JAPAN’S industrial output fell in the January-March period at the fastest pace in almost five years, suggesting the economy may post a mild contraction in the first quarter as manufacturers struggle with the trade war.

However, economists say any decline in Japanese GDP is likely to be temporary as China and the United States edge toward an agreement to end punitive tariffs and China’s economy shows signs of stabilization due to government stimulus.

The sharp decline in Japan’s output highlights the extent of the damage caused by the trade war, but economists are optimistic the world’s third-largest economy can quickly bounce back as global growth remains on relatively firm footing.

“The first quarter looks like a contraction, because output, exports, and business investment are all likely to be weak,” said Hiroaki Muto, chief economist at Tokai Tokyo Research Center.

“Still, we already see a turnaround in China, and that will lift manufacturing globally. The worst is already over for Japan, so I would not get pessimistic.”

Industrial output in January-March tumbled 2.6 percent, the biggest decline since the April-June period in 2014, data from the Ministry of Economy, Trade and Industry (METI) showed Friday. That followed a 1.4 percent expansion in the previous quarter.

On a monthly basis, output fell 0.9 percent in March, more than a median estimate for a 0.1 percent decline in a recent poll of economists, and versus a 0.7 percent rise in February.

The mounting pressure on Japan’s economy from weak external demand has hurt exports and threatens corporate profits, which could weigh on capital expenditure in the first quarter, analysts say.

March industrial output fell due to a 3.4 percent decline in car output and a 6.7 percent drop in the production of machines used to make semiconductors and flat-panel displays, the data showed.

In another source of concern, inventories rose 1.6 percent in March, the fastest increase in a year, due to higher inventories of metals, plastics, and heavy equipment.

The rise in inventories suggests makers of these goods could curb output in the future.

Manufacturers surveyed by the ministry expect production to rise 2.7 percent in April and 3.6 percent in May, but a METI official said it downgraded its assessment of output to say it is weakening recently.

Separate data Friday showed Japan’s retail sales — a key gauge of private consumption that makes up about 60 percent of the economy — rose 1 percent in March from a year earlier, more than a 0.8 percent annual gain expected by economists.(SD-Agencies)