Outlook: Kansai’s economy is likely to remain on a downward trajectory

▶  Production: Although production increased in January, it has not recovered from the October-November slump.
▶  International trade: In February, Kansai’s trade deficit turned into a surplus due to the slump in imports from coronavirus-hit China.
▶  Business confidence: The Economy Watcher DI in February reached its lowest level since April 2011 (after the Great East Japan Earthquake).
▶  Wages: Both nominal and real wages kept declining in December.
▶  Labor market: In January, the job offers-to-applicants ratio deteriorated, and the unemployment rate increased.
▶  Private Consumption: Department store and supermarket sales in January kept declining. Duty-free sales plunged -71.9% in February.
▶  Housing: The number of new housing starts decreased in January.
▶  Construction: Construction investments kept expanding in January, but the growth is decelerating. The contract amount for public works projects in February decreased.
▶   Inbound tourism: Due to the impact of the coronavirus, the number of international arrivals at Kansai International Airport in February slumped -66.0% year-on-year.
▶  Chinese economy: Coronavirus-hit China saw its manufacturing PMI drop to a historic low of 35.7 in February, a level lower than the one registered during the Global Financial Crisis.

Slump in private demand to precipitate recession in FY2019-2020

-Forecast update reflecting the latest GDP estimates and the impact of the coronavirus-

▶Our forecast for Kansai’s real GRP growth is -0.2% in FY 2019, -0.5% in FY 2020 and +1.1% in FY 2021. FY2019 growth was revised down by -0.3%pt, and FY2020 growth by -0.7%pt, reflecting the impact of social distancing, self-quarantines and reduced economic activities due to the coronavirus outbreak.

Data updates
▶　Most major economic indicators deteriorated in January, including residential construction, capital goods shipments, private capital investment, exports, imports, and large retailers’ sales. Inventories piled up as industrial production increased slightly. The recovery in production, however, has been slow since the consumption tax hike last October.

2020 Q1 Forecasts
▶　Our forecast for 2020 Q1 real GDP growth is an annualized -0.3% QoQ.
▶　We forecast an overall GDP deflator of -0.0% QoQ in 2020 Q1.

Summary: Kansai’s economy is deteriorating but likely to level off

▶  Production: Production in December increased for the first time in three months. However, overall Q4 production registered the largest decline since the Global Financial Crisis.
▶  International trade: In January, Kansai logged a trade deficit. Both exports and imports kept shrinking.
▶  Business confidence: The Economy Watcher DI improved in January. However, concerns about the economic impact of the coronavirus epidemic are growing.
▶  Wages: Both nominal and real wages kept declining in November.
▶  Labor market: In December, the effective job offers-to-applicants ratio improved, but the unemployment rate increased.
▶  Private Consumption: Large retailers’ sales kept declining in December. The recovery from the consumption tax hike in October is taking longer than it did in after the tax hike in April 2014.
▶  Housing: Although the number of new housing starts in December increased for the first time in five months, 2019 saw an overall decline.
▶  Construction: Construction investments marked the the 22st straight month of expansion in December. The contract amount for public works projects in January increased in all prefectures.
▶   Inbound tourism: The number of international arrivals at Kansai International Airport in January increased for the first time in two months. The impact of the coronavirus is yet to be felt.
▶  Chinese economy: The release of key statistics has been delayed due to the coronavirus outbreak. Excluding the Hubei province, factories across China are gradually resuming operations. Concerns about the future of the Chinese economy are growing.

Data updates
▶　All major economic indicators deteriorated in 2019 Q4, including industrial production, plannned residential construction, capital goods shipments, private capital investment, exports, imports, and large retailers’ revenues.
▶　Inventories piled up due to the reactionary fall in demand after the consumption tax hike in October.

2019 Q4 Forecasts
▶　Our forecast for 2019 Q4 real GDP growth is an annualized -4.4% QoQ.
▶　We forecast an overall GDP deflator of +0.１% QoQ in 2019 Q4.

Summary: Kansai’s economy is deteriorating but likely to level off

▶  Production: Production declined for the second consecutive month in November.
▶  International trade: Although Kansai logged a trade surplus in December, both exports and imports kept shrinking.
▶  Business confidence: The Economy Watcher DI improved in December. Hopwever, it remains low.
▶  Wages: Both nominal and real wages kept declining in October.
▶  Labor market: In November, the effective job offers-to-applicants ratio deteriorated. Although the unemployment rate decreased , the labor force population shrank for the first time in two months.
▶  Consumption: Large retailers’ revenues kept declining in November. The effect of the consumption tax hike has not worn off completely.
▶  Housing: The number of new housing starts in November decreased for the fourth month in a row.
▶  Construction: Construction investments marked the the 21st straight month of expansion in November.
▶   Inbound tourism:  The number of international arrivals at Kansai International Airport in December declined for the first time in 15 months.
▶  Chinese economy: China’s GDP expanded +6.1% in 2019, reaching the lower bound of the government’s target. Although China and the US signed a “phase one” trade deal in January 2020, structural problems will remain a major issue.

Data updates
▶　There was a major upward revision in Japan’s 2019 Q3 real GDP growth (+0.2%→+1.8% QoQ, annualized). The updated official figure coincides with APIR’s initial forecast.
▶　However, Q4 looks gloomy. The October-November averages of industrial production indices, plannned dwelling construction, capital goods shipments, exports, imports, and sales by large retailers all declined relative to the Q3 averages.

2019 Q4 Forecasts
▶　Our forecast for Q4 real GDP growth is an annualized -4.5% QoQ (a downward revision from our previous forecast).
▶　We forecast an overall GDP deflator of +0.１% QoQ in Q4 (no change from our previous forecast).

Summary: Kansai’s economy is deteriorating but likely to level off

▶  Production: Production in October declined after expanding in September.
▶  International trade: Although Kansai logged a trade surplus in November, exports and imports kept shrinking.
▶  Business confidence: The DI improved in November but it remains low.
▶  Wages: Both nominal and real wages kept declining in September.
▶  Labor market: The number of job openings decreased and unemployment increased in October.
▶  Consumption: Large retailers’ revenues in October slumped after the consumption tax hike.
▶  Housing: The number of new housing starts in October declined.
▶  Construction: The monetary value of construction investments in October kept rising.
▶   Inbound tourism: International arrivals at KIX in November grew despite the decline in Korean visitor numbers.
▶  Chinese economy: China’s PMI improved in November, surpassing the cutoff level of 50 for the first time in seven months. However, the future outlook remains unclear.

Overview: Stagnation concerns turning into reality due to weak domestic and external demand. Lack of robust source of growth a major risk in the future.

▶ Japan’s Q3 real GDP expanded an annualized +0.2%. Domestic demand propped up growth, while net exports supressed it.

▶ Our forecast for Kansai’s real GRP growth is +0.6% in FY 2019, +0.4% in FY 2020 and +0.7% in FY 2021. Private and public demand will make a balanced contribution to growth in FY 2019. In FY 2020, public demand will be the driver of growth. The lack of robust drivers of growth might become a concern by FY 2021.

▶ We estimated economic growth by prefecture in the past fiscal years, and we compared the economic impact of the consumption tax hike this year with the previous one in 2014. We conclude that the large increase in demand indicators in September this year was largely due to a recoil from the natural disasters last year.

Highlight: Global trade has bottomed out, but recovery remains uncertain

▶　Japan’s Q3 real GDP growth was an annualized +0.2% QoQ, well below expectations. APIR’s latest forecast for real GDP growth is +0.7% in FY2019, +0.4% in FY2020, and +0.7% in FY2021.

▶　Rush demand before the consumption tax hike this time was not as pronounced as in 2014. Although private consumption remains weak, we deem an economic recession in FY2019 is unlikely.

▶　The China-US trade conflict is taking its toll on global trade. As the effects of protectionist policies will extend into FY2020, the Japanese economy is not expected to get back on the path to recovery until FY2021.

▶　Future inflation will be influenced not only by energy and non-energy prices, but also by the consumption tax hike and the elimination of child care fees. We forecast a core CPI inflation of +0.6% in FY2019, +0.4% in FY2020, and +0.5% in FY2021.

Data updates
▶　Japan’s Q3 real GDP expanded an annualized +0.2% QoQ, well below expectations.
▶　In October, industrial production, plannned dwelling construction, capital goods shipments, real exports and imports all declined. Retail sales shrank by -14.4%, more than they did after the previous tax hike.

Q4 Forecasts
▶　Our forecast for Q4 real GDP growth is an annualized -3.2%.
▶　We forecast an overall GDP deflator of +0.１% QoQ in Q4.

Summary: The economy is deteriorating but likely to level off

▶ Production: Kansai’s Q3 production expanded YoY for the first time in three quarters.
▶  Nominal wages in Osaka, Kyoto and Hyogo prefectures increased, but real wages kept declining.
▶  Internatinoal trade: Kansai logged a trade surplus in October. However, both exports and imports shrank YoY.
▶  Business confidence: The October Diffusion Index dropped to 39.9, reflecting the reactionary fall after the rush demand in September.
▶  Construction: The number of new housing starts declined, but construction volume expanded YoY in Q3.
▶  Labor market: Nominal and real wages kept declining in August. The number of new job openings decreased and unemployment increased in September.
▶   Inbound sector: International arrivals at Kansai International Airport grew slightly YoY in October.
▶  Chinese economy: China’s PMI in October deteriorated to 49.3. Production, domestic consumption and fixed capital investment all saw decelerating growth rates. China’s international trade volume kept shrinking.

Data updates
▶　The Q3 index of industrial production declined for the first time in two quarters.
▶　Rush demand before the consumption tax hike is evident in September data on retail sales, which saw robust growth.
▶　Both planned residential construction expenditure and capital goods shipments increased in Q3.
▶　Q3 real net exports expanded.

Forecasts
▶　Our forecast for Q3 real GDP growth is an annualized +0.9%. This forecast is likely to be revised upwards once September data on private final consumption is released.
▶　We forecast an overall GDP deflator of +0.2% QoQ in Q3.

Summary: The economy is currently deteriorating but likely to level off
▶  In August, production shrank and the rush demand before the tax hike was still limited. Large retailers’ revenues increased, but the number of new housing starts declined.
▶  Nominal wages in Osaka, Kyoto and Hyogo prefectures increased, but real wages kept declining.
▶  In September, Kansai logged a trade surplus. Both exports and imports expanded, but that was mainly due to the rebound from last year’s typhoon-induced slump in trade.
▶  The huge YoY increase in the number of international arrivals at Kansai International Airport in September can also be attributed to last year’s typhoon.
▶  The value of public works contracts declined, but an upward trend is expected in the areas affected by the natural disasters in October.
▶  China’s Q3 GDP expanded an annualized +6.0%, an all-time low. Consumer spending remained unchanged. Industrial production accelerated, but fixed capital investment decelerated. Prospects remain unclear.

Data updates
▶　The index of industrial production in August declined for the first time in two months (-1.2% MoM).
▶　Rush demand before the consumption tax hike this year seems limited compared to the previous tax hike in 2014.
▶　Both planned residential construction expenditure and capital goods shipments increased in July-August.
▶　Real net exports expanded.

Forecasts
▶　We forecast real GDP growth (expenditure side) of +0.6% QoQ in Q3, or +1.4% if annualized. The production-side forecast is an annualized +2.6%. The average of the two forecasts is an annualized +2.0%.
▶　We expect that the reactionary fall after the tax hike this year will be milder than it was five years ago.
▶　We forecast an overall GDP deflator of +0.1% QoQ in Q3.