Economy in Brief: March 2024

Globally inflation statistics peaked sharply during the COVID, having since been running down and running down at a pace faster than what central banks had expected. But suddenly, this unwinding of inflation appears to have hit a rough patch and the pace of decline in inflation seems to be slowing or even reversing. German inflation statistics for February are inconclusive on this thought. The ECB-targeted HICP rate in Germany rose 0.2% in February with the core up by 0.4%. Germany's own domestic CPI gauge rose by 0.2% in February with its excluding energy measure up by 0.3%. On the face of it, there's nothing glaring about the monthly inflation data. Inflation diffusion, in fact, is quite tempered with month-to-month inflation rising for only 27% of the categories indicating a continuing tendency for inflation to decelerate.

However, sequential inflation data over 12 months, six months and three months show trends that are more equivocal. For Germany, the HICP index rises 2.8% over 12 months, slows to a 1.6% annual rate over six months, then rises back to a 2.9% annual rate over three months – indicating an acceleration over three months that takes it above its 12-month pace. The core measure for the HICP is up 3.6% over 12 months that tails to 2.5% annual rate increase over six months then jumps to a 4% pace as annualized over three months. The core for the HCP is uncomfortably high.

German domestic inflation shows the headline up 2.5% over 12 months, tailing to a 1.5% annual rate over six months then bouncing back to 2.4% annual rate over three months, reminiscent of the pattern that we see for the HICP headline. The German domestic CPI excluding energy rises 3.1% over 12 months, decelerates to a 2.6% annual rate over six months but then jumps to a 3.2% annual rate over three months, once again, like the pattern for the core HICP, but not as draconian in terms of the three-month rebound. Still, there's enough pressure strength and rebound over three months to be off-putting to the monetary authorities.

German inflation diffusion shows inflation accelerating at 72.7% of the categories over three months; that's up sharply from 36.4% accelerating over six months and 27.3% of them accelerating over 12 months compared to the previous 12 months. The notion of inflation accelerating is therefore a fairly broad-based over three months, but it's also a relatively new event.

Japan's GDP in the fourth quarter was revised from a decline to an increase of 0.4%, erasing the two consecutive quarters of negative growth that had previously been in play. With that development, the notion of a ‘rule-of-thumb’ recession in Japan has been set back on the sidelines. Still, growth in Japan fell at a 3.2% annual rate in the third quarter and only rebounded by 0.4% at an annual rate in the fourth quarter. The GDP revision is a pretty thin reed on which to hang optimism.

Year-over-year GDP growth in Japan is at 1.3%; that's down from a 1.6% year-over-year pace in the third quarter and down from a 2.3% pace that was logged in the second quarter. It’s not recession, but it is an ongoing loss in momentum.

In fact, Japanese growth, looking at the year-over-year rates averaged over a five-year period, comes in at only 0.2%, indicating what an extremely weak period this has been for the evolution of Japan's GDP.

Turning back to the quarterly data, real private consumption has fallen for three quarters in a row; this is not a good development. In the fourth quarter private consumption in real terms fell at a 1% annual rate, in the the third quarter it fell at a 1.4% annual rate, and in the second quarter, it fell at a 2.7% annual rate. If we take more perspective, Japan's private consumption fell by 0.5% year-over-year in the fourth quarter and fell by 0.1% year-over-year in the third quarter. Private consumption which is the bulk of GDP (53%) is extremely weak in Japan in the fourth quarter. Public consumption (another 21% of GDP) didn't help at all; public consumption fell by 0.7% at an annual rate after rising by 1.1% in the third quarter- but that had followed a 0.4% decline in the second quarter. The consumption portion of the Japanese GDP equation is quite weak.

The investment side shows some bounce back in the fourth quarter as gross fixed capital formation advances at a 4.2% annual rate in the fourth quarter after declining for two quarters in a row before that. Gross fixed capital formation is now up 2.2% over the last four quarters, a positive development. Investment on plant and equipment rose by a strong 8.4% at an annual rate in the fourth quarter, offsetting declines in the previous two quarters - a decline at a 0.5% annual rate in the third quarter and a decline at a 5.6% annual rate in the second quarter. This quarterly series has been particularly volatile as you can see from data in the table. However, if we look at year-over-year growth, the year-over-year percent change in plant and equipment are up at a 2.5% pace in Q4, an improvement from a 0.9% annualized drop in the third quarter; that drop is preceded by a string of increases.

Housing in Japan shows weakness with a decline of 3.9% at an annual rate in the fourth quarter and a decline at a 2.5% annualized rate in the third quarter after a series of quarterly increases and year-over-year gains for three quarters in a row. But residential investment is up by just 0.4%, annualized in the fourth quarter.

GDP-net exports turned positive in the fourth quarter after posting a small negative number in the third quarter and having put erratic numbers up over the last six quarters. Exports put in a good quarter in Q4, rising at a 10.7% annual rate after a 3.8% annual rate increase in Q3 and a 16.2% annual rate increase in the second quarter. Imports generally lag-behind exports, rising by 6.9% at an annual rate in the fourth quarter, more or less pacing with exports in the third quarter at 4%, and then declining sharply to fall at a 13.5% annual rate in the second quarter. Year-over-year quarterly exports are up 3.7% in the fourth quarter compared with 2.6% decline in imports. Imports are falling year-over-year for three quarters in a row while exports are putting in consistent moderate rates of real growth.

Domestic demand in Japan fell by 0.2% in the fourth quarter after falling by 3% in the third quarter and falling by 2.5% in the second quarter- all of these are annual rates. These three straight declines in domestic demand clearly are huge challenges for GDP looking ahead. Domestic demand in Japan is also lower year-over-year by 0.1% in the fourth quarter and by 0.1% in the third quarter; these numbers compare with 1% gain in the second quarter of 2023.

Domestic demand in Japan is weak; in fact, exports are playing a key role and holding GDP growth up. Exports help to contribute to a positive stimulus from the trade balance that boosts growth. However, it's surprising that even with domestic demand down by 0.2% at an annual rate in the fourth quarter, imports in real terms still increased by 6.9%.

In this week's newsletter, we revisit some pivotal themes related to Japan. We begin by assessing the country's recent inflation trends, specifically highlighting the latest CPI figures from Tokyo and their potential impact on nationwide inflation and monetary policy. Next, we examine Japan's current macroeconomic landscape, acknowledging the slowdown in retail sales and industrial production, alongside a worsening outlook suggested by recent PMI readings. However, we also recognize the significant growth in corporate capital expenditure in Q4 and investigate the potential consequences of this unexpected positive development on Japan's Q4 GDP. We move on to analyze the ongoing rally in Japan's equity market, underscored by earnings growth and robust investment from foreign investors. Shifting gears, we delve into the recent performance of Japan's semiconductor industry, which has experienced a surge in production and exports, fueled by the global demand for AI chips. Finally, we explore Japan's long-term demographic challenges, focusing on workforce trends and the increase in foreign workers.

Tokyo inflation Markets have continued to scan data prints and official comments for cues ahead of the Bank of Japan’s (BoJ) upcoming monetary policy decision on March 19. Among the recent flurry of economic data was Tokyo’s core CPI, which jumped to 2.5% y/y in February, as base effects from Japan’s utility subsidy programme faded. The Japan government implemented support measures in early 2023 to help households tackle rising costs brought about by Russia’s invasion of Ukraine and a weakening yen. Among the measures include subsidies of about 20% on consumer electricity bills. Stripping away energy-related price effects, however, underlying inflation in Tokyo continued to cool, having moderated to 3.1% from 3.3%. As such, it remains to be seen if Tokyo’s latest inflation developments, if reflected in nationwide inflation numbers, are supportive of imminent BoJ policy tightening. Of possible concern is non-fresh food and non-energy inflation, which has remained on a downward trajectory since late 2023.