Econintersect: Japan has reported the first preliminary estimate for GDP (Gross Domestic Product) for the first quarter of 2014 with an annual growth rate of 5.95%, beating the consensus estimate of 4.0% by almost 50%. Rounded to one decimal place this is 1.5% growth from the fourth quarter 2013. The last time this number was higher was in the third quarter of 2011. Before this surprise, forecasts had been for a contraction of 3.3% in the second quarter, with growth to return to an average around 2% for the remaining two quarters of the year. The forecasts for the remaining three quarters of the year may see significant revisions now that the first quarter has exceeded the total of 1.2% previously predicted for the entire year.
The surge is due to a one-time effect: News articles attributed the high growth to a “buying spree” (the Financial Times) and to “consumers [going] on a massive shopping spree” to avoid the sales tax hike implemented on 01 April 2014.
The following graph from Trading Economics shows the most recent 20 quarters of GDP growth quarter-over-quarter:
Looking at the four other high quarters in the past five years, it is informative to assess how volatility has impacted growth over three quarters (high quarter plus the one prior and the one following):
- For 2Q 2009 (1.8%): 3 quarter total = -2.1%
- For 4Q 2009 (1.8%): 3 quarter total = +3.3%
- For 3Q 2010 (1.5%): 3 quarter total = +2.1%
- For 3Q 2011 (2.6%): 3 quarter total = +2.2%
To equal the best of these three quarter spans would require a quarter-to-quarter growth of 1.6% for 2Q 2014. No one is forecasting growth in the second quarter so only comparison to 2Q 2009 seems to be in play. To suffer that result would require a decline of 3.8% for 2Q 2014, not far from the consensus estimate of -3.3%.
If the contraction in 2Q is much smaller than that, particularly if it is less than down 1.7%, the question of whether Abenomics has possibility of success is still in play. If 2Q2014 sees any positive GDP number the prospects will actually be improved considerably. No gain in the second quarter plus an average of 2% (annualized) for the last two quarters of the year would put GDP growth for calendar 2014 at 2.5%. The following annotated graph shows how that would compare to the record since 2001. The graph ends with data for 1Q 2014 – you need to visualize three more quarters ending with a 2.5% at the end of this year. If you do that you see a six quarter span with GDP growth beginning and ending above 2.4%, something that has not happened in the 12 years examined.
That is the challenge that Abenomics faces to have any claim of success. It depends on a major surprise for the second quarter, avoiding a GDP contraction, and achieving the ambitious goal of averaging 0.5% gains (2% annualized) for the last two quarters of the year.
Abe faces a severe challenge from this reality.
- Jan.-Mar. 2014 (The 1st preliminary) (Japan Cabinet Office, 15 May 2014)
- Japan GDP growth trumps expectations at 5.9% (Jonathan Soble, Financial Times, 15 May 2014)
- Japan GDP growth hits 5.9% amid massive shopping spree (Charles Riley, CNN Money, 14 May 2014)
- Japan GDP Growth Rate (Trading Economics, 15 May 2014)
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