• Flash manufacturing PMI hits nine-month low in May
• Rising price pressures amid supply shortages
• Optimism at lowest since late 2016

Flash Nikkei PMI showed Japan's manufacturing sector improving at a slower pace in May, as demand cooled. The data will add to concerns about the health of the economy after the weak first quarter GDP.

Weakest gain since August 2017

The Nikkei Japan Manufacturing PMI™ eased to 52.5 in May from 53.8 in April, according to the preliminary 'flash' reading, a relatively disappointing performance after a solid start to the second quarter. The latest reading was also the lowest since August last year.

Detailed data suggest the manufacturing economy may have settled into a slower pace of growth after a recent run of strong export-led expansions.

Order books increased at the slowest pace for nine months in May, with export sales expanding at a subdued rate compared to earlier in the year. While positive, business expectations of output in the next 12 months meanwhile sank to the lowest for one-and-a-half years. Furthermore, the survey data indicate that stretched supply chains could disrupt production schedules in coming months.

Rising price pressures

A side effect of supply shortages has been upward price pressures. Survey data showed input cost inflation at its highest since the start of 2014. Increased costs have in turn led firms to raise their selling prices, though the rate of increase remained modest in May compared to that seen for input prices, hinting at a further squeeze on profit margins.

Rising domestic demand needs to offset slowing exports

Higher overseas demand has been a key growth engine for Japan's economy since late 2016, but recent PMI surveys indicate that global trade has shifted to a lower gear. Official data have also indicated that Japanese export growth for the first quarter in fact slowed to an annual rate of 4.9%, down from 6.4% in the previous quarter, and the latest PMI gauge of export orders continued to signal a lower rate of growth than the 2017 average.

Although the survey data indicate that the initial estimate of first quarter GDP may have overstated the weakness of the economy at the start of the year, the softer manufacturing growth in May, as indicated by the flash PMI data, raises a possibility that economic activity may weaken further in the second quarter, assuming that domestic demand fails to pick up the slack from slower export growth.

Private consumption was weighed down by inclement weather and higher food and energy prices in the opening three months of 2018. However, consumer demand is likely to improve as these temporary factors subsided. This view was supported by April services PMI data, which showed business activity growth at a six-month high, which points to rising domestic demand. As such, the May services PMI reading will add clarity as to second quarter growth.

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Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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