A Revised Economic Forecast for Fiscal 2005-2006
(Subsequent to Release of Secondary QE for April-June)
September 13, 2005
Gentle Recovery Expected
These revised forecasts of economic growth reflect the content of the secondary quarterly estimates for April-June 2005 (released on September 12) and the impact of hurricane damage in the United States. The major revisions are as follows:
(i) The incorporation of the content of Financial Statements Statistics of Corporations by Industry, Quarterly has increased the likelihood that the growth rate of real capital investment for fiscal 2005 will reach double figures (more consistent with the results of various surveys on capital investment).
On the inventory investment side, the value of the increase in stocks of raw materials during the April-June quarter also appears to have been somewhat underestimated at the time of the preliminary quarterly estimates. For this reason, the contribution of inventory investment to the growth rate for fiscal 2005 has been revised upwards.
(ii) The damage caused by Hurricane Katrina in late August and early September means that the mood of adjustment in the US economy is likely to intensify in the short term. Although reconstruction-led demand is likely to swell for a time in early 2006, from spring onwards, as the effects of interest rate increases filter through, among other factors, it is likely to see a slight deceleration.
If the US economy follows this course, Japan's exports, which revived during the April-June quarter, are once again likely to see gentle growth up to the end of 2005. Although set to see a slight acceleration in the first half of 2006, they are likely to decelerate once more, albeit slightly, in the second half of the year (the reason for the downward adjustments for fiscal 2005 and 2006).
Consequently, this forecast revises the estimated real economic growth rate for fiscal 2005 upwards by 0.4 points and that for fiscal 2006 downwards by 0.4 points as compared with the previous forecast (issued on August 16 after the publication of the primary quarterly estimates: +2.0% in fiscal 2005, +2.2% in fiscal 2006).
The House of Representatives election on September 11 ended in a sweeping victory for the Liberal Democratic Party. Even before the election, JRI's main economic scenario assumed that the Koizumi administration would remain in place and continue its policy of structural reform, and the result of the election in itself is a neutral factor as far as the revision of economic forecasts is concerned. However, the surge of optimism in the stockmarket on September 12, after the election results were announced, suggests that share prices may rise sharply in the short term, leading to a rise in domestic private demand.
As the various pressures for structural reform recede, the downside risk to the economy is declining. Owing largely to the growth of capital investment and the improvement in income and employment conditions, the recovery trend is likely to continue. In the short term, capital investment in particular is likely to see a major expansion owing to investment in expanding capacity in the non-manufacturing sector, the growth of investment in R&D and product development in the manufacturing sector and the emerging demand for the replacement of aging equipment.
In the short term, however, it is likely that inventories will be adjusted in some sectors, such as the general purpose goods sector of production goods, and it is possible that the rapid growth of consumer spending recorded during the first half of 2005 will slow for a while. For this reason, the growth rate for the July-September quarter is likely to be lower than that recorded in April-June.
Moreover, for the following reasons, the growth pattern for the October-December quarter and onwards is likely to remain unstable. The average pace of the recovery is also likely to be a gentle one of around 2% per annum.
(i) While the pace of expansion of overseas economies, including that of the United States, remains slow, export growth is unlikely to see a steady acceleration.
(ii) With the recovery potential of wages lower than it has been in the past, if the planned increases in the household burden, including the cut in the fixed-rate income tax reduction, are implemented on schedule, the recovery of consumer spending is unlikely to accelerate.
(iii) Owing to the delay in raising sales prices, the rise in the prices of raw materials such as crude oil is exerting pressure on corporate profits.
(iv) The upward trend of capital investment is thought likely to continue but, as the boost provided by pent-up demand begins to tail off, the pace of growth is likely to see a gradual fall.
As a result, the real growth rate for fiscal 2005 is likely to reach a relatively strong 2.4%, its highest level since fiscal 2000.
Turning to fiscal 2006, real growth is likely to decelerate somewhat as the second half of the year begins but, over the fiscal year as a whole, is likely to remain in the middle of the 1-2% range, above the latent growth rate, at around 1.8%.
For more information on the content of this report, please contact: Makoto Ishikawa the Japan Research Institute, Limited.