Taiwan PMI jumps to ten-month high

More resilient than expected demand locally is one of the drivers of the current stabilisation.

HSBC Global Research said:

MORE THAN JUST A POST-CNY REBOUND
Not only did Taiwan's HSBC Manufacturing PMI stay above the neutral 50-mark for the second straight month in March, but the pace of expansion was the fastest in ten months at 54.1 compared to 52.7 in February. With Chinese New Year distortions now gone, this reading suggests that the recent lift in manufacturing activity may be more sustainable than previously concluded.

All sub-indices saw activity pick up pace in March than a month ago (except for employment which nevertheless expanded and suppliers' delivery time which deteriorated slightly). March's output sub-index improved dramatically to an eleven-month high of 56.5, up from 53.8 in February.

For the first quarter of 2012, Taiwan's average PMI rose to 51.9 from 44.9 previously, underlining our expectations for the economy to emerge from recession (albeit by the small margin) in 1Q12.

NEW ORDERS STRONG FROM BOTH HOME AND ABROAD
Incoming new business flows saw their fastest pace of expansion in ten months, with both March's new orders and new export orders sub-indices leaping to 56.5 and 55.4 from 54.2 and 53.8 previously, respectively. Taiwan's recent manufacturing revival has been driven not only by restocking activity in the global electronics cycle but also by the resilience of domestic markets.

MANUFACTURERS STILL IN RESTOCKING MODE, FOR SOMETIME NOW
Manufacturers are restocking at a faster pace, in contrast to the seven months of destocking that ended in February. Increased production helped to push the sub-index for stocks of finished goods to 53.9 in March from 52.0 a month earlier, and for stocks of purchases to 52.7 from 51.8 previously.

NEW ORDERS MINUS INVENTORY SUGGESTS PRODUCTION SHOULD REMAIN FIRM
With new orders rising at faster rate than before, our preferred gauge of activity - 'new orders minus inventories'- hit an eleven month high of 2.6 (vs. 2.1 in February). This suggests that production activity should stay firm for a while longer.

EMPLOYMENT EXPANDS FOR FOURTH STRAIGHT MONTH BUT AT A SLOWER PACE
Employment conditions also stayed stable with its sub-index holding above 50, at 50.7 (vs. 51.3 in Feb). The rate at which headcount is rising was marginal however, as has been the case in recent months. 91% of respondents saw no changes in staffing levels compared to February. Where headcount increase was flagged, it was attributed to higher production demands or efforts to re-fill recently vacated positions.

PRICING POWER STILL WITH CUSTOMERS
March saw input prices accelerate notably faster than output prices. The input price sub-index shot up to a seven-month high of 55.4 from 53.1 previously, while the output price sub-index eased to 50.5 from 51.1 previously. This divergence in movement suggests that manufacturers are still finding it difficult to pass on higher costs to customers due to a tough competitive environment. Customers retain the upper hand where price negotiations are concerned, helping to keep consumer price inflation low by historical standards (chart 3).

Bottom line: Taiwan's electronics driven recovery remains on track with manufacturing activities improving to a ten-month high. Downside risks to growth remains, but provided US demand holds up, Taiwan's current modest pace of local job creation should sustained. Barring any unexpected upheavals to the global electronics cycle or global equity markets, Taiwan stands a good chance of emerging from recession in 1Q12 and to slowly regain growth momentum through the rest of this year.