–Q3 GDP -2.1% Annualized Drop Much Weaker Than -0.6% Median Forecast
–Consumption Flat as Pent-Up Demand for Eating Out, Traveling Wanes
–Q4 GDP Seen Up but Faces Slowing Global Demand, Domestic Labor Shortages
By Max Sato
The preliminary data came in much weaker than the median economist forecast of 0.2% contraction (forecasts ranged from a 0.3% drop to a 0.1% rise), or an annualized 0.6% decline (minus 1.2% to plus 0.4%).
It followed growth of 1.1% (revised down from 1.2%) on quarter, or an annualized 4.5% (revised from 4.8%) in April-June, which was led by a sharp rebound in net exports amid easing import costs, which mitigated drops in consumption and capital investment.
The slight 0.1% economic growth on quarter in the final quarter of 2022 was revised down to 0.3% contraction, indicating that Japan had a technical recession in the second half of last year. The 0.3% contraction in the third quarter of 2022 was revised up to a 0.1% drop.
Looking ahead, the economy in October-December is expected to show a slight rebound but faces the headwinds of slowing global demand, elevated costs for daily necessities and labor shortages.
The Cabinet Office estimates that the real GDP would hit the official forecast of 1.3% growth for fiscal 2023 if it fell 0.2% on quarter, or an annualized 0.06%, in each of the remaining quarters through January-March 2024.
The economy grew a real 1.3% in fiscal 2022 (revised down from 1.4%), below the official forecast of a 1.7% rise. It followed a 2.6% 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 Slump Led by Private Inventories; Consumption Flat
Domestic demand trimmed the third quarter GDP by 0.4 percentage point, weaker than the median forecast of being flat (forecasts ranged from a negative 0.2 point to a positive 0.4 point), after lowering Q2 growth by 0.7 point. The decline was due to a sharp drop in private inventories as well as a pullback in public works spending and a second consecutive fall in business investment. The only positive contribution to domestic demand came from government investment.
Private consumption, which accounts for about 55% of GDP, was flat (down 0.04%) on quarter in the third quarter, coming in weaker than the median projection of a 0.2% increase (forecasts ranged from a 0.2% drop to a 0.4% gain). Elevated costs for daily necessities and durable goods weighed on many households. It followed a downwardly revised 0.9% drop in the second quarter, which was the first fall in five quarters.
Consumption provided zero (minus 0.0 percentage point) contribution to the GDP after making a negative 0.5-point contribution to the total domestic output in the previous quarter.
In the third quarter, households trimmed spending on non-durable goods, such as food, beverages and cleaning products, as suppliers continued to raise prices to reflect high import and production costs seen earlier. Expenditures on durable goods posted the second straight quarterly drop as durable goods prices were also marked up and some households had already purchased cars and electric appliances. Spending on semi-durable goods (including clothing, footwear and bags) also slipped after posting the first rebound in three quarters in April-June.
The quarterly decline in those three categories more than offset a modest gain in services.
Capex Sluggish Amid Global Uncertainty
Business investment in equipment fell 0.6% on quarter in July-September, which was weaker than the median forecast of a 0.1% rise (forecasts ranged from a 1.1% drop % to a 1.7% rise). It followed a 1.0% drop in April-June.
Capex trimmed the GDP by 0.1 percentage point after providing a negative 0.2-point contribution the previous quarter.
The Bank of Japan’s quarterly Tankan business survey for September released last month showed large corporations revised up their plans for investment in equipment slightly for fiscal 2023 that began in April, as largely expected, and smaller firms raised their capex plans much more sharply than forecast.
Net Exports Dip After Q2’s Sharp Rebound
Net exports of goods and services — exports minus imports — made a negative 0.1 percentage point contribution to the total domestic output, coming in slightly firmer than the median forecast of a 0.2-point drop (forecasts ranged from minus 0.5 to plus 0.1 points). In the previous quarter, the key measure of external demand pushed up the GDP by 1.8 points.
Japanese exports edged up 0.5% on quarter in the July-September GDP, after rebounding a revised 3.9% in April-June and posting their first drop in five quarters in January-March, down 3.5%. Imports rose 1.0% for the first rise in three quarters after dropping a revised 3.8% previously.
The number of visitors from other countries has continued to pick up in the absence of strict Covid border control, leading to higher spending by foreign visitors, which is counted among exports of services. By contrast, exports of goods have been slower to recover, except for shipments of automobiles thanks to improving supply chains.
Private Inventories Trim GDP Growth, Public Works Spending Down
Private sector inventories provided a negative 0.3-point contribution to the second quarter GDP, compared to the median forecast of a negative 0.1-point contribution (forecasts ranged from a 0.2-point drop to being flat), after pushing down the second quarter GDP by a revised 0.1 percentage point.
Public works spending marked its first quarterly drop in six quarters, down 0.5% on the quarter in July-September, which slightly firmer than the median forecast of a 0.6% drop (forecasts ranged from a 1.4% fall to a 0.2% rise). The effects of earlier spending funded by the supplementary budget for fiscal 2022 that ended in March had run its course. It followed an upwardly revised 0.3% rise in April-June.
Public investment made zero contribution (minus 0.0 point) to the third quarter GDP after providing zero contribution (plus 0.0 point) in the previous quarter.
Price Pressures Accelerate on Year, Ease on Quarter
The unadjusted deflator surged 5.1% on the year in July-September after rising 3.5% in April-June. It was due to a 7.8% plunge in the import deflator following a revised 3.1% drop in the previous quarter. The pace of increase in the domestic demand deflator was steady at 2.4% after easing from 2.8% in the first quarter.
The seasonally adjusted deflator rose 0.5% on quarter after rising 1.4% in the second quarter, with the domestic deflator growing at slower pace of 0.3% after rising 0.5% previously. The import deflator rose 1.9% in the third quarter after falling a revised 2.8% in the prior quarter.