Takahide Kiuchi's View - Insight into World Economic Trends :
Outlook of the Economic Recession in Japan and the World in 2020
Dec. 16, 2019
In 2019, Japan and other countries continued to show signs of an economic slowdown, particularly in the manufacturing industry. However, considering the effects of various policy measures in each country, such as monetary easing in the United States and structural changes in the global economy, it is expected that the global economy will elude this downturn and recover moderately in 2020.
Domestic economic indicators decline after the consumption tax hike
The Cabinet Office's coincident index of business conditions dropped 5.6 points from the previous month, making it the lowest since March 2011. In response to this, the basic assessment of the Cabinet Office remained unchanged for the third consecutive month as "worsening", indicating a high possibility of economic recession.
The substantial downturn in the coincident index primarily reflects the weak performance of the manufacturing industry. In October, industrial production significantly declined by 4.5% compared to the previous month and the outlook for production in November and December was weak. Furthermore, the Bank of Japan’s Tankan (December survey) showed that the business conditions Diffusion Index (DI) among large manufacturers dropped remarkably by 5 points from the previous survey, worsening for the fourth straight quarter. If we only consider the situation of the manufacturing sector, it can be said that the Japanese economy is already in recession. The situation is the same in other countries, including Europe and the United States.
Furthermore, the unexpected downturn in October indicators related to consumer consumption has raised the concern that the negative impact of the consumption tax hike on the economy will be more severe than expected. It is true that a considerable amount of last-minute purchases, mainly of daily necessities, took place in September before the consumption tax hike. However, the subsequent downturn is expected to remain relatively short, mainly limited to October.
Effects of economic measures are noteworthy
If the manufacturing industry continues to deteriorate, the adverse effects will spread to the non-manufacturing industries on a large scale, resulting in a recession of the entire economy. Even so, I assume this will be somehow avoided and the manufacturing industry will recover gradually in the next year.
One of the reasons is the effect of economic measures. From the perspective of fiscal consolidation, the validity of measures should be thoroughly questioned, but it is certain that the economic measures approved by the Cabinet on December 5 will support the Japanese economy after the turn of the year. The central and local governments’ total direct national expenditures of about 9.5 trillion yen can be considered as "government’s pump-priming" in this economic package. According to the Cabinet Office's Economic and Fiscal Model (FY 2018-19), if the government spends this amount on public investments and consumption, the real GDP would increase by 0.8% in one year. A substantial economic stimulus effect equivalent to Japan's potential growth rate will be exerted mainly in 2020.
Overseas demand holds the key to recovery
The second reason is the stabilization of the export environment. There are signs that exports, which have a major influence on the activities of the Japanese manufacturing industry, have ceased to fall. The real GDP increased by annualized 1.8% in the third quarter, as reported by the Bank of Japan.
Looking at the recent major overseas economic indicators, we can see that China’s manufacturing business sentiment improved significantly in November, showing signs of bottoming out. In the United States as well, the outlook for Christmas sales is also growing optimistic. The November employment statistics also highlighted that the number of employees increased more than expected.
Moreover, a sharp decline in long-term interest rates since this spring will encourage household spending in the U.S. in interest-sensitive sectors such as automobiles and housing, mainly around the end of the year. This was because the Federal Reserve Board (FRB) reduced the policy interest rate by a total of 0.75%, which substantially reduced long-term interest rates by a factor of two.
Under such a global economic environment, it is unlikely that the Japanese economy will plunge into a full-fledged recession due to domestic factors such as the consumption tax hike. I assume that the Japanese economy as a whole, including the manufacturing industry, which is currently weak, will begin to show a gradual recovery trend after the turn of the year. Similarly, the global economy as a whole could also be expected to gradually recover.
The global economy is transforming into a structure that is less likely to stall
The fact that the global economy is changing to a structure that is unlikely to stall is one of the reasons why it has been able to show unexpected resilience and avoid a downturn this year. After the global financial crisis in 2008, the U.S. and European economies witnessed a decline in indicators such as productivity growth and potential growth rates. As a result of losing economic dynamism, excess capacity and inventories have become less likely, and instead, resistance to downside risks has become stronger.
Given this situation, if the global economy were to suddenly deteriorate in 2020, it would be triggered by the collapse of the so-called bubble economy, which is the distortion of financial markets accumulated under low-interest rates, making the financial markets enter a full-fledged adjustment phase.