East Asia Econ

In the second release of Q1 GDP, consumption was revised higher. In aggregate terms, there's still no convincing trend up, but the per capita level of spending is now as high as the previous record peak in 2014. The revision boosted GDP to flat QoQ, even though capex was revised down.

Consumer sentiment has been sliding, but in April, the BOJ's measure of consumption was firm. It is still well below the pre-covid level, but the numbers look consistent with the BOJ's view that consumption is on a "moderate increasing trend".

The S&P PMIs indicate slower growth in May, with the mfg PMI dropping sharply, and today's services PMI sluggish. Both also suggest more deflation. In today's survey, input prices ticked up, but selling prices were pushed down by "greater competition for new work and promotional activities".

High-frequency data continue to point to a faster rate of deflation in China in recent weeks. One reason is lower energy prices, which should bring some economic relief to downstream firms, but building materials and steel prices are also falling. Cyclical momentum the economy remains very weak.

Rather than getting the tariff-reprieve boost seen in the official PMI, and other PMIs across the region, the S&P PMI fell to 48.3 in May, the lowest since September 2022. Export orders dropped to the lowest since July 2023. That fed into weaker staffing and continued falls in prices.

The Liberation Day tariffs caused the PMIs to fall sharply in April. Postponement of the tariffs triggered a recovery in May. But the bounce in the headlines was mild, and Korea, where according to S&P "new orders fell at the...strongest rate in almost a decade", continues to lag.

Even with a rebound in semi exports, overall Korean exports continue to go sideways. As a result, the underperformance relative to the rest of the region of the last 6M continues. This presidential election won't affect that, though it should bring stronger fiscal policy, boosting domestic demand.

We don't get many expenditure inputs to estimate components of GDP each quarter. One of the few that is available is net exports, which can be proxied by the change in the monthly balance in goods and services trade. Data today show that remains high, but is now falling YoY, and will dampen Q2 GDP.

After falling sharply in recent months, there was a modest bounce in consumer confidence in May. The consumer mood may have been given a boost by politicians focusing more on the cost of living crisis. But that crisis remained clear in today's survey, with inflation expectations remaining elevated.

The recent renewed decline in upstream prices is partly about energy, and so will provide some help to manufacturers. However, in a sign of the continued weakness of construction, building material prices have also dropped, and the acceleration in PPI deflation is rarely a good sign for the cycle.

Today's data show that, unlike Japan, Korean PPI is following import prices lower. Unsurprisingly, the big moves in the PPI April report were in energy prices, which fell 7.9% YoY. With the KRW also strengthening, the BOK from here should be able to focus even more on the weakness in growth.

After a tick-up in mid-2024, unemployment is back at 3.4%, the lowest in 25 years. In Korea, low UE is offset by big supply-side shifts as the participation rate rises. That isn't happening in Taiwan, so the labour market really is tight, with the big risk being tariffs cause export recession.

March machine orders surged, which could be tariff-related, but the strength was in domestic not foreign orders. Anyway, it seems unlikely to last, with today's flash May PMI repeating the downbeat message of the EW, with business confidence "the second-lowest recorded" since 2020.

After adjusting for days worked, Korea's exports in the first 20 days of May fell YoY for the second consecutive month. But this isn't a tariff shock: in level terms, exports peaked back in mid-2024. If anything, May was a bit stronger, led by a rebound in semiconductor shipments.

YoY import prices are falling everywhere. The implications are mixed. It is contributing to a drop in PPI inflation in Korea, but an intensification of deflation in China. In Japan, meanwhile, PPI inflation remains elevated, supported by the cumulative rise in import prices of recent years.

Optimistically, you could argue that the sharper drop in upstream prices though May is driven by the falling global oil price, a decline that is good news for China. But the details show the prices of other products are dropping too, and the upshot will be a yet faster pace of PPI deflation.

The gap between PPI and import prices is a useful way of thinking about inflation and the BOJ. Usually, the gap is closed as import prices are cut by a combination of global recession and JPY strength. If neither happens, PPI inflation isn't likely to recede, and BOJ hikes will remain on the table.

A key component of the structural shift in the economy is rising wages. That continued in March, with signs of another acceleration in manufacturing wage growth on the back of strong exports. As a result, overall wage growth is once again over 3%, as quick as during the recovery out of covid.

The sharp drop in exports in the first 10 days of May doesn't show tariffs are having an impact. Rather, the decline was because of a fall in the number of working days. But the data do show that Korea's export cycle remains weak, with shipments in level terms treading water for a year.

Data released yesterday showed April as being another boom month for Taiwan exports. TSMC's sales today suggest exports might be stronger still, with TSMC's revenue rising even more quickly than in the 2020-21 post-covid recovery. That's remarkable, even allowing for front-loading.

A lot of market discussion in recent days has centred on hedging by the lifers. The central bank, however, has argued that the move in the TWD was driven by exporters. That is believable: exports grew remarkably strongly in 2020-22, and have done so again through April this year.

My framework for Taiwan and the TWD is a structural economic recovery driving a normalisation of inflation after the near deflation of the 20 years before 2020. That remains the theme, but there is now a clear cyclical slowing of CPI. That will intensify if tariffs trigger an export recession.

The exact timing of monetary easing can vary, but today's interest rate and RRR cuts are not a surprise. Today's moves are consistent with the PBC's usual reaction function, and with inflation so weak, further loosening should be expected.

Politically, China might well be prepared for the trade war. But I remain sceptical that is true economically. The headline of today's Caixin services PMI was soft, and the commentary noted confidence falling "to the second-lowest level recorded since data collection began in November 2005".

Given the global uncertainty, the headline manufacturing PMIs released in the last couple of days for China and Japan didn't look too bad. The tariff impact is much more visible in today's Korea and Taiwan PMIs, both of which declined sharply.