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Downbeat growth figures from Europe and Japan, released this week, have raised concern about the underlying health of the global recovery. Euro Area GDP declined by 0.6% in the fourth quarter, which was the steepest decline since 2009. Moreover, weakness was spread across the currency bloc, with contraction across both the ‘core’ northern economies and the southern periphery. This reinforces the view that, while investor sentiment toward the Euro Area has improved substantially since the middle of last year, this has yet to feed through to the real economy.
Meanwhile in Japan, a surprise negative Q4 GDP figure may encourage its government to continue with a set of bold stimulus measures. It is to be hoped these policies, adapted by PM Shinzo Abe and the Bank of Japan, will help get the economy moving again. Encouragingly, there were signs of improvement in January’s consumer confidence figures – the first to poll households since Mr Abe’s election victory. On the other hand, the recent G7 statement on exchange rates does raise some questions as to whether Tokyo will face pressure to scale back some of its stimulus measures.
G7 currency statement leaves markets confused
Earlier in the week, the G7 managed to shoot itself in its collective foot after inside sources were forced to ‘clarify’ the real meaning of a communiqué, which financial markets had initially interpreted it as a green light for Japan to continue with its aggressive yen-weakening policy measures. The embarrassing gaffe comes as attention has increasingly turned to the issue of exchange rates, and in particular Japan’s more aggressive stance.
Representatives of the G7 group of advanced economies initially released a statement reaffirming the group’s ‘longstanding commitment to market determined exchange rates’, promising not to ‘target exchange rates’. In what turned out to be an ironic twist, the G7 cautioned that ‘excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability’. The release was immediately taken as tacit approval for the status quo. In particular, it appeared to offer a green light for Japan to continue its current mix of stimulative measures which have sharply reduced the value of its currency.
The Yen fell soon after the statement, as the US dollar rose to above JPY 94. It soon became clear that, while Tokyo had not been singled out or sanctioned for its current policy prescription, it hadn’t been given a vote of approval either. Inside sources quickly came forward to clarify that markets had misinterpreted the statement and that the Yen would indeed be a main topic of discussion at the G20 in Moscow. The Yen gained, quickly reversing the day’s earlier losses. By midnight, USD/JPY closed at 93.3 with an intraday low of 93.0 and a high of 94.4.
Euro Area remains mired in recession
Euro Area GDP fell by 0.6% in the fourth quarter, with widespread contraction across the 17-member currency bloc. The downturn was worse than the 0.4% expected by the median forecaster, and marked the deepest decline since 2009. The previously robust ‘core’ northern economies were not immune, as output slumped by 0.6% in Germany and 0.3% in France. The periphery, meanwhile, continued to flounder. Economic output in Italy fell by 0.9%. Shockingly, the level of GDP in Italy has fallen by 1.4% over the past ten years. Meanwhile, Portuguese GDP declined by 1.8% – its second steepest fall since the introduction of the euro. Finally, Greece announced that activity had fallen by 6% over the previous four quarters, as that country’s modern day depression continues. Mario Draghi and the ECB, have managed to ease investors’ concerns about the long-term survival of the common currency. As of yet, however, very little of this ‘positive contagion’ has been transmitted to the real economy.
Investors’ increasing optimism about the viability of the euro has not only been positive; it means they are now willing to pay more for one. As fears of an imminent currency implosion have receded, investors have ploughed money into what remains the world’s second reserve currency. This has pushed the value of the euro up by 3% on a trade-weighted basis since the beginning of the year, and by over 8% since August. This is worrying as net trade was just about the only source of growth in the four quarters to Q3 (the Q4 breakdown is not yet available), contributing +1.8 percentage points during a period when output fell by 0.3%. The combination of a still-weak global outlook, and a rapidly rising currency, means that net trade is unlikely to provide as much support to the economy as has recently been the case.
Sharp rise in Japanese consumer confidence following election of Shinzo Abe
Japanese GDP fell by 0.4% (AR) in the fourth quarter, after a 3.8% (AR) contraction in the third quarter, as the world’s third largest economy remain mired in an economic slump. The downbeat figure was weaker than expected and points to on-going weakness. At this point, negative quarters should no longer come as a surprise. Japan has been bumping along the bottom with flat to falling growth for many years now. Indeed, since the first quarter of 2008, 10 out of 20 quarters have been negative. Therefore, it is to be hoped that the new more aggressive easing policies, endorsed by PM Abe, will have a positive impact. With that in mind, there are tentative signs so far that this might be the case.
Despite falling output over the final three months of 2012, the New Year appears to have begun on a more positive footing. Measures of consumer confidence in Japan rose sharply in January, following the election of Shinzo Abe as Prime Minister. Consumers appear hopeful, for now at least, that the more stimulative measures promised by their new leader and conducted by the Bank of Japan will eventually translate into an improved outlook for growth and employment in particular – as well as an end to deflation. Within the sub-indices, confidence in the employment situation led the way, with the index rising by 7.6 points – the largest monthly increase since 1994. It is worth bearing in mind that employment has been one of Japan’s relative strengths during its long period of stagnation. Therefore, while welcome, any improvement in the outlook for the labour market may not provide as meaningful a guide to the state of the underlying economy as in other countries.