Japan: Economic growth accelerates in Q1 on plunging imports flattering the external sector
The economy expanded for the second consecutive period in the first quarter of 2019, defying market expectations and supporting Prime Minister Shinzo Abe’s plan to hike the sales tax in October this year. However, the reading can be somewhat misleading given that the bulk of the improvement came from a sharp drop in imports, likely reflecting frail domestic demand. GDP expanded 2.1% in seasonally-adjusted annualized terms (SAAR) in Q1, above the 1.6% (SAAR) expansion registered in Q4 and comfortably beating market analysts’ expectations of a 0.2% drop. Economic activity expanded 0.8% compared to the same quarter of the previous year, following a paltry 0.2% year-on-year gain in Q4.
GDP was largely supported by a drop in imports of goods and services, which contracted 17.2% in Q1 (Q4: +12.7% SAAR) and marked the steepest decline since Q1 2019. Exports of goods and services also declined but at a softer pace of 9.4% (Q4: +4.8% SAAR). As a result, the external sector contributed 1.6 percentage points to overall growth.
Domestic demand deteriorated in Q1, with private consumption falling 0.3% in Q1 (Q4: +0.9% SAAR) mostly due to declining purchases of semi-durable and durable goods. Moreover, government consumption fell 0.4% in Q1, contrasting Q4’s 0.4% rise. While private investment remained subdued in Q1, public investment picked up in the same quarter mainly supported by disaster-related works. Against this backdrop, growth in gross fixed capital formation fell from 6.4% in Q4 to 1.0% in Q1.
Despite its weak foundations, Q1’s result will likely reaffirm Prime Minister Abe’s intention to follow through with a tax increase in October. Takashi Miwa, the chief economist at Nomura, takes a similar view, noting:
“As most monthly indicators since April have pointed toward recovery, this weakening in economic activity seems unlikely to continue in Q2 (Apr-Jun) onward, and the overall economy does not look likely to fall into a recession. Based on this point and the GDP estimates, we think the government is unlikely to start considering policies to counteract a downturn, such as delaying the planned hike to the consumption tax rate.”
Looking forward, rising U.S. trade protectionism is the main threat to Japan’s economic recovery. In this regard, President Donald Trump’s decision on 17 May to delay tariffs on imports of cars and car parts for up to six months gives both parties time to find a resolution to the dispute, boding well for growth the coming quarters.