Published: Aug 12, 2014
Source: Saudi Gazette

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GCC’s energy sector to gain from strong China, India manufacturing

Compared with last year, emerging Asia is less vulnerable to external risks, Kuwait-based Asiya Investment, an investment firm investing in emerging Asia, said in its latest report.

The US Federal Reserve began to taper its QE3 program at the start of the year without causing any major havoc, and large trade deficit countries, the ones most affected last year following the tapering announcement, fared well this year. India and Indonesia’s currencies are both up year-to-date, as well as for the majority of Asia, which all depreciated in 2013 with the exception of China and South Korea. Overall, stock markets across the region have been buoyant, already returning twice as much as for the whole of last year, and so far outperforming US and European stocks.

Unlike last year, these economies have performed more based on domestic factors. Political instability in Thailand and a strong consumer base in South Korea are prime examples. The external sector of these Asian economies has also improved this year. At the start of 2014, exports coming from the Asia ex-Japan region fell 5.9 percent year-on-year, the largest decline in over four years. Ever since, exports have consistently ticked up, the latest data showing an increase of 4.3 percent year-on-year in May. Global economic conditions are better today than in 2013: the labor and housing markets in the US are trending up while the eurozone sovereign crisis subsided further, as periphery sovereign bond yields illustrate.

Advanced economies, represented by the US, Europe and Japan, have imported goods at the fastest rate in more than two years in the last three months. The increased demand by advanced economies has helped boost emerging Asia’s exports, and hence its manufacturing sector. 

The latest purchasing managers’ index (PMI) results confirm the robustness of the manufacturing sector in the two largest emerging Asian economies. The PMI is an index composed from data based on monthly questionnaires regarding business conditions answered by purchasing executives in different sectors. 

A reading above 50 would indicate a higher number of respondents reporting “better conditions” than “worse conditions”, hence an expansionary business environment. The PMI is released by both Markit Economics (sponsored by HSBC and co.) and national statistic associations at the start of each month, for both the manufacturing and services sectors. The latest PMI data showed that both China and India’s manufacturing sectors expanded in July, improving from the prior month. The boost in manufacturing in China and India has been driven by both domestic and foreign factors.

Since March, the Chinese government has slowed down the path of reforms due to their negative impact on short-term growth. The government is still implementing mini-stimulus programs, but they are more targeted than they were in 2013. Public housing, alternative energy and railways are yet again the industries involved, and hence have helped stimulate the manufacturing sector. The strength in manufacturing is also heavily related to the improved American and European demand, which were China’s two largest export destinations in the second quarter of this year. 

India faces a different situation. Although both its manufacturing and services sectors embarked on a similar path as China’s in July, India’s business cycle is at a different stage. The victory of the Bharatiya Janata Party (BJP) in May, led by charismatic Narendra Modi, has created a sense of euphoria among businesses and investors in India. Post-election business and consumer sentiment has soared, and so have expectations within the manufacturing sector, following years of slow growth in an environment of red tape and slow infrastructure development. 

Additionally, the weak currency and improved global economic conditions have helped boost India’s exports, which jumped by 10.2 percent year-on-year in June alone, further supporting the country’s manufacturing sector.

China and India’s short-term manufacturing sector outlook is bright. Government support in China and post-election business optimism in India will support manufacturing in the respective countries. Additionally, the positive developments in the US and eurozone will also boost exports and manufacturing in China and India, which will lead to sustained energy demand from the Middle East. 

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