Japan: GDP contracts in Q1, ending two-year run of growth
May 16, 2018
Japan’s economy ground to a halt at the start of 2018, contracting for the first time in nine quarters. The first-quarter result ended the longest streak of growth, of two years, seen in the Japanese economy since the 1980s. GDP contracted 0.6% over the prior quarter in seasonally-adjusted annualized terms (SAAR), down from the 0.6% expansion in Q4 2017. The print was also below market expectations of a 0.2% decline. The downturn came on the back of a poor performance in the domestic sector. In annual terms, GDP grew 0.9% in Q1, moderating from 1.8% growth in Q4.
Domestic demand shrank notably in the quarter on the back of a contraction in investment and flat consumption growth. Growth in fixed capital formation fell further in Q1, logging the largest contraction since Q2 2015 (Q1: -1.2% quarter-on-quarter SAAR; Q4: -0.1% qoq SAAR). Private non-residential investment declined in Q1, whereas public investment recovered slightly. Housing investment shrank sharply in the quarter, recording the steepest decline in over three years. Investment figures, however, could be revised upward when data based on the Ministry of Finance surveys are included in the second GDP estimate. Consumption growth was also lackluster mainly due to adverse weather conditions, and private consumption came in flat in the first quarter (Q4: +1.0 qoq SAAR). Government spending, however, expanded a meager 0.1% over the previous quarter, following a flat print in Q4.
Japan’s all-important external sector was hit in Q1, with growth in exports of goods and services moderating to 2.6% (Q4: +9.2% qoq SAAR). Export growth softened on the back of a drop in shipments of electronic components and equipment. Imports of goods and services also slowed significantly in Q1, easing to 1.2% from 12.9% in Q4. The annualized net contribution from the external sector improved, however, from minus 0.4 percentage points in Q4 to plus 0.3 percentage points in Q1.
The deterioration in Q1 struck a blow to the key Abenomics policy of stronger private consumption and suggests the economy is still vulnerable to economic shocks despite the Bank of Japan’s monetary stimulus. That said, Q1’s contraction is likely a one-off result rather than the outset of a downward cycle. Economic growth in the second quarter should be propped up by stronger exports amid healthy global demand. Elevated business confidence and a solid PMI in April also point to stronger domestic demand in Q2.
Author: Lindsey Ice, Economist