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First quarter GDP growth at 0.9% - yet the word recession still finding its way into print

Let’s start with what the headlines didn’t tell us: On Friday, the Cabinet Office revised GDP data for the fourth quarter of 2007 downward from 0.9% to 0.6%. The bigger news, however, was that preliminary GDP estimates for the first quarter of 2008 showed a 0.8% increase, which translates into an annualized 3.3% gain.

These figures came as somewhat of a surprise to most commentators, and we should not yet begin speculating on whether or not they might also be revised downwards in three months time. Where was the growth? The Cabinet Office announced that strong exports and a recovery in housing starts were chiefly behind the gain. Although housing starts are nowhere near the dismal levels they were at last summer and fall, it should be noted that they were down 5.7% in January, 5.0% in February and 15.6% in March.

According to the data, housing starts rose 4.6% for the first time in five quarters, after having fallen 9.2% in the fourth quarter of 2007. Exports saw 4.5% growth in the January-April quarter, while imports increased 2.0%. Consumer spending rose 0.% while capital spending fell 0.9%. It was the first fall for capital spending registered in the past three quarters.

In fact, rising materials prices helped contribute to a 25 trillion yen outflow in the first quarter, as import prices continue to rise while export prices remain flat. That 25 trillion yen outflow was an all-time high; will there be anything left for capital spending in the second quarter of 2008?

Crucially, the GDP deflator remained negative, showing a 1.4% fall from a year earlier, compared to the 1.3% decline seen in the previous quarter.

At the same time, the extra day in February would have contributed to some of the growth in consumer spending, though we can only estimate this to have contributed about 0.2% to growth.

Looking ahead, most commentators seem to have a negative view for the April-June quarter, with the average result of a recent Nikkei survey of private-sector economists showing a prediction of 0% growth. Responses to the survey ranged from a drop of 2.3% to an increase of 1.4% - and now we know why the high and low scores are tossed out of figure skating competitions. Three of the ten respondents claimed that the Japanese economy has already entered recession. Yoshimasa Maruyama, an economist at BNP Paribas in Tokyo, was quoted by the AP as saying, “It’s unthinkable that growth will continue at this pace.”

With continued falls in capital spending looming, uncertainty surrounding domestic consumption and real worries over continued export growth, we have to agree. Yet, it also seems (almost) unthinkable that April-June GDP will entry negative growth territory. Then again, when it’s finally revised in November, there’s a chance that we might see just such a result.

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