The economy shrank by 0.2 percent in the first three months of 2018, snapping a run of two years of positive growth, according to data released by the Cabinet Office on Wednesday.
Business investment contracted by 0.1 percent on a quarter-to-quarter basis, and household spending — the largest driver of economic growth — remained flat, demonstrating the weak overall appetite for consumers to open up their wallets in a still-uncertain economy. When annualized, GDP was 0.6 percent lower than the previous quarter.
However, the latest preliminary numbers, often prone to statistical revision, may actually belie a relatively healthy economy on pace for modest growth in 2018, economists said.
“I don’t expect that the results foreshadow a larger downturn in the economy,” said Takuji Okubo, the chief economist at Japan Macro Advisors.”The fundamentals of the economy look robust. We have wage growth of 1.3 percent year-on-year and inflation appears to be edging up.”
The biggest surprise from the release was the slight contraction of business investment, also known as private nonresidential investment, a year after it grew by an inflation-adjusted 3 percent.
“We don’t know whether the drop in business investment is a temporary event or a broader trend,” said a Cabinet Office official.
“But we do know that measures of business investment are initially not the most accurate,” the official added, in reference to the preliminary nature of Wednesday’s numbers. A second, more accurate set of economic data for the first quarter of 2018 is due out in early June.
Okubo appeared confident that business investment is stronger than initial readings indicate. “Japan’s corporations have record-level profits, and I would not be surprised if the revised numbers will eventually show that business investment was instead positive in the first quarter,” he said.
As each component of the preliminary GDP numbers are difficult to measure, particularly business investment, there are often revisions to overall economic growth.
Last week, forecasters from Mizuho Research — a think tank affiliated with the global banking giant — predicted in a research memo that first quarter GDP numbers would show 0.2 percent growth, indicating the picture could become rosier when final figures are released.
Marcel Thieliant, a senior Japan economist with Capital Economics, also expected growth to remain on track, but felt that the downside risks may be larger going forward.
“I think the weakness in the last two quarters of growth indicates that there may be growing risk in the economy,” said Thieliant. “But we still expect growth to remain on track in 2018.”
Global economic growth of 3.9 percent is expected in 2018, according to the International Monetary Fund’s annual spring forecast, although it warned that trade risks could threaten the health of the global economy.
In a sign of positive news for the Bank of Japan, an institution five years into its fight against falling prices, the GDP deflator — which measures the impact of inflation on the GDP during a given year — increased to 0.9 percent year-over-year.