After the effects of the natural disaster of the earthquake and tsunami which hit Japan we have of course had the nuclear crisis at the Fukushima plant to consider. Now that a month has passed some of the longer-term effects on the Japanese economy are becoming apparent. For example many car factories are still on part-time working when many felt that the problems would be over quickly. I have reported previously on the effects of the parts shortages on a “just in time” production system and this morning there is more news on this front from Toyota. This time its plants in America and Canada are affected and inspite of its attempts to spin the news the bottom line is this. When the plants are open, they will operate at half capacity, but as they will be shut at various times including a whole week in May (Golden Week in Japan) this means that they will build only about one-third of the usual number of vehicles over the next six weeks. It is no surprise that Honda has already announced production cutbacks but maybe a little bit more of one that General Motors and Ford have had to do so too.
Accordingly we can see that the impact on the world economy may well be more significant that many of the rose-tinted predictions which were published in the media soon after the natural disaster struck Japan. For the immediate future there is no sign of the disruptions ending and linking this to me topic of yesterday the fiscal deficit of the United States we can see that over the second quarter of this year there will be a clear downward influence on economic growth. At a later date some or all of this may be caught up but for now I am reminded of the Chaos theory dictum of a butterfly fluttering its wings over Japan causing a tsunami in America. This time round it is the modern production system which is showing itself to be subject to something of an unpredictable economic tsunami.
Japan’s trade figures show the impact of the crisis
Today the Japanese Ministry of Finance issued the trade figures from March. If we look at exports we see quite an unusual situation for Japan as they fell 2.2% on a year earlier whereas imports rose by 11%. This meant that Japan’s trade surplus fell by 78% from 931,935 million Yen to 196,461 million Yen. If we look for detail in the numbers we can see that car exports fell by 27.8% compared with a year earlier which is in line with the production problems but semi-conductor exports of which there had been similar talk only fell by 7%. The highest percentage fall was in audio apparatus which fell by 31.2% on a year on year basis. If we look at imports the highest percentage increase was 74% and was for iron ore and concentrates which presumably relates to reconstruction efforts.
If we look forward from these figures and consider the production cutback and setbacks then it is likely that the trade figures for April in Japan will show a further deterioration. As these are a component of economic growth (Gross Domestic Product) figures it seems ever more likely that we will have a period of negative economic growth in Japan and that she may well be back in recession as she had a fall in economic output in the last quarter of 2010.
The Japanese Yen
One factor in Japan’s ability to export is her exchange rate. If we think back to the immediate impact of the natural disaster we saw a surge in her exchange rate symbolised by a high of 76.25 against the US dollar in what appeared to be frenzied trading. Regular readers will recall I am not much of a fan of currency intervention but in that melee I would have intervened. Since then there has been a burst of co-ordinated intervention which has improved the situation. Whilst it has not maintained its foray below 85 Yen that happened earlier this month we do find ourselves with the Yen trading just below 83 Yen. So for once those intervening have a profit! Indeed there have been rumours that some of them have been taking it.
Against the Euro the pattern has been even better as the Euro has been strong over this period. If you follow events in the mainstream media you may be surprised by this as I notice even yesterday reports of the Euro being pounded etc. Here the recent low for the Euro was on the tenth of January at 106.75 but right now it is 119.46 for a rise of just under 12% in three months. Not quite the collapsing currency of media headlines is it? Returning to the Japanese and their currency they have been more than happy to see a stronger Euro as it has weakened their currency.
Those looking on and trying to export from Portugal,Ireland and Greece will be much less happy…..
An implication of the recent Japanese and Chinese trade figures
Over the period of the credit crunch there has been much talk of world imbalances. One of these has been in the trade sphere where such imbalance talk revolves around exporters such as Germany,Japan and China importing less and net importers such as the United States and the UK exporting more. Well we can see that Japn is increasing more and if we stretch our minds back to the recent quarterly figures for trade in China we can remind ourselves that with a surplus of only one billion US dollars that on a net basis China is importing more too. There fore someone must be exporting and hopefully one imbalance is being corrected! Perhaps some net importers are actually experiencing the nirvana of export-led growth.
The only flaw in this happy tale is that trade figures are ofetn inaccurate and are prone to substantial revision. It was only 4/5 months ago I was pointing out that US and Chinese trade figures were rather inconsistent to say the least on the subject of Sino-US trade.
The US Housing Market
The Census Bureau provided us with some more information on the state of the US housing market yesterday.
Privately-owned housing starts in March were at a seasonally adjusted annual rate of 549,000. This is 7.2 percent (±18.0%)* above the revised February estimate of 512,000, but is 13.4 percent (±9.1%) below the March 2010 rate of 634,000.
Rather intriguingly and indeed refreshingly the Census Bureau does give a confidence interval for its numbers although it is invariably a bigger number than the answer! Aagain this makes the point that we should look at trends rather than just one months (unreliable) figures. If we do that we see a series of numbers bumping along something of a bottom and the effect of a marginally better number begins to wear off. Also looking back we see that the effect of the stimulus measures such as the home buyer tax credit failed to regenerate the market.
The UK housing market remains very weak
I have been making the case for some time that I feel that the UK housing market is in danger of a hard landing this year. Indeed before I formally joined Mindful Money I wrote an article for this website last November on why I thought that the Bank of England’s accelerated withdrawal of its Supplementary Lending Scheme might hit our housing market hard. In case you are wondering it amounts to approximately £9 billion per month being withdrawn.
In spite of an rather obvious effort to spin the figures (which has worked with the BBC….) you only need to look at the second line of the report to get the truth.
Gross mortgage lending was an estimated £11.3 billion in March, a 21% rise from £9.3 billion in February and a 2% decline from £11.5 billion in March 2010.
If we think back levels of mortgage lending were a worry back in March 2010 and we can see that this March had a level of mortgage lending which is even lower. If we look at the breakdown of the figures we see the following pattern which in fact means that the position is weaker than it may first appear. If we look at what the CML’s chief economist said we get that message.
demand for house purchase loans fell in the first three months of 2011………..Remortgage demand, meanwhile, continues to firm………Stronger remortgage activity looks set to continue propping up overall lending.
So even the Council for Mortgage Lending feels that remortgage activity is leading the market and this is significant because the vast majority of it has nothing to do with the housing market. It may have a knock-on effect on the overall economy but this is hard to measure and as many may well be remortgaging onto higher interest-rates as deals are not what they were this too may be downwards. So we can conclude that even the CML feels that the level of mortgage activity leading to house purchase is very weak.
Rather ironically a firm of estate agents put their house price index for the area in which I live through my door yesterday and it showed that prices in March hit a new all-time high. Now I do live on the edge of and maybe just in the Central London property bubble so that may not be as insane as it may sound to foreign readers! Caveats apply as estate agents have a vested interest but I was left with the thought that yet again we are seeing an example of a feature of these times which is that both income and wealth inequality are rising.
House of Lords
One theme of mine is that our political leaders are putting in a poor performance whilst their numbers seems to ever expand. On that line I notice that the House of Lords now has 792 members and has expanded massively in the term of this Parliament. I would welcome readers thoughts on this as what do they all do for their money? Also I notice a tendency for politicians who lose elections to go to the House of Lords and then to retain involvement in political life and in some cases even be in government. Does this not make something of a mockery of democracy?