Asian factory PMIs hit 51.7 as AI demand offsets Iran war drag

The global AI boom powered Asia's manufacturing sector in June, with China's factory activity expanding for a seventh straight month at a PMI of 51.7, while the Iran war pushed input costs to multi-year highs across the region.

"Overall, the manufacturing sector maintained a steady expansion in June, supported by sustained new order growth, easing cost pressures and improved labor market conditions," said Yao Yu, founder of RatingDog, which compiles China's private-sector PMI.

Japan's PMI rose to 54.8 from 54.5, a sixth consecutive month of expansion with new orders growing at their fastest pace in more than two years. South Korea's factory activity expanded for a seventh month, though at a slower pace on falling export demand. Across emerging Asia, the Philippines held steady at 50.9, Malaysia climbed to 50.7 from 49.9, and both Taiwan and Vietnam also posted expansions. India was the outlier, with manufacturing growing at its second-slowest pace in four years as European demand softened.

The divergence between Asia's AI-driven expansion and the drag from the Middle East conflict highlights how the global economy is being pulled in opposing directions. Input cost inflation in Japan stayed at a nearly four-year high in June, a sign that the energy shock from the Iran war could intensify across the region in coming months, crimping corporate margins and feeding into broader inflation.

AI Demand vs. War-Induced Costs

The surveys reveal a critical tension: booming demand for chips, data-center equipment and other AI-related goods is providing a powerful growth engine, but supply shortages and shipping delays tied to the Middle East conflict are lengthening lead times and pushing up raw material costs. "Firms frequently reported that rising raw material prices, alongside difficulties sourcing and receiving inputs due to delays and shortages, weighed on sector performance," said Usamah Bhatti, an economist at S&P Global Market Intelligence.

Eurozone Inflation Cools as ECB Weighs Next Move

The picture outside Asia is mixed. Eurozone inflation slowed more than expected to 2.8% in June, driven by lower oil prices, after the European Central Bank raised interest rates on June 11 in response to an earlier surge in energy costs. The euro area's manufacturing sector posted its strongest quarter since early 2022, according to business surveys, though the ECB's rate path remains uncertain as the Middle East conflict keeps energy prices volatile.

In contrast, the Bank of England held its base rate at 3.75% for a fourth consecutive meeting on June 18, pausing as the UK economy weakens and inflation stays above target. The monetary policy divergence between a cautious BoE and a determined ECB is likely to keep pressure on the euro-sterling exchange rate.

For Asia, the key question is whether AI demand can continue to offset the drag from higher energy costs and disrupted supply chains. The last time input costs rose at a comparable pace — during the 2022 commodity shock after Russia's invasion of Ukraine — Asian factory margins contracted by an average of 120 basis points over two quarters, according to S&P Global data. If the Iran conflict escalates further, the buffer provided by AI-related orders may narrow.

This article is for informational purposes only and does not constitute investment advice.