A Springtime Economic Snapshot of Asia

Australia, China and Japan—three of the Asia-Pacific region’s largest economies—released some data analysts we follow watch closely last week.^[i] For investors, we think the reaction to the latest figures echoes the sceptical reactions we have observed toward economic data in the US and Western Europe—a sign the global bull market (a period of generally rising equities) has plenty of the proverbial wall of worry to climb.

On China’s Two-Speed Economy

Is Chinese economic growth lopsided? We have seen some economists argue manufacturing and heavy industry—buoyed by export demand—is supporting China’s two-speed economy as domestic spending (household consumption and property demand) struggles. April data seem to support this narrative. Industrial production rose 6.7% y/y, accelerating from March’s 4.5%.^[ii] Yet retail sales decelerated (to 2.3% y/y from March’s 3.1%), as did fixed asset investment (up 4.2% y/y on a year-to-date basis, slowing slightly from March’s 4.5%).^[iii]

We share the opinion that China’s economy has its soft patches. The property sector in particular has been troubled for years, based on our observations. But given the vast amount of commentary on the subject, we don’t think these issues are surprising anyone, let alone China’s government—which, according to our research, has a long history of intervening to support the economy (and, by extension, social stability).

Beijing recently announced a slew of measures to that effect, including pushing local jurisdictions to buy unsold homes.^[iv] Whilst no solution is perfect, the added help underscores the commitment to hitting economic growth targets, in our view.

Plus, our research shows markets don’t need perfect economic conditions. Despite its unique headwinds, China continues contributing to the global economy. April exports grew 1.5% y/y, rebounding from March’s -7.5% drop—a sign of resilient global demand adding to China’s economy, in our view.^[v] Yet many analysts we follow focus on the Middle Kingdom’s struggling property industry or tensions with the US. With expectations for the world’s second-largest economy seemingly so dim, even tepid growth can positively surprise global markets, in our view.^[vi]

Japan’s GDP Contraction Refuels Weak Yen Concerns

Japanese Q1 gross domestic product (GDP, a government-produced measure of economic output) contracted -2.0% annualised (-0.5% q/q), worse than anticipated, as private consumption (-2.0% annualised), imports (-12.8%) and exports (-18.7%) all slid.^[vii] However, some one-time factors drove the decline, including a New Year’s Day earthquake in central Japan and auto production disruptions (tied to a faked safety test scandal).^[viii] With production already resuming, many economists project growth will rebound, based on our review of Japanese GDP coverage.

However, the poor headline GDP number spurred a more pessimistic tone in financial publications we cover as analyses focussed on the weak yen and its damaging effect on Japanese consumers. All else equal, our research shows a weak yen makes imports more expensive—a headwind for households since the country imports much of its fuel and food.^[ix] But the weak currency also gives overseas travellers more purchasing power (i.e., a pound or euro can buy more), buoying Japan’s tourism industry. It also benefits firms with global operations since they can earn more yen for every dollar or pound sterling of merchandise sold overseas—highlighting, in our view, multinationals’ edge over domestic-focussed firms. The former can take advantage of relatively stronger external demand and use their profits from currency translation to at least partly offset energy, imported components and labour costs. In our view, currency strength or weakness isn’t inherently positive or negative economically—it just determines different winners and losers, or even which set of headwinds and tailwinds a company may face.

What Next for the RBA?

Australia’s unemployment rate rose to 4.1% in April (from March’s 3.9%), spurring speculation in financial publications we follow about the Reserve Bank of Australia’s (RBA, the country’s monetary policy institution) next move.^[x] This reaction isn’t novel, based on our observations. Like their peers in the US, UK and Europe, we have seen commentators in the Land Down Under dwell on the economic data’s impact on monetary policy. But similar to US Fed Chair Jerome Powell, BoE Governor Andrew Bailey or European Central Bank President Christine Lagarde, RBA Governor Michele Bullock’s actions aren’t predictable, in our view.

Go back to last year. The RBA paused when many analysts we follow projected a rate increase—and the monetary policy institution hiked its interest rate when few commentators argued one was coming. Though economists and market analysts may make themselves dizzy guessing what will happen next, we don’t think investors partake in the futile exercise, especially since monetary policy has no preset economic or market impact, according to our research.