Growth At 0.6% In Q2

GDP grew by 0.6% in Q2. This was slower than in the preceding quarter (0.9%), but still well above the economy’s potential rate. Growth was mainly stimulated by domestic demand. Foreign trade and government spending should further strengthen. However, question marks remain over household spending due to the losses is purchasing power.

GDP grew by 0.6% in Q2, in line with market expectations. This was slower than in the preceding quarter (0.9%), but still well above the economy’s potential rate estimated at 0.1%. This good performance is related to the very loose macroeconomic policies pursued by the Abe government, the so-called Abenomics.

On the domestic side, government spending contributed 0.3 percentage point to the overall growth rate due to the implementation of the JPY 10 trillion stimulus plan (2 % of GDP) adopted in early January. In addition, private consumption added 0.5 percentage point to growth, as household spending was boosted by employment growth and substantial capital gains in the stock market. As a result, households became more positive about their personal financial outlook. Consumer confidence even reached a historical high in Q2 2013. Moreover, they are bringing their spending forward ahead of the 3 point VAT hike planned for April 2014.

By contrast, the trade performance disappointed, net trade only contributing 0.2 point to growth. The depreciation of the yen (15% since mid November) is certainly supportive to growth. However, world trade is only slowly recovering. In the three months to May, world trade was 0.8% higher from the three preceding months.

The main disappointment came from business investment, which failed to pick up despite strong growth and easy financial conditions. Moreover, inventories deducted 0.3 point from growth.

In the coming months, government consumption and investment should remain very supportive to growth. Also export demand is likely to strengthen as global economic activity is gaining momentum and the yen is likely to remain weak.

The main question mark is over household spending. In particular, household income does not show signs of improving. In June, both contractual cash earnings and real wages were 0.2% lower from a year earlier.

BY Raymond VAN DER PUTTEN

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