|
Global economic growth will recede from the
buoyant pace registered in 2004. While all major economic regions will
expand this year, with the upturn being most pronounced in emerging Asia,
particularly China, growth in Japan and Germany will be sluggish at best. In
Japan, the outlook continues to deteriorate amid disappointing reports about
last year’s performance. The much more moderate expansion registered in 2004
quashes hopes that the economy can put behind a decade of sluggish growth.
The U. S. economy will remain on a robust growth trajectory despite the
sizeable current account and public sector deficits, which have sent the US$
tumbling to new lows against the Euro. Consequently, the Federal Reserve
continues to tighten its policy to rein in inflationary pressures resulting
from the ongoing recovery. The Euro Area continues to lag the U.S. economy.
With the regional heavyweight Germany burdened by soaring unemployment,
private consumption will remain too weak to rekindle economic growth.
Meanwhile, prospects for Latin America remain bright. After having expanded
at the fastest pace in a decade last year, the region is in for another year
of solid growth, as the export-led recovery has already spilled over to
increased domestic demand. |
|
Japanese
economy slips into recession amid sluggish consumption and weaker external
sector
Japan and
Germany, the world’s second and third largest economies in US$ terms, are
experiencing a worse slump than anticipated earlier.
Japan
once again slipped back into recession. In the October-December quarter,
gross domestic product (GDP) contracted 0.5% on an annualized basis and
0.1% over the preceding quarter. The decline came unexpected, as the
market had actually expected the economy to expand by 0.5% on a year-on
year or 0.1% quarter-on-quarter basis. Economic activity dropped amid
lower consumer spending and a weaker contribution from the external
sector, as exports faltered and imports surged. The October-December
decline represents the third consecutive quarter of declining activity, as
the initially reported 0.1% growth reading in the July-September period
was revised downward to a contraction of 0.3%. In the April-June quarter
the economy weakened by 0.2%. In part, the downward revision reflects the
switch to a new methodology that is in line with international standards
and had been announced in November last year. The current slump
represents the fourth recession in 13 years and even in times of cyclical
rebounds growth did not exceed 3%. As a result, economic growth has
averaged barely more than 1% a year during the past decade, making Japan
the slowest growing major economy in the world.
Outlook
moderately positive as consumption is likely to bounce back
The economy
is likely to rebound in the January-March quarter as consumption picks up
with better income and job conditions. In part, weak consumption in the
October-December quarter reflected adverse climatic conditions such as
unseasonably warm weather and typhoons, which kept private consumption at
bay and should bounce back amid normalizing weather conditions. In
addition, a recent boost in machinery orders bodes well for stronger
corporate investment. The government is also upbeat about growth
prospects and maintains that the recovery is intact. Officials claim that
the current slump is just a temporary bout of weakness. Latest data
support the optimistic view. In January, industrial production increased
by 2.1% over December in seasonally adjusted terms, which was well ahead
of market expectations and in fact represented the fasted pace in nine
months. Moreover, January retail sales grew 5.7% over the preceding month
in seasonally adjusted terms amid strong growth in food and clothing
sales. The reading represented the fastest clip in the last five years.
A revival of the domestic economy comes at a welcome moment since external
demand is about to decline, as global economic growth will recede from
last year’s peak. Given these resilient data, Consensus Forecast
panelists are unperturbed by the disappointing October-December figures
and see the economy expanding 1.4% this year, just one tenth of percentage
point down from last month’s forecast.
Germany at
the brink of recession
Germany,
Europe’s largest economy, unexpectedly contracted at the end of last
year. In the fourth quarter, GDP declined 0.2% over the preceding
quarter, compared to 0.2% growth expected by the market. The decline in
fourth-quarter GDP was led by a drop in domestic demand, which was partly
offset by a higher contribution from the external sector. Domestic demand
declined amid more sluggish investment growth while total consumption
remained stagnant as slightly higher private consumption offset lower
government consumption. Despite the strong Euro, the contribution from
the external sector improved amid rising exports (+1.1% qoq) and falling
imports (-0.2% qoq). On an annual basis, GDP still expanded 1.5%.
However, when eliminating the calendar effect – the number of working days
available in the fourth quarter of 2004 was two and a half days more than
in the fourth quarter of 2003 – economic growth would have come in at just
0.6%. In the third quarter, economic growth was flat on a
quarter-on-quarter basis and up 1.2% on a year-on-year basis. For all of
2004, the economy expanded 1.6 %, which was revised downward from the
previously reported 1.7%.
Sluggish
Germany mars Euro Area outlook
Prospects
for the economy remain downcast, as less vigorous global demand and the
strong Euro will render export-led growth more difficult. Simultaneously,
the domestic side of the economy is hampered by soaring unemployment. On
1 March, the government reported that unemployment increased to its
highest
level since 1933 in absolute numbers. In part, the increase reflects
seasonal factors. According to seasonally adjusted data, unemployment
rate rose to a less spectacular 11.7% (a seven-year high) and
measured
by International Labour Organization standards, unemployment rose to only
9.3% in January from 9.2% in December. However, the psychological effect
of the headline unemployment figures is devastating and is likely to send
private consumption downward. With Germany accounting
for around
a third of the entire Euro Area economy, Consensus Forecast panellists
remain pessimistic about this year’s growth prospects and see the Euro
Area’s economy expanding a paltry 1.7%. If true, 2005 would mark the
fifth consecutive year with growth below the 2% threshold. Furthermore,
chances for a strong rebound in 2006 are dim with the Consensus expecting
a mere 1.9% growth in output.
Continued
optimism about Latin American outlook
The
performance of the Latin American region stands in stark contrast to the
dismal developments in Japan and Germany. After growing by 5.7% in 2004,
the fastest clip in a decade, the region will experience yet another year
of solid if somewhat more moderate growth. Last year, Latin America
profited from buoyant global demand, which converted the external sector
into the growth engine for the entire region. While last year’s export
growth is clearly unsustainable in the light of moderating global growth,
the domestic side of the economy will assume a more dominant role in
bolstering economic growth this year. According to this month’s Consensus
Forecast, output in the eleven countries surveyed will expand by 4.0% this
year, which is unchanged from last month’s outlook. In fact, most
countries did not experience any significant change to their growth
outlook. Perceptions only changed for Argentina and Colombia, the first
seen substantially more optimistic than a month ago while the latter
experienced a slight downward adjustment to the GDP forecast for 2005.
Argentina
concludes debt restructuring
In
Argentina,
the
government successfully concluded the restructuring of its sovereign debt
that has been in default since December 2001. The government’s proposal
to pay back 30 cents on the US$ was accepted by the critical majority of
bondholders and has thus put an end to years of lingering uncertainty
about a final resolution of the debt crisis. Moreover, once concluded,
the deal will alleviate the country’s debt burden substantially, paving
the way for sounder public finances and sustained economic growth.
|
