Two conflicting updates from different sides of the world economy, with Japan upgrading its outlook and Britain shocking with a slide into negative growth.
The Bank of Japan upgraded its forecast, despite expectations the economy suffered a sharp slowdown in the 4th quarter.
The reports came as the International Monetary Fund raised its outlook for world growth this year to 4.4%, up from 4.2% last October.
But in the UK, the rush to austerity has lost some of its appeal after the preliminary report on 4th quarter GDP growth revealed a contraction of 0.5%, instead of the widely expected growth of 0.5%.
The new shocked the markets, leaving economists and the government spluttering and wondering about the outlook.
While the Office of National Statistics (ONS), said the first reading on GDP doesn’t include all the relevant data, the impact of the severe winter weather in December was the major factor in the fall in growth.
But the ONS pointed out that without the impact of the bad weather, the economic was "flatish’ in the 4th quarter, meaning it had indeed suffered a slowdown from the higher growth rates seen earlier in the year. The economy grew by 1.2% and 0.7% in the second and third quarters of the year respectively.
So the extent of the slowdown is very evident as the UK economy starts to face the impact of the massive spending cuts and job losses the Conservative/Lib Dem Government announced late last year.
Economists say that even if the remaining economic data improves the picture, Britain now faces the very real prospect of a period of ‘stagflation’ (back to the Seventies?) with slow or no growth and inflation running at an annual rate of 3.7%, which is well above the 2% target of the Bank of England (and it has been above that target now for the best parts of a year or more).
The UK chancellor George Osborne, though, refused to change policy despite the evidence that Britain’s economy is shrinking again.
"There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month," he said in a statement.
"That would plunge Britain into a financial crisis. We will not be blown off course by bad weather," Osborne added.
The ONS reported that the services sector – the dominant part of the UK economy – shrank by 0.5% in the last quarter. Construction suffered a 3.3% decline, but industry grew by 0.9%.
The Financial Times’ Lex column made a very good point:
"For context, the UK economy has not contracted by so much, other than during periods of recession, since the second quarter of 1984. That was down to the outbreak of the miners’ strike.
"Snow cannot be blamed for the whole 1 percentage point shortfall this time. If it made only a half percentage point difference, that is concerning.
"Business and financial services output, not obviously prone to bad weather, contracted by 0.7 per cent.
"Construction obviously suffered but industrial production overall was up, thanks in part to a weaker pound.
"What is more, November temperatures were only 1.6ºC colder than average and October was as normal as it gets."
In Tokyo the Bank of Japan raised its growth forecasts for the financial year ending March 31 and predicted faster inflation as strength in overseas demand bolsters exports and pushes up commodity prices.
The central bank said Japan’s economy may expand 3.3%, up from the 2.1% growth estimate last October.
Despite this sharp improvement, the bank kept its main interest rate between zero and 0.1% and maintained its modest program to buy securities at 5 trillion yen ($US60 billion).
The central bank forecast that consumer prices will increase 0.3% in the year starting April, higher than its October prediction of 0.1%.
The bank described Japan’s economy in the statement: "The Bank’s baseline scenario projects that Japan’s economy is expected to gradually overcome the deceleration in the pace of improvement and return to a moderate recovery path as the growth rate of the global economy is likely to start increasing again led by emerging and commodity-exporting economies. As for prices, the year-on-year rate of decline in the CPI is expected to continue slowing."
December inflation, employment and retail sales data are due today and tomorrow in Tokyo.
And In India, the central bank boosted rates once again to try and control strong inflationary pressures boosted by food shortages and price hikes.
The Reserve Bank of India raised its policy rate by 0.25%, the first increase since November.
The increase took the repo rate, the rate at which the central bank lends to commercial banks, to 6.5% the highest since early 2008, just before the GFC crunched demand.
India’s inflation has not fallen as quickly as expected and wholesale prices rose 8.4% in the year to December, up from 7.5% in the 12 months to November as a shortage of onions hit hard.
The government has had to take emergency measures to alleviate price rises in agricultural commodities, such as onions
