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Economy

Delta surge clouds hopes for Japan GDP recovery

Rebound seen as unlikely at least until year-end as vaccinations lag

The threat of the delta variant hung over the Tokyo Olympics and remains a risk to Japan's economic recovery. (Photo by Kento Awashima)

TOKYO -- Japan's tepid economic growth for April-June has dimmed hopes for a quick recovery from the coronavirus pandemic, with economists predicting similarly weak numbers for July-September as the spread of the contagious delta variant slows consumer spending.   

Japan's real gross domestic product increased an annualized 1.3% in April-June from the previous quarter, the Cabinet Office announced Monday, in a slow recovery from the 3.7% contraction in January-March. Japan's GDP still sits 1.5% below where it was in October-December 2019, before the coronavirus spread globally.

The sluggishness is expected to persist, especially as the delta variant fuels new cases. In a survey on Monday by Nikkei, 10 economists forecast an average growth of 1.4% in July-September from the current quarter -- a significant downgrade from the June forecast of 5.2%.

"We reconsidered when consumer spending would recover, given delays in the vaccine rollout and repeated states of emergency caused by the spread of the delta variant," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

For now, economists predict a growth of 5.9% in October-December, which would lift Japan's GDP to pre-pandemic levels by the end of this year.

But this scenario could prove too rosy. With infections continuing to hit new highs, Japan is posed to put seven more prefectures under a coronavirus state of emergency this week until Sept. 12.

"Recovery will be delayed if the rise in cases doesn't slow, leading to tougher restrictions," said Tatsushi Shikano at Mitsubishi UFJ Morgan Stanley Securities.

Concerns are growing over the global economic outlook as well. The U.S. economy grew 6.5% and the eurozone by 8.3% in April-June. But the delta variant is spreading fast in these regions, including breakthrough cases among vaccinated individuals.

The University of Michigan's consumer sentiment index slumped 11 points from July to 70.2 in August, according to a Friday release. This marks its lowest point since December 2011.

"The U.S. could shift away from its efforts to normalize its economy and toward greater restrictions on activity," said Atsushi Takeda, chief economist at Itochu Research Institute.

Meanwhile, the global composite purchasing managers' index compiled by IHS Markit retreated 0.9 point in July to 55.7. This is the second consecutive month of decline from a peak in May, though it remains above the threshold of 50, which separates growth from contraction.

The service sector PMI in particular lost 1.2 points in July to 56.3, as the delta variant complicated efforts to reopen restaurants and travel in the wake of vaccination drives. Manufacturing PMI also fell for the second straight month to 55.4, largely due to supply-side factors like the global semiconductor shortage.

"We urgently need to bolster health care systems so we don't have to significantly restrict economic activity even when case numbers increase to a certain point," said Taro Saito, an economic research department executive at NLI Research Institute. Governments around the world face a delicate task of balancing pandemic restrictions with economic recovery.

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