–Private Consumption Flat Vs Sharp Drop Forecast, Capex Rise Solid
–Imports Jump on Covid Vaccine Purchases, Outpacing Export Growth
–Q2 GDP Rebound Expected but High Costs, Supply Constraints Linger
By Max Sato
(MaceNews) – Japan’s economy contracted slightly in the January-March quarter after a sharp rebound in October-December as a surge in imports pushed down net exports, but domestic demand showed some resilience, led by solid capital investment and a smaller-than-expected decline in consumer spending despite Covid restrictions, Cabinet Office data released Wednesday showed.
The gross domestic product fell a preliminary 0.2% on quarter, or at an annualized pace 1.0%, in the first quarter, coming in much stronger that the Mace News median economist forecast of a 0.4% drop on quarter, or an annualized 1.6% decrease.
It was the first contraction in two quarters after the economy grew 0.9% (revised down from a 1.1% rise), or an annualized 3.8% (revised from a 4.6% expansion), in the final quarter of 2021, when the government lifted Covid restrictions before the Omicron variant wreaked havoc in the New Year and easing parts supply constraints supported auto production and shipments.
The economy grew a real 2.1% in fiscal 2021 that ended in March, missing the official economic forecast of 2.6% growth. It was the first increase in three years after shrinking 4.5% in fiscal 2020 and 0.7% in fiscal 2019 and edging up 0.2% in fiscal 2018. To hit the official GDP forecast of 3.2% growth in fiscal 2022, the economy would have to grow 1.18% on quarter, or an annualized 4.8%, in each of the four quarters.
From a year earlier, the economy rose just 0.2% in January-March, posting the fourth consecutive rise but slowing further from increases of 0.4% in October-December, 1.2% in July-September and 7.3% in April-June.
Consumption Flat, Capex Solid
Private consumption, which accounts for about 55% of GDP, was flat (minus 0.0%) on quarter in the first quarter, coming in much firmer than the median projection of a 0.5% drop and following a sharp 2.5% rebound (revised up from a 2.4% rise) in the fourth quarter. It made zero contribution with a negative bias (-0.0 percentage point) to the GDP after adding 1.3 points to the total domestic output in the previous quarter.
The government urged many prefectures to adopt strict anti-Covid measures short of a state of emergency for about two months until March 21. People were cautious about eating and drinking out. Domestic leisure travel didn’t start to pick up until late March to early April.
Business investment in equipment posted the second straight increase, rising 0.5% on quarter, after a 0.4% rise (revised from a 0.3% gain) in the previous quarter. The median forecast was for a 0.6% increase. Capex pushed up the Q1 GDP by 0.1 percentage point after adding 0.1 point to the Q4 GDP.
There is solid demand for upgrading computer software and machines for digitizing and automating operations as well as a move toward reducing emissions, but some firms appear to be cautious as the global growth outlook has been clouded by the Ukraine war and supply constraints.
Net Exports Down on Import Surge
Net exports of goods and services – exports minus imports – pushed down the total domestic output by a sharp 0.4 percentage point in the first quarter after pushing up the fourth quarter GDP by 0.1 point (revised down from 0.2 point). It was the first negative contribution in three quarters. The median forecast was a negative 0.3-point contribution (ranging from minus 0.5 point to minus 0.1 point).
Exports of goods and services rose 1.1% on quarter in January-March, posting the second straight quarterly gain after rising 0.9% in October-December. Imports rose at a much faster pace of 3.4% after rising 0.3% (revised from a 0.4% rise) the previous quarter, reflecting higher energy and commodities prices and the need to purchase more Covid-19 vaccines from the U.S. and Europe.
The Bank of Japan’s real export index rose a seasonally adjusted 2.2% on quarter in January-March for the first rise in three quarters, recovering from decreases of 0.1% in October-December and 1.9% in July-September. A decline in capital goods shipments amid uncertainty caused by the Ukraine war was more than offset by a pickup in auto and auto parts shipments as well as solid demand for computers, semiconductors and other information technology goods.
Private sector inventories provided a positive 0.2 percentage point contribution to the January-March GDP (forecasts ranged from zero to plus 0.2 point), after trimming the fourth quarter GDP by 0.2 point (revised from minus 0.1 point).
Public works spending dipped 3.6% on quarter in the first quarter for the fifth consecutive decline after a 4.7% slump (revised down from a 3.8% drop) in the fourth quarter amid construction worker shortages and surging materials costs. It pushed down the GDP by 0.2 percentage point, as seen in the previous three quarters.
The median forecast for public investment was a 3.1% slump on quarter (forecasts ranged from -4.9% to -0.1%). The government has been focused more on purchasing Covid-19 vaccines, which falls into the public consumption category (up 0.6% on quarter).
GDP Rebound Forecast in Q2 but Uncertainty Remains
Economists expect private consumption to lead a rebound in the April-June quarter GDP now that the government ended on March 21 its strict Covid rules which had been in place since late January. But there is a risk of a resurgence in Covid cases after many people traveled on packed trains and planes and crowded sightseeing spots during the Golden Week holidays from late April to early May.
The Ukraine war and Covid lockdowns in China have aggravated global supply chain constraints, sending the annual producer inflation rate in Japan to a fresh 41-year high of 10% in April. Surging food and energy costs are eroding the purchasing power of many households, and even when consumers wish to buy new vehicles or appliances, choices are limited and deliveries have been delayed further.
On average, 36 economists polled by the Japan Center for Economic Research from April 28 to May 11 forecast the GDP would rebound a sharp 5.18% at an annualized pace in the April-June quarter based on their average estimate that the economy slumped 1.36% in previous three-month period, according to the center’s ESP Forecast released Monday.
In the previous ESP Forecast survey, which was conducted from March 31 to April 7, economists on average had projected the GDP would contract an annualized 0.64% in the first quarter and grow 5.04% in the second quarter.
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Contact this reporter: max@macenews.com
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