United States

THE latest report released by the US Federal Reserve revealed that the US economy rebounded sharply in the second quarter, buoyed by consumer spending and a swing in business inventories. Real GDP growth was negative 2.1pc in the first quarter but rose by 4pc in the second quarter.

Despite the pickup, growth in the first half of 2014 averaged about 1pc. Economists have now raised their forecasts for the third quarter leading to an average of near 3pc in the second half, translating into an overall growth of close to 2.1pc 2014. Growth forecast for 2015 has been revised in 2.6-3pc range.

The labor market is still struggling to recover. Fed chairperson Janet Yellen hopes unemployment to return to normal levels in 2016. The jobless rate is expected to be 5.9-6pc in 2014. The forecast for 2015 has been revised down to 5.4-5.6pc. The most recent unemployment data released by the Labor Department showed August jobless rate at 6.1pc, its lowest since September 2008. According to the August jobs report, an additional 2m jobs have been provided since August 2013 but these gains are not putting a dent in the US unemployment crisis.

Labour-force participation is at lows not seen since the recession of the early 1980s.The Jerome Levy Forecasting Center, a New York–based economic consultancy, says the policymakers are not paying attention to a key trend in the global economy: the fall of investment in emerging market economies. The Center forecasts that structural problems in the emerging market economies will change the current growth trend in early 2015. It could have the strongest rebound in 2015 with the economy expanding by 3pc. But problems such as population aging and modest prospects for productivity growth will put a drag on the US economy in the coming years.

Meanwhile, the US central-bank plans to end the bond-buying programme known as quantitative easing after October. The multi-trillion dollar economic stimulus plan was launched in late-2008 with the Fed’s purchase of over $600bn in mortgages after the US financial system had come close to collapse. In almost six-years, the Fed’s balance sheet increased to over $4trillion from the pre-crisis level of $900billion due to the Fed purchases of Treasury and mortgage-backed securities. The Fed has been winding down the programme since December, reducing spending from $85billionn a month in December to about $25billion currently. The Fed plans to reduce its bond buying to $15billionn in October, and then end the programme altogether.

The US Treasury budget update, meanwhile, shows that budget deficit narrowed in the first eleven months of the FY 2014 to $589bn from $755bn for the same period of FY 2013. The budget is expected to show a surplus of $80bn in September. If that happens, the deficit for all of 2014 will be about $500bn. This will be more than 26pc below 2013 and the smallest federal deficit by far since 2008. Private debt has been the biggest factor for the huge deficit. Total US debt at the end of the first quarter of 2014 totaled almost $59.4trn, up nearly $500bn from the fourth quarter of 2013. Total debt was $2.2trn 40 years ago.

A CNN report reveals that in America, the gap between America’s wealthiest and its middle and lower classes is widening. Poverty rates have shown little improvement since the financial crisis in 2008. The nation’s poverty rate fell to 14.5pc in 2013, down from 15pc a year earlier, the first statistically significant drop in poverty since 2006. But the number of people in poverty remains stuck at 45.3m as America’s population expansion and job growth has not kept pace. According to the US Census Bureau, Americans are currently earning as much as they were in 1995. In 2013, the median household income went up just $180, reaching $51,939. It was $56,436 in 2007. The richest Americans (those in the top 5pc) have seen their incomes shoot up 14pc since 1995.

Japan

Most analysts and economists are of the view that Japanese economy currently faces challenges over its energy policy, as well as external risks including weak economic conditions in Europe and the US.

In 2014, after a strong first-quarter growth of 6.1pc, the economy contracted by 7.1pc in the second quarter as consumption declined substantially after the April 2014 hikes in sales tax to 8pc from 5pc, the first rise since 1997 and its worst performance since early 2009 when the global financial crisis was at its height, and the steepest quarterly decline since the 2011 earthquake disaster.

Senior official still hope that the economy will recover, supported by the government’s policy measures, a recovery in employment and a rise in incomes. It is now expected to grow by an annualised 3.6pc in the third quarter, bouncing from a 7.1pc plunge in the second quarter.

The Japanese Cabinet Office has revised GDP growth estimate for 2014 to 1.3pc from 1.9pc projected earlier while the 2015 growth has been raised to 1.6pc from 1.4pc. The IMF expects Japan’s economy to grow by about 1.6pc this year, before slowing to 1.1pc in 2015 as a result of fiscal adjustment.

Inflation is expected to rise temporarily to 2.8pc on average for 2014 due to recent increase in consumption tax rate. The Bank of Japan is forecasting GDP growth, adjusted for prices, to hit 1pc in the current fiscal year ending March 2015 while the OECD has revised down its forecasts for 2014 growth to 0.9pc for Japan.

Japan’s Prime Minister Abe is pursuing a reformist economic agenda, which contains fiscal and monetary expansion as well as elements of structural reform that could liberalise the Japanese economy. Since the launching of Abenomics, reforms are progressing in several areas. According to the IMF, the three-pronged approach to reflate the economy through monetary, fiscal, and structural policies is progressing well. But it stressed the need for more forceful reforms to overcome structural impediments to raising growth and ending deflation. Private consumption has already rebounded. The rise in inflation too has depended to a large extent on the weakening of the yen.

Published in Dawn, Economic & Business, September 29th, 2014