Closely watched gauges of factory sentiment across Asia showed ongoing weakness, led by another swoon lower in the region’s export powerhouses of Japan and South Korea.

The readings underscore the growing threat posed by the escalating U.S.-China trade war to the world economy, a risk that global investors continue to underestimate, according to Morgan Stanley.

South Korea’s Nikkei and IHS Markit manufacturing purchasing managers’ index for May fell to 48.4 from 50.2 in April, with new orders also weakening. Survey respondents complained of poor sales to China and Japan.

“With current conditions turning less favorable, firms pared back their expectations for the year ahead, with business confidence dipping to the lowest since August 2016,” according to the Nikkei and IHS Markit report.

Official data on Saturday showed South Korea’s exports fell 9.4 percent in May from a year earlier, underscoring the trade war’s hit to a bellwether economy for global trade and technology.

Japan’s PMI fell to 49.8 from 50.2 in April. That soft reading came even as business investment rose 6.1% in the first three months of 2019 from a year earlier.

“There were no signs of a let-up in the recent manufacturing downturn during May, as output and new orders both slipped for fifth successive months,” Joe Hayes, economist at IHS Markit, wrote in the survey release.

What Bloomberg’s Economists Say

“This adds to an increasingly challenging picture for Asia, after data last week showed China’s official PMI slipping back into contraction. The upshot: Policy easing is likely to broaden and accelerate. Capital outflows spurred by risk-off sentiment, though, could limit extent of rate cuts by central banks in emerging Asia.”

—Bloomberg Asia economistsClick here to read the report

While Taiwan’s nudged higher to 48.4 from 48.2 in April, it marked the eight consecutive month of contraction. Malaysia’s PMI slid to 48.8 from 49.4.

China’s official manufacturing purchasing managers’ index for May slid into contraction at 49.4, according to a release on Friday. Its employment sub-index tumbled to the lowest level since the aftermath of the global financial crisis. The Caixin manufacturing PMI for May released Monday was 50.2, the same as the previous month.

Even Vietnam, which is enjoying the spillover effect of the trade conflict as companies shift production there in an effort to skirt tariffs, saw its PMI slip to 52 from 52.5. Philippines PMI rose to 51.2 from 50.9.

A reading above 50 signals expansion and one below 50 a contraction.