Japan: The economy unexpectedly slips into recession in Q3
November 17, 2014
The Japanese economy entered in technical recession, after GDP contracted for the second consecutive quarter in the three months up to September. In Q3, GDP fell 1.6% over the previous quarter in seasonally adjusted annualized terms (SAAR). Although the decline was above the 7.3% drop tallied in Q2, it contrasted the 2.2% increase that market analysts had expected. On an annual basis, economic activity decreased 1.2% in Q3 (Q2: -0.2% year-on-year), which marked an over three-year low.
The contraction in Q3 reflected a still-weak domestic demand, while the contribution from the external sector moderated. Private consumption rebounded from Q2’s record drop of 18.6% to a mild 1.5% increase in Q3, while government spending rose 1.3% (Q2: -0.2% quarter-on-quarter SAAR). Gross fixed capital formation declined 2.2% in Q3, which marked a remarkable improvement over the 16.6% contraction tallied in Q2. Private non-residential investment registered a soft 0.9% drop (Q2: -17.9% qoq SAAR).
Exports of goods and services grew 5.3% over the previous quarter in annualized terms (Q2: -1.9% qoq SAAR), while imports rebounded from a sharp 19.9% drop in Q2 to a 3.1% expansion in Q3. As a result of the strong recovery in imports, the external sector’s annualized net contribution to overall growth fell from 4.2 percentage points in Q2 to 0.3 percentage points in Q3.
The unexpected drop in economic activity observed in Q3 could delay the planned second sales-tax hike scheduled for 2015 and trigger new elections. Although Prime Minister Shinzo Abe and his allies have a strong parliamentary majority, Abe could seek a broader mandate to push his reforms ahead while his popularity is still high. Despite Japan’s negative dynamics in Q3, analysts warn that there is no need for pessimism on the country’s outlook.