Japan
The worst financial crisis in 80 years has begun to take its toll on the global economy, and the OECD has forecast contractions in the United States, Europe and Japan in 2009. The crisis could drag Japan’s gross domestic product down for the full year to March 2010.
According to the Japanese Economics Minister, the economy may not grow in the fiscal year starting next April, issuing one of the bleakest comments yet on the impact of the economic downturn. A prolonged contraction would be bad news for the Japanese government’s fiscal situation, as it would mean less tax revenue at a time when it is saddled with a mountain of debt.
The second largest economy in the world had slipped into recession for the first time since 2001. The gross domestic product had contracted at an annual rate of 0.4 per cent in the three months up to September, its second consecutive quarter of negative growth.
The Organisation for Economic Co-Operation and Development (OECD) projects that 2009 GDP will grow 0.1 per cent in Japan, compared with 0.9 per cent in the US and 0.5 per cent across the Eurozone. The economy is less vulnerable. But economists and analysts worry that the dearth of consumer confidence, despite a low unemployment rate of about 4 per cent, could weigh heavily in the long run.
In the second quarter of fiscal 2008, the nation’s seasonally adjusted gross domestic product shrank 0.1 per cent quarter-on-quarter in price-adjusted real terms, following a 0.9 per cent fall in April-June. On an annualized basis, GDP contracted 0.4 per cent. In nominal terms, GDP shrank 0.5 per cent quarter on quarter for an annualized decrease of 2.1 per cent. Japan could not escape the effects of the global economy’s rapid downturn.
External demand, or net exports, had an effect of dragging down real GDP by 0.2 basis points, the biggest negative contribution since July- September 2002. Domestic demand served to push up real GDP by 0.1 percentage point.
Exports, which had been a key engine of growth, rose 0.7 per cent, rebounding from a 2.6 per cent fall in April-June but not growing as strongly as in the preceding quarters, when export growth steadily surpassed 2 per cent. Demand from abroad deteriorated for such items as automobiles, telecommunications equipment and special industrial machinery. Imports jumped 1.9 per cent, reflecting rises in imports of oil products and nonferrous metal products. The GDP deflator, a key yardstick for price trends, fell 1.6 per cent from a year before.
Government data showed that Japan’s economy slipped into recession with a 0.1 per cent contraction in the third quarter, marking the second straight quarter of contraction. Some economists say Japan could be headed for a record four straight quarters of contraction and that the worst is yet to come following the financial maelstrom since mid-September. The October-December quarter and the following one will be the most crucial stage for the Japanese economy in the current downturn.
The economy is likely to contract next fiscal year when it issues its annual economic forecast in mid-December. It would be the first time that this forecast, which the government uses in drafting the budget and an outlook for tax revenue, has pointed to a contraction since its start in 1955. If the outlook for tax revenues is lower than the current fiscal year, the Japanese government would be required to issue more debt to finance the budget, further hurting the country’s fiscal health. Tax revenues for the current fiscal year to March 31 could be up to 7 trillion yen ($72.4 billion) short of the initial forecast due mainly to a sharp fall in corporate profits.
As a result, new debt issuance for this year is likely to exceed the government target of 30 trillion yen, the paper said. Tokyo has compiled austere state budgets in the past few years to rein in a huge state debt, which is nearly 150 per cent of the nation’s gross domestic product and the worst among developed nations. Meanwhile, Japan’s financial sector is bracing itself for the bankruptcy of the investment bank as eight major banking groups own a combined 320 billion yen ($3.05 billion) in bonds or loans tied to the Lehman Brothers. And more than 40 per cent, or some 140 billion yen ($1.33 billion) of the total amount, is not secured with collateral or other means.
Japan’s banks and insurers expect a total of 245 billion yen ($2.33 billion) of potential losses from the collapse of Lehman. Regional financial institutions are also easy prey for the turbulence brought by Lehman’s failure as thirty regional banks possess 61 billion yen ($581 million) in its bonds or loans. In addition, there are 195 billion yen ($1.86 billion) of Lehman-issued smurai bonds circulating in Japan.
Japan’s banks have deposits that exceed the value of their loans by a third. Busy repairing their balance sheets after bank and brokerage failures in the late 1990s, lenders also stayed clear of the risky investments that decimated Wall Street. Sub prime-related losses at Japan’s banks add up to $15.5 billion, just more than half those booked by Charlotte, North Carolina-based Bank of America Corp. alone -- and only about 2 per cent of the world total.
China
China’s economy grew 9.9 per cent year-on-year in the first three quarters of this year, compared to 10.4 per cent achieved in the first half of 2008, showing the impact of the current global financial turmoil on the world’s fastest growing economy.
For the third quarter, GDP growth rate slowed to 9 per cent, which was the lowest in five years, announced the China National Bureau of Statistics. China’s GDP grew by 10.6 per cent and 10.1 per cent in the first and second quarters of this year respectively.
The total GDP for the January-September period included 2.18 trillion yuan generated by the primary sector, up 4.5 per cent, 10.11 trillion yuan by the secondary sector (including manufacturing and construction), up 10.5 per cent and the tertiary sector (mainly services) was up 10.3 per cent, contributing 7.87 trillion yuan.
At the same time, China’s inflation has been easing gradually from June’s 7.1 per cent, 6.3 per cent in July, and 4.9 per cent in August and close to a 12-year-high of 8.7 per cent in February. In September, the Consumer Price Index rose 4.6 per cent against the corresponding period last year.
China’s inflation rate hit a 17-month low of 4 per cent in October, down from 4.6 per cent the previous month. The figure is the lowest since May last year, confirming a trend for weakening inflation in the world’s fourth-largest economy, as growth creation becomes more of a policy concern.
In the first 10 months of the year, China’s consumer price index increased 6.7 per cent from the same time last year. China’s fourth quarter CPI is likely to fall within Beijing’s target of 4.8 per cent, but high inflation in the first half of the year means it is unlikely to meet its target for the whole year.
China’s retail sales, another important economic indicator, increased by 22 per cent year-on-year in the first three quarters and climbed 23.2 per cent in September alone. Analysts say China would have to further stimulate domestic consumption in order to push the economy forward amid an export slump.
The combination of an economic slowdown and easing inflation may give rise to louder calls for loosening the monetary policy and adopting a more proactive fiscal policy. Analysts expect more monetary easing, building on two cuts in interest rates and banks’ required reserves since mid-September
The global economic slowdown is taking its toll on China’s exports, one of the three major drivers of the Chinese economy along with investment and consumption. In the first three quarters, exports grew 22.3 per cent, down 4.8 per cent points from the same period last year. Chinese exporters are facing a difficult situation as they grapple with a combination of rising production costs, appreciation of the yuan and slackening demand amidst the global slowdown.
Fixed assets investment totaled 11.6246 trillion yuan ($1.66 trillion) in the first three quarters of 2008, up 27 per cent over the same period last year, according to the bureau.
China would be ‘very cautious and very watchful’ during the crisis. The basic lesson is that China has already been opening its doors for 30 years. The Chinese trade surplus surged to $35.2 billion in October “the biggest monthly surplus ever” mainly on the back on a sharp decline in import growth from 21.3 per cent to 15.6 per cent. One reason for the slowdown in imports is the fall in commodity prices.
This indicate that import volume growth has slowed sharply and in October this year, import volumes were lower than in the same month of last year. China’s exports to the United States, the European Union and Japan all registered a slowdown in. Many analysts attribute the slowdown in imports to China’s slowing economic growth, which expanded 10.4 per cent year-on-year in the first half of 2008, compared with 11.4 per cent last year.
Last month’s trade surplus hit a monthly record US$28.7 billion, up 14.9 per cent on a year ago. Fixed-asset investment rose 29.1 per cent, with real estate growth outpacing total growth. With shrinking exports and fixed investment possibly leading to economic growth of less than 10 per cent this year and 9 per cent in 2009, analysts expect Beijing may relax its lending policy, cut taxes and curb energy price rises.
China’s vast, underdeveloped inland provinces still had huge needs for infrastructure investment, while domestic consumption had great potential to grow as the income of China’s 1.3 billion people was rising fast. This domestic demand would make up the shortfall from weaker exports.
India
India’s economy is on a sound footing. Despite the global financial crisis, the Indian finance minister is hopeful that the country’s economy will sustain an 8 per cent growth rate this year. The government will take steps to ensure that global recession does not impact the Indian economy.
The finance minister is of the opinion that the global downturn will not affect the domestic economy as India with its strong economic fundamentals could tide over the current global financial crisis.
The huge growth in FDI in India despite global economic slowdown shows how sound and resilient the economy is. The country received foreign direct investments (FDI) worth $2.25 billion and $2.32 billion in July and August respectively.
However, when the financial crisis erupted in a comprehensive manner on Wall Street, there was some premature triumphal among Indian policymakers and media persons. It was argued that India would be relatively immune to this crisis, because of the “strong fundamentals” of the economy and the supposedly well-regulated banking system.
This argument was emphasised by the Finance Minister and others even when other developing countries in Asia clearly experienced significant negative impact, through transmission of stock market turbulence and domestic credit stringency.
Although the central bank (RBI) had recently reduced its economic growth forecast to 7.7 per cent from 8 per cent, India’s GDP growth remains one of the world’s highest. During the first quarter of current fiscal 2008-09, India’s real GDP growth moderated to 7.9 per cent compared to 9.2 per cent a year ago, as rising borrowing costs impacted contribution from manufacturing (5.2 per cent) while services maintained at 10.2 per cent.
The inflation rate in India fell below 11 per cent for the first time since May this year, falling to 10.68 per cent in October raising hopes for a rate cut by the Reserve Bank of India to boost the economy. Analysts had forecast inflation of 10.8 per cent.
Meanwhile, India is likely to miss the export target of $200 billion set for 2008-09, according to the Director General of Foreign. Exports for April-October grew by 21.5 per cent as compared to 30.9 per cent for April-September this year. For the first time in the last five years, in October, there has been a decline of over 15 per cent in exports in dollar terms.
If the buoyant petroleum export is kept aside, the decline would be over 20 per cent. Indian exporters were facing a credit squeeze and it has impacted all sectors except petroleum. The downturn in US and Western Europe has affected Indian exports.
Imports into the country rose 38.5 per cent to $154.74 billion even as exports rose 30.9 per cent to $94.97 billion for the first half of the year, official data showed. Imports grew at a whopping 43.3 per cent in September 2008 while export growth dipped to 10.4 per cent amidst the global financial market turmoil and recessionary tendencies in major economies.
Imports during September 2008 were valued at $24.380 billion, representing an increase of 43.3 per cent over the imports valued at $17.009 billion in September 2007. In rupee terms, imports increased by 61.9 per cent.
India’s trade deficit is likely to widen by 39 per cent to $111.6 billion during current fiscal, mostly due to lower crude oil prices. The trade deficit in 2008-09 will be $111.6 billion against $80.3 billion in the last fiscal.
Trade deficit for April-September was $59.77 billion against $39.09 billion in the corresponding period last year. But India is still working off a very low base, accounting for just 1.5 per cent of global trade. Its goal is to lift its share of world trade to around 5 per cent by 2020.
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