Japan’s economy contracted more than expected in the first quarter as slow vaccine deployment and new COVID-19 infections hit consumer spending, raising fears the country is heading into a double-dip recession .
The economy shrank 5.1% on an annualized basis in the first quarter, more than the expected contraction of 4.6% and after surging 11.6% in the previous quarter, government data showed on Tuesday.
The drop was mainly due to a 1.4 percent drop in private consumption, with the state of emergency to fight the pandemic keeping residents at home and cutting spending on clothing and dining out.
Capital spending has also fallen unexpectedly and export growth has slowed sharply, a sign that the world’s third-largest economy is struggling to get drivers out of the doldrums.
The dismal reading and prolonged state of emergency have increased the risk that Japan will retreat again in the current quarter and fall back into recession, defined as two consecutive quarters of recession, according to some analysts.
“Global chip shortages have caused a sharp slowdown in exports, also dampening capital spending,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “Consumption is likely to remain stagnant, increasing the risks of an economic contraction in the current quarter.”
As Prime Minister Yoshihide Suga’s administration struggles to speed up its vaccine rollout and contain virus cases using a predetermined approach that attempts to limit damage to the economy, it last week added three more prefectures to the last state of emergency, putting about half of the economy. under slightly stricter restrictions than in winter. Restaurants and bars in many major cities are now being asked to refrain from serving alcohol in addition to closing early.
Failure to end the restrictions at the end of May, as planned, could also increase concerns about the hosting of the Tokyo Olympics. Canceling the Games would deal another heavy blow to the economy and increase the likelihood that Suga would be consigned to a long list of short-lived prime ministers. The country is expected to hold national elections in early fall.
The larger-than-expected contraction also reflected a surprise 1.4% drop in capital spending as companies slashed spending on equipment for machines and cars, confusing market expectations of an increase in capital spending. 1.1%.
As exports rose 2.3% on a rebound in global demand for cars and electronics, the pace of the increase slowed sharply from the 11.7% gain in the previous quarter, a sign worrying for an economy still reeling from weak domestic demand.
Domestic demand reduced gross domestic product (GDP) by 1.1 percentage points, while net exports fell 0.2 percentage points, the data showed.
“This weak domestic demand shows that the damaging effects of the coronavirus have not been shaken at all,” said Takeshi Minami, chief economist at the Norinchukin Research Institute.
Despite a substantial monetary and fiscal stimulus, the Japanese economy fell a record 4.6% in the fiscal year that ended in March, the data showed.
Tax expenditures are not enough
“There will undoubtedly be budget money poured into this problem to soften the blow, although after so much already it is difficult to see this having more than a fairly marginal effect,” the analysts wrote. ING in a research note, adding that they expect the economy to contract again in the current quarter. “And the Bank of Japan seems to be running out of policy stimulus right now, so we don’t anticipate anything new other than expanding existing measures.”
Economy Minister Yasutoshi Nishimura blamed the weak GDP reading mainly on the brakes to tackle the pandemic, adding that the economy still had “potential” for recovery.
“It is true that spending on services will probably remain under pressure in April-June. But exports and production will benefit from a resumption of growth abroad, ”he told reporters.
Japan’s economy has grown for two consecutive quarters after its worst post-war crisis in April-June last year due to the pandemic’s first hit.