Asia's manufacturing PMI improves, but trade risks are looming. Manufacturing PMI improved for Asia in June, reflecting a slightly positive business sentiment and helped by a massive reduction in tariffs on China in May. However, looking ahead, we expect Asia export growth to slow, resulting in softer manufacturing and overall GDP growth
We’re starting to get the first glimpse of how Asia’s economy fared in June, and the early signs are looking a bit more upbeat. Manufacturing PMI data released earlier on Tuesday shows that activity across the region picked up, signalling a modest improvement overall.
Even when we exclude China, the numbers still look better compared to May. Countries such as Japan, India, Thailand, and the Philippines all stayed in expansion territory, which is encouraging. However, not all of Southeast Asia shared the same momentum: Vietnam, Malaysia, and Indonesia continued to struggle, with their PMIs still stuck in contraction.
This uptick in June likely reflects a slightly positive business sentiment, helped by those big tariff reductions on China in May. At the same time, it also highlights that the manufacturing sector of some countries like Vietnam and Malaysia could be bearing the brunt of export re-routing by China, with domestic businesses getting hurt.
That said, the broader picture for the second quarter isn’t quite as bright. GDP data for 2Q is shaping up to be weaker than the first, with China, Taiwan, and Indonesia leading the declines. So while June brought a bit of relief, it might not be enough to lift the quarter as a whole. Moreover, in countries such as Vietnam and Thailand, where there’s strong evidence of increased imports from China and re-exports to the US, the manufacturing sector remains weak, suggesting limited domestic value-add and muted industrial momentum.
Looking ahead to the third quarter, we expect Asia export growth to slow down. The recent surge in shipments - driven by businesses rushing orders ahead of tariff deadlines - is likely to reverse. On top of that, global demand is showing signs of fatigue, and persistent uncertainty in the business environment is expected to further dampen trade flows in the months ahead.
Adding to the complexity, none of the ASEAN economies is currently close to securing a trade deal with the US. If the universal 10% tariffs remain in place beyond 9 July, we may see another uptick in re-exporting through ASEAN, as the tariff gap between China and ASEAN stays wide. However, this would offer limited support to local growth and could eventually trigger a tougher response from the US, possibly in the form of higher tariffs on countries seen as re-routing Chinese goods.
Interestingly, the return of reciprocal tariffs could shift the playing field within ASEAN. Malaysia, for instance, may gain a relative advantage over Vietnam, as it faces substantially lower tariffs under the current structure.
