Japan and EU Economic Outlook
The OECD has revised its global economic outlook; countries are easing back on track towards a global recovery. The most recent Economic Outlook by the OECD estimates global growth will reach 4.6% in 2010 and 4.5% in 2011, up from 3.4% and 3.7% respectively. Much of this growth rides on emerging economies, with Asia assuming the lead. Developed countries are benefiting from the spillover effect.
Economic numbers for Japan are looking more positive. Exports are gaining momentum; they increased by 40.4% from the previous year in April, the fifth straight month of growth. The effect is strongly felt in Japan’s critical sectors, such as the auto industry. Domestic output of cars was up 50.8% year on year April.
Household consumption and investment have also increased, though to a lesser extent.
"The data reflected the current strength of the economy," Hiroshi Watanabe, economist at Daiwa Institute of Research told AFP.
The OECD estimates that Japan will grow by 3% in 2010, though this is expected to slow down and average out at 2% in 2011.
The eurozone will continue to experience a growth-lag though. It is projected to grow by 1.2% in 2010 and 1.8% in 2011. Market instability and sovereign debt issues in peripheral countries, such as Greece, Spain, Ireland and Portugal, are affecting the Euro area’s growth. There is a chance that Europe may spiral into a double dip recession, although immediate action by European governments and the European Central Bank has allayed market fears for the moment.
The Greece crisis has highlighted the need to bolster surveillance of domestic spending policies though.
"We are a monetary federation. Now we need the equivalent of a budgetary federation in terms of the control and surveillance of the application of public finance policy," European Central Bank President Jean-Claude Trichet was quoted saying in the Associated Press.
Despite economic activity gaining momentum though, a surge in economic activity doesn’t mean that employment will pick up, especially in the EU area and Japan. Rather, average hours worked will increase. Kyodo News reports that the 1.5% increase in average wages in Japan is due to an increase in overtime pay. Companies will continue to cut costs as a result of deflation, visible in the drop in scheduled salaries.
The case is similar in the EU, where net job creation is unlikely to increase.
And while the Bank of Japan has raised its assessment of the economy, questions still linger about the sustainability of growth. Government initiatives, such as “eco-points”, are due to run out, and tax revenue is unlikely to get any bigger. On the other hand, welfare expectations are only getting higher, in large due to an increasingly graying population.
Economists are increasingly calling for a gradual and staggered hike in consumption tax as of 2011. Consumption tax is currently at 5%. Hiromasa Yonekura, the new chairman of the Japan Business Federation, believes it should rise by 1% per year to help finance social welfare and pension costs, which are increasing by 1 trillion yen every year.
EU member states must set a minimum 15% standard rate Value Added Tax (VAT), the European equivalent of Japan’s consumption tax.
Other economists in Japan look to deregulating markets – indeed, underperforming markets in Japan, such as healthcare, could benefit were the government to outsource to private institutions. The potential for growth is certainly there.