Japan: Subdued Q1 economic activity shows quake impact more severe than thought
May 19, 2011
The 11 March earthquake and subsequent tsunami, which shut down nuclear power generation in north-eastern areas and disrupted supply chains across the country, hit the Japanese economy harder than expected. In the first quarter, GDP contracted 3.7% over the previous quarter in seasonally adjusted annualised terms, exceeding market expectations of a 1.9% drop. The figure followed the revised 3.0% decline recorded in the previous quarter (previously reported: -1.1% quarter-on-quarter saar) showing that the country is going through a deep recession. The sharp contraction over the previous quarter reflected a deterioration in domestic demand, which decreased 3.0% over the previous quarter (Q4 2010: -2.7% qoq saar), in particular in private demand (Q1: -4.7% qoq saar; Q4: -2.8% yoy saar). Moreover, private inventories fell sharply in order to meet elevated demand, while imports surged (+8.2% qoq saar) due to a higher bill for energy inputs amid elevated oil prices. On the other hand, exports of goods and services recorded only a modest gain of 2.8% (Q4: -3.3% yoy saar). As a result, the net contribution from the external sector to overall growth fell from minus 0.3 percentage points in the fourth quarter to minus 0.6 percentage points in the first quarter. Meanwhile, households' consumption, which accounts for nearly 60% of GDP, contracted an annualised 2.2% (Q4: -4.0% qoq saar), while government consumption accelerated to a 3.9% expansion (Q4: +1.5% qoq saar), mainly due to spending programs aimed at mitigating the consequences of the natural disaster. Analysts expect that the triple disaster of earthquake, tsunami and nuclear crisis will strike even harder in the second quarter. In particular, a slump in exports and consumer spending, which has already been observed in April. Moreover, power supply shortages are expected to be more severe during the summer, which may hurt manufacturing industries, adding further pressure to economic growth. Going forward, the economy is likely to enter a recovery path in the second half of the year, as the reconstruction process will begin to kick in and supply chain disruptions will ease.