For Hong Kong sports shoe manufacturer, Feng Tai Footwear, August is typically a busy month when it steps up production of sneakers for the winter season. This year though, US retail giants such as Walmart and Sears have delayed orders until late September because of uncertain demand, forcing Feng Tai to suspend two of its seven production lines at its Dongguan factory in southern China.
While export-reliant Asia has been resilient in the face of a slowdown in the world's largest economy, cracks are showing. Japan and Hong Kong's shipments shrank in June, suggesting a long expected downshift in Asia's exports growth is finally under way.
"US retailers are afraid they'll overstock and the slow economy will hurt sales and they'll have to offer discounts," said Eddie Lam, chief executive of Feng Tai Footwear Co Ltd "They're all waiting."
Emerging markets in Asia have been largely unscathed by the global credit crisis sparked by a collapse in the US subprime mortgage market, but a slowdown in exports would drag on economic growth. And that makes aggressive monetary tightening to deal with inflation unlikely, says J.P. Morgan.
"Growth concerns are creeping back into view," the investment bank said in a research note, citing Malaysia's decision to keep interest rates on hold even though annual inflation in June jumped to a 27-year high of 7.7 percent.
HSBC expects further downward pressure on Asian financial markets, arguing that analysts have not fully factored in the impact of a weaker trade outlook. "Earnings growth forecasts are far too optimistic," said Garry Evans, HSBC's chief equity strategist for Asia-Pacific, referring to analysts' forecasts for 6 percent earnings' growth for Asian companies in 2008 and 15 percent growth in 2009.
"Analysts are assuming a fairly slow year this year, and that next year, everything will bounce back to normal. Analysts haven't got into a bear market (way of thinking) yet," he said. Asia has been in the grips of a bear market since October, yet price/book ratios average 2.1 times, compared with 1.2 times during previous bear markets, he said.
Japan's exports in June fell 1.7 percent from a year earlier, marking the first fall in nearly five years, while in Hong Kong, a re-export centre for Asian trade, exports dipped 0.6 percent, bucking expectations for a 9 percent increase. "Asia is coming out of a very favourable environment over the past four years. This is over," said Sebastien Barbe, Asia senior economist at Calyon, a unit of Credit Agricole.
"It is importing an economic slowdown and I expect a significant deceleration in Asia." Exports from China, the region's manufacturing base, in June rose 18 percent from a year earlier, cooling from growth of more than 20 percent in the preceding months. "Business conditions right now are lousy," said Lam of Feng Tai Footwear.
Hundreds of workers have been sent home on full pay until delayed US orders come in, which adds pressure on Feng Tai's bottom line as costs have surged 30 percent in the past six months due to soaring wages, energy and raw materials prices. When orders arrive in September, Feng Tai will have three months instead of the usual six to produce and deliver the goods, pushing up overtime costs and forcing the company to hire more staff to handle the extra workload.
EARNINGS FLAG MORE PAIN: Corporate earnings are also signalling a deeper exports slowdown which will ultimately brake economic growth. Japan's Toyota Motor Corp, the world's biggest car maker, saw sales to the United States - its biggest market - drop 6 percent in the first half.
South Korea's LG Display Co Ltd, the world's No 2 liquid crystal display maker, is slashing its panel output by 10 percent until later this month, citing a weakening outlook for global sales of flat-screen TVs and personal computers. Analysts say headline economic growth for Asia ex-Japan is expected to top 7 percent this year against 9.1 percent last year, supported by relatively strong domestic consumption.
But Lehman Brothers is less optimistic, forecasting 7 percent growth with risk to the downside. "If US consumption remains weak, emerging economies that export to the United States are going to slow. It's just a matter of time," said Young Sun Kwong, an economist at Lehman Brothers.
Job prospects will also fade as earnings shrink. Most medium-sized firms in an HSBC survey said they did not plan to add staff in the next six months while recruiting company, Hudson, expects executive hiring this quarter to be the slowest in more than three years. American consumer demand was being supported by tax rebates, but that will wear off later this year, Calyon said.
Worse, regional exports which have helped offset slowing shipments to key US and European markets, are also faltering. At Feng Tai Footwear, sales to British baby goods retailer Mothercare are still healthy, but with many analysts saying Britain is headed for recession, Lam is understandably nervous. "Sales to Mothercare are up 5 percent on last year, but they are also delaying buying."