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Hitachi Research Institute

Economic Outlook

Latest economic forecasts for Japan, the U.S., Europe, and China, etc

Dec. 2007 Short-term Economic Outlook Summary



Outlook for Japanese economy revised downward in response to second preliminary estimate of third quarter GDP

Following the downward revision of the Government’s second preliminary estimate of GDP in July-September 2007, announced December 7, we have amended the forecasts described in the "Short and Medium-term Economic Outlook" dated November 12, 2007. As a result, the forecast real GDP growth rates for fiscal 2007 and 2008 have been revised downward from 1.9% and 1.9% to 1.5% and 1.5%. In the process, changes in present conditions were taken into consideration and an analysis made of risks inherent in the standard forecast scenario to produce a risk scenario. At the present point in time, there are numerous uncertainties, and the probability of the standard scenario is estimated to be around 60%.
The main factors behind the downward revision are housing investment and capital investment in fiscal 2007, and the exchange rate of the yen and exports in fiscal 2008. Housing investment is a factor due to the greater than anticipated impact of the revised Building Standards Law, which was amended to prevent a recurrence of the fabricated quake-data scandal and went into effect on June 20, while capital investment is a factor due to the Government’s downward revision of its second preliminary estimate of GDP. The projected exchange rate was changed from ¥110 to ¥105 = US$1. A downward revision was made assuming the greater impact of economic adjustment in China after the Beijing Olympics.

Three destabilizing factors to have repercussions for world and Japanese economies

The world economy presently faces three destabilizing factors—(1) the U.S. subprime loan crisis, (2) crude oil prices, and (3) the overheating of the Chinese economy—which will become intertwined, causing the world to enter an adjustment in 2008. For the standard scenario, it was assumed regarding these three factors that: (1) the U.S. subprime loan crisis would become protracted (taking the form of a 15% decline in U.S. housing prices), (2) crude oil prices would stay high (at US$80/barrel), and (3) Chinese economic growth would decelerate to 8%. The depreciation of the dollar due to the slowdown of the U.S. economy and policy rate cuts (resulting in an exchange rate of ¥105 to US$1) and decline in exports to the U.S. will deal a blow to the Japanese economy. The still high level of oil prices will also squeeze corporate earnings. Nevertheless, growth in personal consumption due to the economy’s escape from deflation and growth in housing investment as it rebounds from the turmoil of fiscal 2007, combined with continued firm growth in exports to China and other developing economies, will allow the Japanese economy to continue to expand until the first half of fiscal 2008. In the second half of the year, however, exports to China will slow owing to the slowdown of the Chinese economy following the Beijing Olympics, and there is a strong probability that the growth phase lasting since the trough in January 2002 will also come to an end. The Japanese economy is forecast to grow 1.5% in fiscal 2008 (1.9% in the first half and 1.0% in the second half).

Strong possibility of global downturn if losses from writing off non-performing subprime loans in the U.S. deepen

In the risk scenario, it was assumed that (1) the subprime loan crisis would deepen and become protracted (resulting in a 30% decline in U.S. housing prices), (2) the price of oil would soar further (to US$100/barrel), and (3) Chinese economic growth would slow to 6%. In this case, U.S. housing prices will decline excessively, causing the subprime loan crisis to worsen. There will be a flight of funds from the financial markets into the commodities markets, and the price of oil will rise to US$100/barrel. The yen will also appreciate sharply (to ¥90 = US$1) due to the plummeting dollar. Losses from write-offs of subprime loans and other non-performing loans, meanwhile, are expected to balloon to around ¥50 trillion (compared with ¥16 trillion in the standard scenario). Although this is less than the official loss of ¥96 trillion on disposal of non-performing loans in Japan in the 1990s in absolute value, the annual average impact will be greater. This will trigger an international credit crunch, and the money glut will begin to draw to a close. Japan and the U.S. will register zero growth and Chinese growth will slow to 6% as the world enters a global downturn. This is expected to cause volatility in the price of oil, which may fall sharply to US$60.

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