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Hitachi Research Institute

Economic Outlook

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

Sep. 2011 Short-term Economic Outlook Summary



Double-dip risk has risen, as more countries turn to fiscal austerity

After the 2008 financial crisis, the world economy managed to escape a replay of the Great Depression, as G20 governments and others implemented economic stimulus packages in 2009 to 2010. The effects of those packages began to taper off early in 2011. It is now clear that the scale of those packages was not big enough for the advanced economies to take off and create a self-sustaining private-sector driven recovery.
While the deflation gap remains large even under a zero interest rate policy, it is preferable to have the government expand fiscal deficits in order to support aggregate demand. However, politicians in Europe and the US are afraid that a Greece-like sovereign debt crisis may hit them soon, unless they turn to fiscal austerity now. History tells us that this is the way to replay the 1937 Roosevelt recession.
The most likely scenario is that the world economy will be slow to recover, but will not fall into recession because we expect that governments will take some deficit-neutral measures to support growth. However, the downside risks are huge. Policy mistakes can easily push a nearly stalled recovery into double-dip recession.
The emerging economies are fighting inflation by tightening monetary policy. We expect that they will cool down. (China: 9.1% GDP growth in 2011, slowing to 8.3% in 2012). We forecast that crude oil prices remain stable (98 USD/bbl in 2011 and 90 USD/bbl in 2012), as slowdown in the world economy will reduce the demand for crude oil.

Risks are plenty in the US and European economies

The US economy decelerated rapidly in the first half of 2011, and is now on the verge of recession. Employment nearly stopped improving, and the housing prices are still declining. Consumer behavior is stagnant, while the households have to reduce their excessive debts. The US economy has failed to move towards a sustainable recovery, and still needs government support. However, the Obama administration will not be able to implement effective policies for job creation, while the Republican Party will insist on short-term fiscal deficit reduction. The US growth will be sluggish, likely staying below its potential growth in 2011 and 2012 (our previous forecast of 2.6% and 2.9% were revised downwards to 1.7% and 2.1%, respectively for 2011 and 2012).
A sovereign debt crisis looms in Europe. Even core countries, such as Germany and France, are decelerating. Peripheral countries are in recession, and will not recover soon, as they have to take austerity measures and regain competitiveness by cutting wages. The EU will grow 1.2% in 2011 and 0.9% in 2012. The UK 0.7% in 2011 and 0.5% in 2012.

The Japanese economy is recovering, but headwinds are strong

As supply chains have recovered faster and earlier than expected, industrial production have climbed back rapidly. From the second half of this fiscal year, reconstruction of buildings and houses by both private-sector and public-sector will accelerate growth. But, the strong growth will not last long, because of the slow world economy, and the ultra strong Yen.
Especially, the ultra strong Yen is damaging. It will spur outward foreign direct investment and overseas M&A, but will hinder domestic investment. The government is expected to act against rapid appreciation of the Yen by expanding overseas financing.
Domestic investments in renewable energy and disaster relief will increase, thanks partly to the newly legislated renewable energy act. Sales of energy saving products and houses are rising, because consumer sentiment is improving and support by public policy.
We expect that Japan will grow 0.1% in fiscal year 2011 (upward revision from our previous forecast of -0.3%) and 2.4% in fiscal year 2012, which is more than its potential growth rate, pushed upwards by reconstruction demand.
The first and second supplementary budget increased government outlays by 6 trillion yen. The third supplementary budget is being prepared. We assume that its outlay will be 13 trillion yen, and that 6.4 trillion yen will be paid out by the end of fiscal year 2012. Budgets will be funded initially by new issues of government bonds, and eventually income and corporate tax rate increases, and successive and permanent VAT rate hikes.

World Economic Outlook

World Economic Outlook1109
Note: Japanese numbers above are on calender year basis, but those in the table below are on a fiscal year basis
Source: Compiled by HRI from various sources  Forecasts by HRI

Japan Economic Outlook

Japan Economic Outlook1109
Source: Compiled by HRI from Cabinet Office "Natural economic accounting" and other sources. Forecasts by HRI

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