Japan’s GDP contracts in Q1 as both private consumption & business capex fall

Chris Scicluna

Equity markets generally firmer in Asia today led by sharp rebound in Taiwan
After falling during a somewhat risk-off session in Asia, UST yields picked up again yesterday as investors perhaps reflected on last week’s lift in inflation and inflation expectations. The 10Y yield closed up 2bps from Friday’s close at 1.65%. In equity markets, the S&P500 had been down as much as ¾% at one point, but erased two-thirds of those losses to close down just ¼%, with the Nasdaq down 0.4% as technology stocks struggled. But since the close US equity futures have rallied, with NASDAQ minis up 0.9%, contributing to a generally possible day in Asia-Pacific equity markets. The largest gain in the region occurred in the market that had struggled most yesterday, with Taiwan’s TAIEX rallying more than 5% following yesterday’s 3% decline. That rebound owed at least in part to a statement released late yesterday by Taiwan’s Ministry of Finance, and reiterated again today, noting that the country’s Financial Stabilization Fund is still monitoring the stock market and will convene a committee meeting to consider “countermeasures” if needed. The statement urged investors to remain rational and calm, arguing that Covid-19 has no impact on Taiwan’s production, exports or imports and that the stock market remains “sound”.

In Japan, despite news that the economy had contracted by slightly more in Q1 than analysts had expected – more on this below – the TOPIX firmed 1.5%. Bourses in Hong Kong, South Korea and Singapore all rallied more than 1%. In Australia, ahead of tomorrow’s key wage data, the ASX200 increased 0.8% and the 10Y ACGB yield increased 3bps to 1.78%, with no obvious reaction to the minutes from the RBA’s most recent Board meeting. Bucking the trend, but following a gain of almost 4% over the past two sessions, stocks were steady in mainland China.

Japan’s GDP contracts 1.3%Q/Q in Q1 as both private consumption and business capex fall
The focus for investors in Japan today was on the preliminary national accounts for Q1. Unsurprisingly, the accounts confirmed that the winter surge in coronavirus cases had set back the economic recovery. According to the Cabinet Office, overall activity declined 1.3%Q/Q (5.1%AR) following an unrevised 2.8%Q/Q lift in the prior quarter. This result, which was 0.2ppts weaker than Bloomberg’s consensus estimate, left output down 1.9%Y/Y, compared with 1.1%Y/Y previously (the latter 0.3ppts firmer than reported previously, as deeper historical revisions redistributed growth from 2019 into the first half of last year).

In the detail, as expected, private consumption was the key driver of the contraction in activity, with spending declining 1.4%Q/Q and thus contributing -0.7ppts to the quarterly outcome. This outcome was actually not quite as weak as anticipated by the market and in fact was close to that indicated by the BoJ’s Consumption Activity Index. The decline in overall spending was relatively broad-based, with spending on services down 2.6%Q/Q and spending on both durable and semi-durable goods down around 3%Q/Q. By contrast, spending on non-durable goods increased 1.6%Q/Q and so was down just 0.7%Y/Y – the latter comparing with declines of around 5%Y/Y or slight more in the other spending categories. It is worth noting that real compensation of employees increased 2.2%Q/Q in Q1 to exceed pre-pandemic levels (and up 1.5%Y/Y). At face value, this suggests that the household savings rate increased from a higher-than-average 6.1% in Q4, providing some ammunition to fuel a recovery in spending once the pandemic is brought under control.

Unfortunately, the smaller-than-expected decline in consumer spending was more than offset by some negative surprises elsewhere in the accounts. Of particular note, after rebounding 4.3%Q/Q in Q4, business investment is estimated to have declined 1.4%Q/Q in Q1 – subtracting 0.2ppts from overall GDP growth – rather than recovering a little further as the market had expected (probably not lease due to the strength seen in machine orders during the quarter). Of course, as usual we note that these figures are subject to the potential for significant revision once the Cabinet Office includes more accurate information from the MoF’s corporate survey (to be released 1 June). The other notable surprise concerned government spending. After increasingly strongly over the prior two quarters, government consumption spending fell 1.8%Q/Q in Q1, subtracting 0.4ppts from overall GDP growth. Moreover, government investment, which had increased for six consecutive quarters, fell 1.1%Q/Q to subtract a further 0.1ppts from overall GDP growth. Even with these declines, government consumption and investment grew 2.8%Y/Y and 2.7%Y/Y respectively.

The remainder of the accounts proved much as expected. Net exports subtracted 0.2ppts from overall GDP growth in Q1, which was in line with the consensus estimate. Overall exports increased 2.3%Q/Q and so were up 1.0%Y/Y – the first time that annual growth has been positive since Q418. While exports of goods increased 4.4%Y/Y, exports of services remained down 10.2%Y/Y. Of course, that result owed in large part to the ongoing slump in spending by overseas visitors, which in direct terms remained down over 44%Y/Y from year-earlier levels that had already begun to be depressed by the pandemic. Imports increased 4.0%Q/Q but were still down 0.8%Y/Y. Meanwhile, residential investment managed a modest 1.1%Q/Q increase in Q1 but was still down 4.1%Y/Y. Private inventories are estimated to have added 0.3ppts to growth in Q1 – not surprisingly in light of the 0.5ppt subtraction made in Q4 – but again this figure could be revised following the receipt of information from the aforementioned MoF corporate survey.

Finally, unsurprisingly, the deflators continued to point to a very weak inflation pulse. The private consumption deflator increased just 0.2%Q/Q in Q1 and so was down 0.4%Y/Y. With the imports deflator rebounding 6.7%Q/Q, the overall domestic demand deflator increased 0.4%Q/Q yet was still down 0.5%Y/Y. The overall nominal GDP deflator fell 0.3%Q/Q and so was down 0.2%Y/Y – a result that was a little weaker than market expectations. As a result, nominal GDP declined 1.6%Q/Q in Q1 and so is about ¥18trn lower than the peak seen just ahead of the consumption tax hike.

Looking ahead, our colleagues in Tokyo presently forecast no more than a fractional rebound in GDP in Q2, with that forecast at risk of disappointment due to the possibility of longer and more expansive pandemic-related restrictions.

Japan’s Tertiary Industry Activity Index rises in March
In today’s other Japanese news, the Tertiary Industry Activity Index confirmed that the service sector had at least ended Q1 on a firmer note, albeit with the re-imposition of new restrictions last month – and their extension this month – clearly set to weigh on output during the current quarter. The overall index increased 1.1%M/M in March – slightly above market expectations. However, with the previously reported 0.3%M/M lift in February revised to a 0.3%M/M decline, the index still fell 1.1%Q/Q in Q1 – about what had seemed likely – following a 2.3%Q/Q lift in Q4.

In the detail, after slumping heavily back in January, activity related to non-essential personal services rebounded a further 2.3%M/M in March. Activity in the living and amusement industry, increased 3.0%M/M in March and so was up 3.7%Y/Y. Of course, activity had fallen by almost 25%M/M in March last year as the pandemic took hold, and so remains almost 23% below pre-pandemic levels. Meanwhile, activity related to essential personal services fell 1.1%M/M in March and so was down 1.4%Y/Y. The business services index increased 1.1%M/M in March but was also down 1.4%Y/Y, with similar outcomes seen for industries supplying services to the manufacturing and non-manufacturing sectors.

UK jobs market turning for the better as economy emerges from lockdown
With the government’s Job Retention Scheme still in operation but GDP having picked up as the pandemic subsides, the UK’s labour market has also taken a turn for the better. Indeed, on the ILO measure, employment rose in the three months to March (up 84k) for the first time in a year, while the unemployment rate on the ILO measure over the same period dropped 0.1ppt for the third successive month to 4.8%, the lowest since the three months to September, assisted also by a drop in labour force participation. Moreover, the number of payrolled employees rose for the fifth consecutive month in April, up 97k to be 190k above the trough, albeit remaining down a sizeable 772k below the pre-pandemic level in February 2020 and 257k below the level a year earlier. And as firms looked forward to full reopening of the economy by the summer, the number of vacancies rose in the three months to April to 657k the highest level since Q120, with most sectors (and most notably hospitality and entertainment) reporting increases.

In terms of pay, growth in total earnings moderated 0.5ppt to 4.0%3M/Y in March, to be up 3.1%3M/Y in real terms. That slowdown partly reflected lower bonus payments, excluding which regular pay growth edged up 0.2ppt to 4.6%3M/Y, the highest since 2007, to be up 3.6%3M/Y in real terms. However, compositional effects (specifically the drop in the number of lower-earning workers) are estimated by the ONS to have boosted average pay by about 1.7%. So, it judged underlying wage growth to be about 2.5%Y/Y for total pay and around 3.0%Y/Y for regular pay. With the return of lower-paid workers, particularly in hospitality, leisure and entertainment, over coming months as restrictions are eased, average pay growth should ease somewhat.

Euro area GDP data to confirm modest drop in Q1; jobs and goods trade figures also due
This morning’s updated estimate of euro area Q1 GDP will likely reaffirm the modest drop of 0.6%Q/Q, which left total economic down 1.8%Y/Y. Having increased 0.3%Q/Q in Q4 despite the drop in GDP that quarter, employment data for Q1 should remain consistent with a stable labour market while March figures for goods trade are likely to show continued growth in both imports and exports, albeit with the former outpacing the latter as Brexit continued to weigh on shipments.

Housing starts and building permits data ahead in the US today
Today will bring the release of US housing starts and building permits figures for April. While housing related indicators – including yesterday’s NAHB housing survey – largely remain robust, Daiwa America Chief Economist Mike Moran expects a downward correction to elevated multi-units starts to weigh on this month’s figures, leading to a 1.7%M/M decline in total housing starts. Meanwhile, the Dallas Fed’s Kaplan is scheduled to speak at a conference hosted by the Atlanta Fed.

No surprises in RBA minutes; Aussie consumer buying
Today’s minutes from the RBA Board’s May meeting didn’t add greatly to the insight provided by the Bank’s post-meeting statement or the subsequently released Statement on Monetary Policy. In the key “Considerations for Monetary Policy” section the minutes noted that “Future policy decisions would be based on close attention to the flow of economic data and conditions in financial markets in Australia. Members agreed that a return to full employment is a high priority for monetary policy and would assist with achieving the inflation target.” These comments will leave investors focused on this week’s key economic reports, which are tomorrow’s Wage Price Index for Q1 and Thursday’s Labour force survey for April.

In other Aussie news, the ANZ-Roy Morgan consumer confidence index increased 0.8% last week to 112.5, thus remaining within its recent narrow range. While households were a little less positive about the economic outlook, the index measuring attitudes to the purchase of major household items increased to a post-pandemic high. 

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