Japan: Economy contracts in Q1 amid second state of emergency
According to a preliminary reading, GDP declined 5.1% in seasonally-adjusted annualized terms (SAAR) in the first quarter, contrasting the 11.6% expansion seen in the fourth quarter of last year. Q1’s reading marked the sharpest contraction since Q2 2020 as the effects of the second state of emergency that ran from end-January to late March dragged on activity. Meanwhile, on an annual basis, GDP contracted 1.9% in Q1, deteriorating from the previous quarter’s 1.1% decrease.
Domestically, Q1’s downturn in SAAR terms was broad-based, with private consumption, public spending and fixed investment all weakening. Household spending dropped 5.4% in Q1, sharply contrasting the 9.0% growth recorded in Q4 2020. Moreover, government spending swung to contraction, shrinking 6.9% in Q1 (Q4 2020: +7.3% SAAR), while fixed investment was down 3.8%, contrasting the 12.4% expansion logged in the previous quarter.
On the external front, growth in exports of goods and services dropped to 9.7% in seasonally-adjusted annualized terms (SAAR) in the first quarter, which was considerably below the fourth quarter’s 55.7% expansion. The slowdown was in part driven by shortages in semiconductor supply. Similarly, growth in imports of goods and services moderated to 16.8% in Q1 (Q4 2020: +20.7% SAAR). As such, the external sector detracted 0.9 percentage points from overall growth in Q1, swinging from the 4.2 percentage-point contribution in Q4 2020.
Looking ahead, our panel currently sees the economy expanding slightly in the second quarter of 2021 as returning capital and consumer spending are bolstered by growth in government spending. However, the announcement in late April of a third state of emergency—and its subsequent expansion in mid-May to now cover nine major prefectures, including Tokyo—is likely to impede the rebound in activity somewhat.
Regarding the outlook, Naohiko Baba, economist at Goldman Sachs, sees a mild rebound in Q2 before strengthening growth towards the end of the year, commenting:
“We expect a turn to modest growth in 2021Q2, mainly on a rebound effect, but highlight the lack of visibility on trends moving forward with a state of emergency reimposed. We expect real GDP growth (qoq annualized) to peak in April-June in the US and in July-September in the euro area along with steady progress on vaccinations. However, with Japan’s vaccine roll-out delayed significantly, we assume peak growth will be pushed back to October-December.”
Contrastingly, Robert Carnell, head of research for the Asia-Pacific region at ING, sees darkening prospects for the rest of the year, commenting:
“What the 1Q figures do is show the negative consequences of states of emergency linked to daily Covid cases, and with more prefectures being placed under such states of emergency this month (nine in total currently) and growing calls for a national state of emergency as hospital beds fill up across the country, the outlook for 2QGDP is for another decline, and that will make reaching 3.5% for the full year as we are currently forecasting all but impossible to achieve without an improbably large second-half bounce-back.”