China’s factories flatlined in June as exports shrank and jobs were cut, a worrying trend evident across Asia that argues for yet more policy stimulus as doubts gather over the potency of measures taken so far. The hard times signalled by a range of surveys was not what the world needed a week after Britain’s vote to leave the European Union condemned that bloc to months, if not years, of political and economic instability. Most of the responses from manufacturers also preceded the Brexit vote, suggesting July could be even tougher. “The unimaginable has happened and the UK vote will cast a long shadow over the UK, Europe and global markets for some time to come,” warned Westpac head currency strategist Robert Rennie. “A structurally weaker pound, a softer euro and weaker global growth beckons.” Among the many surveys out on Friday, China’s official Purchasing Managers’ Index (PMI) slipped a tick to 50 in June, dead on the level that is supposed to separate growth from contraction. One saving grace was the services sector measure, which nudged up to 53.7 in a positive sign for consumer activity. More worrying was the Caixin version of the PMI, which covers a greater share of smaller firms, where the index fell to a four-month trough of 48.6 in June, from 49.2 in May. “Panellists widely commented that poor market conditions and a drop in new work had led them to cut output,” reported Caixin. “Data suggested that part of the weakness stemmed from softer foreign client demand, with new export sales declining for the seventh month in a row.” That had to be a disappointment to Beijing which has resorted to ever-looser fiscal and monetary policy to support growth and jobs in the world’s second largest economy. It was a frustration likely shared by the Bank of Japan which found major manufacturers in a morose mood despite all its attempts at aggressive easing. The reasons were clear in the Markit/Nikkei measure of Japan’s PMI which edged up slightly to 48.1 in June, but stayed in contractionary territory for the fourth straight month. Government data were no better with household spending down for the third month in a row and core consumer prices suffering their biggest annual drop since 2013. Markets reacted by driving Japanese government bond yields deeper into negative territory. Investors now pay 24 basis points for the privilege of lending Japan money for 10 years, a once unthinkable condition that is becoming standard fare. An end to free trade? The news from South Korea was relatively cheery as its PMI reached a six-month high, yet at 50.5 it was just barely into expansionary territory. Indeed, a separate report showed shipments from the world’s sixth-largest exporter fell for an 18th straight month in June. Likewise, electronics powerhouse Taiwan reported some improvement but again growth was only marginal. Vaninder Singh, an economist at Royal Bank of Scotland in Singapore, noted the region had been the greatest beneficiary of globalisation and any shift to trade barriers or closed borders would hurt Asia the most. “Overall, what is clear to us is that the impact, will be limited in the near-term, but much more significant in the medium-term,” said Singh. “We expect this event and what it represents to subtract as much as 0.3% from growth next year compared to our pre-event baseline and expect Asian central banks to respond with another round of easing.”
