Japan Macro: Q1 GDP details are grim – Similar to other advanced economies in the first quarter, Japan’s Q1 GDP surprised to the upside at 2.1% qoq annualised, well above consensus (-0.2%) and our (0.5%) expectations, as well as trend growth (c.1%). However, the details paint a far less rosy picture of the economy. Both private consumption and business fixed investment fell on the quarter, each subtracting 0.2pp from annualised growth. At the same time, the main positive contributions came from net exports (+1.5pp) and inventories (+0.6pp). However, exports actually plunged -9.4% on the quarter, and the only reason for the positive trade contribution is that imports fell at a much faster pace, by -17.2%. Indeed, the collapse in exports likely explains the sizable inventory build. All told, it suggests a sharp decline in external demand that is likely to impact business investment further in the coming quarters.
Similar to other regions, the strength in Q1 looks unsustainable – The story of unusual net export and/or inventory build contributions is consistent with what we have seen in some other advanced economies, notably the US and the UK, and suggests the current strength in global growth is unsustainable. As such, we expect considerable payback in Q2. In Japan and the US, this means growth likely falling back to close to zero in Q2; in Japan, growth could even be negative next quarter (although negative GDP growth is not unusual in Japan, given its low potential growth rate). In the Eurozone, too, growth has been flattered by some unusual one-offs, such as a jump in car registrations following the collapse late last year, and a weather-related surge in construction output, and we expect payback from this strength in Q2 and Q3 (see Global Daily – Unsustainable German GDP spurt and Dutch economy again grows 0.5% in first quarter). Bigger picture, the re-escalation of the trade war, and the ongoing global industrial malaise suggests downside risks to global growth further ahead. (Bill Diviney)