about 3 years ago • 3 mins
According to data out late last week, the prices of Japan’s goods and services shrank last quarter compared to a year ago – plunging its economy back into deflation.
What does this mean?
The prices Japanese shoppers paid in October, November, and December fell versus the same time the year before, and in December specifically, that drop was 1% – the country’s biggest in over a decade. This isn’t exactly new territory for Japan: it’s long struggled to push prices up and, in turn, get its economy firing on all cylinders. This time, though, the country’s anti-coronavirus measures could make things a lot worse: new curfews will discourage people from spending their money, making businesses less likely to raise their prices and more likely to offer cut-price deals.
Why should I care?
For markets: Deflation’s bad for growth.
Shoppers don’t spend as much on nice-to-haves when there’s deflation: falling prices, after all, mean things will probably be cheaper tomorrow, and the day after that, and the day after that. The longer that downward spiral continues, the more it stunts economic growth – which is why central banks do everything they can to avoid deflation. The European Central Bank, for example, is worried it won’t be able to stop eurozone deflation, while the US Federal Reserve might need to step in if the government’s big spending isn’t enough to create inflation.
Zooming out: Already knee-deep in deflation.
Veteran investor Mark Mobius thinks economists are wrong, and that we’ve actually been in a state of global deflation for years. See, economists don’t compare apples to apples when they look at inflation trends: they measure the prices of a typical basket of goods for the era. If you were to compare two apples-to-apples products over time – like, say, a car from the ’50s and one from today – the older one would be cheaper today than it was back then. In other words, prices have been falling, not rising.
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IBM reported worse-than-expected quarterly results late last week, and investors – who sent its share price down 10% – aren’t sure switching it off and on again is going to fix things.
What does this mean?
IBM’s fourth-quarter revenue came in 7% lower than a year ago, and it fell short of investors’ expectations as well. Those investors might not have been too fussed about that, mind you: they’re used to the company’s declining revenue now that this is the tenth quarter in a row it’s happened.
What they probably were fussed about was the drop in the cloud and software revenue that IBM’s been relying on to offset its shrinking legacy business. See, the company spent $34 billion on open-source company Red Hat in 2018 with the aim of shoring up its software segment, and it’s bought seven other cloud-focused firms since October too. But given that those acquisitions don’t seem to be paying off, growth-focused investors might be losing interest. Even IBM’s plan to split its “high-growth” cloud business into a separate company entirely mightn’t win them back unless, y’know, it actually grows…
Why should I care?
For markets: So much for cloud nine.
IBM blamed the drop-off on pandemic-related uncertainty, but – judging by this update and those from Oracle and SAP last year – cloud computing is generally proving a tough nut to crack. And while IBM’s hopeful that its cloud business will come good this year, it’ll have to pull something special out the bag: Microsoft and Amazon look ready to make the $1 trillion industry their own.
Zooming out: Go hardware or go home.
We’re in the earliest stages of this economic cycle, when growth makes its way back from lows and demand for construction materials and industrial machinery typically outstrips demand for IT services. And that’s not been lost on investors: Siemens’ stock rose 7% on Friday after the industrial conglomerate announced stronger-than-expected quarterly earnings.
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