Japan's woeful GDP figures

Japan's woeful GDP figures That kitchen-sinking feeling May 21st 2009 | TOKYO From The Economist print edition At least things can’t get much worse WHEN companies want to emphasise a turnaround in their prospects they paint the past in a dark light so that the future can only appear brighter. Japan’s first-quarter GDP figures also look as though all the bad stuff has been thrown in—except, perhaps, the kitchen sink. The data, showing a 4% contraction of GDP on a quarterly basis, and a 15.2% annualised slump, reflect a continuation of Japan’s worst economic performance since the second world war. Not only were the first-quarter figures bad. The previous quarter’s horrendous fall was itself revised downward by more than two percentage points, to an annualised 14.4%. The collapse of exports was the economy’s Achilles heel in the fourth quarter, and exports continued to slide, down 26% in the first quarter compared with the previous three months. But it was the domestic repercussions of this decline that took the biggest toll on GDP in the first quarter. As companies jammed the brakes on expansion plans, capital expenditure fell 10.4%. Amid widespread lay-offs and consumer unease, household spending slid 1.1%. Destocking acted as a further drag, though inventories have further to fall, which does not bode well for the future. Markets responded with a shrug, however, partly because there are glimmers of a turnaround. Figures on May 19th revealed that industrial production in March rose by 1.6% from a month earlier. Consumer spirits have also improved. The consumer-confidence index jumped to 32.4 in April, having increased every month since December’s trough of 26.2. Many economists believe the April-June quarter may produce a small recovery which could gain momentum in the second half of the year. However, the factors supporting it are temporary in nature, and it is far too soon to say that Japan is fully on the mend. The first pillar of support is government fiscal stimulus, which could amount to about 5% of GDP this year. This may look particularly impressive in the second quarter after a negligible contribution to growth from government spending in the first three months of the year. But it will be short-lived. The second pillar is more technical: as depleted inventories are eventually restocked, production will rise, even if there are few end-buyers for the goods. Exports to China, where the economy may expand by 8% this year (see Economics focus), will provide a fillip. The trouble is, if the world economy does not rebound strongly it is hard to see where the final demand will come from to stimulate production, exports and investment on a more sustainable basis. Moreover, wholesale prices fell 3.8% in April from a year earlier, their fastest decline in almost 22 years. The risk of deflation is exacerbated by rising unemployment and falling incomes because of less overtime and a huge cut in summer bonuses. What will drive Japan’s long-term economic growth—not least as the population shrinks and ages—is even more uncertain. But in the immediate future, there are enough green shoots to sustain some hopes of a rebound. It is just that, as with rice, they start off underwater.