Taiwan: Manufacturing conditions deteriorate for the first time in nearly two-and-a-half years in October
November 1, 2018
Operating conditions in the Taiwanese manufacturing sector worsened in October, as underlying demand continued to weaken amid the ongoing U.S.-China trade war. The manufacturing Purchasing Managers’ Index (PMI), reported by Nikkei and IHS Markit, declined from 50.8 in September to 48.7 in October. The index thus fell below the 50-point threshold that separates expansion from contraction in the manufacturing sector for the first time since May 2016.
The decline logged in October came largely on the back of a sharp fall in output and new orders, which both contracted at the steepest rate in over three years. New export orders also notably fell during the month, indicating that weaker demand came not only from the domestic market, but also from overseas. Due to softer demand conditions, manufacturers reduced their buying activity for the first time in two-and-a-half years, while backlogs of work rose at the slowest pace since June 2016. Meanwhile, employment increased for the second consecutive month, but only marginally.
On the supply side, stock shortages at the vendor level continued to cause a further lengthening of supplier delivery times, while manufacturers’ stocks of both inputs and finished products increased modestly in the month. In addition, input price pressures remained sharp, due notably to higher raw material prices, causing manufacturers to continue raising their selling prices, albeit at the slowest pace in over a year.
Lastly, the overall deterioration of operating conditions in October caused manufacturers to become pessimistic about the production outlook over the next 12 months.
Commenting on the outlook, Annabel Fiddes, principal economist at IHS Markit, noted that:
“Sentiment towards the year-ahead also turned negative for the first time in over two years, with a number of companies anticipating the ongoing China-US trade dispute to weigh on the sector’s performance going forward. The fact that purchasing activity fell for the first time since mid-2016 in October also suggests that output levels may not improve in the near-term”.
Overall, the PMI trend over the last few months indicates that the manufacturing sector will likely remain feeble throughout Q4.
Author: Joffrey Simonet, Economist