Sumitomo Mitsui Financial : Quarterly Economic Outlook for FY2022-2023

【NEWS RELEASE】

August 18, 2022

SMBC Nikko Securities Inc.

Quarterly Economic Outlook for FY2022-2023

August 18, 2022(JST), "SMBC NIKKO Japan Economic Outlook for FY2022-2023"has been released, responding to the first preliminary of GDP (April-June2022 period)

Japan's Consumers Wake From CV19 Slumber

• Real GDP: FY22 +2.0%, FY23 +2.1%
• Nominal GDP: FY22 +2.4%, FY23 +3.2%

Summary

• GDP growth outlook
  We revise our outlook to reflect the first preliminary Apr-Jun 2022 GDP data. We forecast real GDP growth of +2.0% YoY in FY22 and +2.1% in FY23, raising our FY22 forecast by 0.1ppt and our FY23 forecast by 0.1ppt vs previously (8 June)

This material is an English translation of Japanese announcement made on August 18, 2022. Although the company intended to faithfully translate the Japanese document into English, the accuracy and correctness of this translation are not guaranteed and thus you are encouraged to refer to the original Japanese document.

• Economic outlook
• 
  Japan's real GDP growth for Apr-Jun was +2.2% QoQ annualized (Y542.1tn), above pre-CV19 levels. The economy has finally broken out of its CV19-induced slump over the past nine quarters, with key points ahead the outlook for CV19, purchasing power, and inflation.
  Life with CV19:CV19 cases have risen six times in the past, but households have gradually loosened purse-strings. We think they are no longer dismayed by CV19 numbers and recognize the limited danger of the virus, including the low fatality rate. The recent Omicron BA.5 variant's fatality rate is currently around 0.03%, around one-third that for influenza. The real danger level is less than influenza, so we think private consumption could return to pre-CV19 levels, and it actually topped them in Apr-Jun. Assuming CV19 continues to weaken, we expect household spending to continue to recover.
  Purchasing power:We think consumption is unlikely to weaken further as a result of inflation. Household real disposable income is currently around Y309tn, down around Y5tn due to recent inflation. However, this is still around Y12tn higher than consumption. Factoring in excess household savings (around Y49tn), it is around Y61tn higher than the value of consumption. Household purchasing power is well above consumption levels, so we don't think income is a limiting factor.
  Inflation:In Japan it's largely due to rising commodity prices caused by soaring energy and food prices, but in global commodity markets, crude oil and grain prices are now peaking out. We expect inflation to cool as the Fed ramps up QT in earnest while gasoline and wheat prices in Japan are being kept in check by the government's price measures. We expect the CPI to slow rapidly from around the start of next year.
  Thus, we expect a solid recovery in the Japanese economy as CV19 weakens, purchasing power is sufficient to withstand inflation, and inflation subsides.
• US inflation and rate hikes
• 1. 
     US rate hikes:US inflation is skewed to the services sector; it is home-grown inflation driven by rising wages. To curb services consumption, the Fed will probably keep hiking the federal funds
  2. rate to encourage a shift from spending to savings. With the resultant decline in consumption (accounts for about 70% of GDP), the US economy is almost certain to fall into a recession.

L-shapedrecovery:However, given that the Fed tightening is likely a measure to lift labor supply (cause of current US inflation), we would expect it to continue throughout and after the recession until labor supply recovers, resulting in an L-shaped rather than V-shaped recovery.

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Quarterly forecasts for Japanese economy

						《Actual》← →《Forecasts》							《A》← →《F》 (Unit:%)
																					Comparison with
			2021			2022				2023		2024		FY21	FY22	FY23		previous forecasts
																		(as at 8 June 2022)
		1Q	2Q	3Q	4Q	1Q	2Q	3Q	4Q		1Q	2Q	3Q	4Q	1Q						FY22	FY23
Real GDP growth (QoQ)	-0.4	0.5	-0.5	1.0	0.0	0.5	0.6	0.7		0.6	0.5	0.4	0.5	0.4
	(annual rate)	-1.4	1.8	-2.1	4.0	0.1	2.2	2.6	2.9		2.2	1.9	1.7	1.9	1.7		2.3	2.0	2.1		0.1	0.1
	(Calender year base)																1.7	1.5	2.3		0.1	0.1
Domestic demand, contribution (QoQ)	-0.4	0.7	-0.7	0.9	0.5	0.5	0.6	0.7		0.5	0.5	0.5	0.5	0.5		1.5	2.2	2.1		0.1	0.1
	Private consumption (QoQ)	-0.6	0.4	-0.9	2.4	0.3	1.1	0.5	0.8		0.5	0.3	0.4	0.5	0.4		2.6	3.3	1.9		0.0	0.1
	Capex (QoQ)	0.7	1.6	-1.8	-1.3	-1.4	-1.9	0.0	0.2		0.2	0.2	0.2	0.2	0.2		-1.6	-3.8	0.8		-2.1	0.0
	Residential investment (QoQ)	0.8	1.2	-2.1	0.2	-0.3	1.4	1.0	1.4		1.0	1.2	0.9	0.9	0.9		0.6	2.6	4.3		-0.3	0.2
	Public investment (QoQ)	-0.2	-2.5	-3.3	-3.7	-3.2	0.9	0.5	0.8		0.3	0.3	0.3	0.3	0.3		-7.5	-2.9	1.5		3.7	0.0
Foreign demand, contribution (QoQ)	0.1	-0.2	0.2	0.0	-0.5	0.0	0.0	0.0		0.0	0.0	0.0	0.0	0.0		0.8	-0.3	-0.1		-0.1	0.0
	Exports (QoQ)	2.3	3.0	0.0	0.6	0.9	0.9	1.0	0.7		0.6	0.6	0.6	0.6	0.6		12.5	3.2	2.6		-0.3	0.0
	Imports (QoQ)	1.8	4.4	-1.1	0.4	3.5	0.7	0.8	0.6		0.5	0.5	0.8	0.8	0.8		7.2	4.3	2.6		0.0	0.0
Nominal GDP growth (QoQ)	-0.6	-0.2	-0.5	0.5	0.4	0.3	1.2	1.2		0.9	0.9	0.6	0.3	0.4		1.3	2.4	3.2		0.7	0.5
Industrial production (YoY)	-1.8	18.4	6.6	1.1	-0.6	-3.7	0.1	1.4		1.6	4.6	4.1	3.5	4.1		5.9	-0.2	4.0		-4.4	-0.4
Trade balance (Y tn, SAAR)	3.1	-0.4	-3.8	-5.3	-11.5	-21.5	-15.9	-14.8		-12.6	-11.4	-10.7	-11.5	-12.4		-5.2	-16.2	-11.5		-2.7	-3.3
Unemployment rate (%)	2.9	2.9	2.8	2.7	2.7	2.6	2.5	2.5		2.4	2.4	2.3	2.3	2.2		2.8	2.5	2.3		0.1	0.1
Core CPI (YoY)	-0.5	-0.6	0.0	0.4	0.6	2.1	2.4	2.6		2.4	1.8	1.2	0.5	0.3		0.1	2.4	0.9		0.7	0.3
IOER (Eop)	-0.1	-0.1	-0.1	-0.1	-0.1	-0.1	-0.1	-0.1		-0.1	-0.1	-0.1	-0.1	-0.1		-0.1	-0.1	-0.1		0.0	0.0
YCC 10y JGB yields target (Eop)	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0		0.0	0.0	0.0	0.0	0.0		0.0	0.0	0.0		0.0	0.0
US real GDP growth (QoQ annualized)	6.3	6.7	2.3	6.9	-1.6	-0.9	-2.0	-1.0		2.0	1.5	1.5	1.5	1.5		5.7	1.1	0.0		-1.6	0.0
US unemployment rate (%)	6.2	5.9	5.1	4.2	3.8	3.6	3.7	3.8		3.8	3.7	3.6	3.6	3.6		5.4	3.7	0.0		0.2	0.0
US core CPI (YoY)	1.4	3.7	4.1	5.0	6.3	6.0	5.5	5.0		4.7	4.5	4.2	4.1	4.1		3.6	5.7	0.0		0.1	0.0
Fed rate (Eop)	0.125	0.125	0.125	0.125	0.375	1.625	2.875	3.375		3.875	3.875	3.875	3.875	3.875		0.125	3.375	3.875		0.5	0.50

Assumptions: Forex rate (annual mean): Y132/$ in FY22 and Y128/$ in FY23.

Crude oil price (WTI annual mean): $93/bbl in FY22 and $85/bbl in FY23.

Notes: US GDP on a calendar basis, US unemployment rate is the average for the period, FF rate is at end of year.

Sources: Cabinet Office, Ministry of Internal Affairs and Communications,

Ministry of Economy, Trade and Industry, and Bank of Japan, SMBC NIKKO estimates

Outlook for real GDP growth

(YoY % chg, contribution, ppt)			Our outlook
4			2.3%
				2.0%	2.1%
2
0
-2
-4
-6
		-4.5%
-8
2018	2019	2020	2021	2022	2023	(FY)

			Private consumption			Private housing investment
			Capex			Private inventory
			Government expenditure			Imports
			Exports				Real GDP

Sources: Cabinet Office, SMBC NIKKO estimates

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APPENDIX

This research was prepared by non-U.S. analysts employed by SMBC Nikko Securities Inc., an unregistered broker-dealer located in Japan that is not a member of FINRA or SIPC. "SMBC NIKKO" refers to SMBC Nikko Securities, Inc., its affiliate SMBC Nikko Securities America, Inc. ("SI"), a registered U.S. broker-dealer and member firm of FINRA and SIPC, and their other affiliates, as applicable by law. To the extent a non-U.S. analyst(s) was involved in the preparation of this research report, whether in whole or in part, he or she is not registered/qualified as a research analyst with FINRA. Any such non-U.S. analyst may not be an associated person of SI and therefore may not be subject to FINRA Rule 2241 and 2242 restrictions on communications with a subject company, public appearances and trading securities held in a research analyst account.

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The following table shows (1) the distribution of investment ratings for all SMBC NIKKO coverage universe stocks and (2) the proportions of stocks of each rating to which SMBC NIKKO has provided investment banking (IB) services within the past 12 months (updated as of 17 August, 2022)

	1-Outperform	2-Neutral	3-Underperform	Others
(1) Companies under coverage	39%	57%	3%	1%
(2) Proportion of stocks of each rating in (1) with IB relationships	27%	29%	30%	38%

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NR:	Not Rated
RS:	Rating Suspended
Sector ratings are defined as below; the effective rating period is six to 12 months. The market as it pertains to Japan is TOPIX.
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Company Name

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