December PMI rebound not enough to kickstart recovery

Purchasing managers index rallied in Asia but it needs a sustaining catalyst, says HSBC.

Without policy support that encourages domestic lending and spending, the recent positives will sputter out as Asia faces tepid local demand on top of anemic exports.

Singapore in particular, along with Hong Kong, faces "heightened financial uncertainty" that is softening local consumption.

Here's more from HSBC:

One might be forgiven for a little pessimism at this juncture. Things haven't exactly been pretty of late. Europe, Europe, Europe... But, truth be told, the data isn't telling a story of outright collapse. In fact, across the world, PMI data for December was stronger than in November, including the crucial new orders components and America's ISM. Still, we are not out of the woods yet: data has stabilized, that's all. For Asia to take off again, it'll take more than this. The region still requires a more deliberate stimulus. Above all in China.

Start with the customary heatmap. November was a bleak month. No doubt. Only the ISM and India, ever so faintly, painted the board green. Elsewhere, headline PMIs flashed red. One month on, the picture has brightened everywhere (Korea, alas, is bucking the trend). Even the Global PMI is back above the waterline, even if barely so. The biggest jump occurred in India, though China, the US, Australia, and Japan returned to expansion mode as well. Perhaps most notably, in Europe, there has been an improvement across the board, with the rate of contraction easing last month. Not bad, all considered.

The forward looking components are up as well. New Orders have improved again almost everywhere. Inventories, meanwhile, appear to have dipped in December, helping to raise the new order to inventory ratio. China, here, is still an exception, with an apparent inventory overhang still weighing on overall activity (fingers crossed that brisk sales over the New Year holidays will put a dent in stocks). In the US, however, new orders jumped relative to inventories, suggesting that Asian export growth should stabilize in the coming months after sliding into year-end (Chart 1). In fact, new export orders showed signs of life as well, improving in most economies, even if there is still a long way to go before Asia returns to its customary stride.

It's important to keep things in perspective though. Yes, the global economy has stabilized in December. But a take-off is still not in the cards. Consider our second chart. Here we show our Asian new order minus inventory measure and regional output growth. The verdict is clear: we are settling into a disappointingly low trajectory. To turn things around, either Europe will have to wake up (unlikely) or Asia will need to turn the stimulus dial. Before either, the improvement in the ISM alone will not drag the region back to full throttle.

In fact, it's not weaker exports alone that are to blame for Asia's recent wobble. Local demand, the main driver of growth in the latest recovery, has softened as well. This, in part, reflects policy tightening, mostly in China and India, and heightened financial uncertainty in places such as Hong Kong and Singapore. The latest PMIs are not showing any drastic improvement on this front. Consider employment growth: sure, firms were hiring again in Taiwan and India last month; but, overall, our regional employment indicator remains weak. This is good news, of course, for firms complaining about soaring wage costs. But it is a problem for retailers trying to move goods (chart 3). Asia, in short, needs a policy stimulus. Easier money and more spending, please.

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Tags: Singapore softening local demand, Asia PMI