JAPANESE ECONOMY Hardship now and pleasure later, or vice versa?... 1

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1 調査レポート 4/94 25 年 1 月 11 日 JAPANESE ECONOMY Hardship now and pleasure later, or vice versa?... 1 US ECONOMY Economic growth has slowed to some extent Record current account deficits in the third quarter... 3 EUROPEAN ECONOMY Signs of a slowdown in exports... 5 ASIAN ECONOMY The economy remains vigorous This is an abstract of our monthly reports on the Japanese, U.S., European, and Asian economies, translated and edited by Mariko Noda (ndmariko@ufji.co.jp), with the assistance of Chisa Hiro. The information and the views contained herein are subject to change without notice. Economic Research Department

2 JAPANESE ECONOMY: Hardship now and pleasure later, or vice versa? By Akihiko Suzuki, Senior Economist On December 8, the second series of estimates for the third quarter GDP were published, and private institutions, including UFJ Institute, revised their economic forecasts. The average forecast figure for the real GDP growth rate of FY24 was revised down to 2.% from 2.9% in November 24, mainly due to the application of the chain-linking method of calculating GDP deflators. In forecasts for FY25, the average figure was cut from 1.5% to 1.1%. With the increasingly evident slowdown in the economy, many institutions appeared to become bearish about their prospects. Even the Japanese government and the Bank of Japan have revised down their view of the economy, and it has become a general consensus that the economy has slowed since the latter half of last year. Japan: Real GDP growth rate by demand component (qoq, %) Inventory Net exports Government consumption Business investment Private consumption Real GDP Source: Cabinet Office The view regarding the economy s prospects is divided into two categories: One is that the slowdown will linger, but the economy will pick up in the latter half of 25; this is a view of hardship now and pleasure later. The other one is that a domestic demand-led recovery will continue despite the slowdown in the growth rate, and the economy will finally enter into recession in the latter half of 25; this view implies pleasure now and hardship later. Even if the forecast figure for the growth rate in 25 is the same, the scenarios are totally different, depending upon which view you support. UFJ Institute falls into the first camp. According to recent economic indicators, it is likely that an adjustment process will continue for the months ahead. November industrial production expanded by 1.5% on a month-on-month basis (mom), led by an increase in general machinery, information and 1

3 telecommunication machinery, and electronic parts and devices industries; this is an increase after two consecutive months of a fall, but far below the 3.7% rise predicted by the Survey of Production Forecast in Manufacturing. It is highly likely that industrial production will decline in the fourth quarter on a quarter-on-quarter basis (qoq) for two consecutive quarters. In addition, private machinery orders, excluding vessels and electricity, a leading indicator of business investment, fell by 3.1% mom in October, representing the second consecutive month of a decline. It is likely that the actual figure for the fourth quarter will not reach a 1.8% qoq growth rate, as anticipated by expectations for orders. With an improvement in corporate profits, business investment has continued to increase, but it will begin to slow in the coming months. Moreover, a recovery in employment has stalled on top of stagnated growth in wages. The seasonally adjusted number of employed decreased for three consecutive months through November. The November employment level was below that of November in the previous year; employment had remained above the level in the same month of the previous year for three months until November. A deterioration in the income environment will affect private consumption. Real living expenditures for workers households reduced by.9% mom in November for three consecutive months. Moreover, new housing starts have stagnated. The year-on-year (yoy) increase had continued for five consecutive months through November, but they rose only by.2% yoy in November. New housing starts on owned houses have decreased for three consecutive months after a rush before cuts in tax credits for housing loans. In addition, with a reduction in multi-unit dwelling starts, November new housing starts on houses built for sale fell for the first time in the last seven months. Japan: Private consumption (yoy, %) (Seasonally adjusted, %) Average propensity to consume (workers' households, R-H) Real living expenditures (workers' households, L-H) Source: Ministry of Internal Affairs and Communications

4 Economists may recognize subsequently, in retrospect, that the economy peaked in the second quarter of 24 and entered into recession. If production adjustment, however, has already begun in the digital-related sector, due to a decline in demand and an accumulation in inventory, it may be possible that the adjustment process will end in the latter half of this year and production will pick up thereafter. We expect a.6% growth rate for FY25. Our forecast figure is among the lowest, but our scenario is that of hardship now and pleasure later, in the hope of a brighter picture toward FY26. (25.1.6) US Economy By Shin Takayama, Economist Economic growth has slowed to some extent. Economic growth has slowed to some extent, but its underlying vitality remains. The third quarter real GDP growth rate was an annualized 4.% qoq, surpassing 3.3% growth in the second quarter. In addition, the Conference Board s U.S. Leading Index, which had fallen since June, rose by.2% mom in November. The FOMC decided to raise its target for the federal funds rate by.25% points to 2.25% on December 14. The Fed stated that output appeared to be growing and labor market conditions continued to improve, and policy accommodation can be removed at a pace that is likely to be measured. ( ) Record current account deficits in the third quarter Current account deficits have renewed their historical records for three consecutive quarters to $164.7 billion in the third quarter, mainly due to an increase in trade deficits by $4.26 billion, compared with the second quarter. As oil prices soared, trade deficits in oil related products ballooned to $3.64 billion; there were also $.79 billion of payments for the rights to broadcast the 24 Summer Olympic Games, and the surplus on service trade decreased. In addition, October trade deficits soared to $55.46 billion, surpassing the monthly average in the third quarter. It is likely that current account deficits in the fourth quarter will expand. Regarding financial accounts, net financial inflows of foreign money rose to $ billion. Net foreign purchases of U.S. Treasury securities have slowed for two consecutive quarters, but net foreign purchases of U.S. securities other than U.S. Treasury securities and net financial inflows of foreign direct investment in the U.S. remained strong. Net foreign purchases of U.S. securities recorded $63.25 billion in October, almost 3

5 comparable to the monthly average during the third quarter, indicating that capital inflows to the U.S. remain steady. ( ) U.S.: Current Account Balance ($ billion) 5-5 Balance on transfers Balance on income Source: U.S. Dept. of Commerce Balance on trade in goods and services Current account balance U.S.: Financial accounts ($ billion) 5 Others US securities other than US Treasury securities Direct investment US Treasury securities Source: U.S. Dept. of Commerce Net financial inflows of foreign money 4

6 EUROPEAN ECONOMY: Signs of a slowdown in exports By Mariko Noda, Economist Exports, which led the economy, have begun to slow. The real GDP growth rate has slowed to.3% qoq and 1.8% yoy in the third quarter, mainly due to a significant decline in the contribution rate of exports from 1.2% in the second quarter to.5% in the third quarter. Nevertheless, domestic demands, such as private consumption and fixed asset investment, remain solid, and the extent of the slowdown is still moderate. Despite a decline in oil prices, the inflation rate has remained above the ECB s policy target of approximately 2%. The recovery remains rather subdued, and it is likely that the ECB will hold its key interest rate unchanged at 2.% in the coming months. ( ) Euro area: Employment and consumer confidence (yoy, %) (%) 5 Employment (L-H) Consumer confidence (R-H) Source: Datastream ASIAN ECONOMY China: the economy remains vigorous. By Takamoto Suzuki, Economist China s economy is still vigorous. The annual central economic conference, which lays out economic policy for the year ahead, was held in early December. China s policymakers stated that problem areas remained, but that initial control over unstable factors has been successful. They set an 8 percent growth target for 25, which was 1 percent points higher than the target for 24. The inflation rates have moderated, due to an increase in agricultural production, but there has been an eruption of social unrest among workers and farmers. As a result, it appears necessary for China s government to raise its growth target in order to ease social tensions. At the same, it should be noted that China s government has become confident about sustained growth. ( ) 5

7 China: Main economic indicators (yoy, %) (yoy, %) Total retail sales of consumer goods (L-H) Industrial production (L-H) Total investment in fixed assets (R-H) Note: Figures for investment in fixed assets are accumulated data from the beginning of each year, and data are just for cities since 24. Source: CEIC 6