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.

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.

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.

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.

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.

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：　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.

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.

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.

Summary: Current economic deterioration expected to persist

• Production in April expanded MoM for the first time in six months, but output was -0.5% lower than the Q1 average.
• Kansai registered a trade deficit in May for the first time in four months. Both exports and imports shrank YoY.
• The Economy Watchers’ Diffusion Index (DI) in May deteriorated MoM for the first time in two months.
• Both nominal and real wages in March decreased YoY for the first time in three months.
• Sales by large retailers in April shrank YoY for the first time in two months.
• The number of new housing starts in April decreased YoY for the first time in two months.
• The job offers-to-applicants ratio in April increased slightly. The unemployment rate remained unchanged.
• Construction works in April expanded for the 14th consecutive month.
• The number of international arrivals at Kansai International Airport in May grew YoY for the eighth month in a row.
• China’s Purchasing Managers’ Index (PMI) in May deteriorated for the second consecutive month.

Some sectors of the economy are robust but the outlook remains uncertain, dimmed by US-China trade frictions and the upcoming consumption tax hike.

• In 2019Q1 Japan’s real GDP registered the second consecutive quarter of positive growth, expanding +0.5% QoQ (+2.1% ｉｆ　annualized).
• Although some sectors of Kansai’s economy remained robust in 2019Q1, there are growing risks of recession.
• Our forecast for Kansai’s real GRP growth　in FY2019　is +0.7%. Private demand is expected to contribute +0.5%pt, government spending +0.3%pt, and external demand -0.1%pt.
• We forecast a +0.4% real GRP growth in Kansai in FY2020. The expected contributions are +0.3%pt for private demand, +0.3%pt for government spending, and -0.1%pt for external demand.

Summary: Economy remains sluggish with signs of potential deterioration

• Production in March shrank MoM for the first time in two months.
• The April trade balance remained positive for the third month in a row, but it shrank YoY.
• The Economy Watchers’ DI in March improved MoM for the first time in two months.
• Real wages in February increased YoY for the second month in a row.
• Sales by large retailers in March expanded for the first time in five months.
• New housing starts in March increased YoY for the first time in two months.
• The effective job offers-to-applicants ratio in March remained unchanged.
• March was the 13th month of uninterrupted YoY growth in construction.
• International arrivals at KIX in April grew YoY for the seventh month in a row.
• China’s PMI in April deteriorated for the first time in two months.