European Union In Recession, Japan Recession Looks Next

Company Revenue Declines Reflect Progressing Global Slowing

Preliminary U.S. GDP numbers will be announced Thursday with current consensus range being 2.8% to 2.9%. Such numbers seem ambitious given earnings season results. Where over 70% of companies reported earnings above expectations, a startling 60% disappointed on revenues. This marks the lowest beat rate on revenues since Q1, 2009, according to Factset.

Earnings can be made to look good by shifting accruals and creating efficiencies. Revenues are sales and they either exist or they don’t. Through revenues, one gains insight into fundamental demand.

Europe is an obvious explanation for apparent demand weakness. Europe also appears to be trending into added weakness.

Europe is now in recession with two straight quarters of GDP contraction. Most recent Q3 data shows a EU -.1% GDP contraction. This combines with a Q2 contraction of -.2%. Most concerning is Germany, EU’s chief financier. On November 23, Germany reported quarter over quarter GDP decline from Q2 growth of .3% to Q3 growth of .2%. Year over year, Germany’s GDP growth went from 1% in Q2 to .9% for Q3. More concurrent industrial production numbers show German production contracting -2.1% in October.

Japan Q3 GDP Contracts Sharply, Against Its High Sovereign Debt

Projections are next for Japan to fall into recession. Q3 results show Japan’s GDP declined a marked -3.5% versus Q3 2011, its largest contraction since March 2011’s tsunami strike.

Of Japan’s GDP, a cut of .7% came from faltering exports. A concerning feature given Japan’s declining Terms of Trade recently discussed on this space and its implications for Japan to sustain its debt, which ranges 220% of GDP. Highest among G7 countries.

Private capital investment, on the GDP report, saw caution assert with a decline of -3.2% versus Q2.

Japan’s Exports Continue Into Weakness, Now Imports Look To Further Weaken

Troubling for Japanese exports is an ongoing dispute with China over what Japan calls the Senkaku islands (China calls them Diaoyu islands). Consensus is this dispute now creates an outsized impact on trade between China and Japan. China is Japan’s largest trading partner accounting for 20% of Japan’s exports in 2011 compared with U.S. buying 15.3% according to Japan External Trade Organization numbers.

On November 20, Japan reported its merchandise trade results for October. This data reveals balances between exports and imports. According to data, Japan showed a steeper than expected trade deficit of -549B yen, expectation was for a -337B yen deficit. More troubling for global demand is Japan’s exports contracted by -6.5% in October, and its imports also contracted some -1.6%.

Exports for Japan are now down for a 5^th consecutive month, but exports to U.S. have been positive for 12 month and up 3.1% for October. Perhaps demonstrating U.S. decoupling from general global weakness (despite a strong yen). Still, creating real concern for U.S. is Japan’s negative import number of -1.6%, first time in only two months, indicating volatility looking to trend into weakness.

Deflation Marks Japan’s PPI, Japan And China Show Major Weakness In Steel Prices

Released November 11 was Japan’s CGPI (corporate goods price index) which is akin to a producer price index (PPI) and monitors price inflation, or deflation. October price results show deflation in Japan with producer prices falling -.3% month over month and -1.0% year over year. This index is trending into deflation with October bringing a 7^th consecutive monthly decline.

For particular businesses, weakening is most noted in electronics at -3.6% and lumber -3.4%. But what really shows weakness is iron and steel prices down a concerning -9.9%.

Declining steel pricing in Japan combines with a similar result from China’s PPI (released November 8). China’s PPI showed ferrous metals down 11.4% for October, after contracting 12% in September.  

Looking at other economic indicators for Japan, none  point to positive results. General propositions suggest Japan entering recession. However, Bank of Japan has been hard at work with a variety of programs, which includes a very diverse asset purchase program that’s been growing.