Asia’s manufacturing gauges signal growth but outlook remains cloudy

S&P Global’s headline manufacturing purchasing managers index for Asean rose to 51.5 in February, the highest in over half a year, from 50.4 in January, it said Monday.

Maybank economist Erica Tay said it remains unclear how much of the jump in new orders across Asia was due to front-loading ahead of potentially more severe U.S. trade policy. If that occurs, buyers may pull back, driving some softness ahead in the second half of the year, she said.

The PMI data showed quicker output growth for the region and strong underlying demand growth. Confidence among Asean manufacturers rose to a nearly two-year high, while inflationary pressures appeared contained, S&P said.

For Indonesia, the survey’s headline measure hit an 11-month high, while Thailand returned to expansion territory following its dip into contraction in January. Output in Thailand rose at the fastest rate in six months, while new orders and employment stabilized, S&P data showed.

Production capacity in the Southeast Asian region is ramping up in response to buoyant demand across China and several of the region’s economies, Maybank’s Tay said.

Chip-making powerhouse Taiwan’s print marked a slightly faster rate of expansion, signaling a positive near-term outlook, said Joe Hayes, principal economist at S&P Global Market Intelligence. The growth in new factory orders and sales appear to be driven by a mix of domestic and overseas demand, including Europe and the U.S., Hayes added.

It’s not such a rosy picture for other major U.S. regional trading partners Japan and Vietnam, whose PMI readings remained in contraction as new orders and output continued their declines.

Japan marked an eighth consecutive month of deterioration in operating conditions, but the 49.0 reading in February, compared with 48.7 in January, indicated a softer contraction in the manufacturing sector, S&P Global Market Intelligence economist Usamah Bhatti said.

Still, Japanese manufacturers flagged continued weakness in domestic and global manufacturing demand, while confidence among firms weakened to the lowest since mid-2020, Bhatti said.

“The near-term outlook remains clouded," Bhatti said, as “firms highlighted the potential downside risks of U.S. protectionist trade policies and a slower-than-anticipated economic recovery."

Vietnam, with which the U.S. has the second-largest trade deficit among Asian nations, just behind China, saw a slight sequential improvement in its PMI print. However, manufacturers noted continued weak demand both domestically and internationally, alongside muted export demand, S&P said.

Transportation issues, including the speed and availability of freight, as well as increased costs, were key headwinds for the Vietnamese manufacturing sector during the month, said Andrew Harker, economics director at S&P Global Market Intelligence. Firms remained optimistic about the future, should economic conditions stabilize and supply-side constraints experience some alleviation, Harker added.

India’s rates of sales and output growth retreated to 14-month lows, but the PMI data remained firmly in expansion territory, according to S&P.

Focus will remain on global tariff developments and how their impact will ripple through Asia’s manufacturers and economies.

“Trade-driven uncertainty and attendant volatility are as such set to mount, not durably recede, until negotiated compromises dampen additional risks further out," said Vishnu Varathan, Mizuho Securities’ head of macro research for Asia excluding Japan, in a note.

China, South Korea, India, Taiwan and Vietnam are more exposed in Asia to potential reciprocal tariffs by the U.S., which could go into effect from April, Morgan Stanley’s Asia economists said in a report. While the Trump administration has already proposed a number of tariffs, there may be more to come, which could threaten corporate confidence and in turn pressure economies, the economists said.