The Japanese economy contracted in the second quarter of this year, it’s official. The French economy may have contracted. If things don’t improve in the third quarter, then both economies will have experienced recession.
For the economy of the Rising Sun, GDP contracted by 0.6 per cent in the quarter, compared to the previous three-month period. Annual growth was 1 per cent.
It appears the Japanese consumer was the main the main culprit. Consumer spending contracted by 0.3 per cent. In Japan, just like everywhere else, affordability is being stretched. And in Japan, just like everywhere else, fears on jobs are so great that wages are not rising in tandem. As we have argued here many times, rising prices when wages are not moving up, could well be deflationary in the longer-term. (Consider how Mrs Thatcher fought inflation by upping VAT.)
But there is hope lurking in the Japanese figures. Another major contributor to the contraction was a one-off. Public spending reduced by 0.2 per cent. Capital economics reckons: “this may partly reflect a temporary halt to road building owing to a dispute over tolls.” The Japanese government though is planning a fiscal stimulus, so this will help in the next quarter. Taking this into account, Capital Economics was pretty sanguine about Japan. It said: “… is important to view the
fall in GDP in Q2 alongside the unsustainable strength in the previous two quarters and, above all, in the context of the surge in headline inflation. With global commodity prices now tumbling, this bad news is largely old news. The bigger picture is that the economy is still in relatively good shape compared to similar points in previous downturns. Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies, and is well-placed to benefit from the relative resilience of the rest of Asia including China.”
Yet, there is a fear. Japan’s net exports were flat in the quarter, they neither rose nor fell. This was a surprise, most economists had expected them to contract. As the US tax credit stops exerting an effect on US consumer spending, it seems there is good reason to believe Japanese exports will fall in the next quarter.
Twenty per cent of Japan’s exports go to the US, 15.4 per cent to China. So ultimately, Japan’s economic story for the rest of this year depends on whether the effect of the rise in Chinese consumer spending can make up for the fall in US spending.
As for France, recent data suggests France has been flirting with recession. June saw a 0.4 per cent fall in industrial production, taking the annual figure to a contraction of 1.6 per cent. Industrial production is an important part of the French economy – accounting for around 20 per cent of GDP, so that is a nasty blow for the French economy.
Meanwhile, the French consumer seems to be battening down the hatches. French consumer confidence is at a record low, French inflation is on the up, and French house prices seem vulnerable.
Capital Economics has predicted a 10 per cent fall in French house prices, and reckons the growth in French consumer spending will fall markedly.
But there is good news. For one thing, the government is boosting the economy with a 9bn euro tax boost, and while it is thought consumer spending growth will slow, it is still expected to remain positive.
France accounts for just under 8 per cent of Britain’s exports – so as long as French consumers increase spending while the pound stays weak against the euro, there is hope for at least some kind of export growth from the US to that country.
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