GDP Figures Highlight Some Ominous Long-Term Trends
Japan's Q413 GDP release does not make for optimistic reading. While real GDP came in at 1.0% q-o-q seasonally adjusted annualised, it marked the third consecutive quarter in which growth has slowed, showing the diminishing marginal returns of the ongoing monetary and fiscal stimulus measures. From a full-year 2013 growth rate of 2.7%, we expect to see a drop to 1.3% in 2014, which compares with consensus expectations of 1.5%. Even this relatively downbeat growth forecast faces serious downside risks.
Looking at the breakdown of the GDP figures, a few things stand out. On a positive note, gross capital formation grew at a rapid rate of 7.5% annualised, largely driven by the 1.1 percentage point contribution of private investment. The surge in profit growth across the economy, particular in the export sector, owing to the surge in money supply growth over the past year, has allowed companies to boost their capital spending. However, as we have been warning over recent months, the positive impact of these stimulus measures looks to be wearing off, and with companies facing pressures to hike wages, continued growth in capex will be hard to come by.
Moreover, the investment pickup is weighing on the country's external accounts. Import growth acted as a 2.0% annualised percentage point drag on growth, its highest rate since 2010. The drag from net exports was once again substantial, undermining the relative strong increase in domestic demand and reflecting the declining savings rate in the Japanese economy. As the Bank of Japan (BoJ) and the Japanese government continue to artificially pump up the economy, an increasing amount of 'leakage' via its external accounts is to be expected. This trend of declining domestic savings is inevitable as the economy ages rapidly, but 'Abenomics', or at least the first two arrows of it, are exacerbating this trend. Indeed, as the chart below shows, private consumption is now at a record high as a share of GDP and we expect this trend to continue as the savings rate declines.
|Investment Growth Comes At The Expense Of External Accounts|
|Japan - Real Gross Capital Formation Vs Imports, Percentage Point Contribution, q-o-q s.a|