Nomura - Global Economic Outlook Monthly

Nomura | Global Economic Outlook Monthly 11 March 2013

Nomura Securities International Inc.

See Disclosure Appendix A-1 for the Analyst Certification and Other Important Disclosures

Global Economic Outlook Monthly

Economics Research | Global

No pressure 11 MARCH 2013

Amid growing signs that the world’s major economies have hit a speed bump, the US is looking increasingly like a bright spot, but is not without risks of its own.

COUNTRY AND REGIONAL ECONOMIC OUTLOOKS

Australia | The rebalancing of the economy is likely coming 4

Brazil | Accelerating inflation, delayed recovery 5

Canada | Growth exhaustion 6

China | Rising inflation and a weak recovery pose a policy dilemma 7

Euro area | ECB's recovery scenario could be challenged by lack of pass-through 8

Hong Kong | Hong Kong: Fiscal stimulus 9

Hungary | Unorthodox policy focus shifts to non-independent central bank 10

India | Politics trumps economics 11

Indonesia | Still a case to tighten 12

Japan | We forecast 0.9% y-o-y growth in 2013 13

Malaysia | All eyes on the elections 14

Mexico | 2013: The year of reforms 15

Philippines | In a virtuous cycle 16

Poland | NBP's limited cutting cycle is over - growth still outperforming 17

Singapore | A weak start to 2013 18

South Africa | Status quo means the brakes are still applied 19

South Korea | Growth momentum set to carry into Q1 20

Taiwan | External demand is key 21

Thailand | A positive start to 2013 22

Turkey | A healthy rebalancing 23

United Kingdom | Stagnant 24

United States | Lost in translation 25

Rest of EEMEA 26

Rest of Latin America 27

Global Economics

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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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Forecast Summary

Real GDP (% y-o-y) Consumer Prices (% y-o-y) Policy Rate (% end of period)

2012 2013 2014 2012 2013 2014 2012 2013 2014

Global 3.0 3.0 3.8 3.2 3.3 3.5 2.99 3.12 3.24

Developed 1.2 0.9 1.8 2.0 1.6 1.8 0.45 0.37 0.40

Emerging Markets 5.2 5.4 5.8 4.7 5.2 5.3 5.98 6.21 6.24

Americas 2.3 2.3 3.2 3.6 3.7 3.6 2.08 2.23 2.28

United States* 2.2 1.9 3.1 2.1 1.7 1.6 0.13 0.13 0.13

Canada 1.8 1.3 2.0 1.5 1.3 2.0 1.00 1.00 1.50

Latin America†† 2.6 3.4 3.8 8.0 9.6 9.1 7.48 8.00 7.83

Argentina 1.9 4.0 3.5 25.4 32.3 29.7 15.37 17.00 14.00

Brazil 0.9 3.5 3.2 5.8 5.9 5.5 7.25 8.25 8.00

Chile 5.4 5.5 5.0 1.5 3.3 3.0 5.00 5.25 5.25

Colombia 3.8 4.2 4.5 2.4 2.7 3.5 4.25 3.50 4.50

Mexico 3.9 3.5 4.5 4.1 3.4 3.5 4.50 4.00 4.50

Venezuela 5.5 -1.0 3.0 20.1 35.5 27.6 14.55 17.00 16.00

Asia/Pacif ic 5.4 5.3 5.8 3.0 3.6 4.1 4.66 4.90 4.95

Japan† 2.0 1.0 1.9 0.0 0.1 2.3 0.05 0.05 0.05

Australia 3.6 2.2 2.6 1.8 2.6 2.5 3.00 2.75 3.00

New Zealand 2.4 2.7 2.8 1.1 1.8 2.8 2.50 2.75 3.50

Asia ex Japan, Aust, NZ 6.2 6.2 6.6 3.7 4.2 4.5 5.65 5.90 5.90

China 7.8 7.7 7.5 2.6 3.5 4.0 6.00 6.50 6.50

Hong Kong*** 1.4 2.5 3.5 4.1 4.3 4.3 0.40 0.40 0.40

India** 5.1 5.2 6.6 7.5 7.1 6.8 8.00 7.50 7.00

Indonesia 6.2 6.1 6.2 4.3 5.2 5.1 5.75 6.25 6.75

Malaysia 5.6 4.3 4.6 1.7 2.4 2.5 3.00 3.50 4.00

Philippines 6.6 6.4 5.8 3.1 4.6 4.5 3.50 4.00 4.50

Singapore*** 1.3 2.4 4.2 4.6 3.9 3.6 0.38 0.48 0.50

South Korea 2.0 2.5 3.5 2.2 2.7 3.0 2.75 2.75 3.25

Taiw an 1.3 3.0 3.5 1.9 2.3 2.3 1.88 2.13 2.13

Thailand 6.4 4.5 5.0 3.0 3.2 3.1 2.75 2.75 3.25

Western Europe -0.4 -0.6 0.1 2.6 1.8 1.6 0.71 0.50 0.50

Euro area -0.5 -0.8 0.0 2.5 1.6 1.4 0.75 0.50 0.50

Austria 0.6 -0.1 0.8 2.6 2.3 1.9 0.75 0.50 0.50

France 0.0 -0.5 0.5 2.2 1.4 1.6 0.75 0.50 0.50

Germany 0.9 0.5 0.7 2.1 1.6 1.4 0.75 0.50 0.50

Greece -6.6 -5.5 -2.0 1.0 -0.1 -0.3 0.75 0.50 0.50

Ireland 0.6 0.8 1.3 1.9 0.3 0.6 0.75 0.50 0.50

Italy -2.2 -2.5 -1.3 3.3 1.7 1.3 0.75 0.50 0.50

Netherlands -0.9 -1.2 0.1 2.8 2.9 2.1 0.75 0.50 0.50

Portugal -3.2 -3.4 -0.2 2.8 0.4 0.3 0.75 0.50 0.50

Spain -1.4 -2.5 -1.5 2.4 1.9 1.1 0.75 0.50 0.50

United Kingdom 0.0 0.2 0.7 2.8 2.8 2.5 0.50 0.50 0.50

EEMEA 1.8 2.5 3.5 5.5 4.2 4.5 4.41 4.07 4.73

Czech Republic -1.7 0.0 1.4 3.3 1.8 1.6 0.05 0.05 1.00

Hungary -2.7 -0.5 0.9 5.7 4.0 5.4 5.75 4.00 4.00

Israel 2.5 3.0 3.5 1.7 2.6 2.7 1.75 1.75 2.50

Poland 2.2 1.9 3.0 3.7 1.4 2.9 4.25 3.25 4.50

Romania 0.3 0.6 1.5 3.3 3.4 3.2 5.25 5.25 6.00

South Africa 2.6 2.8 3.2 5.7 5.6 5.5 5.00 5.00 6.00

Turkey 3.0 4.5 5.5 8.9 6.7 6.3 5.50 5.50 5.50 Note: AAggregates are 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. The Brent oil price for 2012 was $112; currently, assumed Brent oil prices for 2013 and 2014 are $110 and $102, respectively. *The 2012 policy rate was the midpoint of the 0-0.25% target federal funds rate range; 2013 and 2014 policy rate forecasts are midpoints of the 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. †The 2012 policy rate was the midpoint of the BOJ‟s 0-0.10% target unsecured overnight call rate range; 2013 and 2014 policy rate forecasts are midpoints of BOJ‟s 0-0.10% target unsecured overnight call rate range. ††CPI

forecasts for Latin America are year-on-year changes for Q4. The numbers in bold are actuals. The arrows signify changes from last month. Source: Nomura Global Economics.


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Our View in a Nutshell (changes from last month highlighted)

United States

Fiscal policy remains a source of uncertainty for the outlook, but risks of a policy misstep have diminished.

We expect capital expenditures to accelerate in the second half of the year in response to lower uncertainty around the outlook.

Ample economic slack, apparent in the high rate of unemployment and unused capacity, should restrain inflation.

We expect the FOMC to continue its long-term asset purchases through the third quarter of 2013, and taper purchases thereafter.

A strengthening of the housing market should support investment, job creation, and aggregate demand.

The slowing pace of 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.

OMT announcement reduced probability of Spain calling an ECCL imminently. Our baseline remains an ECCL will be called.

After a phase of relative calm, markets will likely test the backstop and pressure should rebuild around weak sovereigns.

GDP contraction, higher non-performing loans and rising debt trajectories remain the key euro area challenges.

Because we forecast a weak economic backdrop, we retain our bias for lower ECB rates (in June).

We expect inflation to be sticky in the UK, albeit back in the right ballpark, but to slip below target during 2013 in the euro area.

The BoE aggressively announced QE, liquidity and funding support in 2012. We see a bias toward doing more in 2013.

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 ensure the overall economy is in a stable growth phase in 2013.

We expect the BOJ to extend duration of APP-eligible JGBs to 5yr and to raise purchases by ~JPY10trn at its April meeting.

The main risks are yen appreciation, a worsening European debt problem and the US and China slowing.

Asia

Our focus is on overheating risks, but we are cognisant that a China slowdown could take the steam out of Asia’s economies.

China: GDP growth should stay strong in H1, but the debt build-up and rising inflation should thwart the recovery in H2.

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 the structural fiscal deficit still high, we expect weak growth, a high current account deficit and little room for rate

cuts.

Australia: With the peak in resource investment approaching, we believe the RBA will cut rates by 25bp in 2013.

Indonesia: An increasingly uncertain policy environment could 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 should continue to hold the economy back.

Hungary: We view the central bank as having lost its independence and that a devaluation and unorthodox policy are on the way.

Poland: Should experience a strong recovery in H2. The rate-cutting cycle seems over, though the risk is skewed to one more.

Turkey: Rebalancing continues and is likely to pave the way for further upgrades.

Brazil: Supply-side constraints will cap growth at around trend, despite multiple rounds of stimulus measures.

Mexico: We expect the new government to embark on a series of important reforms in 2013.

Argentina‟s growth is set to recover modestly in 2013. Inflation and RER overvaluation to remain problematic.


4

Charles St-Arnaud +1 212 667 1986 [email protected]

Martin Whetton +61 2 8062 8611 [email protected]

Australia | Economic Outlook

The rebalancing of the economy is likely coming

Growth is likely to slow due to weaker business investment and the terms of trade. The RBA is

expected to cut the official rate by 25bp to stimulate the economy.

Activity: Growth slowed in H2 2012 as a result of the negative terms-of-trade shock from

weaker commodity prices, which has reduced business investment and gross domestic income.

We believe that with the peak in resource investment likely coming in the first half of 2013,

business investment growth will slow in 2013. However, with the previous RBA rate cuts making

their way through the economy, we believe that better household spending should spur dwelling

investment and offset some of the weakness. Moreover, better growth in China and the rest of

Asia in 2013 should provide some support to exports and commodity prices. With elections

announced for later this year, fiscal policy could be slightly supportive of growth until then, but

fiscal consolidation should return once the election has passed.

Inflation: CPI inflation in Q4 was weaker than expected, signaling that the second-round impact

of the carbon tax was not an issue. We expect inflation to remain close to the upper band of the

inflation target in the first half of 2013 before moderating in the second half of the year. A similar

profile is expected for the underlying measure. However, both measures should peak slightly

below 3%.

Policy: We expect a further 25bp reduction in the official rate in Q2, as the upside risk to

inflation did not materialize, with the hope this will ease the economic rebalancing from the

resource sector to the non-resource sector and to offset the headwind from the strong

Australian dollar. However, the exact timing of the cuts will depend on incoming data, especially

the release of Q1 CPI. If inflation moderates in Q1, the RBA could cut at the May meeting.

Risks: A strong currency and a sharp slowdown in China remain the main downside risks to the

outlook. On the flip side, improved risk sentiment, momentum in the housing sector, global trade

and renewed increases in commodity prices represent upside risks to growth and inflation.

Fig. 1: Details of the forecast

% q-o-q ar. 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP (% y-o-y) 4.4 3.7 3.1 3.1 2.4 2.2 2.0 2.0 3.6 2.1 2.3

Real GDP 5.0 2.6 2.6 2.4 1.8 1.8 2.0 2.4 3.6 2.1 2.3

Personal consumption 6.3 3.0 0.9 0.9 2.0 2.0 2.2 2.6 3.2 1.8 2.5

Private investment 21.5 12.6 6.4 -14.0 0.8 1.8 3.8 5.0 10.5 0.0 4.6

Business investment 30.3 18.0 7.2 -18.8 0.0 1.0 3.5 5.0 15.0 -1.1 4.6

Dw elling investment -6.8 -7.1 3.2 8.7 4.0 5.0 5.0 5.0 -4.5 4.4 4.5

Government expenditures 0.9 -0.1 -8.5 20.9 -0.2 -0.2 -0.2 -0.2 2.4 2.3 -0.2

Exports -2.6 7.7 6.4 14.0 7.0 7.0 7.0 7.0 6.3 8.2 7.0

Imports 6.8 1.9 1.4 2.6 2.0 3.3 4.6 5.3 6.8 2.8 5.1

Contributions to q-o-q GDP:

Domestic f inal sales 7.6 4.4 0.0 1.1 1.0 1.2 1.6 2.0 3.9 1.3 2.0

Inventories -0.6 -3.0 1.8 -0.6 0.0 0.0 -0.1 0.1 -0.2 -0.1 -0.1

Net trade -2.0 1.2 0.8 1.8 0.9 0.7 0.4 0.3 -0.1 1.0 0.4

Unemployment rate 5.2 5.2 5.3 5.4 5.4 5.5 5.5 5.5 5.2 5.5 5.4

Employment, 000 47 49 6 22 12 23 46 58 31 35 71

Consumer prices 1.6 1.2 2.0 2.2 2.7 2.9 2.1 2.5 1.8 2.6 2.5

Trimmed mean 2.3 2.0 2.4 2.3 2.5 2.6 2.4 2.5 2.3 2.5 2.5

Weighted median 2.3 2.1 2.3 2.3 2.5 2.6 2.5 2.5 2.3 2.5 2.5

Fiscal balance (% GDP) -2.0 -0.5 -0.2

Current account balance (% GDP) -4.1 -5.2 -5.5

RBA cash rate target 4.25 3.50 3.50 3.00 3.00 2.75 2.75 2.75 3.00 2.75 3.00

3-month bank bill 4.30 3.54 3.36 3.07 3.00 2.80 2.80 2.80 3.07 2.80 3.05

2-year government bond 3.47 2.46 2.48 2.65 2.85 2.80 2.85 2.70 2.65 2.70 3.10



AUD/USD 1.04 1.02 1.05 1.04 1.05 1.10 1.12 1.12 1.04 1.12 1.12 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 8 March 2013. Source: Australian Bureau of Statistics, Reserve Bank of Australia, Nomura Global Economics




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Tony Volpon +1 212 667 2182 [email protected]

Brazil | Economic Outlook

Accelerating inflation, delayed recovery

Supply side constraints and a lack of business confidence are delaying a long-awaited recovery.

Meanwhile, various forms of demand-side stimuli should keep inflation elevated.

Activity: The economy grew merely 0.9% in 2012, the slowest pace over the past decade,

barring the crisis year of 2009. Investment fell more than 4% y-o-y, despite 525bp of cuts to the

Selic policy rate since Q3 2011 and various fiscal stimuli applied by the government. Looking

forward, we believe growth will likely rebound to 3.5% in 2013, as the global scenario turns

better and the lagged effects of monetary and fiscal stimuli gradually take effect.

Inflation: Consumer prices have been rising fast recently and inflation pressures should remain

high. This is on one hand due to very accommodative monetary policies, and on the other hand

as a result of policymakers‟ desire to reduce price levels through one-off tax and tariff cuts,

which will only boost income and further stimulate demand down the road without addressing

supply-side bottlenecks. Inflation hit at 6.3% in February, and we expect it to continue edging

up, possibly breaching the 6.5% target upper bound. Inflation should slow down a little bit in H2,

finishing the year at around 6%.

Policy: The priority of policymakers shifted from boosting growth to fighting inflation over the

past month or so. In January, the BCB expressed its desire to see a stronger currency in

fending off inflation; as a result, USDBRL broke the key 2.00 support level in late January and

has stayed below ever since. We expect the currency to gradually appreciate towards 1.90 by

year-end. In its March monetary policy communiqué, the BCB removed its “(rates) low for long”

language and stated explicitly that its next step will depend on macroeconomic scenarios.

Before reading the March BCB minutes (released March 14), we still believe the BCB will start

raising Selic in H2, delivering no more than 100bp of hikes. However, the higher than expected

February inflation considerably raises the likelihood of an early hike, in either April or May.

Risks: Labor markets remain very tight in Brazil, adding substantial pressure to service prices

and keeping headline inflation elevated. Any further supply shocks will complicate an already

tricky inflation outlook in a year when growth is expected to be only around potential.

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 labor costs and boosting private investment in

infrastructure, we expect potential growth to further decelerate over the coming years.

Details of the forecast

% y-o-y change unless noted 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 0.8 0.5 0.9 1.4 2.3 3.5 4.0 4.4 0.9 3.5 3.2


Fixed investment -2.1 -3.7 -5.6 -4.5 -0.2 4.3 7.0 8.3 -4.0 4.8 4.6

Government expenditure 3.4 3.1 3.2 3.1 2.3 0.6 3.2 4.4 3.2 2.7 2.4

Exports 6.6 -2.5 -3.2 2.1 3.0 7.1 8.0 4.0 0.5 3.6 4.5

Imports 6.3 1.6 -6.4 0.4 2.9 4.7 9.0 8.5 0.2 8.1 7.7

Contributions to GDP growth (pp)

Industry -0.4 0.1 0.2 0.3 0.6 0.8 1.0 1.1 0.2 0.8 0.8

Agriculture 0.0 0.0 0.0 0.1 0.1 0.2 0.2 0.2 0.0 0.2 0.2

Services 0.9 0.3 0.5 0.8 1.3 2.0 2.3 2.5 0.5 2.0 1.8

IPCA (consumer prices) 5.2 4.9 5.3 5.8 6.5 6.2 6.0 5.9 5.8 5.9 5.5

IGPM (wholesale prices) 3.2 5.1 8.1 7.8 7.3 7.0 6.8 6.5 7.8 6.2 5.5

Trade balance (US$ billion) 29 24 22 19 18 17 16 15 19 15 15

Current account (% GDP) -2.4 -2.7 -2.7

Primary fiscal balance (% GDP) 2.4 2.0 1.7 2.0 2.0 2.0 2.0

Gross government debt (% GDP) 55.2 55.0 59.3 55.1 55.1 54.0 53.0

Selic % 9.75 8.50 7.50 7.25 7.25 7.25 7.75 8.25 7.25 8.25 8.00

USDBRL 1.83 2.01 2.03 2.05 1.96 1.94 1.92 1.90 2.05 1.90 1.90 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 8 March 2013. Source: Nomura Global Economics.



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Charles St-Arnaud +1 212 667 1986 [email protected]

Canada | Economic Outlook

Growth exhaustion

Growth to remain below potential in 2013, as the expected rebound in investment and exports is

likely to be weak and the oil differential cause a drag on growth

Activity: After some weak growth in H2 of 2012 due to a large drag from net exports and

inventories, we expect growth in Q1 showed a small improvement but should remain below

potential. For 2013, we expect growth to be below 2% most of the year. We expect personal

spending growth to moderate as households gradually reduce their debt burdens and as income

growth remains slow; however, while business investment in machinery and equipment is

expected to pick up, the improvement will likely be small. A rebound in global growth is

expected, with stronger growth in China and the US supporting exports, but this will mainly

affect growth in H2. Moreover, growth in the US could remain weak due to the impact of the

sequester. The continued discount on Canadian oil prices should be negative on the terms of

trade and act as a headwind on growth by reducing corporate profits, and investment tax

revenues.

Inflation: With an increasing amount of spare capacity, inflation remains weak and we think

inflationary pressures are likely to remain contained. We expect headline inflation to increase

gradually, but should end 2013 slightly below the BoC‟s 2% target. Core inflation should also

follow a similar pattern.

Policy: With considerable monetary stimulus in place, but growth remaining weak, we expect

the BoC to remain on hold until mid-2014. However, we believe that the BoC is unlikely to cut

rates as monetary policy is less efficient and the BoC worries it could reignite household debt

accumulation. On fiscal policy, weaker tax revenues due to slower growth and lower commodity

prices and inflexibility on the timing for reaching budget balance will mean some spending cuts.

Risks: We think the threat from a weak US economy due to fiscal policy remains the biggest

negative risk to the Canadian economy. On the upside, domestic demand could prove to be

more resilient than expected, and the US economy could perform better than expected.

Fig. 1: Details of the forecast

% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 1.2 1.9 0.7 0.6 1.4 1.4 1.7 2.1 1.8 1.3 2.0


Non residential f ixed invest 8.1 8.3 -0.4 4.4 2.0 2.0 3.2 3.5 6.2 2.8 3.9

Residential f ixed invest 14.4 0.6 -2.4 0.8 0.0 0.0 0.0 3.0 5.8 0.1 3.2

Government expenditures -1.1 2.3 -1.5 2.5 0.3 0.3 0.3 0.3 -0.5 0.6 0.3

Exports -3.3 1.1 -7.3 1.2 2.3 2.3 3.8 5.0 1.6 1.1 4.7

Imports 5.1 2.3 2.1 -1.0 2.2 2.2 3.1 3.9 2.9 1.8 3.9

Contributions to GDP:

Domestic f inal sales 2.6 1.8 0.9 2.7 1.4 1.4 1.5 1.7 2.0 1.7 1.7

Inventories 1.2 0.5 2.8 -2.8 0.0 0.0 0.0 0.0 0.2 -0.2 0.0

Net trade -2.7 -0.4 -2.9 0.7 0.0 0.0 0.2 0.4 -0.4 -0.2 0.3


Employment, 000 36 113 26 103 20 30 40 60 69 38 63

Consumer prices 2.3 1.6 1.2 0.9 0.6 1.1 1.7 1.7 1.5 1.3 2.0

Core CPI 2.1 2.0 1.5 1.2 1.0 1.0 1.4 1.5 1.7 1.2 2.0



Overnight target rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.50

3-month T-Bill 0.91 0.87 0.97 0.92 1.00 1.00 1.00 1.00 0.92 1.00 1.60




USD/CAD 1.00 1.02 0.98 0.99 1.05 1.07 1.08 1.10 0.99 1.10 1.02 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 8 March 2013. Source: Bank of Canada, Statistics Canada, Nomura Global Economics.



7

Zhiwei Zhang +852 2536 7433 [email protected]

Wendy Chen +86 21 6193 7237 [email protected]

China | Economic Outlook

Rising inflation and a weak recovery pose a policy dilemma

The government will likely keep policy unchanged in the short term.

Activity: Activity data were mostly weak in the first two months of 2013. Retail sales growth

slowed sharply to 12.3% y-o-y in the combined January/February period, from 15.2% in

December, while industrial production growth slowed to 9.9% from 10.3% y-o-y. Fixed asset

investment growth picked up to 21.2% y-o-y (ytd) in February from 20.6% in December, but to a

large extent was driven by real-estate investment which is likely to be only temporary due to

policy tightening in this sector. The official PMI surprisingly fell to 50.1 in February from 50.4 in

January and the HSBC PMI dropped to 50.4 after a jump to 52.3 in January. We see downside

risks to our forecast for GDP growth at 8.2% y-o-y in Q1.

Inflation: CPI Inflation rose to 3.2% y-o-y in February from 2.0% in January, due to rising food

prices and positive base effects. The government lowered its CPI inflation target to 3.5% in

2013 from 4.0% last year. At the National People‟s Congress (NPC), outgoing Premier Wen

Jiabo cited rising prices in food, labour and natural resources, imported inflation from QE in

major economies, and the need to reform energy prices as the primary drivers. This suggests to

us that further price hikes in energy and public utilities will be implemented in H1.

Policy: Monetary policy maintained a loose stance. Total social financing hit an all-time high of

RMB2.5trn in January and remained high in February. M2 growth jumped to 15.9% y-o-y in

January and was 15.2% in February, up from 13.8% in December. The government announced

tightening measures on the property market and set an M2 growth target for 2013 at 13% at the

NPC, down from 14% in 2012. In the short term we expect the government to keep policy

unchanged as both growth and inflation face uncertainty – but rising inflation will likely force

policy tightening in H2 2013.

Risks: We see three key risks to our forecast. The largest risk is policy uncertainty, as political

pressure could force the government to maintain its currently loose policy stance longer than we

expect. The second is inflation, which may rise more slowly than we expect and delay policy

tightening. The third is external demand, given the uncertain outlook of EU and US economies.


% y-o-y growth unless otherwise stated 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 8.1 7.6 7.4 7.9 8.2 8.0 7.4 7.2 7.8 7.7 7.5

Consumer prices 3.8 2.9 1.9 2.1 2.5 3.0 3.6 4.8 2.6 3.5 4.0

Core CPI 1.5 1.3 1.5 1.5 2.0 2.1 2.4 2.1 1.5 2.2 2.0

Retail sales (nominal) 14.9 13.9 13.5 14.9 16.2 15.9 15.5 15.6 14.2 15.8 16.0

Fixed-asset investment (nominal, ytd) 20.9 20.4 20.5 20.6 21.0 21.2 21.3 22.0 20.6 22.0 20.0

Industrial production (real) 11.6 9.5 9.1 10.0 10.8 10.5 9.6 9.6 10.1 10.1 9.7

Exports (value) 7.6 10.4 4.4 9.5 3.0 4.0 6.0 6.0 7.9 4.9 6.0

Imports (value) 6.9 6.4 1.4 2.8 7.0 8.0 9.0 9.0 4.4 8.3 10.0

Trade surplus (US$bn) 0.2 68.4 79.2 83.4 -16.9 52.9 70.1 74.3 231.2 180.3 122.0

Current account (% of GDP) 2.6 1.0 -0.4

Fiscal balance (% of GDP) -1.6 -1.5 -1.6

New increased RMB loans (CNY trn) 8.2 9.0 9.0

1-yr bank lending rate (%) 6.56 6.31 6.00 6.00 6.00 6.00 6.25 6.50 6.00 6.50 6.5

1-yr bank deposit rate (%) 3.50 3.25 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 3.5

Reserve requirement ratio (%) 20.5 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 19.0

Exchange rate (CNY/USD) 6.31 6.32 6.34 6.29 6.22 6.18 6.16 6.15 6.29 6.15 6.14 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 11 March 2013. Source: CEIC and Nomura Global Economics.




8

Nick Matthews +44 20 7102 5126 [email protected]

Jacques Cailloux +44 20 7102 2734 [email protected]

Stella Wang +44 20 7102 0599 [email protected]

Jacques Cailloux

+44 20 7102 2734 [email protected]

Nick Matthews


Stella Wang


Euro area | Economic Outlook

ECB continues to resist rate cut on recovery expectations

The ECB's recovery scenario could be challenged by lack of policy pass-through

Activity: Q4 GDP was 0.1pp weaker than we forecast at -0.6% q-o-q, though the forward-

looking survey data continue to suggest a slowing in the pace of contraction and we have

revised up our Q1 forecast to -0.1% q-o-q (see also Pace of contraction to slow in Q1, 14

February). Global trade has led to a short-term recovery, but a strong and sustained recovery is

needed to offset weak euro area domestic demand. Our baseline remains one of deep

recession in countries most under stress in 2013.

Inflation: The recent decline in oil prices has pushed our euro area headline inflation forecast

down to 1.6% this year (from 1.8%) and to 1.4% in 2014 (from 1.5%). The inflation outlook

remains characterised by contained core inflation due to weak domestic demand (the biggest

downside risk). The main upside risk remains further administered price/indirect tax increases.

Policy: The ECB was marginally more dovish in March as weaker projections led to a loss of

unanimity on rates, but not by enough to trigger a cut. Those against lower rates continue to put

faith in a recovery in the second half of the year, leaving us in data-dependent mode, although

we do not think the data will be weak enough for the ECB to cut in April. Furthermore, despite

the loss of unanimity, we see no other major signals that strongly suggest the ECB intends to

cut rates next month. Continued emphasis on medium-term expectations suggests these have

to change for the ECB to act, putting the spotlight on June‟s Eurosystem staff projections as the

next major evaluation of the outlook. We continue to expect the refi rate to be cut by 25bp at this

meeting (and most likely the corridor narrowed given the ongoing reluctance for negative rates).

Mr Draghi says the ECB will remain accommodative and in full allotment mode for as long as is

needed – a weak form of forward guidance – and a possible trade-off for those pushing for

lower rates (see Angst of the weak (Post ECB meeting), 7 March). We expect pressure on the

ECB to ease financing conditions to remain elevated, in both conventional and unconventional

terms because of the extraordinarily tight financing conditions in the periphery (see Italian SME

credit crunch: economic challenges and policy opportunities, 4 March).

Risks: The ECB‟s OMT has provided a powerful safety net for the periphery and prevented

Spain and Italy from losing market access. Markets have essentially bought on the promise of a

backstop. In our view, this will be another testing year for solidarity against a backdrop of weak

economic activity and lack of pass-through to lending rates in the periphery is a key policy

challenge. Downside risks to the outlook include significant political risks – including in Italy, see

Italian elections: Risk of ungovernability to be priced by the market, 26 February – and appetite

for structural reform in some countries. On the upside, the most significant risk is a loosening of

fiscal targets, in view of the importance of fiscal multipliers in our forecasts.


% 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2012 2013 2014

Real GDP -0.3 -2.4 -0.6 -0.6 -0.2 -0.1 0.2 0.1 -0.5 -0.8 0.0

Household consumption -0.4 -1.6 -1.7 -1.5 -1.5 -1.5 -1.3 -1.3 -1.2 -1.5 -1.4

Fixed investment -3.2 -4.5 -5.6 -4.5 -3.9 -3.6 -3.0 -2.8 -4.0 -4.6 -3.2

Government consumption -0.5 -0.3 -0.8 -0.8 -0.8 -0.8 -0.4 -0.4 -0.1 -0.7 -0.5

Exports of goods and services 4.1 -3.6 0.6 1.6 2.6 2.6 3.1 2.7 2.8 1.1 2.7

Imports of goods and services 0.2 -3.6 -2.8 -2.1 -0.8 -0.4 0.6 0.7 -1.0 -1.8 0.2


Domestic f inal sales -0.9 -1.8 -2.2 -1.9 -1.7 -1.6 -1.3 -1.3 -1.5 -1.8 -1.4

Inventories -1.3 -0.4 0.0 -0.5 -0.1 0.1 0.2 0.3 -0.8 -0.4 0.2

Net trade 1.9 -0.2 1.6 1.7 1.6 1.5 1.3 1.0 1.7 1.3 1.3


Compensation per employee 1.8 1.4 1.0 0.8 0.4 0.3 0.3 0.5 1.7 0.6 0.6

Labour productivity 0.5 0.2 -0.1 0.1 -0.3 0.1 0.3 0.4 0.4 -0.1 0.5

Unit labour costs 1.6 1.4 1.3 1.0 0.7 0.2 0.0 0.1 1.5 0.8 0.1


Current account balance (% GDP) 1.2 0.4 0.8

Consumer prices 2.5 2.3 1.8 1.6 1.6 1.5 1.4 1.5 2.5 1.6 1.4

ECB main refi. rate 0.75 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.75 0.50 0.50

3-month rates 0.22 0.19 0.25 0.18 0.20 0.20 0.20 0.20 0.19 0.20 0.20

10-yr bund yields 1.41 1.30 1.32 1.35 1.48 1.60 1.64 1.68 1.30 1.60 1.75

$/euro 1.29 1.31 1.30 1.28 1.25 1.23 - - 1.31 1.23 - 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 8 March 2013. Source: Eurostat, ECB, DataStream, Nomura Global Economics.







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9

Young Sun Kwon +852 2536 7430 [email protected]

Aman Mohunta +91 22 6617 5595 [email protected]

Hong Kong | Economic Outlook

Hong Kong: Fiscal stimulus

The 2013-14 budget focusses on increasing social welfare spending.

Activity: Real GDP growth increased to 2.6% y-o-y in Q4, led by a pick up in private

consumption and exports. Retail sales growth in volume terms also remained strong, at 10.4%

in January from 8.5% in December, while the PMI remained in the expansion zone at 51.2 in

February, albeit down from January. We expect private consumption to remain robust,

underpinned by a tight labor market, positive wealth effects from buoyant property prices and

increasing visitor numbers from mainland China. Further, domestic fixed asset investment

should remain strong, led by infrastructure works. We expect fiscal stimulus and a moderate

improvement in external demand to lift real GDP growth from 1.4% in 2012 to 2.5% in 2013.

Inflation: CPI inflation eased to 3.0% y-o-y in January from 3.8% in December, largely on base

effects created by the lunar new year holiday, and hence we expect a payback in February.

Thereafter, inflation should rise through 2013, driven by higher food, fuel and rent prices, only

partly offset by inflation-mitigating fiscal measures such as a temporary waiver of public housing

rent and electricity subsidies. We expect CPI inflation to rise from 4.1% in 2012 to 4.3% in 2013.

Policy: Hong Kong's FY13 (April 2013 to March 2014) fiscal policies are more expansionary

than in FY12. The government expects the fiscal balance to shift to a deficit of HKD4.9bn in

FY13 from a surplus of HKD64.9bn in FY12 due to increased expenditures. The budget includes

a reduction in taxes and an increase in the child allowance for low income families; a subsidy for

electricity; and two months‟ waiver of rent payments for public housing tenants. We also expect

the government to continue implementing more macroprudential property tightening measures,

such as hikes in the stamp duty if house prices continue to rise. Because of the USD/HKD peg,

Hong Kong is importing the super-loose monetary policy of the US, and it remains unclear

whether tighter macroprudential measures can provide a sufficient offset in the long run.

Risks: As a small, open economy and financial hub, Hong Kong is one of the most vulnerable

in Asia to weakness in the global economic outlook. An economic hard landing in China would

be especially detrimental through both trade and financial channels.



Real GDP (sa, % q-o-q, annualized) 1.5 -0.4 3.4 4.9 0.6 1.1 5.2 2.8

Real GDP 0.7 1.2 1.1 2.6 2.1 2.5 2.9 2.4 1.4 2.5 3.5

Private consumption 6.3 2.8 2.8 4.5 3.2 3.4 3.6 4.5 4.0 3.7 4.4

Government consumption 3.3 4.1 4.0 3.2 3.5 3.7 3.8 4.2 3.7 3.8 4.4

Gross fixed capital formation 12.5 5.7 8.3 6.0 5.8 5.8 5.7 5.8 9.1 5.8 6.1

Exports (goods & services) -3.6 0.3 3.0 5.0 4.5 5.0 5.0 5.5 1.3 5.0 7.2

Imports (goods & services) -1.6 0.9 3.8 6.4 5.1 5.5 6.2 6.9 2.5 6.0 7.7

Contributions to GDP (% points)

Domestic final sales 7.4 3.6 4.3 5.6 3.8 4.0 4.2 4.8 5.2 4.2 4.8

Inventories -1.7 -1.3 -1.0 -0.3 -0.5 -0.2 1.2 0.6 -1.1 0.3 -0.2

Net trade (goods & services) -4.4 -1.3 -1.6 -2.6 -1.1 -1.4 -2.3 -2.9 -2.5 -1.9 -1.2

Unemployment rate (sa, %) 3.3 3.3 3.5 3.3 3.4 3.4 3.4 3.4 3.4 3.4 3.2

Consumer prices 5.2 4.2 3.1 3.8 3.7 4.3 4.5 4.6 4.1 4.3 4.3

Exports -1.2 2.0 4.4 7.4 9.2 10.4 10.1 10.4 3.2 10.0 12.3

Imports 0.9 2.3 5.0 8.4 9.5 10.5 10.9 11.7 4.3 10.7 12.5

Trade balance (US$bn) -12.7 -15.9 -15.6 -17.4 -14.2 -17.6 -18.3 -21.0 -61.6 -71.2 -80.9

Current account balance (% of GDP) 1.5 -0.1 -0.7

Fiscal balance (% of GDP) 3.3 -0.2 -0.5

3-month Hibor (%) 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40

Exchange rate (HKD/USD) 7.76 7.76 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Source: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 7 March 2013. Source: CEIC and Nomura Global Economics.




10

Peter Attard Montalto +44 (0) 20 710 28440 [email protected]

Hungary | Economic Outlook

Unorthodox policy focus shifts to non-independent central bank

We expect the government's unorthodox approach to continue in 2013 with the

building of a state-owned retail banking sector and a new MNB governor adding risks.

Policy, fiscal and funding: The government has continued to fund itself domestically because

of excess liquidity and a lack of lending by banks, combined with inflows by foreigners still

seeing attractive carry. On external debt, a mixture of derivatives and cash management,

combined with swapping out of domestic issuance and drawing down of deposits, has meant

that funding has been fine and should remain so through to July. Governor Matolcsy wants an

FX devaluation to boost growth (even if the cabinet was split on the issue). In our view, he will

not hike rates to prevent one nor waste FX reserves on intervention when they will be needed

for clearing up the mess of a devaluation on bank and household balance sheets. There could

be a little verbal intervention to ensure the progression of the devaluation is orderly and timed

correctly (i.e. when it is ready with FX mortgage policies). Varga may take part in this verbal

intervention with his credibility. We expect FX issuance early this year to total around

EUR2.5bn. Adding to the recently suggested „residency bond‟ and retail issuance, and we think

this year‟s EUR7bn funding requirement can easily be met. Fiscal policy remains controlled, but

only because of repeated austerity packages, partly to reduce funding requirements and

remove the threat of EDP sanctions. However, we doubt such low deficit levels can be

sustained in the medium run. This situation is likely to be repeated again this year, with the

government‟s revenue assumptions based on growth nearly 1pp higher than our own.

Rates and inflation: We expect headline inflation to remain elevated until the end of 2014 on a

mixture of tax pass-through and pressure from wages and policy. That said, underlying core ex

VAT inflation should remain around the bottom edge of the target through the next two years

because of a lack of demand. EUR/HUF is not the key to rate moves, it is wider risk premia, in

our view. Hence our baseline has been for rate cuts to continue until after the market blows up

in EURHUF. Rates could go as low as 4.00%. We have pencilled in 4.50% as the end point, but

have stressed this was an irrelevant number and it is more about how they react vs

currency/risk premia. Since the appointment of Matolcsy as governor, there has been the

removal of independence and the centralisation of power under the governor. We think the

action is still to come – but as we have said before, it will be step by step – not a big bang.

Growth: We forecast growth in 2013 to remain in negative territory, and expect the economy to show no recovery for another year. Our key concern is potential growth declining over the past four years from 4.0% before the crisis, first to 2.5% by 2010, then 1.75% by this year, but perhaps as low as 1.0% by 2014 thanks to the government's latest austerity packages.

Figure 1. Details of the forecast Figure 2. Headline and core ex-VAT CPI.

2011 2012 2013 2014

Real GDP % y-o-y 1.7 -2.7 -0.5 0.9

Nominal GDP USD bn 140.2 155.7 134.0 136.6

Current account % GDP 1.4 2.5 1.5 1.0

Fiscal balance % GDP -6.2 -2.9 -3.2 -3.3

Structural balance -5.0 -6.5 -5.7 -4.0

CPI % y-o-y * 4.1 5.0 5.0 4.9

CPI % y-o-y ** 3.9 5.7 4.0 5.4

Core CPI ex VAT % y-o-y ** 2.6 2.0 2.7 3.7

Unemployment rate % 10.7 10.7 10.4 10.2

Reserves EUR bn *** 35.1 31.8 28.1 25.0

External debt % GDP*** 138.9 131.6 130.6 132.6

Public debt % GDP 82.8 78.6 79.2 79.0

MNB policy rate %* 7.00 5.75 4.00 4.00

EURHUF* 315 291 320 320

0

1

2

3

4

5

6

7

Jan-2011 Jan-2012 Jan-2013 Jan-2014

Tax

Non-core ex VAT

Core ex VAT

pp y-o-y

Notes: * End of period. ** Period average. Bold is actual data. *** Includes IMF/EU funds. Source: Nomura Global Economics



11

Sonal Varma +91 22 4037 4087 [email protected]


India | Economic Outlook

Politics trumps economics

With the government likely to increase spending ahead of the elections in 2014, macro imbalances should continue and growth will likely disappoint.

Forecast change: We have revised our 2013 GDP growth forecast down to 5.2% (from 6.1%)

and our current account balance forecast down to -5.3% of GDP in 2013 (from -4.7%) and -

4.2% in 2014 (from -3.9%).

Activity: Sharp cutbacks in government spending and a slowdown in the financial sector

dragged down GDP growth to 4.5% y-o-y in Q4 2012. Although growth appears to have

bottomed, in the absence of any positive triggers in the near term we expect GDP growth to

remain below 5% in H1 2013, with a cyclical pick up from Q4 2013 due to increased

government spending ahead of the general election in 2014. However, new capex projects

remain moribund, and we see no pick up in sight. As a result, supply-side constraints remain

binding and suggest limited spare capacity to accommodate a significant pickup in demand

(without generating inflationary pressures and/or a widening trade deficit).

Inflation: Price pressures have eased and we expect WPI inflation to remain below 7% in Q1

2013 due to the lagged impact of a negative output gap, falling input costs and a delay in

updating the coal price index of the WPI basket. However, we expect WPI inflation to start rising

again in Q2 2013 due to higher food prices and the release of some fiscally suppressed inflation,

as subsidies and price controls are relaxed a little. INR depreciation is likely to intensify

inflationary pressures from Q3 2013. Further, double-digit CPI inflation suggests that underlying

pressures remain strong, notwithstanding the fall in WPI inflation.

Policy: The Reserve Bank of India (RBI) cut its repo rate by 25bp in January and we expect

another 25bp cut in May given the fall in WPI inflation. However, with inflation likely to rise again

from Q2 and a worsening current account deficit, we expect policy rates to remain on hold in H2

2013. The government achieved its fiscal deficit target of 5.2% of GDP in FY13, which is lower

than the revised target of 5.3%, and has budgeted for a fiscal deficit of 4.8% in FY14. However,

we expect the fiscal deficit to remain at 5.2% in FY14, as we believe the government is likely to

miss its revenue target, and the elections due in 2014 will limit its ability to cut expenditures.

Risks: A reversal of capital flows, a sharp rise in oil prices, a deeper and prolonged global

slowdown and weather-related shocks are the key downside risks. Lower commodity prices, a

stronger-than-expected global recovery and a quick investment revival are upside risks.



Real GDP (sa, % q-o-q, annualized) 5.9 5.3 6.0 2.5 1.7 9.0 8.1 5.4

Real GDP 5.3 5.5 5.3 4.5 4.7 4.8 5.2 6.0 5.1 5.2 6.6



Fixed investment 2.6 -4.6 -1.0 6.0 4.0 7.2 4.3 4.5 0.7 5.0 6.5

Exports (goods & services) 13.4 7.2 5.2 -2.1 1.5 4.5 6.5 8.6 5.8 5.2 10.3

Imports (goods & services) 24.3 3.9 13.8 -0.3 2.0 8.2 6.5 10.2 9.8 6.7 9.2



Inventories -1.1 1.2 1.2 1.1 1.0 -0.1 0.0 0.1 0.6 0.3 0.2

Net trade 4.0 -0.2 -1.4 1.1 -8.3 -1.7 -0.8 -1.3 1.0 -3.1 -0.6

Wholesale price index 7.5 7.5 7.9 7.2 6.8 7.1 7.2 7.5 7.5 7.1 6.8

Consumer price index 8.6 10.2 9.9 10.1 10.7 9.8 9.6 9.1 9.7 9.8 8.1



Repo rate (%) 8.50 8.00 8.00 8.00 7.75 7.50 7.50 7.50 8.00 7.50 7.00

Reverse repo rate (%) 7.50 7.00 7.00 7.00 6.75 6.50 6.50 6.50 7.00 6.50 6.00

Cash reserve ratio (%) 4.75 4.75 4.50 4.25 4.25 4.25 4.25 4.25 4.25 4.25 4.75

10-year bond yield (%) 8.54 8.18 8.15 8.05 7.80 7.80 7.70 7.50 8.05 7.50 7.00

Exchange rate (INR/USD) 51.2 54.0 52.7 55.0 53.0 55.5 60.0 59.0 55.0 59.0 56.0

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 with base year 2010. 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 7 March 2013. Source: CEIC and Nomura Global Economics.




12

Euben Paracuelles +65 6433 6956 [email protected]

Lavanya Venkateswaran +91 22 3053 3053 [email protected]

Indonesia | Economic Outlook

Indonesia: Still a case to tighten

A combination of recent increases in inflation and persistently weak external balances makes a

compelling case for BI to hike rates.

Activity: Monthly indicators for January, including the consumer confidence index, motorcycle

and cement sales and strong import growth, suggest that consumption demand remained

strong. This, along with higher government spending ahead of the 2014 elections, supports our

2013 GDP growth forecast of 6.1% GDP. But the sustainability of growth is becoming more

worrisome. Merchandise exports improved in January, but we still see upside risks to our

current account deficit forecast of 1.9% of GDP this year, because of robust imports. Without

reducing fuel subsidies or tightening monetary policy, the risk is that domestic demand

increasingly outstrips supply.

Inflation and monetary policy: CPI inflation jumped to 5.3% y-o-y in February from 4.6% in

January, approaching the upper limit of Bank Indonesia‟s (BI) 3.5-5.5% target range. The

increase was largely due to higher food prices, as core inflation remained stable at 4.3%. We

continue to expect inflationary pressures to persist given the electricity tariff adjustments, the

lagged impact of IDR depreciation and elevated inflation expectations (see Asia Insights:

Indonesia: Inflation jumps in February, 1 March 2013). This, combined with persistently weak

external balances, bolsters the case for BI to act. Our base case calls for 50bp of policy rate

hikes in H2. Raising the FASBI rate (the lower bound of the interest rate corridor) can occur

sooner, which would be a signal that BI is moving toward a tightening bias.

Fiscal policy: Our recent trip to Jakarta confirmed the low likelihood of fuel subsidy cuts this

year (see Asia Insights: Indonesia: Postcard from Jakarta, 25 February 2013). That said, we

continue to expect the government to improve its execution on infrastructure spending and other

capital expenditures. Some positive signs of this include progress made on the development of

the Jakarta Mass Rapid Transit system. All told, we expect higher operating expenditures to

increase the 2013 deficit to 2.0% of GDP (versus the budgeted 1.65%).

Risks: The key risk we see is the implementation of more protectionist and populist policies

ahead of the elections, which could damage already-fragile investor sentiment and slow FDI

inflows. On the external front, weaker growth in the EU, US and China also pose downside risks.



Real GDP (sa, % q-o-q, annualized)

Real GDP 6.3 6.4 6.2 6.1 6.1 6.2 6.0 6.0 6.2 6.1 6.2


Government consumption 6.4 8.6 -2.8 -3.3 7.0 8.0 10.0 10.0 1.2 9.0 7.0


Exports (goods & services) 8.2 2.6 -2.6 0.5 6.0 6.0 7.0 9.0 2.0 7.0 10.0

Imports (goods & services) 8.9 11.3 -0.2 6.8 6.5 7.0 5.5 8.0 6.6 6.8 11.9



Inventories 2.0 2.3 -0.1 3.1 -0.2 -0.3 0.0 0.5 1.8 0.0 -0.3

Net trade (goods & services) 0.6 -3.0 -1.2 -2.5 0.4 0.1 1.3 1.2 -1.5 0.7 0.2

Consumer prices 3.7 4.5 4.5 4.4 4.6 5.1 5.4 5.5 4.3 5.2 5.1

Exports (goods) 5.3 -8.2 -13.0 -7.9 7.0 9.0 8.0 9.0 -6.3 8.2 10.4

Imports (goods) 21.6 9.7 -0.3 4.6 6.0 7.0 8.0 10.5 8.3 7.9 12.0

Trade balance (US$bn) 1.7 -2.1 0.6 -2.7 1.6 -1.1 2.7 -3.5 -2.4 -0.3 -0.9

Current account balance (% of GDP) -1.4 -3.5 -2.4 -3.6 -1.2 -2.0 -1.3 -3.2 -2.7 -1.9 -1.7

Fiscal Balance (% of GDP) -1.8 -2.0 -2.2

Bank Indonesia rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.25 6.25 5.75 6.25 6.75

Exchange rate (IDR/USD) 9146 9433 9591 9790 9900 10000 9900 9900 9790 9900 9700

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 7 March 2013. Source: CEIC and Nomura Global Economics.



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13

Shuichi Obata +81 3 6703 1295 [email protected]

Japan | Economic Outlook

We forecast 0.9% y-o-y growth in 2013

We expect stronger exports and the Abe administration’s emergency stimulus package to result

in real GDP growth of 0.9% y-o-y in 2013.

Forecast change: We revised up our real GDP growth forecasts from 0.7% to 1.0% for 2013

and from 1.3% to 1.9% for 2014.

Activity and fiscal policy: The Japanese economy fell into recession around last April.

However, we think the economy bottomed out in Q4 2012 and began a recovery phase,

supported by the recovery in Chinese domestic demand. We expect Japan's export recovery to

become stronger because China‟s economic recovery is boosting trade within Northeast Asia

and the yen continues to weaken against most currencies, including the Korean won. This

should have a knock-on effect for domestic demand and lead to a typical export-led recovery in

the Japanese economy. In terms of fiscal policy, the Abe administration has boosted public

works spending substantially via its emergency stimulus package and the FY13 budget. These

stimulus measures should also help support the economy.

Inflation and monetary policy: On 22 January the Bank of Japan (BOJ) announced the

introduction of a 2% price stability target and a move to an open-ended asset purchase program

from 2014. At the same time, the Japanese government and the BOJ issued a joint statement

saying that the Council on Economic and Fiscal Policy (CEFP) will examine monetary policy,

price movements and price forecasts every three months. We expect the new BOJ governor

and two deputy governors to take over on 20 March. All these points indicate that the BOJ's

policy stance is likely to loosen substantially from April. We expect additional easing measures

to be discussed at the policy board meeting on 3–4 April. However, because there is little time

between the inauguration of the new governor and deputy governors and this meeting, our main

scenario is that the policy board will decide to extend the maturity of JGBs targeted by its asset

purchasing program from around three years to around five and expand the program by

JPY10trn, as it should be easy for the incoming policy board members to form a consensus with

the current members on these measures.

Risks: External factors continue to represent the main risks to the economy. These include an

expansion and/or a prolonging of the risks associated with Euro government debt and a decline

in confidence in US economic policy, both of which would probably have a negative impact on

the economy via, higher volatility, a stronger yen strengthening and a fall in share prices.


% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 6.1 -0.9 -3.7 0.2 1.7 2.5 3.0 3.7 2.0 1.0 1.9

Private consumption 5.0 -0.1 -1.9 2.0 1.6 0.4 1.2 2.1 2.4 0.9 1.2

Private non res fixed invest -9.5 -0.3 -12.5 -5.7 2.6 4.6 6.6 6.5 2.1 -0.3 6.0

Residential fixed invest -6.5 9.1 6.8 14.9 5.7 3.7 5.0 6.9 2.9 7.3 -0.2


Public investment 38.4 27.1 10.7 7.2 6.1 7.9 13.4 11.2 12.5 9.9 -3.3

Exports 14.2 0.2 -19.0 -14.0 2.2 6.7 6.4 7.1 -0.3 -2.4 7.3

Imports 8.6 6.8 -1.9 -9.0 3.5 5.4 4.4 5.5 5.3 1.2 5.3

Contributions to GDP: Domestic final sales 4.1 1.9 -1.7 1.8 1.7 1.6 2.5 3.1 2.9 1.4 1.5

Inventories 1.2 -1.6 0.8 -0.8 0.2 0.7 0.2 0.3 0.0 0.1 0.0

Net trade 0.8 -1.2 -2.8 -0.8 -0.2 0.2 0.3 0.3 -0.9 -0.5 0.4


Consumer prices 0.3 0.2 -0.4 -0.2 -0.3 0.0 0.4 0.5 0.0 0.1 2.3

Core CPI 0.1 0.0 -0.2 -0.1 -0.1 0.0 0.2 0.4 -0.1 0.1 2.3

Fiscal balance (fiscal yr, % GDP) -9.0 -9.1 -7.5

Current account balance (% GDP) 1.0 0.8 1.0

Unsecured overnight call rate 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10

JGB 5-year yield 0.32 0.22 0.19 0.19 0.12 0.16 0.25 0.44 0.19 0.44 0.63

JGB 10-year yield 0.99 0.83 0.77 0.80 0.74 0.81 0.95 1.14 0.80 1.14 1.33

JPY/USD 82.9 79.8 78.0 86.8 93.0 95.0 93.0 93.0 86.8 93.0 100.0 Note: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. Unemployment rate is as a percentage of the labor force. Inflation measures and CY GDP are y-o-y percent changes. Interest rate forecasts are end of period. Fiscal balances are for fiscal year and based on general account. Table reflects data available as of 8 March. 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.



14



Malaysia | Economic Outlook

Malaysia: All eyes on the elections

GDP growth remained robust in 2012 and the momentum is likely to continue this year, but a lot

is dependent upon the outcome of the upcoming elections.

Activity: The economy grew by 6.4% y-o-y in Q4 2012 from 5.3% in Q3, driven by strong

domestic demand, namely from private consumption and investment spending. This took full-

year GDP growth to a robust 5.6% in 2012 (5.1% in 2011). The outlook for this year rests on the

upcoming general elections, which we think will likely be held in April. For now, we maintain our

forecast for 2013 GDP growth to average 4.3%, given the need for the government to move

quickly to fiscal consolidation after the election to avoid exceeding its self-imposed debt limit.

However, admittedly there are upside risks given the strong economic momentum.

Inflation and monetary policy: January CPI inflation rose by 1.3% y-o-y from 1.2% in

December, largely driven by higher food prices. We estimate core inflation also rose by 1.4%

y-o-y from 1.3% in December, consistent with the strength in domestic demand. We maintain

our forecast for CPI inflation to average 2.4% y-o-y in 2013. Furthermore, the uptick in January

inflation justifies Bank Negara Malaysia‟s (BNM) slightly more hawkish stance at its 31 January

meeting. As such, we continue to expect BNM to hike the policy rate by 50bp in H2 to 3.50% as

it looks to normalize rates to avoid not only inflation, but overheating pressures more generally.

Fiscal policy and political outlook: The government met its fiscal deficit target of 4.5% of

GDP in 2012, but the details continue to underscore the need for fiscal reforms. More positively,

our recent trip to Kuala Lumpur bolstered our confidence in the government‟s commitment to

reform. That said, we expect the fiscal impulse to remain positive until the elections, after which

spending cutbacks are likely. We continue to forecast a deficit of 4.5% of GDP versus the target

of 4%, given the political cycle. We expect the elections to be called between 6-20 April and our

baseline (assigned a 60% probability) remains for the incumbents to retain power, but with a

smaller majority (see Asia Insights: Postcard from Malaysia, 26 February 2013).

Risks: With exports at nearly 100% of GDP, a sharp drop in commodity prices and another

global recession are the biggest downside risks. A weaker-than-expected coalition or an

opposition victory would raise questions about the political transition and the reform agenda.


% y-o-y growth unless otherwise stated

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 5.1 5.6 5.2 6.4 5.1 4.7 4.2 3.2 5.6 4.3 4.6


Government consumption 9.1 10.9 2.3 1.1 0.1 -3.0 -2.5 -1.1 5.0 -1.6 3.5


Exports (goods & services) 2.8 2.1 -3.0 -1.5 0.3 1.1 2.2 3.5 0.1 1.8 7.2

Imports (goods & services) 6.8 8.1 4.4 -0.9 1.8 3.3 4.5 4.6 4.5 3.6 8.5



Inventories -0.2 -1.2 2.2 0.2 0.2 0.3 -0.2 -2.1 0.3 -0.5 0.0

Net trade (goods & services) -3.1 -4.9 -6.8 -0.6 -1.3 -1.9 -1.8 -0.7 -3.8 -1.4 -0.6

Unemployment rate (%) 3.0 3.0 3.0 3.2 3.2 3.4 3.5 3.5 3.0 3.4 3.4

Consumer prices 2.3 1.7 1.4 1.3 2.1 2.6 2.5 2.7 1.7 2.4 2.5

Exports 3.3 -0.3 -4.7 0.6 4.6 7.3 6.9 5.6 -0.3 6.1 8.4

Imports 6.2 5.5 3.9 3.9 8.8 10.0 11.7 7.7 4.8 9.6 13.1

Merchandise trade balance (USD bn) 9.7 6.8 5.5 8.7 8.2 6.0 3.5 8.1 30.8 25.7 17.8

Current account balance (% of GDP) 8.0 4.1 4.0 9.4 4.8 4.4 3.3 4.9 6.4 4.7 4.2

Fiscal Balance (% of GDP) -4.5 -4.5 -4.2

Overnight policy rate (%) 3.00 3.00 3.00 3.00 3.00 3.00 3.25 3.50 3.00 3.50 4.00

Exchange rate (MYR/USD) 3.06 3.18 3.06 3.06 3.10 3.06 3.01 2.95 3.06 2.95 2.87

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 7 March 2013. Source: CEIC and Nomura Global Economics.





15

Benito Berber +1 212 667 9503 [email protected]

Mexico | Economic Outlook

2013: The year of reforms

The new government will embark on a series of important reforms in 2013.

Activity: We forecast the economy to expand by 3.0-3.5% y-o-y in 2013. While the US

economy, the main trade partner of Mexico might remain weak, we expect Mexican domestic

aggregate demand to remain resilient. Other risks include a sharper than anticipated contraction

in the eurozone that drags down global growth. 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 likely approve these two key structural reforms that should 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 from 3.6% in 2012 to 3.4-3.5% in 2013 and 2014. However, the

2014 forecast does not include the impact of the fiscal reform of imposing the VAT on food and

medicines from their current 0% rate. Since the fiscal reform will likely be presented to Congress

in September, 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: After keeping the policy rate unchanged at 4.5% since July 2009, Banxico did a one-off

50bp rate cut to 4.0% in March 2013 on the argument that despite it sees an uptick in inflation in

short term, inflation should converge to 3% target in medium term, and inflation expectations

remain well anchored. 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.


% y-o-y change unless noted 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP 4.9 4.4 3.2 3.2 2.9 3.6 3.2 3.1 3.9 3.5 4.5


Fixed investment 8.6 6.2 4.8 6.4 2.3 3.6 3.2 3.2 6.5 3.1 4.0

Government expenditure 3.2 2.2 0.6 -4.5 -3.5 0.7 2.1 2.0 0.3 1.9 2.8

Exports 5.1 6.4 2.4 4.5 0.7 0.0 4.4 2.8 4.6 2.0 4.0

Imports 6.7 4.8 0.5 3.1 -1.5 0.3 2.3 3.9 3.6 1.3 3.5

Contributions to GDP (pp):

Industry 1.4 1.3 1.0 0.9 0.9 1.1 0.9 0.9 1.2 1.0 1.3

Agriculture 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.2

Services 3.1 2.8 2.1 2.0 1.9 2.3 2.0 2.0 2.5 2.2 2.9

CPI 3.73 4.34 4.77 3.57 3.55 3.50 3.45 3.40 4.11 3.40 3.50

Trade balance (US$ billion) 1.8 1.5 -4.1 -3.9 -3.8 -3.8 -3.8 -3.8 -4.7 -15.2 -15.0

Current account (% GDP) -1.5 -1.5 -1.5


Gross public debt (% GDP) 37.3 35.0 34.0

Overnight Rate % 4.50 4.50 4.50 4.50 4.00 4.00 4.00 4.00 4.50 4.00 4.50

USD/MXN 12.81 13.36 12.86 12.85 12.70 12.50 12.25 12.00 12.85 12.00 12.00 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 11 March 2013. Source: Nomura Global Economics.



16



Philippines | Economic Outlook

Philippines: In a virtuous cycle

Growth remains supported by improving governance. Monetary policy is neutral with

macroprudential tools remaining the preferred option for capital flow management.

Activity: Similar to 2012, we expect solid GDP growth of 6.4% y-o-y in 2013. Increased

government spending ahead of the elections in May in addition to the government‟s undeterred

focus to improve capital spending should continue to crowd in private investment and support

GDP growth. We believe the economy is in a virtuous cycle, with improving governance

bolstering consumer and business sentiment, which reinforces the administration‟s popularity,

helping support its push for further reforms.

Inflation and monetary policy: CPI inflation increased to 3.4% y-o-y in February from 3.0% in

January, driven by higher food prices that offset lower utilities prices. Core inflation also

increased to 3.8% y-o-y from 3.6% in January, consistent with the strength of domestic demand.

Headline inflation, however, remains comfortably within the 3-5% target range of Bangko

Sentral ng Pilipinas (BSP). On our recent trip to Manila, BSP indicated that it could afford to stay

on hold for some time, despite robust growth (Asia Insights: Postcard from the Philippines, 28

February 2013). In the interim, macroprudential tools remain the preferred option for managing

strong capital inflows. We maintain our view that headline inflation will average 4.6% y-o-y this

year. Our policy rate forecast is 50bp of hikes in H2, but with a rising potential growth rate and

BSP‟s current neutral stance, there are risks that these hikes are delayed.

Fiscal policy: The fiscal deficit was 2.3% of GDP in 2012, undershooting the original projection

of 2.6%. But the details remain encouraging, as revenue collections are close to target and

capital spending has improved. For 2013, the government has proposed a fiscal deficit of 2.0%

of GDP that continues to focus on increasing capital outlays, especially infrastructure spending,

while higher revenue targets have also been set, which implies improved tax administration.

Risks: The main risk to our forecast is an external shock from the still-fragile European and US

economies. A slowdown in reforms and infrastructure spending could also hurt growth. We see

the election as a political non-event given the current popularity of the government.




Real GDP 6.3 6.0 7.2 6.8 6.7 6.4 6.0 6.3 6.6 6.4 5.8




Exports (goods & services) 10.9 8.3 6.7 9.1 6.8 7.0 7.4 5.4 8.7 6.7 9.0

Imports (goods & services) -3.2 10.3 4.9 4.6 16.4 11.2 16.2 12.0 4.2 13.9 13.0

Contribution to GDP growth (% points)


Inventories -7.2 -0.2 -1.2 -2.3 2.8 1.2 2.4 1.0 -2.6 1.6 0.0

Net trade (goods & services) 7.1 -0.8 1.0 1.2 -4.3 -2.1 -4.3 -3.1 2.0 -3.4 -2.3

Exports 4.8 10.5 6.2 9.1 6.8 7.0 7.4 5.4 7.6 6.7 9.0

Imports -1.5 2.2 0.8 6.4 17.4 12.2 17.2 13.0 1.9 15.0 13.0

Merchandise trade balance (USDbn) -2.6 -1.4 -2.0 -3.7 -4.5 -2.3 -3.6 -5.1 -9.7 -15.4 -19.6

Current account balance (USDbn) 1.1 3.0 3.1 1.1 -0.2 2.3 1.7 1.9 8.2 5.6 5.7

Current account balance (% of GDP) 2.0 4.8 5.1 1.5 -0.2 3.4 2.4 2.2 3.3 1.9 1.8

Fiscal balance (% of GDP)

-2.3 -2.6 -2.2

Consumer prices (2006=100) 3.1 2.9 3.5 3.0 3.5 4.4 4.9 5.4 3.1 4.6 4.5


Reverse repo rate (%) 4.00 4.00 3.75 3.50 3.50 3.50 3.75 4.00 3.50 4.00 4.50

Exchange rate (PHP/USD) 42.9 42.1 41.7 41.0 40.2 39.8 39.6 39.2 41.0 39.2 38.2

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 7 March 2013. Source: CEIC and Nomura Global Economics.





17


Poland | Economic Outlook

NBP's limited cutting cycle is over - growth still outperforming

Although growth will probably be lower this year, we think the economy will bounce

back strongly in H2.

Growth: Poland will likely remain the strongest country in the region, growth will still probably be

lower in 2013 at 1.9% vs 2.2% last year for several reasons. First, the slowing pace of eurozone

structural fund investment will likely combine with domestic fiscal consolidation to drag growth

down by some 0.6pp, in our view. Consumption growth should also slow, particularly in H1

thanks to slightly lower credit growth and a stagnant labour market reducing the ability to draw

down net savings. However, the sentiment shock in the local economy has had a greater effect

on imports and inventories than the export shock. We see meaningful upside risks to growth

from the government's off-balance-sheet investment programme, which could add up to 0.5pp

to growth for next year and offset part of the structural fund drag in H2 of this year. Equally,

traditionally Poland has seen rapid recoveries in inventories and the labour market after external

shocks. We expect a bounce-back in 2014 growth to 3% owing to strong fundamentals and the

underlying balance sheets of households and corporates, banks that are not feeling the effects

of deleveraging, shale gas coming on-stream, and the effects from the investment programme.

Currency: We expect a stronger zloty due to the following factors: we believe the economy is in

better shape than the market understands, the balance of payments picture is improving

significantly, and Poland should remain a “bond-flow-magnet” due to its fiscal strength.

Rates and inflation: We see inflation falling swiftly to below the bottom end of target in the first

half of 2013, driven by non-core pressures falling away, and expect gas price cuts to be key.

However, over the medium run, as growth is likely to recover from H2 2013, we see inflation

rising to settle just below the top of target through much of 2014. After the surprise 50bp cut in

the last MPC meeting, our baseline is that rates are now on hold until H1 next year. A fast

bounce-back in CPI, however, or a marked move up in growth forecasts could mean an earlier

hike; a strong PLN and core CPI still low could mean later in that window. A further external

growth shock would mean a last cut was possible however – perhaps in May. Overall, the shock

at the last meeting was about expectations and communications, not about where rates are

now, highlighting communication issues from the MPC again.

Fiscal and politics: Prime Minister Tusk has announced ambitious budgetary and structural

reforms for the four years of this parliament – sufficient to achieve an upgrade later this year, in

our view. These reforms should take the deficit below 3.0% of GDP in 2013, though not as

targeted in 2012 because of lower growth. Growth matters the most. Aggressive pre-funding,

however, means credit risks remain low. We see off-balance sheet investments via BGK as key

to supporting growth this year and next, with lower growth increasing government resolve.

Figure 1. Details of the forecast Figure 2. Inflation outlook

2011 2012 2013 2014

Real GDP % y-o-y 4.3 2.2 1.9 3.0


Current account % GDP -4.9 -4.7 -3.5 -4.3


CPI % y-o-y * 4.6 2.4 1.7 3.3

CPI % y-o-y ** 4.3 3.7 1.5 3.0


Population mn 38.2 38.5 38.4 38.3


Reserves EUR bn ** 74.3 82.5 85.0 90.0

External debt % GDP 62.7 53.2 48.2 45.9

Public debt % GDP 53.5 52.8 52.2 51.6

NBP policy rate %* 4.50 4.25 3.25 4.50

EURPLN* 4.47 4.08 3.90 3.75

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan-2008 Jun-2009 Nov-2010 Apr-2012 Sep-2013

Headline Expectations Core% y-o-y

Notes: *End of period, **Period average, Bold is actual data. Source: Nomura Global Economics



18





Singapore | Economic Outlook

Singapore: A weak start to 2013

Production and export data surprised on the downside in January. The policy focus

remains on the restructuring agenda to raise productivity.

Forecast changes: Based on the larger budget surplus in FY12, we revise up our FY13 budget

estimate to a surplus of 1.0% of GDP from a deficit of 0.2% of GDP.

Activity: Q4 2012 GDP growth was revised up to 1.5% y-o-y from the flash estimate of 1.1%,

which takes full-year 2012 growth to 1.3%. Data for January indicate that the economy got off to

a weak start in 2013, with industrial production contracting by 0.4% y-o-y in January from growth

of 1.3% in December, despite favourable base effects led by electronics and biomedical output.

Non-oil domestic exports were also weak in January. Forward looking data remained mixed, as

the total manufacturing PMI fell below 50 in February, but the electronics PMI rose above 50.

For 2013, we have a subdued GDP growth forecast of 2.4%, as the government focuses more

on long-term restructuring to boost competitiveness than short-term counter-cyclical policies.

Inflation and monetary policy: CPI inflation eased to 3.6% y-o-y in January from 4.3% in

December, due to favourable base effects. Underlying inflation, which excludes accommodation

and private road transportation costs, also eased sharply to 1.2% y-o-y in January from 1.9%.

However, the easing in January will likely prove temporary given still-elevated transportation

and housing costs, rising wages and tight labour markets. We continue to forecast headline

inflation to average 3.9% y-o-y in 2013. Underlying inflation, according to the Monetary Authority

of Singapore (MAS) should also remain sticky at 1-3%. As such, we remain comfortable with our

view that the MAS will not alter its policy of a modest and gradual appreciation of the S$NEER

policy band at the next announcement in April.

Fiscal policy: The FY13 budget announced on 25 February continued to highlight the

government‟s commitment to raising productivity and restructuring the economy. The measures

announced include further restrictions on foreign workers, cash programs for industries to share

the burden of rising wages and additional help for the elderly. This fiscal balance is expected to

be in a smaller surplus of 0.7% of GDP in FY13 from an upwardly revised surplus of 1.1% in

FY12. Based on this, we now expect a higher surplus of 1.0% of GDP given historical revenue

outperformance. However, we still expect limited counter-cyclical support to growth.

Risks: With exports at 200% GDP, Singapore is the most vulnerable economy in Southeast

Asia to a major contraction in global GDP. Another risk is domestic overheating, fuelled by low

interest rates and capital inflows.



Real GDP (sa, % q-o-q, annualized) 1.3 2.4 4.2 1.3 12.0 -1.2 -4.2 4.7

Real GDP 2.2 3.7 3.5 2.2 2.5 2.2 2.3 2.7 1.3 2.4 4.2

Private consumption -3.6 0.6 4.0 -3.6 3.7 3.9 4.0 3.1 2.2 3.7 3.5

Government consumption 6.6 3.3 5.7 6.6 -0.9 -0.3 1.1 2.7 -3.6 0.6 4.0


Exports (goods & services) 3.2 3.0 11.1 3.2 -1.4 0.9 5.4 6.7 0.3 2.9 10.1

Imports (goods & services)

-0.2 1.5 4.8 5.8 3.2 3.0 11.1

Contributions to GDP (% points) 2.0 2.2 3.1 2.0

Domestic final sales 4.9 -0.4 0.8 4.9 2.2 2.1 2.3 2.1 2.0 2.2 3.1

Inventories -5.6 0.6 0.8 -5.6 3.1 1.1 -2.9 -2.9 4.9 -0.4 0.8

Net trade (goods & services) 2.0 2.2 2.4 2.0 -2.9 -1.0 2.9 3.4 -5.6 0.6 0.8


Consumer prices 0.1 7.6 12.1 0.1 4.2 4.1 3.8 3.4 4.6 3.9 3.6

Exports 3.5 6.3 13.1 3.5 2.6 7.9 9.6 10.3 0.1 7.6 12.1

Imports 31.5 38.7 40.2 31.5 3.2 5.9 7.9 8.2 3.5 6.3 13.1

Merchandise trade balance (US$bn) 18.9 16.1 17.0 18.9 6.8 9.2 11.1 11.7 31.5 38.7 40.2


Fiscal Balance (% of GDP) 0.38 0.48 0.50 0.38 1.1 1.0 0.4

3 month SIBOR (%) 1.22 1.19 1.17 1.22 0.38 0.48 0.48 0.48 0.38 0.48 0.50

Exchange rate (SGD/USD) 1.3 2.4 4.2 1.3 1.21 1.20 1.20 1.19 1.22 1.19 1.17







19


South Africa | Economic Outlook

Status quo means the brakes are still applied

Despite President Zuma's re-election, we expect further downgrades, heightened

fiscal risks and a lack of real reform.

Growth: We see a very sluggish recovery in growth from 2.6% for 2012 to only 2.8% in 2013,

and then not even reaching potential growth in 2014, with only 3.2%. Negative pressures are

strong from Q3 2012 through the middle of 2013 owing to production lost in the mining sector

and second-round effects in up- and downstream industries and consumption. We believe

broader underlying consumption can be maintained to some extent because of credit growth

and large real wage increases. However, the negative drag from a widening trade deficit will

likely offset this. Risks are slightly to the upside if there is a softer landing in the eurozone.

Fiscal policy should be broadly neutral, while public sector investment‟s ability to add much to

growth beyond what it is already doing is limited by funding constraints.

Currency, inflation and rates: With the current account deficit set to remain over 6% of GDP

until mid-2013 the currency should remain weak overall and above 9.0 in USDZAR. At the same

time, funding remains okay despite the global backdrop, but not great because of domestic risk

factors. The SARB has also been surprisingly open about the fact it sees fair value around 8.50-

8.75 (something we think it would have disliked doing in the past) and that it will not intervene

on politically-led risk premia shocks. This strengthens our view that the currency will remain

weak. The underlying inflation dynamic is looking moderately bullish for this year once currency

pass-through and sizeable real wage increase effects pass. We think inflation could breach

target briefly mid-year before returning and staying in target until the end of the forecast horizon.

We see rates on hold for the next 14 months, but still think the MPC would take the opportunity

to cut if it could, it is just that there are currently too many barriers bar a growth shock.

Politics and fiscal: There is currently a breakdown in the traditional societal structures

surrounding labour, and strikes have occurred because of the links between union leadership,

the ANC and BEE funds. We see this re-emerging in the next wage round, which starts more

widely in the economy around Easter. We see the outcome of Manguang as a still ineffective

and deleterious policy in which potential growth is held back by state intervention – something

to be increased in the mining sector now. Although the ANC has backed the National

Development Plan, we remain sceptical that new ANC Deputy President Ramaphosa can make

a meaningful difference in implementation in the short to medium run. Overall, the 2013 budget

is mainly a “holding” one. Significant holes on both the revenue policy side and expenditure

policy side exist that will only be filled later in the year as a result of the National Treasury‟s

long-run and ever-delayed expenditure study and the tax commission. This is where we think

the true risks to the ratings, debt levels and issuance lie.

Figure 1. Details of the forecast Figure 2. Inflation outlook

2011 2012 2013 2014

Real GDP % y-o-y 3.5 2.6 2.8 3.2


PSCE % y-o-y* 6.2 9.7 9.6 10.3


FX reserves, gross USD bn* 48.9 50.7 50.5 50.6

CPI % y-o-y * 6.1 5.7 5.2 5.8

CPI % y-o-y ** 5.0 5.7 5.6 5.5

Manufacturing output % y-o-y 2.4 2.1 1.8 2.6

Retail sales output % y-o-y 5.7 2.3 2.6 4.6

SARB policy rate %* 5.50 5.00 5.00 6.00

EURZAR* 10.5 11.2 10.5 11.1

USDZAR* 8.09 8.47 8.50 9.00

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

Headline - old

Headline - new

% y-o-y

Notes: PSCE – Private sector credit extensions. * End of period. ** Period average. Bold is actual data. Source: Nomura Global Economics

Source: Nomura Global Economics



20


South Korea | Economic Outlook

South Korea: Growth momentum set to carry into Q1

We expect the Bank of Korea to keep rates unchanged at 2.75% through 2013 as

GDP growth and CPI inflation should rise modestly from a low base.

Activity: January-February export data suggest that GDP growth is improving slightly. We

expect GDP growth to rise to 0.7% q-o-q in Q1 (from 0.4% in Q4), supported by inventory

restocking, fiscal front-loading and a modest foreign demand recovery. We view the

strengthening of KRW against JPY as a process of normalization, reflecting improvements in

global demand. The new government will likely increase social welfare spending, implement

some measures to boost the housing market and frontload 60% of its annual expenditure

budget to H1, which should support consumption and construction investment. However, we

expect business investment to remain weak as uncertainty surrounding the global outlook

remains elevated. Domestic demand should recover only slightly due to structural problems,

including a household debt overhang. We maintain our below-consensus forecast for GDP

growth of 2.5% in 2013.

Inflation: A negative output gap and stable KRW should exert downward pressure on inflation,

but higher food prices, rising housing rent and public service fare hikes should push CPI

inflation up to 2.7% in 2013 from 2.2% in 2012, although it should remain below the midpoint of

the Bank of Korea‟s (BOK) new inflation target range of 2.5-3.5% for 2013-15.

Policy: We expect targeted micro stimulus measures on specific areas (e.g., property market)

rather than a broad-based easing of macro policy. We expect the BOK to keep rates at 2.75%

through 2013, as growth and inflation should increase modestly from a low base.

Risks: As a small, open economy, Korea is vulnerable to sudden changes in global economic

conditions, commodity prices and financial markets. That said, we would expect the BOK to cut

rates if one of the major downside risks to global growth (the US fiscal cliff; a renewed eurozone

sovereign crisis; a China hard landing) materialises, but none of these are part of our base case.

Domestically, the new government could formulate a supplementary budget in H1 2013 of as

much as KRW20trn (USD20bn or 1.5% of GDP), which provides an upside risk to our domestic

demand forecast.




Real GDP (sa, % q-o-q) 0.9 0.3 0.1 0.4 0.7 0.9 0.8 0.9

Real GDP 2.8 2.3 1.5 1.5 1.4 2.0 2.8 3.3 2.0 2.5 3.5



Business investment 9.1 -3.5 -6.5 -5.1 -13.1 -5.6 1.2 5.1 -1.8 -3.4 7.7

Construction investment 2.1 -2.1 -0.2 -4.1 -0.7 0.7 1.6 4.1 -1.5 1.8 4.1

Exports (goods & services) 5.0 3.2 2.9 4.0 0.5 1.6 -0.2 2.5 3.7 1.1 4.8

Imports (goods & services) 4.6 0.5 1.1 3.1 -1.6 0.8 -0.1 2.5 2.3 0.4 5.2

Contributions to GDP growth (% points)


Inventories -0.1 0.1 -0.2 -0.1 -0.4 -0.3 0.6 -0.3 -0.1 0.1 0.2

Net trade (goods & services) 0.1 1.4 1.0 0.8 1.0 0.5 -0.1 0.3 0.9 0.4 0.3


Consumer prices 3.0 2.4 1.6 1.7 1.9 2.6 3.1 3.0 2.2 2.7 3.0

Current account balance (% of GDP) 3.8 2.8 2.2

Fiscal balance (% of GDP) 1.3 1.0 1.0

Fiscal balance ex-social security (% of GDP) -1.2 -1.3 -1.0

BOK official base rate (%) 3.25 3.25 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

3-year T-bond yield (%) 3.55 3.30 2.83 2.82 2.75 2.80 2.85 2.90 2.82 2.90 3.30

5-year T-bond yield (%) 3.69 3.42 2.93 2.97 2.80 2.85 2.90 3.00 2.97 3.00 3.40

Exchange rate (KRW/USD) 1133 1154 1118 1071 1065 1040 1035 1030 1071 1030 1030

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 7 March 2013. Source: Bank of Korea, CEIC and Nomura Global Economics.



21



Taiwan | Economic Outlook

Taiwan: External demand is key

The economy should benefit from the up-cycle in global electronics demand and China

GDP, as well as improved cross-strait relations.

Activity and inflation: Real GDP gained strongly in Q4 2012, supported by a rebound in fixed

capital formation and exports. Private consumption also showed modest gains, while

government expenditure fell. Taiwan‟s growth is largely dependent on global demand,

especially from China, its largest export destination accounting for 27% of total exports in 2012.

We expect stronger demand from China and a gradual recovery in global electronics demand to

help lift GDP growth from 1.3% in 2012 to 3.0% in 2013. The government recently upgraded its

2013 GDP growth forecast from 3.15% to 3.53%, citing the benefits of demand for mobile

devices and electronics products. We expect CPI inflation to rise to 2.3% in 2013 from 1.9% in

2012 due to higher food prices and diminished spare capacity. However, given that electricity

tariff hikes will be implemented in multiple stages, inflation is unlikely to become a serious factor

for growth through our forecast horizon.

Cross-strait relations: A faster-than-expected liberalisation of trade and investment with China

would add upside risks to our growth forecasts. The latest developments in this area include

Taiwanese government plans to double the current limit on mainland Chinese institutions‟

securities investments in its market, while Taiwanese banks have (as of this month) started to

accept renminbi deposits.

Monetary policy: We expect the Central Bank of China (CBC) to hike the discount rate from

1.875% to 2.125% in H2 2013 as GDP growth and CPI inflation rise. We view this as a

normalisation of very loose monetary policy rather than a move to outright tightening.

Risks: Another deep recession in advanced economies would have a large impact on Taiwan‟s

open economy. Positive risks include a stronger-than-expected recovery in the global

electronics cycle and a faster-than-expected liberalisation of trade and investment with China.



Real GDP (sa, % q-o-q, annualized) 5.0 -0.1 3.9 7.3 1.3 0.5 4.6 3.6

Real GDP 0.6 -0.1 0.7 3.7 3.1 3.2 3.4 2.5 1.3 3.0 3.5


Government consumption 2.1 2.5 -0.7 -1.7 3.0 3.5 3.0 2.6 0.4 3.0 3.2

Gross fixed capital formation -10.2 -7.7 -0.9 1.3 7.0 5.0 4.0 3.5 -4.4 4.8 4.2

Exports (goods & services) -3.4 -2.5 2.3 4.0 2.8 3.4 3.6 2.2 0.1 3.0 3.3

Imports (goods & services) -7.2 -4.1 1.9 2.2 2.2 2.2 2.3 2.4 -1.9 2.3 3.5

Contributions to GDP growth (% points)

Domestic final sales -2.6 -1.1 -0.4 2.2 2.1 1.9 2.4 1.9 1.2 3.7 3.0

Inventories 1.5 0.5 0.5 -0.3 0.2 0.0 -0.4 0.3 0.0 -0.3 0.2

Net trade (goods & services) 1.7 0.5 0.6 1.8 0.8 1.3 1.4 0.4 1.1 1.0 0.5

Exports -4.0 -0.5 4.3 6.0 5.3 5.9 6.1 4.7 -2.3 5.5 6.3

Imports -5.9 0.3 6.3 6.6 3.7 3.7 3.8 3.9 -3.8 3.8 5.0

Merchandise trade balance (US$bn) 5.7 5.6 8.4 10.8 7.0 7.4 10.5 11.8 30.4 36.7 42.6


Fiscal balance (% of GDP) -1.8 -1.9 -2.0

Consumer prices 1.3 1.6 2.9 1.8 2.1 2.2 2.5 2.5 1.9 2.3 2.3

Unemployment rate (%) 4.1 4.2 4.3 4.3 4.3 4.2 4.2 4.2 4.3 4.2 4.2

Discount rate (%) 1.88 1.88 1.88 1.88 1.88 1.88 2.00 2.13 1.88 2.13 2.13

Overnight call rate (%) 0.42 0.51 0.38 0.41 0.39 0.41 0.45 0.50 0.41 0.50 0.50

10-year T-bond (%) 1.28 1.23 1.19 1.17 1.15 1.20 1.28 1.30 1.17 1.30 1.35

Exchange rate (NTD/USD) 29.5 29.9 29.3 29.1 28.9 28.7 28.7 28.7 29.1 28.7 28.2





22


Nuchjarin Panarode, CNS Thailand +662 638 5791 [email protected]

Thailand | Economic Outlook

Thailand: A positive start to 2013

Growth momentum remained strong in January and credit growth is on the rise, which

supports our forecast for the BOT to stay on hold despite political pressure to cut.

Activity: Although most economic indicators slowed on a year-on-year basis in January given

less favourable base effects, they remained strong seasonally adjusted month-on-month.

Business and consumer sentiment indices continued to suggest strong economic momentum,

while industrial production also picked up in January. In addition, exports rose in January, but

the trade deficit increased substantially on strong import growth. We do not see this is as a

cause for concern, however, since imports were partly driven by the volatile gold imports. We

therefore see upside risks to our 2013 GDP growth forecast of 4.5%.

Monetary policy and inflation: CPI inflation eased further to 3.2% y-o-y in February from 3.4%

in January, while core inflation was stable at 1.6% y-o-y, remaining within the Bank of Thailand‟s

(BOT) 0.5-3.0% target range. Inflation expectations were also stable at 3.6% in January.

However, credit growth (15.0% y-o-y in January from 14.2% in December) and outstanding

loans to households (17.4% y-o-y in Q3 2012 or 77.5% of GDP) continued to increase and may

be an increasing concern for the BOT. Thus, even though inflation remains low, we continue to

expect the BOT to keep the policy rate on hold at 2.75% at the 3 April meeting and for the rest

of the year.

Fiscal policy: Following the cabinet‟s approval, more details on the government‟s THB2trn

infrastructure investment plan and major transportation projects were released. These projects,

combined with the on-going water management projects for which the government is scheduled

to borrow THB340bn (3% of GDP) by June 2013, will likely increase public debt to 47-48% of

GDP by end-FY13, still well-below the debt ceiling of 60%. On our recent trip to Bangkok, we

discovered that the borrowing will be done on an incremental basis, and not all at once, which

suggests that the government is focused on maintaining financial flexibility and sustainability of

its debt (see Asia Insights: Postcard from Thailand, 1 March 2013).

Risks: The downside risks to our forecasts stem from a deepening of the euro area recession

and domestically, from increased political uncertainty over the constitutional amendment and

reconciliation bill. Slow progress on infrastructure plans could weaken investment sentiment.



Real GDP (sa, % q-o-q, annualized) 48.0 13.0 6.1 15.0 -14.5 13.9 7.6 15.4

Real GDP 0.4 4.4 3.1 18.9 4.2 4.4 4.8 4.8 6.4 4.5 5.0


Public consumption -0.2 7.4 10.0 12.1 4.5 -0.1 -3.1 0.2 7.4 0.1 -0.7


Exports (goods & services) -3.2 1.1 -2.8 19.0 6.1 3.2 5.7 1.6 2.9 4.1 5.0

Imports (goods & services) 4.3 8.6 -1.8 14.7 4.2 2.1 6.6 0.3 6.1 3.4 5.0

Contribution to GDP growth (% points)


Inventories 2.9 2.8 -3.7 1.4 -2.7 -2.7 1.2 1.6 0.8 -0.6 -0.1

Net trade (goods & services) -4.7 -4.2 -1.1 4.9 2.0 1.1 0.2 0.8 -1.4 1.0 0.7

Exports -1.4 2.0 -3.8 21.1 3.8 3.0 6.4 2.3 3.1 5.0 6.9

Imports 10.4 9.2 -1.7 18.5 3.5 5.6 14.7 2.7 8.2 6.6 7.2

Merchandise trade balance (US$bn) -5.2 -5.0 -1.6 -6.1 -5.2 -6.7 -6.8 -4.2 -18.1 -23.0 -25.4

Current account balance (US$bn) 1.4 -2.3 2.7 0.9 -0.1 -3.4 -1.9 3.6 2.7 -1.8 -1.9

Current account balance (% of GDP) 1.6 -2.6 3.1 1.0 -0.1 -3.3 -1.8 3.3 0.7 -0.4 -0.4

Fiscal balance (% of GDP, fiscal year basis) -2.6 -3.2 -3.7

Consumer prices 3.4 2.5 2.9 3.2 3.3 3.4 3.1 3.0 3.0 3.2 3.1


Overnight repo rate (%) 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.75 2.75 2.75 3.25

Exchange rate (THB/USD) 30.8 31.8 30.8 30.6 29.5 29.3 29.2 29.1 30.6 29.1 28.6






23

Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]

Turkey | Economic Outlook

A healthy rebalancing

Tightening policy has helped to rebalance the economy. We expect the rebalancing to

lose its 2012 momentum, but the economy looks very healthy for 2013.

Activity: GDP growth looks likely to accelerate to 4.5% in 2013 after 3% growth in 2012. The

risks are now balanced, in our view. The recovery is a very healthy one, with no signs of

overheating, especially compared with the 2010 recovery. Private investment should remain

strong, while private consumption recovers. We do not expect net exports to flip into negative

territory similar to the previous episodes of global recovery.

Inflation: Turkey‟s inflation deteriorated at the expense of a strong fiscal stance in 2012. So far

it has been largely driven by factors beyond the TCMB‟s control, but it looks like the market‟s

working number for the next six months is now around 7.5% with some upside risks. An

improvement in the growth backdrop could lead to a deterioration in inflation expectations.

Policy: The TCMB cut policy rates by 25bp to 5.5% in December. Despite the relatively high

inflation recently, we do not expect a big reaction from the TCMB for several reasons. First, the

high CPI print was largely driven by one-off factors. Furthermore, we are less comfortable with

the core outlook and finally, Turkey has seen a recent growth pick-up (with loan growth, for

example), but not at an overheating stage.

Fiscal policy: Since H2 2011 fiscal policy has helped the monetary authorities, as the

government has used revenue outperformance as a cushion. The recently unveiled Medium

Term Programme (MTP) for 2013-15 suggests that the tight fiscal stance will continue and it

looks like the government intends to avoid running an “election budget” or any form of “election

spending”. While primary surplus estimates are not as ambitious as in the past six or seven

years, we still expect the debt-to-GDP ratio to fall towards the low-30% levels.

Rating outlook: Turkey is now rated investment grade by Fitch, and we expect it to receive an

investment grade rating this year from the other ratings agencies as well. We think rebalancing

and structural reforms are moving in the right direction.

Risks: Terms-of-trade shocks (higher oil prices) and sudden stops of capital inflows are the

main risks. In that scenario, inflation could rise again with unwarranted currency weakness

resulting in a sharp fall in consumer confidence. However, this is not our base case. We think

the risks of capital controls being implemented, on any rapid appreciation, are extremely low.

With EM inflows accelerating, the likelihood of sudden stops has declined. Tight lending

conditions are still weighing on credit demand.

Fig. 1: Details of the forecasts

2011 2012 2013 2014

Real GDP % y-o-y 8.5 3.0 4.5 5.5

Contributions to GDP by selected items

Private consumption 5.5 1.3 2.5 2.4

Private investments 4.7 -0.5 2.1 2.1

Net exports -1.7 2.0 1.0 0.2

CPI % y-o-y * 10.5 6.2 6.5 5.0

CPI % y-o-y ** 6.5 8.9 6.7 6.3

Budget balance % GDP -1.2 -2.4 -2.3 -2.0

Primary balance % GDP 1.6 0.6 1.0 1.2

Public debt % GDP 42.4 37.0 36.0 35.0


TCMB policy rate %* 5.75 5.50 5.50 5.50

USDTRY* 1.89 1.78 1.70 1.75 Notes:* End of period. ** Period average. Bold is actual data. Source: Nomura Global Economics

Fig. 2: Fiscal policy very tight

2009

2010

2011

20122013

35

40

45

50

1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

Cyc. adj. primary balance (% GDP)

Gross debt (%GDP)

Source: Nomura Global Economics, IMF.



24

Philip Rush +44 20 7102 9595 [email protected]

United Kingdom | Economic Outlook

Stagnant

Intensification of the euro area crisis remains a serious threat to the UK. The MPC’s

policy response is consistently aggressive, despite inflation’s persistent stickiness.

Activity: Underlying growth ground to a halt in 2011 and has bumped around broadly the same level of activity ever since. Renewed signs of cyclical growth momentum do not look any different to us than in the previous two mini-cycles. With fundamentals still bleak, we expect momentum to wane at still weak growth rates within the next few months (see UK Comment: The latest mini-cycle's mini-surge). Growth remains constrained by the ongoing domestic deleveraging and the challenging rebalancing act within the euro area. Moreover, the needed rebalancing is only being delayed by policy stimulus, which is shifting the pain from employment onto persistently poor productivity (see UK Theme: the moribund metastable equilibrium).

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. We maintain our long-held view that there will not be a sustained fall

below the inflation target (see UK Theme: Inflation in a black hole). Weak productivity is pushing

up costs and the global environment is no longer disinflationary.

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 signs of recovery are sustained. Concerns about QE‟s effectiveness do

not prohibit its relaunch, but we still believe cutting rates would be counterproductive and other

schemes fail to address the true problem (see UK Theme: FLS fails to firefight monetary arson).

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 will keep

subtracting about 1.0% from GDP growth. However, in order to balance the mandated current

structural balance within a reasonable horizon, we think the government will need to implement

more measures. That is because its current spending plans are conditioned on what we have

long considered to be an overly optimistic view of potential growth and thus revenues (see, for

example, UK Theme: Policymakers remake mistakes, 24 November 2011). As policy is not

responding to slippage, the debt-to-GDP (secondary) target has been broken and we expect

other ratings agencies to downgrade the UK (see UK Theme: Bending the fiscal rules).

Risks: Downside risks dominate our growth forecasts, creating the risk that the MPC delivers

even more easing, despite the risks being to the upside of our inflation forecasts.


1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014

Real GDP -0.2 -0.4 0.9 -0.3 0.0 0.0 0.0 0.1 0.0 0.2 0.7


Government consumption 3.2 -1.1 0.8 0.6 -0.3 -0.3 -0.3 -0.4 3.0 -0.2 -1.5

Fixed investment 0.6 -0.5 -0.2 -0.4 -0.1 0.3 0.3 0.4 -0.3 -0.1 2.5

Exports of goods and services -1.7 -1.1 1.2 -1.5 1.1 0.9 0.9 1.0 -0.6 1.7 3.5

Imports of goods and services -0.1 1.7 -0.4 -1.2 1.1 1.3 1.2 0.9 1.8 2.2 3.1


Domestic f inal sales 1.1 -0.1 0.3 0.2 0.1 0.2 0.1 0.1 1.3 0.6 0.7

Net trade -0.5 -0.9 0.5 -0.1 0.0 -0.2 -0.1 0.0 -0.8 -0.2 0.1

Inventories -0.9 0.6 0.1 -0.4 0.0 0.0 -0.1 0.0 -0.5 -0.2 -0.1


Consumer prices (CPI) 3.5 2.8 2.4 2.7 2.7 3.0 2.9 2.6 2.8 2.8 2.5

Retail prices (RPI) 3.8 3.1 2.9 3.1 3.3 3.7 3.7 3.4 3.2 3.5 3.2

Announced size of the APF (£bn) 325 325 375 375 375 375 375 375 375 375 375

Official Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

3-month sterling libor 1.03 0.90 0.60 0.52 0.51 0.51 0.51 0.51 0.52 0.51 0.60

10-year gilt 2.20 1.73 1.73 1.83 2.00 2.05 2.20 2.20 1.83 2.20 3.35

£ per euro 0.83 0.81 0.80 0.81 0.82 0.81 0.80 0.78 0.81 0.78 tbc

$ per £ 1.60 1.56 1.62 1.61 1.59 1.58 1.56 1.58 1.61 1.58 tbc 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 11 January 2013. Source: ONS, Bank of England, Bloomberg, DataStream, Nomura Global Economics.










25

Lewis Alexander +1 212 667 9665 [email protected]

Ellen Zentner +1 212 667 9668 [email protected]

Aichi Amemiya +1 212 667 9347 [email protected]

Joseph Song +1 212 667 2415 [email protected]

Roiana Reid +1 212 298 4221 [email protected]

United States | Economic Outlook

Lost in translation

Labor market indicators are unlikely to sway the FOMC from its commitment to

provide extraordinarily easy policy even after the recovery strengthens.

Activity: In the 3 1/2 years since the Great Recession ended, real GDP has grown at a

lackluster 2.1% pace and is tracking close to that pace in Q1 2013.

Lower-income households are in the process of ratcheting down spending in response to a

higher tax burden, but aggregate demand is being held up by higher-income spenders reacting

to rising wealth from equities and real estate. Fiscal policy remains a source of uncertainty for

the outlook, but risks of a policy misstep have diminished. Our forecast for the US economy

assumes that half of the 1 March spending cuts will be implemented this year, but it is looking

more likely that the full sequester will remain in place. If so, our assumptions for government

spending will need to be revisited. Congress is working to complete a continuing resolution (CR)

before the 22 March Easter holiday break. The CR is expected to fund the federal government

through the end of this fiscal year (30 September).

Providing a buffer against fiscal headwinds, the housing recovery continues to deepen. Home

price increases are providing support for household confidence and we expect the wealth effect

from real estate to help support aggregate demand.

Inflation: Our forecast for consumer price inflation 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, and limited risks from commodity prices.

Policy: We expect the FOMC to maintain its current longer-term asset purchase program

through Q3 2013, and then begin to taper purchases as the recovery strengthens and outlook

improves convincingly. Upcoming negotiations in Washington over the reprogramming of

spending cuts and the budget are likely to prove very contentious.

Risks: Fiscal policy missteps and slower global growth remain the dominant risks to the

outlook.


% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 2012 2013 2014

Real GDP 2.0 1.3 3.1 0.1 1.8 2.2 2.9 3.1 3.0 3.3 3.4 3.5 2.2 1.9 3.1

Personal consumption 2.4 1.5 1.6 2.1 1.4 1.6 2.7 2.8 2.9 2.8 3.0 3.0 1.9 1.8 2.8

Non residential f ixed invest 7.5 3.6 -1.8 9.7 0.1 2.1 5.2 5.5 4.5 6.9 5.5 5.9 7.7 3.2 5.3

Residential f ixed invest 20.6 8.4 13.6 17.4 18.0 17.0 15.7 18.5 13.6 14.3 12.7 7.5 12.1 16.3 14.5

Government expenditure -3.0 -0.7 3.9 -6.9 -0.6 -0.6 -1.0 -0.9 -0.5 -0.2 -0.1 0.7 -1.7 -1.3 -0.4

Exports 4.4 5.2 1.9 -3.9 5.4 2.3 3.7 5.6 5.9 4.4 4.4 4.5 3.3 2.4 4.8

Imports 3.1 2.8 -0.6 -4.5 5.0 2.4 2.8 3.7 4.1 2.9 3.0 2.3 2.4 1.5 3.3


Domestic f inal sales 2.3 1.5 2.0 1.4 1.3 1.6 2.7 2.9 2.8 3.1 3.1 3.1 2.1 1.8 3.0

Inventories -0.4 -0.5 0.7 -1.6 0.6 0.6 0.2 0.1 0.1 0.2 0.2 0.1 0.1 0.0 0.1

Net trade 0.1 0.2 0.4 0.2 -0.1 -0.1 0.0 0.1 0.1 0.1 0.1 0.2 0.0 0.1 0.0

Unemployment rate 8.3 8.2 8.0 7.8 7.8 7.7 7.6 7.5 7.4 7.2 7.1 7.0 8.1 7.7 7.2

Nonfarm payrolls, 000 262 108 152 201 175 150 175 175 175 180 180 200 181 169 184

Housing starts, 000 saar 715 736 774 901 950 1005 1050 1080 1130 1170 1200 1250 781 1021 1188

Consumer prices 2.8 1.9 1.7 1.9 1.7 1.9 1.8 1.6 1.7 1.6 1.5 1.5 2.1 1.7 1.6

Core CPI 2.2 2.3 2.0 1.9 1.9 1.7 1.8 1.8 1.7 1.7 1.8 1.9 2.1 1.8 1.8

Federal budget (% GDP) -7.0 -5.6 -4.2


Fed securities portfolio ($trn) 2.60 2.61 2.57 2.66 2.90 3.17 3.44 3.64 3.71 3.71 3.70 3.70 2.66 3.64 3.70

Fed funds target 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

3-month LIBOR 0.47 0.46 0.36 0.31 0.35 0.25 0.30 0.35 0.40 0.45 0.50 0.50 0.31 0.35 0.50

TSY 2-year note 0.33 0.33 0.23 0.26 0.20 0.25 0.30 0.35 0.45 0.55 0.60 0.65 0.26 0.35 0.65

TSY 5-year note 1.04 0.72 0.62 0.75 0.70 0.80 0.85 0.95 1.05 1.15 1.20 1.25 0.75 0.95 1.25

TSY 10-year note* 2.23 1.67 1.65 1.77 1.85 2.00 2.10 2.25 2.35 2.45 2.50 2.55 1.77 2.25 2.55

30-year mortgage 3.99 3.66 3.40 3.35 3.40 3.60 3.70 3.90 4.00 4.10 4.15 4.20 3.35 3.90 4.20 * The forecast range for 10y UST is as follows: 1Q13 = 1.80-2.15, 2Q13 = 1.90-2.25 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 and the Fed's securities portfolio are end of period. Housing starts are period averages. Numbers in bold are actual values. Table reflects data available as of 8 March 2013. Source: Nomura







26


Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]

Rest of EEMEA | Economic Outlook

Czech Republic: Postmodernism here we come

Although a technical recession may linger through to Q2, until sentiment improves

domestic demand growth will likely continue to underperform export growth.

2011 2012 2013 2014

Real GDP % y-o-y 1.7 -1.7 0.0 1.4




CPI % y-o-y * 2.4 2.4 1.7 1.4

CPI % y-o-y ** 1.9 3.3 1.8 1.6


Population mn 10.5 10.4 10.4 10.3


Reserves EUR bn ** 31.1 31.5 32.0 32.5


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 25.10 25.50 25.00

*End of period, **Period average, Bold is actual data

Growth should start to recover from Q2, led principally by consumption, because of a still healthy labour market, and then move slowly through to domestic investment. The external shock to the economy has so far been surprisingly muted and so it is the oscillations of imports on net trade that have been the issue. Fiscal drag should still be an issue, shaving some 0.2pp off GDP. Much of the shock, however, is sentiment driven.

An increasingly fractious and unstable coalition should make any stronger fiscal action or structural reforms 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 inflation should stay soft until mid-H2, when it should start to normalise, though headline CPI inflation should fall back through next year. The risks to growth and CPI inflation in the next six months and as interest rates are in the lower bound means that if a sufficient external shock occurs in the eurozone, there could be CNB intervention. We think there may be brief non-level-targeting intervention in small size in Q2 if EURCZK falls to 25.0.

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 1.9 0.3 0.6 1.5



CPI % y-o-y * 3.1 5.0 3.4 3.2

CPI % y-o-y ** 5.8 3.3 3.4 3.2


Public debt % GDP 33.4 39.3 39.5 38.2

BNR policy rate %* 6.00 5.25 5.25 6.00

EURRON* 4.33 4.44 4.60 4.45

*End of period; **Period average; Bold is actual data

Markets are becoming concerned about the confluence of negative factors in Romania, such as Moody‟s lowering of the rating outlook to negative, IMF concerns over the elections in December moving Romania off-programme and the 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. Although the BNR has a contingency plan that may involve capital controls, the precautionary SBA with the IMF may need to be tapped if the situation deteriorates.

The high inflation we expected for 2012 did not materialise, so we now see rates unchanged for this year, with risks of cuts and still no hikes until 2014.

We are not convinced 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

Looser monetary policy should help Israel to recover.

2011 2012 2013 2014

Real GDP % y-o-y 4.8 2.5 3.0 3.5

CPI % y-o-y * 2.2 1.6 2.5 2.5

CPI % y-o-y ** 3.5 1.7 2.6 2.7


Current account % GDP 0.3 -1.5 -1.0 -1.0

Policy rate %* 2.75 1.75 1.75 2.50

USDILS* 3.81 3.73 3.60 3.70

*End of period, **Period average, Bold is actual data

Israel‟s export-driven economy has 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. The electricity price hikes, however, may limit the extent of policy easing. With the policy rate at 1.75%, we see no further cuts unless the global economy deteriorates further.

Underlying final demand should not weaken greatly and the recovery in 2014 should result in measured rate hikes (75bp to 2.50% by year-end).

Source: BOI, Nomura Global Economics




27

Rest of Latin America | Economic Outlook

Argentina: Key mid-term elections coming

Electoral calculations are likely to drive economic policymaking yet again

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

We expect the authorities to keep financing their growing fiscal deficits with monetary financing from the central bank. This will likely 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 lackluster. 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 GDP to grow below potential in 2013

2011 2012 2013 2014

Real GDP % y-o-y 5.9 3.8 4.2 4.5

Consumption % y-o-y 5.8 4.5 4.6 4.5

Gross Investment % y-o-y 16.6 9.0 4.2 9.7

Exports % y-o-y 11.4 7.0 6.5 9.5

Imports % y-o-y 21.5 9.0 7.0 8.5

CPI % y-o-y * 3.7 2.4 2.7 3.5

CPI % y-o-y ** 3.4 2.8 2.6 3.5



Policy Rate % * 4.75 4.25 3.50 4.50

USDCOP * 1938.50 1767.00 1800.00 1780.00

* End of period, ** Period average, Bold is actual data

Q3 2012 growth surprised on the downside (2.1%y-o-y). This disappointing growth reopened a negative output gap. We expect the economy to grow at 4.2% in 2013.

Both headline and core inflation are surprising on the downside. Currently both are located at the lower end of the Central Bank target (2.0%). We expect inflation and inflation expectations to remain well anchored below the 3.0% target.

We expect an additional 50bp interest rate cut to 3.5% in the first half of 2013 and for authorities to continue intervening in the FX market to curb COP appreciation. The monetary policy outlook for the second half of 2013 will depend on how fast the output gap is closing and on the response of credit and housing prices growth to the previous rates cut.

Source: CSOP, NBP, Nomura

Chile: Better external conditions bring upward pressure

We expect domestic demand to remain robust and small hike in H2.

2011 2012 2013 2014

Real GDP % y-o-y 6.0 5.4 5.5 5.0

Consumption % y-o-y 8.8 5.8 6.0 5.5

Gross Investment % y-o-y 17.6 10.5 10.0 7.0

Exports % y-o-y 4.6 3.1 5.0 5.0

Imports % y-o-y 14.4 4.6 9.0 8.0

CPI % y-o-y * 4.4 1.5 3.3 3.0

CPI % y-o-y ** 3.3 3.0 3.2 3.0

Budget balance % GDP 1.5 1.0 1.0 1.0


Policy Rate % * 5.25 5.00 5.25 5.25

USDCLP * 519.55 479.00 460.00 450.00

* End of period, ** Period average, Bold is actual data

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 5.25% 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

Tony Volpon

+1 212 667 2182

[email protected]

Benito Berber +1 212 667 9503

[email protected]

George Lei +1 212 667 9947

[email protected]





28

Disclosure Appendix A-1

ANALYST CERTIFICATIONS

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When JGBs for individual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value of the bond plus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used, (2) for 5-year and 3-year fixed rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used. Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.25% (tax included) of the transaction amount. Also, a direct cost that may be incurred when selling investment trusts is a fee of up to 2.0% of the unit price at the time of redemption. 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No account fee will be charged for marketable securities or monies deposited. Transfers of equities to another securities company via the Japan Securities Depository Center are subject to a transfer fee of up to ¥10,500 (tax included) per issue transferred depending on volume. Nomura Securities Co., Ltd. Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142) Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association of Japan; and Type II Financial Instruments Firms Association. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx

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Lewis Alexander US Chief Economist [email protected] +1 212 667 9665

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Roiana Reid US Economist [email protected] +1 212 298 4221

Joseph Song

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Dimitris Drakopoulos Economist [email protected] +44 20 7102 5846

Lefteris Farmakis Economist [email protected] +44 20 7103 9242

Takuma Ikeda Senior Economist [email protected] +44 20 7102 1605

Philip Rush Economist [email protected] +44 20 7102 9595

Stella Wang Economist [email protected] +44 20 7102 0599

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Tomo Kinoshita Chief Japan Economist [email protected] +81 3 6703 1280

Shuichi Obata Senior Economist [email protected] +81 3 6703 1295

Kohei Okazaki Economist [email protected] +81 3 6703 1291

Asuka Tsuchida Economist [email protected] +81 3 6703 1297

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and Taiwan Economist [email protected] +852 2536 7430

Euben Paracuelles Southeast Asia Economist [email protected] +65 6433 6956

Sonal Varma India Economist [email protected] +91 22 4037 4087

Zhiwei Zhang China Economist [email protected] +852 2536 7433

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Research - Americas [email protected] +1 212 667 2182

Peter Attard Montalto Economist [email protected] +44 20 7102 8440

Benito Berber Senior Latin America

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