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The recovery in tourist numbers over the May holiday was impressive, and the Markit PMI was strong again. But our impression remains that the pickup in overall activity is underwhelming.
Core inflation is only 2%, but that's high by Taiwan's historical standards, and relative to the current extreme weakness of manufacturing. Inflation is being supported by the post-covid normalisation of services, a phenomenon that will be attracting the attention of the central bank.
The case for BOK cuts is simple: the cycle has weakened, headline CPI is falling, and core will follow. But so far, our model suggests only a modest easing of tightening pressure, and there are now signs of activity bottoming. The missing ingredient remains a slackening of the labour market.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Taiwan's domestic economy and inflation are proving more resilient than the weakness of the export cycle would suggest. This desynchronisation is partly due to covid, and as long as it persists, means the usual ways of looking at CBC behaviour could well prove misleading.
We've been more cautious on the outlook than the consensus, and remain so after the official April PMIs. The one indicator that gives us pause for thought is the strength of the construction PMI, but that would be more convincing if there were broader signs of the property cycle really lifting.
We had started to become hopeful that the property market was picking up, but transactions have fallen back down again in April. Other indicators for the industrial cycle also look bearish, with output prices weak, and profits still falling.
As widely expected, the BOJ meeting today didn't announce changes in policy. Data releases also showed consistency, with Tokyo inflation in April still accelerating but the labour market in March going sideways.
Business sentiment remains weak enough to suggest BOK cuts, and the fall in consumer inflation expectations indicates some easing of headline inflation pressure. But there's also signs in both surveys of an upturn in the cycle, creating a risk that core inflation won't fall so far.
Decisions about changing the policy framework are interwoven with deciding that there really is a generational shift in inflation occurring. Given the BOJ's history of premature tightening, that requires almost Jedi-like levels of bravery, and we doubt the bank is ready to reach that conclusion yet.
Driven by private consumption, Korea avoided technical recession through March. The strength of consumer spending was a surprise, so we'd assume that downside risks remain. But it isn't clear that today's data will affect the BOK's view of 2H recovery, which is based on the idea of stronger exports.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Leading indicators suggest a continued double-digit YoY contraction in regional exports in Q2. Demand remains particularly weak from China, and for tech. China's own export data bucked the regional trend, but that looks too good to be true, not being validated yet by any other data points.
Core inflation accelerated in March. The feed through from the big fall in import price inflation from mid-22 is probably only about to start, so the BOJ's view that headline CPI will ease may still prove correct. But the strength of core makes it tough to argue that there is no domestic inflation.
The sell-side and media consensus seems to be that the GDP data show clear recovery. Investors seem less convinced. We'd guess this reflects data discrepancies which undermine the headline message of recovery, and need to be resolved to have conviction that the cycle is gaining momentum.
Detailed GDP data show growth in Q1 being driven by consumption and investment, with zero contribution from net exports. Hospitality grew almost 15% YoY That's not as big a bounce as in 2020, but the base effect is smaller, and indeed, the government has revised up Q422 growth from zero to 0.6% QoQ.
The headline data for Q1 look better, but the details were much weaker. While YoY growth in retail sales rose over 10%, in MoM terms it fell back, with other data showing household income growth in Q1 remaining very weak. At best, the recovery remains fragile.
A summary of what happened on East Asia Econ last week, and what to expect next week.
Taiwan's trade data remain weak, and it remains reasonable to think that the industrial sector remains in recession. But wage growth continues to hold up, as does CPI inflation, though neither would be considered high from a global perspective.
Exports in March were so strong, and the trade surplus so big, that we continue to think they must have been boosted by one-off effects. But it is worth asking the implications if that assumption is wrong, because if it is, it would matter for growth, the currency, and protectionism.
Chinese property prices rose in March. The increase was modest, but with transactions and mortgage lending also picking up, it is looking more likely that the property cycle really has turned. That in turn improves the prospects for the overall economy.
Exports – and the trade surplus – surged in March to record highs. That is remarkable, and while we need to do more digging, for now, we assume it reflects residual LNY seasonality. If not, it is tough to know how the ROW will cope with China's export competitiveness.
The labour market continues to look quite tight. While the unemployment rate was stable, that was because of a rise in participation; employment rose again last month. These data don't give confidence that core inflation will fall.
China's credit and monetary data for March weren't as strong as earlier in the year, but remained firm. The details, including both the structure of credit and a long-awaited bounce in mortgage lending, were also encouraging.
In a unanimous decision, the BOK voted to keep rates unchanged in April. The hurdle for another hike from here seems high, but it will depend on the path of core inflation.