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Hitachi Research Institute

Economic Outlook

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

Mar. 2013 Short-term Economic Outlook Summary

World Economy Picks up with Monetary Easing in Advanced Nations

While the world economy still faces risks, it is picking up at a gradual pace. Supporting the recovery are the policies of advanced nations to maintain and reinforce monetary easing. The US Federal Reserve Board (FRB) has decided to implement a third round of quantitative easing (QE3), while the European Central Bank (ECB) has advanced from Long-term Refinancing Operations (LTRO) to Outright Monetary Transactions (OMT). The Bank of Japan has also finally set a 2% inflation target under the administration of Prime Minister Abe, and has announced plans to implement bold monetary-easing policies that aim at breaking away from deflation. In response to this, correction of the strong yen and rising stock prices are observed in the market, indicating that expectations are stirring for the recovery of the economy. While it was affirmed at the G20 meeting that “competitive devaluation of currencies should be avoided,” the policy received support from the chiefs of the central banks in the US and Europe. Meanwhile, in emerging economies, China is currently trying to put the brakes on the slowdown in the country’s economic growth, while it is forecast that the decline in growth in 2012 in countries including India and Brazil will be reversed by 2013, even if the growth rate may be slow.
Maintaining a recovery trend, the world economy has now entered the phase of improving the long-term fiscal position, where the policies and capabilities of each country’s government are put to the test. Once again, leading the world in the recovery is the US. The “fiscal cliff” at the end of 2012 was averted with only an increase in tax on the wealthy class. However, sequestration, which was delayed till March 1, took effect due to failure to reach an agreement between the ruling and opposition parties. Although a downward pressure on economic growth is expected in the future, there are no signs that recovery of the US economy will stall. This can be attributed to the unwavering confidence of the people in policies that maintain monetary easing, as well as the clear improvement in the real economy, such as the bottoming out of the housing market.

Risks in European and Emerging Economies Remain

In Europe, due to excessive belt-tightening policies that placed priority on reducing fiscal deficit, the real economy fell into negative growth. Instability remains, with a possibility that the European crisis will be rekindled, as can be seen from the political chaos in Italy's general election. In China, too, the economic stimulus measures introduced during the financial crisis, which amounted to four trillion yuan, have given rise to distortions in the economic structure, such as bad debts and an overproduction system. China is now struggling with the reforms, and the extent of the risk is suggested by the reduction in inward direct investment from other countries into China.
Forecast of the world’s real GDP growth for 2013 saw a 0.3% downward adjustment from 3.4% in the previous estimation, but maintains a slight increase from 3.3% in 2012. The forecast value of the US economy for 2013 was adjusted downward by 0.6% to 1.7% due to reasons such as an increase in payroll tax and the sequestration that took effect. However, growth is expected to accelerate from the second half of the year. As for the Euro area economy, the view remains unchanged that there will be continued negative growth for three consecutive years from 2012, with a forecast of -0.6% for 2013 and -0.2% for 2014. Meanwhile, the forecast for emerging economies was 5.5%, 0.2% lower than the previous estimation. Individually, the figures for China, India, and Brazil were revised downward to 7.8%, 5.6%, and 2.3% respectively.

Spreading Expectations in the Japanese Economy toward Abenomics

Since the end of last year, an increase in production activities was seen in the Japanese economy due to the recovery of overseas economies. This, coupled with the high expectations toward the bold monetary easing measures, which were positioned as the first “arrow” of Abenomics, led to a correction of the strong yen and rising stock prices. The problem lies in whether such expectations will be realized. The second “arrow,” flexible fiscal policies, is expected to lead to a 0.8% real GDP growth in FY2013. However, unless the third “arrow,” growth strategies, is able to produce realistic effects, a virtuous cycle cannot be sustained. For this reason, the success of Abenomics hinges on the effectiveness of Japan’s participation in the TPP as well as that of the regulatory reforms. The measures must be impeccable to avoid the risk of being attacked by the financial market for lacking fiscal discipline.
In reality, it may take time for domestic demand and the inflation rate to rise. Hollowing-out of the manufacturing industry is progressing, and the increase in domestic production and reduction in trade deficit are only limited. Although a weaker yen may lead to a rise in prices, it will take time for wages to increase due to the tight labor demand-supply balance. However, immediate effects can be expected from increased consumption due to asset effects such as rising stock prices, as well as a surge in consumer spending before the introduction of a higher consumption tax.
An upward adjustment of 0.5% was made to real GDP growth for FY2013, to 2.3%. Foreign exchange rates are anticipated to be 90 yen/dollar, 115 yen/euro, and 135 yen/pound, and the price of crude oil (CIF) is assumed at $114/barrel.

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