–Q2’s Growth Led by Sharp Net Export Rebound Amid Falling Import Costs; Consumption, Capex Down
–Q3 GDP Rise Seen Slowing but Supported by Consumer Spending on Services
By Max Sato
(MaceNews) – Japan’s strong economic growth led by a sharp rebound in net exports amid easing import costs in the April-June quarter was revised down as business investment in equipment, private consumption and public works spending all turned out to be weaker than initially estimated, Cabinet Office data released Friday showed.
Flat business investment was revised down to post the first drop in two quarters while public works spending showed only a modest rise, compared to robust growth estimated last month. Consumption slipped after pent-up demand boosted demand in the previous two quarters.
The annualized 4.8% growth in the second quarter is the highest among the Group of Seven major economies, well above the solid 2.1% increase in the U.S., the modest 1.0% rise in the Eurozone and a surprise slight contraction in Canada.
Japanese policymakers believe the domestic economy still needs fiscal and monetary policy support. The output gap has turned positive after more than three years of staying in negative territory. It marked a slightly positive 0.4 percentage point in the April-June quarter of 2023 after a negative 0.9 point in January-March. The last positive gap was plus 1.2 points in the third quarter of 2019.
The Cabinet Office estimates that the real GDP would have to grow at about 0.29% on quarter, or an annualized 1.1%, in each of the remaining quarters through January-March 2024 for the economy to hit the official forecast of 1.3% growth for fiscal 2023.
The economy grew a real 1.4% in fiscal 2022, below the official forecast of a 1.7% rise. It followed a 2.7% gain in fiscal 2021, decreases of 4.1% in fiscal 2020 and 0.8% in fiscal 2019, and a 0.2% rise in fiscal 2018.
Domestic Demand Revised Down Sharply
Domestic demand trimmed the second quarter GDP by 0.6 percentage point (revised down from a negative 0.3 point), after boosting Q1 growth by a revised 1.1points. The decline was due to a fall in private consumption and a pullback in private inventories. The only positive contribution to domestic demand came from a sharp gain in housing investment. Public works spending supported growth in the preliminary data but it now shows zero contribution.
Private consumption, which accounts for about 55% of GDP, fell 0.6% on quarter in the second quarter, revised down slightly from an initial 0.5% drop and coming in weaker than the median forecast for an unrevised 0.5% fall. Elevated costs for daily necessities and durable goods weighed on many households. It is the first drop in three quarters following increases of 0.6% in the first quarter and a revised 0.3% in the fourth quarter of 2022 and a slight decline in the third quarter.
Consumption pushed down the GDP by 0.4 percentage point (revised down from a negative 0.3 point) after making a positive 0.3 contribution to the total domestic output in the previous quarter.
In the second quarter, households trimmed spending on non-durable goods, such as food, beverages and soap, as suppliers continued to raise prices to reflect elevated import and production costs seen earlier. Expenditures on durable goods posted the first drop in four quarters as durable goods prices were also marked up and some households had already purchased cars and electric appliances earlier. The quarterly decline in those two categories more than offset modest gains in spending on semi-durable goods (including clothing, footwear and bags) and services.
Capex Rebound Revised Down Sharply
Business investment in equipment was revised down to a 1.0% drop on quarter in April-June from the initial reading of being flat (up a marginal 0.03%). It followed an unexpected rebound, by a downwardly revised 1.6%, in January-March and a 0.7% drop in October-December. Some firms remain cautious about implementing their plans, although capital investment is generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.
Capex trimmed the GDP by 0.2 percentage point (compared to a preliminary zero contribution) after providing a positive 0.3-point contribution the previous quarter.
Based on the results of a quarterly business survey by the Ministry of Finance released last week, the median economist forecast was a downward revision to a 0.8% decrease (forecasts ranged from 1.1% to 0.3% drops).
The demand-side survey by the MOF showed that combined capital investment by non-financial Japanese companies rose 4.5% on year in the April-June quarter, slowing from a 11.0% increase in January-March. On quarter, combined capital outlays fell a seasonally adjusted 1.2% after rising 2.4% in the previous quarter. The capex figures in the preliminary GDP calculation are based solely on supply side data.
Net Exports Rebound as Imports Continue to Drop
Net exports of goods and services — exports minus imports — made a positive 1.8 percentage point contribution to the total domestic output, as reported last month. In the previous quarter, the key measure of external demand pushed down the GDP by 0.3 point after raising it by a revised 0.3 point in the final quarter of 2022.
Japanese exports rebounded 3.1% (revised from plus 3.2%) on quarter in the April-June GDP, despite slow economic recovery in China, after posting their first drop in six quarters in January-March. Imports fell 4.3% for the third consecutive quarterly drop.
The number of visitors from other countries has continued to pick up since the government eased its Covid border control rules in October last year and eased further in May this year, leading to higher spending by foreign visitors, which is counted among exports of services. Exports of goods have been slower to recover, except for faster shipments of automobiles thanks to improving supply chains.
Private Inventories Trim GDP Growth, Public Works Spending Revised Down
Private sector inventories provided a negative 0.2-point contribution to the second quarter GDP, unrevised from the initial estimate, after pushing up the first quarter GDP by a revised 0.3 percentage point.
Public works spending marked its fifth straight quarterly increase, up 0.2% (revised down from a 1.2% rise) on the quarter in April-June. The median forecast was a downward revision to a 0.1% rise (forecasts ranged from a 0.4% drop to a 1.1% gain). This category has been backed by the supplementary budget for fiscal 2022 that ended in March. It followed a downwardly revised 1.4% rise in January-March. Public investment provided zero contribution to the second quarter GDP (revised down form a plus 0.1 point) after a positive 0.1-point contribution in the previous quarter.
Price Pressures Up on Year in Q2
The unadjusted deflator jumped 3.5% (revised up from 3.4%) on the year in April-June after rising 2.0% in January-March due to a 3.1% drop (revised up from minus 3.2%) in the import deflator following a 10.2% surge in the previous quarter. The pace of increase in the domestic demand deflator decelerated to 2.4% (revise down from 2.3%) from 2.8%.
The seasonally adjusted deflator rose 1.6% (revised up from a 1.4% rise) on quarter after rising 1.4% in the first quarter, with the domestic demand deflator growing 0.7% (revised up from 0.5%) and rising 0.5% in the prior quarter. The import deflator fell 3.2% in the second quarter after falling 5.2% in the prior quarter.
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Contact this reporter: max@macenews.com
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