A broad-based drop in Japanese GDP

Chris Scicluna
Emily Nicol

Friday saw the Fed caution about the appropriateness of various market valuations, and yesterday Fed Chair Jay Powell once again warned about the US economic outlook, suggesting that full recovery “may have to await the arrival of a vaccine” and “could stretch through the end of next year, we don’t really know”. Nevertheless, continued moves to reopen shuttered economies supported riskier assets today, with most major Asian stock market indices along with US and European stock futures up, and oil prices higher too (WTI is now above $31 for the first time in more than two months).

In Japan, the Topix closed up about 0.5% as Q1 GDP data (see below) confirmed a deep recession albeit showing a slightly smaller drop than expected (obviously Q2’s figures will be far worse in due course). Following another decent auction, JGBs were slightly firmer, however. In keeping with the better tone to equities, however, USTs and euro area govvies have opened slightly weaker. However, Gilts are a touch firmer after BoE Chief Economist Haldane told the Daily Telegraph that the Bank was looking more closely at negative rates and other unconventional policies (last week Governor Bailey had appeared to pour cold water on negative rate speculation).

Looking ahead, the rest of Monday should be relatively quiet for economic data. But the week will be busy thereafter, will Fed Chair Jay Powell giving his congressional testimony tomorrow, FOMC minutes out the following day, flash PMIs from the major economies out on Thursday, and the ECB’s policy meeting account on Friday. China’s delayed National People’s Congress will also get underway on Friday. Several top-tier UK data will be scattered throughout the week too, including reports on the labour market, inflation, retail sales and public finances. And Italy’s government will hope to make headway into its sizeable borrowing needs though the first half of the week with an important BTP Italia retail issue.

The first estimate of Japan’s Q1 GDP unsurprisingly confirmed that the economy had entered a technical recession at the turn of the year. In particular, GDP fell 0.9%Q/Q (-3.4%Q/Q annualised) in Q1 following a post-consumption tax hike related contraction of 1.9%Q/Q (-7.3%Q/Q ann.) in Q4. This left output down 2% compared with a year earlier – the steepest annual drop since the global financial crisis – to its lowest level since 2016.

The weakness in Q1 was unsurprisingly broad based. Private consumption fell a further 0.7%Q/Q to a level only just above the post-2014 tax-hike trough and accounted for almost half the quarterly drop in GDP. While spending on durable goods was a touch firmer (1.6%Q/Q) this followed a significant double-digit decline Q4. Meanwhile, spending on semi-durable goods was down more than 5½%Q/Q and services down more than 2%Q/Q, the latter the steepest quarterly drop by some margin since the series began in 1994. Residential investment fell a sharp 4.5%Q/Q, the most since 2014, while non-residential investment declined a further 0.5%Q/Q to its lowest level for three years. And government spending provided no material support to growth in Q1 for the second successive quarter.

In terms of net trade, the slump in exports was inevitably steep, with the 6%Q/Q drop the largest since Q211 and caused by a decline in both goods and services. Indeed, the latter was inevitably impacted by the plunge in overseas visitor numbers in Q1, with spending by tourists down a whopping 47.3%Q/Q (almost matching the record slump after the 2011 quake). But similarly there was a drop in imported services. And taken together with weaker imports of goods too, overall imports were down almost 5%Q/Q, the most for eleven years and therefore providing a significant boost to GDP growth for the second quarter running (0.9ppt). As such, the negative contribution from net trade was limited to just 0.2ppt.

Of course, to some extent the aggregate quarterly figures masked the significant weakening in activity in March as concerns about Covid-19 ramped up in Japan. Certainly, today’s tertiary activity figures for that month were extremely weak, with output falling more than 4%M/M (5½%Y/Y) to its lowest level since May 2011. And with Abe having announced an initial state of emergency in certain major prefectures early in April and later extended that to the rest of the country in the middle of the month, recent surveys have pointed to a further marked deterioration in conditions at the start of Q2.

Overall, we anticipate a much larger contraction in GDP growth in Q2. Certainly, goods trade figures on Thursday seem highly likely to show the steepest decline in exports since 2009 (perhaps down by one fifth or more). Department store sales figures on Friday, will likely post the sharpest annual pace of decline on the series, having reported a drop of about one third in March. Likewise, overseas visitor numbers on Wednesday could show an even sharper fall following the 93%Y/Y retreat the prior month. Machine orders figures for March (due Wednesday) will also likely point to a much weaker outlook for capex over the near term. And the latest sentiment surveys – including the Reuters Tankan (Wednesday) and flash PMIs (Thursday) – will show a snapshot of business conditions in the current month.

Turning to inflation, today’s GDP release suggested little change in domestic price pressures at the start of the year, with the domestic demand deflator unchanged at 0.7%Y/Y, the firmest reading since Q318. But Friday’s CPI release for April seems bound to report a marked weakening at the start of Q2, in part related to the recent drop in oil and commodities prices but also a steeper decline in school fees and weaker mobile phone charges. So, we expect to see headline CPI fall 0.2ppt to just 0.2%Y/Y in April. And when excluding fresh foods, the BoJ’s forecast measure of core inflation is likely to have slipped back into negative territory for the first time since 2016.

Euro area:
With the number of new coronavirus cases and deaths well past the peak, euro area member states continue to relax their lockdown measures, e.g. today Italy will allow the reopening of all of its shuttered shops along with restaurants and hairdressers. Against that more positive backdrop, a key focus in the euro area this week will be the release of May surveys, with investors looking for signs of greater optimism.

Perhaps most notable will be Thursday’s flash PMIs, which will be preceded by Germany’s ZEW survey (tomorrow) and the Commission’s preliminary consumer confidence indicator (Wednesday). Led by Germany, the PMIs are likely to point to some modest improvement in conditions this month from the record low readings recorded in April (the headline euro area composite PMI fell more than 16pts to just 13.6), albeit likely still remaining at historically very weak levels.

The other highlight of the week in the euro area will be related to monetary policy, with the account of the end-April ECB Governing Council meeting due to be released on Friday. At that meeting, the ECB cut the interest rate on the forthcoming TLTRO-iii operations and launched an additional new PELTRO funding scheme, but left the asset purchase programmes unchanged. Additionally, Chief Economist Lane will speak publicly on monetary policy tomorrow.

In terms of hard data, euro area new car registrations figures for April (tomorrow) will definitely be dreadful – indeed, national figures already published showed record declines last month in Germany (-61%Y/Y), France (89%Y/Y), Italy (-98%Y/Y) and Spain (97%Y/Y) alike. Meanwhile, after downward revisions to the equivalent French and Spanish data, final euro area inflation figures for April (Wednesday) might bring a downwards revision to the preliminary CPI estimate, which declined 0.3ppt to 0.4%Y/Y, the lowest since September 2016. While the drop from March was due principally to lower oil prices, the flash estimate of the core CPI rate eased 0.1ppt to 0.9%Y/Y. Finally, construction output data for March (also tomorrow) will show a sharp decline in activity – while output in the sector in Germany rose 1.8%M/M it plunged 40.1%M/M in France.

After a quiet start today, the UK will see several top-tier data releases this week, including the latest reports on the labour market (tomorrow), inflation (Wednesday), retail sales and public finance (both Friday), as well as the May flash PMIs (Thursday). Among the labour market data, the claimant count rate, which will be for April, will provide a better guide to the rise in joblessness during the pandemic than the ILO figure, which will be for the prior month and will be distorted by a drop in participation. However, the 7.5mn workers furloughed under the government’s Job Retention Scheme will not show up in either figure. Meanwhile, the inflation figures for April will likely show a notable drop in the headline CPI rate from 1.5%Y/Y to below 1.0%Y/Y (albeit perhaps only just) for the first time since 2016. While prices of petrol and household energy will lead the decline, core inflation is likely to decline from 1.6%%Y/Y in March due to very subdued demand.

Following April’s record weakness (the composite PMI fell more than 22pts to just 13.8), the flash PMIs are likely to suggest a modest improvement in activity in May as firms found ways to work around the lockdown measures and looked forward to an easing of restrictions. However, they will remain exceedingly low. Meanwhile, April’s retail sales figures will report a new record drop of more than 10%M/M following the previous record drop of 5.8%M/M in March. And April’s public finance figures will reveal a massive blowout in the deficit, albeit one which is very difficult to predict with accuracy. With the government having extended the Job Retention Scheme to October, and some guarantees on business loans already being called, the OBR last week increased its baseline forecast for public sector net borrowing in the current fiscal year to a record £298.4bn, £25.5bn higher than its projection published just a month ago.

In the US, Fed Chair Jay Powell will be in the spotlight again tomorrow as he gives his testimony to Congress. And the minutes of the FOMC’s April meeting are due the following day. The economic dataflow, however, will be relatively light, with housing market figures dominating. Among these, the May NAHB indices are due today, April housing starts and building permits data tomorrow, and existing home sales numbers for the same month are out on Friday. Other May survey data include the Philly Fed indices and flash PMIs (both Thursday).

In Australia, tomorrow will bring the minutes of the RBA’s most recent policy meeting (of 5 May) when its yield curve control policy was left unchanged and various economic scenarios were discussed. Following last week’s April labour market report, which unsurprisingly revealed a record drop in employment, the latest weekly ‘experimental’ payroll and wages data (for 2 May) are also due tomorrow, with April skilled vacancy data out the following day. The flash PMIs are due Thursday.


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