By Max Sato
(MaceNews) – Japan’s economy plunged at a much faster pace than expected in the July-September quarter, after a modest rebound in April-June, as a Covid resurgence dampened shopping and dining out while supply chain disruptions hampered business investment, Cabinet Office data released Monday showed.
It was the first contraction in two quarters after the economy expanded 0.4% (revised down from +0.5%), or an annualized 1.5% (revised from +1.9%) in the second quarter, led by resilient consumer spending despite on-and-off restrictions on economic activity during the pandemic.
In order to hit the official economic forecast of a real 3.7% growth for fiscal 2021 ending next March, Japan’s GDP would have to expand 2.63% on quarter, or an annualized rate of 11.0%, in each of the October-December and January-March periods,
From a year earlier, the economy rose 1.4% in July-September, posting the second quarterly pickup from the pandemic-hit slump last year, but the pace of growth decelerated from a 7.6% increase in April-June.
Higher energy and commodities prices are eroding Japan’s purchasing power. The gross national income (GNI) was in negative territory for the third straight quarter, shrinking a real 1.4% on quarter in Q3 after being flat (-0.0%) in Q2 and falling 1.5% in Q1, in light of a net loss in income from overseas and deteriorating terms of trade.
Sluggish Consumption, Capex Lead Q3 GDP Slump
Private consumption, which accounts for about 55% of GDP, dipped 1.1% on quarter in Q3, coming in weaker than the median projection of a 0.6% slip and following a 0.9% rebound in Q2. It pushed down total domestic output by 0.6 percentage point after adding 0.9 point in the previous quarter. The stay-home lifestyle during the pandemic initially boosted demand for furniture and electrical appliances but it seems to have run its course.
In July-September, business investment plunged 3.8% on quarter, after a revised 2.2% rebound in the previous quarter. The median forecast was for a 0.8% drop on quarter. Capex pushed down the Q3 GDP by 0.6 percentage point after pushing up the Q2 GDP by 0.3 point.
Q4 GDP Rebound Expected on Eased Covid Restrictions
As the number of new Covid-19 cases drifted lower toward the end of September after a spike in August, the Japanese government lifted its state of emergency restrictions on Oct. 1, while urging people to maintain social-distancing and face-covering protocols. Municipalities are gradually easing strict rules on business hours and public events.
Against this backdrop, economists on average forecast GDP would rebound 4.93% at an annualized rate in October-December after contracting an estimated 0.56% in July-September, according to the monthly ESP Survey of 37 forecasters conducted by the Japan Center for Economic Research from Oct. 28 to Nov. 4 and released last week.
Net Exports Rebound, Inventory Buildup Mitigate GDP Fall
Net exports of goods and services – exports minus imports – pushed up the total domestic output by 0.1 percentage point in Q3 after trimming 0.3 percentage point off the Q2 GDP. It was the first positive contribution in three quarters. The median forecast was for zero contribution (forecasts ranged from -0.4 to +0.3 percentage point).
Exports of goods and services fell 2.1% on quarter in July-September after rising a revised 3.2% in April-June. Imports dropped at a faster pace of 2.7% after increasing a revised 5.3% in the previous quarter, more than offsetting the impact of the recent slowdown in exports (a decline in imports are counted as a positive factor for net exports).
Protracted global semiconductor shortages and pandemic-caused delays in parts supply from Southeast Asia have forced automakers and electronics firms to reduce production and shipments.
The Bank of Japan’s real export index slumped a seasonally adjusted 6.5% on month in September, the second straight drop (-3.7% in August, +1.4% in July). In the July-September quarter, the index dipped 2.8% on quarter after rising 3.4% in April-June for the first drop in five quarters.
Exports rose 13.0% in September for the seventh year-over-year rise in a row but the pace of increase decelerated further from 26.2% in August, 37.0% in July and 48.6% in June, according to the Ministry of Finance. It was the slowest pace during the current period of double-digit percentage gains that began in March.
Public works spending dropped 1.5% on quarter in Q3 for a third consecutive decline after a 2.1% drop (revised down from a 1.7% fall) in Q2. It pushed down the July-September GDP by 0.1 percentage point. The government has focused more on providing financial supports to individuals and businesses hit by the pandemic as well as importing Covid-19 vaccines. The median forecast was a 2.0% slump on quarter (forecasts ranged from -2.8% to +0.4%).
Private sector inventories provided a positive 0.3 percentage point contribution to the July-September GDP, after pushing down the April-June GDP by 0.3 percentage point. The consensus was for a positive 0.1 percentage point, with economist forecasts ranging from -0.1 point to +0.3 point. Weaker demand and logistical delays appear to have led a buildup in inventories.