Japan's Q1 GDP grows at faster pace, but trade war blunts outlook

Tokyo

JAPAN'S economy grew slightly faster than initially estimated in the first quarter, thanks to stronger capital spending, but analysts say global trade tensions remain a drag on growth and raise risks to the outlook for the export-reliant nation.

The world's third-largest economy is facing growing downward pressure as the US-China trade war intensifies and global demand wanes, while at home consumers are reluctant to spend.

"Although capital spending was revised up, it is expected to deteriorate as foreign demand continues to weaken due to the US-China trade tensions," said Hiroaki Mutou, chief economist at Tokai Tokyo Research Institute. "Consumer spending remains weak as wages have not risen as previously expected. If external demand worsens further, it could dampen both corporate and consumer sentiment and rein in their spending."

The economy grew an annualised 2.2 per cent in January-March, stronger than economists' forecast for 2.1 per cent annualised growth and the preliminary reading of the same rate of expansion, Cabinet Office data showed on Monday.

In the fourth quarter, gross domestic product (GDP) rose an annualised 1.8 per cent.

The annualised growth rate translates into quarter-on-quarter expansion of 0.6 per cent from the previous quarter, compared with a 0.5 per cent growth in the initial reading and the median forecast.

The capital spending component of GDP rose 0.3 per cent from the previous quarter, versus the median forecast for a 0.5 per cent increase and the preliminary 0.3 per cent fall.

Private consumption, which accounts for some 60 per cent of GDP fell 0.1 per cent in Q1 from the previous three months, unchanged from the preliminary reading.

The revised GDP confirmed imports fell faster than exports in Q1, underlining the broadening pressure across the economy as consumers grow more cautious.

That may explain why a separate Cabinet Office survey showed a worsening in sentiment in a key group of employees.

The called "economy watchers" sentiment index, which measures business confidence among workers such as taxi drivers, hotel workers and restaurant staff worsened to about a three-year low in May.

Net exports - or exports minus imports - added 0.4 percentage point to growth, while domestic demand contributed 0.1 percentage point to GDP - both were unchanged from the initial reading.

Japanese exports contracted for the fifth month in April due to a slump in shipments of chip-making equipment to China, while a private survey last week showed the nation's manufacturing activity swung back into contraction in May as export orders fell at the fastest pace in four months.

The data underlined the growing threat to the economy from the bruising Sino-US trade war, and has stoked speculation that Prime Minister Shinzo Abe may delay a sales tax hike for a third time to avoid a further blow to consumer spending.

However, the government has indicated it will go ahead with the sales tax hike to 10 per cent from 8 per cent in October, barring a big economic shock on the scale of the collapse of Lehman Brothers in 2008.

Mr Mutou at Tokai Tokyo Research expects the government to raise the tax, saying its plans for a host of stimulus steps would help ease its effects on households. REUTERS