Japan’s GDP Preview: Scraping Through - ING
James Smith, Economist at ING, suggests that this week’s Japanese GDP
figure may show that the economy narrowly missed recession, but demand
remains weak and will keep the pressure on policymakers to act.
“Although the economy contracted by an annualised rate of 1.1% in the final quarter of last year, warm weather was largely to blame. But the subsequent failure of growth to rebound is harder to explain using temporary factors. Consumption, by far the largest component of GDP (60%), is case in point.
Based on the Family survey, which feeds into GDP, spending looks to have grown by only 0.2% QoQ, following a dip of almost 1% last quarter. That said, it is worth noting that GDP is not adjusted for leap years and thus consumption may come out artificially higher than our forecast. Incidentally, this may be the sole factor preventing the economy from falling into a recession in the first quarter.
The investment component of GDP is notoriously tricky to forecast, partly because the component does not closely mirror any particular lead indicator, but also because it is also often subject to heavy revision in the second estimate (when corporate accounts data is available). That said, there are few reasons to be optimistic about investment in the first quarter. The external environment remains subdued, but more recently, the surge in the Yen has dampened business confidence. After an unexpectedly strong CapEx reading in the fourth quarter, the probability of a hefty fall in the first quarter seems high.
The silver lining comes in the form of net exports, which look to have performed well in the first quarter. With exports, it is important to distinguish between goods, which have floundered over recent years, and services, which have almost tripled since 2012 following a marked increase in tourist numbers. The latter trend continued in earnest in 1Q, but there is also evidence that goods exports also looked more encouraging and as an aggregate, we forecast export growth at 1.5% QoQ.
Taking all of this together, we expect growth to come in at a fairly stagnant annualised rate of 0.3% QoQ, emphasising the need for further action from policymakers. The near term focus is now on the G7 meeting on 26-27 May, where PM Abe has indicated that he hopes to agree on co-ordinated action. However, resistance from other member countries make this look unlikely. Focus will therefore shift back to the fiscal policy, particularly following a Nikkei report over the weekend suggesting that PM Abe is considering postponing the sales tax hike (currently planned for April next year).”