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Published 2 0 November 2013 November 2013

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Global Outlook

Summary tables 2

Summary: Orchestrating growth 4

US rates: Medium-term forecasts 14

Eurozone rates : Medium-term forecasts 15

US: When will the chicken finally lay an egg? 16

Eurozone: Flying low 18

Japan: Continued deflation or financial repression? 20

China: New reforms to trim growth 22Eurozone

Germany: More tortoise than hare 24

France: The path of true growth never runs smooth 26

Italy: Life in slow motion 28

Spain: Viva growth! 30

Netherlands: Domestic disturbance 32

Belgium: Short-term gain, longer-term pain 33

Austria: Business as usual 34

Portugal: Hobsons choice 35

Finland: Cyclical and structural weakness 36

Ireland: Taking off the stabilisers 37

Greece: And debt shall have no dominion 38

Other Europe

Switzerland: No sign of price pressures 39

UK: Jolly good 40

Sweden: Easy does it 42

Norway: Moving on up 44

CEEMEA

Russia: Glum and glummer 46

Ukraine: Crunch time 48

Poland: Goldilocks and the political bugbears 50

Hungary: High-stakes activism 52

Czech Republic: Walking the walk 54

Romania: On the inflation see-saw 55

Turkey: Challenging times 56

South Africa: Fundamentally flawed 58

Saudi Arabia: Rising breakeven oil prices 60

UAE: A packed redemption schedule 61

Qatar: Infrastructure-driven growth 62

Asia Pacific

Australia: Early stages 63

India: A long road ahead 65

South Korea: Safe haven 67

Indonesia: Light at the end of the tunnel 69

Other ASEAN: A sweet and sour mix 70

Taiwan and Hong Kong: Forecast tables 72

The Americas

Canada: Taking it easy 73

Brazil: Living on borrowed economic time 74

Mexico: Loosening the purse strings 76

Colombia: Recovery and elections 78

Chile: Settling down 79

Argentina: A post-election reality check 80

Peru: Copper blues 81

Venezuela: Dogged by instability 82

Long-term economic forecasts 83

Commodities: Its all down to supply 87

Contacts 88

Disclaimer 89

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Summary table 1: Economic and financial forecasts

GDP(% y/y) 11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

World (2) 4.0 3.2 2.9 3.3 3.4 2.5 2.8 3.0 3.2 3.4 3.2 3.2 3.4US 1.8 2.8 1.6 2.2 2.3 1.3 1.6 1.6 2.0 2.2 2.2 2.0 2.2Eurozone 1.6 -0.6 -0.4 1.0 1.0 -1.2 -0.6 -0.4 0.4 0.9 0.9 1.0 0.9Japan -0.6 1.9 1.8 1.3 0.9 0.3 1.1 2.7 3.4 3.1 0.9 0.8 0.4

China 9.3 7.7 7.7 7.3 6.8 7.7 7.5 7.8 7.6 7.5 7.3 7.0 7.3

Industrial production(% y/y) 11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

US 3.3 3.6 2.4 2.8 3.1 2.5 2.0 2.5 2.6 2.5 2.8 2.9 3.0

Eurozone 3.3 -2.0 -0.5 3.3 2.1 -2.2 -0.7 -0.9 1.9 3.1 2.9 3.7 3.5Japan -2.8 0.6 -0.9 2.6 2.4 -7.9 -3.1 2.3 5.6 6.4 2.8 1.0 0.2China 13.9 10.0 9.7 9.1 8.2 9.5 9.1 10.1 9.8 9.5 9.1 8.9 9.3

Unemployment rate(%) 11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

US 8.9 8.1 7.5 6.8 6.2 7.7 7.6 7.3 7.2 7.0 6.9 6.7 6.6

Eurozone 10.2 11.4 12.1 12.1 11.9 12.0 12.1 12.2 12.2 12.2 12.1 12.1 12.0Japan 4.6 4.4 4.0 3.7 3.5 4.2 4.0 4.0 3.9 3.8 3.7 3.7 3.6

CPI(% y/y) 11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

US 3.2 2.1 1.5 1.4 1.8 1.7 1.4 1.6 1.3 1.1 1.5 1.4 1.8Eurozone 2.7 2.5 1.3 0.9 1.2 1.9 1.4 1.3 0.8 0.8 0.8 0.7 1.2Japan -0.3 0.0 0.3 2.6 1.9 -0.6 -0.3 0.9 1.2 1.3 3.5 2.9 2.8

China 5.4 2.6 2.7 3.2 3.5 2.4 2.4 2.8 3.4 3.5 3.6 3.2 2.7

Interest rates (3) 11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

US

Fed funds rate (%) 0-0.25 0-0.25 0-0.25 0-0.25 0.50 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 rate (%) 0.58 0.31 0.25 0.25 0.85 0.28 0.27 0.26 0.25 0.25 0.25 0.25 0.2510-year rate (%) 1.88 1.76 2.85 3.45 3.85 1.85 2.49 2.72 2.85 3.10 3.25 3.30 3.45EurozoneRefinancing rate 1.00 0.75 0.25 0.10 0.10 0.75 0.50 0.50 0.25 0.10 0.10 0.10 0.10

3-month rate (%) 1.36 0.19 0.20 0.10 0.10 0.21 0.22 0.23 0.20 0.10 0.10 0.10 0.1010-year rate (%) (4) 1.83 1.31 1.80 2.10 2.50 1.28 1.73 1.78 1.80 1.90 2.00 2.05 2.10JapanO/N call rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.103-month rate (%) 0.33 0.31 0.22 0.20 0.20 0.25 0.23 0.23 0.22 0.20 0.20 0.20 0.20

10-year rate (%) 0.99 0.80 0.50 0.70 2.50 0.56 0.84 0.69 0.50 0.40 0.50 0.60 0.70China

Official interest rate (%) 3.50 3.00 3.00 3.00 3.25 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

FX rates(3)

11 12 13 (1)

14(1)

15(1)

Q1 Q2 Q3 Q4(1)

Q1(1)

Q2(1)

Q3(1)

Q4(1)

EURUSD 1.29 1.32 1.32 1.23 1.25 1.28 1.30 1.35 1.32 1.28 1.26 1.25 1.23USDJPY 77 87 102 118 120 94 99 98 102 108 112 114 118USDRMB 6.29 6.23 6.08 6.12 6.10 6.21 6.14 6.12 6.08 6.15 6.10 6.15 6.12EURJPY 100 114 135 145 150 121 129 133 135 138 141 143 145

EURGBP 0.83 0.81 0.82 0.78 0.76 0.84 0.86 0.84 0.82 0.83 0.81 0.80 0.78GBPUSD 1.55 1.63 1.61 1.58 1.64 1.52 1.52 1.62 1.61 1.54 1.56 1.56 1.58

Current account Budget balance Year

(% GDP) 11 12 13 (1) 14 (1) 15 (1) (% GDP) 11 12 13 (1) 14 (1) 15 (1)

US -2.9 -2.7 -2.4 -2.4 -2.2 US (5) -8.4 -6.8 -4.0 -4.0 -3.5Eurozone 0.1 1.3 2.2 2.3 2.5 Eurozone -4.2 -3.7 -3.1 -2.5 -2.0

Japan 2.0 1.0 0.9 0.7 0.5 Japan -8.7 -9.1 -8.3 -6.1 -5.6China 1.9 2.3 2.4 2.0 1.9 China -1.9 -1.5 -2.1 -2.3 -2.5

2013

2013

2013

2013

2014

(3) End period (4) Bund yield (5) Fiscal year Figures are y/y percentage change unless otherwise indicated

2013

2013

Footnotes: (1) Forecast (2) BNPP estimates based on country weights in the I MF World Economic Outlook Update, October 2013

2014

Year

Year

Year

2014

2014

2014

2014

Year

Year

Year

Year

Source: BNP Paribas

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Summary table 2: GDP forecasts (% y/y)

Forecasts

Country/region Weight 2011 2012 2013 2014 2015 2013 2014 2015 Q4 13 Q4 14

World (1) 100.0 4.0 3.2 2.9 3.3 3.4 0.0 -0.1 -0.1 3.2 3.4

Advanced economies (1) 50.4 1.7 1.5 1.2 1.9 1.9 0.0 -0.1 -0.1 1.8 1.8

US 19.5 1.8 2.8 1.6 2.2 2.3 0.1 0.0 -0.4 2.0 2.2

Eurozone 13.5 1.6 -0.6 -0.4 1.0 1.0 -0.1 -0.1 -0.1 0.4 0.9

Germany 3.8 3.4 0.9 0.5 1.7 1.5 -0.1 -0.1 0.0 1.4 1.4

France 2.7 2.0 0.0 0.2 0.7 1.3 0.1 -0.1 -0.1 0.6 0.9

Italy 2.2 0.5 -2.4 -1.8 0.3 0.5 -0.1 -0.2 0.0 -0.9 0.6

Spain 1.7 0.1 -1.6 -1.2 0.8 0.8 0.0 -0.1 0.0 -0.1 0.8

Japan 5.5 -0.6 1.9 1.8 1.3 0.9 -0.1 0.1 0.0 3.4 0.4

UK 2.8 1.1 0.1 1.4 2.7 2.3 -0.1 0.1 0.0 2.6 2.3

Canada 1.8 2.5 1.7 1.6 2.0 2.2 0.0 0.0 -0.1 1.9 2.0Other advanced economies (1) 7.3 3.2 2.0 2.2 3.2 2.9 0.1 0.0 0.0 2.6 3.1

Advanced Asia ex-Japan(1)

3.8 4.1 1.7 2.6 3.9 3.6 0.1 -0.1 0.1 3.1 3.9Emerging and developing economies (1) 49.6 6.5 5.0 4.6 4.8 5.0 -0.1 -0.1 -0.1 4.5 5.0CEE & Russia (1) 7.6 5.0 2.3 1.8 2.7 3.0 -0.3 -0.2 -0.1 2.0 3.0

Russia 3.0 4.3 3.6 1.4 2.5 2.5 -0.8 -0.5 0.0 1.7 2.3

Developing Asia (1) 25.0 8.3 6.8 6.5 6.1 6.4 0.0 -0.1 -0.2 6.2 6.5

China 14.7 9.3 7.7 7.7 7.3 6.8 0.0 0.0 -0.2 7.6 7.3

India 5.7 7.5 5.1 4.2 4.2 6.4 0.0 -0.2 -0.2 3.4 5.6

Latin America (1) 8.7 4.6 2.9 2.7 2.9 3.0 -0.1 0.0 0.0 2.6 3.2

Brazil 2.8 2.7 0.9 2.3 1.5 1.0 0.0 0.0 0.0 1.6 1.9

Mexico 2.2 4.0 3.8 1.4 4.1 4.2 -0.3 0.0 0.0 2.0 4.4(1) BNPP estimates based on weights using PPP valuation of GDP in IMF WEO October 2013

Difference fromSeptember 2013

Global Outlook (pp) Forecasts

Source: BNP Paribas

Summary table 3: CPI forecasts (% y/y)(1)

Forecasts

Country/Region Weight 2011 2012 2013 2014 2015 2013 2014 2015 Q4 13 Q4 14

World (2) 100.0 4.8 3.8 3.1 3.3 3.5 0.0 -0.1 0.0 3.1 3.3

Advanced economies (2) 50.4 2.7 2.0 1.4 1.5 1.8 0 .0 -0.3 0.0 1.2 1.8

US 19.5 3.2 2.1 1.5 1.4 1.8 -0.1 -0.5 -0.1 1.3 1.8

Eurozone 13.5 2.7 2.5 1.3 0.9 1.2 -0.2 -0.4 -0.1 0.8 1.2

Germany 3.8 2.5 2.1 1.5 1.3 1.5 -0.1 -0.3 0.0 1.1 1.7

France 2.7 2.3 2.2 1.0 1.1 1.1 0.0 -0.2 -0.3 0.8 1.3

Italy 2.2 2.9 3.3 1.3 0.9 1.0 -0.1 -0.4 -0.3 0.8 1.0

Spain 1.7 3.1 2.4 1.5 0.1 0.8 -0.3 -1.3 -0.4 0.1 0.4

Japan 5.5 -0.3 0.0 0.3 2.6 1.9 0 .1 0.2 -0.1 1.2 2.8

UK 2.8 4.5 2.8 2.6 2.4 2.4 -0.1 -0.2 -0.1 2.2 2.5

Canada 1.8 2.9 1.5 1.0 1.5 2.1 -0.1 -0.6 -0.2 0.8 1.5Other advanced economies (2) 7.3 3.0 1.9 1.5 1.9 2.2 0 .0 -0.1 0.1 1.4 2.1 Advanced Asia ex-Japan (2) 3.8 3.6 2.6 1.5 1.9 2.4 0.0 0.0 0.1 1.3 2.3Emerging and developing economies (2) 49.6 7.1 5.7 5.0 5.1 5.4 0.1 0.0 0.1 5.2 4.9CEE & Russia (2) 7.6 7.9 6.5 5.4 4.8 5.2 0 .0 -0.1 0.6 5.2 4.8

Russia 3.0 8.5 5.1 6.7 5.3 5.2 0.1 0.0 1.4 6.0 5.1Developing Asia (2) 25.0 6.1 3.8 3.6 3.6 3.9 0.1 0.2 0.0 4.2 3.0

China 14.7 5.4 2.6 2.7 3.2 3.5 0.0 0.0 0.0 3.4 2.7

India 5.7 9.5 7.5 6.2 4.6 5.1 0 .3 0.5 -0.2 6.9 3.4Latin America (2) 8.7 6.7 6.2 7.4 8.4 8.4 -0.1 0.1 -0.1 7.2 8.7

Brazil 2.8 6.6 5.4 6.2 6.1 6.2 -0.2 -0.4 0.0 6.0 6.7

Mexico 2.2 3.4 4.1 3.7 3.5 3.4 0.0 0.4 0.0 3.4 3.8(1) HICP where available, India WPI

(2) BNPP estimates based on weights using PPP valuation of GDP in IMF WEO October 201 3

Forecasts

Difference fromSeptember 2013

Global Outlook (pp)

Source: BNP Paribas

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Paul Mortimer-Lee November 2013


Global outlook: Orchestrating growth

We see slow growth globally, with any pickup in tempo likely to be moderate.

We expect inflation to remain low on a global basis, though with isolated hot spots.

Monetary policy in the US, Japan and the eurozone will stay soft, though we expect the Fed totaper from March.

Fed tapering will hit some emerging markets harder than others, but there will be nowidespread crisis.

Bond yields should head up in the US and the eurozone, more in the former. Japanese yieldswill fall.

We like the USD for economic and policy reasons.

Global growth is recovering, but from a very slow pace, and is making less progress than mostexpected. We forecast global growth of 2.9% this year and 3.3% in 2014. This has forced theorchestrators of monetary policy in a number of countries to adopt a more accommodatingapproach than they expected later tapering by the Fed and continued easing in the eurozone,for example.

Policy cacophony prevails. The Fed will have a new conductor in Janet Yellen next year. Whattempo of tapering she adopts and what tune emerging markets will have to dance to as a resultremain to be seen. Mario Draghis ECB board members dont all seem to be singing from thesame hymn sheet, meanwhile, with the majority backing a rate cut in November, but discordbeing struck by a quarter of the Council. In China, reform is on the agenda, but what differencewill it make and how will it affect global growth and markets? We address these issues in ournew forecasts.

What are our chief conclusions?1. Global growth will remain slow. It can take a decade to recover from a good financial crisis

and 2008s was certainly a good un. We are halfway through the adjustment. Dont expectbig positive surprises.

2. The world is left with a lot of spare capacity, not just from the recession, but also from mal-investment, for example, in China. This makes disinflation a threat globally, particularly inthe eurozone, but with pockets of inflation that need to be calmed as a result ofexcessively expansionary past policy (India, Brazil).

3. Emerging markets will find Fed tapering a challenge, but not a disaster. Markets willdifferentiate between markets according to their various positions. Countries with largecurrent account deficits are among the most vulnerable, as are those with high inflation.

Table 1: BNPP end-period interest-rate forecasts (%) Table 2: BNPP end-period FX forecastsSpot Q1 14 Q2 14 Q3 14 Q4 14 Q1 15

USFe d Funds 0 -0 .25 0 -0 .25 0 -0 .25 0 -0. 25 0 -0 .25 0 -0. 252-year 0.29 0.40 0.50 0.65 0.85 1.1010-year 2.70 3.10 3.25 3.30 3.45 3.55Eurozone

Refi 0.25 0.10 0.10 0.10 0.10 0.102-year* 0.11 0.10 0.15 0.20 0.25 0.3010-year* 1.71 1.90 2.00 2.05 2.10 2.20JapanODR 0.30 0.30 0.30 0.30 0.30 0.30Call Rate 0.10 0.10 0.10 0.10 0.10 0.10

2-year 0.09 0.08 0.09 0.10 0.12 0.1510-year 0.63 0.40 0.50 0.60 0.70 1.00

*German benchmark. End period, spot rates as at 15 November 2013Source: BNP Paribas (Market Economics, Interest Rate Strategy)

Spot Q1 14 Q2 14 Q3 14 Q4 14 Q1 15EURUSD 1.35 1.28 1.26 1.25 1.23 1.23

EURJPY 135 138 141 143 145 148

EURGBP 0.84 0.83 0.81 0.80 0.78 0.77

GBPUSD 1.61 1.54 1.56 1.56 1.58 1.60

USDJPY 100 108 112 114 118 120

USDRMB 6.09 6.15 6.10 6.15 6.12 6.07

Source: BNP Paribas (FX Strategy) Spot rates as at 15 November 2013

Global growth is moresluggish than expected

Any pickup is likely to bevery moderate indeed

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4. Bond yields in the major economies will remain low. Japans may move lower from here,while US and eurozone rates may rise, the former by more than the latter. Beyond the veryshort term, Fed tapering should widen the risk premia required on risk assets.

5. In the currency markets, the strengthening US economy and the move to less monetaryaccommodation should favour a stronger USD.

Markets have struggled to strike the right note this year, as we saw with the taper-tantrumearlier in the year, partly because policymakers are also struggling. There are a number of keyquestions facing markets in 2014:

In the US, the Fed is finding it difficult to scale back QE (which it obviously wants to do),because the economic recovery lacks vigour and because the effects of tapering on marketsmay be bigger than it expected on the basis of its analysis of how QE works. When will theFed start to taper, how fast will it go and what will the bond and other market effects be?

We saw earlier in the year that when the Fed tightens, bad stuff happens, including toemerging markets. Has the tapering scare drawn the sting out of the action and will emergingmarkets be only mildly affected, or will there be a sizeable sell-off in local markets?

In China, reform is on the agenda, but can it proceed smoothly or will the transition to moremarket-oriented structures throw up big problems? Will growth pick up strongly, or are we on adeclining growth trend? Will there be a crisis?

As fears about eurozone inflation increase, should we be encouraged that Japan will escapefrom deflation? What does this mean for markets? Or will the economy sink back intodeflation?

Having survived the trauma of the euro crisis, is the euro area going to be pulled down by theinsidious tentacles of deflation? What will the ECB do and what does that mean for markets?

US policy and the economyThe Fed signalled quite strongly in May and June that it was preparing to scale back its QEbond purchases if conditions allowed. They didnt. The extent of the bond sell-off surprised the

Fed and knocked consumer spending and, apparently, activity in housing and autos. Moreover,Washingtons fiscal wrangling presented a threat to both confidence and activity that counselledthe Fed to wait and see. Better data, including payrolls consistently around or above the 200k-a-month mark, is what we believe we will need to see for tapering to start. Our current bestestimate is March, but further fiscal fights and soft data could delay it again. Earlier taperingcould come, but only on strong data, which is not our central projection.

The Fed was surprised by the extent of the sell-off in bonds over the summer. Not only did theterm premium move up, but the market also moved forward the date on which it estimated theFed funds rate would rise. The Fed did not care for this much and could now try to de-linktapering from rate hikes in the markets mind. As both depend on the economy looking better,this may be tough.

Markets have struggled tostrike the right note

We see Fed tapering fromMarch 2014

Chart 1: Ending QE means more volatility Chart 2: US drivers of inflation have shifted

Source: Reuters EcoWin Pro, BNP Paribas Source: Reuters EcoWin Pro

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Accordingly, we expect more upward pressure on bond yields when the Fed begins to decreaseits purchases, or signals its intent to do so (watch the January FOMC meeting and minutes, aswell as the Humphrey Hawkins testimony in February). We believe 10y bond yields could moveup to the 3-3.25% range initially. This would be a smaller sell-off than in the summer, aspositions have been scaled back and markets know the tapering is coming. Its just a questionof when, so there should be less of a shock value. However, there will be effects and it is likelythat the economy will not strengthen as much as the Fed and some outside commentatorswould like to believe. Accordingly, we can see the risks of tapering being stretched out ratherthan completed in less than a year, as some expect. After all, whenever the Fed has ended QEin the past, it has had to re-engage (Chart 1).

We do believe the US economy will strengthen, but more gradually than some expect. Weforecast growth of 2.3% in 2015, after 1.6% in 2013 and 2.2% in 2014. The key differencesbetween our analysis and that elsewhere is that we see a slower pace of investment build-upand also feel that some have misread the shift in fiscal stance between 2013 and 2014 theheadline numbers show much less fiscal tightening next year than in 2013. As most of thisrelates to shifts in payments to government from the agencies and to tax shifting across years,we see a much smaller impact from these sources close to zero. Hence, our caution.

One of the key US issues we are watching at the moment is core inflation (Chart 2). Core servicesinflation has slowed in recent months, not typically a happy sign. If inflation dwindles from here, themarkets will have to reassess what the Fed will do. Large-scale QE for longer, perhaps?

Impact of QE on emerging markets A key element in our discussions of emerging markets has been how much Fed tapering willaffect them. Was what we saw earlier in the year just a taster of a bigger, beefier main courseresponse when the tapering actually begins, or is it a case of forewarned is forearmed? Chart 3shows the sell-off between May and September was related to the scale of the rally in theperiod preceding it. Since September, the local markets that sold off have rallied, but to arelatively small extent. Chart 4 shows that inflation was a key vulnerability in explaining FXreactions to the external shock of tapering talk.

We do not regard tapering as good news for emerging markets, far from it. But neither do wesee it as a disaster, as positioning has been reduced and as current pricing is more appropriatethan before the tapering talk began. Chart 5 is reproduced from the IMFs most recentpublications and tries to give some idea of what countries the IMF has suggested could berelatively more affected in the event of a liquidity shock. We feel that having only twodimensions is too simplistic and would not put too much weight on the rankings; some seemwrong if we take into account a wider range of indicators, for example. Nonetheless, wereproduce it here to give some idea of where policymakers may need to be most mindful of theneed for fully credible policies.

What is clear is that emerging markets have, on the whole, fallen short of market growthexpectations. This is not because advanced markets have disappointed. There are two reasons:

More pressure on yieldswhen tapering starts

US to strengthen, butmore slowly than thought

Keeping an eye on coreUS inflation

Tapering will not be greatnews for emerging markets

Emerging markets havedisappointed on growth

Chart 3: Change in 10y local-currency government bondyields

Chart 4: Inflation and exchange-rate movements

India

ChinaMalaysia

Hong KongHungary

Poland

Turkey

Israel

Colombia

PeruMexico

Brazil

0

50

100

150

200

250

300

350

400

450

-1000-800-600-400-2000200

March 31, 2009 - April 30, 2013 (basis points)

M a y

2 2 -

S e p

5 , 2 0 1 3 ( b a s

i s p o

i n t s )

CEEMEA LATAM Asia

Chile

China

Colombia

India

Israel

Malaysia

Mexico

PeruPhilippines

South Africa

Thailand

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

0 2 4 6 8 10Inflation rate (y/y, May-July average, %)

F o r e

i g n e x c h a n g e c h a n g e v e r s u s

U S D

M a y

2 2 -

S e p

5 , 2 0 1 3 ( % )

CEEMEA LATAM Asia

y = -1.4 * x - 0.8

Source: Reuters EcoWin Pro, IMF, BNP Paribas Source: Reuters EcoWin Pro, IMF, BNP Paribas

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cyclical and structural. We would lend weight to both. On the structural front, emerging marketsbenefited from two periods of excess. The first, prior to 2008, was the build-up of excessivecredit in the advanced economies, which boosted emerging-market exports and also allowedexcessively soft global financial conditions. Post-2008, while export markets in advancedcountries floundered, local markets, themselves, were able to stimulate their domesticeconomies substantially by monetary and fiscal means. Super-easy monetary policy in themajors means that this expansionary, and risky, policy was not punished on the FX markets. Incontrast, it was rewarded with inflows. Market estimates of trend growth were based on actualperformance and gave too much weight to the periods of external and internal excess. Thoseestimates are being revised down.

Now, some local markets are struggling with inflation as the consequence of excessively slackpolicy in the past (for example, Brazil and India), while others have seen pressure on exchangerates and have had to tighten monetary conditions (Turkey). While there is, therefore, a cyclicalelement to these slowdowns, it is also clear that previous estimates of their trend growth rateswere too high. In some cases, this has led the market to be too optimistic on growth and notpessimistic enough on inflation Chart 6 tells the story well for Brazil.

We are not likely to go back to the rates of emerging-market growth we saw before the crisis or inthe years of post-crisis domestic stimulus. Moreover, the slower pace of global growth we are nowseeing translates into poorer terms of trade for a number of emerging markets. Not all developingeconomies will suffer from this. Korea and China, for example, are likely to see improved terms oftrade. However, exporters of raw materials and agricultural commodities will be hurt. For example,Brazil benefited from a big shift in its terms of trade after the global crisis (subdued inflation inadvanced countries, booming commodity demand from China), which, together with domesticpolicy settings, has led to a substantial deterioration in the real net trade balance.

When the Fed tightens, a number of emerging markets will see their exchange rates declineand imported inflation rise, while at the same time the capital inflows that have supporteddomestic demand and credit will diminish. We do not feel that the fall in capital flows toemerging markets will be savage Chart 7 shows how our model predictions of flows are likelyto evolve but those with large current account deficits are likely to feel the brunt of the shift.Domestic conditions will have to be tightened (when the US conductor signals tighten, theorchestra will have to play the same tune) and this will constrain demand growth.

The emerging countries least likely to be affected by the fall-out from Fed tapering will be thosecountries with healthy current account positions and only moderate domestic credit growth, aswell as low inflation. Korea is one of our favourites and, in Latin America, Mexico. EasternEurope is the region least likely to be affected overall by Fed tapering. For one, it is morelinked to the EUR than the USD and, second, the euro crisis had knock-on effects capitaloutflows from Eastern Europe that reduced previous excesses. For example, our forecasts forPoland and Hungary see a significant acceleration in growth from 2013 to 2014.

Some inflation hotspots

We wont see pre-crisisEM growth rates again

Fed tightening will affectEM FX rates and inflation

Korea and Mexico likely tobe least hit by tapering

Chart 5: Emerging-market external and domesticvulnerabilities

Chart 6: Brazil Less growth, more inflation

UkraineRomania

South Africa

Poland

MexicoChile

India

Thailand

Malaysia

Philippines

Brazil

Indonesia

Turkey

China

Colombia

Russia

-10

-8

-6

-4

-2

0

2

4

6

8

10

-8 -6 -4 -2 0 2 4 6 8 10 12 14 16

Real credit growth in excess of GDP growth, average, 2010-12 (%)

A v e r a g e c u r r e n

t a c o u n

t b a l a n c e

2 0 1 0 - 1

2

( % o f

G D P )

CEEMEA LATAM Asia

internal vulnerability

e x

t e r n a

l

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Jan 11 Jul 11 J an 12 J ul 12 Jan 13 Jul 13

B NP forec ast: Inflation 2014 (6.5%

B NP fo recas t: Growth 2014 (1.5%

Consensus 2014

Consensus 20 14 inflatio n

Source: Reuters EcoWin Pro, IMF, BNP Paribas Source: Reuters EcoWin Pro, BNP Paribas

7


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Chinas challengesChina is one of the economies that benefited most from the pre-crisis excesses in advancedcountries, increasing its share of world trade, while excess demand prevailed, particularly in theUS and Europe. The response to the reduction of excesses in the advanced countries was tocreate its own excesses; the credit boom of 2009-10 was by any measure hugely excessive(Chart 8). This resulted in inflationary pressures, so tightening ensued, giving us the slowdownin 2012-13. Easier policy resumed and the economy has started to pick up, aided by a reductionin uncertainty following the leadership transition.

However, the Chinese economy is badly unbalanced. Investment accounts for 49% of GDP andcredit has grown at rates normally associated with large non-performing loan (NPL) problems,Furthermore, the countrys shadow banking system has mushroomed as a means ofcircumventing credit restrictions, while credit from the state banks is too often directed towardsstate-owned enterprises (SOEs), which are sometimes inefficient and more focused on scalethan profitability.

Thus, China has embarked on a period of reform encompassing SOEs, land reform and thefinancial sector, among other things. Longer term, this will lead to a better allocation ofresources and better quality growth. However, reform means the assumptions and projectionssome made under the pre-reform agenda will be rendered false. What will be the effect, forexample, of higher rates on leveraged SOEs? Will the economy really be able to switch frominvestment and export-led growth to consumption-led growth? Doesnt this inevitably meanslower growth? What does this mean for investment in the old sectors? Will it fall rapidly? Whatdoes this means for producers of investment goods within China? Can their resources smoothlybe transferred to services and consumer goods-producing sectors?

We do not foresee a crisis resulting from this, but there will be challenges. The more reformthere is, the less the forces driving the economy will be in the full control of the government. Ifthere are surprises to the downside, how will leveraged sectors and shadow banking evolve?These are not easy questions. However, our forecast incorporates no such adverse shocks, sothe net result in our forecast is a mild acceleration of growth this year, with a beneficial carry-over into 2014, but a trend slowing of growth into 2015.

Our Chinese growth projection for 2013 is 7.7%, the same as in 2012, with 7.3% in 2014 and aforecast of 6.8% in 2015. Inflation is likely to see a mild acceleration, from 2.7% in 2013 to 3.2%in 2014 and 3.5% in 2015, with the pickup partly the result of a retreat in domestic PPI deflation,itself a result of better internal and external demand. We expect the PPI to fall 1.8% this year,close to the result in 2012, but to rise by 1.5% in 2014. We expect RMBUSD to average 6.13 in2014 and 6.10 in 2015, compared with a spot level of 6.09.

Overall, our forecast for China is that its influence on the global picture in 2014 will not be muchdifferent to this year, though we have a downward tilt to our projections. There is no strongresurgence, but no negative shock either, just a gradual ebbing of vigour, with fixed-assetinvestment growth slowing to 15% from 20% (still faster growth than GDP growth). This should

China is badly unbalanced

Embarking on SOE, landand financial reform

We dont see a crisis, butwe do see challenges

The China effect in 2014will be similar to 2013

Chart 7: Emerging-market capital inflows forecast Chart 8: Chinese credit

-100

-50

0

50

100

150

200

250

300

350

Q105 Q106 Q107 Q108 Q109 Q110 Q111 Q112 Q113 Q114 Q115

Trend

Capital inflows to emerging markets* (USD bn)

BNPP

IIF

* BRICs, Turkey, Mexico and Indonesia

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

80

90

100

110

120

130

140

150

160

170

180

190

200

Total social financing (% of GDP)

Source: Reuters EcoWin Pro, BNP Paribas Source: Reuters EcoWin Pro, BNP Paribas

8


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help to keep global trade growth muted and commodities subdued.

At the margin, China has been the most important influence on commodities in recent years, soany innovations in the economy that resulted in a different path to that we are predicting wouldhave large knock-on effects on emerging markets. To the extent that China shifts from exportand investment-led growth in order to rely more on consumption (which includes services),

emerging markets will see lower demand. The most adverse constellation of events from theemerging-market commodity-exporters standpoint would be weak demand in China andsubstantial fallout on financial markets from Fed tapering.

Japan: Differing perceptionsIn Japan, there is a bifurcation of views as to where the country will end up. The majority ofdomestic investors seem to believe that without further stimulus and yen-weakening polices,inflation will slip back after the sales-tax hike works through, with the implication being very lowbond yields, a strong yen and weak equities. Foreign investors generally see a happier ending,with Abenomics succeeding in ending deflation and elevating the trend growth rate. We see theprobability of this scenario at about 10% and of slipping back into deflation at about 35%.

So what do we think will happen? Basically, we are more optimistic than the domestic crowd,

but less optimistic than the foreigners. We expect further fiscal stimulus in H2 2014, which willpush the economy beyond potential and succeed in raising inflation in 2015. There will then bea choice between letting bond yields soar and the yen plunge, or adopting financial repression.We expect the latter, otherwise government finances could spiral out of control. We assign a40% probability to this scenario, so not all that much more than a return to deflation. The keywill be policy and how hard resources are pressed to their full employment threshold.

If financial repression were not adopted, things could turn very nasty indeed, with rocketinginflation, soaring bond yields and a runaway depreciation of the yen, to which scenario wewould attach a 15% probability.

If we sum up our scenario analysis, then, we see it basically coming down to a choice betweenunpalatable scenarios financial repression, deflation or financial disaster. The scenario with

lowest probability is the one with the happy ending.For now, above-trend growth persists because of the fiscal spending being financed by the BoJ.Without further fiscal stimulus, the economy will lose steam by the end of next year, partly underthe influence of the sales-tax hike, which will add 2pp to price growth, but also as the impact ofthe weak yen fades. We do not think Prime Minister Shinzo Abe will allow the growth rate toplunge, so we expect him to take further fiscal measures in H2 2014.

Will there be further monetary measures as well? The stated aim of the BoJ is to get inflation to2%. Without the sales-tax hike, that would be difficult, especially once the effects of yendepreciation work through the system, as wages remain restrained (Chart 9). Based on theevidence of recent years, we think wages will start to pick up once unemployment pierces the3.5% rate (Chart 10).

Split views on whereJapan will end up

We think fiscal repression

is on the cards

A choice betweenunpalatable scenarios

Further monetary easing isunlikely

Chart 9: Japanese wages and CPI (% y/y) Chart 10: Japanese unemployment rate (sa, %)

-4

-2

0

2

4

6

8

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

CPI

Total cash earnings

3.0

3.5

4.0

4.5

5.0

5.5

6.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Forecast

Source: MIC, MHLW, BNP Paribas Source: MIC, BNP Paribas

9


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Japanese inflation is currently 1.1% and the sales-tax hike will likely take this to 3%. This willnot be popular with workers or retirees and the BoJ is unlikely in such circumstances to embarkon further substantial monetary easing, though it will keep bankrolling the government at aroundits current pace.

The BoJ currently dominates the JGB market, with some doubting that there is much of a

market any more. We think bond yields can reach a record low, with the 10-year maturityhitting 0.4%. Thereafter, we expect bond yields to rise to 0.7% by end 2014, but to 2.5% a yearlater, heralding a debt spiral and fiscal crisis in the absence of financial repression.

The risks to our Japanese forecasts are that policy does not stimulate the economy beyond fullemployment, resulting in deflation, or that once inflation emerges, it leads to a fiscal crisis andcrashes on the Japanese financial markets.

Eurozone: Following in Japans footsteps?Just as policy in Japan is directed toward Japan not being Japan anymore, in the sense ofdeflation, there are worrying signs that the eurozone may be following in its footsteps, especiallyas eurozone inflation is now lower than Japan's. A prolonged monetary squeeze, slow solutionsto a banking problem, too cautious a monetary stance and too strong a currency were all

significant elements in the recipe that gave Japan deflation. Are the ingredients in the Europeancake much different? The missing ingredient is probably another recession in the eurozone,Were that to come, then prices, having dipped in the recovery, could crack inflationexpectations to the downside.

The eurozone crisis has been subdued, largely by the ECB and its promise of an OMT (outrightmonetary transaction) bond-buying programme. Vicious spirals between debt sustainability,bond yields and growth have been interrupted. We have gone from a crisis to a more long-termchallenge.

The self-destructive pace of tightening in the periphery has been slowed and growth has pickedup. This has been aided by a recovery from the extreme financial stresses during the crisis.Unfortunately, both these spurs have had an essentially one-off effect on growth. Unless there

is a follow-through in terms of investment and/or consumption, we cannot expect a normalcyclical response. We see investment as likely to be muted for a number of key reasons:

Lack of available credit

Lack of domestic demand

Challenges to competitiveness from the strong euro

Excess capacity in a number of markets

Uncertainty about the future, including political uncertainty

Restructuring of balance sheets

Not all factors play in all markets. In Germany, for example, real wage growth has been better

than for several years (though the marginal tax take is high) and there is a prospect of wagerises for the less well paid under a new minimum wage. German unemployment is close to itspost-unification lows and the governments budget heralds a lack of fiscal pressure. However,German exports (50% of GDP) are being hampered by weak demand elsewhere in Germanysmajor market, the rest of the eurozone (37% of exports).

There are also severe impediments to an increase in eurozone consumption:

Negative or only weakly positive real wage growth

Poor employment prospects

Higher taxes

Balance-sheet restructuring

Uncertainty about the future

We think Japanese bond

yields will hit a record low

Worrying signs of theeurozone following Japan

The ECB and its OMT havesubdued the crisis

Investment likely to remainmuted

Germany humming to a

different tune

Severe impediments toconsumption growth

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laughable. We see the risks as heavily skewed to the downside relative to the ECBs goals.

The ECB sets considerable store in inflation expectations being anchored at 2%. However, along period of substantially low inflation (which the ECB itself expects) and not much actionrisks inflation expectations breaking to the downside. How the ECB would prop them up again,given the likelihood of continued low inflation and limited usable and effective ammunition, is a

moot question.

Certainly, the November 25bp rate cut will do little to help. Market rates are determined, withexcess liquidity, by the deposit rate, not the repo. While the currency has edged off a tad, it isstill too strong. We expect the ECB to lower rates by a further 15bp by March and see a goodchance that it will try to emphasise in its forward guidance that its inflation objective means rateswill remain at that level for a long time. The most favourable interpretation of a refi cut is that it isstrong forward guidance and prevents a future stealth tightening via a liquidity-driven move upin EONIA within the corridor.

We do not expect QE. The Governing Council is divided, with a bloc of six members centred onGermany reportedly having voted against the rate cut. If they oppose this so vehemently, whatwould it take for them to agree to QE? That would probably only come after it was too late, for

example, after a severe recession and/or the onset of deflation. The recent extension by a yearof three-month fixed-rate full-allotment tenders reduces the chances of another LTRO, but wethink this will be instituted in the spring as one of the least contentious means of coping with theeffects of Fed tapering.

So, the ECBs main strategy is to cross its fingers and hope that something turns up.

When it comes to the bond market, with disinflation a problem in the eurozone and the US growthoutlook better than that across the pond, it is likely that European bonds will outperform those inthe US. Moreover, net supply in the core eurozone is set to fall by about a third from 2013 to 2014,when foreign buyers are diversifying out of US Treasuries. Fed tapering clearly implies a verydifferent shift in US Treasury supply to the market an increase of USD 85bn a month once QEends. The ECBs bias to ease leans in the same direction. Our forecast is, therefore, for Bund

yields to rise, but only to 1.90% by end Q1, to 2.10% by end 2014 and to 2.50% by end 2015.What about spreads within the eurozone? The positives for the periphery are low growth ratesand the approaching prospect of peak debt levels being reached soon. A new LTRO would alsohelp. The negatives are the lack of substantial monetary easing and higher bond yields globallyas a result of Fed tapering. Which will dominate? While US bond yields moving up by half apoint or so in Q1 is not a recipe for improved risk appetite, our view is that the other forces willdominate and that spreads will narrow.

Downside risks to our bond-yield forecast are that the Fed will taper later or by less than weexpect, that the ECB will be more aggressive than we forecast and that inflation will come inlower still. Upside risks are likely to stem from renewed pressure on the peripheral countries (forexample, Portugal) or on the political front (for example, Italy). For Italy, at a spread of 239bp

over Bunds now, we envisage 175bp at the end of 2014 and 125bp at end 2015. We expectSpain to get to the same place by end 2015. The risk-weighting of government assets in the AQR could also hurt spreads. The risk of narrower spreads could come from better peripheralgrowth and progress on eurozone integration (such as a centralised deposit resolutionmechanism and fund).

Markets and FXWe address above the prospects for the various bond markets. To sum up, though, in the nearterm, we expect the best-performing bond market to be Japan, as BoJ dominance of the marketforces yields to new lows. The worst performer is likely to be the US, as tapering is coming andthe market will be very sensitive on the upside to stronger-than-expected news. The thresholdfor weak numbers to move the market will be higher, as this will merely be a stay of execution.

Core Europe should see a more sideways move, as it lacks the central-bank balance-sheet actiondriving the two other markets. The spill-over from the US will tend to push up yields, but supply,inflation and a continued ECB bias to ease should be supportive. By historical comparison, yieldsin the major markets will remain very low, with negative real rates in the eurozone and Japan.

We expect another 15bpECB rate cut by March

European bonds likely tooutperform the US

Search for yield to persist,spreads set to edge in

Japan the best-performingbond market short term

Core Europe to movesideways

12


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As we have detailed above, emerging markets are likely to see setbacks once the start of Fedtapering becomes clearer, but with a lesser sell-off than we saw earlier in the year. Countrieswith high current account deficits, relatively high inflation and rapid rates borrowing growth(private and/or public) are where policymakers need to be most credible in avoiding the brunt ofthe reduction in capital flows that will follow Fed tapering.

In terms of FX, we like the USD for economic and policy reasons. In terms of growth, the US willaccelerate, even if only mildly, over the forecast period. We expect the eurozone to get stuck ata rate not far away from potential. Japans growth is tied to its fiscal stimulus, which the marketbelieves cannot last forever, and we think significant fiscal challenges lie ahead. The quality ofJapans growth is poorer than that of the US.

At the same time, US policy is moving towards less accommodation, and whatever the Fedsays, the market will continue to view tapering as tightening. We expect real yields in the US tobe positive, whereas investors will have to pay up, in real terms, for the privilege of lending tothe Japanese and German governments. Therefore, our forecast is that EURUSD will movefrom 1.35 now to 1.28 at the end of Q1 and to 1.23 at end Q4 next year. The correspondingfigures for USDJPY are 100, 108 and 118, respectively (as of 15 Novembers close).

EM sell-off will be lessthan earlier this year

We like the USD for policyand economic reasons

13


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Dominic Bryant November 2013


Eurozone rates: Medium-term forecastsChart 1: Policy rates (%) Chart 2: 2y rate & ECB policy (%)

Source: Reuters EcoWin Pro, BNP Paribas Market Economics and InterestRate Strategy

We forecast the ECB to cut the refinancing rate to 0.10%by end Q1 2014 and to keep it there until at least H1 2016.In real terms, the refi rate will become moderately morenegative in 2015.

Source: Reuters EcoWin Pro, BNP Paribas Market Economics and InterestRate Strategy The spread of two-year yields to the refi rate is forecast toturn positive in 2014. The two-year rate is likely to bedragged higher by developments in the US, while ECBpolicy remains accommodative for the foreseeable future.

Chart 3: 10y/2y spread & ECB policy (%) Chart 4: 10y/3m spread & ECB policy (%)


The 10y/2y curve should steepen, reflecting a further refirate cut by the ECB, while 10-year yields are pulled up byUS yields.


Although the expected sell-off in the US will raiseeurozone 10-year yields, the steepening of 10y/3m sectorwill be gradual, due to weak eurozone growth and inflation.

Chart 5: US-German yield & policy spreads (%) Chart 6: 10y Bund yields (%)


We forecast the US 10-year bond yield to rise much fasterthan the Bund yield, so the US Treasury-Bund spreadshould widen further in 2014.


We forecast 10-year Bund yields to rise over the next twoyears, but to remain low by historical standards. The realyield is expected to rise by less as inflation edges up.

15


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Julia Coronado November 2013


US: When will the chicken finally lay an egg?The US economy continued to tread water in H2 2013, rather than pick up with the fading fiscaldrag, as was widely expected by most forecasters, including the Fed. In light of downsideforecast errors throughout the recovery, Fed speakers continue to cite the need for evidence ofa pickup in growth before tapering QE. They have used a chicken-and-egg analogy, in whichconsumers are not spending because they do not expect stronger income and businesses arenot hiring and investing with greater force because consumers are not spending.

We think the analogy is a good one for the US economy and that the chicken will be a bit slowerin laying an egg than we previously thought. While fiscal tightening has taken a heavy toll ongrowth in 2013, the Feds policies have stimulated an offsetting wealth effect. The fiscal dragshould fade in 2014, while there is a considerable wealth effect in the pipeline owing to the 2013equity-market performance. This should allow somewhat stronger growth in 2014 (Table 1).

The underlying pace of growth has faded in 2013, however, reflecting weaker exports andinvestment, as well as slower housing momentum due to the rise in interest rates. Consumersexpect slightly stronger income growth, although their expectations remain quite low byhistorical standards. We expect underlying growth to improve slowly, but we do not think suchevidence will be decisive enough for the Feds taste until the March 2014 FOMC meeting, whenwe look for it to taper by USD 15bn. We also expect a slower pickup in growth than the Fed isforecasting and believe it will take its time tapering as a result, so that QE will not concludeuntil Q1 2015. We expect the first increase in the Fed funds rate to come in Q4 2015.

Fiscal policy dysfunction is still high. The fiscal drag is set to fade, though it remains a negativefor growth, as does the uncertainty and lack of clarity on policy and regulatory issues. Theregulatory push is reaching a crescendo in nearly all industries, as healthcare, finance andenergy all face intense scrutiny. This will take some time to work through and US firms are notrewarded for sticking their necks out and taking growth-oriented risks. The Fed will ensurestability, but the US still faces a long road to recovery.

Table 1: Underlying growth soft Chart 1: Investment slowing, uncorrelated with surveys

% y/y 2011 2012 2013 1 2014 1 2015 1

Real GDP 1.8 2.8 1.6 2.2 2.3

Fiscal tightening 2,3 -0.7 -1.0 -1.2 -0.7 -0.5

Wealth effect 2,4 0.9 0.7 1.5 1.3 0.8

Underlying GDPgrowth 2

1.7 3.1 1.4 1.5 2.1

Source: (1) Forecasts, (2) BNP Paribas estimates, (3) % of GDP change instructural budget deficit, (4) pp contribution to GDP growth

Source: BNP Paribas Source: Reuters EcoWin Pro, BNP Paribas

Chart 2: Consumers expect subdued income growth Chart 3: Housing demand has taken a hit


US still facing a chicken-and-egg conundrum

Consumers will not spenduntil they see income

Firms will not hire andinvest till consumers spend

Fiscal dysfunction andmonetary suppor t

MBA 30y mortgage rates (%)

16


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Julia Coronado November 2013


US: Economic and financial forecasts

11 12 13(1)

14(1)

15(1)

Q1 Q2 Q3 Q4(1)

Q1(1)

Q2(1)

Q3(1)

Q4(1)

Components of growth

% Q/Q SAAR

GDP - - - - - 1.1 2.5 2.8 1.5 2.1 2.2 2.3 2.3

Dom. demand ex stocks 1.8 2.4 1.5 2.0 2.2 0.5 2.1 1.7 1.6 2.0 2.2 2.2 2.0

Private consumption 2.5 2.2 1.8 2.0 2.1 2.3 1.8 1.5 1.8 2.0 2.2 2.2 2.0

Public consumption -3.2 -1.0 -2.0 -0.4 -0.3 -4.2 -0.4 0.2 -0.7 -0.4 -0.4 -0.4 -0.4

Residential investment 0.5 12.9 13.7 9.8 10.0 12.5 14.2 14.6 5.0 10.0 10.0 10.0 10.0

Non-residential investment 7.6 7.3 2.2 3.8 4.6 -4.6 4.7 1.6 3.7 4.4 4.0 4.0 4.0

Stocks (cont. to growth) 0.2 -0.5 0.4 0.0 0.0 0.4 -0.9 0.6 -2.0 0.4 -0.9 0.6 -2.0

Exports 7.1 3.5 2.6 4.3 3.4 -1.3 8.0 4.5 6.1 3.4 3.4 3.4 3.4

Imports 4.9 2.2 1.4 2.4 2.5 0.6 6.9 1.9 2.3 1.8 2.2 2.5 2.5

GDP (% y/y) 1.8 2.8 1.6 2.2 2.3 1.3 1.6 1.6 2.0 2.2 2.2 2.0 2.2

Industrial production (% y/y) 3.3 3.6 2.4 2.8 3.1 2.5 2.0 2.5 2.6 2.5 2.8 2.9 3.0

Savings ratio (%) 5.7 5.6 4.6 4.8 4.9 4.1 4.5 4.7 5.0 4.7 4.7 4.8 5.0

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Inflation & labour

CPI 3.2 2.1 1.5 1.4 1.8 1.7 1.4 1.6 1.3 1.1 1.5 1.4 1.8

CPI (Ex F&E) 1.7 2.1 1.8 1.8 1.9 1.9 1.7 1.7 1.8 1.7 1.8 1.9 1.9

Core PCE deflator 1.4 1.8 1.3 1.5 1.6 1.5 1.2 1.2 1.2 1.3 1.5 1.5 1.5

Producer prices 6.0 1.9 1.3 1.6 3.0 1.5 1.6 1.3 1.0 1.1 1.7 1.6 2.2

Monthly wages 2.0 1.9 1.9 2.0 2.0 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0

Employment 1.2 1.7 1.6 1.7 1.9 1.5 1.6 1.7 1.7 1.6 1.7 1.8 1.8

Unemployment rate (%) 8.9 8.1 7.5 6.8 6.2 7.7 7.6 7.3 7.2 7.0 6.9 6.7 6.6

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

External tradeTrade balance (USD bn, sa) -557 -535 -483 -471 -444 -123 -118 -119 -123 -117 -118 -117 -119

Current account (USD bn, sa) -458 -440 -411 -424 -417 -106 -102 -103 -99 -109 -107 -106 -102

Current account (% GDP) -2.9 -2.7 -2.4 -2.4 -2.2 -2.6 -2.5 -2.5 -2.4 -2.4 -2.4 -2.4 -2.4

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Financial variables

Money supply 7.3 8.5 6.3 5.9 6.1 7.1 6.9 5.0 6.0 6.0 6.0 6.0 6.0Fed. gov. budget (USD bn) (2) -1297 -1089 -667 -691 -634 -307 91 -157 -319 -326 110 -156 -324Fed. gov. budget (% GDP) (2) -8.4 -6.8 -4.0 -4.0 -3.5 -5.5 -4.2 -4.0 -4.1 -4.1 -4.0 -3.9 -3.9Fed. gov. primary budget (% GDP) (2) -7.0 -5.4 -2.7 -2.7 -2.1 -4.2 -2.9 -2.7 -2.8 -2.8 -2.7 -2.6 -2.6Gross Fed. gov. debt (% GDP) (3) 65.8 70.0 72.7 74.0 74.0 72.1 71.6 71.9 73.1 74.2 72.7 72.7 73.7

11 12 13(1)

14(1)

15(1)

Q1 Q2 Q3 Q4(1)

Q1(1)

Q2(1)

Q3(1)

Q4(1)

Interest & FX rates (3)

Fed funds rate (%) 0-0.25 0-0.25 0-0.25 0-0.25 0.50 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 rate (%) 0.58 0.31 0.25 0.25 0.85 0.28 0.27 0.26 0.25 0.25 0.25 0.25 0.25

2-year rate (%) 0.25 0.25 0.35 0.85 2.30 0.25 0.36 0.33 0.35 0.40 0.50 0.65 0.85

5-year rate (%) 0.83 0.72 1.55 2.30 3.10 0.77 1.40 1.48 1.55 1.80 2.00 2.15 2.30

10-year rate (%) 1.88 1.76 2.85 3.45 3.85 1.85 2.49 2.72 2.85 3.10 3.25 3.30 3.45

EURUSD 1.29 1.32 1.32 1.23 1.25 1.28 1.30 1.35 1.32 1.28 1.26 1.25 1.23

USDJPY 77 87 102 118 120 94 99 98 102 108 112 114 118

Figures are year-on-year percentage changes unless otherwise indicated Footnotes: (1) Forecast (2) Fiscal year (3) End period

Year

Year 2013

2014

Year

Year

Year 20142013

2014

2014

2013

2014

2013

2013

Source: BNP Paribas, national statistics

17


19/91

Ken Wattret November 2013


Eurozone: Flying lowEurozone inflation is uncomfortably low and likely to remain that way for some time for a rangeof reasons, including weak domestic demand, excess capacity, competitiveness adjustmentsand low credit growth. The risks to price stability look to be to the downside and an additionaladverse shock has the potential to unanchor expectations.

The ECB has been slow in its response to persistent below-objective inflation and concernsabout insufficient monetary policy accommodation have increased in the context of adiminishing safety margin against deflation. Cuts in policy rates are a welcome step in the rightdirection, but more needs to be done. Further trimming of rates and additional liquidity provisionare the probable next steps, but given divisions on the Governing Council, progress towardsmore powerful, but contentious unconventional measures may prove frustratingly slow.Balance-sheet expansion via asset purchases would probably be a last resort.

Low inflation implies lower nominal growth, which will have a detrimental impact on sovereigndebt-to-GDP ratios, making fiscal consolidation more challenging. The breathing space affordedthe economy by pushing back the timetable for budget adjustments has contributed to a returnto growth, with improvements in economic conditions evident in the periphery and the core.

Sentiment is fragile, however. Businesses are cautious about investing and hiring and a markedupturn in domestic demand remains unlikely in this context. For this reason, the economy willremain highly sensitive to external demand developments and an appreciating exchange ratewould be very unwelcome amid low growth and inflation.

Potential growth is low, at a little below 1%, and the structural reforms required to boost it arepolitically difficult to achieve. European Parliament elections in May 2014 will not be helpful inthis regard. A bright spot is that banks credit conditions are heading in the right direction due tothe better economic climate. The ECBs comprehensive review of banking-sector balancesheets should help in the long run, but near term, will reinforce the develeraging process.

Chart 1: Uncomfortably low eurozone inflation Chart 2: Eurozone surveys signal slow growth

97 9 8 9 9 00 01 02 0 3 0 4 05 06 0 7 0 8 09 10 11 1 2 13-1.0

-0.5

0. 0

0. 5

1. 0

1. 5

2. 0

2. 5

3. 0

3. 5

4. 0

4. 5Eurozone HICP (% y /y )

99 0 0 0 1 0 2 03 04 05 0 6 0 7 0 8 09 10 11 12 1 3-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0. 0

0. 5

1. 0

1. 5

25

30

35

40

45

50

55

60

65

Composi te PMI

G D P ( % q / q , R H S )


Chart 3: Diminished domestic-demand drag Chart 4: Eurozone credit conditions to improve

0 0 0 1 0 2 0 3 04 05 06 07 08 09 10 11 12 1 3-6

-4

-2

0

2

4

Net exports

G D P ( % y / y,con tr ibu tions by com ponen t)

D o m es t i cd em an d

Inventories

03 04 05 06 07 08 09 10 11 12 13 1 4-2 0

-1 0

0

10

20

30

40

50

60

70

A ctu al

Net % o f banks t igh ten ing cred i t s tandards(to non-financial corporates)

Expected


Low inflation likely forsome time to come

Policy responseinsufficient

Fiscal issues stillchallenging

Domestic demand in thedoldrums

Credit conditions abrighter spot

18


20/91

Ken Wattret November 2013


Eurozone: Economic and financial forecasts

11 12 13(1)

14(1)

15(1)

Q1 Q2 Q3(1)

Q4(1)

Q1(1)

Q2(1)

Q3(1)

Q4(1)


GDP (% q/q) - - - - -0.2 0.3 0.1 0.3 0.3 0.2 0.2 0.2

GDP 1.6 -0.6 -0.4 1.0 1.0 -1.2 -0.6 -0.4 0.4 0.9 0.9 1.0 0.9

Final domestic demand 0.5 -1.7 -1.0 0.7 0.7 -2.0 -1.0 -0.8 -0.1 0.7 0.6 0.7 0.5

Private consumption 0.3 -1.4 -0.6 0.6 0.7 -1.3 -0.7 -0.5 0.1 0.6 0.6 0.6 0.5

Public consumption -0.1 -0.5 0.3 0.7 0.4 -0.4 0.3 0.6 0.7 0.9 0.6 0.6 0.5

Fixed investment 1.7 -3.8 -3.7 0.9 1.5 -5.8 -3.8 -3.5 -1.7 1.0 0.8 1.1 0.7

Stocks (cont. to growth, q/q) 0.2 -0.5 0.0 -0.1 0.1 0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Exports (2) 6.7 2.7 1.5 4.2 3.6 0.2 1.3 1.3 3.2 5.4 3.9 4.2 3.4Imports (2) 4.6 -0.8 0.3 3.7 3.4 -1.8 0.0 0.4 2.6 4.8 3.4 3.6 2.9

Industrial production 3.3 -2.0 -0.5 3.3 2.1 -2.2 -0.7 -0.9 1.9 3.1 2.9 3.7 3.5

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Inflation & labour

HICP 2.7 2.5 1.3 0.9 1.2 1.9 1.4 1.3 0.8 0.8 0.8 0.7 1.2

Core HICP 1.4 1.5 1.1 0.8 1.0 1.4 1.1 1.1 0.8 0.9 0.8 0.7 0.7

Producer prices 5.7 2.8 -0.1 0.9 -0.9 1.2 -0.1 -0.6 -0.8 -0.2 1.0 1.3 1.4

Comp. per employee 2.1 1.9 1.6 1.6 1.7 1.7 1.5 1.6 1.6 1.4 1.6 1.5 1.7

Unit labour costs 0.8 1.9 1.1 0.7 1.2 1.9 1.1 1.0 0.6 0.3 0.7 0.8 1.2

Employment 0.3 -0.7 -0.9 0.1 0.5 -1.0 -1.0 -0.9 -0.6 -0.2 0.0 0.3 0.4

Productivity 1.4 0.0 0.4 0.8 0.5 1.9 1.1 1.0 0.6 0.3 0.7 0.8 1.2

Unemployment rate (%) 10.2 11.4 12.1 12.1 11.9 12.0 12.1 12.2 12.2 12.2 12.1 12.1 12.0

11 12 13(1) 14 (1) 15 (1) Q1 Q2 Q3

(1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

External trade

Trade balance (EUR bn, sa) -18 79 151 160 195 39 42 38 32 40 40 40 40

Current account (EUR bn, sa) 8 126 210 225 250 50 58 52 49 50 60 60 55Current account (% of GDP) 0.1 1.3 2.2 2.3 2.5 2.1 2.4 2.2 2.0 2.1 2.5 2.4 2.2

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Financial variables

General gov. budget (EUR bn) -396 -351 -290 -242 -197 - - - - - - - -

General gov. budget (% GDP) -4.2 -3.7 -3.1 -2.5 -2.0 - - - - - - - -

Primary budget (EUR bn) -105 -57 -13 36 91 - - - - - - - -

Primary budget (% GDP) -1.1 -0.6 -0.1 0.4 0.9 - - - - - - - -Gross gov. debt (% GDP) (3) 88.0 92.7 96.6 97.1 96.6 - - - - - - - -

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)


Refinancing rate (%) 1.00 0.75 0.25 0.10 0.10 0.75 0.50 0.50 0.25 0.10 0.10 0.10 0.10

3-month rate (%) 1.36 0.19 0.20 0.10 0.10 0.21 0.22 0.23 0.20 0.10 0.10 0.10 0.102-year rate (%) (4) 0.14 -0.03 0.10 0.25 0.50 -0.02 0.19 0.18 0.10 0.10 0.15 0.20 0.255-year rate (%) (4) 0.75 0.30 0.70 1.00 1.45 0.31 0.74 0.79 0.70 0.75 0.80 0.90 1.0010-year rate (%) (4) 1.83 1.31 1.80 2.10 2.50 1.28 1.73 1.78 1.80 1.90 2.00 2.05 2.10

EURUSD 1.29 1.32 1.32 1.23 1.25 1.28 1.30 1.35 1.32 1.28 1.26 1.25 1.23

EURGBP 0.83 0.81 0.82 0.78 0.76 0.84 0.86 0.84 0.82 0.83 0.81 0.80 0.78

EURJPY 100 114 135 145 150 121 129 133 135 138 141 143 145

2013

2013

2013

2013

2014

2014

2014

Year

Year

Year

Figures are year-on-year percentage changes unless otherwise indicated

Footnotes: (1) Forecast (2) Includes intra-eurozone trade (3) End period (4) Bund yield

2013 2014

2014Year

Year


19


21/91

Ryutaro Kono November 2013


Japan: Continued deflation or financial repression?Japanese economic growth continues to outpace its trend rate, thanks to fiscal spendingfinanced by the BoJ. However, real exports remain stagnant and the economy is likely to losesteam from Q4 2014 without a further fiscal expansion. Inflation, meanwhile, is likely to creephigher in the near term on the lagged impact of JPY depreciation, though it will probably start toedge lower again from Q3 2014 if there is no further yen depreciation or fiscal stimulus.

The BoJ is unlikely to achieve its stated goal of 2% inflation within two years. However, theheadline inflation rate should jump temporarily to around 3% after April 2014 due to theconsumption tax hike. As wage growth remains limited and prices are rising, political pressureto rein in inflation could mount, making additional easing unlikely. Indeed, if bond yields fallfurther, the BoJ may struggle to implement its current asset-purchase programme in a smoothmanner, as financial institutions may hesitate to sell their JGB holdings out of concern overreinvestment risk. To double the monetary base, the BoJ may have to buy JGBs at negativeyields, thereby further strengthening the downward pressure on the long-term interest rate.

At any rate, with the long-term rate already close to zero, the potency of BoJ monetary policy haswaned. Whether deflation is defeated will largely depend on fiscal policy. Scenario 1: Continueddeflation (35% probability) without further yen depreciation or fiscal stimulus, inflation edges downand growth loses steam. Scenario 2: Financial repression (40%) with the government adoptingmore fiscal stimulus in H2 2014, above-trend growth persists, bringing full employment by H2 2015.

As inflation soars and upward pressure on bond yields mounts, the authorities adopt financialrepression to prevent a fiscal crisis. Scenario 3: High inflation (15%) under financial repression,holding inflation at 4-5% proves hard. Double-digit inflation sparks social unrest. Scenario 4: Happyending (10%) Abenomics succeeds in ending deflation and raising the trend growth rate.

While we see a significant risk of a return to deflation, we view Scenario 2 as more likely at thispoint, as we expect the government to persist with its fiscal pump-priming.

Chart 1: Contracted public works (JPY trn, sa) Chart 2: Real Japanese exports (JPY bn, sa)

9

10

11

12

13

14

15

16

17

18

07 08 09 10 11 12 13

4000

4500

5000

5500

6000

6500

7000

7500

07 08 09 10 11 12 13

Monthly

Quarterly

Source: EJCS, BNP Paribas Source: MoF, BoJ, BNP Paribas

Chart 3: Private consumption, integrated estimates (sa) Chart 4: Goods and services CPI inflation (% y/y)

98

100

102

104

106

108

110

07 08 09 10 11 12 13

Monthly

Quarterly

-6

-4

-2

0

2

4

6

06 07 08 09 10 11 12 13

Services

Goods, less

fresh

food

Source: Cabinet office, BNP Paribas Source: MIC, BNP Paribas

Deflation could resumewithout more growth

Higher prices will forestallpressure for more easing

Defeating deflation couldneed financial repression

20


22/91

Ryutaro Kono November 2013


Japan: Economic and financial forecasts

11 12 13(1)

14(1)

15(1)

Q1 Q2 Q3 Q4(1)

Q1(1)

Q2(1)

Q3(1)

Q4(1)


GDP (% q/q) - - - - - 1.1 0.9 0.5 0.8 0.8 -1.2 0.4 0.4GDP (% q/q annualised) - - - - - 4.3 3.8 1.9 3.4 3.3 -4.6 1.5 1.7GDP (% y/y) -0.6 1.9 1.8 1.3 0.9 0.3 1.1 2.7 3.4 3.1 0.9 0.8 0.4Domestic demand ex-stocks 0.8 2.8 2.1 1.1 0.9 0.7 0.9 0.6 1.1 1.2 -2.2 0.3 0.4Private consumption 0.4 2.3 1.8 0.0 -0.1 0.8 0.6 0.1 1.0 1.9 -3.8 0.1 0.2Government expenditure -0.2 4.2 4.0 3.1 2.2 0.5 1.6 1.6 0.3 0.4 0.9 0.8 0.6Residential investment 5.5 3.0 8.1 -8.1 -0.7 2.3 0.4 2.7 2.0 -4.0 -8.0 -3.0 1.5Private non-residential investment 3.3 2.0 -1.3 4.1 3.6 0.1 1.1 0.2 2.1 0.7 0.9 0.9 1.0Stocks (cont. to growth) -0.5 0.0 -0.1 0.2 0.1 0.0 -0.1 0.4 -0.1 -0.3 0.6 0.1 0.0Exports -0.4 -0.1 1.8 4.6 4.1 3.9 2.9 -0.6 1.5 1.5 1.0 1.0 1.0Imports 5.9 5.5 2.9 5.2 5.1 1.0 1.7 2.2 2.0 2.3 -1.5 1.3 1.2Industrial production (% q/q) - - - - - 0.6 1.5 1.8 1.7 1.4 -2.0 0.0 0.8Industrial production (% y/y) -2.8 0.6 -0.9 2.6 2.4 -7.9 -3.1 2.3 5.6 6.4 2.8 1.0 0.2Savings ratio (%) 2.3 -0.1 -1.4 -2.4 -2.6 - - - - - - - -

(% y/y) 11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Inflation & labour

GDP deflator -1.9 -0.9 -0.5 1.5 1.2 -1.1 -0.5 -0.3 -0.3 0.2 1.9 1.9 2.0Consumption deflator -0.8 0.0 -0.3 1.9 1.3 -0.9 -0.6 0.4 0.1 0.4 2.6 2.3 2.3CPI -0.3 0.0 0.3 2.6 1.9 -0.6 -0.3 0.9 1.2 1.3 3.5 2.9 2.8Core CPI -0.3 -0.1 0.3 2.5 2.0 -0.3 0.0 0.7 0.9 1.2 3.2 2.8 2.8 ex consumption tax -0.3 -0.1 0.3 1.0 1.1 -0.3 0.0 0.7 0.9 1.2 1.2 0.8 0.8US-like core CPI (2) -0.9 -0.6 -0.2 1.8 1.9 -0.8 -0.4 -0.0 0.2 0.5 2.2 2.2 2.4Monthly wages -0.2 -0.6 -0.1 1.1 1.6 -0.5 0.2 -0.3 0.3 0.4 1.6 1.1 1.4Employment -0.1 -0.3 0.5 -0.2 -0.1 0.3 0.6 0.6 0.6 0.2 -0.4 -0.4 -0.3Unemployment rate (%) 4.6 4.4 4.0 3.7 3.5 4.2 4.0 4.0 3.9 3.8 3.7 3.7 3.6

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

External trade

Trade balance (JPY trn, sa) -1.6 -5.8 -10.2 -11.4 -12.5 -10.1 -7.4 -11.3 -11.9 -12.7 -10.7 -11.0 -11.3Current account (JPY trn, sa) 9.6 4.8 4.2 3.4 2.5 3.1 8.9 2.2 2.7 2.0 4.0 3.8 3.6Current account (% GDP) 2.0 1.0 0.9 0.7 0.5 0.7 1.9 0.5 0.6 0.4 0.8 0.8 0.7

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Financial variablesMoney supply (M2, % y/y ) 2.9 2.5 3.8 4.2 3.0 - - - - - - - -Government budget (JPY trn) (3) -41.0 -43.2 -40.5 -30.5 -28.7 - - - - - - - -Government budget (% GDP) (3) -8.7 -9.1 -8.3 -6.1 -5.6 - - - - - - - -Primary balance (% GDP) (3) -6.8 -7.4 -6.8 -4.8 -4.2 - - - - - - - -Gross gov. debt (% GDP) (3) 191 199 203 204 205 - - - - - - - -

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)


O/N call rate (%) 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.103-month rate (%) 0.33 0.31 0.22 0.20 0.20 0.25 0.23 0.23 0.22 0.20 0.20 0.20 0.202-year rate (%) 0.14 0.10 0.09 0.12 0.60 0.07 0.15 0.11 0.09 0.08 0.09 0.10 0.125-year rate (%) 0.35 0.19 0.20 0.30 1.50 0.14 0.31 0.24 0.20 0.15 0.20 0.25 0.3010-year rate (%) 0.99 0.80 0.50 0.70 2.50 0.56 0.84 0.69 0.50 0.40 0.50 0.60 0.70USDJPY 77 87 102 118 120 94 99 98 102 108 112 114 118EURJPY 100 114 135 145 150 121 129 133 135 138 141 143 145

2013Year

Year 2013

2014

2014

Year

2014

2014

Year

2014Year 2013

2013

Footnotes: (1) Forecast (2) US-Like Core CPI: CPI excluding food (but including alcoholic beverages) and energy (3) FY, General government excludingsocial security funds (4)End period Figures are quarter-on-quarter percentage changes unless otherwise indicated

2013


21


23/91

Xingdong Chen November 2013


China: New reforms to trim growthThe Chinese economy rebounded in Q3. GDP growth rose to 7.8% y/y from 7.5% in Q2,dissipating fears of a hard landing. The 7.7% y/y average GDP growth rate in the first threequarters means China will have little difficulty achieving its 7.5% annual growth target for thisyear, enabling the leadership to proceed with its reform agenda unimpeded.

For next year, we are maintaining our growth forecast of 7.3%, but we are lowering our forecastfor 2015 from 7.0% to 6.8%. We think the countrys new reform programmes may deter localgovernment and state-owned enterprises from adopting policies to promote growth and believethis is unlikely to be fully offset by greater private investment. Meanwhile, businesses will haveto adjust their goals and priorities for a new round of reforms and market liberalisation. So, weexpect the Chinese economy to go through 2-3 years of transition.

On the positive side, Chinas economic structure should improve. Private consumption will beunderpinned by a better social safety net and more robust income growth. Exports are likely tobe boosted by the economic recovery in developed countries. Services share of the Chineseeconomy should continue to rise.

PPI deflation has damped consumer prices this year, but we expect inflation to rise from 2.7% in2013 to 3.2% in 2014 and 3.5% in 2015 on base effects and resource/utility price liberalisation.

A new round of comprehensive economic reforms is set to be adopted after the Third Plenum ofthe 18th Party Congress. The objective is to rebalance the functions of government, marketsand enterprise in order to rein in the role of government and promote market competition.

On top of these reforms, the Chinese government will maintain its so-called rangemanagement over the next 2-3 years. Under this policy, growth should not dip far below 7.0%and inflation should not exceed 4%. As long as the economy continues to tick over within thisrange, reforms will be top of policymakers agenda.

Chart 1: Economic structure to improve (% y/y) Chart 2: FAI growth is set to slow (% y/y)

5

7

9

11

13

15

17

19

Q1 01 Q2 02 Q3 03 Q4 04 Q1 06 Q2 07 Q3 08 Q4 09 Q1 11 Q2 12 Q3 13

Tertiary industry - real growth

Secondary industry - real growth

-40

-20

0

20

40

60

80

100

20

23

26

29

32

35

Feb 05 Dec 05 Oct 06 Aug 07 Jun 08 Apr 09 Feb 10 Dec 10 Oct 11 Aug 12 Jun 13

FAI (LHS)

Budget of newly started project (RHS)

Source: NBS, BNP Paribas Source: NBS, BNP Paribas

Chart 3: External demand is strengthening (% y/y) Chart 4: Inflation is rising (% y/y)

30

35

40

45

50

55

60

65

-30

-15

0

15

30

45

01 02 03 04 05 06 07 08 09 10 11 12 13

China export growth (3MMA, LHS)

Average EU & US PMI (RHS)

-10

-8

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13

PPI

CPI

Source: NBS, BNP Paribas Source: NBS, BNP Paribas

7.5% growth target issecured for 2013

Growth to slow to 7.3% in2014, 6.8% in 2015

Structural improvementsto be made

A new round of reforms isset to take place

Range management toset a floor for GDP growth

22


24/91

Xingdong Chen November 2013


China: Economic and financial forecasts

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Components of growth (2)

Total GDP 9.3 7.7 7.7 7.3 6.8 7.7 7.5 7.8 7.6 7.5 7.3 7.0 7.3

Retail sales 17.1 14.3 13.0 12.5 12.8 12.4 13.0 13.3 13.0 12.9 12.5 12.1 12.4

Fixed asset investment 23.8 20.6 20.0 16.2 15.8 20.9 19.7 20.3 19.4 17.9 17.0 15.2 15.7

Exports 20.4 8.0 7.2 7.5 8.7 18.3 3.7 3.9 5.1 4.5 7.6 8.0 9.5

Imports 25.1 4.5 7.5 8.3 9.0 8.4 5.0 8.4 8.1 9.3 8.9 7.2 7.9

Industrial output (3) 13.9 10.0 9.7 9.1 8.2 9.5 9.1 10.1 9.8 9.5 9.1 8.9 9.3

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4

(1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Inflation

CPI 5.4 2.6 2.7 3.2 3.5 2.4 2.4 2.8 3.4 3.5 3.6 3.2 2.7

PPI 6.0 -1.7 -1.8 1.5 2.7 -1.9 -2.7 -1.7 -1.0 -0.3 1.5 2.6 2.1

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4

(1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

External tradeTrade balance (USD bn) (4) 157.9 231.9 243.2 245.8 260.8 43.5 65.7 61.5 73.3 23.2 64.5 70.5 88.6

Current account (USD bn) 136.1 193.1 226.6 208.3 211.7 47.6 48.1 72.5 58.4 27.5 65.0 65.2 50.6

Current account (% GDP) 1.9 2.3 2.4 2.0 1.9 2.5 2.3 3.2 2.0 1.3 2.8 2.6 1.5

Memo: Nom. GDP (USD bn) 7322 8247 9251 10288 11353 1914 2104 2267 2966 2144 2335 2496 3313

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4

(1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Financial variables

Gen. gov. budget (% GDP) (5) -1.9 -1.5 -2.1 -2.3 -2.5 - - - - - - - -

Primary budget (% GDP) -1.4 -1.1 -1.6 -1.8 -2.1 - - - - - - - -

Foreign reserves (USD bn) (6) 3181 3312 3718 3877 3932 3440 3500 3662 3718 3720 3777 3797 3877

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4

(1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)


Official interest rate (%) 3.50 3.00 3.00 3.00 3.25 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00

USDRMB 6.29 6.23 6.08 6.12 6.10 6.21 6.14 6.12 6.08 6.15 6.10 6.15 6.12

Footnotes: (1) Forecast (2) Forecasts of GDP and industrial output are in real terms but, in the absence of data, forecasts of consumption, investment, exports and imports are in nominal terms

(3) Industrial output for enterprises with annual revenue greater than RMB 5mn (4) Trade balance is customs merchandise trade balance

(5) Government budget balance denotes the fiscal balance released by the Ministry of Finance, not the actual budget balance (6) End period

Figures are year-on-year percentage changes unless otherwise i ndicated

2014

2014

2014

2013

2013

2013Year

Year

2014

2014

2013

2013Year

Year

Year

Source: BNP Paribas

23


25/91

Evelyn Herrmann November 2013


Germany: More tortoise than hareIt should come as no great surprise, in light of recent data, that we are sticking with our viewthat German growth will outperform the eurozone average over our forecast period. In 2014,Germany, alone, should account for half of all eurozone growth. Improved foreign demandshould boost German growth in 2014, but we are unlikely to see any further pickup the yearafter unless global growth exceeds expectations. Stronger German domestic demand in 2015will lead to an increase in imports and, hence, a negative net export contribution to GDP,limiting overall German growth.

The much-needed rebalancing of German growth towards domestic demand, however, will beslow. Growth in consumption, real wages and disposable income remains modest; the recentlabour-market stumble is likely to slow the rebalancing by about a year. However, negative realrates will lead to a decline in the savings rate and rising house prices are generating positivewealth effects, only partially offset by the impact of negative real rates on household savings.

German companies have been citing domestic demand and the international politicalenvironment (rather than just the domestic government stalemate) as the two main hurdles tocorporate investment. As growth picks up, investment should rebound. However, capacityutilisation currently stands below its pre-crisis high and is unlikely to return to this level in 2014.Investment is, therefore, likely to be focused on postponed maintenance and repairs rather thannew production capacity.

Inflation pressures, meanwhile, will remain subdued. Domestically, rising unit labour costs willsqueeze profits and prompt companies to pass on cost increases to the consumer. Low andslowing inflation globally, however, should offset the upward pressure and keep inflation stable.

There is still a risk that the German economy will overheat at some stage, but global growthwould have to overshoot expectations considerably. With German monetary policy decided atthe eurozone level, any inflationary pressures will have to be curtailed by tighter fiscal policy.

Chart 1: Ifo business clock for Germany Chart 2: German capacity utilisation and investment

9 2 9 3 9 4 95 9 6 9 7 9 8 99 0 0 01 0 2 0 3 0 4 0 5 0 6 07 0 8 0 9 1 0 1 1 1 2 1 370.0

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Capacity u tilisa tion (RHS)

Eq u ip m e n t in v e s tm e n t (% y /y )


Chart 3: German compensation and consumption (% y/y) Chart 4: German inflation pipeline (% y/y)

9 4 9 5 9 6 9 7 98 99 00 01 0 2 0 3 0 4 0 5 0 6 07 08 09 1 0 11 12 1 3-3

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0 0 01 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 10 1 1 1 2 13-1.0

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German export growth isset to pick up in 2014

Domestic demand will bethe main driver of growth

Corporate investment willonly pick up gradually

Domestic inflation mutedby import price dynamics

Overheating risk could beoffset by fiscal tightening

24


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Evelyn Herrmann November 2013


Germany: Economic and financial forecasts

11 12 13(1)

14(1)

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Q1 Q2 Q3(1)

Q4(1)

Q1(1)

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Components of growth (2)

GDP (% q/q) - - - - - 0.0 0.7 0.3 0.4 0.5 0.4 0.3 0.2GDP 3.4 0.9 0.5 1.7 1.5 -0.3 0.5 0.6 1.4 2.0 1.7 1.6 1.4Domestic demand ex. stocks 2.9 0.4 0.6 1.5 1.7 -0.5 0.8 0.8 1.2 2.0 1.4 1.4 1.4Private consumption 2.3 0.7 1.0 1.1 1.3 0.6 1.1 1.0 1.2 1.3 1.0 1.1 1.1Public consumption 1.0 1.0 0.8 0.6 0.4 0.2 1.3 0.8 0.8 1.0 0.5 0.5 0.5Fixed investment 7.1 -1.3 -0.9 4.0 4.2 -4.5 -0.8 0.0 1.5 5.4 4.0 3.2 3.3Stocks (cont. to growth, q/q) -0.1 -0.6 0.1 0.1 0.0 0.1 -0.1 -0.1 -0.1 0.0 0.0 0.1 0.0Exports 8.1 3.8 1.0 4.0 5.0 -0.4 0.3 1.0 3.2 4.7 3.6 3.4 4.2Imports 7.5 1.8 1.4 4.3 5.8 -0.5 0.8 2.0 3.3 4.9 3.6 3.6 4.9Industrial production 6.9 0.3 0.3 3.1 2.7 -2.4 -0.1 0.2 3.4 5.0 2.6 2.4 2.3Savings ratio 10.4 10.3 9.8 9.4 8.8 - - - - - - - -

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 (1) Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Inflation & labour HICP 2.5 2.1 1.5 1.3 1.5 1.8 1.5 1.7 1.1 1.1 1.2 1.1 1.7Core HICP 1.2 1.3 1.1 1.1 1.3 1.4 1.0 1.2 0.9 0.9 1.1 1.2 1.3PPI 5.3 1.6 -0.1 1.0 1.3 1.3 0.8 -0.1 -0.3 -0.7 0.0 0.9 1.2Compensation per employee 3.3 3.0 1.9 1.8 1.9 3.2 2.6 2.1 1.5 1.4 1.7 1.8 1.9Employment 1.4 1.1 0.5 0.7 0.6 0.9 0.6 0.6 0.5 0.3 0.6 0.7 0.8Unemployment rate (%) 7.1 6.8 6.8 6.6 6.3 6.9 6.9 6.8 6.8 6.8 6.7 6.6 6.5

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

External trade

Trade balance (EUR bn, sa) 156.1 190.9 197.5 202.2 204.9 47.0 50.1 47.7 49.6 50.1 49.8 51.0 50.8Current account (EUR bn, nsa) 161.3 189.5 194.6 203.5 205.6 46.4 46.4 49.4 49.4 49.4 50.3 50.6 51.6Current account (% GDP) 6.2 7.1 7.1 7.1 6.9 - - - - - - - -

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Financial variablesFederal gov. budget (EUR bn) -27.0 -14.5 -23.7 -5.8 -1.2 - - - - - - - -General gov. budget (EUR bn) -21.2 2.5 -18.8 1.1 4.7 - - - - - - - -General gov. budget (% GDP) -0.8 0.1 -0.7 0.0 0.2 - - - - - - - -Primary budget (EUR bn) 29.8 50.8 26.8 44.5 48.1 - - - - - - - -Primary budget (% GDP) 1.1 1.9 1.0 1.6 1.6 - - - - - - - -Gross gov. debt (% GDP) (3) 80.0 81.0 79.2 76.3 73.3 - - - - - - - -

11 12 13 (1) 14 (1) 15 (1) Q1 Q2 Q3 Q4 (1) Q1 (1) Q2 (1) Q3 (1) Q4 (1)

Interest rates (3)

3-month rate (%) 1.36 0.19 0.20 0.10 0.10 0.21 0.22 0.23 0.20 0.10 0.10 0.10 0.1010-year rate (%) 1.83 1.31 1.80 2.10 2.50 1.28 1.73 1.78 1.80 1.90 2.00 2.05 2.10

2014

2014

2014

2014

2014

Footnotes: (1) Forecast (2) Calendar and seasonally adjusted (3) End period

Figures are year-on-year percentage changes u nless otherwise indicated

Year

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Year

2013

2013

2013

2013

2013


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27/91

Dominique Barbet November 2013


France: The path of true growth never runs smoothThe path of French economic recovery is unlikely to run smooth until Q2 2014, primarily forfiscal reasons, but growth should become stronger and less volatile thereafter. It will take timeand wider profit margins for corporate investment to recover fully. The key risks to our recoveryscenario are a jump in energy prices, which would kill off consumption, and an even strongereuro, which would stall export growth.

The slow pace of French growth will probably not spark any great improvement in employmentbefore the second half of 2014. The unemployment rate may stabilise before then, helped bysubsidised jobs, more people being enrolled on training schemes and individuals coming off the

jobless register as they are not actively searching for work. However, we are unlikely to see anysign of wage pressures before 2015 and underlying inflation will remain subdued.

Although the scheduled VAT rate hike should add about 0.25pp to the headline inflation rate inJanuary, we believe the tax credit for competitiveness and employment should easily offset theadverse impact on trend inflation. French inflation had been below that of the eurozone, but thegap has largely vanished over the past few months. This is unlikely to change anytime soon,indeed, not as long as disinflation persists in the peripheral eurozone.

French fiscal tightening will continue in 2014 and 2015, but to a much lesser degree than in2011-13. We think a general budget deficit of 3.0% of GDP is achievable, but only via largerspending cuts and fewer tax hikes, as France is suffering from tax-hike fatigue.

Structural reforms are likely to grind to a halt between the end of 2013 and elections in 2014.French municipal elections will be held in March and the European Parliament election will beheld in May. A poor showing by the ruling Socialist Party, which has been slumping in the polls,is likely to prompt President Franois Hollande to reshuffle the cabinet, at the latest after theMay vote in response to a near party meltdown. The risk of anti-reform industrial action (massstrikes) is limited, but the risk of violent protest persists.

Chart 1: French household confidence vs. retail sales Chart 2: French employment vs. GDP growth

0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3-4 0

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P r i v a te s e c t o r e m p l o y m e n t( n o n - f a rm p a y r o l ls , % y / y )


Chart 3: Subd

GlobalOutlook Q1 2014%5b1%5d

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