Shrug off Singapore's weak PMI: HSBC

The country's manufacturing industry continues to contract but is it an outlier in Asia?

Instead of making too much on the continued weakness of Singapore manufacturing, HSBC would rather paint a broad picture of a slow re-ignition, as evidenced by the rebounding PMIs in larger markets like China, India and Japan.

Here's more from HSBC Global Research:

Not a bad start to the year. After stepping into a soft patch in the fourth quarter, Asian growth is gradually picking up. This rebound is led by the region's giants: China, India, and Japan. Even the smaller, trade-dependent economies are feeling the lift. Asia's inventory correction appears to be running its course and domestic demand has stabilized. Still, risks remain, above all a road-accident in the EU and another dip in US activity. For that reason alone, further stimulus may be needed, especially in China.

It's time to turn on the heat maps. The first shows headline PMI readings and the new order minus inventory measure. A few things stand out: the largest economies are back in deep green, including, quite remarkably, the UK and Germany, which are closer to the epicenter of current troubles. India, especially, has seen an impressive rebound in activity that looks set to continue: new orders vastly exceed inventories.

Even Asia's smaller markets, challenged by excess inventories and a stutter in the global electronics cycle, are seeing light: Korea's new order minus inventory measure is back in green (if barely) and Taiwan's is moving in the right direction (Singapore's is generally less reliable so we wouldn't put too much emphasis on its weaker showing).

Our first chart makes the point clear. The regional new order minus inventory measure has bounced back convincingly. This should lead to stronger industrial output growth in the coming months. Of course, we need to see further improvements in regional PMI measures to sustain this rebound and bring the region back to trend growth. Still, the turn is unmistakable.

As our regular readers know, we like to keep an eye on the US new order to inventory ratio. This has seen a strong bounce in recent months, thus leading the regional recovery quite well. However, the measure tracked sideways in January (this is more due to a rise in inventories given that new orders continued to expand briskly). As our US economist, Kevin Logan, has pointed out, the US economy is not out of the woods yet and growth may even slow in the first quarter after an inventory led surge late last year. Thus, Asian policy-makers, particularly in China, may well keep an easing bias for the time being. In fact, while factories may pick up speed in the coming months, the message on the trade front is still a bit mixed. New export orders have not recovered quite as briskly as headline readings would suggest. This may reflect caution among companies, especially with regard to developments in Europe - the recent uptick in the continent's PMIs notwithstanding. The relatively cautious mood is also reflected in the muted improvement (if any) in the employment measure of the PMIs. Stabilizing consumer demand (chart 3) may ultimately help to invigorate job growth. But it is early days.