JAPANESE ECONOMY Three factors behind the bleak economic outlook... 1 US ECONOMY Manufacturing production is slowing.... 3 EUROPEAN ECONOMY The economy continues to expand, but at an increasingly slower pace.... 5 CHINESE ECONOMY A large disparity between national and regional GDP statistics... 6 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
JAPANESE ECONOMY Three factors behind the bleak economic outlook By Akihiko Suzuki, Senior Economist Pessimistic views prevail since the economic indicators published in late March and the results of the March Tankan survey were worse than expected. The level of stock prices has fallen since then, with the prospects of the U.S. economy gloomier and the fall of U.S. stock prices. The economic indicators published in late April failed to clear the pessimism. But, objectively, the latest data were not so discouraging. March industrial production fell by 0.3% on a month-on-month basis (mom), representing the second consecutive month of a fall, but it rose by 1.7% on a quarter-on-quarter basis (qoq) in the first quarter after two consecutive quarters of a decline. According to the Survey of Production Forecast in Manufacturing, which indicates a rise of 3.5% mom in April and a fall of 1.4% mom in May, it is likely that industrial production will increase on a quarter-on-quarter basis even in the second quarter. The detailed data also showed that inventory adjustments in digital-related goods have progressed. The inventory level of the electronic parts and devices industry increased by around 30% on a year-on-year basis (yoy) last year, but it rose only by 2.9% yoy in March. In the information and communication electronics equipment industry, the inventory level fell by 7.5% yoy in March. Japan: Industrial production (year of 2000=100, seasonally adjusted) 110 105 100 Production Shipments Inventory 95 90 85 01 02 03 04 05 Note: Cross marks indicate estimated figures based on the Forecast Survey. Shaded areas indicate the recession period, according to the Cabinet Office. Source: METI Progress in the inventory adjustments of digital-related goods supports our scenario forecasting a recovery in the latter half of the year. But there are three factors underlying the bleak economic outlook. First, uncertainty about the world economy. The U.S. real GDP growth slowed to an 1
annualized 3.1% qoq in the first quarter. The U.S. economy is expected to pick up in the latter half of the year, but there is a risk of a slowdown, particularly in the sectors sensitive to interest rates, such as housing and business investment, as the Fed continues to raise interest rates. Second, the recovery of the household sector remains feeble, compared with the corporate sector. Real living expenditures of workers households rose by 3.2% qoq in the first quarter after two consecutive quarters of a fall, but they declined by 1.1% mom in March, representing the second consecutive month of a decrease. In addition, the employment and income environment remains troubling. The number of employed decreased by 190,000 in March, compared with the same month last year, after two consecutive months of an increase. Scheduled cash earnings have continued to fall on a year-on-year basis, and non-scheduled cash earnings decreased for the first time in the last 2 years and 8 months, as production has stagnated. As a result, March total cash earnings per employee fell by 0.6% yoy, representing the first decline in the last three months. Japan: Total cash earnings per employee and non-scheduled cash earnings (yoy, %) 8 6 4 2 0-2 -4-6 -8-10 -12 Total cash earnings per employee Non-scheduled cash earnings 01 02 03 04 05 Note: Figures are calculated from nominal wage indexes. Source: Ministry of Internal Affairs and Communications, Ministry of Health, Labor and Welfare. Finally, corporate earnings are weakening. According to the Financial Statements Statistics of Corporations, corporate earnings have deteriorated since the fourth quarter of 2004, and it is likely that a decline in sales prices and a rise in materials prices will squeeze corporate profits. Of these three factors, the third one is least predictable and most critical. Inventory adjustments have progressed in digital-related goods, but demand remains weak and it will take some time for prices to recover. Meanwhile, raw material prices will likely rise further, as demand from emerging economies, such as China, remains robust. A deterioration in corporate profits will reduce business investment and hinder improvement in the employment and income environment, possibly further weakening private consumption. (2005.5.9) 2
US ECONOMY Manufacturing production is slowing. By Shin Takayama, Economist Industrial production expanded by 0.3% mom in March, representing the second consecutive month of a month-on-month increase, while manufacturing production decreased by 0.2% mom, the first month-on-month decline in the last 6 months. A fall in auto and auto parts production by 3.6% mom dragged total manufacturing production. Manufacturing production has fallen slowly on a year-on-year basis. The ISM manufacturing index, which usually leads production by several months, has declined through March, indicating that production would continue to slow at least during the first half of this year. (mom,%) 1.5 U.S.: Industrial production 1.0 0.5 0.0-0.5-1.0 02 03 04 05 Contribution rate of Non-manufacturing Contribution rate of Manufacturing Industrial production Source: Federal Reserve U.S.: Manufacturing production and the ISM index 12 10 8 6 4 2 0-2 -4-6 -8 95 96 97 98 99 00 01 02 03 04 05 Manufacturing production (L-H) ISM index (R-H) 64 62 60 58 56 54 52 50 48 46 44 42 40 Source: Federal Reserve, ISM (Institute for supply management) 3
Inventory cycles in manufacturing suggest that the pressures of inventory adjustments have risen, as the growth rate of shipments has slowed and inventory has accumulated. The increased stress of adjustment has contributed to the recent slowdown in manufacturing production. Nevertheless, as the level of inventory remains low and relatively stable, adjustments should be marginal, and it is unlikely that manufacturing production will fall significantly. (2005.4.22) 10 U.S.: Inventory cycles in manufacturing 8 Growth rate of inventory 6 4 2 0-2 -4 01.1Q 05.1-2M 97.1Q -6-8 -10-8 -6-4 -2 0 2 4 6 8 10 12 14 Growth rate of shipment Source: U.S. Dept. of Commerce (month) 1.7 U.S.: Inventory ratio in manufacturing 1.6 Trend line since Jan '92 1.5 1.4 1.3 1.2 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Source: U.S. Dept. of Commerce 4
EUROPEAN ECONOMY By Shin Takayama, Economist The economy continues to expand, but at an increasingly slower pace. The quarter-on-quarter real GDP growth rate was 0.2% in the fourth quarter, representing the third consecutive quarter of slower growth compared with the previous quarter. The economic sentiment indicator has been below 100 for three months in a row through April. The main reason for slowing growth is a slowdown in external demand. The cumulative trade surplus between January and February stood at just 1.3 billion euro, far below 13.9 billion euro in the fourth quarter of 2004. As for domestic demand, February retail sales rose by 0.3% mom, representing the second consecutive month of a rise, but it is likely that this upturn will be temporary; consumer confidence has deteriorated and auto sales are sluggish. Under these circumstances, the European Central Bank (ECB) decided to hold its key interest rates unchanged at 2.00%. With slowing growth and stable prices, it is likely that the ECB will keep interest rates at the present level for some time. (2005.4.22) Euro Area: Economic sentiment indicators (Long term average=100 120 115 110 105 100 95 90 85 80 75 70 90 92 94 96 98 00 02 04 Source: Datastream 5
CHINESE ECONOMY A large disparity between national and regional GDP statistics By Mariko Noda, Economist The first quarter real GDP growth rate was as high as 9.5% yoy at the preliminary base. This figure marks the seventh consecutive quarter of above 9% growth, confirming the strength of the Chinese economy. As the growth rates stood at around 8% in the early 2000s, the Chinese economy appears to have increased its power recently. China: Quarterly real GDP growth rate 11.0 10.0 9.9 9.6 9.9 9.8 9.6 9.1 9.5 9.5 9.0 8.0 7.0 8.1 8.3 8.2 7.3 8.4 7.8 7.0 6.6 8.0 8.0 8.1 8.1 7.9 6.0 5.0 00 01 02 03 04 05 Source: CEIC The real GDP growth rate for 2004 was 9.5%, according to the National Statistic Office. The real GDP growth rates published by each region, however, surpassed the national average of 9.5%. The weighted average of the 2004 real GDP growth rate is 14.3% by our calculation. We use the share of each region s GDP in total nominal GDP in 2003 as weight. This disparity may be the result of the influence from local officials whose evaluations relate to economic performance, but no one knows the answer for certain. Some economists think that the real GDP growth rate may prove to be above 10% in 2004. Chine: Real GDP growth rates by region (2004) 20.0 15.0 10.0 9.5 13.212.912.8 13.614.9 14.3 15.3 15.7 13.7 14.2 11.5 12.0 12.7 12.2 19.4 12.2 11.7 12.5 12.1 11.8 10.4 10.811.0 12.3 11.0 14.3 5.0 0.0 Total Beijing Hebei Liaoning Shanghai Jiangsu Zhejiang Shandong Henan Hubei Hunan Source: CEIC Note: The weighted average growth rate is calculated based on each region's share of total nominal GDP in 2003. Guandong Sichuan Chongqing Tianjin Inner Mongolia Jilin Heilongjiang Anhui Fujian Guangxi Hainan Yunan Gansu Qinghai Ningxia Weighted average 6
In China, there are only annual data for demand components of GDP, such as consumption and investment, but there are quarterly data regarding industry, such as the agriculture industry and manufacturing industry, at a cumulative base. In the early 1980s, the agricultural industry accelerated its growth, while the industrial sector has led the growth since mid-1980s. Meanwhile, the service sector has grown continuously. China: Real GDP growth by industry 25.0 20.0 Real GDP growth rate Agriculture Industry Service 15.0 10.0 5.0 0.0-5.0 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 Source: CEIC Most importantly, it is quite evident that investment has led the recent strong growth, according to our estimates regarding the contribution rates of each demand components. (2005.4.25) China: Real GDP growth by demand 20.0 15.0 10.0 5.0 0.0-5.0 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Private consumption Goverment consumption Fixed asset investment Inventory Net export Real GDP growth rate Source: CEIC Note: These figures are estimated based on the real GDP index deflated by the GDP deflator. 7