January-March 2004: GDP Should Hold Firm - No Slowdown in Reaction to Rapid Growth in October-December 2003

In the January-March quarter of 2004 real GDP recorded 1.4% growth on the previous quarter (equivalent to an annualized rate of +5.6%), positive growth for an eighth consecutive quarter. Despite fears of a slowdown in reaction to the rapid growth recorded in the October-December quarter of 2003, (i) steady consumer spending against the backdrop of a recovery in consumer confidence, (ii) continued export growth amidst a strengthening of the global trend towards economic recovery and (iii) continued recovery of capital investment, especially in the manufacturing sector, among other factors, have helped to buoy the economy.

(1) Household Sector

With the deterioration in employment and income conditions slowing and the improvement in consumer confidence becoming more evident, consumer spending has continued to rise as (i) demand for relatively high-priced products such as cars has begun to grow and (ii) spending on services has recovered, among other factors. It seems the much-feared impact of BSE, avian influenza and the unusually mild weather was hardly felt. Housing investment also saw a slight rise owing to a recovery in construction starts on housing for rent and condominiums in the Tokyo area.

(2) Exports

With the recovery of the global economy gathering momentum, exports continued to enjoy 2-digit quarter-on-quarter growth. Among exports to Asia in particular, there has been substantial growth of exports to satisfy internal demand such as chemical products and general machinery as well as exports of production goods such as electronic devices and audio equipment components. Exports to the United States have also begun to rise, led by special industrial machinery (for capital investment purposes) and digital consumer electronics.

(3) Capital Investment

In spite of the sharp growth recorded in the October-December quarter, capital investment saw steady growth of 2.4% quarter-on-quarter (equivalent to an annualized rate of +10.1%). Thanks to the recovery of production and capacity utilization, the will to invest has strengthened, particularly in the manufacturing sector, and investment in software, which has been sluggish, also shows signs of recovery.

Outlook: Recovery Likely to Continue in Fiscal 2004-2005

Looking to the future, the following three factors suggest that the economic recovery will continue in the short term. As current conditions make it difficult to pass costs on to the price of final goods, the rise in the price of materials such as crude oil is likely to exert a downward pressure on business profitability but the extra income resulting from the expected sales growth may be enough to offset the negative impact of the deterioration in trade conditions.

(1) The continued recovery of the European, US and Asian economies means that exports will continue to underpin the economy. Exports to China, in particular, are likely to grow across a wide range of sectors, including materials, components and capital goods, owing to the establishment of China's position as "factory to the world" and to the expected growth of domestic demand.

(2) The fall in the price of computers and other capital goods is likely to continue to boost capital investment on a real basis. Moreover, with the economic pulling power of exports growing and domestic private demand holding firm, capital investment is also likely to continue to grow on a nominal basis, centering on the manufacturing sector.

(3) Thanks to the slowing of the deterioration in employment and income conditions and to the underpinning provided by the older generations, which have a higher propensity to consume, consumer spending is expected to hold firm. The stimulus to propensity to consume resulting from the efforts of the corporate sector to develop new products in areas such as cellular phones and digital consumer electronics is also likely to continue for some time.

We have revised our forecasts of economic growth for fiscal 2004 upward by 1.6% on a real basis and 1.7% on a nominal basis as compared with the forecasts issued on March 11, 2004.

Looking ahead, capital investment relating to digital consumer electronics, which has been one of the leading factors in the present economic recovery is likely to slow and begin to show signs of peaking out towards the end of 2005. However, However, given that (i) the recovery of overseas demand is set to continue thanks to the growth of the Chinese economy and (ii) the basis for economic recovery is broadening thanks to the progress made on restructuring programs in the corporate sector, among other factors, the recovery is basically set to continue at a gentle pace.

For more information on the content of this report, please contact
Hideki Matsumura / Hisashi Yamada
Economics Department

Tel: 03-3288-4524 / 4245
E-mail：matsumura.hideki@jri.co.jp/yamada.hisashi@jri.co.jp

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