Our growth forecast is much more pessimistic than consensus
Since we revised our GDP forecast last time on April 8, there have been three new developments, prompting us to revise the forecast again. First, while incoming data are mixed for tracking Q1 GDP, which will be released on May 18, unexpected weakness in February Cabinet Office consumption index and weak business survey suggest a larger than expected contraction in Q1. Second, the fall in exports of autos and capital goods has been sharp and our UBS economist colleagues revised down their forecast, suggesting that the fall in exports and industrial production intensifies in Q2. We expect a large contraction in exports and industrial production in Q2, but manufacturers’ output projection looks for a much milder contraction, probably due to lagging recognition of the shock in overseas. Finally, the Japanese government expanded emergency fiscal measures (supplementary budget) from the initial plan of ¥17 trillion (3% of GDP) to ¥26 trillion (5% of GDP). In all, we now expect a 5.3% contraction in 2020 (revised up from -5.5%) and 3.2% in 2021 (also up from 2.5%). The basic path of the contraction and recovery is unchanged, and we are much more pessimistic than consensus.
Alternative scenarios look for more downside, while uncertainty is high
Our base case forecast assumes that the state of emergency will be extended to end of May (indeed, today’s Nikkei article stated that the government is considering extending the period by one month), and the government’s guideline of restrictions will be gradually relaxed from June. However, there is a possibility that the restrictions could be strengthened in June with more new infections. Moreover, a failure of containment efforts with the virus coming back in waves till mid-2021 is also possible. We presented these alternative scenarios for all countries covered by our economist colleagues. For Japan, the second scenario that the restrictions strengthened and extended to end of June or even early July would leave a deeper 2020 annual GDP contraction at -6.9% (note that the numbers are adjusted from the global note stated above with the revision of Japan’s main scenario) and a lower pick up at 2.7% in 2021. The third scenario of the failure to contain the virus looks for a more severe 7.9% contraction in 2020 and only 1.7% recovery in 2021. Of course, the uncertainly to the outlook is high with the unpredictable nature of the new virus and associated government’s responses in both restrictions and fiscal policy, and private sector’s behaviour to unprecedented events.
Fiscal deficits would be substantial
However, one thing that looks certain is a surge in fiscal deficits in any scenario (Figure 9). Our base case assumes no more fiscal stimulus as the supplementary budget already includes reserves for unspecified extra spending and measures to boost the recovery after the containment of the virus on top of immediate income and credit supports to both corporate and households. However, we note that the budget does not incorporate the expected loss of tax revenue due to the plunge in economic activities. Moreover, additional supplementary budgets may be formed, especially if the restrictions strengthened and/or lengthened as our alternative scenarios assume. With the Bank of Japan’s intention to buy more government bonds, we think that the government will implement additional fiscal stimulus, if necessary, while it may take time to discuss new measures like this time.