Central bank policies continue to provide support for risk assets, with the Bank of Japan today announcing a further ¥10 trillion expansion to ¥40 trillion in planned securities purchases, implying buying of ¥25 trillion – $310 billion – between now and mid-2013 (since the portfolio currently stands at ¥15 trillion).

The link between asset purchases and bank reserves (i.e. cash held by banks at the central bank) is looser in Japan than in the US and UK but it would be surprising if this buying failed to result in a further substantial injection of liquidity – reserves have risen by ¥8 trillion since the announcement on 14 February of an expansion in securities purchases from ¥20 trillion to ¥30 trillion.

Aggregate bank reserves in the US, Japan, Euroland and the UK recently reached a new record, a development that may help to explain the resilience of global equities to another rise in European financial tensions and moderately disappointing economic news. The increase since mid-2011, however, has been concentrated in Europe, with US reserves static.

The claim by the Office for National Statistics that GDP fell by 0.2% in the first quarter following a 0.3% fourth-quarter decline deepens the “productivity puzzle” – the apparent contradiction between output and labour market data.

A previous post warned that construction would act as a significant drag on first-quarter GDP but the surprise in today’s release was the weakness of the rest of the economy – GDP ex. construction was flat.
 
Total hours worked in the economy, however, rose by 1.4% in the three months to February from the prior three months. Official statistics, in other words, are inconsistent, suggesting that output has fallen despite a rise in labour input.

On a year-over-year basis, GDP was unchanged in the first quarter while hours worked fell by 0.1% in the three months to February. Productivity, seemingly, rose by only 0.1%. In its last Economic and fiscal outlook, the Office for Budget Responsibility forecast that “potential” productivity would increase by 0.6% in 2012. Growth was projected to pick up to 2.2% by 2015 – in line with the pre-crisis trend.

The “puzzle” may be lessened by future upward revisions to GDP but these are unlikely to be large enough to reverse the conclusion of dismal supply-side performance, carrying negative implications for inflation and fiscal prospects.

The GDP decline will dominate the headlines but the April quarterly CBI industrial trends survey also released today is arguably more significant, suggesting an improved economic outlook – seasonally-adjusted business optimism rose to its highest level for two years. Employment expectations were particularly strong but skill shortages jumped – further evidence of supply-side weakness.

Eurozone “flash” PMI results for April released on Monday were much weaker than expected here – a solid German Ifo business survey last week together with stable analyst expectations for company earnings and less negative leading indicators had suggested improvement.

It is, however, possible that the PMIs have yet to reflect easier monetary conditions resulting from the ECB’s interest rate cuts and liquidity injections. This view is supported by today’s ECB bank lending survey, showing sharp declines in the net percentages of banks tightening or planning to tighten credit standards on loans to enterprises. The tightening percentages lead (inversely) industrial activity, suggesting a stabilisation or recovery in output into the summer – see chart.

The case for optimism would be increased by a solid March increase in Eurozone M1 in money supply numbers to be reported on Monday.