Japan: Economy contracts sharply in Q3, weighed on by pandemic restrictions
November 15, 2021
According to a preliminary estimate, GDP dropped 3.0% in seasonally-adjusted annualized rate terms (SAAR) in the third quarter, contrasting the 1.5% expansion logged in the second quarter. The result came in well below market analyst expectations and revealed the impact that extended state of emergency measures had on the economy during the third quarter. Meanwhile, on an annual basis, economic growth lost momentum, cooling to 1.4% in Q3, following the previous quarter's 7.6% increase.
Domestically, the downturn in SAAR terms reflected contractions in consumer and capital spending. Private consumption fell 4.5% SAAR in Q3, contrasting the 3.7% increase recorded in Q2, as public vigilance concerning the record-high levels of Covid-19 cases during August and September weighed on spending. Meanwhile fixed investment shrank 11.9% in Q3 (Q2: +4.9% SAAR), marking the worst result since Q2 2020. Contrastingly, public spending growth improved slightly to 4.7% in Q3 (Q2: +4.5% SAAR).
On the external front, exports of goods and services contracted 8.3% in Q3 (Q2: +13.6% SAAR), marking the worst result since Q2 2020. Meanwhile, imports of goods and services declined at a faster pace of 10.5% in Q3 (Q2: +22.8% SAAR), marking the worst reading since Q3 2020. As a result, the external sector contributed 0.4 percentage points to the overall reading in Q3, contrasting the 1.2 percentage-point subtraction in Q2.
Looking ahead, our panel sees economic growth returning in SAAR terms in the final quarter of the year, as a rebound in capital and consumer spending is bolstered by continued government spending. Moreover, the recent election victory for PM Fumio Kishida should see the fruition of his planned fiscal stimulus, which should boost growth heading into the start of 2022.
Naohiko Baba, chief Japan economist at Goldman Sachs, sees growth strengthening towards the end of the year, commenting:
“Looking ahead, we expect Q4 (October–December) GDP data to reflect the lifting of the state of emergency, the easing of restrictions amid a sharp decline in Covid-19 cases, and benefits from economic reopening. We estimate real GDP growth will recover strongly to close to +7% qoq annualized in Q4, fueled primarily by a rebound in consumption. We also expect to see signs of exports bottoming soon.”
However, Takashi Miwa, chief Japan economist at Nomura, is slightly less optimistic, commenting:
“The number of new Covid-19 cases in Japan calmed from the latter half of September, and we think private-sector expenditures have been recovering since October. We also see some signs of alleviation of supply issues, particularly for semiconductors. We nevertheless expect some continued impact from supply constraints in October–December, as some automakers have said they may continue to reduce production. We caution that the recovery could be delayed as a result of the lingering impact on corporate demand, including both real exports and real capex.”
Author: Stephen Vogado, Economist