Contraction in Japanese economy will likely be temporary

Weather factors may largely explain the negative GDP number in Q1. But we expect growth to pick up for the rest of the year.

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The preliminary report of Japanese GDP for Q1 2018 came in below expectations, showing contraction of 0.2% from the previous quarter (0.6% annualised).

The slowdown in growth was broad based across most subindices of the GDP report, but was especially noticeable in internal demand (both consumption and investment). External demand also showed some softness, with net exports contributing little to growth.

The sluggish domestic demand in Q1, in our view, could be partly due to temporary factors such as cold weather. The strong rise in workers’ compensation in recent months indicates that consumption will likely rebound significantly, especially as the negative weather conditions disappear. Tight capacity constraints could lead to more corporate capital expenditure going forward. With synchronised global expansion still going strong, we expect the Japanese economy to return to positive growth in Q2 and through the rest of the year.

Tight capacity constraints in Japan could lead to more corporate capital expenditure going forward. With synchronised global expansion still in place, we expect the Japanese economy to return to positive growth in Q2.

To summarise, the contraction of GDP in Q1 will probably prove temporary. The underlying strength of the economy is still solid. As weather factors disappear in Q2, we expect to see a meaningful rebound in consumption, supported by strong income and payroll growth. Corporate capex should improve as well, as businesses face severe capacity constraints. Finally, against the backdrop of global economic expansion, exports will likely continue to be a major driver of the Japanese economy in 2018.

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