–Q4 GDP Annualized 0.4% Drop Below Median Forecast of 1.6% Growth
–Consumption, Capex Both Post 3rd Straight Drop as Real Wages Keep Falling
–In 2023, Japan’s Nominal GDP in Dollar Terms Falls Behind Germany’s Amid Weak Yen
By Max Sato
(MaceNews) – Japan’s gross domestic product for the October-December quarter unexpectedly posted a slight contraction of 0.1% on quarter, or an annualized 0.4%, much weaker than the consensus call of a 0.4% rebound (annualized 1.6%), pushing the economy into a mild recession amid elevated costs for daily necessities and uncertainty over global growth, Cabinet Office data released Thursday showed.
The second consecutive GDP decline was caused by declines in private consumption, business investment and public works spending. A rebound in net exports was weaker than expected.
The preliminary data came in weaker than the median economist forecast of 0.4% growth (forecasts ranged from 0.1% to 0.9% rises), or an annualized 1.6% increase (0.4% to 3.7% gains). None of the 10 economists in a Mace News survey had predicted contraction for the final quarter of 2023, although one had forecast a decline in the first quarter of 2024.
Economic and Fiscal Policy Minister Yoshitaka Shindo said in a statement that despite the second consecutive drop in real GDP, the economy in nominal terms rebounded 0.3% on quarter to a record high ¥596 trillion in October-December after a 0.1% dip in the previous quarter.
“The latest data showed that private consumption is lackluster as wage growth is not catching up with inflation while it is taking time for solid capital investment plans to be actually implemented,” Shindo said.
The government will support wage hikes through various fiscal measures for businesses and prop up consumer spending by providing cash handouts to households, he said.
From a year earlier, the economy rose 1.0% in October-December (consensus was 1.9%), posting the 11th consecutive rise following a 1.7% rise (revised up from 1.5%) in July-September.
Looking ahead, the economy in January-March is expected to grow moderately but uncertainty over both domestic and external demand remains.
The Cabinet Office estimates that for real GDP to hit the official forecast of 1.6% growth for fiscal 2023, the economy will have to grow 1.23% on quarter, or an annualized 5.0% in January-March 2024.
The economy grew a real 1.5% in fiscal 2022, below the official forecast of a 1.7% rise. It followed a 2.8% gain in fiscal 2021, decreases of 3.9% in fiscal 2020 and 0.8% in fiscal 2019 and a 0.2% rise in fiscal 2018.
On a calendar year basis, real GDP rose 1.9% to ¥558.72 trillion in 2023 after expanding 1.0% to ¥548.38 trillion in 2022. It is now above ¥552.54 trillion in the pre-pandemic 2019.
Nominal GDP rose 5.7% to ¥591.48 trillion in calendar 2023, which would be $4.21 trillion at the average annual exchange rate of ¥140.59. This means Japan’s total output is now the world’s fourth largest in dollar terms, falling behind Germany’s, which is estimated by the Cabinet Office to be $4.46 trillion last year. The weak yen lowered Japan’s GDP in dollar terms last year while Germany’s GDP was boosted by high inflation.
China’s economic scale exceeded Japan’s in 2010 as the latter was mired in deflation. Japan is likely to be surpassed by India in a few years if it fails to stop its working population from shrinking and to boost productivity.
Domestic Demand Slumps, Consumption Weaker Than Expected
Domestic demand trimmed the fourth quarter GDP by 0.3 percentage point, weaker than the median forecast of being flat (forecasts ranged from a negative 0.3 point to a positive 0.2 point), after lowering third quarter growth by 0.8 point in the third quarter.
Private consumption, which accounts for about 55% of GDP, fell 0.2%) on quarter in the fourth quarter, also coming in weaker than the median projection of being unchanged (forecasts ranged from a 0.3% drop to a 0.3% gain). Elevated costs for daily necessities weighed on many households. Consumption posted the third straight quarterly decline, following a 0.3% drop in the third quarter.
Consumption trimmed the fourth quarter GDP by 0.1 percentage point after making a negative 0.1-point contribution to the total domestic output in the previous quarter.
Capex Down for 3rd Straight Quarter Amid Global Uncertainty
Business investment in equipment also marked the third consecutive drop, down 0.1% on quarter in October-December, which was weaker than the median forecast of a 0.3% rise (forecasts ranged from a 0.2% drop % to a 1.0% rise). It followed a 0.6% drop in July-September.
Capex made a slightly negative (-0.0 point) contribution to the fourth quarter GDP after providing a negative 0.1-point contribution the previous quarter.
Net Exports Rebound Slightly
Japanese exports of goods and services posted the third straight increase on quarter, up 2.6% in the October-December quarter GDP, after edging up 0.9% in September-July. Imports rose 1.7% after rising 1.0% in the third quarter and slumping 3.6% in the second quarter.
Private Inventories Trims GDP, Public Works Spending Falls Further
Private sector inventories provided a slightly negative 0.0-point contribution to the fourth quarter GDP, compared to the median forecast of zero contribution (forecasts ranged from a 0.2-point drop to being flat), after pushing down the third quarter GDP by a sharp 0.5 percentage point.
Public works spending fell 0.7% on quarter in October-December, after marking its first quarterly drop in five quarters, down 1.0%, in July-September. It was weaker than the median forecast of a 0.5% fall (forecasts ranged from 2.4% to 0.1% drops).
Public investment made a slightly negative 0.0-point contribution to the fourth quarter GDP after lowering the total output by 0.1 point in the previous quarter.
Price Pressures Slows in Q4
The unadjusted deflator rose 3.8% on year in October-December after surging 5.2% in July-September. The slower increase was due to a smaller 3.7% fall in the import deflator following a 7.4% slump in the previous quarter. The pace of increase in the domestic demand deflator decelerated to 2.0% from 2.5%.
The seasonally adjusted deflator edged up 0.4% on quarter after rising 0.8% in the third quarter, with the domestic demand deflator growing pace at the same pace of 0.4%, as seen previously. The import deflator rose 2.2% after rising 1.4% in the prior quarter.
Q1 GDP Faces Domestic, Global Challenges
Looking ahead, the economy in the first quarter of 2024 is expected to show modest growth but faces uncertainty. Some global supplies have been delayed and transportation costs pushed up by the impact of attacks in the Red Sea, which has prompted shipping firms to avoid the Suez Canal in Egypt, a key route for shipments to and from Europe. Congestion at the drought-hit Panama Canal is also disrupting cargo movements between Asia and the U.S. East Coast.
In addition to geopolitical risks, the government has also warned that the powerful New Year’s Day earthquake in the northwestern region of Hokuriku has reduced electronic parts supply and battered tourism. The magnitude 7.6 quake jolted the Sea of Japan coast areas in Ishikawa Prefecture, killing more than 230 people, most of them crushed under their collapsing homes, and causing damage to more than 30,000 houses. Some areas are still without water and electricity.
Japanese industrial output is forecast to slump in January due to suspension of all domestic production by Toyota Motor group firm Daihatsu over a vehicle safety scandal from late December until mid-February, which appears to be having a widespread impact beyond the auto industry. To make matters worse, Toyota has suspended shipments of 10 models since late January after its supplier Toyota Industries admitted to cheating on engine testing.