Disappointment Becomes Global-Growth Norm as Japan Contracts

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Group of 20 leaders pledged over the weekend to do everything they can to boost the global recovery. Japan’s descent into a recession is the latest reminder of how elusive that goal is proving to be.

Less than 24 hours after heads of state gathering in Brisbane, Australia, agreed to take measures that would boost their economies by a collective $2 trillion by 2018, the Cabinet Office delivered news in Tokyo that Japan’s gross domestic product unexpectedly shrank an annualized 1.6 percent in the three months through September, the second straight contraction.

Disappointment is becoming routine for the global economy, with the International Monetary Fund last month cutting its 2014 world-growth outlook for the sixth time since January 2013. Weaker expansion stands to add pressure on policy makers including European Central Bank President Mario Draghi who are already pushing the limits of monetary stimulus and governments that are reluctant to increase spending.

“People are misreading the strength of these economies,” said Steven Ricchiuto, chief economist for Mizuho Securities USA Inc. in New York. “Monetary policy is not capable of dealing with a world of excess supply. You need proper fiscal policies and nowhere in the world are we applying proper fiscal policies.”

The IMF’s estimate last month for 3.3 percent global expansion this year is down from a 3.6 percent forecast given a year earlier and 4.1 percent two years ago. The institution, whose next World Economic Outlook update comes in January, previously made similar cuts to forecasts for 2012 and 2013 growth as incoming data trailed expectations.

Low Growth

The fund said in a report last week that major advanced economies, especially the euro area and Japan, “could face an extended period of low growth reflecting persistently weak private demand -- especially investment -- that could turn into stagnation.”

The Japanese contraction prompted JPMorgan Chase & Co. to cut its estimate of third-quarter global growth to 2.6 percent from 2.8 percent. “The disappointments have been fairly broadly based,” said Joseph Lupton, JPMorgan senior global economist in New York.

The G-20 plan includes almost 1,000 individual policy changes designed to lift growth, and the nations said they would hold each other to account to ensure they are implemented. While IMF Managing Director Christine Lagarde said she “strongly” welcomed the effort, London-based research firm Capital Economics Ltd. said the proposal “will no doubt join the long list of forgotten” action plans from previous G-20 summits.

U.S. Economy

While the U.S. economy has enjoyed a resurgence, as unemployment dropped last month to the lowest level in six years, the weakening world outlook is being compounded by the threat of recession in Europe and slowing growth in China. The Federal Reserve’s plan to start withdrawing monetary stimulus also threatens to roil markets.

Japan rolled out the package of policies that came to be known as Abenomics in 2013, in an attempt to pull the country out of two decades of stagnation. The Bank of Japan set an inflation target of 2 percent and embarked on an open-ended campaign to expand the monetary base through asset purchases.

The government promised a series of structural reforms, many of which it has yet to implement, such as liberalizing the labor market, lowering corporate taxes and dropping trade barriers.

Printing Money

Now one budget-balancing policy that Prime Minister Shinzo Abe left intact from his predecessor appears to be causing collateral damage. An April increase in the sales tax to 8 percent from 5 percent contributed to Japan slipping into its fourth recession since 2008.

“We haven’t had the reforms,” Paul Donovan, managing director of global economics at UBS Ltd. in London, said in a telephone interview. “What we’ve had is more money being printed.”

Abe today called an early election in a bid to extend his term and salvage his economic policies. He also delayed for 18 months a second planned sales-tax increase that was scheduled for October 2015. The recession didn’t mean Abenomics was a failure, the prime minister said.

Abe’s policies have enriched investors, even if they haven’t delivered the intended economic boost. Since November 2012, Abenomics has sent the Topix index up 89 percent in yen terms, the biggest gain in developed markets.

Fed Study

GDP data for 23 advanced economies since 1970 show output usually fails to return to the pre-crisis trend after recessions, especially deep ones, Fed Board economists said in a research note last week. That leads forecasters to repeatedly cut potential-growth estimates, they wrote.

The ECB may need to expand its asset-buying program to include sovereign bonds if deflation continues to pose a risk for the euro area, the IMF said last week.

The “band of brothers” of developed economies that drove world growth earlier this year appears to be unraveling, with both Japan and Germany struggling, Gustavo Reis, a New York-based economist at Bank of America Corp., said in an e-mail. “The slowing global momentum highlights how badly needed is the tailwind of lower oil prices,” Reis said.