Heraclitus, the ancient Greek philosopher of change, is said to have taught that one cannot step in the same river twice. So too it seems that the international political economy is always in a state of flux; becoming, never being. The synchronized global upturn appears to be giving way to renewed divergence. It is hardly surprising that the US is expanding at a robust pace given fiscal stimulus, spending increases and deregulation that has been pursued. What may have been less expected is the sharp slow down in Japan in Europe this year.

The likely upward revision to Japan’s Q2 GDP, due to a surge in capital expenditures (12.8% year-over-year, the strongest in 11 years),will not alter this assessment. The 0.5% initial estimate for Q2 GDP would have to double to for H1 18 growth to match H2 17. Moreover, Japan runs a significant fiscal deficit that is expected to increase from 3.5% of GDP in 2017 to 3.8% this year. Japan has not recorded a budget deficit of less than 3.0% since 2007.

The Bank of Japan’s balance sheet may be growing more slowing since the introduction of “yield curve control” two years ago, but by increasing the size of its purchases this month through 10-year notes, is a clear signal to the market not to confuse the fewer pre-announced buying days with some sort of stealth tapering. The risk of a debt crisis, which many had been “betting” on with little avail, has been effectively minimized by the central bank now holding roughly 45% of outstanding JGBs. This risk has been supplanted by the real possibility that Japan’s business expansion cycle ends while monetary policy is still open-spigot and with a cyclically adjusted deficit relatively large.

This past week went from bad to worse for Germany. It may have been the worst week in years. Recall that after a soft patch at the start of the year, the survey data (PMI, IFO, ZEW) pointed to a recovery of the European economic engine and the world’s fourth-largest economy. Such optimism has been dashed.

The week began with a downward revision from the flash manufacturing and services PMI. The manufacturing PMI, perhaps undermined by the heightened trade tensions, was revised back to the June low, which itself was the lowest since the end of 2016. The service sector PMI was revised lower, but still was an improvement from July. In fact, the recovery in the service sector looks intact. It bottomed in May and is now back at levels seen in February.

It is difficult to have much faith in Germany services decoupling from industry for long, and there are more indications of weakness in manufacturing. Factory orders, for which economists expected a strong rebound from the 4.0% decline in June, fell 0.9% in July. Factory orders fell in four months in 2017. In 2018, they have fallen in six of the first seven months. This was followed by an unexpected and large 1.1% fall in July industrial output. The small upward revision to the June series (from -0.9% to 0.7%) meant little. The 1.1% year-over-year pace is the weakest since January 2017.