Japan’s economy has emerged from its longest recession in at least 60 years but souring sentiment among United States consumers yesterday highlighted the fragile nature of the global recovery.
Stocks tumbled from ten-month highs as investors worried that a five-month rally in equities had outpaced economic fundamentals, with oil and industrial metal prices also sliding sharply.
Japan’s economy grew by 0.9 percent in the second quarter, making it the third G7 country after Germany and France to pull out of recession.
However the growth, the first in five quarters, slightly lagged behind forecasts and analysts said it will be a long road to a sustained recovery in the world’s second-largest economy.
“The data was driven by stimulus steps in Japan and overseas, so the economy is far from self-sustaining growth,” said Kyohei Morita, chief economist for Japan at Barclays Capital.
“The growth level for the July-September quarter will likely be similar to that of April-June, and the pace of growth is expected to slow down thereafter as the effects of government stimulus run their course.”
European Central Bank Governing Council member Axel Weber also warned against assuming that the global financial crisis had passed. The German economy grew unexpectedly in the second quarter, posting a surprise 0.3 percent expansion which has boosted hopes of an imminent recovery in the wider euro-zone.
“I warn against prematurely declaring the financial crisis to be over,” said Herr Weber.
While trillions of dollars in government stimulus spending appears to have averted a 1930s-style Great Depression, United States data released on Friday showed that rising unemployment and falling incomes were still hurting consumer confidence.
The Reuters/University of Michigan Surveys of Consumers showed that consumer confidence fell by more than expected in early-August, dropping to its lowest level since March.
“Even though economic output is probably increasing again, consumers certainly appear to still be in a funk. This is not surprising, given how many jobs are still being lost,” said Abiel Reinhart, an economist at JP Morgan in New York.
The weak consumer data rattled investors, who had pushed up global stocks as much as 59 per cent from their March lows, knocking $3 a barrel off oil prices on Friday.
Oil fell further yesterday, dipping below $67 a barrel, while copper and zinc also retreated. The yen rose as investors unwound recovery bets on commodity currencies such as the Australian and New Zealand dollars.
“Weak data is no longer treated as a harbinger of an economic apocalypse, but as an indication that the forthcoming period of growth is likely to be frustratingly tepid, relative to the rich valuations of risk-sensitive asset markets,” said David Watt, senior currency strategist at RBC Capital Markets.
Japan’s Nikkei average fell 2.6 per cent and MSCI’s index of stocks elsewhere in the Asia-Pacific slipped 2.5 per cent, led by a fall of as much as 3.3 per cent in China’s Shanghai Composite Index.
After leading the world in the first seven months of the year, Chinese stocks have tumbled 15 per cent in August.
China, which has been carrying much of the hopes for leading the world economy back to health, has seen its rebound moderate after a powerful second-quarter surge. But it is stepping up its pursuit of assets made cheaper by the global financial turmoil that erupted last year.
China Investment Corp, the country’s $200 billion sovereign wealth fund, is set to pour up to $2 billion into the American mortgage system by joining the US Public-Private Investment Plan.