Lost in Translation - The Japanese Growth Story

After calculating the sources of economic growth for Australia, I turned my attention to Japan. Looks a lot less promising.

Using the same methodology as the previous post I calculated that growth of potential GDP was a minuscule 0.02% a year...not great at all. And it's pretty easy to see why. Apart from TFP (which at an annual rate of 0.55%  is saving the day) it looks pretty ordinary on the Labour and Capital Fronts.

 The reduction in capital hurts a bit, but it's the labour hours that is the real story (which in 2012 are at 1963 levels!) Even with all the bluster about reducing their currency and chasing an inflation target of 2%, at the end of the day, I can't see the Japanese story improving until their Labour Force gets sorted out.

Where Australia's Growth is coming from - Net Fixed Capital Investment

As part of the CFA Level 2 Syllabus, we look at Economic Growth and try to separate it into it's relevant factors.

As an exercise, I tried to see where Australia's growth of potential GDP came from between 2000 and 2012. The neoclassical theory of Capital Growth claims that there are three areas that provide most of this growth :-

1. Labour (Growth in hours worked specifically)
2. Capital (Growth in Capital Stock less Depreciation (or consumption of capital)
3. Total Factor Productivity (also used as a proxy for technology)

Using a variety of sources (ABS, OECD, The Conference Board), I have calculated the average potential growth rate to be 2.31% a year over this period. The break down of the growth is as follows :-

Labor - providing 0.97%
Capital - providing 1.92%
TFP - providing  (0.58%) *Not great as this is usually the source of long term growth in a developed economy.

So it's Capital Deepening rather than anything else providing the growth (over 80% of it). Bit of a worry as when the capital spend dries up, so will the long term growth.

And is our capital spend drying up. Well while the trend is still up, we can see a little levelling off occurring in the Fixed Capital Spend over the last few years. Let's hope it doesn't go down too quickly.