East Asia Econ

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?

I spent time last week delving into export prices and terms of trade, dynamics that should be offering support for currencies. The data flow was all about Japan, and painted the picture of an economy in good shape. That could yet be undermined by policy choices, either at home, or in the US.

The BOK's quarterly data show household credit eased under 75% of GDP at in 2025 for the first time since 2017. However, the BOK is concerned that the ongoing rise in house prices will undermine this progress. The bank's own loan officer survey suggests a bounceback in lending is indeed a real risk

Manufacturing sentiment is up, and falling headline inflation should further boost the mood of households too. For the BOJ, the critical issue will be whether these improvements in soft data feed into real aggregate demand, in turn supporting its confidence about the trend in underlying inflation.

As capital goods exporters, the rest of East Asia is vulnerable to the second China Shock. But the first was deflationary not just because export prices fell, but because import prices also rose, squeezing local incomes. By contrast, the terms of trade this time are stable, and starting to improve.

Growth in Q4 was only +0.1% QoQ, but that was partly because of a running down of inventories. Underlying demand was better, and given the strength of business and consumer confidence, the outlook for growth in 2026 is more positive.

Three themes from last week: improving terms of trade, led by rising export prices; expanding current account surpluses; and growing optimism about the sustainability of AI-related hardware demand that is critical for cycles in Taiwan and Korea. Also, happy year of the (fire) horse.

January fx settlement data suggest large fx intervention for a second consecutive month. One reason is the CA surplus, which other data today show widened in Q4. Another is interest rates which are more stable, even though monetary trends aren't changing much, and property prices continue to fall.