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Economy

Rising costs loom over Asia's upbeat factory activity

Nikkei PMI readings came in strong in February, but manufacturers worry about weak currencies

Higher commodity prices, such as those for industrial base metals and iron ore, were the primary factor behind rising costs for manufacturers.   © Reuters

HONG KONG Factory activity across much of Asia expanded in February, but manufacturers in some countries are coming under pressure from rising materials costs as local currencies weaken against the dollar, the latest Nikkei Manufacturing Purchasing Managers' Index shows.

Nine of 11 economies surveyed by Nikkei saw manufacturing activity expand last month. In Southeast Asia, this expansion was supported by solid domestic demand, while in India, better-than-expected growth momentum was a major factor. Among the 11 economies, only Malaysia's and Singapore's figures remained in contraction territory.

Despite the upturn, analysts expect the faster pace of U.S. interest rate hikes and stepped-up economic reforms in China to cause volatility in emerging Asian economies in the coming year.

Some manufacturers in the Association of Southeast Asian Nations are already feeling a chill. The overall Manufacturing PMI reading for the export-oriented regional bloc rose slightly from 50.2 in January to 50.7 in February, with output, new orders and employment all expanding faster than the previous month. A reading below 50 indicates contraction, and a figure above 50 shows growth.

But the Nikkei surveys suggest that the increase in new orders from the seven ASEAN countries surveyed were mostly driven by domestic demand, while export sales fell for the third month in a row.

In addition, manufacturers are facing higher material costs due to weaker exchange rates against the U.S. dollar and higher commodity prices. The PMI reading for input costs in the region accelerated to 57.7 in February from 56.6 in the previous month, hitting its highest level since last April.

"Limited growth of selling prices suggests that companies have struggled to pass on greater costs to customers," said Bernard Aw, principal economist at IHS Markit, which carried out the survey.

While rising global commodity prices, such as those for oil and industrial metals, were the primary factor behind the higher costs, Aw said weaker exchange rates in some countries provided additional pressure.

The Philippines, for example, recorded the highest cost inflation rate in the region last month. In addition to the depreciation of the peso against the dollar, new excise taxes implemented at the start of this year also pushed up input costs for manufacturers.

Vietnam and Myanmar also reported steep cost increases due to currency movements.

India, the third-largest economy in Asia, logged growth of 7.2% in the October-December quarter, outpacing China. Expansion of its manufacturing activities, however, slowed slightly in February and its service sector contracted.

The Nikkei India Manufacturing PMI fell to 52.1 in February from 52.4 in January, while the Services PMI fell to 47.8 from 51.7 on weaker demand.

"Higher oil prices do erode corporate profits for India and also worsen the current account," said Trinh Nguyen, senior economist for emerging Asia at Natixis. But she expects only a "modest" impact, as the recent fall of the Indian rupee against the greenback was just "some correction" from last year's strength.

She added, however, that emerging Asian markets face greater depreciation pressure in the short term, as capital flows back to the U.S. due to higher growth forecasts and faster interest rate hikes.

In addition to the impact of U.S. currency movements, the yuan is also playing a bigger role in the businesses of Asian manufacturers, according to Raymond Yeung, chief economist of greater China at Australia and New Zealand Banking Group.

"ASEAN countries have been increasingly affected by the economic activities in China," Yeung said, adding that the correlation between the yuan and other Asian currencies has become stronger in recent years.

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