Monday, November 17, 2014

Japan GDP - truly awful

I’m going to be out of the office later this week so thought I should get a post done before I head off.  That only left me to decide what to write about.  Then Japan GDP came out.  Problem solved.

What a truly awful number.  Japan’s third quarter GDP contracted at an annual pace of -1.6%.  Remember this was the quarter activity was meant to bounce back following the June quarter fallout from the consumption tax increase when GDP contracted at a -7.3% annualised pace.  Average market expectations were for an increase of 2.2%.

The detail of the result didn’t provide any silver linings.  Inventories contracted more than expected over the quarter but they were always going to be negative following the big positive contribution in the June quarter.

The real disappointment was the weak increase in consumer spending of +1.5% (annualised).  That followed a whopping -18.6% contraction in the June quarter.  I’ve been at the pessimistic end of Japan growth all year, especially with respect to how the economy would come through the tax increase, but even I’m disappointed in that result.

It seems highly likely the second tax hike scheduled for late next year will now be postponed.  That raises another important question beyond the obvious of the near-term growth outlook: how is Japan to achieve any semblance of fiscal sustainability?

Raising revenue is proving too damaging to the economy.  Cutting spending would have the same effect.  You know what I’m going to say next.  So far meaningful structural reform has proven to be too difficult politically.  Time to get on with the job.