South Korean Trade Data Is The Most Important Economic Indicator In The World

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Photo: Wikimedia Commons

We’re hearing more and more about how South Korean is one of the most important — if not THE most important — economic indicator in the world.Much of this has to do with its high correlation to most of the Asian economies.

From Jim O’Neill, Chairman of Goldman Sachs Asset Management:

There are some indicators which are simply more powerful in their reliability than others, as well as having predictability in shores beyond their own. In my view, the Korean trade data, US job claims, the US ISM report and its new orders and inventory component, the Euro area business and consumer confidence surveys, especially the German IFO, are the key numbers I look for each month.

This morning, we heard two top strategist refer to the measure as a “canary in the coalmine.”

From Goldman Sachs via FT Alphaville:

South Korea then is the “canary in the coalmine”, according to Goldman Sachs, because it not only publishes data earliest, but has a high correlation to the export growth of other Asian countries:

The data passes causality tests for contemporaneous exports of China, Japan, Australia and  India as well as the US and the Euro Area (see Exhibit 3). They also pass the causality tests for exports of Hong Kong, Malaysia, Philippines, Singapore and Thailand.


Photo: Goldman Sachs via FT Alphaville

As we reported on Monday, the bad news is that Korean trade data has deteriorated.  South Korean exports and imports both fell unexpectedly in April.

But this isn’t necessarily bad news.  Rather, it may be reflecting secular changes in the Asian economy.

Here’s Ed Yardeni of Yardeni Research:

So why are industrial production and merchandise exports weakening in South Korea? The country has been somewhat of a canary in China’s coal mine, so to speak, since it exports lots of capital goods to China. Its industrial production growth has slowed significantly to only 0.3% y/y through March. Its exports dropped sharply during April, and are down 4.7% y/y.

My hunch is that China’s domestic demand is shifting from capital goods to consumer goods. The country has already slammed the brakes on its program to build more high-speed trains. Other large-scale infrastructure spending may also be cut back as more resources are devoted to improving housing and living standards for low-income workers.

That shift is likely to benefit China’s domestic manufacturers, which tend to produce consumer goods. China’s imports of capital goods from South Korea and other producers of such equipment may see less growth in China for a while.


If Yardeni is right, then it’s about to get a lot more difficult to interpret the South Korean trade data.


SEE ALSO: 9 Economic Indicators You Need To Start Following >

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