Japanese GDP Shocker

November 17, 2014

Japanese real gross domestic product, which had been projected to rebound 0.5% or somewhat more, instead fell another 0.4% last quarter after an upwardly revised 1.9% plunge in 2Q immediately following the economy’s April consumption tax hike.  In annualized terms, GDP fell 7.3% in 2Q and 1.6% in 3Q, revealing an unexpected recession and reviving the memory of the ill-fated 1997 sales tax hike that also triggered a recession which in turn sealed the onset of deflation.  In year-over-year terms, GDP slumped 1.2% last quarter after a dip of just 0.2% in the year to 2Q14.  Personal consumption experienced a 0.4% dead-cat bounce in 3Q after a 5.0% dive in 2Q.  Non-residential business investment slid 0.2% lower after dropping 4.8% in 2Q.  Residential investment also recorded a second straight decline, a plunge of 6.7% following an even bigger 10.0% plunge in 2Q.  The main positive influence came from public-sector demand, which lifted the growth rate by 0.7 percentage points, but net foreign demand accounted for only 0.1 percentage points of GDP growth in spite of a 1.3% non-annualized advance in exports.  Imports went up 0.8%.  Inventories exerted a 0.7 percentage point drag on Japan’s growth rate.  The GDP price deflator was 2.1% higher in 3Q14 than in 3Q13.  Nominal GDP fell 0.8% last quarter or 3.0% at an annualized rate.  This followed a 0.1% dip in 2Q.

A press conference by Prime Minister Abe tomorrow will reportedly postpone the planned second-round consumption tax to 10% from 8% that otherwise would become effective in October 2013.

The Japanese Nikkei-225 stock market index crashed 517 points or 3.0% in response.

In overnight trading, the yen touched new lows for the move of 117.07 per dollar and 146.55 per euro.  However, the yen currently is trading unchanged from its closing level on Friday.

The dollar has risen 0.3% against the euro, Swiss franc, Canadian dollar and Australian dollar.  The U.S. currency is up 0.2% versus sterling and unchanged relative to the kiwi and yuan.

Governor Mark Carney of the Bank of England spoke of huge disinflationary forces that continue to be imported and stressed that too little inflation remains a bigger danger than too much.  WTI oil slid another 1.1% to $75.02 per barrel.  Comex gold is 0.3% firmer at $1,189.50 per troy ounce.

Ten-year German bund and British gilt yields are two basis points lower, but the 10-year Japanese JGB is steady at 0.48%.

In other share price action, equities fell by 1.2% in Hong Kong, 1.1% in Tawian, 0.6% in Singapore, and 0.8% in Australia.  In Europe, the German Dax, Paris Cac and British Ftse show small net losses so far of 0.2% each, but the Madrid and Milan exchanges are a tad higher.

A second focus of attention has been the completion of the annual Group of Twenty leaders summit in Brisbane Australia.  The Group will meet next year in Turkey and in 2016 in China.  One attention grabber was the early exit of Russian President Putin, who’d had enough of the complaining about his incursions into Ukraine.  A long laundry list of initiatives took place, but the overall outlook spelled out in a released statement by the leaders was gloomy.

The global recovery is slow, uneven and not delivering the jobs needed. The global economy is being held back by a shortfall in demand, while addressing supply constraints is key to lifting potential growth. Risks persist, including in financial markets and from geopolitical tensions.  This year we set an ambitious goal to lift the G20’s GDP by at least an additional two per cent by 2018. Analysis by the IMF-OECD indicates that our commitments, if fully implemented, will deliver 2.1 per cent. This will add more than US$2 trillion to the global economy and create millions of jobs. Our measures to lift investment, increase trade and competition, and boost employment, along with our macroeconomic policies, will support development and inclusive growth, and help to reduce inequality and poverty.

Markets now await the release of U.S. industrial production and capacity at 09:15 EST as well as the Empire State manufacturing index.  Data released overnight aside from Japan’s GDP bombshell were generally second-tier stuff.

The euro area trade surplus widened to EUR 17.7 billion in September, thanks to a 4.2% monthly advance in exports.  The year-to-September surplus of EUR 125.8 billion was 20% wider than a year earlier but embodied export growth of just 1.6%.

Britain’s Rightmove house price index showed a bigger on-year increase of 8.5% in November, up from a pace of 7.6%.

New Zealand retail sales volume grew 1.5% last quarter, best in nine quarters and twice what had been forecast.  The economy’s 57.8 service-sector purchasing managers index dipped by 0.2 points in October but continued to convey a strong pace of expansion.

In contrast, Australian auto sales sank 1.6% on month and 0.5% on year in October.

GDP went up 1.1% on quarter in Thailand but climbed just 0.5% between 3Q13 and 3Q14.  The government revised down its growth forecast in response.

Several countries reported trade statistics.  Norway’s surplus was bigger than forecast, but so was Spain’s deficit.  Italy’s surplus was little changed.  Singapore reported a smaller surplus, and gold imports sent India’s deficit higher.

Moody’s upgraded the credit rating of Cyprus, and maintained its assessment of Spain.  Fitch modified the outlook on its Belgian rating to negative from stable.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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