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[ C L I E N T N A M E ]
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See the end pages of this presentation for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
EMEA Emerging Markets ResearchMay 18, 2012
Developed and Emerging Market Prospects and Challenges Through 2013
Michael MarreseAC
EMEA EM Economics and Strategy(44-207) [email protected]
Anthony WongAC
(44-207) 134-7549
J.P. Morgan Securities Ltd.
Topic Slides
DM and EM overview 1-7US 8-12Euro Area 13-21Japan 22-23China 24-25Global indicators 26-29
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The global outlook for 2012 and 2013: EM outperforming DM� J.P. Morgan’s 2012 and 2013 GDP forecasts are respe ctively: Global, 2.2% and 2.6%; USA, 2.4% and 2.2%; Japan, 2.0% and 1.3%; Euro
area, -0.4% and 0.4%; developed markets (DM), 1.2% and 1.5%; and emerging markets (EM), 4.9% and 5.5%. Not only are our DM 2012/2013 growth forecasts well below average DM growth during 2002-2007 of 2.3%, unemployment also remains unacceptably high, especially in the US, Japan and peripheral Europe.
� EMEA EM is likely to continue to outperform its DM neighbors:
1. DM countries should continue to perform much more poorly than their EM counterparts. In February 2011, we expected DM to grow 2.6% in 2012. Now we expect DM to grow just 1.2%—54% lower than our February estimate. In February 2011, we expected EM to grow 6.0% in 2012. Now we expect 4.9%, just an 18% decline.
2. Eurozone countries have worse fiscal and debt figu res than EM Europe, and recent EU/ECB decision have not changed that situation. (slide 7)
3. The ECB’s December policy decisions—the 25bp rate cut; reduction in reserve requirements from 2% to 1 %; the unprecedented three-year unlimited refinancing tenders (LTROs); a nd the loosening of collateral requirements —have allowed Euro area banks to gain access to funding and to slow down their process of deleveraging.
4. Given that the global appetite for Italian and Sp anish debt has declined substantially, it seems reasonable to expect several additional LTROs should Italian and Spanish bond yields continue to widen from current levels. Remember that the first two LTROs injected net EUR510 billion of new liquidity into Euro area banks allowing these banks to: refinance their maturing debt without going to the markets; buy additional sovereign debt; and de-leverage more gradually. J.P.Morgan estimates that Spanish banks borrowed net EUR 166bn and Italian banks borrowed net EUR133bn out of the net 510bn injection.
5. In our view, it is likely that Portugal and Irela nd will receive second assistance packages from the Troika, both without PSI. Also we believe it is likely that Spain will receive a three-year IMF SBA, which will partially cover these sovereign rollover needs.
� Our growth forecasts are based on the following set of assumptions:
1. Average 2012 Brent oil price of $119. 2012 base metal prices to average slightly lower than 2011 averages (lead -6.1%, tin -8.8%, silver -6.1%, nickel -6.7%, zinc -3.7%).
2. EMEA EM inflation forecast at 5.5%oya in December 2012 and 5.3% in December 2013, compared to 6.0% in December 2011.
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The global outlook for 2012 and 2013: downside for the Euro area
� EM Asia growth softening. Chinese data release have disappointed and raise questions about whether our forecast of a bottoming is tracking. Based on the government’s seasonally adjusted data, April sales growth was moderate while fixed investment continued to slow. Alongside weak export performance, manufacturing gains were subpar. Separately, India’s manufacturing PMI ticked up moderately in April, and confirming our suspicion that the PMI surges observed in January and February were an aberration.
� Downside # 1 for 2012-2013 Euro area: EU policies could continue to disappoint. Yields widened for Peripheral European countries except Portugal. For example, between March 8 and May 17, yields in the 10-year part of the curve widened 102bp for Italy, 123bp for Spain, 931bp for Greece.
� Downside # 2 for 2012-2013 Euro area: The marginal benefit of additional ECB LTROs may disappoint.
� Downside # 3 for 2012-2013 Euro area: Ratings downgrade of key Euro area countries. For example, Spain’s public sector debt-to-GDP is not likely to improve over the next few years.
� Downside # 4 for 2012-2013 Euro area: Institutional chaos caused either by some Euro area country leaving the Euro area without assistance from the ECB, Euro zone countries, and the IMF or by disagreement over EU institutional reform.
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Population distributions among major DM and EM countries
Population distributions
Population in millions, % in each age group
Population distributions
Population in millions, % in each age group
� EM Countries in general have younger populations th an DM countries. In EMEA EM, Russia, Poland and South Korea have relatively older populations (older than even that of the US), while South Africa, Turkey have relatively young populations. Turkey’s population is particularly young relative to that of EU countries.
� The structure of China’s population is changing rap idly given the relatively low share of its population ag ed 0-14 years. China’s aged 0-14 year old cohort is 17.6% of its total population compared to: India’s 29.7%; South Africa’s 28.6%; Mexico’s 28.3%; Turkey’s 26.5%; Brazil’s 26.2%; and the USA’s 20.1%. China’s median age and its +60 cohort are projected to rise rapidly, which will be yet another reason (along with rapid growth in nominal and real wages) for China’s current-account surplus to narrow rapidly (slide 24).
� Among DM countries, the US has a relatively young population and its labor force is predicted to grow by 1% per year over the medium term. For example, the median age for the US is 36.9, whereas it is 44.9 for Germany, 44.8 for Japan, 40.0 for the UK, and 39.9 for France. The provides the US with an advantage with regards to potential real GDP growth.
� MENA countries have very young populations. The median age is below 30 in the majority of MENA countries—18.1 in Yemen. The young demographic was a contributing factor to the popular unrest in the region.
Source: US Census estimates 2011
Total population
Median age
0-14 15-59 60+
Germany 81 44.9 13.3 60.2 26.4
Japan 126 44.8 13.2 55.8 31.0
UK 63 40.0 17.3 60.1 22.5
France 65 39.9 18.5 58.5 23.1
Russia 139 38.7 15.2 66.2 18.7
Poland 38 38.5 14.7 65.4 20.0
South Korea 49 38.4 15.6 68.5 15.9
US 313 36.9 20.1 61.4 18.6
China 1,337 35.5 17.6 69.1 13.2
Brazil 203 29.3 26.2 63.7 10.0
Turkey 79 28.5 26.5 64.1 9.3
Mexico 114 27.1 28.3 62.3 9.4
India 1,189 26.2 29.7 62.0 8.4
Saudi Arabia 26 25.3 29.4 65.9 4.5
South Africa 49 25.0 28.6 62.9 8.6
Egypt 82 24.3 32.7 60.0 7.3
Source: US Census estimates 2011
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Global growth and inflation, 2011-2013
Real GDP and inflation forecastsReal GDP and inflation forecasts
1. FY 2011/2012. Source: J.P. Morgan estimates
2011 2012 2013 2Q12 3Q12 4Q12 4Q11 4Q12 4Q13
USA 1.7 2.4 2.2 2.5 3.0 2.0 3.3 1.8 1.7
United Kingdom1 0.7 0.1 1.9 -1.0 2.5 1.5 4.6 2.0 2.0
Germany 3.1 1.1 1.4 1.0 0.8 1.3 2.6 2.1 1.7
France 1.7 0.3 0.7 0.0 0.3 0.5 2.6 2.3 1.5
Italy 0.5 -1.9 -0.7 -2.5 -1.5 -1.0 3.7 4.2 2.1
Spain 0.7 -1.3 -0.7 -2.5 -2.0 -1.5 3.1 2.0 1.3
Japan -0.7 2.0 1.3 2.0 1.4 1.2 -0.3 0.1 -0.2
China 9.2 8.0 8.9 7.0 9.1 9.5 4.6 3.6 3.6
Taiwan 4.0 2.4 5.0 4.8 6.5 5.8 1.4 1.7 1.7
Korea 3.6 3.3 4.0 4.0 4.5 4.0 4.0 2.9 3.5
Malaysia 5.1 3.9 3.2 2.0 2.0 2.5 3.2 2.2 1.8
India 7.0 7.1 7.3 5.5 6.3 6.5 8.4 8.2 7.8
Brazil 2.9 2.9 4.5 4.5 5.7 5.7 6.7 5.0 5.5
Mexico 3.9 3.8 3.5 3.9 2.0 3.2 3.5 4.0 3.5
Russia 4.3 3.7 3.7 2.0 4.0 3.5 6.1 6.2 6.1
South Africa 3.1 2.5 3.6 2.6 2.8 3.2 6.1 6.1 5.1
Turkey 8.5 2.5 4.5 - - - 10.5 7.0 5.8
Poland 4.3 3.0 3.0 2.0 2.5 3.0 4.6 3.1 2.5
Israel 4.8 2.9 4.4 3.2 6.1 7.4 2.6 2.5 2.4
Saudi Arabia 6.1 5.1 4.5 - - - 5.4 4.5 3.8
Ukraine 5.2 3.0 4.2 - - - 4.6 8.3 9.2Kazakhstan 7.5 4.0 4.5 - - - 7.4 7.6 6.9
Global 2.6 2.2 2.6 2.1 2.6 2.5 3.6 2.4 2.2
Developed markets 1.3 1.2 1.5 1.0 1.5 1.3 2.8 1.5 1.3
Emerging markets 5.8 4.9 5.5 4.8 5.7 5.7 5.7 5.0 4.9
Real GDP (%oya) Real GDP (%q/q, saar) Consumer prices (%oya)
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China will contribute 25% to global growth in 2013, slightly more than the USA
Percent contribution to global real GDPPercent contribution to global real GDP
Country weights based on the average nominal GDP 2005-2009. Source: J.P. Morgan
-15
-10
-5
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5
10
15
20
25
30
35
40
45
50
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
China US India Brazil
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Global inflation is moving lower and has peaked in most EM as well
Headline CPI (%oya) Headline CPI (%oya)
Source: J.P. Morgan
1
2
3
4
5
6
7
2010 2011 2012 2013
EM
DM
Global
Shaded area denotes J.P.Morgan forecast
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Euro zone countries have worse fiscal and debt figures than EMEA EM
2012F Fiscal and Debt Indicators
Country GDP
Total Debt2
(2010)
General Gvt Gross
Debt
General Gvt
Revenue3
General Gvt
Balance
Gross borrowing
needs
Ease of Doing
Business
Corruption
Perceptions Index
USDbn % of GDP % of GDP % of GDP % of GDP % of GDP Ranking (2012) Ranking (2011)
United States 15696.5 345.7 105.0 32.6 -6.4 13.8 4 22
Core Europe
Austria 440.8 359.7 74.2 48.4 -3.0 6.2 32 16
Belgium 549.7 420.5 100.5 50.9 -3.0 9.1 28 19
Finland 285.3 276.2 50.5 53.6 -0.7 3.6 11 2
France 2888.9 345.8 90.5 51.8 -4.5 9.2 29 25
Germany 3707.8 310.4 82.2 44.7 -0.9 6.8 19 14
Netherlands 881.8 647.4 70.1 46.3 -4.4 9.2 31 7
UK1
2603.9 523.7 91.2 40.8 -6.7 9.9 7 16
Peripheral Europe
Greece 306.4 233.1 170.4 42.4 -7.6 22.7 100 80
Ireland 227.4 1080.0 116.7 35.8 -9.3 13.0 10 19
Italy 2287.7 326.6 123.2 48.4 -2.6 14.3 87 69
Portugal 240.6 492.0 117.0 43.0 -5.9 11.7 30 32
Spain 1575.1 400.9 80.4 36.0 -5.9 10.0 44 31
EMEA EM
Bulgaria 57.7 201.6 17.6 33.3 -1.5 2.2 59 86
Czech 232.7 132.5 43.0 40.4 -3.6 6.2 64 57
Egypt 252.8 92.0 83.0 25.0 -11.0 15.7 110 112
Hungary 148.5 296.8 78.6 46.1 -2.8 5.1 51 54
Latvia 29.4 245.4 51.9 36.0 -2.7 5.0 21 61
Lithuania 45.4 136.6 42.6 33.5 -3.3 4.4 27 50
Poland 547.9 151.7 56.3 40.1 -3.2 8.3 62 41
Romania 191.0 131.7 35.3 33.4 -3.5 12.9 72 75
Russia 2053 90.0 11.5 36.0 -0.1 0.9 120 143
Saudi Arabia 581.9 37.0 13.0 45.0 4.2 -4.1 12 57
South Africa 410.7 117.6 40.1 27.7 -4.6 5.1 35 64
Turkey 822.5 91.6 40.1 33.6 -1.5 8.4 71 61
Ukraine 184.9 167.7 39.0 41.2 -5.6 12.2 152 152
Source: J.P. Morgan, European Commission, World Bank Doing Business Report 2012 (out of 183 countries) and Transparency International Corruption Perception Index 2011 (out of 178 countries).
1. FY2010/11, government debt is for the total public sector. 2. Latest (2010) from Eurostat or J.P.Morgan estimate - Total debt is the sum of household debt, financial and nonfinancial corporate loans and debt
securities and government debt; but excludes unfunded government pension liabilities. 3. European Commission forecast.
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US 2012-2013 Economic Outlook: Withdrawal of fiscal stimulus – Part 1
� We forecast US growth in 2012 of 2.4%, and in 2013 of 2.2%.
� Domestic final sales in 2012 forecast to rise 2.1%y /y compared to 1.8% in 2011, and 2.2% in 2013. This assumes inflation will be appreciably lower and the US federal budget balance will contract only 1.5%-age points of GDP in 2013.
� For 1Q12, GDP decelerated to 2.2%q/q saar, from 3.0% in 4Q11. The number printed a little softer than expectations, with the downside surprise apparently concentrated in business investment in equipment and in federal defense outlays. The composition of growth was weak, (although consumer spending was better than expected) and the firm pace of stockbuilding last quarter is a headwind for growth in the current quarter, as firms are likely to slow the rate of inventory accumulation. We continue to look for 2.5% growth in 2Q12, and feel that there is probably more downside than upside risk to that call. Because of the slowdown in payroll employment growth.
� While real spending has moderated, measures of cons umer confidence has rebounded sharply since October. For example, The University of Michigan consumer sentiment index increased 1.4 points to 77.8 in the preliminary May report. The increase in May extended the survey’s streak of consecutive increases to nine months and brought the survey’s headline up to a new high for the recovery, although the level of the index remains low by historic standards.
� On aggregate, state and local government budgets ar e in surplus in 2012 and are expected to remain in surplus in 2013 . Yet two large US states continue to be plagued with large deficits: California and Illinois.
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US 2012 Economic Outlook: Withdrawal of fiscal stimulus – Part 2
� Existing home sales have been on an upward trend ov er the past few months, but levels of activity still do not look very good.
� We forecast a US household saving rate of 3.8% in 2 012, compared to 4.7% in 2011 and 5.3% in 2010. The rate was close to 6% in 2009.
� For 2012, we expect business investment to remain s trong and for residential investment to grow 11.4% after five years of contra ction.
� Import prices continued to moderated to 0.5%oya in April , the monthly (sa) index declined 1.7%. Import prices reached their cyclical peak of 13.7% in mid-2011. The price of imported goods excluding fuels subsided to 1.3%oya in April. Note that imported apparel prices remain above 4%oya.
� US unemployment rate improved, but will remain elev ated , projected to average 8.1% this year, from 9.0% in 2011. Initial jobless claims were unchanged at 370,000 during the week ending May 12 (claims for the prior week were revised up by 3,000). The four-week moving average—a better measure of the trend—was essentially unchanged at 375,000; although this latest figure is not as low as what was reported between February and mid-April, this recent move down is a sign of improvement in the labor market.
� Fed on hold until at least late-2014 . Operation ‘twist’ (reinvestments of maturing securities into longer-term USTs, and sales of short-term USTs offset by purchases of longer-term USTs) is underway. Fed issued a “white paper” on steps to heal the house market, which could mean that the Fed would purchase mortgages if another round of QE were to occur.
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0
5
10
15
20
25
52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12
Historic average
(12.0)
14.0
11.1
10
11
12
13
14
15
80 84 88 92 96 00 04 08 12
130.0
112.7Historic average
(73.1)
0
20
40
60
80
100
120
140
52 56 60 64 68 72 76 80 84 88 92 96 00 04 08 12
400
450
500
550
600
650
52 57 62 67 72 77 82 87 92 97 02 07 12
US household wealth
US consumers have been adjusting as their debt burden declines
US household debt service ratio
%
Household debt% of disposable income
Household debt% of household and nonfinancial corporate assets
% of disposable income
Source: J.P. Morgan Source: J.P. Morgan
Source: J.P. Morgan Source: J.P. Morgan
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0
2
4
6
8
10
12
14
80 85 90 95 00 05 10
J.P.Morgan
forecast
0
1
2
3
4
5
6
7
8
02 03 04 05 06 07 08 09 10 11 12
US saving rate
US household saving rate has risen and US labor costs have fallen
%, sa
US employment cost index
Compensation
%oya
Source: J.P. Morgan Source: J.P. Morgan
Wages/salaries
Benefits
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0
50
100
150
200
250
63
64
65
66
67
68
69
70
2000 2002 2004 2006 2008 2010 20120
5
10
15
20
25
30
35
40
45
-20
-15
-10
-5
0
5
10
15
20
2006 2007 2008 2009 2010 2011 2012 2013
J.P.Morgan
forecast
Distressed sales and house prices
US house prices have firmed modestly lately
LoanPerformanceHouse Price Index
Distressed sales as % of all home sales
%oya
Source: J.P. Morgan
Case-Shiller House Price Index
Case-Shiller House Price Index
Homeownership ratio
Case-Shiller Index 2000=100% %
Homeownership ratio at late-1990s level
Source: J.P. Morgan
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-20
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0
10
20
30
05 06 07 08 09 10 11 120
10
20
30
40
50
60
0.0
0.5
1.0
1.5
2.0
2.5
06 07 08 09 10 11 12
House price index, total and ex distressed sales
Total ex. distressed
% ch saar, over six months; CoreLogic
Total
NAHB surveyStarts
%, samillions of units, saar
Housing starts and NAHB homebuilder survey
Source: J.P. Morgan Source: J.P. Morgan
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Euro area 2012: Recession and a Greek Exit from the Euro area – Part 1
� We see two more quarters of Euro area GDP contracti on of -0.8%q/q saar, and -0.5% in 2Q12 and 3Q12, respectively. This is due to the deterioration in sentiment caused by: fiscal tightening; tight credit conditions (not only in the periphery, but also in parts of the core); and the possibility that Greece leaves the Euro area (we now place a 50% likelihood that Greece exits the Euro area).
� The Euro area economy effectively stagnated in 1Q12 (+0.1%q/q saar). However, the GDP outturn was above expectations on the back of a much better-than-expected economic expansion in Germany in 1Q12 (2.1%q/q saar vs expectations of 0.3%). This would be marginally better than the -0.5%q/q saar that we had pencilled in. Consensus expectation was for a -0.2%q/q (not annualised), which is around -0.8%q/q annualised.
� There will be no more PSI. For program countries, debt relief will be provided by restructuring official loans: very long maturities at concessional borrowing rates. Spain and Italy may become program countries, in which case they can benefit from this debt relief. However, a significant substitution of official liabilities for market liabilities for Italy and Spain can only happen via ECB lending to the ESM. Thus, the ECB balance sheet will grow a lot more.
� Given the prospect of deflation in the periphery, i nflation in the core will need to get to at least 3% to deliver 2% inflation in the region as a whole (the ECB’s target). This will only happen with a very easy monetary stance for a very extended period.
� The main policy rate will come down before QE. Only after the policy rate is cut will the ECB engage in areawide unsterilized asset purchases (perhaps purchases of unsecured bank debt with a government guarantee rather than purchases of government debt).
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Euro area 2012: Recession and a Greek Exit from the Euro area – Part 2
� Easy monetary policy and a much larger central bank balance sheet will eventually push the euro a lot lower.
� It is now relatively easy to see what the path to a Greek exit could look like. The next election on June 17th leads to a government dominated by Syriza. The Troika decides to withhold any further disbursements from the second program and in response, the Greek government declares a moratorium on all debt payments and nationalizes the banks. Significant deposit flight takes place that is impossible to manage because the ECB will no longer accept Greek sovereign debt as collateral. The Greek government pressures the Greek central bank to use the ELA to finance both the sovereign and the banks, against the wishes of the ECB in Frankfurt (if the banks are nationalized they could buy new government debt and use it as collateral in the ELA).
� A Greek exit would involve broad-based defaults in Greece by the government, banks, and nonfinancial corporates. With the new currency likely to drop sharply, it would not be possible to repay liabilities in euros or other currencies. As far as the rest of the region is concerned, this would likely be disruptive but much less than it would have been two years ago. Greek government debt has already been restructured, and there has been a significant substitution of official liabilities both for government debt and for bank debt.
� If the direct effects of default were the only thin g to worry about, a Greek exit would be manageable as far as the rest of the region is conc erned. The really serious risk comes from contagion to other peripheral economies, which would put both sovereigns and banks under pressure.
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Euro area slides into recession
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Euro area composite PMI
Index
Level at start of 2008/09 recession
Source: J.P. Morgan
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Euro area unemployment looks like early stage of recession
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Level at start of 2008/09 recession
Euro area unemployment
Monthly change, 000s, 3-mo avg
Source: J.P. Morgan
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2007 2008 2009 2010 2011 2012
The three speed Euro area recovery has lost momentum
Euro area economic sentiment
Index, sa, 100 is post-1990 average
Germany
Core, ex Germany
Periphery
Source: J.P. Morgan
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The challenging fiscal journey in the Euro area
Peripheral fiscal consolidation: forecasts, outturn s and growth
Budget is % GDP, GDP is %oya, forecasts from annual SGPGreece Ireland Italy Portugal Spain
2009 Budget -15.7 -11.1 -5.4 -10.1 -11.2
2010 GDP Forecast -0.3 -1.3 1.1 0.7 -0.3Actual -3.4 -0.4 1.8 1.4 -0.1
Budget Forecast -8.7 -11.6 -5.0 -8.3 -9.8Actual -10.6 -9.2 -4.6 -9.8 -9.3
2011 GDP Forecast -3.5 0.8 1.1 -2.2 1.3Actual -6.9 0.7 0.4 -1.5 0.7
Budget Forecast -7.3 -10.0 -3.9 -5.9 -6.0Actual -10.6 -10.0 -3.9 -7.5 -8.5
Budget data for Ireland exclude capital cost of bank recap, data for Portugal exclude pension transfer in 2011
Holding the line on 2012 budget objectives
% GDP
Greece Ireland Italy Portugal Spain
Impact on 2012 budget of
Weaker growth -2.4 -0.5 -0.2 -0.6 -1.6
Fiscal slippage in 2011 -3.3 0.0 -0.1 -1.6 -2.5
Slippage plus growth effect -5.7 -0.5 -0.3 -2.2 -4.1
2012 budget in 2011 SGP -6.4 -8.6 -2.7 -4.7 -4.4
2012 budget now -6.8 -8.6 -1.7 -4.5 -5.3
Chg in budget target -0.4 0.0 1.0 0.2 -0.9
Impact of weaker growth assumes 0.4 multiplier applied to change in 2012 official growth forecast since 2011 SGP.
Fiscal thrust - JPMorgan estimates based on official plans
% GDP, +ve is tightening
2009 2010 2011 2012 2013
Greece -4.4 6.9 5.0 6.5 2.0
Ireland -1.5 1.3 2.2 1.5 2.3
Portugal -5.6 -0.1 3.3 4.3 1.5
Spain -4.4 2.3 1.4 4.0 3.0
Italy -0.7 0.0 1.0 3.5 2.3
Official versus JPMorgan forecasts for GDP growth
% oya2009 2010 2011 2012 2013
Greece Official -3.3 -3.5 -6.8 -4.8 0.0JPMorgan -6.9 -7.4 -1.9
Ireland Official -7.0 -0.5 0.9 0.5 2.0JPMorgan 0.7 -0.5 0.7
Portugal Official -2.9 1.3 -1.6 -3.0 0.7JPMorgan -1.5 -4.3 -1.2
Spain Official -3.7 -0.1 0.7 -1.7 2.4JPMorgan 0.7 -1.1 -0.7
Italy Official -5.5 1.8 0.7 -1.2 0.5JPMorgan 0.4 -1.8 -0.7
Source: J.P. Morgan Source: J.P. Morgan
Source: J.P. Morgan Source: J.P. Morgan
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The outlook for the Euro area
J.P. Morgan forecasts
2011 2012
GrowthOverall deficit
Primary deficit
Debt GrowthOverall deficit
Primary deficit
Debt
Germany 3.1 -1.0 1.6 81 0.6 -1.0 1.5 82
France 1.7 -5.2 -2.6 86 0.3 -4.4 -1.5 87
Italy 0.5 -3.9 1.0 120 -1.7 -2.6 2.7 123
Spain 0.7 -8.5 -6.3 69 -1.1 -6.0 -3.0 80
Portugal -1.5 -7.5* -3.3* 105 -4.3 -5.9 -1.0 117
Ireland 0.7 -10.0 -6.7 105 -0.5 -9.3 -5.1 117
Greece -6.9 -9.5 -2.6 167 -7.4 -7.6 -1.7 170
UK 0.7 -8.3 -5.3 84 0.4 -7.5 -4.9 89
*This is excluding pension transfer.
Source: J.P. Morgan
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Euro area bank lending
Euro area: Lending to households has begun to decline
%oya
Nonfinancial corporate loans
Household loans
Source: J.P. Morgan
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Is the Euro area experiencing a credit crunch?
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3-month average
Monthly flow
Flow of bank loans to households and nonfinancial co rporates
€bn, not adjusted for loan sales and securitisations
Source: J.P. Morgan
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Japan 2012 Economic Outlook: Underpinnings and Risks – Part 1
� Japan to grow 1.7% in 2012, far above the potential growth rate (0.5%), with an increase in the reconstruction works.
� 1Q GDP came in stronger than expected, led by public works, consumption and inventories. Reconstruction works surged, with the implementation of the supplementary budget, and private consumption strengthened, supported by the pent-up demand. Strength of consumption was broad based. It was not only durables, but also nondurables and services, which rose noticeably. However, a massive decline in capex was disappointing, although it happened after it surged in 4Q. Corporations appeared to be shifting the investment to abroad amid strong yen.
� Japanese policy makers are concerned about the yen’ s strength . Yet in our view, the use of FX intervention in an attempt to support business confidence and the economy has been ineffective.
� All of Japan’s nuclear power plants have now been s hut down . All of Japan’s 54 power plants are now under maintenance or completely offline. A national power shortage could take place, in our view, unless local governors approve the reopening of many of the nuclear power plants that are now closed. The replacement of nuclear power by fossil fuel would require 0.7% of GDP of additional spending, or a 40% higher trade surplus.
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Japan 2012 Economic Outlook: Underpinnings and Risks – Part 2
� CPI deflation has continued in 2011. We project deflation to be an ongoing problem, while we headline CPI is expected to register a positive number (0.3%) this year, Japan will likely return to deflation next year.
� The BoJ established its asset purchase plan and is expected to keep its virtual zero rate policy until it judges that price stability has been achieved (at least for several more years).
� Fiscal consolidation is an urgent issue . Yet the 10-year JGB yield remains below 1%. The natural disaster and the uncertain political situation dim the prospects of near-term fiscal consolidation. 97% of JGBs are held by Japanese investors and central banks.
� In our view, Japan’s current-account surplus could disappear as early as 2014 . Once Japan’s current account falls into deficit, non-residents will need to finance Japan’s fiscal deficit. Unless the market is convinced of Japan’s fiscal discipline, bond yields will rise markedly. For 2012, Japan is projected to have a 1.3% of GDP current-account surplus.
� The consumption tax rate is now 5%, but in order to avoid much higher government borrowing costs in say 3-5 years, an increase in the consumption tax is needed. The ruling party’s Research Commission has announced plans to raise the tax to 8% in October 2013, and to 10% in April 2015. Yet it is unclear whether those recommendations will be implemented.
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China 2012 Economic Outlook: Soft landing – Part 1
� For 2012, we predict 8.0% GDP growth, after 9.2% in 2011. We revised the GDP growth trajectory in the next three quarters to 7.8%oya, 7.9%oya and 8.1%oya, respectively (previous forecast: 8.0%oya, 8.2%oya and 8.5%oya, respectively), compared to 8.1%oya in 1Q12. Our forecast of full-year GDP growth now stands at 8.0%oya (previous forecast: 8.2%), in light of slowing global growth and the slowdown in credit extension to the private sector.
� The slowdown in domestic demand has been mainly due to the government’s efforts to address imbalances in the economy. Tightening in the housing market and sectors with overcapacity (e.g. auto and steel) is an important part of this effort. However, it tends to pose significant drag on the economy in the near term. Overall, weak economic data pointed at downside risk associated with external and internal headwinds. Policy responses were delayed related to our expectations, driven by concerns about inflation and distractions from political transition. This raised the risk of a delayed and milder economic recovery.
� China’s loans to the household sector equal 19% of GDP, while loans to corporates and government have reached 134% of GDP. State-owned bank loans to local government and to SMEs have become a source of concern for Chinese policymakers.
� Triggered by disappointing economic data in April, PBoC announced a 50bp RRR cut on May 12th, this was the second RRR cut this year. Looking ahead, we expect the central bank to adopt a combination of open market operations and RRR cuts to provide liquidity in the coming months. In particular, we expect 2 more RRR cuts this year, and PBoC is likely to keep policy rate on hold unless the economy deteriorates further.
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China 2012 Economic Outlook: Soft landing – Part 2
� The policy-driven correction in the housing market has caused a slowdown in real estate investment and demand in related industries.
� On the currency front, PBoC announced widening of CN Y trading band to +/-1% from the previous +/-0.5% (effective Apr 6th). Overall, we believe there is still room for CNY appreciation in the coming years, though limited and the pace is likely to slow. We expect CNY to appreciate against USD by about 3% this year and the next year, but the pace will slow markedly after that.
� China’s April CPI inflation rate eased moderately t o 3.4% (vs. 3.6% in March), in line with our expectation. As we have argued that the comeback in March inflation figure was largely driven by seasonal food price increases, especially vegetable prices. Due to continued effort in containing inflation pressure and the favorable base effect, we expect that the CPI inflation will continue to ease in the coming months, falling to around 3% in mid-year.
� Manufacturing costs in China have risen significant ly, to an average of US $450 per month from less than US$200 in 2005. In 2010, Chinese labor costs were almost twice as high as in Thailand, roughly three times higher than in the Philippines, and four times higher than in Indonesia.
� If nominal wage growth continues to accelerate fast er than inflation, then this will strengthen domestic demand and help to reduce China ’s current-account surplus .
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Global imbalances, 2011-2013
Current account and fiscal forecastsCurrent account and fiscal forecasts
1. FY 2011/2012 *Official and IMF forecasts. Source: J.P. Morgan
2012 Nominal GDP
(US$ billion) 2011 2012 2013 2011 2012 2013USA 15684.1 -3.1 -3.2 -3.5 -8.6 -7.7 -6.2
United Kingdom1 2428.5 -1.9 -1.3 -0.7 -8.6 -7.8 -6.2
Germany* 3478.8 5.3 4.7 4.5 -1.0 -1.5 -1.5
France* 2712.0 -2.7 -2.4 -2.1 -5.2 -5.2 -4.4
Italy* 2066.9 -3.1 -2.2 -1.3 -3.9 -2.3 -1.1
Spain* 1397.8 -3.9 -2.0 -1.0 -8.5 -5.9 -4.5
Japan 6344.0 2.0 1.3 0.7 -9.0 -9.1 -9.1
China 8588.5 2.8 2.8 2.1 -1.1 -2.0 -2.0
Taiwan 477.6 8.2 7.9 7.4 -1.8 -2.0 -2.0
Korea 1158.7 2.2 1.5 1.0 0.5 1.5 2.0
Malaysia 291.5 11.5 13.3 15.5 -5.4 -4.7 -4.5
India 2090.8 -3.9 -3.6 -3.5 -5.9 -5.5 -5.7
Brazil 2386.5 -2.1 -2.8 -2.4 -2.6 -3.0 -3.3
Mexico 1173.8 -0.5 -0.9 -1.3 -2.5 -2.4 -2.4
Russia 2053.5 5.3 4.5 1.6 0.8 -0.1 -0.9
South Africa 411.0 -3.3 -3.6 -3.7 -4.8 -4.6 -4.0
Turkey 831.0 -9.9 -7.5 -6.1 -1.3 -1.5 -1.4
Poland 549.4 -4.1 -3.8 -3.5 -5.1 -3.2 -3.0
Israel 260.8 -0.2 -1.7 -3.0 -3.3 -3.5 -3.0
Saudi Arabia* 476.0 17.4 6.5 8.4 14.2 4.2 -1.6
Nigeria 275.9 5.9 6.5 5.8 -3.6 -3.2 -2.8
Current account (% of GDP) Fiscal balance (% of GDP)
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Narrowing of current account imbalances and major policy challenges
� For 2012, the USD value of the forecast current-account surpluses of Germany, Japan, China, Korea, Malaysia, Russia, Israel, Saudi Arabia, U.A.E., and Nigeria equals US$604 billion, which is 1.27 times the estimated current-account deficits of the USA and the UK. Note that the current-account surpluses of the above 10 countries are estimated at 3.8%, 3.0%, and 2.4% of their combined GDP for 2011, 2012 and 2013 respectively.
� Many EM countries have found their currencies appreciating in nominal terms tremendously versus USD in the first quarter of 2012.
� J.P. Morgan estimates that during the period January 2004 through April 2012, CNY appreciated in real effective terms 28.8% (modest relative to some EM countries), and appreciated 3.9% in real effective terms since the bankruptcy of Lehman in September 2008 (slide 29).
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Source: Bloomberg
% change over 1Q12 average as of May 18, 2012% change over 1Q12 average as of May 18, 2012
Recent depreciation in EM FX
-0.31 -0.47 -0.59
-1.28 -1.30-1.60
-2.18 -2.21-2.61
-2.99-3.38
-5.70-5.89
-6.20-6.45 -6.52
-6.97
-7.82
-8.63-9.01
TWD CNY PHP COP SGD THB IDR MYR TRY ILS KRW HUF RON RUB CZK INR MXN ZAR PLN BRL
versus USD
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Emerging Markets real effective exchange rates
Real Effective Exchange rate
% change (positive denotes appreciation)
Real Effective Exchange rate
% change (positive denotes appreciation)
� At end-April 2012, COP, CLP, EGP and SAR stood out as having appreciated significantly more since September 2008 in real effective terms than other EM currencies. Since September 2008, TRY, UAH, PLN, HUF, ISK and MXN have depreciated in real effective terms the most.
� Many EMEA EM central banks have been actively inter vening in the FX market to stem depreciation pressures, but with gen erally limited success . The Romanian and Serbian central banks have both been activelyselling euros on the spot market to prevent their currencies from reaching new lows, but depreciation pressures remain due to election noise and/or potential delays in IMF talks. The Central Bank of Egypt also continues to actively intervene in FX markets despite dwindling official reserves. In Sub-Saharan Africa, the Bank of Ghana has complemented FX intervention with aggressive rate hikes in order to stem the cedi’s decline, also with limited success so far. The National Bank of Poland this week hiked rates in response to persistently above-target inflation, citing zloty weakness as one of the factor. We pencil in one more rate hike for 3Q12, but we believe the zloty will remain biased to depreciate as Euro contagion risks increase in coming months. In Turkey, the CBRT's high effective funding rate (currently at 10.5%) should be enough to prevent further lira weakness. But if the lira continues to perform poorly, the CBRT could hike its ON lending rate and thus push the effective funding rate higher. We do not see the CBRT intervening by selling FX again. Finally, the National Bank of Hungary has been conducting euro sale tenders to reduce the FX demand arising from the early repayment of FX mortgages and the conversion of non-performing FX loans.
� We remain of the view that the currency pegs in Bul garia, the Balticsand the GCC will hold. We also believe that if a eurozone government restructured its government debt, the eurozone itself would remain intact.
DM
Jan 2004-
Apr 2012
Change
Sep 2008-
Apr 2012
Change
Big Mac Index Under (-)
or over (+) valuation
against the dollar1
USD -12.8 1.0
EUR -4.0 -9.8 5.5
JPY -3.7 15.5 -1.0
CHF 2.2 18.9 62.1
AUD 25.5 13.1 17.6
NZD 7.4 18.2 -3.6
CAD -6.9 -2.8 10.2
Latam
BRL 83.9 5.6 35.2
COP 46.1 20.0 8.1
CLP 42.3 15.1 -3.6
MXN -0.3 -10.4 -35.7
EMEA EM
BGN 34.5 5.0 -CZK 30.4 -3.8 -17.9
EGP 59.4 14.4 -38.8
HRK 30.1 0.8 -HUF -4.6 -10.6 -37.4
ILS 17.9 -1.4 -1.7
ISK2 -32.0 -10.5 -
KWD 5.0 0.8 -
KZT -5.4 -0.8 -
LVL2 19.6 -2.6 -28.6
PLN 17.7 -12.2 -38.6
RON 39.0 -7.4 -
RUB 55.7 10.3 -39.3
SAR 5.3 10.7 -36.4
SKK 2.5 -9.4 -
TRY -6.3 -16.3 -15.7
UAH 3.6 -16.3 -
ZAR 7.4 5.9 -41.7
Other EM
CNY 28.8 3.9 -41.9
INR -4.6 -2.6 -61.4
KRW -4.0 -2.7 -24.0Source: J.P.Morgan based on PPI. KZT and LVL data lag by one month.1. The Economist as of 11 Jan 12. 2. Central Bank, based on CPI.
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