Japan’s economy contracted by an annualised 0.6 per cent during the first quarter of 2018, ending the country’s longest run of growth since 1989 and dealing a fresh blow to Prime Minister Shinzo Abe.
The slowdown, which was the first contraction in the economy since 2015, was worse than analyst expectations of a 0.2 per cent decline in gross domestic product. It marks the end of an eight-quarter run of uninterrupted growth and suggests the global economic environment is becoming less favourable for Japan.
But analysts do not think the fall is the start of a recession. Japan’s labour market remains extremely tight, with an unemployment rate of just 2.5 per cent, and other economic indicators point to a steady expansion.
“It does certainly seem that export momentum has peaked out,” said Izumi Devalier, head of Japan economics at Merrill Lynch in Tokyo. “We’re not expecting export contraction but you’re not really going to get as much push from export demand as you did in 2017.”
Details of the report showed a mediocre quarter but offered further evidence that a recession is not in prospect. Private consumption and investment were flat. Net exports contributed a modest 0.3 percentage points to growth, offset by a subtraction of 0.3 percentage points from residential investment.
“Residential investment continues to correct after the crackdown on apartment loans,” said Ms Devalier. The Financial Services Agency has forced banks to tighten standards on loans to private individuals for apartment construction after becoming concerned about the pace of credit growth.
The main cause of the unexpectedly weak GDP reading was a subtraction of 0.6 percentage points caused by companies running down inventories, after an inventory build-up in previous quarters.
Since inventories cannot grow or shrink forever, many analysts disregard them when looking at the underlying trend in the economy. A reading on final sales of domestic product, a measure of underlying demand at home, was flat in the first quarter compared with annualised growth of 0.1 per cent in the last quarter of 2017.
Although the figures do not suggest a recession, they do indicate Japan’s economy is coming off the boil, showing a fresh failure to shift from export demand to domestic consumption. Annualised, third-quarter growth in 2017 was revised down from 2.4 per cent to 2 per cent and fourth-quarter growth from 1.6 per cent to 0.6 per cent.
Naohiko Baba, chief economist at Goldman Sachs in Tokyo, said the report was a “negative surprise”. He forecast a return to expansion but said: “We also see downside risk to our outlook in view of the large downward revisions made to historical data, and the steady decline in the pace of GDP growth.”
Ms Devalier said the weakness of consumption was tough to interpret. “If you just look at the fundamentals for consumption they’re really strong,” she said, with solid growth in worker incomes. Earlier in the year the weakness was blamed on bad weather but that explanation is becoming less plausible.
During five years of economic stimulus under Mr Abe, Japan has enjoyed steady growth, but struggled to break free of the deflationary mindset that set in as prices stagnated for two decades. Weaker economic growth will be of particular concern to Mr Abe as he wrestles with a series of scandals that threaten his government.
The initial report of Japan’s GDP is notoriously unreliable because it is based on limited source data. Large revisions are common with the second reading, which is due on June 8.
Colombian election to decide future of economy, peace deal
BOGOTA (Reuters) – Colombia’s presidential election on Sunday will decide the future of peace with Marxist rebels and the nation’s economic model as candidates from across the political spectrum compete with promises of jobs, safer streets and a crackdown on graft.
Right-wing contender Ivan Duque, a protégé of former President Alvaro Uribe, has long been polling ahead of five other candidates with about 40 percent of the vote.
Running second with about 30 percent is leftist former M19 rebel Gustavo Petro, a combative populist who has galvanized support from millions of young people fed up with Colombia’s right-wing status quo.
If no candidate gets over 50 percent, the top two will go to a second round on June 17. Unreliable polls mean centrist Sergio Fajardo and center-right German Vargas may have a shot.
At stake is whether Latin America’s fourth-largest economy will abandon its traditionally market-friendly posture, as well as the future of the peace deal with Revolutionary Armed Forces of Colombia (FARC) rebels.
Campaigning has been marked by candidates’ accusations that their rivals will either collapse the economy or force Colombia back to the battlefield.
“These elections are among the most important we’ve lived since we’ve had a political consciousness,” said Jorge Valderrama, who manages Colombia, Central America and the Caribbean for head of BNP Paribas. “The country’s model is going to be decided.”
Business-friendly Duque has promised to overhaul the peace accord signed in 2016 with the FARC, appealing to those who say the deal was too lenient and want former guerrilla commanders jailed for crimes committed during their half-century insurgency.
Duque also pledges to reduce corporate taxes, exempt capital goods imports and support the development of oil and mining projects to help reinvigorate growth.
Petro, by contrast, has promised a complete overhaul of the economy to take power away from the social and political elites he says have dominated Colombia too long. His tax changes would raise duties on dividends, eliminate loopholes and hike charges on unproductive land.
Investors have expressed worries about Petro’s plans to spend big on education and healthcare and eliminate extractive industries. Colombia’s top exports are oil and coal.
“Petro is a grave danger,” said Bertha Infante de Garavito, 80, a residential building manager in Bogota, who fears his policies could drag Colombia into the kind of economic crisis seen in neighboring, socialist-run Venezuela. “The exact same thing will happen to us.”
LACK OF EXPERIENCE
Though he was never a combatant, Petro belonged to the M19 urban rebel group, which demobilized in 1990. He has often been hailed as an example of how ex-rebels can successfully transition to peaceful politics.
But he has also been slammed for poor management while mayor of Bogota. He was ousted from office for allowing garbage to pile on the streets for days.
Given that, Fajardo may be able to win enough support from centrists who dislike Petro to reach the second round. Vargas is backed by two strong party machines and incumbent President Juan Manuel Santos, which may yet turn out significant numbers of voters for him.
The peace deal, which won Santos a Nobel Peace Prize, saw thousands of guerrilla fighters hand over their weapons and join a reintegration process.
But Vargas has an abrasive public image and a lack of charisma that puts off many voters.
Duque, 41, is seen as more personable but has been dismissed by many as too young and inexperienced to run a nation of 50 million people with a struggling $324 billion economy.
A one-term senator, Duque worked at the Inter-American Development Bank in Washington until 2014, when Uribe asked him to return to Colombia and take a seat in Congress.
Analysts worry his tax cuts could create a revenue gap and some believe he will be heavily influenced by Uribe, known for his harsh offensives against the FARC and presiding over a buoyant economy during his 2002-2010 administration.
Petro supports the peace deal, as do Fajardo and Vargas.
Duque will have an easier time with Congress if elected – following congressional elections in March, his Democratic Center party has more Senate seats than any other and is in second place in the lower house. Petro’s party has only six seats in Congress and he would face an uphill battle to pass legislation.
Graphic tmsnrt.rs/2rAQ4l1 on elections in Latin America
Reporting by Helen Murphy and Julia Symmes Cobb, Additional reporting by Steven Grattan and Nelson Bocanegra; Editing by Daniel Flynn and Rosalba O’Brien
UK economy barely growing amid mounting Brexit concerns
LONDON—A day after the Bank of England’s governor warned about the damaging consequences of a “disorderly” Brexit, official figures Friday confirmed that the British economy barely grew in the first three months of the year.
The Office for National Statistics said the economy expanded by a quarterly rate of just 0.1 per cent amid weak household spending and business investment. Both have been held by factors directly related to the country’s vote to leave the European Union.
Household spending, which rose just 0.2 per cent in the first quarter, has been held back by the inflation stoked by the pound’s sharp fall in the aftermath of the Brexit vote, which led to a rise in the cost of imports.
Meanwhile, business investment fell by 0.2 per cent, with executives seemingly cautious amid uncertainty over Britain’s future relationship with the EU, its biggest trading partner. With firms’ balance sheets healthier than they have been for years and with the global economy — in particular Europe — doing better than expected, business investment should be rising.
For those wishing to blame the low growth on late winter weather, the statistics agency noted that the impact was fairly minimal. It said bad weather had some impact on the economy, particularly in construction and retail, but that its overall effect was limited.
Article Continued Below
The low growth was one of two main reasons why the Bank of England did not raise its main interest rate by a quarter-point this month to 0.75 per cent, as it had earlier signalled it would. The other was that inflation had come down more sharply than anticipated.
The latest growth figures come a day after Bank of England Governor Mark Carney warned that a “disorderly” Brexit could push the bank into the same sort of exceptional stimulus it unleashed after the country voted to leave the EU two years ago. Then, the bank’s Monetary Policy Committee cut its main rate to a record low of 0.25 per cent and enacted some further stimulus measures to shore up confidence.
Amid signs that the British government’s Brexit negotiations with the EU are making little headway and could in fact be deteriorating, Carney told an audience of economists late Thursday that a “sharper” Brexit may lead policymakers to pursue a similar response.
“For example, if the transition were disorderly, or the end state agreement materially worse than the average potential outcome, then the MPC could once again be confronted by a trade-off between the speed with which it returns inflation to target and the support policy provides to jobs and activity,” he said.
“On this path, the MPC can be expected to set policy to manage any trade-off using the framework it applied following the referendum.”
Though acknowledging that the Brexit vote has already hurt the economy by raising inflation and hindering investment, the bank has operated on the assumption that the transition to a new trading relationship with the EU would be smooth.
That gave it room to raise its main rate in November to 0.5 per cent, its first hike in a decade, even though economic growth has slowed noticeably.
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With the British government split over several issues related to Brexit and Prime Minister Theresa May losing a series of votes in Parliament, there’s growing concern that there won’t be a deal by the fall. That means the country could end up crashing out of the EU next year without a deal that would, among other things, see tariffs slapped on British exports.
The aim of the Brexit discussions was to get a political deal by about October to give individual EU parliaments’ the time to approve the agreement before the official Brexit date of March 29, 2019. After that, Britain would remain in the tariff-free and frictionless European single market and customs union until the end of 2020 to smooth the process — but that transition period depends on a broad agreement being reached.
On Thursday, the cross-party Commons Exiting the European Union Committee said it was “highly unsatisfactory” the government had yet to agree on the post-Brexit trading and customs arrangements and that the country may have to stay in the customs union for years after Brexit.
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