V or W?

The cruellest month was actually one of the kindest this year. Economic data from Asia was perky enough to trigger talk of V-shaped recoveries. Industrial production came blasting back and export declines were less precipitous, as inventories were already pared. So what went wrong in May?

Early Asian data for last month came out on Monday and at face value offered little to inspire. China’s official purchasing managers’ index fell from the month before. Exports from Korea, a bellwether for the region, plunged 28 per cent year-on-year; worse than expected and a steeper decline than April’s 19 per cent. Even Thailand threw some nasty consumer price inflation, or rather deflation, into the mix. Asian markets, determined to see the glass half full, jumped. Fair enough; the most important data point, of Chinese PMI, stayed above the 50 level, denoting expansion. As May historically yields a lower reading than April, a slight drop can be taken as positive.

The backdrop in China remains unchanged. This is an economy super-charged by a government with the cash and clout to do so. Fixed asset investment, representing over 40 per cent of economic output, is surging even as exports decline. Goldman Sachs estimates about half of that growth is linked to state spending and, as the latest figures show, Beijing will have to stay in the driving seat for a while yet. Throughput at China’s two biggest container terminals, which handle half the country’s overseas trade, dropped up to 20 per cent in May, year-on-year, according to Citigroup, and was flat in April. Korean exports tell a similar story: in the first 20 days of May, shipments fell 21 per cent year-on-year, only marginally less than in April.

Other indicators point to weak demand at home and abroad: steel production is softening and electricity consumption waning. These may be linked. Either way, May serves as a reminder that, even in China, the trajectory of recovery will be less dramatic than those V-shaped projections suggest.

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