East Asia Econ

Taiwan continues to have a desynchronised story, with exports in recession, but domestic demand and the labour market holding up. This will keep the CBC on hold for now, with next steps being determined by whether the long-awaited DM recession materialises in 2H.

Taiwan's data continue to show that the manufacturing sector remains in recession, but that hasn't yet defused the deflationary pressure of the last few months. Indeed, wage growth in manufacturing continues to run at 3-4% annualised, which by Taiwan's standards is quite high.

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.

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.

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.

Taiwan's industrial sector remains in recession. The PMI in March fell back below 50. The orders:inventory ratio remains soft, and in the separate industrial data, the inventory:shipment through January continued to rise quickly.

Consumer confidence remains depressed, but it did rise in March for the second consecutive month. Inflation expectations have eased a bit, and consumer confidence is probably also getting a boost from government cash handouts and the post-pandemic normalisation of services activity.

Taiwan's labour market was stable in February. Which is more interesting than it sounds, because it would be easy to expect that the recession in the export sector would be causing more pain. With wage growth also relatively high, there are some hints of a structural shift in Taiwan macro.

At its policy meeting today, the CBC hiked rates for the fifth successive time. The bank attributed this latest change to the need to control inflation expectations. That isn't particularly controversial. But the bank does seem optimistic about growth, forecasting GDP growth of 5% YoY in Q423.

Wage growth is quite strong in Taiwan, particularly relative to the weakness of the manufacturing cycle. So far, the strength is more apparent in manufacturing. It will become more important for inflation if it starts to show up in services, where productivity growth is slower.

Exports ticked up in February. The export cycle could be bottoming out here, but there's not a lot of sign of a real rebound. Inflation softened in February. It is low by international standards, but somewhat elevated relative to Taiwan's own history.

The Taiwan February PMI surged to the highest since June 2022. But this was partly because the whole of the Lunar New Year holiday fell in January, meaning there were more working days in February 2023 than any since the survey started. That has relevance for thinking about China's PMI too.

The case for a shift away from tightening is clearest in Taiwan, where the cycle is weak and inflation modest. Our model already points to a big fall in the likelihood of further tightening. It isn't yet suggesting, though, that loosening is on the table.

Earnings and hours worked suggest that although economic activity is contracting, wage growth is holding up, particularly in manufacturing. Wages should be getting support from the post-2020 surge in productivity, but the gap between productivity and wages has been large for years.

Exports fell again in January, led by another big fall in shipments to China. That could reflect Lunar New Year distortions. Leading indicators suggest the trough for the overall export cycle should now be close.

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.

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.

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

The CBC raised policy rates again this quarter. But the bank's statement wasn't hawkish, and data this week showed the labour market continuing to slacken, with overtime hours falling back. Loosening rather than tightening is more likely in 2023.

The last time exports dropped as quickly as they have recently was in the global financial crisis in 2008-09. This time around, the fall does come after a particularly large increase. Even so, with exports falling and inflation low, further rate hikes are unlikely, and cuts are possible.

The industrial cycle is slowing, consumer confidence is weak, and a modest rise in inflation has likely peaked. Given all that, Taiwan is well-placed to be the first regional economy to cut rates. The risks are yet more aggressive Fed hikes, or a powerful economic turnaround in China.

It is no surprise that today's October data show Taiwan's export orders continuing to weaken. More interesting was that the data also showed weakness in orders from the US. That is what should be being seen, though it is a trend has yet to show up consistently in data across the region.