Japan’s worst postwar economic downturn could force new leader to boost stimulus
Japan’s economy sank deeper into its worst postwar contraction in the second quarter as the coronavirus jolted businesses more than initially thought, underscoring the daunting task the new prime minister faces in averting a steeper recession.
Other data put that challenge in perspective, with household spending and wages falling in July as the impact of the pandemic kept consumption frail even after lockdown measures were lifted in May.
The world’s third-largest economy shrank an annualised 28.1percent in April-June, more than a preliminary reading of a 27.8percent contraction, revised gross domestic product (GDP) data showed on Tuesday, suffering its worst postwar contraction.
The data will put the new prime minister, to be elected in a ruling party leadership race on Sept. 14, under pressure to take bolder economic support measures.
Chief Cabinet Secretary Yoshihide Suga, the frontrunner to become next premier, has signalled his readiness to boost spending if he were to lead the country.
“The risk ahead is that the effect of measures taken so far, such as pay-outs to households, will peter out,” said Koichi Fujishiro, an economist at Dai-ichi Life Research Institute.
“If COVID-19 weighs heavily on wages, the new administration could take additional steps to help households.”
The government has so far unveiled a $2 trillion package of stimulus measures, adding to an enhanced easing programme from the Bank of Japan (BOJ).
Japan recently saw a renewed rise in infections but has been spared the kind of big casualties seen in western countries. Total infections stood at 72,321 as of Monday, with 1,380 deaths versus a global tally of over 27 million cases and more than 888,000 deaths.
The main culprit behind Tuesday’s downward GDP revision was a 4.7percent drop in capital expenditure, much bigger than a preliminary 1.5percent fall, suggesting the pandemic was hitting broader sectors of the economy.
“We can’t expect capital expenditure to strengthen much ahead. Companies won’t boost spending when the outlook is so uncertain,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
Japan’s economy has shown some signs of life after suffering three straight quarters of contraction, with factory output rising in July at the fastest pace on record thanks to rebounding demand for automobiles.
Yet separate data on Tuesday suggested any recovery will likely be modest, as household spending fell a bigger-than-expected 7.6percent in July year-on-year, while real wages declined for the fifth straight month, pointing to more pressure on consumer spending.
Reform hopes rise as China focuses on inward economic shift
Chinese reform advocates are hoping President Xi Jinping’s proposed new economic model, expected to be the centrepiece of a key conclave next month, is an opportunity to quicken changes to spur domestic demand and tackle structural woes.
The new development model will be discussed at a meeting of the ruling Communist Party in October, where policies are expected to be built into the next five-year road-map for the economy, policy insiders said.
Xi in May proposed a “dual circulation” strategy for the next phase of economic development in which China will rely mainly on “domestic circulation” – an internal cycle of production, distribution and consumption.
That will be supported by “international circulation”, in which China further integrates with the global economy, opening its doors to more foreign goods, capital and investment.
As tensions between Washington and Beijing rise, the potential decoupling of the world’s two largest economies presents significant risks, a prospect that is firming China’s resolve to shift reliance to its own vast domestic market, policy insiders said.
The gathering of the Central Committee, the largest of the Communist Party’s elite decision-making bodies, will focus on the 2021-2025 plan for the country’s social and economic development. It will be the 14th such plan since China embarked on rapid industrialisation under its first five-year plan in 1953-1957.
“It (dual circulation) will be a pivot of the 14th five-year plan. There will definitely be difficulties to make it work,” said a policy insider.
Guided by the new strategy, elements of the 2016-2020 plan, including supply-side reforms and policies to spur urbanisation and innovation, are expected to be taken to the next level, the details of which will be unveiled at the annual parliamentary session next year.
Few details have been published on the scheme itself, but economists and think tanks are proposing various reforms that they deem crucial to steering a more self-reliant economic course and building long-term growth drivers, they said.
China’s State Council Information Office did not immediately respond to a faxed request for comment.
Government advisers have called for faster reform of China’s land and residency systems – key obstacles to its goal of building a highly urbanised, consumer-driven economy – and tackling a yawning rich-poor gap that has weighed on spending.
Overhauling giant state companies would help tackle deep-rooted economic distortions and help level the playing field for struggling private firms, they argued.
“Domestic circulation won’t take off if we cannot do a good job on reforms,” said a government adviser who declined to be identified.
At a meeting with Chinese economists on Aug. 24, Xi pledged to take more measures to break down “deep-seated institutional barriers”, and reaffirmed a longstanding pledge to let markets play a decisive role in resource allocation.
In April, China’s cabinet issued guidelines on improving market-based allocation of “production factors”, including land, labour, technology and capital, in a bid to deepen market-oriented reforms.
To be sure, rebalancing the economy to rely more on consumer spending and less on inefficient investment and volatile exports has been a key policy goal for the past decade.
But many Chinese advisers and economists are disappointed over the pace of reform in recent years, as a stability-obsessed government has plucked lower hanging fruit and delayed more painful reforms first unveiled at a key party meeting in 2013.
Increased control by the ruling Communist Party over all aspects of society has raised doubts about faster changes.
“If we want to rely on domestic circulation, we must push reforms to unleash growth potentials,” said Jia Kang, head of China Academy of New Supply-side Economics, a think tank.
Indian economy projected to contract 11.8percent year-on-year, fitch domestic arm says
India’s economy is projected to contract 11.8percent on the year in the current fiscal year beginning from April, before bouncing back in the next fiscal year, India Ratings and Research, a domestic arm of ratings agency Fitch, said on Tuesday.
“All indicators, be it mobility or consumption, are pointing towards a much weaker economic recovery,” Sunil Kumar Sinha, its principal economist told an online conference.
The economy is projected to contract 11.9percent in the current quarter, followed by a contraction of 6.7percent in the December quarter and 5.4percent in the subsequent quarter, Sinha said, citing the adverse impact of coronavirus pandemic.
Earlier, India Ratings had projected the economy would contract 5.3percent in the current fiscal year, versus growth of 4.2percent in the previous year.
While a second wave of infections sweeps the globe, India has not yet managed to flatten the first wave, he said.
Its economy shrank 23.9percent in the quarter from April to June, much more than forecast, in a sign that recovery could be longer than expected, with analysts urging further stimulus.
On Monday, India surpassed Brazil as the nation with the largest number of infections outside the United States, with a tally of 4.28 million.
India Ratings projected the federal fiscal deficit to rise to 8.2percent of GDP, propelled by an economic contraction and greater government spending to mitigate the pandemic effects, versus 4.6percent in the previous fiscal year.
Indonesia faces uncertain economic recovery
Indonesia’s retail sales fell 12.3percent in July from a year earlier, following on from the 17.1percent contraction in June.
In reporting these figures, Bank Indonesia (BI) also expects retail sales in August to fall 10.1percent from the same month last year, although this will represent a second consecutive month of improving consumer confidence.
The central bank said, “Consumer confidence improved slightly in August amid raising confidence about income, job availability and purchase of durable goods.
“Consumer perspective on income and job availability continue to improve compared to the previous six months, in line with rising economic activity after large-scale social restrictions.”
These restrictions, however, are likely to resume in the capital Jakarta, after Governor Anies Baswedan announced that he will be re-imposing large-scale mobility restrictions from September 14 in order to combat a new in COVID-19 infections.
Jakarta was placed under a partial lockdown from April, but measures were eased in June. When re-introduced, businesses, except those in “essential sectors”, will be temporarily closed, public transport services will be limited and dining in restaurants forbidden.
Indonesia’s economy shrank by 5.3percent in the second quarter of 2020, the first contraction the country recorded in over two decades. The finance ministry also expected Indonesia’s economic growth to hover between -1.1percent and 0.2percent this year, raising the real prospect of a first recession since the 1999 Asian financial crisis.
Malaysian economy showing clear signs of recovery, Dewan Negara told
The early economic indicators for July have shown that the nation’s economy is improving, said Deputy Finance Minister II Mohd Shahar Abdullah.
He said exports have increased by 3.1 percent year-on-year, while sales of passenger cars and commercial vehicles also rose by 27.3 percent and 44.8 percent, respectively, during the month, compared to June 2020.
Meanwhile, domestic passenger movement also increased by 215.8 percent compared to the previous month and the number of cars on tolled highways rose by 7.4 percent month-on-month.
He said this in reply to a question from Senator Datuk Husain Awang (PAS) during the Dewan Negara sitting on the government’s strategy to strengthen the nation’s economy and enhance the gross domestic product (GDP) by the fourth quarter this year.
Mohd Shahar said the contraction in the GDP had gradually reduced from 28.6 percent in April, 19.5 percent in May and down to 3.2 percent in June.
“This clearly shows economic improvement in line with the reopening of economic sectors which started in May, and the recovery is expected to continue, especially in the second half of the year (H2 2020),” he said.
Based on the better projections for H2 2020, Bank Negara Malaysia has announced that the nation’s economic growth for the whole of 2020 is expected to be between -5.5 percent and -3.5 percent, but will grow by about 5.5 percent to 8.0 percent next year.
“The government will continue to implement various initiatives to improve the people’s well-being, support businesses and revitalise the economy,” he said. — Bernama