Japan economy shrinks in Q3 on disasters after high growth in Q2

14, Nov. 2018

TOKYO, NNA - Japan's economy for the July-September quarter slumped 0.3% on quarter, or an annualized 1.2%, as a series of disasters dampened consumption and business investment posted the first drop in two years after surging in April-June.

The first contraction in real gross domestic product in two quarters was sharper than the median economist forecast for -0.2%, or an annualized pace of -0.9%. Domestic demand pushed down the total domestic output by 0.2 percentage point while net exports – exports minus imports – trimmed GDP by 0.1 percentage point.

It followed a strong rebound of 0.8%, or an annualized 3.0% in the second quarter from a drop of 0.3%, or an annualized 1.1% in the first three months of 2018, which was caused by severe winter weather.

“In the July-September GDP data, consumer spending on durable goods rose while a series of natural disasters hit spending on leisure,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management. “Typhoons in September appeared to have delayed shipments, leading to a decline in Q3 exports.”

Looking ahead, it is too early to judge whether the U.S.-China trade row is hurting Japan’s economy and whether private consumption will rebound in October-December, Takumori said.

“The trade data for the first 20 days of October showed an increase in exports led by semiconductors and cars despite the trade dispute but we need to see whether industrial production will rebound in October after a slump in September,” he said. “The EL Nino may bring in a mild winter, which could hurt spending on winter clothing and leisure.”

Heavy rains hammered Japan’s southwestern regions in July, killing more than 200 people and destroying social infrastructure. Killer heat waves also swept across the country while a strong earthquake hit Hokkaido in September, causing a blackout in the northern province.

In the wake of the rain disaster, supply chain networks in Japan recovered gradually but massive flooding and mud slides caused serious damage to vegetable and fruit farms.

The heat waves had a mixed impact. There was strong retail demand for beverages, air conditioners, refrigerators and fans while people, particularly seniors, stayed home, hurting restaurants and theme parks.

Private consumption, which accounts for about 60% of GDP, slipped 0.1% on quarter in the third quarter after surging 0.7% in the second quarter and dropping 0.2% in the first quarter. It made a negative contribution of 0.1 percentage point to the third-quarter GDP.

Capital investment also slumped 0.2% in payback for a sharp 3.1% rise in the previous quarter, marking the first quarter-on-quarter drop since -0.3% in July-September of 2016. The contribution of capex to GDP was flat with a slight negative bias (-0.0 percentage point).