U.S, Germany Follow Japan`s Long Stagnation?

It is a matter of concern that three pillars of world economy, U.S., Japan, and Germany, are likely to be stagnant next year. U.S. and Germany seems to follow Japan that has been stagnant for 10 years.

▽ Continuous dark prospect = 17 economic analysts like ABN AMRO, JP Morgan prospected economic growth of the U.S. and Germany as 2.7% and 1.3%, which went down by 0.1% and 0.3% respectively.

As a result of research at `Business round table` that is C.E.O. meeting of the U.S. 150 firms, 60% of firms plan to reduce staff and above 80% of firms plan to suspend or reduce investment. Car industry that was a major power of the U.S. economic growth, experienced downward trend and sale amount of GM, Ford, Chrysler in October reduced to 32%, 34%, and 31% respectively, in comparison to October last year.

Business index that German economy research, ZEW, presents every month, has dropped highly from last month 23.4, recording only 4.2 this month. This is even lower than October last year, which was after 9.11 attack.

Growth rate of Germany`s GDP in the first half year was only 0.3% and German government adjusted growth rate of this year from 0.75% to 0.5%.

Japan government also adjusted economic prospect down trend for the first time in a year. Minister of economy and finance, Dakenaka Heizo, stated in the monthly report that he submitted to related Cabinet meeting on 12th, "Speed of economic recovery has become slow".

▽Symptoms of Japan disease = Japan is "synonymous with long depression”. Economic weekly magazine, Economist, evaluated three nations recently (on 11th), "The U.S. and Germany is becoming like Japan`s past 10 years."

It was same point that stock property market had bubbles before economic depression.

Sudden increase in home and company loans is similar, too. Japan`s private debt (except financial firm) was 250% of GDP in early 1990s`. Now, the U.S. and Germany is also approaching 150% and 160% respectively.

The biggest concern is combination of debt and deflation. If prices go down when there is high debt, actual burden for money that should be paid back becomes big and it brings about vicious circle of `low consumption → low income of firm → high insolvent bond of bank → worse employment`. Germany is facing more serious deflation situation than the US, economists expect. Expectation of German`s increase in prices is 0.4%.

Though it is not minus, there is a big risk of deflation as it can`t use economic support due to EU`s control. Hardened market situation is also similar to Japan.

Germany is finding it difficult to reduce non-efficient business industry due to complicated mutual investment and faces big resistance in deduction of employees.

It is expected that German`s worker population would be reduced 0.2% per year for 10 years, like Japan.

If population decreases and aged increases, it disturbs economic recovery and financial burden for pension becomes big.

However, regarding excessive investment of firms, the U.S. is like Japan than Germany.

It took a too much optimistic view on future income and spent money using cheap expenditure for raising fund.

Seung-Jin Kim sarafina@donga.com