Japan’s Q1 GDP contraction revised down

Chris Scicluna

Chinese equities and Bitcoin weaker amidst otherwise mixed session in Asia
It was a slow start to the week on Wall Street with a decline in materials and industrials leaving the S&P500 down less than 0.1% yesterday. The 10Y UST held on to modest 2bp rebound in yields that had occurred in Asian trading, thus ending the session at 1.57%, while the greenback was fractionally weaker. So with the US providing little direction, it has been a mixed day in the Asia-Pacific region. Ahead of tomorrow’s Chinese inflation reports, China’s CSI300 fell 0.9%, with smaller losses seen in Hong Kong and Singapore. Japan’s TOPIX closed up a marginal 0.1%, however, perhaps taking some comfort from an upward revision to GDP in Q1 and news of stronger-than-expected wage growth in April (more on this below). Aussie stocks were also slightly firmer as the NAB business survey reported the best business conditions on record in May (more on this below too). Meanwhile, Bitcoin fell 10% to $33k, moving lower after former US president Trump told viewers of a Fox Business TV interview that the cryptocurrency “seems like a scam”.

Japan’s Q1 GDP contraction slightly smaller as public spending revised higher
Today the Cabinet Office released the revised national accounts for Q1, which amongst other things incorporated new data on capex and inventories from last week’s MoF survey of corporations and improved data from the public sector. Real GDP is now estimated to have contracted 1.0%Q/Q in Q1 – 0.3ppt less than first estimated. So with no material revision to earlier quarters, the annual decline in output now stands at 1.6%Y/Y compared with the previous estimate of 1.9%Y/Y. And with no material change in the GDP deflator either – the annual decline rounding just fractionally higher at 0.1%Y/Y – the contraction in nominal GDP was also revised down 0.3ppt to 1.3%Q/Q.

Turning to the expenditure detail, the upward revision owes largely to a less negative assessment of developments in public spending. Public consumption and investment fell 1.1%Q/Q and 0.5%Q/Q respectively, rather than the 1.8%Q/Q and 1.1%Q/Q declines estimated previously. The contribution to growth from private inventories was also revised up 0.1ppt to 0.4ppt. However, that improved contribution was offset by a downward revision to private consumption, which fell 1.5%Q/Q – 0.1ppt more than first estimated. Non-residential investment declined 1.2%Q/Q, which was 0.2ppts less than estimated previously. The first published breakdown of the capex data reported a steep 8.2%Q/Q decline in investment in transport machinery. Investment in non-transport machinery – which had rebounded a substantial 13.6%Q/Q in Q4 – fell just 2.0%Q/Q. Investment in intellectual property declined 1.8%Q/Q and non-residential building activity declined 3.0%Q/Q, and thus the individual seasonally-adjusted series depicted a more negative outcome than the aggregate series. Growth in residential investment was revised up 0.1ppt to 1.2%Q/Q but growth in both exports and imports was revised down 0.1ppt to 2.2%Q/Q and 3.9%Q/Q respectively, so that the contribution of net exports to growth was unrevised at -0.2ppt.

Given the nature of today’s revisions, we doubt that analysts will be looking to revise up their estimates of output in Q2, which if likely to post a further – albeit smaller – contraction in light of ongoing restrictions on activity.

Japan’s labour cash earnings rise 1.6%Y/Y in April as base effects kick in
In slightly more up-to-date news, today the MHLW released the preliminary Monthly Labour Survey for April. At the headline level, total labour cash earnings (per employee) increased 1.6%Y/Y – double the consensus expectation and up from 0.6%Y/Y in March. While this marked the largest increase since November, earnings had declined 0.7%Y/Y a year earlier as the onset of the pandemic began to wreak havoc to the economy. Earnings in the manufacturing sector outperformed, increasing 2.6%Y/Y after declining 2.3%Y/Y a year earlier.

Compared to last month, the lift in overall growth in wages owed to an 8.6%Y/Y lift in bonus earnings (up just 0.6%Y/Y in March) and a 6.4%Y/Y lift in overtime earnings (down 5.0%Y/Y last month). The increase in overtime earnings – the first since August 2019 – reflects a continued recovery in overtime hours worked, which increased a further 2.9%M/M in April to the highest level since February 2020 (although still 2.6% below that level). Regular earnings increased 0.9%Y/Y, which was actually 0.1ppt down on the improved reading in March. After accounting for inflation, real wages increased 2.1%Y/Y. Given base effects associated with last year’s first wave of coronavirus cases, these annual growth rates will likely rise to even more flattering levels over the next couple of months.

Elsewhere in the survey, while total hours worked increased 1.8%M/M in April, regular employment was unchanged during the month – the first non-positive month since May last year, albeit following a strong outcome in March. However, given base effects, annual growth in employment increased 0.4ppt to 1.1%Y/Y. Employment in the manufacturing sector declined 1.2%Y/Y. By contrast, reflecting demand created by the pandemic, employment in the medical, healthcare and welfare sector increased 2.2%Y/Y. According to the preliminary breakdown – which is often substantially revised – growth in the number of full-time employees decreased 0.6ppt to 0.8%Y/Y. By contrast, the number of part-time employees increased 1.7%Y/Y, compared with a 0.5%Y/Y decline in March – a swing that owes significantly to base effects, with part-time employees being cut at the onset of the pandemic.

Japan’s Economy Watchers survey points to expected upturn in conditions in Q3
Later in the day, the Cabinet Office released the latest Economy Watchers survey, which predictably reported a further weakening of current economic conditions in May. That said, the 1.0pt decline in the headline current conditions DI to a four-month low of 38.1 was much less severe than the consensus had expected. Moreover, respondents expect a marked improvement in conditions over the coming 2-3 months, with the overall expectations DI lifting an unexpected 5.9pts to 47.6 – an outcome that might suggest some anticipated lift from the Olympics, and from progress on vaccinations and reducing the present wave of coronavirus cases.

In the detail, not surprisingly, the driver of the modest deterioration in current conditions was the household sector index, which fell 1.9pts to 33.5. The indices measuring sentiment amongst those respondents interacting with the retail, food and services sectors all fell. By contrast, the corporate sector index increased 1.1pts to 46.9. The non-manufacturing index was almost steady at 44.6, whereas the manufacturing index increased 2.6pts to 50.2. Looking ahead, relative to current levels, the largest improvement is expected in the household sector with the outlook DI improving to 46.5 in May. Some further improvement is also expected by respondents interacting with the business sector, especially in manufacturing where the outlook DI increased to 4.3pts to 52.0.

Japan’s bank lending growth slows as last year’s liquidity squeeze unwinds; corporate bankruptcies
Turning to the rest of today’s Japanese news, the BoJ reported that total bank lending increased 2.9%Y/Y in May, down sharply from 4.8%Y/Y in April. This slowdown mostly reflects base effects associated with last year’s scramble by corporates to access bank liquidity, with this year’s modest 0.2%M/M decline in lending replacing a 1.7%M/M increase last May. Lending at the major city banks, which has increased more than 3%M/M last May, declined 0.4%M/M and so was just up just 0.2%Y/Y – down from 3.9%Y/Y in April. Growth in lending at regional banks slowed 0.6ppt to 4.0%Y/Y while growth in lending at shinkin banks nearly halved to 4.2%Y/Y. On the other side of the ledger, bank deposits grew ¥6.5trn in May. However, base effects meant that annual growth slowed 1.5ppt to 8.0%Y/Y – a 12-month low, but still indicative of significant precautionary behaviour by households. Meanwhile, given the significant support provided by banks and the government to the corporate sector, just 472 bankruptcies were recorded in May (albeit up just over 50%Y/Y, with pandemic disruptions resulting in a record low number of cases in May last year).

Finally, balance of payments data revealed an adjusted current account surplus of ¥1.55trn in April, down from ¥1.70trn last month and very close to the consensus estimate. That narrowing owed to a smaller surplus on merchandise trade and a larger deficit on services, which was offset only partially by a larger surplus on primary income.

German IP drops in April as supply fails to keep up with rising demand
As suggested by yesterday’s weak turnover data, German industrial production fell back at the start of Q2, declining 1.0%M/M in April in contrast to the BBG median forecast of growth of 0.4%M/M. That meant that production was up 26.4% from a year earlier when output plunged in response to the onset of the pandemic. But it was also down 5.6% from the pre-pandemic level in February 2020 – a marked contrast from the performance of new factory orders, which were almost 10% above the pre-pandemic level that month, suggesting that supply continues to struggle to meet rising demand. Within the detail, production excluding energy and construction was down 0.7%M/M, with output of consumer goods down a sharp 3.3%M/M to be 9.0% below the pre-pandemic level. In contrast, production of intermediate goods was down just 0.2%M/M to be just 1.2% below the level in February 2020. And output of capital goods edged down just 0.1%M/M, albeit still 10.6% below the pre-pandemic level. Production of machinery and equipment rose 3.9%M/M to be 0.4% above the level in February 2020, But motor vehicle production extended its recent downtrend, falling 3.3%M/M to be more than 18% below the level at the end of 2020 and almost 24% below the pre-pandemic level. Beyond manufacturing, a leap in energy production of 6.0%M/M offset much of the impact of the steep drop of 4.3%M/M in construction output.

ZEW survey and Q1 euro area GDP expenditure detail due this morning
Looking ahead, this morning will bring final euro area Q1 GDP figures, which are expected to confirm the current estimates (-0.6%Q/Q and -1.8%Y/Y). The expenditure breakdown will be published for the first time and is likely to show that household consumption again subtracted significantly from growth in the first quarter due to ongoing containment restrictions. And as the end of the Brexit transition period significantly hit the recovery in exports, net trade is also likely to have had a negative impact on GDP. Meanwhile, inventories and to a lesser extent fixed investment will likely provide some positive offset. Separately, like yesterday’s Sentix survey, and despite current supply-side constraints, the German ZEW investor sentiment survey is expected to reveal a further increase in optimism about current conditions in Germany’s economy as the country’s vaccine programme maintains momentum and new coronavirus cases continue to decline.

BRC survey points to another string month for UK retail sales in May
In the UK, the BRC’s latest retail monitor this morning signalled another bumper month for sales in May, with the reopening of hospitality and improved weather towards the end of the month seemingly giving a boost. The survey’s headline measure of total sales was up 28.4%Y/Y May, following growth of more than 50%Y/Y in April. And the measure of like-for-like sales - which attempts to exclude the impact of temporary store closures last year - was up an impressive 18.5%Y/Y, albeit marking a moderation after growth of 40%Y/Y in April. Within the detail, despite the inclement weather for much of the month, clothing retailers reported a second month of strong sales on the back of pent up demand for in-store shopping and further relaxation of hospitality restrictions. And there was reportedly a surge in spending on jewellery, footwear and home accessories too. Hardware and furniture stores also continued to fare well. While like-for-like non-food online sales were down compared with a year earlier for the first time since November 2019, there was still strong evidence that, despite the UK’s high uptake of vaccinations, some consumers remained reluctant to return to the high street with the level of online sales remaining extremely elevated.

Trade report, NFIB small business survey and JOLTS data ahead in the US
Today will bring the release of the full trade balance for April. In light of the advance goods data released in late May, Daiwa’s America Chief Economist Mike Moran is looking for a sharp narrowing in the deficit to around $69bn. The NFIB small business survey for May and JOLTS survey for April are also due today, with the latter casting important light on dynamics in the labour market.

Aussie business conditions index sets another record high in May
The key report in Australia today was the NAB Business Survey for May, which surpassed last month’s upbeat results with a number of key indexes setting new record highs. The headline business confidence eased 3pts from last month’s record +23, but the more closely followed business conditions index increased a further 5pts to set a new record high of +37 – a whopping 32pts above the long-term average). The components of the business conditions index – trading conditions, profitability and employment – all increased to fresh record highs. Of particular note, the 5pt increase in the employment index to +25 leaves the index a record 23pts above its long-term average, suggesting that more positive labour market surprises could be ahead for the RBA.. Also of note – and something to keep an eye on over coming months – was further robust readings in the survey’s pricing indicators. Indeed, for a third consecutive month, firms reporting the largest three-month increase in final product prices since 2008 (1.0%Q/Q) with labour costs reported to have increased 1.8%Q/Q.

In other Aussie news, the weekly ANZ-Roy Morgan consumer confidence index slipped 0.6% last week to a two-month low of 110.7, with respondents less optimistic about the year ahead – a result that may reflect the recent coronavirus cluster identified in Melbourne. 

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at https://daiwa3.bluematrix.com/sellside/Disclosures.action.