Japan Government Investment (ann. var. %)

GDP rebounds in the fourth quarter but undershoots expectations

According to a preliminary reading, economic activity bounced back, growing 0.6% in seasonally adjusted annualized rate terms (SAAR) in the fourth quarter, above the 1.0% contraction tallied in the third quarter. However, despite bouncing back, the GDP growth figure undershot market expectations.

Private consumption growth accelerated to 2.0% SAAR in Q4 from a 0.1% expansion in Q3. Government spending improved to a 1.3% expansion in Q4 (Q3: +0.3% SAAR). Meanwhile, fixed investment contracted 1.8% in Q4, marking the worst reading since Q1 2022 (Q3: +4.4% SAAR).

On the external front, exports of goods and services growth fell to 5.7% in Q4, marking the worst result since Q1 2022 (Q3: +10.4% SAAR). In addition, imports of goods and services deteriorated, contracting 1.6% in Q4 (Q3: +24.0% SAAR).

On an annual basis, economic growth lost momentum, cooling to 0.6% in Q4, following the previous quarter’s 1.5% increase.

As expected, total consumption led GDP to rebound in Q4. A travel subsidy scheme boosted private spending, while the government’s new USD 200 billion spending package helped boost public spending. That said, a surprise plunge in inventories subtracted 1.8 percentage points from growth, driving the lower-than-expected GDP reading.

Looking toward Q1, our panelists expect GDP growth to be slowing. Inflation remains high, hampering private spending. Moreover, while China’s reopening bodes positively for exports, economic weakness among Western nations will continue to hamper the external sector.

Analysts at Nomura commented on the outlook:

“Real consumer spending was solid in Oct–Dec 2022 […]. Rising food prices dampened purchasing activity among consumers, and it may also have been weighed down by a rise in COVID infections. That said, the restart of the nationwide travel subsidy scheme and a sharp increase in winter bonuses have been supporting a recovery in consumer spending. We think consumer spending will drive economic recovery through mid-2023.”

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

“We expect real GDP in 2023Q1 (Jan-Mar) to remain in positive territory, albeit modestly, on an anticipated slowdown in inbound spending in reaction to Q4, and a modest recovery in capex from concerns about overseas demand trends. We see recovery momentum to pick up from 2023Q2, helped by China’s economic reopening and an economic upturn in Europe.”