Japan's labour market is continuing to warm up, but to create sustainable wage and price it needs to run hot. Such a transition is possible, but it likely needs a stepping up of employment in the hospitality industry.
Policy statements have generated optimism of a shift in Beijing's economic strategy. But the language being used isn't so unusual, while the challenges the economy faces are. We still think changes in substance, as well as style, are needed, in particular material support for the household sector.
Taiwan's manufacturing sector remains in recession, with signs of a floor tentative at best. So, right now, it looks like growth and inflation will slow further in Q1. The upside risk is what happens to regional demand as the current covid wave recedes in China through Q1
Activity has been weakening for a while, and there are now signs that inflation – for services as well as goods – is starting to turn down too. Rate cuts should be a possibility through Q2. A pre-condition is a more obvious weakening of the labour market.
The PMIs fell again in December, signalling that GDP probably contracted YoY in Q4. That is backward looking, and there will be recovery as China exits covid. But the weakness in consumer income confidence shown in the PBC's Q4 survey shows full recovery out of the covid trough isn't yet likely.
This is what happened on East Asia Econ this week. Region The region's exports in November fell YoY for the first time since 2020. The weakness has so far been clearest in shipments into China, but exports to the US are now starting to fall quickly. With the leads still deteriorating, there is a likelihood of a real air pocket in regional export growth in early 2023, which
The CBC raised policy rates again this quarter. But the bank's statement wasn't hawkish, and data this week showed the labour market continuing to slacken, with overtime hours falling back. Loosening rather than tightening is more likely in 2023.
The region's exports in November fell YoY for the first time since 2020. The weakness has so far been focused in China, but exports to the US are now falling quickly. With the leads still falling, there is a likelihood of a real air pocket in growth in early 2023, and pressure for policy loosening.
The Tankan points to GDP growth remaining tepid. It does, however, confirm other data showing services price inflation is beginning to emerge. That seems likely to at least persist as Asia opens up after covid, challenging BOJ claims that inflation in Japan is all about energy prices.
For the third time in as many years, China's GDP likely contracted in November. With zero covid ending and property policy reversing, there will be recovery through 1H23. But for a sustained pick-up, more policy help is needed for households.
Exports and the property market are turning down sharply. Employment growth has stalled, but the number of jobs hasn't yet fallen much, being held up by the services sector. That should be the next shoe to drop, and if it does, will open up a possible path for BOK rate cuts.
Zero covid has come to a sudden end. That, and property loosening, will ensure economic recovery in 2023. But for next year to prove a real turning point - and justify a steepening of the curve - the government needs to announce tangible policies that boost household incomes and spending.
Money and credit in November was soft. That probably reflects zero covid. With that now being reversed, credit should bounce - and with interest rates low, that bounce could potentially be big. That though is a risk case, offset by the depressed level of liquidity preference.
Japan's cycle remains sluggish, partly because of import price inflation, though that receded in November. In theory, post-covid opening up of the economy should add momentum to the modest wage and service price inflation being seen. But that feels optimistic given softening business sentiment.
Inflation was soft in November, but with the exit from covid dramatically changing the short-term outlook for the economy, these price data are backward looking. Just how much core CPI can now rise will be indicated by inflation expectations and liquidity preference.
The last time exports dropped as quickly as they have recently was in the global financial crisis in 2008-09. This time around, the fall does come after a particularly large increase. Even so, with exports falling and inflation low, further rate hikes are unlikely, and cuts are possible.
Exports took a big step down in November. The out turn was probably worsened by China's covid problems last month, but tech exports have now fallen for four consecutive months, and leading indicators for China's exports point to more worsening to come.
Modest wage growth is gradually accelerating. Labour market dynamics are consistent with that continuing. There is upside risk, but that remains the same as it has been the last few months: normalisation of the economy after covid.
The industrial cycle is slowing, consumer confidence is weak, and a modest rise in inflation has likely peaked. Given all that, Taiwan is well-placed to be the first regional economy to cut rates. The risks are yet more aggressive Fed hikes, or a powerful economic turnaround in China.
Core inflation remains elevated, but the BOK is signalling it is near done with hiking. That's because of the deterioration in activity. That slowing of growth is sharp enough to make cutting a possibility, though the BOK likely needs to first see a fall in employment.
Korean exports fell again in November, and leading indicators suggest there is still more downside to come. The deterioration will test the BOK's ability to continue to hike rates.
The PMIs suggest renewed weakening of the economy in November. That perhaps explains the accelerated pace of property easing. That loosening is an important development, but as long as China remains mired in covid difficulties, the outlook for the economy will remain very difficult.
The population is starting to chafe against lockdowns, but isn't prepared for opening. The compromise path forward is rising covid cases signalling more eventual openness, but lockdowns continuing to be used to try to slow the spread of the virus. That's a very messy path for financial markets.
The BOK wasn't quite as hawkish as it has been, but is still some way from becoming dovish.
The business sentiment survey is suggesting a deterioration in activity, and a fall in inflation. The survey hasn't yet fallen into cutting territory for the BOK, but likely will in Q123. That will become a more important message for the central bank if the labour market also starts to slacken.