Surging Covid-19 Cases Hammer Asian Factories

Date: Friday, September 3, 2021
Source: The Wall Street Journal

HONG KONG—Factory activity faltered across Asia in August, with a resurgence in Covid-19 infections adding to global supply-chain disruptions and confirming fears of a slowdown in the region’s economic recovery.

Gauges of manufacturing activity plummeted across major Asian economies, in large part because virus lockdowns, port congestion and higher input costs hampered production. There were also signs that global demand for some Asian goods has been leveling off, as consumers rein in spending in the West.

Factories in Vietnam have been forced to shut or reduce their workforces during the country’s deadliest Covid-19 wave. In Malaysia, most manufacturers have been told to reduce capacity unless they have vaccinated at least 80% of factory workers. China partly shut down the world’s third-busiest port last month, though it has since reopened.

In China, a closely followed private gauge of factory activity—the Caixin China purchasing managers index, which primarily measures smaller manufacturers—contracted in August for the first time since the start of the country’s economic recovery in April 2020. It dropped to 49.2 in August from 50.3 in July. Readings below 50 signal contraction.

The weaker-than-expected results came on the heels of another disappointing report earlier in the week, when an official government gauge of the overall manufacturing sector slipped to 50.1 in August, its lowest level in 18 months.

Factory activity across seven Southeast Asian countries also dropped in August from the previous month, with Covid-19-battered Myanmar and Vietnam suffering the steepest declines, according to the latest IHS Markit Purchasing Managers’ Index data.

The headline PMI for those seven countries in the region dropped for a third month in a row to 44.5. Vietnam’s manufacturing sector index in August fell to 40.2, the lowest level since April 2020.

While South Korea’s manufacturing activity continued to expand in August, a sub-index on output dropped below 50 for the first time in a year amid material shortages and extended supplier delivery times.

The struggles could signal more problems ahead for buyers of Asian products that remain in high demand, such as toys and semiconductors. As more factories struggle to keep operations staffed and fully operational, it is harder for buyers to source the products they need, potentially adding to inflationary pressures world-wide.

“The virus disruption just adds to a list of disruptions in global supply chains from semiconductor shortages to surging shipping costs,” said Alex Holmes, an emerging-markets economist at Capital Economics in Singapore. He noted that many countries in Southeast Asia are suppliers of intermediate goods such as components used for producing consumer electronics and cars.

“All this means that the global supply-chain bottlenecks are unlikely to get better anytime soon,” he added.

Vietnam, which rapidly gained market share in global exports during earlier stages of the pandemic, is facing some of the region’s biggest challenges, as the government struggles to slow the spread of the coronavirus. Vaccination rates in the country—a supplier of shoes and apparel—remain among the lowest in Asia.

Some factories have temporarily closed. “It leads to serious problems because many orders will not be finished,” said Hoang Ngoc Anh, general secretary of the Vietnam Textile and Apparel Association.

Some production problems could ease as vaccination rates improve. China appears to have contained a brief resurgence in Covid-19 cases that broke out earlier in the summer.

Malaysia, a player in the global semiconductor supply chain, said in early August that it would relax restrictions on movement for fully vaccinated people in some parts of the country, where around half the population has been fully vaccinated. Authorities in Indonesia also said this week that they would roll back some curbs in the country as the number of cases keeps declining.

Compared with richer economies in the West, though, many Asian countries other than China lack the resources and influence to jump ahead in line for vaccines as shortages in some places continue. Some economists fear that if more Asian countries roll back their restrictions without more vaccinations, it will increase infections and cause labor shortages as people isolate at home or refuse to work.

“There is no sort of silver bullet,” said Mr. Holmes, of Capital Economics. “Just because you draw back restrictions, it doesn’t mean there will be no disruptions to the industry.”

There were also indications in the latest data that global demand for some goods is starting to tail off as consumers in the West spend more on services like travel and eating in restaurants, or curb expenditures because of worries about the Delta variant. While any sustained drop-off in demand could make it easier for Asian factories to catch up, easing some supply-chain problems, it could also take some of the steam out of the region’s recoveries, which were powered by stronger-than-expected export demand.

In China, subindexes for new orders fell below 50, indicating that more factory managers saw orders drop than increase, according to the latest Caixin PMI data.

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