The manufacturing slump in March confirms that Japan's economy contracted for a second successive quarter in the first three months of the year, and will mark outright decline in 2011, an analyst has said.

The composite services purchasing managers index (PMI) dropped from 48.5 in February to 41.8 in March, an even bigger points fall than the decline in the manufacturing PMI released last week.

Indeed, with activity also likely to shrink in April-June, we now expect GDP to fall outright in 2011 as a whole, Capital Economics analysts Julian Jessop, David Rea and Vishnu Varathan wrote in a note on Tuesday.

The analysts pointed out that activity in the services sector fell by at least 3 percent month-on-month in March. With this sector accounting for around two-thirds of all economic activity, and adding in the negative contribution from the slump in manufacturing, we now estimate that GDP fell by around 1.5% q/q in Q1, or 6% at an annualized pace. What's more, the decline in Q2 is likely to be even bigger, they wrote.

The analysts said GDP will snap back later in the year as activity recovers from the initial shock and reconstruction spending starts to kick in. But these initial declines would be so large that we do not think the economy will rebound quickly enough to prevent an outright fall in GDP in 2011.

Gdp Japan Japan Manufacturing