Asia Economy

Asia Recovery Delayed Until 2013 as Manufacturing Sags

An economic recovery in Asia will likely be delayed until 2013, the latest batch of manufacturing surveys around the region suggest, with economists warning that any rebound remains dependent on Asia’s growth engine, China, picking up momentum.

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Data on Monday showed remained in contractionary territory for a second consecutive month in September, while manufacturing activity in regional peers, including export-focused Taiwan, and Indonesia pointed to a slowdown.

The HSBC Taiwan purchasing managers index (PMI) fell to its lowest level in ten months in September at 45.6, while Indonesia’s PMI weakened to 50.5 last month from 51.6 in August. A PMI reading above 50 indicates expansion, while a number below 50 implies a contraction.

Separately, exports out of Indonesia fell by a higher-than-expected 24.3 percent in August from a year earlier – reflecting weakening demand out of mainland China and the West.

“There are few signs yet that stabilization has set in, with fourth quarter data likely to show a further slide in activity,” Frederic Neumann, co-head of Asian economic research at HSBC told CNBC.

“This is the most challenging stretch for Asia's manufacturers since the slump caused by the Global Financial Crisis,” he added.

China - a major source of external demand for other countries in Asia - was widely forecast by economists to stage a turnaround in the second or third quarter of this year; however this has failed to materialize.

Vishnu Varathan, market economist at Mizuho Corporate Bank, who had expected such a scenario to play out, says those predictions appear to have been overly optimistic, forecasting the mainland economy to bottom late in 2012.

“Signs of sustainable recovery in Asia may only appear in 2013… Asia doesn’t escape what happens in China,” he said.

After unveiling over $150 billion in infrastructure spending last month, experts say China is unlikely to unveil further stimulus measures until after the Communist party holds its congress on November 8, an event that is particularly significant this year because it will mark a once-in-a-decade leadership change.

Neumann said policymakers in China need to step up measures to boost the economy in the coming months to “prevent the ship from capsizing.”

“Once China fires up again early next year, bolstered by the confidence of the incoming leadership, the region will quickly feel the lift. Until then, however, patience is needed,” he added.

India: A Bright Spot

In contrast to rest of the region, the manufacturing sector in India, Asia’s third largest economy, shows signs of stabilization.

HSBC's India manufacturing PMI, also released on Monday, stood at 52.8 in September, unchanged from the previous month. The index remained above the 50 line the divides contraction from expansion, while the survey also showed output growth picked up and total new orders edged higher.

“India’s manufacturing sector has been stabilizing. The recent policy reforms have raised hopes of a gradual recovery during the second half of 2012 or 2013,” Leif Eskesen, chief economist for India and ASEAN at HSBC said.

The Indian government last month announced a slew of long over-due measures to boost investment and prop up the weak rupee. The reforms included allowing foreign direct investment in broadcast, multi-brand retail and aviation and partial privatization of four state-run industries.

By CNBC’s Ansuya Harjani