Japan’s GDP contracts sharply

Emily Nicol

As the number of coronavirus cases topped 70,000, China, Hong Kong and Singapore pledged additional fiscal support, while the People’s Bank of China offered additional medium-term funding to commercial lenders at a reduced interest rate, the lowest since 2017, while also adding funds via 7-day reverse repo agreements. Against this backdrop, China’s equities started the week on the front foot, with the main CSI300 index up 2¼% to reverse the losses seen since markets reopened after the Lunar New Year holiday. In contrast, however, Japan’s TOPIX fell 0.9% as the first estimate of Q4 GDP reported a much larger contraction (-1.6%Q/Q, -6.3%Q/Q annualised) than had been expected (see more details below). Singapore equities were also lower as the government revised down significantly its expectation for full-year growth this year.

In government bond markets, with the US closed for a national holiday and given the disappointing Japanese economic performance, 10Y JGB yields fell 1bp to -0.04%, while European govvies were little changed at open on what will be a relatively quiet day for economic news. The remainder of the week will, however, be a busy one for top-tier data releases, including the flash February PMIs on Friday, inflation figures from the euro area (Friday) and UK (Wednesday) and labour market reports from the UK (tomorrow) and Australia (Thursday). Minutes from the most recent policy-setting meetings from the Fed and ECB are also due.

While Japan’s economy was anticipated to have contracted in the final quarter of 2019 related not least to the impact of October’s consumption tax hike and the super typhoon, today’s preliminary estimate of Q4 GDP fell a much steeper-than-expected 1.6%Q/Q (-6.3%Q/Q annualised), the most since the 1.9%Q/Q contraction in Q214 when the consumption tax was last increased. But there was also a disappointing downward revision to growth in Q3, by 0.3ppt to just 0.1%Q/Q. And with output having been revised slightly higher a year ago, this left GDP down 0.4%Y/Y, the first negative reading for a year and down from growth of 1.7%Y/Y previously.

Within the detail, unsurprisingly the weakness in Q4 principally reflected the tax hike-related hit to expenditure, with the quarterly decline in GDP fully accounted for by private consumption. Indeed, the 2.9%Q/Q decline was the steepest since the 2014 tax hike, with spending on durable goods down 12.8%Q/Q and semi-durables down 6.2%Q/Q. Overall, this left consumption at its lowest level since Q216 and 4% lower the pre-tax hike peak in 2014.

There were also sizeable declines in private investment in Q4, with housing investment down more than 2½%Q/Q (the most for two years), while private capex fell more than 3½%Q/Q, together knocking a further 0.7ppt off quarterly GDP growth. This was in part offset by public sector investment (up 1.1%Q/Q to boost GDP growth by 0.1ppt), while private sector inventories also provided a modest positive contribution of 0.1ppt. And despite a second successive drop in exports (-0.1%Q/Q), a notable decline in imports (-2.6%Q/Q) related to weaker domestic demand saw net trade add 0.5ppt to growth, the first positive contribution for three quarters.

The near-term outlook for Japan’s economy remains subject to significant downside risks, not least given the likely impact of China’s coronavirus outbreak on both exports and Japan’s tourism sector – indeed, shipments of goods to China account for almost 20% of Japan’s total exports and worth more than 2½% of GDP, while China and Hong Kong together account for almost one third of spending by overseas visitors to Japan.

Despite this backdrop, however, today’s Reuters Tankan survey for February – the first to fully capture heightened concerns about the coronavirus – reported no deterioration in overall business conditions over the past month. Indeed, the headline non-manufacturing diffusion index (DI) actually edged marginally higher (by 1pt to +15), as did the equivalent manufacturing DI (up 1pt to -5). Admittedly, within the detail, there was a notable drop in sentiment in the chemicals sector (the relevant DI was down 17pts to its lowest level since the Global Financial Crisis) which sees a sizeable proportion of exports go to China, while retailers were also unsurprisingly more pessimistic. And overall, the survey suggested no material improvement in business sentiment so far in Q1. Friday’s release of the flash February PMIs will also provide an update on conditions, with the headline composite PMI expected to fall back below 50 for the fourth month out of the past five.

Wednesday’s release of Japanese goods trade figures and overseas visitor numbers for January will also be closely watched for any signs of initial economic impact of the outbreak of the coronavirus – indeed, China accounts for roughly 20% goods exports and a similar share for tourist spending too. In any case, goods exports are likely to have been much weaker than a year earlier due to the time of the Lunar New Year holiday. Wednesday will also bring December machinery orders data, while Friday will bring January CPI inflation figures. Not least given the shift in energy and commodity prices over the past month, these are expected to show headline inflation took a step down at the start of the year, back close to ½%Y/Y (0.2%Y/Y when excluding the effects of the consumption tax hike and government education policies).

Euro area:
A key data focus in the euro area this week will be Friday’s flash PMIs for February. While the manufacturing survey implied some stabilisation in the sector at the start of the year, the subsequent increase of downside risks to the global outlook in light of the coronavirus outbreak looks set to have weighed on sentiment in the sector over the past month. Meanwhile, the services PMI is also expected to post a further modest deterioration in conditions this month. As such, the composite PMI will surely take a step down from the five-month high (51.3) reached in January. While the impact of the coronavirus on household sentiment will be more limited for now, the Commission’s flash estimate of consumer confidence (due Thursday) is expected to show no improvement in February, with the index set to move sideways at a level that was last weaker in 2016.

The back end of the week will also bring final euro area inflation figures for January (Thursday), which, in line with this week’s final German and Spanish figures, are expected to confirm the modest increase in the headline rate (up 0.1ppt to 1.4%Y/Y) on the back of firmer energy prices. The preliminary release saw core inflation decline 0.1ppt to 1.1%Y/Y and this also seems highly likely to be confirmed. That day will also bring the publication of the account from the ECB’s January Governing Council meeting.

Ahead of this, euro area construction output data for December are due later this morning, followed by new car registrations figures for January tomorrow. Not least given significant weakness reported in Germany and France in the respective data sets, both releases are likely to report a notable decline in the euro area as a whole. At the country level, Germany’s ZEW survey of financial professionals and GfK consumer confidence survey are also due on Tuesday and Thursday respectively.

This week will be a busy one for top-tier UK economic releases, with the December labour market figures (due Tuesday), January CPI and retail sales data (Wednesday and Thursday respectively) and the February flash PMIs (Friday) all likely to play an important role in the considerations of the Bank of England. While employment growth is likely to have slowed in the three months to December from the ten-month high of 208k in November, it is expected to remain in positive territory to leave the unemployment rate unchanged at 3.8%. But regular earnings growth looks set to have edged slightly lower in the three months to December, to 3.2%3M/Y, which would be the softest for fifteen months. This notwithstanding, with the flash estimate of productivity in Q4 set to have remained weak, this would imply still solid unit labour cost growth in the final quarter of 2019. Meanwhile, January’s CPI figures are expected to show that headline inflation increased 0.3ppt from December’s near-three-year low of 1.3%Y/Y on the back of higher energy inflation. The upwards drift in core inflation will, however, be more modest.

Turning to the retail sector, while the January BRC and CBI surveys signalled a soft start to the year, Thursday’s retail sales release seems likely to report the first monthly increase in four, albeit leaving year-on-year growth at a still very subdued rate. That day will also bring the latest CBI industrial trends survey, which will provide an update on the manufacturing sector in February. But likely of greater interest will be Friday’s flash February PMIs, which will provide a more comprehensive assessment of economic conditions since the outbreak of the coronavirus gained greater media attention. And while the headline manufacturing PMI jumped in January to 50.0 (the first non-contractionary reading since April), this seems likely to have fallen back as concerns about the global outlook intensified. The services PMI is also likely to have moderated from the sixteen-month high of 53.9 recorded in January, leaving the composite PMI consistent with only modest expansion in February. Finally, Friday will also bring January public finance figures, possibly the last update before the March Budget.

In the US, when markets reopen after today’s Presidents’ Day holiday, tomorrow will bring the first of the week’s housing market indicators with the NAHB housing index for February. This will be followed by January housing starts figures (Wednesday) and existing home sales data (Friday). Other scheduled releases include the Empire Manufacturing index (tomorrow) and the Philly Fed and Conference Board leading indicators (Thursday), while the latest PPI figures will be published alongside the minutes from the Fed’s January policy-setting meeting (Wednesday). In terms of Fed-speak, Wednesday will see FOMC voting members Mester, Kashkari and Kaplan speak publicly, while Friday will see several members speak at a policy forum in New York.

The main focus in Australia this week will be Thursday’s labour market report for January. While employment is expected to have increased in January, this is expected to be smaller than in recent months, leaving the unemployment rate up 0.1ppt to 5.2%. But it is worth noting that ABS expected January’s figures to have been impacted by the escalation of the bushfire crisis.

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