It has become inevitable that the rising number of coronavirus cases and the rising death toll are hurting many economies. There may not be widespread recession now, but some economies are more at risk than others. China was already having weakness and was supposed to start rebounding as the phase-one trade deal was signed with the United States, but the viral outbreak and reactionary shutdown of much of China’s economy are coming with a very high price. One additional economic victim may be Japan, which may be at risk of entering a technical recession.
A report from the Japan economics team at Bank of America Securities (Merrill Lynch) shows how Japan faces rising risks of recession. The report from Izumi Devalier and Takayasu Kudo expects that the fourth-quarter gross domestic product (GDP) reading for 2019 will already show deep contraction of −4.6% when it is released next week. While the October 1 tax hike is the main culprit here, the firm noted that its high-frequency data point to a steep drop in private consumption after the 2.2% rise seen in the third quarter.
On top of what had been front-loaded spending ahead of the tax hike in the prior quarter, there were also disruptions from October typhoons, followed by a negative impact from unseasonably warm temperatures in December. Weak sentiment on top of those items help to account for the severity of the consumption slump, but the team now also expects reactionary declines in both business investment and in housing investment at the same time that exports out of Japan appear to have been weak.
The outlook for the first half of 2020 already looked tough, but that now appears worse than expected, and the team was only calling for a 1% growth by the second quarter of 2020. The coronavirus impact is shown with specifics. Devalier and Kudo’s report said:
In our year ahead report, we had been looking for a feeble but positive rebound in the first quarter (2020) GDP, before an acceleration back to trend of around 1% in the second quarter (2020). But this now looks too optimistic, given the already tangible hit to regional activity and sentiment from the novel Coronavirus. Without the confidence that the outbreak has peaked, it remains difficult to quantify the impact on Japan’s economy. But the hit to tourism is already visible. According to our APAC transportation team, flight capacity out of China to Japan was tracking a 53% (YoY) drop as of 10 February. However, this likely represents the low end for the likely decline in inbound visitors in recent weeks since the Japanese government has continued to widen entry bans, including on port calls by cruise ships. Under our baseline scenario, the decline in inbound consumption (services exports) alone should shave at least 0.6 percentage point off annualized first quarter (2020) GDP growth.
While the “recession” term gets overused and has been frequently overhyped in the media, what investors and economic watchers should consider is that this is effectively considered a “technical recession.” That is when the economic data reflect a recession but without some of the widespread panic and major life disruptions that come into play with a deeper recession. Technical recessions also tend to be short-lived, along with being less destructive.
Japan’s merchandise exports and domestic production are now expected to take a small hit in the near term, with logistical disruptions being present, along with a negative hit to household sentiment tied to outbreak fears and with a capital spending recovery facing potential delays. As a result, Devalier and Kudo took the first quarter of 2020 GDP forecast down to −1.0% from a prior expected gain of 0.6%. The team currently projects a rebound in the second quarter with a 1.8% gain as business activity would be expected to normalize.
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