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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.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Wage growth remains sluggish. However, while gradual, overall it is picking up, and there are now tentative signs of acceleration in part-time hourly earnings. That makes sense given labour supply is running into constraints, though labour demand obviously now needs to hold up.
There continues to be no inflation in China. At a headline level, that will change when food prices rebound. But the decline in inflation isn't just seen in headline. The run-rate of core has slowed from 1.8% annualised before covid to 0.6% since.
As a general trend, both exports and imports remain range-bound. That's interesting, because exports haven't fallen so far from the peak, and imports look much stronger than the collapse in property. Exports have probably bottomed, but there's likely downside risk for imports.
One reason for the sluggish recovery out of covid is Japan entering a new stage of ageing, which is resulting in a faster rate of population decline. That is because of a fall in the number of adults, which cuts aggregate consumption, but should mean per capita wage growth starts to accelerate.
Sequential inflation dropped back to zero in November, but average core over the last three months remains elevated. With the domestic economy holding up, and exports starting to rebound, there isn't a strong case for rate cuts. That will matter for the TWD if exports really do rebound from here.
Fiscal and monetary policy have been negative for household incomes, which are now the weak link in the economy. That context helps explain deputy governor Himino's speech today, which seems to mark an effort by the BOJ to argue that higher rates might not be so bad for the economy after all.
As expected, inflation eased in November. There are still some upside risks, given the rebound in import prices and the continued strength in personal services inflation. For those to become interesting, export growth needs to pick-up powerfully, but the leading indicators don't look so strong yet.
Korea's PMI is now back at 50, but while Taiwan's remains below that level, the upside potential looks bigger. Taiwan domestic momentum also looks stronger. Inflation is higher in Korea, but the risk that the central bank has to raise rates again next year is probably a bit higher in Taiwan.
Japan's labour market continues to go sideways. We think that is unlikely to change without an acceleration in economic growth and thus labour demand. But if that does happen, there are reasons to think the upturn in per capita wage growth could be significant.
We think the main themes for China remain weak aggregate demand and pricing, and strong external surpluses. That indicates lower rates and a stronger CNY. To think that is too pessimistic, we look for signs of better property activity and a reversal of the flow of savings into time deposits.
The BOK was more doveish today than we'd expected, removing one of the two previous references in the statement about whether to raise rates further.
The PMIs weakened again in November, with both manufacturing and services now below 50. Price measures were also weak. Recent fiscal support should remove some of the immediate downside risk, but there's nothing yet to suggest a real rebound in the cycle, equities, or rates.