Weekly Economic Recap: A Bump in the Road for Japan

Last week, just before the end of their trading session, Japan released key economic data, which showed some cracks in their recovery. Bluntly, the April tax increase wreaked havoc on retail sales.

Last week, we learned that the post-tax hike recovery lost steam in July. This comes after back to back strong numbers for both May and June. Sales were down 0.5 percent in July. This is troubling as it throws a bucket of cold water on the Bank of Japan’s (BOJ) theory that spending would recover quickly. Consumers are not absorbing this new tax hike like they were supposed to.

After seeing rapid economic growth of 6.8 percent, the second quarter GDP declined sharply. We are expecting the GDP to recover a bit throughout the second half of 2014. However, weak sales numbers and sharp drop off in industrial production means the downside risk is growing. There is another tax hike coming for October 2015 from eight to ten percent. That tax hike is contingent upon economic growth.

Turning our attention to Europe, and the picture is not very rosy for the struggling European Union. Three months ago, the European Central Bank (ECB) announced a stimulus package which included policy changes, rate cuts and a long term refinance operation. This was designed to spur commercial banks to lend money which would kick start economic growth and stop deflation from setting in.

Last week’s data is not indicative that it worked very well and there are more problems looming on the horizon. The German IFO, manufacturing, lost ground for the fourth straight month. This comes after the German GDP contracted in the second quarter. Worries are mounting that the EU’s workhorse economy is beginning to stall. We also got the initial estimate of the EU CPI and it was not pretty. Annual inflation was just up 0.3 percent. The ECB has a target at two percent.

The likelihood of the ECB implementing further accommodative policies are growing. However, these worries are premature. The first round of TLTRO are scheduled for September 18 and again on December 11. At this week’s meeting, we are likely to get acknowledgement from the ECB over the vulnerability of the EU economy. We are expecting the EU to stand put as they wait to see the effectiveness of the long term refinance operation.