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.

▶　Despite the small upward revision in Q1real GDP official estimates, there are reasons for concern as the  demand-side GDP components all declined QoQ. Growth was mainly driven by the expansion in private inventory changes and shrinking imports.

▶　Contrary to our expectations of an economic recoil following the long holidays, May data showed a robust increase in production. However, this might be temporary.

▶　Regarding Q2, we forecast a real annualized GDP growth of +0.2% (expenditure side). The production-side forecast is an annualized +0.6%. The forecasts from the past month suggest a growth deceleration trend.

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.

▶　Although real GDP in Q1 expanded for the second consecutive quarter, there are reasons for concern as the  demand-side GDP components declined QoQ. Growth was mainly driven by the expansion in private inventory changes and declining imports.

▶　For Q2, we forecast real annualized GDP growth of +0.9% (expenditure side). The production-side forecast is an annualized +1.2%. The forecasts from the past three weeks, however, suggest a negative trend. We forecast a GDP deflator of -0.0% QoQ in Q2.

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.