--Domestic Demand Decline Smaller Than in First Estimate but Consumption Remains Weak --Business Investment Drop Revised Up but Its Negative Contribution Unrevised --Net Export Pullback Slightly Larger Than Expected --Q2 GDP Seen Rebounding about 2% Annualized on Resumed Auto Output; Still Faces Headwinds (MaceNews) – The second reading of Japan's gross domestic product for the January-March quarter confirmed the economy posted its first contraction in two quarters, down an unrevised 0.5% on quarter, but the annualized drop was revised up slightly to 1.8% from last month’s initial estimate of 2.0% thanks to a higher-than-expected private inventory buildup that offset the impact of slightly weaker-than-expected exports, Cabinet Office data released Monday showed. Suspended output at Toyota group firms over a safety test scandal in the first two months of the year triggered a widespread slump beyond the auto industry, hurting consumption and business investment, while net exports declined in payback for a temporary service income surge in the previous quarter. The median forecast for the first quarter real GDP was no revisions from the first reading. The forecasts by 10 economists ranged from decreases of 0.9% to 0.3% on quarter, or an annualized pace of 3.6% to 1.0%. The economy narrowly averted a second straight contraction in the final quarter of 2023. In the preliminary first-quarter GDP data, the fourth quarter’s slight growth was revised down to be flat but it has now been revised up to a 0.1% rise on quarter, or annualized 0.4% growth. In October-December, a solid rebound in business investment and a rise in net exports due to a temporary surge in services income (copyright royalties) were partially offset by declines in consumption and public works as well as a slight fall in private-sector inventories.
From a year earlier, the economy fell just 0.1% in January-March for the first drop in three years, revised up from a preliminary 0.2% drop, following a revised 1.1% rise in October-December. The consensus forecast was a 0.3% fall.
Looking ahead, the economy in April-June is expected to show modest growth of about 2% annualized as auto production resumed in March but more revelations of false safety test records in June, this time at Toyota Motor itself, instead of its subsidiaries, are clouding the growth outlook for coming months. In addition, consumer spending remains sluggish amid elevated costs for food and other necessities. Both households and businesses are concerned that the weakness of the yen, whose value has hit 34-year lows against the dollar, will cause a resumed spike in import costs at a time when transport and labor costs are rising together with some commodities.
The Cabinet Office estimates that in order for real GDP to hit the official forecast of 1.3% growth in fiscal 2024, the economy will have to grow 0.73% on quarter, or an annualized 3.0% in each quarter of the fiscal year that began in April, which appears to be above Japan’s potential growth rate.
The economy grew a real 1.2% in fiscal 2023, below the official forecast of a 1.6% rise after expanding 1.6% in fiscal 2022, which was slightly under the official projection of 1.7%. It followed a 2.8% gain in fiscal 2021 and decreases of 3.9% in fiscal 2020 and 0.8% in fiscal 2019.
Domestic Demand Drop Revised Up Slightly, Consumption Remains Weak
Domestic demand trimmed the first quarter GDP by a slight 0.1 percentage point, revised up from a negative 0.2 point in the initial reading and firmer than the median forecast of minus 0.2 point (forecasts ranged from a negative 0.6 point to zero). It lowered fourth quarter drop by 0.1 point. A rebound in public works spending was more than offset by a pullback in business investment and weak consumer spending.
Private consumption, which accounts for about 55% of GDP, fell 0.7% for a fourth straight quarterly decline, unrevised from the preliminary estimate. The median projection was a 0.7% fall (forecasts ranged from 0.8% to 0.7% drops). It followed a 0.4% fall in the fourth quarter.
Consumption pushed down the first quarter GDP by an unrevised 0.4 percentage point after making a negative 0.2-point contribution to the total domestic output in the previous quarter.
Capex Drop Smaller Than Expected but Still Has Negative Contribution
Business investment in equipment fell 0.4% on quarter in January-March, an upward revision from the initial reading of a 0.8% slump. The median forecast was a 0.7% drop (forecasts ranged from 3.5% to 0.2% drops). It was in payback for a sharp 1.9% rebound in October-December, the first rise in three quarters that was backed by continued solid growth in sales and profits.
Capex made a negative 0.1-point contribution to the first quarter GDP, as seen in the preliminary data, after providing a positive 0.3-point contribution the previous quarter.
Firms have been cautious about implementing their solid plans amid elevated costs and uncertainty over global growth, although capital investment is generally supported by demand for automation amid labor shortages as well as government-led digital transformation and emission control.
Net Exports Show Slightly Deeper Pullback
Net exports of goods and services -- exports minus imports -- made a negative 0.4 percentage point contribution to the total domestic output, revised down from minus 0.3 point in the initial reading. Net exports raised the GDP by 0.2 point in the previous quarter, which was supported by a one-off surge in services income (copyright royalties).
Japanese exports of goods and services posted their first quarterly decline in four quarters in the January-March quarter GDP, down by a revised 5.1% (preliminary a 5.0% drop), after rising 2.8% in October-December. Imports also fell 3.3% (revised from a 3.4% fall) after rising 1.8% in the previous quarter.
The number of visitors from other countries has recovered to pre-Covid levels and their spending is counted as Japanese exports of services. By contrast, exports of goods have been sluggish amid a weak tone in the European economy and despite signs of a pickup in China.
Private Inventories Support GDP, Public Works Spending Rebounds
Private sector inventories provided a positive 0.3 percentage point contribution to the first quarter GDP, revised up from the initial estimate of plus 0.2 point and after trimming the fourth quarter GDP by 0.1 point (revised from minus 0.2 point). The median forecast was plus 0.2 point.
Public works spending posted its first quarterly rise in three quarters, up 3.0% in January-March, backed by the stimulative effects of the fiscal 2023 budget, after falling 0.2% in October-December. It was unexpectedly revised down slightly from a preliminary 3.1% rise. The median forecast was a 3.5% rise (forecasts ranged from 2.2% to 4.6% gains).
Public investment made an unrevised positive 0.2-point contribution to the first quarter GDP after lowering the total output by a slightly negative 0.0 point in the previous quarter.
Price Pressures Continue Easing Both on Year, Quarter
The unadjusted deflator rose 3.4% (revised from 3.6%) on year in January-March after rising 3.9% in October-December. The slower increase was due to a 2.8% rise in the import deflator following a 3.7% fall in the previous quarter. The pace of increase in the domestic demand deflator accelerated to 2.3% (revised from 2.6%) from 2.1%.
The seasonally adjusted deflator rose 0.5% (revised from 0.6%) on quarter after rising 0.6% (revised from 0.7%) in the fourth quarter, with the domestic demand deflator increasing 0.6% (revised from 0.7%) after rising 0.5%. The import deflator rose 1.5% after rising 2.3% (revised from 2.4%) in the prior quarter.
