Nomura global economic outlook 121016

Nomura | Global Economic Outlook Monthly 15 October 2012

Nomura Securities International Inc.

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

Global Economic Outlook Monthly

Economics Research | North America

Suspending disbelief 15 OCTOBER 2012

Financial markets have positioned for a smooth path to sovereign debt relief in Europe and deficit reduction in the US.

COUNTRY AND REGIONAL ECONOMIC OUTLOOKS

Australia | Slower growth in H2, but back to trend by 2013 4

Brazil | Inflation storm on the horizon 5

Canada | Steady as she goes; growth around trend in H2 2012 6

China | Leading indicators suggest an economic recovery in Q4 7

Euro area | Deeper and more protracted contraction as consolidation bites 8

Hong Kong | Looming fiscal stimulus 9

Hungary | Little clarity on backstop path, rate cuts could still occur 10

India | Still a lot needs to be done 11

Indonesia | Some improvement 12

Japan | Weaker external demand likely leads to a recession in H2 2012 13

Malaysia | Signalling fiscal responsibility 14

Mexico | Growth supported by domestic demand 15

Philippines | Sticking to an easing bias 16

Poland | NBP dovishness but not ready to cut - growth still outperforming 17

Singapore | Tolerating slower growth 18

South Africa | Structural MPC dovishness in a year of crucial political battles 19

South Korea | Prolonged sub-potential growth 20

Taiwan | Hinges on the global outlook 21

Thailand | New growth engines 22

Turkey | A healthy rebalancing 23

United Kingdom | Inflections 24

United States | US budget in the crosshairs 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 3.1 3.0 3.6 3.3 3.4 3.4 2.97 3.21 3.34

Developed 1.1 0.6 1.6 2.1 1.6 1.7 0.38 0.42 0.49

Emerging Markets 5.4 5.7 5.8 4.8 5.4 5.2 6.00 6.35 6.36

Americas 2.3 2.0 2.9 3.6 3.6 3.4 2.08 2.42 2.52

United States* 2.1 1.3 2.7 2.2 1.6 1.4 0.13 0.13 0.13

Canada 2.0 2.1 2.3 1.7 1.9 2.0 1.00 1.75 3.00

Latin America†† 2.9 3.7 3.6 7.7 9.2 8.7 7.49 8.54 8.38

Argentina 2.0 4.0 3.5 25.0 30.8 28.3 15.00 17.00 14.00

Brazil 1.3 4.1 3.5 5.4 5.7 5.5 7.25 9.00 8.50

Chile 5.1 5.8 5.0 3.0 3.1 3.0 5.00 5.50 5.00

Colombia 4.5 4.5 4.5 2.9 3.5 3.5 4.50 4.50 5.50

Mexico 3.7 3.5 3.5 4.1 3.4 3.5 4.50 4.50 5.50

Venezuela 6.8 -1.0 3.0 17.3 32.4 24.6 15.00 17.00 16.00

Asia/Pacif ic 5.6 5.4 5.7 3.2 3.8 4.0 4.66 4.92 4.94

Japan† 2.0 0.5 1.2 0.0 0.0 2.0 0.05 0.05 0.05

Australia 3.6 2.4 2.8 1.6 2.6 2.5 3.00 3.50 4.00

New Zealand 2.7 3.2 3.3 1.7 2.4 2.8 2.75 3.50 4.25

Asia ex Japan, Aust, NZ 6.4 6.5 6.6 3.9 4.6 4.4 5.65 5.90 5.85

China 8.1 7.7 7.5 2.9 4.2 4.0 6.00 6.50 6.50

Hong Kong*** 1.5 2.5 3.5 4.0 3.5 3.9 0.40 0.40 0.40

India** 5.5 6.4 6.6 7.8 7.2 6.9 8.00 7.50 6.75

Indonesia 6.1 6.1 6.2 4.5 5.0 5.1 5.75 6.25 6.75

Malaysia 4.8 4.0 4.6 1.7 2.4 2.5 3.00 3.50 4.00

Philippines 6.0 6.0 5.8 3.4 4.4 4.5 3.50 4.00 4.50

Singapore*** 1.8 3.4 4.2 4.8 2.8 3.8 0.38 0.44 0.50

South Korea 2.3 2.5 3.5 2.2 2.7 3.0 2.75 2.75 3.25

Taiw an 1.5 3.0 4.0 2.0 1.2 1.5 1.88 2.13 2.13

Thailand 5.5 4.5 5.0 3.0 3.0 3.1 2.75 2.75 3.25

Western Europe -0.5 -0.6 0.2 2.6 1.9 1.7 0.50 0.50 0.50

Euro area -0.6 -0.9 0.0 2.6 1.8 1.6 0.50 0.50 0.50

Austria 0.3 0.1 0.8 2.5 2.1 1.8 0.50 0.50 0.50

France 0.0 -0.5 0.5 2.3 1.6 1.5 0.50 0.50 0.50

Germany 0.8 0.2 0.7 2.1 1.7 1.7 0.50 0.50 0.50

Greece -6.4 -4.2 -1.6 1.1 0.1 -0.3 0.50 0.50 0.50

Ireland -0.1 0.4 1.3 2.0 0.5 0.6 0.50 0.50 0.50

Italy -2.5 -2.5 -1.4 3.3 1.8 1.5 0.50 0.50 0.50

Netherlands -0.4 -0.4 0.2 2.8 2.5 1.9 0.50 0.50 0.50

Portugal -3.2 -2.8 0.0 2.9 1.3 0.7 0.50 0.50 0.50

Spain -1.7 -3.0 -1.5 2.6 2.6 1.3 0.50 0.50 0.50

United Kingdom -0.3 0.3 1.2 2.8 2.6 2.3 0.50 0.50 0.50

EEMEA 2.0 2.8 3.6 5.7 4.7 4.6 4.66 4.48 5.31

Czech Republic -0.7 0.9 1.4 3.2 1.9 1.4 0.25 0.50 1.00

Hungary -1.1 0.3 1.2 5.9 5.0 4.1 6.25 5.00 6.00

Israel 2.8 3.3 3.5 2.1 2.6 3.0 2.25 3.00 3.00

Poland 2.6 2.3 3.7 4.0 3.2 3.1 4.75 4.00 5.00

Romania 0.2 0.8 1.3 3.3 4.5 5.0 5.00 6.00 9.00

South Africa 2.4 2.9 3.6 5.4 5.0 5.7 5.00 4.50 6.00

Turkey 3.0 4.5 5.0 9.1 6.7 6.3 5.75 5.75 5.75 Note: Aggregates calculated using purchasing power parity (PPP) adjusted shares of world GDP (table covers about 84% of world GDP on a PPP basis); our forecasts incorporate assumptions on the future path of oil prices based on oil price futures, consensus forecasts and Nomura in-house analysis. Currently assumed average Brent oil prices for 2012, 2013 and 2014 are $112, $109 and $104, respectively. *2012, 2013 and 2014 policy rate forecasts are midpoints of 0-0.25% target federal funds rate range. **Inflation refers to wholesale prices. ***For Hong Kong and Singapore, the policy rate refers to 3M Hibor and 3M Sibor, respectively. †Policy rate forecasts in 2012, 2013 and 2014 are midpoints of BOJ‟s 0-0.10% target unsecured overnight call rate range. ††CPI forecasts for Latin America are year-on- utlook Monthly. Source: Nomura Global Economics.


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

United States

Waning business confidence will continue to dampen hiring and investment.

Ample economic slack should restrain inflation and keep inflation expectations anchored.

We expect the FOMC to continue long-term asset purchases through the third quarter of 2013.

Europe‟s debt crisis and the looming “fiscal cliff” should continue to weigh on growth through the rest of 2012.

Addressing fiscal policy is likely to be contentious, but we ultimately expect agreement on a long-term deficit reduction plan.

Europe

Fiscal tightening, financial deleveraging and sovereign debt market tensions should lead to a deeper-than-expected

recession.

We continue to expect Spain to delay an official call for help, but our baseline remains an ECCL is requested by end-month.

After a phase of relative calm, markets will likely test the backstop and pressure will rebuild in Q1 around weak sovereigns.

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

Chances of a rate cut in Dec (our baseline) have reduced, though the ECB needs to respond to weaker growth, in our view.

We expect inflation to settle close to target in the UK but in the euro area to remain above 2% for most of 2012.

The BoE extended liquidity and funding support before announcing £50bn QE in July. We expect £25bn more in November.

Japan

Deterioration of external demand is likely to lead to negative growth in Q2 and Q3 2012.

Economic recovery in Asia should help Japan get back on a moderate recovery track from early 2013.

We expect the BOJ to announce a further expansion of its Asset Purchase Program by Q4 2012.

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

Asia

The export slump calls for policy stimulus, but raises the risk next year of a build up in debt, inflation and asset price

bubbles.

China: Macro data are mixed, but policy easing is picking up speed, supporting the growth outlook for Q4.

Korea: We expect the BOK to stay on hold at 2.75% through 2013 as growth and inflation should rise modestly from low

base

India: Recent reforms have surprised positively and growth is bottoming out. But a V-shaped recovery is unlikely.

Australia: With indications that growth is slowing due to external factors, the RBA is likely to cut rates in November.

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: With inflation now falling fast into target and growth slowing, the SARB may cut rates further.

Hungary: In a difficult spot having rejected the IMF aid conditions over policy concerns, market pressure should force a deal

in 2013.

Poland continues to outperform strongly , a recession is difficult to envisage, as such we don‟t see cuts occurring this year.

Turkey: Rebalancing continues and is likely to pave the way for an upgrade to investment grade.

Economic growth in Brazil will likely be well below 2% in 2012, despite the Selic policy rate falling to 7.50%.

Mexico: Inflation will likely remain above the target and growth will likely moderate in H2 2012.

Argentina‟s growth looks set to slow down in 2012, but inflation to stay high. ARS real appreciation should continue.


4

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

Martin Whetton +61 2 8062 8611 [email protected]

Australia | Economic Outlook

Slower growth in H2, but back to trend in 2013

Growth is likely to slow in H2, due to the impact on exports and the terms-of-trade of

slower Asian growth. We believe the RBA will cut rates by another 25bp in Q4.

Activity: After a strong start to the year, the Australian economy grew at trend in Q2.

Household spending was resilient, likely supported by the previous cuts in the policy rate, while

investment slowed markedly, especially in the housing sector. Net exports contributed positively

to growth as exports remained strong while imports slowed. However, net exports should act as

a small drag on the economy later this year, as imports should remain strong owing to robust

business investment expectations but exports should still be affected by slowing growth in Asia

and the impact of the recent currency strength. Moreover, the decline in commodity prices will

also impact the terms-of-trade, likely leading to a decline in gross national income. We also

expect fiscal policy to continue to act as a small drag on the economy.

Inflation: CPI inflation dropped sharply in H1 and likely bottomed in Q2. We expect inflation to

rise in H2, owing to the impact from the carbon tax and a reduction in the deflationary pressures

from the past appreciation of the Australian dollar. Underlying inflation has also moderated in

recent quarters, and we expect it to remain close to the 2-3% RBA target over the forecast

horizon.

Policy: The RBA cut its policy rates by 25bp at the October meeting and signaled that it is likely

to cut again. We expect a further 25bp reduction in the official rate before the end of the year

but this depends more on external factors, such as continued weakness in Asia and the

eurozone crisis, than on domestic factors. Moreover, the latest budget shows that fiscal policy

will be restrictive this year, leaving the burden of stimulating the economy to the RBA.

Risks: A disorderly resolution to the European debt crisis, a strong currency and a sharp

slowdown in Chinese growth remain the main downside risks to the outlook. On the flip side, an

improvement in risk sentiment, increased global trade and renewed increases in commodity

prices represent upside risks to growth and inflation.

Fig. 1: Details of the forecast

% q-o-q ar. 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2011 2012 2013 2014

Real GDP (% y-o-y) 4.4 3.7 3.1 3.0 2.3 2.3 2.5 2.7 2.1 3.6 2.4 2.8

Real GDP 5.6 2.6 2.1 1.9 2.5 2.8 2.7 2.8 2.1 3.6 2.4 2.8

Personal consumption 7.5 2.3 2.1 2.1 2.3 2.5 2.5 2.6 3.3 3.8 2.3 2.6

Private investment 15.8 2.3 6.6 7.1 8.5 8.5 8.6 8.7 11.4 9.9 7.6 8.4

Business investment 23.0 4.7 8.0 8.5 10.1 10.0 9.9 9.9 14.8 14.4 9.2 9.7

Dw elling investment -7.9 -6.7 1.1 1.4 2.0 2.4 2.9 3.3 1.3 -5.4 1.5 3.2

Government expenditures 4.3 7.8 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 0.1 2.5 0.3 -0.2

Exports -3.5 10.2 6.0 6.0 7.5 8.0 8.0 8.0 -1.3 5.7 7.4 8.0

Imports 4.4 3.7 6.0 8.0 7.6 7.5 7.5 8.0 11.5 7.5 7.2 8.0

Contributions to q-o-q GDP:

Domestic f inal sales 8.8 3.6 2.1 2.2 2.6 2.7 2.7 2.8 3.5 4.1 2.6 3.0

Inventories -1.2 -2.2 0.0 0.1 0.0 0.1 0.0 0.0 0.8 -0.2 -0.1 -0.1

Net trade -2.0 1.2 0.0 -0.4 -0.1 0.0 0.0 -0.1 -2.1 -0.3 0.0 -0.1

Unemployment rate 5.2 5.2 5.2 5.3 5.4 5.5 5.5 5.5 5.1 5.2 5.4 5.3

Employment, 000 25 40 1 12 12 23 46 58 11 19 35 71

Consumer prices 1.6 1.2 1.6 2.1 2.7 2.8 2.4 2.5 3.4 1.6 2.6 2.5

Trimmed mean 2.1 1.9 2.3 2.4 2.6 2.6 2.5 2.5 2.7 2.2 2.6 2.5

Weighted median 2.2 2.0 2.3 2.2 2.5 2.6 2.5 2.5 2.5 2.2 2.5 2.5

Fiscal balance (% GDP) -3.4 -1.8 -0.2 0.1

Current account balance (% GDP) -2.3 -2.6 -3.0 -3.0

RBA cash rate target 4.25 3.50 3.50 3.00 3.00 3.00 3.25 3.50 4.25 3.00 3.50 4.00

3-month bank bill 4.30 3.54 3.36 3.05 3.00 3.00 3.30 3.60 4.50 3.05 3.60 4.00

2-year government bond 3.47 2.46 2.49 2.50 2.50 2.55 2.65 2.70 3.16 2.50 2.70 3.10



AUD/USD 1.04 1.02 1.05 1.03 1.00 0.99 1.00 1.00 1.02 1.03 1.00 1.00 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 15 October 2012. 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

Inflation storm on the horizon

The combination of a record low policy rate and a “dirty band” preventing BRL from

appreciating will likely lead to soaring inflation in 2013

Activity: The Brazilian economy had a fairly poor start to the year, with H1 GDP growing merely

0.6% y-o-y, and investment falling 2.9% y-o-y. Policymakers have rolled out a series of

monetary and fiscal stimuli this year in an attempt to revive growth. However, given the

structural issues on the supply side, ongoing drags from credit markets and a still troubled

international environment, GDP growth will likely remain sluggish at 1.3% in 2012. Given the

gradually improving global growth profile and the lagged effects of domestic stimuli, we should

see more robust growth in 2013, reaching 4.1%.

Inflation: Consumer prices are currently around 5.3% and we expect inflation pressures to

accelerate, given the ongoing commodity price shock and the very accommodative monetary

policies in Brazil. Tradable goods prices are low at around 3.0%, yet several factors – inclement

weather in Brazil and the US, the recent surge in world food prices and BRL above 2.0 – are

already pushing up domestic food prices and we expect this to continue, with inflation ending

2012 at 5.3%. As a result of faster growth, a low base of comparison, the lagged effects of a

weaker currency and a lower policy rate, inflation will likely accelerate in 2013, ending the year

at 5.7%.

Policy: The Central Bank of Brazil (BCB) has slashed its policy rate, Selic, by 525bp since

August 2011, and stated in the October communiqué that “stability of monetary conditions for a

sufficiently long period is the best strategy.” We believe the “stability for long period” language

offers a strong signal that the easing cycle is coming to an end, and the key question now is

how long the BCB will stay put, even in the face of rising inflation.

Risks: The biggest risk, we believe, is the likelihood of a persistent supply shock as a result of

the recent run-up in commodity prices, further amplified by monetary easing from major central

banks. Such a shock should push up inflation rapidly and force the BCB to hike Selic in 2013,

despite still slow GDP growth, leading to a state of lower growth, higher inflation and still higher

rates (see “Inflation storm on the horizon”, August 15 2012). We now expect the new hiking

cycle to start in Q2 2013, as rising consumer prices threaten to go above 6%, and we think Selic

will likely finish 2013 at 9%.

Details of the forecast

Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-on-year changes for Q4. Trade data are a 12-month sum. Interest rate and currency forecasts are end of period. Contributions to GDP growth do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 12 October 2012. Source: Nomura Global Economics.

% y-o-y change unless noted 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 2012 2013

Real GDP 2.1 1.8 0.8 0.5 1.8 2.1 3.3 4.4 1.3 4.1

Personal consumption 2.8 2.8 2.5 2.4 4.2 4.1 4.4 5.7 3.3 5.0

Fixed investment 2.5 2.0 -2.1 -3.7 -1.5 -1.1 4.5 8.1 -2.1 6.2

Government expenditure 1.2 1.3 3.4 3.1 3.8 3.5 4.0 1.2 4.0 3.6

Exports 4.1 3.7 6.6 -2.5 -1.7 -2.3 -0.5 5.5 1.4 4.5

Imports 5.8 6.4 6.3 1.6 5.2 2.7 7.5 11.3 5.1 9.8

Contributions to GDP growth (pp)

Industry 0.5 0.4 -0.4 0.1 0.4 0.5 0.8 1.1 0.3 1.0

Agriculture 0.1 0.1 0.0 0.0 0.1 0.1 0.2 0.2 0.1 0.2

Services 1.2 1.0 0.9 0.3 1.0 1.2 1.9 2.5 0.7 2.3

IPCA (consumer prices) 7.3 6.5 5.2 4.9 5.3 5.4 5.7 5.8 5.4 5.7

IGPM (wholesale prices) 7.5 5.1 3.2 5.1 8.1 7.5 7.0 6.4 6.0 5.6

Trade balance (US$ billion) 5 30 29 24 22 20 18 21 20 25

Current account (% GDP) -3.0 -3.0

Fiscal balance (% GDP) -2.0 -2.0

Net public debt (% GDP) 36.0 35.0

Selic % 12.00 11.00 9.75 8.50 7.50 7.25 7.25 8.25 7.25 9.00

BRL/USD 1.88 1.86 1.83 2.01 2.03 1.98 1.92 1.88 1.98 1.85


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6

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

Canada | Economic Outlook

Suspending disbelief

Financial markets have positioned for a smooth path to sovereign debt relief in Europe and deficit reduction in the US.

Activity: Growth in Q2 was around potential, supported by business investment and inventory

accumulation. Net exports were the major drag to growth, as production disruptions in the oil

industry have resulted in anemic exports gains, while strong domestic demand, led by business

investment, has boosted imports. For the rest of 2012, we expect growth of around 2%. We

expect personal spending growth to remain modest as households gradually reduce their debt

burdens and income growth remains slow. Business investment in machinery and equipment is

likely to slow, after a strong Q2, but should remain strong. Below-trend global growth and the

strong Canadian dollar will likely mean that net exports are not a significant source of growth.

However, the impact from the strong currency is partly reversed by weaker funding costs, owing

to strong foreign inflows into Canadian securities.

Inflation: With some spare capacity and the output gap likely to close in 2013, we think

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

gradually to 1.6%, as the impact from high food and energy prices gradually disappears, and

end the year close to the central bank‟s 2% target. Core inflation should follow a similar pattern,

reaching a low of 1.7%.

Policy: With considerable monetary stimulus in place, and a narrowing of the output gap, we

expect the BoC to remain on hold in 2012, waiting for some clarity on the US fiscal cliff and the

eurozone crisis before reducing the amount of stimulus and taking any further action. We expect

the BoC to be cautious about tightening monetary policy and to bring rates to 1.75% by end-

2013. The latest budgets show that the various levels of government are in consolidation mode,

causing a small drag on the economy.

Risks: A disorderly resolution of the euro-area debt crisis remains an immediate risk to the

Canadian economy, However, we think the threat from the US „fiscal cliff‟ is much bigger and

would have a much larger impact on the Canadian economy, given the strong economic links

between the two countries. On the upside, domestic demand may be more resilient than

expected, and the US economy may perform better than expected. Moreover, QE3 in the US

could be positive for Canada by boosting commodity prices and the terms of trade.


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 15 October 2012. Source: Bank of Canada, Statistics Canada, Nomura Global Economics.

% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2011 2012 2013 2014

Real GDP 1.8 1.8 1.9 2.0 2.2 2.3 2.3 2.2 2.4 2.0 2.1 2.3

Personal consumption 0.7 1.1 1.5 1.5 1.8 1.8 1.8 1.8 2.4 1.6 1.7 1.8

Non residential f ixed invest 5.8 9.4 7.0 7.0 6.5 6.5 6.5 6.5 13.1 6.5 6.8 6.5

Residential f ixed invest 11.5 1.8 4.0 4.0 5.0 5.0 5.0 5.0 2.3 5.9 4.5 5.0

Government expenditures -2.0 -0.5 0.0 0.0 0.3 0.3 0.3 0.3 0.1 -1.6 0.2 0.3

Exports 4.0 0.8 4.0 4.2 4.3 4.3 4.3 4.2 4.6 4.8 4.0 4.2

Imports 5.2 6.4 4.0 4.0 4.2 4.2 4.2 4.2 7.0 4.0 4.3 4.2

Contributions to GDP:

Domestic f inal sales 1.4 1.8 2.0 2.0 2.2 2.2 2.2 2.2 3.0 1.8 2.1 2.2

Inventories 0.9 1.9 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.1 0.0

Net trade -0.4 -1.8 -0.1 0.0 0.0 0.0 0.1 0.1 -0.8 0.2 -0.1 0.1

Unemployment rate 7.4 7.3 7.3 7.3 7.3 7.2 7.2 7.2 7.5 7.3 7.2 7.1

Employment, 000 41 120 17 50 60 60 60 60 51 57 60 63

Consumer prices 2.3 1.6 1.3 1.7 1.8 1.8 2.0 2.0 2.9 1.7 1.9 2.0

Core CPI 2.1 1.7 1.6 1.7 2.0 2.0 2.0 2.0 1.7 1.8 2.0 2.0

Fiscal balance (% GDP) -4.4 -3.8 -3.0 -2.2


Overnight target rate 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.75 1.00 1.00 1.75 3.00

3-month T-Bill 0.91 0.87 0.97 1.00 1.00 1.00 1.30 1.80 0.82 1.00 1.80 3.00




USD/CAD 1.00 1.02 0.98 0.98 1.00 1.00 0.99 0.97 1.02 0.98 0.97 0.97



7

Zhiwei Zhang +852 2536 7433 [email protected]

Wendy Chen +86 21 6193 7237 [email protected]

China | Economic Outlook

Leading indicators suggest an economic recovery in Q4

The growth outlook depends on the strength of housing and infrastructure investments

Forecast change: We revise down our GDP growth forecast for 2013 to 7.7% from 7.9% as our

European team revised down its 2013 euro-area growth forecast to -0.9% from 0.8%. We keep

our 2012 GDP growth forecast unchanged at 8.1%.

Activity: Macro data remain mixed but recent data releases provided positive signals. Growth in

industrial production slowed to 8.9% y-o-y in August from 9.2% in July; fixed asset investment

eased to 20.2% from 20.4%, while retail sales rose marginally to 13.2% from 13.1%. In contrast,

export growth rose sharply to 9.9% y-o-y in September from 2.7% in August, import growth

rebounded to 2.4% from -2.6%, and the PMI rebounded to 49.8 from 49.2, with a big jump in

new orders. Leading indicators in the property sector rose sharply in August: growth in new

housing starts jumped to 14% y-o-y from -27% in July, while developers' land purchase growth

snapped back to 66% from -39% in July.

Inflation: CPI inflation edged down to 1.9% y-o-y in September from 2.0% in August, driven

mostly by base effects. We believe CPI inflation climb to 3.1% in Q4 and 4.2% in 2013 as

growth rebounds and food prices accelerate. The PPI dropped to -3.6% y-o-y from -3.5%.

Policy: Policy easing has picked up. The government announced last month that it had

approved many infrastructure projects with a total investment value of about RMB1trn. Total

social financing rose sharply to RMB 1.6trn in September from 1.2trn in August. This reinforces

our view that the authorities are becoming less tolerant of slower GDP growth as the economy

approaches the official annual target of 7.5%, while the upcoming Communist Party meeting on

8 November imparts a further sense of urgency. We expect the People‟s Bank of China to cut

the bank reserve requirement ratio (RRR) by 50bp in October to boost infrastructure investment

further. We maintain our forecast for no interest rate cuts over the remainder of 2012, as a cut

would risk reigniting the property bubble and could damage bank profitability.

Risks: The key risks to our forecast are related to exports and the property market. If crises

escalate in Europe or the US, our export forecast may be too optimistic. If property prices rise

quickly and the government is forced to take further action to cool the sector, any rebound in

property investment could be temporary and offer less support for a growth recovery in Q4.


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

Real GDP 8.1 7.6 7.7 8.8 8.4 8.0 7.4 7.0 8.1 7.7 7.5

Consumer prices 3.8 2.9 1.9 3.1 3.5 4.2 4.5 4.5 2.9 4.2 4.0

Core CPI 1.5 1.3 1.1 1.8 2.0 2.1 2.4 2.1 1.4 2.2 2.0

Retail sales (nominal) 14.9 13.9 13.2 15.0 16.2 15.9 15.5 15.6 14.3 15.8 16.0

Fixed-asset investment (nominal, ytd) 20.9 20.4 20.4 21.0 20.8 21.2 21.3 22.0 21.0 22.0 20.0

Industrial production (real) 11.6 9.5 9.2 12.0 10.9 10.7 10.5 10.3 10.6 10.6 10.5

Exports (value) 7.6 10.5 4.5 6.0 3.0 4.0 6.0 6.0 7.1 5.4 6.0

Imports (value) 6.9 6.5 1.4 8.0 7.0 8.0 9.0 9.0 5.6 8.3 10.0

Trade surplus (US$bn) 1.1 68.8 79.5 41.8 -16.0 53.4 70.4 29.4 191.2 137.2 65.7

Current account (% of GDP) 1.7 1.0 -0.4

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

New increased RMB loans 8.0 9.0 9.0

1-yr bank lending rate (%) 6.6 6.3 6.0 6.0 6.0 6.0 6.3 6.5 6.0 6.5 6.5

1-yr bank deposit rate (%) 3.5 3.3 3.0 3.0 3.0 3.0 3.3 3.5 3.0 3.5 3.5

Reserve requirement ratio (%) 20.5 20.0 20.0 19.0 18.0 18.0 18.0 18.0 19.0 18.0 17.0

Exchange rate (CNY/USD) 6.29 6.35 6.28 6.28 6.27 6.25 6.24 6.22 6.28 6.22 6.22 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 15 October 2012. Source: CEIC and Nomura Global Economics.




8

Nick Matthews +44 (0) 20 710 25126 [email protected]

Stella Wang +44 (0) 20 710 20599 [email protected]

Euro Area | Economic Outlook

Deeper and more protracted contraction as consolidation bites

We have revised down our growth forecasts and expect aggressive fiscal

consolidation to deepen recessionary forces. Spain continues to delay a call for help.

Activity: We downgraded our forecasts in Euro area Economics: Marking down growth, 5

October, and expect recessionary forces to deepen across the area. While foreign demand is

likely to remain weak, we expect aggressive fiscal consolidation in a growing number of large

economies to adversely affect domestic demand in those countries. With no monetary policy

offset and already negative output gaps, we (like the IMF) believe the fiscal multiplier might be

close to unity in the case of Italy and Spain and these countries will experience much deeper

recessions than currently expected (particularly by their respective governments). We forecast

euro area GDP to contract by 0.9% in 2013 after a slightly smaller contraction in 2012.

Inflation: We expect euro area headline inflation to fall back to 1.8% on average next year and

then to 1.6% in 2014, driven by softening core inflation trends due to weak domestic demand.

Upside risks will likely remain from further additional administered price/indirect tax increases to

deliver fiscal consolidation in some member states.

Policy: No discussion on changing interest rates at the last ECB meeting suggests the chances

of a rate cut in December (our baseline) are reduced, though we think the ECB will need to

revise down its growth forecast much further in December. President Draghi continues to stress

conditionality as the essential part of Outright Monetary Transactions (OMTs) and also set out

further limits (i.e. purchases will stop around quarterly reviews and full market access is

required; for more details see Ready and Waiting... (Post ECB meeting), 4 October or last

month‟s GEOM, 10 September). These are further indications that OMTs should not be

confused with a full QE-type programme as they come with more strings attached than investors

would have liked, which could make smooth execution more difficult. Spain continues to delay

an official call for help, but our baseline remains an ECCL is requested by end-month.

Risks: A number of risks and limits to current support mechanisms remain related to

conditionality, maturity restrictions, limited EFSF/ESM financial resources and the uncertain

seniority status. Whether the sovereign bank nexus can be effectively broken now also needs

clarification, given the recent guidance on ESM direct bank recaptalisation from some AAA

countries that legacy assets should be the responsibility of national authorities (see Implication

of statement on ESM from Germany, Netherlands and Finland, 26 September).


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

Real GDP -0.1 -0.7 -1.4 -1.6 -0.8 -0.6 -0.2 -0.1 -0.6 -0.9 0.0

Household consumption -0.7 -1.0 -1.7 -1.7 -1.7 -1.5 -1.5 -1.5 -1.1 -1.6 -1.4

Fixed investment -5.1 -3.5 -7.0 -6.6 -5.6 -4.5 -3.9 -3.6 -3.9 -5.3 -3.2

Government consumption 0.7 0.4 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 0.0 -0.7 -0.5

Exports of goods and services 2.6 5.3 0.9 -3.1 0.6 1.6 2.6 2.6 2.3 0.8 2.7

Imports of goods and services -1.2 3.7 -4.7 -7.0 -2.8 -2.1 -0.8 -0.4 -1.4 -2.9 0.2


Domestic f inal sales -1.3 -1.1 -2.5 -2.4 -2.2 -1.9 -1.7 -1.6 -1.4 -2.0 -1.4

Inventories -0.6 -0.4 -1.5 -0.9 -0.2 -0.5 -0.1 0.1 -0.9 -0.5 0.2

Net trade 1.8 0.9 2.6 1.7 1.6 1.7 1.6 1.4 1.7 1.7 1.3

Unemployment rate 10.9 11.1 11.4 11.5 11.6 11.8 11.9 12.0 11.2 11.8 12.0

Compensation per employee 1.9 1.7 1.8 1.4 0.9 0.7 0.4 0.3 1.7 0.6 0.6

Labour productivity 0.4 0.2 -0.2 -0.4 -0.7 -0.5 -0.3 0.1 0.0 -0.4 0.5

Unit labour costs 1.5 1.4 2.0 1.8 1.6 1.2 0.7 0.2 1.7 0.9 0.1

Fiscal balance (% GDP) -3.3 -3.1 -2.9

Current account balance (% GDP) -0.3 0.1 0.5

Consumer prices 2.7 2.5 2.6 2.5 2.0 1.9 1.7 1.5 2.6 1.8 1.6

ECB main refi. rate 1.00 1.00 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

3-month rates 0.78 0.65 0.22 0.52 0.67 0.67 0.67 0.67 0.52 0.67 0.67

10-yr bund yields 1.81 1.60 1.41 1.25 1.31 1.38 1.44 1.50 1.25 1.50 1.75

$/euro 1.32 1.25 1.29 1.28 1.25 1.20 1.18 1.18 1.28 1.15 tbc Notes: Quarterly real GDP and its contributions are seasonally adjusted annualised rates. Unemployment rate is a quarterly average as a percentage of the labour force. Compensation per employee, labour productivity, unit labour costs and inflation are y-o-y percent changes. Interest rate and exchange rate forecasts are end of period levels. Numbers in bold are actual values, others forecast. Table reflects data available as of 10 September 2012. 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

Looming fiscal stimulus

We expect expansionary FY13 budget given weak external demand.

Forecast change: We cut our GDP growth forecast from 3.5% to 2.5% for 2013.

Activity: The volume of retail sales growth increased to 3.2% y-o-y in August from 1.4% in July.

We believe that, although private consumption is weakening, it should not weaken sharply, as it

is still supported by a tight labour market and positive wealth effects from buoyant property

prices. Further, domestic demand should remain supported by infrastructure works, while visitor

arrival numbers continue to show double-digit growth (up 20% y-o-y in August). That said, Hong

Kong‟s export slump looks set to continue into at least Q3, and could start having multiplier

effects on domestic demand. Looking ahead, we expect fiscal stimulus and a moderate

improvement in the external demand to lift real GDP growth to 2.5% in 2013 up from 1.5% in

2012. A modest recovery in the global economy should boost GDP growth further to 4% in 2014.

Inflation: CPI inflation surged to 3.7% y-o-y in August from 1.6% in July on higher food prices,

although the rise in residential prices has tapered off and growth in residential mortgage lending

has moderated, which, with a lag, should help ease inflationary pressures. Inflation should

remain moderate through 2013, driven by inflation-mitigating fiscal measures (e.g., a temporary

waiver of public housing rents and subsidies on electricity) but higher food and fuel prices would

restrict a sharp fall. We see CPI inflation slowing from 4.0% in 2012 to 3.5% in 2013. In 2014, a

positive output gap will likely push up CPI inflation to 3.9%.

Policy: Hong Kong's fiscal policy is expansionary as the budget for FY12 (starting in April 2012)

includes not only inflation-mitigating measures but also an income tax reduction for individuals

of up to HKD12,000 per person and a 14.8% increase in capital expenditure. This should

continue to help stabilize inflation and support the job market. We expect the FY13 budget to

also be expansionary given that external demand remains weak.

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

in Asia to a deeper-than-expected global economic downturn. An economic hard-landing in

China would be especially detrimental to Hong Kong through both trade and financial channels.



Real GDP (sa, % q-o-q, annualized) 1.6 0.8 3.0 3.5 -1.3 4.1 4.2 7.7

Real GDP 0.7 1.1 1.7 2.2 1.2 2.3 2.6 3.6 1.5 2.5 3.5

Private consumption 6.5 3.7 2.2 1.8 2.4 3.4 3.8 4.8 3.5 3.6 4.4

Government consumption 2.3 3.5 3.0 3.2 3.5 3.7 4.0 4.2 3.0 3.8 4.4

Gross f ixed capital formation 12.9 5.7 5.4 4.9 5.8 5.8 5.7 5.6 7.0 5.7 6.1

Exports (goods & services) -3.9 0.1 0.7 2.3 4.9 5.4 5.6 6.2 -0.2 5.5 7.2

Imports (goods & services) -2.0 0.8 1.4 2.5 6.0 6.3 6.7 6.9 0.7 6.5 7.6

Contributions to GDP (% points)

Domestic f inal sales 7.4 4.1 3.0 2.6 3.2 4.0 4.3 4.9 4.2 4.1 4.8

Inventories -1.8 -1.4 0.4 0.0 0.2 0.3 0.4 0.1 -0.7 0.3 -0.5

Net trade (goods & services) -4.1 -1.6 -1.3 -0.2 -2.1 -2.0 -1.8 -1.0 -1.8 -1.7 -0.6

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

Consumer prices 5.2 4.2 2.9 3.6 3.2 3.4 3.6 3.8 4.0 3.5 3.9

Exports -1.2 2.0 5.7 7.4 9.6 11.0 10.9 11.2 3.6 10.7 12.3

Imports 0.9 2.3 5.5 7.0 10.6 11.5 11.5 11.7 4.0 11.3 12.4

Trade balance (US$bn) -12.7 -15.9 -14.8 -15.6 -15.0 -18.1 -17.2 -18.0 -58.9 -68.3 -77.2

Current account balance (% of GDP) 2.7 -0.2 -1.4


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 11 October 2012. Source: CEIC and Nomura Global Economics.




10

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

Hungary | Economic Outlook

Little clarity on backstop path, rate cuts could still occur

We think 2012 will be a crunch year, when funding difficulties and recession throw

fiscal policy off track. An IMF backstop is now expected in January/February.

Policy, fiscal and funding: Since the 2010 election there has been a fiscally conservative but

highly unorthodox policy, which we saw as unsustainable owing to one-off and distortive

measures. Add in downgrades, deleveraging and patchy capital flows and we think things will

come to a head this year with still some potential funding difficulties. We think the IMF and EU

are needed to prevent this, by providing a backstop and engendering a change in policy

direction. The government can now fund its FX redemptions until February and as such, talks

won‟t restart in the near future. Thus, we think a backstop is not likely to be in place until around

January/February time. A key barrier to talks, however, is the financial transactions tax on the

central bank (an issue which the EU has started treaty infringement proceedings on) as well as

the macro assumptions in the budget which are too bullish. Changing these factors would

create a significant hole in the budget. In addition, the government is attempting to push on with

costly and unfunded growth and jobs programmes. We judge them to be unfunded, in part,

because they purport to use budget reserves that will already be eaten up by low growth

according to our model. Once the economy starts its recovery and a backstop is provided, we

think EURHUF could strengthen to around 294 by end-2013 from “crisis” lows, which required

the government to act (around 315-320). We are concerned about the sustainability of the

current government programme into the 2014 elections given the lack of growth and popularity,

so we do not see an IMF/EU backstop lasting beyond the end of 2013.

Rates and inflation: We expect the bulk of the rate cuts to start once a deal is reached with the

IMF/EC on a backstop in January/February. Our medium-run forecast, regardless whether there

are “early” cuts or not, is that by Q3 of next year rates will be down to around 5.00% thanks to

heavy and rapid cuts after a backstop deal is signed. The headline inflation picture is very bleak

throughout much of 2012, with a peak of 6.6% in Q3, and we see it remaining above target until

late Q2 2014 due to new tax increases. However, core inflation remains very subdued thanks to

low growth.

Growth: We expect a sharp slowdown in consumption as unemployment climbs and exposure

to eurozone core consumption markets takes a hit in this second crisis period after the balance

of payments event in 2008. However, net trade will likely remain supportive as the surplus

climbs through 2012. Private sector investment will probably contract too, accelerated by

deleveraging. However, there is likely to be a lasting impact from the government‟s policy,

weakening FDI with little external help. Our key concern is potential declining growth over the

past four years from 4.0% before the crisis, first to 2.5% and now to just 1.75%.

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

2010 2011 2012 2013

Real GDP % y-o-y 1.2 1.7 -1.1 0.3

Nominal GDP USD bn 128.7 140.2 150.0 150.7

Current account % GDP 1.09 1.4 2.0 1.0

Fiscal balance % GDP -3.2 -6.2 -4.2 -3.0

Structural balance -5.5 -5.0 -6.5 -5.5

CPI % y-o-y * 4.7 4.1 6.0 4.8

CPI % y-o-y ** 4.9 3.9 5.9 5.0

Core CPI ex VAT % y-o-y ** -0.4 2.6 2.1 2.7

Unemployment rate % 10.8 10.7 11.5 11.0

Reserves EUR bn *** 32.3 35.1 30.8 28.1

External debt % GDP*** 139.8 138.9 131.6 130.6

Public debt % GDP 81.3 82.8 80.9 79.5

MNB policy rate %* 5.75 7.00 6.25 5.00

EURHUF* 279 315 286 294

1.5

2.5

3.5

4.5

5.5

6.5

Jan-2011 Sep-2011 May-2012 Jan-2013 Sep-2013

Constant tax core

Headline

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



11

Sonal Varma +91 22 403 74087 [email protected]


India | Economic Outlook

Still a lot needs to be done

The pickup in reform momentum is positive, but fundamental issues affecting

investments and inflation have yet to be addressed.

Forecast change: We are revising down our GDP forecasts to 6.4% from 6.6% in 2013 and to

6.6% from 6.8% in 2014 to reflect weaker external demand.

Activity: Recent reforms have reversed months of policy paralysis and boosted sentiment.

However, economic fundamentals will take time to catch up for various reasons. First, many of

these announcements still need to be implemented. Second, external demand remains very

fragile going into 2013. Third, risks on the fiscal deficit and inflation remain in place. As such, we

expect weak exports and investment demand to keep real GDP growth subdued at 5.5% and

6.4% y-o-y, in 2012 and 2013 respectively from 7.5% in 2011.

Inflation: WPI inflation jumped back to 7.6% y-o-y in August and is likely to inch closer toward

8% in the coming months due to the direct and indirect impacts from the recent hike in

administered fuel prices. Recent INR appreciation could reduce imported inflationary pressures,

but with food inflation likely to accelerate, we expect headline inflation to remain sticky above

7%. A sudden sharp movement in fruit and vegetable prices in either direction is a key risk.

Policy: We expect the Reserve Bank of India (RBI) to keep policy rates unchanged in 2012 as

inflation remains elevated and the fiscal deficit large. We expect the RBI to cut rates by 50bp in

H1 2013 and by another 75bp in 2014, but only once inflation eases. We anticipate fiscal

slippage of 0.7 percentage points (pp) from the budgeted 5.1% of GDP in FY13 (year ending

March 2013) due to the government‟s inability to control subsidies and reduced tax revenues

from weak growth. We expect the fiscal deficit to remain above 5% of GDP for the next two

years, as populist policies take hold ahead of the April 2014 elections.

Risks: A rise in oil prices and a sharp global downturn are the key downside risks. A revival in

global growth and quick turnaround by the government on investment projects are upside risks.



Real GDP (sa, % q-o-q, annualized) 5.9 5.3 6.1 6.5 7.0 5.9 6.1 7.1

Real GDP 5.3 5.5 5.5 5.7 6.4 6.4 6.3 6.5 5.5 6.4 6.6



Fixed investment 3.6 0.7 2.0 3.9 6.1 9.0 9.1 9.3 2.5 8.3 8.4

Exports (goods & services) 18.1 10.1 9.9 9.1 4.5 9.2 8.8 9.4 12.0 7.8 9.7

Imports (goods & services) 2.0 7.9 6.5 5.8 9.5 10.4 6.7 4.7 5.6 7.6 9.7


Domestic f inal sales 1.3 5.7 5.3 5.4 7.7 7.5 6.3 5.7 4.4 6.8 7.1

Inventories 0.0 0.0 0.1 0.1 0.0 0.1 0.2 0.2 0.0 0.1 0.2

Net trade 4.0 -0.2 0.1 0.1 -1.4 -1.2 -0.2 0.7 1.1 -0.5 -0.7

Wholesale price index 7.5 7.5 8.0 8.2 7.5 7.3 7.0 7.2 7.8 7.2 6.9

Consumer prices 7.2 10.1 9.7 10.7 10.0 8.7 8.7 9.4 9.5 9.2 9.0

Current account balance (% GDP) -3.7 -2.7 -2.8


Repo rate (%) 8.50 8.00 8.00 8.00 7.75 7.50 7.50 7.50 8.00 7.50 6.75

Reverse repo rate (%) 7.50 7.00 7.00 7.00 6.75 6.50 6.50 6.50 7.00 6.50 5.75

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

10-year bond yield (%) 8.54 8.18 8.15 8.10 7.80 7.80 7.80 7.50 8.10 7.50 7.00

Exchange rate (INR/USD) 51.2 54.0 52.7 54.5 55.9 57.3 58.6 60.0 54.5 60.0 57.0

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 for industrial workers. Fiscal deficit is for the central government and for fiscal year, e.g, 2012 is for the year ending March 2013. Table reflects data available as of 11 October 2012. 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

Some improvement

External balances are improving but could remain under pressure given the weak

global backdrop and risks of domestic policy swings.

Forecast changes: For 2013, we lower our forecasts for GDP growth to 6.1% from 6.3%, the

policy rate to 6.25% from 6.50%, and the fiscal balance to -2.0% of GDP from -1.9%.

Activity: Our forecast of a slowdown in H2 growth was supported by the sharp drop in export

growth, which fell 16.2% y-o-y in July/August after a 9.0% drop in Q2. The weakness was broad

based and is likely to persist given weak global demand. Indeed, our European team‟s

downgrade of their 2013 GDP growth forecast for the euro area led us to trim our 2013 GDP

growth forecast. But our downgrade is relatively modest given the strength of domestic demand,

as evidenced by still-buoyant credit growth (23.6% y-o-y in August) and consumer confidence.

The trade deficit has narrowed and FX reserves are up, providing some respite to concerns

about external imbalances. However, this may prove temporary, as the narrowing was driven by

a decline in imports in August resulting from the month‟s extended holidays. Longer term, the

risk of a more uncertain pre-election policy environment remains and could add to external

deficits and lead to slower FDI inflows (see Asia Special Report: Indonesia: Policy swings).

Inflation and monetary policy: CPI inflation eased to 4.3% y-o-y in September from 4.6% in

August due to lower food prices and core inflation. Inflation is likely to remain comfortably within

Bank Indonesia‟s (BI) 3.5-5.5% target range this year, but we expect it to gradually rise because

of strong domestic demand and a weaker IDR. As such, we think it remains appropriate for BI to

maintain its tightening bias which should manifest in the form of administrative measures rather

than outright rate hikes. We pushed out the timing of our first rate hike forecast to Q3 2013.

Fiscal policy: We expect the official fiscal deficit targets of 2.2% and 1.6% of GDP for 2012 and

2013, respectively, to be missed, in part because of still-large subsidies. For 2013, the proposed

budget does not account for an adjustment in fuel prices (see Asia Economic Alert: Indonesia:

2013 budget - another missed opportunity?, August 23). We expect a higher 2013 fiscal deficit

of 2% of GDP, as the government attempts to provide more fiscal support to growth.

Risks: Downside risks stem from external shocks: a deeper recession in the euro area, a hard

landing in China and large capital outflows. In addition, more protectionist policy

announcements could further generate negative sentiment on investment.



Real GDP (sa, % q-o-q, annualized) Real GDP 6.3 6.4 6.0 5.8 5.6 6.0 6.3 6.5 6.1 6.1 6.2



Gross fixed capital formation 10.0 12.3 11.2 10.0 9.9 8.8 8.8 7.1 10.9 8.6 9.0



Contributions to GDP (% points) Domestic final sales 5.5 6.2 6.5 6.6 5.7 5.7 5.9 5.9 6.1 6.0 6.0

Inventories 2.0 2.3 0.8 -0.6 0.0 0.0 -0.9 -0.1 1.1 -0.3 -0.3

Net trade (goods & services) 0.7 -3.2 -1.7 -0.2 0.0 0.2 2.9 -1.6 -1.1 0.4 0.2

Consumer prices 3.7 4.5 4.5 5.1 5.2 4.9 5.0 5.0 4.5 5.0 5.1

Exports 5.3 -7.6 -5.0 2.8 5.6 5.9 7.6 15.1 -1.3 8.7 8.0

Imports 21.4 8.9 9.0 11.5 7.2 6.2 4.8 17.3 12.4 9.0 14.4

Merchandise trade balance (US$bn) 1.7 -1.3 -0.7 -1.2 1.0 -1.6 0.8 -2.7 -1.5 -2.5 -3.3

Current account balance (% of GDP) -1.5 -3.2 -2.2 -2.0 -0.8 -2.3 -1.2 -3.1 -2.2 -1.9 -1.6

Fiscal Balance (% of GDP) -2.4 -2.0 -2.2

Bank Indonesia rate (%) 5.75 5.75 5.75 5.75 5.75 5.75 6.00 6.25 5.75 6.25 6.75

Exchange rate (IDR/USD) 9146 9433 9591 9600 9625 9650 9675 9700 9600 9700 9600

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal (i.e., the single most likely outcome). Table reflects data available as of 11 October 2012. Source: CEIC and Nomura Global Economics.



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13

Tomo Kinoshita +81 3 6703 1280 [email protected]

Japan | Economic Outlook

Weaker external demand likely leads to a recession in H2 2012

We expect decelerating demand across the globe to hurt exports and business

investment in 2012 and 2013.

Forecast change: We have revised down our real GDP growth forecast for 2012 further to

2.0% from 2.3% and 2013 forecast to 0.5% from 1.1%.

Activity: Japan's exports and production have been affected more severely than expected by

the deterioration in the European economy, anemic recovery in the Chinese economy, and the

abrupt decline in business sentiment seen over the past few months in other parts of Asia ex-

Japan. The global slowdown in production looks likely to persist through the end of this year,

which we think will weigh on Japan‟s exports as the global slowdown in capital investment hurts

Japan‟s capital goods exports. As a result, real GDP growth is likely to be negative in both Q3

and Q4 2012. We nonetheless expect a brighter picture to emerge from the beginning of 2013

as Japan benefits from a recovery in the manufacturing sector in the rest of Asia including

China. Capex by non-manufacturers should also stay resilient in 2013.

Inflation and monetary policy: We expect core inflation (CPI excluding fresh food) to improve

only marginally from 0% in 2012 to 0.1% in 2013 as the recession in H2 2012 should delay the

closing of the output gap. This is likely to increase political pressure on the Bank of Japan (BOJ)

to take more aggressive easing measures. We expect the BOJ to implement further easing

policy by the end of this year.

Policy: We expect post-quake reconstruction spending by the government to contribute to

growth until Q1 2013. The enactment of the consumption tax hike bill on 8 August was an

important fiscal achievement to tackle the medium-term budget deficit problem. We expect the

government to raise the consumption tax rate from 5% to 8% in April 2014 and further to 10% in

October 2015, as scheduled.

Risks: External factors continue to represent the main risks facing the Japanese economy.

These external factors include an expansion and prolonging of the risks associated with

European government debt, a decline in confidence in US economic policy, and concerns about

a global economic slowdown, all of which could have a negative impact on the Japanese

economy via financial market turmoil in the form of further strengthening of the yen and

weakening of share prices.


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

Real GDP 5.3 0.7 -2.2 -0.3 1.7 0.4 1.7 1.6 2.0 0.5 1.2

Private consumption 5.0 0.5 -0.4 -1.2 0.7 1.0 1.2 1.9 2.4 0.4 1.2

Private non res f ixed invest -6.3 5.6 -7.8 0.4 3.6 5.0 5.1 4.4 2.3 2.1 5.7

Residential f ixed invest -6.3 3.8 4.5 4.9 7.0 8.6 7.0 3.6 1.6 6.2 -2.9


Public investment 15.2 7.2 8.9 10.7 8.2 -36.1 -3.3 -8.0 7.8 -3.3 -10.1

Exports 14.3 5.0 -12.2 1.1 1.0 4.9 3.8 3.1 2.1 0.7 5.6

Imports 9.1 6.7 -3.0 -0.1 3.2 4.9 4.8 6.5 5.5 2.7 5.9


Domestic f inal sales 3.7 1.9 -0.3 0.0 1.7 -0.2 1.6 1.7 2.5 0.7 1.2

Inventories 1.2 -0.8 -0.2 -0.5 0.3 0.5 0.2 0.3 -0.1 0.1 0.0

Net trade 0.4 -0.4 -1.7 0.2 -0.3 0.1 -0.1 -0.4 -0.4 -0.3 0.0


Consumer prices 0.3 0.2 -0.3 0.0 -0.2 0.0 0.2 0.1 0.0 0.0 2.0

Core CPI 0.1 0.0 -0.2 0.0 0.1 0.1 0.1 0.1 0.0 0.1 2.0

Fiscal balance (f iscal yr, % GDP) -9.6 -10.4 -9.4

Current account balance (% GDP) 1.3 1.6 2.0

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 0.11 0.17 0.15 0.12 0.15 0.11 0.15 0.20

JGB 10-year yield 0.99 0.83 0.77 0.73 0.82 0.82 0.85 0.88 0.73 0.88 1.10

JPY/USD 82.9 79.8 78.0 82.0 83.0 85.0 86.0 88.0 82.0 88.0 90.0 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 15 October. 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

Signalling fiscal responsibility

The government's fiscal deficit targets look ambitious, but considering the upcoming

elections they show the government's strong committment to fiscal consolidation.

Forecast changes: We reduce our 2013 GDP growth forecast to 4.0% from 4.3% previously.

Activity: The weakness in exports has deepened in Q3 with average export growth of -3.6% y-

o-y in July/August versus 4.0% in Q2. Industrial production, however, continues to grow at a

faster rate than implied by export growth, suggesting that domestic demand remains strong.

This is likely to be supported by additional expenditures ahead of the national elections, which

in our base case will be held in November, and must be called before April 2013. We reiterate

our 2012 GDP growth forecast of 4.8% because of the strong fiscal stimulus, but reduce our

2013 forecast to 4.0% (versus the government assumption of 4.5-5.5% in the budget) to reflect

the downgrade in our growth forecast for the euro area, but also the likely fiscal consolidation

after the elections.

Inflation and monetary policy: Headline inflation remained stable at 1.4% y-o-y in August.

This brings year-to-August inflation to 1.8% y-o-y. Core CPI inflation, however, eased further to

1.5% from 1.6% in July. Producer price inflation (which leads the CPI by 2 months) declined by

0.5% y-o-y in August from -0.2% in July (and -0.9% in June), consistent with our view that CPI

inflation could come off further in the next few months before gradually rising towards year-end.

We still expect Bank Negara Malaysia (BNM) to keep the policy rate unchanged late Q3 2013,

unless external conditions deteriorate more sharply, in which case it would have room to cut.

Fiscal policy outlook: The 2013 budget aims to reduce the fiscal deficit to 4.0% of GDP from

4.5% in 2012. The announcement of more one-off handouts was accompanied by deficit-

improving measures. In our view, this reflects the government continuing to strike a balance

between achieving political objectives without undermining fiscal responsibility. Nonetheless, we

think the 2013 fiscal deficit target still looks ambitious. We expect a deficit of 4.5% of GDP in

2013 based on higher-than-budgeted operating expenditures (Asia Economic Alert: Malaysia:

Budget 2013 - signalling fiscal responsibility, October 1).

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

global growth is the biggest downside risk. The political cycle also poses significant negative

risks that could dim prospects for structural reforms.



Real GDP 4.9 5.4 4.7 4.3 4.1 3.5 4.0 4.5 4.8 4.0 4.6







Domestic final sales 8.1 11.6 10.1 8.4 6.8 4.6 4.5 5.5 9.5 5.3 5.4

Inventories -0.2 -1.2 -0.1 0.9 0.2 1.1 0.1 -0.8 -0.1 0.1 0.0

Net trade (goods & services) -3.1 -4.9 -5.3 -5.0 -2.9 -2.2 -0.6 -0.2 -4.6 -1.4 -0.8

Unemployment rate (%) 3.0 3.0 3.0 3.2 3.1 3.1 3.0 2.9 3.0 3.0 3.1

Consumer prices 2.3 1.7 1.3 1.6 2.0 2.4 2.7 2.5 1.7 2.4 2.5

Exports 3.9 0.9 -0.1 4.7 4.7 7.9 10.2 8.4 2.3 7.8 10.4

Imports 6.4 5.7 5.3 11.5 8.4 11.0 11.5 8.9 7.2 10.0 14.4

Merchandise trade balance (USD bn) 9.7 6.8 7.3 7.1 8.5 5.8 7.4 7.3 31.0 29.0 23.1

Current account balance (% of GDP) 8.0 4.1 8.0 5.9 7.3 2.7 7.7 6.0 6.5 6.2 5.7

Fiscal Balance (% of GDP) -4.9 -4.5 -4.2

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

Exchange rate (MYR/USD) 3.06 3.18 3.06 3.07 3.06 3.05 3.03 3.02 3.07 3.02 2.92

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 11 October 2012. Source: CEIC and Nomura Global Economics.






15

Benito Berber +1 212 667 9503 [email protected]

Mexico | Economic Outlook

Growth supported by domestic demand

Growth will likely remain above potential in 2012.

Activity: The Mexican economy is on track to expand above potential in 2012. However, there

are risks to growth associated with a decelerating outlook in the US and the eurozone. On the

positive side, domestic demand in Mexico has picked up, evidenced by strong private

consumption and investment. Consumption has been supported by credit. After growing at an

annual pace of above 4% rate year to date, we now expect growth to moderate to between 3%

and 3.5% for the rest of the year. For 2013, we expect the economy to expand at 3.5%.

Inflation: Inflation remains above 4%, the upper bound of the target band. We estimate that the

output gap has already closed. Agricultural prices have been the main culprit of high inflation.

For 2013, we expect most of the supply-side shocks to dissipate; therefore, we forecast inflation

to moderate to 3.4%.

Policy: We forecast the central bank of Mexico (Banxico) to keep the policy rate unchanged at

4.50% until 2014. There remains a pass-through of the depreciating exchange rate into inflation.

Under most scenarios of the exchange rate, Banxico‟s reaction function will remain unaffected

in the coming years. A rate cut is still possible if the economy decelerates, if MXN appreciates

significantly. We do not expect the rate to be tightened this year unless US economic activity

accelerates significantly. Our medium-term view for the MXN remains sanguine due to the

improvement in fundamentals. 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; and (2) increases in gasoline prices. In terms of fiscal policy, the main risk stems

from a protracted downward correction in oil prices that would put pressure on fiscal revenues.


% y-o-y change unless noted 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 2011 2012 2013

Real GDP 4.5 3.9 4.6 4.1 2.7 3.5 3.7 3.4 3.9 3.7 3.5

Personal consumption 5.2 4.3 4.3 3.3 1.7 4.7 4.3 3.1 4.6 4.5 3.5

Fixed investment 9.0 5.9 8.6 6.2 2.4 3.2 3.2 3.2 8.2 3.0 3.2

Government expenditure 0.5 1.8 2.9 1.7 5.3 0.4 1.3 0.4 0.6 3.9 3.1

Exports 4.3 3.1 5.1 6.3 4.9 7.2 5.1 4.4 6.7 4.1 4.0

Imports 6.2 3.8 7.1 4.0 2.7 6.3 4.7 3.6 6.8 4.3 3.9

Contributions to GDP (pp):

Industry 1.3 1.1 1.4 1.2 0.8 1.0 1.1 1.0 1.2 1.1 1.0

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

Services 2.9 2.5 2.9 2.6 1.7 2.2 2.4 2.2 2.5 2.4 2.2

CPI 3.14 3.82 3.73 4.34 4.60 4.00 3.55 3.70 3.82 4.10 3.40

Trade balance (US$ billion) -3.9 -0.7 1.8 1.5 -4.1 -3.9 -3.8 -3.8 -1.5 -4.7 -15.2

Current account (% GDP) -0.9 -1.5 -1.5


Gross public debt (% GDP) 35.6 37.3 35.0

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

USD/MXN 13.90 13.94 12.81 13.36 12.86 12.70 12.70 12.50 13.94 12.70 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 15 October 2012. Source: Nomura Global Economics.



16



Philippines | Economic Outlook

Sticking to an easing bias

Upward pressure on the currency is likely to prompt another rate cut this year.

Forecast change: We lower our 2013 GDP growth forecast from 6.3% to 6.0%. We also revise

down our fiscal deficit forecast to 2.2% of GDP this year, but raise it to 2.6% in 2013.

Activity: Domestic demand, namely investment spending and private consumption, continued

to bolster growth in H1 even as the contribution from net exports weakened. The consumer and

business confidence indices for Q3 continue to suggest that growth momentum remains strong,

putting GDP growth in 2012 well on track to our forecast 6.0%. For 2013, we expect more

progress in infrastructure projects under the public-private partnership scheme and more fiscal

support ahead of mid-term elections. As a result, we forecast still robust GDP growth of 6.0%

despite the downgrade of euro area 2013 GDP growth by our European economics team.

Inflation and monetary policy: Bangko Sentral ng Pilipinas (BSP) kept the policy rate

unchanged at 3.75% at its September meeting. BSP sees headline inflation as driven by

“transitory” factors such as flooding and oil prices, and remaining within the 3-5% target. Indeed,

inflation in September eased to 3.6% y-o-y from 3.8% in August. Upward pressure on PHP

remains a primary policy parameter for BSP, in our view. We continue to expect another 25bp

cut in the policy rate in one of the remaining two meetings this year. Thereafter, we expect BSP

to keep its loose monetary stance, maintaining the policy rate at 3.5% through H1 2013.

Fiscal policy: In August, the fiscal balance swung to a surplus of PHP2.5bn from a deficit of

PHP39.2bn in July, reflecting slower expenditure growth of 10.4% y-o-y from 21.8% in July.

Expenditures excluding interest payments, however, still rose by a higher 13.9% in August.

Surprisingly, revenue growth slowed to 4.3% in August from 15.3% in July. We expect this to

increase in the coming months, helped in part by privatization proceeds which in turn provide

more room for expenditure disbursements. On a 12-month rolling sum basis, the fiscal deficit till

August was 2.3% of GDP. This is partly behind the reduction of our fiscal deficit forecast for this

year. For 2013, we expect the deficit to widen given elections and the strong bias to use the

available fiscal space to improve the pace and quality of spending.

Risks: The main risk to our forecast is an external shock from Europe. Slower progress on

governance reforms, as well as fiscal and infrastructure spending could also hurt growth.




Real GDP 6.3 5.9 5.6 6.0 6.5 6.1 6.0 5.5 6.0 6.0 5.8





Imports (goods & services) -3.2 4.4 5.9 5.1 13.9 14.7 13.5 9.8 3.0 13.0 13.0

Contribution to GDP growth (% points)


Inventories -7.2 -2.4 -1.4 -1.7 3.6 3.2 2.1 -0.1 -3.1 2.1 0.0

Net trade (goods & services) 7.1 2.1 -0.6 -0.7 -4.9 -5.5 -2.9 -1.6 1.9 -3.7 -2.4

Exports 4.8 10.5 4.6 4.3 3.2 3.3 7.7 7.6 6.1 5.4 9.0

Imports -1.5 2.3 10.2 12.0 14.2 14.7 13.5 9.8 5.6 13.0 13.0

Merchandise trade balance (US$bn) -2.6 -1.4 -3.6 -5.0 -4.4 -3.2 -4.8 -5.8 -12.6 -18.2 -22.7

Current account balance (US$bn) 0.9 1.6 2.3 0.3 0.1 1.8 1.0 2.0 6.2 4.9 4.7



Consumer prices (2006=100) 3.1 2.9 3.5 3.9 4.4 4.6 4.4 4.2 3.4 4.4 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) 42.90 42.10 41.7 42.0 41.8 41.5 41.3 41.0 42.0 41.0 39.7

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 11 October 2012. Source: CEIC and Nomura Global Economics.




17


Poland | Economic Outlook

NBP dovishness but not ready to cut - growth still outperforming

The economy will likely avoid recession despite external shocks and a tightening of

the currently loose fiscal policy.

Growth: As the most closed economy in the region, Poland is well placed to weather severe

external shocks. A narrowing trade deficit in real terms should actually be slightly supportive to

growth through H2, though a stronger currency threatens the deficit improvement. Fiscal policy

is due to be tightened throughout this year with numerous austerity measures introduced,

including pension reforms and mining taxes. A small drag may be felt through 2013 from

government reforms and because accelerated EU structural fund projects subside. Monetary

policy being slightly dovish, coupled with still positive real credit growth should support GDP, as

should private investment, which remained strong into Q1. We see gross fixed capital formation

growth slipping from 7.6% in 2011 to a still healthy 3.6% in 2012. Real disposable income

growth of around 2.5% this year, levered by some credit growth, should help cushion

consumption growth, which we see falling from 3.0% in 2011 to 1.3% in 2012. All together, we

see growth in 2012 falling to 2.6% from 4.3% in 2011. In 2013 we expect a drag from public

sector investment and government spending and the trough of the eurozone crisis to see growth

of around 2.3%. Deleveraging should hit Poland the least thanks to profitable foreign banks.

Currency: We expect to see USD/PLN moving lower due to the following factors: an orthodox

central bank can easily hike if animal spirits start up again, and because the central bank is

unlikely to get concerned about currency strength anytime soon (unlike some other EMs). Also,

it is unlikely to react to a global QE by cutting (again unlike many other EMs).

Rates and inflation: We think CPI inflation will remain very sticky outside the target range until

into Q1 2013, but from there dropping to around 3% by end-2013. Core inflation should remain

under control around target thanks to neutral policy rates. Overall, we expect the MPC to remain

conservative, inflation centric and forward looking, but with a dovish bias because of the growth

numbers. The tone of the most recent MPC statement and the press conference made it far

from a done deal that there would be a cut in November – there was no strong pre-commitment

as in April. Our baseline remains for now only 75bp of cuts starting next year in a slow, short

cycle lower.

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

reforms for the four years of this parliament – sufficient to avoid a downgrade. They should bring

the deficit to less than 3.0% of GDP in 2013, though not as targeted in 2012 given lower growth.

Growth matters the most. Without it, the political dynamic for consolidation becomes more

difficult and there has already been an allowance for lower growth through slower fiscal

consolidation in the 2013 budget. Implementation will be the key after only limited success over

the past four years.

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

2010 2011 2012 2013

Real GDP % y-o-y 3.9 4.3 2.6 2.3


Current account % GDP -4.6 -5.0 -4.5 -5.0


CPI % y-o-y * 3.1 4.6 3.6 3.0

CPI % y-o-y ** 2.6 4.3 4.0 3.2

Core CPI ex VAT % y-o-y ** 1.5 2.4 2.0 2.2

Population mn 38.2 38.2 38.0 37.8


Reserves EUR bn ** 70.0 74.3 71.2 71.9

External debt % GDP 66.9 62.7 53.1 47.9

Public debt % GDP 53.3 53.5 52.8 52.2

NBP policy rate %* 3.50 4.50 4.75 4.00

EURPLN* 3.96 4.47 4.40 4.00

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

Tolerating slower growth

The drag from weak exports is unlikely to be met with strong counter-cyclical policies.

Forecast change: We lower our 2013 and 2014 GDP growth forecasts to 3.4% and 4.2%,

respectively, from 4.2% and 4.6%.

Activity: According to the GDP flash estimates for Q3, the economy grew by 1.3% y-o-y which

implies a sequential contraction of 1.5% q-o-q saar. Q2 GDP growth, however, was revised

significantly higher to 0.2% q-o-q saar (from -0.7% earlier), suggesting that the economy

avoided a technical recession (i.e., two sequential quarters of negative growth). Tentative signs

of a pick-up in electronics exports, and importantly, our view that the Chinese economy is

bottoming, suggest that growth in Q4 should pick up. As such, we reiterate our 2012 GDP

growth forecast of 1.8% (within the government‟s forecast of 1.5-2.5%). For 2013, however, we

have reduced our GDP growth forecasts to reflect a deepening recession in the euro area,

where we now forecast 2013 GDP growth of -0.9% from -0.6% in 2012. We believe this will

have a significant impact on Singapore‟s open economy, particularly as we do not expect the

government to implement strong counter-cyclical policy to offset the external headwinds (see

Singapore: don't count on counter-cyclical policy, 27 August 2012).

Inflation and monetary policy: The Monetary Authority of Singapore (MAS), at it 12 October

meeting, continued its FX policy of a modest and gradual appreciation of the S$NEER policy

band; the slope, width and mid-point of the band were unaltered. This was in line with our

expectations, which were mainly based on the view that the growth and inflation mix remained

consistent with the MAS‟s previous assessment of the outlook. Indeed, the policy statement had

a more hawkish tone, and alluded to upside risks to headline and core inflation from a tight

labour market and potentially higher food and services costs, respectively.

Fiscal policy: In tandem with these policies, we think the fiscal stance will also remain neutral

this year, with the government expected to run a 0.2% of GDP fiscal surplus. For 2013, we

expect only a small deficit of 0.2% of GDP, with the government‟s focus remaining on social

spending as well as more incentives for firms to adopt productivity-enhancing measures.

Risks: With exports accounting for twice its GDP, Singapore remains the most vulnerable

economy in South-east Asia to a global growth slowdown. A worsening of the European debt

crisis and further weakness in China could lead to slower investment spending and negative

wealth effects, which would add further downside risks to growth.



Real GDP (sa, % q-o-q, annualized) 9.5 -0.7 -1.2 2.3 11.9 -5.5 10.4 1.5

Real GDP 1.5 2.0 1.2 2.4 2.9 1.7 4.5 4.3 1.8 3.4 4.2


Government consumption -4.0 -0.9 -8.8 5.0 3.8 4.9 11.8 3.0 -2.4 5.6 4.0





Domestic final sales 4.8 1.0 -0.3 2.0 2.5 2.6 3.8 3.7 1.9 3.2 3.1

Inventories 0.7 1.3 0.6 4.0 -1.2 -2.5 -1.1 0.5 1.6 -1.1 1.0

Net trade (goods & services) -4.0 -0.3 0.9 -3.6 1.7 1.6 1.8 0.2 -1.8 1.3 1.2


Consumer prices 4.9 5.3 4.3 4.5 3.2 2.8 2.6 2.6 4.8 2.8 3.8

Exports 6.0 -0.5 -3.0 -0.7 3.5 6.8 8.2 9.8 0.1 7.3 12.1

Imports 11.7 2.6 -2.0 0.8 4.2 6.6 8.3 10.8 3.1 7.4 13.1

Merchandise trade balance (US$bn) 7.2 6.7 10.8 9.3 6.8 7.4 11.7 9.2 33.1 35.0 36.0


Fiscal Balance (% of GDP) 0.2 -0.2 0.4

3 month SIBOR (%) 0.47 0.46 0.37 0.38 0.38 0.41 0.41 0.44 0.38 0.44 0.50

Exchange rate (SGD/USD) 1.26 1.27 1.23 1.24 1.23 1.23 1.22 1.21 1.24 1.21 1.19






http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=546051&appname=GRP&cid=aUl4dGZjemsxRzA90


19


South Africa | Economic Outlook

Structural MPC dovishness in a year of crucial political battles

Battles could occur around the ANC conferences, between external weakness and

domestic strength, and between inflation and growth for the SARB.

Growth: GDP for Q2 surprised us strongly to the upside, printing at 3.0% y-o-y vs our forecast

of 2.3% and the previous print of 2.1%. Given this we shifted our growth forecast up to 2.4% for

this year from 2.1% previously and to 2.9% next year from 2.7% previously. However, due to the

recent industrial action, we are expressing doubt over these revised forecasts. We expect

growth to slow through H2 anyway as contagion from the external sector spreads, but the

economy is clearly leaving the first half at a much higher base than we thought. A contraction in

private sector investments this year should give way to a boost from the government‟s

infrastructure drive through the end of next year. In 2013, we see a recovery to 2.9%, but any

upside potential is likely to be capped due to limited credit growth and a sluggish recovery

globally.

Currency, inflation and rates: Our current rate call is for a rate cut of 50bp to occur in January.

We no longer think there will be a second cut given the recent rating downgrade and the

reaction of both the currency and bond markets to WGBI inclusion which has been tepid to say

the least. The currency weakening towards 9.0 in USDZAR has been orderly so far and the

balance of payments integrity has not been called into question. If this were to change then FX

intervention and rate hikes could occur, but we are not there yet. We think hikes would be more

likely to occur if core inflation started moving higher faster and risked breaching targets. Note

also that inflation has been in target since May, falling to 5% in August, having peaked at 6.3%

in January.

Politics and fiscal: We are currently seeing a structural breakdown in the traditional societal

structures around labour, and strike action is occurring because of the linkages between union

leadership, the ANC and BEE funds. The problem we have with the current situation is that we

cannot see how it ends easily without employers deciding themselves to grant large wage

increases. The government is doing nothing. We cannot see this situation or lack of control over

the circumstances changing yet, unless we get a more meaningful market, rating or sovereign

risk shock. The outcome of that, however, may simply be centralised minimum wages and large

increases for workers, which harms competitiveness. The battle for the ANC leadership is likely

to be a key driver of policy direction – more free market if Deputy President Motlanthe wins the

contest, more interventionist if President Zuma continues in his post. The National Treasury

presented a highly conservative budget as the deficit fell sharply to -3% in FY 2014/15, yet it is

based on many assumptions which we see as overly ambitious and which the NT admits are

risks. As such, with lower growth but offset by another year of meaningful underspending and a

good wage settlement, we see the deficit at -4.4% in the current FY 2012/13.

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

2010 2011 2012 2013

Real GDP % y-o-y 2.9 3.2 2.4 2.9


PSCE % y-o-y* 5.5 6.2 7.7 9.5


FX reserves, gross USD bn* 43.8 48.9 50.1 50.3

CPI % y-o-y * 3.5 6.1 4.8 5.5

CPI % y-o-y ** 4.3 5.0 5.4 5.0

Manufacturing output % y-o-y 5.0 2.4 0.5 1.8

Retail sales output % y-o-y 5.4 5.7 4.5 3.3

SARB policy rate %* 5.50 5.50 5.00 4.50

EURZAR* 9.0 10.5 9.6 9.0

USDZAR* 6.82 8.09 8.00 7.50

0

2

4

6

8

10

12

Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13

FoodCore CPIServicesHeadline

% 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

Prolonged sub-potential growth

The negative output gap should persist through 2013, exerting disinflationary pressure.

We expect CPI inflation to remain within the BOK's target.

Forecast changes: We cut our 2012 and 2013 GDP growth forecasts to 2.3% and 2.5% from

2.5% and 3.0%, respectively, while raising our 2012 and 2013 CPI inflation forecasts to 2.2%

and 2.7% from 2.0% and 2.5%. We also raise our current account surplus forecast for 2012-14.

Activity: Our Europe team expects euro area GDP to contract by 0.9% in 2013 after a 0.6% fall

in 2012. We expect China‟s GDP growth to slow to 7.7% in 2013 from 8.1% while US GDP

growth will likely ease to 1.9% from 2.1%. That said, we expect Korea‟s export slump to

continue into 2013. The new government will likely increase social welfare spending, which

should partly offset the export slump. However, a high household debt burden (156% of

disposable income) and falling house prices will likely constrain consumption growth. The

business investment by large conglomerates should remain weak at a time when uncertainty

surrounding the global business outlook and new government reforms remain elevated. As a

result, we forecast Korea‟s GDP growth to rise slightly to 2.5% in 2013 from 2.3% in 2012, far

below our estimated potential GDP growth of 3.5%, which we expect to be reached only in 2014.

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

but higher food prices and fading favorable base effects (from a one-off decline in school fees

and expenses) should push CPI inflation up to 2.7% in 2013 from 2.2% in 2012, still 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 the BOK to stay on hold at 2.75% through 2013, as growth should increase

slightly and CPI inflation should rise modestly, each from a very low base on a sequential basis.

Risks: As a small, open, financially integrated economy, Korea is vulnerable to sudden

changes in global economic conditions, commodity prices and financial markets. The eurozone

crisis, the looming US fiscal cliff and an economic hard-landing in China remain the dominant

downside risks to our growth outlook. Domestically, the new government could formulate a

supplementary budget in 2013, which provides an upside risk to our economic outlook.




Real GDP (sa, % q-o-q) 0.9 0.3 0.1 0.5 0.7 0.9 0.8 0.9

Real GDP 2.8 2.3 1.6 1.7 1.6 2.2 2.9 3.3 2.3 2.5 3.5



Business investment 9.1 -3.5 -2.1 3.3 -5.4 5.1 5.1 5.1 1.8 1.7 7.7

Construction investment 2.1 -2.1 -1.6 -1.0 1.2 3.9 3.9 4.1 -1.4 2.9 4.1



Contributions to GDP growth (% points)


Inventories -0.1 0.1 0.6 -0.4 -0.4 -0.3 -0.1 0.0 0.2 0.1 0.2

Net trade (goods & services) 0.1 1.4 0.5 0.6 0.8 0.3 0.2 0.2 0.5 0.4 0.3


Consumer prices 3.0 2.4 1.6 1.6 1.9 2.7 3.1 3.2 2.2 2.7 3.0

Current account balance (% of GDP) 2.6 1.6 1.5

Fiscal balance (% of GDP) 1.3 1.0 1.0

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

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

3-year T-bond yield (%) 3.55 3.30 2.83 2.80 2.80 2.90 3.00 3.00 2.80 3.00 3.30

5-year T-bond yield (%) 3.69 3.42 2.93 2.90 2.90 3.00 3.05 3.10 2.90 3.10 3.50

Exchange rate (KRW/USD) 1133 1154 1118 1120 1115 1110 1105 1100 1120 1100 1100

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 11 October 2012. Source: Bank of Korea, CEIC and Nomura Global Economics.



21



Taiwan | Economic Outlook

Hinges on the global outlook

The economy should benefit from an upcycle in global electronics demand.

Forecast change: We cut our 2013 GDP growth forecast from 3.5% to 3.0%.

Activity and inflation: Exports increased 10.4% y-o-y in September, exceeding market

expectations by a wide margin. GDP growth should recover more visibly in Q3, but from a very

low base. A gradual recovery in global demand for electronics should help lift GDP growth from

1.5% in 2012 to 3.0% in 2013 and further to 4.0% in 2014. CPI inflation slowed to 3.0% y-o-y in

September from 3.4% in August as a typhoon-led one-time surge in food prices reversed. Given

that electricity tariff hikes will be implemented in multiple stages, inflation is unlikely to become a

serious negative factor for growth through our forecast horizon.

Cross-strait relationship: We expect economic linkages between Taiwan and China to

continue to strengthen, through further trade liberalization under the Economic Cooperation

Framework Agreement and an increase in tourist arrivals from China. Taiwan‟s central bank and

China‟s PBoC signed a Currency Settlement MOU on 31 August, which should significantly

boost RMB-related business in Taiwan‟s capital markets. Improving cross-strait ties is a

structural transformation that, over time, should unleash major benefits for Taiwan‟s economy.

Monetary and fiscal policy: The CBC left the discount rate unchanged at 1.875% at its policy

meeting in September, citing downside risks to growth from weak exports. The policy rate is

already very low and with inflation set to rise, we judge that the discount rate is only likely to be

cut if greater downside risks to growth materialize. The government seems focused on reducing

the budget deficit through various measures, including the introduction of a capital gains tax.

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

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

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



Real GDP (sa, % q-o-q, annualized) 2.8 0.5 7.2 4.4 1.5 -0.4 4.3 7.1

Real GDP 0.4 -0.2 2.1 3.7 3.4 3.1 2.4 3.1 1.5 3.0 3.5



Gross f ixed capital formation -10.2 -5.2 0.6 0.5 7.5 5.0 4.0 5.5 -3.6 5.4 4.5

Exports (goods & services) -3.3 -3.3 2.5 3.8 3.0 3.2 3.2 3.2 0.3 3.2 3.3

Imports (goods & services) -7.5 -7.5 2.4 3.5 2.0 2.2 2.1 2.4 -1.2 2.2 3.5

Contributions to GDP grow th (% points)

Domestic f inal sales -2.4 -1.0 1.5 4.7 4.1 3.1 3.2 2.8 0.8 4.4 3.2

Inventories 1.4 0.4 0.3 -0.5 -0.4 0.0 -0.4 0.1 0.4 -0.7 0.2

Net trade (goods & services) 1.6 0.6 0.5 1.0 1.1 1.2 1.2 1.1 0.9 1.1 0.5

Exports -4.0 -1.3 5.0 6.3 5.5 5.7 5.7 5.7 0.5 5.7 6.3

Imports -5.9 -3.1 6.9 7.7 3.5 3.7 3.6 3.9 0.6 3.7 5.0

Merchandise trade balance (US$bn) 5.7 5.6 6.9 8.5 7.3 7.3 8.9 10.3 26.6 33.7 39.6



Consumer prices 1.3 1.6 2.9 2.1 2.1 1.2 0.2 1.1 2.0 1.2 1.5

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

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

Overnight call rate (%) 0.42 0.51 0.38 0.51 0.51 0.64 0.41 0.51 0.51 0.76 0.76

10-year T-bond (%) 1.27 1.23 1.19 1.29 1.31 1.42 1.29 1.29 1.29 1.55 1.55

Exchange rate (NTD/USD) 29.5 29.8 29.3 29.8 29.7 29.6 29.5 29.4 29.8 29.4 29.0 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 11 October 2012. Source: CEIC and Nomura Global Economics.




22


Nuchjarin Panarode +662 638 5791 [email protected]

Thailand | Economic Outlook

Thailand: New growth engines

We expect strong domestic demand to offset export weakness, spurred by loose

monetary and fiscal policies following the 2011 floods.

Forecast changes: We revise down our 2013 GDP forecast to 4.5% from 4.7% and our policy

rate forecast to 2.75% by end-2012 from 3.0%.

Activity: Domestic demand held up in August, with the Bank of Thailand‟s (BOT) composite

indices of private consumption and investment rising 4.1% y-o-y and 19.5%, respectively.

However, from the supply-side, the manufacturing production index (MPI) dropped 11.3% y-o-y

in August, led by export-oriented sectors. We believe the MPI decline is a concern for the BOT,

as it will pull down Q3 GDP. We believe Q3 GDP slowed to 2.8% y-o-y from 4.2% in Q2 as a

result. For 2013, our growth downgrade mainly reflects the cut to our euro area growth forecasts,

but the impact is relatively small as we think domestic demand will stay strong, boosted by loose

macro policies (see Asia Special Report: Thailand: New growth engines, 24 September 2012).

Monetary policy and inflation: CPI inflation accelerated to 3.4% y-o-y in September from 2.7%

in August due to higher refined oil prices and an excise tax increase on tobacco and liquor. But

inflation expectations for the next 12 months, according to the BOT survey, eased to 3.5% from

3.6%. According to the MPC minutes, all MPC members see “the balance of risks for the Thai

economy was skewed towards growth rather than inflation.” We therefore think further monetary

policy easing is possible near-term. With the likely continued drop of the MPI, we now expect

the MPC to cut the policy rate by another 25bp on 17 October.

Fiscal policy: Government spending rose by 13.7% y-o-y in August after rising by 25.6% in

July. For the first eleven months of FY2012, the fiscal deficit was THB356bn, or 81% of the

target. The government cut its spending target for water-management projects to just THB2.0bn

from THB20bn previously due to weak execution. As a result, we revise down our fiscal deficit

forecast for 2012 to 3.8% of GDP from 3.9%, but expect fiscal easing to continue in 2013.

Risks: The downside risks to our forecasts stem from a deepening in 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) 50.8 13.9 1.3 1.3 -0.6 12.2 5.4 7.6

Real GDP 0.4 4.2 2.8 15.2 3.8 3.4 4.5 6.1 5.5 4.5 5.0


Public consumption -0.2 5.6 4.7 6.4 0.8 -2.3 -2.7 0.9 4.1 -1.0 -0.8


Exports (goods & services) -3.2 0.9 -3.1 17.1 4.7 2.6 5.1 3.9 2.4 4.1 5.0


Contribution to GDP growth (% points)


Inventories 2.9 2.8 -1.3 1.1 -2.3 -2.4 -0.1 0.9 1.4 -1.0 0.0

Net trade (goods & services) -4.7 -4.4 -2.7 7.7 1.3 1.1 1.7 0.7 -1.2 1.2 0.7

Exports -1.4 0.0 -4.5 14.5 6.2 5.5 6.6 3.4 2.1 5.4 6.9

Imports 10.4 11.9 1.2 8.7 2.5 3.7 9.4 5.2 7.2 5.2 7.2

Merchandise trade balance (US$bn) -5.2 -5.2 -3.9 -4.0 -3.3 -4.3 -5.9 -5.3 -18.2 -18.7 -20.6

Current account balance (US$bn) 0.6 -2.5 0.5 0.1 0.7 -1.4 -1.3 -0.6 -1.2 -2.6 -2.8

Current account balance (% of GDP) 0.6 -2.7 0.6 0.1 0.7 -1.4 -1.3 -0.6 -0.3 -0.7 -0.7

Fiscal balance (% of GDP, fiscal year basis) -3.8 -3.5 -3.7

Consumer prices 3.4 2.5 2.9 3.4 3.1 2.9 2.7 2.9 3.0 3.0 3.1


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 30.8 30.7 30.6 30.5 30.4 30.8 30.4 30.0






23

Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]

Turkey | Economic Outlook

A healthy rebalancing

A tightening policy helped the rebalancing in 2012. A global slowdown could

accelerate it further, resulting in Turkey reaching investment grade in 2012.

Activity: GDP growth is likely to slow to 3% in 2012 after 8.5% growth in 2011. Unlike in 2008,

stock-building has been light, and net exports are likely to contribute more than 3pp to GDP in

2012, offsetting weak private consumption (1.3% in 2012) and private fixed investment (-0.5% in

2012). We see this as a pretty healthy rebalancing because a faster one would have been

associated with stagflation.

Inflation: Turkey‟s inflation is deteriorating at the expense of a strong fiscal stance. So far it is

largely driven by factors beyond the control of the TCMB, but it looks like the market‟s working

number for the next six months is now around 7.5% (1.0-1.5pp higher than a month ago) with

some upside risks. There are also tentative signs of creeping service price inflation. An

improvement in the growth backdrop could lead to a deterioration in inflation expectations.

Policy: If our framework of a meaningful growth rebound in Q4 2012 and Q1 2013 is right, we

would expect the TCMB to implement some temporary “hikes in disguise” largely for

expectations management purposes later in the last quarter of the year – we think the daily repo

rate could move up to the 6-6.5% area in November or December. These temporary hikes

would not be incompatible with a lowering of the top of the interest rate corridor, and our base

case sees the TCMB narrowing the interest rate corridor. We are referring to the daily repo rate

in these forecasts rather than the 1-week benchmark repo rate (we kept the policy rate constant

in the forecast horizon given the TCMB‟s comfort with the current policy setting).

Fiscal policy: Since H2 2011 fiscal policy has helped the monetary authorities, as the

government has used revenue outperformance as a cushion for a rainy day. The recently

unveiled Medium Term Programme (MTP) for 2013-15 implies that the tight fiscal stance will

continue and it looks like the government intends to avoid running an “election budget” or any

form of “election spending”. While primary surplus estimates are not as ambitious as the past six

or seven years, we still expect the debt-to-GDP ratio to fall towards the low-30% levels.

Rating outlook: We expect Turkey to receive an investment grade rating in 2012 from at least

one rating agency. We think rebalancing and structural reforms are moving in the right direction.

Risks: Terms-of-trade shocks (higher oil prices) and sudden stops of capital inflows are the

main risks. In that scenario, inflation could rise again with unwarranted currency weakness

resulting in a sharp fall in consumer confidence. However, this is not our base case. We think

the risks of capital controls being implemented, on any rapid appreciation, are extremely low.

With EM inflows accelerating in 2012, the likelihood of sudden stops has declined. Tight lending

conditions are currently weighing on credit demand.


2010 2011 2012 2013

Real GDP % y-o-y 9.0 8.5 3.0 4.5

Contributions to GDP by selected items

Private consumption 4.7 5.5 1.3 3.2

Private investments 5.3 4.7 -0.5 2.1

Net exports -4.4 -1.7 2.0 -1.2

CPI % y-o-y * 6.4 10.5 7.5 6.5

CPI % y-o-y ** 8.6 6.5 9.1 6.7

Budget balance % GDP -3.6 -1.2 -1.9 -2.0

Primary balance % GDP 0.5 1.6 1.0 1.0

Public debt % GDP 43.0 42.4 38.0 37.0


TCMB policy rate %* 6.50 5.75 5.75 5.75

USDTRY* 1.54 1.89 1.70 1.70 Notes:* End of period. ** Period average. Bold is actual data. Source: Nomura Global

Economics

Fig. 2: Tighter policy mix

2006

2007

2008

2009

20102011

2012-Mid point of

band

2012 - Top point of

band

-2

0

2

4

6

8

10

12

14

-1 0 1 2 3 4

Ex-ante real rate, %

Cyclically Adj.

Primary Balance,

Source: Nomura Global Economics



24

Philip Rush +44 20 7102 9595 [email protected]

United Kingdom | Economic Outlook

Inflections

Intensification of the euro-area crisis remains a serious threat to the UK. The MPC is

responding with aggressively loose policy, despite inflation’s persistent stickiness.

Activity: Underlying growth ground to a halt in 2011 and the subsequent double-dip recession

is being compounded by recurrent intensification of the eurozone‟s sovereign debt crisis. Large

trade and financial relationships with the euro area tie the UK to its apparently bleak economic

fate (see UK Theme: Sounding in a pounding?). Earlier signs of cyclical growth momentum

waned at still weak growth rates leaving the UK on the brink of recession, probably until 2013,

besides when one-off factors boost GDP in Q3 (see UK Theme: Several shocking months).

Beyond that, growth is still constrained by the ongoing domestic deleveraging and the

challenging rebalancing within the euro area (see UK Comment: Forecast: limping into 2014).

Inflation: Inflation has been boosted by a series of “one-off” shocks such as changes to VAT

and energy prices, but underlying inflation is still probably too strong. And there are further “one

offs” from tuition fees. Unlike the MPC, we do not expect a sustained fall below the inflation

target, let alone materially so (see UK Theme: Inflation in a black hole).

Policy: The MPC is responding aggressively to signs of weaker global growth and subdued

domestic demand. Upon completing its latest £50bn programme of gilt purchases in May, the

MPC resisted doing more. But disappointment at demand growth brought the MPC back to

easing mode in July with another £50bn programme, which we expect to be extended by £25bn

in November (see UK Theme: The monetary blunderbuss). Part of demand's ongoing weakness

is attributable to the economy's unavoidable but impeded rebalancing and associated fiscal

consolidation programme. We estimate fiscal policy alone to subtract about 0.9% from GDP in

2012-13, which is a moderation from 1.5% in 2011-12. However, in order to meet its fiscal

mandate of reaching a current structural balance by the end of a rolling five-year period, we

think the government will need to implement more measures. That is because its current

spending plans are conditioned on what we still consider to be an overly optimistic view of

potential growth (see, for example, UK Theme: Policymakers remake mistakes, 24 November

2011). As new measures will probably be back-loaded, we expect the secondary target to be

broken and the UK to lose its AAA rating by May 2015 (see UK Theme: Bending the fiscal

rules).

Risks: Downside risks dominate our growth forecasts, but the risks are to the upside of our

inflation forecasts. With activity dominating the BoE‟s reaction function, we see the risks from it

being that the MPC delivers even more easing than we expect.


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

Real GDP -0.3 -0.4 0.7 -0.2 0.0 0.1 0.2 0.2 -0.3 0.3 1.2

Private consumption 0.3 -0.2 0.5 -0.4 0.1 0.3 0.4 0.4 0.4 0.6 1.6

Fixed investment 3.2 -2.7 1.7 -0.2 -0.6 -0.3 0.2 0.5 1.7 -0.7 4.2

Government consumption 3.1 -1.6 -0.3 -0.4 -0.4 -0.4 -0.4 -0.4 2.0 -1.9 -2.2

Exports of goods and services -1.6 -1.1 1.0 0.9 0.7 0.7 0.8 0.9 0.0 2.8 3.1

Imports of goods and services -0.1 1.4 0.6 0.5 0.7 0.7 0.8 0.8 2.6 2.9 2.6


Domestic f inal sales 1.4 -0.9 0.5 -0.3 -0.1 0.1 0.2 0.2 1.0 -0.2 1.1

Inventories -1.3 1.2 0.1 0.1 0.1 0.0 0.0 0.0 -0.4 0.6 0.0

Net trade -0.5 -0.8 0.1 0.1 0.0 0.0 0.0 0.0 -0.8 -0.1 0.1


Consumer prices (CPI) 3.5 2.8 2.4 2.5 2.3 2.7 2.8 2.4 2.8 2.6 2.3

Retail prices (RPI) 3.8 3.1 2.9 3.1 3.0 3.4 3.4 2.8 3.2 3.2 2.6

Announced size of the APF (£bn) 325 325 375 400 400 400 400 400 400 400 400

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 0.65 0.65 0.65 0.65 0.65 0.70 0.65 0.70 0.70

10-year gilt 2.20 1.73 1.80 1.60 1.50 1.50 1.60 1.75 1.60 1.75 2.50

£ per euro 0.83 0.81 0.80 0.78 0.77 0.75 0.75 0.75 0.78 0.75 tbc

$ per £ 1.60 1.56 1.60 1.64 1.62 1.60 1.57 1.53 1.64 1.53 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 27 September 2012. Source: ONS, Bank of England, Bloomberg, DataStream, Nomura Global Economics.


http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=514180









25

Lewis Alexander +1 212 667 9665 [email protected]

David Resler +1 212 667 2415 [email protected]

Ellen Zentner +1 212 667 9668 [email protected]

United States | Economic Outlook

US budget in the crosshairs

A contentious debate over near- and long-term fiscal policy will weigh on the economy.

Activity: In the three years since the Great Recession ended, real GDP has grown at a

lackluster 2.2% pace and at an even slower 1.65% pace during the first half of 2012. Faced with

the unusual uncertainties about the eventual resolution of the US fiscal challenges and the on-

going sovereign debt crisis in Europe, the US economy looks likely to continue along this lower

trajectory through Q2 2013.

In recent months, surveys of confidence have diverged as business caution over slowing

earnings and uncertain fiscal outcomes later this year has increased, while households appear

to have a more optimistic outlook. Other recent data suggest that firming home values have led

to an increase in household wealth from real estate and, going forward, should encourage more

households to spend. After the election, we expect economic activity to slow and both

businesses and consumers to pull back in response to a contentious debate over fiscal policy.

Looking ahead to the second half of next year and beyond, we expect the pace of recovery to

begin to accelerate once Washington policymakers resolve the near-term fiscal and other policy

challenges that have undermined business confidence.

Inflation: Crude oil prices remain volatile and a source of inflation instability. Inflation in the

“core” PCE price index shows no hint of developing pressures as the year-on-year rate of

increase has remained continuously below 2% since Q4 2008. We expect the persistence of

ample economic slack to restrain inflation throughout the forecast horizon.

Policy: In spite of recent improvements, the slow recovery in labor markets is of “grave”

concern for the FOMC. We expect the FOMC to continue its purchases of long-term assets

through Q3 2013. Addressing fiscal policy changes is likely to be contentious, but we ultimately

expect agreement on a long-term deficit reduction plan. Nevertheless, the forecasts shown in

the table below reflect the risk that scheduled fiscal changes could go into effect in January

before a long-term deal is reached.

Risks: The eurozone economic crisis and looming fiscal cliff remain the dominant risks to the

outlook.


% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 2011 2012 2013 2014

Real GDP 2.0 1.3 1.8 1.2 0.5 1.1 2.2 2.6 2.9 3.1 1.8 2.1 1.3 2.7

Personal consumption 2.4 1.5 1.7 2.3 0.7 1.4 2.2 2.6 2.8 2.7 2.5 1.9 1.6 2.6

Non residential f ixed invest 7.5 3.6 -0.8 1.0 -0.3 0.9 4.7 4.8 3.9 8.2 8.6 7.3 1.3 5.1

Residential f ixed invest 20.6 8.4 17.8 11.2 11.4 10.2 10.3 10.2 7.5 8.0 -1.4 12.2 11.5 9.0

Government expenditure -3.0 -0.7 -1.7 -2.2 -2.2 -0.9 -1.0 -0.9 -0.2 -1.0 -3.1 -2.1 -1.6 -0.8

Exports 4.4 5.2 -3.0 2.1 2.9 3.1 3.7 5.3 5.5 4.2 6.7 3.1 2.4 4.6

Imports 3.1 2.8 -0.7 2.7 1.5 1.8 2.3 3.5 3.9 3.1 4.8 2.9 1.8 3.1


Domestic f inal sales 2.3 1.5 1.2 1.5 0.3 1.2 2.1 2.4 2.6 2.8 1.9 2.0 1.3 2.6

Inventories -0.4 -0.5 0.9 -0.2 0.0 -0.2 0.0 0.0 0.2 0.2 -0.2 0.2 0.0 0.0

Net trade 0.1 0.2 -0.3 -0.2 0.1 0.1 0.1 0.1 0.1 0.0 0.1 -0.1 0.0 0.0

Unemployment rate 8.3 8.2 8.1 7.9 8.1 8.0 8.0 7.9 7.8 7.6 9.0 8.1 8.0 7.6

Nonfarm payrolls, 000 226 67 146 100 100 100 120 150 150 150 139 135 118 169

Housing starts, 000 saar 715 736 748 802 816 837 860 876 897 931 612 750 847 955

Consumer prices 2.8 1.9 1.7 2.4 1.8 1.9 1.6 1.0 1.2 1.3 3.1 2.2 1.6 1.4

Core CPI 2.2 2.3 2.0 1.9 1.8 1.6 1.6 1.7 1.7 1.7 1.7 2.1 1.7 1.8

Federal budget (% GDP) -8.7 -7.0 -6.2 -5.3


Fed securities portfolio ($trn) 2.61 2.62 2.60 2.72 3.01 3.30 3.59 3.58 3.57 3.57 2.61 2.72 3.58 3.57

Fed funds target 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

3-month LIBOR 0.47 0.46 0.36 0.40 0.40 0.50 0.50 0.50 0.60 0.60 0.58 0.40 0.50 0.65

TSY 2-year note 0.33 0.33 0.23 0.20 0.30 0.45 0.55 0.65 0.70 0.80 0.24 0.20 0.65 1.10

TSY 5-year note 1.04 0.72 0.63 0.70 0.50 0.70 0.90 1.00 1.10 1.20 0.83 0.70 1.00 1.50

TSY 10-year note* 2.23 1.67 1.63 1.75 1.50 1.75 1.90 2.00 2.00 2.10 1.87 1.75 2.00 2.40

30-year mortgage 3.99 3.66 3.50 3.50 3.40 3.40 3.60 3.70 3.70 3.80 3.95 3.50 3.70 4.10 *The medium term forecast range for the TSY 10-year note is as follows: 1.30-2.30. Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is a quarterly average as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages. Numbers in bold are actual values. Table reflects data available as of 19 October 2012. Source: Nomura





26


Olgay Buyukkayali +44 (0) 20 710 23242 [email protected]

Rest of EEMEA | Economic Outlook

Czech Republic: No escape, no safe haven

An ongoing recession in H1 may be inevitable for this most open economy. Politics

remain a key risk under a new coalition with only a marginal majority.

2010 2011 2012 2013

Real GDP % y-o-y 2.7 1.7 -0.7 0.9




CPI % y-o-y * 2.3 2.4 2.3 1.6

CPI % y-o-y ** 1.5 1.9 3.2 1.9

Core CPI ex VAT % y-o-y ** 1.3 0.8 0.2 1.0

Population mn 10.5 10.5 10.4 10.4


Reserves EUR bn ** 31.8 31.1 29.6 29.2


Public debt % GDP 41.3 43.8 45.2 47.0

CNB policy rate %* 0.75 0.75 0.25 0.50

EURCZK* 25.0 25.59 25.20 24.20

*End of period, **Period average, Bold is actual data

GDP will likely contract in 2012 thanks to contamination from the eurozone, owing to the openness of the economy. However, a strong banking system, where deleveraging should only have a small effect, and the lessening of the fiscal drag vs. 2011 are two positives.

We expect the government to make small additional measures to keep fiscal consolidation on track, but with a potentially unstable coalition we believe any stronger action or structural reforms are unlikely. The ruling coalition‟s reduced majority leaves little margin for error, and we doubt deficit targets will be met. However, with steady access to domestic funding and low debt, little additional fiscal consolidation may be needed for the medium-run path to remain credible.

Underlying CPI inflation should stay at the bottom of the target in 2012 before falling in 2013. We think the CNB will stay on hold after October‟s cut until Q3 2013 as we think inflation is under control and fiscal austerity should lead to lower growth.

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.

2010 2011 2012 2013

Real GDP % y-o-y -1.6 2.5 0.2 0.8



CPI % y-o-y * 8.0 3.1 4.7 3.4

CPI % y-o-y ** 6.1 5.8 3.3 4.5


Public debt % GDP 30.5 33.3 35.0 33.3

BNR policy rate %* 6.25 6.00 5.00 6.00

EURRON* 4.28 4.33 4.25 4.00

*End of period; **Period average; Bold is actual data

Markets are becoming concerned about Romania due to Moody‟s ratings outlook downgrade to negative, IMF concerns that November elections mean targets are not met and asset fire sales to support higher public sector wages.

We think the external slowdown and minimal credit growth will mean a sluggish recovery in H2, although stronger than others in the region. Romania is also vulnerable to deleveraging, which could pose a serious risk for the balance of payments. While the BNR has a contingency plan that may involve capital controls, tapping the IMF‟s precautionary SBA may be necessary if the situation deteriorates.

Fears of losing the next election may mean the new Victor Ponta-led coalition will not stick to the IMF-backed austerity programme. We see much political risk this year, although the real policy risk is next year.

Source: Ministry of Statistics, Nomura Global Economics

Israel: Slower exports, slower growth, but no recession

An increasingly weak currency and looser monetary policy should help Israel.

2010 2011 2012 2013

Real GDP % y-o-y 4.5 4.8 2.8 3.3

CPI % y-o-y * 2.7 2.2 3.4 3.3

CPI % y-o-y ** 2.7 3.5 2.1 2.6

Budget balance % GDP -3.0 -2.7 -3.0 -3.5

Current account % GDP 3.0 0.3 -0.3 1.0

Policy rate %* 2.00 2.75 2.25 3.00

USDILS* 3.52 3.81 3.80 3.60

*End of period, **Period average, Bold is actual data

Israel‟s export-driven economy outperformed the region in the post-crisis environment thanks to an aggressive monetary policy response resulting in healthy domestic demand. The economy is currently slowing in line with the global backdrop.

Inflationary pressures appear to have subsided and inflation expectations are well anchored. This year‟s electricity price hikes however, may limit the extent of policy easing. With the policy rate at 2.25%, we see no further cuts unless the global economy deteriorates further.

Underlying final demand should not weaken greatly and the recovery in H2 should result in measured rate hikes (75bp to 3.00% by Q3 2013).

Source: BOI, Nomura Global Economics




27

Boris Segura +1 212 667 1375 [email protected]

Benito Berber +1 212 667 9503 [email protected]

Tony Volpon +1 212 667 2182 [email protected]

Rest of LatAm | Economic Outlook

Argentina: Old habits die hard

Policy moves after the presidential elections damage economic performance

2010 2011 2012 2013

Real GDP % y-o-y 9.2 8.9 2.0 4.0

Consumption % y-o-y 9.4 10.7 4.3 4.2

Gross Investment % y-o-y 21.2 16.6 -7.1 7.3

Exports % y-o-y 14.6 4.3 -5.7 6.7

Imports % y-o-y 34.0 17.8 -5.2 10.8

CPI % y-o-y * 10.9 9.5 9.9 9.7

CPI % y-o-y ** 25.2 21.8 24.7 30.2

Budget balance % GDP *** 1.7 0.3 -0.9 -2.7

Current account % GDP 0.8 0.0 1.8 1.9

Policy Rate % 9.7 14.6 15.0 12.0

USDARS 3.98 4.29 4.90 5.65

* Official data, ** Private estimate, ***Primary budget balance, Bold is actual data

The authorities continue to pursue expansionary fiscal and monetary policies.

Exchange controls are effectively segmenting the FX market, with heavy damage to economic activity and microeconomic efficiency.

Locals are rushing to purchase USDs, as high inflation, policy missteps and other mixed signals sap domestic confidence in the ARS.

We expect faster ARS depreciation, but without a supportive macroeconomic framework we fear that a necessary real depreciation of the currency will be difficult to achieve.

Source: CSO, CNB, Nomura Global Economics.

Colombia: Growth moderating

After a strong half, the growth will likely lose momentum.

We have revised our 2012 GDP growth forecast to 4.5% y-o-y after a strong first half supported by strong domestic consumption and resilient exports.

Inflation and inflation expectations will remain well anchored around 3.0%.

We expect an additional 25bp interest rate cut to 4.50% during the remainder of the year and for the authorities to continue intervening in the FX market to curb COP appreciation.


Chile: Between rock and a hard place

Domestic demand remains strong in Chile, while inflation has moderated. We expect the central

bank to keep its policy rate on hold in the near term.

Chile‟s economy has shown strong resilience in a turbulent year, as robust consumption and investment continue to support growth. We revise up our 2012 GDP growth forecast to 5.1%, slightly above potential.

Both headline and core inflation are now below target (3%) and the currency‟s recent appreciation should help soften the global commodity price shock. We expect end-2012 CPI inflation of around 3%, with expectations well anchored.

Given around-trend growth, below-target inflation and improving external scenarios, we expect the central bank (BCCh) to remain in “wait-and-see” mode and keep the policy rate on hold at 5%.

Strong imports, driven by domestic demand, and a slightly weaker export profile, are pushing the trade balance lower and current account in negative territory, potentially increasing Chile‟s external vulnerability in the medium term.






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29

Disclosure Appendix A-1

ANALYST CERTIFICATIONS

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33

Global Economics

Economists

North America-Economics Research

Lewis Alexander US Chief Economist [email protected] +1 212 667 9665

David Resler MD- Chief Economic

Adviser [email protected] +1 212 667 2415

Aichi Amemiya US Economist [email protected] +1 212 667 9347

Charles St-Arnaud ED - G10 FX Research [email protected] +1 212 667 1986

Ellen Zentner Senior US Economist [email protected] +1 212 667 9668

EMEA-Economics Research

Jacques Cailloux Chief European Economist [email protected] +44 (0) 20 710 22734

Nick Matthews

[email protected] +44 (0) 20 710 25126

Silvio Peruzzo

[email protected] +44 (0) 20 710 23205

Dimitris Drakopoulos Economist [email protected] +44 20 710 25846

Lefteris Farmakis Economist [email protected] +44 (0) 20 710 39242

Takuma Ikeda Senior Economist [email protected] +1 212 667 1153

Philip Rush Economist [email protected] +44 20 7102 9595

Stella Wang Economist [email protected] +44 (0) 20 710 20599

Japan-Economics Research

Tomo Kinoshita Chief Japan Economist [email protected] +81 3 6703 1280

Mika Ikeda Economist [email protected] +81 3 6703 1287

Shuichi Obata Senior Economist [email protected] +81 3 6703 1295

Kohei Okazaki Economist [email protected] +81 3 6703 1291

Asuka Tsuchida Economist [email protected] +81 3 6703 1297

Asia Ex-Japan-Economics Research

Rob Subbaraman

Chief Economist Asia, Asia ex-Japan and Head of Fixed Income Research, Asia ex-

Japan

[email protected] +852 2536 7435

Young Sun Kwon MD - Korea Economist [email protected] +852 2536 7430

Euben Paracuelles Southeast Asia Economist,

Executive Director [email protected] +65 6433 6956

Sonal Varma India Economist, Executive

Director [email protected] +91 22 403 74087

Zhiwei Zhang Executive Director [email protected] +852 2536 7433

Strategists

Global-Emerging Markets Research

Olgay Buyukkayali Head of EM Strategy, EMEA [email protected] +44 (0) 20 710 23242

Tony Volpon Head of Emerging Markets

Research - Americas [email protected] +1 212 667 2182

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

Benito Berber Senior Latin America

Strategist [email protected] +1 212 667 9503

Boris Segura Senior Latin America

Strategist [email protected] +1 212 667 1375





























Documents

Nomura global economic outlook 121016