The APAC economies of Japan and Australia slipped into contraction in early 2022 as new waves of COVID-19 infections disrupted business activity. Service sectors have been particularly hard hit, and manufacturing in Australia has also been hit hard. That said, pressures on selling prices have eased according to flash PMI data from IHS Markit, signaling a positive development in light of the recent rise in inflation.

APAC economies feel the brunt of surging COVID-19 infections Omicron

The latest flash PMI data from IHS Markit revealed that the APAC economies of Japan and Australia both saw private sector activity contract in early 2022. This marked a sharp slowdown from compared to December 2021, when PMI data showed growth momentum only waning from the initial stimulus. after the COVID-19 Delta wave. The image deterioration mainly reflects the drawbacks of the COVID-19 Omicron wave.

Specifically, Australia’s composite PMI fell to 45.3 in January while Japan fell to 48.8, both the lowest in at least four months and in both cases indicating a third period of economic contraction due to the pandemic.

IHS Markit Flash Composite PMI

Service sector contract in Japan and Australia renewed amid rising infections

In both countries, the performance of the services sector was particularly affected by the latest COVID-19 Omicron wave, although no new restrictions were imposed, thus reflecting only the impact of the surge in cases.

Manufacturing and service production

Manufacturing output also contracted in Australia, although the services sector output index fell almost twice as fast as its manufacturing counterpart. Not only has demand been weighed down by the latest pandemic developments, with consumers holding back their consumption of services as COVID-19 cases hit an all-time high, but widespread supply and labor disruptions have also been reported, contributing to the sharp drop in the services sector. Manufacturing output in Australia was also affected, although demand growth persisted in January as production efforts were hampered by the series of supply disruptions, including longer delivery times at a faster rate. severe and employee absenteeism.

On the other hand, Japan’s manufacturing output has been growing at a stronger pace, although COVID-19 cases are likely to remain on the rise in Japan, suggesting it’s still early days for the “sixth wave” of infections. Production in the service sector, on the other hand, fell sharply in line with demand.

Japan and Australia see selling price pressures easing

A positive sign gleaned was the easing of selling price pressures in the two APAC countries in January despite the disruptions related to COVID-19. That said, the effects could well be demand-driven following the drop in new orders.

Specifically for Australia, retail price inflation eased from the all-time high in December 2021, but input price inflation continued to climb to a new survey high. Anecdotal evidence suggests that the surge in COVID-19 infections has worsened input costs for businesses, although weaker demand conditions have limited the ability of businesses to pass on some of these costs to their customers.

By comparison, Japan – which appears to be at the start of the new wave of COVID-19 – had seen pricing pressures easing on both input costs and production costs. Further developments on the COVID-19 front will continue to be closely watched to determine the effect on Japanese prices going forward.

Moreover, the risks of renewed pressure on prices should also not be ruled out given the precedents of previous waves. The unleashing of pent-up demand as each wave of COVID-19 subsides has also previously added to price pressures and could also pose a threat to prices when COVID-19 conditions improve.

Input and output price indices

Perspectives for the Japanese and Australian private sectors

Business confidence in Japan and Australia reacted immediately to the latest developments on the COVID-19 front. Indices of future production expectations, while reflecting sustained optimism, dipped to the lowest levels seen since April 2020 and January 2021 for Australia and Japan respectively.

IHS Markit continues to expect the transition from a global COVID-19 pandemic to endemic status in 2022, and Australia has so far shown a lack of intention to tighten restrictions even as cases reached a record. This will likely eliminate the threat of restrictions on economic activity, although voluntary restrictions remain widespread amid heightened risk aversion in these countries due to high numbers of COVID-19 cases. As things stand, Australia had seen new cases of COVID-19 peak in late January, offering hope for a recovery in the coming months.

Meanwhile, Japan has been seen bringing back virus restrictions following the Omicron surge. Some effects on the economy may be felt even if the restrictions were considered less stringent than previous shutdowns. Any quicker turnaround from the “sixth wave” with these restrictions would nonetheless bode well for Japan.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.