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Industrial production declines 4.3% y/y in March as exports
fall during first quarter
Steepest drop in demand for capital goods for over six
years
Japan's economy expanded more than expected in the opening
quarter of 2019, but growth looks set to weaken in the second
quarter.
A 0.5% rise in GDP in the first quarter comes after mixed data
late last year. Official data showed GDP falling sharply in the
third quarter of 2018 but regained most of the lost ground in the
fourth quarter. However, despite the fourth quarter improvement, by
the end of last year the annual rate of GDP growth was still a
lacklustre 0.2%. The sluggish expansion raised concerns that the
economy was heading into 2019 on a soft footing ahead of a planned
sales tax rise later in the year. The better than anticipated start
to 2019 therefore goes some way to ease these concerns, but demand
and underlying economic conditions still seem worrying weak.
While the 0.5% real GDP rise during the first quarter of the
year surpassed market expectations, the year-on-year growth rate
was just 0.8%, and broadly in line with the Nikkei PMI survey
signal (compiled by IHS Markit). Worryingly, the survey data
indicate that underlying weakness likely extended into the second
quarter. The composite PMI, which tracks output at both
manufacturing and service sector companies, registered 50.8 in
April, up from an average of 50.6 in the first quarter but
considerably below the average of 52.1 seen over the course of
2018.
Manufacturing woes
Like the official data, the PMI survey highlights the drag on
the economy from manufacturing and trade. Alongside the latest GDP
statistics, final industrial output data for March was released,
revealing a 4.3% reduction compared to last year, the steepest in
almost four years, corroborating the signal seen in the PMI survey
from
March.
Japan's manufacturing sector woes have, to a large extent,
reflected slowing global economic growth. Goods exports fell 2.4%
in the first three months of the year compared to the final quarter
of 2018, matching similar weakness in the PMI data, which had
signalled successive monthly declines from January through to
March. The survey's anecdotal evidence highlights how weak sales to
China and other parts of Asia reflected rising global trade
frictions.
Although latest PMI data up to April showed a slight easing in
the strength of Japan's manufacturing downturn, signs of underlying
weakness remained apparent, as export orders fell at a sharper
rate. Trade frictions between the US and China have also escalated
once more, which will likely act as a further dampener on trade
flows in coming months.
Global economic fragility hurting investment goods
makers and autos
Sub-sector data indicate that there is particular weakness
within the investment goods category. According to PMI survey data,
capital goods producers have faced especially tough demand
conditions, with new orders falling sharply during April, declining
at the quickest rate in over six years. These PMI numbers therefore
suggest that the downturn in Japan's machinery orders - a key
indicator of business capex - will have intensified in April.
The
global PMI survey data also highlight the ongoing downturn of
the autos sector, which accounts for an especially high proportion
of manufacturing production in Japan. New orders for autos and
related parts fell globally in April at the steepest rate since
data were first available in 2009.
Service sector drives growth despite weak
consumption
Support to the economy has come from the service sector. While
the PMI has shown manufacturing output falling in the first four
months of 2019, the service sector has continued to expand, with
the average rate of growth exceeding that seen during 2018, albeit
by only a small margin.
Of greater concern, however, were signs from the GDP data of
weak domestic private consumption, which fell 0.1%, contributing in
turn to a 4.6% drop in imports.
While the stronger than anticipated rise in GDP will embolden
Prime Minister Shinzo Abe in hiking the country's sales tax in the
autumn, any persistent weakness of consumption in the second
quarter will be a concern, especially as one would expect consumers
to be buying ahead of the tax rise.
Our flash Japan manufacturing PMI data will be updated on
Thursday 23rd May, providing the first insights in production
trends in May. Given recent escalations of trade frictions between
the US and China, as well as underlying fragility within the global
economy and a continued deterioration in global auto sector demand
in recent months, Japanese manufacturers are struggling against
many headwinds.
Joe Hayes, Economist, Economic Indices
Tel: +44 1491 461 006
joseph.hayes@ihsmarkit.com
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
