Investopedia's Forex Outlook For May 2012: Japanese and British Economies
Japan Rebuilding Should Boost Prospects
Japan's economy was one of the few economies in Asia to experience a decline in its real GDP last year of 0.7%. Economists believe that this rate will improve to 2% in 2012 and 1.7% in 2013, boosted by reconstruction spending in 2012 from the earthquake and significant flooding in Thailand, but slowed by European worries through 2013. Despite the optimistic outlook, there are many risks that remain in place for the country. The IMF has warned that the country's bonds could be in danger if it does not implement strong medium-term fiscal consolidation plans. Meanwhile, the country's debt-to-GDP remains the highest in the developed world, although it's considered relatively safe.
Riding the Recovery From Disaster
Japan's economy faced a series of setbacks from its earthquake and the floods in Thailand. These events led to a sizable 2.3% annualized contraction of its GDP during the fourth quarter of 2011. But on the plus side, the IMF expects the ensuing recovery from those events to boost the country's economy and expand GDP by 2% in 2012.
Japan Faces Risk Without Fiscal Consolidation
Japan has announced plans to halve its primary deficit by 2015 and achieve a primary surplus by 2020, while doubling its consumption tax to 10% by 2015. But the IMF warned in a recent report that a lack of medium-term fiscal consolidation plans could erode the country's safe-haven status, destabilize global bond markets, and potentially have large effects on global output.
Japan's sovereign debt remains the highest in the developed world at approximately 229% of its GDP in 2011, according to IMF estimates. Fortunately, the high level of debt hasn't been a concern for the country, because the majority of it is held domestically and it has traditionally seen account surpluses. But of course, much of that has changed since the global economic crisis.
SEE: How Countries Deal With Debt
Britain Sacrifices Growth For AAA Rating
Britain's economy has been growing at an anemic rate due largely to austerity measures imposed by its government. While these measures have succeeded in preserving the country's AAA rating for now, some economists are questioning whether or not they need to be eased in order to stimulate the economy and drive GDP growth.
The country also faces a number of key risks in the near-term, including a drop in business sentiment that has some economists worried and a potential hike in interest rates by the Bank of England, designed to tame inflation. Combined, these efforts could deflate any hopes of significant surprise economic growth over the coming months.
Slow and Steady Growth
The UK economy narrowly avoided a double-dip recession last quarter, growing just 0.1%, according to the National Institute of Economic and Social Research. The slow growth has been largely attributed to austerity measures that have succeeded in keeping the country's AAA credit rating intact for the time being.
Many economists don't expect the country to return to regular growth rates until 2013 at the earliest. The Chief Economist at the British Chamber of Commerce expects growth of just 0.6% during 2012 as a whole, which is marginally lower than the 0.8% forecast by the government's Office of Budget Responsibility last month.
AAA Credit Rating Preserved
Despite the slow growth, Britain's AAA credit rating remains safe thanks to its successful austerity measures. Standard and Poor's recently affirmed the country's top rating and regards the country's economic outlook as stable. The agency anticipates the country will see modest real GDP growth of about 1.6% between 2012 and 2015.
Moody's and Fitch also maintain an AAA credit rating on the country, but at least one of them sees some key challenges. Moody's reduced its outlook to negative, warning that weak economic growth could threaten the government's plans to reduce the deficit. In particular, this could be caused by reduced political commitments, higher bond yields or a new banking crisis.
SEE: What Is A Corporate Credit Rating?
Several Key Risks Remain
One of the key concerns was a surprise drop in factory output in February of 2012, which came despite an upbeat tone seen in recent business surveys. The drop was the largest fall since April of last year when the Japanese tsunami and royal wedding disrupted normal business. These troubled production figures have slashed hopes of a surprise increase in GDP.
The market shouldn't be looking towards the Bank of England for any help either. Despite the country's lackluster growth, the central bank is said to be nearing the end of its asset-purchasing program that has helped stimulate the economy. Moreover, it may even raise interest rates sooner than expected in order to combat stubbornly high inflation.
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