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 [email protected]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)
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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
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
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
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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.
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%.
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
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
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.
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
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).
Nomura | Global Annual Economic Outlook 13 November 2012
51
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52
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