Asia: Lowering our growth forecast for Japan again
Once again we have significantly lowered our growth forecast for Japan. This is, not least, because we now believe that GDP plummeted by a whopping 2.1% q/q in Q4 last year. The December trade data were miserable, and we believe that net exports alone cut GDP growth by around 2 percentage points in Q4. Also, consumer spending seems to have been hit by the financial crisis and labour market weakness as early as Q4, so consumer spending probably contracted by 0.6% q/q in the final quarter of last year. Without the substantial inventory building that is likely to have taken place in Q4, GDP growth in the quarter would probably have been even weaker. Meanwhile, the need to reduce inventories in manufacturing industry will be a drag on growth in the coming quarters. On top of this, the government's stimulus package looks likely to be (at best) delayed, so consumer spending will probably not begin to pick up until some time in Q2 this year. That is why we have lowered our estimate of GDP growth for Q1 09 to -0.8% q/q. All in all, this means we have cut our growth estimate for 2009 to -2.6% from -1.5%.
The weak growth outlook will bring additional pressure to bear on the Bank of Japan (BoJ) to find new ways of stimulating economic growth now that the central bank, in reality, cannot lower its rates any further. The growing focus of the BoJ on easing companies' access to funding is a step in the right direction, though we wish to emphasise that Japan's current weakness is due to a huge external demand shock that has created substantial overcapacity rather than to the financial crisis having depleted the funding sources available to Japanese companies. As such, fiscal easing is currently more important for Japan than new measures to ease access to finance. Political uncertainty and the failure of the government to take more effective fiscal action so far are indeed having a very negative impact on the Japanese economy at the moment.
In China, the past week saw the beginning of the Year of the Ox - a year that is not normally associated with economic prosperity. Given the serious challenges facing the Chinese economy, securing prosperity would indeed require the hard work and perseverance of the ox. That said, the Chinese economy is one of few Asian economies that have not seen universally negative indicators recently. Quickening loan growth and an increase in manufacturing PMI data in December indicate that the Chinese economy is reaching bottom. The focal point in the week ahead will be the release of January PMI data from the CLSA and the NBS. We expect December's positive trends in both indicators to have continued in January.
Key events of the week ahead
* In China, attention will focus on Wednesday's release of manufacturing PMI data from the CLSA and the NBS.
* In Japan, few major releases are due out in the coming week, though December wages and salaries will be published on Wednesday.
* In the rest of the Asian region, we await with interest the release of South Korean trade data for January on Monday and the policy meeting at Bank Indonesia Wednesday, where we expect benchmark rates to be cut by 50bp.
Foreign Exchange: In the hands of governments and central banks
The British pound was the big winner among G10 currencies in the past week, with EUR/GBP managing to retreat from a top of 0.9520 on Monday to break below 0.90 early Friday. The strengthening of the pound comes after the major sell-off the previous week, when the pound weakened by more than what both relative interest rates and equity market developments would have suggested. The Norwegian krone, meanwhile, continued to strengthen, while the US and Canadian dollars also appreciated against the euro. Generally speaking, it was the countries that launched new fiscal measures that strengthened over the week. The week's big loser was the New Zealand dollar, which experienced a major fall following the Reserve Bank of New Zealand's 1.50 percentage point rate cut to a historic low of 3.50%.
That we find ourselves in a particularly deep global recession is no longer news. Unfortunately, however, this does not rule out further negative surprises. This was underscored in the past week when the International Monetary Fund (IMF) yet again cut its expectations for global growth in 2009, with a forecast now of just 0.5% - the lowest level of growth since World War 2! The deep global slowdown naturally gives rise to a need for initiatives from the world's governments and central banks, which have indeed already been extremely active. The past week saw yet another raft of measures, with the Norwegian government presenting a comprehensive fiscal package, the US House of Representatives passing the government's proposed USD 819bn stimulus package, and US President Obama discussing new initiatives (establishment of a "bad bank", see "Editorial" and "Fixed Income") to take illiquid assets off bank balance sheets. Finally, the British Treasury presented a similar plan, which would give the Bank of England the option of buying GBP 50bn worth of assets in the market (see "UK"). Both NOK and GBP strengthened against EUR.
Fiscal and monetary initiatives will very probably also be a dominating theme in FX markets in the week ahead, when focus will be on the US Senate's passage of the fiscal stability package and any further news on the "bad bank". While very accommodative fiscal and monetary policies could weaken the dollar via the effects of an increased money supply and worries about the US's chances of financing already large government budget and current account deficits, we maintain our view that this is more a theme for the medium term. Thus we still expect that the dollar will strengthen in the short term as a result of the positive effects on US growth and the subsequent chance that the US could turn faster than Euroland thanks to a more flexible (and thus a much more accommodative) economic policy.
Central bank measures will also attract attention in the coming week, which sees no less than four G10 rate meetings: Tuesday at Reserve Bank of Australia (RBA), Wednesday at Norges Bank, and finally Thursday at the Bank of England (BoE) and the ECB. While we, like the market, expect the ECB to leave rates unchanged, we expect the BoE to cut buy 50bp, which could put pressure on the pound (not least given the latest discussion in the market on whether the BoE will follow the US Fed and move to quantitative easing). If Norges Bank as expected cuts by 50bp to 2.5%, NOK could also face some temporary pressure, and we see a real chance that EUR/NOK could go above 9.00 before the NOK can strengthen substantially once more. In Australia, we expect that the RBA will cut by 100bp to 3.25%, which could help undermine the AUD, which is already under pressure from the global slowdown and the steep fall in commodity prices over the past six months. We still expect that AUD/USD will reach 0.60 in H1 09. Finally, there will be a string of important activity indicators (PMIs) which, insofar as there is no tentative sign of the slowdown stabilising, could lend further support to the defensive currencies, JPY, CHF and USD.
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