Delta variant spread derails Asia's economic recovery

TOKYO • Asia's robust economic recovery from last year's coronavirus low is losing momentum as a surge in Covid-19 cases sees shops empty again and factories close, dimming prospects for corporate profit growth after a blockbuster half year.

The rapid spread of the highly infectious Delta variant and low vaccination rates have caught much of the region off guard, especially in emerging markets, even as economies in Europe and North America reopen.

Mr Rob Carnell, Asia-Pacific head of research at ING in Singapore, said: "It's clear that economies across the region are suffering more from Covid-19 than they previously did.

"The biggest factor is that Asia is poorly vaccinated."

While year-on-year corporate and economic indicators continue to show strong recovery, flattered by comparisons with last year's sharp declines, quarter-on-quarter indicators reveal flagging momentum.

Asia's biggest firms are likely to post their first quarter-on-quarter profit decline in six quarters in the period from last month to next month, falling 6.19 per cent, according to calculations based on Refinitiv Eikon analyst data of 1,069 companies with market capitalisation of at least US$1 billion (S$1.36 billion).

"There's no mistake there will be a slowdown in the third quarter," said Mr Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

In the near term, much depends on vaccination progress in South-east Asia - a major production base - and whether China takes extra steps to support its economy, Mr Fujito said.

Vehicle sales in China, the world's second-largest economy, slipped 11.9 per cent last month versus the same month last year, falling for a third consecutive month amid virus outbreaks and a global semiconductor shortage, which is curbing output.

Toyota Motor, the world's largest automaker by sales volume, said last week it would cut next month's production by 40 per cent from its previous plan because of the chip crunch, though it retained production and sales targets for its fiscal year.

Factory activity in the region contracted last month at the fastest pace since June last year, IHS Markit data showed.

"That's quite a strong signal that economic momentum in South-east Asia will slow in the third quarter," said Mr Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore.

Delta variant outbreaks in South-east Asia have caused supply chain headaches for some of the world's largest manufacturers, many of which rely on auto parts and semiconductors made in low-cost bases such as Thailand, Vietnam and Malaysia.

Mitsubishi Motors chief financial officer Koji Ikeya said the Covid-19 resurgence will depress demand, the chip shortage will have a lengthy impact on production, and prices of steel and other materials are set to rise.

In Malaysia and Vietnam, lockdown measures and cases of infection have forced factories to suspend operations.

"Of course, governments are trying to put in place better protection for essential workers... for example, giving them priority for vaccination," said Mr Biswas.

Asian economies that were moving from a state of relative openness to lockdown will probably see their gross domestic product contract quarter on quarter, said Mr Carnell.

REUTERS