Summary: Further economic deterioration in sight
▶ Production in July expanded MoM for the first time in two months.
▶ Although Kansai logged a trade surplus in August, the total trade volume kept declining. The slowdown of the Chinese economy had a major negative impact. In contrast, the impact of trade tensions with Korea remains limited to individual firms.
▶ The Economy Watchers’ Diffusion Index (DI) in August improved MoM for the first time in four months.
▶ Nominal wages in June increased in Shiga, Hyogo and Kyoto, but declined in Nara and Wakayama.
▶ Sales by large retailers in July fell below last year’s level for the first time in three months.
▶ Housing construction expanded due to rush demand, but the increase was modest compared to the one seen before the previous tax hike in 2014.
▶ The effective job offers-to-applicants ratio in July declined slightly. The unemployment rate declined to 2.4%.
▶ July was the 17th month of uninterrupted YoY growth in public construction works.
▶ The number of international arrivals at Kansai International Airport in August grew YoY for the 11th consecutive month. However, growth decelerated to +4.9% (from +15.5% in July) due to the deterioration in Korea-Japan relations.
▶ China’s economic slowdown become more evident in August. Car sales kept declining (-8.1% YoY), and investment in the industrial sector decelerated significantly. China’s total trade volume shrank for the fourth consecutive month.

Summary: Private domestic demand might taper off amid deteriorating global trade

▶　Japan’s Q2 real GDP growth was an annualized +1.8% QoQ, precisely matching APIR’s final　CQM forecast of +1.8%. Private and public domestic demand propped up growth, whereas net exports made a negative contribution. The China-US trade frictions remain the main risk factor to global trade, posing significant challenges to making forecasts.

▶　APIR’s forecast for real GDP growth is +1.0% in FY2019 and +0.5%　in FY2020. The tax hike in October 2019 will inevitably cause a temporary downturn. However, we deem that an economic recession in FY2019 is unlikely due to several factors (see full report).

▶　In addition to energy and non-energy price fluctuations, as well as the impact of the tax hike in October, future trends in prices will be influenced by the planned elimination of child care fees. Considering all these factors, we forecast a core CPI inflation of +0.6% in FY2019 and +0.5% in FY2020.

Summary：　Prospects dimmed by growing uncertainties despite continued growth

▶ Japan’s real GDP expanded an annualized +1.8% QoQ in 2019Q2 , registering the third consecutive quarter of positive growth.

▶ Although Kansai’s basic economic trends remained robust in 2019Q2, prospects seem bearish due to growing uncertainties, notably the China-US trade conflict and the upcoming tax hike, which caused a noticeable deterioration in expectations-related indicators.

▶ We forecast real GRP growth of +0.6% in FY2019 and +0.5% in FY2020 in Kansai. Private consumption and government spending will prop up growth, contributing +0.8%pt and +0.4%pt in FY2019, while external demand (outside Kansai) will suppress growth by -0.5%pt. The expected FY2020 contributions are +0.3%pt for private consumption, +0.2%pt for government spending, and -0.0%pt for external demand.

▶ We analyze the impact of the trade conflict with Korea on Kansai’s economy and conclude that even if the conflict persists, its impact is likely to be limited.

Data updates
▶　Q2 real GDP grew an annualized +1.8% QoQ, expanding for the third consecutive quarter.
▶　The consumption goods production index in July fell -0.3% compared to the Q2 average. In contrast, the capital goods production index in July increased +2.0% compared to the Q2 average.
▶　Compared to the Q2 average, real exports and real imports in July grew +2.1% and +1.1%, respectively. As a result, net exports expanded.
▶　The national Consumer Price Index (CPI) in July increased +0.6%YoY, expanding for the 31st consecutive month.

Forecasts
▶　Our forecast for Q3 real GDP growth (expenditure side) is +0.6% QoQ, or +2.6% if annualized.　The production-side forecast is an annualized +2.7%.
▶　We forecast an overall Q3 GDP deflator of +0.2% QoQ.

Summary: Further economic deterioration in sight

･ Production in June shrank MoM for the first time in three months.
･ Although Kansai logged a trade surplus in July, the total amount of trade declined YoY for the eighth consecutive month. The impact of the trade tensions with Korea are limited to individual firms rather than industries.
･ The Economy Watchers’ Diffusion Index (DI) in July deteriorated MoM for the third consecutive month.
･ Nominal wages in May remained unchanged, but real wages decreased YoY for the third consecutive month.
･ Sales by large retailers in June exceeded last year’s level for the second month in a row.
･ The number of new housing starts in June contracted by -3.6% YoY, decreasing for the third consecutive month.
･ Both the effective job offers-to-applicants ratio and the unemployment declined slightly in June.
･ June was the 16th month of uninterrupted YoY growth in construction works.
･ The number of international arrivals at Kansai International Airport in June grew YoY for the tenth consecutive month.
･ China’s Purchasing Managers’ Index (PMI) in July improved slightly, but it remained below 50 for the third month in a row.

▶　We forecast a real annualized GDP growth of +1.5% in Q2 (expenditure side). The production-side forecast is an annualized +2.1%.

▶　Q2 GDP growth was mainly driven by domestic demand, while net exports are expected to have made a negative contribution.

▶　The latest official figures suggest a robust increase in production, consumption and capital investment in Q2. However, this might be temporary, as the forecasts from the past month suggest a growth deceleration trend.

▶　Q2 CPI inflation is expected to have decelerated to a modest +0.1% QoQ. We forecast an overall GDP deflator of -0.1% QoQ.

Summary: Further economic deterioration in sight

･ Production in May expanded MoM for the second month in a row.
･ Although Kansai registered a trade surplus for the first time in two months in June, both exports and imports shrank YoY.
･ The Economy Watchers’ Diffusion Index (DI)  in June deteriorated MoM for the second consecutive month.
･ Both nominal and real wages in April decreased YoY for the second consecutive month.
･ Sales by large retailers in May expanded YoY for the first time in two months.
･ The number of new housing starts in May plummeted sharply (-27.5% YoY), decreasing for the second consecutive month.
･ Although the effective job offers-to-applicants ratio in May declined slightly, the absolute numbers of both job offers and applicants increased. The unemployment rate remained unchanged.
･ Construction works in May expanded YoY for the 15th month in a row. However, public works contracts declined.
･ The number of international arrivals at Kansai International Airport in June grew YoY for the ninth month in a row.
･ China’s Q2 real GDP expanded +6.2% YoY, the slowest growth rate since 1992.