CCR World Magazine

A day after similarly weak numbers in Singapore, today's very weak Chinese and Korean data highlight just how hard hit Asia was towards the end of last year by the global downturn.  Across the region, a collapse in export growth has had direct flow-on effects to industrial production, and we are now seeing this start to impact employment, with household spending the next in line.

China

Chinese activity data were predictably poor given the collapse in export growth already reported, and supports our below-consensus growth view for 2009.  Meanwhile, the price data showed further easing in inflation pressures, providing scope for further rate cuts.

Industrial production growth (YTD y/y) fell to 12.9% in December, down from 13.7% in November and well-below levels recorded earlier in 2009. Slumping external demand is hitting the manufacturing sector hard, and although official employment data are yet to fully reflect this, the impact on the labor market is clearly building.

Consumer spending will also feel the effects.  So far retail spending has held up reasonably well, but growth is slipping.  Retail sales grew 21.6% (YTD y/y) in December,  down slightly from November, but a downward trend now appears to be in place. Data in the first few months of 2009 may be affected by the timing of new year holidays and the base impact of last year's severe snowstorms, but we expect underlying consumer spending will weaken appreciably in H1.

Weak exports and IP made a sharp slowdown in GDP growth inevitable for Q4.  In y/y terms, growth fell from 9.0% in Q3 to 6.8% in Q4, while growth for 2008 as a whole fell to 9.0%, the weakest since 2001. This downward trend is set to continue, with growth in H1 in particular likely to be very weak.  Policy stimulus and infrastructure spending should help stabilize growth in H2 but any rebound will be tentative and highly dependent on the strength of any global recovery. We expect growth of 6.0% for 2009 as a whole, with risks still skewed to the downside.

CPI inflation fell to 1.2% in December from 2.4% in November, confirming that inflation is a non-issue for policymakers at the moment and supporting the case for further rate cuts. PPI inflation was also very
weak at -1.1%.  We forecast another 162 basis points of cuts in the 1-year lending rate over 2009 to 3.69%.

Korea

Korean GDP fell 5.6% q/q in Q4, much worse than consensus forecast and the sharpest drop since the East Asian crisis of 1997-98. Exports fell almost 12 percent, reflecting weak external demand across most major trading partners. For 2008 as a whole, GDP rose just 2.5%, the smallest rise since 1998.
 
We expect more weakness to come, forecasting a contraction in GDP in H1 before a modest recovery in H2, with growth of just 0.8 percent for 2009 as a whole. Risks are clearly growing on the downside. We also forecast another 75 basis points of cuts, taking the benchmark rate to1.75%.

(Source - Emerging Markets Research Group, RBC Capital Markets)