­Disinflation, weaker growth put pressure on Asian central banks

BEIJING/SEOUL: Chinese factories were forced to cut prices for the sixth straight month in January to sell their products, while economic growth in South Korea slowed sharply, raising the prospect of more policy easing from major central banks in Asia.
The weak manufacturing reading from China added to expectations that Beijing will have to announce fresh stimulus measures soon, and came a day after the European Central Bank took the ultimate leap and launched a huge bond-buying program as it tries to stave off deflation and kick-start growth.
China’s manufacturing growth stalled for the second month in a row, the HSBC/Markit Flash Manufacturing Purchasing Managers’ Index (PMI) survey showed on Friday, while the sub-index for input prices fell to the lowest since the global financial crisis, reflecting a tumble in oil prices that is spreading disinflationary pressure throughout the globe.
Chinese companies again cut output prices, but more deeply than in December, eroding their profit margins and pointing to faltering demand.
Analysts at Nomura saw more downside pressure on China’s producer prices, “enhancing our concerns over deflation”.
“This looks like a trend and it will affect core inflation at some stage. So the PBOC will very likely react to such deflation concerns,” said Chang Chun Hua, an economist at Nomura, adding he expected the central bank to cut commercial banks’ reserve requirement ratio (RRR) in the first quarter to free up more money to lend.
News out of South Korea made for uncomfortable reading as well. Asia’s fourth-largest economy grew a seasonally adjusted 0.4 percent in the October-December period on-quarter, less than half of the 0.9 percent gain in the third quarter.
A senior statistics official from the central bank pointed to the uncertainty facing the trade-reliant economy, not least from the slowdown in China, South Korea’s biggest export market.
The Bank of Korea is widely expected to cut interest rates in the first half of this year.
In Bangkok, Thailand’s finance minister urged the central bank to cut rates to help the sputtering economy and said he was worried that the strength of the baht currency will hurt exports, a key growth engine.
In Australia, investors now see a bigger chance of a cut after surprise easing from Canada earlier this week, while India last week cut rates earlier than expected and hinted at more to come.
The lone bright spot in Asia was Japan, where manufacturers saw a pick up in domestic and overseas orders this month and hired more staff.
Still, the Bank of Japan is struggling to reach its ambitious 2 percent inflation target two years into so-called ‘Abenomics’ – a mix of aggressive monetary and fiscal policy plus structural reform aimed at pulling the country out of decades of deflation, a fate other global policymakers are desperate to avoid.
Indeed, earlier this week, the BoJ slashed its inflation forecasts.
While the Japanese central bank signaled it was in no hurry to add to its massive asset-buying scheme, some analysts suspect it will have to do more later in the year.
“With very low inflation, or even negative inflation and some slack remaining, we expect that advanced economy monetary policy will continue to loosen overall,” analysts at Citi wrote in a note to clients.
“ECB QE will probably be scaled up further over time. We also expect the BoJ to expand QE further around mid-year.”
Friday’s reports in Asia came a day after the European Central Bank launched a full-scale attack on the threat of deflation, pledging to pump hundreds of billions in new money into a sagging Eurozone economy.
While surveys on the Eurozone manufacturing sector due later on Friday will not reflect the ECB’s latest measures, any disappointment would only serve to further justify its bold action.
Similar reports on the US factory sector may highlight concerns that its economy could be the only engine driving global growth this year.