Japan and U.K. Recoveries Offer Other Economies Very Modest Hope

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Recent information from Japan and the United Kingdom shows that accelerated recoveries from deep recessions are underway. There may be a way to track how these governments worked to turn around their economies. In other words, economies elsewhere may have a hope that if they adopt policies from these two countries, there may be means to improve their own situations. However, each nation lacks the kind of innovation that has been the underpinning of many recoveries in the past.

Japan’s first-quarter gross domestic product (GDP) rose by an extraordinary 4.1%. That puts it in a class, at least in terms of expansion, closer to developing nations than to those that have been developed for decades. Monetary policy and a stimulus package have helped fuel the improvement. At the core of these is the huge bond-buying efforts by the Bank of Japan. However, these efforts can only take the economy so far, if the U.S. experience is any indication. Japan still needs to encourage a new generation of business expansion marked by innovation and ways to bring down the labor costs that are a part of its once formidable manufacturing sector.

Japan’s financial and manufacturing businesses still are overshadowed by those in China, the United States and to some extent Germany. Toyota Motor Corp. (NYSE: TM) is the largest industrial company in Japan, and it has carved out a place at the top of the global automotive industry. Other successful companies are those that provide services exclusively in Japan, first among them its large telecom companies. Beyond its banks, local telecoms and car companies are corporations like Sony Corp. (NYSE: SNE) that are in trouble because of lack of innovation and low costs of goods sold.

The economy in the United Kingdom has started an unexpected recovery. There have been widely held concerns that austerity measures meant to balance the nation’s budget would rob it of a chance to grow, as have similar programs adopted by nations within the European Union. The United Kingdom has not taken radical measures like those in Japan as a means to support a turnaround. The United Kingdom does not have the financial or political means to do so. However, at least one other factor has buttressed the modest recovery of the battered economy. According to Bloomberg:

Britain’s economic recovery is showing signs of strengthening, with indexes of confidence, output and employment rising, according to a survey by BDO LLP.

A gauge of company output expectations increased to 94.4, the highest since June 2012, from 94.1, and a business confidence index rose to 93.6 in May, the most in a year, from 93 in April, the accountancy firm said in a report in London today. A measure of employment intentions rose to 96.6 from 94.4. Still, the output index remains below the 95 level that points to positive growth one quarter ahead.

Bank of England policy makers last week left their bond-purchase target unchanged at 375 billion pounds ($583 billion) as Governor Mervyn King said there are “signs now of a recovery.” Growth nevertheless remains fragile, with lending by banks declining in the first quarter despite an extension of the bank’s Funding for Lending Scheme in April and increased incentives to get credit to smaller companies.

“It’s encouraging to see that U.K. business confidence has continued its upward trend, and that businesses have retained their healthy hiring intentions,” Peter Hemington, partner at BDO, said in the statement. “However, the government must do more to achieve the robust economic growth that remains tantalizingly out of reach. The government must look to ensure more funds are reaching British businesses through lending, in order to help them drive the U.K.’s economic recovery.”

So, experts believe that stimulus eventually must be part of the ongoing improvement. Whether that is true could end up being at the heart of the austerity vs. stimulus debate.

The U.K. economy shares one thing with Japan’s. Most of its very largest companies are financial ones, or those that provide goods and services to people who live there. Only a few of its huge corporations serve tremendous markets outside the country. One of these exceptions is BP PLC (NYSE: BP). Telecom firm Vodafone Group PLC (NASDAQ: VOD) also has substantial business outside the United Kingdom. The only other really huge U.K. company that is a major exporter is drug firm GlaxoSmithKline PLC (NYSE: GSK).

The recoveries in Japan and the United Kingdom eventually could be capped because their consumer economies have not shown rapid expansion, and that may not change for some time because of lingering concern about the prospects of the two nations. More importantly, over the long term, neither nation has been able to set an environment that is fertile enough to help create companies like Apple Inc. (NASDAQ: AAPL), Google Inc. (NASDAQ: GOOG) or even aging but still successful General Electric Co. (NYSE: GE), Procter & Gamble Co. (NYSE: PG) and International Business Machines Corp. (NYSE: IBM). Without these kinds of enterprises, growth in Japan and the United Kingdom have natural and hard to combat limits.

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