Japanese GDP Flopped

August 15, 2010

After suspiciously robust annualized growth of 4.1% in 4Q09 and 4.4% in 1Q10, Japanese growth virtually stalled last quarter, edging just 0.4% above the first-quarter level.  Growth in the major advanced economies was extremely diverse in the second quarter.  Japan did the worst, the aforementioned 0.4%.  Then came the United States with a 2.4% annualized pace, but subsequent data like the spiking trade deficit strongly suggest that estimate will get revised downward to 1.5% or less.  Real GDP in the euro area increased about 4% annualized, and Germany topped the leader board with a fantastic 9.0% annualized rate of expansion.

Germany also had the best on-year rate of economic growth, 3.7%.  In second place was the United States, whose GDP rose 3.2% between 2Q09 and 2Q10, although that figure will be revised a little lower.  Four-quarter growth was similar in Japan (2.0%) and the euro area (1.7%).  From their cyclical troughs, GDP has recovered 4.5% in Japan, 4.2% in Germany, 3.2% in the United States, but only 1.7% in the euro area, where some countries like Greece remain in recession.  From the prior cyclical peaks before the world recession, real GDP in Japan still shows a substantial net drop of 4.6%.  Revised data show truly horrendous GDP contractions in Japan of 10.0% annualized in 4Q08 and 16.6% in the first quarter of 2009.  The euro area’s GDP remains 3.5% below its previous cyclical peak, and even German GDP lies 2.7% under its peak.  The United States, where GDP is just 1.1% under its cyclical high, is most advanced in the recovery to its former level.  If U.S. GDP were to embark on a fresh decline, that fact would also support the contention that a new recession has begun rather than viewing the shrinkage as part of the original recession.

In the second quarter, Japanese exports soared 25.9% annualized, and net exports augmented real GDP growth by 1.3 percentage points.  Inventories and government spending exerted drags of 0.7 percentage points and 0.4 percentage points, respectively.  The biggest disappointment occurred in personal consumption, which edged just 0.1% higher.  Non-residential investment growth of 1.9% was similar to the pace in 1Q10, while residential investment fell by 5.0% after rising 1.2% in the first quarter.  Private domestic demand accounted for just 0.2 percentage points of GDP growth between the first and second quarters, a much weaker result than in the United States where the contribution was 3.2 percentage points.

Japanese GDP advanced 2.0% between the second quarter of 2009 and the second quarter of 2010.  Private domestic demand was responsible for 0.9 percentage points of on-year growth, half as much as the U.S. share.  Net exports in Japan produced 1.7 percentage points of on-year growth.  In contrast to the United States where inventories produced 1.9 percentage points of on-year GDP growth, inventories in Japan exerted a 0.7 percentage point drag.

Arguably the most shocking fact to emerge from Japan’s published national income accounts is a 3.7% annualized plunge in nominal GDP.  The GDP and personal consumption price deflators were each 1.8% lower than in the second quarter of 2009.  Deflation made a big comeback during the great recession and has persisted during the ensuing recovery.  The GDP deflator has recorded calendar year rises since 1994 just twice, 0.1% in 1994 and 0.5% in 1997.  Prices were unchanged in 1998, reflecting a value added tax increase.  All other calendar years saw the deflator fall by at least 0.7%. 

Fed officials continue to work hard to make sure a similar insidious economic disease doesn’t take root in the United States.  Japan’s data can be expected to feed the momentum of risk aversion in all markets seen last week.  At this writing, the Nikkei is down 1.6% on the day and approaching 9100.  By comparison, the Nikkei was a bit over 17K when the world financial crisis began three years ago, and it peaked at 38,916 at the end of 1989.  Japanese debt has climbed to nearly twice the size of GDP, yet the ten-year JGB yield is only 0.97%.  The condition of real and nominal economic growth are far greater long-term interest rate determinants than the size of deficit spending in Japan.  Why wouldn’t that also be the case in the United States?

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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