Consumption in Japan

Japan - Consumption

GDP contracts in Q3 on weaker external sector, surprising market

According to a preliminary reading, GDP contracted 1.2% in seasonally adjusted annualized rate terms (SAAR) in the third quarter, below the 4.6% expansion recorded in the second quarter. Q3’s reading marked the worst since Q3 2021 and belied market expectations of an expansion.

Private consumption growth moderated to 1.1% SAAR in Q3 from a 5.1% expansion in Q2. Government consumption was stable (Q2: +3.4% SAAR). Meanwhile, fixed investment growth slowed to 4.8% in Q3 from 6.0% in the previous quarter.

Exports of goods and services increased 7.9% on a SAAR basis in the third quarter, above the second quarter’s 7.2% expansion. In addition, imports of goods and services growth picked up to 22.6% in Q3 (Q2: +3.3% SAAR). Therefore, the external sector detracted from the reading.

On an annual basis, economic growth improved marginally to 1.8% in Q3, compared to the previous period’s 1.7% growth.

The unexpected contraction in Q3 was primarily due to a negative net contribution from the external sector. Moderating private consumption growth also contributed to weaker growth amid a spike in Covid-19 cases during the summer. Our panelists expect GDP growth to pick up in Q4, as the economy benefits from a rebound in tourism and the government’s new USD 200 billion spending package.

Analysts at Nomura commented on the outlook:

“We think private-sector consumption, a representative measure of domestic demand, will slow in 2023 H2 while exports will start falling in 2023 H1. We attribute the slowdown in private-sector final consumption to the dropout of spending stemming from the reopening of the economy. The fall in exports will likely reflect economic downturns in the US and eurozone in 2022 depressing demand for exports of goods from Japan in 2023 H1.”

Naohiko Baba, chief Japan economist at Goldman Sachs, said:

“We expect real GDP in Q4 (Oct-Dec) to recover, driven mainly by consumer spending and exports (including inbound spending) especially on the services front due to reopening of the Japanese economy. Furthermore, we expect imports to temporarily fall steeply as the one-off factor drops out.”

FocusEconomics panelists see the economy expanding 1.4% in 2023, which is down 0.1 percentage points from last month’s forecast, and 1.3% in 2024.