Narratives give shape to economic outlook

IT is probably a good thing that discussions on economics are so arcane. Otherwise we would have to listen to all the self-proclaimed experts on epidemiology and medicine venture into a field they know nothing about.

This past week, we have seen several important disclosures, not least of which is the trade data coming out of South Korea. Exports from Korea are critical because they tell a broad story of economic activity around the globe.

South Korea’s major exports include a diverse range of products, including electronic products, machinery, motor vehicles, steel, ships, and textiles and clothing. Further, Korea’s export destinations are geographically diverse because of the range of its exports—from consumer goods to materials needed for other economies’ value-added exports. Thus we can say “how Korea goes, so goes global trade.”

The latest numbers for May show that the Korean trade data displays no signs of a turnaround in exports despite the easing of lockdowns in many trading partners. In the first 20 days of May, exports fell by 20 percent year-on-year, largely unchanged from April.

The internals of the data show the same pattern as April’s. Exports to China held up better than most, falling back 1.7 percent as the Chinese economy tries to come back on board. However, exports to the US were worse, falling 28 percent, while goods sent to the European Union were also weak, down 18 percent.

Exports to Japan were off by more than 20 percent, and the market to Vietnam followed a similar decline as that of the US. Korea depends on US consumers and on Vietnam’s factories buying its goods.

It would be easy to attribute these negative changes only to lower economic production, but it is more than that and more serious.

For example, one of the challenges that the US is currently facing is food inflation. Protein prices in the US are skyrocketing. Wholesale beef prices have more than doubled in the past two months. Many restaurants are now adding a “Covid-19 surcharge.” This is draining valuable consumer financial resources that will not be available once the economy tries to recover.

There was a bright spot for places like the Philippines and other “Emerging Economies.” A critical factor is the “capital flows” in and out of an economy. This is beyond the headline data like overseas workers’ remittances. While those are important, remittances only consist of one money flow that makes up the total picture.

We often hear about “hot money” like for the stock market, but that too is only one piece of money flow. Emerging market capital flows, including for the Philippines, bottomed out at the beginning of April and have recovered well though not yet back to pre-lockdown levels.

Finally, the Bank of Thailand reduced interest rates yet again to historic low levels in a desperate bid to help (or save) that economy. If Thailand cuts again in the next month, that will mean the Thai economy is showing no signs of life since it is so dependent on tourism to make a quick buck.

In the Philippines, the Bangko Sentral ng Pilipinas has much room to maneuver and while another rate cut is likely, not much can be done until the second quarter economic numbers come out in two months.