The platform for tracking and understanding East Asia macro
We don't think data since December will change thinking at the BOJ. The bigger considerations are downside risks from the earthquake, and upside for inflation from renewed JPY weakening. If the bank's meetings during 2H23 were all 'live', then the same is true right now.
A slide pack from a presentation on the lessons China can learn from the development experiences of other economies in the region
Official Q4 data reiterate existing trends: weak consumption and property, but some growth in other sectors. The property data were disappointing, when other data have started to suggest a floor. But we still think there are some upside risks, with the PBC's balance sheet expanding more quickly.
Government borrowing – and weak GDP growth – continues to generate a modest lift in the credit impulse. Non-official borrowing did tick-up in December, but only marginally. Mortgage lending and M1 remain weak. At best, the data suggest a muddling through on the back of government projects.
China's data continues to be neither good, nor particularly bad. Headline PPI and CPI are both in deflation, but there aren't signs of core CPI falling. Exports are going sideways, and imports have strengthened. The rose in imports has eroded the trade surplus.
The BOK became incrementally more doveish at its January meeting, effectively closing the door entirely on the risk of further hikes. It also warned against premature cuts, but in our assessment, not particularly convincingly.
Taiwan full-month exports for December and Korea 10-day exports for January were strong at the headline levels, but the details were weaker. Leading indicators continue to point to further upside, but there are signs of supply chain disruptions emerging again.
One consequence of China's industrial strength will be protectionism. But we think there should be an exchange rate impact too. The real CNY has fallen by 6% since 2020, while the manufacturing trade surplus has risen to over 10% of GDP, and real interest rates might have risen.
December data show no real slack appearing in the labour market. The BOK minutes reveal confidence that inflation is easing, but rising concern about leverage. We'd still expect the BOK to be on hold, with cuts needing inflation to fall faster than expected, and the recent export upturn to stall.
Wage growth was weaker in November, but because of bonuses. Scheduled wages for full-time workers ticked up, and there was a decent rise in hourly wages for part-timers. Even that rise looks a bit tentative, but the BOJ seems to believe the labour market is tighter than the official data suggest.
Headline inflation has eased, but core excluding food and energy remains over 2%, and shows no sign of sequential deceleration. The BOJ is likely to continue to edge towards arguing that inflation is sustainable.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
This note is a bit different to our usual offering. It is still relevant to investors, but it is more of a guide to the economic issues that I would be thinking about if I were a voter in Taiwan. That includes one observation, and five questions that politicians should be answering.
We would have thought Taiwan would now be at the stage where exports were more clearly taking over from the domestic sector as a driver of growth. Instead, recent industrial data have been sluggish, while domestic momentum is holding up. Unemployment continues to fall.
The BOJ remains more confident than we would be looking at the hard data, which over December were soft. That said, the fall in US rates does improve the picture, lessening the real income squeeze of 2022-23. Given the BOJ's attitude, that likely means further "normalisation" of policy in 2024.
The headline PMIs suggest activity is going sideways, but the details are a bit better, and both feel stronger than investor sentiment. Policy is also becoming more supportive, with more confirmation today of expansion of the PBC's balance sheet. The combination should mean some upside for markets.
The Korean story hasn't changed much: exports are recovering; domestic activity is weak; inflation is slowing, but core still isn't low. We still think this leaves the BOK on hold, with the downside risks being a stalling of exports, a bigger drop in core CPI, or renewed property problems.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
M1 and NGDP remain weak, and consumption is softer than headline data suggest. These are headwinds, and we don't expect macro turnaround. But we are somewhat more concerned about an upside surprise than further deterioration, with one driver being PBC balance sheet expansion.
The CBC kept rates on hold at its quarterly meeting today, and doesn't look in a rush to make a move either up or down any time soon. It expects modestly stronger GDP growth in 2024. It forecasts inflation to fall, but the expected core rate of 1.8% would still be high relative to Taiwan's history.
The BOJ appears confident that the labour market is tightening, edging Japan closer to a reflationary cycle. The Q4 Tankan, showing sticky inflation and continued labour market tightness, will reinforce that view. That suggests that the bank will continue with the gradual shift in policy.
The credit data don't change the cyclical picture of weak growth, held up by government spending. But while not strong enough to boost activity, credit is rising relative to GDP, now reaching 300%. M1 continues to fall, which is deflationary, pushing down NGDP, and raising the credit ratio.
The main development in Korea's labour market through Q423 is evidence that the period of peak tightness is over. As of yet, that transition hasn't yet led into slack appearing. That might be the next stage, but 10D data for December give more evidence of an export rebound.
Wage growth has slowed, but the three-year trend remains the highest in 20 years. The same is true of core CPI, and both make sense with unemployment being the lowest since the early 2000s. The labour market isn't yet pointing to a significant deceleration in inflation.
Exports look to be picking up, and if that continues, there isn't a convincing case for rate cuts. There are signs that the recovery is stronger in Taiwan, which makes sense given structural competitiveness. With ultra-robust external finances too, that makes prospects for the TWD look better.