TOKYO (Businesshala) – Japan’s economy contracted much faster than expected in the third quarter as global supply disruptions and fresh COVID-19 cases hit business and consumer spending, posing challenges to the new government’s growth plans.
While many analysts expect the world’s third-largest economy to recover in the current quarter, worsening global production constraints pose risks to the outlook.
“The contraction was much larger than expected due to supply-chain constraints, which barely affected production and capital expenditure,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.
“We expect the economy to improve in the quarter, but the pace of recovery will be slow as consumption did not start off well even after the easing of COVID-19 restrictions at the end of September.”
The economy shrank 3.0% annually in July-September after a revised 1.5% gain in the first quarter, preliminary gross domestic product (GDP) data showed on Monday, compared to the average market forecast for a 0.8% contraction.
The weak GDP contrasts with more promising readings from other advanced countries such as the United States, which saw their economies expand by 2.0% in the third quarter on strong demand.
On a quarter-on-quarter basis, GDP fell 0.8% compared to the market’s forecast of a 0.2% decline.
Prime Minister Fumio Kishida plans to compile a massive economic stimulus package worth “several tens of trillions of yen” on Friday, but some economists were skeptical about its impact on near-term growth.
“The package will be a mixed bag of near-term and long-term growth measures, and the focus may be hazy, so it won’t have much impact in the near term,” Norinchukin’s Minami said.
Consumption fell 1.1% in July-September as compared to the previous quarter after rising 0.9% in April-June.
Capital expenditure also declined by 3.8%, after increasing a revised 2.2% in the previous quarter.
Domestic demand declined 0.9% points to account for GDP growth.
Exports declined 2.1% in July-September from the previous quarter as trade was hit by chip shortages and supply-chain constraints.
Analysts polled by Businesshala expect Japan’s economy to expand 5.1% annually in the current quarter, thanks to a decline in consumer activity and auto output as COVID-19 cases and easing supply disruptions.
Japanese firms still face risks from higher commodity costs and supply constraints, which threaten to undermine the economic outlook in the short to medium term.