What the GDP Figures for 2023 Q2 Tell Us

Real GDP growth rate for 2023 Q2 was stronger than expected

The GDP figures for the second quarter (Q2) of 2023 was published on August 15. It shows that the seasonally-adjusted real GDP growth rate for the quarter compared to the previous quarter was 1.5 percent or 6.0 percent in annualized terms. Domestic demand contributed negatively by -0.3 percentage points, but it was more than offset by net exports which showed a strong positive contribution of 1.8 percentage points. Three consecutive quarters of positive growth is something we haven’t seen since the first three quarters of 2019 (Figure 1).

The private sector forecasters before the publication of the official numbers expected somewhat weaker growth. According to the August survey of the ESP Forecast (showing an average of 36 forecasters), the average expected real GDP growth rate for the quarter was 0.59 percent or 2.41 percent in annualized terms. The private-sector forecasters were somewhat optimistic about the domestic demand but pessimistic on the external side (Figure 2).

Domestic demand was weak because of the lack of growth in private consumption

The weak domestic demand was mainly due to the fall in private consumption which had a negative contribution to growth of -0.3 percentage points (Figure 3). Additional negative contribution came from change in private inventories which brough down the real GDP growth rate by -0.2 percentage points (we will come back to the latter later).

The bulk of private consumption is made up of domestic household consumption. The breakdown of domestic household consumption shows that, among its four components (durable goods, semi-durable goods, non-durable goods, and services), consumption of non-durable goods showed the largest negative contribution to real GDP growth. Its decline contributed to real GDP growth rate by -0.3 percentage points (Figure 4). Since non-durable goods include energy, it can be regarded as a result of the rise in energy prices and the consequent fall in energy demand.

Net exports was strong partly because of the fall in imports

The strong positive contribution came from both exports and imports. Exports had increased by 3.2 percent which contributed to real GDP growth rate by 0.7 percentage points, while imports declined by 4.3 percent, contributing to real GDP growth rate positively by 1.1 percentage points (Figure 3).

What is notable is the decline in imports that contributed to more than 70 percent of the real GDP growth rate during the quarter. First and foremost, it reflects the weak final domestic demand that we confirmed earlier. In addition, it is also a result of the drawing down of inventories to meet the domestic demand so that there was a less need for imports. As we already saw earlier, private inventories showed a decline that contributed to real GDP growth rate by -0.2 percentage points (Figure 3).

Positive observations for the future growth of the Japanese economy

What we have seen is that, while the real GDP growth rate was stronger than expected, domestic demand had declined and a considerable part of the stronger contribution of net exports was a result of the weakness of the domestic demand. I’m afraid, the fact is bit gloomy despite the strong positive growth. But there is something that we can look forward to: I would like to spend the rest of the column to note some positive observations.

First is the positive growth in real compensation of employees. The rate of growth compared to the previous quarter was 0.6 percent, the first positive growth in nine quarters (last time we saw a positive growth was in the 2021Q1) (Figure 5). If the positive growth is sustained, it will be a comfortable environment for the private consumption to increase.

Second is the increase in GDP deflator. The seasonally adjusted GDP deflator is showing a positive increase over the previous quarter for three consecutive quarters (Figure 6). If it sustains, it could be a sign that the trend of aggregate prices excluding the impact of imported inflation is finally changing.

Third is the improvement in terms of trade. There has been a decline in terms of trade for nine consecutive quarters since 2020 Q3. However, terms of trade is now showing improvement since 2022 Q4. As a result, the real growth rate of gross national income (GNI) in 2023 Q2 is 2.6 percent higher than that of GDP. If this increase in GNI can be channelled to households or companies effectively, it could strengthen the growth of domestic demand.

How we can make the most of these positive observations will determine the growth of the Japanese economy in the near future.