Tuesday, May 18, 2004

Two bits of data out today suggest that the global recovery is still trying to get its sea legs.

First, from Germany:
German economic sentiment dipped for the fifth month running in May because of weak domestic demand, heightened geopolitical risk and rising oil prices, the research institute ZEW said on Tuesday.

The Mannheim-based institute said its monthly economic expectations index, compiled from a survey of analysts and institutional investors, fell to 46.4 this month from 49.7 in April.

The bigger than expected drop in the ZEW index, which has a good track record as a leading indicator of output trends, cast doubt over the strength of the recovery in the eurozone's biggest economy.

"A change in mood among financial analysts has failed to materialise - no good omen for the economic recovery," said Wolfgang Franz, ZEW president.

The decline in the index, which is now at its lowest level since July 2003, comes just a day after the Bundesbank warned the upturn was still too dependent on exports to be sustainable.
Second, from Japan:
The growth in the Japanese economy surpassed all expectations for the first quarter as a largely export-driven recovery broadened to include a pickup in consumer spending, government figures showed on Tuesday.

Japan's gross domestic product rose at an annual rate of 5.6 percent, after vigorous growth in the fourth quarter of 2003, when the economy increased at a 6.4 percent annual pace, the fastest in 13 years. . . .

The government said Monday that Japan's current account surplus - a broad measure of trade in goods, services, tourism and investment - rose in March for the ninth consecutive month, expanding 13 percent from the month a year earlier to 1.83 trillion yen ($16 billion). Rising exports to Asia, especially to China, were the main reason for the increase.
Now it is true that the Japanese recovery is being fawned over in the press today thanks to a jump in household spending, per the Financial Times "the largest portion of GDP expansion". The continuing reliance on exports, however -- demonstrated by the nine-month swell of the current account surplus in Japan as well as the symbiotic relationship between Japan and China -- suggests the Japanese recovery is far from self-sustaining. If the promised Chinese slowdown ever comes to fruition, we will really be able to gauge the reality of the Japanese recovery.

Moreover, the rise in household consumption in Japan has not been matched by concomitant rises in household income.
a sustained rebound in consumer spending is far from a sure thing. Although spending has been ticking higher, there has so far been no corresponding increase in incomes. And economists warn that the spending recovery will fade unless wages begin to rise.
So it appears that both Japan and the US -- the two largest economies in the world -- are relying inordinately on "toxic" forms of income (e.g. debt) to boost consumption.

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