Japanese Imports and Exports Show no Signs of Global Green Shoots

Posted by Michael A. Kamperman on August 26, 2009

The media has hyped the recent GDP data out of France, Germany, and Japan and has declared their economies emerged out of recession in the second quarter and returned to growth.  In July which is the start of the third quarter, Japan’s exports fell 1.3% from June.  Exports in July fell 36.5% from year earlier levels and imports fell 40.8%.  Should we really declare an export dependent economy exporting less than 2/3 of what they exported the year before as out of recession and growing?  How weak is domestic demand in Japan if imports have fallen 40.8%?  In July exports from Japan to the U.S. fell 39.5%.  Now how is the U.S. economy on the verge of recovery if our imports from Japan are down nearly 40%?  The clear answer is both Japan and the U.S. are still mired in a deflationary depression.  If a V-shaped recovery is on the way, then it must have started in August because it certainly didn’t start in July.

 

But what really caught my eye from Japan’s report was that Japanese exports to China dropped 26.5% from a year earlier.  Many economists expect China to play a major part in pulling the world out of the global economic crisis.  These analysts point to China’s 7.9% growth rate in the second quarter as a sign their stimulus plan is working.  I’m sorry, but an economy that is truly growing 7.9% per year does not have a 26.5% drop in imports from one of its largest trading partners.  While China is not doing as badly as Japan or the U.S., in many ways the numbers out of China are more disturbing.  China initiated an aggressive stimulus plan that is the largest in the world as a percentage of GDP. China’s stimulus plan has been front-end loaded, whereas the dysfunctional U.S. plan has been back-end loaded.  China has also opened the lending spigot.  Whereas total lending from U.S. banks has been negative the last few months, China’s banks have increased their loans by over one trillion dollars already this year.  Shouldn’t China be showing growing imports based on all of the stimulus spending and lending in their economy?

 

China calculates their GDP data based on production and not on final demand.  As long as products are produced they are counted in the GDP data even if they are simply placed in a warehouse for storage.  The drop in imports is indicative of declining demand in China.  Most likely China has been over-producing relative to real demand to maintain its growth rates.  If this is so, then China will not need to increase production when real demand returns.  If demand doesn’t return, then China has placed itself in a position whereby it will need to sharply curtail production.  Perhaps the lack or internal demand in China is the reason China’s electricity consumption is down.  It also explains the reason the Chinese economy is now experiencing deflation.  In the Great Depression there was a sharp leg down in the economy, followed by a temporary flattening period, followed by a second sharp leg down in the economy.  Another leg down in the global economy could originate with a loss of faith that China can actually pull itself out of the global deflationary depression, no less the rest of us.