Macro Weekly Europe is not Japan

Macro Weekly
Group Economics
Macro & Financial Markets Research
Europe is not Japan
7 September 2014
 Talk of a Japan scenario is widespread: Pessimism about the eurozone economy is widespread. Many
commentators argue, usually casually, that the eurozone economy is sliding into a 'Japan scenario'.
Presumably, what is meant by the Japan scenario is a long period of deflation and no growth, due to the
bursting of asset price bubbles against the background of high debt.
 Differences between Japan and the eurozone: There is no denying that potential growth in the eurozone is
low and that the economy's growth performance is likely to be very modest at best in the period ahead, but the
situation in the eurozone is very different from what happened in Japan over twenty years ago. The strength of
the yen and scale of asset price bubbles that burst in Japan are not comparable with developments in the
eurozone. Policymakers have also done a better job in reacting to problems in Europe.
 Very sluggish growth, but positives are appearing: Recent economic data out of the eurozone have been
disappointing. However, we have recently seen a couple of positive developments. First, as mentioned
previously, the ECB's bank lending survey is indicating a modest loosening of credit standards by eurozone
banks. Another helpful development is the weakening of the euro.
Main economic/financial forecasts
GDP grow th (%)
2012
2013
2014e
2015e
+3M
+12M
2014e
2015e
2.3
2.2
2.2
3.8
United States
0.23
0.23
0.3
1.3
0.3
1.7
-0.6
-0.4
0.9
1.7
Eurozone
0.17
0.15
0.0
0.0
0.0
0.0
1.5
1.5
1.5
1.4
Japan
0.21
0.21
0.2
0.2
0.2
0.2
United Kingdom
0.3
1.7
3.0
2.8
United Kingdom
0.56
0.56
1.0
1.8
1.0
2.2
China
7.7
7.7
7.5
7.0
World
Inflation (%)
3.0
2012
3.0
2013
3.2
2014e
3.8
2015e
28/08/2014 04/09/2014
+3M
+12M
2014e
2015e
United States
2.1
1.5
2.0
2.2
US Treasury
2.34
2.45
2.6
3.1
2.6
3.3
Eurozone
2.5
1.3
0.5
1.0
German Bund
0.89
0.97
1.0
1.4
1.0
1.6
Japan
0.0
0.3
2.5
1.7
Euro sw ap rate
1.07
1.17
1.2
1.6
1.2
1.8
United Kingdom
2.8
2.6
1.6
1.7
Japanese gov. bonds
0.49
0.51
0.5
1.1
0.5
1.1
China
2.7
2.6
2.4
2.8
UK gilts
2.37
2.50
2.6
3.1
2.6
3.2
World
Key policy rate
3.9
04/09/2014
3.8
+3M
3.9
2014e
3.8
2015e
28/08/2014 04/09/2014
+3M
+12M
2014e
2015e
Federal Reserve
0.25
0.25
0.25
1.50
EUR/USD
1.32
1.30
1.28
1.20
1.28
1.20
European Central Bank
0.05
0.05
0.05
0.05
USD/JPY
103.7
105.3
110
117
110
120
Bank of Japan
0.10
0.10
0.10
0.10
GBP/USD
1.66
1.64
1.62
1.56
1.62
1.60
Bank of England
0.50
0.75
0.75
2.00
EUR/GBP
0.79
0.79
0.79
0.77
0.79
0.75
People's Bank of China
6.00
6.00
6.00
6.00
USD/CNY
6.14
6.14
6.10
6.20
6.10
6.20
United States
Eurozone
Japan
Source: Thomson Reuters Datastream, ABN AMRO Group Economics.
3M interbank rate
10Y interest rate
Currencies
28/08/2014 04/09/2014
2
Macro Weekly - Europe is not Japan - 7 September 2014
Han de Jong, tel. +31 20 628 4201
The Big Picture
Pessimism about the eurozone economy is widespread. Many
JPY/USD
commentators argue, usually casually, that the eurozone
economy is sliding into a 'Japan scenario'. Unfortunately, what
that is exactly is not well defined. Presumably, what is meant
by the Japan scenario is a long period of deflation and no
growth, due to the bursting of asset bubbles against the
1985-1995
270
220
background of high debt . There is no denying that potential
growth in the eurozone is low and that the economy's growth
170
performance is likely to be very modest at best in the period
ahead, but I still think that the situation in the eurozone is very
120
different from what happened in Japan after the bursting of the
asset bubbles over twenty years ago. In fact, looking at the
data, perhaps Japan's economic performance hasn't been as
bad as many make it out to be. So in a sense, even Japan
70
85
86
87
88
89
90
91
92
93
94
95
Source: Bloomberg
may not be the Japan as some see it.
The deflationary effect of the bursting of bubbles in Japan was
Japan is not ‘Japan’
massive. Japanese policymakers had kept the value of the yen
It is not entirely clear what people mean when they say that
artificially low after the second world war, but pressure to allow
Europe is falling into a Japan scenario. But one must assume
the yen to appreciate started building in the mid 1980s. The
they mean a sustained period of stagnation, or worse,
yen then, indeed, doubled in value, appreciating from some
combined with deflation. However, the fact is often overlooked
250 yen per dollar in 1985 to 120 two years later. The
that the Japanese economy has grown modestly since the
appreciation continued albeit at a slower pace. The euro has
bursting of its bubbles in the late 1980s. The standard of living
been more expensive than its 'fair value' for some time, but it
in Japan is high and unemployment is low. In fact, the country
has not doubled in value.
is looking at ways to increase its labour input by trying to raise
the participation of women and by considering allowing more
The Japanese stock market reached a high near the end of
immigration. When one travels to Japan, one does not get a
1989 when the Nikkei traded at nearly 39,000 points. Almost
sense of being in a country that has been in crisis for 20 years.
25 years later, the index stands at some 15,600. The
Eurostoxx50 index peaked at around 4500 in 2007, then fell to
Differences with Japan
below 2000 in 2009, but has now recovered to some 3250.
Recessions are a normal part of the business cycle in any
This is no comparison with Japan.
economy. The causes of recessions can vary. Sometimes,
mature upswings lead to bottlenecks and rising inflation. When
Nikkei 225
central banks try to fight inflation with tight monetary policy,
Index
they regularly push the economy into a downturn. A recession
can also be caused by a shock, such as a sudden sharp rise in
40,000
energy prices. Another form of recession is often described as
35,000
a 'balance-sheet recession', a term coined by the economist
30,000
Richard Koo. Such a downturn is caused by the loss of wealth
following declining asset prices against a background of high
debt.
The
necessity
to
repair
balance
sheets
forces
25,000
20,000
households, companies and banks to reduce spending and
15,000
save. As economic activity drops, asset prices are undermined
10,000
further, making it hard to achieve economic recovery. The
5,000
process of balance-sheet repair is slow and painful, as we
have been experiencing for some time.
90
Source: Bloomberg
94
98
02
06
10
14
3
Macro Weekly - Europe is not Japan - 7 September 2014
Another difference is property prices. Japan's real estate
Another helpful development is the weakening of the euro. The
became unbelievably overvalued in the 1980s and then fell for
single currency has lost some 10 dollar cents since March with
a period of more than 15 years. A number of European
most of the decline occurring since July. This should provide
countries have also seen property prices come down, but,
some useful strengthening of competitiveness over time.
again, what happened in Japan does not bear comparison.
Last, but not least, there was Mario Draghi. The potential for
Japan land prices
the ECB boss to disappoint markets last week was high. But
Draghi did not disappoint. In fact, he exceeded expectations by
Nationwide all, % yoy
cutting interest rates and suggesting that sizeable action in
15
terms of asset purchases will be forthcoming soon. It is starting
10
to look like the ECB is in the process of launching a multistage rocket. The first tranche of the TLTRO is due on 18
5
September. By cutting interest rates last week, the ECB has
provided further encouragement for banks not to be shy and to
0
go for a high take-up. The ECB will also announce an asset
purchasing programme next month and start buying asset-
-5
backed securities and covered bonds straight away. The
-10
91
93
95
97
99
01
03
05
07
09
11
13
Source: Bloomberg
remarks Draghi made about the desire to increase the size of
the ECB's balance sheet back in the direction of the levels
seen in 2012 suggest that the asset purchases will be
sizeable. We continue to have a nagging feeling that European
Japanese policymakers allowed the budget deficit to rise to
markets for these securities are too small to achieve the size
10% GDP in 1998, and while the deficit has been lowered
of purchases Draghi is hinting at. The icing on the cake will be
since, it has averaged some 7% GDP over the last 15 years or
the release of the outcome of the asset quality review among
so. Combined with very sluggish growth of nominal GDP, this
banks and the results of the stress tests. There is, clearly, a
has led to government debt currently above 200% GDP. Here,
potential for disappointments. But if the ECB plays its cards
too, there is no comparison with Europe.
the way Draghi has been doing recently, we could be looking
at a period of positive news.
A last major difference is the response of the monetary
authorities. After the equity and property bubbles burst in
US going from strength to strength, but labour market
Japan, the BoJ initially tightened monetary policy. Stimulus
takes a breather
came much later. Bank supervisors were also slow in
Last week saw the publication of the various ISM measures in
responding to the problems in the banks. The ECB's efforts to
the US. According to this gauge, business confidence in the
create transparency about the banks' positions cannot really
manufacturing sector strengthened from an already high 57.1
be called 'decisive' either, but they have been quicker and
to 59.0. Even more impressive was the rise in business
more assertive than their Japanese colleagues.
confidence in the non-manufacturing sector: 59.6, up from
58.7. This series goes back to 1997 (in Bloomberg) and its
Very sluggish growth, but positives are appearing
August level has been exceeded only three times since then.
It can be argued, of course, that regardless of the causes,
Interestingly,
Europe is facing a period of stagnation and deflation similar to
strengthened in China last month.
business
confidence
in
services
also
what people believe Japan has gone through. Recent
disappointing data strengthen such fears. There is no doubt
The employment report for August fell short of expectations.
that the eurozone's trend growth rate is relatively low and that
For the first time in six months, the US economy added fewer
inflation is currently too low for comfort. We have recently seen
than 200,000 jobs in one month. The August total amounted to
a couple of positive developments, however.
a modest 142,000 while the data for the previous two months
was revised down by a total of 28,000. A stronger number
First, as mentioned a few weeks ago, the ECB's bank lending
would have been better, but this is not bad either. It implies
survey is indicating a modest loosening of credit standards by
that the recovery is continuing. The trend increase in the
eurozone banks. That survey also suggests that credit demand
labour force is most likely somewhat below 100,000, so even
is strengthening. Last week saw some hopeful signs in
the August number reduces unemployment, albeit not by
Germany. Having been sluggish for some months, industrial
much. At the same time, the relatively weak number provides
orders and industrial production were strong in July. Orders
support to the doves on the FOMC who prefer to start
jumped no less than 4.6% mom, while output was up 1.9%.
tightening monetary policy later rather than sooner.
4
Macro Weekly - Europe is not Japan - 7 September 2014
WEEKLY ECONOMIC CALENDAR
Day
Date
Time
Country
Monday
Monday
Monday
Monday
Monday
Monday
08/09/2014
08/09/2014
08/09/2014
08/09/2014
08/09/2014
08/09/2014
01:50:00
01:50:00
07:00:00
09:15:00
JP
JP
JP
CH
CN
RU
Tuesday
Tuesday
Tuesday
09/09/2014
09/09/2014
09/09/2014
10:30:00
13:30:00
16:00:00
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
Wednesday
10/09/2014
10/09/2014
10/09/2014
10/09/2014
10/09/2014
10/09/2014
Thursday
Thursday
Thursday
Thursday
Key Economic Indicators and Events
Period
Latest outcome
Consensus
GDP - % qoq
BOP Current account - JPY bn
Economy Watchers Survey - index
CPI - % yoy
Trade balance - USD bn
GDP - % yoy
2Q F
Jul
Aug
Aug
Aug
2Q P
-1.7
-399.1
51.3
0.0
47.3
0.8
-1.9
410.1
51.0
GB
US
US
Manufacturing production - % mom
NFIB small business optimisme - index
US Job Openings by Industry
Jul
Aug
Jul
0.3
95.7
4671.0
0.3
95.7
01:50:00
08:45:00
23:00:00
15/09/2014
15/09/2014
15/09/2014
JP
FR
NZ
CN
CN
CN
Machinery orders private sector - % mom
Industrial production - % mom
Policy rate - %
M2 money growth - % yoy
New Yuan Loans - CNY bn
Aggregate Financing - CNY bn
Jul
Jul
Sep 11
Aug
Aug
Aug
8.8
1.3
3.5
13.5
385.2
273.1
3.7
-0.4
13.5
700
1170
11/09/2014
11/09/2014
11/09/2014
11/09/2014
01:01:00
03:30:00
03:30:00
08:00:00
GB
AU
CN
DE
RICS house price balance - %
Unemployment - %
CPI - % yoy
CPI - % yoy
Aug
Aug
Aug
Aug F
49
6.4
2.3
0.8
47
6.3
2.2
0.8
Friday
Friday
Friday
Friday
Friday
Friday
12/09/2014
12/09/2014
12/09/2014
12/09/2014
12/09/2014
12/09/2014
03:00:00
06:30:00
11:00:00
14:00:00
14:30:00
15:55:00
KR
JP
EC
IN
US
US
Policy rate - %
Industrial production - % mom
Industrial production - % mom
CPI - % yoy
Retail sales - % mom
Univ. of Michigan cons. confidence - index
Sep 12
Jul F
Jul
Aug
Aug
Sep P
2.25
0.2
-0.3
8.0
0.0
82.5
2.25
0.5
0.9
0.3
82.8
0.5
83.5
Saturday
Saturday
Saturday
13/09/2014
13/09/2014
13/09/2014
07:30:00
07:30:00
07:30:00
CN
CN
CN
Fixed investments - % yoy
Retail sales - % yoy
Industrial production - % yoy
Aug
Aug
Aug
17.0
12.2
9.0
16.9
12.1
8.8
ABN AMRO
40.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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