Have the Asian Economies Hit a Bottom? Yes and No and Yes and No …

There has been a lot of talk of bottoms and second derivatives lately. Most of the discussion is related to March PMI data. In almost every country, PMIs have bounced off of their record low levels in January. Of course, they remain quite close to their record low levels and are (with the exception of China) continuing to point to sharp contractions. Nonetheless, if PMI data are to be believed, we might see an easing of the pace of decline.

But, I am always suspicious of survey data and, at least to me, the PMIs are subject to some of the same whims as consumer confidence: when purchasing managers feel good about the world they report higher numbers. In general their feelings are a good indication of the weather, but sometime they are not. I continue to believe that PMIs are most useful for their timeliness rather than their unfailing accuracy. I prefer, when I have a choice, to wait for data.

Trade data is my favorite: it’s timely, well-measured, and theoretically sound. Take a look at the picture below. Korean exports seem to have leveled off. The dramatic fall in January seems to have been over stated and probably had more to do with the nadir in the auto sector than anything else. I take this as a sign that Korea’s external sector is not as weak as I inferred from the January fall.
Korean imports, however, tell a different story. Imports continue to fall unabated. The pace of the decline may have slowed slightly but even these slower falls are huge by historical standards. I read this as an indication that Korea is still falling and has not hit bottom. That probably means Asia is not at a bottom; a Korean decline would be felt across the region.

We also have March trade data for Taiwan. In this case, both imports and exports are up from their January lows. These numbers give hope of stabilization but at an extremely low level: imports remain 50 percent below their August peak.

In all countries, the pace of imports gives insight on the growth rate of domestic demand. In the Asian economies, not surprisingly, imports are tilted toward production rather than consumption, at least relative to the G7. Imports consist of intermediate goods, both capital and commodities.

Of course, the timing of the change in production and the timing of the fall in imports do not have to coincide, inventories play a large role. Korean IP shown below bounced off its December lows, rising in both January and February. However, the given the import data shown above this resurgence does not seem sustainable. I expect Korean IP to continue its downward trend. With luck the downward trend will look like an ordinary recession rather than a free falling collapse.

The fall in Taiwanese IP is already consistent with the overall fall in imports. In this case, there is a possibility that production has found a floor. I will be quite interested to see the March production numbers to be released later this month.

Even if exports, imports, and production have reached a floor, the recession is not over. Production and trade have, if anything, stabilized at a very low level. The domestic economies have made little progress adjusting to this new level of activity. In particular, the level of employment is not consistent with the level of production. Barring a true recovery in production and trade (a recovery in levels not growth rates), employment will have to fall, maybe by as much as 20 percent.

This fall in employment will lead to a second round of production and trade cuts. These falls will (likely) be smaller than the ones seen to date. Consumption accounts for a relatively small percent of GDP in these economies. Nonetheless, the production and trade falls to date are so large that these second round adjustments are likely to themselves look like an ordinary recession.

Takeaway: I believe we are beyond the freefall. The falls in Asian and European production were unprecedented: The Asian falls were faster and more extreme than the decline in production observed during the Great Depression in the United States.