With few signs of the global cycle slowing, the developed Asian economies again looked well placed to outperform. The region benefits not only from the geographic diversification of its export base but also its exposure to the tech sector, which has been a key driver of trade flows in recent quarters.
While we would expect a transition from an acceleration phase to a moderation phase, the latest Korean trade data, a key bellwether, remained strong, rising 8.9 percent year-on-year in December.
The key question is which economy is best placed to exploit the opportunity? Judging by trade-to-GDP ratios, Hong Kong and Singapore are most exposed to the global cycle, with Japan the least dependent on external demand conditions. However, this view may be misleading.
An important additional consideration is how higher activity levels translate to stronger jobs growth and household income, a relationship captured in economics by “Okun’s Law”. Based on historical relationships, the transmission of activity to jobs is relatively low in developed Asia. This reflects labor markets’ inflexibility, which makes it more difficult for employers to manage their workforce over the cycle. These include factors such as low unemployment benefits, polarization between full and part-time workers and, in some instances, lifetime employment and labor-hording tendencies. It may also reflect the international proliferation of supply chains, particularly in the key manufacturing sectors, which leads to an ongoing competitive bidding process on production costs or best access.
Given these relationships, should we be concerned that domestic fundamentals will consistently lag the global cycle, making sustainable growth in the region elusive? In some places, the government is prepared to step in to support domestic incomes.
In South Korea, President Moon Jae-in is pushing an agenda of public job creation and wage promotion through minimum wage hikes and stronger labor unions. This is backed by a large 428.8 trillion won (US$402.7 billion) budget, which represents a 7.1 percent increase on last year’s total. This bodes well for better income trends in 2018, particularly as South Korea does appear to be an economy where the sensitivity of jobs to activity is relatively high.
Elsewhere in the region there are signs that fiscal authorities may become more supportive too, with Hong Kong set to increase welfare spending, while Taiwan has targeted sizeable new infrastructure investment.
Of course, higher government spending during a strong global upturn is likely to risk a backlash from fiscal hawks. In Japan, the fiscal stimulus looks largely behind us, with a more neutral impulse in the year ahead, and the 2019 VAT hike likely to prove contractionary. Consequently, the government will be hoping that the market mechanism will deliver the wage outcome that employment conditions had long been expected to deliver.
We have been paying close attention to consumption, as households tend to increase spending in anticipation of higher wages. The path has been disappointing of late, with a contraction in private consumption in third-quarter GDP setting alarm bells ringing. However, the partial data in fourth quarter points to a recovery in activity; real core household spending and retail sales jumped 2.7 percent month-on-month and 1.9 percent, respectively, in November. However, skepticism about the Bank of Japan’s price target remains high, meaning employers may remain cautious.
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