— Consumption, Capex, Net Export Gains Behind Expected Solid Q4 Growth
— Q1 GDP Face Downside Risks as Omicron-Led Covid Spike Hurts Sentiment
By Max Sato
(MaceNews) – Japan’s gross domestic product for the October-December quarter is forecast by economists to post a 1.4% rebound on quarter, or an annualized 5.8% rise, as easing parts supply constraints supported auto exports and consumers dined out and traveled before an Omicron-led spike in new cases promoted the government to resume anti-Covid restrictions in January.
The median forecast for Q4 GDP is based on projections by 10 economists compiled by Mace News, which ranged from +1.0% to +1.8% on quarter, or an annualized +4.0% to +7.4%.
The Cabinet Office will release preliminary GDP data for the final quarter of 2021 at 0850 JST Tuesday, Feb. 15 (2350 GMT/1850 EST Monday, Feb. 14).
The expected expansion in the fourth quarter would be the first quarter-on-quarter rise in two quarters after the economy contracted 0.9%, or an annualized 3.6%, in July-September, when a Covid resurgence triggered by the Delta variant dampened shopping and dining out while supply chain disruptions hampered business investment.
Consumption Seen Up, Capex Modest
The median forecast for private consumption, which accounts for about 55% of GDP, is for a 2.3% rebound on quarter in Q4 (ranging from +1.5% to +2.8%) following a 1.3% drop in Q3.
Japan’s household expenditures unexpectedly slipped in November from both the previous year and month as fewer Covid cases prompted more people to go traveling and resume commuting to work, which resulted in less spending on utilities at home.
But spending is expected to have posted a modest rise in December, when people had not yet seen the full impact of the Omicron variant, which sparked a sixth wave of Covid infections in January. The gradual reopening of the economy since Oct. 1, when the government eased Covid restrictions after keeping them in place from July 12 to Sept. 30, is believed to have supported private consumption in the October-December period.
Household spending data for December and the fourth quarter will be released at 0850 JST on Feb. 8 (2350 GMT/1850 EST on Feb. 7), but economists are unlikely to change their overall GDP forecasts.
Business investment in equipment is expected to show a modest rebound in Q4, up 0.8% on quarter, recovering only partially from a sharp 2.3% slump in Q3. The forecasts range from a 0.8% decline to a 1.8% rise.
Japanese firms appear to remain cautious on implementing their solid capital investment plans amid uncertainty over the negative impact of the pandemic. However, there is strong underlying demand for upgrading computer software for digiting and automating operations amid chronic labor shortages for some industries and the government-led drive to modernized the economy.
External Demand to Support GDP
The median forecast for net exports of goods and services – exports minus imports – is for a positive 0.2 percentage point contribution to total domestic output (ranging from zero to +0.5 percentage point) in the final quarter of 2021. In Q3, the key measure of external demand made zero contribution to the GDP.
Net exports appear to have been buoyed by the recent pickup in automobile production and shipments, thanks to eased delays in parts supply from Southeast Asia, and by an expected drop in imports in Q4, when surging oil and gas prices slowed Japanese purchases.
In its monthly report for January, the government maintained its assessment of exports as being “largely flat” after downgrading it for the second month in a row in November. Shipments of vehicles and parts are improving while those of capital goods are showing. Exports of smartphone parts and base stations for the 5G telecommunications standard are expected to increase.
The Bank of Japan’s real export index dipped a seasonally adjusted 1.2% on month in December for the first drop in two months, led by a sharp drop in capital goods shipments and despite a continuing pickup in auto exports. It followed a 9.1% surge in November and a 0.5% fall in October. The index sagged 0.9% in the October-December quarter, the second straight quarterly decline after falling 2.9% in July-September.
In other details, private sector inventories are expected to have provided zero contribution to the October-December GDP (forecasts ranged from -0.2 to +0.3 percentage point), after pushing up the July-September GDP by 0.1 point. Four of the 10 economists expect a slight rise based on a faster buildup in manufacturers’ inventories in Q4 from Q3 while two forecast a slight drop, assuming some inventories were drawn down to meet higher shipments amid reopening demand.
On the downside, public works spending is expected to mark a fourth consecutive quarter-on-quarter decline, as 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 for public investment is a 3.0% slump on quarter in Q4 (forecasts ranged from -4.0% to -0.4%) after a 2.0% drop in Q3.
Downside Risks to Q1 GDP
The relentless spread of the pandemic in the new year has prompted the government to expand strict restrictions on social and economic activities to 35 of Japan’s 47 prefectures. It may be forced to extend the measures, short of a state of emergency, for 13 prefectures including Tokyo after they expire on Feb. 13. The restrictions on most of the 22 other jurisdictions are due to end on Feb. 20.
Economists are expected to revise down their forecasts for the January-March economic performance, with some looking at a possible contraction. On average, 36 economists polled by the Japan Center for Economic Research from Dec. 24 to Jan. 7, had predicted that GDP would grow 5.05% at an annualized rate in the first quarter of 2022.
From mid-December to mid-January, consumer spending seemed to have hovered around the average-year levels seen from 2017 through 2019, according to private-sector data. Retail stores reported higher sales during the year-end and new year shopping season, compared to a year earlier.
During that period, people generally braved the Omicron scare and dined out more and resumed visits to their hometowns for the traditional new year’s celebrations after restraining a year before, supporting private consumption.
Omicron Hurting Sentiment
But toward the end of January and into February, Japan saw a rapid surge in new Covid cases, discouraging people from going out and forcing some factories and retail stores to suspend operations as employers fell sick or were required to quarantine after coming in close contact with people who tested positive.
The Cabinet Office’s Consumer Confidence Survey of households with two or more people, which was conducted on Jan. 15, showed that sentiment plunged in all key areas.
The Consumer Confidence index fell 2.4 points to a five-month low of 36.7 in January on a seasonally adjusted basis, marking the second straight monthly decline after dipping 0.1 point to 39.1 in December. This led the Cabinet Office to downgrade its assessment that consumer sentiment is “pausing” from its previous view that “signs of a pickup continue.”
Consumers were more pessimistic about all four key aspects that affect their sentiment – overall economic well-being, income gains, job prospects and whether it would be a good time to buy durable goods over the next six months.
Similarly gloomy results are expected from the monthly Economy Watchers Survey for January to be released at 1400 JST (0500 GMT/0000 EST) on Feb. 8.
The most recent Watchers’ poll, which was conducted by the Cabinet Office from Dec. 25 to Dec. 31, showed sentiment was nearly flat in the face of a spike in coronavirus cases caused by the more contagious Omicron variant, and that the near-term outlook became dimmer.
The Watchers’ sentiment index for Japan’s current economic climate posted the fourth straight month-on-month rise in December, edged up to 56.4 on a seasonally adjusted basis, the highest in 16 years (since 57.5 in December 2005), but the increase was only 0.1 point after rising 0.8 point to an eight-year high of 56.3 in November and surging 13.4 points to 55.5 in October.
The end to the state of emergency Covid restrictions on Oct. 1 helped the index recover from August’s 13.7-point plunge to a seven-month low of 34.7.
But in light of the latest Covid development, rising materials prices and supply constraints, the Watchers’ outlook index, which shows sentiment about the situation two to three months ahead, slumped below the key 50 mark, posting the second consecutive drop, down 4.0 points to a four-month low of 49.4 in December after falling 4.1 points to 53.4 in November and reversing a 0.9-point gain to a nearly eight-year high of 57.5 in October.