HONG KONG • Factory activity contracted in most Asian countries last month as an escalating trade war between Washington and Beijing raised fears of a global economic downturn and heaped pressure on policymakers in the region and beyond to roll out more stimulus.
Such growth indicators are likely to deteriorate further in the coming months as higher trade tariffs take their toll on global commerce and further dent business and consumer sentiment, leading to job losses and delays in investment decisions.
Some economists predict a world recession and a renewed race to the bottom on interest rates if trade tensions fail to ease at a Group of 20 Summit in Osaka, Japan, where President Donald Trump and President Xi Jinping could meet at the end of this month.
In China, Asia's economic heartbeat, the Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) released yesterday showed only modest expansion at 50.2, but output growth slipped, factory prices stalled and businesses were the least optimistic on production since the survey series began in April 2012. An official gauge on factory activity - reaching a broader spectrum of participants - saw contraction last Friday as both domestic and external demand slackened.
PMIs were below the 50-point mark separating contraction from expansion in Japan, South Korea, Malaysia and Taiwan, came below expectations in Vietnam and improved slightly in the Philippines. In Singapore, the PMI slipped 0.4 point to 49.9 last month from April - dipping below 50 for the first time since August 2016.
"The additional shock from the escalated trade tensions is not going to be good for global trade and if demand in the US, China and Europe continues to soften, which is very likely, it will bode ill for Asia as a whole," said senior emerging markets economist Aidan Yao of AXA Investment Managers.
"In terms of the monetary policy response, almost everywhere the race is going to be to the downside."
Central banks in Australia and India are expected to cut rates this week, with others around the world seen following suit in the coming weeks and months.
Euro zone activity is expected to shrink as well, while US manufacturing is expected to grow steadily, although economists expect the global malaise to eventually feed back into the US economy. Fed funds rate futures are now almost fully pricing in a rate cut by September, with about 50 per cent chance of a move by July 30 to 31.
JP Morgan expects the Federal Reserve to cut rates twice this year, a major change from its previous forecast that rates will stay on hold until the end of next year.
The PMI data from India, one of the world's leaders in terms of growth, was expected later yesterday. Last Friday, data showed the economy growing at its slowest pace in more than four years in January to March.
Washington's new tariff threats against Mexico last week also contributed to global recession fears.
South Korea's exports - seen as a bellwether of world growth-fell 9.4 per cent last month, worse than a median forecast for a 5.6 per cent decline, data showed on Saturday.