Japanese Q2 Real GDP Growth Downshifts Sharply as Export Growth Slows

By: Paul_L_Kasriel

After growing at an annualized rate of 3.2% in the first quarter, Japanese real GDP growth slowed to only 0.5% in the second quarter. To be sure, domestic demand growth slowed - from 1.5% to 0.4%. But, as the first chart below shows, a rising percentage of Japanese real GDP is accounted for by its exports. For example, in Q2:2003, real exports accounted for 11.5% of Japanese real GDP. By Q2:2007, this ratio had risen to 15.3%.

Chart 1

In the second quarter, annualized Japanese real export growth slowed to 3.5% from 14.3% in the first quarter. Hmm. U.S. real imports contracted at an annual rate of 2.6% in the second quarter after growing 3.9% in the first. As the chart below shows, there is relatively high positive correlation between U.S. real import growth and Japanese real export growth. So, if U.S. domestic demand is slowing, this will retard U.S. import growth. Simultaneously, this will retard export growth in the world's second largest economy - Japan.

All of which goes to show that the consensus talk about how the global economic fundamentals are in great shape even if the U.S. economy is going through a bit of a "soft patch" (Alan, how we miss your phrase-making) is just another example of partial-equilibrium analysis. We live in a general equilibrium world. Everything affects everything else. And one important reason non-U.S. real GDP growth has been so strong in recent years is that the U.S. has been a huge importer of the rest of the world's production. Now that U.S. domestic demand is giving up the ghost, the rest of the world will begin to see its export growth slow. On top of that, because many foreign central banks have been tightening their monetary policies, the rest of the world's domestic demand will be slowing as well.

Chart 2

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

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