Nomura | Global Annual Economic Outlook 13 November 2012
Nomura Securities International Inc.
See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures
Global Annual Economic Outlook
Economics Research | Global
Weak, with a chance of becoming bleak 13 NOVEMBER 2012
Contents
GLOBAL
Global Outlook | Weak, with a chance of becoming bleak 2
Forecast Summary 5
Our View on 2013 in a Nutshell 6
ASIA EX-JAPAN
Asia Outlook | 2013: The heat is on 7
Australia | The peak in resource investment is coming 11
China |Up in H1, down in H2 12
Hong Kong |Looming fiscal stimulus 15
India | A year of consolidation 16
Indonesia | Watch policies and politics 17
Malaysia | Time for fiscal tightening 18
Philippines | Still likely to shine 19
Singapore | The (long) road to restructuring 20
South Korea | Growth to rebound from a very low base 21
Taiwan | External demand holds the key 22
Thailand | New growth engines 23
JAPAN
Japan | Export recovery likely to deliver positive growth in Q1 2013 24
AMERICAS
United States | More clarity, less uncertainty 27
Canada | Steady as she goes: growth slightly above trend in 2013 33
Mexico | 2013: The year of reforms 34
Brazil | Inflation storm on the horizon 35
Rest of LatAm 36
EURO AREA
Euro Area | Spain and Italy to remain at the epicenter 37
UNITED KINGDOM
United Kingdom | Stagnant 41
EEMEA
EEMEA Outlook| Some silver linings to the external risks bearing down 42
Hungary | Fun and games continue 46
Poland | NBP in a limited cutting cycle - growth still outperforming 47
South Africa | Status quo means the brakes are still applied 48
Turkey | A healthy rebalancing 49
Rest of EEMEA 50
Global Economics
Contributor names can be found within the body of this report and on the back cover
This report can be accessed electronically via: www.nomura.com/research or on Bloomberg (NOMR)
Nomura | Global Annual Economic Outlook 13 November 2012
2
Desmond Supple +44 (0) 20 710 22125 [email protected]
Global Outlook | Weak, with a chance of becoming bleak
Another year of below-trend global growth
Our view is that the global economic outlook for 2013 is best defined as weak, with the chance
of becoming bleak. Our core view points to global economic growth of 3.0% in 2013, down from
3.1% this year and below the trend rate of global growth of around 3.75%. Once again, the
developed markets comprise the most notable source of weakness, expected to expand by just
0.7% next year, down from an already soft estimated 1.2% in 2012.
Reasons for weakness
1) Echoes of a burst bubble
One reason for the continued weak performance of developed markets is the lingering
repercussions of the bursting of the credit bubble five years ago. Household, corporate and
financial sector balance sheet restructuring remains a theme across many countries, which is
limiting leverage in the system and rendering consumption growth more a function of income
growth. The post-crisis push for deeper financial sector regulation is adding a further headwind
to global growth. To illustrate using the Basel 3 regulatory framework, this increases banks‟
capital charges and forces them to rely on longer-term, more expensive funding. As such, banks
are growing more discerning over their use of their balance sheets, resulting in spreads
between lending rates and the policy rate structurally widening.
2) The ongoing eurozone crisis
A second key reason for the weakness in global growth is the continuing eurozone crisis. Policy
settings in the eurozone are deeply restrictive, with governments implementing a policy of pro-
cyclical fiscal tightening. Moreover, peripheral countries face a zero-bound problem, which is
made worse by weakness in domestic banking systems resulting in a break in the transmission
mechanism from low policy rates to broader lending rates. In short, Europe is in an unstable
equilibrium, with a deepening growth crisis belying the European Central Bank's (ECB) efforts to
address the financial crisis.
We expect eurozone GDP to fall by 0.8% next year following a decline of 0.5% in 2012.
Europe's current policy settings seem incompatible with a notable economic recovery over a
meaningful timeframe, and in peripheral markets the outlook is for depression rather than
recession. In Spain, we expect GDP to fall by 3.0% next year and by 1.5% in 2014, while we
forecast Greek growth of -4.2% for 2013, which would be a sixth consecutive year of recession.
(The question of official sector involvement in Greek debt relief, and indeed the stability of the
country‟s presence in the euro, should remain sources of uncertainty in 2013.) Europe is set to
remain a heavy weight on global growth over the medium term. Needless to say, Europe's
inability to grow means that solvency concerns will remain elevated in the peripheral economies
in 2013, and we see a risk that these concerns creep into some semi-core markets, such as
France.
3) Pro-cyclical fiscal austerity
A third constraint on growth is the extent to which fiscal policy restrains demand. In the US,
even if the fiscal cliff is smoothly traversed, our US research team notes that current policies will
see fiscal policy reduce growth by 1 percentage point (pp) next year (if we go over the fiscal cliff
permanently, then clearly a deep, double-dip recession looms). We have already noted the pro-
cyclical fiscal policy in the eurozone that is helping to push many countries into unstable
equilibriums, while we do not expect the UK government to blink in the face of anaemic growth,
and we assume it will continue efforts to rein-in the budget deficit.
However, one developed country that might buck the trend of fiscal restraint is Japan. Post-
earthquake reconstruction spending should remain a continued support to economic growth, but
one possible additional spur to consumer demand is the anticipated consumption tax hikes in
2014 and 2015. As was seen before Japan's last consumption tax hike on 1 April 1997, this has
the potential to see consumers bring forward their spending plans. Of course, the experience of
1997 is not a happy one for Japan. The consumption tax hike saw growth slide over the
Nomura | Global Annual Economic Outlook 13 November 2012
3
subsequent 12 months, primarily due to the deterioration in financial stability and the Asian
economic crisis. However, we are confident that history will not repeat and our economic
research team is comfortable in assuming that positive growth can be maintained in 2014 after
a tax hike in April is implemented.
Few monetary policy shibboleths will remain
One of the additional themes of 2013 is likely to be the degree to which central banks will try to
offset weak growth by adopting yet more unorthodox monetary policies. In this respect, the ECB
and the Bank of Japan (BOJ) are likely to be at the forefront of embracing fresh unorthodoxy.
In the eurozone, we expect a renewed escalation in the crisis as the proposed firewall proves
inadequate to address the lingering solvency concerns in non-core markets. This should once
again force the ECB into the unwanted position of having to contemplate even bolder and
previously unpalatable monetary responses, or be confronted with a realistic prospect of a euro
break-up.
However, in Japan a potentially greater and more structural change may be taking place in
monetary policy. The growing political influence over the BOJ is expected to be reinforced by
the appointment of BOJ Governor Shirakawa‟s replacement next April. Q2 1013 should also be
a critical time for Japan as the government will be making the final decision on whether it
implements the April 2014 consumption tax. We expect the increased political pressure on the
BOJ to embed a trend towards bolder monetary policy easing given that inflation is expected to
undershoot the goal of 1%. We expect a weak JPY to be a feature of 2013.
The extent of monetary policy gyrations taking place in Europe and Japan are so notable that, in
comparison, the continued aggressive and bold monetary policy trends in the US and the UK
appear rather routine. In the US, we assume that the Fed will maintain its USD40bn a month
rate of MBS purchases until Q3 2013, while Operation Twist will be replaced with a programme
of outright Treasury purchases. Meanwhile, in the UK – where the Bank of England (BOE) has
expanded its balance sheet proportionally more than all other G10 central banks since the onset
of the crisis – we expect the BoE to deliver just a GBP50bn expansion of QE3 in February,
taking the asset purchasing fund to GBP425bn. Our UK economics team does not expect a
trend of above-target inflation in 2013 to restrain the BOE from its focus on supporting growth.
In the emerging world: Brazil to outperform the other BRICs
We expect that once again, emerging markets will provide a partial – but not compete – offset to
weakness in developed markets. Although even here, our optimism is equivocal. Of the crucial
BRIC economies, we expect Brazil to display the most improved growth outlook in 2013 as the
economy rebounds on the monetary and fiscal stimulus delivered this year. We forecast
Brazilian growth to rebound to 4.1% in 2013 from an estimated 1.3% this year. One interesting
theme in Brazil next year will be how long the central bank will refrain from tightening monetary
policy in the face of recovering growth and an expected uptrend in inflation following a
cumulative 525bp of cuts to the Selic rate since August 2011.
Within Asia, our out-of-consensus forecast for a policy-driven rebound in growth in China in Q4
2012 and Q1 2013 is being validated by an upswing in economic data. However, we also
assume that China's unleashed policy stimulus will be short-lived, as inflation rises in 2013. The
current investment-led stimulus and rapid expansion of financing outside the regulated banking
sector could also exacerbate the already large structural problems in the economy. Therefore,
we expect GDP growth to slow back towards 7.0-7.5% levels from H1 2013 onwards. Full-year
2013 growth is forecast to be lower than in 2012. We also maintain our one-in-three probability
of a hard landing (i.e. GDP growth averaging 5% or less over four consecutive quarters),
starting to play out before the end of 2014. Meanwhile, we expect a very shallow recovery in the
other Asian BRIC – India – where growth remains weighed down by a lack of structural reforms
(we are sceptical that recent reform announcements will be fully implemented ahead of
elections in 2014) and by the related trend of “sticky” inflation.
Elsewhere in the EM world, we expect the EEMEA region to be split between stronger growth
outperformers like Turkey and Poland, and those suffering from a mix of domestic idiosyncratic
risks while feeling greater pain inflicted on them by the eurozone crisis. This group includes
Hungary, South Africa and the Balkans, where narrow funding tightropes will need to be walked.
Nomura | Global Annual Economic Outlook 13 November 2012
4
Pockets of optimism and upside risks to the core view…
Nonetheless, there are some clear pockets of optimism within our generally downbeat global
economic outlook.
As the uncertainty surrounding the US fiscal cliff dissipates, we anticipate a capex-driven rise in
US growth in H2 2013 (helped by an ongoing housing market recovery), such that we expect
the US to post above-trend rates of expansion into Q4 2013. This underpins our view that the
Fed will call time on its latest round of QE in Q3 next year as the outlook for unemployment
should have improved.
In Europe, one possible upside surprise is if policymakers start to target structural reforms and
structural budget deficits more than nominal budget deficits. While this might not remove the
pro-cyclical fiscal tightening already in motion, it may be able to break the cycle of weak growth
undermining deficit-reduction targets, leading to fresh austerity, leading to weaker growth…
In the developed world, inflation is expected to be contained, which should allow monetary
policy to focus more directly on growth considerations.
… but there remains an asymmetry around the risk
However, when looking at the world economy it is clear that an asymmetry exists as the
downside risks are profound.
In Europe, our forecast for a deep regional recession and depression in some countries already
assumes further bold monetary policy responses. What if Spain and Italy require a full bail-out
and the Troika is unable to provide sufficient funding? As our European economics team says
with regard to the eurozone: “The currency might be irrevocable but membership is no longer”.
In the US, the fiscal cliff looms large as a downside risk. Although, on this point we assume that
the severe economic consequences of going over the cliff will provide something of a self-
equilibrating mechanism to the political machinations: we assume that economic weakness
would swiftly force politicians back to the negotiating table. Our US economists outline how a
temporary leap off the cliff would have a far less damaging impact on growth than a persistent
shock. In essence, a fiscal bungee jump versus a fiscal swan dive.
In China, the perennial risk is that the country fails to engineer a soft landing. After all, this
would be an historic achievement since there are no precedents of a large country experiencing
a controlled descent from such a rapid expansion of credit and investment growth.
In Asia generally, our team notes that trend growth rates are declining. In this context, the
decline in the region‟s current account surplus is somewhat worrisome since it is happening for
the wrong reasons.
Given how bleak the sum of these risks is, our weak macroeconomic baseline scenario might
not be such a bad outcome.
Nomura | Global Annual Economic Outlook 13 November 2012
5
Forecast Summary
Real GDP (% y-o-y) Consumer Prices (% y-o-y) Policy Rate (% end period)
2012 2013 2014 2012 2013 2014 2012 2013 2014
Global 3.0 3.0 3.7 3.3 3.4 3.4 2.96 3.21 3.36
Developed 1.1 0.7 1.7 2.0 1.5 1.7 0.38 0.42 0.49
Emerging Markets 5.2 5.6 5.8 4.7 5.5 5.3 5.99 6.34 6.40
Americas 2.3 2.1 3.0 3.6 3.6 3.4 2.08 2.42 2.53
United States* 2.1 1.5 2.8 2.1 1.6 1.4 0.13 0.13 0.13
Canada 2.2 2.0 2.1 1.7 1.9 2.0 1.00 1.75 3.00
Latin America†† 2.8 3.7 3.6 7.9 9.4 8.9 7.49 8.54 8.39
Argentina 2.0 4.0 3.5 26.4 32.3 29.7 15.00 17.00 14.00
Brazil 1.3 4.1 3.5 5.5 5.7 5.5 7.25 9.00 8.50
Chile 5.1 5.5 5.0 3.0 3.3 3.0 5.00 5.50 5.25
Colombia 4.5 4.5 4.5 2.9 3.5 3.5 4.50 4.50 5.50
Mexico 3.7 3.5 3.5 4.1 3.4 3.5 4.50 4.50 5.50
Venezuela 6.0 -1.0 3.0 17.5 32.4 24.7 15.00 17.00 16.00
Asia/Pacif ic 5.4 5.4 5.7 3.1 3.8 4.0 4.66 4.92 4.99
Japan† 1.6 0.5 1.2 -0.1 -0.3 1.8 0.05 0.05 0.05
Australia 3.6 2.4 2.8 1.6 2.6 2.5 3.00 3.50 4.00
New Zealand 2.7 3.2 3.3 1.7 2.4 2.8 2.75 3.50 4.25
Asia ex Japan, Aust, NZ 6.3 6.4 6.6 3.7 4.6 4.5 5.65 5.90 5.90
China 7.9 7.7 7.5 2.6 4.2 4.0 6.00 6.50 6.50
Hong Kong*** 1.5 2.5 3.5 4.0 4.3 4.3 0.40 0.40 0.40
India** 5.3 6.1 6.5 7.6 7.2 6.9 8.00 7.50 7.00
Indonesia 6.1 6.1 6.2 4.4 5.2 5.1 5.75 6.25 6.75
Malaysia 4.8 4.0 4.6 1.7 2.4 2.5 3.00 3.50 4.00
Philippines 6.0 6.0 5.8 3.2 4.4 4.5 3.50 4.00 4.50
Singapore*** 1.8 3.4 4.2 4.8 3.9 3.6 0.38 0.48 0.50
South Korea 2.3 2.5 3.5 2.2 2.7 3.0 2.75 2.75 3.25
Taiw an 1.0 3.0 3.5 2.0 2.3 2.3 1.88 2.13 2.13
Thailand 5.5 4.5 5.0 3.0 3.0 3.1 2.75 2.75 3.25
Western Europe -0.4 -0.6 0.2 2.6 1.8 1.7 0.50 0.50 0.50
Euro area -0.5 -0.8 0.0 2.5 1.7 1.6 0.50 0.50 0.50
Austria 0.4 0.2 0.8 2.5 2.2 2.0 0.50 0.50 0.50
France 0.1 -0.5 0.5 2.2 1.4 2.0 0.50 0.50 0.50
Germany 0.9 0.3 0.7 2.2 1.8 1.8 0.50 0.50 0.50
Greece -6.5 -4.7 -1.8 0.9 -0.2 -0.3 0.50 0.50 0.50
Ireland -0.1 0.4 1.3 2.0 0.4 0.5 0.50 0.50 0.50
Italy -2.4 -2.5 -1.5 3.3 1.8 1.4 0.50 0.50 0.50
Netherlands -0.3 -0.3 0.2 2.8 2.6 1.9 0.50 0.50 0.50
Portugal -3.2 -2.8 0.0 2.8 1.3 0.7 0.50 0.50 0.50
Spain -1.4 -3.0 -1.5 2.5 2.5 1.4 0.50 0.50 0.50
United Kingdom -0.2 0.4 1.0 2.8 2.6 2.3 0.50 0.50 0.50
EEMEA 2.0 2.6 3.6 5.7 4.6 4.5 4.54 4.41 5.31
Czech Republic -0.9 0.7 1.4 3.3 2.1 1.5 0.05 0.05 1.00
Hungary -1.1 0.1 0.8 5.9 5.0 4.3 5.75 5.00 6.00
Israel 2.8 3.0 3.5 2.1 2.6 2.7 2.00 2.50 3.00
Poland 2.4 2.0 3.5 3.8 2.4 3.0 4.50 4.00 5.00
Romania 0.2 0.8 1.8 3.8 5.0 4.2 5.00 6.00 9.00
South Africa 2.4 2.6 3.2 5.6 5.5 5.7 5.00 4.50 6.00
Turkey 3.0 4.5 5.5 9.1 6.7 6.3 5.75 5.75 5.75 Note: Aggregates calculated using purchasing power parity (PPP) adjusted shares of world GDP (table covers about 84% of world GDP on a PPP basis); our forecasts incorporate assumptions on the future path of oil prices based on oil price futures, consensus forecasts and Nomura in-house analysis. Currently assumed average Brent oil prices for 2012, 2013 and 2014 are $112, $109 and $104, respectively. *2012, 2013 and 2014 policy rate forecasts are midpoints of 0-0.25% target federal funds rate range. **Inflation refers to wholesale prices. ***For Hong Kong and Singapore, the policy rate refers to 3M Hibor and 3M Sibor, respectively. †Policy rate forecasts in 2012, 2013 and 2014 are midpoints of BOJ‟s 0-0.10% target unsecured overnight call rate range. ††CPI forecasts for Latin America are year-on- k Monthly. Source: Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
6
Our View on 2013 in a Nutshell
United Sates
We expect growth to accelerate in the second half of the year, led by a rebound in capital expenditures.
Ample economic slack, apparent in the high rate of unemployment and unused capacity, should restrain inflation.
We expect the FOMC to embark on further long-term asset purchases at the start of the year.
A strengthening of the housing market should support investment, job creation, and aggregate demand.
Europe‟s debt crisis, slowing global growth, and contractionary US fiscal policy are the key risks to growth.
Europe
Fiscal tightening, financial deleveraging and sovereign debt market tensions should lead to a deeper-than-expected recession.
Spain risks delaying call for ECCL due to market stability and ESM bank recap delays. Our baseline is an ECCL will be called.
After a phase of relative calm, markets will likely test the backstop and pressure should rebuild in Q1 on weak sovereigns.
GDP contractions, higher non-performing loans and rising debt trajectories remain the key euro area challenges.
The likelihood of a December ECB rate cut is finely balanced, but is increasingly likely that the next will not be before Q1 2013.
We expect inflation to be sticky in the UK, albeit back in the right ballpark, but in the euro area to slip below target during 2013.
The BoE aggressively announced QE, liquidity and funding support in 2012. We forecast more, with £50bn of QE in February.
Japan
We expect an export recovery, driven by China's economic recovery to deliver positive growth in Q1 2013.
The export recovery should stimulate domestic demand and push the overall economy into a stable growth phase in 2013.
Our main scenario is that the BOJ will apply additional easing measures in January 2013, with the risk earlier than our call.
The main risks are yen appreciation, a worsening European debt problem and the US and China slowing.
Asia
The export slump calls for policy stimulus, but raises the risk next year of a build-up in debt, inflation and asset price bubbles.
China: GDP growth will likely stay strong in H1 2013 supported by investment, but slow in H2 due to policy tightening.
Korea: We expect the BOK to stay on hold at 2.75% through 2013 as growth and inflation should rise modestly from a low base.
India: With macro imbalances slow to correct and binding supply-side constraints, we expect only a shallow recovery.
Australia: With global growth stabilising, the RBA is comfortable with the current level of monetary stimulus in the economy.
Indonesia: An increasingly uncertain policy environment may lead to delays in reforms and sustained current account deficits.
EEMEA (Emerging Europe, Middle East and Africa) and Latin America
South Africa: A continuing political status quo will continue to hold the economy back, the SARB may cut again.
Hungary: A market blow-up is needed for an IMF deal, rate cuts and a new MNB Governor in March could be the trigger.
Poland continues to outperform and a recession is difficult to envisage, so we see a limited cutting cycle.
Turkey: Rebalancing continues and is likely to pave the way for further upgrades.
Brazil: Inflation is set to rise towards 6% in H1 2013, forcing the BCB to start a new hiking cycle.
Mexico: The new government will embark on a series of important reforms in 2013.
Argentina‟s growth is set to recover modestly in 2013. Inflation and REER overvaluation to remain problematic.
Nomura | Global Annual Economic Outlook 13 November 2012
7
Rob Subbaraman +852 2536 7435 [email protected]
Asia Outlook | 2013: The heat is on
Asia’s rapid economic rebalancing increases the risk of some economies overheating.
Since the global financial crisis, Asia ex-Japan has been instrumental in helping to rebalance
the global economy. The region‟s total current account surplus has shrunk to 2% of GDP, a
level not seen since the Asian financial crisis 15 years ago (Figure 1). The shrinkage is not just
due to weak exports but also resilient Asian domestic demand (Figure 2). Unlike in 2008-09,
Asian exports have cooled but not collapsed, so the multiplier effects on domestic demand, via
job losses, have not been as significant, while Asia‟s already-lax policies have become looser.
To be sure, the ongoing healing process from balance sheet recessions will keep the big,
advanced economies fragile in 2013, especially the euro area where we expect more bouts of
financial market turmoil and a slight GDP contraction in every quarter next year. But while
cognizant of the downside risks to global growth, our base case is for the global economy to not
suffer another major heart attack, as it did in late 2008. This distinction is important, for without a
collapse in Asian exports or a mass exodus of foreign capital, our core view is for the rebalancing
to continue, with Asian domestic demand further increasing its contribution to GDP growth. We
expect aggregate GDP growth in Asia ex-Japan to rise from 6.3% y-o-y in 2012 to 6.4% in 2013
(see the country outlook pages for details). Our over-arching theme for Asia next year is that
economies will display increasing symptoms of overheating, like debt build-up, frothy property
markets and rising CPI inflation. The biggest risk, in our view, is that Asian policymakers fall
behind the curve in normalizing very accommodative macro policies. This is the crux of our China
story of two halves: 8.2% y-o-y GDP growth in H1 2013, followed by 7.2% in H2.
Fig. 1: Asia ex-Japan’s total current account surplus
-2
-1
0
1
2
3
4
5
6
7
8
Jun-96 Jun-00 Jun-04 Jun-08 Jun-12
% of GDP
Source: CEIC.
Fig. 2: Contribution to year-on-year real GDP growth, 2012
-6
-4
-2
0
2
4
6
8
10
12 Net exports
Investment
Consumption
percentage points
Note: Year to Q3 GDP for China, Korea and Indonesia; others are H1 GDP. Source: CEIC.
Three growth engines
We see three main factors supporting Asia‟s rapid economic rebalancing:
China. Contrary to consensus, we have long held the view that China can experience a policy-
led cyclical economic recovery despite its deep structural problems. Fiscal policy easing really
only started in earnest in July after the announcement that Q2 GDP growth had fallen below
8%; there was no single large-scale stimulus announcement like in late 2008, but add up all the
measures and it is significant. We expect GDP growth to rebound from 7.4% y-o-y in Q3 to
8.4% in Q4, and stay above 8% in H1 2013. However, we expect a positive output gap to stoke
CPI inflation to over 4% y-o-y in Q2 2013, triggering policy tightening. This, coupled with a
renewed debt buildup outside the regulated banking sector and slow progress in rebalancing
from investment- to consumption-led growth, will likely heighten investor concerns, causing
GDP growth to slow to 7% y-o-y by Q4 2013. This may seem weak by China‟s standards, but
the size of China‟s economy (at market exchange rates) has almost doubled from USD4.5trn in
2008 to an estimated USD8.2trn in 2012. A much larger economy growing at a moderately
slower pace is still a very powerful growth pole for the rest of Asia. Actually, we estimate that
Nomura | Global Annual Economic Outlook 13 November 2012
8
2012 is the crossover year when the annual increase in nominal personal consumption in China
(USD478bn) surpasses the US (USD403bn).
Loose policies. The central banks in China, India, Indonesia, Korea, Thailand and the
Philippines have all cut policy rates this year and, adjusted for inflation, real policy rates are
historically low across Asia. But what is less appreciated is that many other Asian governments
are mimicking China, taking advantage of low public debt levels and shifting to more
expansionary fiscal policies. Hong Kong, Malaysia, Thailand and the Philippines release timely
monthly fiscal data, which show that their combined central budget deficit in the 12 months to
September is almost as large as after the global financial crisis (Figure 3). In the advanced
world, loose monetary policies are being offset by fiscal austerity; in emerging Asia, both
policies work together and are more effective. Low unemployment, solid credit growth and
positive wealth effects from buoyant property markets are conspiring with these loose macro
policies to bolster domestic demand. There are, however, some exceptions: India has limited
room to use countercyclical policies due to high inflation and poor fiscal finances; Korea‟s loose
policies are being dampened by a household sector overburdened with debt; and Singapore
has refrained from fiscal easing as it focuses on raising productivity.
Capital inflows. Net foreign capital inflows to Asia have significant scope to intensify in 2013.
The most comprehensive gauge, which captures FDI, portfolio debt and equity flows as well as
cross-border foreign bank claims, is the financial account of the balance of payments. Using this
measure (Figure 4), we see that, in the space of just two and a half years since the crisis (Q1
2009 to Q2 2011), net capital inflows to Asia ex-Japan totalled a massive USD783bn, more than
the USD573bn in the five years prior, “pulled” by Asia‟s relatively higher growth prospects and
“pushed” by central bank quantitative easing in advanced economies (which, through portfolio
rebalancing, has spill-over effects on emerging markets by pushing investors into riskier assets).
While volatile in recent quarters, we expect another large bout of net inflows, buoyed by China‟s
economic recovery, QE3 and the fading of US fiscal cliff fears. There certainly seems to be
room for more inflows. A glaring example is the widening gap between the shares of emerging
Asia in world GDP and in the MSCI world equity index (Figure 5). Another large bout of net
capital inflows would accelerate Asia‟s rebalancing via 1) currency appreciation, which crimps
exports;or 2) FX intervention and central banks keep interest rates lower than they would
otherwise, easing liquidity conditions and buoyed asset markets.
Fig. 3: Central government budget positions
-40
-30
-20
-10
0
10
20
-250
-200
-150
-100
-50
0
50
100
Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12
China, LHS
Rest of Asia, RHS
USD bn, 12-month rolling sum USD bn, 12-month rolling sum
Note: Rest of Asia is the aggregate fiscal balances of Hong Kong, Malaysia, Thailand and the Philippines. Source: CEIC.
Fig. 4: Asia ex-Japan’s net capital inflows
-90
-60
-30
0
30
60
90
120
Jun-03 Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12
US$bn
QE2 announced
QE1 announced
USD 573bn
USD 783bn
Note: Countries are China, HK, India, Indonesia, Korea, Taiwan, Malaysia, Philippines, Singapore, and Thailand. Source: CEIC.
Four risks
The one we are most concerned with is some Asian economies overheating.
Overheating. In our view, there is too much reliance on countercyclical policies to counter
weak exports, and not enough on structural reforms to boost the supply-side of the economies.
In October, the real interest rate on 1yr bank deposits in China was 1.1%, while in the rest of
Asia the average real policy rate, weighted by GDP, was just 0.1% – and this is during a period
of low inflation in the region (Figure 6). Asia‟s real policy rate is likely to turn negative again as
inflation rises. These persistent negative real rates sow the seeds of overheating. From 1999 to
2005, the real interest rate was negative 19% of the time in China and 10% of the time
elsewhere in Asia, while from 2006 to 2012, the share of time with negative real rates increased
Nomura | Global Annual Economic Outlook 13 November 2012
9
to 57% and 43%, respectively. Central banks justify erring on the side of laxity as insurance
against the downside risks to global growth and to avoid provoking too-strong capital inflows,
but as a result credit is growing faster than nominal GDP in all Asian countries, and property
markets are frothy in many of Asia‟s capital cities. We see a danger in the increased use of
macro-prudential measures in an attempt to cool property markets and credit growth; these
measures may work for a while but overtime as loopholes are found, they turn out to be a poor
substitute for higher interest rates. Central banks ultimately find themselves behind the curve in
tackling credit booms, asset price bubbles and inflation. Hong Kong seems most at risk, but we
cannot rule out overheating in other countries, including China, India, Indonesia and Singapore.
Commodity price surge. Despite lackluster growth in the advanced economies, very loose
monetary policies around the world and strengthening demand in emerging economies,
especially Asia, could fuel another surge in global commodity prices, particularly food prices.
The global supply-demand equation for food remains tight, and the size of the annual increase
in China‟s personal consumption is about to overtake the US to be the world‟s largest. This is
important. For unlike other commodities, the sensitivity of the demand for food to an increase in
personal income is much greater for lower-income countries, as is the changing of diets toward
a higher calorie intake. A surge in global food prices could lift Asian inflation sharply and
ultimately restrict growth, notably in India, Indonesia, and the Philippines.
Recoupling. Trend GDP growth in Asia ex-Japan is around 7%, a full five percentage points
higher than in advanced economies, or put more starkly: real GDP is above its pre-global
financial crisis peak by 41% in China, 31% in India, 25% in Indonesia and 11% in Korea
compared with 2.3% in the US and still 2.4% below in the euro area. However, the 2008-09
experience has debunked any notion that Asia can decouple from advanced economies at
times of extreme dislocation. While relatively strong economic and policy fundamentals have
helped buffer Asian economies against sub-par growth in the US and euro area, another deep
recession in the advanced world would be a completely different story, as Asia would hit a
tipping point where non-linear effects kick in from a collapse in exports and foreign capital flight.
Those economies that are very open to trade (Hong Kong, Singapore, Malaysia), have current
account deficits (India and Indonesia) or weak domestic economies (Korea) are most vulnerable.
China hard landing. In November 2011, we published an Anchor Report, China risks, in which
we analyzed China‟s structural economic problems and concluded that they had become too big
to ignore. We assigned a one-in-three likelihood of China experiencing a hard economic landing
before the end of 2014, which we defined as GDP growth averaging 5% y-o-y or less over four
consecutive quarters. To quantify the macro risks on an ongoing basis we developed the
Nomura China Stress Index (CSI), which is near its all-time high. We maintain a one-in-three
likelihood of a hard landing, as recent policy easing has increased shadow banking activities,
which caused the CSI to rise in Q3 2012. A China hard landing would have a significant impact
on Asia. A recent IMF study estimated that each percentage point (pp) decline of investment
growth in China would lower GDP growth by more than 0.5pp in Korea, Taiwan and Malaysia.
Fig. 5: Asia emerging market share in world GDP and MSCI
1
5
9
13
17
21
25
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Asia EM share in world MSCI equity index
Asia EM share in world GDP (at market exchange rates)
% shareIMF forecasts
Note: Asia EM is China, India, Indonesia, Malaysia, Korea, Philippines, Taiwan and Thailand. Source: MSCI and IMF.
Fig. 6: Real policy interest rates (deflated by headline CPI)
-5-4-3-2-101234567
Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12
China's real bank deposit rate
Rest of Asia's real policy rate
% p.a.
Note: For the rest of Asia, the real policy rate is GDP weighted. Source: Bloomberg and CEIC.
Nomura | Global Annual Economic Outlook 13 November 2012
10
A tour of the region
China’s economy is on a structurally downtrend for the next several years because of two
reasons. First, potential growth slows as (i) excess labor supply has been largely depleted,
which drives up wages and drags down productivity growth; (ii) external demand weakens
particularly in developed economies; and (ii) progress on economic reforms has been sluggish
and the outlook remains uncertain. Moreover, structurally higher inflation and over-capacity in
the manufacturing industry will constrain the effectiveness of government‟s supportive policy.
We believe the government will gradually lower the annual GDP growth target (from 7.5% in
2012) over the next several years to tolerate slower growth. Against this backdrop, we expect
growth in 2013 to remain above 8% in H1, supported by cyclical policy easing, and then weaken
in H2 to 7% by Q4, as inflation rises above 4% by June and forces a tightening of the policy
stance. We believe a growth recovery in H1 will be largely driven by policy rather than economic
fundamentals, hence growth should return to its long term downtrend once policy supports are
removed. We see inflation as the main risk to our view. If inflation does not rebound quickly in
H1 and force a policy shift toward tightening, our growth outlook may face upside risks and the
recovery may last into H2.
In Korea, we expect GDP growth and CPI inflation to rise only modestly, allowing the Bank of
Korea (BOK) to keep rates unchanged at 2.75% through 2013. The growth rebound should be
driven by inventory restocking and a modest global demand recovery in 2013. But high
household debt (156% of disposable income) should constrain domestic demand, so we
maintain our below-consensus 2013 GDP growth forecast of 2.5%. A negative output gap and
stable KRW should exert downward pressure on inflation, but fading favorable base effects
(from a one-off decline in school fees and expenses) should push CPI inflation up to 2.7% in
2013 from 2.2% in 2012, within the BOK‟s inflation target range 2.5-3.5% for 2013-15.
Hong Kong and Taiwan stand to benefit most from a China recovery, and we expect GDP
growth to rise in 2013 to 2.5% in Hong Kong and 3.0% in Taiwan. Taiwan‟s very low policy rate
is likely to be hiked twice in H2, whereas Hong Kong, due to the HKD/USD peg, will continue to
import so-called US QE infinity, and will likely struggle to contain asset prices.
In India, with twin deficits correcting only very gradually, we expect 2013 to be a year of growth
consolidation rather than a sharp rebound. GDP growth should pick up to 6.1% in 2013 after
falling to a decade low of 5.3% in 2012. However, compared to past recoveries, this should be
very shallow for three reasons. First, we expect external demand to remain subpar in 2013.
Second, the supply-side of the economy remains severely constrained. With potential growth
having slowed to 6.5-7.0%, we expect the output gap to close quickly in response to a demand
revival, lifting core inflation in H2 2013 and limiting the extent of rate cuts to 50bp in H1 2013.
Third, new investments are unlikely to pick up quickly due to the high cost of capital, weak
exports and high global uncertainty. Recent reform announcements are positive, but
implementation risks remain ahead of 2014 general elections. At best, faster land and
environmental clearances, as they happen, could drive existing projects. We expect a current
account deficit of 3.7% of GDP in 2013 due to inelastic imports and weak exports, the financing
of which leaves India susceptible to global risk appetite. We expect the fiscal deficit to remain
above 5% of GDP in FY14 due to slow growth and populist spending ahead of the elections.
In Southeast Asia, the domestic oriented economies of the Philippines and Indonesia should
be the star performers, both posting GDP growth of 6% or more. Among the open economies,
we see some differentiation in the outlook. In Singapore, growth is likely to be below trend, at
3.4%, as we continue to expect no countercyclical policies, as the government is focused on its
long-term economic restructuring agenda. Malaysia has to call elections in H1 and, regardless
of the outcome, this will likely be followed by significant fiscal consolation which will add to the
external drag, capping growth at 4.0%. By contrast, we expect solid 4.5% growth in Thailand as
the government ramps up spending, particularly on infrastructure. This should help to crowd in
more private investment that already benefits from very loose monetary policies and the post-
flood recovery. We expect inflation to rise in 2013, with the balance of risks tilted to the upside
given above-potential growth (Philippines, Thailand), modest subsidy adjustments (Indonesia,
Malaysia), and tight labor markets (Singapore). This will limit the scope for further monetary
easing. In fact, we see policy rate hikes starting in Q3 2013 in Indonesia, Malaysia and the
Philippines. The extent of the monetary tightening will, however, be modest, as the decision to
hike rates will be complicated by the risk of attracting excessive capital inflows. In this context,
we expect more macro-prudential measures to address asset price inflation.
Nomura | Global Annual Economic Outlook 13 November 2012
11
Charles St-Arnaud +1 212 667 1986 [email protected]
Martin Whetton +61 2 8062 8611 [email protected]
Australia | Economic Outlook
The peak in resource investment is coming
Growth will likely be resilient in 2013, helped by lower rates and stronger global growth.
With inflation close to target, we think the RBA will be on hold for some time.
Activity: The Australian economy will likely end 2012 on a weak due to a negative term-of-
trade shock linked to the decline in commodity prices. Moreover, the lower commodity prices
have force the cancellation and postponement of some investment projects in the resource
projects. As a result, the peak in investment will likely happen in 2013. However, we believe that
thanks to previous monetary policy stimulus, business investment in the non-resource sector
should pick-up. Moreover, the improvement of the housing market will likely support consumer
confidence and household spending. A rebound of global growth, especially China, should also
provide some support for export. However, the strong Australian dollar due to continued inflows
into the Australian fixed income market could hamper both exports and non-resource business
investment.
Inflation: CPI inflation increase sharply in Q3 due to the introduction of the carbon tax. We
believe that inflation will likely remain elevated over the next quarters, owing to some delayed
impact from the impact from the carbon tax and a moderation of the deflationary pressures from
the past appreciation of the Australian dollar. Underlying inflation has also increases in recent
quarters, and we expect it to remain close to the 2-3% RBA target over the forecast horizon.
Policy: The RBA has left its policy rate unchanged at its latest monetary policy meeting and has
signaled that it is comfortable with the level of interest rates, at least for now. We expect the
RBA to remain on hold until mis-2013, where we believe that economic condition will likely
warrant a 25bp hike in the policy rate. How, there is a non negligible risk that th RBA could cut
rates if the incoming data, both domestically and globally, weakens . Moreover, the latest
budget shows that fiscal policy will be restrictive this year, leaving the burden of stimulating the
economy to the RBA.
Risks: A disorderly resolution to the European debt crisis, a strong currency and a sharp
slowdown in Chinese growth remain the main downside risks to the outlook. On the flip side, an
improvement in risk sentiment, increased global trade and renewed increases in commodity
prices represent upside risks to growth and inflation.
Fig. 1: Details of the forecast
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. CPI inflation includes the impact from, the carbon tax, but not the underlying measures. Interest rate
and exchange rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 12 November 2012. Source: Australian Bureau of Statistics, Reserve
Bank of Australia, Nomura Global Economics.
% q-o-q ar. 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2011 2012 2013 2014
Real GDP (% y-o-y) 4.4 3.7 3.1 3.1 2.3 2.3 2.5 2.7 2.1 3.6 2.5 2.8
Real GDP 5.6 2.6 2.1 2.0 2.5 2.8 2.7 2.8 2.1 3.6 2.5 2.8
Personal consumption 7.5 2.3 2.1 2.2 2.3 2.5 2.5 2.6 3.3 3.8 2.3 2.6
Private investment 15.8 2.3 6.6 7.1 8.5 8.5 8.6 8.7 11.4 9.9 7.6 8.4
Business investment 23.0 4.7 8.0 8.5 10.1 10.0 9.9 9.9 14.8 14.4 9.2 9.7
Dw elling investment -7.9 -6.7 1.1 1.4 2.0 2.4 2.9 3.3 1.3 -5.4 1.5 3.2
Government expenditures 4.3 7.8 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 0.1 2.5 0.3 -0.2
Exports -3.5 10.2 6.0 6.0 7.5 8.0 8.0 8.0 -1.3 5.7 7.4 8.0
Imports 4.4 3.7 6.0 8.0 7.6 7.5 7.5 8.0 11.5 7.5 7.2 8.0
Contributions to q-o-q GDP:
Domestic f inal sales 8.8 3.6 2.1 2.2 2.6 2.7 2.7 2.8 3.5 4.1 2.6 3.0
Inventories -1.2 -2.2 0.0 0.1 0.0 0.1 0.0 0.0 0.8 -0.2 -0.1 -0.1
Net trade -2.0 1.2 0.0 -0.4 -0.1 0.0 0.0 -0.1 -2.1 -0.3 0.0 -0.1
Unemployment rate 5.2 5.2 5.2 5.3 5.4 5.5 5.5 5.5 5.1 5.2 5.4 5.3
Employment, 000 25 40 1 12 12 23 46 58 11 19 35 71
Consumer prices 1.6 1.2 1.6 2.1 2.7 2.8 2.4 2.5 3.4 1.6 2.6 2.5
Trimmed mean 2.1 1.9 2.3 2.4 2.6 2.6 2.5 2.5 2.7 2.2 2.6 2.5
Weighted median 2.2 2.0 2.3 2.2 2.5 2.6 2.5 2.5 2.5 2.2 2.5 2.5
Fiscal balance (% GDP) -3.4 -1.8 -0.2 0.1
Current account balance (% GDP) -2.3 -2.6 -3.0 -3.0
RBA cash rate target 4.25 3.50 3.50 3.25 3.25 3.25 3.50 3.50 4.25 3.25 3.50 4.00
3-month bank bill 4.30 3.54 3.36 3.05 3.25 3.30 3.60 3.60 4.50 3.05 3.60 4.00
2-year government bond 3.47 2.46 2.49 2.66 2.60 2.55 2.65 2.70 3.16 2.66 2.70 3.10
5-year government bond 3.58 2.58 2.56 2.55 2.50 2.50 2.55 2.60 3.29 2.55 2.60 3.20
10-year government bond 4.08 3.04 2.94 2.90 2.80 3.00 3.10 3.20 3.67 2.90 3.20 3.60
AUD/USD 1.04 1.02 1.05 1.03 1.00 0.99 1.00 1.00 1.02 1.03 1.00 1.00
Nomura | Global Annual Economic Outlook 13 November 2012
12
Zhiwei Zhang +852 2536 7433 [email protected]
Wendy Chen +86 21 6193 7237 [email protected]
China | Economic Outlook
Up in H1, down in H2
We expect economic growth to be driven by cyclical policies as progress on structural
reforms may be slow.
Overview
We expect China‟s GDP growth to recover strongly to above 8% y-o-y in Q4 2012 and H1 2013,
and then slow in H2, toward 7% by Q4 2013. Policy easing through infrastructure investments
should be a main driver of a H1 recovery. We believe this cyclical recovery, amid slowing
potential output growth, will push inflation to above 4% y-o-y by mid 2013 and force the
People‟s Bank of China (PBoC) to tighten policies and hike interest rates twice, reducing GDP
growth in H2. Progress on structural reforms will likely be slow, as new leaders need time to
build the requisite political authority to implement tough reforms.
Our view is very different from consensus, which expects growth to be flat in Q4 and on an
upward trend through 2013 (Figure 1). The main distinguishing factor of our 2013 view comes
from the policy outlook. We believe policy easing is not sustainable beyond H1 due to inflation
and potential financial risks from a rapid credit expansion, while the consensus believes that
policies will be supportive throughout 2013.
Cyclical upturn in Q4 2012 and H1 2013
We believe growth will rebound both faster and stronger than the consensus expects, as policy
easing leads to a pickup in investment growth. Policy easing has been mostly implemented
through quantitative measures like relaxing controls on trust loans and bond issuance. We do
not think the PBoC will cut interest rates in 2013 since inflation is likely to rebound soon and
growth begins to recover.
Housing investment is the key “wild card” for the short-term growth outlook. We believe housing
investment growth could pick up moderately in Q4 after falling in Q1-Q3. Housing and
infrastructure investment combined account for half of China‟s fixed asset investment.
Infrastructure investment has already picked up strongly and its momentum will very likely
continue in Q4 and H1 2012. If housing investment also rebounds, GDP growth will likely
recover faster and stronger than the consensus expects, consistent with our view. Transactions
in the housing market have rebounded (Figure 2), which suggests that housing investment may
pick up soon.
Fig. 1: Consensus versus Nomura forecasts
6.5
7.0
7.5
8.0
8.5
9.0
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
% y-o-yConsensus forecast
Nomura
Source: Bloomberg and Nomura Global Economics
Fig. 2: Floor space sold and housing investment
-2
4
10
16
22
28
34
40
-40
-20
0
20
40
60
80
100
Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
Housing sold
Housing investment, rhs
% y-o-y, ytd % y-o-y, ytd
Source: CEIC and Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
13
Potential growth has slowed to 7.0-7.5%
China‟s GDP growth has averaged 10% over the past ten years. We believe China‟s potential
growth has now slowed to 7.0-7.5%. The key driver of this slowdown is the depletion of excess
labor. China used to have a huge pool of excess labor in its rural inland regions, estimated at
250 million persons. Over the past ten years, this group of labor was gradually absorbed into
the industrial sector. The ratio of urban labor demand to supply has risen to above 1.0 since
December 2010, which suggests that labor markets have turned from structurally oversupplied
to fully employed and structurally tight. This ratio remained at 1.05 in Q3 despite GDP growth
slowing to 7.4% y-o-y (Figure 3).
Because China‟s excess labour supply has been spent, it will require structural reforms to
support growth. However, progress on reforms will likely be slow in 2013, as new leaders will
need time to build the political authority required to push through tough reforms. There is little
controversy as to what economic reforms China requires - the 12th Five Year Plan has a
comprehensive list of reforms from financial sector liberalization to removing barriers of entry for
private companies into monopolized sectors. But the implementation of these reforms will be
tough and vested interest groups will surely resist any significant changes.
Growth to slow in H2 as inflation rises and policy easing ends
It is important to note that a recovery in H1 would be driven by countercyclical policy easing and
not an improvement in economic fundamentals. The over-capacity issue in the industrial sector
has not been resolved and inventory levels in the housing sector are still high (Figure 4). All
these factors suggest a recovery that is not sustainable. When policy easing ends, GDP growth
should return to its potential rate.
We expect policy easing to end in mid-2013, when inflation rises above 4% y-o-y. The
government sets 4% as its 2012 inflation target, and we believe it will remain the target in 2013.
Inflation should rise through 2013 for two reasons: 1) Headline GDP growth will be pushed
above 8%y-o-y by policy easing in H1. This should result in the emergence of a positive output
gap which leads to inflationary pressures; and 2) global commodity prices have rebounded in
recent months and will likely push up production costs in 2013.
It is worth noting that the PBoC is clearly concerned about inflation. In its Q3 monetary policy
report, it stated that “The economy has changed to be less sensitive to the constraint imposed
by employment, but more sensitive to constraint imposed by inflation”. This statement was not
included in previous MPC reports. We agree with its assessment, and believe it will change
policies swiftly when inflation rises to an uncomfortable level.
Risks to our forecast
We see three key risks to our forecast. The first and most important comes from policy
uncertainty. 2013 is the first year of new leadership in China. Our base case assumes that the
new leaders will tighten policies, perhaps starting as early as Q2 2013, allowing growth to return
to its potential level, but there could be political pressures to maintain a loose policy stance.
Local governments have issued many new investment plans. Infrastructure projects that began
in 2012 will likely continue into 2013. The demand for credit will be strong, and thus so will be
the resistance from local governments and the corporate sector against policy tightening. If the
central government decides to keep policies loose, our growth forecast faces upside risks for
2013 but downside risks in 2014, as inflation will likely become much higher and economic
imbalances will worsen.
The second risk is inflation. We expect CPI inflation to return quickly in 2013 and rise above 4%
y-o-y by June. We acknowledge that there are risks associated with this view as inflation may
return at a slower pace. In that event, policy easing would likely continue for longer, and our
growth forecast for 2013 (particularly H2) would also face upside risks.
The third risk comes from global economy. There is still uncertainty over economic conditions in
Europe. We would argue that this presents less of a challenge to China than policy and inflation
risks, given it has a relatively closed economy. China's economy has become increasingly
domestically driven. If the European situation worsens, we believe policy can and will be
loosened more and longer to offset its impact. Our concern over Europe is that the external
weakness may heighten the policy risks discussed above – the government may choose to
loosen policy too much, as it did in 2009.
Nomura | Global Annual Economic Outlook 13 November 2012
14
Fig. 3: Urban labour demand to supply ratio and GDP growth
6
8
10
12
14
16
0.6
0.7
0.8
0.9
1.0
1.1
Sep-03 Sep-06 Sep-09 Sep-12
% y-o-yRatio Labour demand/supply ratio
Real GDP growth, rhs
Source: CEIC and Nomura Global Economics
Fig. 4: Floor space started and sold
0
20
40
60
80
100
120
140
160
180
Sep-00 Sep-04 Sep-08 Sep-12
Floor space started (12mma)
Floor space sold (12mma)
Sqare meter mn
Source: CEIC and Nomura Global Economics
Fig. 5: China outlook summary table
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP 8.1 7.6 7.4 8.4 8.4 8.0 7.4 7.0 7.9 7.7 7.5
Consumer prices 3.8 2.9 1.9 2.0 2.8 3.7 4.6 5.6 2.6 4.2 4.0
Core CPI 1.5 1.3 1.5 1.8 2.0 2.1 2.4 2.1 1.5 2.2 2.0
Retail sales (nominal) 14.9 13.9 13.5 15.0 16.2 15.9 15.5 15.6 14.3 15.8 16.0
Fixed-asset investment (nominal, ytd) 20.9 20.4 20.5 21.0 20.8 21.2 21.3 22.0 21.0 22.0 20.0
Industrial production (real) 11.6 9.5 9.1 12.0 10.9 10.7 10.5 10.3 10.6 10.6 10.5
Exports (value) 7.6 10.5 4.5 5.0 3.0 4.0 6.0 6.0 6.8 4.8 6.0
Imports (value) 6.9 6.5 1.4 9.0 7.0 8.0 9.0 9.0 6.0 8.3 10.0
Trade surplus (US$bn) 1.1 68.8 79.5 32.1 -16.0 53.4 70.4 19.1 181.5 126.9 54.5
Current account (% of GDP) 1.7 1.0 -0.4
Fiscal balance (% of GDP) -1.5 -1.5 -1.6
New increased RMB loans (CNY trn) 8.0 9.0 9.0
1-yr bank lending rate (%) 6.56 6.31 6.00 6.00 6.00 6.00 6.25 6.50 6.00 6.50 6.50
1-yr bank deposit rate (%) 3.50 3.25 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 3.50
Reserve requirement ratio (%) 20.5 20.0 20.0 19.5 19.5 19.5 19.5 19.5 19.5 19.5 18.5
Exchange rate (CNY/USD) 6.29 6.35 6.28 6.28 6.26 6.26 6.25 6.24 6.28 6.24 6.24
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. The CNY/USD forecast is for the fixing rate, not the spot rate. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
15
Young Sun Kwon +852 2536 7430 [email protected]
Aman Mohunta +91 22 6617 5595 [email protected]
Hong Kong | Economic Outlook
Looming fiscal stimulus
We expect expansionary FY13 budget given weak external demand.
Activity: Retail sales growth volume increased by 8.5% y-o-y in September from 3.2% in
August while the PMI rose to 50.5 from 49.6. We expect private consumption to remain robust,
supported by a tight labour market, positive wealth effects from buoyant property prices and
increasing visitor numbers. Further, domestic fixed asset investment should remain strong
supported by infrastructure works. We expect fiscal stimulus and a moderate improvement in
external demand to lift real GDP growth to 2.5% in 2013, from 1.5% in 2012. A modest recovery
in the global economy should boost GDP growth further to 4% in 2014.
Inflation: CPI inflation ticked up to 3.8% y-o-y in September from 3.7% in October on food
prices. Inflation should rise through 2013, driven by higher food, fuel and rent prices, only partly
offset by inflation-mitigating fiscal measures such as a temporary waiver of public housing rent
and electricity subsidies. We expect CPI inflation to rise from 4.0% in 2012 to 4.3% in 2013.
Policy: Hong Kong's fiscal policy is expansionary as the budget for FY12 (year starting April)
includes not only inflation-mitigating measures but also an income tax reduction for individuals
of up to HKD12,000 per person and a 14.8% increase in capital expenditure. This should
continue to help stabilize inflation and support the job market. We expect the FY13 budget to
also be expansionary given that external demand remains weak. We would also expect the
government to continue implementing more macro-prudential property tightening measures,
such as hikes in stamp duty if house prices continue to rise, although so far these piecemeal
measures have had limited success in cooling the property market. Because of the USD/HKD
peg, Hong Kong is importing the super loose monetary policy of the US, and it remains unclear
whether tighter macro-prudential measures can provide a sufficient offset in the long run.
Risks: As a small, open economy and financial hub, Hong Kong is one of the most vulnerable
in Asia to weakness in the global economic outlook. An economic hard-landing in China would
be especially detrimental through both trade and financial channels.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 2.6 -0.2 2.6 4.3 2.4 2.4 1.4 2.5
Real GDP 0.7 1.1 1.7 2.3 2.3 2.9 2.6 2.2 1.5 2.5 3.5
Private consumption 6.5 3.7 1.8 2.2 2.8 3.4 3.8 4.5 3.5 3.6 4.4
Government consumption 2.3 3.5 3.0 3.2 3.5 3.7 4.2 4.2 3.0 3.9 4.4
Gross f ixed capital formation 12.9 5.7 5.4 5.0 5.8 5.8 5.7 5.8 7.0 5.8 6.1
Exports (goods & services) -3.9 0.1 0.8 2.2 4.5 5.1 5.1 5.5 -0.2 5.1 7.2
Imports (goods & services) -2.0 0.8 1.4 2.5 5.3 5.7 6.2 6.9 0.7 6.0 7.6
Contributions to GDP (% points)
Domestic f inal sales 7.4 4.1 2.7 2.9 3.5 4.0 4.3 4.8 4.2 4.1 4.8
Inventories -1.8 -1.4 0.4 0.0 0.2 0.3 0.4 0.1 -0.7 0.3 -0.5
Net trade (goods & services) -4.1 -1.6 -1.1 -0.4 -1.3 -1.4 -1.8 -2.3 -1.8 -1.7 -0.6
Unemployment rate (sa, %) 3.4 3.3 3.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.2
Consumer prices 5.2 4.2 3.1 3.6 3.7 4.3 4.5 4.6 4.0 4.3 4.3
Exports -1.2 2.0 4.4 7.3 9.2 10.5 10.1 10.4 3.2 10.1 12.3
Imports 0.9 2.3 5.0 7.0 9.8 10.7 10.9 11.7 3.9 10.8 12.4
Trade balance (US$bn) -12.7 -15.9 -15.6 -15.7 -14.5 -17.8 -18.3 -19.1 -59.9 -69.7 -78.8
Current account balance (% of GDP) 2.3 -0.6 -1.9
Fiscal balance (% of GDP) -0.2 -0.5 -0.5
3-month Hibor (%) 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40
Exchange rate (HKD/USD) 7.76 7.76 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75
Source: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
16
Sonal Varma +91 22 403 74087 [email protected]
Aman Mohunta +91 22 6617 5595 [email protected]
India | Economic Outlook
A year of consolidation
With macro imbalances slow to correct, binding supply-side constraints and weak
global demand, a quick rebound is unlikely. We expect a shallow growth recovery.
Activity: Despite GDP growth falling to a 10-year low of 5.3% in 2012, we believe the recovery
will be shallow, with growth of 6.1% in 2013, for three reasons. First, we expect growth in
Western economies to remain weak in 2013. Second, with potential growth down to 6.5-7.0%,
the output gap will close quickly on any demand pick-up, pushing up core inflation and limiting
the extent of monetary easing. Third, the number of new capex projects is unlikely to increase
due to a higher cost of capital, an uncertain demand outlook and the lagged impact/
implementation risks of reforms announced so far. We expect only existing shelved investments
to be revived if land, coal and environmental issues are resolved.
Inflation and trade: With sub-potential growth, we expect WPI inflation to moderate from an
estimated 7.6% in 2012 to a still-high 7.2% in 2013. Core inflation should moderate in H1 2013
because of the negative output gap, but we expect INR depreciation and a narrowing output
gap to push up core inflation again in H2 2013. With binding supply-side constraints and high
food inflation, we do not expect headline and core inflation to be able to sustain levels below 7%
and 5%, respectively. We expect high inflation to reduce India‟s export competitiveness, even
as imports remain elevated from domestic supply side constraints. Hence, we expect the current
account deficit to remain high at 3.8% of GDP in 2013 from an estimated 4.2% in 2012.
Policy: We expect the Reserve Bank of India to reduce the repo rate by 50bp in H1 2013 on the
back of lower core inflation in H1. However, with headline inflation likely to remain in a 7.0-7.5%
range in 2013 and core inflation likely to accelerate again, we see limited scope for aggressive
rate cuts. We also expect the fiscal deficit to remain above 5% of GDP in FY14 (year ending
March 2014) due to slow growth and populist spending ahead of elections in 2014.
Risks: A sharp rise in oil prices, a deeper and prolonged global slowdown and weather-related
shocks are key downside risks. Lower commodity prices, a stronger than expected global
recovery and a quick investment revival are upside risks.
Details of the forecast
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, e.g, 2012 is for the year ending March 2013. Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 5.9 5.3 5.2 5.8 6.8 5.9 6.2 6.8
Real GDP 5.3 5.5 5.4 5.3 5.9 6.0 6.1 6.4 5.3 6.1 6.5
Private consumption 6.1 4.0 3.5 4.1 4.0 5.1 5.0 5.6 4.4 5.0 6.0
Government consumption 4.1 9.0 5.5 5.0 5.1 5.5 6.5 7.0 5.8 6.0 6.2
Fixed investment 3.6 0.7 2.0 4.5 5.1 5.5 5.0 4.5 2.7 5.0 6.4
Exports (goods & services) 18.1 10.1 9.9 8.0 6.8 6.2 7.8 8.5 11.7 7.3 9.9
Imports (goods & services) 2.0 7.9 6.5 5.0 6.0 7.2 6.0 5.7 5.4 6.2 8.6
Contributions to GDP (% points)
Domestic f inal sales 1.3 5.7 5.2 5.0 5.6 6.7 6.2 6.2 4.2 6.1 6.6
Inventories 0.0 0.0 0.1 0.1 0.0 0.1 0.2 0.1 0.0 0.1 0.2
Net trade 4.0 -0.2 0.1 0.2 0.3 -0.9 -0.2 0.1 1.1 -0.2 -0.3
Wholesale price index 7.5 7.5 7.6 7.9 7.6 7.3 7.0 7.0 7.6 7.2 6.9
Consumer prices 7.2 10.1 9.8 10.1 10.5 9.8 9.7 9.3 9.3 9.8 9.2
Current account balance (% GDP) -4.2 -3.8 -3.4
Fiscal balance (% GDP) -5.8 -5.2 -5.0
Repo rate (%) 8.50 8.00 8.00 8.00 7.75 7.50 7.50 7.50 8.00 7.50 7.00
Reverse repo rate (%) 7.50 7.00 7.00 7.00 6.75 6.50 6.50 6.50 7.00 6.50 6.00
Cash reserve ratio (%) 4.75 4.75 4.50 4.25 4.00 4.00 4.00 4.00 4.25 4.00 4.75
10-year bond yield (%) 8.54 8.18 8.15 8.10 7.80 7.80 7.70 7.50 8.10 7.50 7.00
Exchange rate (INR/USD) 51.2 54.0 52.7 53.0 54.0 57.0 60.0 59.0 53.0 59.0 57.0
Nomura | Global Annual Economic Outlook 13 November 2012
17
Euben Paracuelles +65 6433 6956 [email protected]
Lavanya Venkateswaran +91 22 3053 3053 [email protected]
Indonesia | Economic Outlook
Watch policies and politics
The policy environment is likely to remain challenging ahead of the 2014 elections.
Activity: We expect GDP growth to remain stable at 6.1% in 2013, driven mainly by resilient
domestic demand. Growth in investment spending will likely moderate but that of private
consumption should remain stable. Government expenditures should also contribute more
positively ahead of the 2014 elections, as implementation of the budget improves, particularly
on infrastructure (as opposed to this year‟s under-spending). The risk of nationalist and populist
policies is also likely to increase in 2013 as the incumbents focus on the 2014 parliamentary
and presidential elections. On the external front, we believe the current account deficit will likely
narrow in 2013 supported by higher export growth to China in H1, and improving US and EU
growth in H2. However, as we approach 2014, the uncertain policy environment could add to
concerns over FDI inflows (see Asia Special Report: Indonesia: Policy swings, August 2012),
affecting the balance of payments, and in turn pressuring IDR.
Inflation and monetary policy: We expect CPI inflation to rise to 5.2% y-o-y in 2013 from an
estimated 4.4% this year, driven by core inflation and supply-side factors such as the upward
adjustments of electricity tariffs (approximately 4% each quarter) and the risk of elevated food
prices. While this is still within Bank Indonesia‟s (BI) target range of 3.5%-5.5%, we expect it to
maintain its tightening bias and indeed hike the policy rate by a cumulative 50bp in H2 2013. In
the interim, it is likely that BI will introduce administrative and macro-prudential measures if
domestic demand remains strong and portfolio capital inflows persist.
Fiscal policy: We expect the 2013 fiscal deficit to overshoot the budgeted 1.65% of GDP.
While the approved 2013 budget allows the government to raise fuel prices if deviations from
macroeconomic assumptions occur, we have not factored any changes to fuel subsidy policy
into our baseline forecast because of the elections. Thus, we expect increased operating costs
and subsidies to cause fiscal slippage of close to 0.3pp, resulting in a 2013 deficit of 2% of GDP.
Risks: The key risk for next year is a lack of progress on structural reforms and the
implementation of more protectionist policies ahead of the elections, both of which could
damage fragile investor sentiment. A deeper recession in the euro area, a hard landing in China
and large capital flow reversals also pose downside risks.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized)
Real GDP 6.3 6.4 6.2 5.7 6.1 6.2 6.0 6.0 6.1 6.1 6.2
Private consumption 4.9 5.2 5.7 5.6 5.5 5.5 5.6 5.5 5.4 5.5 5.6
Government consumption 5.9 7.4 -3.2 5.0 7.0 8.0 10.0 10.0 3.6 9.0 7.0
Gross fixed capital formation 10.0 12.3 10.0 9.9 9.8 8.9 8.8 7.1 10.5 8.4 9.0
Exports (goods & services) 7.9 2.2 -2.8 5.5 6.0 6.0 7.0 8.0 3.1 6.8 10.0
Imports (goods & services) 8.0 10.9 -0.5 6.0 6.5 7.0 5.5 14.0 6.0 8.4 11.9
Contributions to GDP (% points)
Domestic final sales 5.5 6.4 5.3 6.3 5.7 5.8 6.0 6.1 6.2 6.0 6.0
Inventories 2.0 2.3 -0.1 -1.0 0.0 0.0 0.0 0.2 0.8 0.0 -0.3
Net trade (goods & services) 0.7 -3.1 -1.2 0.4 0.4 0.0 1.3 -1.5 -0.8 0.1 0.2
Consumer prices 3.7 4.5 4.5 4.7 5.0 5.1 5.3 5.4 4.4 5.2 5.1
Exports 5.3 -7.6 -5.0 2.8 5.6 5.9 7.6 15.1 -1.3 8.7 8.0
Imports 21.4 8.9 9.0 11.5 7.2 6.2 4.8 17.3 12.4 9.0 14.4
Merchandise trade balance (US$bn) 1.7 -1.3 -0.7 -1.2 1.0 -1.6 0.8 -2.7 -1.5 -2.5 -3.3
Current account balance (% of GDP) -1.5 -3.1 -2.2 -2.0 -0.8 -2.3 -1.2 -3.2 -2.2 -1.9 -1.6
Fiscal Balance (% of GDP) -2.4 -2.0 -2.2
Bank Indonesia rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.25 6.25 5.75 6.25 6.75
Exchange rate (IDR/USD) 9146 9433 9591 9600 9630 9700 9800 9750 9600 9750 9600
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
18
Euben Paracuelles +65 6433 6956 [email protected]
Lavanya Venkateswaran +91 22 3053 3053 [email protected]
Malaysia | Economic Outlook
Time for fiscal tightening
We see significant fiscal consolidation after the elections, adding to the external drag.
Activity: We expect growth to slow to 4.0% in 2013 from an estimated 4.8% in 2012 as
domestic and external demand weaken. Fiscal policy has supported growth for about two years,
longer than expected, and public debt has risen from 39.8% of GDP in 2008 to 51.8% in 2011.
This suggests fiscal consolidation will have to be significant once the elections are over. In our
base case, we expect the elections to be held in March (just before the April 2013 deadline). At
the same time, external demand will likely remain subdued: our US and Europe economists
expect growth to stay weak in H1 and pick up moderately in H2, while the reverse is expected in
China, which would have a bigger impact on commodity exporters like Malaysia.
Inflation and monetary policy: We estimate headline CPI inflation will average 2.4% in 2013
higher than 1.7% in 2012 due to factors such as minimum wage hikes, higher cost push
pressures, and modest subsidy adjustments (e.g. sugar). Against this backdrop, we continue to
expect Bank Negara Malaysia (BNM) to stay on hold throughout H1 2013, before hiking its
policy rate by 50bp in H2 2013. In our view another key policy consideration is the risk from
keeping rates low for too long, fueling an excessive build-up of public and household debt levels.
Hence we judge BNM‟s bias is still to normalize rates, but make the adjustment gradual. We
expect a total of 50bp hikes next year, taking the policy rate to its pre-crisis level of 3.50%.
Fiscal policy and political outlook: The 2013 budget aims to reduce the fiscal deficit to 4.0%
of GDP from 4.5% in 2012 and suggests the government recognizes the need to get its
medium-term fiscal consolidation plans back on track. Nonetheless, we think this is ambitious
because this implies a negative fiscal impulse and is based on high GDP growth assumptions
(4.5-5.5%). We forecast the fiscal deficit at 4.5% of GDP as a result. In terms of the political
outlook, we think the elections in March will result in a win by Barisan Nasional, but with a
smaller majority (see Asia Insights: The Malaysian general election revisited, 8 November 2012).
This should still bode well for the resumption of structural reforms.
Risks: With exports nearly 100% of GDP, a sharp drop in commodity prices and another global
recession is the biggest downside risk. A weaker-than-expected coalition or a win by the
opposition would raise questions about the political transition and the reform agenda.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP 4.9 5.4 4.5 4.7 4.3 4.3 3.8 3.7 4.8 4.0 4.6
Private consumption 7.4 8.8 8.9 8.6 7.9 6.1 5.1 5.3 8.4 6.1 5.5
Government consumption 7.3 9.4 8.7 5.4 4.7 4.6 3.9 3.6 7.4 4.1 4.5
Gross fixed capital formation 16.2 26.1 18.2 10.1 7.6 5.5 5.4 5.4 17.5 5.9 7.0
Exports (goods & services) 2.8 2.1 1.1 2.3 3.3 4.1 2.9 2.4 2.1 3.2 7.2
Imports (goods & services) 6.8 8.1 7.3 7.0 6.4 5.3 3.8 3.4 7.3 4.7 8.5
Contributions to GDP (% points)
Domestic final sales 8.1 11.6 9.8 7.7 6.4 5.2 4.6 4.8 9.3 5.2 5.3
Inventories -0.2 -1.2 -0.1 0.9 0.2 -0.2 -0.2 -0.4 -0.1 -0.2 0.0
Net trade (goods & services) -3.1 -4.9 -5.2 -3.9 -2.3 -0.7 -0.6 -0.8 -4.3 -1.1 -0.7
Unemployment rate (%) 3.0 3.0 3.0 3.2 3.3 3.3 3.4 3.4 3.0 3.4 3.4
Consumer prices 2.3 1.7 1.4 1.6 2.1 2.6 2.5 2.4 1.7 2.4 2.5
Exports 3.9 0.9 -4.7 6.5 6.5 9.4 8.2 5.2 2.7 7.3 9.1
Imports 6.4 5.7 3.9 11.2 9.1 10.4 9.1 6.2 6.8 8.7 13.8
Merchandise trade balance (USD bn) 9.7 6.8 5.5 8.2 9.1 7.0 8.0 8.1 32.7 32.3 25.0
Current account balance (% of GDP) 8.0 4.1 6.1 5.6 5.5 6.0 5.2 4.6 6.0 5.6 5.1
Fiscal Balance (% of GDP) -4.9 -4.5 -4.2
Overnight policy rate (%) 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 4.00
Exchange rate (MYR/USD) 3.06 3.18 3.06 3.00 2.97 2.97 2.96 2.94 3.00 2.94 2.88
Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
19
Euben Paracuelles +65 6433 6956 [email protected]
Lavanya Venkateswaran +91 22 3053 3053 [email protected]
Philippines | Economic Outlook
Still likely to shine
Given the momentum of reform, investment is set to become a bigger growth driver.
Activity: We forecast 2013 GDP growth at an above-potential 6.0%, driven by more progress in
infrastructure projects under the public-private partnership (PPP) scheme and higher fiscal
spending ahead of the mid-term elections in May 2013. We expect private consumption to
remain robust with resilient remittances and buoyant consumer sentiment. But we see more
notable improvement in investment spending, which reflects the lagged effects from significant
monetary easing this year but also the strength of business sentiment from governance reforms.
As a result, investment-led domestic demand should fully offset the weakness in exports.
Inflation and monetary policy: We expect CPI inflation to rise to 4.4% in 2013 from 3.2% in
2012, as demand side pressures strengthen. This is still within the Bangko Sentral ng Pilipinas
(BSP) 3-5% target but risks are to the upside with above-trend growth and measures pending
such as legislation to increase taxes on „sin‟ products (i.e., alcohol and tobacco). Therefore, we
expect BSP to keep its policy rate unchanged at 3.5% for the rest of 2012 and throughout H1
2013, before hiking it gradually in Q3 2013. Large capital inflows will remain a key consideration
in BSP‟s policymaking and as such, the risk of more administrative and macro-prudential
measures is likely to remain high.
Fiscal policy: We expect the fiscal deficit to widen to 2.6% of GDP from 2.2% this year given
the mid-term elections and the strong bias to use the available fiscal space to improve the pace
and quality of spending. Gross government debt has fallen from 70.5% of GDP in 2006 to 56%,
and we expect more progress on fiscal policy reforms to broaden the tax base and improve tax
collections (e.g., the „sin‟ tax bill is likely to be passed soon) which will put the country‟s
sovereign credit rating on track for an upgrade to investment grade within the next two years.
Risks: The main risk to our forecast is an external shock from Europe and the US fiscal cliff.
Slower progress on reforms and infrastructure spending could also hurt growth. We see the
elections as a non-event because the status quo will likely be maintained, but it could
temporarily disrupt the legislation of fiscal reforms and the bidding out of infrastructure projects.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 12.6 1.5 2.3 8.1 13.7 0.7 0.5 9.3
Real GDP 6.3 5.9 5.8 6.0 6.3 6.1 5.6 5.9 6.0 6.0 5.8
Private consumption 5.1 5.7 5.8 6.0 6.2 7.0 6.0 5.8 5.7 6.3 5.8
Government consumption 20.9 5.9 14.3 18.1 10.9 13.5 3.8 7.8 14.1 9.2 8.0
Gross fixed capital formation 3.9 8.5 10.8 12.8 11.1 12.1 11.9 11.5 8.9 11.6 14.5
Exports (goods & services) 10.9 8.3 4.6 5.9 4.6 4.8 7.1 5.7 7.5 5.5 9.0
Imports (goods & services) -3.2 4.4 5.9 5.1 13.9 14.7 12.3 8.5 3.0 12.4 13.0
Contribution to GDP growth (% points)
Domestic final sales 6.4 6.1 7.6 8.4 8.0 8.6 7.0 7.4 7.2 7.8 8.1
Inventories -7.2 -2.4 -1.1 -2.2 2.5 2.9 1.2 0.2 -3.2 1.5 0.0
Net trade (goods & services) 7.1 2.1 -0.6 -0.1 -4.2 -4.7 -2.6 -1.7 2.0 -3.3 -2.3
Exports 4.8 10.5 4.6 5.9 4.6 4.8 7.1 5.7 6.5 5.5 9.0
Imports -1.5 2.2 10.2 12.0 14.2 14.7 12.3 8.5 5.6 12.3 13.0
Merchandise trade balance (US$bn) -2.6 -1.4 -3.6 -4.9 -4.2 -2.9 -4.7 -5.6 -12.5 -17.5 -21.9
Current account balance (US$bn) 0.8 2.8 2.3 0.5 0.3 2.0 1.2 2.2 6.4 5.6 5.5
Current account balance (% of GDP) 1.5 4.6 3.7 0.6 0.5 3.0 1.7 2.7 2.5 1.9 1.7
Fiscal balance (% of GDP)
-2.2 -2.6 -2.2
Consumer prices (2006=100) 3.1 2.9 3.5 3.4 4.2 4.6 4.4 4.5 3.2 4.4 4.5
Unemployment rate (sa, %) 6.9 7.0 7.5 7.0 6.8 6.8 6.5 6.5 7.1 6.7 6.5
Reverse repo rate (%) 4.00 4.00 3.75 3.50 3.50 3.50 3.75 4.00 3.50 4.00 4.50
Exchange rate (PHP/USD) 42.9 42.1 41.7 40.8 40.3 40.3 40.2 39.8 40.8 39.8 39.3
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
20
Euben Paracuelles +65 6433 6956 [email protected]
Lavanya Venkateswaran +91 22 3053 3053 [email protected]
Euben Paracuelles +65 6433 6956 [email protected]
Lavanya Venkateswaran +91 22 3053 3053 [email protected]
Singapore | Economic Outlook
The (long) road to restructuring
The government is rightly sticking to its long-term goal of raising productivity. In the
meantime, the economy will likely endure a low growth, high inflation environment.
Activity: In line with official projections, we expect GDP growth to increase but remain below
potential at 3.4% y-o-y in 2013 from 1.8% in 2012. The improvement should be led by
recovering growth in China in H1, and the EU and US in H2. However, due to the on-going
efforts to restructure the economy as productivity-driven growth (less reliant on foreign labor),
we expect the government to refrain from stimulus spending. Private investment spending will
also likely remain weak as business sentiment is affected by external uncertainty and tight
domestic policies.
Inflation and monetary policy: We expect CPI inflation to remain elevated, averaging 3.9% in
2013 from 4.8% in 2012, led by private transport and accommodation costs. In addition,
underlying inflation should remain sticky as labour markets remain tight and wage pressures
persist. The Monetary Authority of Singapore (MAS) believes there are upside risks from rising
global food prices. The MAS decision to maintain its S$NEER policy in October despite slowing
growth suggests inflation will remain a key concern. In addition, we think this policy decision
complements its longer term economic objectives, as the MAS explicitly stated that the decision
was in line with containing inflationary pressures but also with “keeping the economy on a path
of restructuring towards sustainable growth.”
Fiscal policy: The fiscal stance should remain broadly neutral in 2013 with the government
running a small deficit of 0.2% of GDP from a surplus of 0.2% in 2012. We believe the
government is firmly focused on encouraging the private sector to adopt productivity-enhancing
measures rather than alleviating cyclical external risks. Pressure is mounting from small and
medium enterprises (SMEs) which are asking the government to relax its foreign labor policy,
but the government said there will be “no U-turn”. Instead, it is increasing awareness among
SMEs regarding fiscal schemes that have already been in place to boost productivity but have
seen limited adoption. We also expect higher budget allocations to social spending given the
ageing population and widening income disparity, as well as to upgrading public infrastructure.
Risks: With exports twice its GDP, Singapore is the most vulnerable economy in South-east
Asia to a major contraction in global GDP. Another risk flare up in Europe, the US falling off the
fiscal cliff, or a hard landing in China would hit Singapore hard via knock-on effects from exports
and capital outflows. Another risk is domestic overheating, fueled by low interest rates.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 9.5 -0.7 -1.2 2.3 10.7 1.3 -0.1 4.9
Real GDP 1.5 2.0 1.2 2.4 2.7 3.2 3.4 4.1 1.8 3.4 4.2
Private consumption 4.7 1.8 0.6 2.3 4.1 4.9 4.6 4.3 2.3 4.5 3.5
Government consumption -4.0 -0.9 -8.8 5.0 3.8 3.9 3.0 3.3 -2.4 3.5 4.0
Gross fixed capital formation 17.0 1.8 1.0 3.0 2.0 4.5 5.0 5.0 5.3 4.1 5.7
Exports (goods & services) 2.2 2.3 2.6 3.0 3.2 4.1 5.6 7.0 2.5 5.0 10.1
Imports (goods & services) 4.7 2.8 2.6 5.4 2.8 3.6 5.3 7.1 3.9 4.7 11.1
Contributions to GDP (% points)
Domestic final sales 4.8 1.0 -0.3 2.0 2.5 3.1 3.1 3.1 1.9 3.0 3.1
Inventories 0.7 1.3 0.6 4.0 -1.5 -2.2 -2.2 -0.8 1.6 -1.7 1.0
Net trade (goods & services) -4.0 -0.3 0.9 -3.6 1.7 2.2 2.5 1.8 -1.8 2.1 1.2
Unemployment rate (sa, %) 2.1 2.0 1.9 2.1 2.2 2.2 2.1 2.1 2.0 2.2 2.4
Consumer prices 4.9 5.3 4.2 5.0 4.4 4.0 3.8 3.4 4.8 3.9 3.6
Exports 6.0 -0.5 -5.8 2.3 5.4 8.8 9.2 9.3 0.8 8.4 12.1
Imports 11.7 2.6 -3.1 1.9 6.1 8.2 8.9 9.5 3.8 8.2 13.1
Merchandise trade balance (US$bn) 7.2 6.7 8.8 11.3 6.9 7.8 12.2 10.1 33.3 37.0 38.2
Current account balance (% of GDP) 16.2 16.3 19.9 14.2 13.1 13.0 26.7 17.1 16.6 17.5 18.4
Fiscal Balance (% of GDP) 0.2 -0.2 0.4
3 month SIBOR (%) 0.38 0.38 0.38 0.38 0.38 0.48 0.48 0.48 0.38 0.48 0.50
Exchange rate (SGD/USD) 1.26 1.27 1.23 1.22 1.21 1.21 1.20 1.19 1.22 1.19 1.17
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
21
Young Sun Kwon +852 2252 1370 [email protected]
South Korea | Economic Outlook
Growth to rebound from a very low base
We expect the Bank of Korea to keep rates unchanged at 2.75% through 2013 as
GDP growth and CPI inflation should rise modestly from a very low base.
Activity: September industrial output and October export numbers suggest that GDP may have
bottomed out in Q3. We expect GDP growth to rebound to 0.5% q-o-q in Q4 (from 0.2% in Q3)
and to a sequential quarterly average of 0.8% in 2013, supported by inventory restocking in Q4
and a modest foreign demand recovery in 2013. But compared to past recoveries, this one is
tepid despite starting from a very low base. An important reason is weak domestic demand, held
back by structural problems, including a household sector overburdened in debt equivalent to
156% of personal disposable income. So we maintain our below-consensus forecast of 2.5%
GDP growth in 2013 – far below our potential GDP estimate of 3.5%, which we expect to be
reached only in 2014. The new government will likely increase social welfare spending, but this
will only partly offset the export slump, given the headwinds on personal consumption from high
household debt and falling house prices. We expect business investment to remain weak as
uncertainty surrounding the global outlook and new government reforms remain elevated.
Inflation: A negative output gap and stable KRW should exert downward pressure on inflation,
but higher food prices and fading favourable base effects (from a one-off decline in school fees
and expenses) should push CPI inflation up to 2.7% in 2013 from 2.2% in 2012, although still
below the midpoint of the BOK‟s new inflation target range of 2.5-3.5% for 2013-15.
Policy: We expect the BOK to keep rates at 2.75% through 2013, as growth should increase
slightly and CPI inflation should rise modestly, each from a very low base on a sequential basis.
Risks: As a small, open, financially integrated economy, Korea is vulnerable to sudden
changes in global economic conditions, commodity prices and financial markets. That said, we
would expect the BOK to cut rates if one of the major downside risks to global growth (the US
fiscal cliff; a renewed eurozone sovereign crisis; a China hard landing) actually materialises, but
none of these are held in Nomura Global Economics‟ base case. Domestically, the new
government could formulate a supplementary budget in H1 2013, which provides an upside risk
to our domestic demand forecast.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 3.5 1.1 0.6 2.0 2.8 3.6 3.2 3.6
Real GDP (sa, % q-o-q) 0.9 0.3 0.2 0.5 0.7 0.9 0.8 0.9
Real GDP 2.8 2.3 1.6 1.8 1.6 2.3 2.9 3.3 2.3 2.5 3.5
Private consumption 1.6 1.1 1.5 2.5 2.0 2.2 2.0 2.1 1.9 2.1 2.3
Government consumption 4.4 3.6 3.3 5.1 2.7 4.0 4.1 4.1 3.9 3.7 4.1
Business investment 9.1 -3.5 -6.0 -0.9 -9.2 -1.5 5.1 5.1 -0.2 -0.4 7.7
Construction investment 2.1 -2.1 -0.1 -0.6 1.6 3.0 3.9 4.1 -1.2 3.1 4.1
Exports (goods & services) 5.0 3.2 2.6 6.6 2.9 4.1 2.5 2.5 3.9 3.0 4.8
Imports (goods & services) 4.6 0.5 0.9 5.6 0.7 3.2 2.5 2.5 3.0 2.2 5.2
Contributions to GDP growth (% points)
Domestic final sales 2.8 0.8 0.7 1.2 0.8 1.8 2.1 3.1 1.5 1.8 3.0
Inventories -0.1 0.1 -0.1 -0.4 -0.4 -0.3 0.5 0.0 0.1 0.2 0.2
Net trade (goods & services) 0.1 1.4 1.0 1.2 1.2 0.8 0.2 0.3 0.7 0.6 0.3
Unemployment rate (sa, %) 3.4 3.3 3.1 3.2 3.2 3.2 3.2 3.2 3.3 3.2 3.2
Consumer prices 3.0 2.4 1.6 1.8 2.1 2.8 3.1 2.8 2.2 2.7 3.0
Current account balance (% of GDP) 3.3 2.3 2.0
Fiscal balance (% of GDP) 1.3 1.0 1.0
Fiscal balance ex-social security (% of GDP) -1.2 -1.3 -1.0
BOK official base rate (%) 3.25 3.25 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25
3-year T-bond yield (%) 3.55 3.30 2.83 2.80 2.80 2.90 3.00 3.00 2.80 3.00 3.30
5-year T-bond yield (%) 3.69 3.42 2.93 2.90 2.90 3.00 3.05 3.10 2.90 3.10 3.50
Exchange rate (KRW/USD) 1133 1154 1118 1090 1085 1085 1080 1070 1090 1070 1070
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 12 November 2012. Source: Bank of Korea, CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
22
Young Sun Kwon +852 2536 7430 [email protected]
Aman Mohunta +91 22 6617 5595 [email protected]
Taiwan | Economic Outlook
External demand holds the key
The economy should benefit from an upcycle in China's GDP, global electronic
demand and an improved cross-strait relationship with China.
Activity and inflation: Exports increased 10.4% y-o-y in September, exceeding market
expectations by a wide margin. GDP growth should recover more visibly in Q4, but from a very
low base. Stronger demand from China and a gradual recovery in global demand for electronics
should help lift Taiwan‟s GDP growth from 1.0% in 2012 to 3.0% in 2013 and further to 3.5% in
2014, as strengthening economic linkages with China start to increasingly benefit (see below).
We expect CPI inflation to rise to 2.3% in 2013 from 2.0% in 2012 due to higher food prices and
consumption. Given that electricity tariff hikes will be implemented in multiple stages, inflation is
unlikely to become a serious negative factor for growth through our forecast horizon.
Cross-strait relationship: We expect economic linkages between Taiwan and China to
continue to strengthen, through further trade liberalization under the Economic Cooperation
Framework Agreement and an increase in tourist arrivals from China. Taiwan‟s central bank and
China‟s PBoC signed a Currency Settlement MOU in August, which should significantly boost
RMB-related business in Taiwan‟s capital markets. Improving cross-strait ties is a structural
transformation that, over time, should unleash major benefits for Taiwan‟s economy through
higher value-added trade and investment with China, and deepening capital markets.
Monetary policy: We expect the Central Bank of China (CBC) to hike discount rates from
1.875% to 2.125% in H2 2013 as GDP growth and CPI inflation should rise. We view this as
more a normalization of very loose monetary policy, rather than a move to outright tightening.
Risks: Another deep recession in advanced economies would have a large impact on Taiwan‟s
open economy. Positive risks include a stronger-than-expected recovery in the global
electronics cycle and a faster-than-expected liberalization of trade and investment with China.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 2.8 0.5 2.7 4.4 4.9 1.6 1.0 2.4
Real GDP 0.4 -0.2 1.0 2.6 3.1 3.4 3.0 2.5 1.0 3.0 3.5
Private consumption 1.4 0.8 0.5 1.0 1.9 2.6 2.8 2.8 0.9 2.5 3.2
Government consumption 2.7 2.4 2.0 1.5 3.0 3.5 3.0 2.6 2.1 3.0 3.4
Gross f ixed capital formation -10.2 -5.2 0.8 0.5 7.5 5.0 4.0 5.0 -3.5 5.3 4.5
Exports (goods & services) -3.3 -3.3 -1.0 2.5 2.8 3.4 4.0 2.2 -0.9 3.1 3.3
Imports (goods & services) -7.5 -7.5 -0.5 3.0 2.2 2.0 2.1 2.0 -2.1 2.1 3.5
Contributions to GDP grow th (% points)
Domestic f inal sales -2.4 -1.0 0.0 3.6 3.9 3.4 3.8 2.2 0.2 4.4 3.2
Inventories 1.4 0.4 0.5 -0.5 -0.4 0.0 -0.4 0.1 0.4 -0.7 0.2
Net trade (goods & services) 1.6 0.6 -0.5 0.3 0.8 1.4 1.7 0.6 0.5 1.1 0.5
Exports -4.0 -1.3 1.5 5.0 5.3 5.9 6.5 4.7 -1.7 5.6 6.3
Imports -5.9 -3.1 4.0 7.2 3.7 3.5 3.6 3.5 -2.1 3.6 5.0
Merchandise trade balance (US$bn) 5.7 5.6 8.4 7.8 7.0 7.6 10.9 9.1 27.4 34.5 40.4
Current account balance (% of GDP) 9.6 8.9 8.3 7.6 6.9 7.5 9.6 8.1 8.6 8.0 7.5
Fiscal balance (% of GDP) -1.8 -1.9 -2.0
Consumer prices 1.3 1.6 2.9 2.1 2.1 2.2 2.5 2.2 2.0 2.3 2.3
Unemployment rate (%) 4.1 4.2 4.3 4.3 4.3 4.2 4.2 4.2 4.3 4.2 4.2
Discount rate (%) 1.88 1.88 1.88 1.88 1.88 1.88 2.00 2.13 1.88 2.13 2.13
Overnight call rate (%) 0.42 0.51 0.38 0.51 0.51 0.64 0.41 0.51 0.51 0.76 0.76
10-year T-bond (%) 1.27 1.23 1.19 1.29 1.31 1.42 1.29 1.29 1.29 1.55 1.55
Exchange rate (NTD/USD) 29.5 29.8 29.3 29.1 28.9 28.9 28.9 28.8 29.1 28.8 28.3
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
23
Euben Paracuelles +65 6433 6956 [email protected]
Nuchjarin Panarode +662 638 5791 [email protected]
Thailand | Economic Outlook
New growth engines
Investment and consumption spending will provide a boost to GDP growth even as the
external outlook remains uncertain, spurred by loose monetary and fiscal policies.
Activity: We forecast 2013 GDP growth at a solid 4.5% after recovering sharply to 5.5% in
2012 after last year‟s floods. We believe domestic demand, supported by accommodative
monetary and fiscal policies, will mitigate the impact of weak exports. Private consumption
should receive a boost from the sharp rise in real wages (the minimum wage was hiked by 40%
this year, putting upward pressure on overall wages as well), while private investment should be
bolstered by higher public infrastructure spending, the industrial sector upgrading production
capacity after the floods, and a relatively more stable political outlook (see Asia Special Report:
Thailand: New growth engines, 24 September 2012). These will be the new growth engines that
help drive and rebalance the Thai economy, making it more resilient to external shocks.
Monetary policy and inflation: We expect inflation to remain stable at 3.0% in 2013, as the
government utilizes subsidies to contain emerging price pressures. As a result, we expect the
Bank of Thailand (BOT) to keep the policy rate unchanged at 2.75% throughout 2013, following
a cumulative 100bp of cuts since the floods. This implies negative real policy rates, and hence
even with the BOT on hold, the monetary policy stance should remain accommodative for some
time. There is room to cut further if the external outlook deteriorates sharply, or if domestic
demand fails to strengthen fast enough to offset any the export weakness.
Fiscal policy: The budget deficit is set at 2.4% of GDP in FY13, from an estimated 2.0% of
GDP in FY12. Public debt to GDP has risen steadily since early 2012, from 40.6% to 44.2% in
July. This is still well below the debt ceiling of 60%, so there is plenty of scope to run
expansionary fiscal policies. Including non-budgetary spending – such as that on water-
management infrastructure and the planned THB2.27bn of mega-project investment – we
forecast a “cash” deficit in FY13 of 3.5% of GDP versus 2.5% estimated in FY12.
Risks: The downside risks to our forecasts stem from a deepening of the euro area recession,
and domestically, from increased political uncertainty over the constitutional amendment and
reconciliation bill. Slow progress on infrastructure plans could weaken investment sentiment.
Details of the forecast
% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP (sa, % q-o-q, annualized) 50.8 13.9 1.3 1.4 0.4 14.1 3.7 2.0
Real GDP 0.4 4.2 2.8 15.2 4.1 4.1 4.8 4.9 5.5 4.5 5.0
Private consumption 2.9 5.3 5.0 6.7 6.0 5.7 3.9 3.1 5.0 4.7 4.2
Public consumption -0.2 5.6 4.7 6.4 0.8 -2.3 -2.7 0.9 4.1 -1.0 -0.8
Gross fixed capital formation 5.2 10.2 10.7 16.0 10.0 7.2 7.5 9.8 10.4 8.6 9.9
Exports (goods & services) -3.2 0.9 -2.9 17.8 4.9 2.8 5.1 3.6 2.6 4.1 5.0
Imports (goods & services) 4.3 8.5 0.0 6.6 3.6 1.2 3.3 4.2 4.7 3.1 5.0
Contribution to GDP growth (% points)
Domestic final sales 2.5 5.7 5.5 7.6 5.2 4.6 3.5 3.7 5.2 4.3 4.4
Inventories 2.9 2.8 -1.3 0.2 -2.3 -2.0 -0.1 0.2 1.2 -1.0 0.0
Net trade (goods & services) -4.7 -4.4 -2.3 8.7 1.5 1.3 1.7 0.3 -0.9 1.2 0.7
Exports -1.4 0.0 -3.8 14.8 4.9 4.2 5.1 1.5 2.3 5.0 6.9
Imports 10.4 11.9 -1.7 7.0 3.2 4.4 13.3 7.4 6.1 7.1 7.2
Merchandise trade balance (US$bn) -5.2 -5.2 -1.6 -2.9 -4.4 -5.5 -6.8 -4.0 -14.9 -20.7 -22.9
Current account balance (US$bn) 0.6 -2.5 2.7 1.6 0.6 -2.3 -2.0 1.1 2.4 -2.6 -2.8
Current account balance (% of GDP) 0.6 -2.7 3.0 1.7 0.6 -2.4 -2.0 1.0 0.7 -0.7 -0.7
Fiscal balance (% of GDP, fiscal year basis) -2.5 -3.5 -3.7
Consumer prices 3.4 2.5 2.9 3.4 3.1 2.9 2.7 2.9 3.0 3.0 3.1
Unemployment rate (sa, %) 0.7 0.9 0.6 0.6 0.9 0.8 0.6 0.6 0.7 0.7 0.7
Overnight repo rate (%) 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25
Exchange rate (THB/USD) 30.8 31.8 30.8 30.3 30.1 30.1 30.1 29.9 30.3 29.9 29.3
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
24
Tomo Kinoshita +81 3 6703 1280 [email protected]
Shuichi Obata +81 3 6703 1295 [email protected]
Kohei Okazaki +81 3 6703 1291 [email protected]
Asuka Tsuchida +81 3 6703 1297 [email protected]
Japan | Economic Outlook
Export recovery likely to deliver positive growth in Q1 2013
We expect the export recovery, driven by China's economic recovery and solid
domestic demand, to support growth in 2013.
We expect growth in Q4 2012 to remain negative
We believe Japan's economy entered a recession in Q3 2012 due to the worsening external
environment. Even though domestic demand and reconstruction demand were quite robust until
Q1 with support from government subsidies for automobile purchases, a marked fall in exports
weakened Japan's growth from June 2012. Japan's exports to China had already started to
shrink from the end of 2011, but its exports to Europe and Asia shrank significantly from the
middle of 2012 as Asia's exports to Europe deteriorated, which caused a fall in intra-Asian
trade. For Japan, whose exports to Asia accounted for more than half of total exports in 2011,
this deterioration in the external environment has led to a decline in exports and investments in
manufacturing. Economic growth in Q3 was also exacerbated by the ending of the government
subsidies for automobile purchases. Worsening business sentiment and the expiration of the
car subsidy have started to weaken Japan's private consumption since September.
The recovery process should start to materialize in Q1 2013
We expect an economic recovery will materialize from Q1 2013 with a pick-up in China's
domestic demand. We believe that China's domestic demand will gain traction by end-2012 with
the ending of inventory de-stocking in the manufacturing sector, which should lead to a pick-up
in exports to China from their neighboring industrialized economies. In fact, the inventory de-
stocking has already reached its final stage in Asia‟s advanced economies. The resulting
increase in production in these economies is likely to bring about a recovery in exports from
Japan to the rest of Asia including China, Korea and Taiwan. However, in our view, the pace of
such a recovery in Japan's exports is likely to be a moderate for two reasons. First, we do not
expect Japan's exports to Europe to recover in H1 2013 due to a continued recession in
Europe. Second, Japan's recovery in exports is likely to be slower than that of Korea or Taiwan
as the recovery in capital goods exports tends to lag that in materials and intermediate goods
exports, because of the higher share of capital goods exports in Japan than in other Asian
economies. Nonetheless, we expect the export recovery in Japan to stimulate private
investment and also domestic demand, allowing overall growth to return to positive territory from
Q1 onwards. By mid-2013, Japan's export growth is likely to gain further strength as we expect
growth in the US to pick up in H2 2013. This recovery process should also be supported by yen
depreciation against the US dollar to 88 JPY/USD at end-2013. We expect growth to pick up to
0.5% in 2013 from an annualized -2.1% in H2 2012, followed by 1.2% in 2014.
Domestic demand should regain its strength in 2013
Once external demand improves, we expect private consumption and non-manufacturing
investment to return to their trend growth paths. We expect the aging population to bring private
consumption to a moderate growth path with an even lower savings rate. By contrast, the most
recent Tankan survey (September survey) by the Bank of Japan (BOJ) suggests that non-
manufacturers are likely to increase their investment again once they see signs of a recovery in
private consumption (Figure 1). Private consumption is likely to stay robust partly due to
demand being brought forward owing to the scheduled consumption tax rate hike in April 2014.
Fiscal policy: We expect a supplementary budget in early 2013
The immediate task faced by the ruling DPJ (Democratic Party of Japan) and the opposition
LDP (Liberal Democratic Party) is the passage of the bill that will allow the government to issue
a deficit-funding government bond. Without its passage, the government will need to stop
spending from early December. If the bill is not passed by the end of the year, funding shortfalls
are expected to arise: JPY8.5trn in Q4 2012 and JPY20.7trn in Q1 2013. We think this would
lower real GDP growth by 7.6 percentage points (pp) q-o-q and 6.2pp, respectively. Even if
spending on the police, the self-defense forces and other areas deemed important to the
Nomura | Global Annual Economic Outlook 13 November 2012
25
public‟s daily life were continued, as special cases are exempt from a government shutdown, we
estimate that the dent to real GDP growth would still be 5.7pp in Q4 2012 and 3.1pp in 2013. As
the cost of non-passage of this bill is too big to accept, we expect a compromise to be reached
by the two parties.
Fig. 1: Non-manufacturing investment growth and Tankan survey's DI on excessive capacity
-4
-2
0
2
4
6
8
10-30
-20
-10
0
10
20
30
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Real capex by non-manufacturing companies (lhs)
Capex DI (rhs)
y-y, % DI:"excess" - "shortage": inverse scale
Notes: Capex is in real terms using the 2005 base year deflator. Source: Nomura, the Bank of Japan and Ministry of Finance and Cabinet Office
Faced with a recession in H2 2012, we expect the Diet to enact a supplementary budget by
January 2013. Although the consumption tax rate hike from 5% to 8% is scheduled for April
2014, the government can choose not to implement under the law based on its assessment of
the state of the economy. As the decision will be made around autumn 2013, growth in Q2 2013
will be critically important as this is the last quarterly GDP data published before the decision is
made. As there is a risk that Japan‟s recovery will be halted by a delay in inventory de-stocking
in China or worsening relations between Japan and China, we expect the two major parties, the
DPJ and the LDP, to agree on the supplementary budget.
Although government spending including social welfare is capped at JPY71trn, as self-imposed
by the government, it can still utilize its surplus fund amounting to JPY2trn, which the
government earned during FY11. We expect the government to set aside JPY700bn for public
construction spending for a quick disbursement during H1 2013, which is likely to raise real
GDP growth by 0.16pp in 2013.
Fig. 2: Schedule of major political events in Japan
2012 Nov 30 End of the Extraordinary Diet session
DecBeginning of
the month
16 Election of the Tokyo Metropolitan Governor
By month-end Determine the framework for tax reform and FY13 budget
2013 Jan Ordinary Diet session begins
・Discuss supplementary budget for FY12
・Debate FY13 budget
・Discuss contents of growth strategy
Mar 19 End of terms of BOJ two deputy governors simultaneously
Apr 8 End of terms of BOJ governor Shirakawa
Jul 28 End of current terms of members of Upper House
Aug 29
Summer Election of the Tokyo Metropolitan Assembly
Fall Final decision on consumption tax hike
2014 Apr 1 Consumption tax rate hike from 5% to 8%
During the
month
End of terms of members of Lower House (assuming no early dissolution/holding of general election)
Deadline to pass the bill to allow government to issue deficit bonds, whithout which the national
government would stop spending
Source: Nomura, based on various news reports
Nomura | Global Annual Economic Outlook 13 November 2012
26
Monetary policy: We expect the BOJ to ease further in 2013
We expect the BOJ to implement multiple rounds of monetary easing in 2013. In our view, the
first one is likely to be implemented in January 2013 as we expect the BOJ to try to support an
economic recovery following a recession in H2 2012. Political pressures are likely to mount as a
result of an expected general election and in the light of the expiring terms for two Deputy
Governors and Governor Shirakawa, which should also encourage the BOJ to ease monetary
conditions. After the new leadership is inaugurated in April, we expect the BOJ to ease further
as it will likely try to ensure positive growth in Q2 through exercising its influence on the real
economy and asset markets, as Q2 GDP growth is the last figure published before the
government decides whether to implement a hike in the consumption tax rate scheduled for
April 2014. Towards end-2013, the BOJ is likely to stop implementing further easing measures
temporarily due to expectations of demand for private consumption and housing being brought
forward before the consumption tax rate hike, although we believe that the BOJ continues to
monitor carefully asset price movements, which may incorporate the negative impact from a
consumption tax rate hike before it is actually implemented.
Risks
External factors continue to be the main risks for the Japanese economy. Delays in inventory
de-stocking in China pose a significant risk to growth as this delays Asia‟s recovery process.
The relationship between Japan and China poses another downside risk to an economic
recovery if it does not improve in H1 2013 as we expect. Weaker exports from Japan to China,
as well as less Chinese tourists to Japan may reduce Japan‟s real GDP growth by 0.35
percentage points if current political tensions persist throughout 2013. Other external risks
include an expansion and the prolonging of risks associated with European government debt, a
decline in confidence in US economic policy, and concerns about a global economic slowdown.
Fig. 3: Japan: Details of the forecast
% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP 5.2 0.3 -3.5 -1.5 2.0 1.9 1.8 2.0 1.6 0.5 1.2
Private consumption 4.9 -0.4 -1.8 -1.4 1.6 1.4 1.5 1.9 2.1 0.4 1.2
Private non res f ixed invest -7.4 3.8 -12.1 -3.4 1.6 3.9 5.9 6.1 1.0 0.1 5.8
Residential f ixed invest -4.4 6.0 3.8 2.8 6.6 8.6 7.0 3.6 1.9 5.7 -2.9
Government consumption 4.3 1.9 1.4 0.9 1.4 1.4 1.2 1.2 2.2 1.3 1.2
Public investment 17.7 11.0 16.8 11.3 4.6 -7.5 -14.1 -12.2 9.9 1.5 -11.2
Exports 14.1 5.3 -18.7 -4.1 2.0 3.9 5.1 5.5 0.7 -0.9 6.2
Imports 9.2 7.3 -1.4 -4.2 2.9 5.3 3.6 6.1 5.7 2.0 5.9
Contributions to GDP:
Domestic f inal sales 3.6 1.5 -1.5 -1.0 1.8 1.5 1.3 1.7 2.2 0.7 1.1
Inventories 1.2 -0.8 0.8 -0.5 0.3 0.5 0.2 0.3 0.1 0.2 0.0
Net trade 0.4 -0.4 -2.8 0.0 -0.1 -0.1 0.3 0.0 -0.7 -0.4 0.1
Unemployment rate 4.6 4.4 4.2 4.4 4.5 4.5 4.4 4.3 4.4 4.4 3.9
Consumer prices 0.3 0.2 -0.4 -0.3 -0.7 -0.5 -0.1 0.1 -0.1 -0.3 1.8
Core CPI 0.1 0.0 -0.2 0.0 -0.2 -0.1 0.1 0.1 -0.1 0.0 1.9
Fiscal balance (f iscal yr, % GDP) -9.6 -10.4 -9.5
Current account balance (% GDP) 1.2 1.6 2.1
Unsecured overnight call rate 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10
JGB 5-year yield 0.32 0.22 0.19 0.20 0.22 0.20 0.22 0.23 0.20 0.23 0.37
JGB 10-year yield 0.99 0.83 0.77 0.80 0.82 0.82 0.85 0.88 0.80 0.88 1.10
JPY/USD 82.9 79.8 78.0 82.0 83.0 85.0 86.0 88.0 82.0 88.0 90.0
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is as a percentage of the labor force. Inflation measures and CY GDP are year-on-year percent changes. Interest rate forecasts are end of period. Fiscal balances are for fiscal year and based on general account. Table last revised 12 November. All forecasts are modal forecasts (i.e., the single most likely outcome). Numbers in bold are actual values, others forecast.
Source: Cabinet Office, Ministry of Finance, Statistics Bureau, BOJ, and Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
27
Lewis Alexander +1 212 667 9665 [email protected]
Ellen Zentner +1 212 667 9668 [email protected]
Aichi Amemiya +1 212 667 9347 [email protected]
Roiana Reid +1 212 298 4221 [email protected]
United States | Economic Outlook
More clarity, less uncertainty
In 2013 we expect the pace of recovery to begin to accelerate once Washington
policymakers resolve the near-term fiscal and other policy challenges.
Overview
In the three years since the Great Recession ended, real GDP has grown at a lackluster 2.2%
pace, mired in what we judge to be a “Rogoff-Reinhart world,” characterized by sub-normal
growth for an extended period. While the adjustment to household balance sheets is largely
complete, our forecast for personal consumption reflects our view that borrowing is not likely to
drive the economy forward and spending will broadly track growth in income.
Business investment is depressed, relative to previous cyclical norms. The root cause of
uncertainty, the on-going sovereign debt crisis in Europe and US fiscal challenges, is likely to
hold back growth in the economy a bit longer. Looking ahead to 2013, we expect the pace of
recovery to begin to accelerate in the second half of the year, led by a rebound in capital
expenditures, once Washington policymakers resolve the near-term fiscal and other policy
challenges that have undermined business confidence.
Higher capital expenditures should support job creation. Moreover, a strengthening recovery in
the nation‟s housing market should lift that sector‟s contribution to economic growth – through
investment, job creation and the wealth effect from stabilizing home values. Nevertheless, as
more workers are encouraged to enter the labor market to look for work, we expect the labor
force participation rate to rise and the unemployment rate to remain stubbornly high throughout
the forecast horizon. We expect the lack of a “substantial” improvement in the labor market to
lead the Federal Open Market Committee (FOMC) to embark on further long-term asset
purchases at the start of the year.
Details of the forecast
% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2011 2012 2013 2014
Real GDP 2.0 1.3 2.0 1.3 0.7 1.2 2.3 2.7 3.0 3.2 1.8 2.1 1.4 2.8
Personal consumption 2.4 1.5 2.0 2.3 0.7 1.4 2.2 2.6 2.8 2.7 2.5 1.9 1.6 2.6
Non residential f ixed invest 7.5 3.6 -1.3 1.0 -0.3 0.9 4.7 4.8 3.9 8.2 8.6 7.3 1.2 5.0
Residential f ixed invest 20.6 8.4 14.4 17.5 17.9 16.7 15.9 15.6 13.9 13.7 -1.4 12.2 16.2 14.4
Government expenditure -3.0 -0.7 3.7 -2.2 -2.1 -0.9 -1.1 -0.9 -0.3 -1.0 -3.1 -1.4 -0.9 -0.8
Exports 4.4 5.2 -1.6 2.1 2.9 3.1 3.7 5.3 5.5 4.2 6.7 3.3 2.6 4.6
Imports 3.1 2.8 -0.2 2.7 1.5 1.8 2.3 3.5 3.9 3.1 4.8 2.9 1.9 3.1
Contributions to GDP:
Domestic f inal sales 2.3 1.5 2.3 1.7 0.5 1.3 2.2 2.5 2.7 3.0 1.9 2.1 1.5 2.8
Inventories -0.4 -0.5 -0.1 -0.1 0.0 -0.2 0.0 0.0 0.2 0.2 -0.2 0.1 -0.1 0.0
Net trade 0.1 0.2 -0.2 -0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 -0.1 0.0 0.0
Unemployment rate 8.3 8.2 8.1 7.9 8.1 8.0 8.0 7.9 7.8 7.6 9.0 8.1 8.0 7.6
Nonfarm payrolls, 000 226 67 146 130 100 100 120 150 150 150 139 142 118 169
Housing starts, 000 saar 715 736 786 850 895 940 985 1030 1085 1140 612 772 963 1170
Consumer prices 2.8 1.9 1.7 2.1 1.7 1.8 1.6 1.3 1.4 1.4 3.1 2.1 1.6 1.4
Core CPI 2.2 2.3 2.0 1.9 1.8 1.6 1.6 1.7 1.7 1.7 1.7 2.1 1.7 1.8
Federal budget (% GDP) -8.7 -7.0 -5.8 -5.0
Current account balance (% GDP) -3.1 -2.8 -1.6 -1.0
Fed securities portfolio ($trn) 2.61 2.62 2.60 2.72 3.01 3.30 3.59 3.58 3.57 3.57 2.61 2.72 3.58 3.57
Fed funds target 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25
3-month LIBOR 0.47 0.46 0.36 0.40 0.40 0.50 0.50 0.50 0.60 0.60 0.58 0.40 0.50 0.70
TSY 2-year note 0.33 0.33 0.23 0.20 0.30 0.50 0.60 0.70 0.80 0.90 0.24 0.20 0.70 1.10
TSY 5-year note 1.04 0.72 0.63 0.60 0.80 1.00 1.20 1.30 1.40 1.50 0.83 0.60 1.30 1.80
TSY 10-year note* 2.23 1.67 1.63 1.65 2.00 2.20 2.35 2.50 2.55 2.60 1.87 1.65 2.50 2.85
30-year mortgage 3.99 3.66 3.50 2.75 3.00 3.40 3.60 3.70 3.70 3.80 3.95 2.75 3.70 4.10 * The forecast range for 10y UST is as follows: 4Q12 = 1.25-2.0, 1Q13 = 1.7-2.3. Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is a quarterly average as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages. Numbers in bold are actual values. Table reflects data available as of 9 November 2012. Source: Nomura
Nomura | Global Annual Economic Outlook 13 November 2012
28
Fiscal policy
The evolution of fiscal policy will have a major impact on economic activity over the next two
years. In the near term we expect an acrimonious debate between President Obama and
Republicans in Congress over the trajectory of fiscal policy. That debate is likely to weigh on the
US economy and financial markets over the next six months. However, we expect that, in the
end, an agreement will be reached. Moreover, we expect that other important policy reforms,
such as fundamental tax reform, will support growth in the second half of next year and into
2014. Greater clarity over the course of economic policy in general, and fiscal policy in
particular, as well as positive fundamental reforms elsewhere, should generate faster economic
growth starting in the second quarter of next year.
The near-term fiscal challenge
If Congress fails to act before the end of this year tax rates will go up substantially and federal
spending will decline at the beginning of next year. If these policy changes go fully into effect for
all of 2013 the direct impact on the fiscal deficit will be nearly $700 billion, or about 4% of GDP.
This would be enough to throw the US economy into recession in the first half of next year.
Both President Obama and the Republican leaders in Congress have stated repeatedly that
they want to avoid the full fiscal effects of a sharp increase in taxes and blunt spending cuts that
are currently scheduled for the beginning of next year, and, in the end, we expect that an
agreement will be reached to reduce fiscal drag in 2013. But reaching that agreement may
generate a great deal of uncertainty.
The President and some members of Congress may seek to put in place, before year-end, a
“grand bargain” comparable in scale to the Bowles-Simpson proposals, i.e., a package of fiscal
measures covering the next ten years that is large enough to first stabilize and then lower the
level of federal government debt to GDP. But the likelihood of success in the lame duck session
does not seem high.
A less ambitious objective would be to reach a simple agreement to extend the deadlines for the
major pieces of the “fiscal cliff,” i.e., the Bush tax cuts that are set to expire and the automatic
Budget Control Act (BCA) spending cuts mandated in the 2011 deal to raise the debt limit. Such
an extension could buy the time needed to reach a broader agreement. It may be difficult,
however, to reach agreement even on a simple extension. Democrats and Republicans have
significant differences of principle on tax rates for high income taxpayers and on the appropriate
level of spending in 2013. If these differences cannot be bridged it is possible that there will be
no agreement before the end of this year.
While it is possible that we will “go off the fiscal cliff,” it is unlikely that we will go very far into
2013 without an agreement to mitigate the impact of fiscal consolidation on the economy. The
current debt limit is likely to become binding early in 2013. The need to raise the debt limit
could, as in 2011, provide impetus to break the impasse.
A contentious debate over fiscal policy in coming weeks is likely to be a drag on aggregate
demand. Businesses have been reluctant to launch new investment projects and to hire new
workers because they do not have confidence in the economic outlook and they do not know
what their tax obligations will be. Under the weight of this uncertainty, business investment in
general has slowed markedly this year and remains depressed relative to previous cyclical
norms (Figure 1).
The economic impact of “going off the cliff” will depend on how long the tax increases and
spending cuts are actually in place. If they are in place permanently, a recession in the first half
of next year looks certain. On the other hand, if the core fiscal cliff policies are only in effect for a
short time, the effects on the economy should be much more modest (Figure 2).
Nomura | Global Annual Economic Outlook 13 November 2012
29
Figure 1: Business investment has suffered from uncertainty
-10
-8
-6
-4
-2
0
2
4
6
8
Q2-2009 Q4-2009 Q2-2010 Q4-2010 Q2-2011 Q4-2011
Investment shortfall (Actual less model predicted value)
pp
Source: Nomura
Figure 2: Estimated impact of “fiscal cliff” policies** on real GDP (%)
-5
-4
-3
-2
-1
0
1
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2013 2014
-5
-4
-3
-2
-1
0
1
%
Temporary (1 qrt.) Permanent
** Estimated impact of the expiration of “fiscal cliff” policies – excluding the payroll tax cut and the “Doc fix” – under the assumption that changes are shocks are imposed in Q1 2013 only or permanently. Effects on GDP are estimated using the Fair Model. Source: Nomura
Policy over the long term
Looking beyond the next few months, it is likely that fiscal policy will be a drag on growth for
many years. The budget that President Obama proposed earlier this year anticipates steady
declines of US fiscal deficits from 8.7% of GDP in 2011 to 3.1% of GDP in 2015. Note that
Republican proposals anticipated a significantly faster decline in the deficit, to 1.7% of GDP in
2015. Our forecast anticipates about 1% of fiscal drag in 2013 and somewhat more in 2014.
We also anticipate some progress on other aspects of economic policy. The US tax system is
ripe for reform. The last major reform of the US tax code was passed in 1986. The statutory
corporate tax rate in the US remains relatively high compared with many of its international
competitors, and the many deductions make the system complex and distortive. In addition,
over time an increasing share of the tax code has become subject to annual renewal, a further
source of recurring uncertainty for businesses (Figure 3). A significant amount of preparatory
work on tax reform has been done in Congress. In addition, the Obama administration has put
out a white paper advocating revenue-neutral corporate tax reform.
In the near term, policy uncertainty is likely to be a significant drag on growth. But we think that
much of that uncertainty will be resolved in the first half of 2013. However, the US has just
completed a long, hard-fought election that generated a status quo outcome. If partisan politics
prevents the implementation of a near-term fiscal deal, and progress in other areas of economic
policy, then our outlook for the economy may prove to be too optimistic.
On the other hand, policy has the potential to over-perform as well. At this time fundamental
reforms in a number of areas – including taxation, infrastructure, energy, immigration, and
mortgage finance – have the potential to make a significant positive contribution to long-term
economic growth. If the current gridlock in Congress can be overcome we see significant upside
potential for the US economy.
Nomura | Global Annual Economic Outlook 13 November 2012
30
Figure 3: Share of the tax code subject to annual renewal
0
2
4
6
8
10
12
14
2000 2002 2004 2006 2008 2010 2012
Alternative Minimum Tax
Bush Tax Cuts
Other Tax Provisions
%
Source: Congressional Budget Office, Joint Committee on Taxation, Nomura
Figure 4: Labor force participation rate
63.0
63.5
64.0
64.5
65.0
65.5
66.0
66.5
67.0
67.5
63.0
63.5
64.0
64.5
65.0
65.5
66.0
66.5
67.0
67.5
1995 1999 2003 2007 2011
%
Labor force participation rate
...projected based ondemographic trends
%
Source: Bureau of Labor Statistics, Nomura
Monetary policy
At the September meeting, the FOMC said it expects a very low federal funds rate to be
warranted until at least “mid-2015” and initiated an open-ended, long-term asset purchase
program targeting mortgage-backed securities (MBS) at a monthly pace of $40 billion.
Moreover, the Committee vowed to “continue its purchases of agency mortgage-backed
securities, undertake additional asset purchases, and employ its other policy tools as
appropriate”…“if the outlook for the labor market does not improve substantially.” In discussing
how long these purchases might last the Chairman suggested that these measures would likely
continue until the economy was growing fast enough to sustain an employment rate that is
declining “gradually.”
In the spring the Chairman argued that the US needs growth beyond the rate of the economy‟s
potential for the unemployment rate to decline (see “Recent Developments in the Labor Market”,
26 March 2012, see “What labor markets mean for monetary policy”, Special Report, 9 April
2012). In the latest summary of economic projections table, the FOMC‟s central tendency of
potential growth in output is between 2.3% and 2.5%.
The Chairman has also noted that sustained declines in the participation rate could be reversed
if the recovery accelerates. For example, in October the unemployment rate ticked up to 7.9%
even though US households reported having gained more than 400k net new jobs because
more workers flooded back into the labor market to seek employment. Figure 4 provides an
historical look at labor force participation. Adjusting for demographic trends suggests the current
rate of participation is roughly a full percentage point too low. An increase in the participation
rate would likely lead to a higher unemployment rate.
An economy growing at its potential would be just fast enough to accommodate new entrants
into the labor market, but would need to grow beyond potential to additionally accommodate
unemployed workers as they re-enter the labor market. Taken together this implies that the
FOMC would need to see the prospect of GDP growth of at least 3.0% for several quarters to
expect a sustained decline in the unemployment rate. Given the headwinds facing the US
economy, including problems relating to US fiscal policy, it is hard to imagine a sustained
acceleration in growth before the middle of 2013. That means that MBS purchases will likely go
on until the third quarter of 2013. Furthermore, we expect the FOMC to replace the current
maturity extension program (MEP, or “Operation Twist”) – scheduled to expire at the end of the
year – with a program of outright Treasury purchases similar in size and pace (roughly $40bn
monthly) at the beginning of the year.
Our forecast for consumer prices to remain below 2% for the forecast horizon reflects the effects
of a substantial output gap that has emerged from three years of sub-par growth in the
economy. There is a risk, however, that inflation expectations are too optimistic with respect to
Nomura | Global Annual Economic Outlook 13 November 2012
31
the supply-side of the US economy. Were core inflation to accelerate and/or inflation
expectations begin to rise, the FOMC may be forced to tighten monetary policy sooner than
expected.
Recent press reports suggest that Chairman Bernanke may not seek a third term when his
current term expires at the end of 2013. Nevertheless, President Obama will likely seek
continuity in Federal Reserve policy.
Housing
Housing, which often kick-starts US recoveries, has largely been missing this time around, but is
poised to contribute to growth in 2012 for the first time since 2005. Though this important sector
is making headway toward normalization, lingering problems with mortgage financing and an
overhang of inventories remain a constraint on the pace of the recovery. More than 20% of all
outstanding mortgages are underwater and we estimate there are more than 3 million so-called
“shadow” inventories (mortgages that are seriously delinquent or are in the foreclosure process
but have not been put on the market). Nevertheless, the strengthening recovery in housing
provides a key underpinning for our forecasts for job growth and aggregate demand over the
forecast horizon.
Positive developments for supply
The months‟ supply of existing homes – the ratio of visible inventories for sale to monthly sales
and a good measure to gauge the balance between supply and demand in the housing market
– fell below six months in September 2012 for the first time in several years. Looking ahead, the
ebb and flow of visible inventories should continue to be influenced by heavy investor appetite
for single-family rental properties on the demand side, and an increase in listings as prices
improve on the supply side. In the meantime, tight supply of visible inventories has put a floor
under home values and year-on-year price increases are spreading to more areas of the
country. In January, only one metro included in the S&P/Case-Shiller home price index
experienced a year-on-year price gain. By July, 14 metros experienced price gains.
Supporting the tighter supply of visible inventories, the inflow of distressed properties has
slowed significantly over the past few years as the economy has improved and the shock of
troubled mortgages has diminished. A series of policy efforts to reduce foreclosures such as the
Home Affordable Refinance Program (HARP) and Home Affordable Modification Program
(HAMP), and investigations into the improper foreclosure process by banks (the so-called “robo-
signing” scandal) have also helped. The mortgage delinquency rate declined to 7.6% in Q2
2012, down 86 basis points over the last year. The transition of mortgages from early
delinquency (30-60 days past due) into serious delinquency (90 days or more past due) has
also trended lower. The number of foreclosure starts in Q2 2012 was nearly half of its peak of
566k in Q2 2009. It is important to note that while delinquency rates have improved,
delinquencies remain much higher than historical norms. Still, as the delinquency rates decline,
the share of sales that represent distressed assets has declined, lessening the damping effect
these discounted properties have had on home price appreciation.
Pent-up demand
Household formation, arguably one of the most important determinants of demand for housing,
has accelerated in 2011 and 2012. The centered 3-year moving average of the net increase in
US households has now moved back in line with the underlying pace implied by demographic
trends (Figure 5). This may indicate that potential home buyers and renters are becoming more
confident about the economic outlook. For several years following the financial crisis household
formation remained lower than demographics suggested, implying a sizable build-up of pent-up
demand for housing. Against this backdrop, we forecast that housing starts will reach an annual
rate of one million units in Q4 2013, growing by nearly 25% in 2013. Furthermore,
reconstruction efforts after Hurricane Sandy likely point to upside risk to housing‟s contribution
to the economy in 2013 as replacement demand will add to the natural rate of loss in annual
housing stock.
Nomura | Global Annual Economic Outlook 13 November 2012
32
Prices
Despite the strengthening recovery, an overhang of supply and lingering problems in mortgage
financing remain obstacles to a more robust housing market. Adding some 2.6 million units in
traditional, visible inventories to our shadow inventory estimate of roughly 3.3 million units
suggests the housing market remains constrained by a substantial inventory overhang. Should
a faster pace of shadow inventories move into visible inventories, price growth is likely to be
tempered for some time to come (Figure 6). Nevertheless, home prices, as measured by the
S&P/Case-Shiller home price index are poised for growth of 1 to 3% in 2013 and we would
expect similar price gains over our forecast horizon.
Figure 5: Housing starts forecast and household formation
0.50
0.75
1.00
1.25
1.50
1.75
2.00
Jan-80 Jan-90 Jan-00 Jan-10 Jan-20
Actual household formation (centered 3-yr moving average)Housing starts (actual and forecast)
Household formation implied by demographics
y-o-y, change, mn units
Note: "Household formation implied by demographics" is the hypothetical pace of household formation assuming constant headship rate by age cohort. We calculated three different population projections depending on immigrants which are laid out by the Census Bureau. Source: Census Bureau, Nomura
Figure 6: Housing inventories: shadow vs. visible
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
invisible inventories in foreclosure process
90 days + delinquent mortgages
New home inventories
visible inventories of distressed assets
existing home inventories ex-distressed assets
thous. units
Shadow inventories
Note: 1.REOs are excluded. 2. New home inventories are 1-family house only. 3. Visible inventories of distressed assets are estimated based on the share of distressed assets in existing home sales. Source: National Association of Realtors, Department of Commerce, Nomura
Nomura | Global Annual Economic Outlook 13 November 2012
33
Charles St-Arnaud +1 212 667 1986 [email protected]
Canada | Economic Outlook
Steady as she goes: growth slightly above trend in 2013 After some weakness in Q3 1012, growth should be slightly higher than potential, but
risks remain skewed to the downside.
Activity: We expect growth in Q3 to be relatively weak, because of a big drag from net exports.
Weaker global growth and production disruptions in the oil industry have resulted in anemic
exports gains, while strong domestic demand, led by business investment, has boosted imports.
We expect a rebound in growth in Q4, as some of those factors may prove temporary. For 2013,
we expect growth to be slightly over 2%. We expect personal spending growth to moderate as
households gradually reduce their debt burden and income growth remains slow and business
investment in machinery and equipment to pick-up somewhat. A rebound in global growth with
stronger growth in China and the US likely to avoid the fiscal could support exports. However, the
strong Canadian dollar may dampen the exports contribution to growth. However, the impact from
the strong currency is partly reversed by weaker funding costs, owing to strong foreign inflows into
Canadian securities.
Inflation: With some spare capacity and the output gap likely to close by the end of2013, we
think inflationary pressures are likely to remain contained. We expect headline inflation to have
bottomed in Q3 2012 and should gradually increase ending 2012 close to the central bank‟s 2%
target. Core inflation should follow a similar pattern, reaching a low of 1.7% in Q4 20122.
Policy: With considerable monetary stimulus in place, and a narrowing of the output gap, we
expect the BoC to remain on hold in 2012, waiting to have some clarity on the fiscal cliff in the
US and the crisis in the eurozone before reducing the amount of stimulus before taking any
actions. We expect the BoC to be cautious about tightening monetary policy and to bring rates
to 1.75% by mid-2013. The latest budgets show that the various levels of government are in
consolidation mode, causing a small drag on the economy.
Risks: A disorderly resolution of the euro-area debt crisis remains the most immediate risk to
the Canadian economy, However, we think the threat from the US „fiscal cliff‟ is much bigger
and would have a much larger impact on the Canadian economy than the eurozone crisis, given
the strong economic links between the two countries. On the upside, domestic demand could
prove to be more resilient than expected, and the US economy could perform better than
expected. Moreover, QE3 in the US could be positive for Canada by boosting commodity prices
and the terms of trade.
Fig. 1: Details of the forecast
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 13 November 2012. Source: Bank of Canada, Statistics Canada, Nomura Global Economics.
% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2011 2012 2013 2014
Real GDP 1.8 1.9 1.0 1.9 2.1 2.1 2.1 2.1 2.6 2.1 1.9 2.1
Personal consumption 1.5 0.8 1.7 1.5 1.8 1.8 1.8 1.8 2.4 1.6 1.7 1.8
Non residential f ixed invest 7.0 9.3 9.0 7.0 6.5 6.5 6.5 6.5 10.4 7.5 7.1 6.5
Residential f ixed invest 15.8 -1.5 5.0 4.0 5.0 5.0 5.0 5.0 1.9 6.9 4.4 5.0
Government expenditures -1.7 0.4 0.0 0.0 0.3 0.3 0.3 0.3 0.5 -1.0 0.2 0.3
Exports -4.4 4.0 0.2 4.2 4.3 4.3 4.3 4.2 4.6 3.1 3.7 4.2
Imports 2.4 2.5 4.0 4.0 4.2 4.2 4.2 4.2 5.8 2.9 4.0 4.2
Contributions to GDP:
Domestic f inal sales 2.1 1.4 2.2 1.9 2.1 2.1 2.1 2.1 2.6 1.9 2.0 2.1
Inventories 1.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 0.2 0.0 0.0
Net trade -2.2 0.4 -1.2 0.0 0.0 0.0 0.1 0.1 -0.4 0.0 -0.1 0.1
Unemployment rate 7.4 7.3 7.3 7.3 7.3 7.2 7.2 7.2 7.5 7.3 7.2 7.1
Employment, 000 41 120 17 50 60 60 60 60 51 57 60 63
Consumer prices 2.3 1.6 1.2 1.7 1.8 1.8 2.0 2.0 2.9 1.7 1.9 2.0
Core CPI 2.1 2.0 1.5 1.7 2.0 2.0 2.0 2.0 1.7 1.8 2.0 2.0
Fiscal balance (% GDP) -4.4 -3.8 -3.0 -2.2
Current account balance (% GDP) -2.8 -3.4 -3.7 -3.7
Overnight target rate 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.75 1.00 1.00 1.75 3.00
3-month T-Bill 0.91 0.87 0.97 1.00 1.00 1.00 1.30 1.80 0.82 1.00 1.80 3.00
2-year government bond 1.20 1.03 1.07 1.20 1.20 1.30 1.60 2.20 0.95 1.20 2.20 3.20
5-year government bond 1.57 1.21 1.31 1.40 1.50 1.80 2.10 2.30 1.28 1.40 2.30 3.20
10-year government bond 2.11 1.74 1.73 1.90 2.00 2.10 2.30 2.50 1.94 1.90 2.50 3.40
USD/CAD 1.00 1.02 0.98 0.98 1.00 1.00 0.99 0.97 1.02 0.98 0.97 0.97
Nomura | Global Annual Economic Outlook 13 November 2012
34
Benito Berber +1 212 667 9503 [email protected]
Mexico | Economic Outlook
2013: The year of reforms
The new government will embark on a series of important reforms in 2013.
Activity: We forecast the economy to expand by 3.0-3.5% y-o-y in 2013. While the US
economy, the main trade partner of Mexico might remain weak, we expect Mexican domestic
aggregate demand to remain resilient. Other risks include a sharper than anticipated contraction
in the Eurozone that drags down global growth. For 2012 the Mexican economy is on track to
expand above potential growth of 3.0-3.25%. A fiscal reform to increase non-oil revenues and
an energy reform to increase private sector participation will be the main focus of attention in
2013. Authorities will approve these two key structural reforms that will enhance potential
growth and reduce vulnerabilities.
Inflation: For 2013 we expect most of the supply-side shocks to dissipate; therefore, we
forecast inflation to moderate to 3.4% from around 4.0% in 2012. However this forecast does
not include the impact of the fiscal reform of increasing the VAT on food and medicines from
their current 0% rate. Since the fiscal reform will likely be presented to Congress in February, at
the earliest, we won‟t be able to re-calibrate the inflation forecast until then. If authorities
increase the VAT for food and medicines to 16%, which is the rate for other goods, inflation
would surpass 7.0% y-o-y. If authorities increase the VAT gradually, the impact on inflation
could be significantly lower.
Policy: We forecast the central bank of Mexico (Banxico) to keep the policy rate unchanged at
4.50% until 2014 despite the recent hawkishness of Governor Agustin Carstens. Our medium-
term view for the MXN remains sanguine due to the likely approval of the structural reforms. We
forecast that MXN will strengthen to 12.00 by 4Q 2013.
Risks: The main risk is a double-dip recession in the US economy, which seems unlikely. In
terms of inflation, we see the following risks to our call: (1) pass-through effects due to MXN
depreciation; (2) increases in gasoline prices; and the passage of the fiscal reform
Details of the forecast
Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-over-year changes for Q4. Trade data are period sums. Interest rate and currency forecasts are end of period. Contributions to GDP do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 13 November 2012.
Source: Nomura Global Economics.
% y-o-y change unless noted 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP 4.6 4.1 3.5 3.5 3.7 3.4 3.2 3.1 3.7 3.5 3.5
Personal consumption 4.3 3.3 3.4 4.7 4.3 3.1 3.3 3.4 4.5 3.5 3.6
Fixed investment 8.6 6.2 2.4 3.2 3.2 3.2 3.2 3.2 3.0 3.2 3.9
Government expenditure 2.9 1.7 5.3 0.4 1.3 0.4 2.2 2.0 3.9 3.1 2.8
Exports 5.1 6.3 4.9 7.2 5.1 4.4 3.6 2.8 4.1 4.0 3.9
Imports 7.1 4.0 2.7 6.3 4.7 3.6 3.6 3.9 4.3 3.9 3.5
Contributions to GDP (pp):
Industry 1.4 1.2 0.8 1.0 1.1 1.0 0.9 0.9 1.1 1.0 1.0
Agriculture 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1
Services 2.9 2.6 1.7 2.2 2.4 2.2 2.0 2.0 2.4 2.2 2.2
CPI 3.73 4.34 4.60 4.00 3.55 3.50 3.45 3.40 4.10 3.40 3.50
Trade balance (US$ billion) 1.8 1.5 -4.1 -3.9 -3.8 -3.8 -3.8 -3.8 -4.7 -15.2 -15.0
Current account (% GDP) -1.5 -1.5 -1.5
Fiscal balance (% GDP) -2.2 -2.2 -2.2
Gross public debt (% GDP) 37.3 35.0 34.0
Overnight Rate % 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 5.50
USD/MXN 12.81 13.36 12.86 12.70 12.70 12.50 12.70 12.00 12.00
Nomura | Global Annual Economic Outlook 13 November 2012
35
Tony Volpon +1 212 667 2182 [email protected]
Brazil | Economic Outlook
Inflation storm on the horizon
The combination of a record low policy rate and a “dirty band” preventing BRL from
appreciating will likely lead to soaring inflation in 2013.
Activity: The Brazilian economy had fairly lackluster performance in 2012, with H1 GDP
growing merely 0.6% y-o-y, and investment falling 2.9% y-o-y. Policymakers have rolled out a
series of monetary and especially fiscal stimuli in an attempt to revive growth. However, given
the structural issues on the supply side, ongoing drags from credit markets and a still troubled
international environment, GDP growth will likely remain sluggish at 1.3% in 2012. Given the
gradually improving global growth profile and the lagged effects of domestic stimuli, we should
see more robust growth in 2013, reaching 4.1%.
Inflation: Consumer prices have been rising fast recently and we expect inflation pressures to
remain high, given very accommodative policies and a virtually fixed exchange rate regime.
Tradable goods prices are low at around 4%, yet several factors – inclement weather in Brazil
and the US, the recent surge in world food prices and a BRL weaker than 2.0 – are already
pushing up domestic food prices and we expect it to continue, with inflation ending 2012 at
5.5%. As a result of faster growth, a low base of comparison, the lagged effects of a weaker
currency and a lower policy rate, inflation will likely accelerate in 2013, ending the year at 5.7%.
Policy: The Central Bank of Brazil (BCB) has slashed its policy rate, Selic, by 525bp since
August 2011, and stated in the October minutes that “stability of monetary conditions for a
sufficiently long period is the best strategy”. We believe the “stability for a long period” language
offers a strong signal that the easing cycle has ended, and the key question now is how long the
BCB will stay put, even in the face of rising inflation.
Risks: The biggest and more immediate risk, we believe, is the likelihood of on-going supply
shocks further amplified by monetary easing from major central banks in the developed world.
Any such shock could push up inflation rapidly given still very tight factor markets, with
unemployment near all-time lows and the economy fully reacting to multiple rounds of monetary
and fiscal stimuli. This should push Brazil back into a “stop and go” pattern in monetary policy,
and lead the BCB to hike Selic in 2013. We now expect the new hiking cycle to start in Q2 2013,
as rising consumer prices threaten to go above 6%, and think Selic will likely finish 2013 at 9%.
In the medium term, Brazil faces the challenge to reorient its growth model from a consumption-
driven one to a more investment-driven one. Without enough political will to tackle this
challenge, especially when it comes to lowering soaring labor costs, we expect potential growth
to slow to around 3.5% over the coming years.
Details of the forecast
Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-on-year changes for Q4. Trade data are a 12-month sum. Interest rate and currency forecasts are end of period. Contributions to GDP growth do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 12 October 2012.
Source: Nomura Global Economics.
% y-o-y change unless noted 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP 0.8 0.5 1.8 2.1 3.3 4.4 3.9 4.2 1.3 4.1 3.5
Personal consumption 2.5 2.4 4.2 4.1 4.4 5.7 5.0 5.2 3.3 5.0 4.1
Fixed investment -2.1 -3.7 -1.5 -1.1 4.5 8.1 8.5 6.5 -2.1 6.2 5.5
Government expenditure 3.4 3.1 3.8 3.5 4.0 3.2 3.0 3.3 4.0 3.6 3.0
Exports 6.6 -2.5 -1.7 -2.3 -0.5 5.5 7.5 6.1 1.4 4.5 4.5
Imports 6.3 1.6 5.2 2.7 7.5 11.3 12.1 10.8 5.1 9.8 8.0
Contributions to GDP growth (pp)
Industry -0.4 0.1 0.4 0.5 0.8 1.1 0.9 1.0 0.3 1.0 0.8
Agriculture 0.0 0.0 0.1 0.1 0.2 0.2 0.2 0.2 0.1 0.2 0.2
Services 0.9 0.3 1.0 1.2 1.9 2.5 2.2 2.4 0.7 2.3 2.0
IPCA (consumer prices) 5.2 4.9 5.3 5.5 5.8 6.0 5.8 5.7 5.5 5.7 5.5
IGPM (wholesale prices) 3.2 5.1 8.1 7.5 7.3 7.0 6.8 6.5 7.5 6.5 5.5
Trade balance (US$ billion) 29 24 22 20 18 21 23 25 20 25 22
Current account (% GDP) -2.4 -2.5 -2.5
Fiscal balance (% GDP) -2.0 -2.0 -2.0
Net public debt (% GDP) 36.0 35.0 34.0
Selic % 9.75 8.50 7.50 7.25 7.25 8.25 9.00 9.00 7.25 9.00 8.50
BRL/USD 1.83 2.01 2.03 2.00 2.00 1.93 1.90 1.90 2.00 1.90 1.85
Nomura | Global Annual Economic Outlook 13 November 2012
36
Boris Segura +1 212 667 1375 [email protected]
Benito Berber +1 212 667 9503 [email protected]
Tony Volpon +1 212 667 2182 [email protected]
Rest of LatAm | Economic Outlook
Argentina: Key mid-term elections coming
Electoral calculations are likely to drive economic policymaking yet again
We expect the authorities to keep financing their growing fiscal deficits with monetary financing from the central bank. This is to increase inflationary pressures.
Despite more supportive trade flows, we do not expect a relaxation of draconian exchange controls.
Argentina‟s economic recovery in 2013, a key electoral year, is likely to be lacklustre. As such, the authorities are likely to resort to their usual recipe: Expansionary fiscal and monetary policies.
Increasing RER overvaluation to put further strain on output ex commodities and automobile production to Brazil.
Source: BCRA, Indec, MECON, Nomura
Colombia: Growth around trend
We expect around-trend growth in 2013 driven by resilient domestic demand.
After a strong first half supported by strong domestic consumption and resilient exports, we expect the economy to grow at 4.5% in 2012.
Both headline inflation and inflation expectations remain well anchored around 3.0%.
We expect an additional 25bp interest rate cut to 4.50% by 2012 year end and for authorities to continue intervening in the FX market to curb COP appreciation. Given around-trend growth, inflation within target band and improving external scenarios, we expect the BanRep to remain in “wait-and-see” mode in 2013 and keep the policy rate on hold at 4.50%.
Source: CSOP, NBP, Nomura Global Economics.
Chile: Better external conditions bring upward pressure
We expect domestic demand to remain robust. As global growth prospect brightens and
inflation picks up, we expect a small hiking cycle in H2 2013.
Chile has been growing robustly in 2012, with retail and construction sectors propping up internal demand. As external growth gradually improves, we expect the Chilean economy to expand even faster in 2013.
Inflation is currently below target (3%) and expectations are well-anchored. Yet upside risks are notable in the medium-term, given the tight labor market, strong wage hikes and Chile‟s high exposure to oil price shocks.
As global uncertainties clear up, the central bank will increasingly focus on the domestic front to determine the next move, as the monetary policy rate (TPM) is currently around neutrality. We expect a small hiking cycle in H2 2013, taking TPM to 5.5% by year-end.
The presidential election on November 17 will be the most important political event next year. Incumbent Piñera is constitutionally barred from seeking immediate reelection and no firm candidate has emerged yet.
Source: Haver, Bloomberg, Nomura Global Economics.
2011 2012 2013 2014
Real GDP % y-o-y 8.9 2.0 4.0 3.5
Consumption % y-o-y 10.7 4.4 4.2 3.8
Gross Investment % y-o-y 16.6 -9.0 7.5 5.0
Exports % y-o-y 4.3 -6.0 6.7 5.0
Imports % y-o-y 17.8 -7.6 10.8 10.0
CPI % y-o-y * 9.5 10.2 10.2 10.2
CPI % y-o-y ** 21.8 26.4 32.3 29.7
Budget balance % GDP *** 0.3 -0.8 -2.0 -1.5
Current account % GDP 0.0 1.8 1.9 1.0
Policy Rate % 18.8 15.0 17.0 14.0
USDARS 4.29 4.88 6.00 7.20
* Official data, ** Private estimate, ***Primary budget balance, Bold is actual data
2011 2012 2013 2014
Real GDP % y-o-y 5.9 4.5 4.5 4.5
Consumption % y-o-y 5.8 4.5 4.4 4.5
Gross Investment % y-o-y 16.6 9.0 9.2 9.7
Exports % y-o-y 11.4 7.0 9.0 9.5
Imports % y-o-y 21.5 9.0 8.0 8.5
CPI % y-o-y * 3.7 2.9 3.5 3.5
CPI % y-o-y ** 3.4 3.2 3.5 3.5
Budget balance % GDP -2.1 -1.8 -2.0 -2.3
Current account % GDP -3.0 -3.5 -3.0 -3.0
Policy Rate % * 4.75 4.50 4.50 5.50
USDCOP * 1938.50 1825.00 1750.00 1750.00
* End of period, ** Period average, Bold is actual data
2011 2012 2013 2014
Real GDP % y-o-y 6.0 5.1 5.5 5.0
Consumption % y-o-y 8.8 5.5 6.0 5.5
Gross Investment % y-o-y 17.6 7.5 10.0 7.0
Exports % y-o-y 4.6 3.8 5.0 5.0
Imports % y-o-y 14.4 4.6 9.0 8.0
CPI % y-o-y * 4.4 3.0 3.3 3.0
CPI % y-o-y ** 3.3 3.3 3.2 3.0
Budget balance % GDP 1.5 1.0 1.0 1.0
Current account % GDP -1.3 -3.0 -3.0 -2.0
Policy Rate % * 5.25 5.00 5.50 5.25
USDCLP * 519.55 475.00 460.00 450.00
* End of period, ** Period average, Bold is actual data
Nomura | Global Annual Economic Outlook 13 November 2012
37
Jacques Cailloux +44 (0) 20 710 22734 [email protected]
Nick Matthews +44 (0) 20 710 25126 [email protected]
Euro Area | Economic Outlook
Spain and Italy to remain at the epicenter
By mid 2012 it had become increasingly clear that the combination of the unwillingness of the
ECB to buy bonds and the reluctance of Germany to show more solidarity towards other
member states had become life-threatening for EMU. By mid July, markets started pricing that
scenario with Italy and Spain facing a sudden stop.
The combination of Draghi‟s commitment to “do whatever it takes” on 26 July and the apparent
support from the German Chancellor which followed soon after have given the market hopes
that the worst of the crisis might finally be over and that solidarity might finally be winning the
day.
In our view, 2013 will be another testing year for solidarity against a backdrop of weakening
economic activity. In fact, we believe that the macro-economic challenges and the cost of
preserving the stability of the system remain higher than the nature and size of the backstops
available.
Our baseline scenario for 2013 is one of deep recession in the countries most under stress and
of shallow recession in the centre (Figure 1), with the euro area as a whole expected to contract
around 0.8% next year (Figure 2). The ongoing deterioration in labour markets coupled with still
extremely restrictive monetary and financial conditions in countries like Spain and Italy (where
the currency, borrowing costs and liquidity constraints all add up to pretty tight financial
conditions) should feed back into public finances and NPLs creating a depressionary
environment in a growing share of the region. This negative loop has the potential to threaten
the stability of the whole system again given the absence of an unlimited and unconditional
backstop.
We expect the following chain of events by mid 2013:
Fig. 1: Country specific forecast
2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014
Euro area -0.5 -0.8 0.0 2.5 1.7 1.6 -3.3 -3.2 -3.0 93.7 98.1 100.9
Austria 0.4 0.2 0.8 2.5 2.2 2.0 -2.7 -2.6 -2.9 74.1 75.2 76.3
France 0.1 -0.5 0.5 2.2 1.4 2.0 -4.5 -3.9 -3.6 90.0 93.7 95.6
Germany 0.9 0.3 0.7 2.2 1.8 1.7 -0.1 -0.2 -2.0 81.9 81.5 80.3
Greece -6.5 -4.7 -1.8 0.9 -0.2 -0.3 -6.9 -5.9 -3.8 176.6 188.3 198.2
Ireland -0.1 0.4 1.3 2.0 0.5 0.5 -8.5 -8.1 -0.5 117.6 123.4 125.1
Italy -2.4 -2.5 -1.5 3.3 1.8 1.4 -2.9 -3.1 -5.2 126.3 131.1 133.8
Netherlands -0.3 -0.3 0.2 2.8 2.6 1.8 -3.6 -3.1 -5.9 68.7 69.9 71.9
Portugal -3.2 -2.8 0.0 2.9 1.3 0.7 -5.2 -5.0 -2.8 119.1 127.6 129.6
Spain -1.4 -3.0 -1.5 2.5 2.5 1.4 -8.0 -7.0 -3.1 85.0 95.5 101.1
Debt level
(as % of GDP)
Real GDP Consumer prices Budget balance
(% y-o-y) (% y-o-y) (as % of GDP)
Source: Nomura Global Economics.
Spain: from bank bailout to sovereign bail out
After having given the impression to market participants that they were actively considering
calling for help, we now have little doubt that Spain will try to free-ride the system by keeping
expectations of a bailout high without pulling the trigger. We believe this to be a highly risky
strategy which will eventually backfire.
We see four triggers that could precipitate the call for help:
Nomura | Global Annual Economic Outlook 13 November 2012
38
1. Rating downgrade
A single notch of downgrade from DBRS would have an immediate knock on effect on haircuts
(additional 5%) which could prove destabilizing. More importantly, a downgrade to below
investment grade by one of the rating agencies could be more significant. An absence of a call
for help in the short term and further disappointments on the economic front would most likely
lead to such an outcome.
2. Investors losing patience with Spain
There is little doubt that spreads have tightened on the back of the so called “Draghi put” rather
than on improving fundamentals. In that context, a lack of expediency on that front could test
the market‟s patience. To be fair, we had expected markets to be less patient than they have
been, a sign perhaps that this channel might not work for quite some time. What could
accelerate investors‟ willingness to lighten their exposure to Spain could be the fear of an illiquid
end year holding significant exposure to Spain without any clarity regarding the timing for help.
3. The revelation that Spain might never call for help
The unwillingness of market participants to sell Spain up to now is the result of the credibility of
the Draghi put making the risk-reward of selling not an attractive proposition. However, the
Draghi put would lose all credibility if it became clear that Spain was in no position to call for
help as it saw no benefit from it. The past few weeks have clearly increased the likelihood of
that scenario, with Prime Minister Rajoy explicitly stating in a radio interview (see NEMO, 7
November 2012) that the spread on the 10-year should narrow by 200bp to make it an
interesting proposition, something the ECB will not be able to deliver with its OMT programme
as suggested by Mr Draghi at November‟s press conference. (The OMT is designed to address
„tail risk‟ events.)
4. The ECB loses patience
Since the beginning of the crisis, the ECB has been instrumental in “pushing” countries into
bailout. This was the case for all bailed-out countries and could thus be repeated in the case of
Spain should the ECB grow increasingly worried about the danger of postponing the help.
In all, this suggests to us that Spain will not escape a sovereign bailout. We think this will most
likely happen after renewed market stress, although conditions 1 and 4 might bring Spain
directly into a bailout without necessarily much market deterioration.
Fig. 2: Euro area macroeconomic forecast
% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP -0.1 -0.7 -0.6 -1.6 -0.8 -0.6 -0.2 -0.1 -0.5 -0.8 0.0
Household consumption -0.7 -1.0 -1.7 -1.7 -1.7 -1.5 -1.5 -1.5 -1.1 -1.6 -1.4
Fixed investment -5.1 -3.5 -7.0 -6.6 -5.6 -4.5 -3.9 -3.6 -3.9 -5.3 -3.2
Government consumption 0.7 0.4 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 0.0 -0.7 -0.5
Exports of goods and services 2.6 5.3 0.9 -3.1 0.6 1.6 2.6 2.6 2.3 0.8 2.7
Imports of goods and services -1.2 3.7 -4.7 -7.0 -2.8 -2.1 -0.8 -0.4 -1.4 -2.9 0.2
Contributions to GDP:
Domestic f inal sales -1.3 -1.1 -2.5 -2.3 -2.2 -1.9 -1.7 -1.6 -1.3 -1.9 -1.4
Inventories -0.6 -0.4 -0.7 -0.9 -0.2 -0.5 -0.1 0.1 -0.9 -0.5 0.2
Net trade 1.8 0.9 2.6 1.7 1.5 1.7 1.6 1.4 1.7 1.7 1.3
Unemployment rate 10.9 11.1 11.4 11.7 11.9 12.0 12.1 12.2 11.3 12.1 12.3
Compensation per employee 1.9 1.7 1.8 1.4 0.9 0.7 0.4 0.3 1.7 0.6 0.6
Labour productivity 0.4 0.2 -0.2 -0.4 -0.7 -0.5 -0.3 0.1 0.0 -0.4 0.5
Unit labour costs 1.5 1.4 2.0 1.8 1.6 1.2 0.7 0.2 1.7 0.9 0.1
Fiscal balance (% GDP) -3.3 -3.2 -3.0
Current account balance (% GDP) -0.3 0.1 0.5
Consumer prices 2.7 2.5 2.5 2.4 1.9 1.8 1.5 1.4 2.5 1.7 1.6
ECB main refi. rate 1.00 1.00 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
3-month rates 0.78 0.65 0.22 0.18 0.21 0.21 0.21 0.21 0.18 0.21 0.21
10-yr bund yields 1.81 1.60 1.41 1.25 1.31 1.38 1.44 1.50 1.25 1.50 1.75
$/euro 1.32 1.25 1.29 1.28 1.25 1.20 1.18 1.18 1.28 1.15 tbc
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualised rates. Unemployment rate is a quarterly average as a percentage of the labour force. Compensation per employee, labour productivity, unit labour costs and inflation are y-o-y percent changes. Interest rate and exchange rate forecasts are end of period levels. Numbers in bold are actual values, others forecast. Table reflects data available as of 9 November 2012.
Source: Eurostat, ECB, DataStream, Nomura Global Economics.
Nomura | Global Annual Economic Outlook 13 November 2012
39
Italy: still lacking a credible backstop
The biggest danger for Italy in the near term is renewed deterioration in the Spanish bond
market given how high the correlation of the two countries‟ bond markets have been in the past
few months. This is in fact our baseline scenario.
But there are other risks that seem to be underestimated by the market: the rapid increase in
NPLs in the banking sector, the downward trajectory of the economy, the broken transmission
mechanism and political risk.
In our baseline scenario, we expect Italy to experience renewed bond market deterioration
either through negative contagion from Spain or independently from Spain.
Renewed stress in the Italian bond market would most likely have much greater impact on other
asset classes than Spain which is now largely seen as an idiosyncratic risk, something we
would agree with at least in the next few months.
Need for additional conventional and unconventional policy easing
As can be seen in Figure 3, a simple Taylor rule for the euro area suggests that while the policy
rate might be broadly appropriate in the core at present, it is too tight for the periphery. This is
without considering the widening in interest spreads in the periphery. The good news is that if
our expectation of a significant deterioration in the core proves correct, then the case for
additional easing will be much easier to make. Based on our forecast, an additional 150-200bp
would be required, an amount of easing obviously impossible to deliver solely via conventional
policy. We thus expect the pressure for QE to rise during the course of next year.
Once the financial crisis is addressed there will still be an economic crisis
Perhaps the greatest challenge of all will be how to tackle the very significant and rapid increase
in unemployment in the periphery. Figure 4 shows the extent of the economic damage caused
in the periphery and the inadequacy of the euro-area policy toolkit to address these issues.
Indeed, while compressing bond spreads is relatively easy to do (once the hurdle of getting the
ECB on board is surpassed), there is no obvious policy tool at this stage in the euro area that
could help in reducing unemployment rapidly. Elevated unemployment, and rising discontent in
some countries about Europe, suggests that the ECB has no ability to eradicate the so-called
convertibility risk that there is in the system. The currency might be irrevocable but membership
is no longer.
Fig. 3: ECB policy rates vs Taylor rule recommended rates
-4
-3
-2
-1
0
1
2
3
4
5
6
1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14
ECB rate
Core
Periphery
%
Note: The Taylor rule we employed is
, where πt is the inflation
and yt is the output gap. Core stands for Germany, France, Netherlands, and Austria and periphery includes Italy, Spain, Ireland, Portugal and Greece.
Source: EC and Nomura Global Economics
Fig. 4: Unemployment rate: core vs periphery
0
2
4
6
8
10
12
14
16
18
20
Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
Core Periphery
%
Note: Core refers to Germany, France, Austria, Finland, Belgium, Luxembourg and Netherlands. Periphery refers to Italy, Spain, Ireland, Portugal and Greece.
Source: Eurostat, Datastream and Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
40
Risks to the outlook:
We see several risks to the downside. They include very significant political risk in pretty much
all the region (but most importantly Greece, Cyprus, Portugal, Italy, Germany, Finland,
Netherlands, Spain and France) either through tense relations between member countries or
the rise of populism at home. Another risk stems from dysfunctional credit markets and the
danger of depressionary spirals.
On the upside, the most significant risk stems from the potential shift in Europe away from strict
adherence to nominal fiscal targets to either structural deficit targets or only the commitment to
structural reform. Indeed, our forecast s for countries such as Spain, Italy and France are quite
sensitive to the assumptions we have made on the amount of fiscal consolidation to come.
Nomura | Global Annual Economic Outlook 13 November 2012
41
Philip Rush +44 20 7102 9595 [email protected]
United Kingdom | Economic Outlook
Stagnant
Intensification of the euro-area crisis remains a serious threat to the UK. The MPC is
responding with aggressively loose policy, despite inflation’s persistent stickiness.
Activity: Underlying growth ground to a halt in 2011 and the subsequent double-dip recession
is being compounded by recurrent intensification of the eurozone‟s sovereign debt crisis. Large
trade and financial relationships with the euro area tie the UK to its apparently bleak economic
fate (see UK Theme: Sounding in a pounding?). Earlier signs of cyclical growth momentum
waned at still weak growth rates leaving the UK on the brink of recession, probably until 2013,
besides when one-off factors boosted GDP in Q3 (see UK Theme: Several shocking months).
Growth remains constrained by the ongoing domestic deleveraging and the challenging
rebalancing act within the euro area (see UK Comment: Forecast: limping into 2014).
Inflation: Inflation has been boosted by a series of “one-off” shocks such as changes to VAT
and energy prices, but underlying inflation is still probably too strong. And there are further “one
offs” from tuition fees. Unlike the MPC, we do not expect a sustained fall below the inflation
target, let alone materially so (see UK Theme: Inflation in a black hole).
Policy: The MPC is responding aggressively to signs of weaker global growth and subdued
domestic demand. QE3 was brought to an end in November after buying £50bn, because the
MPC wanted to see if tentative signs of recovery are sustained. We doubt they will be and
expect disappointment at demand to cause the MPC to resort to QE again as soon as February.
Although concerns are growing about QE‟s effectiveness, we still do not expect a Bank rate cut,
which we believe would be counterproductive (UK Theme: The monetary blunderbuss). Part of
demand's ongoing weakness is attributable to the economy's unavoidable but impeded
rebalancing and associated fiscal consolidation programme. We estimate fiscal policy to keep
subtracting about 1.0% from GDP growth. However, in order to meet its fiscal mandate of
reaching a current structural balance by the end of a rolling five-year period, we think the
government will need to implement more measures. That is because its current spending plans
are conditioned on what we still consider to be an overly optimistic view of potential growth (see,
for example, UK Theme: Policymakers remake mistakes, 24 November 2011). As new
measures will probably be back-loaded, we expect the debt-to-GDP (secondary) target to be
broken and the UK to lose its AAA rating by May 2015 (UK Theme: Bending the fiscal rules).
Risks: Downside risks dominate our growth forecasts, creating the risk that the MPC delivers
even more easing than we expect, despite the risks being to the upside of our inflation
forecasts.
Details of the forecast
Notes: Quarterly figures are % q-o-q changes. Annual figures are % y-o-y changes. Inventories include statistical discrepancy. Inflation is % y-o-y. Interest rates and currencies are end-of-period levels. Numbers in bold are actual values; others forecast. Table reflects data available as of 6 November 2012. Source: ONS, Bank of England, Bloomberg, DataStream, Nomura Global Economics.
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014
Real GDP -0.3 -0.4 0.8 -0.2 0.0 0.1 0.1 0.2 -0.2 0.4 1.0
Private consumption 0.3 -0.2 0.8 -0.4 0.3 0.4 0.5 0.4 0.5 1.0 1.8
Fixed investment 3.2 -2.7 -0.3 0.2 -0.1 0.3 0.3 0.5 0.8 -0.3 2.5
Government consumption 3.1 -1.6 0.0 -0.4 -0.4 -0.4 -0.4 -0.4 2.2 -1.7 -1.6
Exports of goods and services -1.6 -1.1 1.4 0.8 0.7 0.7 0.8 0.9 0.2 2.9 3.0
Imports of goods and services -0.1 1.4 0.6 0.5 0.9 0.8 0.8 0.8 2.6 3.1 2.5
Contributions to GDP:
Domestic f inal sales 1.4 -0.9 0.4 -0.3 0.1 0.2 0.3 0.3 1.0 0.2 1.1
Inventories -1.3 1.2 0.1 0.0 0.0 -0.1 -0.1 -0.1 -0.4 0.3 -0.3
Net trade -0.5 -0.8 0.3 0.1 -0.1 0.0 0.0 0.0 -0.8 -0.1 0.1
Unemployment rate 8.2 8.0 7.9 7.9 7.7 7.6 7.5 7.4 8.0 7.6 7.0
Consumer prices (CPI) 3.5 2.8 2.4 2.5 2.4 2.7 2.7 2.4 2.8 2.6 2.3
Retail prices (RPI) 3.8 3.1 2.9 3.1 3.1 3.4 3.3 2.8 3.2 3.2 2.6
Announced size of the APF (£bn) 325 325 375 375 425 425 425 425 375 425 425
Official Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
3-month sterling libor 1.03 0.90 0.60 0.65 0.65 0.65 0.65 0.70 0.65 0.70 0.70
10-year gilt 2.20 1.73 1.73 1.60 1.50 1.50 1.60 1.75 1.60 1.75 2.50
£ per euro 0.83 0.81 0.80 0.78 0.77 0.75 0.75 0.75 0.78 0.75 tbc
$ per £ 1.60 1.56 1.62 1.64 1.62 1.60 1.57 1.53 1.64 1.53 tbc
Nomura | Global Annual Economic Outlook 13 November 2012
42
Peter Attard Montalto +44 (0) 20 710 28440 [email protected]
Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]
James Burton +44 20 710 24927 [email protected]
EEMEA Outlook
Some silver linings to the external risks bearing down
The region is not homogeneous, but tighter fiscal policy and broadly orthodox
monetary policy are a common theme, along with a lower beta to the eurozone.
The same shocks that we commented on in our outlook last year are affecting EEMEA currently:
eurozone bank deleveraging, export demand shocks from the eurozone, the global growth
slump and a range of domestic idiosyncratic risks (mainly surrounding politics and their
interaction with fiscal policy). Those shocks are all still very much present across the region.
Deleveraging has, if anything, been faster and more aggressive in a number of countries than
we first thought.
Sentiment has been a big catalyst for a slower EEMEA in 2012. The weakening of export
growth has been slower than that of domestic demand in CEE in general (and so trade deficits
have narrowed markedly). While tighter credit and lending standards did not exceed our
expectations, sharply deteriorating sentiment across the region has played a key role in
damping investment, inventory building and labour market dynamics in particular.
That said, if we consider our eurozone growth forecast is -0.8% in 2013 and -0.5% in 2012 and
then +0.8% in 2014, our own region growth forecast of 3.2% next year after 2.7% this year and
3.8% in 2014 compares very favourably with what happened in 2009 when GDP growth slowed
to 4.8%. The growth dynamic and contagion through the domestic economy was much weaker
in 2008-09.
The region does, therefore to some extent, seem to be establishing itself as having a lower beta
to the eurozone crisis, even though specific contagion channels are still very much present. We
believe there are several reasons for this. First, there is a lot of pent-up demand from the more
region-centric crisis than there was in 2008-09. Second, fiscal drag, while still present in most
economies, has much less of an impact now than back then. Furthermore, the nominal and real
policy rates went lower for longer (i.e. the transmission lags have had time to work through) and
households, governments and corporates all have cleaner, deleveraged (or partially so) balance
sheets. This is evident in the level of current accounts alone. Add to that a global shock that is
probably more limited, combined with easier liquidity internationally than under the previous
shock and a certain degree of export partner diversification into Asia, Africa, LatAm – and the
picture while certainly not rosy has some more underlying supports.
The risks
Upside risks to our forecast stem from a softer landing in Asia rather than core and northern
eurozone growth remaining very robust through next year. However, the risks of further central
Fig. 1: Growth comparisons
-8
-6
-4
-2
0
2
4
6
8
10
GDP growth for Strong countries
GDP growth for Weak countries
% y-o-y
Nomura forecasts
Source: Nomura, Bloomberg. Note: „Strong‟ countries include Russia, Poland and Turkey. „Weak‟ countries include Czech Republic, Hungary, Romania and South Africa.
Fig. 2: Inflation performance
2
3
4
5
6
7
8
9
10
1 3 5 7 9 11 13 15 17 19 21 23
2008/2009 Headline
2008/2009 Core
Oct 2010 to present Headline CPIOct 2010 to present Core CPI
%, y-o-y
Months into period
Source: Nomura, Bloomberg. Note: GDP-weighted country sample for Czech, Hungary, Poland, Romania, Russia, Turkey and South Africa.
Nomura | Global Annual Economic Outlook 13 November 2012
43
bank printing are probably one of the most complex areas of contention on risk because they
can sweep all manner of ills under the carpet in EEMEA, yet at the same time do little to
provoke structural reforms.
To the downside the most severe risk is probably an untimely, early end to central bank printing
perhaps on global inflation picking up. Equally, core eurozone growth surprising to the downside
could drag some of the less affected consumption-related exports in the region lower at a faster
pace. Banking contagion from a more meaningful shock from the eurozone is still there, but as
difficult to quantify as ever, and we have written significantly on that risk and the use of
backstops and exchange controls to offset in the past.
The good
While these factors apply across the region there is one group of countries that they apply
specifically to – Russia, Turkey and Poland. This strong group has seen more orthodox policy of
late, has strong fiscal balance sheets and good funding, and more closed economies than the
rest of the region. Turkey has recently been upgraded and Poland should follow suit next year.
All three have more solid domestic demand.
Interestingly, deleveraging in Turkey and Poland has, gross, been the highest in the region, but
because liquid banking asset markets and deleveraging by eurozone banks have been too
eager sellers wanting to expand in the region and provide credit, the impact on the economies
has been minimal if any.
Here are some specifics in each case:
Turkey: Turkey‟s rebalancing is likely to continue, but at a lower pace. We have a reasonably
confident view on Turkey‟s recovery from the current soft patch driven by investments. Net
exports are unlikely to deteriorate very sharply similar to previous recoveries. Export market
share differentiation, thanks to a sharp rise in Middle East exports, helps external balances to
improve even further. Monetary policy has taken a dovish turn especially after Turkey‟s rating
upgrade as the TCMB does not want TRY to have a disorderly appreciation. We do not believe
inflation priorities are thrown out of the window completely and expect to see a “hike in disguise”
if we are right about the recovery in the activity. Fiscal policy appears very tight on a cyclically
adjusted perspective and the government is trying to put debt-to-GDP sub-30% of GDP –
helping crowding in private investments.
Fig. 3: Strong vs weak in retail sales and IP
-15
-10
-5
0
5
10
15
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Strong countries Retail salesWeak countries Retail salesStrong countries IPWeak countries IP
%, y-o-y
Source: Nomura, Bloomberg. Note: „Strong‟ countries include Russia, Poland and Turkey. „Weak‟ countries include Czech, Hungary, Romania and South Africa.
Fig. 4: Strong vs weak in exports
-35
-25
-15
-5
5
15
25
35
45
Jan-06 Mar-07 May-08 Jul-09 Sep-10 Nov-11
Strong countries Exports growthWeak countries Exports growth
%, y-o-y
Source: Nomura, Bloomberg. Note: „Strong‟ countries include Russia, Poland and Turkey. „Weak‟ countries include Czech, Hungary, Romania and South Africa.
Russia: Russia has gone through its deleveraging much earlier than other countries and hence
balance sheets are at a healthier point, as well as domestic demand. The economy is still very
leveraged with oil and oil prices (higher than 2008 probably), but that may not be a bad thing for
2013. Economic growth should remain above 3.5% and inflation pressures should result in the
Central Bank of Russia “acting” more like an inflation targeter than countries formally
implementing an inflation-targeting framework.
Poland: We are actually quite optimistic on growth for next year vs the central bank (we
forecast 2.0%, the NBP is projecting 1.5%), though we see a minimal risk of a recession. Poland
Nomura | Global Annual Economic Outlook 13 November 2012
44
has exhibited a significant capacity to prefund itself, combined with probably the most orthodox
monetary policy in the region. That said, growth should slow sharply vs potential to around 4.0%
(long run) thanks to slowing public sector infrastructure spending at the end of the current EU
funding window, combined with a stagnant labour market.
In 2012 consumption has been helped by declining savings, but the boon from that in 2013
should become less readily available. We, however, see continuing acceptable real credit
growth and low inflation helping real incomes, while the important re-export cycle to Asia
remains key. The test of the conservative nature of the MPC comes of course in how much it
cuts rates, but with a desire to keep real deposit rates positive and the likely MPC view of long-
run inflation being higher than the NBP economists expect we see only a limited cycle. That
should continue to support Poland‟s credibility.
While fiscal consolidation has slowed in response to slower growth, off-balance-sheet measures
add significant upside risks to our forecast for growth, even if they cannot be totally factored in
at this stage. Poland‟s strength however means that large foreigner holdings of onshore
treasury debt have been built up, which is a risk albeit not unique to it. That said, Poland,
perhaps, is at higher risk of undershooting expectations because of the high base it starts from.
The “OK”
We would place Israel and Czech Republic in the category of countries that have decent
fundamentals, but monetary policy has shifted in each to be less inflation-targeting and more
currency or global growth targeting.
Czech: We expect the further slump in the eurozone next year and possibly a further crunch in
the eurozone banking system flowing over into the Czech Republic to reinforce the deflationary
(core inflation) dynamic there, and hence for the CNB to be ready to undertake some form of
currency intervention. We think that will be a soft-floor type arrangement with 25.0 or 25.5 in
EURCZK as its base. The CNB has started to abandon its traditional mantra of conservative no-
touch policy on the currency because of the internal view that rates will need to be negative, in
effect, to stimulate the economy sufficiently. Thus, because of the impossibility of this, FX policy
is the other way to ease monetary conditions. The Czech Republic is also an interesting
example, and probably the most dramatic, where the external slowdown has not matched the
domestic slowdown and hence net trade remains supportive.
In this category we would also include the highly exposed but still structurally sound Baltic
economies that had done their homework during the 2008-09 crisis, but nevertheless will suffer
again with austerity maintained. The fruits of an export and labour-intensive FDI boom in the
past few years however should start to pay off from next year to a greater degree and with it act
to support growth.
Israel: Israel has a modestly deteriorating current account and an economy that is reasonably
highly correlated with global activity. An activist monetary policy and fiscal policy have never
resulted in the Israeli economy falling into a recession, but in the face of weak global growth –
monetary policy gets very dovish.
The “less good”
The final group of countries has a mixture of susceptibility to the eurozone crisis and global
slowdown, but amplified by domestic political, policy and structural deficiencies. This means
fiscal consolidation momentum is all the more important to successfully navigate often very
narrow funding tightropes through next year. The Balkans, Hungary and South Africa fall into
this bucket. Growth is less important in these cases, while monetary policy has taken a turn to
the more unorthodox – in the case of Romania, Serbia and Hungary through politicisation and
potential further easing measures, and in the case of South Africa more mundanely a shift to
even lower real rates.
Fiscal policy in each case has significant political risks both in the immediate future and more
over the medium run. In the case of SEE, the reversal of existing (and in our view very
necessary structural reforms), while in Hungary it is more about the unorthodoxy of fiscal policy
as the 2014 elections are approached. South Africa has a lethal mix of the breakdown of trust in
politics and the unions, combined with the ANC‟s elective conference next month. All these
combine with medium-run risks that the ANC tries to solve the countries socio-economic
Nomura | Global Annual Economic Outlook 13 November 2012
45
problems through a continual shifting forward of required fiscal consolidation but not a blow up
in the budget.
Potential growth remains very low and is probably falling in both countries. In Hungary we
estimate potential growth (over medium run) to now be around 1.0% vs 4.0% before 2007, and
in South Africa to be around 3.50% currently vs 3.85-4.00% pre crisis. In both cases we think
this means the risk of further downgrades.
There are some specifics to highlight here:
Hungary: The story here shows a marked disconnect between market pricing and reality, but
we find it hard to see how the shocks that might change this any time soon. Of course external
shocks like Spain or US fiscal cliff could be one source, but the additional global liquidity that
would lead to that would make the shock filtering through to Hungry only temporary.
Domestically fiscal underperformance through next year combined with a new Governor of the
MNB and an attempt to issue FX debt before an IMF plan is in place could all be sufficient a
shock to provoke market reassessment. We are very concerned that a new Governor and
widely replaced management of the MNB will combine with the government‟s attempts to
increase its role in the banking sector through state-owned banks and unorthodox policy; a
carefree attitude toward inflation (with the level of the currency and the volume of loan growth
proving more important); and postmodern policy measures, will all lead to eventual instability in
the currency. Like Poland the risks of a self-sustaining crisis from large foreign holdings of
onshore debt are significant. Further downgrades could play a role here as well.
Overall, though, the backstop of an IMF is not and is unlikely to be present until a severe market
blowup provokes a change in the government‟s mindset and it accepts IMF conditionality.
South Africa: While current policy in South Africa is pretty orthodox, the risks are mounting on
the fiscal side in particular. Furthermore, the political risks of an ANC in the throes of a
leadership election, where payoffs to get votes and attempts to solve recent labour market
unrest are dealt with through extra spending should also exert pressure. Equally, with rates
falling lower and a current account totally financed by credit and portfolio flows, the moves lower
in real rates is starting to look unorthodox for the normally conservative SARB. With a record
level of bond inflows by foreigners there is, therefore, a small window of credibility and funding
to maintain stability through next year. Hence, fiscal rectitude is required. As ever we don‟t see
South Africa „blowing up‟. Instead, we expect the market to probably start to realise that the
status quo of a President Zuma maintaining control of the ANC will be the problem. Therefore,
with an unchanged policy or even a new policy further damaging competitiveness we will see
potential growth remaining at a record low. All this should lead to additional downgrades.
Nomura | Global Annual Economic Outlook 13 November 2012
46
Peter Attard Montalto +44 (0) 20 710 28440 [email protected]
Hungary | Economic Outlook
Fun and games continue
We see the government's tough approach continuing in 2013; however, a new
financial transaction tax and new Governor of the MNB add different risks for markets.
Policy, fiscal and funding: The government has continued to be able to fund itself domestically
because of excess liquidity and a lack of lending by banks, combined with inflows by foreigners
still seeing attractive carry. On external debt, a mixture of derivatives and cash management,
combined with swapping out domestic issuance and drawing down deposits have meant that
funding has been fine and can continue to be as such through February of 2013 - after which
MNB funding can bridge the gap. We think these factors and the fall in local and external yields
mean that an IMF/EU backstop deal is not necessary at the moment. The IMF equally is
unwilling to countenance further negotiations because the government is unwilling to
compromise and unwilling to negotiate in good faith. Hence talks have all but collapsed. We
think the government will only return to the table if there is a blow up in market risk premia. That
could happen in early Q1 because the FX funding situation is far from certain. We think the
government will eventually get impatient and therefore issue FX debt anyway next year. We are
concerned about the sustainability of the current government programme into the 2014
elections, so we do not see any IMF/EU backstop lasting beyond the end of 2013. Fiscal policy
remains controlled, but if only by repeated austerity packages, in part to reduce funding
requirements and remove the threat of EDP sanctions. However, we see poor sustainability of
such low deficit levels in the medium run.
Rates and inflation: We expect headline inflation to remain outside target until the middle of
2014 on a mixture of tax pass-through and pressure from wages and policy. That said,
underlying core ex tax VAT inflation should remain around the bottom edge of the target until it
starts slowly rising in the middle of next year. This means that the external members of the MPC
can continue cutting rates step-by-step as long as the currency and broad risk premia are under
control. While we pencil the MPC stopping at 5.00%, in reality if it could get away with it the
MPC could well go lower still. More important than this however is a new Governor of the MNB
in March and two new Deputy Governors in July. We think these would be political
appointments that would attempt to fulfil FIDESZ's 2010 election manifesto and provide MNB
funding for banks, corporates and the development banks via a form of QE or more general
postmoderism. This may include giving the government greater access to FX reserves.
Growth: We forecast growth in 2013 of only barely above zero (0.1% in our forecast), meaning
the economy will be showing no recovery for its second dip into recession next year. Our key
concern is potential growth declining over the past four years from 4.0% before the crisis, first to
2.5% by 2010, then 1.75% by this year, but perhaps as low as 1.0% by 2014 thanks to the
government's latest austerity packages.
Figure 1. Details of the forecast Figure 2. Headline and core ex-VAT CPI.
2011 2012 2013 2014
Real GDP % y-o-y 1.7 -1.1 0.1 0.8
Nominal GDP USD bn 140.2 160.8 150.4 159.6
Current account % GDP 1.4 2.5 1.5 1.0
Fiscal balance % GDP -6.2 -4.2 -3.1 -2.6
Structural balance -5.0 -6.5 -5.7 -4.0
CPI % y-o-y * 4.1 6.1 4.8 4.0
CPI % y-o-y ** 3.9 5.9 5.0 4.3
Core CPI ex VAT % y-o-y ** 2.6 2.0 2.3 3.0
Unemployment rate % 10.7 10.5 10.4 10.2
Reserves EUR bn *** 35.1 31.3 28.1 25.0
External debt % GDP*** 138.9 131.6 130.6 132.6
Public debt % GDP 82.8 79.5 80.0 79.0
MNB policy rate %* 7.00 5.75 5.00 6.00
EURHUF* 315 280 295 280
*End of period, **Period average, Bold is actual data
***Includes IMF/EU funds
1.5
2.5
3.5
4.5
5.5
6.5
Jan-2011 Nov-2011 Sep-2012 Jul-2013 May-2014
Constant tax core
Headline
% y-o-y
Notes: * End of period. ** Period average. Bold is actual data. *** Includes IMF/EU funds. Source: Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
47
Peter Attard Montalto +44 (0) 20 710 28440 [email protected]
Poland | Economic Outlook
NBP in a limited cutting cycle - growth still outperforming
Although growth will probably be lower next year, the economy will likely avoid
recession, meaning the scope for rate cutting is still limited.
Growth: Although Poland will likely remain the strongest country in the region, growth will still
probably be lower in 2013 at 2.3% vs 2.4% this year because of a confluence of factors. First,
the slowing pace of eurozone structural fund investments will likely combine with domestic fiscal
consolidation to drag growth down by some 0.6pp in our view. Consumption should also slow,
particularly in H1 thanks to slightly lower credit growth and a stagnant labour market feeding
through as the ability to draw down net savings reduces. Slowing credit should also be felt in
private sector investments though to a lesser degree. However, the sentiment shock in the local
economy and its effects on imports and inventories have actually been larger than the export
shock. Upside risks to growth from the government's off-balance-sheet investment programme
however are meaningful and could add up to 0.5pp to growth to next year. Downside risks
emanate from the eurozone and on the trade side, particularly from Asia. We see a rapid
bounce back in 2014 growth to 3.7% owing to strong fundamentals and underlying balance
sheets of households and corporates, banks that are not feeling the effects of deleveraging
because of their profitability, combined with Shale gas coming on-stream, and potentially even
larger effects from the investment programme.
Currency: We expect USD/PLN to move lower due to the following factors: an orthodox central
bank can easily stop its cutting cycle and even hike if animal spirits return, and because the
central bank is unlikely to get concerned about currency strength anytime soon.
Rates and inflation: We see inflation moving swiftly lower to within target by the end of this
year and then further down into the middle of 2014 to spend a brief period below the centre
band of the target. All in all the stickiness of the CPI in the last few years should pass and allow
this recently begun NBP MPC cutting cycle to continue. However, over the medium run as
growth is likely to recover from H2 2013 we see inflation rising to settle just below the top of
target through much of 2014. This outlook, combined with the government‟s off-balance-sheet
fiscal stimulus and the cautious nature of the median of the MPC means we only see a handful
of cuts in H1 2013 - currently only 50bp in our forecast, but we see more than 75bp as unlikely.
Fiscal and politics: Prime Minister Tusk has announced ambitious budgetary and structural
reforms for the four years of this parliament – sufficient to achieve an upgrade next year. These
reforms should bring the deficit to less than 3.0% of GDP in 2013, though not as targeted in
2012 because of lower growth. Growth matters the most. Aggressive pre-funding however
means credit risks remain low.
Figure 1. Details of the forecast Figure 2. Inflation outlook
2011 2012 2013 2014
Real GDP % y-o-y 4.3 2.4 2.0 3.5
Nominal GDP USD bn 513.6 578.9 597.4 636.2
Current account % GDP -4.9 -4.7 -3.8 -4.3
Fiscal balance % GDP -5.1 -3.4 -2.9 -2.7
CPI % y-o-y * 4.6 3.0 2.3 3.2
CPI % y-o-y ** 4.3 3.8 2.4 3.0
Core CPI ex VAT % y-o-y ** 2.4 2.2 2.4 2.8
Population mn 38.2 38.5 38.4 38.3
Unemployment rate % 12.5 13.0 12.8 12.2
Reserves EUR bn ** 74.3 82.5 85.0 90.0
External debt % GDP 62.7 53.2 48.2 45.9
Public debt % GDP 53.5 52.8 52.2 51.6
NBP policy rate %* 4.50 4.50 4.00 5.00
EURPLN* 4.47 4.10 3.90 3.75
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan-2008 Jun-2009 Nov-2010 Apr-2012 Sep-2013
Headline Expectations Core% y-o-y
Notes: *End of period, **Period average, bold are actual data. Source: Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
48
Peter Attard Montalto +44 (0) 20 710 28440 [email protected]
South Africa | Economic Outlook
Status quo means the brakes are still applied
Although we expect President Zuma to be re-elected, the implications are for further
downgrades, heightened fiscal risks and a lack of real reform.
Growth: We see a very sluggish recovery in growth from 2.4% this year to only 2.6% in 2014
and then not even reaching potential growth with only 3.6% in 2014. Negative pressures are
strong from Q3 of this year through to the middle of 2013 from production lost in the mining
sector and second-round effects into up and downstream industries and consumption. We
believe broader underlying consumption can be maintained to some extent because of credit
growth and large real wage rises; however, the negative drag from a widening trade deficit will
likely offset that. Risks are slightly to the upside if there is a softer landing in the eurozone.
Fiscal policy should be broadly neutral, while the capacity of public sector investments to add
much to growth beyond what it is already doing is limited by funding constraints.
Currency, inflation and rates: With the current account deficit set to remain over 6% of GDP
until mid-2013, while funding remains okay despite the global backdrop, but not great because
of domestic risk factors, the currency should remain weak overall and above 8.0 in USDZAR.
The SARB has also been surprisingly open about both the fact it sees fair value around 8.50-
8.75 (something we think it would have disliked doing in the past) and that it will not intervene
on politically-led risk premia shocks - this all reaffirms the fact the currency may remain weak.
The new inflation index coming from the January print (out February) should shift inflation up by
about 0.3pp to start with. However, the underlying inflation dynamic is looking a little less bullish
for 2013 thanks to currency pass-through and larger real wage increases, and it could breach
target briefly mid-year before breaching more sustainably through the end of the year. However,
we think the SARB forecast can be more anchored in target and combined with a growth-centric
response to the labour unrest and weak underlying growth, there could be another rate cut in
January. That said, the inflation dynamic makes that cut still far from certain.
Politics and fiscal: There is currently a structural breakdown in the traditional societal
structures around labour, and strike action is occurring because of the linkages between union
leadership, the ANC and BEE funds. Although there has been some let up more recently in the
level of strike action, we see it re-emerging in the next wage round that starts more widely in the
economy around Easter time. The outcome of that, however, may simply be centralised
minimum wages and large increases for workers, which harms competitiveness. The battle for
the ANC leadership is likely to be a key driver of policy direction – but we expect re-election for
President Zuma because of a mixture of policy payoffs he has given to the unions in particular
and also the lack of aggression in campaigning that Deputy President Motlanthe has made. The
outcome of this however is a still ineffectual and deleterious policy that holds back potential
growth. The budget outlook still looks very much skewed to the downside and the funding
window will likely remain tight. There really is very limited room for error.
Figure 1. Details of the forecast Figure 2. Inflation outlook
2011 2012 2013 2014
Real GDP % y-o-y 3.1 2.4 2.6 3.2
Current account % GDP -3.8 -6.1 -5.3 -4.7
PSCE % y-o-y* 6.2 7.8 9.5 10.2
Fiscal balance % GDP -4.4 -4.7 -4.4 -3.9
FX reserves, gross USD bn* 48.9 50.0 50.2 50.3
CPI % y-o-y * 6.1 5.5 5.5 6.1
CPI % y-o-y ** 5.0 5.6 5.5 5.7
Manufacturing output % y-o-y 2.4 1.6 2.0 6.8
Retail sales output % y-o-y 5.7 4.3 1.8 3.5
SARB policy rate %* 5.50 5.00 4.50 6.00
EURZAR* 10.5 11.4 9.8 10.4
USDZAR* 8.09 8.90 8.50 9.00
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14
Headline - old
Headline - new
% y-o-y
Notes: PSCE – Private sector credit extensions. * End of period. ** Period average. Bold is actual data. Source: Nomura Global Economics
Source: Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
49
Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]
Turkey | Economic Outlook
A healthy rebalancing
A tightening policy helped the rebalancing of the economy. We expect the rebalancing
to lose its 2012 momentum, but the economy looks very healthy for 2013.
Activity: GDP growth looks likely to accelerate to 4.5% in 2013 after 3% growth in 2012. The
risks are to the upside, in our view. Private investment should remain strong while private
consumption recovers. We do not expect net exports to flip into negative territory similar to the
previous episodes of global recovery.
Inflation: Turkey‟s inflation deteriorated at the expense of a strong fiscal stance in 2012. So far
it has been largely driven by factors beyond the TCMB‟s control, but it looks like the market‟s
working number for the next six months is now around 7.5% with some upside risks. An
improvement in the growth backdrop could lead to deterioration in inflation expectations.
Policy: With our framework of a growth rebound in Q4 2012 and Q1 2013, we expect the TCMB
to implement some temporary “hikes in disguise” largely for expectations management
purposes when data improve further (possibly early 2013). We think the daily repo rate could
move up to the 6-6.5% area in December or early Q1 2013. Our base case sees the TCMB
narrowing the interest rate corridor. We are referring to the daily repo rate in these forecasts
rather than the 1-week benchmark repo rate (we kept the policy rate constant in the forecast
horizon given the TCMB‟s comfort with the current policy setting). In a situation of very sharp
EM inflows and strong TRY appreciation, the TCMB signaled it can lower the benchmark repo
rate and bottom of the interest rate corridor as well.
Fiscal policy: Since H2 2011 fiscal policy has helped the monetary authorities, as the
government has used revenue outperformance as a cushion. The recently unveiled Medium
Term Programme (MTP) for 2013-15 implies that the tight fiscal stance will continue and it looks
like the government intends to avoid running an “election budget” or any form of “election
spending”. While primary surplus estimates are not as ambitious as in the past six or seven
years, we still expect the debt-to-GDP ratio to fall towards the low-30% levels.
Rating outlook: Turkey is now rated investment grade by Fitch, and we expect it to receive an
investment grade rating in 2013 from other rating agencies as well. We think rebalancing and
structural reforms are moving in the right direction.
Risks: Terms-of-trade shocks (higher oil prices) and sudden stops of capital inflows are the
main risks. In that scenario, inflation could rise again with unwarranted currency weakness
resulting in a sharp fall in consumer confidence. However, this is not our base case. We think
the risks of capital controls being implemented, on any rapid appreciation, are extremely low.
With EM inflows accelerating in 2012, the likelihood of sudden stops has declined. Tight lending
conditions are still weighing on credit demand.
Fig. 1: Details of the forecast
2011 2012 2013 2014
Real GDP % y-o-y 8.5 3.0 4.5 5.5
Contributions to GDP by selected items
Private consumption 5.5 1.3 2.5 2.4
Private investments 4.7 -0.5 2.1 2.1
Net exports -1.7 2.0 1.0 0.2
CPI % y-o-y * 10.5 7.5 6.5 5.0
CPI % y-o-y ** 6.5 9.1 6.7 6.3
Budget balance % GDP -1.2 -2.4 -2.3 -2.0
Primary balance % GDP 1.6 0.6 1.0 1.2
Public debt % GDP 42.4 37.0 36.0 35.0
Current account % GDP -10.0 -7.0 -6.0 -6.0
TCMB policy rate %* 5.75 5.75 5.75 5.75
USDTRY* 1.89 1.80 1.70 1.75 Notes:* End of period. ** Period average. Bold is actual data. Source: Nomura Global
Economics
Fig. 2: Fiscal policy very tight
2009
2010
2011
20122013
35
40
45
50
1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8
Cyc. adj. primary balance (% GDP)
Gross debt (%GDP)
Source: Nomura Global Economics, IMF.
Nomura | Global Annual Economic Outlook 13 November 2012
50
Peter Attard Montalto +44 (0) 20 710 28440 [email protected]
Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]
Rest of EEMEA | Economic Outlook
Czech Republic: Postmodernism, here we come
Whilst a technical recession may well linger through till Q2, until there is a return of
sentiment domestic growth will continue to under-perform even export growth.
2011 2012 2013 2014
Real GDP % y-o-y 1.7 -0.9 0.7 1.4
Nominal GDP USD bn 215.5 219.8 207.7 208.9
Current account % GDP -2.9 -2.5 -2.8 -3.2
Fiscal balance % GDP -4.0 -4.5 -4.0 -3.8
CPI % y-o-y * 2.4 2.5 1.7 1.5
CPI % y-o-y ** 1.9 3.3 2.1 1.5
Core CPI ex VAT % y-o-y ** 0.8 0.3 1.2 1.1
Population mn 10.5 10.4 10.4 10.3
Unemployment rate % 8.6 9.0 8.8 8.5
Reserves EUR bn ** 31.1 31.5 32.0 32.5
External debt % GDP 50.8 49.2 47.8 47.7
Public debt % GDP 43.8 45.2 47.0 46.6
CNB policy rate %* 0.75 0.05 0.05 1.00
EURCZK* 25.59 25.00 25.50 25.00
*End of period, **Period average, Bold is actual data
Growth should start to recover from Q2, led principally by consumption given a still healthy labour market and then slowly through to domestic investments. The external shock to the economy has so far been surprisingly muted and so it is more the oscillations of imports on net trade that have been the issue. Fiscal drag will still be an issue shaving some 0.2pp from GDP. Much of the shock, however, is sentiment driven.
An increasingly fractious and unstable coalition will mean any stronger fiscal action or structural reforms are unlikely. However, with steady access to domestic funding and low debt, it is questionable how much additional fiscal consolidation is needed for the medium-run path to remain credible.
Overall we expect a largely lame duck government to keep things ticking over but its ability to survive through to the 2014 election remains very much in doubt.
Underlying CPI should stay soft till the middle of H2 when it should start to normalise though headline CPI should fall back through next year. The risks to both growth and CPI in the next six months as well as the fact that interest rates are at the lower bound means that if enough of an external shock is delivered from the Eurozone we can see the CNB institute postmodern measures via some form of currency floor around 25.0-25.5.
Source: CSO, CNB, Nomura Global Economics
Romania: Markets should concentrate on fiscal not politics
Twin deficits leave little room for supporting growth in a challenging external demand environment with domestic political and constitutional uncertainties not helping.
2011 2012 2013 2014
Real GDP % y-o-y 2.5 0.2 0.8 1.8
Current account % GDP -4.2 -3.7 -4.2 -4.5
Fiscal balance % GDP -4.5 -3.5 -4.0 -3.7
CPI % y-o-y * 3.1 6.4 4.1 3.8
CPI % y-o-y ** 5.8 3.8 5.0 4.2
External debt % GDP 72.3 70.0 72.0 71.8
Public debt % GDP 38.6 39.3 39.5 38.2
BNR policy rate %* 6.00 5.00 6.00 9.00
EURRON* 4.33 4.55 4.60 4.45
*End of period; **Period average; Bold is actual data
Markets are becoming concerned with the confluence of negative factors in Romania, such as the downgrade of the rating outlook to negative by Moody‟s, IMF concerns over the elections in December moving them off-programme and fire sales of assets to support increased public sector wages.
Romania is vulnerable to deleveraging forces, which could pose a serious risk to the balance of payments. While the BNR has a contingency plan that may involve capital controls, tapping of the precautionary SBA with the IMF may be necessary if the situation deteriorates.
Rate hikes are becoming increasingly probable, reversing the recent 100bp of cuts, potentially taking rates up to 7.00% on a marked currency sell-off.
There are questions whether the new Victor Ponta-led coalition will stick to the IMF-backed austerity programme, which would likely see the party lose the next election.
Source: Ministry of statistics, Nomura Global Economics
Israel: Slower exports, slower growth, but no recession
An increasingly weak currency and looser monetary policy should help Israel.
2011 2012 2013 2014
Real GDP % y-o-y 4.8 2.8 3.0 3.5
CPI % y-o-y * 2.2 3.4 2.5 2.5
CPI % y-o-y ** 3.5 2.1 2.6 2.7
Budget balance % GDP -2.7 -3.0 -3.5 -3.0
Current account % GDP 0.3 -0.3 -1.0 -1.0
Policy rate %* 2.75 2.00 2.50 3.00
USDILS* 3.81 3.80 3.60 3.70
Israel‟s export-driven economy outperformed the region in the post-crisis environment thanks to an aggressive monetary policy response resulting in healthy domestic demand. The economy is currently slowing in line with the global backdrop.
Inflationary pressures appear to have subsided and inflation expectations are well anchored. This year‟s electricity price hikes, however, may limit the extent of policy easing. With the policy rate at 2.00%, we see no further cuts unless the global economy deteriorates further.
Underlying final demand should not weaken greatly and the recovery in 2013 should result in measured rate hikes (50bp to 2.50% by year end).
Source: BOI, Nomura Global Economics
Nomura | Global Annual Economic Outlook 13 November 2012
51
Disclosure Appendix A-1
ANALYST CERTIFICATIONS
Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified on the cover page hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. ADDITIONAL DISCLOSURES REQUIRED IN THE U.S. Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc. Personnel: The fixed income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with obtaining liquidity and pricing information for their respective coverage universe. Valuation Methodology - Global Strategy A “Relative Value” based recommendation is the principal approach used by Nomura‟s Fixed Income Strategists / Analysts when they make “Buy” (Long) “Hold” and “Sell”(Short) recommendations to clients. These recommendations use a valuation methodology that identifies relative value based on: a) Opportunistic spread differences between the appropriate benchmark and the security or the financial instrument, b) Divergence between a country‟s underlying macro or micro-economic fundamentals and its currency‟s value and c) Technical factors such as supply and demand flows in the market that may temporarily distort valuations when compared to an equilibrium priced solely on fundamental factors. In addition, a “Buy” (Long) or “Sell” (Short) recommendation on an individual security or financial instrument is intended to convey Nomura‟s belief that the price/spread on the security in question is expected to outperform (underperform) similarly structured securities over a three to twelve-month time period. This outperformance (underperformance) can be the result of several factors, including but not limited to: credit fundamentals, macro/micro economic factors, unexpected trading activity or an unexpected upgrade (downgrade) by a major rating agency. Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. („NIHK‟), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. („NFIK‟), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. („NSL‟), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. („NAL‟), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia („PTNI‟), Indonesia; Nomura Securities Malaysia Sdn. Bhd. („NSM‟), Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch („NITB‟), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited („NFASL‟), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034); NIplc, Madrid Branch („NIplc, Madrid‟) and NIplc, Italian Branch („NIplc, Italy‟). „CNS Thailand‟ next to an analyst‟s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited („CNS‟) to provide research assistance services to NSL under a Research Assistance Agreement. CNS is not a Nomura entity. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative
Nomura | Global Annual Economic Outlook 13 November 2012
52
instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (as defined within Financial Services Authority („FSA‟) rules in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor‟s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. („MSCI‟). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Clients outside of the US may access the Nomura Research Trading Ideas platform (Retina) at http://go.nomuranow.com/equities/tradingideas/retina/ Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the „1933 Act‟), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc, which is authorized and regulated by the FSA and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This document has not been approved for distribution in the Kingdom of Saudi Arabia („Saudi Arabia‟) or to clients other than 'professional clients' in the United Arab Emirates („UAE‟) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or to any person located in Saudi Arabia or to clients other than 'professional clients' in the UAE. By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are a 'professional client' in the UAE and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Disclaimers required in Japan Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example, transactions involving Japanese equities are subject to a sales commission of up to 1.365% (tax included) of the transaction amount or a commission of ¥2,730 (tax included) for transactions of ¥200,000 or less, while transactions involving investment trusts are subject to various fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to each investment trust). In addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses. Transactions involving Japanese equities (including Japanese REITs, Japanese ETFs, and Japanese ETNs) are subject to a sales commission of up to 1.365% (tax included) of the transaction amount (or a commission of ¥2,730 (tax included) for transactions of ¥200,000 or less). When Japanese equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Japanese equities carry the risk of losses owing to price fluctuations. Japanese REITs carry the risk of losses owing to fluctuations in price and/or earnings of underlying real estate. Japanese ETFs carry the risk of losses owing to fluctuations in the underlying indexes or other benchmarks. Transactions involving foreign equities are subject to a domestic sales commission of up to 0.9975% (tax included) of the transaction amount (which equals the local transaction amount plus local fees and taxes in the case of a purchase or the local transaction amount minus local fees and taxes in the case of a sale) (for transaction amounts of ¥750,000 and below, maximum domestic sales commission is ¥7,455 tax included). Local fees and taxes in foreign financial instruments markets vary by country/territory. When foreign equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a
Nomura | Global Annual Economic Outlook 13 November 2012
53
separate fee for OTC transactions, as agreed with the customer. Foreign equities carry the risk of losses owing to factors such as price fluctuations and foreign exchange rate fluctuations. Margin transactions are subject to a sales commission of up to 1.365% (tax included) of the transaction amount (or a commission of ¥2,730 (tax included) for transactions of ¥200,000 or less), as well as management fees and rights handling fees. In addition, long margin transactions are subject to interest on the purchase amount, while short margin transactions are subject to fees for the lending of the shares borrowed. A margin equal to at least 30% of the transaction amount and at least ¥300,000 is required. With margin transactions, an amount up to roughly 3.3x the margin may be traded. Margin transactions therefore carry the risk of losses in excess of the margin owing to share price fluctuations. For details, please thoroughly read the written materials provided, such as listed securities documents or documents delivered before making a contract. Transactions involving convertible bonds are subject to a sales commission of up to 1.05% (tax included) of the transaction amount (or a commission of ¥4,200 (tax included) if this would be less than ¥4,200). When convertible bonds are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Convertible bonds carry the risk of losses owing to factors such as interest rate fluctuations and price fluctuations in the underlying stock. In addition, convertible bonds denominated in foreign currencies also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When bonds are purchased via public offerings, secondary distributions, or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Bonds carry the risk of losses, as prices fluctuate in line with changes in market interest rates. Bond prices may also fall below the invested principal as a result of such factors as changes in the management and financial circumstances of the issuer, or changes in third-party valuations of the bond in question. In addition, foreign currency-denominated bonds also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When Japanese government bonds (JGBs) for individual investors are purchased via public offerings, only the purchase price shall be paid, with no sales commission charged. As a rule, JGBs for individual investors may not be sold in the first 12 months after issuance. When JGBs for individual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value of the bond plus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.8 will be used through 9 January 2013, and an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used starting on 10 January 2013, (2) for 5-year and 3-year fixed rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.8 will be used through 9 January 2013, and an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used starting on 10 January 2013. Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.25% (tax included) of the transaction amount. Also, a direct cost that may be incurred when selling investment trusts is a fee of up to 2.0% of the unit price at the time of redemption. Indirect costs that may be incurred during the course of holding investment trusts include, for domestic investment trusts, an asset management fee (trust fee) of up to 5.25% (tax included, annualized basis) of the net assets in trust, as well as fees based on investment performance. Other indirect costs may also be incurred. For foreign investment trusts, indirect fees may be incurred during the course of holding such as investment company compensation. Investment trusts invest mainly in securities such as Japanese and foreign equities and bonds, whose prices fluctuate. Investment trust unit prices fluctuate owing to price fluctuations in the underlying assets and to foreign exchange rate fluctuations. As such, investment trusts carry the risk of losses. Fees and risks vary by investment trust. Maximum applicable fees are subject to change; please thoroughly read the written materials provided, such as prospectuses or documents delivered before making a contract. An annual account maintenance fee of up to ¥1,575 (tax included) is charged for any account held with Nomura Securities containing equities or investment securities. An additional annual account maintenance fee of up to ¥3,150 (tax included) is charged for any account containing foreign securities. No account fee will be charged for other marketable securities or monies deposited. Transfers of equities to another securities company via the Japan Securities Depository Center are subject to a transfer fee of up to ¥10,500 (tax included) per issue transferred depending on volume. Nomura Securities Co., Ltd. Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142) Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association of Japan; and Type II Financial Instruments Firms Association. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2012 Nomura Securities International Inc.. All rights reserved.
Nomura | Global Annual Economic Outlook 13 November 2012
54
Global Economics
Economists
Global-Economics Research
Lewis Alexander US Chief Economist [email protected] +1 212 667 9665
Olgay Buyukkayali Head of EM Strategy, EMEA [email protected] +44 (0) 20 710 23242
Tony Volpon Head of Emerging Markets
Research - Americas [email protected] +1 212 667 2182
Peter Attard Montalto Economist [email protected] +44 (0) 20 710 28440
Benito Berber Senior Latin America
Strategist [email protected] +1 212 667 9503
Boris Segura Senior Latin America
Strategist [email protected] +1 212 667 1375
North America-Economics Research
Aichi Amemiya US Economist [email protected] +1 212 667 9347
Roiana Reid Economist [email protected] +1 212 298 4221
Charles St-Arnaud G10 FX Research [email protected] +1 212 667 1986
Ellen Zentner Senior US Economist [email protected] +1 212 667 9668
EMEA-Economics Research
Desmond Supple Global Head of Fixed
Income Research [email protected] +44 (0) 20 710 22125
Jacques Cailloux Chief European Economist [email protected] +44 (0) 20 710 22734
Nick Matthews Senior Economist [email protected] +44 (0) 20 710 25126
Silvio Peruzzo Senior Economist [email protected] +44 (0) 20 710 23205
Dimitris Drakopoulos Economist [email protected] +44 20 710 25846
Lefteris Farmakis Economist [email protected] +44 (0) 20 710 39242
Takuma Ikeda Senior Economist [email protected] +1 212 667 1153
Philip Rush Economist [email protected] +44 20 7102 9595
Stella Wang Economist [email protected] +44 (0) 20 710 20599
Japan-Economics Research
Tomo Kinoshita Chief Japan Economist [email protected] +81 3 6703 1280
Mika Ikeda Economist [email protected] +81 3 6703 1287
Shuichi Obata Senior Economist [email protected] +81 3 6703 1295
Kohei Okazaki Economist [email protected] +81 3 6703 1291
Asuka Tsuchida Economist [email protected] +81 3 6703 1297
Asia Ex-Japan-Economics Research
Rob Subbaraman Chief Economist Asia [email protected] +852 2536 7435
Young Sun Kwon Hong Kong, South Korea
and Taiwan Economist [email protected] +852 2536 7430
Euben Paracuelles Southeast Asia Economist [email protected] +65 6433 6956
Sonal Varma India Economist [email protected] +91 22 403 74087
Zhiwei Zhang China Economist [email protected] +852 2536 7433