Surging Covid-19 Cases Hammer Asian Factories

Continuing struggles in region’s manufacturing sector could lead to higher prices for consumer goods such as shoes and electronics.

By guest authors Stella Yifang and Jon Emont from the Wall Street Journal.

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.

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