Japanese GDP falls in Q3; consumption and investment hit by coronavirus

Chris Scicluna
Emily Nicol

Japanese GDP falls more than expected as consumption and investment hit by coronavirus
With coronavirus-related restrictions having been in place in some form or another since April, there was no major surprise that the latest national accounts numbers, published overnight, showed that Japan’s economy contracted in Q3. But the magnitude of decline was larger than had been expected, with the drop of 0.8%Q/Q (-3.0%Q/Q annualised) roughly four times steeper than had been anticipated and following downwardly revised growth of 0.4%Q/Q (1.5%Q/Q ann.) in Q2. As such, the level of GDP was still more than 2% lower than the pre-pandemic level and more than 4% lower than the pre-consumption tax hike peak in Q319.

Within the detail, the weakness was caused not least by private domestic demand. In particular, household consumption fell 1.1%Q/Q as spending on durable goods slumped 13.1%Q/Q and spending on semi-durables was down 5.0%Q/Q, to leave overall household expenditure still 6½% lower the pre-consumption tax peak. Private investment fell sharply too in Q3, with residential building work down 2.6%Q/Q and capex down 3.8%Q/Q, to leave both around 10% lower than the pre-tax hike level in Q319. Public investment also fell for the third consecutive quarter (-1.5%Q/Q). But this was more than offset by a further boost to government spending (1.1%Q/Q). And private sector inventories also provided a notable contribution to growth in Q3 (0.3ppt). The positive contribution from net trade (+0.1ppt) merely reflected a larger drop in imports (-2.7%Q/Q) than in exports (-2.1%Q/Q).

Kuroda still committed to “powerful” accommodative policy and ready to add more stimulus too
The weaker outturn last quarter raises the likelihood that the headline numbers of Prime Minister Kishida’s economic stimulus package (to be compiled later this week) will come in at the upper end of expectations – reports last week suggested a headline figure of more than ¥40trn (¥30trn when only including central government expenditure). Quite how much of that will reflect actual new money, however, remains to be seen. Nevertheless, with Japan’s state of emergency having been lifted at the end of September, in a speech in Nagoya, BoJ Governor Kuroda today rightly suggested that the economic recovery should now gather momentum. And he expects the pre-pandemic level of output to be reached in the first half of 2022, requiring growth of around 1½%Q/Q in each quarter from Q421-Q222. While Kuroda noted that financial conditions remained favourable compared with the onset of the pandemic, he acknowledged that the financial positions of some SMEs, particularly in the consumer-facing services sector, remained weak.

So, while some reports suggested that the Bank might well scale back its Covid funding package in due course, Kuroda reiterated that the Bank would not hesitate to take additional easing measures if necessary. Indeed, while he expects inflation to rise to about 1%Y/Y as the output gap turns positive around the middle of next year, the 2% target is certainly not expected to be met before the end of FY23. And so, while some central banks are thinking about the exit from recent policies, he stated that the BoJ will still need to “persistently continue” with its QQE and Yield Curve Control over the horizon.

Other top-tier Japanese economic data due this week include October goods trade and September machine orders data (Wednesday) as well as October’s national CPI inflation data on Friday. The month-ahead Tokyo data suggest that the national figures will report declines in both headline inflation and the BoJ’s preferred measure of core inflation, weighed by lower prices for some household goods, mobile call charges and fresh food. Headline CPI inflation might edge down to 0.1%Y/Y with core inflation (excluding fresh food and energy) expected to drop to -0.7%Y/Y, a far cry from the current inflation rates in the US and Europe.

Chinese activity beats expectations, but IP pickup driven by coal and retail sales flatted by inflation
Expectations of a near-term cut in reserve requirement ratios by the PBoC were reduced as, on balance, today’s key Chinese activity data for October beat expectations. Growth was nothing better than tepid, however. Having surprised significantly on the downside in September, real industrial production accelerated 0.4ppt to 3.5%Y/Y. But the pickup was in part supported by an extra working day last month. And it was largely driven by an acceleration in mining, including coal extraction, growth of which jumped 2.8ppts to 6.0%Y/Y, the strongest in more than two years. Power generation growth also picked up, rising 1.4ppts to 11.1%Y/Y. And in contrast, the improvement in manufacturing output was minimal, with growth up from 2.4% to 2.5% YoY. As in other major economies, the main sources of the ongoing sluggishness were sub-sectors most significantly affected by supply-side challenges. So, for example, the pace of decline in auto production remained substantive at 7.9%Y/Y. And energy-intensive industry suffered from continued disruption, e.g. with smelting of ferrous metals down 12.8%Y/Y. In contrast, growth in telecoms and computer production accelerated 4.5ppts to 14.0%Y/Y, with pharmaceuticals growth moderating but still vigorous at 16.3%Y/Y. Overall, manufacturing production was up 11.3%YTD/Y with overall IP up 10.9%YTD/Y.

Like IP, nominal retail sales growth also picked up in October and well ahead of expectations, rising 0.5ppt to 4.9%Y/Y compared to the BBG consensus of just 3.7%Y/Y to be up 14.9%YTD/Y. The pattern of sales very much mirrored that of production, not least with auto sales down 11.5%Y/Y. Indeed, excluding autos, retail sales were up a more respectable 6.7%Y/Y with strength in ICT appliances (up almost 35%Y/Y) and petrol-and-related products (up almost 30%Y/Y, admittedly not least due to higher prices). But, sales of clothing, shoes and textiles dropped 3.3Y/Y. Sales of furniture and daily-use goods were up just 2.4%Y/Y and 3.5%Y/Y, with the former likely weighed by the continued troubles in the housing sector. And, of course, the headline sales figures are flattered by price increases, adjusting for which real retail sales slowed 0.6ppt to just 1.9%Y/Y. Meanwhile, close to expectations, fixed asset urban investment slowed 1.2ppts to 6.1%Y/Y, a rate which Daiwa HK’s Kevin Lai estimates implies a decline of about 4.7%Y/Y in October, hit by the slump in housing and autos as well as pressures on margins related to extremely high producer price inflation (13.5%Y/Y last month).

UK labour market, inflation and retail sales data might help swing next month’s BoE rate decision
Last week’s slightly softer-than-expected Q3 GDP data left the BoE’s December rate decision still finely balanced. But this week will bring more key UK economic data that might have a bearing on the near-term monetary policy outlook. Certainly, tomorrow’s labour market report will be closely watched and provide some partial insight into conditions since the termination of the government’s Job Retention Scheme at the end of September, when more than 1mn jobs were estimated to have been still supported. But with a recent ONS business survey having suggested that around 87% of furloughed employees had returned to work and only 3% had been made permanently redundant, any pickup in unemployment should prove limited. Tomorrow’s claimant count data for October might offer further insights, but the ILO unemployment rate and redundancy figures will refer to the three months to September and so will not provide a guide to the impact of the end of the support scheme. While headline wage growth is expected to have moderated further in the three months to September, this will in part reflect ongoing compositional effects and base effects.

In addition, Wednesday’s release of October inflation data seems highly likely to see headline inflation jump from 3.1%Y/Y in September to close to 4%Y/Y, principally due to the increase in the regulated household energy price cap and higher petrol prices. Indeed, despite an anticipated pickup up in services inflation to its highest since mid-2013, core inflation is likely to have risen just 0.1ppt to 3.0%Y/Y. Finally, Friday’s release of October retail sales figures will provide an update on spending on goods at the start of the fourth quarter, with recent surveys pointing to a pickup in expenditure as consumers started their Christmas shopping early amid fears of ongoing supply shortages throughout the festive season.

Lagarde should be dovish today as Netherlands and Austria return to partial lockdowns; euro area trade and jobs due along with updates on GDP and inflation
This week is set to bring plenty more ECB-speak – which should be broadly dovish, not least given the sudden returns to partial lockdowns in the Netherlands and Austria – starting with President Lagarde at the European Parliament and including further commentary from her and key Executive Board members Schnabel and Lane as the week progresses. Data-wise, the flow gets underway today with the September goods trade report, which are likely to report inertia in exports consistent with that reported in Friday’s industrial production figures, which suggested a sideways trend through the third quarter as supply constraints prevented firms from fully meeting firm demand for goods. Updated euro area GDP figures for Q3 (tomorrow), will likely confirm that growth firmed very slightly from Q2 by 0.1ppt to 2.2%Q/Q, although Spanish GDP should in due course be upwardly revised to give a boost to the euro area numbers. Tomorrow’s figures will come alongside preliminary employment numbers for the third quarter, which are expected to report another strong quarter of jobs growth, likely leaving the number of people in work less than 1mn below the pre-pandemic level. Wednesday will bring updated euro area CPI figures for October, which are likely to align with the flash estimate that showed headline inflation rising 0.7ppt to 4.1%Y/Y, a euro-era high, as energy prices surged. The increase in the flash core CPI rate was therefore more modest, by 0.2ppt to 2.1%Y/Y, with the trimmed mean estimate likely to have ticked only slightly higher too. Friday’s final Spanish data, however, raise the possibility of a downwards revision to headline inflation. German producer price inflation numbers for October on Friday are likely to register a new post-reunification high.

Retail sales and industrial production the data highlights in the US
The US dataflow gets underway today with the Empire Manufacturing survey. But tomorrow’s retail sales report for October will be much closely watched: Daiwa America’s Mike Moran expects sales to have risen by 1%M/M (a touch below the Bloomberg consensus) supported by decent household spending on the back of recent jobs growth as well as higher prices of autos, gasoline and food. Tomorrow also brings October’s industrial production data, which Mike expects to have rebounded somewhat (+0.5%M/M) following the slump in September (-1.3%M/M). But shorter work weeks in manufacturing and mining will limit the increase and output from the utilities sector will be hindered by the unseasonably warm temperatures that month. This week also brings plenty of US housing market data with the November NAHB indices due tomorrow and housing starts and building permits due the following day. In terms of Fed-speak, Vice Chair Clarida will speak on Friday on “Perspectives on global monetary policy coordination, cooperation and correlation”, while Waller will speak on the economic outlook. 

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