Japan emerges from deep recession
Exports rose 6.3% from the previous quarter, the biggest gain since the second quarter of 2002
- guardian.co.uk, Monday 17 August 2009 08.16 BST
- Article history
Japan has emerged from its worst recession since the end of the second world war, recording its first quarter of growth for more than a year amid a rise in exports.
Japan's fledgling recovery saw gross domestic product (GDP) rise at an annualised rate of 3.7% from April to June, and by 0.9% from the previous three months, the cabinet office said.
Exports rose 6.3% from three months earlier, the first increase since the start of 2008 and the biggest gain since the second quarter of 2002.
The emergence of the world's second-largest economy from recession follows last week's news that Germany and France – the two biggest economies in the eurozone – returned to growth in the second quarter.
Freefalling global demand for the consumer durables on which Japan built its economic success – notably consumer electronics and cars – were to blame for dragging it into a recession from which few believed it would emerge so quickly.
The guarded optimism now surrounding Japan is shared elsewhere.
The US economy shrank at an annualised 1% last quarter, its smallest contraction in a year, while the 0.1% contraction seen in the eurozone was its best showing for more than a year. China's economy, helped by a vast $586bn (£357bn) stimulus package, grew 7.9% from a year earlier.
The figures appear to bear out prime minister Taro Aso's assurance that Japan would be one of the first major economies to emerge from recession, although polls suggest they probably will not be enough to save his Liberal Democratic party from defeat in the general election in a fortnight's time.
Though parts of his ¥25tn (£160bn) stimulus package were derided – in particular the cash handouts to all residents – those, together with subsidies for fuel-efficient cars and green electrical appliances, have produced at least some short-term benefits.
Experts warned, however, that the recovery could quickly fizzle out without improvements in demand at home, where falling wages and job fears have hit household spending.
Unemployment is at a six-year high of 5.4% and could rise to a record 5.8% next year. In addition, wages fell 1.7% in the last quarter, while consumer spending, which accounts for 55% of the economy, rose just 0.8% from the previous three months. Public investment, buoyed by the government stimulus, was up 8.1%.
Private capital investment dropped 4.3% from the previous quarter, while housing investment fell 9.5%, the government said.
Hiroshi Watanabe, an economist at the Daiwa Institute of Research in Tokyo, said: "When you look at the numbers, the contrast between external demand and internal demand is as clear as night and day. With payments falling, it's really hard to expect individual spending to hold up."
Still, even modest, export-led growth offers respite after more than a year of contraction that included a record 13.1% annualised drop in GDP in the last quarter of last year and an 11.7% fall in the first quarter of this year.
Yoshimasa Hayashi, the economic and fiscal policy minister, warned of continued threats to sustained recovery. "Production is still at a low level, and worries remain that employment conditions will worsen," he said. "So we must watch the downside risks."
Pessimism Still Grips Wall Street
Pessimism about the global recovery settled over world markets, including Wall Street. Above, traders at work at the New York Stock Exchange.
In recent weeks, it seemed as if nothing could hold back investors trying to will a recovery into reality. Stocks gained week after week, adding up to a 42 percent rise since mid-March, despite troubling news of bank loan defaults, mixed corporate earnings reports and lukewarm forecasts from Federal Reserve Bank officials.
Then consumer data sobered investors.
With signs re-emerging that battered American businesses, hamstrung by tight consumer spending, will struggle for revenue growth the rest of this year, investors sent the major markets into their steepest fall in six weeks.
“There’s concern that the market had gone too far,” said Nigel Gault, chief United States economist at IHS Global Insight.
The Dow Jones industrial average fell 186.06 points, or 2 percent, to close at 9,135.34. The broader Standard and Poor’s 500-stock index dropped 2.43 percent, or 24.36 points, to 979.73, while the Nasdaq composite index shed 2.75 percent to 1,930.84.
Acknowledging continuing weakness in critical parts of the economy, the Federal Reserve and the Treasury announced Monday that they were extending a program to spur consumer and business lending for several more months. The program known as Term Asset-Backed Securities Lending Facility, or TALF, had originally been scheduled to expire at the end of 2009.
A key part of it has been dedicated to propping up the commercial real estate market, which has recently been plagued by mounting loan defaults at small and regional banks. Colonial BancGroup, a lender based in Montgomery, Ala., that collapsed Friday, was the biggest bank to fall this year.
“The Fed is extending TALF because commercial real estate is still very much a trouble spot,” said John Lonski, chief economist at Moody’s Capital Markets. “The high ranking officials only say that we’ve bottomed out and the recession has ended. But the equity market has already priced in the start of a recovery. There’s a dichotomy between the two camps.”
Adding to Wall Street’s pessimism were jittery Asian investors who feared that a sustained weakness in American spending would threaten recovery in export-dependent countries like Japan and China.
Markets in Shanghai and Tokyo posted their worst one-day drops in months. The Shanghai composite index plummeted 5.8 percent, taking its total decline since Aug. 4 to 17 percent and further eroding a rally that had sent it up more than 80 percent in the first seven months of this year.
“It’s almost an Asian flu that the markets caught today,” said Art Hogan, the chief market analyst at Jeffries & Company. “Creeping into the conversation now is, when do we see top-line revenue growth? When is the consumer going to take over from government stimulus? But the answer is consumer data has been less than spectacular.”
Lowe’s, the home improvement chain, reported weaker earnings on Monday, which seemed to encapsulate American retailers’ continuing struggle to pry open consumers’ pocketbooks. The chain reported a 19 percent drop in profit from last year after sales fell $500 million short of expectations.
Other corporate news reinforced the belief that consumers are still in poor shape.
Bank of America and Capital One Financial said credit card defaults rose in July.
Intel, which generates about 60 percent of annual sales from Asia, saw its shares dipped 1.7 percent and I.B.M. fell 1.4 percent after economic growth in Japan trailed forecasts.
But there are signs that industry may be rebounding more quickly. According to data released Monday, New York State’s manufacturing showed growth in August. Economists at the Federal Reserve Bank in New York ratcheted up the state’s general economic index to 12.1, the highest it has been since April 2008.
“The manufacturing survey shows us returning to growth,” said Mr. Gault of IHS Global Insight. “That’ll dampen some of the initial negative sentiment from overseas.”
As stock prices sank, investors headed for the relative safety of government debt, driving up bond prices. The benchmark 10-year note rose 27/32 to 101 10/32. The yield fell to 3.47 percent, from 3.57 percent late Friday.
The price of oil retreated again to settle at $66.75 a barrel as consumer outlook undermined future energy demand. The drop occurred despite the looming threat of hurricanes and tropical storms that could curtail supply.
ConocoPhillips fell 3.2 percent to $42.36 after oil prices reached a two-week low.
“Oil prices were exaggerated because growth demand was exaggerated,” said Fadel Gheit, the managing director of oil and gas at Oppenheimer Funds. “Prices are still inflated.”
Asian markets were broadly lower. The Nikkei 225, Japan’s main index, dropped 3.1 percent — its worst performance in nearly five months. The benchmark market gauges in Singapore, South Korea and Thailand also fell.
The Bombay Stock Exchange’s Sensex index and the India Nifty index each dropped about 4 percent. And the Hang Seng in Hong Kong shed 3.6 percent in its largest decline since late March.
The sharpest declines were in mainland China, where homegrown uncertainties about the direction of bank lending have helped deflate a rally that many analysts had long warned would be unsustainable.
“The market in China was clearly seeing a bubble that was partially driven by massive lending by state-controlled banks,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.
European markets, too, started the day in a gloomy mood. The major indexes in Germany and France finished 2 percent lower. The FTSE-100 in London was down 1.46 percent.
Following are the results of Monday’s Treasury auction of three- and six-month bills:
This can't be the recovery yet ... can it?
Markets are soaring, but many analysts remain troubled, write Katie Allen and Andrew Clark
- The Observer, Sunday 16 August 2009
- Article history
Can it really be over? Are those nerve-shattering days of financial panic merely a memory? The stockmarket certainly seems to be telling us so after a swifter, harder rally in share prices than anybody had dared to contemplate.
The FTSE 100 has rallied 34% since its nadir five months ago. On Wall Street, the Dow Jones Industrial Average has gained a startling 42.4% to 9321 since it bottomed out at a 12-year low of 6547 in March. The broader Standard & Poor's 500 index broke a psychologically significant barrier this month by reaching 1,000 points for the first time since November.
A quick glance down a list of popular shares shows just how energetic the bounce has been. On the FTSE 100, HSBC has doubled since the market's low point. In the US, Macy's has leapt 128% and Apple's stock has doubled.
The golden question is whether it can last. To date, the market's recovery has been V-shaped but a further shock could well turn that into a W. A growing number of experts are beginning to worry that the rally has set off too fast and could shortly run out of steam.
"It is extremely dangerous to have a rally of 35% over six months without a pull back," says David Buik at BGC Partners in London. He predicts the dollar will strengthen, knocking oil, other commodities and US equities, and therefore other stock exchanges.
Still, the FTSE has further to go before the end of the year, Buik predicts. "As a result of [investors' approval for] cost-cutting exercises and huge redundancy plans the FTSE will probably hit 5,100 by the end of December."
Strategists at Morgan Stanley have analysed 19 previous long-term bear markets, including the US in the 1930s and Japan in the 1990s, to gain some insight into where markets may be headed. They found the usual rebound rally is 71% over 17 months. Given Europe is now up some 40% from its trough, in five months, "if it ends here, it would have been a very small rebound rally," they note.
The bank's equity strategist Graham Secker sees further gains for the FTSE 100 for the rest of this year. But the rally will be in the order of a modest 10%. "Our view is, by and large the market can continue to grind higher, rather than soar higher, until we get close to a new cycle of higher interest rates."
In the meantime, investors will have to get used to volatility. This year has seen four cycles so far: the plunge in February and March; a rally, a fallback in June; and then the current rally.
At ground level, the picture is still a miserable one. Unemployment in Britain has surged to 2.435 million, the highest since 1995. The economy contracted faster than feared in the second quarter and the Bank of England warns recovery could be "slow and protracted".
Although US unemployment was not quite as bad as expected in July, employers still axed a quarter of a million jobs. A record 360,000 homes faced foreclosure proceedings last month, and retail sales dipped by 0.1%.
But there are some justifiable grounds for the market's recovery. Widespread relief that the world was not spiralling into a 1930s-style depression prompted the rally in March and April. Good earnings reports are the big driver in this latest surge. The credit freeze has begun to thaw and the markets have had a lift from the sheer volume of cash pumped into the economy by central banks.
But stockmarkets still face some big questions. "The cyclical variables are increasingly favouring the market. The structural issues still remain problematic," says Jim Reid, head of European equity strategy at Deutsche Bank. "Governments are heavily borrowing from the future to stop the short-term implosion and you've got a banking sector which is still bloated."
If government bond yields start to rise, shares will lose some of their shine. Reid predicts banks and consumers will not be able to take up the slack and we will see "notably lower equity markets".
Andrew Milligan, head of global strategy at Standard Life, also sees a number of tensions in stock markets. "For a couple of weeks now there has been a growing rumble within the broking community that this rally looks like it is getting long in the tooth," he says. "It would be no surprise at all to see a market correction into the autumn."
Barclays Capital's chief US market strategist, Barry Knapp, says one concern is that the original slow-motion market crash, between October 2007 and March 2009, was not as dramatic as it might have been. "Our base premise is that we never really believed the market got exceedingly cheap," says Knapp. "Expecting a long period of above-average returns over the next couple of years is unrealistic."
Technical calculations add to a picture of stocks in a hurry. Mary Ann Bartels, chief US market strategist at Merrill Lynch, says an unusually high 88% of US stocks are above their 200-day moving average. This ratio last reached 90% just before a market correction in March 2004. She predicts that stocks could slip back by 15% to 20%.
For many analysts a concern remains that instead of achieving better sales, many companies have simply cut costs with ruthless efficiency.
08/17/2009 12:00 AM
'TINY GREEN SHOOTS OF HOPE'
Is the Recession Really Over?
By Christian Reiermann and Thomas Schulz
After going into a tailspin for a year, the German economy is experiencing slight growth once again. But experts are divided over whether it is merely a temporary respite or a sign of genuine recovery.
Germany's two main political parties, the conservative Christian Democrats and the center-left Social Democrats, may have locked horns as election campaigning in Germany begins in earnest. But when it comes to the state of the domestic economy at least, the two rivals are, as of last Thursday, on the same page -- and united in their determination to not be overly optimistic.
A construction worker at the new China World Tower in Beijing: China has announced growth of 8 percent in the second quarter.
A few hours earlier, the Federal Statistics Office in the western city of Wiesbaden had declared an end, albeit a preliminary one, to the worst recession in the history of postwar Germany. In the second quarter of 2009, the statistics experts announced, the German economy grew by 0.3 percent compared with the first quarter.
In light of the preceding dramatic declines, there was little reason for excessive enthusiasm, which explains the hesitant approach taken by the members of Merkel's cabinet.
"There are more and more indications that things are slowly going upwards again," said a cautiously optimistic Finance Minister Peer Steinbrück, who belongs to the SPD. Even Economics Minister Karl-Theodor zu Guttenberg, a member of the CDU's Bavarian sister party, the Christian Social Union, kept his comments muted. "We should be encouraged by these numbers," he said, but simultaneously cautioned against euphoria.
'A Bit Surprising'
But after months of bad news, including recurring bank troubles, company bankruptcies and sharp declines in production, other observers were surprisingly quick to express their relief. "Germany is awakening from the recession," the respected center-left broadsheet Süddeutsche Zeitung wrote in its cover story. And the Financial Times Deutschland struck a note of celebration: "The German economy is taking off once again."
Even professional observers of the economy could hardly believe their eyes. "It's really a bit surprising," admits Gustav Horn, the head of the Macroeconomic Policy Institute (IMK), which has links to Germany's unions. Like many of his fellow economists, Horn had expected zero or slightly negative growth.
In any case, economies worldwide appear to be recovering from the state of shock induced by the crisis. The news coming from the United States, the epicenter of the economic tremors of the last two years, is surprisingly positive. The rate of growth is beginning to pick up, the wave of job cuts is slowly subsiding and many companies are already taking a more optimistic view of the future.
On the other hand, foreclosures are at a record high in the United States, a repercussion of the American real estate crisis, the effects of which could very well be felt around the world for a long time to come.
German economic growth is still well shy of, for example, the 8 percent China is already reporting. Nevertheless, the latest statistics from Wiesbaden are part of a wave of positive news that has market players and politicians breathing a sigh of relief.
The Ifo Business Climate Index for industry and trade, for example, has been rising for months. Such barometers of the general mood provide an indication of companies' and consumers' expectations for economic development in the coming months.
Signs of Stabilization
Even more important is the fact that production volume in German industry increased by 4 percent in June compared with May. The total number of orders is also rising once again, by leaps and bounds in some cases. In June, exports were up a surprising 7 percent.
But the German economy is also faced with its share of contradictions, with industry insiders admitting that companies are cutting jobs at the highest rate since 2002. Nevertheless, the overwhelmingly positive data have even prompted skeptics to concede that the recession may have come to an end.
"There are in fact a number of signs of stabilization at the moment," says Jürgen Stark, chief economist at the European Central Bank. According to Stark, these assessments are no longer based solely on polls, "but are increasingly being confirmed by actual economic data."
The upturn is attributable to the proactive efforts of national governments to combat the crisis. The German government, for example, has introduced two economic stimulus programs, and the measures are beginning to work. Other factors contributing to the upturn include the central banks' low interest rates and current price trends. Many products, most notably gasoline and food, are significantly cheaper than in 2008. This increases buying power and stimulates consumption, at least in Germany.
Last week German statisticians confirmed the first annual decline in consumer prices in the country for more than 22 years, with the country's Federal Statistics Office releasing figures showing that consumer prices had dropped 0.5 percent in July compared to the same month last year. This acts as an additional stimulus program, because it reduces costs for consumers by billions of euros.
Fears of the W
But what comes next? Is the cautious growth in the second quarter merely a temporary blip or the beginning of a real turnaround? Economists are applying several different theories in an attempt to predict the future.
The majority of economists long believed that the current recession could be characterized by an L-shaped curve: a rapid drop, followed a prolonged period of virtually no growth. The advocates of the L-shaped recession theory are currently on the wane, while a V-shaped curve seems increasingly likely: a rapid drop, followed by a speedy recovery. Others believe a slower, U-shaped recovery is more realistic.
One of the optimists is Michael Heise, the chief economist of German insurance giant Allianz, who predicts that growth rates of 2 to 3 percent next year are within the realm of possibility.
But a large number of economists fear that the current downturn may turn out to be a W-shaped recession: a brief recovery followed by another collapse.
The W-shaped scenario cannot be ruled out, says IMK economist Gustav Horn. "The worst is over, but not on the job market," he says, arguing that unemployment always lags a few months behind the actual economic trend.
Lurking Risks
This is also the reason why not all experts are convinced that the economy is in fact turning around. "Current developments in the labor market have real potential for causing a setback," says Kai Carstensen, who is head of the economic trends department at the Munich-based Ifo Institute for Economic Research. According to Carstensen, consumption will suffer if a significant number of people become unemployed soon, after the end of Germany's short-time work program, whereby employees work shorter hours and the state makes up part of their lost income. This, in turn, could quickly put an end to tentative growth.
Other problems could arise when economic stimulus programs, such as Germany's scrapping bonus for cars, expire. Besides, not all risks in the financial sector have been warded off, and new problems in the banking sector cannot be ruled out.
All caveats aside, Ifo economist Kai Carstensen still expects growth to accelerate in the third quarter. He predicts it could exceed 0.5 percent. Some analysts are already correcting their initial forecasts, although the changes remain cosmetic at best.
Carstensen estimates that the German economy will shrink by about 5.5 percent for the year as a whole, and not 6 percent, as originally predicted. Joachim Scheide of the Kiel Institute for the World Economy (IfW) agrees with Carstensen's assessment. Both economists also expect the German economy to continue growing in 2010, though not with any significant force. Scheide expects that "we will spend the entire year hovering just above the zero line."
'The Worst May Be Behind Us'
In the United States, on the other hand, the mood is becoming decidedly buoyant. The US economy is expected to grow at an annualized rate of 2.4 percent in the third quarter. Three-quarters of the 50 economists surveyed by the Wall Street Journal last week are convinced that the recession will end in the United States before the summer is out -- or that it could already be history.
"It's over," economists at Barclays Bank announced a few days ago. For the first time in more than a year, unemployment is down, although the decline, from 9.5 to 9.4 percent, is barely noticeable. Imports are up, also for the first time in more than a year. And stock prices have risen by 40 percent since March.
Like Chancellor Merkel, US President Barack Obama's official take on the positive economic news has been cautious. "The worst may be behind us," Obama said. Nevertheless, the administration in Washington is already taking the credit for the change in the overall mood. "The fingerprints of the (Obama administration's) Recovery Act are all over this data," said Jared Bernstein, Vice President Joe Biden's chief economist.
The talk these days in the United States is less about if the recession is over than why it is over. "What if in the end they got it right?" the New York Times asked, referring to the US administration's economic experts such as Treasury Secretary Timothy Geithner and White House economic adviser Larry Summers, who have been accused in recent months of serious errors in judgment.
Even critical observers like Nobel laureate Paul Krugman, and pessimists like economist Nouriel Roubini, one of the few to have predicted the crisis in all its fury, now support the government's efforts to combat the recession.
They argue that Ben Bernanke, the chairman of the US Federal Reserve, should be reappointed, because, as Roubini wrote in the New York Times, he "averted the L-shaped near-depression that seemed highly likely."
Harvard economist Kenneth Rogoff agrees. "The Obama administration has done a great job of warding off the risk of a new Great Depression," he says. However, Rogoff argues, this doesn't necessarily mean that a strong recovery is on the way. "This wasn't a normal recession, but an epic event," he says. Rogoff believes that growth is unlikely to top 2 percent in the coming years. The country, according to Rogoff, "had a heart attack, and it'll take some time to recover from it."
Don't Double Dip
Caution is indeed indicated, particularly with unemployment levels expected to remain high in the United States for some time. Experts estimate that the unemployment rate will not consistently fall below 7 percent until 2012. The Fed even expects unemployment to rise above 10 percent. As a result, very few experts expect a fast, sustained economic recovery, and they believe that growth will remain at only about 2 or 3 percent in 2010, although it could very well rise sharply after that, in their opinion.
A small but vocal minority of economists is not even convinced that will happen. They fear that Americans will fare the way they did in the early 1980s, when a sharper than expected upturn was followed by yet another downturn. US economists refer to the phenomenon of the W-shaped curve as a "double-dip" recession.
The possibility of that happening certainly exists. High unemployment will continue to curb American consumer spending, which accounts for 70 percent of economic output. Retail sales declined by another percentage point last month, despite the billions the US government is spending on its "cash for clunkers" program, modeled on Germany's scrapping bonus for cars.
Consumer debt also remains high among Americans. Many homeowners owe more on their mortgages than their houses are worth. And it is by no means clear just how stable the situation is among banks, whose balance sheets are still burdened with hundreds of billions of dollars in subprime mortgages and other toxic securities.
Pessimists, almost taking perverse pleasure in the direness of the situation, are pointing out supposed parallels to the world economic crisis of the early 1930s. Then, newspapers, experts and government agencies repeatedly declared the crisis to be over, only to see the economy slump again shortly afterwards.
Such cautionary tales have kept Chancellor Merkel from using overly optimistic language. Late last week, she praised what she called "tiny green shoots of hope" -- as if she were personally responsible for protecting them from harm.
Translated from the German by Christopher Sultan
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