Thursday, February 14, 2008

Japan Q4 2007 GDP

Well the preliminary Q4 GDP numbers are now out and they are definitely better than expected. Japan's economy grew at an annualised rate of 3.7 percent in the last quarter of 2007, and this was at least double the pace most economists were expecting, as strong business investment and exports to Asia and Europe helped the Japanese economy weather the U.S. slowdown. Gross domestic product in the three months which ended Dec. 31 accelerated from a 1.3 percent annualised rate expansion in the third quarter, according to data released by the Japanese Cabinet Office in Tokyo today. We need to be a little carfeul in using these annualised rates, since they are derived by simply multiplying quarterly rates by 4, but still whole year growth for 2007, according to the first preliminary estimate, was 2.1%, which compares with 2.4% in 2006 and 1.9% in 2005, so the final result is not at all - by current Japanese standards - a bad one.

On a quarter-on-quarter basis, growth in Q4 was at 0.9%, up from 0.3% in Q3, and the -0.4% contraction in the second quarter.So it is clear that, despite all the negative sentiment we have been faithfully recording here, the Japanese economy actually accelerated in the second half of 2007 and this despite the dramatic slowdown in residential housing. The big question - as Francois reasonably asks in comments to Claus's last post - why?

I freely admit these results have surprised me, as I was expecting something significantly worse. But I suppose we should to some extent have seen this coming. Growth in Q2 was very bad, and the rebound in Q3 was relatively weak, yet all those export numbers we have also been recording over the months - and the surprise upside in consumption in December - should have been some sort of indication. Plus government spending in the last quarter seems to have been pretty strong. Lets take a look at some of the details.

I have made the following charts on a simple cut-and-paste basis from the PDF summary file provided by the cabinet office, but I think they may help people to see what is happening at a glance, since they show either the percentage contributions of the more important components to growth or the quarterly percentage growth rates (depending), and hence may make what are otherwise pretty dry numbers a bit more real. Firstly the evolution in real quarterly GDP growth (all the charts are based on real, not nominal, data).

If we now come to look at the comparative role of exports and domestic demand, we can see that while the role of exports continues to be strong (and is much better in both Q3 and Q4 when compared with Q2) the share was actually down slightly on Q3, so exports aren't the whole story here by any means, since domestic demand moved from being a negative 0.4% drag in Q3 to a positive 0.5% boost in Q4.

Household consumption was up slightly, contributing 0.2 percentage points to growth:

The decline in residential construction continued and even accelerated across Q4 (residential construction declined by 9.1% over the previous quarter when it declined by 8.3% from Q2, although the rate of decline may well have been slowing off in November and December).

Private non-residential investment (or fixed capital formation) grew strongly in Q4. Could we interpret this as a response to the stronger than expected performance in exports in the face of the US slowdown?

But perhaps the biggest surprise of all comes from government consumption, which grew 0.8% over the previous quarter, contributing 0.1 percentage points to quarterly growth.

So to go back to Francois original question, about how to account for the Q4 performance, could we say some small improvement in household consumption, sustained export growth, an increase in government consumption (perhaps undertaken to offset the impact of the housing contraction), and a large rise in investment, as I say possibly the outcome of the strong performance in exports and the reasonable domestic consumption outcome leading people to be a wee bit more optimistic about the immediate future.

And here's a bit of news I just saw in Bloomberg that may help explain some of what is happening on the exports front:

Japan's shipments of construction machinery may rise 9 percent to a third straight annual record next fiscal year as building and mining booms in Asia drive demand for earthmovers built by Komatsu Ltd. and its rivals.

Shipments of excavators, tractors, cranes and other construction machinery may climb to 2.6 trillion yen ($24 billion) in the year starting April 1, according to estimates released by the Tokyo-based Japan Construction Equipment Manufacturers Association today. Shipments in the year ending March 31 may reach 2.4 trillion yen, 15 percent more than the previous year.

China's effort to develop its hinterland, oil-funded construction booms in Russia and the Gulf nations, and mining projects in Southeast Asia have countered the housing recession in the U.S., the world's biggest market for earthmoving equipment. The demand has prompted Komatsu and Hitachi Construction Machinery Co., Japan's biggest makers of earthmoving machinery, to expand factories and boost production.

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