Macquarie Research, Asia:: Stronger growth and policy tightening

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Stronger growth and policy tightening
Summary
 This note provides a quick review of the key economic developments over the
past couple of weeks. Data releases have generally been strong, supporting
the idea that the pace of recovery re-accelerated in late 2010. Reflecting the
stronger growth figures, policy tightening has continued, in the form of interest
rate hikes and capital controls, although benign inflation readings mean the
pace is unhurried.

Growth re-acceleration
 Perhaps the most encouraging data came from outside Asia, with US initial
jobless claims falling below 400k for the first time since July 2008. The four
week average is running at 414k compared to 487k at the end of August when
the Fed started pushing the idea of QE2. Non-farm payroll data on Friday
might support the idea that the weak November release was an anomaly.
 European growth continues to look solid despite the sovereign debt crisis,
with the December Eurozone PMI of 56.8 being the strongest since April.
 In Asia there is more evidence that growth re-accelerated in late 2010. Trade
and industrial production have both picked up again after a sluggish period in
mid-2010. Korea has already released December trade data, showing export
growth surging in 4Q10, mirrored by November releases elsewhere.
 This is supported by the PMI for China. Although at 53.9 the December
reading was slightly softer than the two previous months (Oct 54.7, Nov 55.2),
activity stepped up in 4Q10, as shown in the second chart on the left.
Rate hikes
 Both Taiwan and China raised interest rates at year end. Taiwan continues its
gradualist approach that has seen rates rise from 1.25% to 1.625%, in
12.5bps increments. China pushed rates up another 25bps.
 In contrast, the Philippines left rates unchanged, illustrating the idea that even
though policy tightening is likely to be the dominant theme of 2011, underlying
inflation remains subdued in most cases so there is not a need to be
particularly aggressive.
 The Bank of Japan also left policy unchanged, but will come under pressure
to ease further if the yen continues its recent strengthening (up 3.1% against
the US$ over the past two weeks). However, signs that the economy is edging
away from the risk of renewed recession will help to justify inaction.
Capital controls
 The trend towards trying to reduce exposure to volatile capital flows
continues, although the nature of the issue is that it is relatively subtle and
technical. Korea, Taiwan and Indonesia all took minor steps to reduce the risk
of foreign exchange volatility.