The two economies that have caused me most consternation so far this year have been the Euro zone (more precisely France and Italy) and Japan. Both reported June quarter GDP this week and neither failed to deliver on low expectations. But don’t expect a rush to action from either the European Central Bank or the Bank of Japan.
Japan activity data has been volatile
recently around the increase in consumption tax that was implemented on April 1st. The March quarter benefitted from strong
pre-tax hike spending which saw GDP expand at an annualized rate of +6.1% only
for the economy to give back more than that gain in the second quarter with a
contraction of -6.8%. While that result
was a tad better than the consensus forecast, those forecasts had been lowered
sharply following the release of weaker-than expected June partial data a
couple of weeks ago.
The detail of the result was weaker than
expected with a larger than forecast decline in consumption of -5.0% (not
annualized!!) and a +1.0 percentage point contribution from private inventory
accumulation. The weak consumption
number supports our assertion that consumer spending in Q2 would not only
suffer from the payback from Q1 but also from the reduction in real incomes. Exports were also disappointing but a large
drop in imports led to a better than expected positive contribution from net
Looking ahead the consumption result was so
weak there must be a bounce back the other way in Q3. That said, inventories will probably be a
drag on growth the next quarter. I’ve
bumped up my Q3 forecast to an annualized 3.5% followed by a return to around trend
in Q4. That results in annual average
growth of 1.1% for the calendar year.
Euro zone GDP was unchanged in the June
quarter. Germany was weaker than we were
forecasting (-0.2% q/q) while Portugal (+0.6% q/q) the Netherlands (+0.5%) and
France (no change) were better than expected.
I’m less worried about the result from
Germany. The Q2 result appears to be a
bit of payback from the strong good-weather-related Q1 result. But I continue to be concerned about the
outlook for both France and Italy (the serial non-reformers). Both will remain a drag on overall Euro zone
I don’t expect the Euro zone to slip back into
recession. Highly stimulatory monetary
conditions, lower fiscal drag and a gradual recovery in global growth should
see recession avoided. But I also don’t
expect anything near robust growth in the second half of the year. Our forecast of only modest growth in the
second half of the year is expected to result in annual average growth of 0.8%
for calendar 2014.
Neither the Bank of Japan nor the European
Central Bank are likely to respond to the latest news with new stimulus any
time soon. But there is still a chance
they will do more later in the year. For
Japan the key to further monetary policy action is how growth plays out in the in
the second half of the year – so it’s still too early.
The ECB undertook new stimulus measures in
June including the new TLTRO program. We
expect they will want to wait to see what impact that has before deciding on
the need for any new measures. Also the
Euro is now lower which will contribute to higher inflation. We expect this will accelerate once
the Fed starts to raise interest rates and we see a stronger USD – but that’s a
story for next year.