The real economy expanded at a 1.5% annualized rate in the third quarter of 2007, following negative growth in the second quarter. However, growth will slow in the second half of fiscal 2007 due to weak export growth amid the U.S. economic slowdown, and slump of housing starts following the building code revision. For fiscal 2007 overall, real GDP will grow 1.1%, falling under the 2% threshold for the first time since fiscal 2003. We predict the economy will resume a 2.0% pace in fiscal 2008. Nonetheless, downside risks—an unexpectedly deep U.S. slowdown, and repercussions of a prolonged slump in building construction starts—could intensify and derail the economy.