Asian manufacturers seem to be on firmer ground, with the latest survey data signaling stronger output and orders, but building cost pressures could stoke concerns about inflation.
Purchasing managers index data from S&P Global showed improvements in industrial powerhouses like South Korea and China midway through the second quarter.
“Asia’s manufacturing recovery looks to be firming by the month,” said Maybank economist Erica Tay.
Headline manufacturing PMI numbers for May in China, South Korea and Taiwan were all around two-year highs.
“Domestic demand-driven economies such as Indonesia and the Philippines are also seeing buoyant activity in manufacturing,” Tay said.
A revival in factory orders spurred the strongest rise in manufacturing output in South Korea for nearly three years, S&P said on Monday.
“South Korea’s manufacturing sector appears to have caught a second wind,” said Joe Hayes, principal economist at S&P Global Market Intelligence.
Better demand at home and abroad drove the surge, with headline PMI indicating a return to growth after signaling contractions for two months. The survey data paints a promising picture, said Hayes, as hiring growth returned and purchasing activity increased.
A measure of China’s factory activity was similarly upbeat. Data from Caixin Media Co. and S&P Global signaled a fourth straight month of accelerated growth in the sector as the market continued to improve.
The headline PMI reached a high not seen since June 2022, said Wang Zhe, senior economist at Caixin Insight Group. Output hit a 23-month high, and businesses turned more optimistic, expressing high expectations for domestic and foreign demand over the following year, he said.
In Japan, the manufacturing sector’s health improved for the first time in a year in May, the au Jibun Bank PMI indicated. That reflected another round of job creation, a renewed increase in preproduction inventories and broadly stable new orders and production.
Taiwan’s turnaround also continued, with data echoing the regional trend of growth in output and new orders—“a noticeable turnaround from the moribund performances of the last couple of years,” said Paul Smith, economics director at S&P Global Market Intelligence.
Output and new orders also rose in Indonesia, and the Filipino manufacturing sector continued to improve.
The positive growth signals were accompanied by rising cost pressures. In India, for example, new export orders rose at the fastest pace in over 13 years amid demand across markets overseas, but so did costs pressures.
Manufacturers were only able to pass on part of the increase to consumers, squeezing margins, said Maitreyi Das, global economist at HSBC.
“This is a risk that bears monitoring,” Maybank’s Tay said. In China, manufacturers also reported little ability to pass on higher costs to customers.
In Japan, goods producers face intensifying cost pressures as a weak yen strains import prices.
“Coupled with rising wage costs, the increase in input prices underpinned the sharpest upturn in output charges for a year [in May],” said Pollyanna De Lima at S&P Global Market Intelligence. That is undesirable considering that domestic and external demand remain subdued, she said.
Businesses in Taiwan face an uncomfortable reacceleration of input cost inflation, which hit a 22-month high in May, Smith said. South Korean firms are also feeling the pinch, Hayes said, as the recovery of global manufacturing conditions spurs a rise in commodity prices.
The Asia PMIs come after initial data signaled faster developed-market growth, some easing cost pressures but also stubbornly high inflation by prepandemic standards, S&P said.
Signs of more cost pressure may add uncertainty to the outlook for interest-rate cuts in Asia, where central banks have largely stayed on the sidelines as they look for inflation to return to target, growth to solidify and clarity on the start of Federal Reserve easing.
“With major developed central banks set to lower rates from June, inflation trends in other parts of the world will offer clues on which economies may follow suit,” said Jingyi Pan, economics associate director at S&P Global Market Intelligence.
Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com