Shocks & Surprises Among the Bunting

Economic data releases didn’t quite stop over the holiday period,  but there was less of it, and most of it in any case was fated to pass unnoticed and unlamented.  Here are three which I think are worth noticing:

•        Taiwan’s Exports Orders, which provided a dramatic surge in the export book/bill ratio
•        The Bank of England’s quarterly credit conditions report, which contained surprisingly robust news on both supply and demand conditions.  Have we Brits learned nothing from the financial crisis? Seems not. 
•        China’s Industrial Profits. Few economists seem to follow this data, which seems a pity since profits are, after all, the point of the business cycle. 

1. Taiwan's Exports Recovery On Dec 20^th, Taiwan reported that Nov’s export orders jumped 11.1% yoy, on a 6.1% mom rise which was 1.9SDs above seasonal trends. Given that Nov’s actual exports were dull (up just 0.9%) this dramatically improved the export book to bill ratio, producing the best one-month result since early 2010 and inflecting the 6m line up sharply to its strongest since Jan 2011. The stage was set for the export surprise which duly arrived in Dec’s data – exports rose 9% yoy, and the 4.9% mom jump was 0.95SDs above seasonal trends.

So far so normal, and the clear implication is that Taiwan’s economy is gradually feeling the warmth of China’s modest upswing.  Indeed, it would seem the most obvious truism that if Taiwan’s exports are in recovery, then exports to China, and electronics export in particular, must be in recovery.

But the details of Dec’s export strength confound such easy assumptions. First, Taiwan’s electronics sector is lagging the recovery, not leading it, rising only 1.3% mom in Dec, vs 4.9% for exports as a whole. Rather, what’s delivering the growth is intermediate goods and raw materials: basic metals rose 12% mom, plastics/rubber rose 10.1%, chemicals rose 8.3%, and precision instruments rose 8.3%.  Taiwan’s exporters seem to be piggybacking on a broader industrial re-inventorying rather than a consumer-led electronics recovery.

Industrial re-inventorying? That sounds like Mainland. But once again, the assumption isn’t right: exports to the Mainland rose only 4.4% mom – that’s lagging the monthly gain. Rather, Dec’s export strength reflected European demand: exports to Germany, UK and the Netherlands jumped 23.6% mom. Meanwhile, exports to the US were flat mom, and fell to most of the rest of Asia (except Hong Kong).

The message is clearly complicated, but the moral perhaps is that whilst we assume Taiwanese exports can only be about China and electronics, it seems actually what Taiwan is really selling is its extraordinary production flexibility.  

2. British Credit Conditions Sometimes important surprises arrive almost entirely unheralded (even by me). This happened with the quarterly Bank of England survey of credit conditions, which surfaced quietly on Jan 3^rd. It had two major findings: first, that the availability of credit for households and corporates is improving dramatically, and secondly, the demand for credit  from households, for both secured and unsecured lending, is also recovering sharply. Both are potentially extremely important.  

First, the new availability of credit for households and corporates is unprecedented since BoE’s survey began in 2007. It is almost certainly owing to the Funding for Lending Scheme initiated in July 2012, subsequently disappearing from commentary and due to expire in Jan 2014. Under the scheme the Bank of England will be prepared to swap Treasuries for bank loan collateral up to a maximum of 5% of the initial loan book, plus 100% of the marginal loans made to households and corporates, with no upper limit. More, the fee charges for the collateral swap will fall as the size of banks’ loan books grow. It has taken a little time for the size and power of these incentives to sink in, but the survey suggests the message is now finally getting through.

Just as important is that household credit demand is also undimmed: the survey shows not just robust demand for mortgage (and re-mortgage)borrowing, but also for credit card debt too.

Has the British consumer learned nothing from the financial bust (unlike his counterparts throughout the world from Japan to the US? Seemingly not. All of which is potentially good news for British domestic demand in 2013: over the last five years, domestic demand momentum has generally tended to mirror changes in demand for household secured credit.  

3. China Profits Recovery  China’s industrial profits survey isn’t widely followed at the best of times, so the Dec 27^th report that profits rose 3% yoy in November probably sank without trace. But it is worth salvaging because the trend-breaking recovery was the product both of stronger revenues, and wider margins, than trend. By my unadjusted calculations, revenues rose 11.4% yoy (vs 8.6% in Oct), and margins for the  month widened to 7.4% from 6.3% in Oct and 7% in Oct 2011. 

The recovery seems to have been shared by every major reporting sector except the auto industry.   If we take this profits recovery at face value, it provides solid underpinning for the  economy’s mild upswing. But there is a downside: accounts receivable also grew at the fastest rate since April, and by far more than in Nov 2011. What this suggests is that as non-bank lending is allowed to reliquefy the system,  China’s corporates are emerging from the downturn with their financial risk-appetite undimmed.  Good thing or bad thing?