Japan economy snaps 2-year growth streak in Q1 but seen recovering in current quarter

Workers packing salads at Delicious Cook & Co's food factory in Narashino, Japan, on April 17, 2018.
Workers packing salads at Delicious Cook & Co's food factory in Narashino, Japan, on April 17, 2018. PHOTO: REUTERS

TOKYO (BLOOMBERG) - Japan's economy shrank for the first time in two years during the first quarter, contracting more than expected on a surprise fall in business spending and flat private consumption. Yet economists expect a rebound in the current quarter as the global economy regains traction.

Gross domestic product contracted at an annualized rate of 0.6 per cent in the three months ended March 31. Growth in the last three months of 2017 was revised down to 0.6 per cent from 1.6 per cent.

Private consumption was unchanged in the first quarter from the previous three months while the contribution of net exports, or shipments less imports, to GDP growth was 0.1 percentage point. Business spending declined 0.1 per cent from the previous quarter.

Japan's economy had expanded at well above its potential growth rate for a year, as strong export growth fueled production and investment, helping to raise wages and inflationary pressures. The first-quarter slowdown likely sapped progress on inflation - Goldman Sachs predicted core inflation fell in April to 0.7 per cent. Yet most economists see GDP rebounding in the current quarter, fueled partly by better exports and production.

The decline was partly due to temporary factors such as higher vegetable prices and a drop-off in sales of smartphones, according to a statement released by Toshimitsu Motegi, the economy minister. The government expects the recovery to continue, centered around private consumption and investment, Motegi said.

"This will not be a turning point, but is temporary," said Takeshi Minami, chief economist at Norinchukin Research Institute. "Overall domestic demand was weak with sluggish consumption and capital investment. But people are earning more."

Growth will pick up from this quarter, but it will be slower than in last fiscal year, Minami said.

"Weak consumer spending, capital spending and exports contributed to the negative GDP growth. These components should show some pickup in the second quarter as the global recovery continues," said Masaki Kuwahara, senior economist at Nomura Securities Co.

"Consumer spending was dragged down by bad weather. Exports slowed because of weaker global demand for cell phones after good growth at the end of last year. The decline in capital spending was a surprise and that's probably because companies were cautious as exports weakened," Kuwahara said.

"What I'm concerned about is overseas demand," said Hiroaki Muto, chief economist, Tokai Tokyo Research Center. "Exports are slowing down, which is in line with the consensus, but they slowed to 0.6 per cent. If this trade-friction-like condition becomes the norm, I think this will move from an economic soft patch to a recession."

Measured quarter on quarter, GDP shrank 0.2 per cent.