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Last week, next week
What happened on East Asia Econ last week.
Paul Cavey
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Japan – exports sideways
Imports have fallen, allowing the trade deficit to narrow. Exports are going sideways. Our regional export leading indicator has started to lift, which should benefit Japan. But for export performance to improve materially, Japan's auto sector needs to perform more strongly.
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Taiwan – resilient wage growth
Wage growth is quite strong in Taiwan, particularly relative to the weakness of the manufacturing cycle. So far, the strength is more apparent in manufacturing. It will become more important for inflation if it starts to show up in services, where productivity growth is slower.
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China - home price inflation returns
Property prices rose in February for the first time in 17 months, consistent with other data suggesting the market has reached a floor. Interest rates indicate upside, but buyer sentiment has been weak. We are waiting for the PBC's Q1 depositor survey to get a sense of change in that cautiousness.
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Korea – strong employment
Import price inflation continues to slow, as does consumer lending, but there was a sharp bounce in employment in February. That doesn't look cyclically driven, but still, it means the BOK will likely remain hawkish for the moment.
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China – soft growth
Official activity data for Jan-Feb were soft, with retail sales growing by just 3.7% annualised. Through January at least, China had yet to escape fully from the shadow of zero covid, so there should be more recovery ahead. But given the recession last year, the pace of recovery seems soft.
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Japan – BSI solid
The BSI reinforces recent themes: that growth should be a bit stronger in the next few months, and that the labour market should finally get back to pre-covid levels of tightness.
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Last week, next week
This is what happened on East Asia Econ this week.
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Japan – 6/10, maybe 7
The Economy Watchers Survey was better again in February. So maybe the recovery is a bit stronger than our last assessment of 6/10. But Q4 GDP growth was weak, so the recovery is still young, and so it seems unlikely the new BOJ leadership will want to move policy too much.
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Taiwan – exports and inflation lower
Exports ticked up in February. The export cycle could be bottoming out here, but there's not a lot of sign of a real rebound. Inflation softened in February. It is low by international standards, but somewhat elevated relative to Taiwan's own history.
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China – stronger credit growth
Credit growth held up in February, meaning that total issuance in the first two months was a new record of almost CNY10trn. That this hasn't been more bullish for markets perhaps reflects an expectation that this boost will face, as it did after the first policy reaction to covid in 2020.
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China – softer inflation
CPI and PPI inflation were soft in February. There will be Lunar New Year distortions, but still, the date don't support the idea of strong economic recovery.
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Japan - wage growth slows
Wage growth in Japan slowed in January, as the benefit of year-end bonuses disappeared. Underlying wage growth is running a bit over 1% YoY, stronger than history, but not enough to produce CPI inflation of 2%. In this sense, the BOJ doesn't have much room to shift policy.
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Korea – lower inflation
Inflation eased in February, and probably a bit more quickly than the BOK was expecting. However, the details weren't so weak, with sequential core and private services inflation remaining elevated. Our model for the BOK suggests tightening pressure, while lessening a bit, remains high.
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Last week, next week
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Taiwan – big upturn
The Taiwan February PMI surged to the highest since June 2022. But this was partly because the whole of the Lunar New Year holiday fell in January, meaning there were more working days in February 2023 than any since the survey started. That has relevance for thinking about China's PMI too.
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The East Asia Economist
Headline CPI is likely to decline. But a sharp drop to 2% seems unlikely. Cyclically, the percentage of items rising in the basket rose to a new high in January. Structurally, wage growth suggests Korea still isn't entering a demographically driven deflation.
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Japan – taking stock
Inflation is finally falling, and the labour market is tightening. But the easing of inflation is because of government subsidies, and employment is still below pre-pandemic levels. So, the recovery is gradual and vulnerable to shocks, with the obvious one being another sharp move higher in $JPY.
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China – better headline PMIs
The headline manufacturing PMI data were strong at around 52, which is roughly in line with our FCI. But the details were underwhelming, and leaves us still thinking that the recovery needs more effective policy support to be sustained.
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Korea – export floor?
Korean exports continue to fall, but there are sighs that a short-term floor might be near. The driver of that is recovery in China, which is happening when exports to DM have yet to decline.
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Last week, next week
This is what happened on East Asia Econ this week. Thematic The China Diviner: The importance of interest rates Perhaps the most popular global macro chart for China plots global metals prices against China's credit impulse. But we'd argue that even in China, it is useful to look at the price of money not just the quantity, with interest rates leading credit. The relationship has weakened
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Taiwan - taking stock
The case for a shift away from tightening is clearest in Taiwan, where the cycle is weak and inflation modest. Our model already points to a big fall in the likelihood of further tightening. It isn't yet suggesting, though, that loosening is on the table.
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Japan - inflation up again
CPI inflation rose again in January. That's probably the peak, with utility subsidies kicking in from February, and import prices easing. Still, it is no longer reasonable to argue that inflation isn't broad-based, even if it hasn't yet become fully domestically generated.
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The China Diviner
A popular chart for China plots metals prices against the credit impulse. But we'd argue that even in China, it is useful to look at the price of money not just the quantity, with interest rates leading credit. The relationship has weakened since 2020, but that tells us about what ails the cycle.
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Korea – back to hawkish
As expected, the BOK didn't hike rates today, but sounded hawkish. The economy is weak enough to end tightening. But inflation remains high, and the market will likely struggle to get conviction on the direction of CPI much before the end of Q2.