1 August 2018
Thailand: Second quarter ends on positive note

We revise our 2Q18 growth forecast to 4.5% from 4.0% but maintain our full-year growth forecast at 4.0%. Firmer GDP growth is positive for the Thai baht (THB) but weakening external payments are negative

Thailand’s activity data for the second quarter of 2018- the June manufacturing and current account balance- surprised on the upside, signalling that it was a better quarter for GDP growth than we expected. While the government agencies, the finance ministry, and the central bank, have been upgrading their growth forecasts for 2018, we retain our 4% forecast for this year. Absent central bank (BoT) policy support, and with weakening external payments, the Thai baht (THB) should continue its depreciation trend for the rest of the year, although with some stabilisation in July. 

Taiwan GDP surprises on the back of weaker imports

Taiwan's GDP surpassed our expectations, which is why we marginally revise our annual forecast to 2.48%. But if the trade war continues to escalate, we expect export-related manufacturing activities to slow. This time, Taiwan will have fewer measures to help itself from falling 

Taiwan's GDP came in at 3.29% year on year in 2Q18, surprisingly up from 3.02% in 1Q, surpassing our forecast of 2.8% and consensus 2.9%. However, the surprising growth doesn't imply a strong economy in fact, quite the opposite.  

The main reason for the higher GDP growth was simply that import growth was smaller which reflects that exporters were cautious to import materials for manufacturing and therefore export growth should slow down too in the coming months. The cautious behaviour is probably due to rising concerns about the bilateral trade war between Mainland China and the US.

Due to the strong 2Q GDP growth, we revise our 2018 GDP growth to 2.48% from 2.4%.

Not a single component tells a positive story

Every component in the GDP breakdown experienced slower growth than in 1Q18, but due to the negative nature of imports, the headline numbers look good. Consumption, government spending and exports all exhibited slower growth, and investment continued to shrink even more negatively than in the first quarter. 

The interest rate is already at a low level of 1.375%, so there is little room for the central bank to cut rates any further. The slower government spending shows that fiscal stimulus, if any, would be small.

So, given that business owners cannot rely on fiscal or monetary policies, Taiwan's manufacturers have to find a way to save themselves - better to manufacture substitute goods for Chinese exporters. But this won't be easy either, especially when the trade war escalates to the extent that it affects the job market and global demand and inflation.

In short, Taiwan's economy looks somewhat shaky at the time of this bilateral trade war between China and the US.

Japan: Some policy tweaks but not a lot

Has the Bank of Japan strengthened its commitment to reaching the 2% inflation target or conceded defeat in getting there anytime soon? Absent a departure from an ultra-easier monetary policy stance, the 10-year JGB yield should retrace its recent spike

BoJ maintains ultra-easier monetary policy stance

As widely expected, there was no change to the Bank of Japan’s ultra-easier monetary policy stance, though today’s policy meeting wasn’t a complete non-event. There were some policy alterations aimed at enhancing the sustainability of its monetary policy, with more flexible market operations towards the price stability target of 2%. But the changes were subtle.

As we expected, the BoJ didn't abandon its inflation target nor was there any reduction in the asset purchases pace, both having grossly underperformed the 2% and JPY80 trillion targets, respectively.

Korea: Central bank policy stalemate

Slower growth and rising inflation put the Bank of Korea's policy in limbo, supporting our forecast of no policy change through mid-2019

Forward-looking Korean confidence indicators paint a picture of dim growth for the coming months, while inflation continues on an uptrend. These developments put the central bank's policy in limbo. We aren’t forecasting any change to the 1.50% BoK policy rate through mid-2019.

China: Trade war impact begins to bite

Both manufacturing and non-manufacturing PMI point to expectations of slower export-related activities, including logistics. Luckily, domestic services are still holding up well

This is just the beginning of the downturn

Both manufacturing and non-manufacturing PMI point to concerns about the trade war impact on businesses. This is just the beginning of the trade war. If the 25% tariff on $16 billion worth of goods starts on 1 August, it will only get worse for exporters and related businesses. We believe that this would make the yuan even weaker. Our USDCNY forecast is at 7.0 by the end of 2018.

Both manufacturing and non-manufacturing PMI show trade war is starting to bite

Regarding manufacturing PMI, new export orders stayed at 49.8 in July, the same as June but imports fell to below 50 at 49.6 from June's 50.0. Although domestic orders are still holding up steadily at 52.3, the figure is still lower than last month’s 53.2. The survey indicates that worries of an escalating trade war have fed through export manufacturers to domestic manufacturers via the supply chain.

The non-manufacturing PMI also fell, from 54.0 to 53.0, mainly reflecting the fall in demand for production-related services and logistics, which fell by 1.9 and 5.7 points, respectively to 55.8 and 52.8. The steep fall in logistic services implies that exports and imports could slow down in the midst of a trade war.

Luckily, the domestic consumption related manufacturing PMI rose 0.6 points to 52.4, which indicates domestic consumption is still strong, and has yet to feel the heat of the trade war.

Reading time around 5 minutes

Good MornING Asia - 1 August 2018

Weak China PMI in July is a sign of trade war impact already kicking in, while the US is gearing up for the next round of tariffs on $200bn of Chinese imports 

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