Natural disasters add to growing economic headwinds as GDP contracts in third quarter

Natural disasters this summer combined with global trade frictions were behind the economy’s sluggish third-quarter performance, making GDP fall at an annualized rate of 1.2 percent, government data showed Wednesday.

Over the July to September period, torrential rains hit western Japan, shutting down factories and affecting supply chains. A massive earthquake also occurred in Hokkaido, which further weakened the economy.

“We think that today’s result was influenced largely by the many natural disasters that occurred, temporarily pushing down personal consumption and exports,” said Toshimitsu Motegi, minister of economic and fiscal policy, at a news conference Wednesday in Tokyo.

On a quarter-to-quarter basis, GDP shrank by 0.3 percent, the second contraction of the year. Third-quarter economic activity was dragged down across important sectors of the economy, including the once consistently reliable export sector, which fell sharply by 1.8 percent.

Business investment, meanwhile, dipped by 0.2 percent on a quarterly basis, after showing strong positive growth of over 0.7 percent through the past four quarters.

Yoko Takeda, chief economist at Mitsubishi Research Institute, agreed with the government that, at least for now, the hit to exports was mainly the result of natural disasters.

“I believe the result is due to a slump in U.S. automobile sales and a temporary suspension of domestic production, which was caused by heavy rains in July, ” Takeda said.

Motegi, in a nod to growing international concern that Washington’s increasingly aggressive trade position could damage international commerce, warned that “it is necessary to pay attention … to the influence of trade issues on the global economy.”

Takeda also warned that trade disputes could eventually take a bite out of economic growth by early 2019, particularly as exports and business investment are sensitive to the uncertainties caused by tariff hikes.

Wednesday’s release also showed that external conditions were not the only factor holding back the economy, with household consumption falling by 0.1 percent on a quarterly basis.

Sluggish personal consumption is likely to remain a concern for the government as it prepares a slew of policies to encourage spending in preparation for a consumption tax hike scheduled for October 2019.

Consumer spending is the largest contributor to growth, accounting for over 50 percent of economic activity.

Marcel Thieliant, a senior Japan economist with Capital Economics, wrote in a research note that weak consumer spending was “rather puzzling” because households were finally seeing larger pay raises.

Despite Wednesday’s gloomy economic data and the potential for trade disputes to weigh on long-term growth, Thieliant said he believes that “a rebound in Q4 (economic growth) seems likely.”