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Nomura | Global Annual Economic Outlook

13 November 2012

Global Annual Economic Outlook


Economics Research | Global

Weak, with a chance of becoming bleak


Contents
GLOBAL
Global Outlook | Weak, with a chance of becoming bleak Forecast Summary Our View on 2013 in a Nutshell 2 5 6

13 NOVEMBER 2012

Global Economics
nomura-globalEconomics@nomura.com 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)

ASIA EX-JAPAN
Asia Outlook | 2013: The heat is on Australia | The peak in resource investment is coming China |Up in H1, down in H2 Hong Kong |Looming fiscal stimulus India | A year of consolidation Indonesia | Watch policies and politics Malaysia | Time for fiscal tightening Philippines | Still likely to shine Singapore | The (long) road to restructuring South Korea | Growth to rebound from a very low base Taiwan | External demand holds the key Thailand | New growth engines 7 11 12 15 16 17 18 19 20 21 22 23

JAPAN
Japan | Export recovery likely to deliver positive growth in Q1 2013 24

AMERICAS
United States | More clarity, less uncertainty Canada | Steady as she goes: growth slightly above trend in 2013 Mexico | 2013: The year of reforms Brazil | Inflation storm on the horizon Rest of LatAm 27 33 34 35 36

EURO AREA
Euro Area | Spain and Italy to remain at the epicenter 37

UNITED KINGDOM
United Kingdom | Stagnant 41

EEMEA
EEMEA Outlook| Some silver linings to the external risks bearing down Hungary | Fun and games continue Poland | NBP in a limited cutting cycle - growth still outperforming South Africa | Status quo means the brakes are still applied Turkey | A healthy rebalancing Rest of EEMEA 42 46 47 48 49 50

Nomura Securities International Inc.

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

Nomura | Global Annual Economic Outlook

13 November 2012

Global Outlook | Weak, with a chance of becoming bleak


Desmond Supple
+44 (0) 20 710 22125 desmond.supple@nomura.com

Another year of below-trend global growth


Our view is that the global economic outlook for 2013 is best defined as weak, with the chance of becoming bleak. Our core view points to global economic growth of 3.0% in 2013, down from 3.1% this year and below the trend rate of global growth of around 3.75%. Once again, the developed markets comprise the most notable source of weakness, expected to expand by just 0.7% next year, down from an already soft estimated 1.2% in 2012.

Reasons for weakness


1) Echoes of a burst bubble One reason for the continued weak performance of developed markets is the lingering repercussions of the bursting of the credit bubble five years ago. Household, corporate and financial sector balance sheet restructuring remains a theme across many countries, which is limiting leverage in the system and rendering consumption growth more a function of income growth. The post-crisis push for deeper financial sector regulation is adding a further headwind to global growth. To illustrate using the Basel 3 regulatory framework, this increases banks capital charges and forces them to rely on longer-term, more expensive funding. As such, banks are growing more discerning over their use of their balance sheets, resulting in spreads between lending rates and the policy rate structurally widening. 2) The ongoing eurozone crisis A second key reason for the weakness in global growth is the continuing eurozone crisis. Policy settings in the eurozone are deeply restrictive, with governments implementing a policy of procyclical fiscal tightening. Moreover, peripheral countries face a zero-bound problem, which is made worse by weakness in domestic banking systems resulting in a break in the transmission mechanism from low policy rates to broader lending rates. In short, Europe is in an unstable equilibrium, with a deepening growth crisis belying the European Central Bank's (ECB) efforts to address the financial crisis. We expect eurozone GDP to fall by 0.8% next year following a decline of 0.5% in 2012. Europe's current policy settings seem incompatible with a notable economic recovery over a meaningful timeframe, and in peripheral markets the outlook is for depression rather than recession. In Spain, we expect GDP to fall by 3.0% next year and by 1.5% in 2014, while we forecast Greek growth of -4.2% for 2013, which would be a sixth consecutive year of recession. (The question of official sector involvement in Greek debt relief, and indeed the stability of the countrys presence in the euro, should remain sources of uncertainty in 2013.) Europe is set to remain a heavy weight on global growth over the medium term. Needless to say, Europe's inability to grow means that solvency concerns will remain elevated in the peripheral economies in 2013, and we see a risk that these concerns creep into some semi-core markets, such as France. 3) Pro-cyclical fiscal austerity A third constraint on growth is the extent to which fiscal policy restrains demand. In the US, even if the fiscal cliff is smoothly traversed, our US research team notes that current policies will see fiscal policy reduce growth by 1 percentage point (pp) next year (if we go over the fiscal cliff permanently, then clearly a deep, double-dip recession looms). We have already noted the procyclical fiscal policy in the eurozone that is helping to push many countries into unstable equilibriums, while we do not expect the UK government to blink in the face of anaemic growth, and we assume it will continue efforts to rein-in the budget deficit. However, one developed country that might buck the trend of fiscal restraint is Japan. Postearthquake reconstruction spending should remain a continued support to economic growth, but one possible additional spur to consumer demand is the anticipated consumption tax hikes in 2014 and 2015. As was seen before Japan's last consumption tax hike on 1 April 1997, this has the potential to see consumers bring forward their spending plans. Of course, the experience of 1997 is not a happy one for Japan. The consumption tax hike saw growth slide over the

Nomura | Global Annual Economic Outlook

13 November 2012

subsequent 12 months, primarily due to the deterioration in financial stability and the Asian economic crisis. However, we are confident that history will not repeat and our economic research team is comfortable in assuming that positive growth can be maintained in 2014 after a tax hike in April is implemented.

Few monetary policy shibboleths will remain


One of the additional themes of 2013 is likely to be the degree to which central banks will try to offset weak growth by adopting yet more unorthodox monetary policies. In this respect, the ECB and the Bank of Japan (BOJ) are likely to be at the forefront of embracing fresh unorthodoxy. In the eurozone, we expect a renewed escalation in the crisis as the proposed firewall proves inadequate to address the lingering solvency concerns in non-core markets. This should once again force the ECB into the unwanted position of having to contemplate even bolder and previously unpalatable monetary responses, or be confronted with a realistic prospect of a euro break-up. However, in Japan a potentially greater and more structural change may be taking place in monetary policy. The growing political influence over the BOJ is expected to be reinforced by the appointment of BOJ Governor Shirakawas replacement next April. Q2 1013 should also be a critical time for Japan as the government will be making the final decision on whether it implements the April 2014 consumption tax. We expect the increased political pressure on the BOJ to embed a trend towards bolder monetary policy easing given that inflation is expected to undershoot the goal of 1%. We expect a weak JPY to be a feature of 2013. The extent of monetary policy gyrations taking place in Europe and Japan are so notable that, in comparison, the continued aggressive and bold monetary policy trends in the US and the UK appear rather routine. In the US, we assume that the Fed will maintain its USD40bn a month rate of MBS purchases until Q3 2013, while Operation Twist will be replaced with a programme of outright Treasury purchases. Meanwhile, in the UK where the Bank of England (BOE) has expanded its balance sheet proportionally more than all other G10 central banks since the onset of the crisis we expect the BoE to deliver just a GBP50bn expansion of QE3 in February, taking the asset purchasing fund to GBP425bn. Our UK economics team does not expect a trend of above-target inflation in 2013 to restrain the BOE from its focus on supporting growth.

In the emerging world: Brazil to outperform the other BRICs


We expect that once again, emerging markets will provide a partial but not compete offset to weakness in developed markets. Although even here, our optimism is equivocal. Of the crucial BRIC economies, we expect Brazil to display the most improved growth outlook in 2013 as the economy rebounds on the monetary and fiscal stimulus delivered this year. We forecast Brazilian growth to rebound to 4.1% in 2013 from an estimated 1.3% this year. One interesting theme in Brazil next year will be how long the central bank will refrain from tightening monetary policy in the face of recovering growth and an expected uptrend in inflation following a cumulative 525bp of cuts to the Selic rate since August 2011. Within Asia, our out-of-consensus forecast for a policy-driven rebound in growth in China in Q4 2012 and Q1 2013 is being validated by an upswing in economic data. However, we also assume that China's unleashed policy stimulus will be short-lived, as inflation rises in 2013. The current investment-led stimulus and rapid expansion of financing outside the regulated banking sector could also exacerbate the already large structural problems in the economy. Therefore, we expect GDP growth to slow back towards 7.0-7.5% levels from H1 2013 onwards. Full-year 2013 growth is forecast to be lower than in 2012. We also maintain our one-in-three probability of a hard landing (i.e. GDP growth averaging 5% or less over four consecutive quarters), starting to play out before the end of 2014. Meanwhile, we expect a very shallow recovery in the other Asian BRIC India where growth remains weighed down by a lack of structural reforms (we are sceptical that recent reform announcements will be fully implemented ahead of elections in 2014) and by the related trend of sticky inflation. Elsewhere in the EM world, we expect the EEMEA region to be split between stronger growth outperformers like Turkey and Poland, and those suffering from a mix of domestic idiosyncratic risks while feeling greater pain inflicted on them by the eurozone crisis. This group includes Hungary, South Africa and the Balkans, where narrow funding tightropes will need to be walked.

Nomura | Global Annual Economic Outlook

13 November 2012

Pockets of optimism and upside risks to the core view


Nonetheless, there are some clear pockets of optimism within our generally downbeat global economic outlook. As the uncertainty surrounding the US fiscal cliff dissipates, we anticipate a capex-driven rise in US growth in H2 2013 (helped by an ongoing housing market recovery), such that we expect the US to post above-trend rates of expansion into Q4 2013. This underpins our view that the Fed will call time on its latest round of QE in Q3 next year as the outlook for unemployment should have improved. In Europe, one possible upside surprise is if policymakers start to target structural reforms and structural budget deficits more than nominal budget deficits. While this might not remove the pro-cyclical fiscal tightening already in motion, it may be able to break the cycle of weak growth undermining deficit-reduction targets, leading to fresh austerity, leading to weaker growth In the developed world, inflation is expected to be contained, which should allow monetary policy to focus more directly on growth considerations.

but there remains an asymmetry around the risk


However, when looking at the world economy it is clear that an asymmetry exists as the downside risks are profound. In Europe, our forecast for a deep regional recession and depression in some countries already assumes further bold monetary policy responses. What if Spain and Italy require a full bail-out and the Troika is unable to provide sufficient funding? As our European economics team says with regard to the eurozone: The currency might be irrevocable but membership is no longer. In the US, the fiscal cliff looms large as a downside risk. Although, on this point we assume that the severe economic consequences of going over the cliff will provide something of a selfequilibrating mechanism to the political machinations: we assume that economic weakness would swiftly force politicians back to the negotiating table. Our US economists outline how a temporary leap off the cliff would have a far less damaging impact on growth than a persistent shock. In essence, a fiscal bungee jump versus a fiscal swan dive. In China, the perennial risk is that the country fails to engineer a soft landing. After all, this would be an historic achievement since there are no precedents of a large country experiencing a controlled descent from such a rapid expansion of credit and investment growth. In Asia generally, our team notes that trend growth rates are declining. In this context, the decline in the regions current account surplus is somewhat worrisome since it is happening for the wrong reasons. Given how bleak the sum of these risks is, our weak macroeconomic baseline scenario might not be such a bad outcome.

Nomura | Global Annual Economic Outlook

13 November 2012

Forecast Summary
Real GDP (% y-o-y) Global Developed Emerging Markets Americas United States* Canada Latin America Argentina Brazil Chile Colombia Mexico Venezuela Asia/Pacific Japan Australia New Zealand Asia ex Japan, Aust, NZ China Hong Kong*** India** Indonesia Malaysia Philippines Singapore*** South Korea Taiw an Thailand Western Europe Euro area Austria France Germany Greece Ireland Italy Netherlands Portugal Spain United Kingdom EEMEA Czech Republic Hungary Israel Poland Romania South Africa Turkey 2012 3.0 1.1 5.2 2.3 2.1 2.2 2.8 2.0 1.3 5.1 4.5 3.7 6.0 5.4 1.6 3.6 2.7 6.3 7.9 1.5 5.3 6.1 4.8 6.0 1.8 2.3 1.0 5.5 -0.4 -0.5 0.4 0.1 0.9 -6.5 -0.1 -2.4 -0.3 -3.2 -1.4 -0.2 2.0 -0.9 -1.1 2.8 2.4 0.2 2.4 3.0 2013 3.0 0.7 5.6 2.1 1.5 2.0 3.7 4.0 4.1 5.5 4.5 3.5 -1.0 5.4 0.5 2.4 3.2 6.4 7.7 2.5 6.1 6.1 4.0 6.0 3.4 2.5 3.0 4.5 -0.6 -0.8 0.2 -0.5 0.3 -4.7 0.4 -2.5 -0.3 -2.8 -3.0 0.4 2.6 0.7 0.1 3.0 2.0 0.8 2.6 4.5 2014 3.7 1.7 5.8 3.0 2.8 2.1 3.6 3.5 3.5 5.0 4.5 3.5 3.0 5.7 1.2 2.8 3.3 6.6 7.5 3.5 6.5 6.2 4.6 5.8 4.2 3.5 3.5 5.0 0.2 0.0 0.8 0.5 0.7 -1.8 1.3 -1.5 0.2 0.0 -1.5 1.0 3.6 1.4 0.8 3.5 3.5 1.8 3.2 5.5 Consum er Prices (% y-o-y) 2012 3.3 2.0 4.7 3.6 2.1 1.7 7.9 26.4 5.5 3.0 2.9 4.1 17.5 3.1 -0.1 1.6 1.7 3.7 2.6 4.0 7.6 4.4 1.7 3.2 4.8 2.2 2.0 3.0 2.6 2.5 2.5 2.2 2.2 0.9 2.0 3.3 2.8 2.8 2.5 2.8 5.7 3.3 5.9 2.1 3.8 3.8 5.6 9.1 2013 3.4 1.5 5.5 3.6 1.6 1.9 9.4 32.3 5.7 3.3 3.5 3.4 32.4 3.8 -0.3 2.6 2.4 4.6 4.2 4.3 7.2 5.2 2.4 4.4 3.9 2.7 2.3 3.0 1.8 1.7 2.2 1.4 1.8 -0.2 0.4 1.8 2.6 1.3 2.5 2.6 4.6 2.1 5.0 2.6 2.4 5.0 5.5 6.7 2014 3.4 1.7 5.3 3.4 1.4 2.0 8.9 29.7 5.5 3.0 3.5 3.5 24.7 4.0 1.8 2.5 2.8 4.5 4.0 4.3 6.9 5.1 2.5 4.5 3.6 3.0 2.3 3.1 1.7 1.6 2.0 2.0 1.8 -0.3 0.5 1.4 1.9 0.7 1.4 2.3 4.5 1.5 4.3 2.7 3.0 4.2 5.7 6.3 Policy Rate (% end period) 2012 2.96 0.38 5.99 2.08 0.13 1.00 7.49 15.00 7.25 5.00 4.50 4.50 15.00 4.66 0.05 3.00 2.75 5.65 6.00 0.40 8.00 5.75 3.00 3.50 0.38 2.75 1.88 2.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 4.54 0.05 5.75 2.00 4.50 5.00 5.00 5.75 2013 3.21 0.42 6.34 2.42 0.13 1.75 8.54 17.00 9.00 5.50 4.50 4.50 17.00 4.92 0.05 3.50 3.50 5.90 6.50 0.40 7.50 6.25 3.50 4.00 0.48 2.75 2.13 2.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 4.41 0.05 5.00 2.50 4.00 6.00 4.50 5.75 2014 3.36 0.49 6.40 2.53 0.13 3.00 8.39 14.00 8.50 5.25 5.50 5.50 16.00 4.99 0.05 4.00 4.25 5.90 6.50 0.40 7.00 6.75 4.00 4.50 0.50 3.25 2.13 3.25 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 5.31 1.00 6.00 3.00 5.00 9.00 6.00 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 BOJs 0-0.10% target unsecured overnight call rate range. CPI forecasts for Latin America are year-onk Monthly. Source: Nomura Global Economics.

Nomura | Global Annual Economic Outlook

13 November 2012

Our View on 2013 in a Nutshell


United Sates
We expect growth to accelerate in the second half of the year, led by a rebound in capital expenditures. Ample economic slack, apparent in the high rate of unemployment and unused capacity, should restrain inflation. We expect the FOMC to embark on further long-term asset purchases at the start of the year. A strengthening of the housing market should support investment, job creation, and aggregate demand. Europes debt crisis, slowing global growth, and contractionary US fiscal policy are the key risks to growth.

Europe
Fiscal tightening, financial deleveraging and sovereign debt market tensions should lead to a deeper-than-expected recession. Spain risks delaying call for ECCL due to market stability and ESM bank recap delays. Our baseline is an ECCL will be called. After a phase of relative calm, markets will likely test the backstop and pressure should rebuild in Q1 on weak sovereigns. GDP contractions, higher non-performing loans and rising debt trajectories remain the key euro area challenges. The likelihood of a December ECB rate cut is finely balanced, but is increasingly likely that the next will not be before Q1 2013. We expect inflation to be sticky in the UK, albeit back in the right ballpark, but in the euro area to slip below target during 2013. The BoE aggressively announced QE, liquidity and funding support in 2012. We forecast more, with 50bn of QE in February.

Japan
We expect an export recovery, driven by China's economic recovery to deliver positive growth in Q1 2013. The export recovery should stimulate domestic demand and push the overall economy into a stable growth phase in 2013. Our main scenario is that the BOJ will apply additional easing measures in January 2013, with the risk earlier than our call. The main risks are yen appreciation, a worsening European debt problem and the US and China slowing.

Asia
The export slump calls for policy stimulus, but raises the risk next year of a build-up in debt, inflation and asset price bubbles. China: GDP growth will likely stay strong in H1 2013 supported by investment, but slow in H2 due to policy tightening. Korea: We expect the BOK to stay on hold at 2.75% through 2013 as growth and inflation should rise modestly from a low base. India: With macro imbalances slow to correct and binding supply-side constraints, we expect only a shallow recovery. Australia: With global growth stabilising, the RBA is comfortable with the current level of monetary stimulus in the economy. Indonesia: An increasingly uncertain policy environment may lead to delays in reforms and sustained current account deficits.

EEMEA (Emerging Europe, Middle East and Africa) and Latin America
South Africa: A continuing political status quo will continue to hold the economy back, the SARB may cut again. Hungary: A market blow-up is needed for an IMF deal, rate cuts and a new MNB Governor in March could be the trigger. Poland continues to outperform and a recession is difficult to envisage, so we see a limited cutting cycle. Turkey: Rebalancing continues and is likely to pave the way for further upgrades. Brazil: Inflation is set to rise towards 6% in H1 2013, forcing the BCB to start a new hiking cycle. Mexico: The new government will embark on a series of important reforms in 2013. Argentinas growth is set to recover modestly in 2013. Inflation and REER overvaluation to remain problematic.

Nomura | Global Annual Economic Outlook

13 November 2012

Asia Outlook | 2013: The heat is on


Asias rapid economic rebalancing increases the risk of some economies overheating.
Since the global financial crisis, Asia ex-Japan has been instrumental in helping to rebalance the global economy. The regions total current account surplus has shrunk to 2% of GDP, a level not seen since the Asian financial crisis 15 years ago (Figure 1). The shrinkage is not just due to weak exports but also resilient Asian domestic demand (Figure 2). Unlike in 2008-09, Asian exports have cooled but not collapsed, so the multiplier effects on domestic demand, via job losses, have not been as significant, while Asias already-lax policies have become looser. To be sure, the ongoing healing process from balance sheet recessions will keep the big, advanced economies fragile in 2013, especially the euro area where we expect more bouts of financial market turmoil and a slight GDP contraction in every quarter next year. But while cognizant of the downside risks to global growth, our base case is for the global economy to not suffer another major heart attack, as it did in late 2008. This distinction is important, for without a collapse in Asian exports or a mass exodus of foreign capital, our core view is for the rebalancing to continue, with Asian domestic demand further increasing its contribution to GDP growth. We expect aggregate GDP growth in Asia ex-Japan to rise from 6.3% y-o-y in 2012 to 6.4% in 2013 (see the country outlook pages for details). Our over-arching theme for Asia next year is that economies will display increasing symptoms of overheating, like debt build-up, frothy property markets and rising CPI inflation. The biggest risk, in our view, is that Asian policymakers fall behind the curve in normalizing very accommodative macro policies. This is the crux of our China story of two halves: 8.2% y-o-y GDP growth in H1 2013, followed by 7.2% in H2.
Fig. 1: Asia ex-Japans total current account surplus
% of GDP 8 7 6 5 4 3 2 1 0 -1 -2 Jun-96

Rob Subbaraman
+852 2536 7435 rob.subbaraman@nomura.com

Fig. 2: Contribution to year-on-year real GDP growth, 2012


percentage points 12 10 8 6 4 2 0 -2 -4 -6
Net exports Investment Consumption

Jun-00

Jun-04

Jun-08

Jun-12

Source: CEIC.

Note: Year to Q3 GDP for China, Korea and Indonesia; others are H1 GDP. Source: CEIC.

Three growth engines


We see three main factors supporting Asias rapid economic rebalancing: China. Contrary to consensus, we have long held the view that China can experience a policyled cyclical economic recovery despite its deep structural problems. Fiscal policy easing really only started in earnest in July after the announcement that Q2 GDP growth had fallen below 8%; there was no single large-scale stimulus announcement like in late 2008, but add up all the measures and it is significant. We expect GDP growth to rebound from 7.4% y-o-y in Q3 to 8.4% in Q4, and stay above 8% in H1 2013. However, we expect a positive output gap to stoke CPI inflation to over 4% y-o-y in Q2 2013, triggering policy tightening. This, coupled with a renewed debt buildup outside the regulated banking sector and slow progress in rebalancing from investment- to consumption-led growth, will likely heighten investor concerns, causing GDP growth to slow to 7% y-o-y by Q4 2013. This may seem weak by Chinas standards, but the size of Chinas economy (at market exchange rates) has almost doubled from USD4.5trn in 2008 to an estimated USD8.2trn in 2012. A much larger economy growing at a moderately slower pace is still a very powerful growth pole for the rest of Asia. Actually, we estimate that

Nomura | Global Annual Economic Outlook

13 November 2012

2012 is the crossover year when the annual increase in nominal personal consumption in China (USD478bn) surpasses the US (USD403bn). Loose policies. The central banks in China, India, Indonesia, Korea, Thailand and the Philippines have all cut policy rates this year and, adjusted for inflation, real policy rates are historically low across Asia. But what is less appreciated is that many other Asian governments are mimicking China, taking advantage of low public debt levels and shifting to more expansionary fiscal policies. Hong Kong, Malaysia, Thailand and the Philippines release timely monthly fiscal data, which show that their combined central budget deficit in the 12 months to September is almost as large as after the global financial crisis (Figure 3). In the advanced world, loose monetary policies are being offset by fiscal austerity; in emerging Asia, both policies work together and are more effective. Low unemployment, solid credit growth and positive wealth effects from buoyant property markets are conspiring with these loose macro policies to bolster domestic demand. There are, however, some exceptions: India has limited room to use countercyclical policies due to high inflation and poor fiscal finances; Koreas loose policies are being dampened by a household sector overburdened with debt; and Singapore has refrained from fiscal easing as it focuses on raising productivity. Capital inflows. Net foreign capital inflows to Asia have significant scope to intensify in 2013. The most comprehensive gauge, which captures FDI, portfolio debt and equity flows as well as cross-border foreign bank claims, is the financial account of the balance of payments. Using this measure (Figure 4), we see that, in the space of just two and a half years since the crisis (Q1 2009 to Q2 2011), net capital inflows to Asia ex-Japan totalled a massive USD783bn, more than the USD573bn in the five years prior, pulled by Asias relatively higher growth prospects and pushed by central bank quantitative easing in advanced economies (which, through portfolio rebalancing, has spill-over effects on emerging markets by pushing investors into riskier assets). While volatile in recent quarters, we expect another large bout of net inflows, buoyed by Chinas economic recovery, QE3 and the fading of US fiscal cliff fears. There certainly seems to be room for more inflows. A glaring example is the widening gap between the shares of emerging Asia in world GDP and in the MSCI world equity index (Figure 5). Another large bout of net capital inflows would accelerate Asias rebalancing via 1) currency appreciation, which crimps exports;or 2) FX intervention and central banks keep interest rates lower than they would otherwise, easing liquidity conditions and buoyed asset markets.
Fig. 3: Central government budget positions
USD bn, 12-month rolling sum 100 USD bn, 12-month rolling sum 20

Fig. 4: Asia ex-Japans net capital inflows


US$bn 120 90 60 30
0 USD 573bn USD QE1 announced 783bn

50 0 -50

10 0
-10

-100 -150 -200


China, LHS -20

-30
-60 QE2 announced -90 Jun-03 Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12

Rest of Asia, RHS

-30

-250 -40 Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12

Note: Rest of Asia is the aggregate fiscal balances of Hong Kong, Malaysia, Thailand and the Philippines. Source: CEIC.

Note: Countries are China, HK, India, Indonesia, Korea, Taiwan, Malaysia, Philippines, Singapore, and Thailand. Source: CEIC.

Four risks
The one we are most concerned with is some Asian economies overheating. Overheating. In our view, there is too much reliance on countercyclical policies to counter weak exports, and not enough on structural reforms to boost the supply-side of the economies. In October, the real interest rate on 1yr bank deposits in China was 1.1%, while in the rest of Asia the average real policy rate, weighted by GDP, was just 0.1% and this is during a period of low inflation in the region (Figure 6). Asias real policy rate is likely to turn negative again as inflation rises. These persistent negative real rates sow the seeds of overheating. From 1999 to 2005, the real interest rate was negative 19% of the time in China and 10% of the time elsewhere in Asia, while from 2006 to 2012, the share of time with negative real rates increased

Nomura | Global Annual Economic Outlook

13 November 2012

to 57% and 43%, respectively. Central banks justify erring on the side of laxity as insurance against the downside risks to global growth and to avoid provoking too-strong capital inflows, but as a result credit is growing faster than nominal GDP in all Asian countries, and property markets are frothy in many of Asias capital cities. We see a danger in the increased use of macro-prudential measures in an attempt to cool property markets and credit growth; these measures may work for a while but overtime as loopholes are found, they turn out to be a poor substitute for higher interest rates. Central banks ultimately find themselves behind the curve in tackling credit booms, asset price bubbles and inflation. Hong Kong seems most at risk, but we cannot rule out overheating in other countries, including China, India, Indonesia and Singapore. Commodity price surge. Despite lackluster growth in the advanced economies, very loose monetary policies around the world and strengthening demand in emerging economies, especially Asia, could fuel another surge in global commodity prices, particularly food prices. The global supply-demand equation for food remains tight, and the size of the annual increase in Chinas personal consumption is about to overtake the US to be the worlds largest. This is important. For unlike other commodities, the sensitivity of the demand for food to an increase in personal income is much greater for lower-income countries, as is the changing of diets toward a higher calorie intake. A surge in global food prices could lift Asian inflation sharply and ultimately restrict growth, notably in India, Indonesia, and the Philippines. Recoupling. Trend GDP growth in Asia ex-Japan is around 7%, a full five percentage points higher than in advanced economies, or put more starkly: real GDP is above its pre-global financial crisis peak by 41% in China, 31% in India, 25% in Indonesia and 11% in Korea compared with 2.3% in the US and still 2.4% below in the euro area. However, the 2008-09 experience has debunked any notion that Asia can decouple from advanced economies at times of extreme dislocation. While relatively strong economic and policy fundamentals have helped buffer Asian economies against sub-par growth in the US and euro area, another deep recession in the advanced world would be a completely different story, as Asia would hit a tipping point where non-linear effects kick in from a collapse in exports and foreign capital flight. Those economies that are very open to trade (Hong Kong, Singapore, Malaysia), have current account deficits (India and Indonesia) or weak domestic economies (Korea) are most vulnerable. China hard landing. In November 2011, we published an Anchor Report, China risks, in which we analyzed Chinas structural economic problems and concluded that they had become too big to ignore. We assigned a one-in-three likelihood of China experiencing a hard economic landing before the end of 2014, which we defined as GDP growth averaging 5% y-o-y or less over four consecutive quarters. To quantify the macro risks on an ongoing basis we developed the Nomura China Stress Index (CSI), which is near its all-time high. We maintain a one-in-three likelihood of a hard landing, as recent policy easing has increased shadow banking activities, which caused the CSI to rise in Q3 2012. A China hard landing would have a significant impact on Asia. A recent IMF study estimated that each percentage point (pp) decline of investment growth in China would lower GDP growth by more than 0.5pp in Korea, Taiwan and Malaysia.
Fig. 5: Asia emerging market share in world GDP and MSCI Fig. 6: Real policy interest rates (deflated by headline CPI)
% p.a. 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 Oct-00

% share
25
21 Asia EM share in world MSCI equity index Asia EM share in world GDP (at market exchange rates)

IMF forecasts

China's real bank deposit rate Rest of Asia's real policy rate

17
13

9
5

1 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Oct-02

Oct-04

Oct-06

Oct-08

Oct-10

Oct-12

Note: Asia EM is China, India, Indonesia, Malaysia, Korea, Philippines, Taiwan and Thailand. Source: MSCI and IMF.

Note: For the rest of Asia, the real policy rate is GDP weighted. Source: Bloomberg and CEIC.

Nomura | Global Annual Economic Outlook

13 November 2012

A tour of the region


Chinas economy is on a structurally downtrend for the next several years because of two reasons. First, potential growth slows as (i) excess labor supply has been largely depleted, which drives up wages and drags down productivity growth; (ii) external demand weakens particularly in developed economies; and (ii) progress on economic reforms has been sluggish and the outlook remains uncertain. Moreover, structurally higher inflation and over-capacity in the manufacturing industry will constrain the effectiveness of governments supportive policy. We believe the government will gradually lower the annual GDP growth target (from 7.5% in 2012) over the next several years to tolerate slower growth. Against this backdrop, we expect growth in 2013 to remain above 8% in H1, supported by cyclical policy easing, and then weaken in H2 to 7% by Q4, as inflation rises above 4% by June and forces a tightening of the policy stance. We believe a growth recovery in H1 will be largely driven by policy rather than economic fundamentals, hence growth should return to its long term downtrend once policy supports are removed. We see inflation as the main risk to our view. If inflation does not rebound quickly in H1 and force a policy shift toward tightening, our growth outlook may face upside risks and the recovery may last into H2. In Korea, we expect GDP growth and CPI inflation to rise only modestly, allowing the Bank of Korea (BOK) to keep rates unchanged at 2.75% through 2013. The growth rebound should be driven by inventory restocking and a modest global demand recovery in 2013. But high household debt (156% of disposable income) should constrain domestic demand, so we maintain our below-consensus 2013 GDP growth forecast of 2.5%. A negative output gap and stable KRW should exert downward pressure on inflation, but 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, within the BOKs inflation target range 2.5-3.5% for 2013-15. Hong Kong and Taiwan stand to benefit most from a China recovery, and we expect GDP growth to rise in 2013 to 2.5% in Hong Kong and 3.0% in Taiwan. Taiwans very low policy rate is likely to be hiked twice in H2, whereas Hong Kong, due to the HKD/USD peg, will continue to import so-called US QE infinity, and will likely struggle to contain asset prices. In India, with twin deficits correcting only very gradually, we expect 2013 to be a year of growth consolidation rather than a sharp rebound. GDP growth should pick up to 6.1% in 2013 after falling to a decade low of 5.3% in 2012. However, compared to past recoveries, this should be very shallow for three reasons. First, we expect external demand to remain subpar in 2013. Second, the supply-side of the economy remains severely constrained. With potential growth having slowed to 6.5-7.0%, we expect the output gap to close quickly in response to a demand revival, lifting core inflation in H2 2013 and limiting the extent of rate cuts to 50bp in H1 2013. Third, new investments are unlikely to pick up quickly due to the high cost of capital, weak exports and high global uncertainty. Recent reform announcements are positive, but implementation risks remain ahead of 2014 general elections. At best, faster land and environmental clearances, as they happen, could drive existing projects. We expect a current account deficit of 3.7% of GDP in 2013 due to inelastic imports and weak exports, the financing of which leaves India susceptible to global risk appetite. We expect the fiscal deficit to remain above 5% of GDP in FY14 due to slow growth and populist spending ahead of the elections. In Southeast Asia, the domestic oriented economies of the Philippines and Indonesia should be the star performers, both posting GDP growth of 6% or more. Among the open economies, we see some differentiation in the outlook. In Singapore, growth is likely to be below trend, at 3.4%, as we continue to expect no countercyclical policies, as the government is focused on its long-term economic restructuring agenda. Malaysia has to call elections in H1 and, regardless of the outcome, this will likely be followed by significant fiscal consolation which will add to the external drag, capping growth at 4.0%. By contrast, we expect solid 4.5% growth in Thailand as the government ramps up spending, particularly on infrastructure. This should help to crowd in more private investment that already benefits from very loose monetary policies and the postflood recovery. We expect inflation to rise in 2013, with the balance of risks tilted to the upside given above-potential growth (Philippines, Thailand), modest subsidy adjustments (Indonesia, Malaysia), and tight labor markets (Singapore). This will limit the scope for further monetary easing. In fact, we see policy rate hikes starting in Q3 2013 in Indonesia, Malaysia and the Philippines. The extent of the monetary tightening will, however, be modest, as the decision to hike rates will be complicated by the risk of attracting excessive capital inflows. In this context, we expect more macro-prudential measures to address asset price inflation.

10

Nomura | Global Annual Economic Outlook

13 November 2012

Australia | Economic Outlook


The peak in resource investment is coming
Growth will likely be resilient in 2013, helped by lower rates and stronger global growth. With inflation close to target, we think the RBA will be on hold for some time.
Activity: The Australian economy will likely end 2012 on a weak due to a negative term-oftrade shock linked to the decline in commodity prices. Moreover, the lower commodity prices have force the cancellation and postponement of some investment projects in the resource projects. As a result, the peak in investment will likely happen in 2013. However, we believe that thanks to previous monetary policy stimulus, business investment in the non-resource sector should pick-up. Moreover, the improvement of the housing market will likely support consumer confidence and household spending. A rebound of global growth, especially China, should also provide some support for export. However, the strong Australian dollar due to continued inflows into the Australian fixed income market could hamper both exports and non-resource business investment. Inflation: CPI inflation increase sharply in Q3 due to the introduction of the carbon tax. We believe that inflation will likely remain elevated over the next quarters, owing to some delayed impact from the impact from the carbon tax and a moderation of the deflationary pressures from the past appreciation of the Australian dollar. Underlying inflation has also increases in recent quarters, and we expect it to remain close to the 2-3% RBA target over the forecast horizon. Policy: The RBA has left its policy rate unchanged at its latest monetary policy meeting and has signaled that it is comfortable with the level of interest rates, at least for now. We expect the RBA to remain on hold until mis-2013, where we believe that economic condition will likely warrant a 25bp hike in the policy rate. How, there is a non negligible risk that th RBA could cut rates if the incoming data, both domestically and globally, weakens . Moreover, the latest budget shows that fiscal policy will be restrictive this year, leaving the burden of stimulating the economy to the RBA. Risks: A disorderly resolution to the European debt crisis, a strong currency and a sharp slowdown in Chinese growth remain the main downside risks to the outlook. On the flip side, an improvement in risk sentiment, increased global trade and renewed increases in commodity prices represent upside risks to growth and inflation.
Fig. 1: Details of the forecast
% q-o-q ar. Real GDP (% y-o-y) Real GDP Personal consumption Private investment Business investment Dw elling investment Government expenditures Exports Imports Contributions to q-o-q GDP: Domestic final sales Inventories Net trade Unemployment rate Employment, 000 Consumer prices Trimmed mean Weighted median Fiscal balance (% GDP) Current account balance (% GDP) RBA cash rate target 3-month bank bill 2-year government bond 5-year government bond 10-year government bond AUD/USD 4.25 4.30 3.47 3.58 4.08 1.04 3.50 3.54 2.46 2.58 3.04 1.02 3.50 3.36 2.49 2.56 2.94 1.05 3.25 3.05 2.66 2.55 2.90 1.03 3.25 3.25 2.60 2.50 2.80 1.00 3.25 3.30 2.55 2.50 3.00 0.99 3.50 3.60 2.65 2.55 3.10 1.00 3.50 3.60 2.70 2.60 3.20 1.00 1Q12 4.4 5.6 7.5 15.8 23.0 -7.9 4.3 -3.5 4.4 8.8 -1.2 -2.0 5.2 25 1.6 2.1 2.2 2Q12 3.7 2.6 2.3 2.3 4.7 -6.7 7.8 10.2 3.7 3.6 -2.2 1.2 5.2 40 1.2 1.9 2.0 3Q12 3.1 2.1 2.1 6.6 8.0 1.1 -0.2 6.0 6.0 2.1 0.0 0.0 5.2 1 1.6 2.3 2.3 4Q12 3.1 2.0 2.2 7.1 8.5 1.4 -0.2 6.0 8.0 2.2 0.1 -0.4 5.3 12 2.1 2.4 2.2 1Q13 2.3 2.5 2.3 8.5 10.1 2.0 -0.2 7.5 7.6 2.6 0.0 -0.1 5.4 12 2.7 2.6 2.5 2Q13 2.3 2.8 2.5 8.5 10.0 2.4 -0.2 8.0 7.5 2.7 0.1 0.0 5.5 23 2.8 2.6 2.6 3Q13 2.5 2.7 2.5 8.6 9.9 2.9 -0.2 8.0 7.5 2.7 0.0 0.0 5.5 46 2.4 2.5 2.5 4Q13 2.7 2.8 2.6 8.7 9.9 3.3 -0.2 8.0 8.0 2.8 0.0 -0.1 5.5 58 2.5 2.5 2.5 2011 2.1 2.1 3.3 11.4 14.8 1.3 0.1 -1.3 11.5 3.5 0.8 -2.1 5.1 11 3.4 2.7 2.5 -3.4 -2.3 4.25 4.50 3.16 3.29 3.67 1.02 2012 3.6 3.6 3.8 9.9 14.4 -5.4 2.5 5.7 7.5 4.1 -0.2 -0.3 5.2 19 1.6 2.2 2.2 -1.8 -2.6 3.25 3.05 2.66 2.55 2.90 1.03 2013 2.5 2.5 2.3 7.6 9.2 1.5 0.3 7.4 7.2 2.6 -0.1 0.0 5.4 35 2.6 2.6 2.5 -0.2 -3.0 3.50 3.60 2.70 2.60 3.20 1.00 2014 2.8 2.8 2.6 8.4 9.7 3.2 -0.2 8.0 8.0 3.0 -0.1 -0.1 5.3 71 2.5 2.5 2.5 0.1 -3.0 4.00 4.00 3.10 3.20 3.60 1.00

Charles St-Arnaud
+1 212 667 1986 charles.starnaud@nomura.com

Martin Whetton
+61 2 8062 8611 martin.whetton@nomura.com

Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. CPI inflation includes the impact from, the carbon tax, but not the underlying measures. Interest rate and exchange rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 12 November 2012. Source: Australian Bureau of Statistics, Reserve Bank of Australia, Nomura Global Economics.

11

Nomura | Global Annual Economic Outlook

13 November 2012

China | Economic Outlook


Up in H1, down in H2
We expect economic growth to be driven by cyclical policies as progress on structural reforms may be slow. Overview
We expect Chinas GDP growth to recover strongly to above 8% y-o-y in Q4 2012 and H1 2013, and then slow in H2, toward 7% by Q4 2013. Policy easing through infrastructure investments should be a main driver of a H1 recovery. We believe this cyclical recovery, amid slowing potential output growth, will push inflation to above 4% y-o-y by mid 2013 and force the Peoples Bank of China (PBoC) to tighten policies and hike interest rates twice, reducing GDP growth in H2. Progress on structural reforms will likely be slow, as new leaders need time to build the requisite political authority to implement tough reforms. Our view is very different from consensus, which expects growth to be flat in Q4 and on an upward trend through 2013 (Figure 1). The main distinguishing factor of our 2013 view comes from the policy outlook. We believe policy easing is not sustainable beyond H1 due to inflation and potential financial risks from a rapid credit expansion, while the consensus believes that policies will be supportive throughout 2013. Zhiwei Zhang
+852 2536 7433 zhiwei.zhang@nomura.com

Wendy Chen
+86 21 6193 7237 wendy.chen@nomura.com

Cyclical upturn in Q4 2012 and H1 2013


We believe growth will rebound both faster and stronger than the consensus expects, as policy easing leads to a pickup in investment growth. Policy easing has been mostly implemented through quantitative measures like relaxing controls on trust loans and bond issuance. We do not think the PBoC will cut interest rates in 2013 since inflation is likely to rebound soon and growth begins to recover. Housing investment is the key wild card for the short-term growth outlook. We believe housing investment growth could pick up moderately in Q4 after falling in Q1-Q3. Housing and infrastructure investment combined account for half of Chinas fixed asset investment. Infrastructure investment has already picked up strongly and its momentum will very likely continue in Q4 and H1 2012. If housing investment also rebounds, GDP growth will likely recover faster and stronger than the consensus expects, consistent with our view. Transactions in the housing market have rebounded (Figure 2), which suggests that housing investment may pick up soon.

Fig. 1: Consensus versus Nomura forecasts

Fig. 2: Floor space sold and housing investment

% y-o-y 9.0 8.5

% y-o-y, ytd

Consensus f orecast
Nomura

100 80
60

Housing sold % y-o-y, ytd Housing investment, rhs 40

34
28

8.0
7.5

40 20
0

22 16
10

7.0
6.5 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Source: Bloomberg and Nomura Global Economics

-20
-40 Oct-08

4
-2 Oct-12

Oct-09

Oct-10

Oct-11

Source: CEIC and Nomura Global Economics

12

Nomura | Global Annual Economic Outlook

13 November 2012

Potential growth has slowed to 7.0-7.5%


Chinas GDP growth has averaged 10% over the past ten years. We believe Chinas potential growth has now slowed to 7.0-7.5%. The key driver of this slowdown is the depletion of excess labor. China used to have a huge pool of excess labor in its rural inland regions, estimated at 250 million persons. Over the past ten years, this group of labor was gradually absorbed into the industrial sector. The ratio of urban labor demand to supply has risen to above 1.0 since December 2010, which suggests that labor markets have turned from structurally oversupplied to fully employed and structurally tight. This ratio remained at 1.05 in Q3 despite GDP growth slowing to 7.4% y-o-y (Figure 3). Because Chinas excess labour supply has been spent, it will require structural reforms to support growth. However, progress on reforms will likely be slow in 2013, as new leaders will need time to build the political authority required to push through tough reforms. There is little controversy as to what economic reforms China requires - the 12th Five Year Plan has a comprehensive list of reforms from financial sector liberalization to removing barriers of entry for private companies into monopolized sectors. But the implementation of these reforms will be tough and vested interest groups will surely resist any significant changes.

Growth to slow in H2 as inflation rises and policy easing ends


It is important to note that a recovery in H1 would be driven by countercyclical policy easing and not an improvement in economic fundamentals. The over-capacity issue in the industrial sector has not been resolved and inventory levels in the housing sector are still high (Figure 4). All these factors suggest a recovery that is not sustainable. When policy easing ends, GDP growth should return to its potential rate. We expect policy easing to end in mid-2013, when inflation rises above 4% y-o-y. The government sets 4% as its 2012 inflation target, and we believe it will remain the target in 2013. Inflation should rise through 2013 for two reasons: 1) Headline GDP growth will be pushed above 8%y-o-y by policy easing in H1. This should result in the emergence of a positive output gap which leads to inflationary pressures; and 2) global commodity prices have rebounded in recent months and will likely push up production costs in 2013. It is worth noting that the PBoC is clearly concerned about inflation. In its Q3 monetary policy report, it stated that The economy has changed to be less sensitive to the constraint imposed by employment, but more sensitive to constraint imposed by inflation. This statement was not included in previous MPC reports. We agree with its assessment, and believe it will change policies swiftly when inflation rises to an uncomfortable level.

Risks to our forecast


We see three key risks to our forecast. The first and most important comes from policy uncertainty. 2013 is the first year of new leadership in China. Our base case assumes that the new leaders will tighten policies, perhaps starting as early as Q2 2013, allowing growth to return to its potential level, but there could be political pressures to maintain a loose policy stance. Local governments have issued many new investment plans. Infrastructure projects that began in 2012 will likely continue into 2013. The demand for credit will be strong, and thus so will be the resistance from local governments and the corporate sector against policy tightening. If the central government decides to keep policies loose, our growth forecast faces upside risks for 2013 but downside risks in 2014, as inflation will likely become much higher and economic imbalances will worsen. The second risk is inflation. We expect CPI inflation to return quickly in 2013 and rise above 4% y-o-y by June. We acknowledge that there are risks associated with this view as inflation may return at a slower pace. In that event, policy easing would likely continue for longer, and our growth forecast for 2013 (particularly H2) would also face upside risks. The third risk comes from global economy. There is still uncertainty over economic conditions in Europe. We would argue that this presents less of a challenge to China than policy and inflation risks, given it has a relatively closed economy. China's economy has become increasingly domestically driven. If the European situation worsens, we believe policy can and will be loosened more and longer to offset its impact. Our concern over Europe is that the external weakness may heighten the policy risks discussed above the government may choose to loosen policy too much, as it did in 2009.

13

Nomura | Global Annual Economic Outlook

13 November 2012

Fig. 3: Urban labour demand to supply ratio and GDP growth

Fig. 4: Floor space started and sold

Ratio
1.1 1.0

Labour demand/supply ratio

% y-o-y 16 14

Real GDP growth, rhs

Sqare meter mn 180 Floor space started (12mma) 160 Floor space sold (12mma) 140

120

0.9 0.8
0.7 0.6 Sep-03

12 10
8 6 Sep-12

100

80
60

40
20

Sep-06

Sep-09

0 Sep-00

Sep-04

Sep-08

Sep-12

Source: CEIC and Nomura Global Economics

Source: CEIC and Nomura Global Economics

Fig. 5: China outlook summary table


% y-o-y growth unless otherwise stated Real GDP Consumer prices Core CPI Retail sales (nominal) Fixed-asset investment (nominal, ytd) Industrial production (real) Exports (value) Imports (value) Trade surplus (US$bn) Current account (% of GDP) Fiscal balance (% of GDP) New increased RMB loans (CNY trn) 1-yr bank lending rate (%) 1-yr bank deposit rate (%) Reserve requirement ratio (%) Exchange rate (CNY/USD) 1Q12 8.1 3.8 1.5 14.9 20.9 11.6 7.6 6.9 1.1 2Q12 7.6 2.9 1.3 13.9 20.4 9.5 10.5 6.5 68.8 3Q12 7.4 1.9 1.5 13.5 20.5 9.1 4.5 1.4 79.5 4Q12 8.4 2.0 1.8 15.0 21.0 12.0 5.0 9.0 32.1 1Q13 8.4 2.8 2.0 16.2 20.8 10.9 3.0 7.0 -16.0 2Q13 8.0 3.7 2.1 15.9 21.2 10.7 4.0 8.0 53.4 3Q13 7.4 4.6 2.4 15.5 21.3 10.5 6.0 9.0 70.4 4Q13 7.0 5.6 2.1 15.6 22.0 10.3 6.0 9.0 19.1 2012 7.9 2.6 1.5 14.3 21.0 10.6 6.8 6.0 181.5 1.7 -1.5 8.0 6.00 3.00 19.5 6.28 2013 7.7 4.2 2.2 15.8 22.0 10.6 4.8 8.3 126.9 1.0 -1.5 9.0 6.50 3.50 19.5 6.24 2014 7.5 4.0 2.0 16.0 20.0 10.5 6.0 10.0 54.5 -0.4 -1.6 9.0 6.50 3.50 18.5 6.24

6.56 3.50 20.5 6.29

6.31 3.25 20.0 6.35

6.00 3.00 20.0 6.28

6.00 3.00 19.5 6.28

6.00 3.00 19.5 6.26

6.00 3.00 19.5 6.26

6.25 3.25 19.5 6.25

6.50 3.50 19.5 6.24

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. The CNY/USD forecast is for the fixing rate, not the spot rate. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics

14

Nomura | Global Annual Economic Outlook

13 November 2012

Hong Kong | Economic Outlook


Looming fiscal stimulus
We expect expansionary FY13 budget given weak external demand.
Activity: Retail sales growth volume increased by 8.5% y-o-y in September from 3.2% in August while the PMI rose to 50.5 from 49.6. We expect private consumption to remain robust, supported by a tight labour market, positive wealth effects from buoyant property prices and increasing visitor numbers. Further, domestic fixed asset investment should remain strong supported by infrastructure works. We expect fiscal stimulus and a moderate improvement in external demand to lift real GDP growth to 2.5% in 2013, from 1.5% in 2012. A modest recovery in the global economy should boost GDP growth further to 4% in 2014. Inflation: CPI inflation ticked up to 3.8% y-o-y in September from 3.7% in October on food prices. Inflation should rise through 2013, driven by higher food, fuel and rent prices, only partly offset by inflation-mitigating fiscal measures such as a temporary waiver of public housing rent and electricity subsidies. We expect CPI inflation to rise from 4.0% in 2012 to 4.3% in 2013. Policy: Hong Kong's fiscal policy is expansionary as the budget for FY12 (year starting April) 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. We would also expect the government to continue implementing more macro-prudential property tightening measures, such as hikes in stamp duty if house prices continue to rise, although so far these piecemeal measures have had limited success in cooling the property market. Because of the USD/HKD peg, Hong Kong is importing the super loose monetary policy of the US, and it remains unclear whether tighter macro-prudential measures can provide a sufficient offset in the long run. Risks: As a small, open economy and financial hub, Hong Kong is one of the most vulnerable in Asia to weakness in the global economic outlook. An economic hard-landing in China would be especially detrimental through both trade and financial channels.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (sa, %) Consumer prices Exports Imports Trade balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP) 3-month Hibor (%) Exchange rate (HKD/USD) 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 2013 2014 2.6 -0.2 2.6 4.3 2.4 2.4 1.4 2.5 0.7 1.1 1.7 2.3 2.3 2.9 2.6 2.2 1.5 2.5 3.5 6.5 3.7 1.8 2.2 2.8 3.4 3.8 4.5 3.5 3.6 4.4 2.3 3.5 3.0 3.2 3.5 3.7 4.2 4.2 3.0 3.9 4.4 12.9 5.7 5.4 5.0 5.8 5.8 5.7 5.8 7.0 5.8 6.1 -3.9 0.1 0.8 2.2 4.5 5.1 5.1 5.5 -0.2 5.1 7.2 -2.0 0.8 1.4 2.5 5.3 5.7 6.2 6.9 0.7 6.0 7.6 7.4 -1.8 -4.1 3.4 5.2 -1.2 0.9 -12.7 4.1 -1.4 -1.6 3.3 4.2 2.0 2.3 -15.9 2.7 0.4 -1.1 3.5 3.1 4.4 5.0 -15.6 2.9 0.0 -0.4 3.4 3.6 7.3 7.0 -15.7 3.5 0.2 -1.3 3.4 3.7 9.2 9.8 -14.5 4.0 0.3 -1.4 3.4 4.3 10.5 10.7 -17.8 4.3 0.4 -1.8 3.4 4.5 10.1 10.9 -18.3 4.8 0.1 -2.3 3.4 4.6 10.4 11.7 -19.1 4.2 -0.7 -1.8 3.4 4.0 3.2 3.9 -59.9 2.3 -0.2 0.40 7.75 4.1 0.3 -1.7 3.4 4.3 10.1 10.8 -69.7 -0.6 -0.5 0.40 7.75 4.8 -0.5 -0.6 3.2 4.3 12.3 12.4 -78.8 -1.9 -0.5 0.40 7.75

Young Sun Kwon


+852 2536 7430 youngsun.kwon@nomura.com

Aman Mohunta
+91 22 6617 5595 aman.mohunta@nomura.com

0.40 7.76

0.40 7.76

0.40 7.75

0.40 7.75

0.40 7.75

0.40 7.75

0.40 7.75

0.40 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 12 November 2012. Source: CEIC and Nomura Global Economics.

15

Nomura | Global Annual Economic Outlook

13 November 2012

India | Economic Outlook


A year of consolidation
With macro imbalances slow to correct, binding supply-side constraints and weak global demand, a quick rebound is unlikely. We expect a shallow growth recovery.
Activity: Despite GDP growth falling to a 10-year low of 5.3% in 2012, we believe the recovery will be shallow, with growth of 6.1% in 2013, for three reasons. First, we expect growth in Western economies to remain weak in 2013. Second, with potential growth down to 6.5-7.0%, the output gap will close quickly on any demand pick-up, pushing up core inflation and limiting the extent of monetary easing. Third, the number of new capex projects is unlikely to increase due to a higher cost of capital, an uncertain demand outlook and the lagged impact/ implementation risks of reforms announced so far. We expect only existing shelved investments to be revived if land, coal and environmental issues are resolved. Inflation and trade: With sub-potential growth, we expect WPI inflation to moderate from an estimated 7.6% in 2012 to a still-high 7.2% in 2013. Core inflation should moderate in H1 2013 because of the negative output gap, but we expect INR depreciation and a narrowing output gap to push up core inflation again in H2 2013. With binding supply-side constraints and high food inflation, we do not expect headline and core inflation to be able to sustain levels below 7% and 5%, respectively. We expect high inflation to reduce Indias export competitiveness, even as imports remain elevated from domestic supply side constraints. Hence, we expect the current account deficit to remain high at 3.8% of GDP in 2013 from an estimated 4.2% in 2012. Policy: We expect the Reserve Bank of India to reduce the repo rate by 50bp in H1 2013 on the back of lower core inflation in H1. However, with headline inflation likely to remain in a 7.0-7.5% range in 2013 and core inflation likely to accelerate again, we see limited scope for aggressive rate cuts. We also expect the fiscal deficit to remain above 5% of GDP in FY14 (year ending March 2014) due to slow growth and populist spending ahead of elections in 2014. Risks: A sharp rise in oil prices, a deeper and prolonged global slowdown and weather-related shocks are key downside risks. Lower commodity prices, a stronger than expected global recovery and a quick investment revival are upside risks.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Fixed investment Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade Wholesale price index Consumer prices Current account balance (% GDP) Fiscal balance (% GDP) Repo rate (%) Reverse repo rate (%) Cash reserve ratio (%) 10-year bond yield (%) Exchange rate (INR/USD) 1.3 0.0 4.0 7.5 7.2 5.7 0.0 -0.2 7.5 10.1 5.2 0.1 0.1 7.6 9.8 5.0 0.1 0.2 7.9 10.1 5.6 0.0 0.3 7.6 10.5 6.7 0.1 -0.9 7.3 9.8 6.2 0.2 -0.2 7.0 9.7 6.2 0.1 0.1 7.0 9.3 4.2 0.0 1.1 7.6 9.3 -4.2 -5.8 8.00 7.00 4.25 8.10 53.0 6.1 0.1 -0.2 7.2 9.8 -3.8 -5.2 7.50 6.50 4.00 7.50 59.0 6.6 0.2 -0.3 6.9 9.2 -3.4 -5.0 7.00 6.00 4.75 7.00 57.0 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 2012 5.9 5.3 5.2 5.8 6.8 5.9 6.2 6.8 5.3 5.5 5.4 5.3 5.9 6.0 6.1 6.4 5.3 6.1 4.1 3.6 18.1 2.0 4.0 9.0 0.7 10.1 7.9 3.5 5.5 2.0 9.9 6.5 4.1 5.0 4.5 8.0 5.0 4.0 5.1 5.1 6.8 6.0 5.1 5.5 5.5 6.2 7.2 5.0 6.5 5.0 7.8 6.0 5.6 7.0 4.5 8.5 5.7 4.4 5.8 2.7 11.7 5.4 2013 6.1 5.0 6.0 5.0 7.3 6.2 2014 6.5 6.0 6.2 6.4 9.9 8.6

Sonal Varma
+91 22 403 74087 sonal.varma@nomura.com

Aman Mohunta
+91 22 6617 5595 aman.mohunta@nomura.com

8.50 7.50 4.75 8.54 51.2

8.00 7.00 4.75 8.18 54.0

8.00 7.00 4.50 8.15 52.7

8.00 7.00 4.25 8.10 53.0

7.75 6.75 4.00 7.80 54.0

7.50 6.50 4.00 7.80 57.0

7.50 6.50 4.00 7.70 60.0

7.50 6.50 4.00 7.50 59.0

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 12 November 2012. Source: CEIC and Nomura Global Economics.

16

Nomura | Global Annual Economic Outlook

13 November 2012

Indonesia | Economic Outlook


Watch policies and politics
The policy environment is likely to remain challenging ahead of the 2014 elections.
Activity: We expect GDP growth to remain stable at 6.1% in 2013, driven mainly by resilient domestic demand. Growth in investment spending will likely moderate but that of private consumption should remain stable. Government expenditures should also contribute more positively ahead of the 2014 elections, as implementation of the budget improves, particularly on infrastructure (as opposed to this years under-spending). The risk of nationalist and populist policies is also likely to increase in 2013 as the incumbents focus on the 2014 parliamentary and presidential elections. On the external front, we believe the current account deficit will likely narrow in 2013 supported by higher export growth to China in H1, and improving US and EU growth in H2. However, as we approach 2014, the uncertain policy environment could add to concerns over FDI inflows (see Asia Special Report: Indonesia: Policy swings, August 2012), affecting the balance of payments, and in turn pressuring IDR. Inflation and monetary policy: We expect CPI inflation to rise to 5.2% y-o-y in 2013 from an estimated 4.4% this year, driven by core inflation and supply-side factors such as the upward adjustments of electricity tariffs (approximately 4% each quarter) and the risk of elevated food prices. While this is still within Bank Indonesias (BI) target range of 3.5%-5.5%, we expect it to maintain its tightening bias and indeed hike the policy rate by a cumulative 50bp in H2 2013. In the interim, it is likely that BI will introduce administrative and macro-prudential measures if domestic demand remains strong and portfolio capital inflows persist. Fiscal policy: We expect the 2013 fiscal deficit to overshoot the budgeted 1.65% of GDP. While the approved 2013 budget allows the government to raise fuel prices if deviations from macroeconomic assumptions occur, we have not factored any changes to fuel subsidy policy into our baseline forecast because of the elections. Thus, we expect increased operating costs and subsidies to cause fiscal slippage of close to 0.3pp, resulting in a 2013 deficit of 2% of GDP. Risks: The key risk for next year is a lack of progress on structural reforms and the implementation of more protectionist policies ahead of the elections, both of which could damage fragile investor sentiment. A deeper recession in the euro area, a hard landing in China and large capital flow reversals also pose downside risks.

Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com

Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com

Details of the forecast


% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Consumer prices Exports Imports Merchandise trade balance (US$bn) Current account balance (% of GDP) Fiscal Balance (% of GDP) Bank Indonesia rate (%) Exchange rate (IDR/USD) 1Q12 6.3 4.9 5.9 10.0 7.9 8.0 5.5 2.0 0.7 3.7 5.3 21.4 1.7 -1.5 5.75 9146 2Q12 6.4 5.2 7.4 12.3 2.2 10.9 6.4 2.3 -3.1 4.5 -7.6 8.9 -1.3 -3.1 5.75 9433 3Q12 6.2 5.7 -3.2 10.0 -2.8 -0.5 5.3 -0.1 -1.2 4.5 -5.0 9.0 -0.7 -2.2 5.75 9591 4Q12 5.7 5.6 5.0 9.9 5.5 6.0 6.3 -1.0 0.4 4.7 2.8 11.5 -1.2 -2.0 5.75 9600 1Q13 6.1 5.5 7.0 9.8 6.0 6.5 5.7 0.0 0.4 5.0 5.6 7.2 1.0 -0.8 5.75 9630 2Q13 6.2 5.5 8.0 8.9 6.0 7.0 5.8 0.0 0.0 5.1 5.9 6.2 -1.6 -2.3 5.75 9700 3Q13 6.0 5.6 10.0 8.8 7.0 5.5 6.0 0.0 1.3 5.3 7.6 4.8 0.8 -1.2 6.25 9800 4Q13 6.0 5.5 10.0 7.1 8.0 14.0 6.1 0.2 -1.5 5.4 15.1 17.3 -2.7 -3.2 6.25 9750 2012 6.1 5.4 3.6 10.5 3.1 6.0 6.2 0.8 -0.8 4.4 -1.3 12.4 -1.5 -2.2 -2.4 5.75 9600 2013 6.1 5.5 9.0 8.4 6.8 8.4 6.0 0.0 0.1 5.2 8.7 9.0 -2.5 -1.9 -2.0 6.25 9750 2014 6.2 5.6 7.0 9.0 10.0 11.9 6.0 -0.3 0.2 5.1 8.0 14.4 -3.3 -1.6 -2.2 6.75 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 12 November 2012. Source: CEIC and Nomura Global Economics.

17

Nomura | Global Annual Economic Outlook

13 November 2012

Malaysia | Economic Outlook


Time for fiscal tightening
We see significant fiscal consolidation after the elections, adding to the external drag.
Activity: We expect growth to slow to 4.0% in 2013 from an estimated 4.8% in 2012 as domestic and external demand weaken. Fiscal policy has supported growth for about two years, longer than expected, and public debt has risen from 39.8% of GDP in 2008 to 51.8% in 2011. This suggests fiscal consolidation will have to be significant once the elections are over. In our base case, we expect the elections to be held in March (just before the April 2013 deadline). At the same time, external demand will likely remain subdued: our US and Europe economists expect growth to stay weak in H1 and pick up moderately in H2, while the reverse is expected in China, which would have a bigger impact on commodity exporters like Malaysia. Inflation and monetary policy: We estimate headline CPI inflation will average 2.4% in 2013 higher than 1.7% in 2012 due to factors such as minimum wage hikes, higher cost push pressures, and modest subsidy adjustments (e.g. sugar). Against this backdrop, we continue to expect Bank Negara Malaysia (BNM) to stay on hold throughout H1 2013, before hiking its policy rate by 50bp in H2 2013. In our view another key policy consideration is the risk from keeping rates low for too long, fueling an excessive build-up of public and household debt levels. Hence we judge BNMs bias is still to normalize rates, but make the adjustment gradual. We expect a total of 50bp hikes next year, taking the policy rate to its pre-crisis level of 3.50%. Fiscal policy and political outlook: The 2013 budget aims to reduce the fiscal deficit to 4.0% of GDP from 4.5% in 2012 and suggests the government recognizes the need to get its medium-term fiscal consolidation plans back on track. Nonetheless, we think this is ambitious because this implies a negative fiscal impulse and is based on high GDP growth assumptions (4.5-5.5%). We forecast the fiscal deficit at 4.5% of GDP as a result. In terms of the political outlook, we think the elections in March will result in a win by Barisan Nasional, but with a smaller majority (see Asia Insights: The Malaysian general election revisited, 8 November 2012). This should still bode well for the resumption of structural reforms. Risks: With exports nearly 100% of GDP, a sharp drop in commodity prices and another global recession is the biggest downside risk. A weaker-than-expected coalition or a win by the opposition would raise questions about the political transition and the reform agenda.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (%) Consumer prices Exports Imports Merchandise trade balance (USD bn) Current account balance (% of GDP) Fiscal Balance (% of GDP) Overnight policy rate (%) Exchange rate (MYR/USD) 1Q12 4.9 7.4 7.3 16.2 2.8 6.8 8.1 -0.2 -3.1 3.0 2.3 3.9 6.4 9.7 8.0 3.00 3.06 2Q12 5.4 8.8 9.4 26.1 2.1 8.1 11.6 -1.2 -4.9 3.0 1.7 0.9 5.7 6.8 4.1 3.00 3.18 3Q12 4.5 8.9 8.7 18.2 1.1 7.3 9.8 -0.1 -5.2 3.0 1.4 -4.7 3.9 5.5 6.1 3.00 3.06 4Q12 4.7 8.6 5.4 10.1 2.3 7.0 7.7 0.9 -3.9 3.2 1.6 6.5 11.2 8.2 5.6 3.00 3.00 1Q13 4.3 7.9 4.7 7.6 3.3 6.4 6.4 0.2 -2.3 3.3 2.1 6.5 9.1 9.1 5.5 3.00 2.97 2Q13 4.3 6.1 4.6 5.5 4.1 5.3 5.2 -0.2 -0.7 3.3 2.6 9.4 10.4 7.0 6.0 3.00 2.97 3Q13 3.8 5.1 3.9 5.4 2.9 3.8 4.6 -0.2 -0.6 3.4 2.5 8.2 9.1 8.0 5.2 3.25 2.96 4Q13 3.7 5.3 3.6 5.4 2.4 3.4 4.8 -0.4 -0.8 3.4 2.4 5.2 6.2 8.1 4.6 3.50 2.94 2012 4.8 8.4 7.4 17.5 2.1 7.3 9.3 -0.1 -4.3 3.0 1.7 2.7 6.8 32.7 6.0 -4.9 3.00 3.00 2013 2014 4.0 4.6 6.1 5.5 4.1 4.5 5.9 7.0 3.2 7.2 4.7 8.5 5.2 -0.2 -1.1 3.4 2.4 7.3 8.7 32.3 5.6 -4.5 3.50 2.94 5.3 0.0 -0.7 3.4 2.5 9.1 13.8 25.0 5.1 -4.2 4.00 2.88

Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com

Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com

Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as 12 November 2012. Source: CEIC and Nomura Global Economics.

18

Nomura | Global Annual Economic Outlook

13 November 2012

Philippines | Economic Outlook


Still likely to shine
Given the momentum of reform, investment is set to become a bigger growth driver.
Activity: We forecast 2013 GDP growth at an above-potential 6.0%, driven by more progress in infrastructure projects under the public-private partnership (PPP) scheme and higher fiscal spending ahead of the mid-term elections in May 2013. We expect private consumption to remain robust with resilient remittances and buoyant consumer sentiment. But we see more notable improvement in investment spending, which reflects the lagged effects from significant monetary easing this year but also the strength of business sentiment from governance reforms. As a result, investment-led domestic demand should fully offset the weakness in exports. Inflation and monetary policy: We expect CPI inflation to rise to 4.4% in 2013 from 3.2% in 2012, as demand side pressures strengthen. This is still within the Bangko Sentral ng Pilipinas (BSP) 3-5% target but risks are to the upside with above-trend growth and measures pending such as legislation to increase taxes on sin products (i.e., alcohol and tobacco). Therefore, we expect BSP to keep its policy rate unchanged at 3.5% for the rest of 2012 and throughout H1 2013, before hiking it gradually in Q3 2013. Large capital inflows will remain a key consideration in BSPs policymaking and as such, the risk of more administrative and macro-prudential measures is likely to remain high. Fiscal policy: We expect the fiscal deficit to widen to 2.6% of GDP from 2.2% this year given the mid-term elections and the strong bias to use the available fiscal space to improve the pace and quality of spending. Gross government debt has fallen from 70.5% of GDP in 2006 to 56%, and we expect more progress on fiscal policy reforms to broaden the tax base and improve tax collections (e.g., the sin tax bill is likely to be passed soon) which will put the countrys sovereign credit rating on track for an upgrade to investment grade within the next two years. Risks: The main risk to our forecast is an external shock from Europe and the US fiscal cliff. Slower progress on reforms and infrastructure spending could also hurt growth. We see the elections as a non-event because the status quo will likely be maintained, but it could temporarily disrupt the legislation of fiscal reforms and the bidding out of infrastructure projects.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contribution to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP) Consumer prices (2006=100) Unemployment rate (sa, %) Reverse repo rate (%) Exchange rate (PHP/USD) 1Q12 12.6 6.3 5.1 20.9 3.9 10.9 -3.2 6.4 -7.2 7.1 4.8 -1.5 -2.6 0.8 1.5 3.1 6.9 4.00 42.9 2Q12 1.5 5.9 5.7 5.9 8.5 8.3 4.4 6.1 -2.4 2.1 10.5 2.2 -1.4 2.8 4.6 2.9 7.0 4.00 42.1 3Q12 2.3 5.8 5.8 14.3 10.8 4.6 5.9 7.6 -1.1 -0.6 4.6 10.2 -3.6 2.3 3.7 3.5 7.5 3.75 41.7 4Q12 8.1 6.0 6.0 18.1 12.8 5.9 5.1 8.4 -2.2 -0.1 5.9 12.0 -4.9 0.5 0.6 3.4 7.0 3.50 40.8 1Q13 13.7 6.3 6.2 10.9 11.1 4.6 13.9 8.0 2.5 -4.2 4.6 14.2 -4.2 0.3 0.5 4.2 6.8 3.50 40.3 2Q13 0.7 6.1 7.0 13.5 12.1 4.8 14.7 8.6 2.9 -4.7 4.8 14.7 -2.9 2.0 3.0 4.6 6.8 3.50 40.3 3Q13 0.5 5.6 6.0 3.8 11.9 7.1 12.3 7.0 1.2 -2.6 7.1 12.3 -4.7 1.2 1.7 4.4 6.5 3.75 40.2 4Q13 9.3 5.9 5.8 7.8 11.5 5.7 8.5 7.4 0.2 -1.7 5.7 8.5 -5.6 2.2 2.7 4.5 6.5 4.00 39.8 2012 6.0 5.7 14.1 8.9 7.5 3.0 7.2 -3.2 2.0 6.5 5.6 -12.5 6.4 2.5 -2.2 3.2 7.1 3.50 40.8 2013 6.0 6.3 9.2 11.6 5.5 12.4 7.8 1.5 -3.3 5.5 12.3 -17.5 5.6 1.9 -2.6 4.4 6.7 4.00 39.8 2014 5.8 5.8 8.0 14.5 9.0 13.0 8.1 0.0 -2.3 9.0 13.0 -21.9 5.5 1.7 -2.2 4.5 6.5 4.50 39.3

Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com

Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.

19

Nomura | Global Annual Economic Outlook

13 November 2012

Singapore | Economic Outlook


The (long) road to restructuring
The government is rightly sticking to its long-term goal of raising productivity. In the meantime, the economy will likely endure a low growth, high inflation environment.
Activity: In line with official projections, we expect GDP growth to increase but remain below potential at 3.4% y-o-y in 2013 from 1.8% in 2012. The improvement should be led by recovering growth in China in H1, and the EU and US in H2. However, due to the on-going efforts to restructure the economy as productivity-driven growth (less reliant on foreign labor), we expect the government to refrain from stimulus spending. Private investment spending will also likely remain weak as business sentiment is affected by external uncertainty and tight domestic policies. Inflation and monetary policy: We expect CPI inflation to remain elevated, averaging 3.9% in 2013 from 4.8% in 2012, led by private transport and accommodation costs. In addition, underlying inflation should remain sticky as labour markets remain tight and wage pressures persist. The Monetary Authority of Singapore (MAS) believes there are upside risks from rising global food prices. The MAS decision to maintain its S$NEER policy in October despite slowing growth suggests inflation will remain a key concern. In addition, we think this policy decision complements its longer term economic objectives, as the MAS explicitly stated that the decision was in line with containing inflationary pressures but also with keeping the economy on a path of restructuring towards sustainable growth. Fiscal policy: The fiscal stance should remain broadly neutral in 2013 with the government running a small deficit of 0.2% of GDP from a surplus of 0.2% in 2012. We believe the government is firmly focused on encouraging the private sector to adopt productivity-enhancing measures rather than alleviating cyclical external risks. Pressure is mounting from small and medium enterprises (SMEs) which are asking the government to relax its foreign labor policy, but the government said there will be no U-turn. Instead, it is increasing awareness among SMEs regarding fiscal schemes that have already been in place to boost productivity but have seen limited adoption. We also expect higher budget allocations to social spending given the ageing population and widening income disparity, as well as to upgrading public infrastructure. Risks: With exports twice its GDP, Singapore is the most vulnerable economy in South-east Asia to a major contraction in global GDP. Another risk flare up in Europe, the US falling off the fiscal cliff, or a hard landing in China would hit Singapore hard via knock-on effects from exports and capital outflows. Another risk is domestic overheating, fueled by low interest rates.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (sa, %) Consumer prices Exports Imports Merchandise trade balance (US$bn) Current account balance (% of GDP) Fiscal Balance (% of GDP) 3 month SIBOR (%) Exchange rate (SGD/USD) 1Q12 9.5 1.5 4.7 -4.0 17.0 2.2 4.7 4.8 0.7 -4.0 2.1 4.9 6.0 11.7 7.2 16.2 0.38 1.26 2Q12 -0.7 2.0 1.8 -0.9 1.8 2.3 2.8 1.0 1.3 -0.3 2.0 5.3 -0.5 2.6 6.7 16.3 0.38 1.27 3Q12 -1.2 1.2 0.6 -8.8 1.0 2.6 2.6 -0.3 0.6 0.9 1.9 4.2 -5.8 -3.1 8.8 19.9 0.38 1.23 4Q12 2.3 2.4 2.3 5.0 3.0 3.0 5.4 2.0 4.0 -3.6 2.1 5.0 2.3 1.9 11.3 14.2 0.38 1.22 1Q13 10.7 2.7 4.1 3.8 2.0 3.2 2.8 2.5 -1.5 1.7 2.2 4.4 5.4 6.1 6.9 13.1 0.38 1.21 2Q13 1.3 3.2 4.9 3.9 4.5 4.1 3.6 3.1 -2.2 2.2 2.2 4.0 8.8 8.2 7.8 13.0 0.48 1.21 3Q13 -0.1 3.4 4.6 3.0 5.0 5.6 5.3 3.1 -2.2 2.5 2.1 3.8 9.2 8.9 12.2 26.7 0.48 1.20 4Q13 4.9 4.1 4.3 3.3 5.0 7.0 7.1 3.1 -0.8 1.8 2.1 3.4 9.3 9.5 10.1 17.1 0.48 1.19 2012 1.8 2.3 -2.4 5.3 2.5 3.9 1.9 1.6 -1.8 2.0 4.8 0.8 3.8 33.3 16.6 0.2 0.38 1.22 2013 3.4 4.5 3.5 4.1 5.0 4.7 3.0 -1.7 2.1 2.2 3.9 8.4 8.2 37.0 17.5 -0.2 0.48 1.19 2014 4.2 3.5 4.0 5.7 10.1 11.1 3.1 1.0 1.2 2.4 3.6 12.1 13.1 38.2 18.4 0.4 0.50 1.17

Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com

Lavanya Venkateswaran
+91 22 3053 3053 lavanya.venkateswaran@nomura.com

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.

20

Nomura | Global Annual Economic Outlook

13 November 2012

South Korea | Economic Outlook


Growth to rebound from a very low base
We expect the Bank of Korea to keep rates unchanged at 2.75% through 2013 as GDP growth and CPI inflation should rise modestly from a very low base.
Activity: September industrial output and October export numbers suggest that GDP may have bottomed out in Q3. We expect GDP growth to rebound to 0.5% q-o-q in Q4 (from 0.2% in Q3) and to a sequential quarterly average of 0.8% in 2013, supported by inventory restocking in Q4 and a modest foreign demand recovery in 2013. But compared to past recoveries, this one is tepid despite starting from a very low base. An important reason is weak domestic demand, held back by structural problems, including a household sector overburdened in debt equivalent to 156% of personal disposable income. So we maintain our below-consensus forecast of 2.5% GDP growth in 2013 far below our potential GDP estimate of 3.5%, which we expect to be reached only in 2014. The new government will likely increase social welfare spending, but this will only partly offset the export slump, given the headwinds on personal consumption from high household debt and falling house prices. We expect business investment to remain weak as uncertainty surrounding the global outlook and new government reforms remain elevated. Inflation: A negative output gap and stable KRW should exert downward pressure on inflation, but higher food prices and fading favourable 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, although still below the midpoint of the BOKs new inflation target range of 2.5-3.5% for 2013-15. Policy: We expect the BOK to keep rates 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. That said, we would expect the BOK to cut rates if one of the major downside risks to global growth (the US fiscal cliff; a renewed eurozone sovereign crisis; a China hard landing) actually materialises, but none of these are held in Nomura Global Economics base case. Domestically, the new government could formulate a supplementary budget in H1 2013, which provides an upside risk to our domestic demand forecast.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP (sa, % q-o-q) Real GDP Private consumption Government consumption Business investment Construction investment Exports (goods & services) Imports (goods & services) Contributions to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Unemployment rate (sa, %) Consumer prices Current account balance (% of GDP) Fiscal balance (% of GDP) Fiscal balance ex-social security (% of GDP) BOK official base rate (%) 3-year T-bond yield (%) 5-year T-bond yield (%) Exchange rate (KRW/USD) 1Q12 2Q12 3.5 1.1 0.9 0.3 2.8 2.3 1.6 1.1 4.4 3.6 9.1 -3.5 2.1 -2.1 5.0 3.2 4.6 0.5 2.8 -0.1 0.1 3.4 3.0 0.8 0.1 1.4 3.3 2.4 3Q12 0.6 0.2 1.6 1.5 3.3 -6.0 -0.1 2.6 0.9 0.7 -0.1 1.0 3.1 1.6 4Q12 2.0 0.5 1.8 2.5 5.1 -0.9 -0.6 6.6 5.6 1.2 -0.4 1.2 3.2 1.8 1Q13 2.8 0.7 1.6 2.0 2.7 -9.2 1.6 2.9 0.7 0.8 -0.4 1.2 3.2 2.1 2Q13 3.6 0.9 2.3 2.2 4.0 -1.5 3.0 4.1 3.2 1.8 -0.3 0.8 3.2 2.8 3Q13 3.2 0.8 2.9 2.0 4.1 5.1 3.9 2.5 2.5 2.1 0.5 0.2 3.2 3.1 4Q13 3.6 0.9 3.3 2.1 4.1 5.1 4.1 2.5 2.5 3.1 0.0 0.3 3.2 2.8 2012 2013 2014

Young Sun Kwon


+852 2252 1370 youngsun.kwon@nomura.com

2.3 1.9 3.9 -0.2 -1.2 3.9 3.0 1.5 0.1 0.7 3.3 2.2 3.3 1.3 -1.2 2.75 2.80 2.90 1090

2.5 2.1 3.7 -0.4 3.1 3.0 2.2 1.8 0.2 0.6 3.2 2.7 2.3 1.0 -1.3 2.75 3.00 3.10 1070

3.5 2.3 4.1 7.7 4.1 4.8 5.2 3.0 0.2 0.3 3.2 3.0 2.0 1.0 -1.0 3.25 3.30 3.50 1070

3.25 3.55 3.69 1133

3.25 3.30 3.42 1154

3.00 2.83 2.93 1118

2.75 2.80 2.90 1090

2.75 2.80 2.90 1085

2.75 2.90 3.00 1085

2.75 3.00 3.05 1080

2.75 3.00 3.10 1070

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 12 November 2012. Source: Bank of Korea, CEIC and Nomura Global Economics.

21

Nomura | Global Annual Economic Outlook

13 November 2012

Taiwan | Economic Outlook


External demand holds the key
The economy should benefit from an upcycle in China's GDP, global electronic demand and an improved cross-strait relationship with China.
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 Q4, but from a very low base. Stronger demand from China and a gradual recovery in global demand for electronics should help lift Taiwans GDP growth from 1.0% in 2012 to 3.0% in 2013 and further to 3.5% in 2014, as strengthening economic linkages with China start to increasingly benefit (see below). We expect CPI inflation to rise to 2.3% in 2013 from 2.0% in 2012 due to higher food prices and consumption. 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. Taiwans central bank and Chinas PBoC signed a Currency Settlement MOU in August, which should significantly boost RMB-related business in Taiwans capital markets. Improving cross-strait ties is a structural transformation that, over time, should unleash major benefits for Taiwans economy through higher value-added trade and investment with China, and deepening capital markets. Monetary policy: We expect the Central Bank of China (CBC) to hike discount rates from 1.875% to 2.125% in H2 2013 as GDP growth and CPI inflation should rise. We view this as more a normalization of very loose monetary policy, rather than a move to outright tightening. Risks: Another deep recession in advanced economies would have a large impact on Taiwans 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.

Young Sun Kwon


+852 2536 7430 youngsun.kwon@nomura.com

Aman Mohunta
+91 22 6617 5595 aman.mohunta@nomura.com

Details of the forecast


% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Government consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contributions to GDP grow th (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP) Consumer prices Unemployment rate (%) Discount rate (%) Overnight call rate (%) 10-year T-bond (%) Exchange rate (NTD/USD) 1Q12 2.8 0.4 1.4 2.7 -10.2 -3.3 -7.5 -2.4 1.4 1.6 -4.0 -5.9 5.7 9.6 1.3 4.1 1.88 0.42 1.27 29.5 2Q12 0.5 -0.2 0.8 2.4 -5.2 -3.3 -7.5 -1.0 0.4 0.6 -1.3 -3.1 5.6 8.9 1.6 4.2 1.88 0.51 1.23 29.8 3Q12 2.7 1.0 0.5 2.0 0.8 -1.0 -0.5 0.0 0.5 -0.5 1.5 4.0 8.4 8.3 2.9 4.3 1.88 0.38 1.19 29.3 4Q12 4.4 2.6 1.0 1.5 0.5 2.5 3.0 3.6 -0.5 0.3 5.0 7.2 7.8 7.6 2.1 4.3 1.88 0.51 1.29 29.1 1Q13 4.9 3.1 1.9 3.0 7.5 2.8 2.2 3.9 -0.4 0.8 5.3 3.7 7.0 6.9 2.1 4.3 1.88 0.51 1.31 28.9 2Q13 1.6 3.4 2.6 3.5 5.0 3.4 2.0 3.4 0.0 1.4 5.9 3.5 7.6 7.5 2.2 4.2 1.88 0.64 1.42 28.9 3Q13 1.0 3.0 2.8 3.0 4.0 4.0 2.1 3.8 -0.4 1.7 6.5 3.6 10.9 9.6 2.5 4.2 2.00 0.41 1.29 28.9 4Q13 2.4 2.5 2.8 2.6 5.0 2.2 2.0 2.2 0.1 0.6 4.7 3.5 9.1 8.1 2.2 4.2 2.13 0.51 1.29 28.8 2012 1.0 0.9 2.1 -3.5 -0.9 -2.1 0.2 0.4 0.5 -1.7 -2.1 27.4 8.6 -1.8 2.0 4.3 1.88 0.51 1.29 29.1 2013 3.0 2.5 3.0 5.3 3.1 2.1 4.4 -0.7 1.1 5.6 3.6 34.5 8.0 -1.9 2.3 4.2 2.13 0.76 1.55 28.8 2014 3.5 3.2 3.4 4.5 3.3 3.5 3.2 0.2 0.5 6.3 5.0 40.4 7.5 -2.0 2.3 4.2 2.13 0.76 1.55 28.3

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.

22

Nomura | Global Annual Economic Outlook

13 November 2012

Thailand | Economic Outlook


New growth engines
Investment and consumption spending will provide a boost to GDP growth even as the external outlook remains uncertain, spurred by loose monetary and fiscal policies.
Activity: We forecast 2013 GDP growth at a solid 4.5% after recovering sharply to 5.5% in 2012 after last years floods. We believe domestic demand, supported by accommodative monetary and fiscal policies, will mitigate the impact of weak exports. Private consumption should receive a boost from the sharp rise in real wages (the minimum wage was hiked by 40% this year, putting upward pressure on overall wages as well), while private investment should be bolstered by higher public infrastructure spending, the industrial sector upgrading production capacity after the floods, and a relatively more stable political outlook (see Asia Special Report: Thailand: New growth engines, 24 September 2012). These will be the new growth engines that help drive and rebalance the Thai economy, making it more resilient to external shocks. Monetary policy and inflation: We expect inflation to remain stable at 3.0% in 2013, as the government utilizes subsidies to contain emerging price pressures. As a result, we expect the Bank of Thailand (BOT) to keep the policy rate unchanged at 2.75% throughout 2013, following a cumulative 100bp of cuts since the floods. This implies negative real policy rates, and hence even with the BOT on hold, the monetary policy stance should remain accommodative for some time. There is room to cut further if the external outlook deteriorates sharply, or if domestic demand fails to strengthen fast enough to offset any the export weakness. Fiscal policy: The budget deficit is set at 2.4% of GDP in FY13, from an estimated 2.0% of GDP in FY12. Public debt to GDP has risen steadily since early 2012, from 40.6% to 44.2% in July. This is still well below the debt ceiling of 60%, so there is plenty of scope to run expansionary fiscal policies. Including non-budgetary spending such as that on watermanagement infrastructure and the planned THB2.27bn of mega-project investment we forecast a cash deficit in FY13 of 3.5% of GDP versus 2.5% estimated in FY12. Risks: The downside risks to our forecasts stem from a deepening of the euro area recession, and domestically, from increased political uncertainty over the constitutional amendment and reconciliation bill. Slow progress on infrastructure plans could weaken investment sentiment.
Details of the forecast
% y-o-y growth unless otherwise stated Real GDP (sa, % q-o-q, annualized) Real GDP Private consumption Public consumption Gross fixed capital formation Exports (goods & services) Imports (goods & services) Contribution to GDP growth (% points) Domestic final sales Inventories Net trade (goods & services) Exports Imports Merchandise trade balance (US$bn) Current account balance (US$bn) Current account balance (% of GDP) Fiscal balance (% of GDP, fiscal year basis) Consumer prices Unemployment rate (sa, %) Overnight repo rate (%) Exchange rate (THB/USD) 1Q12 50.8 0.4 2.9 -0.2 5.2 -3.2 4.3 2.5 2.9 -4.7 -1.4 10.4 -5.2 0.6 0.6 3.4 0.7 3.00 30.8 2Q12 13.9 4.2 5.3 5.6 10.2 0.9 8.5 5.7 2.8 -4.4 0.0 11.9 -5.2 -2.5 -2.7 2.5 0.9 3.00 31.8 3Q12 1.3 2.8 5.0 4.7 10.7 -2.9 0.0 5.5 -1.3 -2.3 -3.8 -1.7 -1.6 2.7 3.0 2.9 0.6 3.00 30.8 4Q12 1.4 15.2 6.7 6.4 16.0 17.8 6.6 7.6 0.2 8.7 14.8 7.0 -2.9 1.6 1.7 3.4 0.6 2.75 30.3 1Q13 0.4 4.1 6.0 0.8 10.0 4.9 3.6 5.2 -2.3 1.5 4.9 3.2 -4.4 0.6 0.6 3.1 0.9 2.75 30.1 2Q13 14.1 4.1 5.7 -2.3 7.2 2.8 1.2 4.6 -2.0 1.3 4.2 4.4 -5.5 -2.3 -2.4 2.9 0.8 2.75 30.1 3Q13 3.7 4.8 3.9 -2.7 7.5 5.1 3.3 3.5 -0.1 1.7 5.1 13.3 -6.8 -2.0 -2.0 2.7 0.6 2.75 30.1 4Q13 2.0 4.9 3.1 0.9 9.8 3.6 4.2 3.7 0.2 0.3 1.5 7.4 -4.0 1.1 1.0 2.9 0.6 2.75 29.9 2012 5.5 5.0 4.1 10.4 2.6 4.7 5.2 1.2 -0.9 2.3 6.1 -14.9 2.4 0.7 -2.5 3.0 0.7 2.75 30.3 2013 4.5 4.7 -1.0 8.6 4.1 3.1 4.3 -1.0 1.2 5.0 7.1 -20.7 -2.6 -0.7 -3.5 3.0 0.7 2.75 29.9 2014 5.0 4.2 -0.8 9.9 5.0 5.0 4.4 0.0 0.7 6.9 7.2 -22.9 -2.8 -0.7 -3.7 3.1 0.7 3.25 29.3

Euben Paracuelles
+65 6433 6956 euben.paracuelles@nomura.com

Nuchjarin Panarode
+662 638 5791 nuchjarin.panarode@nomura.com

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 12 November 2012. Source: CEIC and Nomura Global Economics.

23

Nomura | Global Annual Economic Outlook

13 November 2012

Japan | Economic Outlook


Export recovery likely to deliver positive growth in Q1 2013
We expect the export recovery, driven by China's economic recovery and solid domestic demand, to support growth in 2013.

We expect growth in Q4 2012 to remain negative


We believe Japan's economy entered a recession in Q3 2012 due to the worsening external environment. Even though domestic demand and reconstruction demand were quite robust until Q1 with support from government subsidies for automobile purchases, a marked fall in exports weakened Japan's growth from June 2012. Japan's exports to China had already started to shrink from the end of 2011, but its exports to Europe and Asia shrank significantly from the middle of 2012 as Asia's exports to Europe deteriorated, which caused a fall in intra-Asian trade. For Japan, whose exports to Asia accounted for more than half of total exports in 2011, this deterioration in the external environment has led to a decline in exports and investments in manufacturing. Economic growth in Q3 was also exacerbated by the ending of the government subsidies for automobile purchases. Worsening business sentiment and the expiration of the car subsidy have started to weaken Japan's private consumption since September. Tomo Kinoshita
+81 3 6703 1280 tomo.kinoshita@nomura.com

Shuichi Obata
+81 3 6703 1295 shuichi.obata@nomura.com

Kohei Okazaki
+81 3 6703 1291 kohei.okazaki@nomura.com

Asuka Tsuchida
+81 3 6703 1297 asuka.tsuchida@nomura.com

The recovery process should start to materialize in Q1 2013


We expect an economic recovery will materialize from Q1 2013 with a pick-up in China's domestic demand. We believe that China's domestic demand will gain traction by end-2012 with the ending of inventory de-stocking in the manufacturing sector, which should lead to a pick-up in exports to China from their neighboring industrialized economies. In fact, the inventory destocking has already reached its final stage in Asias advanced economies. The resulting increase in production in these economies is likely to bring about a recovery in exports from Japan to the rest of Asia including China, Korea and Taiwan. However, in our view, the pace of such a recovery in Japan's exports is likely to be a moderate for two reasons. First, we do not expect Japan's exports to Europe to recover in H1 2013 due to a continued recession in Europe. Second, Japan's recovery in exports is likely to be slower than that of Korea or Taiwan as the recovery in capital goods exports tends to lag that in materials and intermediate goods exports, because of the higher share of capital goods exports in Japan than in other Asian economies. Nonetheless, we expect the export recovery in Japan to stimulate private investment and also domestic demand, allowing overall growth to return to positive territory from Q1 onwards. By mid-2013, Japan's export growth is likely to gain further strength as we expect growth in the US to pick up in H2 2013. This recovery process should also be supported by yen depreciation against the US dollar to 88 JPY/USD at end-2013. We expect growth to pick up to 0.5% in 2013 from an annualized -2.1% in H2 2012, followed by 1.2% in 2014.

Domestic demand should regain its strength in 2013


Once external demand improves, we expect private consumption and non-manufacturing investment to return to their trend growth paths. We expect the aging population to bring private consumption to a moderate growth path with an even lower savings rate. By contrast, the most recent Tankan survey (September survey) by the Bank of Japan (BOJ) suggests that nonmanufacturers are likely to increase their investment again once they see signs of a recovery in private consumption (Figure 1). Private consumption is likely to stay robust partly due to demand being brought forward owing to the scheduled consumption tax rate hike in April 2014.

Fiscal policy: We expect a supplementary budget in early 2013


The immediate task faced by the ruling DPJ (Democratic Party of Japan) and the opposition LDP (Liberal Democratic Party) is the passage of the bill that will allow the government to issue a deficit-funding government bond. Without its passage, the government will need to stop spending from early December. If the bill is not passed by the end of the year, funding shortfalls are expected to arise: JPY8.5trn in Q4 2012 and JPY20.7trn in Q1 2013. We think this would lower real GDP growth by 7.6 percentage points (pp) q-o-q and 6.2pp, respectively. Even if spending on the police, the self-defense forces and other areas deemed important to the

24

Nomura | Global Annual Economic Outlook

13 November 2012

publics daily life were continued, as special cases are exempt from a government shutdown, we estimate that the dent to real GDP growth would still be 5.7pp in Q4 2012 and 3.1pp in 2013. As the cost of non-passage of this bill is too big to accept, we expect a compromise to be reached by the two parties.
Fig. 1: Non-manufacturing investment growth and Tankan survey's DI on excessive capacity
y-y, % DI:"excess" - "shortage": inverse scale

30 Real capex by non-manuf acturing companies (lhs) 20

-4 -2

Capex DI (rhs)

0
10 2 0 4 -10 6 -20 8 10 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

-30

Notes: Capex is in real terms using the 2005 base year deflator. Source: Nomura, the Bank of Japan and Ministry of Finance and Cabinet Office

Faced with a recession in H2 2012, we expect the Diet to enact a supplementary budget by January 2013. Although the consumption tax rate hike from 5% to 8% is scheduled for April 2014, the government can choose not to implement under the law based on its assessment of the state of the economy. As the decision will be made around autumn 2013, growth in Q2 2013 will be critically important as this is the last quarterly GDP data published before the decision is made. As there is a risk that Japans recovery will be halted by a delay in inventory de-stocking in China or worsening relations between Japan and China, we expect the two major parties, the DPJ and the LDP, to agree on the supplementary budget. Although government spending including social welfare is capped at JPY71trn, as self-imposed by the government, it can still utilize its surplus fund amounting to JPY2trn, which the government earned during FY11. We expect the government to set aside JPY700bn for public construction spending for a quick disbursement during H1 2013, which is likely to raise real GDP growth by 0.16pp in 2013.
Fig. 2: Schedule of major political events in Japan
2012 Nov Dec 30 End of the Extraordinary Diet session

Beginning of Deadline to pass the bill to allow government to issue deficit bonds, whithout which the national the month government would stop spending 16 Election of the Tokyo Metropolitan Governor

By month-end Determine the framework for tax reform and FY13 budget 2013 Jan During the month Ordinary Diet session begins Discuss supplementary budget for FY12 Debate FY13 budget Discuss contents of growth strategy Mar Apr Jul Aug Summer Fall 2014 Apr 1 19 8 28 29 End of terms of BOJ two deputy governors simultaneously End of terms of BOJ governor Shirakawa End of current terms of members of Upper House End of terms of members of Lower House (assuming no early dissolution/holding of general election) Election of the Tokyo Metropolitan Assembly Final decision on consumption tax hike Consumption tax rate hike from 5% to 8%

Source: Nomura, based on various news reports

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Nomura | Global Annual Economic Outlook

13 November 2012

Monetary policy: We expect the BOJ to ease further in 2013


We expect the BOJ to implement multiple rounds of monetary easing in 2013. In our view, the first one is likely to be implemented in January 2013 as we expect the BOJ to try to support an economic recovery following a recession in H2 2012. Political pressures are likely to mount as a result of an expected general election and in the light of the expiring terms for two Deputy Governors and Governor Shirakawa, which should also encourage the BOJ to ease monetary conditions. After the new leadership is inaugurated in April, we expect the BOJ to ease further as it will likely try to ensure positive growth in Q2 through exercising its influence on the real economy and asset markets, as Q2 GDP growth is the last figure published before the government decides whether to implement a hike in the consumption tax rate scheduled for April 2014. Towards end-2013, the BOJ is likely to stop implementing further easing measures temporarily due to expectations of demand for private consumption and housing being brought forward before the consumption tax rate hike, although we believe that the BOJ continues to monitor carefully asset price movements, which may incorporate the negative impact from a consumption tax rate hike before it is actually implemented.

Risks
External factors continue to be the main risks for the Japanese economy. Delays in inventory de-stocking in China pose a significant risk to growth as this delays Asias recovery process. The relationship between Japan and China poses another downside risk to an economic recovery if it does not improve in H1 2013 as we expect. Weaker exports from Japan to China, as well as less Chinese tourists to Japan may reduce Japans real GDP growth by 0.35 percentage points if current political tensions persist throughout 2013. Other external risks include an expansion and the prolonging of risks associated with European government debt, a decline in confidence in US economic policy, and concerns about a global economic slowdown.

Fig. 3: Japan: Details of the forecast

% Real GDP Private consumption Private non res fixed invest Residential fixed invest Government consumption Public investment Exports Imports Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Consumer prices Core CPI Fiscal balance (fiscal yr, % GDP) Current account balance (% GDP) Unsecured overnight call rate JGB 5-year yield JGB 10-year yield JPY/USD

1Q12 5.2 4.9 -7.4 -4.4 4.3 17.7 14.1 9.2 3.6 1.2 0.4 4.6 0.3 0.1

2Q12 0.3 -0.4 3.8 6.0 1.9 11.0 5.3 7.3 1.5 -0.8 -0.4 4.4 0.2 0.0

3Q12 -3.5 -1.8 -12.1 3.8 1.4 16.8 -18.7 -1.4 -1.5 0.8 -2.8 4.2 -0.4 -0.2

4Q12 -1.5 -1.4 -3.4 2.8 0.9 11.3 -4.1 -4.2 -1.0 -0.5 0.0 4.4 -0.3 0.0

1Q13 2.0 1.6 1.6 6.6 1.4 4.6 2.0 2.9 1.8 0.3 -0.1 4.5 -0.7 -0.2

2Q13 1.9 1.4 3.9 8.6 1.4 -7.5 3.9 5.3 1.5 0.5 -0.1 4.5 -0.5 -0.1

3Q13 1.8 1.5 5.9 7.0 1.2 -14.1 5.1 3.6 1.3 0.2 0.3 4.4 -0.1 0.1

4Q13 2.0 1.9 6.1 3.6 1.2 -12.2 5.5 6.1 1.7 0.3 0.0 4.3 0.1 0.1

2012 1.6 2.1 1.0 1.9 2.2 9.9 0.7 5.7 2.2 0.1 -0.7 4.4 -0.1 -0.1 -9.6 1.2

2013 0.5 0.4 0.1 5.7 1.3 1.5 -0.9 2.0 0.7 0.2 -0.4 4.4 -0.3 0.0 -10.4 1.6

2014 1.2 1.2 5.8 -2.9 1.2 -11.2 6.2 5.9 1.1 0.0 0.1 3.9 1.8 1.9 -9.5 2.1

0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0.32 0.22 0.19 0.20 0.22 0.20 0.22 0.23 0.99 0.83 0.77 0.80 0.82 0.82 0.85 0.88 82.9 79.8 78.0 82.0 83.0 85.0 86.0 88.0

0-0.10 0-0.10 0-0.10 0.20 0.23 0.37 0.80 0.88 1.10 82.0 88.0 90.0

Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is as a percentage of the labor force. Inflation measures and CY GDP are year-on-year percent changes. Interest rate forecasts are end of period. Fiscal balances are for fiscal year and based on general account. Table last revised 12 November. All forecasts are modal forecasts (i.e., the single most likely outcome). Numbers in bold are actual values, others forecast. Source: Cabinet Office, Ministry of Finance, Statistics Bureau, BOJ, and Nomura Global Economics.

26

Nomura | Global Annual Economic Outlook

13 November 2012

United States | Economic Outlook


More clarity, less uncertainty
In 2013 we expect the pace of recovery to begin to accelerate once Washington policymakers resolve the near-term fiscal and other policy challenges.

Overview
In the three years since the Great Recession ended, real GDP has grown at a lackluster 2.2% pace, mired in what we judge to be a Rogoff-Reinhart world, characterized by sub-normal growth for an extended period. While the adjustment to household balance sheets is largely complete, our forecast for personal consumption reflects our view that borrowing is not likely to drive the economy forward and spending will broadly track growth in income. Business investment is depressed, relative to previous cyclical norms. The root cause of uncertainty, the on-going sovereign debt crisis in Europe and US fiscal challenges, is likely to hold back growth in the economy a bit longer. Looking ahead to 2013, we expect the pace of recovery to begin to accelerate in the second half of the year, led by a rebound in capital expenditures, once Washington policymakers resolve the near-term fiscal and other policy challenges that have undermined business confidence. Higher capital expenditures should support job creation. Moreover, a strengthening recovery in the nations housing market should lift that sectors contribution to economic growth through investment, job creation and the wealth effect from stabilizing home values. Nevertheless, as more workers are encouraged to enter the labor market to look for work, we expect the labor force participation rate to rise and the unemployment rate to remain stubbornly high throughout the forecast horizon. We expect the lack of a substantial improvement in the labor market to lead the Federal Open Market Committee (FOMC) to embark on further long-term asset purchases at the start of the year. Lewis Alexander
+1 212 667 9665 Lewis.Alexander@nomura.com

Ellen Zentner
+1 212 667 9668 ellen.zentner@nomura.com

Aichi Amemiya
+1 212 667 9347 aichi.amemiya@nomura.com

Roiana Reid
+1 212 298 4221 Roiana.Reid@nomura.com

Details of the forecast


% Real GDP Personal consumption Non residential fixed invest Residential fixed invest Government expenditure Exports Imports Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Nonfarm payrolls, 000 Housing starts, 000 saar Consumer prices Core CPI Federal budget (% GDP) Current account balance (% GDP) Fed securities portfolio ($trn) Fed funds target 3-month LIBOR TSY 2-year note TSY 5-year note TSY 10-year note* 30-year mortgage 2.61 2.62 2.60 2.72 3.01 3.30 3.59 3.58 3.57 3.57 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 0.47 0.46 0.36 0.40 0.40 0.50 0.50 0.50 0.60 0.60 0.33 0.33 0.23 0.20 0.30 0.50 0.60 0.70 0.80 0.90 1.04 0.72 0.63 0.60 0.80 1.00 1.20 1.30 1.40 1.50 2.23 1.67 1.63 1.65 2.00 2.20 2.35 2.50 2.55 2.60 3.99 3.66 3.50 2.75 3.00 3.40 3.60 3.70 3.70 3.80 1Q12 2.0 2.4 7.5 20.6 -3.0 4.4 3.1 2.3 -0.4 0.1 8.3 226 715 2.8 2.2 2Q12 1.3 1.5 3.6 8.4 -0.7 5.2 2.8 1.5 -0.5 0.2 8.2 67 736 1.9 2.3 3Q12 2.0 2.0 -1.3 14.4 3.7 -1.6 -0.2 2.3 -0.1 -0.2 8.1 146 786 1.7 2.0 4Q12 1.3 2.3 1.0 17.5 -2.2 2.1 2.7 1.7 -0.1 -0.2 7.9 130 850 2.1 1.9 1Q13 0.7 0.7 -0.3 17.9 -2.1 2.9 1.5 0.5 0.0 0.1 8.1 100 895 1.7 1.8 2Q13 1.2 1.4 0.9 16.7 -0.9 3.1 1.8 1.3 -0.2 0.1 8.0 100 940 1.8 1.6 3Q13 2.3 2.2 4.7 15.9 -1.1 3.7 2.3 2.2 0.0 0.1 8.0 120 985 1.6 1.6 4Q13 2.7 2.6 4.8 15.6 -0.9 5.3 3.5 2.5 0.0 0.1 7.9 150 1030 1.3 1.7 1Q14 3.0 2.8 3.9 13.9 -0.3 5.5 3.9 2.7 0.2 0.1 7.8 150 1085 1.4 1.7 2Q14 3.2 2.7 8.2 13.7 -1.0 4.2 3.1 3.0 0.2 0.1 7.6 150 1140 1.4 1.7 2011 1.8 2.5 8.6 -1.4 -3.1 6.7 4.8 1.9 -0.2 0.1 9.0 139 612 3.1 1.7 -8.7 -3.1 2012 2.1 1.9 7.3 12.2 -1.4 3.3 2.9 2.1 0.1 -0.1 8.1 142 772 2.1 2.1 -7.0 -2.8 2013 1.4 1.6 1.2 16.2 -0.9 2.6 1.9 1.5 -0.1 0.0 8.0 118 963 1.6 1.7 -5.8 -1.6 2014 2.8 2.6 5.0 14.4 -0.8 4.6 3.1 2.8 0.0 0.0 7.6 169 1170 1.4 1.8 -5.0 -1.0

2.61 2.72 3.58 3.57 0-0.25 0-0.25 0-0.25 0-0.25 0.58 0.40 0.50 0.70 0.24 0.20 0.70 1.10 0.83 0.60 1.30 1.80 1.87 1.65 2.50 2.85 3.95 2.75 3.70 4.10

* The forecast range for 10y UST is as follows: 4Q12 = 1.25-2.0, 1Q13 = 1.7-2.3. Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. The unemployment rate is a quarterly average as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages. Numbers in bold are actual values. Table reflects data available as of 9 November 2012. Source: Nomura

27

Nomura | Global Annual Economic Outlook

13 November 2012

Fiscal policy
The evolution of fiscal policy will have a major impact on economic activity over the next two years. In the near term we expect an acrimonious debate between President Obama and Republicans in Congress over the trajectory of fiscal policy. That debate is likely to weigh on the US economy and financial markets over the next six months. However, we expect that, in the end, an agreement will be reached. Moreover, we expect that other important policy reforms, such as fundamental tax reform, will support growth in the second half of next year and into 2014. Greater clarity over the course of economic policy in general, and fiscal policy in particular, as well as positive fundamental reforms elsewhere, should generate faster economic growth starting in the second quarter of next year.

The near-term fiscal challenge


If Congress fails to act before the end of this year tax rates will go up substantially and federal spending will decline at the beginning of next year. If these policy changes go fully into effect for all of 2013 the direct impact on the fiscal deficit will be nearly $700 billion, or about 4% of GDP. This would be enough to throw the US economy into recession in the first half of next year. Both President Obama and the Republican leaders in Congress have stated repeatedly that they want to avoid the full fiscal effects of a sharp increase in taxes and blunt spending cuts that are currently scheduled for the beginning of next year, and, in the end, we expect that an agreement will be reached to reduce fiscal drag in 2013. But reaching that agreement may generate a great deal of uncertainty. The President and some members of Congress may seek to put in place, before year-end, a grand bargain comparable in scale to the Bowles-Simpson proposals, i.e., a package of fiscal measures covering the next ten years that is large enough to first stabilize and then lower the level of federal government debt to GDP. But the likelihood of success in the lame duck session does not seem high. A less ambitious objective would be to reach a simple agreement to extend the deadlines for the major pieces of the fiscal cliff, i.e., the Bush tax cuts that are set to expire and the automatic Budget Control Act (BCA) spending cuts mandated in the 2011 deal to raise the debt limit. Such an extension could buy the time needed to reach a broader agreement. It may be difficult, however, to reach agreement even on a simple extension. Democrats and Republicans have significant differences of principle on tax rates for high income taxpayers and on the appropriate level of spending in 2013. If these differences cannot be bridged it is possible that there will be no agreement before the end of this year. While it is possible that we will go off the fiscal cliff, it is unlikely that we will go very far into 2013 without an agreement to mitigate the impact of fiscal consolidation on the economy. The current debt limit is likely to become binding early in 2013. The need to raise the debt limit could, as in 2011, provide impetus to break the impasse. A contentious debate over fiscal policy in coming weeks is likely to be a drag on aggregate demand. Businesses have been reluctant to launch new investment projects and to hire new workers because they do not have confidence in the economic outlook and they do not know what their tax obligations will be. Under the weight of this uncertainty, business investment in general has slowed markedly this year and remains depressed relative to previous cyclical norms (Figure 1). The economic impact of going off the cliff will depend on how long the tax increases and spending cuts are actually in place. If they are in place permanently, a recession in the first half of next year looks certain. On the other hand, if the core fiscal cliff policies are only in effect for a short time, the effects on the economy should be much more modest (Figure 2).

28

Nomura | Global Annual Economic Outlook

13 November 2012

Figure 1: Business investment has suffered from uncertainty

Figure 2: Estimated impact of fiscal cliff policies** on real GDP (%)


% 1 0 1 0

pp 8 6 4

Investment shortfall (Actual less model predicted value)

-1

-1
Temporary (1 qrt.) Permanent -2 -3 -4 -5 Q1 Q2 2013 Q3 Q4 Q1 Q2 2014 Q3 Q4

2
0
-2 -3 -4 -5

-2
-4

-6
-8

-10 Q2-2009 Q4-2009 Q2-2010 Q4-2010 Q2-2011 Q4-2011


Source: Nomura

** Estimated impact of the expiration of fiscal cliff policies excluding the payroll tax cut and the Doc fix under the assumption that changes are shocks are imposed in Q1 2013 only or permanently. Effects on GDP are estimated using the Fair Model. Source: Nomura

Policy over the long term


Looking beyond the next few months, it is likely that fiscal policy will be a drag on growth for many years. The budget that President Obama proposed earlier this year anticipates steady declines of US fiscal deficits from 8.7% of GDP in 2011 to 3.1% of GDP in 2015. Note that Republican proposals anticipated a significantly faster decline in the deficit, to 1.7% of GDP in 2015. Our forecast anticipates about 1% of fiscal drag in 2013 and somewhat more in 2014. We also anticipate some progress on other aspects of economic policy. The US tax system is ripe for reform. The last major reform of the US tax code was passed in 1986. The statutory corporate tax rate in the US remains relatively high compared with many of its international competitors, and the many deductions make the system complex and distortive. In addition, over time an increasing share of the tax code has become subject to annual renewal, a further source of recurring uncertainty for businesses (Figure 3). A significant amount of preparatory work on tax reform has been done in Congress. In addition, the Obama administration has put out a white paper advocating revenue-neutral corporate tax reform. In the near term, policy uncertainty is likely to be a significant drag on growth. But we think that much of that uncertainty will be resolved in the first half of 2013. However, the US has just completed a long, hard-fought election that generated a status quo outcome. If partisan politics prevents the implementation of a near-term fiscal deal, and progress in other areas of economic policy, then our outlook for the economy may prove to be too optimistic. On the other hand, policy has the potential to over-perform as well. At this time fundamental reforms in a number of areas including taxation, infrastructure, energy, immigration, and mortgage finance have the potential to make a significant positive contribution to long-term economic growth. If the current gridlock in Congress can be overcome we see significant upside potential for the US economy.

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Figure 3: Share of the tax code subject to annual renewal

Figure 4: Labor force participation rate


67.5 67.0 % Labor force participation rate 67.0 ...projected based on demographic trends 66.5 66.0 65.5 65.0 64.5 64.0 63.5 63.0 1999 2003 2007 2011 % 67.5

% 14 12 Alternative Minimum Tax 10 Bush Tax Cuts 8

66.5 66.0 65.5

Other Tax Provisions


6 4
64.0 65.0 64.5

2
63.5

0 2000 2002 2004 2006 2008 2010 2012


Source: Congressional Budget Office, Joint Committee on Taxation, Nomura

63.0 1995

Source: Bureau of Labor Statistics, Nomura

Monetary policy
At the September meeting, the FOMC said it expects a very low federal funds rate to be warranted until at least mid-2015 and initiated an open-ended, long-term asset purchase program targeting mortgage-backed securities (MBS) at a monthly pace of $40 billion. Moreover, the Committee vowed to continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriateif the outlook for the labor market does not improve substantially. In discussing how long these purchases might last the Chairman suggested that these measures would likely continue until the economy was growing fast enough to sustain an employment rate that is declining gradually. In the spring the Chairman argued that the US needs growth beyond the rate of the economys potential for the unemployment rate to decline (see Recent Developments in the Labor Market, 26 March 2012, see What labor markets mean for monetary policy, Special Report, 9 April 2012). In the latest summary of economic projections table, the FOMCs central tendency of potential growth in output is between 2.3% and 2.5%. The Chairman has also noted that sustained declines in the participation rate could be reversed if the recovery accelerates. For example, in October the unemployment rate ticked up to 7.9% even though US households reported having gained more than 400k net new jobs because more workers flooded back into the labor market to seek employment. Figure 4 provides an historical look at labor force participation. Adjusting for demographic trends suggests the current rate of participation is roughly a full percentage point too low. An increase in the participation rate would likely lead to a higher unemployment rate. An economy growing at its potential would be just fast enough to accommodate new entrants into the labor market, but would need to grow beyond potential to additionally accommodate unemployed workers as they re-enter the labor market. Taken together this implies that the FOMC would need to see the prospect of GDP growth of at least 3.0% for several quarters to expect a sustained decline in the unemployment rate. Given the headwinds facing the US economy, including problems relating to US fiscal policy, it is hard to imagine a sustained acceleration in growth before the middle of 2013. That means that MBS purchases will likely go on until the third quarter of 2013. Furthermore, we expect the FOMC to replace the current maturity extension program (MEP, or Operation Twist) scheduled to expire at the end of the year with a program of outright Treasury purchases similar in size and pace (roughly $40bn monthly) at the beginning of the year. Our forecast for consumer prices to remain below 2% for the forecast horizon reflects the effects of a substantial output gap that has emerged from three years of sub-par growth in the economy. There is a risk, however, that inflation expectations are too optimistic with respect to

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the supply-side of the US economy. Were core inflation to accelerate and/or inflation expectations begin to rise, the FOMC may be forced to tighten monetary policy sooner than expected. Recent press reports suggest that Chairman Bernanke may not seek a third term when his current term expires at the end of 2013. Nevertheless, President Obama will likely seek continuity in Federal Reserve policy.

Housing
Housing, which often kick-starts US recoveries, has largely been missing this time around, but is poised to contribute to growth in 2012 for the first time since 2005. Though this important sector is making headway toward normalization, lingering problems with mortgage financing and an overhang of inventories remain a constraint on the pace of the recovery. More than 20% of all outstanding mortgages are underwater and we estimate there are more than 3 million so-called shadow inventories (mortgages that are seriously delinquent or are in the foreclosure process but have not been put on the market). Nevertheless, the strengthening recovery in housing provides a key underpinning for our forecasts for job growth and aggregate demand over the forecast horizon.

Positive developments for supply


The months supply of existing homes the ratio of visible inventories for sale to monthly sales and a good measure to gauge the balance between supply and demand in the housing market fell below six months in September 2012 for the first time in several years. Looking ahead, the ebb and flow of visible inventories should continue to be influenced by heavy investor appetite for single-family rental properties on the demand side, and an increase in listings as prices improve on the supply side. In the meantime, tight supply of visible inventories has put a floor under home values and year-on-year price increases are spreading to more areas of the country. In January, only one metro included in the S&P/Case-Shiller home price index experienced a year-on-year price gain. By July, 14 metros experienced price gains. Supporting the tighter supply of visible inventories, the inflow of distressed properties has slowed significantly over the past few years as the economy has improved and the shock of troubled mortgages has diminished. A series of policy efforts to reduce foreclosures such as the Home Affordable Refinance Program (HARP) and Home Affordable Modification Program (HAMP), and investigations into the improper foreclosure process by banks (the so-called robosigning scandal) have also helped. The mortgage delinquency rate declined to 7.6% in Q2 2012, down 86 basis points over the last year. The transition of mortgages from early delinquency (30-60 days past due) into serious delinquency (90 days or more past due) has also trended lower. The number of foreclosure starts in Q2 2012 was nearly half of its peak of 566k in Q2 2009. It is important to note that while delinquency rates have improved, delinquencies remain much higher than historical norms. Still, as the delinquency rates decline, the share of sales that represent distressed assets has declined, lessening the damping effect these discounted properties have had on home price appreciation.

Pent-up demand
Household formation, arguably one of the most important determinants of demand for housing, has accelerated in 2011 and 2012. The centered 3-year moving average of the net increase in US households has now moved back in line with the underlying pace implied by demographic trends (Figure 5). This may indicate that potential home buyers and renters are becoming more confident about the economic outlook. For several years following the financial crisis household formation remained lower than demographics suggested, implying a sizable build-up of pent-up demand for housing. Against this backdrop, we forecast that housing starts will reach an annual rate of one million units in Q4 2013, growing by nearly 25% in 2013. Furthermore, reconstruction efforts after Hurricane Sandy likely point to upside risk to housings contribution to the economy in 2013 as replacement demand will add to the natural rate of loss in annual housing stock.

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Prices
Despite the strengthening recovery, an overhang of supply and lingering problems in mortgage financing remain obstacles to a more robust housing market. Adding some 2.6 million units in traditional, visible inventories to our shadow inventory estimate of roughly 3.3 million units suggests the housing market remains constrained by a substantial inventory overhang. Should a faster pace of shadow inventories move into visible inventories, price growth is likely to be tempered for some time to come (Figure 6). Nevertheless, home prices, as measured by the S&P/Case-Shiller home price index are poised for growth of 1 to 3% in 2013 and we would expect similar price gains over our forecast horizon.

Figure 5: Housing starts forecast and household formation


y-o-y, change, mn units 2.00 1.75 1.50 1.25 1.00

Figure 6: Housing inventories: shadow vs. visible


thous. units 8,000 7,000 6,000 5,000 4,000 3,000 2,000 Shadow inventories

0.75 0.50 Jan-80

1,000 0 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 invisible inventories in foreclosure process 90 days + delinquent mortgages New home inventories visible inventories of distressed assets existing home inventories ex-distressed assets
Note: 1.REOs are excluded. 2. New home inventories are 1-family house only. 3. Visible inventories of distressed assets are estimated based on the share of distressed assets in existing home sales. Source: National Association of Realtors, Department of Commerce, Nomura

Jan-90

Jan-00

Jan-10

Jan-20

Actual household formation (centered 3-yr moving average) Housing starts (actual and forecast) Household formation implied by demographics
Note: "Household formation implied by demographics" is the hypothetical pace of household formation assuming constant headship rate by age cohort. We calculated three different population projections depending on immigrants which are laid out by the Census Bureau. Source: Census Bureau, Nomura

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Nomura | Global Annual Economic Outlook

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Canada | Economic Outlook


Steady as she goes: growth slightly above trend in 2013
After some weakness in Q3 1012, growth should be slightly higher than potential, but risks remain skewed to the downside.
Activity: We expect growth in Q3 to be relatively weak, because of a big drag from net exports. Weaker global growth and production disruptions in the oil industry have resulted in anemic exports gains, while strong domestic demand, led by business investment, has boosted imports. We expect a rebound in growth in Q4, as some of those factors may prove temporary. For 2013, we expect growth to be slightly over 2%. We expect personal spending growth to moderate as households gradually reduce their debt burden and income growth remains slow and business investment in machinery and equipment to pick-up somewhat. A rebound in global growth with stronger growth in China and the US likely to avoid the fiscal could support exports. However, the strong Canadian dollar may dampen the exports contribution to growth. However, the impact from the strong currency is partly reversed by weaker funding costs, owing to strong foreign inflows into Canadian securities. Inflation: With some spare capacity and the output gap likely to close by the end of2013, we think inflationary pressures are likely to remain contained. We expect headline inflation to have bottomed in Q3 2012 and should gradually increase ending 2012 close to the central banks 2% target. Core inflation should follow a similar pattern, reaching a low of 1.7% in Q4 20122. Policy: With considerable monetary stimulus in place, and a narrowing of the output gap, we expect the BoC to remain on hold in 2012, waiting to have some clarity on the fiscal cliff in the US and the crisis in the eurozone before reducing the amount of stimulus before taking any actions. We expect the BoC to be cautious about tightening monetary policy and to bring rates to 1.75% by mid-2013. The latest budgets show that the various levels of government are in consolidation mode, causing a small drag on the economy. Risks: A disorderly resolution of the euro-area debt crisis remains the most immediate risk to the Canadian economy, However, we think the threat from the US fiscal cliff is much bigger and would have a much larger impact on the Canadian economy than the eurozone crisis, given the strong economic links between the two countries. On the upside, domestic demand could prove to be more resilient than expected, and the US economy could perform better than expected. Moreover, QE3 in the US could be positive for Canada by boosting commodity prices and the terms of trade.
Fig. 1: Details of the forecast
% Real GDP Personal consumption Non residential fixed invest Residential fixed invest Government expenditures Exports Imports Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Employment, 000 Consumer prices Core CPI Fiscal balance (% GDP) Current account balance (% GDP) Overnight target rate 3-month T-Bill 2-year government bond 5-year government bond 10-year government bond USD/CAD 1.00 0.91 1.20 1.57 2.11 1.00 1.00 0.87 1.03 1.21 1.74 1.02 1.00 0.97 1.07 1.31 1.73 0.98 1.00 1.00 1.20 1.40 1.90 0.98 1.00 1.00 1.20 1.50 2.00 1.00 1.00 1.00 1.30 1.80 2.10 1.00 1.25 1.30 1.60 2.10 2.30 0.99 1.75 1.80 2.20 2.30 2.50 0.97 1Q12 1.8 1.5 7.0 15.8 -1.7 -4.4 2.4 2.1 1.9 -2.2 7.4 41 2.3 2.1 2Q12 1.9 0.8 9.3 -1.5 0.4 4.0 2.5 1.4 0.0 0.4 7.3 120 1.6 2.0 3Q12 1.0 1.7 9.0 5.0 0.0 0.2 4.0 2.2 0.0 -1.2 7.3 17 1.2 1.5 4Q12 1.9 1.5 7.0 4.0 0.0 4.2 4.0 1.9 0.0 0.0 7.3 50 1.7 1.7 1Q13 2.1 1.8 6.5 5.0 0.3 4.3 4.2 2.1 0.0 0.0 7.3 60 1.8 2.0 2Q13 2.1 1.8 6.5 5.0 0.3 4.3 4.2 2.1 0.0 0.0 7.2 60 1.8 2.0 3Q13 2.1 1.8 6.5 5.0 0.3 4.3 4.2 2.1 0.0 0.1 7.2 60 2.0 2.0 4Q13 2.1 1.8 6.5 5.0 0.3 4.2 4.2 2.1 0.0 0.1 7.2 60 2.0 2.0 2011 2.6 2.4 10.4 1.9 0.5 4.6 5.8 2.6 0.4 -0.4 7.5 51 2.9 1.7 -4.4 -2.8 1.00 0.82 0.95 1.28 1.94 1.02 2012 2.1 1.6 7.5 6.9 -1.0 3.1 2.9 1.9 0.2 0.0 7.3 57 1.7 1.8 -3.8 -3.4 1.00 1.00 1.20 1.40 1.90 0.98 2013 1.9 1.7 7.1 4.4 0.2 3.7 4.0 2.0 0.0 -0.1 7.2 60 1.9 2.0 -3.0 -3.7 1.75 1.80 2.20 2.30 2.50 0.97 2014 2.1 1.8 6.5 5.0 0.3 4.2 4.2 2.1 0.0 0.1 7.1 63 2.0 2.0 -2.2 -3.7 3.00 3.00 3.20 3.20 3.40 0.97

Charles St-Arnaud
+1 212 667 1986 charles.starnaud@nomura.com

Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 13 November 2012. Source: Bank of Canada, Statistics Canada, Nomura Global Economics.

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Nomura | Global Annual Economic Outlook

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Mexico | Economic Outlook


2013: The year of reforms
The new government will embark on a series of important reforms in 2013.
Activity: We forecast the economy to expand by 3.0-3.5% y-o-y in 2013. While the US economy, the main trade partner of Mexico might remain weak, we expect Mexican domestic aggregate demand to remain resilient. Other risks include a sharper than anticipated contraction in the Eurozone that drags down global growth. For 2012 the Mexican economy is on track to expand above potential growth of 3.0-3.25%. A fiscal reform to increase non-oil revenues and an energy reform to increase private sector participation will be the main focus of attention in 2013. Authorities will approve these two key structural reforms that will enhance potential growth and reduce vulnerabilities. Inflation: For 2013 we expect most of the supply-side shocks to dissipate; therefore, we forecast inflation to moderate to 3.4% from around 4.0% in 2012. However this forecast does not include the impact of the fiscal reform of increasing the VAT on food and medicines from their current 0% rate. Since the fiscal reform will likely be presented to Congress in February, at the earliest, we wont be able to re-calibrate the inflation forecast until then. If authorities increase the VAT for food and medicines to 16%, which is the rate for other goods, inflation would surpass 7.0% y-o-y. If authorities increase the VAT gradually, the impact on inflation could be significantly lower. Policy: We forecast the central bank of Mexico (Banxico) to keep the policy rate unchanged at 4.50% until 2014 despite the recent hawkishness of Governor Agustin Carstens. Our mediumterm view for the MXN remains sanguine due to the likely approval of the structural reforms. We forecast that MXN will strengthen to 12.00 by 4Q 2013. Risks: The main risk is a double-dip recession in the US economy, which seems unlikely. In terms of inflation, we see the following risks to our call: (1) pass-through effects due to MXN depreciation; (2) increases in gasoline prices; and the passage of the fiscal reform
Details of the forecast

Benito Berber
+1 212 667 9503 Benito.Berber@nomura.com

% y-o-y change unless noted Real GDP Personal consumption Fixed investment Government expenditure Exports Imports Contributions to GDP (pp): Industry Agriculture Services CPI Trade balance (US$ billion) Current account (% GDP) Fiscal balance (% GDP) Gross public debt (% GDP) Overnight Rate % USD/MXN

1Q12 4.6 4.3 8.6 2.9 5.1 7.1 1.4 0.2 2.9 3.73 1.8

2Q12 4.1 3.3 6.2 1.7 6.3 4.0 1.2 0.2 2.6 4.34 1.5

3Q12 3.5 3.4 2.4 5.3 4.9 2.7 0.8 0.1 1.7 4.60 -4.1

4Q12 3.5 4.7 3.2 0.4 7.2 6.3 1.0 0.1 2.2 4.00 -3.9

1Q13 3.7 4.3 3.2 1.3 5.1 4.7 1.1 0.1 2.4 3.55 -3.8

2Q13 3.4 3.1 3.2 0.4 4.4 3.6 1.0 0.1 2.2 3.50 -3.8

3Q13 3.2 3.3 3.2 2.2 3.6 3.6 0.9 0.1 2.0 3.45 -3.8

4Q13 3.1 3.4 3.2 2.0 2.8 3.9 0.9 0.1 2.0 3.40 -3.8

2012 3.7 4.5 3.0 3.9 4.1 4.3 1.1 0.2 2.4 4.10 -4.7 -1.5 -2.2 37.3

2013 3.5 3.5 3.2 3.1 4.0 3.9 1.0 0.1 2.2 3.40 -15.2 -1.5 -2.2 35.0 4.50 12.00

2014 3.5 3.6 3.9 2.8 3.9 3.5 1.0 0.1 2.2 3.50 -15.0 -1.5 -2.2 34.0 5.50 12.00

4.50 12.81

4.50 13.36

4.50 12.86

4.50 12.70

4.50 12.70

4.50 12.50

4.50 12.70

Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-over-year changes for Q4. Trade data are period sums. Interest rate and currency forecasts are end of period. Contributions to GDP do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 13 November 2012. Source: Nomura Global Economics.

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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 fairly lackluster performance in 2012, with H1 GDP growing merely 0.6% y-o-y, and investment falling 2.9% y-o-y. Policymakers have rolled out a series of monetary and especially fiscal stimuli in an attempt to revive growth. However, given the structural issues on the supply side, ongoing drags from credit markets and a still troubled international environment, GDP growth will likely remain sluggish at 1.3% in 2012. Given the gradually improving global growth profile and the lagged effects of domestic stimuli, we should see more robust growth in 2013, reaching 4.1%. Inflation: Consumer prices have been rising fast recently and we expect inflation pressures to remain high, given very accommodative policies and a virtually fixed exchange rate regime. Tradable goods prices are low at around 4%, yet several factors inclement weather in Brazil and the US, the recent surge in world food prices and a BRL weaker than 2.0 are already pushing up domestic food prices and we expect it to continue, with inflation ending 2012 at 5.5%. As a result of faster growth, a low base of comparison, the lagged effects of a weaker currency and a lower policy rate, inflation will likely accelerate in 2013, ending the year at 5.7%. Policy: The Central Bank of Brazil (BCB) has slashed its policy rate, Selic, by 525bp since August 2011, and stated in the October minutes that stability of monetary conditions for a sufficiently long period is the best strategy. We believe the stability for a long period language offers a strong signal that the easing cycle has ended, and the key question now is how long the BCB will stay put, even in the face of rising inflation. Risks: The biggest and more immediate risk, we believe, is the likelihood of on-going supply shocks further amplified by monetary easing from major central banks in the developed world. Any such shock could push up inflation rapidly given still very tight factor markets, with unemployment near all-time lows and the economy fully reacting to multiple rounds of monetary and fiscal stimuli. This should push Brazil back into a stop and go pattern in monetary policy, and lead the BCB to hike Selic in 2013. We now expect the new hiking cycle to start in Q2 2013, as rising consumer prices threaten to go above 6%, and think Selic will likely finish 2013 at 9%. In the medium term, Brazil faces the challenge to reorient its growth model from a consumptiondriven one to a more investment-driven one. Without enough political will to tackle this challenge, especially when it comes to lowering soaring labor costs, we expect potential growth to slow to around 3.5% over the coming years.
Details of the forecast
% y-o-y change unless noted Real GDP Personal consumption Fixed investment Government expenditure Exports Imports 1Q12 0.8 2.5 -2.1 3.4 6.6 6.3 2Q12 0.5 2.4 -3.7 3.1 -2.5 1.6 3Q12 1.8 4.2 -1.5 3.8 -1.7 5.2 4Q12 2.1 4.1 -1.1 3.5 -2.3 2.7 1Q13 3.3 4.4 4.5 4.0 -0.5 7.5 2Q13 4.4 5.7 8.1 3.2 5.5 11.3 3Q13 3.9 5.0 8.5 3.0 7.5 12.1 4Q13 4.2 5.2 6.5 3.3 6.1 10.8 2012 1.3 3.3 -2.1 4.0 1.4 5.1 2013 4.1 5.0 6.2 3.6 4.5 9.8 2014 3.5 4.1 5.5 3.0 4.5 8.0

Tony Volpon
+1 212 667 2182 tony.volpon@nomura.com

Contributions to GDP growth (pp) Industry -0.4 Agriculture 0.0 Services 0.9 IPCA (consumer prices) IGPM (wholesale prices) Trade balance (US$ billion) Current account (% GDP) Fiscal balance (% GDP) Net public debt (% GDP) Selic % BRL/USD 9.75 1.83 5.2 3.2 29

0.1 0.0 0.3 4.9 5.1 24

0.4 0.1 1.0 5.3 8.1 22

0.5 0.1 1.2 5.5 7.5 20

0.8 0.2 1.9 5.8 7.3 18

1.1 0.2 2.5 6.0 7.0 21

0.9 0.2 2.2 5.8 6.8 23

1.0 0.2 2.4 5.7 6.5 25

0.3 0.1 0.7 5.5 7.5 20 -2.4 -2.0 36.0

1.0 0.2 2.3 5.7 6.5 25 -2.5 -2.0 35.0 9.00 1.90

0.8 0.2 2.0 5.5 5.5 22 -2.5 -2.0 34.0 8.50 1.85

8.50 2.01

7.50 2.03

7.25 2.00

7.25 2.00

8.25 1.93

9.00 1.90

9.00 1.90

7.25 2.00

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.

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Nomura | Global Annual Economic Outlook

13 November 2012

Rest of LatAm | Economic Outlook


Argentina: Key mid-term elections coming
Electoral calculations are likely to drive economic policymaking yet again
2011 8.9 10.7 16.6 4.3 17.8 9.5 21.8 0.3 0.0 18.8 4.29 2012 2.0 4.4 -9.0 -6.0 -7.6 10.2 26.4 -0.8 1.8 15.0 4.88 2013 4.0 4.2 7.5 6.7 10.8 10.2 32.3 -2.0 1.9 17.0 6.00 2014 3.5 3.8 5.0 5.0 10.0 10.2 29.7 -1.5 1.0 14.0 7.20

Boris Segura
+1 212 667 1375 Boris.Segura@nomura.com

Real GDP % y-o-y Consumption % y-o-y Gross Investment % y-o-y Exports % y-o-y Imports % y-o-y CPI % y-o-y * CPI % y-o-y ** Budget balance % GDP *** Current account % GDP Policy Rate % USDARS

We expect the authorities to keep financing their growing fiscal deficits with monetary financing from the central bank. This is to increase inflationary pressures. Despite more supportive trade flows, we do not expect a relaxation of draconian exchange controls. Argentinas economic recovery in 2013, a key electoral year, is likely to be lacklustre. As such, the authorities are likely to resort to their usual recipe: Expansionary fiscal and monetary policies. Increasing RER overvaluation to put further strain on output ex commodities and automobile production to Brazil.

* Official data, ** Private estimate, ***Primary budget balance, Bold is actual data Source: BCRA, Indec, MECON, Nomura

Colombia: Growth around trend


We expect around-trend growth in 2013 driven by resilient domestic demand.
2011 2012 5.9 4.5 5.8 4.5 16.6 9.0 11.4 7.0 21.5 9.0 3.7 2.9 3.4 3.2 -2.1 -1.8 -3.0 -3.5 4.75 4.50 1938.50 1825.00 2013 4.5 4.4 9.2 9.0 8.0 3.5 3.5 -2.0 -3.0 4.50 1750.00 2014 4.5 4.5 9.7 9.5 8.5 3.5 3.5 -2.3 -3.0 5.50 1750.00

Benito Berber
+1 212 667 9503 Benito.Berber@nomura.com

Real GDP % y-o-y Consumption % y-o-y Gross Investment % y-o-y Exports % y-o-y Imports % y-o-y CPI % y-o-y * CPI % y-o-y ** Budget balance % GDP Current account % GDP Policy Rate % * USDCOP *

After a strong first half supported by strong domestic consumption and resilient exports, we expect the economy to grow at 4.5% in 2012. Both headline inflation and inflation expectations remain well anchored around 3.0%. We expect an additional 25bp interest rate cut to 4.50% by 2012 year end and for authorities to continue intervening in the FX market to curb COP appreciation. Given around-trend growth, inflation within target band and improving external scenarios, we expect the BanRep to remain in wait-and-see mode in 2013 and keep the policy rate on hold at 4.50%.

* End of period, ** Period average, Bold is actual data

Source: CSOP, NBP, Nomura Global Economics.

Chile: Better external conditions bring upward pressure


We expect domestic demand to remain robust. As global growth prospect brightens and inflation picks up, we expect a small hiking cycle in H2 2013.

Tony Volpon
+1 212 667 2182 Tony.Volpon@nomura.com

2011 Real GDP % y-o-y 6.0 Consumption % y-o-y 8.8 Gross Investment % y-o-y 17.6 Exports % y-o-y 4.6 Imports % y-o-y 14.4 CPI % y-o-y * 4.4 CPI % y-o-y ** 3.3 Budget balance % GDP 1.5 Current account % GDP -1.3 Policy Rate % * 5.25 USDCLP * 519.55

2012 5.1 5.5 7.5 3.8 4.6 3.0 3.3 1.0 -3.0 5.00 475.00

2013 5.5 6.0 10.0 5.0 9.0 3.3 3.2 1.0 -3.0 5.50 460.00

2014 5.0 5.5 7.0 5.0 8.0 3.0 3.0 1.0 -2.0 5.25 450.00

Chile has been growing robustly in 2012, with retail and construction sectors propping up internal demand. As external growth gradually improves, we expect the Chilean economy to expand even faster in 2013. Inflation is currently below target (3%) and expectations are well-anchored. Yet upside risks are notable in the mediumterm, given the tight labor market, strong wage hikes and Chiles high exposure to oil price shocks. As global uncertainties clear up, the central bank will increasingly focus on the domestic front to determine the next move, as the monetary policy rate (TPM) is currently around neutrality. We expect a small hiking cycle in H2 2013, taking TPM to 5.5% by year-end. The presidential election on November 17 will be the most important political event next year. Incumbent Piera is constitutionally barred from seeking immediate reelection and no firm candidate has emerged yet.

* End of period, ** Period average, Bold is actual data

Source: Haver, Bloomberg, Nomura Global Economics.

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Nomura | Global Annual Economic Outlook

13 November 2012

Euro Area | Economic Outlook


Spain and Italy to remain at the epicenter
By mid 2012 it had become increasingly clear that the combination of the unwillingness of the ECB to buy bonds and the reluctance of Germany to show more solidarity towards other member states had become life-threatening for EMU. By mid July, markets started pricing that scenario with Italy and Spain facing a sudden stop. The combination of Draghis commitment to do whatever it takes on 26 July and the apparent support from the German Chancellor which followed soon after have given the market hopes that the worst of the crisis might finally be over and that solidarity might finally be winning the day. In our view, 2013 will be another testing year for solidarity against a backdrop of weakening economic activity. In fact, we believe that the macro-economic challenges and the cost of preserving the stability of the system remain higher than the nature and size of the backstops available. Our baseline scenario for 2013 is one of deep recession in the countries most under stress and of shallow recession in the centre (Figure 1), with the euro area as a whole expected to contract around 0.8% next year (Figure 2). The ongoing deterioration in labour markets coupled with still extremely restrictive monetary and financial conditions in countries like Spain and Italy (where the currency, borrowing costs and liquidity constraints all add up to pretty tight financial conditions) should feed back into public finances and NPLs creating a depressionary environment in a growing share of the region. This negative loop has the potential to threaten the stability of the whole system again given the absence of an unlimited and unconditional backstop. We expect the following chain of events by mid 2013:
Fig. 1: Country specific forecast

Jacques Cailloux
+44 (0) 20 710 22734 Jacques.Cailloux@nomura.com

Nick Matthews
+44 (0) 20 710 25126 Nick.Matthews@nomura.com

Real GDP (% y-o-y) 2012 Euro area Austria France Germany Greece Ireland Italy Netherlands Portugal Spain -0.5 0.4 0.1 0.9 -6.5 -0.1 -2.4 -0.3 -3.2 -1.4 2013 -0.8 0.2 -0.5 0.3 -4.7 0.4 -2.5 -0.3 -2.8 -3.0 2014 0.0 0.8 0.5 0.7 -1.8 1.3 -1.5 0.2 0.0 -1.5

Consumer prices (% y-o-y) 2012 2.5 2.5 2.2 2.2 0.9 2.0 3.3 2.8 2.9 2.5 2013 1.7 2.2 1.4 1.8 -0.2 0.5 1.8 2.6 1.3 2.5 2014 1.6 2.0 2.0 1.7 -0.3 0.5 1.4 1.8 0.7 1.4

Budget balance (as % of GDP) 2012 -3.3 -2.7 -4.5 -0.1 -6.9 -8.5 -2.9 -3.6 -5.2 -8.0 2013 -3.2 -2.6 -3.9 -0.2 -5.9 -8.1 -3.1 -3.1 -5.0 -7.0 2014 -3.0 -2.9 -3.6 -2.0 -3.8 -0.5 -5.2 -5.9 -2.8 -3.1

Debt level (as % of GDP) 2012 93.7 74.1 90.0 81.9 176.6 117.6 126.3 68.7 119.1 85.0 2013 98.1 75.2 93.7 81.5 188.3 123.4 131.1 69.9 127.6 95.5 2014 100.9 76.3 95.6 80.3 198.2 125.1 133.8 71.9 129.6 101.1

Source: Nomura Global Economics.

Spain: from bank bailout to sovereign bail out


After having given the impression to market participants that they were actively considering calling for help, we now have little doubt that Spain will try to free-ride the system by keeping expectations of a bailout high without pulling the trigger. We believe this to be a highly risky strategy which will eventually backfire. We see four triggers that could precipitate the call for help:

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1. Rating downgrade A single notch of downgrade from DBRS would have an immediate knock on effect on haircuts (additional 5%) which could prove destabilizing. More importantly, a downgrade to below investment grade by one of the rating agencies could be more significant. An absence of a call for help in the short term and further disappointments on the economic front would most likely lead to such an outcome. 2. Investors losing patience with Spain There is little doubt that spreads have tightened on the back of the so called Draghi put rather than on improving fundamentals. In that context, a lack of expediency on that front could test the markets patience. To be fair, we had expected markets to be less patient than they have been, a sign perhaps that this channel might not work for quite some time. What could accelerate investors willingness to lighten their exposure to Spain could be the fear of an illiquid end year holding significant exposure to Spain without any clarity regarding the timing for help. 3. The revelation that Spain might never call for help The unwillingness of market participants to sell Spain up to now is the result of the credibility of the Draghi put making the risk-reward of selling not an attractive proposition. However, the Draghi put would lose all credibility if it became clear that Spain was in no position to call for help as it saw no benefit from it. The past few weeks have clearly increased the likelihood of that scenario, with Prime Minister Rajoy explicitly stating in a radio interview (see NEMO, 7 November 2012) that the spread on the 10-year should narrow by 200bp to make it an interesting proposition, something the ECB will not be able to deliver with its OMT programme as suggested by Mr Draghi at Novembers press conference. (The OMT is designed to address tail risk events.) 4. The ECB loses patience Since the beginning of the crisis, the ECB has been instrumental in pushing countries into bailout. This was the case for all bailed-out countries and could thus be repeated in the case of Spain should the ECB grow increasingly worried about the danger of postponing the help. In all, this suggests to us that Spain will not escape a sovereign bailout. We think this will most likely happen after renewed market stress, although conditions 1 and 4 might bring Spain directly into a bailout without necessarily much market deterioration.
Fig. 2: Euro area macroeconomic forecast
% Real GDP Household consumption Fixed investment Government consumption Exports of goods and services Imports of goods and services Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Compensation per employee Labour productivity Unit labour costs Fiscal balance (% GDP) Current account balance (% GDP) Consumer prices ECB main refi. rate 3-month rates 10-yr bund yields $/euro 2.7 1.00 0.78 1.81 1.32 2.5 1.00 0.65 1.60 1.25 2.5 0.75 0.22 1.41 1.29 2.4 0.50 0.18 1.25 1.28 1.9 0.50 0.21 1.31 1.25 1.8 0.50 0.21 1.38 1.20 1.5 0.50 0.21 1.44 1.18 1.4 0.50 0.21 1.50 1.18 1Q12 -0.1 -0.7 -5.1 0.7 2.6 -1.2 -1.3 -0.6 1.8 10.9 1.9 0.4 1.5 2Q12 -0.7 -1.0 -3.5 0.4 5.3 3.7 -1.1 -0.4 0.9 11.1 1.7 0.2 1.4 3Q12 -0.6 -1.7 -7.0 -0.8 0.9 -4.7 -2.5 -0.7 2.6 11.4 1.8 -0.2 2.0 4Q12 -1.6 -1.7 -6.6 -0.8 -3.1 -7.0 -2.3 -0.9 1.7 11.7 1.4 -0.4 1.8 1Q13 -0.8 -1.7 -5.6 -0.8 0.6 -2.8 -2.2 -0.2 1.5 11.9 0.9 -0.7 1.6 2Q13 -0.6 -1.5 -4.5 -0.8 1.6 -2.1 -1.9 -0.5 1.7 12.0 0.7 -0.5 1.2 3Q13 -0.2 -1.5 -3.9 -0.8 2.6 -0.8 -1.7 -0.1 1.6 12.1 0.4 -0.3 0.7 4Q13 -0.1 -1.5 -3.6 -0.8 2.6 -0.4 -1.6 0.1 1.4 12.2 0.3 0.1 0.2 2012 -0.5 -1.1 -3.9 0.0 2.3 -1.4 -1.3 -0.9 1.7 11.3 1.7 0.0 1.7 -3.3 -0.3 2.5 0.50 0.18 1.25 1.28 2013 -0.8 -1.6 -5.3 -0.7 0.8 -2.9 -1.9 -0.5 1.7 12.1 0.6 -0.4 0.9 -3.2 0.1 1.7 0.50 0.21 1.50 1.15 2014 0.0 -1.4 -3.2 -0.5 2.7 0.2 -1.4 0.2 1.3 12.3 0.6 0.5 0.1 -3.0 0.5 1.6 0.50 0.21 1.75 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 9 November 2012. Source: Eurostat, ECB, DataStream, Nomura Global Economics.

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Italy: still lacking a credible backstop


The biggest danger for Italy in the near term is renewed deterioration in the Spanish bond market given how high the correlation of the two countries bond markets have been in the past few months. This is in fact our baseline scenario. But there are other risks that seem to be underestimated by the market: the rapid increase in NPLs in the banking sector, the downward trajectory of the economy, the broken transmission mechanism and political risk. In our baseline scenario, we expect Italy to experience renewed bond market deterioration either through negative contagion from Spain or independently from Spain. Renewed stress in the Italian bond market would most likely have much greater impact on other asset classes than Spain which is now largely seen as an idiosyncratic risk, something we would agree with at least in the next few months. Need for additional conventional and unconventional policy easing As can be seen in Figure 3, a simple Taylor rule for the euro area suggests that while the policy rate might be broadly appropriate in the core at present, it is too tight for the periphery. This is without considering the widening in interest spreads in the periphery. The good news is that if our expectation of a significant deterioration in the core proves correct, then the case for additional easing will be much easier to make. Based on our forecast, an additional 150-200bp would be required, an amount of easing obviously impossible to deliver solely via conventional policy. We thus expect the pressure for QE to rise during the course of next year. Once the financial crisis is addressed there will still be an economic crisis Perhaps the greatest challenge of all will be how to tackle the very significant and rapid increase in unemployment in the periphery. Figure 4 shows the extent of the economic damage caused in the periphery and the inadequacy of the euro-area policy toolkit to address these issues. Indeed, while compressing bond spreads is relatively easy to do (once the hurdle of getting the ECB on board is surpassed), there is no obvious policy tool at this stage in the euro area that could help in reducing unemployment rapidly. Elevated unemployment, and rising discontent in some countries about Europe, suggests that the ECB has no ability to eradicate the so-called convertibility risk that there is in the system. The currency might be irrevocable but membership is no longer.

Fig. 3: ECB policy rates vs Taylor rule recommended rates


% 6

Fig. 4: Unemployment rate: core vs periphery


% 20 18 16 Core Periphery

ECB rate Core Periphery

5
4 3

14
12 10 8 6

2
1 0

-1
-2 -3

4
2 0 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11

-4 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14

Note: The Taylor rule we employed is , where t is the inflation and yt is the output gap. Core stands for Germany, France, Netherlands, and Austria and periphery includes Italy, Spain, Ireland, Portugal and Greece. Source: EC and Nomura Global Economics

Note: Core refers to Germany, France, Austria, Finland, Belgium, Luxembourg and Netherlands. Periphery refers to Italy, Spain, Ireland, Portugal and Greece. Source: Eurostat, Datastream and Nomura Global Economics

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Risks to the outlook:


We see several risks to the downside. They include very significant political risk in pretty much all the region (but most importantly Greece, Cyprus, Portugal, Italy, Germany, Finland, Netherlands, Spain and France) either through tense relations between member countries or the rise of populism at home. Another risk stems from dysfunctional credit markets and the danger of depressionary spirals. On the upside, the most significant risk stems from the potential shift in Europe away from strict adherence to nominal fiscal targets to either structural deficit targets or only the commitment to structural reform. Indeed, our forecast s for countries such as Spain, Italy and France are quite sensitive to the assumptions we have made on the amount of fiscal consolidation to come.

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United Kingdom | Economic Outlook


Stagnant
Intensification of the euro-area crisis remains a serious threat to the UK. The MPC is responding with aggressively loose policy, despite inflations 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 eurozones sovereign debt crisis. Large trade and financial relationships with the euro area tie the UK to its apparently bleak economic fate (see UK Theme: Sounding in a pounding?). Earlier signs of cyclical growth momentum waned at still weak growth rates leaving the UK on the brink of recession, probably until 2013, besides when one-off factors boosted GDP in Q3 (see UK Theme: Several shocking months). Growth remains constrained by the ongoing domestic deleveraging and the challenging rebalancing act within the euro area (see UK Comment: Forecast: limping into 2014). Inflation: Inflation has been boosted by a series of one-off shocks such as changes to VAT and energy prices, but underlying inflation is still probably too strong. And there are further one offs from tuition fees. Unlike the MPC, we do not expect a sustained fall below the inflation target, let alone materially so (see UK Theme: Inflation in a black hole). Policy: The MPC is responding aggressively to signs of weaker global growth and subdued domestic demand. QE3 was brought to an end in November after buying 50bn, because the MPC wanted to see if tentative signs of recovery are sustained. We doubt they will be and expect disappointment at demand to cause the MPC to resort to QE again as soon as February. Although concerns are growing about QEs effectiveness, we still do not expect a Bank rate cut, which we believe would be counterproductive (UK Theme: The monetary blunderbuss). Part of demand's ongoing weakness is attributable to the economy's unavoidable but impeded rebalancing and associated fiscal consolidation programme. We estimate fiscal policy to keep subtracting about 1.0% from GDP growth. However, in order to meet its fiscal mandate of reaching a current structural balance by the end of a rolling five-year period, we think the government will need to implement more measures. That is because its current spending plans are conditioned on what we still consider to be an overly optimistic view of potential growth (see, for example, UK Theme: Policymakers remake mistakes, 24 November 2011). As new measures will probably be back-loaded, we expect the debt-to-GDP (secondary) target to be broken and the UK to lose its AAA rating by May 2015 (UK Theme: Bending the fiscal rules). Risks: Downside risks dominate our growth forecasts, creating the risk that the MPC delivers even more easing than we expect, despite the risks being to the upside of our inflation forecasts.
Details of the forecast
1Q12 Real GDP Private consumption Fixed investment Government consumption Exports of goods and services Imports of goods and services Contributions to GDP: Domestic final sales Inventories Net trade Unemployment rate Consumer prices (CPI) Retail prices (RPI) Announced size of the APF (bn) Official Bank rate 3-month sterling libor 10-year gilt per euro $ per -0.3 0.3 3.2 3.1 -1.6 -0.1 1.4 -1.3 -0.5 8.2 3.5 3.8 325 0.50 1.03 2.20 0.83 1.60 2Q12 -0.4 -0.2 -2.7 -1.6 -1.1 1.4 -0.9 1.2 -0.8 8.0 2.8 3.1 325 0.50 0.90 1.73 0.81 1.56 3Q12 0.8 0.8 -0.3 0.0 1.4 0.6 0.4 0.1 0.3 7.9 2.4 2.9 375 0.50 0.60 1.73 0.80 1.62 4Q12 -0.2 -0.4 0.2 -0.4 0.8 0.5 -0.3 0.0 0.1 7.9 2.5 3.1 375 0.50 0.65 1.60 0.78 1.64 1Q13 0.0 0.3 -0.1 -0.4 0.7 0.9 0.1 0.0 -0.1 7.7 2.4 3.1 425 0.50 0.65 1.50 0.77 1.62 2Q13 0.1 0.4 0.3 -0.4 0.7 0.8 0.2 -0.1 0.0 7.6 2.7 3.4 425 0.50 0.65 1.50 0.75 1.60 3Q13 0.1 0.5 0.3 -0.4 0.8 0.8 0.3 -0.1 0.0 7.5 2.7 3.3 425 0.50 0.65 1.60 0.75 1.57 4Q13 0.2 0.4 0.5 -0.4 0.9 0.8 0.3 -0.1 0.0 7.4 2.4 2.8 425 0.50 0.70 1.75 0.75 1.53 2012 -0.2 0.5 0.8 2.2 0.2 2.6 1.0 -0.4 -0.8 8.0 2.8 3.2 375 0.50 0.65 1.60 0.78 1.64 2013 0.4 1.0 -0.3 -1.7 2.9 3.1 0.2 0.3 -0.1 7.6 2.6 3.2 425 0.50 0.70 1.75 0.75 1.53 2014 1.0 1.8 2.5 -1.6 3.0 2.5 1.1 -0.3 0.1 7.0 2.3 2.6 425 0.50 0.70 2.50 tbc tbc

Philip Rush
+44 20 7102 9595 philip.rush@nomura.com

Notes: Quarterly figures are % q-o-q changes. Annual figures are % y-o-y changes. Inventories include statistical discrepancy. Inflation is % y-o-y. Interest rates and currencies are end-of-period levels. Numbers in bold are actual values; others forecast. Table reflects data available as of 6 November 2012. Source: ONS, Bank of England, Bloomberg, DataStream, Nomura Global Economics.

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EEMEA Outlook
Some silver linings to the external risks bearing down
The region is not homogeneous, but tighter fiscal policy and broadly orthodox monetary policy are a common theme, along with a lower beta to the eurozone.
The same shocks that we commented on in our outlook last year are affecting EEMEA currently: eurozone bank deleveraging, export demand shocks from the eurozone, the global growth slump and a range of domestic idiosyncratic risks (mainly surrounding politics and their interaction with fiscal policy). Those shocks are all still very much present across the region. Deleveraging has, if anything, been faster and more aggressive in a number of countries than we first thought. Sentiment has been a big catalyst for a slower EEMEA in 2012. The weakening of export growth has been slower than that of domestic demand in CEE in general (and so trade deficits have narrowed markedly). While tighter credit and lending standards did not exceed our expectations, sharply deteriorating sentiment across the region has played a key role in damping investment, inventory building and labour market dynamics in particular. That said, if we consider our eurozone growth forecast is -0.8% in 2013 and -0.5% in 2012 and then +0.8% in 2014, our own region growth forecast of 3.2% next year after 2.7% this year and 3.8% in 2014 compares very favourably with what happened in 2009 when GDP growth slowed to 4.8%. The growth dynamic and contagion through the domestic economy was much weaker in 2008-09. The region does, therefore to some extent, seem to be establishing itself as having a lower beta to the eurozone crisis, even though specific contagion channels are still very much present. We believe there are several reasons for this. First, there is a lot of pent-up demand from the more region-centric crisis than there was in 2008-09. Second, fiscal drag, while still present in most economies, has much less of an impact now than back then. Furthermore, the nominal and real policy rates went lower for longer (i.e. the transmission lags have had time to work through) and households, governments and corporates all have cleaner, deleveraged (or partially so) balance sheets. This is evident in the level of current accounts alone. Add to that a global shock that is probably more limited, combined with easier liquidity internationally than under the previous shock and a certain degree of export partner diversification into Asia, Africa, LatAm and the picture while certainly not rosy has some more underlying supports.

Peter Attard Montalto


+44 (0) 20 710 28440 peter.am@nomura.com

Olgay Buyukkayali
+44 (0) 20 710 23242 olgay.buyukkayali@nomura.com

James Burton
+44 20 710 24927 James.Burton@nomura.com

The risks
Upside risks to our forecast stem from a softer landing in Asia rather than core and northern eurozone growth remaining very robust through next year. However, the risks of further central
Fig. 1: Growth comparisons
10 8 6 4 2 % y-o-y Nomura forecasts

Fig. 2: Inflation performance


%, y-o-y 10 2008/2009 Headline

2008/2009 Core
Oct 2010 to present Headline CPI Oct 2010 to present Core CPI

9 8
7

0 -2 -4 -6 -8
GDP growth for Strong countries GDP growth for Weak countries

6 5
4 3

2 1 3 5 7 9

Months into period 11 13 15 17 19 21 23

Source: Nomura, Bloomberg. Note: Strong countries include Russia, Poland and Turkey. Weak countries include Czech Republic, Hungary, Romania and South Africa.

Source: Nomura, Bloomberg. Note: GDP-weighted country sample for Czech, Hungary, Poland, Romania, Russia, Turkey and South Africa.

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bank printing are probably one of the most complex areas of contention on risk because they can sweep all manner of ills under the carpet in EEMEA, yet at the same time do little to provoke structural reforms. To the downside the most severe risk is probably an untimely, early end to central bank printing perhaps on global inflation picking up. Equally, core eurozone growth surprising to the downside could drag some of the less affected consumption-related exports in the region lower at a faster pace. Banking contagion from a more meaningful shock from the eurozone is still there, but as difficult to quantify as ever, and we have written significantly on that risk and the use of backstops and exchange controls to offset in the past.

The good
While these factors apply across the region there is one group of countries that they apply specifically to Russia, Turkey and Poland. This strong group has seen more orthodox policy of late, has strong fiscal balance sheets and good funding, and more closed economies than the rest of the region. Turkey has recently been upgraded and Poland should follow suit next year. All three have more solid domestic demand. Interestingly, deleveraging in Turkey and Poland has, gross, been the highest in the region, but because liquid banking asset markets and deleveraging by eurozone banks have been too eager sellers wanting to expand in the region and provide credit, the impact on the economies has been minimal if any. Here are some specifics in each case: Turkey: Turkeys rebalancing is likely to continue, but at a lower pace. We have a reasonably confident view on Turkeys recovery from the current soft patch driven by investments. Net exports are unlikely to deteriorate very sharply similar to previous recoveries. Export market share differentiation, thanks to a sharp rise in Middle East exports, helps external balances to improve even further. Monetary policy has taken a dovish turn especially after Turkeys rating upgrade as the TCMB does not want TRY to have a disorderly appreciation. We do not believe inflation priorities are thrown out of the window completely and expect to see a hike in disguise if we are right about the recovery in the activity. Fiscal policy appears very tight on a cyclically adjusted perspective and the government is trying to put debt-to-GDP sub-30% of GDP helping crowding in private investments.
Fig. 3: Strong vs weak in retail sales and IP
%, y-o-y 15

Fig. 4: Strong vs weak in exports


%, y-o-y Strong countries Exports growth Weak countries Exports growth

Strong countries Retail sales Weak countries Retail sales Strong countries IP Weak countries IP

45
35 25

10
5 0

15
5 -5

-5 -10
-15 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

-15
-25 -35 Jan-06 Mar-07 May-08

Jul-09

Sep-10 Nov-11

Source: Nomura, Bloomberg. Note: Strong countries include Russia, Poland and Turkey. Weak countries include Czech, Hungary, Romania and South Africa.

Source: Nomura, Bloomberg. Note: Strong countries include Russia, Poland and Turkey. Weak countries include Czech, Hungary, Romania and South Africa.

Russia: Russia has gone through its deleveraging much earlier than other countries and hence balance sheets are at a healthier point, as well as domestic demand. The economy is still very leveraged with oil and oil prices (higher than 2008 probably), but that may not be a bad thing for 2013. Economic growth should remain above 3.5% and inflation pressures should result in the Central Bank of Russia acting more like an inflation targeter than countries formally implementing an inflation-targeting framework. Poland: We are actually quite optimistic on growth for next year vs the central bank (we forecast 2.0%, the NBP is projecting 1.5%), though we see a minimal risk of a recession. Poland

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has exhibited a significant capacity to prefund itself, combined with probably the most orthodox monetary policy in the region. That said, growth should slow sharply vs potential to around 4.0% (long run) thanks to slowing public sector infrastructure spending at the end of the current EU funding window, combined with a stagnant labour market. In 2012 consumption has been helped by declining savings, but the boon from that in 2013 should become less readily available. We, however, see continuing acceptable real credit growth and low inflation helping real incomes, while the important re-export cycle to Asia remains key. The test of the conservative nature of the MPC comes of course in how much it cuts rates, but with a desire to keep real deposit rates positive and the likely MPC view of longrun inflation being higher than the NBP economists expect we see only a limited cycle. That should continue to support Polands credibility. While fiscal consolidation has slowed in response to slower growth, off-balance-sheet measures add significant upside risks to our forecast for growth, even if they cannot be totally factored in at this stage. Polands strength however means that large foreigner holdings of onshore treasury debt have been built up, which is a risk albeit not unique to it. That said, Poland, perhaps, is at higher risk of undershooting expectations because of the high base it starts from.

The OK
We would place Israel and Czech Republic in the category of countries that have decent fundamentals, but monetary policy has shifted in each to be less inflation-targeting and more currency or global growth targeting. Czech: We expect the further slump in the eurozone next year and possibly a further crunch in the eurozone banking system flowing over into the Czech Republic to reinforce the deflationary (core inflation) dynamic there, and hence for the CNB to be ready to undertake some form of currency intervention. We think that will be a soft-floor type arrangement with 25.0 or 25.5 in EURCZK as its base. The CNB has started to abandon its traditional mantra of conservative notouch policy on the currency because of the internal view that rates will need to be negative, in effect, to stimulate the economy sufficiently. Thus, because of the impossibility of this, FX policy is the other way to ease monetary conditions. The Czech Republic is also an interesting example, and probably the most dramatic, where the external slowdown has not matched the domestic slowdown and hence net trade remains supportive. In this category we would also include the highly exposed but still structurally sound Baltic economies that had done their homework during the 2008-09 crisis, but nevertheless will suffer again with austerity maintained. The fruits of an export and labour-intensive FDI boom in the past few years however should start to pay off from next year to a greater degree and with it act to support growth. Israel: Israel has a modestly deteriorating current account and an economy that is reasonably highly correlated with global activity. An activist monetary policy and fiscal policy have never resulted in the Israeli economy falling into a recession, but in the face of weak global growth monetary policy gets very dovish.

The less good


The final group of countries has a mixture of susceptibility to the eurozone crisis and global slowdown, but amplified by domestic political, policy and structural deficiencies. This means fiscal consolidation momentum is all the more important to successfully navigate often very narrow funding tightropes through next year. The Balkans, Hungary and South Africa fall into this bucket. Growth is less important in these cases, while monetary policy has taken a turn to the more unorthodox in the case of Romania, Serbia and Hungary through politicisation and potential further easing measures, and in the case of South Africa more mundanely a shift to even lower real rates. Fiscal policy in each case has significant political risks both in the immediate future and more over the medium run. In the case of SEE, the reversal of existing (and in our view very necessary structural reforms), while in Hungary it is more about the unorthodoxy of fiscal policy as the 2014 elections are approached. South Africa has a lethal mix of the breakdown of trust in politics and the unions, combined with the ANCs elective conference next month. All these combine with medium-run risks that the ANC tries to solve the countries socio-economic

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problems through a continual shifting forward of required fiscal consolidation but not a blow up in the budget. Potential growth remains very low and is probably falling in both countries. In Hungary we estimate potential growth (over medium run) to now be around 1.0% vs 4.0% before 2007, and in South Africa to be around 3.50% currently vs 3.85-4.00% pre crisis. In both cases we think this means the risk of further downgrades. There are some specifics to highlight here: Hungary: The story here shows a marked disconnect between market pricing and reality, but we find it hard to see how the shocks that might change this any time soon. Of course external shocks like Spain or US fiscal cliff could be one source, but the additional global liquidity that would lead to that would make the shock filtering through to Hungry only temporary. Domestically fiscal underperformance through next year combined with a new Governor of the MNB and an attempt to issue FX debt before an IMF plan is in place could all be sufficient a shock to provoke market reassessment. We are very concerned that a new Governor and widely replaced management of the MNB will combine with the governments attempts to increase its role in the banking sector through state-owned banks and unorthodox policy; a carefree attitude toward inflation (with the level of the currency and the volume of loan growth proving more important); and postmodern policy measures, will all lead to eventual instability in the currency. Like Poland the risks of a self-sustaining crisis from large foreign holdings of onshore debt are significant. Further downgrades could play a role here as well. Overall, though, the backstop of an IMF is not and is unlikely to be present until a severe market blowup provokes a change in the governments mindset and it accepts IMF conditionality. South Africa: While current policy in South Africa is pretty orthodox, the risks are mounting on the fiscal side in particular. Furthermore, the political risks of an ANC in the throes of a leadership election, where payoffs to get votes and attempts to solve recent labour market unrest are dealt with through extra spending should also exert pressure. Equally, with rates falling lower and a current account totally financed by credit and portfolio flows, the moves lower in real rates is starting to look unorthodox for the normally conservative SARB. With a record level of bond inflows by foreigners there is, therefore, a small window of credibility and funding to maintain stability through next year. Hence, fiscal rectitude is required. As ever we dont see South Africa blowing up. Instead, we expect the market to probably start to realise that the status quo of a President Zuma maintaining control of the ANC will be the problem. Therefore, with an unchanged policy or even a new policy further damaging competitiveness we will see potential growth remaining at a record low. All this should lead to additional downgrades.

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Hungary | Economic Outlook


Fun and games continue
We see the government's tough approach continuing in 2013; however, a new financial transaction tax and new Governor of the MNB add different risks for markets.
Policy, fiscal and funding: The government has continued to be able to fund itself domestically because of excess liquidity and a lack of lending by banks, combined with inflows by foreigners still seeing attractive carry. On external debt, a mixture of derivatives and cash management, combined with swapping out domestic issuance and drawing down deposits have meant that funding has been fine and can continue to be as such through February of 2013 - after which MNB funding can bridge the gap. We think these factors and the fall in local and external yields mean that an IMF/EU backstop deal is not necessary at the moment. The IMF equally is unwilling to countenance further negotiations because the government is unwilling to compromise and unwilling to negotiate in good faith. Hence talks have all but collapsed. We think the government will only return to the table if there is a blow up in market risk premia. That could happen in early Q1 because the FX funding situation is far from certain. We think the government will eventually get impatient and therefore issue FX debt anyway next year. We are concerned about the sustainability of the current government programme into the 2014 elections, so we do not see any IMF/EU backstop lasting beyond the end of 2013. Fiscal policy remains controlled, but if only by repeated austerity packages, in part to reduce funding requirements and remove the threat of EDP sanctions. However, we see poor sustainability of such low deficit levels in the medium run. Rates and inflation: We expect headline inflation to remain outside target until the middle of 2014 on a mixture of tax pass-through and pressure from wages and policy. That said, underlying core ex tax VAT inflation should remain around the bottom edge of the target until it starts slowly rising in the middle of next year. This means that the external members of the MPC can continue cutting rates step-by-step as long as the currency and broad risk premia are under control. While we pencil the MPC stopping at 5.00%, in reality if it could get away with it the MPC could well go lower still. More important than this however is a new Governor of the MNB in March and two new Deputy Governors in July. We think these would be political appointments that would attempt to fulfil FIDESZ's 2010 election manifesto and provide MNB funding for banks, corporates and the development banks via a form of QE or more general postmoderism. This may include giving the government greater access to FX reserves. Growth: We forecast growth in 2013 of only barely above zero (0.1% in our forecast), meaning the economy will be showing no recovery for its second dip into recession next year. Our key concern is potential growth declining over the past four years from 4.0% before the crisis, first to 2.5% by 2010, then 1.75% by this year, but perhaps as low as 1.0% by 2014 thanks to the government's latest austerity packages.

Peter Attard Montalto


+44 (0) 20 710 28440 peter.am@nomura.com

Figure 1. Details of the forecast


2011 Real GDP % y-o-y Nominal GDP USD bn Current account % GDP Fiscal balance % GDP Structural balance CPI % y-o-y * CPI % y-o-y ** Core CPI ex VAT % y-o-y ** Unemployment rate % Reserves EUR bn *** External debt % GDP*** Public debt % GDP MNB policy rate %* EURHUF* 1.7 140.2 1.4 -6.2 -5.0 4.1 3.9 2.6 10.7 35.1 138.9 82.8 7.00 315 2012 -1.1 160.8 2.5 -4.2 -6.5 6.1 5.9 2.0 10.5 31.3 131.6 79.5 5.75 280 2013 0.1 150.4 1.5 -3.1 -5.7 4.8 5.0 2.3 10.4 28.1 130.6 80.0 5.00 295 2014 0.8 159.6 1.0 -2.6 -4.0 4.0 4.3 3.0 10.2 25.0 132.6 79.0 6.00 280

Figure 2. Headline and core ex-VAT CPI.


% y-o-y

Constant tax core


Headline

6.5
5.5 4.5

3.5
2.5

*End of period, **Period average, Bold is actual data ***Includes IMF/EU funds

1.5 Jan-2011 Nov-2011 Sep-2012


Source: Nomura Global Economics

Jul-2013

May-2014

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

46

Nomura | Global Annual Economic Outlook

13 November 2012

Poland | Economic Outlook


NBP in a limited cutting cycle - growth still outperforming
Although growth will probably be lower next year, the economy will likely avoid recession, meaning the scope for rate cutting is still limited.
Growth: Although Poland will likely remain the strongest country in the region, growth will still probably be lower in 2013 at 2.3% vs 2.4% this year because of a confluence of factors. First, the slowing pace of eurozone structural fund investments will likely combine with domestic fiscal consolidation to drag growth down by some 0.6pp in our view. Consumption should also slow, particularly in H1 thanks to slightly lower credit growth and a stagnant labour market feeding through as the ability to draw down net savings reduces. Slowing credit should also be felt in private sector investments though to a lesser degree. However, the sentiment shock in the local economy and its effects on imports and inventories have actually been larger than the export shock. Upside risks to growth from the government's off-balance-sheet investment programme however are meaningful and could add up to 0.5pp to growth to next year. Downside risks emanate from the eurozone and on the trade side, particularly from Asia. We see a rapid bounce back in 2014 growth to 3.7% owing to strong fundamentals and underlying balance sheets of households and corporates, banks that are not feeling the effects of deleveraging because of their profitability, combined with Shale gas coming on-stream, and potentially even larger effects from the investment programme. Currency: We expect USD/PLN to move lower due to the following factors: an orthodox central bank can easily stop its cutting cycle and even hike if animal spirits return, and because the central bank is unlikely to get concerned about currency strength anytime soon. Rates and inflation: We see inflation moving swiftly lower to within target by the end of this year and then further down into the middle of 2014 to spend a brief period below the centre band of the target. All in all the stickiness of the CPI in the last few years should pass and allow this recently begun NBP MPC cutting cycle to continue. However, over the medium run as growth is likely to recover from H2 2013 we see inflation rising to settle just below the top of target through much of 2014. This outlook, combined with the governments off-balance-sheet fiscal stimulus and the cautious nature of the median of the MPC means we only see a handful of cuts in H1 2013 - currently only 50bp in our forecast, but we see more than 75bp as unlikely. Fiscal and politics: Prime Minister Tusk has announced ambitious budgetary and structural reforms for the four years of this parliament sufficient to achieve an upgrade next year. These reforms should bring the deficit to less than 3.0% of GDP in 2013, though not as targeted in 2012 because of lower growth. Growth matters the most. Aggressive pre-funding however means credit risks remain low.

Peter Attard Montalto


+44 (0) 20 710 28440 peter.am@nomura.com

Figure 1. Details of the forecast


2011 Real GDP % y-o-y Nominal GDP USD bn Current account % GDP Fiscal balance % GDP CPI % y-o-y * CPI % y-o-y ** Core CPI ex VAT % y-o-y ** Population mn Unemployment rate % Reserves EUR bn ** External debt % GDP Public debt % GDP NBP policy rate %* EURPLN* 4.3 513.6 -4.9 -5.1 4.6 4.3 2.4 38.2 12.5 74.3 62.7 53.5 4.50 4.47 2012 2.4 578.9 -4.7 -3.4 3.0 3.8 2.2 38.5 13.0 82.5 53.2 52.8 4.50 4.10 2013 2.0 597.4 -3.8 -2.9 2.3 2.4 2.4 38.4 12.8 85.0 48.2 52.2 4.00 3.90 2014 3.5 636.2 -4.3 -2.7 3.2 3.0 2.8 38.3 12.2 90.0 45.9 51.6 5.00 3.75

Figure 2. Inflation outlook


% y-o-y 6.0 5.5 Headline Expectations Core

5.0 4.5
4.0 3.5

3.0
2.5 2.0 1.5

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

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

47

Nomura | Global Annual Economic Outlook

13 November 2012

South Africa | Economic Outlook


Status quo means the brakes are still applied
Although we expect President Zuma to be re-elected, the implications are for further downgrades, heightened fiscal risks and a lack of real reform.
Growth: We see a very sluggish recovery in growth from 2.4% this year to only 2.6% in 2014 and then not even reaching potential growth with only 3.6% in 2014. Negative pressures are strong from Q3 of this year through to the middle of 2013 from production lost in the mining sector and second-round effects into up and downstream industries and consumption. We believe broader underlying consumption can be maintained to some extent because of credit growth and large real wage rises; however, the negative drag from a widening trade deficit will likely offset that. Risks are slightly to the upside if there is a softer landing in the eurozone. Fiscal policy should be broadly neutral, while the capacity of public sector investments to add much to growth beyond what it is already doing is limited by funding constraints. Currency, inflation and rates: With the current account deficit set to remain over 6% of GDP until mid-2013, while funding remains okay despite the global backdrop, but not great because of domestic risk factors, the currency should remain weak overall and above 8.0 in USDZAR. The SARB has also been surprisingly open about both the fact it sees fair value around 8.508.75 (something we think it would have disliked doing in the past) and that it will not intervene on politically-led risk premia shocks - this all reaffirms the fact the currency may remain weak. The new inflation index coming from the January print (out February) should shift inflation up by about 0.3pp to start with. However, the underlying inflation dynamic is looking a little less bullish for 2013 thanks to currency pass-through and larger real wage increases, and it could breach target briefly mid-year before breaching more sustainably through the end of the year. However, we think the SARB forecast can be more anchored in target and combined with a growth-centric response to the labour unrest and weak underlying growth, there could be another rate cut in January. That said, the inflation dynamic makes that cut still far from certain. Politics and fiscal: There is currently 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. Although there has been some let up more recently in the level of strike action, we see it re-emerging in the next wage round that starts more widely in the economy around Easter time. 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 but we expect re-election for President Zuma because of a mixture of policy payoffs he has given to the unions in particular and also the lack of aggression in campaigning that Deputy President Motlanthe has made. The outcome of this however is a still ineffectual and deleterious policy that holds back potential growth. The budget outlook still looks very much skewed to the downside and the funding window will likely remain tight. There really is very limited room for error.

Peter Attard Montalto


+44 (0) 20 710 28440 peter.am@nomura.com

Figure 1. Details of the forecast


2011 Real GDP % y-o-y Current account % GDP PSCE % y-o-y* Fiscal balance % GDP FX reserves, gross USD bn* CPI % y-o-y * CPI % y-o-y ** Manufacturing output % y-o-y Retail sales output % y-o-y SARB policy rate %* EURZAR* USDZAR* 3.1 -3.8 6.2 -4.4 48.9 6.1 5.0 2.4 5.7 5.50 10.5 8.09 2012 2.4 -6.1 7.8 -4.7 50.0 5.5 5.6 1.6 4.3 5.00 11.4 8.90 2013 2.6 -5.3 9.5 -4.4 50.2 5.5 5.5 2.0 1.8 4.50 9.8 8.50 2014 3.2 -4.7 10.2 -3.9 50.3 6.1 5.7 6.8 3.5 6.00 10.4 9.00

Figure 2. Inflation outlook


% y-o-y 7.0
6.5

6.0 5.5
5.0 4.5 4.0
Headline - old

Headline - new

3.5 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14

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

Source: Nomura Global Economics

48

Nomura | Global Annual Economic Outlook

13 November 2012

Turkey | Economic Outlook


A healthy rebalancing
A tightening policy helped the rebalancing of the economy. We expect the rebalancing to lose its 2012 momentum, but the economy looks very healthy for 2013.
Activity: GDP growth looks likely to accelerate to 4.5% in 2013 after 3% growth in 2012. The risks are to the upside, in our view. Private investment should remain strong while private consumption recovers. We do not expect net exports to flip into negative territory similar to the previous episodes of global recovery. Inflation: Turkeys inflation deteriorated at the expense of a strong fiscal stance in 2012. So far it has been largely driven by factors beyond the TCMBs control, but it looks like the markets working number for the next six months is now around 7.5% with some upside risks. An improvement in the growth backdrop could lead to deterioration in inflation expectations. Policy: With our framework of a growth rebound in Q4 2012 and Q1 2013, we expect the TCMB to implement some temporary hikes in disguise largely for expectations management purposes when data improve further (possibly early 2013). We think the daily repo rate could move up to the 6-6.5% area in December or early Q1 2013. 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 TCMBs comfort with the current policy setting). In a situation of very sharp EM inflows and strong TRY appreciation, the TCMB signaled it can lower the benchmark repo rate and bottom of the interest rate corridor as well. Fiscal policy: Since H2 2011 fiscal policy has helped the monetary authorities, as the government has used revenue outperformance as a cushion. The recently unveiled Medium Term Programme (MTP) for 2013-15 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 in the past six or seven years, we still expect the debt-to-GDP ratio to fall towards the low-30% levels. Rating outlook: Turkey is now rated investment grade by Fitch, and we expect it to receive an investment grade rating in 2013 from other rating agencies as well. We think rebalancing and structural reforms are moving in the right direction. Risks: Terms-of-trade shocks (higher oil prices) and sudden stops of capital inflows are the main risks. In that scenario, inflation could rise again with unwarranted currency weakness resulting in a sharp fall in consumer confidence. However, this is not our base case. We think the risks of capital controls being implemented, on any rapid appreciation, are extremely low. With EM inflows accelerating in 2012, the likelihood of sudden stops has declined. Tight lending conditions are still weighing on credit demand.
Fig. 1: Details of the forecast
2011 Real GDP % y-o-y Private consumption Private investments Net exports CPI % y-o-y * CPI % y-o-y ** Budget balance % GDP Primary balance % GDP Public debt % GDP Current account % GDP TCMB policy rate %* USDTRY* 8.5 5.5 4.7 -1.7 10.5 6.5 -1.2 1.6 42.4 -10.0 5.75 1.89 Contributions to GDP by selected items 1.3 -0.5 2.0 7.5 9.1 -2.4 0.6 37.0 -7.0 5.75 1.80 2.5 2.1 1.0 6.5 6.7 -2.3 1.0 36.0 -6.0 5.75 1.70 2.4 2.1 0.2 5.0 6.3 -2.0 1.2 35.0 -6.0 5.75 1.75 2012 3.0 2013 4.5 2014 5.5

Olgay Buyukkayali
+44 (0) 20 710 23242 olgay.buyukkayali@nomura.com

Fig. 2: Fiscal policy very tight


50 Gross debt (%GDP)
2009 45

2010 2011 2012


2013 35

40

Cyc. adj. primary balance (% GDP) 1.2 1.3 1.4 1.5 1.6 1.7 1.8

1.1

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

Source: Nomura Global Economics, IMF.

49

Nomura | Global Annual Economic Outlook

13 November 2012

Rest of EEMEA | Economic Outlook


Czech Republic: Postmodernism, here we come
Whilst a technical recession may well linger through till Q2, until there is a return of sentiment domestic growth will continue to under-perform even export growth.
2011 Real GDP % y-o-y Nominal GDP USD bn Current account % GDP Fiscal balance % GDP CPI % y-o-y * CPI % y-o-y ** Core CPI ex VAT % y-o-y ** Population mn Unemployment rate % Reserves EUR bn ** External debt % GDP Public debt % GDP CNB policy rate %* EURCZK* 1.7 215.5 -2.9 -4.0 2.4 1.9 0.8 10.5 8.6 31.1 50.8 43.8 0.75 25.59 2012 -0.9 219.8 -2.5 -4.5 2.5 3.3 0.3 10.4 9.0 31.5 49.2 45.2 0.05 25.00 2013 0.7 207.7 -2.8 -4.0 1.7 2.1 1.2 10.4 8.8 32.0 47.8 47.0 0.05 25.50 2014

1.4 208.9 -3.2 -3.8 1.5 1.5 1.1 10.3 8.5 32.5 47.7 46.6 1.00 25.00

Growth should start to recover from Q2, led principally by consumption given a still healthy labour market and then slowly through to domestic investments. The external shock to the economy has so far been surprisingly muted and so it is more the oscillations of imports on net trade that have been the issue. Fiscal drag will still be an issue shaving some 0.2pp from GDP. Much of the shock, however, is sentiment driven. An increasingly fractious and unstable coalition will mean any stronger fiscal action or structural reforms are unlikely. However, with steady access to domestic funding and low debt, it is questionable how much additional fiscal consolidation is needed for the medium-run path to remain credible. Overall we expect a largely lame duck government to keep things ticking over but its ability to survive through to the 2014 election remains very much in doubt. Underlying CPI should stay soft till the middle of H2 when it should start to normalise though headline CPI should fall back through next year. The risks to both growth and CPI in the next six months as well as the fact that interest rates are at the lower bound means that if enough of an external shock is delivered from the Eurozone we can see the CNB institute postmodern measures via some form of currency floor around 25.0-25.5.

*End of period, **Period average, Bold is actual data

Source: CSO, CNB, Nomura Global Economics

Romania: Markets should concentrate on fiscal not politics


Twin deficits leave little room for supporting growth in a challenging external demand environment with domestic political and constitutional uncertainties not helping.
2011 Real GDP % y-o-y Current account % GDP Fiscal balance % GDP CPI % y-o-y * CPI % y-o-y ** External debt % GDP Public debt % GDP BNR policy rate %* EURRON* 2.5 -4.2 -4.5 3.1 5.8 72.3 38.6 6.00 4.33 2012 0.2 -3.7 -3.5 6.4 3.8 70.0 39.3 5.00 4.55 2013 0.8 -4.2 -4.0 4.1 5.0 72.0 39.5 6.00 4.60 2014 1.8 -4.5 -3.7 3.8 4.2 71.8 38.2 9.00 4.45

Peter Attard Montalto


+44 (0) 20 710 28440 peter.am@nomura.com

Markets are becoming concerned with the confluence of negative factors in Romania, such as the downgrade of the rating outlook to negative by Moodys, IMF concerns over the elections in December moving them off-programme and fire sales of assets to support increased public sector wages. Romania is vulnerable to deleveraging forces, which could pose a serious risk to the balance of payments. While the BNR has a contingency plan that may involve capital controls, tapping of the precautionary SBA with the IMF may be necessary if the situation deteriorates. Rate hikes are becoming increasingly probable, reversing the recent 100bp of cuts, potentially taking rates up to 7.00% on a marked currency sell-off. There are questions whether the new Victor Ponta-led coalition will stick to the IMF-backed austerity programme, which would likely see the party lose the next election.

*End of period; **Period average; Bold is actual data

Source: Ministry of statistics, Nomura Global Economics

Israel: Slower exports, slower growth, but no recession


An increasingly weak currency and looser monetary policy should help Israel.
2011 Real GDP % y-o-y CPI % y-o-y * CPI % y-o-y ** Budget balance % GDP Current account % GDP Policy rate %* USDILS* 4.8 2.2 3.5 -2.7 0.3 2.75 3.81 2012 2.8 3.4 2.1 -3.0 -0.3 2.00 3.80 2013 3.0 2.5 2.6 -3.5 -1.0 2.50 3.60 2014 3.5 2.5 2.7 -3.0 -1.0 3.00 3.70

Olgay Buyukkayali
+44 (0) 20 710 23242 olgay.buyukkayali@nomura.com

Israels 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 years electricity price hikes, however, may limit the extent of policy easing. With the policy rate at 2.00%, we see no further cuts unless the global economy deteriorates further. Underlying final demand should not weaken greatly and the recovery in 2013 should result in measured rate hikes (50bp to 2.50% by year end).

Source: BOI, Nomura Global Economics

50

Nomura | Global Annual Economic Outlook

13 November 2012

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51

Nomura | Global Annual Economic Outlook

13 November 2012

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Disclaimers required in Japan


Investors in the financial products offered by Nomura Securities may incur fees and commissions specific to those products (for example, transactions involving Japanese equities are subject to a sales commission of up to 1.365% (tax included) of the transaction amount or a commission of 2,730 (tax included) for transactions of 200,000 or less, while transactions involving investment trusts are subject to various fees, such as commissions at the time of purchase and asset management fees (trust fees), specific to each investment trust). In addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses. Transactions involving Japanese equities (including Japanese REITs, Japanese ETFs, and Japanese ETNs) are subject to a sales commission of up to 1.365% (tax included) of the transaction amount (or a commission of 2,730 (tax included) for transactions of 200,000 or less). When Japanese equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Japanese equities carry the risk of losses owing to price fluctuations. Japanese REITs carry the risk of losses owing to fluctuations in price and/or earnings of underlying real estate. Japanese ETFs carry the risk of losses owing to fluctuations in the underlying indexes or other benchmarks. Transactions involving foreign equities are subject to a domestic sales commission of up to 0.9975% (tax included) of the transaction amount (which equals the local transaction amount plus local fees and taxes in the case of a purchase or the local transaction amount minus local fees and taxes in the case of a sale) (for transaction amounts of 750,000 and below, maximum domestic sales commission is 7,455 tax included). Local fees and taxes in foreign financial instruments markets vary by country/territory. When foreign equities are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a

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separate fee for OTC transactions, as agreed with the customer. Foreign equities carry the risk of losses owing to factors such as price fluctuations and foreign exchange rate fluctuations. Margin transactions are subject to a sales commission of up to 1.365% (tax included) of the transaction amount (or a commission of 2,730 (tax included) for transactions of 200,000 or less), as well as management fees and rights handling fees. In addition, long margin transactions are subject to interest on the purchase amount, while short margin transactions are subject to fees for the lending of the shares borrowed. A margin equal to at least 30% of the transaction amount and at least 300,000 is required. With margin transactions, an amount up to roughly 3.3x the margin may be traded. Margin transactions therefore carry the risk of losses in excess of the margin owing to share price fluctuations. For details, please thoroughly read the written materials provided, such as listed securities documents or documents delivered before making a contract. Transactions involving convertible bonds are subject to a sales commission of up to 1.05% (tax included) of the transaction amount (or a commission of 4,200 (tax included) if this would be less than 4,200). When convertible bonds are purchased via OTC transactions (including offerings), only the purchase price shall be paid, with no sales commission charged. However, Nomura Securities may charge a separate fee for OTC transactions, as agreed with the customer. Convertible bonds carry the risk of losses owing to factors such as interest rate fluctuations and price fluctuations in the underlying stock. In addition, convertible bonds denominated in foreign currencies also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When bonds are purchased via public offerings, secondary distributions, or other OTC transactions with Nomura Securities, only the purchase price shall be paid, with no sales commission charged. Bonds carry the risk of losses, as prices fluctuate in line with changes in market interest rates. Bond prices may also fall below the invested principal as a result of such factors as changes in the management and financial circumstances of the issuer, or changes in third-party valuations of the bond in question. In addition, foreign currency-denominated bonds also carry the risk of losses owing to factors such as foreign exchange rate fluctuations. When Japanese government bonds (JGBs) for individual investors are purchased via public offerings, only the purchase price shall be paid, with no sales commission charged. As a rule, JGBs for individual investors may not be sold in the first 12 months after issuance. When JGBs for individual investors are sold before maturity, an amount calculated via the following formula will be subtracted from the par value of the bond plus accrued interest: (1) for 10-year variable rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.8 will be used through 9 January 2013, and an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used starting on 10 January 2013, (2) for 5-year and 3-year fixed rate bonds, an amount equal to the two preceding coupon payments (before tax) x 0.8 will be used through 9 January 2013, and an amount equal to the two preceding coupon payments (before tax) x 0.79685 will be used starting on 10 January 2013. Purchases of investment trusts (and sales of some investment trusts) are subject to a purchase or sales fee of up to 5.25% (tax included) of the transaction amount. Also, a direct cost that may be incurred when selling investment trusts is a fee of up to 2.0% of the unit price at the time of redemption. Indirect costs that may be incurred during the course of holding investment trusts include, for domestic investment trusts, an asset management fee (trust fee) of up to 5.25% (tax included, annualized basis) of the net assets in trust, as well as fees based on investment performance. Other indirect costs may also be incurred. For foreign investment trusts, indirect fees may be incurred during the course of holding such as investment company compensation. Investment trusts invest mainly in securities such as Japanese and foreign equities and bonds, whose prices fluctuate. Investment trust unit prices fluctuate owing to price fluctuations in the underlying assets and to foreign exchange rate fluctuations. As such, investment trusts carry the risk of losses. Fees and risks vary by investment trust. Maximum applicable fees are subject to change; please thoroughly read the written materials provided, such as prospectuses or documents delivered before making a contract. An annual account maintenance fee of up to 1,575 (tax included) is charged for any account held with Nomura Securities containing equities or investment securities. An additional annual account maintenance fee of up to 3,150 (tax included) is charged for any account containing foreign securities. No account fee will be charged for other marketable securities or monies deposited. Transfers of equities to another securities company via the Japan Securities Depository Center are subject to a transfer fee of up to 10,500 (tax included) per issue transferred depending on volume.

Nomura Securities Co., Ltd.


Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142) Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association of Japan; and Type II Financial Instruments Firms Association. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright 2012 Nomura Securities International Inc.. All rights reserved.

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Global Economics
Economists
Global-Economics Research Lewis Alexander Olgay Buyukkayali Tony Volpon Peter Attard Montalto Benito Berber Boris Segura North America-Economics Research Aichi Amemiya Roiana Reid Charles St-Arnaud Ellen Zentner EMEA-Economics Research Desmond Supple Jacques Cailloux Nick Matthews Silvio Peruzzo Dimitris Drakopoulos Lefteris Farmakis Takuma Ikeda Philip Rush Stella Wang Japan-Economics Research Tomo Kinoshita Mika Ikeda Shuichi Obata Kohei Okazaki Asuka Tsuchida Asia Ex-Japan-Economics Research Rob Subbaraman Young Sun Kwon Euben Paracuelles Sonal Varma Zhiwei Zhang Chief Economist Asia Hong Kong, South Korea and Taiwan Economist Southeast Asia Economist India Economist China Economist rob.subbaraman@nomura.com youngsun.kwon@nomura.com euben.paracuelles@nomura.com sonal.varma@nomura.com zhiwei.zhang@nomura.com +852 2536 7435 +852 2536 7430 +65 6433 6956 +91 22 403 74087 +852 2536 7433 Chief Japan Economist Economist Senior Economist Economist Economist tomo.kinoshita@nomura.com mika.ikeda@nomura.com shuichi.obata@nomura.com kohei.okazaki@nomura.com asuka.tsuchida@nomura.com +81 3 6703 1280 +81 3 6703 1287 +81 3 6703 1295 +81 3 6703 1291 +81 3 6703 1297 Global Head of Fixed Income Research Chief European Economist Senior Economist Senior Economist Economist Economist Senior Economist Economist Economist desmond.supple@nomura.com Jacques.Cailloux@nomura.com Nick.Matthews@nomura.com silvio.peruzzo@nomura.com dimitris.drakopoulos@nomura.com lefteris.farmakis@nomura.com takuma.ikeda@nomura.com philip.rush@nomura.com stella.wang@nomura.com +44 (0) 20 710 22125 +44 (0) 20 710 22734 +44 (0) 20 710 25126 +44 (0) 20 710 23205 +44 20 710 25846 +44 (0) 20 710 39242 +1 212 667 1153 +44 20 7102 9595 +44 (0) 20 710 20599 US Economist Economist G10 FX Research Senior US Economist aichi.amemiya@nomura.com Roiana.Reid@nomura.com charles.starnaud@nomura.com ellen.zentner@nomura.com +1 212 667 9347 +1 212 298 4221 +1 212 667 1986 +1 212 667 9668 US Chief Economist Head of EM Strategy, EMEA Head of Emerging Markets Research - Americas Economist Senior Latin America Strategist Senior Latin America Strategist Lewis.Alexander@nomura.com olgay.buyukkayali@nomura.com tony.volpon@nomura.com peter.am@nomura.com Benito.Berber@nomura.com Boris.Segura@nomura.com +1 212 667 9665 +44 (0) 20 710 23242 +1 212 667 2182 +44 (0) 20 710 28440 +1 212 667 9503 +1 212 667 1375

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