East Asia Econ

Deflation momentum continued to lessen in February, a trend that will now be given a further boost by global oil prices. But with this shift in the direction of deflation being driven by external factors, it isn't based on the sort of improvement in domestic growth that is needed for sustainability.

With activity and inflation in East Asia picking up before the war started, the extra push to prices from the conflict will be important for the near-term policy outlook if tensions subside quickly. Right now, the bigger risk seems to be a real supply shock that causes a demand shock too.

The CA surplus was strong in January, but while NPS outflows eased, retail buying of offshore equities remained high. Core inflation ticked up to 2.3% YoY, but that was related to holiday spending. The impact of the Middle East war will only start to be seen from March data.

The S&P/RatingDog PMIs suggest an economy that is finally recovering. The official PMIs, by contrast, indicate continued sluggishness. I am inclined to think there is no change, at least until the LNY impact fades. The one common theme is firmer input prices, even before an energy price shock.

The Q4 data showed corporate profits and capex remaining strong, but little change in firms' huge cash holdings. The labour share has bottomed, but isn't rising. Separate data show unemployment creeping up, which will become a bigger concern if the war with Iran causes a cycle problem.

The big theme in focus last week was current account surpluses, which across the region are both large and structural. There will be some downside risk if the latest problems in the Middle East cause oil prices to spike. Otherwise, the surpluses remain a fundamental reason for currency appreciation.

My framework for this year is an easing of tariff and price shocks that give a boost to domestic activity. Today's February data for Tokyo show the fall in headline inflation in January is persisting. Retail sales in January did jump, but these data can be noisy. IP is trending up, but slowly.

The surge in the current account surplus of January-September continued into the end of 2025. In Q4, the surplus reached almost 30% of GDP. The government's GDP forecast implies that will be roughly the size of the full-year surplus in 2026. Taiwan needs huge capital outflows to keep the TWD stable.

The tone from today's BOK meeting was cautious. The new rate dot plot suggests that at the margin risks for policy are still weighted towards loosening, the upgrade to the GDP growth forecast was only 0.2ppts, and having made that change, the bank thinks risks to the outlook are now balanced.

Business sentiment in today's BOK survey returned to the level that has historically divided loosening and tightening cycles. Tomorrow, the bank will likely raise its 2026 growth forecast to above its 2% estimate of potential. The rates market has already priced this, but the currency can move more.

The continued strength of consumer confidence in today's February survey might be hinting at a broader cyclical upturn. At the same time, house price expectations eased. CPI expectations were stable at 2.6%, and likewise, today's PPI for January doesn't point to a big near-term change in inflation.

Taiwan's macro story is fascinating. Rarely has growth in such a rich economy accelerated so much, with reindustrialisation and huge external surpluses, at the same time as rates and the currency barely move. I'd think that something has to give. Will 2026 finally be the year that it does?