My Weekly Column – September the 28th

It was initially published in French here

Different elements must be noticed this week to understand the macroeconomic outlook

The first element is Janet Yellen’s speech. She talked one week after the press conference following the last Fed’s monetary committee. In her discussion of the US monetary policy, everyone was able to find what he wanted to find. Pros and cons of a rate hike have arguments in her speech to feed their own perception. The situation remains highly uncertain on monetary policy side

The second point is related to the French economy. With the second GDP estimate for the second quarter, we have details on behaviors. Before that, we note that the French profile is marginally stronger. The first quarter GDP growth is still at 0.7% (non-annualized rate) and the second at 0% but the carry over growth for 2015 is higher at 0.87% versus 0.83%. To converge to 1% which is the government target, a mere 0.18% is needed in each of the two remaining quarters of this year. Before the new estimate it was 0.25%. Continue reading

3 graphs on the Japanese recession

The Japanese economy is back into recession. After the deep drop of the second quarter due to the VAT rate hike on April the first, the negative momentum has not been reversed. (see chart 1).
GDP dropped by -1.6% at annual rate in the third quarter after -7.3% during the second quarter. Compared to Q3 2013 GDP is down by -1.1%. Carry over growth for 2014 is still positive but by a mere 0.2%.
It seems that Shinzo Abe has postponed the second VAT rate hike that was scheduled for October 2015. He is right as in a very weak global environment, the Japanese economy will have to find resources in itself to converge to a growth trajectory. A new negative shock is not necessary.
It will be complicated for Japan to escape to a long recession. From my point of view, we can expect a recession of several quarters. In 1997 after the VAT rate hike, the shock was milder than the current one but the recession lasted 5 quarters.
The very accommodative monetary policy can help to recover. Weaker yen and negative real interest rates will help.
In details (see 2nd graph), there was a small rebound in consumption during the third quarter (+1.5% annual rate) after -18.6% during Q2. Investment was down again in the third quarter: -2.2% after -16.6%. Due to a positive contribution from government expenditures, internal demand had a small positive contribution: +0.65% versus -14.7% in Q2. (see 3rd graph)
Net export has a positive contribution as exports regain a stronger momentum. But contribution from inventories was negative. Companies has accumulated inventories in Q2 but reverse the movement in Q3. That explains the fall into recession of the Japanese economy
Japan-2014-Q3-GDP-trendJapan-2014-q3-ContribJapan-2014-Q3-Int-Demand

An Unprecedented Negative Shock on the Japanese Economy in the second quarter

I have already spoken a lot on VAT rate hike in Japan and the negative impact that this fiscal measure has had on the economic outlook (see here, here and here)
The negative GDP growth number for the second quarter was not a surprise. It dropped by -6.8% (at annual rate) after +6.1% during the first three months of this year. Compared to the second quarter of 2013 growth is at 0%. Carry over at the end of the first semester is 0.5% for 2014.

The first chart presents the Japanese GDP profile since 2000. The red line is a trend calculated from 2000 to Q2 2008. At the end of the second quarter of 2014 the gap between the GDP level and the trend is -8.7%. The GDP level is 8.7% below the trend. Continue reading

Japan – The negative impact of the higher VAT rate on sales can still be seen in May

The increase of the VAT rate on April the 1st was an important event in Japan but also for the world economy. The success or failure of the Abenomics was partly dependent on the impact of this increase on Japanese consumers’ behavior. We now have figures from department stores’ sales in May.
One month ago I did a first evaluation of the higher VAT rate on sales (here in French for department stores and here in English for retail sales). This post is an update.
In April department stores’ sales dropped dramatically after the VAT rate hike. March figures were strong in anticipation of this increase.
This dynamics was the same than in 1997 during the previous VAT increase.
Is there a difference in May? Continue reading