Exports fell again in January, led by another big fall in shipments to China. That could reflect Lunar New Year distortions. Leading indicators suggest the trough for the overall export cycle should now be close.
Much market discussion focuses on consumption-driven recovery. Spending will rise in 2023, but only because it was so depressed in 2022. Policy isn't yet in place to make the recovery sustainable. In any case, GDP can't grow without property also expanding. That seems likely, but isn't yet assured.
Wages and consumption are trending up, but progress in incremental. Earnings grew more strongly in December 2022 than in any month since 1997. That is welcome, but is mainly the result of bonuses. Separate consumption data weakened in December, but that is probably payback after a strong Q3.
An opinion piece recently published in the SCMP.
As with Korea, there are some tentative signs of a tun in Taiwan's industrial cycle, with export orders ticking up in December, and equities rising. But inventories in IT remain high, and the PMI in January was very soft. There's little sign of a real lift yet.
There wasn't much change in either exports or CPI in January. At -14.6% YoY, the change in exports was the weakest in the current cycle. Headline CPI ticked up, but that was because of an expected change in utility prices. Core and personal services inflation fell, though only slightly.
The two big hopes for Japan's economy in 1H23 are a decline in inflation that lifts domestic spending, and a normalisation of Asian travel that boosts tourism. December unemployment and January consumer confidence suggest both dynamics might be in play, but not yet powerfully.
The PMIs improved in January, and our FCI indicates a further rise to 52 from here. That said, the details today weren't particularly strong. They can be regarded as backward-looking, but we continue to think that policy hasn't moved enough to ensure recovery continues beyond the next few months.
This is what happened on East Asia Econ this week. Thematic The East Asia Economist: modelling the reaction function of Taiwan's CBC A couple of weeks ago, we outlined a policy reaction function for the BOK. Today we do the same for Taiwan's central bank, the CBC. Perhaps because Taiwan has never really experienced any inflation, we couldn't find a way in which CBC
A couple of weeks ago, we outlined a policy reaction function for the Korean central bank. Today we do the same for the Taiwan. The model strongly suggests that the tightening cycle is over, but isn't yet indicating that loosening is about to begin.
Tokyo CPI rose again in January, and on a headline basis is now above 4%. Leading indicators continue to suggest the peak should be close, with this week's services PPI for December falling.
Business sentiment continues to fall, taking the BOK into what would usually be loosening territory. However, there is now some risk of second derivative improvement, with exporter sentiment and the diffusion both ticking up through February.
Inflation expectations ticked up in January. That probably reflects a stabilisation of headline CPI on the back of higher utility prices. It would be more significant if improving market sentiment towards the global cycle starts to show up in a real strengthening of Korean industrial data.
Exports across the region fell by -7% on average in December. By the end of Q1, the rate of contraction is likely to double, led by bigger falls in shipments to the US and EU. Beyond that, there are tentative signs of a floor, as DM sentiment surveys bounce, and China emerges after covid.
With US rates peaking and Asia finally opening up after covid, Japan's economy looks better placed for recovery. If the BOJ tightens now, it risks a policy mistake. Otherwise, the indicators to be watching are the shunto, and recovery of the hospitality industry as Asian travel finally normalises.
Exports remain weak, and should deteriorate further in Q1. However, shipments in January weren't as bad as they might have been, and with our regional leading indicator showing early signs of bottoming out, there is now a risk of second-derivative improvement in Korean exports through Q2.
Inflation trends aren't changing much. Current inflation through December was high, but leading indicators point to a clear peak. Regardless, policy uncertainty will remain high at lest until the PM picks a new governor for the central bank, an annoucement that is likely in the next few weeks.
Korea's property market is reversing sharply. That turn will help control CPI inflation, but also increases the downside risks to growth. That in turn makes BOK rate cuts more likely.
Taiwan's GDP contracted in Q4. The labour market was stable at a headline level in December, but employment in manufacturing did fall. We continue to think Taiwan will be the first to cut, with the risk being any lift that results from China's re-opening.
If there was a surprise with the Q4 data, it was that the official measure of GDP managed to grow. The details were weak, with only household savings rising strongly. Those savings provide a platform for a rebound in 2023, though not if households think their income growth has permanently slowed.
Import price inflation eased in December, suggesting CPI inflation falls below 2% YoY in 1H23. On this basis, the BOJ shouldn't be tightening. But having opened the door to change in December, the bank faces an enormous task if it wants to convince the market that rates aren't moving further.
Official December data point to property prices bottoming out. That isn't unexpected, given the ending of zero covid and other signs that property prices have picked up. Cuts in mortgage rates suggest there could be quite a big bounce in prices, but that needs household confidence to recover.
After a big fall in November, the trade data were less eventful in December, in MoM terms hardly changing at all. That means YoY growth is still deteriorating, and leading indicators point to that continuing through at least Q1.
The BOK hiked again today, but the meeting gave strong hints that this is the last in the current cycle. The probability of a cut will likely start to grow in Q1, though for the BOK to actually do that, the bank will need more confidence that inflation is going to decline.
The EW survey of corporates and households continues to suggest modest recovery. It can be hoped that household sentiment improves from here as inflation comes down. That will be helped by the stronger JPY, though data released yesterday confirm very large JGB purchasing by the BOJ in December.