THE world’s third-largest economy recovered to its pre-pandemic size in the second quarter (2Q), as consumer spending picked up following the end of coronavirus curbs on businesses.

GDP grew at an annualised pace of 2.2% in 2Q22, coming in below the median estimate of 2.6%, Cabinet Office data showed on Monday. That lifted the size of the economy to 542.1 trillion yen, above what it was at the end of 2019. 1Q GDP was revised to an expansion from a prior contraction.

The end of pandemic restrictions on businesses in late March helped spur the economy. Consumer spending, which accounts for more than half of Japan’s economic output, led the growth, as did business spending. Still, the gains were more limited than expected a few months ago, showing that pent-up demand among consumers has been moderate.

The report came out as downside risks mount at home and abroad. Japan has been reporting record Covid infection cases with daily numbers continuing to top 200,000 this month. The government has so far kept economic activity as normal as possible without bringing back restrictions. But high-frequency data suggest people’s mobility is falling.

In Japan’s key trading partners, growth is slowing with the US and Europe fighting inflation and China sticking to its zero-Covid policy. The war in Ukraine continues to disrupt food and energy supplies while the crisis in Taiwan adds to geopolitical risks.

Inflation remains relatively moderate in Japan, but consumption may cool with prices rising faster than wages. After factoring in inflation, paychecks in Japan have been falling for three months in a row through June.

Prime Minister Fumio Kishida reshuffled his cabinet last week but signaled that the core parts of his policies will remain the same, with the Bank of Japan expected to continue with their ultra-low rates policy. Kishida also suggested he’ll remain flexible on fiscal support, although he’ll focus on spending existing reserve funds first before reaching for additional debt issuance. He said last week that he’ll order additional measures to relieve the impact of inflation later Monday. – BLOOMBERG