Japan: Economy slows in the final quarter; records worst annual contraction since 2009
According to a preliminary estimate, GDP growth slowed to 12.7% in seasonally-adjusted annualized terms (SAAR) in the fourth quarter, from 22.7% in the third quarter. On an annual basis, GDP contracted 1.2% in Q4, softening from the previous quarter’s 5.8% decrease. As such, GDP for the full year fell 4.8% in 2020, sharply down from 2019’s 0.3% growth and marking the largest fall since 2009.
Domestically, Q4’s slowdown in SAAR terms was spearheaded by milder private consumption growth, which clocked 8.9% in the final quarter and was thus notably below the third quarter’s 22.0% expansion. Nevertheless, Q4’s reading was still the second strongest rate of growth in at least 25 years, highlighting robust household spending despite spiking Covid-19 infections and the implementation of associated restrictions during the period. Concurrently, public spending growth softened to 8.1% in Q4 (Q3: +11.7% SAAR), while fixed investment rebounded sharply, growing 13.2% in Q4 and contrasting the 8.4% contraction recorded in the previous quarter.
On the external front, growth in exports of goods and services accelerated to 52.3% in Q4 (Q3: +33.2% SAAR), marking the best reading since at least 1994 as shipments of electrical and transport equipment to Asia and other emerging economies boosted the print. In addition, imports of goods and services rebounded, growing 17.3% in Q4 (Q3: -29.0% SAAR). As such, the external sector contributed 4.3 percentage points to overall growth in Q4, reducing somewhat from the substantial 11.3 percentage-point contribution in Q3.
Looking ahead, the economy is projected to contract slightly in the first quarter of 2021 as capital and consumer spending is reigned in following January’s state of emergency declaration. Furthermore, elevated daily infections in Europe and the U.S. at the outset of the new year are a cause for concern for the external sector. However, the significant and sustained fiscal and monetary stimulus packages announced since April last year should lay the foundations for a recovery from Q2 onwards.
Regarding the outlook, Naohiko Baba, an economist at Goldman Sachs, commented:
“While we forecast -4.4% growth in 2021Q1 due to the impact of the state of emergency, we expect a much narrower decline than that in 2020Q2 (-29.3%), which was under the first state of emergency. Our view is based chiefly on (1) limited activity restrictions and decline in people mobility, (2) continued firm trend of external demand, and (3) signs of a recovery in capex.”
Hiromichi Shirakawa and Takashi Shiono, economists at Credit Suisse, concur, stating:
“Looking ahead, we expect real GDP to contract qoq in 1Q21 driven by a temporary decrease in household services consumption under the state of emergency declaration and peaking of exports. The outlook after 1Q will continue to depend on developments of the Covid-19 pandemic as well as pace of vaccine distribution into summer.”
Looking past the first quarter, Robert Carnell, Asia-Pacific regional head of research at ING, sees activity gaining steam in the middle of the year, commenting:
“After a slightly shaky start to 2021, we would anticipate that the global rollout of vaccines and the local rollout in Japan will coincide with lower daily cases and death rates, and a further relaxation of social distancing measures and restrictions on gathering. This should see a second pick up in economic activity moving from 2Q21 to 3Q21, which will take Japan close to its pre-Covid GDP level. Following this, we would imagine further growth will be more difficult to engineer, and Japan will begin to revert to its previous uninspiring underlying rates of growth.”