GDP in China and Korea may turn negative in mid 2011

On MoM seasonally adjusted basis, industrial production fell sharply by -3.8% from March, bringing down sequential growth to a negative 2.1% 3M/3M saar in April from the positive 22.1% seen in March. This implies the likelihood that the quarter-on-quarter growth rate in industrial output (probably also real GDP) will turn negative in 2Q.

The output weakness should be attributed to the deterioration in the outlook for export demand, amid increased concerns about US and China slowdown. Taiwan’s export orders in April have reported a MoM (sa) drop of -2.3%. Meanwhile, the adverse impact of Japan’s natural disasters also became visible. Some of Taiwan’s manufacturing sectors which heavily rely on Japan supply registered a significant output decline in April, such as vehicles (-22.1% MoM, -0.4% YoY) and plastics and rubbers (Imports from Japan account for as much as 44% of Taiwan’s total imports of plastics & rubbers, 36% of total imports of vehicles).

What is encouraging is that domestic final demand has continued to perform well to help pick up the slack. Retail sales growth in April stayed at the trend rate of 0.3% MoM sa. The fuller recovery in the labor market helps explain the resilience in consumer spending. The unemployment rate has dipped further to 4.35% sa in April from 4.42% in March, touching the lowest level since Sep08 when the global financial crisis broke out.

Consumer expectations of employment opportunities, a subindex in the consumer confidence survey, also gained significantly by four points in April and crossed over the neutral reading of 100. As such, the major uncertainty facing the Taiwanese economy is the outlook for the external sector rather than the domestic sector. Whilst the impact of the Japan quake is widely reckoned to be short-lived, China and US economic data will be key to watch so as to gauge the sustainability of the US recovery and the possibility of China’s growth rebound in the second half.