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Economy

December PMI shows inflation pressures ease at Asia manufacturers

Export slump proves more intractable, dragging down business confidence

The share price of Indian motorcycle maker Bajaj Auto rose over the last two months of 2018 as oil prices slid.   © Reuters

SINGAPORE -- Stabler local currencies and lower oil prices have eased cost pressures at Asian manufacturers, who still face slumping external demand, according to the latest Nikkei Purchasing Managers' Index survey.

The monthly survey asks companies in Asian economies outside mainland China about changes in output, orders and other business conditions, versus the previous month. A PMI reading above 50 points to expansion, while one below 50 indicates contraction.

Since many manufacturers in Asia are under the value chains of Chinese makers, PMI surveys in the previous few months showed declining export orders, an effect of U.S.-China trade tensions.

In December, six of the 15 sets of PMI data rose, while nine declined due to weaker demand. But this was partly offset by fewer cost pressures.

According to data for the Association of Southeast Asian Nations, the Input Costs Index fell to 53.4 in December from November's 57. It was the lowest reading since October 2016. The input prices index for Indonesia dropped to 56.1 from 61.2, while that for the Philippines went to 54 from 61.

David Owen, an economist at IHS Markit, said the ASEAN figures "indicated that the recent fall in raw materials prices such as crude oil and metals translated into the weakest rise in input costs for over two years." Owen added, "The softer rate of inflation was undoubtedly welcomed by companies to help ease pressure on margins."

During 2018, emerging market turmoil hit local manufacturers as weaker currencies translated into higher import costs. The Indonesian rupiah depreciated to a historic low in early October, when it took more than 15,400 to buy a dollar. Thereafter, the currency strengthened and stabilized in December.

The Indian rupee and Philippine peso found themselves in similar situations. Central banks in the region repeatedly raised interest rates to support their currencies.

In addition to stabler currencies, the recent decline of crude prices has also helped alleviate cost pressures. The benchmark Dubai crude price fell sharply after October, from over $80 per barrel to below $60 per barrel by the end of 2018.

Some Asian makers gained from these exchange and commodity price factors. The share prices of Indian motorcycle maker Bajaj Auto and carmaker Maruti Suzuki rose over the last two months of 2018; cheaper oil is generally considered a plus for car sales.

Yet, external demand continued to decline for the region's manufacturers due to the trade war, the ebbing global tech cycle and other factors.

Taiwan's New Export Orders Index declined to 44.6 from November's 45.8, dragging down the economy's headline PMI to a three-year low of 47.7. Subdued global demand and the impact of the Sino-U.S. trade war are hampering the sector's performance, according to the survey. ASEAN's New Export Orders Index marked a fifth consecutive month of contraction at 49.4.

U.S. President Donald Trump and Chinese President Xi Jinping agreed to a 90-day trade war truce on Dec. 1, before the PMI survey, but manufacturers remained cautious. ASEAN's Future Output Index fell from 66.5 in November to 65.6 in December.

"Going forward, the truce is likely to provide some short-term support to external demand and manufacturing," said Priyanka Kishore, head of India and Southeast Asia Economics at Oxford Economics. "Nonetheless, the possibility of renewed escalation of trade tensions during the course of 2019 cannot be ruled out and we remain fairly cautious in our expectations for industrial activity across the region."

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