Economy in Brief: 2023

In this week’s letter, we take the opportunity to reflect on the year, with a focus on key developments in the Asia Pacific region. We note that regional disinflation has finally materialized, aided by a decline in energy prices and as cumulative effects of past monetary tightening take hold. Further, we take stock of monetary policy in the region, with one camp of central banks potentially having concluded their tightening cycles, while another camp keeps policy easy, due to less-than-ideal economic conditions at home. Next, we evaluate regional currency performance, and with a nod to effects from monetary policy. We give a nod to equities in the region as well, noting however the headwinds that continue to drag on returns. We also examine shifting trade dynamics between China and other Asian Pacific economies, acknowledging continued export woes in South Korea, and increased shipments by Australia and Vietnam. Lastly, we delve into the state of tourism in the region, acknowledging the enduring gap left by Chinese tourists who have not returned and the measures being taken by regional governments to encourage their comeback.

Inflation developments Headline inflation in the Asia Pacific region cooled rapidly in early 2023, partly due to a sharp drop in energy prices (chart 1), while tighter monetary conditions weighed on domestic demand in some economies. Notably, both China and Thailand recorded their first post-pandemic deflation readings in July and October, respectively. Thailand’s headline inflation was dragged lower additionally by recent measures enacted by the new government, aimed at lowering living costs via diesel tax cuts, reduced electricity bills, and similar measures. However, apart from China and Thailand, relatively high headline inflation rates persist in the Philippines, India, Australia, and Singapore, despite easing price pressures. In the third quarter, there was a resurgence in inflation due to a rebound in crude oil prices, although a subsequent price correction suggests that these inflationary pressures may soon subside.

The S&P manufacturing PMI indexes improved in November as slightly more countries saw increases than saw deterioration. However, the median gauge slipped slightly on a month-to-month basis. Rather than thinking of the report as being better or worse month-to-month, it seems more productive to recognize how stable the readings have been over the past year, at least in PMI terms. The median readings for 12-month, six-month, and three-month averages across countries/regions are in a range of 48.6 to 48.7 – quite tight. The period-to-period changes are quite small except that the 12-month average compared to 12-months ago shows substantial slippage of 3.4 diffusion points. But since that slippage, the readings have been quite consistent.

The queue or rank percentile standings have a median at the 24th percentile; however, if we choose to place the monthly observations in a range of high to low, the median is at the 58.4 percentile. I prefer the queue percentile standings, because they include all the observations while the percent-of-range calculations only involve the very highest, the very lowest, and the current observations. The queue percentile standings reveal a few extremely strong readings. Mexico has a 96.2 percentile standing and that is matched by Russia - if you believe that response. India has a 65.4 percentile standing. Indonesia sports a 57.7 percentile standing. South Korea logs a 55.8 percentile standing. All the rest of the standings are below the 50th percentile which places them below their historic medians. The most industrialized and developed countries are giving us the worst readings in November.

Diffusion measures the percentage of countries where there is improvement; that reading goes to a 61-percent diffusion reading for 12-months compared to 12-months ago. There is also a 61-percent diffusion reading for six-months compared to 12-months and a 50-percent reading for three-months compared to six-months. In the current month the diffusion reading has a 66.7 percent breadth reading implying an improvement in about two-thirds of the observations compared to one-month ago. Breadth is generally improving slowly. The grey highlights in the table flag those observations with diffusion readings above 50. There you can see that readings above 50 have not been sporadic but have been consistent with Mexico, Russia, India, and Indonesia showing readings above 50 on a consistent basis; South Korea shows a reading above 50 in November alone.

The percentile standings for groups at the bottom of the table reveal that the queue percentile standing for the U.S., the U.K., European Monetary Union, Canada, and Japan is at the 16.9 percentile. BRIC countries are at their 53.8 percentile, while the average for Asia is at its 34.6 percentile. The BRIC readings are considerably influenced by Russia where the economy is believed to be performing poorly although Russia continues to report extremely strong readings. India tends to report PMI values above 50, while China and Brazil tend to report PMI values below 50.