Top 5 Graphs of the Week - 22 May 2010

This week we look at the data out over the past week that showed a continued (yet fragile) economic recovery in Japan, higher economic growth rates in Mexico, continued strength in the economy of Taiwan, and relatively subdued inflation pictures in both the EU and US.

1. Japan GDP Growth
Japan's economy grew at an annualized 4.9% in Q1 2010, below consensus estimates of 5.5%, but on par with a revised Q4 2009 growth figure of 4.2%. Japan's economy has made a decent bounce-back over the past year, driven largely by international trade; showing a continued reliance of the Japanese economy on exporting. However much of the recovery thus far has been driven by export demand from China (relating to stimulus spending), and more broadly from inventory rebuilding (inventory cycle). Thus much of it to date has been somewhat artificial - it's almost coming down to a question of whether international trade will make a solid and broad based recovery as to whether Japan's economic recovery will be cemented. But then there's also deflation issues and fiscal challenges.


2. Mexico GDP Growth
Mexico saw its economy return to growth on an annual basis (but pulling back slightly on a quarterly basis - note the impact of the comparator period). GDP grew 4.3% in Q1 year on year; slightly above the 4% Bloomberg median estimate. On a growth basis Mexico has also made a sharp recovery back to 'normal' from the deep lows at the height of the crisis. However Mexico's growth is running below potential as the drug war drags on; with continued violence spooking off foreign direct investment. Even the Finance Minister, Ernesto Cordero, noted that violence from the drug war cuts about 1% point off of GDP growth. So as with most emerging economies, lots of potential return, but plenty of volatility.


3. Taiwan GDP Growth
The economy of Taiwan grew 13.27% in Q1 year on year, beating estimates for 11% growth, and surging ahead of the Mainland's 11.9% growth. The statistics bureau of Taiwan raised its 2010 GDP growth projection to 6.14% from 4.72%, and inflation to 1.4% from 1.27%. The economy of Taiwan (whether you call it province of China, or republic of China), has benefited immensely from sales of computer chips and display panels to the Mainland as the Chinese economy continues to surge; opting for closer trade ties over ideology differences as progress moves on in freeing up trade and commerce. But again, as there is huge potential return, there is also risk; eventually China wants reunification, and the form that eventually may take will also have significant economic ramifications (with the potential to be positive or negative).


4. EU Inflation
European inflation crept up slightly in April, with Euro Area inflation tracking at 1.5% (1.4% in March, and 0.6% in April 2009), and European Union inflation tracking at 2% (1.9% in March, and 1.3% in April 2009). As can be seen on the chart below headline inflation is making a bit of a rebound as cyclical factors such as commodity prices push through into the more volatile/market driven aspects of inflation. However core inflation continues to track downwards. Basically the inflation picture for Europe is reasonably subdued for the near term, especially as fiscal challenges continue to dog the continent; but there are risks to the upside longer term, particularly if stimulus measures become more significant and prolonged in their use.


5. US Inflation
US inflation muddled along sideways in April, recording 0.9% year on year in the core index, and 2.2% in the headline index. The results are fairly boring this time, no particular signs of inflation re-surging just yet, which in the short term will give the Fed plenty of comfort (and those who watch the Fed - opposing any step to withdraw stimulus) to continue its policy of significantly low interest rates for a long extended period. Of course the risks to this policy include sowing the seeds for future inflation, encouraging excessive risk taking, and promoting asset bubbles. But to be fair there is a time and a place - and that probably is still now, but the challenge will be to pull out before the vicious asset bubble cycle is reflated (with timing being one aspect, and political pressure being another aspect).


Summary

On the GDP front we looked at the strong rebound in the Japanese economy; noticing that it is still heavily dependent on international trade, with consumer spending and inflation still lack luster, and risks arising from deflation and fiscal challenges. Then we looked at Mexico, which showed a strong recovery in economic growth, but held back by drug and gang related violence. Then Taiwan with a surging recovery, helped by forging closer ties with the Mainland. The uniting theme is a strong bounce back since the peak of the crisis, but in each case significant risks remain to continued strong economic growth.

On the inflation front, the EU showed little signs of a pick up in inflation, other than headline measures. While the US results showed little in the way of an upward trend in the past index results. So on both fronts, a reasonably subdued inflation picture in the short to medium term. But what will be interesting to monitor is the medium to long term, and of course - the policy response to this.

So as a one line summary for the data we looked at this week: strong economic growth bounce back with plenty of risks, and relatively subdued inflation pictures in the developed economies.

Sources
1. Economic and Social Research Institute (Japan) www.esri.cao.go.jp
2. OECD Statistics database www.oecd.org
3. National Statistics, Republic of China (Taiwan) eng.stat.gov.tw
4. Eurostat ec.europa.eu/eurostat
5. Bureau of Labour Statistics www.bls.gov

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