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Global Weekly Economic Monitor
N O M U R A G L O B A L E C O N O M I C S
G3 sovereign debt travails
The US needs to muster the political will, the euro area needs to sort out its
architecture, and Japan needs to overcome deflation. None will be easy.
GLOBAL LETTER
G3 sovereign debt dramas 5
Politics blocks budget measures in the US and Japan; in the EA contagion threatens.
REGIONAL ROUNDUPS
United States
Contingency plans 6
While we see an H2 bounce-back, policymakers will respond quickly if they need to.
Europe
Europe peers into the abyss 8
A policy response in Italy and from the EU being expected, panic has abated for now.
Japan
The master plan for reconstruction 10
A ¥10trn-plus supplementary budget is likely to be passed in September or October.
Asia
South Korea: Wait-and-see mode 12
We maintain our call that the BOK will pause hiking until February 2012.
Emerging Markets
MENA: Preparing for European waves 14
Trade/tourism links are strongest in North Africa, financial market ones in the Gulf.
SPECIAL TOPICS
Japan
Impact of change in CPI base year 16
We now expect a 0.9pp y-o-y downward revision in the core CPI to result.
Brazil
Brazil: Labor market bubble 17
We see one, but as growth continues to falter the labor market will likely weaken.
15 July 2011
DATA AND OUTLOOKS
Forecast summary ...................... 2
Our view in a nutshell ................. 3
Economic data calendar .............. 4
United States ........................... 20
Europe ..................................... 23
Japan ....................................... 27
Asia ......................................... 29
Emerging Markets ..................... 35
Contacts .................................. 48
This document is being provided for the exclusive use of CHRIS SZE at MERIT ACT LIMITED
Nomura Global Economics 2 15 July 2011
Global Weekly Economic Monitor
Forecast Summary
Note: Aggregates calculated using purchasing power parity (PPP) adjusted shares of world GDP; 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 2011, 2012 and 2013 are $109, $111 and $112 respectively, after $80 in 2010. *2011 and 2012 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 2011, 2012 and 2013 are midpoints of BOJ’s 0-0.10%
target unsecured overnight call rate range. ††CPI forecasts for Latin America, Egypt and Saudi Arabia are year-on-year changes for Q4.
†††We have refocused our research coverage within Europe, putting more emphasis on countries within the euro area. Therefore, the
WAAG now includes forecasts for Austria but excludes forecasts for Denmark. The ↑↓ arrows signify changes from last week.
Source: Nomura Global Economics.
Real GDP (% y-o-y) Consumer Prices (% y-o-y) Policy Rate (% end of period)
2011 2012 2013 2011 2012 2013 2011 2012 2013
Global 4.2 4.4 4.4 4.6 3.8 3.5 3.77 ↑ 4.27 ↑ 4.71 ↑
Developed 1.9 2.5 2.5 2.7 ↑ 1.6 1.5 ↓ 0.81 1.23 ↓ 2.09
Emerging Markets 6.7 ↑ 6.3 6.3 6.7 6.1 5.5 6.97 ↑ 7.42 7.33 ↑
Americas 2.9 2.9 3.2 4.4 ↑ 3.2 ↑ 2.8 ↓ 2.70 2.97 3.83
United States* 2.3 ↓ 2.6 3.0 2.9 ↑ 1.3 ↑ 1.2 ↓ 0.13 0.13 1.50
Canada 2.7 2.4 2.2 2.7 2.1 2.0 1.75 2.75 3.50
Latin America†† 4.4 3.8 4.0 8.7 8.4 7.2 9.80 10.50 10.01
Argentina 8.0 4.0 3.5 24.4 25.4 18.0 12.00 11.00 14.00
Brazil 3.8 3.7 4.5 5.9 4.9 4.5 12.75 12.75 10.75
Chile 6.5 5.0 6.0 4.5 3.0 3.0 6.00 6.00 6.00
Colombia 5.0 4.5 4.5 3.5 3.7 3.7 5.00 7.00 7.00
Mexico 4.0 3.5 3.2 3.9 4.0 3.7 4.50 6.50 6.50
Venezuela 1.5 3.0 3.5 30.1 32.0 29.8 20.00 22.00 22.00
Asia/Pacif ic 6.3 6.9 6.5 5.0 4.4 4.2 5.21 ↑ 5.53 ↑ 5.65 ↑
Japan† -0.6 3.5 1.8 0.3 0.4 0.6 0.05 0.05 0.05
Australia 2.8 4.3 3.2 3.7 3.4 3.4 5.25 5.25 5.75
New Zealand 0.9 3.5 3.6 4.2 2.6 2.5 2.75 3.75 5.00
Asia ex Japan, Aust, NZ 7.9 7.7 7.5 6.0 5.3 4.9 6.28 ↑ 6.62 ↑ 6.68 ↑
China 9.5 ↑ 8.7 8.4 5.2 4.8 4.5 6.81 7.31 7.31
Hong Kong*** 6.0 4.8 4.3 5.5 5.4 ↑ 4.6 0.40 0.40 1.65 ↑
India** 7.7 7.9 8.1 9.4 7.3 7.1 7.75 7.75 7.75
Indonesia 6.5 7.0 7.0 5.8 6.3 5.5 7.00 7.50 6.50
Malaysia 5.2 5.3 5.0 3.5 3.6 3.1 3.25 3.75 3.75
Philippines 5.1 5.7 6.5 5.1 5.4 5.8 5.00 5.50 6.50
Singapore*** 6.0 5.5 5.5 4.5 3.4 3.0 0.44 ↑ 0.44 ↑ 1.75
South Korea 3.5 5.0 4.0 4.4 3.6 3.0 3.25 3.50 4.00
Taiw an 5.2 5.2 4.8 2.2 2.9 2.5 2.13 2.63 3.00
Thailand 4.1 5.0 4.8 4.3 4.4 3.6 3.75 ↑ 4.50 ↑ 4.50 ↑
Vietnam 6.4 6.9 7.1 18.3 12.0 8.1 14.00 10.00 9.00
Western Europe 2.0 1.9 2.1 2.9 ↓ 2.1 1.9 1.38 2.38 2.97
Euro area 2.0 1.8 2.0 2.7 1.9 1.8 1.50 2.50 3.00
Austria††† 3.0 2.0 2.4 3.5 1.8 1.9 1.50 2.50 3.00
France 2.0 1.9 2.3 2.3 ↑ 1.9 ↑ 1.7 1.50 2.50 3.00
Germany 3.5 2.2 2.1 2.4 1.6 1.7 1.50 2.50 3.00
Greece -4.9 -0.9 1.2 3.0 0.8 0.4 ↑ 1.50 2.50 3.00
Ireland 0.3 1.4 1.8 0.7 ↓ 0.6 1.0 ↓ 1.50 2.50 3.00
Italy 0.8 1.1 1.3 2.9 2.2 1.9 ↑ 1.50 2.50 3.00
Netherlands 2.0 1.8 ↑ 2.1 ↑ 2.5 2.1 2.0 1.50 2.50 3.00
Portugal -2.1 -1.8 0.2 3.2 ↑ 1.8 ↑ 1.3 ↓ 1.50 2.50 3.00
Spain 0.7 1.0 1.7 3.1 2.1 ↑ 2.0 1.50 2.50 3.00
United Kingdom 1.3 2.3 2.4 4.4 ↓ 2.9 2.0 0.50 1.50 2.50
Norw ay 2.5 3.1 ↓ 3.0 1.6 ↓ 1.8 ↓ 2.3 ↓ 3.00 4.00 4.50
Sw eden 4.5 2.3 ↓ 2.1 ↓ 3.0 ↑ 2.7 ↑ 2.6 ↑ 2.50 3.50 4.00
Sw itzerland 2.2 2.3 1.6 0.7 1.0 1.7 0.25 1.25 1.75
EEMEA 4.8 4.2 4.0 6.9 ↓ 6.6 5.8 6.24 6.89 6.83
Czech Republic 1.4 2.6 3.2 1.6 ↓ 4.0 ↑ 2.2 1.25 2.00 3.00
Egypt†† 1.2 3.1 2.5 12.1 9.5 8.0 8.25 9.00 9.00
Hungary 2.5 2.7 3.0 3.8 ↓ 3.4 ↓ 3.6 ↑ 5.50 5.50 5.50
Israel 4.2 3.3 3.5 3.3 3.0 3.3 3.50 4.00 4.25
Kazakhstan 6.2 5.5 6.0 8.3 7.4 7.8 7.50 7.50 8.00
Poland 4.4 4.3 4.1 4.2 ↓ 3.5 ↓ 2.9 ↓ 5.00 5.50 5.00
Qatar 20.2 14.0 10.0 3.6 3.5 3.2 1.50 2.00 2.50
Romania 2.0 2.5 3.5 6.4 3.5 3.0 6.25 7.00 8.00
Russia 4.4 3.9 3.5 8.7 8.2 6.5 8.50 9.00 8.00
Saudi Arabia†† 6.0 4.5 4.0 5.6 5.0 5.0 2.00 2.00 2.50
South Africa 3.7 4.3 4.0 4.9 6.2 6.5 ↓ 6.00 8.00 9.00
Turkey 7.0 4.2 5.0 7.5 7.0 6.8 7.00 8.00 8.50
Ukraine 4.8 5.0 3.8 10.2 12.4 10.5 7.75 9.00 9.00
United Arab Emirates 4.8 4.0 4.5 2.0 3.0 3.2 2.00 2.00 2.50
This document is being provided for the exclusive use of CHRIS SZE at MERIT ACT LIMITED
Global Weekly Economic Monitor
Our View in a Nutshell (changes from last week highlighted)
Global
• We expect developed world growth, helped by a rebound in Japan and lower oil prices, to pick up in the second half.
• We expect most of the emerging world, led by Asia, to keep up its brisk growth after parts navigate a slow path.
• We see high headline inflation in Europe leading the BoE and ECB to hike rates several times before the Fed and BOJ start.
• We see inflationary pressures continuing to mount in EM, with policymakers risking falling behind the curve.
• Downside risks: euro fiscal crisis escalates; investment pulls back in China; US fiscal gridlock triggers premature tightening.
• An upside surprise? Animal spirits stir and crisis-calibrated monetary policies help release pent-up developed world demand.
• G3 currencies (US dollar, euro and yen) are set to underperform EM and other G10 currencies in H2.
United States
• We expect the high level of household debt to restrain growth as it has in recoveries after previous financial crises.
• We judge that concerns about long-term deficits will override any new proposals for short-term fiscal stimulus.
• Supply-chain disruptions and high gas prices have slowed growth but we expect a lively rebound in the second half of 2011.
• Ample unused capacity – evident in the high jobless rate – should restrain core inflation and contain inflation expectations.
• We expect the Fed to keep the size of its securities holdings constant well into 2012 and policy rates steady until 2013.
Europe
• We see the euro staying intact, with fiscal consolidation and debt restructuring, aided by official financing, restoring solvency.
• We expect euro-area growth in 2011 to be sustained by stronger investment and net trade despite fiscal headwinds.
• We expect a continued gradual recovery in UK growth despite the damping effect of deleveraging and fiscal consolidation.
• Inflation will likely stay over double the target during 2011 in the UK and peak about 1pp above the 2% target in the euro area.
• We now expect the ECB to delay its next rate hike until January 2012, and the BoE to delay its first hike until February 2012.
Japan
• We expect the economy to slow sharply in H1 2011, but we expect a V-shaped recovery in H2 led by restoration of demand.
• We expect deflation to linger, as August’s rebase will likely push down year-on-year core CPI (ex-fresh food) by 0.9pp.
• Barring yen strength or overseas economies stalling, we now see the BOJ keeping policy unchanged on our forecast horizon.
• The main risks relate to the nuclear plant and power shortages, a US/China slowdown and deterioration in the Middle East.
Asia
• Growth may soon regain its vigor. Our bigger concern is inflation remaining persistently high.
• China: With inflation sticky, we expect a little more tightening but see growth picking up again in H2 as one-off factors abate.
• Korea: We believe the BOK will focus on slowing growth rather than rising inflation and not raise rates until February 2012.
• India: Without reforms easing the supply-side constraints, we expect growth to remain capped as monetary policy stays tight.
• Australia: We see GDP growth recovering from natural disasters assisted by much stronger capex in the resource sector.
• Indonesia: With robust growth, inflation risks and capital inflows, we expect policy rate hikes and further capital controls.
EEMEA (Emerging Europe, Middle East and Africa) and Latin America
• South Africa: With a need to see evidence of second-round inflation pressures, the MPC risks being late in hiking policy rates.
• Hungary’s anti-growth fiscal policy is a concern; with a more political MPC and pension changes, markets could be volatile.
• Poland has a monetary and fiscal policy credibility deficit after a number of mistakes – in spite of strong growth.
• Russia’s economy is set to be propelled by rising domestic consumption rather than the higher oil price.
• Turkey: We see strong domestic demand and bigger imbalances, resulting in core inflation and current account pressures.
• Middle East: Political unrest is rising across the region, leading to economic challenges and increasing risk premia.
• Economic growth in Brazil is set to slow below potential, after a 150bp policy rate hike in H1.
• Mexico stands to reap the most from a US recovery in 2011, the pick-up in domestic demand set to add momentum to growth.
• With the output gap closed, Argentina’s strong growth is likely to keep inflation high in 2011.
Nomura Global Economics 3 15 July 2011
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Global Weekly Economic Monitor
Economic Data Calendar
The Week at a Glance
For more detail see country and regional data previews
Previous, Nomura, Consensus
Mon 18 July Tue 19 July Wed 20 July Thu 21 July Fri 22 July
N
or
th
A
m
er
ic
a
US Net long-term TIC
flows (May)
$bn 30.6, n.a., n.a.
US
NAHB builders index
(Jul) Index 13, 15, 15
US
Housing starts (Jun)
k 560, 595, 575
US
Building permits (Jun)
k 612, 616, 600
Canada
BoC rate decision
% 1.00, 1.00, 1.00
US
Existing home sales (Jun)
k 4810, 4950, 4940
US
Existing home sales (Jun)
% m-o-m -3.8, 2.9, 2.6
Canada
BoC Monetary policy
report (Jul)
US
Philly Fed index (Jul)
Index -7.7, 2.5, 4.5
US Leading economic
indicators (Jun)
% m-o-m 0.8, 0.4, 0.2
Canada
CPI - Total (Jun)
% y-o-y 3.7, 3.5, 3.6
Canada
CPI - Core (Jun)
% y-o-y 1.8, 1.7, 1.8
Eu
ro
pe
(e
x-
U
K
)
Germany
ZEW index (Jul)
Index -9.0, -9.5, -12.3
Euro area Consumer
confidence (Jul-pre)
Index -9.8, -10.0, -10.0
Germany
Producer prices (Jun)
% y-o-y 6.1, n.a., 5.5
Euro area
PMI mfg (Jul-flash)
Index 52.0, 52.2, 51.5
Euro area
PMI services (Jul-flash)
Index 53.7, 53.3, 53.2
Germany
Ifo index (Jul)
Index 114.5, 114.2, 113.8
U
K
BoE MPC minutes (7 Jul)
Vote for no change
7-2, 7-2, 7-2
Retail sales
(ex-auto fuel) (Jun)
% m-o-m, sa -1.6, 0.1, 0.9
PSNB ex interventions
(Jun)
£bn 17.4, 12.8, 12.9
Ja
pa
n
Holiday – markets closed
Exports (Jun)
% y-o-y -10.3, -2.9, -4.1
All-industry activity
indices (May)
% m-o-m 1.5, 1.6, 1.8
A
si
a
New Zealand
CPI (Q2)
% y-o-y 4.5, 4.7, 5.1
Singapore Non-oil
domestic exports (Jun)
% y-o-y 7.8, 3.6, 4.1
Australia
Reserve Bank Board
minutes (Jul)
Hong Kong
Unemployment rate (Jun)
% sa 3.5, 3.5, 3.5
Malaysia
CPI (Jun)
% y-o-y 3.3, 3.6, 3.6
Taiwan
Export orders (Jun)
% y-o-y 11.5, 10.6, n.a
Hong Kong
CPI (Jun)
% y-o-y 5.2, 5.6, 5.4
Australia
Export price index (Q2)
% q-o-q 5.2, 4.0, 4.5
Taiwan
Unemployment rate (Jun)
% sa 4.4, 4.5, n.a.
Em
er
gi
ng
M
ar
ke
ts
Poland
Employment (Jun)
% y-o-y 3.6, 3.5, 3.5
Poland
Avg gross wages(Jun)
% y-o-y 4.1, 5.5, 5.4
Hungary
Avg gross wages (May)
% y-o-y 5.9, 4.5, 4.2
Poland
Industrial production (Jun)
% y-o-y 7.7, 6.5, 5.7
South Africa
CPI (Jun)
% y-o-y 4.6, 5.1, 5.0
Brazil
IPCA-15 (Jul)
% m-o-m 0.2, 0.1, 0.1
Brazil
Selic target rate (Jul)
% 12.25, 12.50, 12.50
Turkey
TCMB rate meeting (Jul)
% 6.25, 6.25, n.a.
South Africa
SARB MPC meeting (Jul)
% 5.50, 5.50, 5.50
Mexico
Central bank meeting
minutes
Mexico
Bi-weekly CPI (Jul)
% 2w-o-2w -0.05, 0.10, n.a.
Mexico
Bi-weekly core CPI (Jul)
% 2w-o-2w 0.04, 0.08, n.a.
Sources for consensus forecasts: Bloomberg.
Nomura Global Economics 4 15 July 2011
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Global Weekly Economic Monitor
Global Letter Paul Sheard
G3 sovereign debt dramas
Oppositions block budget measures in the US and Japan while contagion threatens the euro area.
The US, the euro area and Japan are all facing sovereign debt challenges. At one level, this is
hardly surprising: it is natural given the crisis and recession that fiscal deficits in affected
countries would increase dramatically as government expenditures rise and tax revenues fall.
Government dissaving accommodates the desire of the private sector in a country to save more,
the rest of the world being unable to absorb all of that increase when the recession/downturn is
global in scope. In all three cases, this crisis-driven cyclical deterioration comes against the
backdrop of longer-term fiscal sustainability challenges associated with aging populations and
potentially ballooning social welfare and medical care expenditures. But circumstances differ.
Political brinkmanship in the United States over the raising of the debt ceiling is making for high
drama. This week Moody’s placed the US’s triple-A government bond rating on review for a
possible downgrade, citing “the rising possibility that the statutory debt limit will not be raised on
a timely basis, leading to a default on US Treasury debt obligations”. Moody’s warned that, even
if a default is averted, the outlook would likely be changed to negative “unless substantial and
credible agreement is achieved on a budget that includes long-term deficit reduction”.
Watching the political bun-fight over the debt ceiling, it is easy to become pessimistic about the
capacity of the US political system to deal with the country’s fiscal challenges, and see a fiscal
train wreck coming. Without doubt, the US needs to get its long-term fiscal house in order. But,
stepping back, the positive is that the US political system and policy debate is fully focused on
this issue. Both sides agree on the need to restore long-term fiscal sustainability, and do so in a
way that does not snuff out the recovery. What they disagree on are the details. Welcome to the
messy world of politics in the US system of divided government and checks and balances. It is
worth asking: has there been a systematic failure to deliver reasonable policy outcomes (across
a range of issues) in the past? Are there compelling reasons to expect that the system will fail to
do so this time on this issue? For now, we are inclined to answer “no” to both questions.
In Europe this week the high drama involved the first real signs of contagion of the fiscal crisis
from the “weak periphery” to the “big periphery”, notably Italy. Ironically and no doubt to the
great frustration of many Europeans, the fundamental driver of the fiscal crisis is not the size of
the fiscal problems for the euro area as a whole; we forecast a fiscal balance of -4.2% of GDP in
the euro area this year compared with -10.9% for the US, and a current account deficit of 0.6%
versus 3.1%. The problem is that, unlike the US, the euro area is a monetary union but not a
fiscal (particularly fiscal transfer) union. So at heart, the euro area faces a crisis of (economic
and political) architecture, of which country fiscal crises and contagion are symptoms.
Our core thesis remains that “Europe will work”, in the sense that, under market pressure,
policymakers will take the necessary measures to bolster and evolve the architecture of the euro
area – towards incorporating more elements of fiscal union (the support schemes unveiled so far
can be seen as such ex post innovations) – rather than the fiscal crisis being the trigger for the
euro zone to break up. But, as has always been the case in the multi-decade “European project”,
this involves a slow-moving, arduous political process, and in this phase financial market
pressure, not proactive political vision, is the driver. Thus there is a heightened risk of disorderly
or even fragmenting outcomes occurring due to policy fatigue setting in, policy credibility being
eroded or there being political backlash or an “accident”. Our European team now sees a
sizeable (40%) chance of a disorderly outcome (albeit with the euro surviving) and a small but
non-zero (5%) prospect of the euro breaking up (see last week’s Sovereign crisis scenarios).
Meanwhile, Japan is embroiled in its own budget deadlock, as political opponents of Prime
Minister Naoto Kan continue to use budget bill blocking (and other) tactics to try to maneuver
him out of office. Japan’s seemingly daunting sovereign debt problems have much to do with its
chronic deflation (the GDP deflator peaked in Q2 1994) but, related to that, Japan has the luxury
of being able to fully finance its deficits from domestic savings. Even with a huge stock of public
debt and double-digit (as percent of GDP) budget deficits expected out to 2013, a sovereign
debt crisis in Japan does not appear imminent. That equilibrium may not last indefinitely,
however. The BOJ seems to fear doing aggressive QE to end deflation because it would
presumably cause bond yields to rise and, given the stock of public debt, might trigger a fiscal
crisis. Ironically, it might take a fiscal crisis at some point for the BOJ to fire that ammunition.
Nomura Global Economics 5 15 July 2011
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Nomura Global Economics 6 15 July 2011
Global Weekly Economic Monitor
United States ⏐ Roundup David Resler
Contingency plans
While we expe
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