Asia's factory activity grows but Ukraine crisis clouds outlook

Asia's factories sustained a brisk recovery in February amid signs the coronavirus was having less of an impact of business, but the Ukraine crisis has rapidly emerged as a fresh risk that could disrupt supply chains and worsen cost pressures.

Strong international sanctions against Russia in response to its invasion of Ukraine have jolted markets and boosted oil prices, adding to headaches for Asian economies and businesses already reeling from rising input costs.

"The war in Ukraine is a major new source of uncertainty," Reserve Bank of Australia Governor Philip Lowe said on Tuesday after his bank kept interest rates at a record low.

While the conflict in eastern Europe now looms as significant risk for the global economy, indicators from February showed conditions had been gradually improving before the significant escalation in the crisis.

Chinese factory surveys, both official and private sector, showed activity remaining in expansionary territory, pointing to resilience in the world's second-largest economy despite cost pressures.

Manufacturing activity also expanded in Malaysia, Vietnam and the Philippines as they gradually re-opened their economies even as Omicron infections continued to spread, surveys showed.

But Japan's factory activity growth slowed to a five-month low in February on continued Covid-19curbs and rising input costs.

The expansion in activity also slowed in Taiwan and Indonesia in a sign of the lingering impact of supply chain disruptions caused by the pandemic.

The surveys indicate the fragile state of Asia's recovery even before the Ukraine crisis.

"The most immediate hit from the crisis will come from rising oil prices, which will deal a severe blow to many Asian economies," said Toru Nishihama, chief economist at Dai-ichi Life Research Institute in Tokyo.

"Russia is a big exporter of gas, rare metals and other goods critical for chip production. That means the crisis could aggravate supply chain disruptions, which would be bad news for countries like Japan, South Korea and Taiwan."

INFLATION RISKS

China's factory activity returned to growth in February on rising new orders, a private survey showed on Tuesday, although employment remained mired in contraction.

Separately, China's official manufacturing purchasing managers' index (PMI) rose to 50.2 in February, remaining above the 50-point mark that separates growth from contraction. It picked up from a reading of 50.1 in January and confounded analysts' estimate of a slowdown to 49.9.

Despite the pick-up, China's official PMI remains well below its pre-pandemic average, said Julian Evans-Pritchard, senior China economist at Capital Economics.

"The upshot is that China's economy appears to have struggled for momentum so far this year," he said.

Japan's PMI slipped to 52.7 in February from 55.4 in January, marking the slowest expansion since September last year.

The spike in commodities prices caused by Russia's invasion of Ukraine could prop up inflation and complicate policies for Asian central banks, as they balance the need to arrest an unwelcome rise in inflation and underpin growth.

Malaysia, for one, will wait until the third quarter before raising rates from a record low to support an uneven economic recovery, analysts in a Reuters poll expect.