Japanese GDP returned to growth in Q1

Chris Scicluna
Emily Nicol

Japanese GDP returned to growth in Q1, boosted by a recovery in consumer spending and tourism

  • Japan’s GDP returned to growth in Q1 for the first quarter in three, and by a stronger-than-expected 0.4%Q/Q (1.6%Q/Q annualised). This left output up 1.2%Y/Y in FY22, bang in line with the BoJ’s forecast and some 1.3% above the pre-pandemic level in Q419. Nevertheless, due to the distortion to the profile of activity caused by the consumption tax hike that year, economic output still remains some 0.6% below the average level in 2019 which is seen as an important benchmark at the BoJ. 
  • The expansion in Q1 was led by a further improvement in household consumption, up for the third quarter out of the past four and by 0.6%Q/Q to contribute 0.3ppt to GDP growth. This was driven not least by an acceleration in spending on durable goods (5.9%Q/Q) as supply constraints, particularly for autos, continued to ease. The release of pandemic-related pent-up demand for services (0.8%Q/Q) also provided an important boost, not least from increased spending on dining out and accommodation. And spending on non-durable goods (particularly food) also provided support having been a drag in the previous quarter. But as households rebalanced spending due to the erosion of their purchasing power by higher prices, spending on semi-durable goods fell for a second successive quarter (-2.6%Q/Q), with expenditure on clothing seemingly restrained in part due to the mild winter weather.
  • Meanwhile, private sector capex added a further 0.2ppt to overall growth, with the 0.9%Q/Q increase above the market consensus and taking it to the highest level in three years, just 0.6% below the 2019 average. The rise in private capex was, nonetheless, consistent with recent survey indicators, not least from the BoJ’s own Tankan survey, which point to solid investment not least on digitisation, efforts to cope with labour shortages, the green transition, supply-chain resilience and reshoring. In contrast, the recovery in residential investment remained relatively lacklustre, with growth of 0.2%Q/Q from just 0.1%Q/Q the prior quarter leaving the level still more than 13½% below the 2019 average. With public sector investment rising by the most since Q220 (2.4%Q/Q) thanks to recent fiscal stimulus packages, overall, domestic demand added 0.7ppt to GDP growth.
  • While the return of overseas visitors provided a further boost to services exports in Q1 (5.6%Q/Q), goods shipments fell (-6.5%Q/Q) by the most since the onset of Covid-19 in Q220. That reflected weakness in demand from China, not least for semiconductors and autos. Certainly, as this week’s activity data underscored, the recovery in Chinese economic activity from the pandemic remains patchy and underwhelming, and (more happily perhaps) relatively disinflationary. Overall, given the weakness in goods demand, total exports fell for the first quarter in six (-4.2%Q/Q), to knock 0.9ppt off GDP growth. So, as imports declined at roughly half the pace of exports, net trade subtracted 0.3ppt from GDP growth.
  • In terms of prices, the GDP deflator grew 2.0%Y/Y, remaining in positive territory for a second straight quarter and up 0.8ppt from Q4. The pause in yen depreciation meant that the import deflator (down more than 10ppts to 10.3%Y/Y) slowed more than the export deflator (down a little more than 6ppts to 7.4%Y/Y). More importantly perhaps, the domestic demand deflator – which aligns better to underlying inflation – eased 0.5ppt to 2.9%Y/Y, the softest in three quarters, albeit remaining positive for an eighth straight quarter. The PCE deflator slowed 0.6ppt to 3.0%Y/Y, still high by historical standards but notably off the peak.
  • Looking ahead, we expect moderate GDP growth in Q2 at a similar pace to Q1. Unfortunately, that will still leave the level of economic output below the 2019 average. We expect that benchmark only to be passed in the second half of this year – a factor likely to encourage BoJ Governor Ueda to maintain current monetary policy settings for a while yet. And there are obvious downside risks too, not least associated with soft external demand, including US recession risks and the non-negligible probability that China remains on a lacklustre post-Covid recovery path. High inflation poses a downside risk to private consumption too. But given that the 2023 spring wage negotiations provided the strongest settlements for thirty years, and inflation should subside back below the BoJ’s 2% target over the near term, higher real incomes should eventually emerge and support an ongoing recovery in household spending. And unless we see a marked weakening in external demand and private consumption, business capex should continue to expand in line with survey indicators.

Euro area final inflation figures likely to tally with the flash estimates reporting a slight uptick in the headline rate but slight easing in the core rate

  • One focus in the euro area today will be the release of final euro area consumer price figures for April. The flash estimate saw headline inflation unexpectedly tick higher, by 0.1ppt to 7.0%Y/Y, while the core rate edged slightly lower, by 0.1ppt to 7.5%Y/Y. While final numbers from Italy yesterday brought a modest downwards revision of 0.1ppt to 8.7%Y/Y, the equivalent data from Germany, France and Spain were unrevised from the flash releases. Today’s data will provide the granular detail, as well various measures of underling price pressures closely followed by the Governing Council, including the Persistent and Common Component of Inflation (PCCI) and trimmed mean HICP rates.
  • This morning also brought the latest new car registration figures from the EU. According to the ACEA, there was a further sizeable increase in sales in April compared with a year earlier, by 19.4%Y/Y in the euro area, leaving registrations in the year-to-date up 19%Y/Y. Growth in new car sales was widespread among the member states, although lagged somewhat in Germany (12.6%Y/Y), compared with France (21.9%Y/Y) and Italy (29.2%Y/Y). Overall, registrations across the region remain well down compared with the pre-pandemic benchmark, with aggregate euro area sales in April some 30% below the April 2019 level.

US housing starts expected to decline in April as demand remains hit by tighter credit conditions

  • In the US, as discussions on a possible debt ceiling agreement will continue between White House and Congressional staff, while President Biden heads off for the G7 Summit in Japan, today’s US data-flow will bring housing starts figures for April. Restrained permit issuance and emerging headwinds from tighter credit conditions suggest a slowing in multi-family starts last month. And so, while single-family housing starts might well report a fourth consecutive increase (from an admittedly low level), overall housing starts are expected to have declined, by around 1½%M/M. 

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