Japan: Recovery delayed

In Japan, economic output contracted significantly in the first quarter of 2021. The pandemic and measures to contain it continued to dampen economic activity, in particular private consumption. All in all, I expect that the Japanese economy will grow only moderately (when compared to other countries) in the current year due to the slump in economic output in the first quarter. Gross domestic product will – according to my forecast – increase by 1.8 percent in the current year. In 2022, I expect a growth rate of 3.3 percent.

In Japan, gross domestic product contracted significantly by 1.3 percent in the first quarter of 2021 (annualized minus 5.1 percent). As higher number of Corona cases occurred in winter, containment measures were tightened. In particular, people were encouraged to stay at home and switch to working from home if possible. This significantly dampened private consumption. In addition, exports were less dynamic at the start of the year than at the end of 2020. In the second quarter, the Japanese economy is expected to grow only slightly. As Japan’s vaccination program has been slow to get underway, various containment measures remain in place or have even been tightened again for individual regions. This will continue to dampen private consumption.

Economic growth will continue to be supported by strong foreign demand. However, exports will grow less strongly than at the end of 2020, and sentiment among Japanese companies has also improved somewhat recently. Against this background, business investment should increase at solid rates in the second quarter and even stronger in the second half of the current year.

From the third quarter onward, the Japanese economy is likely to grow more significantly again. Increasing vaccination coverage and relaxed containment measures will strengthen Japanese domestic demand in the second half of the year.

In addition, expansionary monetary and fiscal policies are likely to continue to support the recovery process. Financing conditions for companies will remain favorable. Corporate investment is also stimulated by additional fiscal recovery measures agreed last winter. The extensive program adopted in December 2020 is less strongly geared to stimulating the economy in the short term than the previous packages, but instead primarily includes long-term measures in the area of digitization and the promotion of “green” energy sources, which should boost corporate investment in particular. Not only the additional fiscal measures, but also an improved situation on the labor market should strengthen household incomes. Despite the economic slump, the official unemployment rate had increased only slightly since the outbreak of the pandemic, from 2.2 in December 2019 to 3.1 percent in October 2020; the government’s short-time work program prevented unemployment from rising more sharply. In March 2021, the unemployment rate was as low as 2.6 percent.

Whether the Summer Olympics can be held in Tokyo as planned is not yet certain. However, due to the pandemic, only a few foreign guests will arrive even if the Games are held; exports and private consumption will thus only be stimulated to a limited extent. All in all, the Japanese economy will grow will grow only moderately (when compared to other countries) in the current year due to the slump in economic output in the first quarter. Gross domestic product will – according to my forecast – increase by 1.8 percent in the current year. In 2022, I expect a growth rate of 3.3 percent.

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What caught my eye: Budgeting for the future, currency arrangements, the education of the future, and much more…

“Here’s how to get billions of COVID-19 vaccine doses to the world” by Chad P. Bown and Thomas J. Bollyky:

https://www.piie.com/blogs/trade-and-investment-policy-watch/heres-how-get-billions-covid-19-vaccine-doses-world

“Budgeting for the future”, a nice way to improve financial literacy:

https://www.futurebudget.org/

“New Science aims to build new institutions of basic science, starting with the life sciences.” Sounds very interesting:

https://newscience.org/

education-freedom wants to “Give students the freedom to get the most affordable and highest quality education”. I like the idea:

https://educationfreedomprogram.org/

“What three economists taught us about currency arrangements” by Jeffrey Frankel:

https://voxeu.org/article/what-three-economists-taught-us-about-currency-arrangements

“Pathways for productivity and growth after the COVID-19 crisis” by Hans‐Helmut Kotz, Jan Mischke, Sven Smit:

https://voxeu.org/article/pathways-productivity-and-growth-after-covid-19-crisis

“Why Working from Home Will Stick” by Jose Maria Barrero, Nicholas Bloom & Steven J. Davis:

https://www.nber.org/papers/w28731

“The Historical Decline in Real Interest Rates and Its Implications for CBO’s Projections” Presentation by Edward Gamber, an analyst in CBO’s Macroeconomic Analysis Division, at the 23rd Federal Forecasters Conference:

https://www.cbo.gov/publication/57163

“Everything You Know about Cross-Country Convergence Is (Now) Wrong” by Dev Patel, Justin Sandefur and Arvind Subramanian:

https://www.cgdev.org/blog/everything-you-know-about-cross-country-convergence-now-wrong

“Sticky floors or glass ceilings? The role of human capital, working time flexibility and discrimination in the gender wage gap” by Gabriele Ciminelli, Cyrille Schwellnus:

https://voxeu.org/article/human-capital-working-time-flexibility-and-discrimination-gender-wage-gap

“The SEC should—and can—pay more attention to financial stability” by Daniel K. Tarullo

“Startups in the United States during the pandemic reflect some dynamism amid job losses” by Simeon Djankov and Eva (Yiwen) Zhang:

https://www.piie.com/publications/policy-briefs/startups-united-states-during-pandemic-reflect-some-dynamism-amid-job

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Quote of the week – Esther Duflo

“I’ve never had a TV in my whole life. Television passed by me.”

Esther Duflo

The last quotes were from Peter Drucker, Frank Knight, Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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U.S. economy: The strong recovery continues

Fiscal relief and stimulus measures will lead to strong economic growth in 2021. In addition, the U.S. vaccination program has started well and is likely to have increased confidence that the pandemic will gradually subside in the current year. The very expansionary fiscal policy and the gradual easing of the containment measures will massively stimulate private consumption this year. In addition, many households accumulated savings last year which will be partly used for private consumption this year.  I am optimistic for the U.S. economy and expect a GDP growth rate of almost eight percent this year (the consensus still seems to be below 7 percent). Inflation will increase this year to around three percent, but will decrease again in 2022 to around two percent. In the medium-term, I expect somewhat higher inflation rates than in the pre-pandemic period of time.

In the United States, economic output rose by 1.6 percent in the first quarter of the current year (annualized 6.4 percent). The recovery continued after the pandemic-related slump in the first half of 2020 was thus stronger again after weaker growth in the final quarter of 2020. New corona infections, which had already been rising since the fall, peaked in mid-January. Infection control measures were somewhat stricter than in late summer and continued to weigh on personal services in particular.

The US economy started the second quarter with even more momentum. Industrial production and retail sales continued to rise noticeably in April. Purchasing managers’ indices continued their upward trend above the expansion threshold of 50 index points, and consumer sentiment also brightened very significantly in April. These developments were mainly due to the aid and stimulus packages adopted at the end of December and in mid-March totaling more than two and a half trillion US dollars. This sum includes, among other things, one-time payments to low- and middle-income persons of $2,000 and an increase in unemployment benefits of $300 a week until September. In addition, the vaccination program is off to a good start by international standards and has contributed to a gradual waning of the pandemic. The various containment measures are gradually being relaxed and have even been lifted to a large extent in some states.

The very expansionary fiscal policy and the gradual easing of containment measures are massively stimulating private consumption in the current year. In addition, households have massively expanded their savings rate on average since the outbreak of the pandemic. This year and next, the savings rate should gradually return to normal and further stimulate private consumption. These factors should lead to extremely strong economic growth in the summer half-year, driven primarily by private consumption. In the wake of this development, the situation on the labor market will also improve significantly. In April, the unemployment rate was 6.1 percent, having risen sharply in April 2020 from 3.5 percent in February to 14.7 percent in the interim. However, the official unemployment rate continues to underestimate the actual extent of unemployment by probably more two percentage points. Against a background of strong consumer demand, business investment will also continue to increase markedly. Although corporate financing conditions are less favorable than last year, they continue to support the propensity of companies to invest.

Monetary policy will remain expansionary – partly because the central bank’s revised monetary policy strategy will allow a moderate overshooting of the inflation rate above the average inflation target of two percent. In the current year, the inflation rate is likely to rise to over three percent in some months; however, this is also due to temporary factors such as higher oil prices compared with last spring. Currently, I am less worried about short-term inflation than some other commentators. But one should certainly not deny that inflation risks will increase and one should not take for granted that inflation rates will slow down to around two percent again. One should also stress that the Federal Reserve bases its decisions mainly on the Personal Consumption Expenditures Price Index (published by the Bureau of Economic Analysis) and not on the Consumer Price Index (published by the Bureau of Labor Statistics). The Personal Consumption Expenditures (PCE) Price Index tends to be somewhat lower than the Consumer Price Index (CPI) and I do not think that the PCE will rise above three percent this year. Having said that, I expect somewhat higher inflation rates for both types of indices in the medium-term than in the years before the pandemic. I expect that the Federal Reserve will already start to gradually adjust its policy in the course of the second half of the year (so I think it will happen somewhat earlier than other commentators expect).

All in all, the U.S. economy will probably expand by 7.9 percent in the current year. For 2022, my current forecast indicates a growth rate of 3.2 percent. 

Email: info@eagle-economist.com

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What caught my eye: Inclusive prosperity, recession-proof your finances, central banks, and much more…

“A Policy Matrix for Inclusive Prosperity” by Dani Rodrik and Stefanie Stantcheva, highly reommended:

“7 ways to help recession-proof your finances after coronavirus crisis” by Sara Foster from bankrate. Simple and useful recommendations!

https://www.bankrate.com/personal-finance/smart-money/ways-to-recession-proof-your-finances/

“Introduction to Psychological Science” by Steven Pinker:

https://stevenpinker.com/psy-1-introduction-psychological-science-lectures

“New CEPR Policy Insight – The Legacy of the Pandemic: How Covid-19 is Reshaping Economic Policy in the EU” by Marco Buti (European Commission); George Papaconstantinou (European University Institute): 

https://cepr.org/content/new-cepr-policy-insight-legacy-pandemic-how-covid-19-reshaping-economic-policy-eu

“The Death of the Central Bank Myth” by Adam Tooze:

“The Future of the WTO” with Alan Wm. Wolff

https://www.piie.com/events/future-wto

“Setting Europe’s economic recovery in motion: a first look at national plans” by Zolt Darvas and Simone Tagliapietra:

https://www.bruegel.org/2021/04/setting-europes-economic-recovery-in-motion-a-first-look-at-national-plans/

By the way, in case you missed my recent forecast for the Italian economy:

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Email: info@eagle-economist.com

Quote of the week – Peter Drucker

“The most important thing in communication is hearing what isn’t said.”

Peter Drucker

Do you agree?

The last quotes were from Frank Knight, Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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How-to Guide: Becoming a Digital Nomad

Have you ever thought about pulling up your roots and setting sail on your own adventure? Do you want to find a way to prioritize experiences and relationships over material things and owning land or a house that would just cement you in one location? This guest post by Lance Cody-Valdez (the creator of free-lance-now.com) shares some things to think about before you turn the world into your office.

Digital nomads live these kinds of lives. They use online work and technologies to earn an income while traveling, sightseeing, and spending time with the ones they love the most, instead of being chained to one desk or one city. There is plenty of research to suggest that this kind of lifestyle improves creativity. These creative people don’t want to be saddled with the burden of the traditional office environment, instead opting for the open road.

How do you make money?

The life of the digital nomad may not require a mortgage, but you still need to fund travel, computer costs, internet expenses, and sustenance. There are countless ways for digital nomads to make money, including publishing an eBook and marketing it online (creating a passive income stream for you) and joining sites like Fiverr to do odd jobs for people in need.

Another interesting way to make money would be to start your own freelance business. Depending on your skillset, you can set up a freelance practice to do myriad things, like blogging, tax preparation, editing, or offering resume writing services. It’s easy to create a profile on an online job board, where potential clients can read reviews, weigh your average delivery time, and determine the cost before hiring you.

How do you find the right working spot?

When you’re living the nomadic lifestyle, you don’t have one specific work location, but you still need access to the internet to do your work. So, where do you go? Coffee shops, libraries, and even bars offer internet access. Choose a place where you know you will be comfortable enough to get your work done, and then close your laptop and explore!

One option would be to find a coworking space. This is essentially a place you can go to work “with” people — or, in other words, in the same physical space as others, even though you are doing different work or working for different companies. These places offer a comfortable environment to put in a few hours of work and allow folks to share ideas, community, conversation, and costs.

How do you afford it?

Speaking of costs, it’s probably one of the biggest questions about embracing the digital nomad lifestyle: How do you afford to pack your bags, move away, and keep moving? The first step toward saving up for this kind of lifestyle is to determine how much you’re spending now — and how much you can cut. Once you ditch the mortgage or rent payment and hit the road, that will be one big expense you can do away with — but you should also take a look at your discretionary spending and start putting more money toward your future.

When it comes time to start traveling, don’t discount the usefulness of travel websites that can get you good deals on lodging. Stay in hostels or book a stay at an Airbnb. You should also learn how to cook, as homemade meals are much less expensive (as well as more nutritious!)

As a digital nomad, you’ll be able to earn an income from any location you choose. Instead of working in a traditional office, put these tips into practice today!

Lance Cody-Valdez is the creator of free-lance-now.com, which helps others to use freelancing to escape the 9 to 5 daily grind. Lance worked in corporate marketing before, but decided to quit his job the following day and used his meager savings to stay afloat as he built a career as a freelance writer and content marketer.

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Email: info@eagle-economist.com

What caught my eye: The future of work, macroprudential policy, the globalization of research, and much more…

Nobel Prize winner Robert Solow talks about the work of the future:

“Capitalism, Alone – Books in Perspective”:

“Economist Report: Remote Work and Socialization” (by upwork, interesting piece but might not be unbiased):

https://www.upwork.com/press/releases/economist-report-remote-work-and-socialization

Macro horizons: An interesting podcast on fixed income, currencies, and commodities (“FICC”) markets:

https://www.stitcher.com/show/macro-horizons

Council on Foreign Relations: C. Peter McColough Series on International Economics with Lawrence H. Summers:

https://www.cfr.org/event/c-peter-mccolough-series-international-economics-lawrence-h-summers

“What’s behind the globalization of R&D?” Britta Glennon and David Dollar:

“Assessing the impact of Basel III: Evidence from macroeconomic models: literature review and simulations”:

https://www.bis.org/bcbs/publ/wp38.htm

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Email: info@eagle-economist.com

South Korean economy: Strong first quarter – what next?

In South Korea, gross domestic product grew by a substantial 1.6 percent in the first quarter of 2021. In the fourth quarter of last year, growth had been slightly lower at 1.2 percent. Despite the pandemic and ongoing measures to contain it, the South Korean economy is doing very well so far. While private consumption was still declining in the fourth quarter, it grew solidly by 1.1 percent in the opening quarter. Business investment in equipment has also risen significantly (+6.6 percent), while exports, after very strong rates in the second half of 2020, have increased somewhat less markedly than recently (+1.9 percent). As imports have expanded at a slightly faster rate, the trade surplus has narrowed slightly.

The Covid-19 pandemic and the measures taken to contain it also led to a sharp decline in economic output in South Korea in 2020, although this was much smaller than in other developed economies. Various containment measures and uncertainties about the further course of the pandemic remain. The increasing availability of vaccines – South Korea began vaccinating its population in February – and the onset of the summer half-year should gradually ease the pandemic situation. Restrictions, particularly on personal services, are likely to remain in place for some time and were tightened again somewhat in April in light of rising case numbers.

The South Korean economy will continue to grow at solid rates for the rest of 2021. This is also indicated by the indices collected by the central bank, which measure business and consumer sentiment. Economic growth will again be driven more by domestic demand. However, exports are also likely to continue to rise strongly in the wake of the global economic recovery. In addition, expansionary monetary and fiscal policies are supporting the South Korean economy. The central bank is likely to continue its expansionary policy of low interest rates and securities purchases, thus also keeping interest rates low for private companies. Inflation is likely to remain low in the forecast period; the inflation target of two percent will probably not be reached for the time being. Fiscal policy is also expansionary, supporting the economy.

Despite the economic slump, the official unemployment rate increased only slightly during 2020; the government’s short-time working program prevented a sharper rise in unemployment. As the economy gradually recovers, the unemployment rate will gradually decline again. All in all, the South Korean economy will probably expand by 3.6 percent in the current year. In 2022, the growth rate is likely to be 2.5.

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Quote of the week – Frank Knight

“Always history is being made; opinions attitudes and institutions change, and there is evolution in the nature of capitalism”

Frank Knight

Do you agree?

The last quotes were from Joan Robinson, Robert Mundell, Alfred Marschall, Janet Yellen, Ludwig von Mises, Thorstein Veblen, Deirdre N. McCloskey, Paul Samuelson, Elinor Ostrom, Robert Solow, Joan Robinson, and Friedrich A. Hayek.

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Some of my blog posts and economic forecasts are first reserved to my paying subscribers. After two weeks, all articles are publicly available. If you would like to get instantaneous access, you can subscribe for 5 US dollars per month (or the equivalent amount in your currency). You can unsubscribe at any time:

Email: info@eagle-economist.com