JAPANESE ECONOMY Private consumption may prove to be resilient.... US ECONOMY The economy remains buoyant despite some soft patches. EUROPEAN ECONOMY U.K. economy is slowing mildly.... CHINESE ECONOMY Fixed investments have led fast growth.... 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 By Akihiko Suzuki, Senior Economist Private consumption may prove to be resilient. In May, private think tanks published their forecasts for FY ; the average of the forecasted real GDP growth rate was a positive.% on a year-on-year basis (yoy). Most think tanks, including UFJ Institute, expected the Japanese economy to decelerate to some extent from FY, but pick up in the latter half of FY. The main scenario is as follows: A) Inventory adjustments in digital-related goods, such as semiconductors and liquid panels, will end, and the growth rates of foreign economies will accelerate. B) With an increase in exports, production will rise, improving profits and expanding investment. C) A recovery in profits will fuel consumption through an increase in employment and wages. Experiences from recent recoveries indicate that the recovery momentum will spread first through production and investment, but it will be difficult to stimulate consumption. Companies are still eager to reduce personnel expenses, and money will not flow into the household sector. In other words, the corporate sector will lead the economy, while the household sector will restrain it. The present scenario is consistent with the past. Recent economic data showed mixed indications. Negative signs were seen in exports. Exports of digital-related goods and those to Asia have slowed at an unexpected pace. The global inventory adjustment process continues in digital-related goods, and the current slowdown in foreign economies, particularly in the U.S. and China, may become more acute than expected. Meanwhile, inventories other than digital-related goods, such as transport equipment and general machinery, have accumulated. If another inventory adjustment process incurs, there is the possibility of a prolonged slowdown. If the corporate sector is not sturdy, the main scenario of a recovery in the latter half of this fiscal year will be less likely. Nevertheless, there may be an unexpected development, if the household sector improves robustly. In the first quarter, private consumption rose by a vigorous.% on a quarter-on-quarter basis (qoq), and real living expenditures for workers households increased by.% on a month-on-month basis (mom) in April. A slight improvement in the employment and income environment was the reason behind the sound consumption. Actually, the employment environment has not ameliorated that much. In April, the number of employed decreased by,, compared with the same month last year, but the status of those employed has changed. The share of low-paid part-time workers stopped expanding, while regular employees began to increase. As the share of regular employees stopped declining, average wages also ceased falling. In addition, even if scheduled cash earnings remain unchanged, bonus payments will rise along with the increase in corporate UFJ Institute Economic Research Dept. Global Watch June
profits, boosting consumer confidence. Since bonus payments increased last winter, some people expect summer bonus payments to rise also. They may buy PCs and other products with their summer bonuses. It is unrealistic to expect a consumption-led recovery, but the seemingly unreliable element of consumption may be hardy. (..) Japan: Exports by destination yoy, %) Asia U.S. Total EU Others - - Source: Ministry of Finance Japan: Living expenditures and propensity to consume Year of s.adj, % 8 98 9 9 9 9 Average propensity to consume (workers' households, R-H) Real living expenditures (workers' households, L-H) 8 8 78 7 7 7 7 8 Source: Ministry of internal affairs and communications UFJ Institute Economic Research Dept. Global Watch June
US ECONOMY The economy remains buoyant despite some soft patches. By Shin Takayama, Economist Some soft patches are apparent, but the U.S. economy as a whole remains resilient. Real GDP grew by an annualized qoq.% in the first quarter. The growth rate slowed somewhat from the previous quarter, but still maintained a level equal to the potential growth rate of the mid-% range. The household sector remains solid. April retail sales rose by.% mom, representing the fifth consecutive month of an increase. Core retail sales, excluding autos, construction materials, and gasoline, reflect underlying consumption trends, and they increased by.9% mom. As retail sales recovered from the mom decline in March, the fear of a slowdown has receded. Nevertheless, as consumer confidence continues to worsen with high energy prices and weak stock prices, it is unlikely that private consumption will grow further. The University of Michigan s consumer confidence index fell to 8. in May, the lowest level since March. The corporate sector remains strong, although the manufacturing sector has been slowing. April industrial production declined by.% mom for the first time in the last three months, but inventory levels remain low and a drastic adjustment appears unlikely. The Federal Open Market Committee decided to raise the federal funds rate by.% points to.% on May. As the economy continues to show resilience, it is likely that the Fed will continue to raise interest rates up to a neutral level. (..7) U.S.: Main economic indicators 9 8 7 -year government bond yield FF rate (yoy, %). 7.... -. -. -7. Number of person employed change from the same month of the previous year, R-H Core consumer price (excluding foods and energy) thousand) Industrial production yoy, L-H 9 9 9 9 9 9 97 98 99 Source: Federal Reserve et al. 7 - - -7 UFJ Institute Economic Research Dept. Global Watch June
EUROPEAN ECONOMY U.K. economy is slowing mildly. By Shin Takayama, Economist There are some hints of a slowdown in the U.K. economy. Real GDP grew by only.% qoq in the first quarter, down from.7% qoq in the fourth quarter of. Private consumption grew by only.% qoq, while the qoq growth rate of fixed investment became flat, and inventory investment decreased. Meanwhile, as imports fell more than exports, the contribution rate of net exports to growth turned positive for the first time in the last three quarters. The housing markets also slowed somewhat. The Halifax house price index rose by 7.8% yoy in April, slowing sharply from its peak in July, when the index rose by.% yoy. (..7) U.K.: Real GDP growth rate by demand..... -. -. Net Exports Inventory Fixed Investment Government Consumption Private Consumption Real GDP Source: Datastream U.K.: Halifax house price index UFJ Institute Economic Research Dept. Global Watch June
CHINESE ECONOMY Fixed investments have led fast growth. By Mariko Noda, Economist The Chinese economy has grown fast, led by fixed asset investments. Since China s entry to the WTO, foreign direct investments have surged, stimulating domestic enterprises investments. There were some overheated investments in the first half of. Due to the government s tightening measures called macro-control, overheated investments have cooled down, but investment activities, especially real estate investments, continue to expand. As a result, the share of fixed assets investments to GDP has soared to about %. China: Real GDP growth China: Investment ratio (yoy, %) Investment rate - 79 8 8 8 87 89 9 9 9 97 99 Contribution rate of fixed asset investment Real GDP growth rate 79 8 8 8 87 89 9 9 9 97 99 Note: Investment rate Real fixed asset investment / Real GDP Fixed asset investments are divided into four categories: a) capital construction, including public investment and business investment b) innovation c) real estate development and d) other investment, including maintenance of roads and bridges. Each category of investments grew by about % yoy. The fastest growing category was real estate development. Reform of the housing system and an inflow of speculative money, in anticipation of the revaluation of the Renminbi, have boosted the real estate market. China: Fixed asset investments by category (yoy% and contribution rates of each category) (yoy, %) - 98 99 Note: Data for is not published, excluding real estate development. Capital construction Innovation Real estate development Others yoy contribution rate, %) - 98 99 Note: Data for is not published excluding real estate development. Others Real estate Innovation Capital investment Fixed asset investment UFJ Institute Economic Research Dept. Global Watch June
Fixed investments by state-owned units have stagnated as shown below. But those made by others, including foreign companies, have grown rapidly, indicating the important contribution of foreign companies to China s rapid growth. China: Fixed asset investment by ownership (yoy% and the contribution rates by each category) yoy, %) State owned Collective Owned yoy contribution rate, % Joint owned, foreign funded and others Individuals 98 99 Individuals Joint owned, foreign funded and others 98 99 Collective owned State owned Fixed asset investment Note: Data of state owned and others in are not published. Note: Data of state owned and others in ' are not released. Despite the government s macro-control measures, it is likely that fixed asset investment will continue to expand as interest rates remain low. In addition, as the investment efficiency has deteriorated, certain levels of investments are required to maintain approximately 8% GDP growth rates. If the incremental capital output ratio (ICOR) rises (or deteriorates) to. in, slightly higher than. in, a % investment rate is needed to achieve 8% growth rate. (..) China: Some investments have cooled down China; ICOR is deteriorating Accumulated from beginning of the year, yoy% Central government projects 8 7 Investment efficiency deteriorates Local government project Manufacturing (Non metal mineral product) Manufacturing (Ferrous metal) ICOR - 7 9 79 8 8 8 87 89 9 9 9 97 99 Note: Figures are calculated from GDP and fixed asset investment, both deflated by GDP deflator. UFJ Institute Economic Research Dept. Global Watch June