Tags: Japan | Effect | Global | Soft | Patch

Japan Effect Can't Fully Explain Global Soft Patch

Thursday, 02 Jun 2011 01:27 PM

 

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Japan's hit to the global supply chain is not the only culprit behind a remarkably synchronised worldwide economic slowdown, casting doubt on predictions of a rapid rebound.

Manufacturing surveys on Wednesday showed the pace of factory activity in May slackened just about everywhere except Switzerland, undershooting economists' forecasts.

Supply disruptions from Japan's earthquake and nuclear disaster are clearly behind some of that. Auto companies cannot make or sell cars if they can't get parts. Toyota Motor's sales dropped 35 percent in China last month, the company said on Thursday.

But Japan's troubles don't explain why economic growth slowed in the United States, India, China and elsewhere in the first quarter. The March 11 earthquake and tsunami came too late in the period to create a substantial drag.

Nor can they fully explain worrisome readings on the U.S. job market. The manufacturing survey's employment index recorded its biggest decline since October 2008, which was the month immediately after the Lehman Brothers bankruptcy sparked the worst global economic collapse in 80 years.

"A cut in production may be inevitable at a time when essential parts are unavailable, but a cut in employment is not," said Goldman Sachs economist Jan Hatzius.

The manufacturing figures and ADP's surprisingly weak May employment report led Hatzius to cut his forecast for U.S. payroll growth to just 100,000, down from 150,000. Other economists have also cut their forecasts for Friday's report.

Figuring out how much blame to assign Japan is important because if the quake is the primary driver, the current slowdown will be short-lived. Japan's production is already coming back on line and should quickly filter through the global supply chain.

If the problems run deeper, hopes for a second-half bounce back may be misplaced.

 

Bank of Japan board member Seiji Nakamura on Thursday downplayed the earthquake's effect on the global economy, calling it "limited as a whole." 

 

ROUNDING UP SUSPECTS

If it's not just Japan, what else might be going on?

Wacky weather can explain some of the weakness that appeared before the quake. Flooding in Australia drove its first-quarter output into negative territory, and harsh U.S. winter storms dented demand early in the year.

Those factors have passed and shouldn't put lasting pressure on growth. Still, U.S. consumption has yet to regain levels seen at the end of 2010.

Many emerging market countries have been tightened monetary policy to try to tamp down inflation, and that may have tempered growth in some regions. Monetary policy works with a lag, so the drag could linger for some time.

Europe's latest round of sovereign debt worries haven't helped matters either, adding to global economic uncertainty and perhaps making business leaders think twice about investing or hiring. Many investors worry those problems will fester.

A spike in oil prices, which intensified in February when unrest hit Libya, also played a role in crimping growth. Oil dropped sharply in early May, although many private economists suspect commodities will soon resume their upward climb.

Oil cartel OPEC is considering increasing its supply target when ministers meet in Vienna next week, a delegate said. That would also ease pressure on the world economy. 

HSBC, which coordinates most of the purchasing managers' surveys outside the United States, thinks an inventory correction was behind the latest round of weak readings.

"This isn't a hard landing," Frederic Neumann, HSBC's co-head of Asian economic research, wrote in a note to clients. "The expansion remains intact, even if at a far less impressive speed."

Speed does matter. The longer the U.S. economy grows below its potential rate — as it did in the first quarter — the bigger the threat to jobs. Fewer jobs mean less spending, and the world remains heavily reliant on Americans to buy goods.

 

BARBERS AND BARTENDERS

J.P. Morgan cut its second-quarter U.S. economic growth forecast to a 2 percent annualised rate from 2.5 percent, largely because of weak consumer spending, and said there was a risk that the final number could look even worse. In the first-quarter, the growth rate was 1.8 percent, data showed last week.

Michael Feroli, a senior J.P. Morgan economist, said he was sticking with his third-quarter estimate of a 3 percent growth rate, which assumes a bounce back in manufacturing and motor vehicle production as Japan's supply chain returns to normal.

But once the damage seeps into the job market it won't be reversed quickly. The labour market tends to feel economic bumps long after they hit, and the recovery comes slowly too.

"We need to stay alert to whether weaker first half growth feeds into materially softer labour market activity... which could in turn propagate the current soft patch on into the second half," Feroli said.

Economists aren't the only ones banking on a second-half recovery. Many businesses are as well.

Package delivery company United Parcel Service said the U.S. economic outlook was "a little muddier" than expected earlier this year but should pick up. 

Rival DHL Express was a bit less sanguine, saying 2011 growth might not be as robust as last year's, when the world economy came charging back from a deep recession. 

Friday's batch of economic data will offer some useful clues about Japan's role in the slowdown. The U.S. employment report naturally takes the spotlight but the global surveys on the services sector bear close watching as well.

Barbers, bartenders, book stores and the myriad other businesses that fall under the broad "services" category don't need Japanese parts, so if those surveys look as weak as the ones for manufacturing, it will be harder to blame Japan. 

© 2014 Thomson/Reuters. All rights reserved.

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