Japan: Economy returns to growth in Q4 but remains hampered by weak Asian demand
February 14, 2019
The economy rebounded in the last quarter of 2018, after a series of natural disasters and weak investment caused a contraction in the third quarter. GDP expanded 1.4% in Q4 in seasonally-adjusted annualized terms (SAAR), sharply contrasting the revised 2.6% (SAAR) decline registered in Q3 (previously reported: -2.5% SAAR) and matching analysts’ expectations. However, economic activity was flat when compared to the same quarter of the previous year, following paltry 0.1% year-on-year growth in Q3. This puts economic growth for the full year 2018 at 0.7%, a marked deceleration from 2017’s solid 1.9%.
The economy was largely supported by domestic consumption expenditures in the quarter, while investment spending somewhat recovered from its sharp slump in Q3. On the other hand, the external sector’s performance was feeble, dragged down by weak demand for tech products and a regional slowdown in Asia—primarily driven by China.
Looking at the details, private consumption recovered from Q3’s 0.8% contraction (SAAR) to post 2.4% growth in Q4, while simultaneously government consumption growth accelerated to 3.2% (Q3: +0.9% SAAR). Fixed investment growth rebounded to a solid 6.1% in Q4, however this was not enough to offset the larger 8.4% contraction registered in the previous quarter. Indeed, despite a strong recovery in business investment—as companies ramped up efforts to automate production in order to overcome labor shortages—and an acceleration of investment growth in the residential sector, a sixth consecutive quarter of decline in public investment spending weighed on the print. Lastly, turning to the external sector, exports failed to make up for Q3’s 5.6% contraction, growing just 3.7% in Q4 amid tepid regional demand, while conversely import growth surged to 11.3% (Q3: -2.6% SAAR).
Looking ahead, Nomura analysts expect that the weak external environment will continue to weigh on growth going forward, although they see domestic demand as resilient. Commenting on the outlook, they noted:
“We have lowered our overall outlook primarily to factor in slowdowns in external demand and in real capex […] We do not anticipate a large fall in overall domestic demand. We expect the income climate for households to remain favorable, with both hiring and employment likely to remain on an upward trajectory owing to structural labor shortages. We also expect government policy to lend support to domestic demand. The government has been looking at relatively aggressive measures to mitigate the impact of the consumption tax hike scheduled for October 2019. This includes public works designed to prevent or mitigate damage from natural disasters and make the nation less vulnerable, and these are likely to boost real public investment.”
Author: Joffrey Simonet, Economist