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Japan’s economy expanded in Q2, but weaker domestic demand left growth well short of expectations. GDP rose 0.3% q/q, or 1.1% annualized, compared with 2.1% annualized growth in Q1 and consensus for around 2.0%. Result covers first full quarter incorporating impact of Iran war and higher energy costs, yet economy still avoided contraction.

Composition was considerably softer than headline growth suggested. Domestic demand fell -0.2% q/q, with private consumption essentially flat and capital expenditure dropping -1.2%, against expectations for an increase. Private residential investment also declined -0.5%. Weak consumption is particularly relevant for BoJ, which is watching whether wage gains are translating into sustained household demand and domestically generated inflation.

External sector did most of heavy lifting. Net exports added 0.5 percentage point to quarterly growth, as exports rose 0.5% while imports fell -1.5%. Solid US demand for Japanese hybrid vehicles and continued global AI investment supported shipments of semiconductor-related equipment and components. Government consumption also rose 1.6%, while some weakness in private consumption may have reflected one-off shifts toward public spending, including education-related measures.

Flat consumption and falling business investment argue against describing domestic economy as strongly accelerating, but positive headline growth and resilient exports leave BoJ normalization case intact if policymakers view Q2 drags as temporary. Bigger question is whether higher energy and import costs begin squeezing households more visibly in Q3, weakening demand just as BoJ considers faster pace toward tighter policy.

Data Summary

Key Takeaways

• Japan GDP grew 0.3% q/q in Q2, equivalent to 1.1% annualized, undershooting expectations for 0.5% q/q and 2.0% annualized growth.
• Domestic demand contracted 0.2%, making composition notably weaker than positive headline GDP suggests.
• Private consumption stalled after 0.5% growth in Q1, an important weak point as BoJ looks for a durable wage-consumption-inflation cycle.
• Business investment fell 1.2%, substantially weaker than expectations for a 0.4% increase, while residential investment also declined.
• External demand kept economy growing, contributing 0.5 percentage point as exports rose 0.5% and imports fell 1.5%.
• Government consumption accelerated from 0.4% to 1.6%, providing another offset to weak private demand.
• Report complicates rather than overturns September BoJ hike case. Domestic momentum is soft, but positive growth and resilient exports leave normalization path intact if policymakers see Q2 drags as temporary.
• Q3 focus shifts to whether higher energy and import costs squeeze household spending, particularly as some Q2 durable-goods demand may have been temporarily boosted.

Full Japan Q2 GDP release here.

New Zealand’s services sector stayed in expansion in July, although momentum eased slightly. BNZ–BusinessNZ PSI slipped from 50.9 in June to 50.6 in July, marking a second consecutive month above 50 breakeven. Encouragingly, Activity/Sales improved from 49.7 to 50.5, moving into expansion for first time in six months, while Stocks/Inventories strengthened from 50.3 to 51.6.

Details nevertheless point to a recovery that remains narrow. New Orders/Business stayed strongest component despite easing from 53.3 to 52.6, while Employment slipped from 48.8 to 48.5 and Supplier Deliveries fell from 51.2 to 48.5. BusinessNZ said firms remain cautious about hiring, while respondent sentiment was notably weak, with 64% of comments negative amid concerns over living costs, fuel prices, interest rates and election uncertainty.

Overall, July PSI reinforces signs that New Zealand services activity is stabilizing rather than entering a strong rebound. Return of Activity/Sales above 50 is a meaningful improvement, but persistent employment contraction and subdued business sentiment argue against reading two months of headline expansion as broad recovery. For markets, mixed composition provides little reason by itself to overturn last week’s tension between RBNZ’s still-hawkish expected OCR path and sharply lower near-term inflation expectations.

Data Summary

Key Takeaways

• Services remained in expansion for second straight month, with PSI easing only slightly from 50.9 to 50.6.
• Activity/Sales provided strongest sign of improvement, rising from 49.7 to 50.5 and moving above 50 for first time in six months.
• Recovery remains narrow, as Employment stayed in contraction at 48.5 and Supplier Deliveries dropped sharply below 50.
• New Orders remained relatively firm at 52.6, suggesting demand has not rolled over despite cautious business sentiment.
• 64% of respondent comments were negative, with cost-of-living pressures, fuel prices, higher interest rates and election uncertainty weighing on confidence.

Full NZ BNZ PSI release here.

US consumer sentiment deteriorated sharply in August, adding to signs that household confidence is weakening even as inflation concerns persist. University of Michigan Consumer Sentiment fell from 55.2 to 51.0, below 54.1 consensus. Current Conditions dropped from 54.8 to 51.8 and Expectations declined from 55.4 to 50.6. Survey said expected business conditions fell -11% for short run and -17% for long run, with weakness particularly pronounced among older, lower-income and non-college consumers.

Inflation expectations moved in opposite direction. One-year expectations edged up from 4.2% to 4.3%, remaining well above 3.4% in February before Iran conflict. Long-run expectations held at 3.3% for third straight month. Purchasing-power concerns remain acute: only 8% of consumers expect income growth to exceed inflation over next year, down from 18% in December 2024. That combination suggests households are becoming less confident about growth without becoming more comfortable about prices.

For Fed, report is awkward rather than clearly dovish. Weak sentiment adds to softer retail sales and July labor data, reinforcing evidence that demand is losing momentum. But elevated inflation expectations argue against assuming weaker activity will automatically translate into faster disinflation. Overall signal is mildly stagflationary: consumer confidence is deteriorating while inflation expectations remain too high, strengthening case for Fed to hold and wait for clearer August data.

Data Summary

Key Takeaways

• UoM Consumer Sentiment fell from 55.2 to 51.0 in August, well below 54.1 consensus, ending two consecutive months of improvement.
• Consumer Expectations weakened more sharply from 55.4 to 50.6, while Current Conditions fell from 54.8 to 51.8.
• Expected business conditions dropped 11% for short run and 17% for long run, pointing to growing concern over economic outlook.
• One-year inflation expectations edged up from 4.2% to 4.3%, remaining well above 3.4% seen before Iran conflict.
• Long-run inflation expectations stayed at 3.3% for third straight month, still slightly above 2024 range of 2.8–3.2%.
• Only 8% of consumers expect income growth to exceed inflation over next year, down from 18% in December 2024.
• Report carries a stagflationary tone: confidence is weakening while inflation expectations remain elevated, reinforcing Fed case to hold and assess incoming data.

Full US UoM consumer sentiment release here.