Welcome to this week’s edition of the Economy in Digits. Without further adieu, here are the economic highlights from the week ending December 28th.
Pending home sales, which measures contracts to purchase previously owned sales, rose less than forecast in the month of November. Pending home sales rose only 0.2% whereas economists had predicted a rise of 1%. This indicates that rising borrowing costs due to the FED tapering its asset purchases is resulting in a slowdown in the residential real estate market. When compared with the previous year, pending home sales have fallen 4%. The graph below displays an aggregate of 30 year mortgage rates in the United States. As you can see, mortgage rates dropped after 2008 but have recently been picking up.
Since the start of the financial crisis, the US government and the FED had been artificially supporting the housing market. For example, the FED’s Quantitative Easing program had been purchasing $40 billion of mortgage backed securities since last year, leading to an artificial decrease in mortgage rates. The recent indicators displaying a slowdown in the housing sector points to the fact that the housing market is returning to its fundamental levels instead of being inflated by external factors.
In response to Prime Minister Shinzo Abe’s expansionary monetary and fiscal policy, Japanese inflation (measured by the Consumer Price Index) increased by 1.2% over the previous year, which is the largest increase over the last 5 years. In an effort to bring Japan out of a two decade long era of slow growth and deflation, Shinzo Abe promised to stimulate the Japanese economy and increase inflation with massive fiscal and monetary easing. The recent inflation figure indicates that Abenomics, as some have labeled this policy, seems to be working. The graph below depicts Japanese CPI since 2010.
But as I had stated in the previous Economy in Digits post, not everything is clear sailing for the land of the rising sun yet. Monetary and fiscal stimulus devalues a nation’s currency. This usually has the effect of increasing exports. But because Japan imports a majority of its energy, devaluing its currency has the effect of increasing the value of its imports too. Additionally, the Japanese government is expected to implement a tax hike later this year which could weaken demand and bring inflation back down again.
Ever since the Chinese Communist Party first started opening up China’s economy to the world and adopting free market principles under the leadership of Deng Xiapoing in the 1908s, China had been experiencing extremely rapid growth, As you can see from the graph below GDP growth had been almost 10% on average over the last decade. But over the past few years, as China enters the final stages of its transformation from a rural to an urban economy and implements the reforms to become a middle class nation, its economy has started to slow down. With that in mind, the Chinese government announced last Tuesday that their target GDP growth for 2014 would be 7.5%. As you can see from the graph below, if you exclude the crisis of 2008, 7.5% is lower than the growth numbers that China used to produce in the past. However, Chinese President Xi Jinping has promised to continue to reform the Chinese economy and the Chinese society. In line with that promise, Chinese officials have stated that they are confident that maintaining a 7.5% growth rate will help keep creating more jobs, while providing room to deepen reforms as well.
That is all for this week ladies and gentlemen. I was late in posting this week’s Economy in Digits due to an exam I had to take on Sunday. But I can assure you that it won’t happen again. So tune in next Saturday for the upcoming week’s economic indicators.
“The economy isn’t some vengeful being that takes things away from us. The economy is just made up of people, and people have just lost their faith in it. What people really should be doing is spending more. Spending is fine. People should just go outside. People should just go outside. They should buy the things they need for their friends and family”