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Hitachi Research Institute

Economic Outlook

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

Dec. 2013 Short-term Economic Outlook Summary

1.Acceleration of the U.S. economic recovery will support the world economy in 2014

Despite a downward revision by 1.2% from the previous forecast of 4.3% to 3.1%, growth in the United States is expected to accelerate from the spring of 2014 onwards. Although there was considerable political uncertainty when the federal government was shut down for two weeks from October 1, 2013 following a standoff between Democrats and Republicans, the Republican Party is expected to refrain from taking any drastic action in the months ahead in the lead up to the November 2014 mid-term election. Consequently, there is little possibility of an event that would trigger the federal government shut-down or a U.S. bond default in January or February. Nevertheless, the anticipated continuation of sequestration has resulted in a downward revision in real GDP growth forecast from September. In its meeting on September 18, the Federal Reserve Board (FRB) postponed tapering off (reducing asset purchases) its third round of quantitative easing (QE3). In February 2014, Janet Yellen will take office as a new FRB Chairman, and she has already made it clear that even if QE3 tapering-off begins, she will continue monetary easing over the long term. A policy interest rate hike is not expected before 2015.

In 2014 the eurozone will move out of negative growth territory for the first time in three years with growth of 0.2%. However, the timing of monetary easing has been slow, so, like Japan in the past, economic stagnation is expected to be protracted. The July to September 2013 quarter saw positive growth in real GDP for the second consecutive quarter (annualized growth rate from previous quarter of 0.4%) but softened from the 1.1% growth in the April to June quarter. Meanwhile, the likelihood of deflation has become a matter of concern. In contrast to an inflation target of just under 2%, inflation is set to remain at under 1%. The European Central Bank (ECB) lowered the policy interest rate on November 7 from 0.5% to 0.25%, but the governors of the national central banks of Germany, the Netherlands and Austria cast dissenting votes, making leadership a challenge for Governor Draghi at the helm.

There is a strong possibility that growth in China will trend in the range of 7% to 7.5%. At the Third Plenum of the 18th Communist Party of the China Central Committee from November 9-12, 2013, the Xi Jinping Administration put forward a blueprint for reform and liberalization. The plan is aimed at measures to further promote a market economy including the reform of state-owned enterprises, completion of a modern market system, and transformation of government roles, and there are growing expectations for progress in reform. While there remain risks that the real estate bubble and past excessive investment may induce stock adjustment, the economy is demonstrating underlying strength.

From June 2013 onwards, the value of currencies in emerging countries such as the Indian rupee and the Brazilian real fell rapidly against the U.S. dollar, but FRB’s postponement in tapering off QE3 and protective currency measures such as raising of interest rates by the central banks of various countries resulted in the stablizing of a large number of currencies from September onwards. However, in those countries where the economies had already slowed, the increase in interest rates caused further deceleration of the economy.

Real GDP growth for the world as a whole in 2014 is expected to reach 3.6%, even with a 0.3% downward revision from the previous forecast, surpassing the 3.1% growth of 2013. Emerging economies are expected to achieve 5.1% growth, a downward revision of 0.1% from the previous forecast. In particular, growth in India is set to reach 5.2%, down 0.4% from the previous forecast, with Brazil and China remaining at the previously forecast rates of 2.8% and 7.3% respectively.

2.Despite a rise in the consumption tax rate, the Japanese economy will continue to recover. An inflation target of 2% may be achieved

With real GDP growth at 1.9% in the July to September 2013 quarter, the Japanese economy maintained positive growth for the fourth consecutive quarter. Prime Minister Abe’s Cabinet decided on October 1 to raise the consumption tax rate to 8% effective April 2014. At the same time, the Cabinet decided on an economic stimulus package to avert a stall in economic recovery. The government intends to finalize details of specific measures and the amount to be appropriated in the December 2013 supplementary budget and in the fiscal 2014 tax reform. On the premise that the economic stimulus package will result in additional effective demand of 2.5 trillion yen in fiscal 2014, we forecast that the economy will continue on a path of recovery in fiscal 2014 with growth at 0.7%.

With growth at this pace, the economy will eradicate its deflation gap in fiscal 2015, bringing the target of “2% inflation in two years” within reach. From 2016 onwards, supply capacity is likely to become a factor restricting economic growth, and the true value of Japan’s growth strategy will be tested.

World Economic Outlook

World Economic Outlook1312
Note: Since the figures above are based on the calendar year, the figures for Japan are different from the fiscal-year based figures in the table below.
Source: IMF. Forecast by Hitachi Research Institute

Japan Economic Outlook

Japan Economic Outlook1312
Source: National Accounts, etc. Forecast by Hitachi Research Institute.

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