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Hitachi Research Institute

Economic Outlook

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

Jul. 2012 Short-term Economic Outlook Summary



A World economy entangled in the European sovereign debt crisis

The European sovereign debt crisis has begun to entangle the world through finance and trade. Greece’s financial crisis has spread to Spain’s financial/banking crisis, and Spain is expected to become the fourth eurozone country to request financial aid from the EU. There was an outflow of funds from the eurozone and emerging countries because of risk avoidance. In currency exchange, the euro and currencies of emerging countries depreciated while the U.S. dollar and Japanese yen appreciated.
Simultaneously, the crisis fueled falling stock prices, the high price of the government bonds of Japan, the U.S. and Germany (decline on yields) and a decline in commodity prices. Due to these changes in global finance and stagnant exports to Europe, the economic slowdown in emerging countries began to accelerate. The world economy must now first deal with the collapse of economic bubble in Europe which may trigger a double-dip recession before cleaning up the Lehman Shock caused by the bursting of the bubble economy in the U.S.

Increased political risks in each country

Although politics are usually entrusted with bringing an end to a flagging economy, politics instead have become a risk factor.
For Europe, due to the launch of the Hollande administration in France, the full commitment to fiscal austerity is expected to ease somewhat. However, in order to end the European sovereign debt crisis, there is still much to do, beginning with an expansion of monetary easing by the ECB, such as a banking union which includes a deposit insurance function and fiscal integration, etc. Whether or not financial markets can wait for action will change any future scenarios. In the meantime, the rerun election in Greece is noteworthy. If Greece exits the eurozone, we cannot deny the impact may expand to other countries in southern Europe, cause a collapse of the entire eurozone, and lead to the first major global depression since the Lehman Shock. Even if the situation does not go that poorly, the world economy will remain in a sensitive phase. The key is Germany, however, it is very difficult for Germans to accept an increase in their burden. Prompt coordination by government authorities from the G7/G20 is also necessary.
In the U.S., the presidential and congressional elections in November are attracting attention. The standard scenario has a compromise of some sort being established between the Democratic Party and the Republican Party following the elections, however, if a compromise is not reached, due to the “Fiscal Cliff” of tax cuts, etc. set to automatically expire at the end of the year, there is a risk of the 2013 growth rate significantly decreasing. In Japan, the anticipated passing of the consumption tax increase bill under discussion in the divided Diet is being taken into account by the market, and while this is the standard scenario, if the bill does not pass, there is risk of disruption in the market. Countries such as China, India and Brazil are facing a sharp downturn in their economies and their ability to manage their economies will be tested. With the background of exports to advanced countries slumping, self-recovery mainly with domestic demand requires time, and there is a risk of economic slowdown if policy mistakes are made.

Increased deceleration of the world economy and the enhanced underlying strength of the Japanese economy

If the world economy develops under the standard scenario where Greece exits the eurozone but the entire eurozone does not collapse, the 2012 real GDP growth rate will be 3.1% for a 0.1% downward revision from the previous forecast. For the U.S., concern about a slowdown is increasing, however, the reality is expectations by the market for future recovery only are being chipped away. The housing market has hit bottom and its gradual recovery continues. The 2012 real GDP growth rate has been upwardly revised 0.1% from the previous forecast and now stands at 2.0%. For the EU, real GDP growth rate is 0.1% downwardly revised to -0.6% mainly due to a downturn of south European economies. China’s real GDP growth rate is 0.1% downwardly revised to 8.0% due to an increase in the downturn trend. For India and Brazil as well, the real GDP growth rate for new emerging countries is 0.2% downwardly revised to 5.1%.
For the economy of Japan, the real GDP growth rate for the January - March quarter recorded an annualized growth rate of 4.7% on a quarter-on-quarter basis. Demand for reconstruction following the Great East Japan earthquake materialized and personal consumption increased due to the effects of tax-cuts for environmentally friendly vehicles, etc. For the 2012 fiscal year, we forecast steady growth of 2.2%, unchanged from the previous forecast. However, single-digit growth is forecast for domestic capital investment and exports due to the continuing strong yen. Of the \60 trillion domestic capital investment, overseas direct investment (net) significantly increased by 84% to 9.1 trillion yen compared to the previous year (103% increase in U.S. dollars). Income from such investments will contribute to the current account in the black as balance on income. In addition, it is assumed that the resumption of nuclear power plant operation has advanced to a certain extent, however, increases in fuel costs in the 2012 fiscal year are expected to be 0.6 trillion yen while GDP will be pushed down -0.1%.
The price of crude oil (CIF) for the 2012 fiscal year is expected to be 110 dollars/barrel, while the exchange rate is forecasted to be 80 yen/dollar, 98 yen/euro and 118 yen/pound.

World economic outlook

World economic outlook1207

Japan economic outlook

Japan economic outlook1207

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