’s official manufacturing purchasing managers’ index fell to 49.0 in July from 50.2 in June, the National Bureau of Statistics (NBS) said last week.
PMI readings are sequential and represent month-to-month expansion or contraction. A reading above 50 suggests growth while anything below 50 indicates contraction.
China, which saw its economy grow just 0.4% year-on-year in the second quarter, is a key export market for many Asian countries. Therefore, a slowdown in the world’s second largest economy will have a global impact on the entire region.
“The manufacturing sector is really the most fragile part of the global economy right now,” Neumann said.
“This is where we are seeing the first signs of weakness, whether in the United States, mainland China or Europe,” he said, adding that the slowdown will have a ripple effect on the Asian growth.
“Asia is particularly dependent on global manufacturing economies like [South] Korea, Japan, Taiwan, all are highly exposed to global manufacturing demand. So this slowdown will immediately translate into slower growth in Asia,” Neumann said.
According to the economist, the weak outlook for global manufacturing is further complicated by soaring inflation in the region.
“We also have the inflation issue. It’s going to be tricky…and we think it’s going to last with us for a good part of the year, despite the slowdown in manufacturing,” Neumann said.
Commodity prices have started to “come out of the boil”, which could dampen headline inflation, he said. However, core inflation remains high, partly due to wages and supply chain disruptions, he noted.
This will likely hurt Asian exporters, as underlying inflation will likely increase price pressures, Neumann added.
“Make no mistake, we are seeing very sticky underlying inflation,” Neumann said. “And of course the supply chain disruptions in Asia are not helping on that front in terms of reducing pricing pressures in the months ahead.”