A buildup of investors has led to an oversupply in the electronics sector.
Although Asia-Pacific manufacturing soft data, including Purchasing Managers' Indices (PMIs), improved in March, it is still too early to expect an imminent manufacturing recovery, a report by S&P Global Ratings revealed.
Despite the improvement in PMI data, the region's industrial production data continued to be weak as seasonal factors in Q1 led to noisy activity data, including PMI numbers.
According to S&P Global Ratings, two factors suggest that manufacturing still faces some challenges.
“First, the electronics sector, which is influential in industrial production in many countries in Asia, is still weak. A buildup of inventories over the past year has led to an oversupply in the market. Second, retail sales activity in the U.S. and Europe has been moderating. The two regions are large consumers of Asian products,” they explained.
Meanwhile, economic activity across the region was observed to be mixed. Residential construction in Australia is reportedly slowing due to weakness in the housing market, and household wealth effects are reducing private consumption.
"The Reserve Bank of Australia is likely to keep cash rates on hold, but a material decline in growth below trend of about 2.6% would lead to rate cuts later this year," Shaun Roache, S&P Global Ratings' Asia-Pacific chief economist, said in a statement.
Meanwhile, policy easing in China is said to be gaining traction. S&P Global Ratings' financial conditions index reportedly eased again in March at its most supportive for the real economy since early 2016. Activity data also suggested that the slowdown is moderating, including above-consensus growth of 6.4% YoY for China's Q1 GDP. Both industrial production and retail sales growth picked up in March.
"The policy easing signaled by our financial conditions index suggests the economy is on track to meet or exceed our 6.2% growth forecast for 2019," Roache said. "Domestic policies are now clearly supportive. In our view, market observers' beliefs that policymakers are 'pushing on a string' and that confidence would not recover are misplaced."
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