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

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Forecasts updates
▶ Our latest expenditure-side forecast for Japan’s real GDP growth in 2020 Q1is an annualized -2.7%. Our production-side forecast is an annualized +0.3%. The average of the two forecasts is an annualized -1.2%.
▶ Our forecasts for the private final consumption expenditure deflator and the domestic demand deflator in 2020 Q1 are both +0.1% QoQ. As the terms of trade are deteriorating, we forecast an overall GDP deflator of 0.0% QoQ.

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

▶  Production: Production declined in February.
▶  International trade: In March, Kansai’s trade surplus was smaller than the previous month.
▶  Business confidence: The Economy Watcher DI in March reached an all-time low.
▶  Wages: Both nominal and real wages kept declining in January.
▶  Labor market: In February, the job offers-to-applicants ratio kept deteriorating, and the unemployment rate kept increasing.
▶  Private Consumption: In February, department store sales plummeted while supermarket sales rose due to stockpiling in the face of the coronavirus pandemic.
▶  Housing: The number of new housing starts kept decreasing in February.
▶  Construction: Construction investments in February kept expanding, albeit at a decelerating pace. The contract amount for public works projects in March increased.
▶   Inbound tourism: Due to the impact of the coronavirus, the number of international arrivals at Kansai International Airport in March plunged -95.1% year-on-year.
▶  Chinese economy: China saw its Q1 GDP shrink for the first time since quarterly GDP statistics started in 1992.

Data updates

▶ Although production increased for the third consecutive month in February, its recovery from the October-November slump has been sluggish.
▶ Spending on goods (40% of total private final consumption expenditure) increased in February. However, statistics on spending on services, which have more weight and might have been affected substantially by Covid-19, have not been released yet, making it hard to draw conclusions on private consumption trends.
▶ Private housing, private capital investment and changes in private inventories were all bearish in 2020 Q1.
▶ February imports were hit particularly hard by Covid-19. That caused an abrupt expansion in net exports, which propped up GDP growth. However, as the global economy entered a synchronized slowdown in March, we expect that exports will decline, which will worsen the trade balance.

2020 Q1 Forecasts
▶ Our forecast for 2020 Q1 real GDP growth is an annualized -0.2% QoQ.
▶ However, real total demand growth (i.e. domestic demand plus imports) is an annualized -4.8%.
▶ We forecast an overall GDP deflator of -0.1% QoQ in 2020 Q1.

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.

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.

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.

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.

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.

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.