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The China Diviner
An opinion piece recently published in the SCMP.
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Taiwan – tentative turn
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.
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Korea – not much change
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.
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Japan – slow grind
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.
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China – strong headline, weaker details
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.
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The East Asia Economist
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.
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Japan – inflation up again
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.
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Korea – still weakening
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.
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Korea – inflation expectations up
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.
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Region - a floor in Q1?
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.
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The East Asia Economist
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.
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Korea – less worse
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.
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Japan – not much change
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.
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Korea – careful what you wish for
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.
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Taiwan – contracting
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.
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China – worse than it looks
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.
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Japan – inflation back to 2%
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.
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China – property floor
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.
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Korea – last hike
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.
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Japan – 3.5% core services CPI
Tokyo CPI accelerated again in December, with further evidence of a broadening in price pressures away from just imports and goods. Underlying services inflation looks to be running at around 3.5% YoY, and with the economy continuing to open up after covid, a further increase is likely from here.
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Japan – (still) warming up
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.
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The China Diviner
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.
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Taiwan – industrial recession
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
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Korea – inflation now turning
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.
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China – unsound footing
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.