2024 Global Macro Outlook
Forging a new path
Our baseline forecast is a disinflationary softish landing for the world
economy, but things are abnormal in many respects.
• The US should grow mildly in H1 followed by a small recession
in H2, with the first fed rate cut not until June, which will be the
start of a long cutting cycle of 100bp in 2024 and 200bp in 2025.
• Europe is likely now in a mild recession, and we expect a slow
recovery from mid-2024. We expect the first rate cut by the ECB
in June and the BOE in August, and total cuts by each of 125bp.
• In Japan, we are cautiously confident that the economy is
awakening from its three-decade slumber, and expect the BOJ
to scrap NIRP in January 2024 and YCC in April 2024.
• In China, there are increasing signs of another economic dip but
we hold the hope that this will convince Beijing to roll out more
direct and effective stimulus, including possibly PBoC QE.
• The rest of Asia is well positioned for outperformance, driven
by fundamentals and the tech cycle. Over the medium term, we
see India, Indonesia and the Philippines as the new rising stars.
• Strategy: Top trades are short USD/JPY, short USD/KRW, long
AUD basket, and long 15Y IndoGBs.
Global Markets Research
11 December 2023
Research Analysts
Global Economics
Rob Subbaraman - NSL
rob.subbaraman@nomura.com
Aichi Amemiya - NSI
aichi.amemiya@nomura.com
George Buckley - NIplc
george.buckley@nomura.com
Kyohei Morita - NSC
kyohei.morita@nomura.com
Ting Lu - NIHK
ting.lu@nomura.com
Sonal Varma - NSL
sonal.varma@nomura.com
Euben Paracuelles - NSL
euben.paracuelles@nomura.com
Global FX Strategy
Craig Chan - NSL
craig.chan@nomura.com
Production Complete: 2023-12-11 09:25 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 1: Forging a new path
2
Nomura | 2024 Global Macro Outlook
11 December 2023
Contents
Forecast summary
Policy interest rates – actuals and forecasts
Overview
Box 1: Life after Covid
Box 2: Why the last mile of the inflation fight might be the hardest
Box 3: Black Swans and Grey Rhinos
US: Slowdown, recession and last mile inflation risk
Box 4: Hard data versus soft data
Box 5: End point of QT is contingent on economic outlook
Box 6: 2024 election outlook
Risk scenarios to our economic outlook
China: After the rabbit, enter the dragon?
2024 could be more challenging than 2023
Inflation should remain subdued in 2024
Enter the Dragon: The chance to regain some vitality
Other positives in 2024: Exports may receive some support
Box 7: The bumpy road to home delivery
Box 8: The thrift economy in China
Euro area: A harmless recession
The growth outlook – weak, but not collapsing
Box 9: Euro area housing – defying gravity
Inflation – Getting back to target
Monetary policy – Shifting the narrative from hikes to cuts
Box 10: Commodity prices and ECB inflation forecasts
Box 11: ECB operational framework review and other measures
Fiscal policy – Less accommodative than before
Box 12: German Court ruling sets up fiscal battle for 2024
Box 13: European Parliament elections, and a lurch to the right
UK: Stagnation, sticky inflation, slow to ease
Mild recession, slow recovery
Inflation grinding back to target
The latest news is good news
Fiscal policy
Monetary policy – no rush to cut
Box 14: BoE end-of-cycle communication
Box 15: The UK general election
Japan: Our BOJ call changed, supported by above-potential recovery
Economic activity: The recovery is set to continue
Wages and inflation: A virtuous cycle between wages and prices... coming closer
Monetary policy: The BOJ will likely lift NIRP in January 2024 and scrap YCC in Q2 2024
Box 16: Single-year budget system and fund budget
Box 17: A method to capture the underlying trend of inflation
Box 18: Why does a virtuous cycle between wages and prices critically matter?
Asia: In pole position
Our global view
Key themes
High-conviction, out-of-consensus views
Box 19: What if food and oil prices rise further?
Box 20: Policy and political developments to watch in 2024
Box 21: Implications of BOJ policy normalization for Asia
Box 22: Asia’s rising stars – India, Indonesia and the Philippines
Korea: An export-led but uneven recovery
GDP growth set to rebound, led by exports
Inflation: Endgame in sight
BOK is set to start rate cuts in July, with 100bp of cumulative cuts by end-2024
5
6
7
8
10
13
14
17
22
23
24
25
26
31
32
34
36
37
38
38
40
40
42
43
46
47
47
48
50
50
53
53
55
56
57
60
61
61
64
66
68
69
70
71
71
71
72
75
76
77
78
79
79
81
82
3
Nomura | 2024 Global Macro Outlook
Box 23: What drives chip cycles?
Box 24: Cooling housing market and risk of default in project financing
Taiwan: Stable and solid growth
Strong growth
Inflation and monetary policy
Box 25: Rising risk of an overheating economy
Hong Kong: Adjusting towards a new pattern
India: Strong start, weak finish
Year to date
Growth outlook: Delayed pessimism
Inflation outlook: Choppy waters but ship is anchored
Monetary policy: Easing into easing
External sector: The name is bond (index)
India’s political battle royale
Risks to our view
Box 26: India’s private capex – Ready, steady…
Box 27: India’s food price inflation outlook
Box 28: Drivers of India’s medium-term growth
Box 29: India’s elections and economics
ASEAN-5: Modest growth, some fiscal risks
Regional overview
Box 30 : ASEAN’s rising exposure to goods trade with China
Indonesia: All eyes on a high-stakes election
Box 31: A long election season
Malaysia: Par for the course
Philippines: Seeing light at the end of the tunnel
Singapore: Core inflation pressures likely to persist
Thailand: High fiscal risks
Box 32: The low fiscal multiplier of Thailand’s digital wallet policy
Australia: 2024 economic outlook
The macro outlook for 2024 and 2025
Box 33: Side effects of a surging population
RBA outlook: Most likely done, when do cuts come?
Box 34: The RBA Review – implementation
Forecast summary and risks ahead – a return to normal?
Key global FX/rates strategy trades running into 2024
Key themes and view for Q1 2024 and beyond
Our top 7 FX and rates trades in 2024
Medium-term views/opportunities on Asia FX and rates
Box 35: FX performance into and out of first Fed rate cut
Appendix A-1
11 December 2023
84
84
85
87
87
87
89
91
94
94
94
94
95
95
96
96
98
99
100
101
102
102
106
107
110
111
112
114
116
120
121
121
123
125
126
126
128
128
132
139
140
4
Nomura | 2024 Global Macro Outlook
11 December 2023
Forecast summary
Fig. 2: Forecast summary
Real GDP (% y-o-y)
Global
Developed
Emerging Markets
Americas
United States*
Canada
Latin America†
Brazil
Chile
Colombia
Mexico
Peru
Asia/Pacific
Japan
Australia
New Zealand
Asia ex Japan, Aust, NZ
China
Hong Kong
India
Indonesia
Malaysia
Philippines
Singapore***
South Korea
Taiwan
Thailand
Western Europe
Euro area**
France
Germany
Italy
Spain
United Kingdom
EEMEA
Czech Republic
Hungary
Poland
Romania
South Africa
Turkey
Russia
Israel
2022
3.2
2.5
3.7
2.4
1.9
3.4
3.4
2.9
2.4
7.5
3.1
2.7
3.8
1.0
3.7
2.2
4.1
3.0
-3.5
6.7
5.3
8.7
7.6
3.6
2.6
2.4
2.6
3.5
3.4
2.5
1.9
3.9
5.8
4.3
2.2
2.4
4.8
5.1
4.6
1.9
5.3
-2.1
6.6
2023
3.1
1.5
4.4
2.4
2.4
1.5
2.6
3.0
-0.2
1.2
3.3
0.5
4.7
2.0
2.0
1.1
5.1
5.2
3.2
7.0
5.1
3.8
5.2
0.9
1.3
1.6
2.0
0.4
0.4
0.8
-0.2
0.6
2.3
0.5
2.1
-0.3
-0.5
0.4
2.2
0.7
4.0
2.1
3.0
2024
2.4
0.6
3.7
1.4
1.3
0.5
1.8
1.6
2.0
1.8
2.0
2.4
3.9
0.2
1.1
0.8
4.3
4.0
2.4
5.7
5.2
4.1
5.8
2.8
1.9
3.3
3.0
-0.3
-0.3
0.1
-0.4
-0.4
0.3
-0.1
2.2
1.9
2.8
2.7
3.2
1.3
3.0
1.4
3.2
Consumer Prices (% y-o-y)
2025
2.6
0.8
3.9
0.9
0.4
1.4
2.2
2.0
2.4
2.7
2.2
2.9
4.1
0.5
2.0
2.2
4.5
4.0
3.0
6.1
5.0
4.5
6.1
2.5
2.1
4.4
3.0
1.0
1.0
1.1
1.0
0.7
1.4
1.0
2.4
2.7
3.0
3.4
3.8
1.7
3.3
1.1
3.5
2022
8.0
7.5
8.4
8.2
8.0
6.8
9.0
9.3
11.6
10.2
7.9
7.9
3.6
2.5
6.6
7.2
3.6
2.0
1.9
6.7
4.2
3.4
5.8
6.1
5.1
3.0
6.1
8.5
8.4
5.9
8.6
8.7
8.3
9.0
28.2
15.1
14.5
14.3
13.8
6.9
72.0
13.8
4.4
2023
5.2
4.7
5.5
4.6
4.1
3.8
6.1
4.7
7.6
11.8
5.6
6.5
2.3
3.2
5.7
5.7
2.1
0.2
2.0
5.7
3.7
2.6
6.0
4.8
3.7
2.5
1.3
5.8
5.5
5.8
6.2
6.1
3.6
7.4
20.1
10.8
17.8
11.6
10.6
5.8
54.2
5.9
4.3
2024
3.6
2.0
4.8
2.6
2.1
2.0
4.2
4.0
3.5
5.9
4.3
3.2
2.0
1.7
3.8
3.1
2.0
0.6
2.0
5.1
2.9
2.4
3.5
2.5
2.5
2.2
-0.4
1.8
1.6
2.2
2.2
0.8
2.6
2.8
18.0
2.5
5.0
5.7
5.6
4.9
53.1
5.7
2.8
2025
2.9
2.0
3.6
2.5
2.2
2.3
3.6
3.7
3.0
3.8
3.6
2.5
2.1
1.4
3.2
2.2
2.1
1.3
1.9
4.0
2.5
3.0
3.3
1.5
1.9
1.8
0.8
1.8
1.7
1.6
2.2
1.5
2.0
2.2
10.2
2.1
3.7
4.0
4.1
4.5
27.5
4.1
2.1
Policy Rate (% end period)
2022
2023
2024
2025
4.375
4.25
5.375
5.00
4.375
4.00
2.375
3.00
-0.10
3.10
4.25
-0.10
4.35
5.50
0.00
3.60
4.50
0.00
3.60
3.50
2.00
4.75
6.25
5.50
2.75
5.50
3.03
3.25
1.750
1.25
2.23
2.00
2.00
2.00
2.00
2.00
3.50
1.80
5.75
6.50
6.00
3.00
6.50
3.25
3.50
1.875
2.50
1.80
4.75
5.75
5.00
3.00
5.50
2.75
2.50
1.875
2.00
9.0
2.75
2.75
2.75
2.75
2.75
4.25
1.80
2.75
5.50
5.00
3.00
5.00
2.75
2.00
1.875
2.00
4.00
4.00
4.00
4.00
4.00
5.25





2.75
2.75
2.75
2.75
2.75
4.00
e,
Note: Aggregates are calculated using purchasing power parity (PPP) adjusted shares of world GDP (table covers about 84% of world GDP on a PPP basis); our forecasts
incorporate assumptions on the future path of oil prices based on oil price futures. Currently, assumed Brent oil prices for 2024 and 2025 are $77.1 and $74.6, respectively. Policy
rate for China is 7d reverse repo rate. Consumer prices for euro area countries are HICP measure. *The US policy rate forecasts are midpoints of 4.25-4.50% for 2024, 2.252.50% for 2025 target federal funds rate range, respectively. **Policy rate for the euro area is deposit facility rate. ***For Singapore, the policy rate refers to the SORA 3-month
compounded average. †CPI forecasts for Latin America are year-on-year changes for December. The ↑↓ arrows signify changes from the last issue. Reported numbers are in
bold. We use Bloomberg Economic Forecasts for Latin America, and EEMEA; rest are Nomura forecasts.
Source: IMF, Bloomberg, Nomura Global economics
5
Nomura | 2024 Global Macro Outlook
11 December 2023
Policy interest rates – actuals and forecasts
Fig. 3: Central bank forecast summary
US
Current 5.25%
Jul 23
25
CAN
UK
EUR
SWE
NOR
SWI
AUS
NZ
JPN
CHI
IND
KOR
IDN
THA
5.00%
5.25%
4.00%
4.00%
4.25%
1.75%
4.35%
5.50%
-0.10%
1.80%
6.50%
3.50%
6.00%
2.50%
0
0
0
0
0
0
0
0
0
25
0
25
25
Aug 23
Sep 23
25
25
0
Oct 23
0
0
0
0
0
Dec 23
0
0
Jan 24
0
0
0
0
May 24
0
Jun 24
-25
0
Jul 24
0
-25
0
25
0
0
25
0
0
0
0
0
0
Nov 24
-25
Dec 24
-25
-25
-25
Jan 25
-25
-25
Jun 25
-25
Jul 25
-25
-25
Sep 25
-25
Oct 25
-25
-25
0
-25
0
-25
0
-25
-25
0
0
0
0
-25
-25
-25
-25
0
0
0
0
0
-25
0
0
0
0
0
-25
0
0
0
0
0
0
0
0
0
0
-25
-25
0
-25
-25
0
-25
-25
-25
-25
0
-25
-25
0
0
0
0
0
0
0
0
-25
-25
0
0
0
0
0
0
-25
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-25
-50
0
0
0
0
0
0
0
0
0
0
0
0
0
0
-50
0
0
0
0
-25
0
0
0
-25
0
-25
0
0
0
0
0
0
25
0
0
-25
-25
0
0
0
-25
-25
0
0
0
0
0
0
0
0
0
-25
-25
0
10
0
0
0
Nov 25
0
0
0
0
-25
-25
0
0
Aug 25
0
0
-25
0
0
May 25
0
-25
-25
Apr 25
25
0
0
Feb 25
-25
-25
-25
0
-25
-25
Oct 24
0
-10
0
0
0
-25
-25
0
0
0
Aug 24
Dec 25
0
0
-25
Apr 24
Mar 25
25
0
Feb 24
Sep 24
25
0
Nov 23
Mar 24
25
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
Peak 5.25%
5.00%
5.25%
4.00%
4.00%
4.50%
1.75%
4.35%
5.50%
0.00%
2.00%
6.50%
3.50%
6.00%
2.50%
Trough 2.25%
4.00%
4.00%
2.75%
2.75%
3.00%
1.00%
3.60%
3.50%
-0.10%
1.80%
5.50%
2.50%
5.00%
2.00%
Note: In some cases exact meeting dates have not been announced, so we are estimating the month that a meeting will occur. The dark dotted grey line separates meetings that
have occurred and our forecasts for future meetings.
The policy rate referenced for China is the PBoC 7-day OMO reverse repo rate, for the ECB it is the deposit facility rate and for the Federal Reserve it is the Federal Funds
Target Rate – lower bound.
Source: Bloomberg, Nomura
6
Nomura | 2024 Global Macro Outlook
11 December 2023
Overview
Research Analysts
We settled on the title ‘forging a new path’ to describe our 2024 outlook, because while
our baseline is an optimistic disinflationary soft landing for the world economy, things are
abnormal in three respects. One is the great Covid reset (see Box 1: Life after Covid ),
which has likely led to some structural breaks or more subtle changes in past economic
relationships, making it even harder to forecast the future. Two is how 2024’s economic
expansion will unusually be running on very little fiscal or monetary policy support. And
three is the highly uncertain political economy outlook, including what is touted as the
biggest election year in history – 47 countries will be holding major elections in 2024,
including the US – plus several geopolitical hotspots. But before delving into our 2024
outlook, it is worth looking back.
Rob Subbaraman - NSL
Global Economics
rob.subbaraman@nomura.com
+65 6433 6548
Si Ying Toh - NSL
siying.toh@nomura.com
+65 6433 6666
Post-mortem
We started by saying “it is with a high dose of humility that we present our 2023 outlook”,
which proved apt, for we got several things wrong. We were right in predicting that
inflation would be sticky and that central banks would remain resolute to beat inflation (our
peak Fed funds rate of 5.50-5.75% was close to the mark), but we were wrong in
forecasting long-lasting recessions in much of the DM world. Economies have been more
resilient than we had thought, particularly the US which, with hindsight, we attribute to
massive positive household wealth effects, the locking-in of very low borrowing costs and
larger-than-expected fiscal support. On China, we were close to the mark, cautioning that
the “road to reopening could be gradual, painful and bumpy…the property sector recovery
may still be distant…and we do not see inflation as a major concern”. In Japan, we underpredicted inflation and missed the YCC tweaks. Finally, nothing over the past year has
derailed our medium-term view that India and ASEAN economies are set to be the new
rising stars, with everything to play for. Having learnt from some of our misses, it is again
with a high dose of humility that we present our 2024 outlook (Figure 4).
Our outlook in a nutshell
Fig. 4: Nomura’s key economic forecasts
United States
Euro area
Real GDP
United Kingdom
(% q-o-q, sa)
Japan
China
United States
Euro area
Core CPI
United Kingdom
(% y-o-y)
Japan
China
United States
Policy rate, Euro area
end-period United Kingdom
(%)
Japan
China
Brent crude oil prices
(US$/bbl)
Q4 23
0.2
-0.3
-0.2
0.3
0.8
3.9
3.9
5.6
2.6
0.6
5.375
4.00
5.25
-0.10
1.80
Q1 24
0.3
-0.1
-0.1
-0.1
1.6
3.3
2.5
5.2
2.1
0.7
5.375
4.00
5.25
0.00
1.80
Q2 24
0.3
0.0
0.1
0.3
0.4
2.7
2.3
3.6
1.9
0.8
5.125
3.75
5.25
0.00
1.80
Q3 24
-0.3
0.1
0.2
-0.1
1.4
2.4
2.1
3.2
1.6
0.6
4.875
3.25
4.75
0.00
1.80
Q4 24
-0.5
0.2
0.2
-0.2
0.7
2.1
2.3
3.1
1.3
0.8
4.375
2.75
4.25
0.00
1.80
Q1 25
0.1
0.3
0.3
0.2
1.3
2.1
2.3
2.9
1.3
0.8
3.875
2.75
4.00
0.00
1.80
Q2 25
0.3
0.3
0.3
0.4
0.6
2.2
2.2
2.5
1.4
0.8
3.375
2.75
4.00
0.00
1.80
Q3 25
0.6
0.3
0.3
0.2
1.1
2.4
2.1
2.3
1.4
0.8
2.875
2.75
4.00
0.00
1.80
Q4 25
0.8
0.3
0.3
0.2
0.8
2.7
2.0
2.0
1.4
0.8
2.375
2.75
4.00
0.00
1.80
2023
2.4
0.4
0.5
2.0
5.2
4.8
5.0
6.3
3.1
0.7
5.375
4.00
5.25
-0.10
1.80
2024
1.3
-0.3
-0.1
0.2
4.0
2.6
2.3
3.8
1.7
0.7
4.375
2.75
4.25
0.00
1.80
2025
0.4
1.0
1.0
0.5
4.0
2.3
2.1
2.4
1.4
0.8
2.375
2.75
4.00
0.00
1.80
85.7
79.0
76.9
76.5
75.8
75.4
75.0
74.5
73.5
82.8
77.1
74.6
Note: For Japan, core CPI excludes only fresh food. Policy rate refers to the midpoint of the Fed funds rate target range for the US, the deposit facility rate for the euro area and
the 7d reverse repo rate for China. Our Brent crude oil price assumptions are based on Brent crude oil futures prices as of 6 December.
Source: Nomura estimates.
In the US, we forecast a modest expansion in H1 2024, followed by a mild recession in H2, as
the lagged effects of monetary tightening feed through and fiscal policy turns less supportive.
Despite our forecast of below-potential growth, we expect core CPI inflation to decline only
gradually toward 2% y-o-y by Q4 2024 (see Box 2: Why the last mile of the inflation fight might
be the hardest ), and the first Fed rate cut not until June 2024, as the FOMC waits until the
burden of proof in defeating inflation is beyond reasonable doubt (after all, Jerome Powell is a
lawyer by training!). We then forecast a long rate cutting cycle of 100bp in 2024 and 200bp in
2025, as the Fed slowly recalibrates monetary policy back toward neutral. Interestingly, 2024
market pricing of the fed funds rate – a weighted probability of all possible outcomes – is
currently blending two main opposing views: the sticky inflation camp and the quick disinflation
camp (Figure 5). Over time, it should become clearer which one is right.
7
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 1: Life after Covid
In economic circles the pandemic is sometimes referred to as the ‘Great Economic Reset’, because it likely caused
shifts and breaks in some established economic relationships, making the job of forecasting even more challenging.
The abnormality of the shock, the extraordinary policy response and the subsequent surge in inflation have played
havoc on seasonal adjustments, led to greater dislocations between surveys and hard economic data, probably
contributed to the extreme gap between US GDP and GDI growth, and may have led to a new phenomenon of rolling
recessions from sector to sector. Here are eight consequences of the Great Economic Reset to ponder:
1. Widening wealth gap. It was a problem before Covid and has worsened, because the pandemic and cost of living
crisis disproportionately hurt the young and poor, while the equity and property market rallies disproportionately
benefited the rich. This widening wealth gap amid a huge global political cycle in 2024 could see some major election
upsets, a rise of populist leaders and more government focus on wealth and income redistribution policies.
2. CRE overhang. Office real estate has sustained significant oversupply, as pandemic-era work-from-home activity
evolved into permanent remote and hybrid work practices, and the fallout has yet to be fully felt. Meanwhile, retail real
estate continues to face headwinds due to greater e-commerce activity.
3. Fiscal activism. The fiscal response to Covid – the largest ever in peacetime – was so powerful and successful in
averting a great depression that governments may feel licensed to push the boundary of fiscal activism. And if there
was ever a year for populist policies it is 2024, with no less than 47 countries holding major elections (Figure 6). This
could set already very high public debt in some countries on unsustainable paths, and 2024 could also be the year that
bond vigilantes return with a vengeance.
4. Delayed defaults. The massive fiscal support and the locking-in of low fixed-rate loans during the pandemic may
have allowed zombie firms and heavily indebted households to continue to service their debts in the monetary
tightening cycle for longer than usual. But the risk is a wave of delayed defaults if rates stay high for longer (and fixedrate loans reset), fiscal support fades and unemployment rises.
5. Changing behavior of workers. Tight labour markets, ageing populations and lost real wages during the inflation
surge have empowered workers with greater bargaining power not only to demand larger wage gains but also better
and more flexible working conditions and, in Europe, shorter working weeks. By how much a rise in unemployment and
generative AI weakens worker demands is very uncertain.
6. Changing behavior of firms. In the decades of low inflation, firms that faced cost increases were hesitant to raise
prices, lest they lose market share. But this mindset changed during the pandemic and commodity price surges, as
common shocks acted like an implicit coordination mechanism for firms to collectively raise prices without losing market
share. If firms have permanently rediscovered pricing power, they may be more willing to risk profit squeezes and will
pass on cost pressures to prices more readily. It is for this reason and #5 that central banks are likely to stay high well
into 2024.
7. Puzzling housing markets. Considering the speed and magnitude of policy rate hikes, house prices in several
countries have been quite resilient, and in the case of the US have continued to rise. It is partly due to very low fixedrate mortgages being locked in during Covid, so mortgage holders have little incentive to sell existing homes and face
much higher new mortgage rates. Another reason is pent-up migration surges in some countries, such as Australia,
post Covid. Ironically, once the policy rate cutting cycle starts, house prices could fall in countries such as the US,
where they are currently resilient, as a pent-up supply of existing homes are put on the market.
8. A shifting Beveridge curve. In many economies, vacancy rates still far exceed unemployment rates – 1.35x in the US
– which may reflect skill mismatches but probably also a new phenomenon of willingness mismatches: workers in contactintensive service jobs shifting to new remote, digital jobs during Covid, and now not willing to move back despite high
demand. As growth slows, unemployment may be slower to rise than usual, given there is still significant room to reduce
job vacancies. In economists’ parlance, rather than moving along the Beveridge curve – the inverse relationship between
unemployment and job vacancies – the whole curve shifts inward, reflecting a more flexible job market.
8
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 5: Forecasts of fed funds rate (upper bound)
Note: We use forecasts of the 49 forecasters surveyed by Bloomberg who have provided their forecasts until Q4 2025.
Source: Bloomberg and Nomura Global Economics.
In Europe, we believe the euro area and UK economies are in the midst of mild
recessions, which will be followed by very slow recoveries starting around mid-2024.
Similar to the US, we expect the last mile of bringing underlying inflation down will be the
hardest, because of still-strong wage growth keeping services inflation sticky. As a result,
we are in the high for longer camp, forecasting the first rate cut by the ECB in June 2024
and the BOE in August 2024. We see stickier wage inflation and lower productivity growth
in Europe than in the US, and consequently expect the rate cutting cycles by the ECB and
BOE – totaling 125bp each – to be shallower than that of the Fed.
On Japan, we are more optimistic, forecasting the economy to remain on an above-potential
recovery path and for a further pick-up in wage growth to firm the ground for a price-wage
virtuous cycle in 2024. This will allow the BOJ to finally scrap NIRP in January 2024 and YCC
in April 2024. The end of a deflationary mindset and other positive structural changes make us
cautiously confident that Japan is awakening from its three-decade slumber.
In China, a recent raft of policy stimulus hint that Beijing is finally willing to tolerate moral
hazard risk in order to break the vicious downward spiral in the property market. After
false dawns, there is a tangible possibility of economic recovery in 2024. Yet, in the near
term, we remain cautious, as it is unclear whether the stimulus will be sufficient in terms of
scale and effectiveness. A final economic dip in coming months – the latest data suggest
it might have already started – may well be needed to convince Beijing to bite the bullet
and directly take on the role of lender of last resort, bypassing the banks and rescuing
property developers, including with PBoC QE, so as to deliver all the pre-sold homes.
Elsewhere in Asia, we see a sweet spot in H1 2024, driven by a tech-led export upswing
and more supportive macro policies and job markets than in other regions, though political
uncertainty will be high with elections in Taiwan, Indonesia, India and South Korea. As
inflation abates, we expect several central banks to cut rates in 2024 – including South
Korea (-100bp), the Philippines (-100bp), Indonesia (-100bp), India (-75bp), Australia (75bp) and Thailand (-50bp) – but interestingly, unlike past cycles, none cutting by more
than the Fed. Economies could be in for a bumpier ride in H2 as the US enters a mild
recession, but recoveries in China and Europe will likely provide an offset.
9
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 2: Why the last mile of the inflation fight might be the hardest
Central bankers hope for an immaculate disinflation back to within their targets, but they may be too optimistic. That is
the warning from the empirical evidence. The IMF identified over 100 inflation shock episodes in 56 countries since the
1970s, and found that only in 60% of episodes was inflation brought back down within five years, and even in these
‘successful’ cases, resolving inflation took, on average, over three years. Those in the sticky inflation camp believe that
the world economy has become permanently more supply constrained, for several reasons.
First is how rising geopolitical risks have fragmented global supply chains. Friend-shoring, re-shoring and blatant
protectionism will raise costs of production. Second is the impact of climate change . Increasing weather disasters are
fueling more food price shocks, while the tricky transition to green technologies – such as EVs and wind plants – may
result in insufficient investment in fossil fuels and excess demand for metals and minerals, like copper, lithium and
cobalt, lifting the prices of a broad spectrum of commodities. Third is the risk of lower productivity growth – due to
ageing workforces and more fiscal spending on interest payments, healthcare and defense – crowding out more
productive investment. Fourth is the danger of fiscal dominance . This is when central banks face political pressure to
cut interest rates despite still-high inflation in a bid by governments to prop up growth, perhaps due to elections, and
2024 could be the world’s biggest election year in history (Figure 6). And finally, the pandemic and inflation shock have
empowered workers across the globe to push harder – including via strikes – to recoup lost real wages. If wages
continue to catch up, firms, which have also recently rediscovered their pricing power, will need to decide whether to
absorb the higher costs or pass them on. It may be too early to rule out the latter, i.e. a ‘wage-price spiral’ as workers
and firms try to recoup their losses.
Out-of-consensus economic calls
In 2024, there are many tail risks to consider (see Box 3: Black Swans and Grey Rhinos ),
and, by our count, 47 countries – comprising 45% of world GDP – will be holding general
and/or presidential elections (Figure 6). Against this very uncertain backdrop, we have
stuck our necks out with eight out of-consensus economic calls or high conviction
economic views and our five top trade recommendations:
1. In the US, we expect a capex-driven recession in H2 2024, and have an out-ofconsensus Fed call: the first rate cut not until June, followed by a long cutting cycle of
100bp in 2024 and 200bp in 2025.
2. We have high conviction that the euro area and UK economies are in the midst of
mild, short recessions, but we do not expect the ECB’s first rate cut to occur until June
2024, while its cutting cycle should be much shallower than the Fed’s, totaling 125bp.
3. In Japan, we have high conviction that the Shunto annual wage bargaining round in Q1
2024 will result in an even stronger wage increase than in 2023, raising the chances of a
virtuous wage-price cycle.
4. As a result of #3, we expect the BOJ to exit NIRP in January 2024, and to exit YCC in
April 2024.
5. In China, we warn of another economic dip in coming months, forcing Beijing to finally
bite the bullet with direct funding, including possibly QE, to property developers that
should then drive a real recovery.
6. In India, a slowdown in investment and consumption, coupled with global spillovers,
should lead to real GDP growth disappointing at 5.7% in 2024 (Consensus: 6.0%). We
expect the RBI to cut the repo rate by 75bp in 2024 and 25bp in 2025.
7. In Korea, our outlook is for solid exports but weak domestic demand, resulting in core
CPI inflation falling faster than the consensus expects, to 2% y-o-y by mid-2024, leading
to the first BOK rate cut in July.
8. In Thailand, we are out-of-consensus in forecasting CPI deflation through 2024
(Nomura: -0.4%; Consensus: 1.9%), impelling the BOT to cut rates by 25bp in each of Q2
and Q3 2024 (Consensus: 0bp).
Top five strategy trade recommendations
We highlight five top trade recommendations going into the New Year:
1. Short USD/JPY (target 139 by end-March 2024) on BOJ normalization; intensifying
10
Nomura | 2024 Global Macro Outlook
11 December 2023
Fed cut risk; unwind of JPY shorts and FX undervaluation; and terms-of-trade recovery.
2. Short USD/KRW (target 1,250 by end-February) on softer USD; strengthening exports,
chip recovery, and current account surplus; potential foreign allocation into equities and
bonds (FTSE WGBI inclusion ahead); and KRW undervaluation.
3. Short CNH basket (USD, EUR, AUD, JPY, KRW; target 3% gain by end February) on
softer USD; past major negative gamma pockets; risk of another economic dip; balance of
payments still challenging; FX regime normalizing; and State bank/PBoC buying of USDs.
4. Long AUD vs. EUR and USD (5% gains by mid-January) on commodity and record
trade/current account surpluses; rate differentials and softer USD.
5. Long IndoGB (target 6.25% by end Q1) on easing global financing conditions; softer
USD; manageable local bond supply in 2024; return of foreign inflows; and attractive
valuations.
11
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 6: The massive global election cycle in 2024
Share of world
GDP
Share of world
population
Real GDP
growth
CPI
inflation
Fiscal
balance
Public
debt
Bangladesh1
%
0.43
%
2.18
% y-o-y
6.0
% y-o-y
9.0
% of GDP
-4.5
% of GDP
39.4
9-Jan
Bhutan1
0.00
0.01
5.3
5.2
-5.2
123.4
13-Jan
Taiwan1,2
0.72
0.30
0.8
2.1
0.3
26.6
14-Jan
Comoros2
0.00
0.01
3.0
11.1
-4.9
33.3
28-Jan
Finland2
0.29
0.07
-0.1
4.5
-2.6
73.6
4 Feb & 3 Mar
El Salvador1
0.03
0.08
2.2
4.4
-4.0
73.0
8-Feb
Pakistan1
0.33
2.96
-0.5
29.2
-8.1
76.6
14-Feb
Indonesia1,2*
1.36
3.55
5.0
3.6
-2.2
39.0
25-Feb
Belarus1
0.07
0.12
1.6
4.7
-0.7
44.1
25-Feb
Cambodia1
0.03
0.21
5.6
2.0
-4.5
35.3
25-Feb
Senegal2
0.03
0.23
4.1
6.1
-5.0
81.0
10-Mar
Portugal1
0.26
0.13
2.3
5.3
-0.2
108.4
17-Mar
Russia2
1.78
1.83
2.2
5.3
-3.7
21.2
31-Mar
Turkey3
1.11
1.10
4.0
51.2
-5.4
34.4
31-Mar (TBC)
Ukraine2
0.17
0.42
2.0
17.7
-19.1
88.2
No later than April
Slovakia2
0.13
0.07
1.3
10.9
-5.5
56.7
10-Apr
South Korea1
1.64
0.66
1.4
3.4
-1.2
54.3
April-May
India1
3.57
18.26
6.3
5.5
-8.8
81.9
April
North Macedonia1
0.02
0.03
2.5
10.0
-4.7
51.6
5-May
Panama1
0.08
0.06
6.0
1.5
-3.1
52.8
19-May
Dominican Republic1
0.12
0.14
3.0
4.9
-3.2
59.8
May
South Africa1
0.36
0.79
0.9
5.8
-6.4
73.7
1-Jun
Iceland2
0.03
0.00
3.3
8.6
-0.9
61.2
2-Jun
Mexico1,2
1.73
1.68
3.2
5.5
-3.9
52.7
6 to 9 Jun
EU4
17.56
5.70
0.7
6.5
-3.4
84.0
9-Jun
Belgium1*
0.60
0.15
1.0
2.5
-4.9
106.0
Jun
Ireland3
0.56
0.07
2.0
5.2
1.7
42.7
Jun
Mauritania2
0.01
0.06
4.5
7.5
-2.7
49.5
Aug
Rwanda1
0.01
0.17
6.2
14.5
-5.0
63.3
Aug
Spain3
1.51
0.61
2.5
3.5
-3.9
107.3
Aug-Oct
Australia3
1.62
0.34
1.8
5.8
-1.4
51.9
Before Sep
Sri Lanka2
0.07
0.29
-2.1
20.3
-8.8
n/a
22-Sep
Croatia1*
0.08
0.05
2.7
8.6
-0.8
63.8
Sep
Germany3
4.24
1.07
-0.5
6.3
-2.9
65.9
By 6 Oct
Lithuania1*
0.08
0.04
-0.2
9.3
-1.8
36.1
6-Oct
Bosnia and Herzegovina3
0.03
0.04
2.0
5.5
-1.1
28.6
9-Oct
Mozambique1
0.02
0.43
7.0
7.4
-2.8
89.7
26-Oct
Georgia1
0.03
0.05
6.2
2.4
-3.0
39.6
27-Oct
Uruguay1
0.07
0.05
1.0
6.1
-3.2
61.6
Oct
Botswana1
0.02
0.03
3.8
5.9
-1.9
18.7
Oct
Brazil3
2.04
2.61
3.1
4.7
-7.1
88.1
Oct
Canada3
2.03
0.51
1.3
3.6
-0.7
106.4
Oct
Chad1,2
0.01
0.23
4.0
7.0
8.3
43.2
Likely Oct**
UK1*
3.19
0.87
0.5
7.7
-4.5
104.1
By Oct
Austria1
0.50
0.12
0.1
7.8
-2.4
74.8
5-Nov
US1,2
25.79
4.28
2.1
4.1
-8.2
123.3
12-Nov
Palau1
0.00
0.00
0.8
12.5
-0.5
85.4
Nov
Namibia1
0.01
0.03
2.8
6.0
-4.2
67.6
Nov
Romania1,2*
0.34
0.24
2.2
10.7
-6.3
51.0
Due in Nov
Moldova2
0.02
0.03
2.0
13.3
-6.0
35.1
7-Dec
Ghana1
0.07
0.42
1.2
42.2
-4.6
84.9
Dec
Algeria2
0.21
0.59
3.8
9.0
-8.6
55.1
Dec
Venezuela2
0.09
0.34
4.0
360.0
n/a
n/a
Sometime in 2024
Mauritius1
0.01
0.02
5.1
7.8
-5.0
79.7
Sometime in 2024
South Sudan1
0.01
0.19
3.5
16.3
8.4
60.4
Sometime in 2024
Tunisia2
0.05
0.16
1.3
9.4
-5.2
77.8
All countries
66.6
52.0
Countries with major elections (general/legislative
and/or presidential)
44.5
42.6
Date
Country/region
7-Jan
Note: 1General or legislative election. 2Presidential election. 3Local election (e.g. regional, state, territorial, provincial or municipal election). 4European parliament election.
*The UK also has Northern Ireland Assembly elections in January and local elections in May, Belgium has local elections in October, Lithuania has a presidential election in
May, Indonesia has local elections in November, Croatia has a presidential election in December and Romania has local elections in September. **UK general elections must
be held by 28 January 2025. Data on elections are obtained from IIF, Bloomberg, Reuters and national sources. Data on share of world GDP, share of world population, real
GDP growth, CPI inflation, fiscal balance and public debt are obtained from the IMF WEO database (October 2023 edition) and are 2023 estimates. For Sri Lanka, share of
world GDP and share of world population are 2022 estimates, as 2023 estimates are unavailable, while data on real GDP growth, CPI inflation and fiscal balance are 2023
estimates obtained from Bloomberg. Countries that are bolded are those with major elections (i.e. general/legislative and/or presidential) and with share of world GDP greater
than or equal to 0.5%. Source: IIF, IMF, Bloomberg, Reuters, national sources and Nomura Global Economics.
12
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 3: Black Swans and Grey Rhinos
A “black swan” is an improbable event that typically has extreme consequences. A “grey rhino” is a highly likely yet
ignored event that is a matter of when, not if. Here are 10 tail risks to consider in 2024 (and note there are three positive
ones!):
1. America’s polarizing election. It is still nearly a year away but markets are forward-looking and there is a high chance
of a Trump second term. If he wins and if America turns isolationist, it may throw the world into grave geopolitical peril,
fuel more trade protectionism and economic nationalism across the globe, and be a major setback in coordinating
policies against global warming. Domestically, political drama could rise to new levels, if Trump were to seek retribution
against his foes, further polarizing the US social and political fabric, while tax cuts may do more harm than good if they
awaken bond vigilantes and the Fed.
2. A global supply boom. The new remote and hybrid work practices could significantly increase labour force
participation of the young, elderly and females, boosting labour supply. At the same time, the much faster user adoption
rate of Generative AI compared with past tech innovations could mean that the productivity gains are reaped a lot
earlier too. All these could end inflation problems.
3. AI-based cyber attacks. As is typically the case with new innovations, regulating them lags. With increasing
geopolitical hot spots and a massive global election cycle in 2024 (Figure 6), there is a high risk that AI is weaponized
by rogue states and terrorists, attacking cyberspace and physical spaces.
4. More frequent weather disasters. 2023 was the hottest year for the planet on record, and 2024 could be even hotter,
leading to even more severe and frequent weather disasters, driving up food prices, inflation, fiscal costs and social
unrest. A grey rhino would be a typhoon hitting Taiwan’s TSMC.
5. A Chindia-led global recovery. China is out of sync with other big economies, having suffered multiple crises and
now on the verge of deflation. It is the most likely candidate for QE-led policy stimulus in 2024. India’s economy,
meanwhile, could go from strength to strength, as the next big EM story. These two EM giants already drove half of
global growth in 2023, and dominate global commodity demand.
6. The two geopolitical hotspots erupt. Markets have largely shrugged off the Israel-Hamas and Russia-Ukraine
conflicts, yet they continue, and the danger in 2024 is they simultaneously erupt. Two conflicts are harder to police and
finance than one, and accidents can happen. The conflict in the Middle East could spread, or NATO financing for
Ukraine could weaken, either of which could be seized on by Mr. Putin for a major offensive. A Trump win in the US
election could be an even bigger catalyst.
7. Taiwan. With so many of their own problems to resolve, the last thing China and the US want is a crisis over Taiwan.
Yet, under new leadership after the island’s January 2024 election, there is a black swan risk that Taiwan oversteps
Beijing’s red line, and initial tit-for-tat responses spiral out of control.
8. Deflation in 2024. Central banks seem to have convinced markets that the last mile is the hardest in returning
inflation to target, but naturally they want to keep their guards up and avoid a repeat of the 1970s. But what if they are
wrong again? As growth cools, the newfound wage bargaining strength of workers and pricing power of firms could
suddenly evaporate. At the same time, a global supply boom (see #2) or commodity price slump, or both, could happen
in 2024.
9. Fiscal largesse meets bond vigilantes. In 2023, public debt rose to a record-high 67% of GDP in EM, and to over
110% in DM – the only other period it was this high was after WWII. It is high time for fiscal consolidation, but with
slowing growth, widening wealth inequality and major elections in 2024 in 47 countries, some governments will likely
take on bond markets and roll the dice once more.
10. BRISIESAUCE. The BRICS+6 are dismissed as too diverse to carve out a new world order. But the bloc’s next
annual summit in Russia in October 2024, just before the US election, could surprise: a BRICs digital currency, or less
ambitiously, BRICS-pay – a new payment system for transactions among the BRICS without having to convert local
currency into dollars – could be announced.
13
Nomura | 2024 Global Macro Outlook
11 December 2023
US: Slowdown, recession and last mile
inflation risk
US growth momentum is slowing following the surprising resilience in 2023. We expect
real GDP growth to average close to zero for 2024, with a below-trend average of 1.3% in
H1 ahead of a mild recession in H2 . Tight financial conditions will weigh on the cyclical
sectors and lead to strains on private sector balance sheets. Disinflation is likely to
continue through 2024, but progress could be uneven. Wage growth, in particular, is likely
to remain elevated, raising the risk of an eventual inflation reacceleration or ‘last-mile’
inflation persistence. Disinflation and sluggish growth will likely lead to a pre-emptive rate
cut of 25bp in June 2024, but an aggressive rate cutting cycle seems unlikely until a
recession starts in H2 2024. We expect the Fed to begin a 25bp per meeting cutting cycle
and halt balance sheet reduction once a recession is underway in September.
Fig. 7: US growth momentum is slowing, and we expect a
recession to begin in H2 2024
Research Analysts
North America Economics
Aichi Amemiya - NSI
aichi.amemiya@nomura.com
+1 212 667 9347
Jeremy Schwartz - NSI
jeremy.schwartz@nomura.com
+1 212 667 9637
Fig. 8: We expect the first rate cut in June 2024, followed by a
faster pace of easing once recession is underway
Source: BEA, Haver, Nomura
Source: FRB, Bloomberg, Nomura
Growth momentum is slowing
After surprising strength in 2023, growth momentum appears to be cooling. Financial
conditions have tightened significantly for the second consecutive year, with higher longterm yields adding to 2022’s high-speed Fed liftoff. Households and businesses have
been well-insulated from rising interest costs so far, but higher borrowing costs will
increasingly weigh on cyclical spending.
Mortgage rates have risen through 2023, and this is likely to lead to renewed weakness in
housing markets. Housing affordability (which was already around multi-decade lows)
took another leg lower in recent months. Homebuilder sentiment has declined sharply,
and we see early signs of a slowdown in single-family construction and new home sales.
Multifamily construction was already trending lower before the latest tightening in financial
conditions, and we expect further weakness in 2024.
Equipment investment has already turned negative, and headwinds are likely to intensify.
Interest costs for businesses will continue to rise, and credit conditions (particularly from
bank lending) have tightened. We expect business financial stress to intensify throughout
the year, with default rates continuing to rise. Slowing growth and inflation will also likely
lead to a deceleration in revenues, with a strong dollar adding additional headwinds to
multinational corporations and export-driven businesses. Regional Fed surveys show
forward-looking capex plans have slowed for both the manufacturing and services
businesses.
In addition to looming headwinds, some one-off positive shocks for capex are likely to
fade. Industrial policy from CHIPS and the Inflation Reduction Act (IRA) led to a surge of
investment in the tech sector in 2023. We do not expect a sharp reversal, but the fastest
pace of increase has likely passed. In addition to fiscal support, supply-chain stress in
14
Nomura | 2024 Global Macro Outlook
11 December 2023
2021-22 led to back-loaded strength in spending in 2023 (as many businesses wanted to
invest, but equipment only became available with a lag).
The labor market is beginning to cool
Labor markets have slowed significantly, even without a sharp growth downturn or
widespread layoffs. The monthly run-rate for nonfarm payrolls has decelerated to below
200k — in line with its pre-pandemic average — and the unemployment rate has drifted
higher to 3.9%.
So far, this slowdown appears to be a normalization after frenzied hiring and labor
hoarding in 2021-22. Measures of hiring and labor demand have moderated and the pace
of layoffs has increased modestly.
Taken together, slower hiring and a faster run-rate for layoffs suggest a further increase in
the unemployment rate. We expect the unemployment rate to move above 4% in H1
2024, with a sharper increase only occurring later after the onset of recession.
Slowing growth will put pressure on employment in the cyclical sectors, but hiring in the
non-cyclical sectors remains robust (Figure 9), and we expect solid growth to continue
through H1 2024. The overall level of employment in these sectors is below the prepandemic trend, and job openings remain elevated for these industries, suggesting steady
employment growth can continue.
We expect wage growth to only slow gradually, remaining above its pre-pandemic
averages through 2024 (Figure 10). Wages tend to lag tight labor markets and rapid
nominal GDP growth — suggesting some back-loaded strength is likely despite a broader
growth slowdown. Real wages will likely accelerate, making up some ground after low or
negative growth throughout most of the post-pandemic recovery.
Fig. 9: Slowing growth to put pressure on employment in
cyclical sectors, but hiring in non-cyclical sectors remains
robust
Source: BLS, Haver, Nomura
Fig. 10: Wage growth to only slow gradually, remaining well
above the pre-pandemic run-rate throughout 2024
Source: BLS, BEA, NBER, Haver, Nomura
Consumers are resilient, but growth is moderating
Solid labor income growth will likely support consumer spending. Tighter financial
conditions are a strain for households, but this is more likely to lead to a slowdown than
an outright downturn in the near term.
Household balance sheets have been well-insulated from higher rates and tighter financial
conditions (Figure 11). Around 70% of household debt is mortgage borrowing, which is
overwhelmingly fixed-rate debt still paying low rates. Despite home price appreciation and
rising homeownership rates, mortgage debt payments are still below 2019 levels as a
percentage of disposable personal income.
15
Nomura | 2024 Global Macro Outlook
Fig. 11: Household balance sheets have been well-insulated
from higher rates and tighter financial conditions
Note: Debt service ratio measures monthly mortgage payments as a % of disposable
personal income
Source: Freddie Mac, BEA, Federal Reserve, Nomura
11 December 2023
Fig. 12: Headwinds are building, which will strain household
finances
Source: BEA, Haver, Nomura
Despite this solid foundation, headwinds are building for household finances (Figure 12).
Most household liabilities are insensitive to rising rates, but credit card interest costs are
increasing, and delinquency rates have picked up. The resumption of student loan
payments (following years of forbearance) is also a drag on household cashflows (it is
noteworthy that total non-mortgage interest payments appear on-track to surpass
mortgage interest this winter).
Consumer surveys demonstrate that higher borrowing costs and tighter lending conditions
are weighing on demand for vehicles and other large durable goods. The University of
Michigan consumer sentiment survey showed a sharp rise in the share of households that
claim it is a bad time to make large purchases due to high interest rates. Rejection rates
for consumer credit applications have also increased, and a rising share of households
have indicated that they have been discouraged from even applying for credit.
16
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 4: Hard data versus soft data
Survey data have been an unreliable gauge for growth in recent years. Widely tracked indicators like ISM manufacturing and
the University of Michigan consumer sentiment have been deeply negative since mid-2022 – even as hard data on spending
and production remained resilient. The degree of divergence is significant, but not unprecedented (Figures 13 and 14).
It is difficult to pinpoint the drivers of soft data underperformance, but we see evidence for several possible
explanations.
• Elevated inflation and supply shortages might have weighed on consumer sentiment in the pandemic recovery. For
decades pre-pandemic, headline sentiment was driven by household finances and labor market conditions. That
said, historically, high and volatile inflation may also push sentiment lower (Figure 14).
• Conversely, temporary factors such as excess savings or mending supply chains might have boosted spending
and production, in spite of poor sentiment.
• On the business side, higher interest rates, tighter credit conditions, and market uncertainty might be affecting
survey responses. Historically, ISM manufacturing has been highly correlated with changes in financial conditions,
beyond what FCI might imply for growth (Figure 13).
• Extreme macroeconomic volatility in the pandemic might also confound survey responses. Survey respondents are
likely somewhat imprecise about rates vs. levels and the appropriate baseline to gauge economic conditions. In
normal times, this is mostly inconsequential, but large cyclical fluctuations in 2020-22 may have worsened the
slippage between vague surveys and precise hard data.
Fig. 13: Tighter financial conditions weighs more on
surveys
FCI_G: Financial Conditions index publishes by FRB
Fig. 14: The decline in sentiment due to inflation
concerns has been slightly offset by a strong labor
market
Source: University of Michigan, NBER, Haver, Nomura
Source: FRB, ISM, NBER, Haver, Nomura
With inflation moderating, we expect consumer surveys to be more reliably correlated with labor market and spending
data. Similarly, the extreme volatility of the pandemic has moderated, simplifying the connection between diffusion
indices and growth measures. Financial conditions are likely to remain restrictive, but at least the pace of tightening
has moderated, which should mean business surveys could at least provide a useful signal for second derivative
momentum swings.
We are cautious about relying too heavily on surveys as we forecast a momentum slowdown and eventual recession.
However, we continue to believe soft data provide valuable information, especially when they are corroborated by a
broader range of indicators.
Disinflation is underway
We believe disinflation will likely continue in 2024 and forecast core PCE inflation to
decelerate to 2.3% in Q4 2024 from 3.5% as of October 2023 (Figure 15). Disinflationary
forces appear to be concentrated in vehicle prices and rent (Figure 16), while we expect
inflation of supercore components to moderate more gradually.
17
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 15: We expect disinflation to continue in 2024, with the
slowdown concentrated in vehicle prices and rent
Fig. 16: Private rent data point towards continuing
deceleration through 2024
Source: BEA, Haver, Nomura
Note: Zillow and Apartment List rent data are seasonally adjusted by Nomura
Source: BLS, Zillow, Apartment List, Haver, Nomura
Higher interest rates started to drive down vehicle prices, which make core goods prices
one of the primary sources of disinflation (Figure 17). Used vehicle prices have been one
of the largest inflation drivers since the pandemic and appear to be sensitive to changes
in credit conditions for auto loans. The delinquency rate for subprime auto loans continued
to increase and banks’ lending standards for those loans have been tightening. As buyers
with lower credit scores tend to buy used vehicles, the impact of tighter credit conditions
should exert substantial downward pressure on used vehicle prices (Figure 18). New
vehicle markets have been more resilient, but there seems to be scope for further
increases in rebate sales incentives for automakers. By contrast, non-auto core goods
prices might be supported by higher import prices in anticipation of a weakening US dollar
(please see our FX research team’s forecasts in Figure 216: G10/Asia FX forecasts).
However, the magnitude of expected declines in vehicle prices will likely outweigh the
positive impact from higher import prices.
Fig. 17: Disinflation of core goods prices is underway
Fig. 18: The impact of tighter credit conditions should exert
substantial downward pressures on used vehicle prices
Source: BEA, Haver, Nomura
Source: BLS, FRB, NBER, Haver, Nomura
Leading indicators point towards a continuing deceleration in rent inflation through 2024 (
Figure 16). Private rent data remain weak and over-supply of apartment buildings in
certain metropolitan areas have pushed up the rental vacancy rate. Moreover, historically,
rent inflation has been cyclical and weak income growth should prevent a strong rebound.
18
Nomura | 2024 Global Macro Outlook
11 December 2023
Note that the relative importance of vehicle prices and rent in core CPI is larger than in
core PCE price index. Expected moderation in vehicle prices and rent inflation will likely
have a larger disinflationary impact on core CPI than core PCE inflation.
The remaining part of core inflation is non-rent core service prices, so-called supercore
inflation. CBO and CMS forecasts for cost increases for Medicare services point to stable
inflation for healthcare service prices (please see our discussion on healthcare service
prices ). However, about one-third of supercore components such as food service prices
seems to be sensitive to wages (please see our report on wages and inflation ). Based on
our analysis, wage growth tends to be sticky and thus those wage-sensitive prices will
likely moderate more gradually than rent and core goods prices. We expect supercore
PCE inflation to fall to 3.1% y-o-y in Q4 2024, from 3.9% in October 2023.
Last-mile risks
Realized inflation is falling, but the Fed will likely be sensitive to the risk of a
reacceleration. We think wage growth and hence supercore inflation provide an important
guide for assessing these risks. Many policymakers (including Chair Powell) have argued
that any evidence that tightness in the labor market is no longer easing could put further
progress on inflation at risk, which underlines the importance of labor markets and wage
growth for the inflation outlook (Figure 19).
One lesson from the 1970s inflation was not to declare victory prematurely without broad
corroboration that inflation and wage growth both have slowed (Figure 20). In the 1970s, a
series of shocks (including the two oil crises and depreciation of the US dollar associated
with the end of the Bretton Woods exchange rate regime) exerted inflationary forces. The
Fed tightened policy to prevent a positive output gap, but did not remain restrictive
enough to address building demand pressures in wage growth and persistent services
inflation. Prices reaccelerated and expectations became unanchored, leading to a
prolonged period of high and volatile inflation.
Fig. 19: Inflation risks are elevated as long as wage growth
remains strong
Note: AHE is for private production and nonsupervisory workers
Source: BEA, BLS, Haver, Nomura
Fig. 20: The 1970s inflation cautions against premature easing
Source: BLS, BEA, FRB, Haver, Nomura
Fed is done hiking, but aggressive rate cuts are unlikely until a recession happens
Disinflation and sluggish growth are likely to discourage the Fed from hiking rates further,
and we expect a tentative start to rate cuts in June 2024 . However, we believe the Fed
would not be comfortable easing aggressively until inflation and wages decelerate more
decisively.
Pre-emptive easing makes sense in theory, and a simple Taylor rule would suggest this is
a reasonable response to falling (but still above-target) inflation. Some Fed officials have
begun to advocate this approach, most notably Governor Waller, who claimed that lower
inflation would be a sufficient reason to lower policy rates.
In our view though, it will be difficult for the Fed to deliver a large-scale cutting cycle as
long as growth is solid and realized inflation remains above target. We see two key
uncertainties that should discourage aggressive easing until a recession is underway.
19
Nomura | 2024 Global Macro Outlook
11 December 2023
First, as the prior sections suggest, inflation risks will likely remain skewed to the upside
even when realized core PCE is printing close to the Fed’s target. It is always difficult to
distinguish between temporary, volatile drivers of inflation and structural trends. Our
inflation forecast for 2024 suggests disinflation will be driven mostly by noisy goods prices
and backward-looking rents, raising the risk that ‘underlying’ inflation is still elevated.
Second, rate cuts would raise the risk that policy becomes accommodative. Rates are
well above the Fed’s model-based estimates of ‘neutral,’ but these models are unreliable
in real time. Small differences in assumptions lead to significant differences in estimates
across models. By design, these models tend to assume neutral rates are slow moving,
rendering them incapable of picking up a regime shift until many years after the fact
(please see Special Report - US: Seeing stars ).
It is unclear whether neutral rates have shifted, but risks appear skewed higher (Figure 21).
The past few years have seen growth, inflation, and labor data all less responsive to
policy rates than the Fed and many forecasters had expected. This may just be due to
temporary positive shocks, or unusually long policy lags, but it’s also possible that
dramatic fiscal expansion in the pandemic and significant private sector balance sheet
repair could lead to structurally higher interest rates.
In the past, rate cuts outside recessions have been limited, and were often preceded by
financial stress (Figure 22). Since rate decisions were made public in 1994, there have
only been three instances of non-recessionary rate cuts, in 1995, 1998, and 2019 –
following the Mexican peso crisis, LTCM, and QT-related money-market stress. In each
case, there was only 75bp of cumulative easing. Without salient financial stability risks,
the size of pre-emptive rate cuts will likely be small.
Fig. 21: Rates are well above the Fed’s estimate of ‘neutral,’
but R* models are unreliable in real time
Fig. 22: In the past, non-recessionary cutting cycles have
been limited, and were often preceded by financial stress
Source: NY Fed, Richmond Fed, Federal Reserve Board, Haver, Nomura
Source: FRB, Haver, Nomura
Why a recession is likely
Tighter financial conditions have not led to acute stress yet, but in our view, the risk of a
downturn remains elevated.
The Fed’s aggressive rate hikes and slowing inflation are raising real interest rates. In
addition, the economy is slowing, weighing on revenue growth of US businesses.
Refinancing maturing corporate debt in 2024 and subsequent years will also increase the
debt burden on businesses gradually. The banking sector is still facing pressures as
interest margins for small banks have continued to be squeezed and the Senior Loan
Officer Opinion Survey (SLOOS) points to slower loan growth in coming quarters. Against
this backdrop, credit conditions for the business sector continue to tighten, which
corroborates recent increases in the speculative corporate bond default rate (Figure 23).
Based on our calculation, the interest coverage ratio, a measure of the ability of businesses
to pay interest, started to deteriorate this year (Figure 24). Historically, changes in the
interest coverage ratio tend to affect certain types of business investment with a one-year
20
Nomura | 2024 Global Macro Outlook
11 December 2023
lag. Overall, we will likely see a more substantial impact from credit tightening on business
investment in coming quarters, causing a capex-driven recession in H2 2024.
Fig. 23: Credit conditions for the business sector continue to
tighten, which corroborates recent increases in the
speculative corporate bond default rate
Note: % of banks tightening standards for C&I loans to large firms, and trailing 12m HY
default rate
Source: Federal Reserve, Moody's, Haver, Nomura
Fig. 24: The interest coverage ratio, a measure of the
capability of businesses paying interests, started to
deteriorate this year
Note: The interest coverage ratio is defined as corporate profits before tax without IVA
and CCAdj divided by interest paid by domestic nonfinancial corporate business. 2023
figure is estimated based on corporate earnings, US effective banks' lending rates and
corporate loans and debt securities through Q32023.
Source: BEA, FRB, FDIC, Haver, Nomura
The Fed can cut quickly and end QT when a recession is underway
Once a recession is underway, the Fed’s employment and inflation mandate are both
likely to suggest policy can ease.
Even in a mild recession, unemployment is likely to rise significantly. We expect the
headline unemployment rate to rise towards 5% by the end of 2024, and increase to a
peak in the mid-5% range by 2025. Wage growth tends to be sticky early on in
recessions, but it predictably declines after a sufficient lag.
We expect a recession in H2 2024 would likely push down supercore PCE inflation to its
pre-COVID level in 2025. Additional disinflationary forces stemming from a recession
should make the Fed confident that the risk of inflation rebounding has diminished,
enabling it to launch a large scale rate cutting cycle in September 2024, along with an end
to quantitative tightening.
We expect the Fed to end balance-sheet rundown during a recessionary cutting cycle.
(see Box 5: End point of QT is contingent on economic outlook ).
Fiscal policy on hold
With divided government and a national election looming in November, we do not expect
any significant fiscal easing in response to a recession. 2024 is an election year and the
administration cares about slowing growth. However, House Republicans likely have less
incentive to support policy that boosts the economy. Inflation risks and concerns of
elevated deficits might dampen support for stimulus, even among Democrats.
At the state level, we expect strong property tax collections and replenished rainy day
funds to support state and local government spending.
21
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 5: End point of QT is contingent on economic outlook
At the post-July FOMC press conference , Chair Powell mentioned that the Fed could continue balance sheet runoff,
aka “quantitative tightening (QT)” while lowering the policy rate. Since then, market expectations have shifted and
market participants have pushed out the expected date when QT will stop (Figure 26). Under our current outlook, we
expect QT to end in September 2024 once a recession is underway.
Historically, balance sheet policy has been used for both macroeconomic and technical objectives. The scenario laid
out by Powell in July suggests the Fed would be focusing on technical reserve management, allowing the balance
sheet to ‘normalize’ even as policy rates move in the opposite direction. In our view, this approach could make sense
against the backdrop of ‘insurance cuts.’ Interestingly, the July FOMC minutes revealed the Fed’s staff abandoned
their mild recession scenario and presented a more sanguine economic outlook.
However, under a recession scenario, we think it is unlikely for the Fed to continue quantitative tightening. When
downside risks to the economic outlook emerge and market risk sentiment deteriorates, market participants might see
the Fed as being insufficiently flexible in adjusting monetary policy if the balance sheet runoff continues. Changes in
market perceptions about the degree of the Fed’s flexibility could accelerate risk-off trades in markets and lead to
unwelcome tightening in financial conditions. One research report from the Atlanta Fed suggests the impact of QT
varies significantly, depending on the degree of risk aversion of market participants. This was evident with market
reactions to Powell’s comments on QT in December 2018, which suggested that QT would continue to proceed on
autopilot deteriorated market sentiment substantially.
Figure 25 shows our expectation for balance sheet policy under a range of growth and market scenarios. In our base
case, we forecast the combined size of reserves and overnight reverse repo operations will decrease to $3.3trn or
11.4% of GDP by September 2024 and then slow very gradually thereafter (Figure 27). Our forecast suggests the level
of reserves will likely remain “abundant” in the banking system. It’s a close call, but we expect the Fed to reinvest the
proceeds from maturing mortgage backed securities (MBS) into Treasuries because we do not anticipate any specific
stress in mortgage markets or housing.
As we discussed in the main section, there is a significant risk of the economy avoiding a recession. Under such a softlanding scenario, QT would likely continue. Conversely, if a recession becomes more severe, the Fed would not only stop QT
but also roll over its MBS holdings. We think the Fed’s balance sheet policy is flexible, depending on the economic outlook.
Fig. 25: Nomura: the Fed's balance sheet policy scenario for 2024
QT ends
QT continues
Recession
Severe Recession
MBS reinvested into MBS
15%
No recession
Mild Recession
Reserve Scarcity
MBS reinvested into Treasuries
45%
5%
No reserve scarcity
QT Continues
35%
Source: Nomura
Fig. 26: Evolution of market expectations for the timings
of QT end and first rate cut
Note: Based on the Survey of Market Participants
Source: New York Fed, Nomura
Fig. 27: Nomura's forecast for the combined size of bank
reserves and ONRRP
Source: FRB, Haver, Nomura
22
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 6: 2024 election outlook
There is significant uncertainty around the 2024 election, and polling data are usually unreliable this far in advance.
Historically unpopular candidates, an unusual economic backdrop, and potential third-party candidates suggest a wide
probability distribution for the national election outcome.
Recent election trends and structural features of the US political system help to narrow down the most likely outcomes
though. We see two main takeaways:
1. A unified (single-party) government is our most likely outcome, but it is a close call, leaving a high probability of
divided government and continued gridlock.
2. A Republican president would be more likely to preside over a unified government.
The party that wins the presidency is likely to also gain control of the House of Representatives, where all 435 seats
will be up for election in 2024. In recent decades, voters have tended to vote for the same party in the Presidential and
Congressional races, making the outcomes increasingly correlated. Based off district maps and past election results,
we believe Republicans likely have a slight advantage in a close election, but this margin has diminished in recent
years. Figure 28 shows House seat margins compared with the House popular vote. In 2012-20, Republicans would
often win a greater share of seats than aggregate vote totals would suggest (including 2012, where they won a majority
despite receiving fewer votes). However, in 2022 Democrats actually slightly outperformed.
The Senate will be an uphill battle for Democrats. Only one-third of Senate seats come up for election every two years,
and the race in 2024 is favorable for Republicans (Figure 29). 23 of the seats up for election are currently held by
Democrats, compared with just 11 for Republicans. Democrats are very likely to lose an open race in West Virginia,
and will have to defend two seats in states that Trump won in 2020. Democrats will also be defending five seats in
states that Biden won by less than 2.8%. The most vulnerable races for Republican incumbents are in Florida and
Texas, where Trump won by 3.4-5.6%.
If a Republican wins the presidency in 2024, we think it is almost certain that Republicans will also gain control of the
Senate (note that if the Senate is tied 50-50, then the Vice President casts the deciding vote). If a Democratic president
wins by a clear margin, then there is a strong likelihood that Democrats can maintain their Senate majority, but it is far
from certain (they would need to run the table in close races or win an unlikely victory in a solidly Republican state). If
Democrats win the presidency by a narrow margin, Republicans would likely be favored to take the Senate regardless.
We see a 40% probability of a unified Republican government, a 35% probability of a split government with a
Democratic president, a 15% probability of a unified Democratic government, and a 10% probability of a split
government with a Republican president.
The 2024 election outcome will likely have a direct impact on tax policy in 2025, as the Trump-era tax cuts are set to
expire. There has been some bipartisan support for extending some provisions, but the extent to which the tax cuts are
extended depends on whether Republicans win a unified government.
Fig. 28: Republicans likely hold a structural advantage in
the House race
Fig. 29: Democrats have an uphill battle in the Senate,
currently holding the most competitive races
Note: A positive margin represents a Republican majority. A negative margin
represents a Democratic majority.
Source: MIT Election Lab, Nomura
Note: R equals Republican and D equals Democrat.
Source: University of Virginia, Nomura
23
Nomura | 2024 Global Macro Outlook
11 December 2023
Risk scenarios to our economic outlook
Soft landing is a risk
The drag from tight financial conditions makes a recession seem more likely than not,
however a soft landing remains a risk.
Cyclical spending has already fallen significantly since the start of the tightening cycle,
and it is possible that demand stabilizes even if financial conditions remain restrictive. In
particular, we will be attentive to any signs of a structural ‘floor’ for residential investment
or business capex. Also, strong balance sheets of households might provide more support
to the broader economy than we currently assume.
Potential changes to the Fed’s reaction function
Since late 2021, the Fed has been prioritizing the inflation leg of its dual mandate.
Officials have repeatedly said that returning inflation to 2% was their priority, and that they
would do whatever was necessary to achieve this objective.
Since October, there have been signs of wavering. Officials adjusted their reaction
function to look past hawkish data at the November FOMC meeting. And recently,
Governor Waller (who has been hawkish through the hiking cycle) began to make the
case for ‘insurance cuts’ just a few weeks after Chair Powell had insisted that the FOMC
has not begun to consider reducing rates.
Our forecast for Fed policy in 2024 assumes this emphasis on inflation will persist, but a
more aggressive dovish pivot is a risk. Importantly, due to policy lags, disinflation and
sluggish growth will likely persist for at least a few months regardless of the Fed’s policy
approach. In our view, this would risk an inflation reacceleration in the medium term, but
there is no near-term circuit breaker that would prevent the Fed from easing policy or lead
to a rapid hawkish reversal.
Severe recession and financial stress
Our expectation is that a 2024 recession would be mild, with just two quarters of negative
growth and the unemployment rate peaking around 5.3%. In our view, this is a reasonable
base case given the fundamental strength of household balance sheets and the lack of
overinvestment during the expansion. That said, recent history shows that recessions often
trigger financial stress, leading to a negative feedback loop and a more severe downturn.
We do not see a clear catalyst for financial stress, but growth downturns can reveal
hidden vulnerabilities or ‘break’ otherwise healthy markets. The past three recessions
have coincided with equity sell-offs of 30% or more, and even past mild recessions
typically lead to some credit stress.
Lingering inflation risks will likely prevent the Fed from cutting rates sharply early in a recession,
but in a severe downturn we would expect the Fed to ease more decisively than our base case
forecast. The FOMC would likely end QT as well, and in this scenario we see a higher
probability that maturing MBS proceeds are reinvested back into the mortgage market.
Fig. 30: United States: Details of the forecast
1Q23
2Q23
3Q23
4Q23
1Q24
2Q24
3Q24
4Q24
1Q25
2Q25
3Q25
4Q25
2022
q-o-q
(%, a.r.)
(%)
(%, a.r.)
(%, a.r.)
(%, a.r.)
(%, a.r.)
(%, a.r.)
(%, a.r.)
2.2
0.6
3.8
5.7
-5.3
4.8
6.8
1.3
2.1
0.5
0.8
7.4
-2.2
3.3
-9.3
-7.6
5.2
1.3
3.6
1.3
6.2
5.5
6.0
5.2
0.9
0.2
1.4
-1.6
-5.8
3.8
1.8
-0.3
1.3
0.3
1.5
2.7
-12.5
1.7
0.5
2.7
1.4
0.3
1.3
1.7
-2.2
1.4
0.5
1.5
-1.1
-0.3
-0.4
-9.5
-1.0
1.6
0.2
-3.0
-1.9
-0.5
-1.0
-9.5
-1.6
1.4
-0.5
-2.4
0.4
0.1
0.7
-1.8
1.5
0.8
0.5
-2.0
1.1
0.3
1.0
2.0
3.5
0.5
2.5
0.3
2.6
0.6
1.6
2.8
4.5
0.5
2.8
1.5
3.4
0.8
1.8
5.2
7.2
0.5
3.5
3.8
1.9
2.4
1.3
0.4
2.5
5.2
-9.0
-0.9
7.0
8.6
2.2
4.1
-11.2
4.0
2.5
-1.7
1.3
-0.5
-4.4
2.6
0.7
0.5
0.5
-2.4
1.5
0.9
1.1
-0.8
(pp., a.r.)
(pp., a.r.)
(pp., a.r.)
4.5
0.6
-2.2
2.1
0.0
0.0
3.8
0.0
1.4
1.4
0.2
-0.5
0.9
-0.3
0.4
1.1
-0.1
0.3
-0.9
0.4
-0.2
-1.5
0.3
-0.4
0.8
0.3
-0.4
1.3
0.2
-0.2
1.8
0.1
0.8
2.2
-0.1
1.2
1.3
-0.5
0.6
2.8
0.5
-0.4
1.1
0.0
0.2
0.5
0.2
0.0
As noted
(%)
(000s)
(000s, a.r.)
(%, y-o-y)
(%, y-o-y)
(%, y-o-y)
(%, y-o-y)
3.5
312
1385
5.8
5.6
5.0
4.8
3.6
201
1450
4.1
5.2
3.9
4.6
3.7
221
1367
3.6
4.4
3.4
3.9
3.9
180
1253
3.1
3.9
2.9
3.3
4.0
160
1220
2.5
3.3
2.3
2.7
4.1
70
1224
2.3
2.7
2.1
2.4
4.5
-120
1232
1.9
2.4
1.9
2.4
4.9
-220
1239
1.7
2.1
2.0
2.3
5.2
50
1255
2.0
2.1
2.1
2.2
5.3
150
1279
2.1
2.2
2.1
2.2
5.2
200
1307
2.3
2.4
2.2
2.3
5.0
250
1344
2.4
2.7
2.2
2.3
3.6
399
1551
8.0
6.1
6.3
5.0
3.7
229
1364
4.1
4.8
3.8
4.2
4.4
-28
1229
2.1
2.6
2.1
2.4
-5.3
-3.8
-5.8
-3.0
-5.9
-2.6
5.2
162.5
1296
2.2
2.3
2.2
2.3
-6.3
-2.1
8.04
4.375
4.41
3.99
3.88
7.10
5.375
4.55
4.15
4.20
6.39
4.375
3.00
3.10
3.45
6.39
2.375
2.25
2.80
3.35
%
Real GDP
Personal consumption
Nonresidential fixed invest
Residential fixed invest
Government expenditure
Exports
Imports
Contributions to GDP:
Final sales
Net trade
Inventories
Unemployment rate
Nonfarm payrolls
Housing starts
Consumer prices
Core CPI
PCE Deflator
Core PCE
Federal budget
Current account balance
(% GDP)
(% GDP)
Fed securities portfolio
Fed funds target midpoint
TSY 2-year note
TSY 5-year note
TSY 10-year note
($trn)
(%)
(%)
(%)
(%)
7.82
4.875
4.06
3.60
3.48
7.58
5.125
4.87
4.13
3.81
7.33
5.375
5.03
4.60
4.59
7.10
5.375
4.55
4.15
4.20
6.87
5.375
4.35
4.05
4.10
6.63
5.125
4.10
3.90
4.00
6.39
4.875
3.45
3.40
3.60
6.39
4.375
3.00
3.10
3.45
6.39
3.875
2.80
3.05
3.45
6.39
3.375
2.60
2.95
3.40
6.39
2.875
2.45
2.95
3.40
6.39
2.375
2.25
2.80
3.35
2023
2024
2025
Note: 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. The Fed securities portfolio is end-of-period. The annual interest rate forecasts are end-of-period. Housing starts are
period averages. Numbers in bold are actual values. Table reflects data available as of 8 December 2023.
Source: BEA, BLS, Census Bureau, FRB, Haver, Nomura
24
Nomura | 2024 Global Macro Outlook
11 December 2023
China: After the rabbit, enter the dragon?
Research Analysts
Despite the multitude of stimulus measures announced recently, we believe it is still too
early to call the bottom, and there might yet be another economic dip in spring 2024 due
to a worsening property sector, with the delayed delivery of numerous homes, the fading
of pent-up demand, weaker external demand, a slowdown following the investment
fervour in “green” sectors and lasting geopolitical tensions. That said, we hold the hope
that, by the spring of 2024, in the Year of the Dragon – which denotes energy and vitality
– the pain of another economic dip may finally convince Beijing to identify the real pain
points, roll out truly effective measures to help deliver presold homes, clean up local
governments’ financial messes and ramp up fiscal spending in the right places.
Ting Lu - NIHK
The year 2023 is associated with the rabbit – a symbolic creature in Chinese folklore.
According to legend, similar to the Aesop’s fable, the rabbit was proud of its speed, and it
was confident that it would win the race for determining the order of the zodiac among the
twelve animals. Unsurprisingly, the rabbit got off the mark ahead of others, but then
complacently fell asleep when no other animals were in sight, thinking it would obviously
be first. In the end, the rabbit ranked only fourth, even after the ox, which the rabbit had
looked down upon.
hannah.liu@nomura.com
+852 2252 1082
Asia Economics
ting.lu@nomura.com
+852 2252 1306
Jing Wang - NIHK
jing.wang@nomura.com
+852 2252 1011
Harrington Zhang - NIHK
harrington.zhang@nomura.com
+852 2252 2057
Hannah Liu - NIHK
Too early to call the bottom, as the property woes drag on
In hindsight, our predictions in “The Year of Rabbit: While fast, it may still fail to win the
race” proved to be quite close to the lackluster recovery and to how asset prices evolved
in 2023. Some recent signs of stabilization have triggered a new round of optimism over
the near-term potential for a growth rebound. Despite the multitude of stimulus measures
announced over the past several months, we believe it is still too early to call the bottom,
and there might yet be another economic dip in the first half of 2024 due to a worsening
property sector, the fading of pent-up demand, weaker external demand, a slowdown
following the investment fervour in “green” sectors and lasting geopolitical tensions. While
markets may have become somewhat desensitized from constant discussions related to
the property sector, it remains the single largest drag affecting China’s economy,
especially as cash-strapped and insolvent developers have left a vast number of homes
unfinished.
Hope rises in the Year of the Dragon after several rounds of failed policy tinkering
That said, we hold the hope that, by the spring of 2024, in the Year of the Dragon – which
fortuitously denotes power, energy and vitality – the pain of another economic dip may
finally convince Beijing to identify the real pain points, roll out truly effective measures to
help deliver presold homes, clean up local governments’ financial messes, ramp up fiscal
spending in the right places, concede more space to the private sector, mollify geopolitical
tensions and raise the confidence of all entities, including foreign investors. Despite the
worsening global slowdown, which could suppress China’s exports, falling yields in
developed economies and a weaker dollar can provide Beijing with more space to ramp
up its fiscal spending, with funding either from markets or its own central bank. Weak
external demand also limits inflation and leaves more room for the PBoC’s money printing,
which might be essential for rescuing many projects left unfinished by developers.
There are some other positive factors. Despite our overall cautiousness on exports in
2024, we forecast an improvement in export growth from an estimated -5.0% in 2023 to 1.5% in 2024. Exports of consumer electronics and mobile phones may benefit from a
potential global tech upswing, while low domestic inflation and the weak RMB could help
China’s export sector maintain a competitive edge; also, the “new three” sectors (i.e., EV,
lithium batteries and solar modules) may continue to grow. The ongoing disinflationary
environment, which clearly appears to be mainly a result of weak demand, could drive
fierce competition and relentless innovation among Chinese enterprises catering to
households with slowing income growth and damaged balance sheets.
We expect Beijing to set a GDP growth target of “around 4.5%” for 2024, a touch below
the “around 5.0%” for 2023. We predict growth will slow to 4.0% in 2024 (up slightly from
our previous forecast of 3.9%) from an estimated 5.2% in 2023 (up slightly from 5.1%
previously). The timing, probability, scale and format for Beijing to take the eventful step of
directly intervening in the delayed construction of pre-sold homes is still uncertain, but we
do see a much higher chance in 2024, after Beijing has exhausted other policy tools over
the previous two years. In sum, after ending the pandemic at end-2022, we are finally
seeing real potential for China’s economy to regain some vitality. A decline in potential
25
Nomura | 2024 Global Macro Outlook
11 December 2023
growth is still inevitable, in our view, as many issues will remain unaddressed, but a
cyclical recovery, hopefully taking place in 2024, is badly in need for China to revive its
growth momentum.
2024 could be more challenging than 2023
Markets appear much less hopeful than a year ago, when Beijing had just ended its zeroCovid policy, terminated some of its overly restrictive property tightening measures,
consolidated its party leadership and launched a charm offensive by sending its top
leaders for overseas visits. Recently, and perhaps thanks to the raft of easing and
stimulus measures, some early signs of stabilization have rekindled hopes among market
participants, think-tank analysts and policymakers that the economy is bottoming out.
However, we remain cautious, as we believe the economy has yet to truly recover, those
stabilization signs might be short-lived, and policymakers cannot afford to become
complacent.
• First and foremost, recent data show that the property sector’s woes are once again
worsening. The moderate rise in home transactions in top-tier cities might further
squeeze low-tier cities, where many private developers have been trapped. And with
the delayed delivery of around 20mn units of homes, the negative feedback loop
between households’ reluctance to buy homes and developers’ shortage of cash to
build homes still haunts the property sector, especially in low-tier cities. Developers’
falling home sales and slumping land purchases are forcing local governments to cut
workers’ pay and other expenditures, leading to further drop in new home purchases.
• Second, the post-pandemic release of pent-up demand for travel and gatherings may
fade notably, especially after the Chinese New Year holiday in mid-February, which
takes place almost exactly one year after the reopening, meaning that in 2024 China
will likely lose the most important growth driver of 2023.
• Third, the export sector, which experienced a 5.6% contraction in the first ten months
of 2023, faces new challenges, as highly restrictive interest rates across developed
markets may finally weigh on the global economy and dampen demand for China’s
products. China’s exports could also be dented by plummeting FDI, as foreign
companies still contribute around 30% of China’s exports.
• Fourth, the so-called “new three” sectors (i.e., solar modules, lithium batteries and EV
manufacturing) have been a bright spot and impressive growth driver in 2023, but
concerns over overinvestment and the EU’s anti-subsidy probe might cause a setback
in 2024.
• Last but not least, though geopolitical tensions have been mollified recently, the
easing of tensions was quite limited with very few breakthroughs. With the US
presidential election set for November 2024, a worsening appears more likely than an
easing.
The property sector has yet to recover
The property sector is entering its third straight year of sharp contraction. In late 2022
Beijing rushed to scrap the Volcker-style tightening, but the move failed to improve
funding conditions among developers. The post-Covid release of pent-up demand for
homes was rather short-lived. Another round of easing was introduced from mid-year, but
has made little progress, as recent data show the major property indices worsening again.
We believe the property sector has yet to reach bottom because of the following factors.
• First, there is a massive number of presold but unfinished homes in low-tier cities with
a vast funding gap (Figure 31; see Box 7: The bumpy road to home delivery ).
Households may postpone their home purchases due to the perceived high risk of
failing to obtain presold homes on time. Fewer sales could further constrain developer
funding and lead to more overdue homes. This scenario is particularly relevant to
private developers, which accounted for more than 80% of national new home sales
before the crash.
• Second, since land sales and other property-related taxes comprise as much as 38%
of local governments’ total revenue (Figure 33), the 41% contraction in land sales
since 2021 has severely worsened local fiscal conditions (the real picture could be
even worse, as local governments have extensively sold land to their own funding
vehicles). Many local governments have reportedly cut compensation for government
26
Nomura | 2024 Global Macro Outlook
11 December 2023
workers, a key social class for housing demand, resulting in weaker new home sales
in those cities.
• Third, the latest round of easing measures in large cities – including media
speculation of a potential QE program to renovate urban villages and build more
affordable housing in large cities – could drain housing demand in low-tier cities,
which account for 70% of national new home sales and are primarily served by private
developers. Such a reduction of demand could worsen further the financial conditions
of those troubled private developers.
Without cleaning up the mess from the delayed delivery of approximately 20mn units of
homes, we would not expect any real property sector recovery. At some point, Beijing
may finally reach consensus to address the most crucial issues in the property sector, but
it may still take time. Most property indicators could deteriorate further in H1 before
stabilizing in H2. For major indicators, we expect growth of new home sales volumes and
property construction investment to remain negative in 2024, albeit up slightly to -3.0%
and -6.0%, respectively, from an estimated -7.5% and -12.0% in 2023.
Fig. 31: Floor space of pre-sold home and completions
Fig. 32: The ratio of presales over new home sales volume
Source: Wind, Nomura Global Economics.
Note: Presales only refer to presales of residential properties.
Source: Wind, Nomura Global Economics.
Local governments will likely face another difficult year
Amid the property collapse, 2023 has been difficult for China’s local governments, but 2024
might be even more challenging as the property sector’s woes drag on. Revenues from land
sales have plummeted by 20% so far in 2023 and are down 41% from 2021 levels (the
actual situation could be much worse if we adjust for the land sales to LGFVs), significantly
worsening the solvency of highly indebted local government finance vehicles (LGFVs). With
contracting home sales, land sales could drop by another 10% in 2024, in our view.
Recognising such risks, since October, Beijing has allowed local governments to tap the
unused local government bond (LGB) quota for issuance of special refinancing bonds
(SRB) to swap with LGFV debt (i.e., the so-called “hidden debt”, for a provincial
breakdown, Figure 35). State-owned banks were also directed to roll over some hidden
debt at lower interest rates. These measures should alleviate some pain but are unlikely
to fix the issue. The overall size of SRB is expected to reach ~RMB1.5trn, which equates
to only about 3% of the RMB47trn outstanding hidden debt, according to our estimates.
Repayment pressures will remain high in coming years, with RMB3.2trn, RMB2.5trn and
RMB3.1trn of maturing LGFV bonds in 2024, 2025 and 2026, respectively.
27
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 33: Land sales and property-related tax proceeds still
account for a large proportion of local fiscal revenue
Fig. 34: Growth of government revenue from land sales and
property-related taxes
Source: Ministry of Finance, Nomura Global Economics
Note: We use the average of January-February data to largely smooth out the Chinese
New Year distortions.
Source: Wind, Nomura Global Economics
Fig. 35: Provincial breakdown of local government special refinancing bonds (LGSRBs)
Note: Data are as of 5 December.
Source: provincial and municipal bureaus of finance, Wind, Nomura Global Economics
Pent-up consumption demand has been fading
2023 could be remembered for the release of pent-up demand for in-person services
consumption, especially catering and hospitality. However, overall post-pandemic
consumption growth is well below market expectations and people have been much more
conscious about their spending. Merchandise retail sales grew by only 5.6% y-o-y in the
first ten months in 2023 after the 0.5% contraction during the Covid-stricken 2022. Unlike
most other economies, which experienced a surge of post-Covid inflation, China’s CPI
inflation has been largely close to zero. Expenditure per trip was clearly below prepandemic levels and signs of a consumption downgrade have been quite evident (see
Box 8: The thrift economy in China ).
That said, consumption is still the top growth driver of 2023, thanks to a low base and
pent-up demand. Looking to 2024, we expect a much smaller contribution to growth from
consumers for the following reasons.
• First, the release of pent-up demand has largely run its course. The recovery in the
total number of trips made during this year’s major holidays has been moderating and
fell to only 4.1% above 2019 levels during the National Day Golden Week from 19.1%
28
Nomura | 2024 Global Macro Outlook
11 December 2023
during the Labour Day holiday.
• Second, the household saving rate has already dropped to below 2019 levels in Q3,
while taking into account seasonality, and it means households have been draining
their excess savings – accumulated during the pandemic years – to support
consumption (Figure 36).
• Third, household income growth has been running well below the pre-pandemic pace
(Figure 37), which also suggests headwinds to consumption. With home prices down
by an average of 0.6% over the past year across all city tiers and stock market prices
down 2.3% so far this year, falling wealth may also suppress consumption growth in
coming months. The property market woes this year have also forced a rising number
of local governments to slash employee compensation.
• Finally, China’s outbound travel and expenditures should recover further next year
after a slow start this year (Figure 38), adding to the pressures on domestic
consumption in 2024 (Figure 39).
Fig. 36: Households have already been reducing their excess
savings since Q3
Fig. 37: Household nominal income growth remains well
below pre-pandemic levels
Source: NBS, Wind, Nomura Global Economics
Source: NBS, Wind, Nomura Global Economics
Fig. 38: China's international flights schedule has only
reached ~55% of the 2019 pre-pandemic level by endNovember
Fig. 39: Outbound travel expenditure has recovered much
faster than the recovery of international flights — already
reaching ~90% of 2019 levels by October
Note: Including flights to and from Hong Kong, Macau, and Taiwan.
Source: VariFlight, Nomura Global Economics
Source: SAFE, Wind, Nomura Global Economics
Household savings rate
29
Nomura | 2024 Global Macro Outlook
11 December 2023
Exports will likely face new headwinds from a global slowdown and falling FDI
Export growth dropped to -5.6% y-o-y in the first ten months this year from 5.6% in 2022.
Despite the low base, export growth might remain in negative territory in 2024, constrained
by the expected global slowdown. Our US team believes the adverse impact from the Fed’s
highly restrictive policy stance could continue building well into next year, which should
eventually lead the US economy into a recession in H2 2024. They project a marked
economic slowdown to 1.3% in 2024 from 2.4% in 2023. Our European economics team
believes the euro area has already entered a recession and expect it to return to very
moderate positive growth only in Q3 2024, with a negative full-year growth reading of -0.4%
in 2024, down from expected growth of 0.4% in 2023. Our Japan economics team thinks
Japan’s economic growth could decelerate notably to 0.2% in 2024 from 2.0% in 2023 (see
Japan: Our BOJ call changed, supported by above-potential recovery ).
Other than a global slowdown, we see two potential headwinds for exports. First, a surge of
EV, battery and solar panel exports from China could trigger an increase in trade frictions. In
September, the European Union formally launched anti-subsidy investigations into China’s
electric vehicle industry in an attempt to protect its manufacturers. At this stage, it is still
unclear what punitive measures the EU could take once the investigation is completed.
However, as electric vehicles – the exports of which (by value) are up 37.0% y-o-y over the
first ten months this year – have been a major driver of export growth this year, an
escalation of trade tensions may generate additional headwinds to China’s exports next
year, as demand for major consumer products remains soft.
Another potential barrier is the higher base for exports to Russia. Following the
implementation of sanctions on Russia by the West, Chinese companies were quick to fill
the gap, delivering stellar 52.2% y-o-y growth over the first ten months of 2023 after
posting 33.8% growth in 2022. However, as Chinese companies establish themselves
within Russian markets, this elevated pace is unlikely to sustain through 2024.
Finally, due to a variety of factors related to rising geopolitical tensions, foreign companies
have clearly reduced their direct investment in China and have even relocated some of
their existing production lines out of China, as evidenced by the first-ever negative FDI
print in Q3 2023 at -USD11.8bn, according to the PBoC’s BoP data. Since foreign
companies still account for about 30% of China’s total exports, and considering the lag
between falling FDI and output, we see downward pressure on China’s exports in coming
quarters on the supply side.
Peak investment growth in the “new three”
Despite the reopening, fixed asset investment (FAI) growth dropped to 2.9% y-o-y in the first
ten months of 2023 from 5.1% in 2022, due to falling raw material prices, still deeply negative
property investment, the private sector’s lack of confidence in manufacturing investment and a
slowdown of infrastructure investment, as local governments struggle for solvency.
There are still bright spots, however, with the brightest being the rising “new three” sectors
(i.e., electric vehicles (EVs), lithium batteries and solar panels). Investment in these “new
three” has been a stellar driver of sales both on and offshore. Despite slowing from 96.7% in
2022, the 37% y-o-y growth of domestic EV sales over the first ten months of 2023 is quite
impressive, given the market share of newly sold EVs was already over 30% (Figure 40).
Exports of EVs and lithium batteries expanded by 89.8% y-o-y and 36.0%, respectively, over
the first ten months of 2023. While solar panel exports in USD terms did contract by 3.0% y-o-y
year-to-date by October, this was due to plunging prices. Volume growth has been 26.1% y-o-y
so far in 2023 (first 10 months). We estimate that, in value added terms, the “new three” are
contributing 1.1% of China’s GDP this year and, if investment is taken into account, this
would total 2.9% of GDP.
However, these elevated growth prints of investment are unlikely to continue, in our view. As
a result of the unprecedented investment into these “new three” in recent years (Figure 41),
these sectors now face serious issues related to both overcapacity and overinvestment.
According to our battery sector equity analysts, China’s domestic battery overcapacity ratio
could remain well above 200% through the end of the 2030s. The capacity utilisation rate of
the EV battery producers currently stands at only ~35% and is expected to remain at around
this level through the 2030s. We expect investment growth in the battery sector to slow
sharply from 126% y-o-y in 2022 to ~33.5% in 2023, before plunging to 10% in 2024 and
zero growth in 2025. For EVs, while the market remains highly fragmented and major new
investment is still expected, growth is likely to slow materially. Based on our projections,
investment growth in the EV sector could slow to 12.5% in 2024 from well above 20% in
30
Nomura | 2024 Global Macro Outlook
11 December 2023
2023, before dropping to 7.5% and 2.5% in 2025 and 2026, respectively. We also expect
investment growth in the solar panel industry to drop to near-zero in 2024.
Fig. 40: Massive production expansion of the "new three"
sectors since 2016
Fig. 41: Investment growth of the "new three" should have
already peaked by 2023
Note: 2023 levels are Nomura forecasts
Source: NBS, Wind, Nomura Global Economics
Source: NBS, company data, Wind, Nomura Global Economics, Nomura Global
Markets Research
Inflation should remain subdued in 2024
The subdued inflation readings so far this year reflect a weak growth recovery. With our
relatively cautious view of growth in 2024, we expect inflation to remain subdued. We
estimate CPI and PPI inflation will rise only slightly to 0.6% and -0.8%, respectively, in
2024 from an estimated 0.2% and -3.0% in 2023.
Food prices are likely to remain low amid the food security drive
Due to the shift in top leadership’s focus towards food security, we think food prices are
likely to stay both relatively moderate and stable in the years ahead, as Beijing continues
to view the issue with a strategic bent. Given the current demand and supply balance of
pork, pork prices are unlikely to fluctuate significantly in 2024, in our view. We expect food
price inflation to remain subdued at -0.6% in 2024, down from an estimated -0.4% in
2023. On non-food inflation, we expect energy price inflation to rise modestly in 2024,
following this year’s strong global disinflation process (Figure 42).
Goods inflation is also set to remain low amid fierce domestic price competition
Core goods prices should be largely subdued, due to the currently low PPI inflation
readings for consumer goods, which lead consumer goods CPI inflation by a couple of
months. In our view, the ongoing consumption downgrade (see Box 8: The thrift economy
in China ) and the fierce price competition among manufacturers and retailers in some
industries – most notably auto dealers this year – are likely to continue weighing on the
pricing power of retailers and suppress goods price inflation next year. This situation could
be further exacerbated by contracting exports, which means producers will likely lower
their prices and destock domestically in order to compensate for the sales lost due to
softening external demand (see Exports will likely face new headwinds from a global
slowdown and falling FDI ).
Service price inflation unlikely to pick up given the sizeable labour market slack
Service price inflation is likely to stay moderate in 2024, following the strong release of
pent-up demand in the sector this year, even with a gradually closing output gap. We see
several structural disinflationary factors that are likely to sustain for some time. Given the
historically high level of youth unemployment and the sizeable labour market slack, the
service sector is expected to experience an outsized disinflationary impact. Unlike the
manufacturing and infrastructure industries, the labour supply for the service sector is
highly concentrated in this age cohort, as China’s young generations generally avoid
factory and construction work. In our view, skill mismatches and other types of friction
could weigh on the labour market and service price inflation for years to come.
31
Nomura | 2024 Global Macro Outlook
11 December 2023
PPI inflation is set to rebound but remain in deflationary territory
We expect PPI inflation to pick up next year. However, in contrast to the consensus view,
we believe it will remain in negative territory in 2024 at -0.8%, up from an estimated -3.0%
this year (Figure 43). First, we think the property sector woes and lacklustre construction
activity will likely continue to drag on domestic raw material and global commodity prices.
Second, we think the gloomy exports picture for next year is likely to weigh on
manufacturing activity, which would, in turn, drag on any PPI inflation rebound.
Fig. 42: We expect CPI inflation to rise moderately in 2024, but
to remain notably below the pre-pandemic trend
Fig. 43: We expect PPI inflation to rebound in 2024, but to
remain in negative territory
Source: NBS, Wind, Nomura Global Economics
Source: NBS, Wind, Nomura Global Economics
Enter the Dragon: The chance to regain some vitality
We are now approaching 2024, the Year of the Dragon, which is perceived as powerful,
energetic and full of vitality. For those familiar with Bruce Lee’s The Way of the Dragon
and Enter the Dragon , there is no need to explain what the dragon means for the Chinese
people. The dragon in China has long been associated with emperors and is exclusively
used as a symbol of absolute imperial power. The question is, will China’s economy
regain its dynamism and vigor in the year of dragon, following three pandemic years and a
lackluster post-Covid 2023?
Nothing is certain, but at some point in 2024, Beijing may finally see the need to bail out
the numerous residential projects that remain seriously behind their delivery schedules.
We believe that such a move, especially if it is funded by one of the PBoC’s quantitative
easing (QE) programs, would mark a real turning point for the economy, as finishing these
delayed presold homes would help 1) rebuild households’ confidence in the government,
developers and banks, 2) end the negative feedback loop, 3) increase demand for raw
materials, workers and home appliances, and 4) boost household consumption demand,
as their housing assets are secured.
The key question is, why has Beijing been so reluctant to implement such a program? We
see several factors behind its reluctance.
• First, the number of unfinished homes might be so large that the task of completing
them may seem too daunting. We estimate there are around 20 million units of
delayed pre-sold homes which, to put in perspective, is equivalent to 20 times the size
of Country Garden as of end-2022. We also estimate that the total funding gap to
complete these units would be around RMB3.2trn. When a task is perceived as too
burdensome, people have a tendency to sit on their hands and hope for a miracle.
• Second, policymakers may rely too much on extrapolating from their past experiences.
Over the past two decades, in every down-cycle (the current one excluded), the property
sector has recovered every time Beijing took its foot off the brake and stepped on the
gas. This time, Beijing has tinkered several times since November 2022 by scrapping
those “financing redlines”, lowering mortgage loan rates, cutting down payment ratio,
and recently ditching restrictions on home transactions in many big cities. Unfortunately,
32
Nomura | 2024 Global Macro Outlook
11 December 2023
these measures failed to achieve their desired impact, as the collapse of the property
sector was much worse than previous corrections due to massive distortions from the
shantytown renovation program in 2015-18, the weak confidence of the private
sector and worsening geopolitical tensions.
• Third, the views of government officials differed widely in their assessment of the
property market collapse, the root causes of the ongoing woes and the potential
solutions. Over the past year, policymakers have placed significant hope in the raft of
easing measures, with the latest round focused on renovating urban villages, building
social welfare housing and investing in dual-use urban infrastructure projects. Behind
these differing viewpoints, many may have been looking to avoid any blame for what
has led to the severe situation in the property sector.
• Fourth, even as policymakers reach consensus on rescuing developers’ delayed projects,
moral hazard concerns may actually remain. Once they announce their intention to use
central government coffers (likely with money printed by the PBoC), developers and local
governments could perceive this as free lunch, and the eventual demand for such funding
could go far beyond what was initially envisaged. Developers and local governments might
even collude to slow construction of local projects to offload some costs to the
government. As such, if not handled well, a rescue plan such as this could initially result in
a slowdown and a higher burden on the central government.
• Fifth, even if policymakers agree that rescuing developers’ unfinished projects is
inevitable, they may be waiting to see whether it gets bad enough before extending
support, as they may fear damaging their image of containing “greedy” developers
and protecting the interests of common people.
• Last but not least, until mid-November 2023, Beijing had been under intense pressure
to defend its currency. Without relying on the PBoC’s money printing, a massive
program of rescuing development projects could push up market interest rates and
crowd out other borrowers. However, if Beijing asks the PBoC to turn on the money
spigot, the RMB would be subject to even stronger depreciation pressures, which
could trigger capital flight and endanger Beijing’s campaign for RMB
internationalization.
When might Beijing finally take this step?
While it is hard to pinpoint the exact timing for such an announcement, as there are a
multitude of economic and noneconomic factors, we are seeing some changes. In our
view, amid the collapsing property sector and widespread credit fallout among property
developers, home buyers might become increasingly impatient while awaiting the delivery
of their purchased new homes. At some point next year, the issue of home delivery might
turn into a social stability issue, and Beijing may be compelled to directly address this
issue. We see this as the key to truly restoring confidence in the property sector and
economy (see China: Balance sheet damage is not the major drag, and Beijing’s fiscal
stimulus is no panacea, 11 October 2023).
Other than the potential pressure on Beijing from homebuyers, local governments,
financial institutions, as well as developers and their suppliers, there are two other drivers
that could prompt Beijing to perhaps take the step of rescuing development projects. First,
Beijing has tried a variety of measures and has mostly exhausted its existing toolbox.
Second, with the recent rapid appreciation of RMB, the PBoC may finally be able to
breathe a sigh of relief and gain some room to implement QE.
More proactive fiscal policy and limited room for conventional monetary policy
For most of 2023, fiscal policy has taken a back seat, as Beijing expected the reopening
from Covid alone would be enough to deliver decent growth. By mid-2023, when it proved
to not be the case, Beijing first relied on conventional monetary tools, followed by a batch
of property easing measures. Only from end-October did Beijing reluctantly turn to fiscal
stimulus by announcing a RMB1.0trn infrastructure program for post-flood reconstruction.
Later in mid-November, media reports began speculating that Beijing was mulling another
program to bolster the property sector by spending on urban village renovation, welfare
housing and urban infrastructure projects, with funding from the PBoC.
Looking into 2024, we expect a more proactive fiscal stance and some additional nonconventional monetary stimulus. Due to limited space for rate cuts and RRR cuts, the
PBoC may opt to further expand its balance sheet via facilities such as MLF, PSL and
33
Nomura | 2024 Global Macro Outlook
11 December 2023
relending. Our broad measure of “total government spending” may show an acceleration
to positive growth of 3.6% in 2024 from a contraction of -6.9% in 2023.
Falling land sales and a larger central government deficit
The RMB1.0trn extra CGB approved in late October suggests Beijing is becoming more
willing to leverage up the central government. As such, we expect Beijing to set the 2024
official fiscal deficit target at 3.4% of GDP, which is above the original 2023 target of 3.0%
but below the revised 3.8%. We believe only 10% of the extra RMB1.0trn in funding may
be used in 2023, 70% may be in spent in 2024 and the remaining 20% could be used in
2025. To fill the 3.4% fiscal deficit, we forecast the new CGGB quota will be raised to
RMB3.80trn in 2024 from RMB3.16trn in 2023, while the LGGB quota may remain
unchanged at RMB0.72trn due to limited space.
With a real property recovery not in sight, we expect land sales revenues to shrink further
in 2024, down 10% from 2023, compared with an estimated contraction of -21.0% in 2023
and -23.3% in 2022. Adjusting for distortions from LGFV purchases, we estimate actual
land sales revenues could dip from RMB3.2trn in 2023 to RMB2.9trn in 2024. To offset
part of the decline, the new quota for LGSB could be raised to RMB4.0trn in 2024 from
RMB3.8trn in 2023.
Total fiscal spending and the broader fiscal deficit ratio
Amid increased central government borrowing and more spending on “three major
projects” in large cities, in-budget fiscal expenditure growth could rise markedly to 7.2% yo-y in 2024 from -1.1% in 2023, after taking into account the spending of the extra
RMB1.0trn in 2024. However, contracting land sales revenues and the corresponding
drop in related expenditure could chip away at that 7.2% pace. We expect our “total fiscal
spending” measure – which is the combination of in-budget fiscal expenditure, spending
of local government special bonds and the full use of land sales revenue – to speed up to
3.6% in 2024 from -6.9% in 2023. Our “broader fiscal deficit ratio”, which includes LGSBs,
may rise to 8.6% in 2024 from 7.5% in 2023.
Little space for conventional monetary policy
This year, the PBoC delivered a 20bp cut to the 7d reverse repo rate, a 25bp cut to the 1year MLF rate, a 20bp cut to the 1-year loan prime rate (LPR), a 10bp cut to the 5-year
LPR and two 25bp RRR cuts. Banks were also guided to lower deposit rates and existing
mortgage rates.
After years of policy rate and RRR cuts, conventional policy space has become
increasingly limited. Faced with lower growth, lower inflation and limited room for policy
rate cuts, we think the PBoC is increasingly unlikely to use conventional monetary tools,
such as rate and RRR cuts, to stimulate the economy. Beijing may instead have shifted its
focus towards non-conventional monetary easing tools, including MLF, PSL and
relending. Supporting evidence include the RMB600bn in MLF net injections in November
and the widely-reported RMB1.0trn of QE for the property sector in large cities. As we
highlighted above, the eventual action to rescue the property sector might include tapping
the central government’s coffers, funded perhaps by the PBoC’s money printing, to
directly ensure the building and completion of those tens of millions of unfinished homes.
As depreciation pressures on RMB have recently faded, the PBoC may have more room
to step up money printing and expand its balance sheet.
Credit growth should remain elevated
The strong headwinds expected throughout much of 2024 may dent demand for credit,
but as Beijing steps up its policy support with funding from either markets, the PBoC or
both, growth of outstanding aggregate financing could rise from 9.3% y-o-y in October
2023 to 9.6% at end-2023 and remain elevated at around 9.5% in 2024. Growth of
outstanding RMB loans may slow modestly to 10.6% y-o-y at end-2024 from an estimated
11.0% at end-2023.
Other positives in 2024: Exports may receive some support
Despite our overall cautiousness on exports and our predicted contraction in 2024, we
see the export sector as a potential stabiliser of GDP growth, as we expect export growth
to speed up from -5.0% in 2023 to an estimated -1.5% in 2024. Exports of consumer
electronics and mobile phones may benefit from a potential global tech upswing, while low
domestic inflation and a weak RMB could help China’s export sector maintain a
competitive edge, and the “new three” sector flagship products may continue to make
34
Nomura | 2024 Global Macro Outlook
11 December 2023
positive contributions.
China’s tech exports may benefit from the global tech upswing
Our tech equity analysts believe the global semiconductor sector has moved past the
inventory correction that ran from mid-2022 to mid-2023 and expect an upswing in the
semi cycle in Q4 2023 and H1 2024. In addition to restocking demand for chips, end-use
demand for consumer electronics such as PCs and mobile phones may also pick up. The
replacement cycle for consumer electronics is usually about three to four years. The
previous upcycle was led by the pandemic-related work-from-home demand in 2020-21.
With work-from-home becoming a more permanent behaviour after the pandemic,
replacement demand for work-from-home products could be a silver lining for exports.
Contributions from the “new three” should remain positive on government support
EVs, lithium batteries and solar modules, combined as the “new three”, have bolstered
exports this year. In the first ten months of 2023, exports of the “new three” surged by
30.4% y-o-y, contributing 1.0pp to overall export growth. The combined share of their
exports increased to 4.6% from 3.4% in 2022. However, momentum has started
weakening in recent weeks. Export growth of the “new three” dropped from 163.8%,
58.1% and 10.4% y-o-y, respectively, in H1 to 47.2%, 12.6% and -22.3% in Q3 and
48.8%, 15.5% and -23.0% in October. Looking into 2024, despite geopolitical challenges,
the “new three” may still make a positive contribution to exports, due mainly to China’s
competitive prices.
We expect import growth to improve to -0.3% y-o-y in 2024 from an estimated -5.3% in 2023
on the subsiding of a high base for commodity price inflation and more processing imports.
With a narrowing goods surplus and widening services deficit, we expect the current
account balance to narrow to 1.2% of GDP in 2024 from an estimated 1.5% in 2023.
The bright side of disinflation
With average CPI and PPI inflation dropping to 0.3% and -3.1% y-o-y, respectively, so far
this year from 2.0% and 4.1% in 2022, China has been clearly experiencing disinflation,
driven mainly by weak demand, but we also see other drivers on the supply side, such as
fierce competition and relentless innovation among Chinese enterprises in their effort to
cater to households with slowing income growth and damaged wealth.
The emergence of discount online platform Pinduoduo, grocery retail chain Hotmaxx, and
the 10-yuan shop MINISO serve as examples of how companies are adapting to the
changing environment. Restaurant chains that strategically targeted low-tier cities with
affordable meal options are now expanding their market share in top-tier cities. From
burger chain Tastin to Lanzhou Noodle, those offering meal sets priced at RMB20 are
expanding their footprints in tier-1 cities. For much more sophisticated big-ticket products,
the surge of sales of EV (see China: The price war among carmakers may drag down CPI
inflation, 14 March 2023) both onshore and offshore is the latest evidence that intense
competition among Chinese entrepreneurs could increase quality.
Fig. 44: China: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (% q-o-q, sa)
Real GDP
Contributions to GDP (pp):
Final consumption
Gross capital formation
Net exports (goods & services)
CPI
Core CPI
PPI
Retail sales (nominal)
Fixed-asset investment (nominal, ytd)
Industrial production (real)
Exports (value)
Imports (value)
Trade balance (USD bn)
Current account balance (% of GDP)
Fiscal balance (narrow; % of GDP)
Fiscal balance (broad; % of GDP)
Outstanding RMB loans
Outstanding aggregate financing (AF)
Money supply M2
1-yr MLF rate (% pa)
7-day PBoC's reverse repo rate (% pa)
Reserve requirement ratio (large banks; %)
1Q23
2.3
4.5
2Q23
0.5
6.3
3Q23
1.3
4.9
4Q23
0.8
5.2
1Q24
1.6
4.0
2Q24
0.4
3.7
3Q24
1.4
4.1
4Q24
0.7
4.2
1Q25
1.3
3.9
2Q25
0.6
4.1
3Q25
1.1
3.8
4Q25
0.8
3.9
3.0
1.6
-0.1
1.3
0.8
-1.6
5.8
5.1
3.0
-1.8
-7.0
183
2.0
5.3
2.1
-1.1
0.1
0.6
-4.5
10.7
3.8
4.5
-4.8
-6.7
221
1.5
4.7
1.1
-0.8
-0.1
0.8
-3.3
4.2
3.1
4.2
-9.8
-8.6
226
1.4
-0.4
0.6
-2.8
10.3
2.9
5.0
-3.0
1.5
182
1.1
0.0
0.7
-2.4
4.8
-2.1
3.8
-2.5
1.0
157
1.5
0.5
0.8
-1.0
6.4
0.3
4.0
-2.0
-1.2
212
1.0
0.6
0.6
0.0
6.7
3.1
4.2
-1.0
-0.5
221
1.4
1.2
0.8
0.1
4.3
4.1
4.1
-0.5
-0.3
180
0.8
1.3
0.8
0.6
4.9
5.2
4.0
0.5
-0.5
164
1.2
1.2
0.8
0.4
5.2
4.9
3.8
-1.0
1.0
197
0.9
1.2
0.8
0.6
5.4
4.6
4.0
-0.5
0.5
213
0.9
1.3
0.8
0.8
5.0
4.3
4.0
0.0
0.0
180
0.9
11.8
10.0
12.7
2.75
2.00
10.75
11.3
9.0
11.3
2.65
1.90
10.75
10.9
9.0
11.3
2.50
1.80
10.50
11.0
9.6
11.1
2.50
1.80
10.50
10.6
9.5
11.1
2.50
1.80
10.50
10.8
9.5
11.0
2.50
1.80
10.50
10.8
9.6
10.8
2.50
1.80
10.50
10.6
9.5
10.6
2.50
1.80
10.50
10.6
9.4
10.6
2.50
1.80
10.50
10.5
9.4
10.4
2.50
1.80
10.50
10.5
9.4
10.4
2.50
1.80
10.50
10.5
9.4
10.4
2.50
1.80
10.50
2022
2023
2024
2025
3.0
5.2
4.0
4.0
1.0
1.5
0.5
2.0
0.9
4.1
-0.2
5.1
3.6
5.9
0.8
848
2.3
-4.8
-9.0
11.1
9.6
11.8
2.75
2.00
11.00
4.3
1.1
-0.2
0.2
0.7
-3.0
7.8
2.9
4.2
-5.0
-5.3
813
1.5
-4.5
-7.5
11.0
9.6
11.1
2.50
1.80
10.50
3.1
1.0
-0.1
0.6
0.7
-0.8
5.5
4.1
4.0
-1.5
-0.3
769
1.2
-5.6
-8.6
10.6
9.5
10.6
2.50
1.80
10.50
3.1
0.9
0.0
1.3
0.8
0.6
5.1
4.3
4.0
-0.3
0.2
754
1.0
-5.2
-8.0
10.4
9.4
10.4
2.50
1.80
10.50
Note: Numbers in bold are actual values; others are forecasts. Interest rate 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 5 December 2023.
Source: Wind, Nomura Global Economics.
35
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 7: The bumpy road to home delivery
Presales have been the predominant method of selling homes in China for the past two decades. The proportion of
presales in total new home sales (by volume) has steadily increased from 57.7% in 2005 to a peak of 89.6% in 2021,
which also marked the highest sales year (Figure 17). The rising reliance on presales over the past decade has served
as a major source of funding for developers, enabling them to expand rapidly but also posing risks to developers,
homebuyers, the financial system and the overall economy.
After peaking in 2020-21, China’s property sector experienced an unprecedented correction. The “Five Red Lines” to
tighten property financing compelled developers to slow construction and delay delivery of pre-sold homes in order to
alleviate funding constraints. This delay in delivering pre-sold homes triggered an unprecedented mortgage boycott in
July 2022, as homebuyers found themselves investing their life-time savings into unfinished projects, leading to
potential social problems.
Current progress in home delivery
Recognising the gravity of the situation, top leaders made a serious commitment to address the issue and ensure the
delivery of these unfinished homes. Since the subsequent July Politburo meeting, the central government has stepped
up to provide funding support for home deliveries. In a press release by the State Council in July this year, the PBoC
pledged a total of RMB550bn for delayed projects, with RMB350bn in special purpose loans from policy banks and
RMB200bn through a relending facility.
High expectations were held for the timely delivery of homes by the upcoming spring, marking one and a half years
since the central government's commitment to home delivery. Although headline figures showed marked year-on-year
growth of 20% in new home completions during the first nine months, up significantly from -15% in 2022, this upturn fell
short of resolving the issue. Assuming 20% volume growth in new home completions for the current year, developers
would only manage to deliver 48% of the homes pre-sold between 2015 and 2020, leaving 52% still subject to delays. A
failure to rectify this situation may result in a renewed decline in market sentiment.
Estimates of the current funding gap
No official estimates have been released regarding the actual scale of the delayed pre-sold homes. However, assuming
an average construction progress of 50% for the delayed projects, the area of unconstructed and delayed pre-sold
homes during 2015 and 2020 amounts to a staggering 2bn sqm. Considering an average floor area of 100sqm per unit,
this translates into 20 million units of unconstructed and delayed pre-sold homes. To put this into perspective, it is
equivalent to 20 times the size of Country Garden as of end-2022.
Based on the estimate of 2bn sqm of unconstructed and delayed pre-sold homes, with an assumed construction cost of
RMB3,000 per square meter, and taking into account that developers typically have 50% of the necessary funds
available, the total funding gap to complete the remaining units would be around RMB3.2trn.
It is important to note that these estimates are conservative. First, they exclude long-overdue homes that were sold
before 2015 (i.e., homes that have been delayed for more than seven years). Second, residential apartments built on
commercial land are also excluded. Third, the data used for new home completions may overestimate the number of
completed pre-sold homes, as it includes unsold inventory. Lastly, the assumed 50% of construction progress for
delayed projects may underestimate the funding gap, as more funding could be required to complete the remaining
50%, particularly due to the need for in-house decorations before delivery.
Can commercial banks come to the rescue?
Many may believe commercial banks will provide supplementary loans to fill the gap. As part of the unprecedented 16point measures, commercial banks were enlisted to extend facilitating loans to support the completion of delayed presold housing projects. However, in reality, profit-oriented commercial banks are hesitant to lend. Despite being granted
exemptions from the "lifetime responsibility for loans" policy, the inherent delinquency nature of these types of loans
translates into additional administrative work, including asset revaluation, endless internal reviews, numerous meetings
etc. Many credit department personnel may be unwilling to participate in such time-consuming home delivery projects.
36
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 8: The thrift economy in China
Chinese consumers are experiencing a consumption downgrade in the post pandemic era, as they are looking for
equally good products but with less of a price premium. Here, we present evidence of thrifty consumer behavior across
various markets, from daily beverages to dining out and grocery shopping. Consumer loyalty is dwindling, as individuals
become more price-sensitive, adopting a "whichever is cheaper" strategy.
This shift in mindset has sparked an intense price war across various consumption markets. In the coffee market,
Luckin Coffee, with over 13,255 stores and a cup priced at RMB20, has surpassed Starbucks, which owns more than
6,500 stores with a cup price of RMB30. New competitors like Cotti Coffee, a recent upstart that offers prices as low as
RMB9, further intensified the price war. A similar story is unfolding in the bubble tea market, where budget brand Mixue,
known for its RMB7 drinks, has expanded to over 20,000 stores across 300 cities, putting pressure on fancier brands
such as Heytea and Nayuki to lower their prices below RMB30.
Thanks to the fierce competition among manufacturers, retail chains and online platforms, average selling prices of nondurable goods like skin-care products, kitchen cleaners, toothbrushes and infant formula in China have all fallen during
the first quarter compared to the previous year, according to Kantar Worldpanel. The disparity between a 2% y-o-y
growth in sales value and a 13% growth in parcel shipments during the Double 11 shopping festival suggest a decline in
the average order price.
Consumer preferences are also shifting when dining out. Yum China, which owns household names like KFC and
Pizzahut, reported a decline in revenue growth to 9% y-o-y in Q3 from 16% in H1. Various restaurant chains have
witnessed a decrease in average spending per customer. For instance, Haidilao and Tai'er's overall average spending
per customer decreased from RMB105 and RMB78 last year, respectively, to RMB102 and RMB75 this year. The
industrial mass production of ready meals have further lowered the cost of meals.
In terms of tourism and outdoor activities, which were expected to rebound strongly after prolonged pandemic
restrictions, consumers are opting for less expensive and simpler ways to relax. This is reflected in the latest tourism
data: average spending per trip during the past three holidays (Labour Day, Dragon Boat Festival and National Day),
has declined from RMB615 in 2019 to RMB601 in 2023. Activities such as hiking, camping, and attending music
festivals in the suburbs have gained in popularity. Camping-related products have experienced strong growth in 2023,
as indicated by online sales data from BigOne Lab. Visiting low-tier cities, known as sinking markets, to enjoy affordable
prices and cultural experiences, has become a new trend. For example, counties like Zibo, renowned for their lowpriced BBQ, have seen a surge in the number of barbecue-related company registrations, with an increase of 800
during March to July, according to Qichacha, an enterprise credit information provider.
In terms of economic implications, the consumption downgrade in China could exert downward pressure on inflation, which
we forecast at 1.0% in 2024. Retail sales growth, which is expressed in nominal terms, could also be affected. We expect
growth of 5.5% in 2024, down from the expected 7.8% in 2023. Real volume growth could still be sustainable thanks to the
supply-side improvement from fierce competition and constant innovation among Chinese firms.
37
Nomura | 2024 Global Macro Outlook
11 December 2023
Euro area: A harmless recession
Research Analysts
Surveys may have overstated the expected economic downturn during 2022 and 2023,
but nonetheless, official activity data appear to be finally turning too. We forecast a very
benign, almost harmless one could say, recession, lasting three quarters from Q3 2023,
lopping 0.5% off GDP. Inflation is declining sharply from its peak, more sharply than we
had expected, though the evolution of services inflation will be greatly dependent on
wage pressures. The euro area’s labour market remains strong, with employment growth
still positive, unemployment still at a historical lows, and hours worked not falling by as
much as typical during a downturn. We believe the ECB is done with its hiking cycle, but
we expect ECBspeak to lean against aggressive market pricing for near-term rate cuts. In
our view, the ECB is likely to begin its cutting cycle only in June 2024 and cut by 125bp,
bringing rates back down to the upper end of where we estimate neutral to be. Moreover,
we expect the ECB to begin tapering PEPP portfolio redemptions from April 2024, and we
expect the ECB’s operational framework to be announced at end-Q2 2024, albeit we see
risks of it being delayed yet again. Fiscal policy, meanwhile, looks to be less
accommodative in 2024 than it has been in the years since the pandemic.
George Buckley - NIplc
European Economics
george.buckley@nomura.com
+44 (0) 20 710 21800
Andrzej Szczepaniak - NIplc
andrzej.szczepaniak@nomura.com
+442071023167
George Moran - NIplc
george.moran@nomura.com
+442071023320
The growth outlook – weak, but not collapsing
Our growth expectations for the euro area in 2024 can best be described as weak, but not
collapsing. We expect a mild three-quarter recession spanning late 2023 and early 2024.
Economic growth has already been marginally weak in Q3 2023 (-0.1% q-o-q), and we
forecast it to also print negative in Q4 2023 (-0.3%) and Q1 2024 (-0.1%). After this we
see a very gradual ascent back to trend growth, which we estimate to be around 0.3% qo-q, and which we think will only be achieved by the start of 2025.
Surveys gave a confusing signal at the end of 2022, falling sharply, while hard data (GDP,
industrial production, retail sales etc.) proved to be more resilient than these surveys
implied. 2023 saw many surveys, notably the Sentix and ZEW, remain particularly weak.
Indeed, they have remained firmly in the recession quadrant of the euro area business
cycle clock since mid-2022. Some official data have begun to turn negative, notably
industrial output, construction, and retail sales, and so there appears to have been some
convergence between hard and soft data (Figure 45).
Fig. 45: Soft and hard data both currently look weak
Note: Soft and hard data indices are calculated by taking a z-score of the individual
components and subsequently computing the average. Soft data is ZEW Current
Conditions, Sentix headline index, PMI composite output index, EC consumer
confidence, and EC economic sentiment. Hard data is GDP, retail sales, and industrial
output.
Source: Sentix, ZEW, Eurostat, S&P Global, Haver, Nomura
Fig. 46: Real wage growth is finally back
Note: Numbers for Q4 2023 onwards are forecasts not realised values. For wages in
the US we use the Employment Cost Index, in the UK we use average weekly earnings
and in the euro area we use compensation per employee.
Source: Macrobond, ONS, Eurostat, BLS, Nomura
That said, we remain cautious about reading too much into the relationship between
survey data and official data; notably, the PMI data suggest output should be rather
weaker than it is. We have frequently commented that subsequent to a shock, there is an
increase in the volatility of survey data, resulting in a spike in the noise-to-signal ratio
38
Nomura | 2024 Global Macro Outlook
11 December 2023
between surveys and official data. Indeed, the ECB Governing Council commented in its
October 2023 meeting minutes that the signal from the PMI specifically “might have lost
some predictive power”. Ultimately, survey data seem to be overstating any impending
economic downturn, but taking stock of both survey data and official data, these broadly
support our mild recession view.
GDP decomposition by country: Among the euro area big four economies, we see the
largest fall in output coming from Germany, with a total decline of 0.6pp across three
quarters (beginning in Q3 2023). Germany has large manufacturing and construction
sectors, which are more capital intensive and are therefore more sensitive to interest rate
changes. It is also still vulnerable after the energy price shock in 2022 and as retail gas
and electricity prices remain elevated. We see the shallowest recession occurring in
Spain, with just two quarters of -0.1% q-o-q growth (beginning in Q4 2023).
GDP decomposition by expenditure category: In our view, the recession is first and
foremost an investment recession, with weakness also seen in household consumption.
Typically, business-cycle fluctuations in investment are larger than those for consumption.
This makes sense; it is easier for a firm to cut back on spending than it is for a consumer.
We see exports and imports falling in tandem, thereby making a null contribution to
growth.
What are likely the main drivers of growth in 2024? What factors could limit or amplify the
scale of the expected downturn?
• The return of real wage growth: For the first time since 2021, the euro area should
see positive real wage growth. According to our forecasts, it should peak at 2.4% y-oy in Q2 2024, mostly due to falling inflation, with compensation per employee growth
slowing only marginally. This should provide some support to embattled consumers
that have been suffering from a cost-of-living squeeze.
Fig. 47: A lot of monetary transmission is still in the pipeline
Fig. 48: Could excess savings be limiting the downturn?
Source: Eurostat, Statistics Sweden, Statistics Norway, BoE, BEA, Macrobond, Nomura
Source: Eurostat, ONS, BEA, Haver, Nomura
• The looming monetary policy lags: Working against consumers and firms is the
likely pass-through of more monetary policy tightening. We have recently written
about the risks that the euro area has likely not felt much of the effects of the ECB's
monetary tightening yet, and that lags may be as long as two years until any marked
impact is felt (see “If it isn’t hurting, it isn’t working” , 1 August 2023). Countering this,
some ECB Governing Council members have suggested monetary policy is now less
potent than previously due to structural changes in the economy or the presence still
of unconventional monetary policy tools. Financial conditions have clearly
tightened, and lending to both households and firms has taken a material hit, but it is
less clear when the transmission to the real economy will occur.
• Excess savings: Different measures give different conclusions but on balance we
think the depletion of excess savings will be a headwind for growth in 2024 relative to
2023. In Figure 48, we look just at the currency and deposit data in the financial
accounts to conclude that “excess deposits” have now disappeared. This is different
39
Nomura | 2024 Global Macro Outlook
11 December 2023
to the conclusion reached when looking at savings rates but we think financial
account data is a “cleaner” measure to use.
The euro area’s labour market continues to be resilient. As of October 2023, the
unemployment rate remains at its historical low of 6.5%. We expect the unemployment
rate to rise, but only by 0.5pp from its current level, to 7.0% in Q4. This relatively benign
rise stems from the structure of the euro area’s labour markets; by and large, they are
quite inflexible due to the large-scale existence of job retention schemes. These job
retention schemes mean that unemployment in the euro area is more inelastic to changes
in activity or in response to economic downturns versus in the US or UK. Moreover, still
high vacancies suggest that unemployment could prove even less sensitive this time
around. Moreover, employment growth is still positive, and hours worked have not
declined by as much as is typical during a downturn.
Box 9: Euro area housing – defying gravity
House prices in general are remarkably resilient in the face of the most aggressive hiking cycle in the ECB’s history. In
the euro area as a whole, the house price index was up by 0.5% between Q1 2022 and Q2 2023 (Figure 49). This
masks significant heterogeneity across regions. Germany, for example, has seen a sharp fall in house prices (-8%) and
building permits (-38%) across this period, while Spain and Portugal have both seen these indicators rise strongly. This
trend seems to have little relationship with the structure of the mortgage markets because Germany has much more
fixed rate mortgages than Spain and a lower share of the German population has a mortgage.
What is probably propping up some of these countries’ housing markets is foreign demand. You’ll notice a lot of these
“booming” property markets are in popular holiday destinations such as Spain, Portugal and Croatia. We think the
strong recovery in tourism after the pandemic may be supporting demand both from new buyers and stopping existing
buyers from selling who are seeing higher demand for holiday rentals. These markets are also the areas where supply
has been the most constrained in recent years. Generally, the periphery countries suffered a much sharper downturn in
the Global Financial Crisis and for the last 15 years construction has been far below pre-GFC levels. Constrained
supply should be supporting prices and therefore permits at present.
Fig. 49: There’s significant house price heterogeneity
Fig. 50: Building activity is down especially in core
regions
Source: Eurostat, Haver Analytics, Nomura
Source: FRB, BLS, Haver Analytics, Nomura
Inflation – Getting back to target
Getting back to target
Headline HICP inflation in the euro area peaked in October 2022 at 10.6%, and printed at
2.4% in November 2023. Core HICP inflation, meanwhile, peaked at 5.7% in March 2023,
and in November 2023 printed at 3.6%. Moreover, inflation data since the September print
have continued to surprise to the downside for both headline and core inflation. As a
result, it is clear that the disinflation process in the euro area is underway in earnest, and
maybe proving stronger than we had expected.
We expect headline HICP inflation to reach 2.1% by January 2024 and fall meaningfully
over 2024, finally printing at 1.5% in December 2024. Meanwhile, we believe euro area
40
Nomura | 2024 Global Macro Outlook
11 December 2023
core HICP inflation is set to continue its descent and reach 2.6% by January 2024, dip
below 2% briefly during July and August, before rebounding and hovering around 2.3%
until end-2024. We expect core HICP inflation to continue to slow thereafter, albeit much
more slowly, and reach the ECB’s 2% inflation target in a consistent manner by
September 2025.
Fig. 51: Nomura’s inflation forecast
Fig. 52: Wage growth likely to remain resilient near-term
Source: Eurostat, Haver Analytics, Nomura
Source: ECB, Indeed, Nomura
The disinflation process in core inflation appears to be broad-based across core goods
and services. The slowing in underlying inflationary pressures within core goods has been
felt for some time now; indeed, core goods prices have been deflationary on a month-onmonth seasonally-adjusted basis since September 2023. Services inflation, meanwhile,
has appeared to be more persistent; it averaged 0.45% m-o-m SA during Q1 2023,
slowing to an average of 0.38% in Q2, and finally an average of 0.30% in Q3. In October
2023, it then printed at 0.31% m-o-m SA, before declining markedly to -0.10% in
November 2023. In our view, part of this particular weakness was likely driven by volatile
components (such as package holidays or airfares). However, where country-level data
are available, it appears to suggest a robust, broad-based slowing in services inflation.
Some ECBspeak has recently shifted focus to “domestic inflation” and “domestic inflation
cleaned of the overhang from the pandemic and gas shocks”. In our view, domestic
inflation should be read as services inflation, which tends to reflect the domestic economy
and is less responsive to exchange rate movements (and thus imported inflation).
Moreover, the ECB’s recent shift in its focus to labour market dynamics and wage growth
pressures is directly linked to the services sector, which tends to be more labourintensive, and therefore firms’ decisions regarding price increases are more likely to be
intrinsically linked to wage growth pressures.
ECBspeak during Q4 2023 has suggested that the labour market, and in particular, wage
growth, will be pivotal for the medium-term euro area inflation outlook. Joachim Nagel
highlighted the risk that European wage growth may continue to accelerate as workers,
understandably so in his view, demand to be recuperated for lost real incomes during the
pandemic and Russian gas crisis (source: Bloomberg). Philip Lane, too, has discussed
the importance of wage growth for gauging the medium-term outlook for wage-driven
inflationary pressures, notably within the services sector, and has argued we will
eventually need to wait until January and February 2024, when most new wage
negotiations occur.
In Q1 2023, negotiated wage growth accelerated by some 120bp to 4.4% y-o-y, which is
the second fastest pace of change in the annual rate since the creation of the euro area.
Negotiated wage growth then printed again at 4.4% in Q2 2023 against expectations of an
acceleration, before rising to 4.7% in Q3 2023. Moreover, the latest ECB analysis
suggests that new contracts signed in Q3 2023 had on average 6% wage increases
compared with just over 5% previously, which ultimately will feed into negotiated wage
data for Q4 2023 and Q1 2024.
41
Nomura | 2024 Global Macro Outlook
11 December 2023
That said, the Indeed Wage Tracker , with a three-quarter lead, suggests that wage
pressures appear to be easing. However, this would only indicate negotiated wage
increases of less than 4% in Q3 2024. Additionally, some wage agreements are
negotiated for a period of two years; where this is the case, wage agreements for 2024
exhibit lower wage growth than agreements for 2023, further underscoring that wage
growth should slow during 2024.
However, this would still be elevated versus what we estimate as consistent with a 2%
medium-term inflation target (see Wage growth: How much is enough? ), and further
underscores our view that the ECB won’t begin cutting rates until June 2024, much later
than markets price. There are risks of an earlier cut, however; indeed, if the eventual
wage agreements are much weaker during the January/February negotiations, this could
give the ECB the confidence it needs to cut earlier.
Risks to headline – balanced, but ever present
• Market fixings for HICPxt, at the time of writing, are firmly above our headline
HICP forecast profile during 2024. However, they have continued to edge closer to
what we forecast, suggesting risks to our euro area headline HICP inflation forecast
profile are finely balanced.
• Crude oil prices have been steadily declining since end-September, which, if
sustained, could mean continued weakness in forecourt pump prices in the months
ahead.
• lf energy companies have more pricing power post-Covid, retail electricity and
gas prices may not come down as much as implied by wholesale prices, which
have fallen sharply from their peaks in 2022. Moreover, should Europe face a
particularly cold winter, we could see natural gas prices rise further.
Risks to core – potentially more material, and probably more likely
• Services inflation may be stronger than we forecast as a result of Europe’s tight
labour market (while the unemployment rate tends to be unresponsive due to job
retention schemes, hours worked have not declined by as much as usual during
economic downturns), still-strong wage growth, and firms continuing to cite an inability
to hire workers as keeping price pressures elevated.
• Core goods inflation has been weaker than usual of late, potentially stemming from
euro strength from September 2022 to July 2023, and this could mean more
weakness in core goods prices than we assume in coming months.
Monetary policy – Shifting the narrative from hikes to cuts
The next move is likely lower
The ECB began raising rates at the most aggressive pace in its history in July 2022. This
resulted in its deposit facility rate being brought from -0.5% to a historical high of 4% in
September 2023. Now, however, we think the ECB is done and dusted on rates.
This is because: (i) activity data are softening, whether you consider surveys, which
suggest an impending material recession, or soggy official data, indicating just a slowing
or potential rolling sectoral recession; (ii) both headline and core inflation have fallen
markedly since their respective peaks, and underlying momentum in core inflation, which
is at present the ECB’s main focus, is slowing; and finally (iii) guidance from the ECB
suggests no more hikes are forthcoming and ultimately the Governing Council, on the
whole, appears comfortable with rates at current levels.
But when is the ECB likely to begin its cutting cycle? In our view, markets have got a bit
ahead of themselves, and we believe market pricing at the moment is overly aggressive in
both the magnitude of cuts priced in for 2024 and 2025, as well as the timing of when
markets think the ECB is likely to begin its cutting cycle. (see ECB: Markets are
underpricing the risk of more hikes , 17 November 2023, and ECB: No declaration of
victory (yet) , 5 December 2023.)
In our view, the ECB is likely to begin cutting only in June 2024. This is because: (i) the
most dovish of ECBspeak continues to lean against market pricing for near-term rate cuts;
(ii) core inflation, while underlying momentum is slowing, remains elevated versus what
the ECB wants to see; and (iii) activity data outturns are printing more resilient than what
surveys would otherwise suggest, even if official data are beginning to turn as
well. Ultimately, all of this means that there is little impetus for the ECB to pivot dovishly
and begin cutting as quickly as markets currently price.
42
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 10: Commodity prices and ECB inflation forecasts
As highlighted, crude oil and natural gas prices can materially affect inflation and therefore inflation forecasts as well. It
was noted in the ECB September meeting minutes that “a mechanical update to the projections to include the higher oil
prices and weaker euro observed since the cut-off date suggested that headline inflation would no longer fall below the
ECB’s target by the end of the horizon”.
The cut-off date for the September macroeconomic projections was 22 August 2023, whereas by the time of the
September meeting, crude oil prices had risen by around 13%. But nonetheless, this, and moves in natural gas prices
and the exchange rate, would have pushed out the time by which headline HICP inflation fell below 2% from Q4 2025
to mid-2026.
Hence, these moves can be particularly important for central banks. Moreover, as we saw clearly from the UkraineRussia conflict and subsequent gas crisis, moves in commodity prices can have material spillovers on core inflation
and also affect headline inflation through the energy component directly.
So, how could changes in crude oil and natural gas prices affect the ECB’s macroeconomic projections for inflation?
While not necessarily the exact estimates that the ECB uses in its models, these come from various ECB analyses,
and are likely similar to those used in the ECB staff forecasts. The estimate for crude oil is taken from "Indirect effects
of oil price developments on euro area inflation ", ECB Monthly Bulletin, December 2014, whereas the estimate for
natural gas is taken from "Energy price developments in and out of the COVID-19 pandemic – from commodity prices
to consumer prices ", ECB Economic Bulletin, June 2022.
Crude oil
• A 10% change in oil prices was estimated to lead to a 0.4 percentage point impact via direct effects on the energy
component – most of which would happen relatively quickly – and an approximate 0.2 percentage point impact via
other HICP components over a period of up to three years .
Natural gas
• On average about 10-12% of the increase in natural gas prices is passed on to consumer gas prices in the euro
area after one year .
Fig. 53: Crude oil and natural gas prices can be volatile
Fig. 54: Crude oil prices drive liquid fuels HICP
Source: Bloomberg, Nomura
Source: ECB, Eurostat, Nomura
The risks to this view are likely skewed towards earlier cuts. First, inflation has printed
weaker than forecast over the last three prints. Indeed, market participants continuously
underestimated inflation as it was rising, and as a result there is the risk we could be
doing the same (in reverse) on the way down. Second, while we expect wage negotiations
to prove strong in January/February 2024, they may eventually not. Indeed, if inflation
continues to print weaker than expected, and the January/February 2024 wage
negotiations result in weak wage growth, these two factors may encourage the ECB to
begin cutting earlier, in say April, or March even.
That said, we think market pricing for cuts may strengthen in the near-term, as activity
surveys continue to show broad-based weakness (even if they are beginning to tick up,
43
Nomura | 2024 Global Macro Outlook
11 December 2023
they nonetheless remain firmly in contractionary territory), and inflation data in Europe
continue to print weaker than forecast. Indeed, we struggle to see a material catalyst for
the front-end to sell off between now and end-2023. However, widely expected strength in
forward-looking annual wage negotiations should ultimately begin to push expectations for
the ECB to begin its cutting cycle further out, from the beginning of 2024 to more in-line
with our view of June 2024.
The rationale for cutting rates is that the ECB will eventually want to bring rates down from
restrictive to neutral. As a result, we see the ECB cutting by 25bp at each meeting from
June 2024 until the depo rate reaches 2.75% (at that pace, it would get there by the end
of 2024). We estimate that neutral by then will be in the range of 2.25 – 2.75%, and we
believe the ECB will likely want to keep rates at the higher end of this range as structural
factors may see inflationary pressures more pronounced versus pre-pandemic.
Fig. 55: Nomura’s ECB view
Tool
Fig. 56: The ECB’s APP portfolio is shrinking very gradually
Key assumptions
ECB Deposit Rate
2023
No further change
2024
25bp cuts in Jun, Jul, Sep, Oct, Dec
Peak
4.00% (Sep 2023)
Trough
2.75% (Dec 2024)
APP balance sheet - passive roll off
Full roll-off since 1 July 2023
PEPP balance sheet - passive roll off
Likely from April 2024
Source: ECB, Nomura
Source: ECB, Nomura
Will the ECB pivot?
Our view on rate cuts might best be described as utopian. We expect a soft landing, for
inflation to slow in a timely manner, and for the ECB to be able to begin its cutting cycle in
a nice and well predictable manner. The reality is that when central banks are forced to
cut, they tend to do so at a more rapid pace than just 25bp per meeting and do so in
response to sharply weakening economic output. While it is important to caution that no
two cutting cycles are alike, in previous cutting cycles that coincided with a pronounced
recession, the ECB typically cut rates at a pace of 50bp or more per meeting. Ultimately, a
cutting cycle related to “job well done” on inflation might not need to be as urgent as one
related to a collapse in output.
This raises the question: What conditions are necessary for forcing a further hike or for
forcing a more aggressive easing cycle? Essentially, it comes down to an unforeseen
global shock, where every major central bank is likely to begin cutting, or it boils down to
the euro area recession being far more pronounced than our bottom-of-consensus
forecast for 2024 suggests and the realisation of a severe hard landing, which the ECB
simply cannot ignore.
Beyond rates
Aside from interest rates, the ECB is also gradually reducing the size of its balance sheet
and conducting “quantitative tightening”. It is, at present, doing this with the APP portfolio
by allowing full roll-off of redemptions. As for the PEPP portfolio, it continues to reinvest
redemptions fully, and continues to give itself the flexibility to deviate from the capital key
should it choose to in order to contain fragmentation risk.
If the ECB were to consider an acceleration of quantitative tightening, it then essentially
would have two options available: (1) it could begin active sales of the APP portfolio; or
(2) it could end reinvestments in the PEPP portfolio.
A priori , the focus for a number of the ECB Governing Council members is to end PEPP
portfolio redemption reinvestments prior to the current guidance, which says these will
44
Nomura | 2024 Global Macro Outlook
11 December 2023
continue until at least end-December 2024.
The (negative) trade-offs are quite clear between the two:
• Active sales of the APP portfolio result in crystallising realised losses and affect the
profit & loss of the ECB and various national central banks (NCBs), with the risk that
some NCBs may need to be recapitalised.
• Ending PEPP tapering early means the ECB loses its first (and maybe only) line of
defence against fragmentation risk. While some argue the ECB could rely on the TPI
should it be necessary, we remain of the view that the TPI still does not exist as an
implementable tool, with the ECB instead hoping it would be akin to Mario Draghi’s
“whatever it takes” moment (see Will the ECB ever fire its TPI bazooka? , 31 January
2023).
Allowing PEPP portfolio redemptions to roll off makes sense as the ECB is trying to
tighten the monetary policy stance, and all other tools are trying to do that, whereas at the
moment, the PEPP is essentially working in the opposite direction. However, in our view,
timing will be key. Importantly, the ECB will likely want to declare victory on inflation and
to be clear to markets that rates won’t rise further, before making an announcement on
ending PEPP portfolio redemption reinvestments. This, in our view, will likely lead to a
more subdued market reaction versus the ECB announcing the end of PEPP reinvestments
and its primary defence against fragmentation risk, while there remains the risk of raising
rates further.
Thus, in our view, an announcement on PEPP tapering is most likely at the March 2024
meeting, with tapering to commence in April 2024, as we believe the ECB is likely to only
declare victory on inflation in March 2024 alongside its new macroeconomic projections.
We’ve assumed that PEPP portfolio redemptions will equal approximately €16bn per
month, i.e., around their recent monthly average reinvestments, which is around half to
two-thirds that of APP portfolio redemptions.
Given the lack of ECBspeak on active sales of APP, and even the fact that some ECB
Governing Council members that were previously in favour of APP active sales no longer
seem to favour them (Simkus, for example), we no longer believe active sales of APP
appear likely in the near term.
For what it’s worth, the latest Bloomberg ECB survey conducted in October 2023
suggests 57% of economists (20 out of 35 respondents) do not expect the ECB to bring
forward the end date for PEPP portfolio redemption reinvestments. This is marginally
down from the September 2023 survey (where 61%, or 17 out of 28 respondents, did not
expect the date to be brought forward).
This in part is likely because 67% of respondents (24 out of 36) expect the ECB to use
PEPP flexibility within the next 12 months in response to the recent BTP-Bund spread
widening. However, it is worth noting that Visco said (13 October, source: Bloomberg) that
there are no signs that Italian spreads will reach levels whereby the ECB needs to act
(although this could have been in reference to enacting the TPI as opposed to using
PEPP flexible reinvestments).
As for active sales of the APP portfolio, 65% (24 out of 37 respondents) did not expect the
ECB to embark on this venture “at some point in the future”, marginally above the
percentage of respondents in September (57%, or 16 out of 28 respondents).
Moreover, the ECB is widely expected to announce the results of its operational
framework strategy review in Q2 2024, which is already delayed from December 2023,
with risks of further delay (see Box 11: ECB operational framework review and other
measures ). This is widely expected to include a number of details (including whether the
ECB opts for a floor or corridor system), which could ultimately determine the eventual
necessary size of the ECB’s balance sheet. Hence, waiting until after this could be
prudent in determining whether and how quickly the ECB further shrinks its balance sheet
via ending PEPP redemption reinvestments. That said, we don’t view the two as
intrinsically linked, in part because the redemption profile of the PEPP is small, meaning
any expected impact on the size of the balance sheet will be very gradual.
45
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 11: ECB operational framework review and other measures
The ECB is currently undertaking a strategy review of the way the ECB conducts monetary policy, delayed until “spring
2024”, which could well slip to mid-year. This will include whether it should continue to use a floor system, whereby
excess liquidity delivered by unconventional monetary policy pushes short rates to the lowest of the ECB’s interest rate
range (the deposit rate), or return to the previous corridor system. An intrinsically related question is the optimal size of
the ECB's balance sheet, as it is essentially impossible to operate a corridor system with excess liquidity (Figure 57).
A number of Governing Council members have spoken recently on the topic. Isabel Schnabel (Reuters interview) said
that as a result of autonomous factors the ECB’s “balance sheet is going to be around three times as large as before
the global financial crisis”. Philip Lane (ECB Conference on Money Markets) has said that “even if much lower than the
current level, the appropriate level of central bank reserves should avoid the risks associated with excessively-scarce
or excessively-abundant reserves”. And Joachim Nagel (Frankfurt Euro Finance Summit) argued “the central bank
balance sheet should be run down to a much lower, reasonable level within an acceptable timeframe”.
On the topic of floor vs. corridor, Nagel (European Economics and Financial Centre speech) appeared to prefer a
supply-driven corridor, albeit conceding that with the current size of the balance sheet and excess liquidity, the ECB is
very far from the conditions for such a framework. Ms Schnabel (Reuters interview) noted that “whatever framework we
choose, money market rates will initially remain close to the floor [as a result of the current situation of excess
liquidity]”. But she appears to be in favour of a demand-driven floor, largely because “this would mean the size would
not be determined by us, which is a good thing, because we don’t know precisely what the demand is”.
Based on abundant excess liquidity and Governing Council members expecting the balance sheet to be larger than
pre-financial crisis, we see a floor system (either demand or supply driven) as most likely to prevail.
Fig. 57: The ECB has conducted monetary policy using a de facto floor since the global financial crisis
Source: ECB, Bloomberg, Nomura
In addition, the ECB Governing Council is mulling other measures linked to the ECB’s operational framework review.
• Minimum Required Reserves: At present, this is set at 1%; however, there is an increasing expectation the ECB
could raise this to 2% or higher (Reuters suggested 4% in an ECB-sourced article). That would automatically – by
accounting purposes alone – reduce excess liquidity. How could raising the MRR affect monetary policy? The
MRR is not a policy tool. However, as banks receive 0% on required reserves but are remunerated for excess
reserves, banks lose out and have tighter profit margins as a consequence. Thus we would expect banks to be keen
to recoup this lost source of revenue elsewhere. They could do so by raising lending rates, reducing deposit rates, or
some combination of the two, to support net interest margins. Consequently, having a higher MRR could eventually
amplify the monetary policy transmission mechanism during hiking cycles and weaken it during easing cycles.
• Remuneration on government deposits: As of 1 May 2023, the ECB introduced a ceiling on the remuneration of
government deposits equal to the euro short-term rate (€STR) minus 20bp. This aimed to provide incentives for a
gradual and orderly reduction of such deposits held with the Eurosystem, in order to minimise the risk of adverse
effects on market functioning, and ensure the smooth transmission of monetary policy. Subsequently, in August
2023, the Bundesbank reduced the remuneration of domestic government deposits to 0%. Markets began to
question whether other NCBs would do the same. In our view, the decision by the Bundesbank was
uncontroversial; domestic government deposits had already declined to pre-pandemic levels, when remuneration
was also 0%. We see it as unlikely that other NCBs, or even the ECB, will follow suit quickly.
46
Nomura | 2024 Global Macro Outlook
11 December 2023
Fiscal policy – Less accommodative than before
2024 looks to be a year when fiscal policy could be less accommodative than it has been
in the years since 2020, but with only a gradual return to normalcy. The European
Commission forecasts that most major euro area economies will shrink their fiscal deficits,
although in general not enough to make much progress on the road to fiscal balance. This
will likely attract scrutiny from the European Commission, which is planning to
reimplement fiscal rules. The current form of these rules is yet to be finalised, with the
previous incarnation having been suspended until end-2023 (albeit we expect a further
suspension in 2024 until the expected new rules are finalised). For certain countries, this
will act as a constraint on their spending capabilities.
The European Commission has identified eight countries that are at risk of having
excessive deficit procedures brought against them (Belgium, Spain, France, Italy, Latvia,
Malta, Slovenia and Slovakia). These new fiscal rules probably won’t affect the current
draft 2024 budgets, but are likely to affect the planning for the 2025 budgets. Regardless,
generally there is increasing pressure from institutions like the ECB and national
politicians to see more fiscal discipline.
Box 12: German Court ruling sets up fiscal battle for 2024
On 15 November, the German Constitutional Court ruled that it was no longer lawful for the ruling coalition to use offbudget special-purpose funds to bypass the debt brake. Set in 2009, the debt brake caps annual deficit spending to
0.35%. This court ruling throws a country that has a genuinely strong fiscal position relative to its peers into a situation
where it is scrapping to find fiscal savings. The near-term solution has been to suspend the debt brake for another year
in 2023 but the outlook for 2024 remains uncertain. There are a few options available to the coalition government:
1. Suspend the debt brake into 2024: Normally this can only happen if the government has declared an emergency. It
is less clear what this emergency would be in 2024, excluding the risk of a deeper recession. An emergency is
defined as “situations beyond governmental control and substantially harmful to the state’s financial capacity”
(source: DW news). To suspend the debt brake in the event of an emergency requires a simply majority (although
this can lead to legal challenges). To make a permanent change to the debt brake requires a two-thirds majority,
which is very challenging to get while the CDU/CSU and AfD control over a third of the seats in the Bundestag,
especially as it was the CDU/CSU that initiated the original court challenge.
2. Cut public spending and raise taxes: If the debt brake stays in place, the Finance Minister Lindner has suggested a
€17bn adjustment to the 2024 budget will be required. He is known as a fiscal hawk and recent comments suggest
this option is likely. He said that “[the debt brake] must be respected and new detours must not be sought” (source:
Reuters). But on the left of the coalition there will likely be concern about spending cuts particularly relating to
investment and green spending. Germany already spends a lower percentage of GDP on government investment
relative to most OECD countries (source: OECD).
3. Legalise a new special-purpose fund: This would function in a similar way to suspending the debt ceiling but falls
into the same problems. It requires a two-thirds majority in both legislative houses which would be very challenging.
In each of these scenarios we see tighter spending plans in 2024 relative to before this court ruling. It seems unlikely
that the German government could pass option (1) or (3) with the current layout of Parliament, so fiscal tightening is the
most likely. Finance Minister Lindner’s steadfast support for the debt brake suggests option (2) is the most likely. This
will involve filling a €17bn gap in the 2024 budget, which will probably have to mostly be funded by spending cuts.
For most countries, it’s not an issue of fiscal space. In general, debt is well-structured,
meaning that in the near-term the effects of higher interest rates and additional borrowing
can be managed well (see Euro area sovereign debt crisis: This time is different ). During
the era of super low interest rates, many governments wisely locked in low rates for
longer periods. The average residual maturity of debt is now 8.1 years (up from 6.4 years
at the start of 2010). That debt (except Italy) generally does not have a floating rate
component and is mostly financed with the euro.
47
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 58: Italy, France, and Spain have more front-loaded debt
Fig. 59: Euro governments not facing an interest squeeze yet
Note: The diamonds refers to the period 2054+. Calculated as a three year centred
moving average.
Source: Bloomberg, Nomura
Source: OECD, Macrobond, Nomura
All of this means that in general interest payments as a percentage of GDP are not due to
rise especially sharply, so this will not be a strict constraint on fiscal policy in 2024.
However, beyond this point in the medium-term, with inflation falling and interest rates on
outstanding debt rising, some countries – such as Italy – will need to run a primary surplus
if they want to see debt falling sustainably. The ECB's quantitative tightening likely does
not help the situation because the ECB has turned from being an important net buyer of
government bonds to a net seller. The impact on yields, however, remains to be seen;
BoE analysis, for example, suggests its quantitative tightening programme, which includes
active sales of gilts, has resulted in less than a 10bp increase (“Quantitative tightening:
the story so far ”, 19 July 2023, delivered at the Bank of England).
Box 13: European Parliament elections, and a lurch to the right
Spain held a general election in July 2023, where right-wing eurosceptic party Vox was polling 15% in the run-up,
despite only eventually obtaining 12% of the vote and losing seats. In the Netherlands, the right-wing eurosceptic
party Farmer–Citizen Movement surprised pundits and won the most seats in the May 2023 senate election.
Subsequently, the far-right and eurosceptic Party for Freedom gained the most seats in the November 2023 Dutch
general election. In Germany, the far-right and eurosceptic political party AfD is polling around 20% in opinion polls
(source: Politico), with the party making a number of advances in German state elections; in the October 2023 Bavaria
state election, for example, the AfD gained 10 seats (rising to 32 out of 203, putting it third in terms of seat numbers)
and increased its vote share by 4.4% (to 14.6%).
The 2024 European Parliament election will be held on 6 to 9 June, and clearly there are concerns about the lurch to
the right and increasing popularity of right-wing eurosceptic political parties. Moreover, it is believed that often voters
may eventually shy away from voting for populist/extreme parties in national elections, but are potentially more willing to
do so in European Parliament elections because they see them as less important. In the 2019 European Parliament
election, right-wing to far right-wing eurosceptic political parties made up 18.2% of the popular vote and 19% of seats
(when cumulating for the groupings ID [far-right eurosceptic] and ECR [centre-right eurosceptic]). What if the 2024
European Parliament election results in right-wing to far right-wing eurosceptic political parties obtaining, say, 25% of
seats? Well, this may not be so implausible eventually; the latest opinion polling suggests these parties should win 23 –
25% of seats in the 2024 European Parliament elections.
What are the implications of such a “lurch to the right”? Much of the legislation in the European Union, proposed by the
European Commission, requires the active participation of the European Parliament (“co-decision” legislation) or
approval ("consent legislation”). In essence, further integration (such as the common banking backstop, capital markets
union, fiscal union, etc.) could prove more challenging and be put on the back burner, especially as a result of there
being much disagreement already among europhile parties. This also likely makes the agreement and adoption of new
EU fiscal rules, which have been suspended in response to the pandemic, more challenging.
48
Nomura | 2024 Global Macro Outlook
11 December 2023
Another element in the fiscal equation is the roll-out of the Next Generation EU (NGEU)
funds. These measures could be a substantial stimulus for some euro area economies;
Italy, for example, is likely to receive the lion's share of payments, which includes grants
and loans. Payments commenced in August 2021, and so far, 25% of the total amount
expected has been disbursed – a further 19% is widely expected in 2024 (source: ECB).
These funds, however, will not necessarily be as major as they may look at first glance.
First, the loan component has not been fully taken up, with 25% of funds left unclaimed.
Second, several member states appear to be struggling to meet the conditions for the
disbursement of the funds. Third, there could be crowding out effects as NGEU funds may
replace spending that would have happened anyway.
Fig. 60: Euro area: Details of the forecast
Quarterly forecasts
3Q23
4Q23
1Q24
2Q24
3Q24
4Q24
1Q25
2Q25
3Q25
4Q25
2022
2023
2024
2025
Real GDP (% q-o-q)
Real GDP level: 2019 Q4=100
Household consumption
Fixed investment
Government consumption
Exports
Imports
-0.1
103.0
0.3
0.0
0.3
-1.1
-1.2
-0.3
102.7
-0.1
-1.5
0.4
-0.8
-0.8
-0.1
102.6
-0.1
-0.8
0.4
-0.5
-0.5
0.0
102.6
0.0
-0.5
0.4
-0.2
-0.2
0.1
102.7
0.1
0.0
0.4
0.0
0.0
0.2
102.9
0.1
0.3
0.4
0.2
0.2
0.3
103.2
0.2
0.5
0.3
0.4
0.4
0.3
103.5
0.3
0.5
0.3
0.4
0.4
0.3
103.9
0.3
0.5
0.3
0.4
0.4
0.3
104.3
0.3
0.5
0.3
0.4
0.4
3.4
102.5
4.2
2.8
1.6
7.4
8.0
0.4
102.9
0.5
0.4
0.2
-1.0
-1.6
-0.3
102.7
0.1
-2.2
1.5
-2.0
-1.8
1.0
103.7
0.8
1.4
1.4
1.1
1.1
Contributions to GDP:
Domestic final sales
Inventories
Net trade
0.2
-0.3
0.0
-0.3
0.0
0.0
-0.1
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0
0.2
0.0
0.0
0.3
0.0
0.0
0.3
0.0
0.0
0.3
0.0
0.0
0.3
0.0
0.0
3.1
0.3
0.0
0.4
-0.2
0.2
-0.1
0.1
-0.2
1.0
0.0
0.0
Unemployment rate
Compensation per employee
6.5
5.2
6.4
4.7
6.5
4.0
6.7
4.4
6.9
3.9
7.0
3.4
7.0
3.0
7.0
2.7
6.9
2.5
6.9
2.4
6.7
4.5
6.5
5.2
6.8
3.9
7.0
2.7
Consumer prices
Core HICP
5.0
5.1
2.8
3.9
1.9
2.5
1.7
2.3
1.3
2.1
1.4
2.3
1.6
2.3
1.7
2.2
1.8
2.1
1.8
2.0
8.4
3.9
5.5
5.0
1.6
2.3
1.7
2.1
ECB main refi. rate
ECB deposit rate
4.50
4.00
4.50
4.00
4.50
4.00
4.25
3.75
3.75
3.25
3.25
2.75
3.25
2.75
3.25
2.75
3.25
2.75
3.25
2.75
2.50
2.00
4.50
4.00
3.25
2.75
3.25
2.75
10-yr bund yields
EUR/USD
2.84
1.06
2.35
1.10
2.35
1.12
2.50
1.13
2.40
1.14
2.15
1.15
2.25
1.15
2.40
1.16
2.50
1.17
2.65
1.18
2.57
1.07
2.35
1.10
2.15
1.15
2.65
1.18
Notes: Quarterly real GDP and contributions are seasonally adjusted quarterly 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 changes. Interest rate and exchange rate forecasts are end-period levels. Numbers in
bold are actual values, others forecast. Data available as of 8 December 2023. Source: Eurostat, ECB, Macrobond, Nomura Global Economics.
49
Nomura | 2024 Global Macro Outlook
11 December 2023
UK: Stagnation, sticky inflation, slow to ease
Research Analysts
Economic growth has slowed but remains more resilient than we’d originally envisaged.
With business surveys having generally held up, we forecast only a mild, and short, nearterm recession, with risks in both directions. Inflation is falling, but we think it will take longer
to get back to target than it took to reach its peak. Upstream services inflation in particular is
proving more stubborn, according to recent survey evidence. And a tight – but easing
– labour market should mean wage growth takes time to normalise. While markets are
pricing in the possibility of earlier monetary policy loosening, especially from the ECB and
the Fed, stickier UK inflation, alongside additional fiscal support ahead of the impending
general election point to the BoE waiting for longer before cutting rates than the market
expects about other central banks (we think August 2024 before the first cut).
George Buckley - NIplc
European Economics
george.buckley@nomura.com
+44 (0) 20 710 21800
Andrzej Szczepaniak - NIplc
andrzej.szczepaniak@nomura.com
+442071023167
George Moran - NIplc
george.moran@nomura.com
+442071023320
Mild recession, slow recovery
GDP – where we’re starting from
Over the past two-and-a-half years the UK has experienced only a single quarter of falling
output, and even then the decline was mild. We suspect that the ongoing rebound in GDP
from Covid has masked some of the underlying weakness in the economy that would
have otherwise been more visible. Consumer spending in particular has suffered, being
still 1.5% below its pre-pandemic peak, and retail sales have been even weaker than
that as households have rotated spending away from goods and back to services postCovid.
The latest GDP print, which recorded zero growth in Q3 2023, turned out better than we
had expected. But that was largely due to the fact that volatile trade contributed positively
to growth (total exports up, imports down – after precisely the opposite the previous
quarter and with goods’ exports down for a third consecutive quarter). Indeed, the details
of the latest GDP report were disappointing, with ‘core’ domestic spending items such as
consumer spending and business investment both down.
Near-term recession view – short and shallow
In this annual outlook we stick with our view of a near-term mild recession for the UK, with a
slow recovery thereafter. Recent survey evidence (PMI, CBI for example) has been mixed
but generally points to the UK having weathered the supply shock storm relatively well.
Should the UK ‘get away with’ an economic contraction, whereby GDP falls from peak to
trough by just 0.3% (as we expect, with output falling for just two quarters between Q4 2023
and Q1 2024), we think it would be reasonable to call that a ‘soft landing’.
Fig. 61: Our recession forecast is modest vs. past episodes
Fig. 62: UK on the lower end of the DM recovery spectrum
Source: ONS, Haver Analytics, Nomura
Source: National statistics offices, Haver Analytics, Nomura
Figure 61 shows how such a decline would compare with past recessions – the peak-totrough fall is very modest. And such a small decline in output must be seen in the context
of a combination of wars, uncertainty, past surges in energy prices and various overhangs
50
Nomura | 2024 Global Macro Outlook
11 December 2023
from both the Covid pandemic and Brexit. But it must also be seen against the backdrop
of a generally stronger recovery among the UK’s peer group countries, with UK’s GDP
rebound from its pre-Covid (Q4 2019) level somewhat limited (Figure 62).
Comparing our forecasts and looking further ahead
Following zero quarterly growth in Q3 2023, our profile for economic growth is for two
modest quarterly declines in Q4 2023 and Q1 2024 (-0.2% and -0.1% q-o-q respectively).
After that we expect growth to return to +0.2% q-o-q in H2 2024 and +0.3% q-o-q on
average the year after – in other words, run-rates of around 0.8% annualised in H2 2024
and 1.2% annualised in 2025. That implies calendar year GDP growth rates of 0.5% y-o-y
in 2023, then -0.1% in 2024 and 1% in 2025.
How do we compare with other forecasters? Our view of near-term recession is generally
weaker than consensus. Further ahead, our view of a recovery in GDP growth to a run-rate
of 0.2-0.3% q-o-q in 2024-25 is a) similar to consensus forecasts but b) stronger than the
Bank of England’s view (i.e., largely 0.0-0.1% quarterly growth rates) and c) weaker than
that of the Office for Budget Responsibility (OBR) in its November forecasts (Figure 63).
Fig. 63: Comparing our growth view to other forecasters
Fig. 64: Forecasts for potential growth are down everywhere
Source: OBR, Bank of England, Consensus Forecasts, IMF, Haver Analytics, Nomura
Source: Consensus Forecasts, Nomura
There are risks in both directions to our growth forecasts:
Upside
• Inflation is falling at the same time nominal wage growth remains strong – meaning
real pay growth is finally turning positive (Figure 65), while at the same time
households are to some extent drawing down on their Covid savings. This
combination could end up supporting consumer spending more than we think.
• The latest fiscal policy decisions in the Autumn Statement (lowering National
Insurance taxes and making permanent full-expensing of capital spending – see here
for more), on top of the fiscal loosening announced in March 2023, could have a
larger effect on consumer spending and business investment.
• Higher interest rates are passing through the economy only slowly due to greater
numbers and maturities of fixed rate mortgages, which could slow the pace at which
the economy responds to monetary policy.
Downside
• That last upside risk might also be a downside risk to growth over a longer period as
more of the pass-through from tighter monetary policy is felt later (the BoE in its latest
Monetary Policy Report estimates only around 50% of the tightening has thus far
been passed through, and that it won’t be until 2025 when rates hikes are fully felt).
Moreover, it could be that debtor households reduce their consumption before higher
interest rates are felt, in anticipation of their loans resetting.
• Unemployment is rising by more than in most other DM economies (Figure 66),
51
Nomura | 2024 Global Macro Outlook
11 December 2023
though how much trust we can place in the data remains questionable (see here ).
However, evidence on employment from the surveys has been mixed (see here and
here for more), with some showing employment holding up, others showing a notable
slowing.
• The housing market (prices and transactions) is likely to stay weak as interest rates
remain at restrictive levels and unemployment rises.
• The Bank of England makes an important point when it comes to “excess savings”,
that “when savings are considered relative to income, the above-trend savings built up
during the pandemic have been fully eroded. If households aim to maintain a stock of
savings in line with incomes, they may not want to draw down savings any further”.
Rising unemployment may also encourage precautionary saving which, for any given
level of income, would come at the expense of consumer spending.
• The underlying weakness in the economy may only truly reveal itself only as
economic growth normalises from its post-Covid ‘catch-up’ (Buffett: “Only when the
tide goes out do you learn who has been swimming naked”).
Fig. 65: Real wage growth turning positive
Fig. 66: Unemployment rising faster than in other major DMs
Source: ONS, Haver Analytics, Nomura
Source: National statistics offices, Haver Analytics, Nomura
Why might supply growth have weakened?
Finally, expectations for long-term economic growth have, according to many forecasters,
weakened over recent years/decades. We illustrate this in Figure 64 which shows 6-10
year ahead consensus forecasts for GDP growth (which, bearing in mind how far ahead
these forecasts relate to, can realistically be construed as estimates of trend GDP) having
been on a falling trajectory for some years since the global financial crisis.
A similar sense of weakening trend growth can be seen from the BoE’s own forecasts
–Bank forecasts made between 2006 and 2014 for three-year ahead economic growth
stood at around 3% on average, falling to an average of around 2% for forecasts made
between 2015 and 2019 and to just over 1% on average since 2020. Finally, similar
conclusions can also be drawn from the evolution of the IMF end-horizon (five-year
ahead) forecasts for many countries, not just the UK.
There are a number of possible explanations for slowing trend growth, including the effect
of Brexit (in the case of the UK), demographic changes (such as slowing population
growth or rising dependency ratios; Figure 67) and various reasons to think that there may
be a permanently higher level of underlying inflation than in the past – requiring policy to
bear down more on demand growth to influence the part of inflation that it can affect. The
factors that may be pushing up on inflation include increased costs from climate change
and fewer favourable tailwinds from slower rates of globalisation (or even deglobalisation).
The Bank of England believes that supply potential growth could average only around 1%
in the coming years, and be even weaker than that in 2024 and 2025 in particular
(Figure 68). This could have important ramifications for monetary policy, as we discuss
below.
52
Nomura | 2024 Global Macro Outlook
Fig. 67: Inflationary demographics may require slower growth
Source: UN, Nomura
11 December 2023
Fig. 68: BoE has revised down its estimates of supply growth
Source: Bank of England, Nomura
Inflation grinding back to target
The latest news is good news
The news on UK inflation in recent months has been encouraging. The October CPI print
revealed a notable decline in headline inflation, from 6.7% to 4.6%, lower than we, the
consensus and the Bank of England were expecting. The scale of that particular monthly
fall was attributable largely to non-core items, with a combination of lower household
electricity and gas bills (as well as the dropping out of sharp rises from a year ago) and a
much more modest rise in food prices accounting for the lion’s share of the fall. In
addition, and more importantly from a monetary policy perspective, service prices rose at
a much more reasonable rate during the month.
Crucially, October was not just an isolated incident. Rather, as Figure 69 shows, the trend
in excess monthly core price growth (i.e., how much core prices are rising over and above
what they normally do in each month) has been firmly downwards since the spring of
2023. Because we are looking at excess price growth relative to the 1997-19 period
–when headline inflation averaged 2% – the Bank of England will be keen to engineer this
measure of excess momentum back to zero. This is pretty much where it has been on
average during the latest three months of data (August-October). More formally
seasonally adjusting the data also shows a downward trend in core price momentum.
Fig. 69: Trend in core price momentum is firmly downwards
Fig. 70: Service prices elevated but moving in right direction
Source: ONS, Haver Analytics, Nomura
Source: ONS, S&P Global, Haver Analytics, Nomura
53
Nomura | 2024 Global Macro Outlook
11 December 2023
The Bank will, however, be wary of declaring “job done” on inflation too soon for a number
of reasons. First, bearing in mind the variability in the inflation data, the MPC would
presumably like to see more than just a handful of months of inflation moving in the right
direction. Second, upstream prices continue to point to services inflation settling at rates
above past averages. For example, while the PMIs report manufacturing upstream prices
below normal, the latest service sector survey shows input prices almost five points and
prices charged over six points above their pre-pandemic averages (Figure 70). Still, there
has been some encouraging news on upstream prices, with goods price inflation having
fallen sharply and the official measure of upstream services inflation up by just 0.4% q-o-q
in Q3 2023, only once lower on a quarterly basis since the end of 2020.
Quick up, long down
So the key questions are – how sticky will headline/services inflation prove, and how long
will it be until we are back at target on both? Figure 71 shows how UK core inflation
(alongside that of New Zealand) has been the strongest among all DM countries on average
since the end of 2019. As for headline CPI inflation there have been a number of countries
that have seen similar (US) or even larger (New Zealand, Netherlands, Sweden, Germany)
rises over that time frame, though the UK still stands towards the top end of the distribution.
We agree with Bank of England thinking (MPC minutes) that “second-round effects in
domestic prices and wages are expected to take longer to unwind than they did to
emerge” (which explains the introduction of an upside skew to the Bank’s modal
forecasts). Still, we think bringing inflation back to 2% – both core and headline – by end2025 is very much achievable, especially as spare capacity in the economy increases and
unemployment rises (relative to its equilibrium level). In short:
• We see services inflation only falling back below 5% by mid-2024, below 4% by early
2025 and to around 2.5% by end-2025. This is a slower decline than in goods inflation
– something reported in the latest BoE Agents’ survey (“inflationary pressures for
consumer services were weakening more slowly than for goods”).
• Our forecast is for core inflation to fall back to around 3% by end-2024 and to around
the 2% CPI inflation target by end-2025.
• As for headline inflation, which is being pushed down more sharply by energy and
food prices (which, as discussed above, are rising much more modestly than a year
ago), we see declines to around 4% by early 2024, 2.5% by early 2025 and just under
2% by end-2025.
This correction in core CPI inflation, which took longer than it took to emerge, is shown in
Figure 72. Upon core inflation rising persistently above 2% from August 2021, it took 22
months until it reached its peak of 7.1% (May 2023). We think it will take 30 months from
that peak to return to 2% (i.e., at the very end of 2025). In short, it may be more difficult to
squeeze the final bits of above-target inflation out of the system than it will be to lower
inflation from its peak. In other words, the last mile may well be the hardest.
Fig. 71: UK core inflation tops that of most DM countries
Fig. 72: Core inflation – quicker up than down
Source: National statistics offices, Haver Analytics, Nomura
Source: ONS, Haver Analytics, Nomura
54
Nomura | 2024 Global Macro Outlook
11 December 2023
Risks – supply, wages, sterling
Despite our optimism that the BoE will be able to achieve its inflation target over a
reasonable time-frame (end-2025), one important risk relates to the fact that potential
supply growth may have weakened. That will require the central bank to use monetary
policy to bear down on demand growth by more than in the past in order to ensure
economic growth is not inflationary – i.e., does not exceed low potential supply growth.
A second risk relates to wage growth. While we have seen the monthly run-rate of private
sector regular pay ease in recent months, this series has a history of being revised up and
more recent evidence on pay settlements has been stronger (though not many
negotiations are conducted in the second half of the calendar year – rather they tend to be
concentrated earlier in the year, specifically in January and April).
A third upside risk could be that geopolitical risks lead to further rises in energy prices,
which add to inflationary pressures relative to our view, which does not incorporate any
large upward (or downward) swings in wholesale energy costs.
Another risk to inflation that could work in either direction is the evolution of the currency.
However, our FX team expects GBP to appreciate against USD and against a basket of
currencies, highlighting the downside pressure on inflation from this source. The UK is a
highly open economy, with an elevated openness ratio (exports plus imports as a
percentage of GDP) of around 60% – currency moves are therefore particularly important
to the UK’s inflation outlook.
Fiscal policy
The UK government generally makes two fiscal interventions each year – the spring
Budget and the Autumn Statement, the latter having been delivered last month. In it
there were two major announcements regarding policies that cost taxpayers a lot of
money: i) a reduction in National Insurance taxes to be introduced almost instantaneously
(from January 2024), and ii) making permanent full expensing of business investment.
These measures, among others, included in the Autumn Statement package were
focused on tax cuts rather than spending increases (Figure 73), and cost an average of
0.5% of GDP (for more on our views on the Autumn Statement see here ). They come on
top of measures worth 0.8% of GDP in the 2023 Budget earlier in the year. Moreover, with
a general election highly likely to be held in 2024 (the last date by which an election must
legally be held is January 2025; see Box 15: The UK general election ), we can expect
further loosening to be delivered in the spring 2024 Budget, which is set to be the last
fiscal statement before the vote.
Fig. 73: The latest loosening – measures worth 0.5% of GDP
Fig. 74: Fiscal stance still being tightened, just not as much
Source: OBR, HM Treasury, Nomura
Source: OBR, Nomura
While such fiscal loosening will not go unnoticed by the Bank of England (remember what
it said about the March loosening: “the fiscal measures announced in the Spring Budget
are expected to boost GDP over the forecast”) there are a number of important caveats
worth noting, suggesting a potentially more limited inflationary impact of looser policy than
might otherwise have been expected:
55
Nomura | 2024 Global Macro Outlook
11 December 2023
• Some measures may support economic supply, easing any potential inflationary
consequences. These include encouraging labour participation (the announcement in
March 2023 of a childcare package among other measures) and incentives to invest.
Still, reducing National Insurance is more likely, we think, to have a larger near-term
demand effect than the more limited and prolonged supply side effects.
• Taking into consideration all fiscal policies announced over time (including those in last
year’s 2022 Autumn Statement, which tightened the purse strings after the disastrous
mini-Budget of September that year), the Bank of England notes that “fiscal support is
being progressively withdrawn”. That can be seen in the more limited fall in the
Treasury’s plans for the cyclically adjusted primary deficit (Figure 74).
• Despite the further loosening, the OBR judged the government’s two fiscal rules – debt
to be falling and the deficit to be less than 3% in five years’ time – were met, albeit by a
narrow margin and on the basis of optimistic growth assumptions (Figure 75).
In summary – fiscal policy was loosened by the measures announced in the two fiscal
events of 2023 and is likely to be eased further in the pre-election Budget of spring
2024. But the inflationary effects of these loosening measures need to be set against the
government’s plans to intentionally reduce the cyclically adjusted primary deficit (i.e.,
tighten policy) over time and the fact they may boost economic supply.
Monetary policy – no rush to cut
The near-term outlook – rate cuts from August 2024
Over the past two years the Bank of England has raised Bank Rate by 515bp, from 0.10%
in December 2021 (one of the earliest central banks to tighten) to 5.25%
currently. Figure 76 shows how this compares with other central banks, the UK being at
the upper end of the spectrum of both rate hikes and current levels of policy rates.
Fig. 75: The UK’s fiscal rules – met, but only just on debt
Source: OBR, HM Treasury, Nomura
Fig. 76: BoE rate hikes – a cross-country perspective
Source: National central banks, Haver Analytics, Nomura
We think that the Bank is now done with tightening, though with inflation still well above
2% and likely to take some time to return to target we expect forward guidance to be
retained for some time. That guidance currently states that the policy stance will need to
remain “sufficiently restrictive for sufficiently long” (i.e., for an “extended period”) and that
“further tightening in monetary policy would be required if there were evidence of more
persistent inflationary pressures”. For more on policy communication around the end of
cycles, see Box 14: BoE end-of-cycle communication .
Questions then turn to – what is the likely timing of the first cut, and how far will the Bank
need to trim rates once it begins loosening?
On the first question, Figure 77 is informative – it shows UK interest rate ‘turnaround
times’ since BoE independence, i.e., the speed with which the MPC has voted to cut
interest rates after the last hike, or raised interest rates after the last cut. The distribution
looks almost bi-modal – the Bank has tended to be either speedy in its policy reversal
(three to five months), or lagged (12 months or more). We think that with inflation sticky56
Nomura | 2024 Global Macro Outlook
11 December 2023
ish (core not returning to 2% until the end of 2025) and our view of only a modest
recession, the Bank of England will be in no rush to lower interest rates, especially with
only half of the hikes sanctioned having yet been passed through to the real economy
(according to the Bank). As a result, we expect the Bank to begin cutting rates only
from August 2024 and at a pace of 25bp per meeting.
On the second question, we expect the Bank to pause its cutting cycle at 4%, which at a
pace of 25bp per meeting starting in August 2024 would be reached by February 2025. This
is probably a little above the neutral nominal Bank Rate for the UK which we’ve tentatively
placed around 3.25%. If we’re right on this then our view of 4% rates would represent a sort
of inflection point, with the Bank probably on hold at that point until 2026 on beyond – or until
the Bank is confident that inflation has been defeated.
Box 14: BoE end-of-cycle communication
It’s worth remembering that central banks – and the Bank of England in particular – do not tend to communicate
explicitly when they have reached the end of a monetary policy cycle, whether that be a cutting or hiking cycle. In this
short box we take a look at what the Bank of England has communicated to the markets on the occasion of the last
policy tightening of each cycle since the Bank became independent in 1997.
• June 1998 (+25bp hike to 7.50%)
The minutes showed eight members voting for the final 25bp rate hike, with one member opting for a “modest
cut”. For those voting for hikes “the question was raised as to whether a quarter point rise in rates would prove
sufficient”, suggesting the majority of the MPC thought there were risks that more hikes might be needed.
○
○
The Bank cut interest rates for the first time just four months later in October 1998, by 25bp.
• February 2000 (+25bp hike to 6.00%)
Eight members voted for a 25bp rate hike, one voted for no change, with some members voting for 25bp having
considered a 50bp rise.
○
○
The Bank took a full year to start its cutting cycle after the last hike, lowering Bank Rate by 25bp in February
2001.
• August 2004 (+25bp hike to 4.75%)
All nine members voted to hike by 25bp, though there was little discussion about the likely next moves.
○
○
The Bank took a full year to start its cutting cycle after the last hike, lowering Bank Rate by 25bp in
August 2005.
• July 2007 (+25bp hike to 5.75%)
Six members voted for the hike, the remaining three for no change. While the hike came “without a clear
presumption that further increases would be necessary”, it was stressed that there should be a “gradual
approach to any further tightening in policy” should it be required.
○
○
The onset of the global financial crisis meant the Bank started cutting interest rates by the end of the year
(December 2007) and with the European sovereign debt crisis and the vote for Brexit following, interest rates
were not raised again for many years.
• August 2018 (+25bp hike to 0.75%)
All nine MPC members voted for the 25bp hike, with the Bank providing guidance that “ongoing tightening”
would be “appropriate” and that rates would be raised to a “gradual and limited extent”.
○
○
Rates remained where they were for 19 months before Covid intervened and the Bank lowered rates down to
0.10% in March 2020.
In summary, in all but one occasion since gaining operational independence in 1997 (August 2004), the Bank of
England has – on the occasion of its last rate hike – communicated in various ways that another hike might be needed.
And it continues to do so with its current guidance. At some point we expect that guidance to be either moderated or
dropped altogether, before the Bank embarks on a cutting cycle from August 2024 (see Figure 77 for lengths of
turnaround times in UK monetary policy since BoE independence).
How do these views compare with market pricing? Figure 78 shows current market pricing
for the Bank of England, relative to the ECB and the Fed. A couple of things stand out
from this chart: i) the first BoE cut is priced by August (same as our view) but markets see
the pace of cutting as slower than our view – cuts running at a pace of up to 25bp per
57
Nomura | 2024 Global Macro Outlook
11 December 2023
quarter (versus our view of one cut per meeting which equates to two cuts per quarter),
ii) the Bank is expected by the market to cut at a slower pace than the ECB or the Fed,
with around five 25bp rate cuts priced for the BoE by end 2025, the risk of one more by
the ECB, and around seven cuts priced over the same time frame by the Fed.
Trimming the BoE’s balance sheet
The Bank of England has stated it will reduce its balance sheet in the year to September
2024 to the tune of £100bn of gilts, achieved by a combination of passive roll-off and
active sales. This comes after a similar amount of quantitative tightening (£80bn gilts,
£20bn corporates) the previous year. Figure 79 shows the splits in roll-offs versus active
sales of gilts that would be required if the Bank maintained a pace of £100bn QT per year.
Increased redemption activity looking ahead means the need for much less active sales
between October 2024 and September 2025 in order to achieve a £100bn total QT target.
Fig. 77: Monetary turnaround times – a bi-modal distribution
Fig. 78: Market pricing for BoE rate cuts vs the ECB and Fed
Source: Bank of England, Haver Analytics, Nomura
Source: Bloomberg, Nomura.
Reductions in the Bank’s balance sheet are intended to work in the background and not
be directly related to short-term monetary policy considerations. As a result, we think the
Bank will continue with balance sheet reduction even after beginning to cut interest rates
in 2024 – especially if those cuts are modest and are in response to falling inflation rather
than sharp and in response to slumping output.
Fig. 79: Roll-offs and active sales from the balance sheet
Fig. 80: Where will inflation settle in the long-run?
Source: Bank of England, Nomura
Source: Consensus Forecasts, Nomura
58
Nomura | 2024 Global Macro Outlook
11 December 2023
Andrew Hauser, the BoE's former Executive Director for Markets (having recently been
appointed as the RBA’s new Deputy Governor) discussed extensively how far the Bank
might go in reducing its balance sheet in his recent speech “Re-calibrating the role of
central bank reserves”. That would depend on banks’ transaction and precautionary
demand for reserves, which Mr Hauser estimated to be much higher than before the
global financial crisis. His conclusion was that the Bank would need to supply “a materially
higher standing stock of reserves than we did pre-2008”.
Reducing the Bank’s gilt ownership – the counterpart to reserves – by £100bn per year
would lower the stock held by the Bank to just over £450bn, which is within the range that
a recent Bank of England survey suggested could be banks’ aggregate precautionaryand transactions-based demand (£335-495bn). That suggests the Bank could continue at
the current pace of QT until at least September 2025, possibly September 2026, but
would probably need to slow the pace thereafter.
Long-run relationships – inflation, growth and policy
The Bank of England has the tools, and the legal mandate, to achieve its 2% inflation
target. As a result, while consensus forecasts raise questions about whether the Bank will
be able to achieve its target in the long-run (Figure 80), we are more willing to believe the
Bank can – and will – do so.
This means that the more interesting questions to ask than ‘where is the settling point for
inflation?’ are: i) how long will it take inflation to fall back to target? (a question we have
attempted to answer above), and crucially ii) what combination of interest rates and
economic growth will be required to achieve the 2% target?
The combination of expected slower trend economic growth and inflationary headwinds
(see above) support the view that the Bank of England will have to keep interest rates
higher for longer in order to keep demand slow enough (i.e., at the weaker rate
of potential growth) that inflationary pressures are kept in check. In summary – elevated
interest rates and slower demand growth are likely in the future in order to achieve the
Bank’s 2% inflation target.
Fig. 81: United Kingdom: Details of the forecast
Quarterly forecasts
Real GDP (% q-o-q)
Real GDP level: 2019 Q4=100
Household consumption
Fixed investment
Government consumption
Exports
Imports
3Q23
0.0
101.8
-0.4
-2.0
-0.5
0.5
-0.8
4Q23
-0.2
101.6
-0.2
-0.9
0.3
-0.8
-0.8
1Q24
-0.1
101.5
-0.1
-0.6
0.3
-0.5
-0.5
2Q24
0.1
101.5
0.0
0.0
0.3
-0.2
-0.2
3Q24
0.2
101.7
0.1
0.2
0.3
0.0
0.0
4Q24
0.2
101.9
0.1
0.5
0.3
0.2
0.2
1Q25
0.3
102.2
0.2
0.5
0.3
0.4
0.4
2Q25
0.3
102.5
0.3
0.5
0.3
0.4
0.4
3Q25
0.3
102.8
0.2
0.5
0.3
0.4
0.4
4Q25
0.3
103.1
0.3
0.5
0.3
0.4
0.4
2022
4.3
101.2
5.2
7.9
2.5
8.6
14.1
2023
0.5
101.7
0.3
2.5
-0.2
-0.7
-1.6
2024
-0.1
101.6
-0.3
-1.9
1.4
-1.2
-1.1
2025
1.0
102.7
0.7
1.7
1.2
1.1
1.1
Inventories (contribution)
Net trade (contribution)
-0.1
0.4
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.9
-1.7
-1.1
0.3
-0.1
0.0
0.0
0.0
Unemployment rate
Average weekly earnings
4.2
7.9
4.3
7.1
4.5
6.3
4.8
4.0
4.9
3.4
4.9
3.1
5.0
2.9
5.0
2.7
4.9
2.6
4.8
2.5
3.7
6.0
4.2
7.4
4.8
4.2
4.9
2.7
Consumer prices
Core consumer prices
6.7
6.4
4.5
5.6
4.0
5.2
2.3
3.6
2.4
3.2
2.6
3.1
2.4
2.9
2.2
2.5
2.2
2.3
1.8
2.0
9.0
5.9
7.4
6.3
2.8
3.8
2.2
2.4
BoE Bank Rate, % EOP
5.25
5.25
5.25
5.25
4.75
4.25
4.00
4.00
4.00
4.00
3.50
5.25
4.25
4.00
10-yr Gilt yields
EUR/GBP
GBP/USD
TWI
4.44
0.87
1.22
82.2
4.05
0.87
1.27
82.9
4.05
0.88
1.27
82.3
4.20
0.88
1.28
82.5
4.10
0.88
1.29
82.7
3.9
0.89
1.30
82.2
3.80
0.89
1.31
82.4
3.95
0.89
1.32
82.6
4.05
0.88
1.33
83.4
4.20
0.88
1.34
83.6
3.67
0.89
1.21
77.4
4.05
0.87
1.27
82.9
3.85
0.89
1.30
82.2
4.20
0.88
1.34
82.2
Source: Notes: Quarterly real GDP and contributions are seasonally adjusted quarterly 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 changes. Interest rate and exchange rate forecasts are end-period levels. Numbers in
bold are actual values, others forecast. Data available as of 5 December 2023. Source: Eurostat, ECB, Macrobond, Nomura Global Economics
59
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 15: The UK general election
Timing. The next general election must be held by January 2025, and is likely either in late spring or the autumn of
2024. It is unlikely to be earlier than the spring as the Conservatives will want any Budget loosening measures
(typically announced in March) to have their desired effect, and probably no later than October as cold weather may
lower turnout among older voters, who may be more likely to vote Conservative. August/September are also difficult
times for elections with parliament in recess/party conference season in full swing (in the past 200 years there has
never been an election in September, nor in August since 1895). We think the most likely dates are May, June or
October.
Latest polling. Mr Sunak's Conservative party is trailing Kier Stamer’s Labour opposition by 20pp in the polls (Figure 82).
Still, Labour is currently polling lower for both the party and especially leader satisfaction than was the case with Tony
Blair ahead of the 1997 election (source: FT). Due to Labour’s starting point – the 2019 general election was its worst
performance since 1935, winning just 203 of 650 seats (Figure 83) – quite a sizeable polling lead is needed to avoid a
hung parliament. To a more marginal extent the redrawing of the constituency boundaries is believed to be positive for
the Conservatives (source: Bloomberg).
Fig. 82: Conservatives trail Labour by around 20pp
Fig. 83: Large Labour lead needed to recover from 2019
Source: UK Parliament, Nomura
Source: Various opinion polls, Nomura
Labour will be acutely aware of its electoral history, having often under-performed in the run-up to elections. On
average Labour has performed 6pp worse in elections vs. polling a year before. The 1987 election provides a good
case in point – having had a seven point lead over the Conservatives a year before, Labour ended up losing by 11pp.
Labour’s policy agenda. Should Labour win the election with a majority, and return to power after a 14 year period of
Conservative rule, what is the party’s plan for government?
• Fiscal rules: Debt falling as share of GDP in five years’ time, similar to the existing fiscal mandate. Shadow
Chancellor Reeves has talked about the fiscal rules being “iron-clad” and taking precedence over all policies.
• Green Prosperity Plan: One of Labour’s key policies, to borrow around 1% of GDP per year to spend on climate
policies. First announced in 2021 when interest rates were low, higher rates have since led to Labour scaling back
this policy, now to be achieved by 2027. Labour intends to end new oil and gas licenses for N Sea extraction.
• Housing: Build 1.5m new homes over 5-years, similar to the current government’s 300k per year target. Funded by
higher stamp duty on overseas buyers. Overhaul planning, fast-tracking brownfield development.
• Investment: National wealth fund to leverage private business investment, intention to crowd-in three times as
much private investment relative to public spending on the plan.
• Health and education : VAT on private schools, ending business rate relief. Plans to expand the NHS, funded by
ending non-dom tax status, whereby UK tax liabilities are reduced for qualifying individuals.
• Employment law: Focus on worker rights, abolishing zero hour contracts, and repealing legislation that has made it
more difficult to take industrial action (including the need for minimum public service levels during strikes).
• Other: Crafting a closer relationship with the EU, the shadow foreign secretary saying it would be the number one
foreign policy priority. A more extensive windfall tax on energy firms, constitutional reform of the House of Lords.
60
Nomura | 2024 Global Macro Outlook
Japan: Our BOJ call changed, supported
by above-potential recovery
We think Japan’s economy will remain on an above-potential recovery path towards
2025, supported by (1) a moderate recovery in real labor income, with wage hikes in the
2024 shunto faster than in 2023, (2) fiscal support by the Kishida cabinet, including
personal income tax cuts, (3) progress in labor-saving and digitalization types of capex in
response to a strong labor shortage, and (4) a decline in risks of the US economy falling
into a recession soon. Driven by labor shortages, we expect the 2024 and 2025 shunto
(spring wage negotiations) to come with faster wage hikes than in 2023, translating into
stickiness in inflation in and beyond mid-2024. Along with these views, we believe the
BOJ will lift NIRP in January 2024 and abolish YCC in Q2 2024 (with April most likely
timing).
Economic activity: The recovery is set to continue
The economy should continue to recover at an above-potential pace from Q4 2023
through 2025 with ups and downs
While the latest Q3 GDP figures revealed that private consumption and capex contracted
quarter-on-quarter for two quarters on end, we expect private-sector domestic demand to
pick up, keeping Japan’s economy on an above-potential recovery path towards 2025.
11 December 2023
Research Analysts
Global Economics
Kyohei Morita - NSC
kyohei.morita@nomura.com
+81 3 6703 1395
Takashi Miwa - NSC
takashi.miwa@nomura.com
+81 3 6703 1280
Kohei Okazaki - NSC
kohei.okazaki@nomura.com
+81 3 6703 1255
Uichiro Nozaki - NSC
uichiro.nozaki@nomura.com
+81 3 6703 1284
Yuki Ito - NSC
yuki.ito@nomura.com
+81 3 6703 3867
Yuki Kodera - NSC
yuki.kodera@nomura.com
+81 3 6703 1281
In terms of consumer spending, we expect real employee compensation to start to rise
year-on-year, albeit at only a modest pace, from mid-2024 onwards on the back of wage
hikes and lower inflation. In addition to this, we think the Kishida administration's cash
handouts, together with cuts to income tax and residents' tax (worth over ¥5trn in total,
equivalent to less than 2% of annual disposable income), will also boost consumer
spending between Q1 2024 and Q3 2024, assuming such handouts and tax cuts are
delivered to households in January and June 2024, respectively.
Meanwhile, for capex, we expect a longer-term growth trend to emerge with respect to
investment in labor-saving and digital technologies, in response to labor shortages.
In addition, we had been forecasting a US economic downturn in Q4 2023, but we now
expect this to happen in Q3 2024. This should limit the downside risks for Japanese
exports to a certain extent.
In view of the above, we think Japan’s economy will recover at a pace in excess of its
potential growth rate (of around 0.5% annualized) from Q4 2023 onwards, albeit with
some ups and downs along the way with some slowing in H2 2024, when the US
economy is likely to fall into a recession.
Risks abound, both globally and domestically
We see a number of global and domestic risk factors on the future trajectory of the
economy.
The first risk factor for our economic outlook is overseas economies, including the US and
China, and global financial and capital markets. Even though we have now pushed back
the timing at which we expect the US economic downturn to start, the size and timing of
any downturn in the US will likely reflect future credit crunch pressures.
The second risk factor for our economic outlook is political and geopolitical tensions,
centered mainly around Russia/Ukraine, US/China, and the Middle East. Resource and
food prices have settled down to some extent since around mid-2022, but there is no
guarantee that this situation will continue. If resource and food prices were to rise sharply
and the terms of trade (export prices/import prices) of Japan’s economy were to
deteriorate, this would result in downside risks for capex. At the same time, if companies
were to decide not to raise wages, while raising their sales prices, in the interests of
profits, this would reduce households' real income (household income/prices) and thus
have a negative impact on consumer spending.
The third risk factor for our economic outlook is a further increase in the severity of labor
shortages in Japan. We expect the labor shortages that Japan is experiencing to
encourage capex aimed at reducing the need for labor, but this is not a certain prospect.
There is also a risk that companies will give up on capex if they are faced with labor
shortages as well as problems in terms of business succession. It could be argued that,
even if business succession fails to prove successful, a redistribution of labor and real
61
Nomura | 2024 Global Macro Outlook
11 December 2023
estate among companies and industries could increase the efficiency of economic
activities over the long term. In the short term, however, this could also exert downward
pressure on the economy via a decrease in capex and an increase in unemployment.
The Kishida cabinet’s economic package will support the economy mainly in Q1-Q3
2024
On 2 November, the Kishida cabinet decided on a new economic package targeted at
getting the economy thoroughly out of deflation. This package includes five main pillars;
(1) measures to tackle price hikes, (2) structural wage hikes and revitalization of the local
economy, (3) promotion of domestic investment, (4) digitalization and measures to tackle
a declining population and (5) strengthening national resilience and people’s safety and
security.
This package’s total project scale, including private activity to be induced by this package,
amounts to JPY37.4trn or 6.5% of GDP, of which expenditures of national and local
governments total JPY20.9trn (3.6% of GDP; Figure 84). The government expects this
package to add JPY19trn to real GDP likely over the coming three years or JPY6.3trn
(1.1% of GDP) per year on average. The scale can be taken as sizeable given that
Japan’s output gap (a gap between actual GDP and potential GDP) is almost zero,
suggesting the nonexistence of demand deficiency.
Fig. 84: Size of economic stimulus packages in recent years
Business scale
Private sector, etc
(FY)
2013
Fiscal outlays
Central and
local
government
FILP
(¥trn)
(¥trn)
(¥trn)
(¥trn)
(¥trn)
20.2
9.9
10.3
9.9
0.4
Efficacy
Boost of around 2.0% in real GDP terms. Creation of around 600,000 jobs.
18.6
13.1
5.5
5.4
0.1
Boost of around 1.0% in real GDP terms. Creation of around 250,000 jobs.
2014
16.0
12.5
3.5
3.5
-
Boost of around 0.7% in real GDP terms.
2016
28.1
14.6
13.5
7.5
6.0
Boost of around 1.3% in real GDP terms.
2019
26.0
12.8
13.2
9.4
3.8
Boost of around 1.4% in real GDP terms.
117.1
68.7
48.4
35.8
12.5
Boost of around 4.4% in real GDP terms.
73.6
33.6
40.0
32.3
7.7
Boost of around 3.6% in real GDP terms. Creation/support of 600,000 jobs by end-FY21.
78.9
23.2
55.7
49.7
6.0
Boost of around 5.6% in real GDP terms.
2020
2021
2022
2023
13.2
7.0
6.2
6.2
0.0
71.6
32.6
39.0
37.6
1.4
Boost of around 4.6% in real GDP terms. Dent of more than 1.2ppt to CPI.
-
37.4
15.6
21.8
20.9
0.9
Boost of around ¥19trn in real GDP terms, around 1.2% annualized (assuming boost over three years)
Source: Nomura, based on Cabinet Office and MOF data
In our baseline scenario of the economic outlook, we particularly considered three policy
tools. First, cash handouts for low income earners and cuts in income and residential
taxes will amount to approximately JPY5trn (0.9% of GDP), with JPY1.5trn coming from
cash handouts to be most likely delivered to households in January 2024 or later and the
residual JPY3.5trn from tax cuts in June 2024.
Second, the extension of measures to suppress the burden of energy costs on
households from end-December 2023 to end-April 2024. This should reduce the inflation
rate in FY23 and, in turn, increase it in FY24.
Third, an increase in the budget for infrastructure investment will directly contribute to
public investment on a GDP basis. We expect the amount to be around JPY3.1trn (0.5%
of GDP).
The first two tools will mainly support private consumption with handouts and tax cuts
increasing nominal household disposable income and the measures to suppress energy
costs underpinning CPI and hence real disposable income.
The third tool will add to public investment. While we believe public investment will remain
on the downtrend, as the past budget for public investment runs its course, the pace of
such a decline will be more moderate thanks to the package.
Also, in relation to fiscal policy management, we discuss the approach the Japanese
government has adopted to implement multiple-year budgeting under the single-year
budget system in Box 16: Single-year budget system and fund budget .
Exports and capex will likely grow with some sluggishness expected in H2 2024
A direct factor that led us to revise up our export forecasts is our view on the timing of a
US recession, which we now believe will be delayed until Q3 2024, as opposed to our
62
Nomura | 2024 Global Macro Outlook
11 December 2023
previous outlook of Q4 2023. This will support Japan’s exports towards the middle of
2024. In turn, we now believe there will be some slowing in exports in H2 2024, when we
believe the US economy will fall into a mild recession.
We expect inbound tourism, part of service exports, to also remain on a moderate
recovery path, albeit at a slower pace (Figure 85). The number of inbound tourists other
than from China have already surpassed the pre-pandemic levels, naturally leading to
some slowing in the expansion of tourists going forward. In addition, the release of treated
water from the Fukushima nuclear power plant into the sea may suppress the pace at
which tourists from China increase.
All in all, exports of both goods and services will likely recover at a moderate pace.
A pickup in exports can cyclically lead to a pickup in capex, too. In addition, there are
structural factors to support capex. First, severe labor shortages can induce more laborsaving types of capex. Second, digitalization will continue to motivate companies to invest
in such items as software. Labor shortages can also be a driver here. Third, the necessity
of a buildup of the domestic supply chain can shift the destination of capex from outside
Japan to inside Japan, as the global supply chain remains under pressure to be realigned
under global political and geopolitical tension (Figure 86).
Fig. 85: Outlook for GDP-basis inbound spending and
number of overseas visitors to Japan
Fig. 86: Manufacturing companies' plans to strengthen or
reduce their domestic production bases
Note: Seasonally adjusted. Seasonal adjustment of number of overseas visitors by
Nomura.
Source: Nomura, based on Cabinet Office, Japan Tourism Agency data
Note: Does not cover plans for FY22.
Source: Nomura, based on Development Bank of Japan data
Private consumption should return to a recovery path, supported by wage hikes,
slower inflation and the Kishida cabinet’s economic package
While private consumption contracted in Q2 and Q3 2023 in real terms, we believe it will
be placed back on a recovery path due mainly to three factors.
First, wage hikes in 2024 will likely exceed those in 2023, in our view, as described
below. An increasing number of companies seem to have been put under stronger
pressure to hike wages under severe labor shortages.
Second, we expect inflation to slow through the middle of 2024, driven by food prices.
This, together with wage hikes, would improve households’ real income or purchasing
power.
Third, as mentioned above, the Kishida cabinet has decided on an economic package that
includes handouts to low income earners and cuts to income and residential taxes. These
are expected to amount to JPY5trn, equivalent to less than 2% of annual household
disposable income. Of course, these handouts and tax cuts are unlikely to fully translate
into consumer spending, but will still underpin private consumption mainly in Q1-Q3
2024.
63
Nomura | 2024 Global Macro Outlook
11 December 2023
Wages and inflation: A virtuous cycle between wages and
prices... coming closer
Shunto wage hikes in 2024 are expected to exceed those in 2023
While this year’s shunto (spring wage negotiations) ended up with faster-than-expected
wage hikes of 2.1% (excluding seniority-based wage hikes) on a base salary basis, actual
per-capita wage growth lacked upward momentum without stably exceeding the year-onyear change of 2%, due partly to an ongoing decline in the ratio of full-time workers, who
tend to be paid more than part-time workers, to total employees. Given this, we don’t
believe that Japan has successfully formed a virtuous cycle between wages and prices, a
critical criterion to gauge the appropriateness of the BOJ’s monetary policy.
That said, we note that there seems to be growing momentum towards further wage hikes
in the 2024 shunto. Rengo (Japanese Trade Union Confederation) announced its basic
concept for the 2024 shunto, saying it plans to demand ‘5% or more’ of wage hikes
(including seniority-based wage hikes), increasing the demand level from ‘approximately
5%’, which it demanded for the 2023 shunto. Under these circumstances, we are
collecting more news headlines where companies, particularly large ones, announce their
plans to increase wages faster than in 2023.
It is also worth noting that the driver of wage growth is set to shift from 2023. In 2023, the
major driver of wage growth was inflation centering on energy and food, essential
consumption items. Going forward, however, we see the labor shortage as playing a more
important role and, as a result, wages would be put under a longer-term upward
pressure.
While there remains uncertainty about how fast SMEs can hike wages, we revised up our
forecasts for shunto wage hikes in 2024 and 2025 and now believe wage hikes can reach
3.9% (including seniority-based wage hikes) in both 2024 and 2025, as opposed to 3.6%
in 2023 (Figure 87).
Fig. 87: Estimated results of spring wage negotiations
Note: (1) Figures are based on MHLW data on results of spring wage negotiations. (2) The estimation formula is as follows:
wage increase (%) = 1.106 + 0.326 x wage negotiation increase (-1) + 0.326 x %y-o-y change in core CPI (-1) + 0.013 x %yo-y change in recurring profits (-1) + 0.346 x expected growth rate for next three years (-1) - 0.177 x output gap - 0.639 x
structural change dummy + 0.400 x structural change dummy x wage negotiation increase (-1) - 0.244 x structural change
dummy x %y-o-y change in core CPI (-1) -0.009 x structural change dummy x %y-o-y change in recurring profits (-1) - 0.299
x structural change dummy x expected growth rate for next three years (-1) - 0.146 x structural change dummy x output gap.
Adjusted R2 = 0.97. (-1) indicates a one-year lag. The case in which rising consumer prices is taken into consideration
excludes the dummy variable effect for 1995 and thereafter. (3) The core CPI, recurring profits, the expected growth rate for
the next three years, and the output gap are all fiscal year values. (4) Nomura forecasts for core CPI inflation and change in
recurring profits revised using the past forecast revision rates in the September 2023 BOJ Tankan survey, and assume a
1.2% economic growth rate for Japan over the next three years (Cabinet Office's Annual Survey of Corporate Behavior, the
same as for FY22).
Source: Nomura, based on Ministry of Health, Labour and Welfare, Ministry of Internal Affairs and Communications, MOF,
Cabinet Office, BOJ, and Japanese Trade Union Confederation data
CPI inflation will likely decline but gradually become stickier
Our forecast for Japan’s economy to recover at a pace in excess of the potential growth
rate from Q4 2023 onwards means that we expect the output gap to widen further in the
direction of excess demand (real GDP > potential GDP).
Moreover, in our view, this output gap largely reflects labor shortages, and is a factor
likely to strengthen the upward pressure on wages going forward, as mentioned above.
64
Nomura | 2024 Global Macro Outlook
11 December 2023
Under these circumstances, we think core core CPI inflation (all items less energy and food,
but including alcoholic beverages), which reflects more underlying inflation trends, will remain
stably above 1.5% y-o-y (but below 2.0%) from mid-2024 through early 2026. We thus expect
inflation to gradually become stickier even as core CPI inflation (less fresh food) declines
driven by food prices (Figure 88).
As one major risk to our inflation outlook, we need to note changes in companies' pricesetting behavior. If price hikes increasingly feed off each other as a large number of
companies decide to raise prices after taking the view that competitors' price hikes make
it easier for them to hike prices themselves, inflation could become stickier at a fasterthan-expected pace.
The changes in behavior that could take place at Japanese companies are not limited to
their price-setting behavior. There is also a possibility of changes in behavior that will
affect the labor market, including changes in employment and wage-setting behavior. If
companies' wage-setting behavior is largely aligned as they compete for limited labor,
wages could rise more than we expect. On the other hand, a scenario in which prices and
wages return to the doldrums cannot be ruled out unless changes in companies' behavior,
in terms of both raising wages and hiking prices, are aligned.
In considering the sustainability of inflation, it is worthwhile to also see how inflation has
been distributed across items. We discuss inflation distributions by goods and services in
Box 17: A method to capture the underlying trend of inflation .
Fig. 88: Outlook for core CPI inflation (monthly)
Note: The core CPI is the consumer price index less fresh food. It excludes the impact of the consumption tax increases of
April 2014 and October 2019, the abolition of fees for preschool education in October 2019, and the abolition of fees for
higher education in April 2020. Nondurables are "nondurable goods" as described by the Ministry of Internal Affairs and
Communications, excluding foods, electricity charges, city gas charges, propane gas, kerosene, and gasoline but including
alcohol. Data for November 2023 onwards are Nomura forecasts.
Source: Nomura, based on Ministry of Internal Affairs and Communications, estimates by Nomura
Why is Nomura’s inflation outlook so different from the BOJ’s, particularly in FY24?
In fiscal year terms, we expect Japan’s core CPI to rise by 2.7% in FY23, 1.5% in FY24
and 1.4% in FY25. This compares with the BOJ’s median forecasts by the policy board
members (as of October 2023) of 2.8% in FY23, 2.8% in FY24 and 1.7% in FY25, leaving
a fairly large gap with Nomura, particularly in FY24.
This gap can be mainly attributed to the differences in assumptions. We assume 1) that
the USD/JPY will decline and 2) that oil prices will follow the forward curve, and we also 3)
factor in any likely policy measures to affect prices, even if they have yet to be officially
determined and/or legislated.
On the other hand, the BOJ assumes 1) that the USD/JPY remains flat and 2) that oil
prices follow the forward curve, while on 3), it does not factor in policy measures to affect
prices before they are officially determined and/or legislated. So the assumptions for 1)
and 3) differ between the BOJ and us.
If we apply the bank’s assumptions, our core CPI outlook changes to 2.9% for FY23, 2.2%
for FY24 and 1.7% for FY25 and the gap for FY24 narrows. The remaining gap will likely
be due to the BOJ’s more bullish economic outlook and a difference in the views on the
extent to which companies’ price setting behavior will be embedded.
65
Nomura | 2024 Global Macro Outlook
11 December 2023
Monetary policy: The BOJ will likely lift NIRP in January 2024
and scrap YCC in Q2 2024
Our new BOJ call envisages an earlier scrapping of NIRP and YCC
We have changed our monetary policy scenario following the latest revisions to our
economic outlook described above.
In our previous main scenario, the BOJ scraps its yield curve control policy (YCC) in Q4
2024 and its negative interest rate policy (NIRP) in 2025 or later. Our new main scenario
(to which we assign a probability of 60%) is for the lifting of NIRP in January 2024 and the
scrapping of YCC in Q2 2024 (potentially in April; Figure 89). We also think the BOJ will
remove the phrase "will not hesitate to take additional easing measures if necessary" from
its forward guidance at the same time that it ends its YCC.
Fig. 89: Nomura’s forecast scenarios for monetary policy
Scenario
▼ Main scenario
60%
▼ Risk scenario A
(BOJ judges 2% inflation
to be stable and
sustainable earlier than
expected, moves to end
YCC early)
30%
1)
Negative interest rate policy
abandoned
2)
Results of “broad-perspective” review
→
announced
▼ Risk scenario B
→
January 2024
We assume announcement in 2024
H1 or later
3) YCC abandoned
→
2024 Q2
(potentially April)
1) YCC abandoned
→
By March 2024
2)
Results of “broad-perspective” review
→
announced
3) End of negative interest rate policy
1)
(Economy slows, wage
and price inflation lose
sustainability)
Order in which policies are
implemented
Policies
Probability
Results of “broad-perspective” review
→
announced
10%
2) YCC abandoned
3)
→
Negative interest rate policy
abandoned
We assume announcement in 2024
H1 or later
By June 2024
We assume announcement in 2024
H1 or later
→
From 2025
→
From 2026
Note: Text in red under order in which policies are implemented shows differences from our main scenario.
Source: Nomura
That said, we find it difficult to assume that the BOJ will adopt a positive interest rate
policy and quantitative tightening (QT) along our forecast horizon through 2025, as we do
not envision entrenched economic conditions (growth in demand and wages) that would
result in inflation remaining above 2% in a sustainable and stable fashion. We thus think
the BOJ will also retain its inflation-overshooting commitment (the commitment to continue
expanding the monetary base until observed core CPI inflation exceeds 2% and stays
above the 2% target in a stable manner).
In addition to this main scenario, we have two risk scenarios. Risk scenario A (30%
probability) is for the BOJ to scrap YCC by March 2024 and to scrap NIRP by June 2024,
assuming that: (1) a virtuous cycle between wages and prices is achieved earlier than
expected; or that (2) the BOJ decides that a 2% sustainable and stable inflation rate has
been achieved, in order to avoid instability in the forex and rates markets, even before
such a virtuous cycle is confirmed.
Risk scenario B (10% probability) is for YCC not to be scrapped until at least 2025 and for
NIRP not to be scrapped until at least 2026, assuming a slowdown in the economy and a
loss of sustainability in prices and wages.
Why does the BOJ, which aims to achieve inflation of 2%, want a virtuous cycle between
wages and prices, rather than simply a rise in prices? In our view, it is because the BOJ is
not aiming to simply foster inflation, but is looking to make the causes of inflation take root
66
Nomura | 2024 Global Macro Outlook
11 December 2023
in the Japanese economy. If the factors that trigger appropriate inflation can be
embedded, Japan would be less likely to return to deflation even if there were an
economic downturn. A virtuous cycle between wages and prices is a key element when
assessing whether the causes of inflation have taken root in the Japanese economy. We
discuss why such a virtuous cycle between wages and prices matters and how it works in
Box 18: Why does a virtuous cycle between wages and prices critically matter? .
Fig. 90: Japan: Details of the forecast
%
3Q23
4Q23
1Q24
2Q24
3Q24
4Q24
1Q25
2Q25
3Q25
4Q25
2023
2024
2025
Real GDP (% q-o-q, annualized)
Real GDP (% q-o-q)
Private consumption
Private non res fixed invest
Residential fixed invest
Government consumption
Public investment
Exports
Imports
-2.9
-0.7
-0.2
-0.4
-0.5
0.3
-0.8
0.4
0.8
1.2
0.3
0.1
0.2
-0.5
-0.3
-2.0
2.4
0.3
-0.3
-0.1
0.4
0.7
-0.2
-0.4
-1.0
-0.2
1.0
1.4
0.3
0.5
0.9
-0.4
0.0
-0.3
0.7
0.9
-0.2
-0.1
0.3
0.5
-0.6
-0.3
-0.5
-0.2
0.6
-0.9
-0.2
-0.3
0.3
-0.5
0.3
-2.0
-0.1
0.3
0.9
0.2
0.1
0.8
-0.6
-0.1
2.5
0.6
0.8
1.4
0.4
0.2
0.8
-0.8
-0.1
2.2
0.8
0.5
0.8
0.2
0.1
0.8
-0.8
0.2
-1.8
0.7
0.3
0.9
0.2
0.2
0.8
-0.8
0.5
-2.9
0.7
0.5
2.0
0.9
1.6
1.2
0.9
1.9
2.8
-1.4
0.2
0.6
1.2
-1.1
-0.5
-3.4
3.0
1.8
0.5
0.4
2.7
-2.5
0.1
0.6
1.8
2.2
Contributions to GDP: (ppt, q-o-q)
Domestic final sales
Inventories
Net trade
-0.1
-0.5
-0.1
-0.1
0.0
0.4
0.2
0.0
-0.2
0.4
0.0
0.0
0.1
0.0
-0.2
-0.2
0.0
-0.1
0.2
0.0
0.0
0.3
0.0
0.1
0.1
0.0
0.1
0.2
0.0
0.0
1.2
0.0
0.8
0.2
-0.3
0.3
0.6
0.0
-0.1
2.6
3.2
3.0
2.5
2.6
2.6
2.4
2.1
2.1
2.5
1.9
1.9
2.4
1.6
1.6
2.4
1.3
1.3
2.3
1.3
1.3
2.4
1.4
1.4
2.4
1.4
1.4
2.4
1.4
1.4
2.6
3.2
3.1
2.4
1.7
1.7
2.4
1.4
1.4
2.7
2.7
1.8
1.7
1.6
1.7
1.6
1.5
1.5
1.5
2.5
1.7
1.6
5.2
4.5
4.7
4.1
5.2
3.7
4.0
3.7
5.2
3.8
-7.4
3.7
-4.9
4.5
-4.4
4.2
-0.10
0.32
0.77
149.4
-0.10
0.35
0.80
144.0
0.00
0.35
0.80
142.0
0.00
0.40
0.90
140.0
0.00
0.50
1.05
135.0
0.00
0.50
1.10
135.0
0.00
0.50
1.10
130.0
0.00
0.50
1.10
130.0
0.00
0.50
1.10
130.0
0.00
0.50
1.10
130.0
-0.10
0.35
0.80
144.0
0.00
0.50
1.10
135.0
0.00
0.50
1.10
130.0
Unemployment rate
Consumer prices (% y-o-y)
Core CPI
CPI less foods (ex. alcoholicbeverages)
and energy
Fiscal balance (fiscal yr, % GDP)
Current account balance (% GDP)
Policy rate
JGB 5-year yield
JGB 10-year yield
JPY/USD
Note: Unemployment rate is as a percentage of the labour 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 reflects data available as of 8 December 2023.
Source: Cabinet Office, Ministry of Finance, Statistics Bureau, BOJ and Nomura Global Economics.
67
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 16: Single-year budget system and fund budget
The role of fiscal policy is being reconsidered globally in the face of the low interest rate, low inflation and low growth
environment of the late 2010s, the escalating conflict between the United States and China, the major technological
milestones of digitalization and climate change. These include the Inflation Reduction Act in the US, the Next
Generation EU (Recovery Fund) in the EU, and China Manufacturing 2025 in China. From a fiscal perspective, all of
these national strategies are long-term projects of five or more years. The governments have been committed to fiscal
measures for multiple years.
These multi-year projects were difficult to implement under the Japanese fiscal system. In Japan, the single-year budget
system is determined by law. Under the single-year policy, the budget enacted by the Diet is supposed to be completed
within the year in principle (exceptions exist for public works and defense).
The major approach to implement multiple-year budgeting under the single-year budget system is fund budgeting.
Under this approach, a fund is established in an agency outside the government, and the funds are disbursed from the
government budget to cover multi-year projects. This expenditure needs to be approved by the Diet as a budget.
However, since the expenditure from the government budget to the fund is completed within the fiscal year, there is no
violation of the single-year budget system. The fund can expend the money in the following years avoiding violation of
the single-year system.
Figure 91 shows the outstanding of the fund's budget. It has grown significantly since the pandemic. These include
interest subsidies for loans to support firms in trouble during the pandemic, as well as a fund to support the postCOVID-19 business transformation. However, the Green Innovation Fund, which supports R&D towards decarbonized
society, the fund for supporting domestic production of semiconductors, and the funds for economic securities which
assure supply of specific strategic resources are also increasing the presence.
Concerns relate to fiscal discipline. Indeed, about 30% of the 197 projects in FY2022 did not have long-term targets,
and about 40% did not have deadlines for the targets. As of fiscal 2022, the size of the fund's budget reached a
massive ¥16.6trn, which is too large to overlook. PM Kishida ordered an inspection and expressed his intention to
review the fund's budget within 2023.
Fig. 91: Size of the fund budget
Source: Nomura, based on various media reports
68
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 17: A method to capture the underlying trend of inflation
Japan's inflation indicators (Core CPI, BOJ core core CPI, and MIC core core CPI) are all above 2% y-o-y, exceeding
the BOJ’s price stability target at 2%. The measures of underlying inflation which the BOJ releases (trimmed mean,
weighted median, and mode) are all above 2% as of October 2023.
However, all of these price indicators are heavily influenced by external factors. Such external factors include energy,
food and exchange rates. The BOJ’s price stability target of 2% is not inflation driven by such external factors, but
inflation as a result of a virtuous cycle of wages and prices in Japan. Although there are several inflation indicators
hovering above 2%, we cannot yet conclude that the BOJ’s inflation target has been achieved since these indicators
have also been strongly influenced by external factors.
The important factor is whether recent inflation can be transformed into sustainable and stable inflation based on a
virtuous cycle of wages and prices, even if arising originally from external factors. Looking back at the spring wage
negotiations in 2023, the rate of wage increases was 3.58% (including seniority-based wage hikes), which is the highest
growth in the last 30 years. Although the wage increase originated from external factors, the spillover effect from prices
to wages has been confirmed to some extent. However, it is unclear whether wage growth has reached a point at which
it sustainably supports inflation.
The useful way to monitor this is to calculate the rate of price change for items in the CPI and look at its distribution.
The distribution of price changes in Figure 92 shows an increase in the thickness on the right side of distribution in JulySeptember 2023 compared to normal times (average for 2017-18). This is largely reflected by inflationary pressures
caused by energy, food, and exchange rates that began in 2022. However, inflationary pressures from such external
factors are supposed to wane as they run their course. The important thing is whether the price distribution will return to
its normal shape as was seen in 2017-18 or stabilize in a shape consistent with 2% inflation. If companies continue to
raise prices in response to wage hikes and households accept them (supported by wage hikes), the distribution of price
changes should settle into a shape different from the shape of the normal times before COVID-19.
At the end of 2024, we expect 1) USD/JPY to fall to 135, 2) the Brent oil price to decline to USD76/bbl, and 3) the
FAO’s food price index to hover at the current level or lower. These factors would exert downside pressure on CPI
inflation. On the other hand, Nomura expects the 2024 spring wage negotiations to lead to wage hikes of 3.9% due to a
more severe labor shortage. We thus need to monitor closely the shape of the price change distribution in order to see
whether it will end up with a shape consistent with the BOJ’s 2% inflation target.
Fig. 92: The price change distributions by goods and services
Note: Distribution of y-o-y price changes of items both for goods and services (small categories included in MIC core core CPI) is shown in 1% increments from -20%
to +20%.
Source: Nomura, based on the Ministry of Internal Affairs and Communications
69
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 18: Why does a virtuous cycle between wages and prices critically matter?
Why does the BOJ, which aims to achieve inflation of 2%, want a virtuous cycle between wages and prices, rather than
simply a rise in prices? It is because the BOJ is not aiming to simply foster inflation, but is looking to make the causes of
inflation take root in the Japanese economy, in our view.
We see four specific pathways linking wages and prices (Figure 93). Two of these are pathways where the pressure
flows from wages to prices, and two are where pressure flows from prices to wages.
The first is the markup pathway. Markups reflect price-setting behavior at companies, in the form of how much they
increase selling prices in response to the emergence of additional costs. The pathway leading from wages to prices
becomes stronger when companies hike selling prices in response to wages being increased (additional costs arise)
because of a labor shortage. We highlight corporate earnings as a factor for assessing the establishment of this
pathway.
The second is the expenditure (demand) pathway. If households increase their expenditure (spending) because of a
rise in wages, the companies that sell the products are more likely to hike their selling prices. The pathway leading from
wages to prices gains momentum in this case too. Consumer spending is a yardstick for assessing this pathway.
The third is the labor share pathway. Corporations increase their income by raising selling prices and allocate it to
employees by hiking wages, thus forming a pathway through which higher prices lead to higher wages. The spring
wage negotiations (shunto) are a factor influencing the strength of this pathway. Put another way, shunto is just an
event to confirm a channel from prices to wages and not a factor determining the entirety of the virtuous cycle between
wages and prices, which market participants at times mistakenly believe is the case.
The fourth is the real wage (consumers' purchasing power) pathway. Growth in labor productivity gaining momentum as
a result of corporations pushing ahead with investment in automation because of the labor shortage opens up a
pathway towards a sustained rise in real wages (= wages/prices). Once this pathway is established, price rises will tend
to accompany faster nominal wage growth.
Once these four channels start to work in tandem, we can say a virtuous cycle between wages and prices has been
built, possibly leading to the BOJ’s conclusion that not only inflation but also the causes of inflation have been
embedded in Japan’s economy, which in turn will lead to the scrapping of YCC and NIRP. We believe Japan will reach
this stage around the middle of 2024.
Fig. 93: Four major pathways comprising a virtuous cycle between wages and prices
Source: Nomura
70
Nomura | 2024 Global Macro Outlook
11 December 2023
Asia: In pole position
Research Analysts
We believe growth in most Asian economies will outperform that of US and Europe in
2024, due to a semiconductor-led export tailwind and domestic offsets that should
facilitate a soft landing in Asia (unlike the West, we do not expect any technical
recessions in Asia). We see Asia entering its sweet spot in early 2024, due to the chip
cycle recovery, but see a more challenging second half of the year, as the US recession
unfolds. Inflation divergence will be an important theme, with last-mile challenges in
Australia and Singapore juxtaposed against headline deflation in Thailand. We expect a
monetary policy pause through Q1 to give way to rate cuts starting in Q2 2024, although
Asia will likely deliver less cumulative easing than the Fed in this cycle. Over the medium
term, we see India, Indonesia and the Philippines as Asia’s rising stars.
Sonal Varma - NSL
Asia Economics
sonal.varma@nomura.com
+65 6433 6527
Si Ying Toh - NSL
siying.toh@nomura.com
+65 6433 6666
Our global view
We expect a synchronised global growth slowdown in 2024, with rolling mild recessions in
the euro area and UK at the turn of the year (until Q1 2024), and a delayed impact in the
US (-0.3% q-o-q, sa, in Q3 and -0.5% in Q4 2024). The Fed’s hiking cycle has likely
ended, and we expect rate cuts to start in June 2024 (100bp in 2024 and 200bp in 2025).
We assume Brent crude oil prices will average USD77.1/bbl in 2024, down from
USD82.8/bbl in 2023 and our FX strategists expect the dollar to weaken in 2024. Based
on these assumptions, we summarise our economic forecasts in Figure 94.
Key themes
A semiconductor-led export tailwind
Asia’s export growth downturn bottomed out in mid-2023, and semiconductors have since
driven the turnaround. Nomura’s tech analysts expect global semiconductor shipments to
increase by 17.8% y-o-y in 2024 after a 9.4% drag this year, powered by AI chips, the end
of the inventory correction (PCs and smartphones) and higher memory prices (production
cuts; see Anchor Report: APAC Technology: The start of the AI era , 30 November 2023).
We also expect demand from China to stabilise after the slump in 2022-23. That said,
export growth will likely be frontloaded in Q1 and parts of Q2, with softer momentum in H2
2024, which is when we expect an unfolding US recession to weigh on exports of capital
and consumer goods and services. Still, export growth in 2024 should be higher than in
2023, because of the starting point; Asia’s exports already hit recessionary levels in mid2023 (Figure 95).
Asian economies should soft land
Despite the weak global backdrop, Asia’s growth should outperform that of DM, due to the
export tailwind and domestic offsets. Asia never overtightened monetary policy, reducing
the potential impact on interest rate-sensitive sectors, particularly housing. The labour
market remains healthy, with ongoing job gains and steady real income growth. The credit
impulse is positive. There is consumption support in Japan from the Kishida cabinet’s
economic package (~1.5% of household disposable income), in Thailand (digital wallet
scheme; 2.8% of GDP) and Indonesia (pre-election spending). Even in economies where
rate hikes will likely bite (Korea and Australia), overall growth should slow but not slump.
A sweet spot in H1, followed by a choppier H2
Piecing together the global and local views, we see Asia entering its sweet spot in the first
half of 2024, due to an upturn in the export cycle and still-positive US growth (slow but
positive growth, with gradual disinflation). The second half of the year could become
choppier, as export growth momentum begins to roll over, US recession fears increase
economic uncertainty, and US-China political tensions heat up ahead of the US
presidential elections.
China’s real turning point
Beijing has announced a multitude of easing measures so far, but Nomura’s Chief China
economist, Ting Lu, warns that there is still a risk of another dip by spring 2024. New
home sales remain weak, and resolving the large number of unsold homes in low-tier
cities is essential. He reckons that after spring 2024, Beijing could play the role of lender
of last resort, funding major troubled developers to deliver unfinished pre-sold homes,
thereby marking a real turning point for China’s property market (see Box 7: The bumpy
road to home delivery ). Structurally, though, China’s economy faces challenges on
demographics, debt and geopolitics, which we expect to drive a slowing of GDP growth to
3.9% over the medium term (2024-28 average).
71
Nomura | 2024 Global Macro Outlook
11 December 2023
The economics of politics
The first half of 2024 will be busy politically (see Box 20: Policy and political
developments to watch in 2024 ). Election results could have medium-term implications
for geopolitics (Taiwan) and country-specific economic outlooks (Indonesia, India and
Korea; see Box 29: India’s elections and economics ). There could also be short-term
effects, such as weaker FDI inflows ahead of elections in Indonesia (see Box 31: A long
election season ), a moderation in both public and private capex in India (pre-elections), a
greater infrastructure push by the Philippines in H2 2024 (ahead of the midterms in May
2025) and a restructuring of project financing and construction firms after Korea’s
legislative elections, which could result in weak housing markets (see Box 24: Cooling
housing market and risk of default in project financing ). Interestingly, despite these Asian
elections, we don’t expect any fiscal populism – a sign of prudent policymaking.
Brace for inflation divergence
On aggregate, we expect CPI inflation to moderate across all Asian economies in 2024,
but we also see divergence as an important theme, depending on labour market
tightness, the stage of the business cycle, the size of fiscal subsidies and exposure to
food/energy shocks (see Box 19: What if food and oil prices rise further? ). Slowing but
still-tight labour markets mean that Australia and Singapore will likely face the last mile
inflation challenge. We see inflation reaching the top end of the RBA’s 2-3% target band
only by end-2025, representing the slowest moderation in the region (Figure 96). Our
underlying inflation scorecard also shows inflation running hot in the Philippines, South
Korea and Taiwan (Figure 97). Meanwhile, we see headline deflation persisting in
Thailand due to weak demand and the implementation of subsidies, and underlying
inflation remains low in Indonesia.
Monetary policy easing is next, but we expect Asia to ease less than the Fed
The rate hiking cycle is likely over. We expect an extended pause until Q1, followed by
rate cuts starting in Q2 2024 (led by Thailand and Indonesia). The one exception is
Japan, where we expect the BOJ to end NIRP in January 2024 and scrap YCC in Q2
2024 (likely April; see Box 21: Implications of BOJ policy normalization for Asia ).
However, Asian central banks should deliver less monetary policy easing than the Fed
(because they hiked less), with policy rates likely to be taken closer to neutral (Figures 98
and 99). Notably, five Asian central banks (a higher number compared with the past) will
end up with terminal policy rates lower than that of the Fed. Compared with the market
consensus, we expect more rate cuts in Korea (150bp cumulatively; consensus: 100bp),
Thailand (50bp; consensus: none) and India (100bp; consensus: 50bp), but no easing in
Taiwan (consensus expects 25bp of cuts).
It’s still Asia's time to shine
Beyond the cyclical view, we continue to believe that Asia has stronger economic
fundamentals, pro-reform governments and many new exciting growth opportunities, such
as shifting supply chains and public infrastructure spending in India and ASEAN, green
and EV opportunities in Korea and China, and downstreaming in Indonesia, which mean
Asia is well-placed to attract large capital inflows (see Asia’s time to shine , 5 June 2023).
Replacing China, we see India, Indonesia and the Philippines as the fastest growing
economies this decade (see Box 22: Asia’s rising stars – India, Indonesia and the
Philippines ).
High-conviction, out-of-consensus views
• China: We see a material risk of another dip for the economy, with GDP growth
slowing to 4.0% (Consensus: 4.5%) in 2024, led by a still-depressed property sector.
• India: A slowdown in investment and consumption, coupled with global spillovers,
should lead to GDP growth disappointing at 5.7% in 2024 (Consensus: 6.0%).
• Korea: Despite an export recovery, higher financial stress should weigh on private
consumption and lead the BOK to ease by 100bp in 2024 itself (Consensus: 5075bp), as core inflation falls.
• Taiwan: A chip-led export recovery, solid consumption and higher facility investment
should lead to above-consensus growth of 3.3% in 2024 (Consensus: 3.0%).
• Australia: GDP growth should slow to 1.1% (Consensus: 1.4%) in 2024, due to
weaker consumption, but we still expect a slow disinflation process, with inflation
easing to an above-target 3.8% in 2024 (Consensus: 3.5%).
72
Nomura | 2024 Global Macro Outlook
11 December 2023
• Thailand: Deflationary pressures should persist throughout 2024 (Nomura: -0.4%;
Consensus: 1.9%) which, coupled with deteriorating growth, will likely prompt the BOT
to cut rates by 25bp in each of Q2 and Q3 2024 (Consensus: No change).
• Indonesia: We forecast higher GDP growth of 5.2% in 2024 (Consensus: 4.9%), but
financing a wider current account deficit (Nomura: 1.3% of GDP; Consensus: 0.8%)
could become challenging, as FDI inflows weaken into the elections.
• Philippines: Ahead of the midterm elections in 2025, increased fiscal spending
should lead to higher GDP growth (Nomura: 5.8%; Consensus: 5.5%), but also wider
fiscal deficits (Nomura: 5.9% of GDP; Consensus: 5.5%).
Fig. 94: Nomura versus consensus forecasts
Real GDP, % y-o-y
Australia
Japan
China
Hong Kong
India
Indonesia
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Asia (excl. JP and AU)
2023
Nomura
2.0
2.0
5.2
3.2
7.0
5.1
3.8
5.2
0.9
1.3
1.6
2.0
3.5
Nomura
1.1
0.2
4.0
2.4
5.7
5.2
4.1
5.8
2.8
1.9
3.3
3.0
3.8
2024
Consensus
1.4
1.0
4.5
3.1
6.0
4.9
4.3
5.5
2.1
2.1
3.0
3.7
3.9
CPI, % y-o-y
2023
Nomura
5.7
3.2
0.2
2.0
5.7
3.7
2.6
6.0
4.8
3.7
2.5
1.3
3.3
Nomura
3.8
1.7
0.6
2.0
5.1
2.9
2.4
3.5
2.5
2.5
2.2
-0.4
2.3
2024
Consensus
3.5
2.2
1.6
2.1
4.7
3.0
2.5
3.8
3.1
2.4
1.7
1.9
2.7
Policy rate, %
End-2023
Nomura
4.35
-0.10
1.80
5.75
6.50
6.00
3.00
6.50
3.25
3.50
1.875
2.50
End-2024
Nomura
Consensus
3.60
3.85
0.00
0.00
1.80
4.75
5.75
6.00
5.00
5.25
3.00
3.00
5.50
5.75
2.75
2.50
2.75
1.875
1.750
2.00
2.50
Note: Policy rate refers to the 7d reverse repo rate for China, the discount rate for Hong Kong and the SORA 3-month compounded average for Singapore. Real GDP and CPI
inflation consensus estimates are obtained from the Asia Pacific Consensus Economics forecast survey (November edition), except for India where consensus estimates are
sourced from Bloomberg. Policy rate consensus estimates are from Bloomberg (where available). In the last row, real GDP growth and CPI inflation for Asia (excluding Japan and
Australia) are aggregated using simple average.
Source: Consensus Economics, Bloomberg and Nomura Global Economics.
Fig. 95: Past AEJ export cycle troughs and their preconditions
Source: CEIC and Nomura estimates.
73
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 96: Timeline on when inflation will return to target across Asia
Note: Target refers to the central bank inflation target for Australia, Japan, India, Indonesia, the Philippines, South Korea and Thailand. For countries that do not have explicit
central bank inflation targets, we use the shadow inflation target of 2% for Singapore (core) and Taiwan, 3% for China and the 10-year average inflation for Hong Kong and
Malaysia.
Source: Nomura estimates.
Fig. 97: Ranking: Inflationary pressures across Asia
Trimmed
mean CPI
(% y-o-y)
Overall
ranking
1
2
3
4
5
6
7
8
9
Singapore
Philippines
South Korea
Taiwan
Hong Kong
Malaysia
India
Thailand
Indonesia
3.9
4.9
3.0
2.6
2.4
1.7
4.7
0.6
2.2
Weighted Underlying
median CPI inflation
(% y-o-y)
(% y-o-y)
4.2
4.8
2.7
2.2
1.8
1.9
4.5
0.2
2.0
Deviation of
underlying
inflation from
long-term
average (pp)
2.8
2.1
1.1
1.2
0.1
-0.1
-0.1
-0.4
-1.1
4.0
4.9
2.8
2.4
2.1
1.8
4.6
0.4
2.1
Central bank
Deviation of
Deviation of
Core inflation
inflation target
underlying
core inflation Aggregate
(% 3m/3m
/ 10-year
inflation from
momentum from z-scores
saar)
average
target (pp)
target (pp)
inflation (%)
2.0
3.0
2.0
2.0
2.7
1.8
4.0
2.0
3.0
2.0
1.9
0.8
0.4
-0.6
0.0
0.6
-1.6
-0.9
1.7
3.1
2.8
2.0
4.1
1.9
3.2
0.4
1.3
-0.3
0.1
0.8
0.0
1.4
0.1
-0.8
-1.6
-1.7
103.1
102.8
101.9
100.8
100.5
99.4
99.1
96.3
96.2
Note: Higher score/ranking = Higher underlying inflation pressures. Trimmed mean CPI and weighted median CPI refer to the latest monthly figures (October 2023 for all
countries). Aggregate z-scores are computed by summing the z-scores of 1) deviation of underlying inflation from long-term average, 2) deviation of underlying inflation from
target, and 3) deviation of core inflation momentum from target, with equal weights assigned to all three components. Note that “underlying inflation” refers to the average of the
latest trimmed mean CPI and weighted median CPI, and “target” refers to the central bank inflation target for India, Indonesia, the Philippines, South Korea and Thailand, the
shadow target of 2% for Singapore and Taiwan, and the 10-year average inflation for Hong Kong and Malaysia. Core inflation momentum refers to the latest % 3m/3m saar core
CPI inflation.
Source: CEIC and Nomura Global Economics.
Fig. 98: Policy rate: Terminal versus nominal neutral
Terminal policy
rate (end-2025)
Fig. 99: Cumulative policy rate hikes and cuts until end-2025
Nominal neutral Deviation
rate
from neutral
%
%
pp
Australia
3.60
3.60
0
China
1.80
1.80
0
India
5.50
5.50
0
Indonesia
5.00
5.00
0
Japan
0.00
1.50
-1.50
Malaysia
3.00
3.00
0
Philippines
5.00
4.50
0.50
South Korea
2.00
2.00
0
Taiwan
1.88
2.00
-0.13
Thailand
2.00
1.50
0.50
Euro area
2.75
2.50
0.25
UK
4.00
3.25
0.75
US
2.375
2.125
0.25
Note: Terminal policy rates refer to Nomura's forecasts of end-2025 policy rates. Policy
rate refers to the midpoint of the Fed funds rate target range for the US, the deposit
facility rate for the euro area and the 7d reverse repo rate for China. Nominal neutral
rates are Nomura estimates.
Source: Nomura Global Economics estimates.
Source: Nomura estimates.
74
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 19: What if food and oil prices rise further?
Our baseline inflation forecasts assume no oil and food price shocks in 2024, but there are upside risks. Food prices
could rise due to food protectionism and a prolonged El Niño until April 2024, while ongoing production cuts from
OPEC+ and geopolitical risks could simultaneously put a floor on oil prices with uncapped upside potential.
What does this mean for Asia? Higher commodity prices could drive an adverse terms-of-trade shock for the region,
with higher inflation, lower growth and worsening twin fiscal and current account balances (Figure 100). That said, the
pass-through could be lagged due to government intervention (price controls or subsidies), which often results in a
trade-off between fiscal balance and inflation.
Who’s the most vulnerable in Asia? All AEJ economies are net food and oil importers, with the exception of Thailand
and India, which are net food exporters, although Thailand and India are net importers of wheat and edible oil
respectively. Within Asia, the Philippines is the most exposed, as food and energy account for 43.9% of its CPI basket
(rice alone has an 8.9% weighting), and the absence of fuel subsidies implies a direct pass-through to consumers (a
0.4pp rise in headline inflation for every 10% increase in oil prices). India is also vulnerable, but given it is self-sufficient
in most food crops, we view increased food protectionism as more of a risk, while fuel price controls will enlarge the
subsidy bill as cost increases are unlikely to be passed on to consumers into the elections (in H1 2024).
How will policymakers respond? Fiscal policy and supply-side interventions will likely be the first lines of defense.
The role of monetary policy is limited in the face of supply-driven pressures, but could be activated if second-round
effects materialize. This is especially true in the Philippines, where BSP follows its inflation mandate more strictly. For
other central banks, the bar to hike is much higher. By contrast, the risk of a wider fiscal deficit, including off-budget
subsidies, is much higher in Thailand, India and Indonesia, due to their proclivity to activate fiscal subsidies.
Fig. 100: Economic impact of every 10% rise in oil prices
Fig. 101: Net food and oil imports (% of GDP) vs share of
food and energy in CPI basket (%)
Impact of every 10% rise in oil prices
GDP
growth
(pp)
CPI
inflation
(pp)
Current
Fiscal
account
balance
(% of GDP) (% of GDP)
China
0.00
0.10
-0.20
-0.01
Hong Kong
0.00
0.07
-0.07
-0.01
India
-0.10
0.25
-0.40
-0.20
Indonesia
0.05
0.10
-0.20
-0.20
Malaysia
0.04
0.20
-0.03
0.00
Philippines
-0.07
0.40
-0.30
0.00
Singapore
-0.03
0.20
-0.70
0.00
South Korea
-0.05
0.15
-0.15
-0.10
Taiwan
-0.03
0.15
-0.10
-0.20
Thailand
-0.08
0.30
-0.50
-0.20
Source: Nomura estimates.
Note: In computing the share of food in CPI basket, we define food as including
raw food, condiments and processed food, while excluding beverages and
dining-out food/prepared meals.
Source: CEIC and Nomura Global Economics.
75
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 20: Policy and political developments to watch in 2024
2024 is a busy year for politics and policies in Asia. This box summarizes key events to watch in 2024.
Fig. 102: Summary of policy and political developments to watch in 2024
Country
Taiwan
Date
Policy/political event
Comments
Presidential and
legislative elections
The Presidential election is a three-way contest among Lai Ching-te (DPP), Ko Wen-je
(TPP) and Hou Yu-ih (KMT), with polls suggesting a close contest. A victory for DPP's
Lai, who is perceived as a strong advocate for Taiwan's political independence, could
exacerbate tensions between China and Taiwan, while an opposition win will be seen as
easing tensions with China.
14 Feb 2024
Presidential and
legislative elections
Three-way race among Prabowo, Ganjar and Anies. We expect Prabowo, who is
currently leading in the polls, to be the front-runner. Among the three candidates,
Prabowo has the most populist fiscal policies, hence fiscal risks could rise if he gets
elected. Political uncertainty may also exacerbate external risks, weighing on the BOP,
since FDI inflows have historically declined in the run-up to the elections.
27 Nov 2024
Local government
elections
Taking place shortly after the new president takes office, this will be the first time that
local elections (Pilkada) for governors and other local officials will be held simultaneously
across the country (as opposed to different dates for various regions).
Q1 2024
Constitutional
amendment
The government plans to hold a referendum by Q1 2024 to determine if the 2017
constitution, which was written after the 2014 military coup, should be re-written in order
to make it more democratic.
10 April 2024
Legislative election
The legislative election results are important to determine whether the Yoon
administration can push through its reform agenda in the Assembly, where the
opposition Democratic Party of Korea has a strong majority. In the run-up to the election,
we expect a cabinet reshuffle in late Dec 2023 or early 2024, with the new cabinet likely
to reset economic policies to boost domestic consumption, including by reducing
households’ financial burden (firstly, by encouraging commercial banks to lower lending
rates for the lower income group, and secondly, by increasing pressure for rate cuts).
However, the new cabinet will likely maintain tighter fiscal policy.
April 2024
Reshuffling of MPC
members
BOK MPC members Cho Yoon-Je (hawk) and Suh Young Kyung (neutral) will end their
tenure on 20 April 2024. Park Chunsup (hawk) has joined the new cabinet, and is no
longer an MPC member. We expect the spectrum of the BOK MPC to become more
dovish as the government and Korea Chamber of Commerce will likely recommend
dovish members to the BOK.
April-May 2024
General election
Lower house elections, with the fight between incumbent BJP and opposition (Congress
and other regional parties). Early opinion polls suggest the BJP's alliance will retain
power in 2024, which would signal policy continuity. Ahead of the elections, there is a
risk of competitive populism.
Through 2024
RBI MPC term ends
Deputy Governor Michael Patra’s term ends in January; the three external MPC
members conclude their terms in early October; and Governor Das’ second extension
ends in December.
Before
21 Nov 2024
Prime minister
leadership transition
PM Lee Hsien Loong will hand over leadership to DPM Lawrence Wong by the PAP's
70th birthday (21 Nov 2024), and before the next General Election (which has to be
called by Nov 2025).
13 Jan 2024
Indonesia
Thailand
Korea
India
Singapore
Source: Nomura Global Economics.
76
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 21: Implications of BOJ policy normalization for Asia
(Joint box with ASEAN economics and Andrew Ticehurst)
Our Japan economics team expects the removal of NIRP in January 2024 and the scrapping of YCC in Q2 2024
(potentially in April). According to the IMF , whether there will be material outflows likely depends on the consequent
change in JGB yields and Japanese-cross market bond spreads. So far, we have not seen a material change in
investment flows or asset allocation following the YCC policy tweaks, but it is worth looking at potential spillovers.
Japan’s portfolio investment in overseas assets stood at USD4.2trn in Q2 2023, double the amount invested before the
GFC, with more money invested in debt than in equity. If the BOJ’s policy normalization triggers repatriation back into
Japan, Australia would be the most exposed within the region, as 4.8% of its outstanding debt securities are held by
Japanese investors (Figure 103). Large selling of AUD bonds by Japanese investors would increase borrowing costs
for the Commonwealth and State governments, but should not tighten financial conditions materially, as corporate
loans are typically shorter-dated, and most home loans are either based on floating rates, or fixed for very short periods
(2-3 years). Countries within ASEAN – in particular, Singapore, Malaysia and Indonesia – are also exposed to the risk
of bond outflows, though the impact would likely be more limited, as only 1-2% of their outstanding debt securities are
held by Japanese investors, based on our estimates.
Cross-border lending from Japanese banks is another risk to watch. A look at two historical periods when the BOJ
normalized policy – August 2000 and March 2006 – shows no abnormal drop in Japanese bank lending to Asian
economies (Figure 104). Moreover, higher net interest margins and better lending opportunities in EM Asia, due to
faster growth and more financing needs for infrastructure projects, mean that cross-border lending should remain
robust, even if there is a temporary lending pull-back in the short term. Yet, with cross-border lending from Japanese
banks at a very high level, spillovers to Asia from this channel need to be carefully monitored, especially if there is
banking stress in Japan (not our baseline).
Fig. 103: Japan's equity and debt investments across
Asia
Note: Data are as of end-2022. Countries are arranged in descending order of
Japan's investment in debt securities (% of outstanding).
Source: Ministry of Finance (Japan), CEIC, BIS, Bloomberg and Nomura Global
Economics.
Fig. 104: Japanese bank lending to Asia
Note: Asia includes Australia, China, Hong Kong, India, Indonesia, Malaysia, the
Philippines, Singapore, South Korea, Taiwan and Thailand.
Source: BIS and Nomura Global Economics.
77
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 22: Asia’s rising stars – India, Indonesia and the Philippines
As compared with other EM regions, Asia has stronger economic fundamentals: higher growth, lower inflation and
healthier external finances (Figure 105). Even with a structurally slowing China, our medium-term (2024-28) projections
have real GDP growth for Asia ex-Japan (4.6% y-o-y) outperforming other EMs (Figure 106) – LatAm (2.4%) and
CEEMEA (3.3%). In particular, Asia’s striving tiger cubs – India, Indonesia and the Philippines – are likely to be the
fastest growing economies this decade. They have been scaling up structural reforms to address infrastructure gaps,
strengthen regulations and improve competitiveness. With ample room for economic development catch-up and
superior working-age populations, these economies are poised to attract stronger FDI and portfolio inflows, potentially
setting off a virtuous cycle where higher investment leads to stronger economic growth, which in turn attracts more
investment. After the significant EM risk reduction over the past year (Figure 107), Asia is now underinvested and
appears well-placed to attract large capital inflows. Asia’s flying geese paradigm should once again spring into action.
Fig. 105: Economic fundamentals scorecard of 20 EM economies
Inflation and growth
China
India
Indonesia
Malaysia
Philippines
South Korea
Taiwan
Thailand
Brazil
Chile
Colombia
Mexico
Peru
Czech Republic
Hungary
Poland
Romania
Russia
South Africa
Turkey
CPI
inflation
Real GDP
growth
2022 Latest
% y-o-y
2.0
-0.2
6.7
4.9
4.2
2.6
3.4
1.8
5.8
4.9
5.1
3.8
2.9
3.1
6.1
-0.3
9.3
4.8
11.6
5.0
10.2
10.5
7.9
4.3
8.3
4.5
15.1
8.5
14.5
9.9
14.3
6.6
13.7
8.1
13.8
6.7
6.9
5.9
72.0
61.4
2022
2023f
% y-o-y
3.0
5.0
6.7
6.3
5.3
5.0
8.7
4.0
7.6
5.3
2.6
1.4
2.4
0.8
2.6
2.7
2.9
3.1
2.4
-0.5
7.5
1.4
3.1
3.2
2.7
1.1
2.5
0.2
4.6
-0.3
4.9
0.6
4.8
2.2
-2.1
2.2
2.1
0.9
5.4
4.0
Monetary policy stance
Nominal policy
rate
End-2020
%
2.20
4.00
3.75
1.75
2.00
0.50
1.13
0.50
2.00
0.50
1.75
4.25
0.25
0.25
0.60
0.10
1.50
4.25
3.50
17.00
Latest
%
1.80
6.50
6.00
3.00
6.50
3.50
1.88
2.50
12.25
9.00
13.25
11.25
7.00
7.00
11.50
5.75
7.00
15.00
8.25
40.00
Fiscal finances
Real
policy
rate
Real
10y bond
yield
Fiscal
balance
Latest
%
2.00
1.63
3.44
1.20
1.60
-0.30
-1.18
2.81
7.43
3.97
2.77
6.99
2.48
-1.50
1.60
-0.85
-1.07
8.31
2.35
-21.36
Latest
%
2.89
2.39
4.04
2.03
1.32
-0.14
-1.70
3.26
6.13
0.74
0.24
5.12
2.73
-4.24
-3.09
-1.14
-1.20
4.32
5.59
-35.45
2022 2023f
% of GDP
-7.5
-7.1
-9.2
-8.8
-2.3
-2.2
-5.9
-4.7
-5.5
-4.8
-1.6
-1.2
-1.7
0.3
-4.6
-2.9
-3.1
-7.1
1.4
-1.6
-6.2
-3.5
-4.3
-3.9
-1.4
-2.2
-3.6
-4.1
-6.2
-5.5
-3.7
-5.3
-5.8
-6.3
-1.4
-3.7
-4.7
-6.4
-1.7
-5.4
Balance of Payments
Public
debt
Current
account
balance
Total
external
debt
Foreign currency
share of total
external debt
FX reserves/
Short-term
external debt
FX reserves/
Imports
Aggregate
z-score
(Higher =
More
vulnerable)
2022 2023f
% of GDP
77.0
83.0
81.0
81.9
40.1
39.0
65.6
66.9
57.5
57.6
53.8
54.3
29.7
26.6
60.5
61.4
85.3
88.1
38.0
38.4
60.4
55.0
54.1
52.7
34.3
33.9
44.2
45.4
73.3
68.7
49.1
49.8
50.5
51.0
18.9
21.2
71.1
73.7
31.7
34.4
2022 2023f
% of GDP
2.2
1.5
-2.0
-1.8
1.0
-0.3
3.1
2.7
-4.5
-3.0
1.8
1.3
13.3
11.8
-3.0
-0.2
-2.8
-1.9
-9.0
-3.5
-6.2
-4.9
-1.2
-1.5
-4.1
-1.9
-6.1
0.5
-8.0
-0.9
-3.0
1.0
-9.3
-7.3
10.5
3.4
-0.5
-2.5
-5.3
-4.2
Q2 2023
% of GDP
14.1
16.9
28.0
60.2
27.1
38.9
37.7
33.6
66.7
51.5
33.0
34.4
59.9
138.4
47.7
48.8
18.4
40.8
41.2
Q2 2023
%
68.1
69.6
68.4
46.5
97.1
68.5
68.2
71.3
92.0
97.6
62.8
99.3
59.7
83.7
67.3
83.1
69.3
57.3
96.0
Sep 2023
Times
2.3
4.2
2.3
0.8
5.0
2.7
3.0
2.4
4.2
1.5
1.7
2.9
6.7
1.0
0.9
2.1
1.2
5.0
1.5
0.5
Oct 2023
# months
14.5
9.2
6.4
4.3
8.2
7.1
18.8
7.8
14.8
5.7
9.4
3.6
15.6
5.6
2.3
4.8
5.3
15.9
5.1
2.6
98.4
99.4
95.9
99.9
97.5
98.6
92.8
99.0
97.8
101.1
101.9
98.4
94.2
103.0
108.9
101.4
104.3
91.6
102.3
113.4
Note: All 2023f estimates are from the IMF WEO database (October 2023 edition). The latest data for CPI inflation are as of October 2023. Data on total external
debt and foreign currency share of total external debt are as of Q2 2023, except for China (Q1 2023). Data on FX reserves/ST external debt are as of September
2023, except for India, the Philippines, Thailand, Colombia, Mexico, Czech Republic, Hungary, Poland, Russia, South Africa, Turkey (all June 2023) and China
(March 2023). Data on FX reserves/imports are as of October 2023, except for India, Colombia and Mexico (all September 2023). The aggregate Z-score is
calculated by summing the individual Z-scores (equal weights) for latest CPI inflation (+ve sign), average of 2022 and 2023f GDP growth (-), real policy rate (-), real
10y bond yield (-), average of 2022 and 2023f fiscal balance (-), average of 2022 and 2023f public debt (+), average of 2022 and 2023f current account balance (-),
total external debt x foreign currency share (+), FX reserves/short-term external debt (-) and FX reserves/imports (-).
Source: Bloomberg, CEIC, Institute of International Finance, International Monetary Fund, World Bank and Nomura Global Economics.
Fig. 106: Nomura's 2024-28 average real GDP forecasts
Note: Forecasts for Asian countries are Nomura's estimates. Forecasts for
CEEMEA and LatAm are obtained from the IMF WEO database (October 2023
edition).
Source: IMF and Nomura estimates.
Fig. 107: Gross portfolio inflows into Asia ex-Japan
Source: CEIC and Nomura Global Economics.
78
Nomura | 2024 Global Macro Outlook
11 December 2023
Korea: An export-led but uneven recovery
Research Analysts
We expect GDP growth to rise to 1.9% y-o-y in 2024 from 1.3% in 2023, led by a
recovery in exports. Solid demand for AI and inventory restocking should support high
single to double-digit growth in exports amid rising chip prices. However, sluggish
consumption will likely remain a drag on economic growth, as elevated financial stress
will take its toll on consumers, which will offset export growth. Despite highly volatile
supply-side prices, we expect headline inflation to slow to 2.5% y-o-y in 2024 from 3.7%
in 2023, helped by core inflation returning to the BOK’s 2% target relatively quicker than
headline inflation, reflecting sluggish domestic demand. As a result, we expect the BOK
to start cutting rates in July after core inflation slows to the 2% range by mid-2024, which
will lower its policy rate to 2.5% by end-2024 from 3.5% currently.
Jeong Woo Park - NSL
Asia Economics
jeongwoo.park@nomura.com
+65 6433 6197
GDP growth set to rebound, led by exports
Export-led recovery has started
We expect GDP growth to rise to 1.9% y-o-y in 2024 from 1.3% in 2023, as export growth
will likely become a strong tailwind for headline growth. We believe a recovery in export
growth can partly offset sluggish private consumption and construction activity.
Exports: Strong growth first, downside risk later
After a 14-month downturn, export growth has started to pick up, driven by: 1) a pick up in
chip prices, 2) stabilizing demand, and 3) base effects. Indeed, a recovery in the chip
upcycle (see Box 23: What drives chip cycles? ) is helping export growth turn positive,
which is consistent with our tech team ’s forecast of a double-digit rise in global chip
sales growth in 2024 (Figure 108), which suggests export growth is set to accelerate over
the next few quarters.
• Price effects: Chip companies have started to adjust their chip production in
response to weak demand, which has mitigated the downside risk to chip prices. At
the same time, owing to a lower base in 2023, favorable base effects can amplify
the positive effect on year-on-year growth throughout 2024.
• Inventory restocking and AI investment: As tech companies have benefited from
early signs of stability in PC and smartphone demand, we expect inventory restocking
in the sector to increase demand for legacy chips. At the same time, demand for highspeed chips will likely be more of a key driver for the expected chip cycle in coming
months.
We expect exports to expand at a robust pace (a high single- to double-digit) in 2024, led
by the chip cycle, which should also lead to a wider trade surplus in 2024. However, it
remains to be seen how long the export upturn can last as we believe there is still high
uncertainty around the export outlook in H2.
High uncertainty around the sustainability of the export recovery into H2
We expect the export cycle to be shorter than the historical average of 23 months , as
higher capital costs will likely weigh on business spending. Indeed, big tech companies in
the US and China remain cautious about H2 2024 (Figure 109), suggesting chip-led
export growth will likely face headwinds in H2.
Currently, it is uncertain whether we will see a mid-cycle correction or a double-dip after a
short-term rebound led by positive price effects and inventory restocking, although
structural demand such as AI-driven investment is emerging. While we believe a midcycle correction is more likely, as our US team forecasts a mild recession in the US, we
remain cautious about the export outlook beyond H1 2024.
Sluggish domestic demand will likely offset the export recovery
Sluggish consumption
Consumption has started to cool off, and we expect consumption to remain sluggish,
owing to easing labor market conditions amid a higher financial burden.
• Easing labor markets: We expect total nominal wage growth to slow to 3-4% y-o-y in
2024 from 6.9% in 2023, the lowest growth since the 2020 pandemic, as the weak
services sector will likely weigh on employment growth (Figure 110).
• Higher financial burden: At the same time, household debt overhang will remain a
drag on consumption, with elevated interest payments reducing spending power. We
79
Nomura | 2024 Global Macro Outlook
11 December 2023
estimate that for consumers receiving regular wages, interest payments account for
around 10% of their regular wage income in 2023, up from 7% in 2022.
The recent slowdown in consumption indicates that pent-up demand has run its course,
and excess savings are mostly depleted. Thus, amid moderating household spending
power (Figure 111), we expect consumption to remain subdued, underperforming
headline growth in 2024.
Investment is set to slow, led by weak construction investment
Weaker construction investment
Construction orders, a forward-looking indicator, suggest that construction investment is
likely to contract in 2024 (Figure 112). As the default risk of project financing (PF)
persists in the property sector (see Box 24: Cooling housing market and risk of default in
project financing ), real estate developers have been struggling with financing their
construction projects, leading to a drop in construction orders in 2023, which will
consequently weigh on construction investment in 2024.
Mild recovery in facility investment
We expect a modest increase in facility investment growth as improved export growth will
likely spur companies to increase capex. Indeed, growth in capital goods imports and
machinery orders indicate a recovery in facility investment (Figure 113).
Overall, we expect gross capital formation to moderate to 0.9% y-o-y in 2024 from 1.8% in
2023, as weaker construction investment will have a bigger impact on investment.
Fig. 108: Nomura's forecast for export growth
Fig. 109: Capex spending of tech companies in US and China
Note: We first estimate export growth for the sample period (2012-2019), and then
produce out-of-sample forecasts for the period from 2020 to 2024. Our export growth
forecast combines results from different forecasting methods such as error correction
model, autoregressive distributed lag (ARDL) model, and time-varying regression to
capture the dynamic relationship among variables. Our forecasting model incorporates
a range of variables including global liquidity conditions (G4 central banks assets,
China credit impulse), global demand (global capex spending, tech companies'
expenditure), and the OECD's G20 composite leading index.
Source: CEIC, Nomura Global Economics
Note: We sum up capex spending of tech companies in the US and China including
MS, Amazon, Google, Meta, Alibaba, among others.
Source: Bloomberg, CEIC, Nomura Global Economics
80
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 110: Total wage income and private consumption
Fig. 111: Household spending power vs consumption
Note: Total wage income = Regular workers * regular wage; Total wage income is
nominal growth; Private consumption is real growth
Source: CEIC, Nomura Global Economics
Note: Household spending power is the sum of labor income, cashflow from assets (net
interest income and rental income), and change in the household savings rate.
Source: CEIC, Bank of Korea, Nomura Global Economics
Fig. 112: Construction investment and construction orders
Fig. 113: Capital goods imports
Note: Construction orders are 20-month rolling average
Source: CEIC, Nomura Global Economics
Source: CEIC, Nomura Global Economics
Inflation: Endgame in sight
Disinflationary forces are set to resume
We expect headline disinflation to resume as sluggish consumption should support an
easing in core inflation. Although the inflation outlook will remain uncertain owing to high
oil and food price volatility, easing price pressures in other products will likely support the
disinflation cycle (Figure 114). This is due to the following factors.
• Easing core prices: With sluggish consumption due to softer wage growth, we
expect core disinflation, led by moderating dining-out and clothing price inflation
(Figure 115).
• Stabilizing inflation expectations: We expect household inflation expectations to
continue moderating towards 2%, reflecting cooling consumption and easing oil prices.
Thus, we expect headline disinflation to resume, which should help slow inflation to 2.5%
y-o-y in 2024 from 3.7% in 2023, suggesting that inflation will likely return to the BOK’s
2% target only in Q4 2024. However, we expect core inflation to slow to 2% by mid-2024,
which will help increase the BOK’s confidence on price stability.
81
Nomura | 2024 Global Macro Outlook
Fig. 114: Headline disinflation cycles
11 December 2023
Fig. 115: Total wage income and core inflation
Note: X-axis denotes months before and after headline inflation peaks at above 5%.
Y-axis denotes the magnitude of disinflation from the peak.
Source: CEIC, Nomura Global Economics
Note: Total wage income = Regular workers*regular wage
Source: CEIC, Nomura Global Economics
BOK is set to start rate cuts in July, with 100bp of cumulative
cuts by end-2024
Policy reaction function to emphasize more domestic factors
We expect the BOK’s policy reaction function to place more emphasis on domestic factors
than the Fed’s monetary policy stance. Our US team believes that the Fed delivered its
last rate hike in July 2023, and this will create more room for the BOK to make an
independent policy decision from that of the Fed.
In our view, despite the recovery in headline growth and higher household debt, which
support hawks at the BOK, we expect the pressure for rate cuts to gradually build,
reflecting sluggish consumption and easing inflation concerns. In addition, we believe two
factors will strengthen the case for rate cuts in 2024.
• Increasing risk of a double-dip in the housing market: We expect housing prices
to resume their decline in 2024 after a soft landing in 2023 (see Box 24: Cooling
housing market and risk of default in project financing ). Recently, there have been
some early signs of a housing market slowdown in terms of house prices and
transaction volumes. An increasing risk of a double-dip in the housing market will
prompt rate cuts.
• Private sector debt burden: We believe consumers and nonfinancial corporations
will likely experience more financial difficulties in 2024 . As a result, we expect the
private sector to cut back on consumption and investment, owing to a higher debt
service burden, which will lead to sub-par growth and prompt the BOK to
pivot towards an easing cycle in H2.
Taylor rule estimates suggest a likely change to the policy course in H2
More policy splits in H1; rate cuts starting in July
We expect the BOK's MPC to turn more dovish over coming months, reflecting diverging
trends in exports and the domestic economy. Indeed, the BOK has lowered its 2024 GDP
growth forecast to 2.1% from 2.2% earlier, reflecting a weaker consumption outlook
despite the export recovery. At the same time, the BOK’s MPC members have started to
have different views on the policy rate. Indeed, two members of the MPC lowered their
terminal rate forecasts to 3.5% at the November meeting, a dovish shift from 3.75% at the
October meeting.
There may be more policy splits at the BOK’s upcoming meetings, when the negative
factors (risk of a double-dip in the property market and the private sector’s debt burden)
outweigh the positive factors such as an export-led recovery, leading to a policy trade-off.
Thus, despite the export-led recovery, cooling inflation and sluggish consumption, along
with rising financial stress will eventually lead to the BOK’s pivot in Q3 2024, in our view.
82
Nomura | 2024 Global Macro Outlook
11 December 2023
This is also supported by our modified Taylor rule estimates (Figure 116). We expect the
BOK’s pivot towards easing to occur in July, which will lead to 100bp in cumulative rate
cuts by end-2024 (terminal rate: 2.5%).
Fig. 116: Modified Taylor rules for the BOK
Note: Our modified Taylor rules suggest different levels of terminal rate:
1) BOK inertia rule (dotted grey) considers only domestic economic conditions, and suggests 2.0-2.5%.
2) The Fed follower rule (dark grey), which only considers Fed policy rate and not domestic conditions,
suggests 4.0-4.5%.
3) The balanced BOK rule (black line) considers both the domestic conditions and the Fed's policy rate, and
suggests 3.0-3.5%.
Source: CEIC, Nomura Global Economics
83
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 23: What drives chip cycles?
Lessons from past chip cycles
There have been increasing signs that the tech upturn is gaining momentum with chip prices picking up. After the
severe downturn, with ongoing chip production cuts, chip export growth is likely to increase on stabilizing demand for
tech products such as PCs and smartphones, and newly rising demand for AI servers. However, there still exists much
uncertainty over the duration of the chip cycle. Indeed, the Fed’s higher-for-longer strategy may increase the cost of
capital and weaken investment.
Figure 117 shows earlier chip cycles and key drivers for each cycle, which suggests that the interplay between the
strength of demand and supply-side conditions determine the phase and length of a chip cycle.
• Cyclical versus structural demand: In the past, structural demand has driven chip cycles, such as PCs in the
1990s, mobile phones in the 2000s, and smartphones in the 2010s. Since 2016 and the release of DDR5 in 2020,
structural demand (i.e., data centre investment) has continued to underpin the chip cycle. By contrast, the
pandemic boom was caused by cyclical demand, which ended sharply after the Fed started to tighten. Nomura’s
tech analysts expect investment in AI and its consumer and business penetration to accelerate as the barriers to
entry for developing AI models have fallen.
• Supply-side conditions: Owing to rapid developments in chip-making technology and highly volatile cyclical
demand, chip prices frequently experienced sharp fluctuations in the previous chip cycle downturn, and
chip makers had little influence over volatile chip prices. However, after much consolidation and aggressive
competition, only three survivors (Samsung, SK Hynix, Micron) dominate the memory markets, and chip makers
have gained more power over chip prices, enabling them to mitigate the downside risks by adjusting chip
production.
Structural demand can offset tighter monetary policy
Previous chip cycles suggest that a chip cycle can move into an upturn on structural demand, even with tighter
financial conditions. Interestingly, before the 2008 GFC, every upturn in the chip cycle was accompanied by a tighter
Fed monetary policy. For the current cycle, encouragingly, structural demand is also driving the current chip cycle with
an increasing number of companies joining AI-led investment, while the Fed is likely to maintain its higher policy rate,
which resembles the 1990s PC boom.
Although the pre-GFC cycles show that the chip cycle can improve along with tighter monetary policy, we remain
cautious about the sustainability of the current upturn in the chip cycle. For example, the 2006-07 cycle lasted only 14
months, because of the US financial crisis in 2008, the shortest upturn since 1993.
Overall the current chip cycle upturn has more legs, but there is uncertainty over the demand outlook amid the Fed’s
higher-for-longer strategy, especially if it causes a deeper slowdown beyond our view of a mild US recession.
Fig. 117: Chronology of chip cycles
Chip cycles
Period
Upturn
June 1993 - November 1995
Duration (Months)
29
Downturn
November 1995 - June 1998
31
Upturn
June 1998 - September 2000
27
Main events
Global Financial conditions
New economy and PC boom
Tightening (Fed hikes: 3.0% -->6.0%)
Overinvestment and excess supply
Asia financial crisis and double-dip
DDR1 and IT bubble (e-commerce, Y2K)
Fed's small cuts (5.5% --> 4.75%)
Higher-for-longer strategy
Tightening (Fed hikes)
Downturn
September 2000 - July 2001
10
IT bubble burst
Easing (Fed cuts: 6.5% -->1.75%)
Upturn
July 2001 - May 2004
34
DDR2, NAND driven boom (Apple's iPod and mobile phones)
Easing (Fed cuts: 1.75% -->1.0%)
Downturn
May 2004 - June 2006
25
Global soft landing
Tightening (Fed hikes: 1.0% --> 5.25%)
Upturn
June 2006 - August 2007
14
DDR3, China investment/US housing market boom
Fed rate at 5.25%
Downturn
August 2007 - January 2009
17
US subprime crisis/ DRAM market restructuring
Easing (Fed cuts: 2.0% --> 0.25% and QE)
Upturn
May 2009 - September 2010
20
NAND boom: Smartphones and tablet PC
DRAM consolidation
China's fiscal stimulus package
Downturn
September 2010 - July 2012
22
Slowing PC demand (Cannibalization of PC)
Global QE2
Zero interest rate policy (ZIRP)
Upturn
July 2012 - October 2014
27
Downturn
October 2014 - February 2016
16
Final consolidation in DRAM markets (Elpida's fall)
DDR4; Supply-side driven boom
Peak smartphones
Global QE3
Upturn
February 2016 - September 2018
31
Data center investment: Server PC boom
Tightening (Fed hikes: 0.25% --> 2.5%)
Downturn
September 2018 - April 2020
19
Excess chip supply (inventory overhang)
Trade war and Covid-19
Easing (Fed cuts: 2.5% --> 0.25%)
Upturn
April 2020 - December 2021
20
DDR5, Data center investment: Pandemic boom
Global pandemic stimulus packages
Downturn
December 2021 - April 2023
16
Upturn
April 2023 -
The pandemic chip boom burst
Excess inventory
AI server boom; Strong demand for high-speed chip
Chip production cuts
Tightening (Fed hikes: 0.25% --> 5.5%)
Fed's 'higher for longer' strategy
The average upturn cycle : 26 months
The average downturn cycle: 19.5 months
Note: We calculate the chip cycle by using the Hamilton-filter method. We use Fed's monetary policy as a proxy for global financial conditions.
Source: Nomura Global Economics
84
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 24: Cooling housing market and risk of default in project financing
We expect the risk of default in project financing to rise again as the government has tightened its macroprudential
measures after easing them in 2023, and we believe played a crucial role in a housing market crash being avoided
during its first downturn in 2022.
Easing macroprudential measures helped achieve a soft landing in the housing market
In early 2023, the government eased its macroprudential measures, including setting up the special mortgage lending
program. In addition, despite the BOK’s tighter monetary policy, the government encouraged commercial banks to
lower their household lending rates, a selective shadow easing policy, which has helped the housing market recover.
Indeed, the Seoul apartment price index, a benchmark index for housing prices in Korea, has started to pick up from its
bottom, after an 11% drop from the peak of the cycle. As a result, with a soft landing in the housing market ,
construction companies have managed to start their pre-approved construction projects, which have partly helped ease
their financial burdens.
Risk of default on project financing loans will likely rise again
We believe the risk of project financing loans defaulting will rise again as reinstated tighter macroprudential measures
will likely amplify the negative impact of higher interest rates on the housing market. Our estimate of returns on housing
investment indicates that downward pressures are building in the housing market (Figure 118), which we first
introduced in our special report (see Korea: The looming housing recession , 6 October 2022).
NBFIs (non-banking financial institutions) and construction companies will be under pressure from the housing
market's downturn, as the amount of exposure to project financing stood at around KRW140trn (~6% of GDP; as of
September 2022). Although we believe the risk of a systemic liquidity crunch may be contained as the BOK preemptively introduced liquidity support measures (standing lending facility) in July 2023, the construction sector is likely
to be immediately affected by the worsening housing market due to tighter liquidity conditions. Indeed, despite a
recovery in the housing market this year, most construction companies are struggling with refinancing their debt as
their profit margins remain under pressure from higher construction costs and a softer housing market (Figure 119).
Thus, amid construction companies’ low interest coverage ratio, we believe the risk of defaults in project financing will
rise again as more construction companies may fail to refinance their debt.
Fig. 118: House price and return on housing investment
Source: CEIC, Nomura Global Economics
Fig. 119: Construction sector: Profitability and debt
burden
Source: Bank of Korea, Nomura Global Economics
Risk to our view
A stronger-than-expected recovery in exports is an upside risk to the GDP growth outlook,
while a deeper global recession and a more severe downturn in the housing market pose
downside risks to the GDP growth outlook. Oil and food price fluctuations pose upside
risks to the inflation outlook, whereas weaker private consumption is a downside risk.
85
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 120: Korea: 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
Construction investment
Facilities investment
R & D 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 (USDbn)
Current account balance (% of GDP)
Fiscal balance (% of GDP)
Fiscal balance ex-social security (% of GDP)
BOK official base rate (%)
10-year government bond
Exchange rate (USD/KRW)
3Q23
2.4
0.6
1.4
0.3
0.9
4.0
-4.7
-1.1
3.2
0.0
4Q23
1.8
0.5
2.0
0.4
0.1
3.2
-9.1
1.3
7.5
3.1
1Q24
4.2
1.0
2.7
0.2
0.9
1.2
-5.3
2.5
3.7
1.1
2Q24
0.7
0.2
2.3
0.6
1.2
0.9
-3.2
2.5
6.8
5.5
3Q24
-0.9
-0.2
1.4
0.5
0.6
-3.2
5.1
4.1
3.3
3.7
4Q24
1.4
0.4
1.3
1.2
0.4
-5.1
10.6
4.1
4.2
4.6
1Q25
4.9
1.2
1.5
1.6
1.1
-5.1
4.2
2.0
4.2
3.9
2Q25
-0.2
-0.1
1.3
1.8
2.1
-3.4
4.9
2.0
4.1
4.1
2023
2024
2025
1.3
1.7
1.5
2.7
-0.8
1.5
2.2
3.0
1.9
0.6
0.8
-1.6
1.8
3.3
4.5
3.7
2.1
1.9
1.6
-1.3
5.3
2.6
5.0
5.0
0.4
-0.4
1.4
2.6
3.1
14.1
3.4
0.1
-0.2
2.1
2.6
3.7
17.1
3.9
1.6
-0.1
1.2
2.7
3.2
8.7
2.0
1.1
0.3
0.9
2.9
2.9
10.6
2.3
1.2
0.2
0.1
2.9
2.4
12.6
2.6
1.1
0.1
0.2
3.0
1.5
13.3
2.7
0.9
0.3
0.3
3.1
1.8
11.6
2.4
1.3
-0.3
0.3
3.1
1.9
13.1
2.6
3.50
4.0
1349
3.50
3.4
1285
3.50
3.2
1250
3.50
3.0
1220
3.00
2.9
1200
2.50
2.9
1180
2.25
3.1
1170
2.00
3.0
1160
1.4
0.1
-0.2
2.6
3.7
33.7
2.0
-1.6
-3.9
3.50
3.4
1285
1.2
0.1
0.6
2.9
2.5
45.2
2.4
-1.9
-3.9
2.50
2.9
1180
1.6
0.2
0.3
3.0
1.9
56.9
2.8
-1.0
-3.0
2.00
3.0
1140
Note: Numbers in bold are actual values; others forecast. Interest rate, currency 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 5 December 2023.
Source: CEIC, Nomura Global Economics
86
Nomura | 2024 Global Macro Outlook
11 December 2023
Taiwan: Stable and solid growth
Research Analysts
We expect GDP growth to rise to 3.3% y-o-y in 2024 from 1.6% in 2023, led by a
recovery in export growth. Investment will also likely pick up modestly, driven by
construction investment amid a tepid rise in facility investment. Consumption will likely
slow after two years of strong growth, as pent-up demand has likely run its course.
However, with a tighter labor market and a solid private sector balance sheet, we expect
a soft landing in consumption. We expect inflation to ease to 2.2% y-o-y in 2024 from
2.5% in 2023, reflecting softer domestic consumption. As a result, we expect the CBC to
leave its policy rate unchanged at 1.875% throughout 2024.
Jeong Woo Park - NSL
Asia Economics
jeongwoo.park@nomura.com
+65 6433 6197
Strong growth
We expect GDP growth to increase to 3.3% y-o-y in 2024 from 1.6% in 2023, led by a
recovery in exports and construction, offsetting softer consumption.
A recovery in export growth led by the chip cycle
We expect export growth to return to a solid pace led by a recovery in the chip cycle (see
Box 23: What drives chip cycles? ). Chip export growth is already picking up, led by solid
demand for AI investment and stabilizing PC and smartphone markets. Beyond the upturn
in the chip cycle, we expect two factors to strengthen the export recovery in 2024.
• Inventory restocking: In addition to AI-led chip exports, we expect traditional
markets, such as computer makers, to start inventory restocking as wholesale
inventories in the US have fallen to low levels again, which will help increase exports
across the tech sectors including electronics parts beyond chip exports.
• Improving export growth to China: China’s weak demand exacerbated the export
downturn. The improvement seen in two key leading indicators, such as the OECD
China leading index and China’s credit impulse, is an encouraging signal that positive
export growth to China is in sight (Figure 121), although our China team does not
expect a major demand recovery.
A mild recovery in investment
We expect a mild recovery in gross capital formation, reflecting a modest increase in
construction investment. We expect a tepid recovery in business investment despite the
export recovery, as companies remain cautious about demand in 2024.
• Conservative capex plans: Chip companies remain conservative about capex for
2024, as they are still suffering from inventory overhang. For example, TSMC has
pencilled in another ~8% decline in its capex plans for 2024.
• Mild recovery in construction investment: We expect a recovery in the housing
market to support a mild recovery in construction investment. As M1 money supply
growth is likely to increase, owing to the export recovery (Figure 124), mortgage loans
are likely to pick up, which may lead to a recovery in housing prices, and hence a
pickup in construction investment (Figure 122).
Soft landing in consumption
We expect consumption growth to moderate after two years of strong growth as pent-up
demand has run its course. However, we believe a solid labor market and strong household
balance sheets will support a soft landing in consumption, with growth of around 2%.
A strong labor market will likely help achieve a soft landing in consumption
The unemployment rate has remained at 3.4%, a decade low, supporting wage growth of
mid-2%. Although tightness in the labour market is likely to ease, as job vacancies are
slowing, we expect solid headline GDP growth to support job creation, leading to a soft
landing in consumption.
Inflation and monetary policy
Easing inflation, but uncertainty prevails over the outlook
We expect inflation to moderate to 2.2% y-o-y in 2024 from 2.5% in 2023, as cooling
domestic consumption is likely to ease inflation pressures (Figure 123).
Cooling consumption and easing core inflation
Pent-up demand has led to increased spending on dining out and entertainment, which in
turn has pushed up prices for these two items. However, after the release of pent-up
demand over the past few quarters, spending on these two items is likely to normalize
along with cooling consumption, which should help ease underlying inflation pressures.
87
Nomura | 2024 Global Macro Outlook
11 December 2023
Much uncertainty over when price stability will be achieved
However, volatile oil and food prices will likely remain a source of upside risk for the inflation
outlook. Indeed, 2023 saw more frequent typhoons lead to more volatile food prices, which
is likely to persist owing to global climate change. Moreover, elevated political tensions in
the Middle East suggest supply-side challenges could still trigger an unexpected increase in
inflation. Therefore, we expect inflation to return to the 2% target only in Q4 2024.
Monetary policy: Hawkish hold, but tighter credit policy
We expect the CBC to leave its policy rate unchanged at 1.875% throughout 2024, as
inflation moderates towards its goal by end-2024. However, the export recovery amid a
soft landing in consumption increases the risk of an overheating economy, which would
lead to more diverging views on the future path of monetary policy (see Box 25: Rising
risk of an overheating economy ).
Although we believe the increasing risk of an overheating economy will likely strengthen
the CBC’s hawkish stance, cooling consumption and easing inflation concerns are likely to
constrain any aggressive reaction. The looming recession in the US will also likely support
doves at the CBC.
As a result, we expect the CBC to use tighter credit controls rather than rate hikes if it
sees the economy showing some signs of overheating in the housing market, while
remaining patient about inflation, which will more likely temporarily deviate from its 2%
target in H1 before moderating towards 2% by end-2024.
Fig. 121: OECD China leading index and export growth
to China and Hong Kong
Fig. 122: Construction investment and mortgage loan
Source: CEIC, Nomura Global Economics
Source: CEIC, Nomura Global Economics
Fig. 123: Consumption and core inflation
Fig. 124: Export growth and money supply
Source: CEIC, Nomura Global Economics
Source: CEIC, Nomura Global Economics
88
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 25: Rising risk of an overheating economy
With resilient fundamentals, the risk of an economic overheating is likely to increase, as we expect GDP growth to rise
to above-3% in 2024, higher than our estimate of trend growth (~3%). Indeed, a solid labor market with an
unemployment rate at a decade low, improving monetary conditions, and strong private sector balance sheets are
likely to fuel the risk of overheating.
• Widening output gap: As economic growth has started to pick up, led by exports, we expect the output gap to
close (Figure 125), increasing upward pressure on inflation.
• Increasing money supply: The widening trade surplus should lead to an increase in M1 money supply growth, if
the CBC intervenes.
• Rising household lending: Mortgage loan growth is picking up again after a downturn lasting 24 months. As
money supply growth increases, we expect commercial banks to ease their lending standards to increase
mortgage lending.
• Negative real policy rate: With inflation remaining elevated above 2%, the real policy rate has become more
negative, which could fuel another housing market boom.
If the economy shows signs of overheating in H1, as we expect, will the CBC raise the policy rate to cool the overheating
economy? Indeed, our estimate of the Taylor rule (Figure 126) suggests there will be increased pressure to raise rates
throughout 2024. We expect the CBC to take two different approaches in response to a likely overheating economy.
Scenarios for the CBC’s likely reaction to an overheating economy
• A non-rate policy, tightening credit controls (55% probability): The CBC will tighten macroprudential policy if
inflation remains within its predicted outlook, but housing prices rise sharply. The possible measures include
lowering the LTV (loan to value) ratio cap and adopting tighter credit controls.
• Rate hikes (45% probability):The CBC will seriously consider rate hikes if the economy overheats and this
pushes inflation higher than it is willing to tolerate. In this case, we expect the CBC to resume its hiking cycle until it
becomes comfortable with its inflation outlook.
We assign a slightly higher probability of credit control measures being implemented in response to an overheating
economy, as we expect inflation to remain anchored at the 2% target, owing to cooling consumption. Moreover, a
slowing global economy will put more downward pressure on oil prices, which should help stabilize inflation. Thus, we
expect the CBC to use credit control measures in response to an overheating economy.
Fig. 125: Output gap and Nomura's forecast
Fig. 126: CBC's policy rate and Taylor rule estimates
Source: CEIC, Nomura Global Economics
Note: Our modified Taylor rule adds the money supply gap (6%-M1 money
supply growth) to the original Taylor rule equation reflecting the importance of
money supply in the CBC's policy reaction function.
Source: CEIC, Nomura Global Economics
Risk to our view
Stronger-than expected export growth poses an upside risk to the growth outlook, while a
deeper-than-expected global recession is a downside risk. Higher-than-expected food and
oil prices will pose an upside risk to the inflation outlook, while slower-than-expected
consumption growth will be a downside risk.
89
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 127: Taiwan: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (sa, % q-o-q)
Real GDP
Private consumption
Government
Gross capital formation
Exports
Imports
Contributions to GDP growth (pp)
Domestic demand
Net trade (goods & services)
Unemployment rate (sa, %)
Consumer prices
Current account balance (USDbn)
Current account balance (% of GDP)
Fiscal balance (% of GDP)
CBC discount rate (%)
10-year government bond
Exchange rate (USD/TWD)
3Q23
2.5
2.3
8.9
0.7
-14.0
-1.0
-4.9
2023
2024
2025
1.6
8.3
2.1
-10.3
-3.4
-5.0
3.3
2.0
2.6
2.1
6.1
4.3
4.4
2.4
2.0
7.4
5.8
5.2
1.2
0.4
3.5
2.5
73.4
9.4
-1.3
1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875
1.20
1.25
1.25
1.20
1.15
1.10
1.25
1.20
1.25
31.7
31.0
30.0
29.5
29.3
29.0
28.9
28.8
31.0
1.7
1.9
3.4
2.2
84.2
9.8
-0.8
1.875
1.10
29.0
2.9
1.5
3.5
1.8
111.6
12.8
-0.4
1.875
1.15
28.5
0.4
1.9
3.4
2.5
15.7
7.8
4Q23
2.5
5.7
5.3
2.1
-9.1
5.6
-3.1
1Q24
-0.7
5.8
3.1
3.9
-5.2
7.9
0.2
2Q24
0.4
4.8
1.8
2.4
1.1
7.8
3.1
3Q24
0.4
2.7
1.5
3.8
6.2
4.6
5.6
4Q24
0.4
0.6
1.4
0.2
6.2
3.9
8.2
1Q25
0.6
1.8
2.2
2.0
2.8
4.5
6.1
2Q25
3.0
4.5
3.2
2.0
9.2
4.5
4.8
0.5
5.4
3.4
2.9
21.9
10.3
0.7
5.0
3.3
2.4
21.3
10.5
1.4
3.5
3.3
2.1
18.7
9.0
2.6
0.3
3.4
1.9
18.8
8.5
2.0
-1.4
3.5
1.5
25.4
11.3
2.4
1.0
3.6
1.7
26.4
12.7
3.5
0.6
3.5
1.8
27.4
12.9
Note: Numbers in bold are actual values; others forecasts. The “Inventories” component in growth contributions also includes statistical discrepancy. Interest rate, currency 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 5 December 2023.
Source: CEIC, Nomura Global Economics
90
Nomura | 2024 Global Macro Outlook
11 December 2023
Research Analysts
Hong Kong: Adjusting towards a new pattern Asia Economics
2023 was a roller-coaster for Hong Kong’s post-Covid recovery. The economy initially
rebounded fairly strongly amid China’s rapid reopening and the significant influx of
Mainland tourists following the removal of the three-year-long border closure. However,
things turned quickly to the downside, as China’s recovery lost momentum and
geopolitical concerns deepened, which eventually led to an anti-climactic conclusion to
this highly anticipated recovery. We expect GDP growth to moderate to 2.4% in 2024, as
Hong Kong continues to adjust to what we view as a new paradigm, in which the local
economy is much more aligned with the Chinese Mainland than the rest of the world. We
also believe the property sector is unlikely to improve materially next year.
Harrington Zhang - NIHK
harrington.zhang@nomura.com
+852 2252 2057
Jing Wang - NIHK
jing.wang@nomura.com
+852 2252 1011
Hannah Liu - NIHK
hannah.liu@nomura.com
+852 2252 1082
Ting Lu - NIHK
Growth is likely to moderate in 2024 as the economy adjusts to a new paradigm
ting.lu@nomura.com
+852 2252 1306
We expect GDP growth to slow to 2.4% in 2024 from an estimated 3.2% in 2023, as the
favourable low base disappears (Figure 128), though notable uncertainties remain, as
China’s economy continues to struggle with multiple headwinds and the ongoing global
slowdown is set to intensify. The trajectory of growth in 2023 shows how synchronised Hong
Kong’s economy has now become with China’s economy during this new post-Covid era.
While we are cautious about growth in China in 2024, we think the steady return of Mainland
visitors – as we project the recovery in cross-border travel to gather pace in 2024 – and the
robust labour market should continue to backstop private consumption. However, we are
concerned that investment will continue to face substantial headwinds amid highly elevated
global interest rates and prolonged geopolitical tensions. Inflation is also likely to stay
moderate owing to declining housing prices and lacklustre growth.
Geopolitical uncertainties and elevated rates are set to continue hampering investment
Highly elevated global interest rates will likely continue weighing on private investment,
which could be further exacerbated by declining property prices, in addition to the
traditional channel of rising borrowing costs. Falling property prices may affect investment
through the credit channel too, as collateral becomes less valuable. This is best
evidenced by the lacklustre bond and stock performance of local property developers.
Moreover, heightened geopolitical tensions will likely continue to hinder FDI into Hong
Kong. In Q3, China recorded its first ever negative inward FDI since data began in 1998.
Many inward investments into Hong Kong have originally been targeted at opportunities in
Mainland China, so concerns about the ongoing national security drive, and the slowing
Chinese economy may lead foreign businesses to think twice before making expansion
decisions. Indeed, some media reports show that foreign businesses may have already
started to withdraw from Hong Kong (source: WSJ ). As Hong Kong adjusts towards this
new paradigm, major investment may eventually have to come from the Mainland, which
is unlikely to materialise on any large scale over the very near term, in our view, as China
continues to struggle with its own economic performance.
The property sector is set to face continued structural headwinds
Following a mini rebound at the beginning of the year amid the fast and earlier-thanexpected border reopening with the Chinese Mainland, property prices resumed a gradual
decline in H2. Property prices have again fallen below their previous trough reached at end2022 (Figure 129). Unfortunately, we have not seen any material improvement from these
structural headwinds. First, the previous retreat of expatriates may have stopped, but the
trend has not been reversed, which had represented a major support to local property
demand. Second, the application for the Quality Migrant Admission Scheme (QMAS) has
been popular since the border reopening, but there is clear evidence that many successful
applicants may not have actually settled in Hong Kong, thus, offering no material property
demand. Finally, our US economics team expects the Fed to hold rates steady until
June 2024, which means mortgage rates in Hong Kong are likely to remain elevated for
some time. The depressing performance of local stock markets could clearly exacerbate the
situation due to negative wealth effects.
Inflation is likely to remain moderate amid declining property prices
Despite the initial strong recovery following the border reopening, the economy has shown
very limited signs of inflationary pressures. Notable price increases have mostly been
concentrated in the food, catering-related categories, and some transport fares, as inperson services continue to normalise, particularly owing to the influx of Mainland visitors.
Looking ahead, we expect CPI inflation to remain moderate at 2.0% in 2024, unchanged
from 2023 (Figure 130), as the major contributor – shelter price inflation – is likely to
91
Nomura | 2024 Global Macro Outlook
11 December 2023
remain fairly soft, in our view.
A new consumption behaviour is emerging
Another new phenomenon has also emerged since the full restoration of border access in
early 2023. There are a large number of Hong Kong residents travelling regularly across
the border to Mainland China for shopping, dining and sightseeing, with the figure
reaching above 200,000 every weekend, according to Chief Executive John Lee. Due to
price differentials, and in some cases better value of services, there are indeed strong
incentives behind such a change in behaviour. However, should this consumption
behaviour persist, it could generate strong downward pressure on local price inflation and
retail sales and catering service sales (Figure 131). Indeed, based on official statistics,
restaurant receipts in volume terms were still 19.2% below 2019 levels by Q3 2023, with
the situation particularly acute at Chinese restaurants, which were still down 29.3%,
demonstrating well the value-driven substitution effect taking place away from Chinese
restaurants in Hong Kong and towards Mainland Chinese catering services (Figure 132).
Fig. 128: Hong Kong's quarterly GDP growth and contributions of major components
Source: Census and Statistics Department, CEIC, Nomura Global Economics
Fig. 129: We do not expect Hong Kong's property prices to
improve on a material scale in 2024
Fig. 130: We expect Hong Kong's CPI inflation to remain
largely stable in 2024 and 2025
Source: Centaline Property, CEIC, Nomura Global Economics
Source: Census and Statistics Department, Wind, Nomura Global Economics
92
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 131: Hong Kong retail sales remain notably below prepandemic levels in both value and volume terms
Fig. 132: Hong Kong restaurant receipts volume index and
breakdown indices show sales at Chinese restaurants remain
well below pre-pandemic levels
Note: Index: Oct 2019 - Sep2020 = 100
Data are 12-month moving average.
Source: Census and Statistics Department, CEIC, Nomura Global Economics
Note: Index: Oct 2019 - Sep 2020 = 100
Data are 4-quarter moving average
Source: Census and Statistics Department, CEIC, Nomura Global Economics
Fig. 133: Hong Kong: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (sa, % q-o-q)
Real GDP
Contributions to GDP (pp)
Domestic final sales
Inventories
Net trade (goods & services)
Unemployment rate (sa, %)
Consumer prices
Exports
Imports
Current account balance (% of GDP)
Fiscal balance (% of GDP)
Discount rate (%)
3-month Hibor (%)
Exchange rate (USD/HKD)
3Q23
0.1
4.1
4Q23
0.1
4.2
1Q24
1.2
0.0
2Q24
1.0
2.4
3Q24
1.0
3.4
4Q24
0.7
4.0
1Q25
0.6
3.4
2Q25
0.7
3.0
3Q25
0.7
2.6
4Q25
0.7
2.6
2022
2023
2024
2025
-3.5
3.2
2.4
3.0
6.4
3.1
-5.4
2.8
1.9
-6.0
-2.8
7.4
4.5
-2.8
2.4
2.8
2.3
2.5
3.9
6.2
3.9
-4.4
0.5
2.7
1.6
3.6
1.1
7.9
5.8
-4.4
1.0
2.7
2.1
2.1
0.2
8.3
4.1
-0.1
-0.6
2.7
2.4
3.5
3.1
4.0
5.2
-4.1
2.9
2.6
1.8
1.5
0.2
6.3
7.6
-2.5
-1.6
2.6
1.7
4.9
4.3
7.4
5.2
-0.6
-1.5
2.6
1.9
5.9
4.1
4.2
4.9
1.9
-4.0
2.5
2.0
5.7
5.5
3.0
1.5
0.1
1.1
2.5
2.0
6.1
6.0
4.8
5.75
5.27
7.83
5.75
5.50
7.80
5.75
5.00
7.78
5.50
4.75
7.77
5.25
4.50
7.76
4.75
4.25
7.75
4.25
4.00
7.75
3.75
3.75
7.75
3.25
3.50
7.75
2.75
3.50
7.75
-1.1
-0.9
-1.5
4.3
1.9
-8.6
-7.2
11.0
-4.3
4.75
4.99
7.79
6.0
-1.8
-1.1
3.0
2.0
-8.8
-6.5
6.7
-2.9
5.75
5.50
7.80
4.7
0.9
-3.2
2.7
2.0
2.6
1.2
6.6
-0.7
4.75
4.25
7.75
4.7
-1.5
-0.3
2.6
1.9
5.7
5.0
4.8
0.7
2.75
3.50
7.75
Note: Numbers in bold are actual values; others are Nomura forecasts. 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). Financial year (FY) from April to next March is applied for fiscal balance (government consolidated account). Table
reflects data available as of 5 December 2023.
Source: CEIC, Wind, Nomura Global Economics
93
Nomura | 2024 Global Macro Outlook
11 December 2023
India: Strong start, weak finish
Research Analysts
We remain optimistic on the medium-term outlook, but strong near-term growth
momentum is unlikely to be sustained into 2024. We expect slower public capex, a
moderation in consumption and weak global demand to slow GDP growth to a belowconsensus 5.7% in 2024, from 7.0% expected in 2023. With core inflation already
anchored, we expect headline inflation to ease to 5.1% in 2024 from 5.7% in 2023,
despite near-term upside risks from food price inflation. This growth-inflation mix is likely
to lead to the RBI gradually shifting its focus to growth, and cumulatively easing policy
rates by 100bp, starting from August 2024. The market’s focus for 2024 will be on India’s
bond index inclusion and general elections. Our base case is policy continuity, but an
upset loss or weaker win could reshuffle the deck on India’s macro outlook.
Sonal Varma - NSL
Asia Economics
sonal.varma@nomura.com
+65 6433 6527
Aurodeep Nandi - NFASL
aurodeep.nandi@nomura.com
+91 22 4037 4087
Year to date
Contrary to our expectations for a slowdown in 2023, India’s growth momentum has been
resilient. Frontloaded public capex, a missed global recession, and the resilience in urban
consumption have supported overall growth. Our views on core inflation settling at 4.5%
levels and the RBI pausing rate hikes at 6.50% have played out. That said, higher
headline inflation, due to food price shocks, and resilient growth, have obviated the need
for rate cuts in H2 2023, which we had expected. Looking ahead, we are positive medium
term, but we believe the cyclical slowdown is delayed, rather than averted.
Growth outlook: Delayed pessimism
India’s GDP growth rose by a strong 7.6% y-o-y in Q3 2023 from 7.8% in Q2, attesting to
robust domestic growth momentum, underpinned by strong investment and urban
consumption demand. High frequency data suggest this momentum has continued into
Q4. Consequently, we have raised our 2023 GDP growth forecast to 7.0% (from 6.3%)
and FY24 (year ending March 2024) forecast to 6.7% (from 5.9%).
That said, we expect GDP growth to slow to 5.7% y-o-y in 2024 and 5.6% in FY25,
below consensus (6.2%) and the RBI’s outlook of 6.5%, with the risk of a more material
slowdown in H2 2024. We expect the growth impulses to weaken for three key reasons:
• Growth is not broad-based: Much of the current growth resilience is driven by
government activism, both for consumption and investment, and urban demand
(supported by better-off consumers). Private capex remains subdued and our analysis
points to only select pockets of investment in roads, cement and metal sectors (see Box
26: India’s private capex – Ready, steady… ). Into the election cycle, we expect the
awarding of new infrastructure projects to slow, and the private sector to await the
election results, before committing their long-term capital. On the consumption side,
rural demand remains subdued, likely due to lacklustre real rural wage growth, which
suggests that the farming terms of trade are yet to improve (Figures 135 and 136). We
also expect urban consumption demand to moderate, amid signs that formal sector
hiring is moderating and due to tighter macroprudential measures on unsecured retail
lending, which should slow consumer loan growth (Figures 137 and 138).
• Synchronised global growth slowdown: Our baseline view of a mild US recession
in H2 2024 and weak growth in the euro area will weigh on India’s exports. These
economies account for around one-third of India’s merchandise exports and a larger
share of services exports. We expect weaker momentum in services exports in H2
FY25, which is already visible in the cautious guidance given by IT companies and
their lower headcount needs. This could in turn affect discretionary consumption in
cities like Bengaluru, Hyderabad, Gurugram and Pune.
• Waning terms-of-trade tailwinds: The sharp correction in commodity prices in 2023,
particularly crude oil, has played an important role in driving growth by improving
India’s terms of trade. This has been reflected in rising corporate profits for the
manufacturing sector, even though sales growth has moderated. If commodity prices
bottom out in 2024 (instead of falling further), then the incremental support to
industrial profits from favourable terms-of-trade conditions is likely to wane.
Inflation outlook: Choppy waters but ship is anchored
We marginally raise our CPI inflation forecast to 5.7% y-o-y for 2023, from 5.3%
previously; and FY24 to 5.6% from 5.3% (RBI: 5.4%), due to higher near-term food prices.
94
Nomura | 2024 Global Macro Outlook
11 December 2023
For FY25, our forecast remains unchanged at 4.5%, similar to the RBI’s outlook.
In the near term, we expect headline inflation to rise from 4.9% y-o-y in October to 5.56.0% during the November-December period, due to food inflation, particularly led by
vegetables, cereals, pulses and spices. We expect headline inflation to remain sticky in
the near term, above 5.5% in H1 2024, but should ease to 4.0-4.5% in H2 2024. The
moderation in H2 2024 reflects base effects, but also our view that food inflation should
ease, due to lower pulses inflation and assuming a normal monsoons next year (see Box
27: India’s food price inflation outlook ).
Additionally, core inflation has fallen significantly in 2023 and at 4.3% (as of October ) is
already quite low. We expect it to ease further to ~4% and remain around those levels
throughout 2024. We believe underlying inflation is well anchored, with lower wage growth
and falling inflation expectations (both firms and households), despite persistent supplyside shocks. Indeed, if there are no large supply-side shocks, then our view of softer
demand will mean that headline inflation should converge to core inflation in H2 2024. We
would note that core is already aligned to the RBI’s mid-point target of 4% (Figure 139).
Monetary policy: Easing into easing
The macro environment of resilient growth, anchored core inflation, but high food inflation
creates the setting for an extended pause, without a trigger for rate hikes or cuts.
However, we believe the RBI will persist with its hawkish talk (emphasising that it is
serious about the 4% target) and tighter liquidity (policy tightening in stealth).
That said, if we are right about the growth and inflation outlook in 2024, i.e. growth
disappoints below the RBI’s projection of 6.5%, and headline inflation trends closer to
core in H2 2024, then the policy bias will shift towards easing. The MPC members have
often expressed comfort around a real rate of around 1.0%. With inflation at ~4.5% levels,
the 6.50% nominal repo rate would result in a real rate of close to ~2.0% (Figure
140) – which would be restrictive in times of a growth slowdown. Hence, we stick to our
view that the RBI will deliver 100bp of rate cuts cumulatively, but push back the timing of
the first cut from April to August. We expect 75bp in rate cuts in 2024 and another
25bp in Q1 2025, with risks skewed towards earlier cuts.
Finally, the composition of the MPC is set to see some changes in 2024. Deputy Governor
Michael Patra’s term ends in January and the three external MPC members conclude
their terms in early October. Importantly, Governor Das’ second extension also ends in
December. While we are not pencilling in a material change in the monetary policy
outlook, we will be closely following these developments (see Box 20: Policy and political
developments to watch in 2024 ).
External sector: The name is bond (index)
The merchandise trade deficit surged to a record high in October , but this was primarily
driven by idiosyncratic factors such as price effects (oil, gold) and higher demand due to
Diwali, which should reverse in coming months. However, a higher trade deficit has been
compensated by stronger invisibles flows through services and remittances. Looking
ahead, we expect merchandise import demand to moderate in 2024, owing to weaker
domestic growth, while the pace of increase in invisibles should flatten out as global
growth further falters. Overall, we expect the current account deficit to remain
comfortable at ~1.4% of GDP in FY24 and FY25.
Net FDI inflows disappointed in the first nine months of 2023, slowing to ~USD11bn from
USD35.4bn in 2022, despite the optimism about India’s medium-term growth prospects,
mainly due to higher repatriation (see Box 28: Drivers of India’s medium-term growth ).
We do not expect a major recovery in FDI flows in 2024 owing to the local (election) and
global (slowdown) backdrop, but we expect considerable FII flows because of the bond
index inclusion developments. India has finally been included in the JP Morgan
Government Bond Index-Emerging Markets (GBI-EM) index with a 10% weighting, which
should lead to inflows of around USD23bn starting June 2024, with some debt inflows
already underway. The Bloomberg Barclays EM Index is also evaluating India’s inclusion
(source: Bloomberg ), which could lead to another ~USD18-20bn of inflows.
Consequently, we believe that even as the basic BOP (CA plus net FDI) is likely to remain
negative, the overall BOP should be manageable.
95
Nomura | 2024 Global Macro Outlook
11 December 2023
India’s political battle royale
India is scheduled to hold its Lower House (Lok Sabha) elections around April/May 2024,
where Prime Minister Modi’s Bharatiya Janata Party (BJP) will seek its third term in power
(total seats: 543, simple majority: 272). Its coalition, the NDA (National Democratic
Alliance) faces the main challenge from the Indian National Congress (INC) and regional
heavyweights, which have set their differences aside and coalesced to form a
coalition called I.N.D.I.A (Indian National Developmental Inclusive Alliance).
While elections are difficult to predict, opinion polls so far suggest that the BJP is likely to
return to power with a simple majority. Recently, the BJP routed INC 3-0 in the elections of
the three key Hindi heartland states – Madhya Pradesh, Rajasthan and Chhattisgarh –
beating expectations. In part, this speaks to PM Modi’s continued mass appeal. While state
election results have not been a good leading indicator of general election results, investors
will most likely view these developments positively. The return of a strong majority for the
BJP would signal policy continuity and fiscal consolidation in the medium term. If the BJP
loses power, then the fiscal and inflation outlook would be slightly different, although there
should not be a complete derailment of reforms, in our view. We discuss macro scenarios
under various political outcomes in Box 29: India’s elections and economics .
On fiscal arithmetic, strong GDP growth in FY24 should help the government meet
its fiscal deficit target of 5.9% of GDP, although we believe it will still require expenditure
consolidation, particularly in capex. In the run-up to the elections, the government has
already extended the free food scheme by five years, increased LPG cylinder subsidies,
extended food export bans, and there have been reports that the government is looking to
expand the scope of the cash transfers to farmers (source: Bloomberg ). We do not
expect these to exact a large fiscal cost, but if the opposition alliance engages in
competitive populism and the BJP sees its support waning, then there is a risk of more
sops being announced. For FY25, we expect the next budget to pencil in fiscal
consolidation, but weaker growth is likely to make consolidation tougher, in our view.
Risks to our view
We have a conservative growth outlook for 2024, which could face upside risks, if private
capex picks up convincingly and global demand remains resilient, while a deeper US
recession could lead to even weaker growth. We also expect inflation to remain anchored,
which could be pushed higher if India faces shocks on commodities such as food and oil
and if higher growth leads to a resurgence in core inflation. Political risks are also
elevated next year, with an overwhelming consensus expecting status quo in terms of the
ruling party BJP returning with another large mandate. However, a weaker victory or
capitulation in favour of the opposition alliance could lead to market disappointment,
translating into an equity market correction and short-term capital outflows.
Fig. 134: India: Details of the forecast
% y-o-y growth unless otherwise stated
3Q23
4Q23
1Q24
2Q24
3Q24
4Q24
1Q25
2Q25
2023
2024
2025
FY23
FY24
FY25
Real GDP
Private consumption
Government consumption
Fixed investment
Exports (goods & services)
Imports (goods & services)
Contributions to GDP (pp)
Domestic final sales
Net trade (goods & services)
Consumer price index
Current account balance (% GDP)
Fiscal balance (% GDP)
Repo rate (%)
Standing Deposit Facility (SDF) rate (%)
Cash reserve ratio (%)
10-year bond yield (%)
Exchange rate (USD/INR)
7.6
3.1
12.4
11.0
4.3
16.7
6.6
6.0
10.0
7.5
5.0
10.0
5.1
5.5
9.1
8.0
8.0
17.0
5.9
6.0
7.6
5.0
20.0
15.0
5.5
5.5
9.9
6.0
6.0
10.0
6.5
6.5
10.0
9.0
3.8
9.5
4.8
4.6
6.1
7.8
5.0
6.5
5.5
6.0
12.0
8.5
15.0
17.0
7.0
4.5
5.4
8.9
3.3
10.6
5.7
5.9
9.1
7.0
9.1
12.7
6.1
6.1
9.8
10.0
11.9
18.7
7.2
7.5
0.1
11.4
13.6
17.1
6.7
5.2
7.4
8.6
2.5
13.5
5.6
5.6
8.2
7.0
8.2
10.2
6.7
-3.6
6.4
-0.8
6.9
-1.4
5.5
-2.3
6.9
-2.1
5.7
-1.4
5.9
0.1
5.7
-1.2
6.1
-1.6
4.2
-1.6
7.8
-1.6
4.6
-1.8
6.1
-0.5
3.6
-1.0
7.6
-1.5
3.6
-1.1
6.2
-2.0
5.7
-1.1
6.7
-1.3
5.1
-1.5
8.0
-2.5
4.0
-1.3
6.50
6.25
4.50
7.22
83.0
6.50
6.25
4.50
7.10
83.0
6.50
6.25
4.50
7.00
82.0
6.50
6.25
4.50
6.88
81.5
6.25
6.00
4.50
6.75
81.0
5.75
5.50
4.50
6.50
81.0
5.50
5.25
4.50
6.25
80.8
5.50
5.25
4.50
6.25
80.5
6.50
6.25
4.50
7.10
83.0
5.75
5.50
4.50
6.50
81.0
5.50
5.25
4.50
6.25
80.0
6.7
-2.0
-6.4
6.50
6.25
4.50
7.31
82.2
5.6
-1.4
-5.9
6.50
6.25
4.50
7.00
82.0
4.5
-1.4
-5.5
5.50
5.25
4.50
6.25
80.8
Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. For fiscal balance, calendar
year refers to the forthcoming fiscal year. The SDF rate has replaced the reverse repo rate as the operational floor of the policy corridor from April 2022. Table reflects data
available as of 5 December 2023.
Source: CEIC and Nomura Global Economics
96
Nomura | 2024 Global Macro Outlook
Fig. 135: Rural activity growth
11 December 2023
Fig. 136: Farming Terms of Trade
Source: CEIC and Nomura Global Economics
Note: This captures sales of tractors, two-wheelers, fertilisers, rural wages (agri and
non-agri), and fiscal spend on rural-related ministries.
Source: CEIC, EViews and Nomura Global Economics
Fig. 137: State of formal sector hiring
Fig. 138: Unsecured retail loans
Source: CEIC and Nomura Global Economics
Source: Company data, RBI, SEBI and Nomura research
Fig. 139: CPI Inflation projections
Fig. 140: Real repo rate
Source: CEIC and Nomura Global Economics
Note: Real rate is calculated by considering the 3-month average of the one year
ahead inflation outlook.
Source: CEIC and Nomura Global Economics
97
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 26: India’s private capex – Ready, steady…
After a decade of balance sheet clean-ups by banks and corporates, has a broad-based private capex uptrend begun?
Detailed official data on investment are dated (until March 2022), so we tap into alternate data sources.
Alternate signals
• Capacity utilisation in the manufacturing sector rose to ~73.6% in Q2 2023, back to pre-pandemic levels, although
below the 80% levels that prevailed during 2009-10.
• Bottom-up data on aggregate capex of the listed BSE-500 companies (ex-financials) show that nominal capex rose
18.6% y-o-y during FY22-FY23, but as a share of GDP, capex has fallen to 2.6% in FY23 from 3.9% in FY13, with
some pickup in recent years in the cement and consumer discretionary sectors.
• Bids awarded by the government’s eProcurement system stood at an elevated INR16.3trn in FY24 ytd (AprilOctober), lower than the INR19.4trn in FY23 ytd, but up from an average of INR9.2trn in the prior three years. A
good part of this is the awarding of bids for road construction.
• On the funding side, data on the debt financing avenues of capex such as bank credit, external commercial
borrowing (ECB) and issuance via corporate bonds show some pickup in ECBs, but not as much funding through
other channels. However, the RBI’s data on private capex financing by banks and financial institutions show
that projects funded in FY23 stood at a record high of INR2.7trn vs INR1.4trn in FY22, with some 40% expected to
be spent in FY24, mainly in roads (government’s capex focus) and metals (Figure 141).
• Data by private agency, Centre for Monitoring Indian Economy (CMIE), suggest that the post-pandemic increase in
new investment projects (both public and private) has peaked, and at 10.6% of GDP in Q3 2023 (on a 4-quarter
rolling sum basis) is still much lower than previous peaks (Figure 142).
Tying it together and our view
Overall, the signals on private capex are mixed, in our view. The still-low capacity utilisation rate and slower listed
corporate capex as a share of GDP suggest that the capex uptrend is not yet broad-based, though there are pockets of
increase, driven by road construction, cement and metal sectors. We expect private capex to remain lacklustre in 2024,
owing to global and domestic policy uncertainty (ahead of elections), and due to slower corporate revenue growth.
Beyond 2024, the medium-term outlook is brighter. Apart from better balance sheets, shifts in manufacturing supply
chains and more real estate investment after a decade of moderation are tailwinds. The cost of capital has also likely
peaked, and should moderate in 2024. The government’s medium-term focus on public capex (roads and railways) and
on ease of doing business, should correct India’s traditional weaknesses on logistics and regulatory reform (see Box
28: Drivers of India’s medium-term growth ). All of these should be positive for a more entrenched private capex revival.
Fig. 141: Sector wise private capex projects sanctioned
by banks/FIs
Fig. 142: New investment projects
Source: CMIE and Nomura Global Economics.
Source: RBI and Nomura Global Economics
98
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 27: India’s food price inflation outlook
Food inflation has been a source of upside surprise for India’s inflation trajectory in 2023, driven by swings in vegetable
prices, but also a broad-based increase, led by cereals, milk, pulses and spices (Figure 143). India’s 2024 inflation
outlook will depend on how food prices behave. A bottom-up approach suggests food price pressures will remain
elevated in the near term (H1 2024), but should cool in H2 2024.
Bottom-up assessment
• Cereal production – both rice and wheat - is at risk of falling in the ongoing season. Late and disruptive monsoons
have led to a 4.5% y-o-y drop in kharif (summer) cereals production, mainly rice. Underwhelming water reservoir
levels could also affect wheat, with early data pointing to a 5% drop in wheat area sown compared with a year ago.
This means that the government’s export curbs on rice and wheat are likely to continue well into 2024. We see
scope for rice prices to ease in H2 2024, if the next crop season is normal. Higher cereal prices could also raise
animal feedstock costs for protein food items such as milk, meat and eggs in the near months, but weak rural
demand will be an offset.
• Pulses kharif output is down by 6.6% y-o-y and rabi (winter) sowing is tracking 9.4% lower (as of early December).
However, pulses are typically affected by the cobweb cycle, with higher prices encouraging higher production and
eventually leading to over-production and a consequent correction in prices. Based on past trough-to-peak cycles,
we expect this price correction to begin around mid-2024.
• India largely depends on imported edible oil, and the fall in global prices has pushed edible oil price inflation into
deflationary territory. However, we see upside risks in 2024, due to the potential impact on global edible oil
production from El Niño conditions in 2023.
• Finally, on vegetables, we expect that the ongoing surge in onion and tomato prices in November will see a sharp
reversal after December and through Q1 2024, before rising in line with their seasonal trends.
Our baseline and risk scenarios
With the above assumptions, we expect CPI food & beverage inflation to average 6.5% y-o-y in 2024, down from 6.6%
in 2023, but with a higher H1 (8.4%) and a lower H2 (4.7%). Taking into account our core inflation forecast (2024:
4.2%; 2023: 5.0%), we expect headline inflation to average 5.1% in 2024 (2023: 5.7%), in our baseline scenario.
However, because of the uncertainty on food prices, we construct two alternate scenarios: (1) a ‘good’ scenario, where
we assume that current food price pressures are short-lived and will moderate early in H1 2024, alongside the
correction in the pulses' inflation cycle; and (2) an ‘ugly’ scenario, where we consider only a partial correction in
vegetable prices in the near term and assume that 2024 will witness another year of erratic monsoons, meaning food
prices remain elevated even in H2 2024. Figure 144 plots our headline inflation forecasts under these two scenarios. In
the ‘good’ scenario, headline inflation will ease more than expected to ~4.5% in 2024 (versus 5.1% in our baseline),
while the ‘ugly’ scenario could see inflation averaging 6.5% in 2024, near the upper-end of the RBI’s target range.
Fig. 143: Key contributors of food inflation
Source: CEIC and Nomura Global Economics
Fig. 144: Headline inflation under different food inflation
scenarios
Source: CEIC and Nomura Global Economics
99
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 28: Drivers of India’s medium-term growth
There are four key factors that should support a stronger decade for India.
• Positive demographics: Among the G-20, India has the largest population and one of the largest cohorts of
youth (below the age of 15). 67% of the population is working age and represent a highly aspirational, digitally
savvy and mobile demography.
• Supply chain relocation: The shift in supply chains offers the opportunity of higher FDI, a build-up of
manufacturing facilities, a rise in export market shares and higher incomes.
• Better balance sheets: Banks and corporates have significantly deleveraged in recent years. This gives banks
room to lend, and corporates room to borrow to support a private capex revival (see Box 26: India’s private capex
– Ready, steady… ).
• Reform momentum: The focus on public capex in areas such as roads and railways, on ease of doing business,
digitisation of public services, subsidies to encourage domestic manufacturing (Production Linked Incentives),
and implementing GST are also enabling factors.
In our baseline, we believe India can grow at a CAGR of 6.5-7.0% between FY23 and FY30, led by investment and
productivity, and close to the accelerated growth observed during the FY03-FY10 period (Figure 145). That said, this is
not a done deal. In the early stages of supply chain relocation from China, while India has managed to raise its global
export market share by 0.23pp between 2015 and 2022 (led by electronics and machinery), Vietnam has increased its
share by over 0.5pp (Figure 146). Also, while schemes such as the PLI may be productive in kick-starting manufacturing,
most foreign firms are primarily interested in assembling in India, whereas the focus should be to move up the value
chain.
Fig. 145: India's potential growth estimates
Fig. 146: Share of global merchandise exports
Source: CEIC, World Bank, UNDP and Nomura Global Economics
Source: CEIC, Trademap and Nomura Global Economics
100
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 29: India’s elections and economics
Opinion polls suggest that there will be no change of guard in the 2024 general elections. The ruling party, the BJP, will
return with an absolute majority and PM Modi will retain his premiership. BJP's strong win in the recent Hindi heartland
state elections also supports this view. However, there are still 4-5 months for polls and a lot can still change. We
analyse three likely political scenarios that might emerge, and their impact (Figure 147).
• Outright BJP victory: This is a scenario of policy status quo, with the BJP winning over 272 seats, which we
believe is more likely. This scenario should see policy continuity, a focus on public capex, regulatory reform, and
fiscal consolidation. PM Modi has preferred a centralised form of governance, which is likely to continue into his
third term.
• NDA victory: This scenario would see the BJP lose seats and having to rely on its coalition partners to get over
the half-way mark. PM Modi remains the most popular prime minister nationally by a considerable margin, and
hence there should be no challenge in his return to the top post. Our macro outlook would remain largely
unchanged but PM Modi may have to acquiesce some ministries to key allies.
• I.N.D.I.A victory: In this scenario, the fractious alliance of opposition parties overthrows the BJP. The absence of a
single PM candidate and ambiguity on the economic agenda could lead to an immediate negative market reaction.
However, it’s worth noting that most of the core reforms, especially on tax administration, capex and regulatory
reform are largely apolitical. If the alliance announces populist measures in their election campaign, then there may
be pressure to deliver on these measures after victory, as we observed with INC after its Karnataka win. A
consumption stimulus is likely to be positive for near-term growth prospects, but could adversely affect the
medium-term outlook, if the current focus on public capex and fiscal consolidation is diluted. As there are
considerable differences and rivalry between the INDIA member parties, centralised governance is likely to be a
challenge and there can be multiple power centres outside the Prime Minister’s office. Finally, ex-RBI Governor
Raghuram Rajan, who was appointed during the previous INC government and has previously advised INC leader,
Rahul Gandhi (one of the PM contenders), has expressed reservations about the current Production Linked
Incentive (PLI) scheme for manufacturing. A change of guard could lead to tweaks on this policy.
Fig. 147: Lok Sabha election scenarios
Outright BJP victory
Political outcome
BJP wins over 272 seats. PM Modi
retains premiership.
Likelihood
High
Growth outlook
Reform outlook
Fiscal outlook
NDA victory
BJP short of majority, but comfortable win
of its NDA coalition. PM Modi retains
premiership.
Medium
Baseline growth projections - stronger near term outlook (FY24: 6.7%), cyclical
slowdown in FY25 (5.6%) and robust medium term outlook (6.5-7.0%).
I.N.D.I.A victory
The INDIA coalition manages to get over the halfway mark, led by INC. Several contenders for PM.
Low
Possible upside in the near term if consumption
stimulus is promised. Medium term inflation could
be higher due to more consumption-focussed
policies, and marginally weaker growth, if current
focus on public capex is diluted.
Largely unchanged reform and public
capex outlook, but PM Modi may have to
acquiesce some ministries to key allies.
Core reforms likely to be still ongoing, but if
populist poll promises are made, then there may
be some rollback of public capex to accommodate
them. Some tweaks to the PLI scheme are
possible. Multiple power centers could impede
effective governance.
Focus on fiscal consolidation to continue - government likely to stick to its aim of
4.5% of GDP fiscal deficit by FY26.
Broad adherence to fiscal discipline still likely, but
medium term consolidation likely to take longer,
given risk of more expansionary policies.
Policy continuity, focus on public capex,
regulatory reform, fiscal consolidation
and strong governance. Reforms on
land and labour may still be difficult to
execute.
Note: BJP: Bharatiya Janata Party, NDA: National Democratic Alliance, INC: Indian National Congress, INDIA: Indian National Developmental Inclusive Alliance.
Source: Nomura Global Economics
101
Nomura | 2024 Global Macro Outlook
11 December 2023
ASEAN-5: Modest growth, some fiscal risks
Research Analysts
On aggregate, we see growth improving in 2024 from 2023 but with divergences. We are
cautious on Thailand, which faces multiple growth headwinds, persistent deflation
pressures and weakening balance sheets with rising fiscal risks. In Indonesia, growth
should benefit from a temporary election-related boost, but elevated political uncertainty
could also weigh on sentiment and add to balance of payment pressures at a time when
current account deficits are set to widen. We are more optimistic on Singapore, which
should benefit the most from the tech upcycle, although core inflation pressures are likely
to stay elevated. We remain neutral on the Philippines, given its improving growth outlook
but above-target inflation and still-large but stabilizing twin deficits; as well as on
Malaysia, where uncertain external conditions will likely necessitate a recalibration of the
government’s fiscal consolidation and subsidy rationalization goals, in order to avoid
adding to growth or inflation risks.
Euben Paracuelles - NSL
Asia Economics
euben.paracuelles@nomura.com
+65 6433 6956
Charnon Boonnuch - NSL
charnon.boonnuch@nomura.com
+65 6433 6189
Nabila Amani - NSL
nabila.amani@nomura.com
+65 6433 6409
Regional overview
Growth doesn’t all start from within
Our GDP growth forecasts point to a modest aggregate improvement in ASEAN-5
countries, to 4.5% for 2024 from 3.9% in 2023 (Figure 148). This improvement, however,
masks some key differences. We expect below-consensus growth in Thailand at 3.0%
(Consensus: 3.7%), reflecting low multiplier effects from the digital wallet policy despite its
large size, and in Malaysia at 4.1% (Consensus: 4.3%), due to soft external demand,
particularly from China. By contrast, we are slightly above consensus on Indonesia (5.2%;
Consensus: 4.9%), as we pencil in a sizeable but temporary impact from election-related
spending; and in both Singapore (2.8%; Consensus: 2.1%) and the Philippines (5.8%;
Consensus: 5.5%), due to the tech cycle turnaround and higher public infrastructure
spending, respectively.
Fig. 148: ASEAN - Nomura GDP growth forecasts
% y-o-y
ID
MY
PH
SG
Fig. 149: ASEAN - Nomura's four-factor scorecard on the
growth outlook
TH
ASEAN-5
Quarterly trajectory and forecasts
Actual
2Q23
5.2
2.9
4.3
0.5
1.8
3.6
3Q23
4.9
3.3
5.9
1.1
1.5
3.8
4Q23f
5.3
3.4
4.4
1.4
2.1
3.9
1Q24f
5.3
4.7
5.3
2.7
1.4
4.2
2Q24f
5.3
4.2
7.5
3.4
2.3
4.7
Nomura 3Q24f
5.1
3.7
5.6
2.5
3.4
4.4
4Q24f
5.2
3.9
5.0
2.5
4.8
4.6
1Q25f
5.0
4.6
5.4
2.2
4.3
4.5
2Q25f
5.0
4.6
5.8
2.3
3.6
4.4
Full year forecasts
2021
3.7
3.3
5.7
8.9
1.5
4.3
2022
5.3
8.7
7.6
3.6
2.6
5.4
2023f
5.1
3.8
5.2
0.9
2.0
3.9
Nomura 2024f
5.2
4.1
5.8
2.8
3.0
4.5
2025f
5.0
4.5
6.1
2.5
3.0
4.4
Actual
Source: Nomura Global Economics
Note: We rank ASEAN countries based on the following metrics of the four factors we
identified as key: 1 - fiscal support: Nomura forecast of 2024 fiscal deficit (% of GDP) vs
pre-pandemic average, 2 - drag from high interest rates: private sector debt (% of
GDP), 3 - benefit from tech upcycle: share of electronics exports (% of GDP), and 4 exposure to weak China and US recession: goods exports ex-IT to China and US +
tourism receipts from China and US (% of GDP). For the overall rank, we calculate a
weighted average per factor, using the contribution of these factors in the GDP
accounts of each country as weights. A score of 5 is the most favourable for the growth
outlook and 1 is the least.
Source: CEIC, IMF, Bloomberg, Nomura Global Economics
That said, our forecasts remain sub-par relative to pre-pandemic trends (averaging 4.8%)
and official projections across the board, in part due to our more cautious view on global
growth and still-elevated uncertainty, which is negative for consumer and business
sentiment. We also analyse four key factors that we view as important to the near-term
growth outlook but work in different directions. The rebound in (1) electronics exports
102
Nomura | 2024 Global Macro Outlook
11 December 2023
could be a powerful driver (see Box 23: What drives chip cycles? ), but may face
headwinds in H2 2024, which is when we expect (2) a mild recession in the US, as well as
a subdued recovery in China, to which ASEAN-5 has increased its exposure (see Box 30
: ASEAN’s rising exposure to goods trade with China ). Domestically, (3) high interest
rates should persist for some time, weighing on private consumption and investment
spending, but (4) fiscal policy could provide some offset.
Using this simple framework, we weighed all relevant metrics together in a four-factor
growth scorecard (Figure 149), and found that Indonesia and the Philippines rank most
favourably, while Thailand appeared weakest, consistent with our overall GDP forecasts.
Thailand scores well only in the ‘fiscal support’ factor and fares poorly in all the others,
reflecting the low contribution of electronics exports, its high exposure to external demand
for both goods and services (i.e., tourism) from China and the US, and high private sector
debt (households and businesses), which implies higher interest rates will weigh more on
domestic demand.
Continuing disinflation, but not without risks…
We expect headline CPI inflation to decline on an aggregate basis to 2.4% y-o-y in 2024
from 3.5% in 2023 (Figure 150), but we acknowledge there is a high level of uncertainty in
this outlook. The key sources of risk include global crude oil prices amid geopolitical
tensions, and food prices due to the El Niño phenomenon as well as protectionist policies
of major food exporters (see Box 19: What if food and oil prices rise further? ). We see
three camps with respect to the balance of risks:
• Low-risk camp: Indonesia and Thailand face more limited supply-side risks than
regional peers due to fiscal subsidies and price controls, which will likely remain
throughout 2024. In Indonesia, we expect fuel prices and electricity rates to remain
fixed given the elections, which should help to bring down headline CPI inflation to
2.9% in 2024 (revised up from our previous forecast of 2.6%) from 3.7% in 2023
(Consensus: 3.0%). In Thailand, we expect CPI inflation to drop to -0.4% in 2024 from
1.3% in 2023 (Consensus: 1.9%), due to the energy subsidies and prices controls of
the new government, as well as Thailand’s status as a food producer/exporter, which
shields it from external risks. Demand-side pressures will also likely be limited
because wage growth is low.
• High-risk camp: Singapore and the Philippines are likely to face more sticky inflation
and are more vulnerable to external shocks in the absence of fiscal subsidies.
Inflation in the Philippines is declining but is not expected to return to BSP’s 2-4%
target until July 2024, due to a combination of supply-side constraints and spillover
effects from recent transport fare adjustments and minimum wage hikes. In
Singapore, core inflation will likely be relatively sticky, given the lagged pass-through
effects from high wage growth this year, exacerbated by another 1pp GST hike to 9%
in January 2024. We forecast Singapore core inflation of 3.0% in 2024 from 4.1% in
2023, within the MAS forecast range of 2.5-3.5%.
• Middle camp: We would put Malaysia’s inflation outlook somewhere in between the
first two camps. We expect CPI inflation to ease more gradually to 2.4% in 2024 from
2.6% in 2023 (revised up from our previous forecast of 2.1%). This new forecast takes
into account some subsidy rationalization by the government, as mentioned in Budget
2024, but implementation is being managed so as not to add to cost of living
concerns. We assume the 2pp services tax increase will become effective in Q2 2024
and fuel prices will be raised slightly from late-Q3.
… or significant fiscal implications for some due to subsidies
The upshot is that the fiscal implications from various subsidy policies will also likely
diverge (Figure 151), with the highest risk, and potentially the most credit rating pressure,
in Thailand. In addition to extended energy subsidies, which could add to contingent
liabilities (e.g., via the Oil Fund), Thailand’s planned stimulus package via the digital wallet
is likely to be implemented despite some pushback. We expect the FY24 fiscal deficit to
rise sharply to 5.2% of GDP from 4.3% in FY23.This means public debt ratios, which are
already above similarly rated peers, would rise further and pressure credit ratings. In
Indonesia, however, the 2024 budget has already been passed; it envisages a fiscal
deficit of 2.3%, which we think should be met if our oil price assumption materializes. The
new government also does not take over until October 2024. However, as we have
discussed in previous reports (see Indonesia: Election watch series #1 - The ( long) race
is on , 1 November 2023), a win by Prabowo Subianto, taking into account his proposals,
103
Nomura | 2024 Global Macro Outlook
11 December 2023
will likely raise some market concerns over fiscal risks beyond 2024.
Fig. 150: ASEAN - Nomura CPI inflation forecasts
Source: Nomura Global Economics
Fig. 151: ASEAN - Total central government fiscal deficits and
pre-pandemic averages
Note: f = Nomura forecasts.
Source: CEIC, Nomura Global Economics
Both Malaysia and the Philippines will likely implement a slower pace of fiscal
consolidation than what is targeted in their budgets or medium-term fiscal frameworks
(MTFF). We think Malaysia’s government will only partly reduce subsidy allocations, while
the uncertain growth outlook prompts continued fiscal support, particularly to lower
income households. In the Philippines, the government has been clear about its
prioritization of implementing flagship infrastructure projects, which we think will continue
to gain traction after a slow start. The government is also amenable to missing MTFF
targets to accommodate more progress in capital expenditures (see Philippines: A
conversation with Finance Secretary Diokno , 27 July 2023). By contrast, in Singapore, we
expect the government to run a small surplus before running a deficit in 2025, when
elections are likely to be called, to comply with the balanced budget rule.
Patience in pivoting towards monetary accommodation
We believe policy rates have reached their peaks across the region, and our baseline
view remains one in which ASEAN central banks do not start their cutting cycles ahead of
Fed rate cuts (Figure 152). BI and BSP have maintained their hawkish stances, but a
resumption of rate hikes will likely be precluded by the Fed having reached its terminal
rate and the gradual decline in headline inflation. As BI places FX stability as its top policy
priority, we forecast the start of its cutting cycle in June 2024, a few months since its last
hike in October 2023, with a total of 100bp of rate cuts within the year to 5.00% (i.e., four
25bp rate cuts from June to October 2024). We think BSP will start rate cuts later in
August, but it would be more motivated by inflation returning to within its 2-4% target,
which we expect by July. We forecast 150bp of total rate cuts by BSP to 5.00% (i.e., four
25bp cuts in August to December 2024 and two 25bp cuts by Q1 2025).
For BOT, we forecast a total of 50bp of rate cuts by BOT to 2.00%, starting in Q2 2024
(i.e., 25bp in each of June and August). In addition to headline inflation having already
turned negative, which we expect to persist through 2024, we forecast a large growth
disappointment relative to BOT’s forecast that will be difficult to overlook, driven by the
budget delay, the low fiscal multiplier of the digital wallet stimulus and a less robust
tourism recovery. By contrast, we expect monetary policy settings to be stable in Malaysia
in 2024. While we think growth will lose some momentum in H2 and headline CPI inflation
could edge higher due to subsidy policy adjustments, BNM is unlikely to judge that a
monetary policy response is warranted, with the current level of the OPR at 3% still likely
viewed by BNM as neutral.
External balances are still important to watch
Similar to 2023, we think current account balances will be interesting to track in the year
ahead amid shifting global financial conditions, especially among the ‘deficit countries’
(Figure 153). In Indonesia, we still expect the current account deficit (CAD) to widen to
1.3% of GDP from 0.1%, as positive terms-of-trade (ToT) effects continue to fade and
104
Nomura | 2024 Global Macro Outlook
11 December 2023
external demand remains subdued, particularly from China. Importantly, we think
financing the deficit could remain a challenge, as Q3 2023 data suggest FDI inflows have
already started declining as the elections approach. The uncertainty related to the change
in government, unlike during the 2019 election, also implies any FDI recovery would likely
be delayed, especially if there are concerns that the incoming government will be less
reform-oriented.
Fig. 152: ASEAN - policy rates and Nomura forecasts
Fig. 153: ASEAN - Current account balance (4Q rolling sum)
and Nomura forecasts
% of GDP
Actual
Nomura
Source: CEIC, Nomura Global Economics
ID
PH
TH
1Q22
0.4
-2.5
-2.1
2Q22
0.9
-4.2
-3.1
3Q22
0.8
-5.4
-3.7
4Q22
1.0
-4.5
-3.2
1Q23
1.1
-4.5
-2.3
2Q23
0.7
-3.4
-1.4
3Q23
0.3
-2.7
0.7
4Q23f
-0.1
-3.3
1.4
1Q24f
-0.6
-3.3
1.9
2Q24f
-0.9
-3.1
2.5
3Q24f
-1.2
-3.2
2.3
4Q24f
-1.3
-3.3
2.3
1Q25f
-1.2
-3.2
2.7
2Q25f
-1.2
-3.2
3.4
Source: CEIC, Nomura Global Economics
In the Philippines, we expect the CAD to stabilize but remain relatively large at 3.3% of
GDP in 2024, unchanged from our forecast for 2023. Capital goods imports will continue
to receive support from infrastructure implementation, while export growth should benefit
from the tech upcycle. ToT effects will likely be more supportive given our commodity
price assumptions. In Thailand, we now forecast a smaller improvement in the current
account surplus to 2.3% of GDP in 2024 (was 3.7%) from 1.4% in 2023, owing to our
lower assumptions for tourist arrivals and per capita spending by international visitors,
taking into account, in part, our view of more subdued travel demand from China.
105
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 30 : ASEAN’s rising exposure to goods trade with China
While some signs have emerged of a slow decoupling of Asia from China, as our AeJ Chief Economist Sonal Varma
recently pointed out (see Asia Economic Monthly - Is Asia slowly decoupling from China?, 8 September 2023),
ASEAN-5 countries are bucking the trend and have actually increased their exposures to China over the past decade.
The share of ASEAN-5’s goods exports to China has increased to 15.4% of total exports from 11.8% in 2013 (Figure
154). For comparison, the share of G3 countries in ASEAN-5 exports have risen only marginally to 26.4% from 25.5%.
Fig. 154: ASEAN-5 - Share of exports to China and to G3
Fig. 155: ASEAN-5 - Composition of goods exports to
China
Source: CEIC, Nomura Global Economics
Note: Numbers in brackets are in USDbn.
Source: Trademap, CEIC, Nomura Global Economics
In our view, supply-chain diversification is one driver, as is evident from the higher share of electronics exports and
components in ASEAN’s total exports to China, particularly from 2019 (i.e., in the aftermath of the US-China ‘trade
wars’). However, exports of iron & steel and other metals increased even more notably (Figure 155), mainly from
Indonesia. Indeed, China now comprises nearly 25% of Indonesia’s total exports, a staggering increase to more than
twice the share from a decade ago (Figure 156), a quarter of which is now exports of nickel products and iron & steel,
up from nearly zero before. This, in turn, reflects the impact of Indonesia’s “downstreaming policy” which led to an
increase in smelting capacity to process metal ores onshore, particularly nickel which is a key input for EV battery
manufacturing in China (see Indonesia: Assessing the sustainability of the current account surplus , 8 May 2023).
A key implication, therefore, is that China’s subdued economic recovery could pose a greater near-term headwind to any
improvement in ASEAN’s goods exports than in the past. In 2023, China was already a major drag on ASEAN-5 exports
(Figure 157). There are also amplifying effects: for commodity producers like Indonesia and Malaysia, declining
commodity prices dominated the decline in the value of their commodity exports, while volumes are also now starting to
fall. Given the increasing contribution of nickel exports, overcapacity in China’s EV battery sector (see China: After the
rabbit, enter the dragon? ) could be particularly worrisome for Indonesia and may add to its balance of payment pressures.
Fig. 156: ASEAN-5: Goods exports to China (12-m rolling
sum) by country
Fig. 157: ASEAN-5 - Contribution of exports to G4 to
headline export growth
Source: CEIC, Nomura Global Economics
Source: CEIC, Nomura Global Economics
106
Nomura | 2024 Global Macro Outlook
11 December 2023
Indonesia: All eyes on a high-stakes election
We expect GDP growth to receive a significant but temporary boost from election-related
spending. On the external front, we see a further widening of the CAD, due to a
deteriorating ToT effect and weak external demand, while imports are likely to hold up.
Fiscal policy should remain a source of stability, as the new government will not take over
until October 2024, but fiscal concerns could rise if Prabowo, who has some of the most
populist proposals among the candidates, remains the front-runner. We see inflation
remaining within BI’s 1.5-3.5% target, given administered prices and see the start of BI’s
cutting cycle in June 2024. We are cautious on rising political risks, which may further
weigh on sentiment and add to external financing vulnerability.
Election-related spending should temporarily boost domestic demand
We forecast a slight rise in GDP growth to 5.2% y-o-y in 2024 from an estimated 5.1% in
2023, within BI’s projection of 4.7-5.5% and identical to the government’s budget
assumption (Consensus: 5.0%). We expect both household and government expenditure
growth to pick up during the election year, rising 5.4% in 2024 from 4.9% in 2023 (Figure
158). Investment spending growth, however, is likely to ease slightly to 4.4% from 4.5%,
as businesses are likely to be more cautious, given the uncertainty related to the change
in government, as has been the case historically (see Indonesia’s changing of the guard ,
18 March 2014), coupled with the current environment of high interest rates and elevated
global economic uncertainty.
While the boost from election-related spending may be short-lived, we think this time will
be more comparable to 2019, when incumbent President Joko Widodo ran for re-election
and government spending accelerated going into Q2 (8.2% from 5.3% in Q1), reflecting
some front-loading of big ticket expenditures. This scenario is more likely to occur, in our
view, because President Jokowi’s eldest son, Gibran Rakabuming Raka, is the vice
presidential candidate to Defence Minister Prabowo Subianto (see Election watch series
#1 – The (long) race is on , 1 November 2023). The fact that this election is a three-horse
race and includes both legislative and regional elections, which extends the political
calendar, also adds to the growth impact.
Fig. 158: Indonesia – Real GDP growth and contributions of
demand-side components
Fig. 159: Indonesia – Current account balance
Source: CEIC, Nomura Global Economics.
Source: CEIC, Nomura Global Economics.
High political uncertainty
While uncertainty remains high, latest surveys show Prabowo as the front-runner and
suggest he is benefiting from his choice of Gibran (see Indonesia: Surveys show
Prabowo is benefiting from his VP pick , 20 November 2023) as his running mate.
However, a potential Prabowo victory could, in our view, elicit market concerns over fiscal
risks from the nationalist and populist measures in his platform (see Box 31: A long
election season ). By contrast, his main rival, Ganjar Pranowo, is viewed as more reformoriented. We are also mindful of other sources of uncertainty. For instance, in a very close
107
Nomura | 2024 Global Macro Outlook
11 December 2023
contest, the election result could be disputed and the constitutional court, which has
recently faced questions of impartiality (see Indonesia: ‘Ethics violation’ by constitutional
court chief justice adds to uncertainty , 8 November 2023 ), will have to preside over the
disputes. A potentially bitter campaign could lower the quality of discourse among
candidates (instead of focusing on debates about important economic issues, similar to
2019). The risk of “open hostility” between President Jokowi and politicians from PDIP
(which supported Jokowi throughout his presidency but now backs Ganjar), as some
political analysts have flagged, also bears close monitoring.
External financing pressures are likely to remain
Overall, we think political uncertainty could exacerbate balance of payment pressures. We
expect the current account to widen further to 1.3% of GDP in 2024 from an estimated
0.1% in 2023 (Figure 159), due to deteriorating terms-of-trade effects and weak external
demand, with processed nickel exports and downstreaming efforts only just starting to
provide some offset. In year-to-September 2023, exports of nickel and articles have
expanded by 23.2% y-o-y, easing after a staggering jump of 405.4% in year-to-September
2022. However, subdued growth in major trading partners, particularly China, could keep
a lid on goods export growth. In addition, we expect import demand to hold up, partly due
to an election-related boost to consumption spending, as mentioned above.
Importantly, the risk of a downtrend in FDI inflows may intensify, weakening further the
key source of financing for the CAD. During the last two presidential elections, FDI inflows
weakened in the run-up to the elections. Indeed, in Q3, net FDI inflows fell further to
USD2.8bn from USD4.0bn. In both 2014 and 2019, the decline in net FDI inflows was
significant as the presidential elections approached, but the subsequent recovery was
weaker in 2014 than in 2019 (Figure 160), likely reflecting the uncertainty related to the
change in government, which will likely also be the case in 2024. At the same time, with
rate cuts by the Fed in the coming months, interest rate differentials are unlikely to boost
portfolio inflows at a time when domestic political uncertainty could stay elevated.
Fig. 160: Indonesia - Net FDI inflows during election periods
Fig. 161: Indonesia - Headline and core inflation vs BI target
Note: T0 = Election quarter
Source: CEIC, Nomura Global Economics.
Source: CEIC, Nomura Global Economics
Fiscal stability remains an anchor for now
Amid the uncertain political backdrop, fiscal policy will remain a source of stability, in our
view. We forecast a slight widening of the fiscal deficit to 2.3% of GDP in 2024 from an
estimated 1.8% in 2023 (revised down from 2.1%), in line with the 2024 budget, which
was already approved by the government. We believe the 2024 budget targets will remain
intact regardless of the election results, as the new government will not take over until
October 2024. We forecast relatively stable revenue growth (5.6% versus 5.5% estimated
this year), in line with solid GDP growth. On expenditures, we forecast government
consumption growth to pickup materially to 7.1% from 3.9%, mainly due to rising social
assistance and subsidies. We have seen some underspending of social assistance in
2023, for which the budget has only reached 78.6% as of October 2023, lower than the
average disbursement of 79.6% over the same period within five years before the
pandemic. Nonetheless, we expect spending to catch up, with a ramp up in shovel-ready
108
Nomura | 2024 Global Macro Outlook
11 December 2023
social assistance disbursements in Q4, along with newly unveiled measures such as the
‘El Niño’ aid. We believe the government will likely shift the strategy to again front-load
some allocated expenditures in H1 2024.
No rush in BI’s rate cutting cycle
Despite the still-benign inflation outlook, we believe BI will be unable to start its easing
cycle before the Fed. The external backdrop and the Fed’s higher-for-longer narrative will
be key considerations for BI, given FX stability remains its top priority. As we discussed
above, the elections may also weigh on sentiment and capital flows, which should keep BI
cautious about cutting rates too early, even if headline CPI inflation remains within its
target range. For 2024, we forecast a decline in average CPI inflation to 2.9%, from 3.7%
in 2023, and ending the year at 2.9%, within BI’s target range of 1.5-3.5%, which it
lowered from 2-4% (Figure 161), as we expect the government to leave all administered
prices unchanged through 2024 (given the elections) and slightly higher core inflation
(2.6% from 2.5%), consistent with domestic demand conditions. Overall, we forecast a
total of four 25bp cuts by BI from June to October, taking the policy rate back to the prepandemic level of 5%.
Fig. 162: Indonesia: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (sa, % q-o-q)
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 (% nsa)
Consumer prices
Exports (BOP basis)
Imports (BOP basis)
Trade balance (US$bn, BOP basis)
Current account balance (US$bn)
Current account balance (% of GDP)
Fiscal Balance (% of GDP)
Policy rate, 7 day reverse repo rate (%)
10-year government bond yield (%)
Exchange rate (USD/IDR)
3Q23
0.3
4.9
5.1
-3.8
5.8
-4.3
-6.2
4Q23
1.7
5.3
5.4
4.3
5.5
-2.3
-2.4
1Q24
1.6
5.3
5.5
5.1
4.5
1.0
1.1
2Q24
1.6
5.3
5.6
5.3
4.3
2.6
2.2
3Q24
0.2
5.1
5.3
5.0
4.4
3.1
2.9
4Q24
1.9
5.2
5.4
5.2
4.5
3.6
2.9
1Q25
1.3
5.0
5.1
5.2
4.7
4.0
2.4
2Q25
1.6
5.0
5.0
4.9
4.4
5.2
3.9
2023
2024
2025
5.1
5.1
3.5
4.5
0.2
-2.1
5.2
5.5
5.1
4.4
2.6
2.3
5.0
5.2
5.0
4.4
5.1
4.6
4.2
0.5
0.2
5.4
2.9
-17.8
-10.8
10.3
-0.9
0.3
5.1
0.3
-0.1
5.4
2.6
-10.4
1.0
8.9
-1.7
-0.1
4.7
0.6
0.0
5.3
2.7
-3.6
14.3
4.7
-3.7
-0.6
4.7
0.4
0.2
5.3
2.9
0.3
16.8
1.6
-7.3
-0.9
4.5
0.4
0.2
5.2
2.9
2.3
16.4
2.9
-5.7
-1.2
4.9
0.1
0.3
5.2
2.9
1.9
10.4
4.2
-4.0
-1.3
4.5
0.0
0.5
5.2
3.0
0.4
2.4
3.5
-3.1
-1.2
4.4
0.2
0.4
5.2
2.4
4.3
3.9
1.9
-7.1
-1.2
4.4
0.2
0.5
5.4
3.7
-11.6
-6.7
43.9
-1.8
-0.1
-1.8
6.00
6.59
15400
4.7
0.4
0.2
5.3
2.9
0.2
14.4
13.5
-20.7
-1.3
-2.3
5.00
5.75
14700
4.5
0.1
0.3
5.2
2.5
2.6
4.6
9.1
-26.7
-1.5
-2.2
5.00
5.75
14400
5.75
6.00
6.00
5.75
5.25
5.00
5.00
5.00
6.91
6.59
6.25
6.00
5.75
5.75
5.75
5.75
15455 15400 15200 15100 14900 14700 14625 14550
Note: Numbers in bold are actual values; others forecast and inventories under the GDP components also includes statistical discrepancies. Interest rate and currency forecasts
are end of period; other measures are period average. Quarterly current account balance (% of GDP) numbers are four-quarters rolling sum. All forecasts are modal forecasts
(i.e., the single most likely outcome). Table reflects data available as of 5 December 2023.
Source: CEIC, Nomura Global Economics.
109
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 31: A long election season
Indonesia’s presidential election in 2024 will be a three-way contest between Prabowo Subianto, Ganjar Pranowo and
Anies Baswedan (see Indonesia: Election watch series #1 – The (long) race is on, 1 November 2023). The political
calendar will be lengthy, with the official campaign period kicking off on 28 November 2023 and inauguration day on 20
October 2024, marking the end of Jokowi’s presidency after two five-year terms in office. Voting day is 14 February
2024 with 204.8mn voters registered. If no candidate garners more than 50% of the vote, a second round between the
top two candidates would be held on 26 June. Exit polls on election night should be a good indicator of the outcome,
with the Election Commission (KPU) officially announcing the results a few weeks later. Nationwide regional elections
will also be held on 27 November 2024, extending the election season further.
Based on surveys, Prabowo is the current frontrunner but a second round is likely. He has been extending his lead
over Ganjar since late September, after months of surveys showing a relatively tight race (Figure 163). Prabowo picked
Gibran Rakabuming Raka, President Jokowi’s eldest son and Mayor of Solo, to be his running mate. In our view,
Gibran will help increase Prabowo’s chances of victory, owing to the popularity of President Jokowi, which is supported
by recent surveys . We see two other key factors that may support Prabowo more than his rivals, including the higher
share of young voters (56.5%) and the support of the largest coalition of parties (Figure 164).
Fig. 163: Indonesia - Survey results with three candidate
choices
Fig. 164: Indonesia - Candidates’ party coalition and
share of seats in parliament
Prabowo Subianto
Gerindra
13.6%
Golkar
14.8%
PAN
7.7%
Demokrat
9.4%
PBB
0.0%
Gelora
0.0%
Garuda
0.0%
Total
45.4%
Ganjar Pranowo
PDIP
22.3%
PPP
3.3%
Perindo
0.0%
Hanura
0.0%
Total
25.6%
Anies Baswedan
Nasdem
10.3%
PKB
10.1%
PKS
8.7%
Total
29.0%
Note: Parliamentary seat counts are based on 2019-2024 election results.
Presidential candidate in the General Election needs to be at least supported by
115 seats of political parties in the parliament.
Source: CNN Indonesia, Kompas, Nomura Global Economics.
Note: Dates indicate survey periods
Source: SMRC, LSI, Indikator, Populi
Figure 165 summarizes the fiscal policy proposals of candidates, which we think market participants will be watching
closely. These are mainly derived from their ‘vision and mission’ books, and we still need to watch the campaign trail.
Prabowo appears to be the most populist, retaining some of his key campaign pledges from 2019. These include not
just the continuation of energy subsidies and raising civil servant salaries across the board, but also on the revenue
side, cutting personal income tax rates and increasing the exemption threshold, which would narrow the tax base
further. In our view, these measures suggest increased fiscal risks under Prabowo, although the existing fiscal rules –
such as the fiscal deficit limit per year of 3% of GDP – should provide a backstop, unless this legislation is changed.
Fig. 165: Indonesia - Summary of candidates' fiscal policy proposals
Candidates
Prabowo
Subianto /
Gibran
Rakabuming
Raka
Policy proposals
• Establish new State Revenue Agency and increase revenue ratio to 23% of GDP
• Increase the threshold of non-taxable income (PTKP) and cut personal income tax (PPh 21) to encourage economic activity and to
increase tax ratio
• Increase salary of civil servants (esp. teachers, lecturers, health workers), military, police, and state officials. This policy will be based on
provincial minimum wage (UMP) regulation using the highest salary range of a professional job, although implementation is subject to
state finances
• Continue energy subsidy program (fuel, LPG, and electricity)
• Continue social programs i.e. National Health Card (KIS), Smart Indonesia Card (KIP), Family Hope Program (PKH), direct cash
transfers (BLT), credit for startups, credit for millennials.
Ganjar
Pranowo /
Mahfud MD
• Family Hope Program (PKH) to have 15mn beneficiaries (increasing from 10mn)
• Establish Social Welfare Endowment Fund
• Decrease economic and social inequality between regions, and special financial support for Papua region
• Increase the salary for teachers and lecturers
Anies
Baswedan /
Muhaimin
Iskandar
• Establish State Revenue Agency directly under the President
• Enhance budget efficiency by prioritizing productive spending to increase fiscal space
• Increase the tax base and improve compliance to raise the tax ratio to 13-16% of GDP by 2029
• Ensuring well-planned tax incentives, including tax holiday and tax allowance
• Reduce pulic debt ratios from 38.1% of GDP to below 30% in 2029
• Implement cash transfers (BLT) and Family Hope Program (PKH)
• Ensure salary increase of a minimum 15% in 5 years for civil servants
Source: Candidates' Vision and Mission Books, Nomura Global Economics.
110
Nomura | 2024 Global Macro Outlook
11 December 2023
Malaysia: Par for the course
We forecast a modest pickup in GDP growth, supported by a recovery in electronics
exports. However, in the second half of the year, the economy may face headwinds,
given our house view of a US recession and a still-muted recovery in China. We believe
fiscal consolidation will therefore be slow, so as not to hurt growth further and to manage
inflation risks. We think a services tax hike will be implemented in May and subsidy
rationalization will take place later in H2, which would have only a moderate impact on
inflation. We expect BNM to leave the policy rate unchanged at 3% in 2024, given the
growth-inflation picture. We see this pragmatic fiscal approach and a neutral monetary
stance as the appropriate policy mix amid still-tough external conditions.
Still a tough external environment to navigate
We forecast a modest improvement in GDP growth to 4.1% in 2024 from 3.8% in 2023
(slightly below the government’s 4-5% and the consensus forecast of 4.3%), mainly driven
by external demand conditions, which should evolve through the year but be challenging
overall. In H1 2024, growth momentum should pick up, led by a recovery in electronics
exports before facing headwinds by H2, given our house view of a US recession and a
still-muted recovery in China. We expect domestic demand, particularly private
consumption spending, to follow a broadly similar trajectory, given the large and quick
spillover effects from export growth via the labor market and wage growth, with about a
one-quarter lag. Business sentiment and private investment spending should likewise
remain relatively subdued, given still-elevated global uncertainty.
A slower pace of fiscal consolidation
Against this backdrop, we think the government will likely be pragmatic in implementing
fiscal consolidation under its medium-term fiscal framework (MTFF), aiming to bring down
the deficit to 3.5% by 2025, so as not to hurt growth further and add significantly to inflation
risks. Indeed, we note the MTFF has been adjusted over the last few years in response to
evolving economic conditions and reflects a political willingness to revise as warranted. We
maintain our forecast for a narrowing of the fiscal deficit to 4.6% of GDP in 2024 from 5.0%
in 2023, but by less than the budget’s 4.3% projection (Figure 166). On the revenue side, we
expect the proposed measures to be implemented but not all at the start of the year,
blunting the impact on full-year collections. For instance, we assume the 2pp tax hike on
services to 8% will be implemented in May 2024, the same timing for the luxury goods tax.
Fig. 166: Malaysia - Fiscal deficit and consolidation path
Fig. 167: Malaysia - Nomura CPI inflation forecasts and
estimates of impact of Budget 2024 measures
Source: CEIC, MOF, Nomura Global Economics
Source: MOF, CEIC, Nomura Global Economics
Importantly, we think subsidy rationalization will be smaller than budgeted. With our oil
price assumptions close to the government’s USD85/bbl, we estimate budget allocations
for subsidies imply fuel prices will have to rise sharply to meet the lower subsidy target for
the full year, which we think will be politically unpalatable. We therefore only pencil in a
5% increase in diesel prices in June, followed by another 5% in October versus the
implied total of 70% needed to reduce subsidy allocations as indicated in the budget
(assuming other subsidized fuel prices remain fixed since PM Anwar only mentioned
diesel in his budget speech).
111
Nomura | 2024 Global Macro Outlook
11 December 2023
A modest impact on core inflation
Taking these factors into account, we raise our CPI inflation forecasts moderately to 2.4%
from 2.1% for 2024 and to 3.0% from 2.6% for 2025, with our estimated impact from the
implemented budget measures at about 0.3-0.4pp. For 2024, our forecast is well within
the government’s range of 2.1-3.6%, and slightly below the consensus forecast of 2.5%.
The upward trajectory of our CPI forecasts is much more modest than what is implied by
the full implementation of all the revenue-raising and subsidy rationalization measures at
the start of 2024 (Figure 167), again consistent with our view that the government will
remain cautious of inflation risks and aim to avoid stoking cost of living concerns. As a
result, we expect limited second-round effects from these relatively small supply-side
adjustments, with labor markets and wage growth also gradually declining, as mentioned
above. We therefore still forecast a slight decline in core inflation to 2.8% in 2024 from
3.1% in 2023, before climbing back modestly to 3.1% by 2025.
Stable monetary policy settings for a while
The relatively subdued growth and inflation outlook continues to support our view that
BNM’s hiking cycle is over, and so we still expect the overnight policy rate (OPR) to
remain unchanged at 3% throughout 2024. Amid recent FX weakness, BNM has also
been clear that OPR decisions remain linked to its assessment on growth and inflation
risks and that the OPR will not be used as a tool for addressing MYR weakness, in line
with our long-held view (see Malaysia: BNM stays on-hold and relaxed about FX
weakness , 2 November 2023 ). By the same token, we do not see BNM as likely to follow
the Fed when its rate cutting cycle starts. Instead, a combination of allowing FX to adjust
and, if appreciation pressures continue, rebuilding FX reserves, given the drainage over
the last few months, would be BNM’s preference. Fundamentally, while we think growth
will lose some momentum at that point and headline CPI inflation could edge higher due
to the implementation of fiscal measures, BNM is unlikely to judge that a monetary policy
response is warranted, with the level of the OPR at 3% still seen by BNM as neutral.
Fig. 168: Malaysia: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (sa, % q-o-q)
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 (BOP basis)
Imports (BOP basis)
Trade balance (US$bn, BOP basis)
Current account balance (US$bn)
Current account balance (% of GDP)
Fiscal Balance (% of GDP)
Overnight policy rate (%)
Exchange rate (USD/MYR)
3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 2Q25
2.6
-1.7
2.3
1.1
2.1
-1.5
3.0
1.1
3.3
3.4
4.7
4.2
3.7
3.9
4.6
4.6
4.6
4.3
4.6
5.2
4.9
5.0
5.0
5.2
5.8
6.1
4.1
4.1
3.2
4.0
3.7
4.1
5.1
6.4
4.2
3.7
4.6
2.9
6.3
4.2
-12.0
-2.9
4.0
3.9
3.4
3.3
5.9
6.0
-11.1
-0.1
4.2
4.9
4.3
4.5
6.9
6.8
4.5
0.2
-1.4
3.4
2.0
-23.2
-21.6
7.1
2.0
2.8
4.6
0.8
-2.0
3.5
1.9
-15.1
-6.6
5.9
1.7
1.7
4.1
0.5
0.1
3.6
1.9
-8.0
0.0
4.3
2.3
2.0
4.4
0.3
-0.5
3.5
2.2
7.4
14.3
3.6
3.6
2.4
4.3
-0.2
-0.4
3.6
2.6
10.0
9.2
8.2
1.9
2.3
4.1
0.3
-0.6
3.6
2.8
9.9
8.7
7.1
1.3
2.2
4.8
0.1
-0.3
3.6
2.9
8.4
12.1
2.8
2.3
2.1
4.6
0.4
-0.3
3.6
3.0
8.9
9.3
3.6
5.0
2.3
3.00
4.69
3.00
4.61
3.00
4.56
3.00
4.53
3.00
4.45
3.00
4.40
3.00
4.37
3.00
4.35
2023
2024
2025
3.8
4.7
3.6
5.5
-7.0
-6.9
4.1
4.9
3.9
3.8
3.6
4.5
4.5
5.2
4.1
5.0
5.5
6.6
4.4
-0.2
-0.4
3.5
2.6
-17.9
-15.3
28.5
6.7
1.7
-5.0
3.00
4.61
4.3
0.2
-0.4
3.6
2.4
4.7
8.0
23.2
9.1
2.2
-4.6
3.00
4.40
4.7
0.2
-0.5
3.6
3.0
11.7
11.9
25.5
14.2
3.0
-4.2
3.00
4.29
Note: Numbers in bold are actual values; others are forecasts, and inventories under the GDP components also includes statistical discrepancies. 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 5
December 2023.
Source: CEIC, Nomura Global Economics.
Philippines: Seeing light at the end of the tunnel
We expect the main engine driving a pickup in growth to be public investment spending,
which should gain more traction due to the government’s push to build infrastructure after
a slow start. Private consumption growth is likely to be held back by high interest rates,
which should persist for a while. We believe BSP’s hiking cycle is over but that it will
remain vigilant of inflation risks and only start cutting in August 2024, after inflation
returns to BSP’s target and inflation expectations stabilize. The twin deficits are set to
remain relatively large, although stabilizing, with higher capital expenditures slowing the
pace of fiscal consolidation and at the same time boosting import demand.
112
Nomura | 2024 Global Macro Outlook
11 December 2023
A growth improvement but still sub-par
We forecast an improvement in GDP growth to 5.8% in 2024 from our estimate of 5.2% in
2023, which is still below the government’s target range of 6.5-8.0% (Consensus: 5.5%).
Public investment spending will be the key driver of the pick-up, in our view, reflecting more
progress in coming quarters on the government’s flagship infrastructure projects after a
disappointing start to 2023. The central government is pushing catch-up spending plans and
implementation should also be sustained ahead of the May 2025 mid-term elections. By
contrast, the persistence of an uncertain inflation outlook and sustained elevated interest
rates (more below) will likely weigh on household spending growth, but not cause it to
plunge, given low household debt at around 10% of GDP. Despite falling employment
growth due to the economic downturn this year, the unemployment rate also averaged
4.7%, near the pre-pandemic low of 4.6%. Overall, we expect gross fixed capital formation
growth to rise strongly to 12% from 8%, due to faster infrastructure implementation, which
may also encourage some participation from the private sector, but this would be partly
offset by an easing of private consumption growth to 4.5% from 5.4% (Figure 169).
BSP remains vigilant of inflation risks
A greater source of uncertainty remains on the inflation outlook (relative to the growth
outlook), prompting the Bangko Sentral ng Pilipinas (BSP) to maintain a hawkish stance,
despite delivering the most aggressive hiking cycle in Asia, with 450bp of total hikes since
2022. We believe BSP’s hiking cycle is over after the latest headline CPI print in October
and November surprised lower, with core inflation also moderating in line with weaker
demand conditions. We maintain our CPI inflation forecasts of 6.2% for 2023 and 3.8% for
2024. We forecast average CPI inflation of 6% for 2023 (was 6.2%; 2022: 5.8%) and 3.5%
for 2024 (was 3.8%). Base effects are set to become more favourable over the next few
months but we believe headline inflation is unlikely to return to BSP’s 2-4% target until
July 2024, barring new shocks.
Fig. 169: Philippines - GDP growth forecasts and key demandside drivers
Fig. 170: Philippines - CPI inflation and Nomura forecasts vs
BSP's target
Source: CEIC, Nomura Global Economics
Source: CEIC, Nomura Global Economics
As such, we only expect BSP to start its cutting cycle from August 2024, as BSP will only be
comfortable to pivot if, as it has indicated before, actual data show headline inflation is
becoming more entrenched within its 2-4% target. In the interim, BSP should remain vigilant
of inflation risks and maintain a relatively hawkish tone, continuing to pledge that it remains
ready to resume hiking, as needed. This relative hawkishness also suggests the policy rate
is unlikely to return to the pre-pandemic level of 4.0% as we forecast four 25bp cuts in
August to December 2024 and two 25bp cuts in Q1 2025, taking the policy rate to 5%.
The twin deficits remain large but are stabilizing
We think the current account deficit (CAD) will stabilize but remain relatively large at 3.3%
of GDP in 2024, unchanged from our 2023 forecast. Capital goods imports will continue to
be boosted by infrastructure implementation, as discussed above. Food imports should
also remain a policy response to ease domestic supply constraints, although to a lesser
extent than in 2022/23, given recent government measures, such as clamping down on
hoarding and other market malpractices that exacerbated the tightening of supply
113
Nomura | 2024 Global Macro Outlook
11 December 2023
conditions. At the same time, export growth should receive some support from the upturn
in the tech cycle, particularly through H1 2024, providing some offset, before dissipating in
H2, given our view of a mild US recession. Partly for that reason, we also expect growth
of remittances by overseas workers to slow to a more steady-state 1.5% after rising by
3.2% in 2023, which was boosted by a delayed normalization of worker deployment to
pre-pandemic levels.
We expect a still-high fiscal deficit of 5.9% of GDP in 2024, narrowing from 6.6% in 2023
but both above the MTFF targets of 6.1% and 5.1%, respectively. We believe the
government remains committed to the MTFF but will likely achieve a slower pace of fiscal
consolidation, given our view that GDP growth will likely fall below official forecasts and
thus revenue collections are likely to underperform. At the same time, the disbursement of
capital expenditures will likely improve, sparked by this year’s catch-up spending plans
pushed by the central government, and sustained by the still-strong prioritization of the
administration’s “build better more” program. The upside risks from expenditure savings
and additional revenue collections from proposed fiscal reform measures – such as
rationalizing pension schemes of military and uniformed personnel and taxation in the
mining sector – are now likely limited, in our view, given the likely delay in the passing of
required legislation past the initial target of end-2023.
Fig. 171: Philippines: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (% q-o-q, sa)
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)
Unemployment rate (sa, %)
Consumer prices (2018=100)
Exports (BOP basis)
Imports (BOP basis)
Trade balance (US$bn, BOP basis)
Current account balance (US$bn)
Current account balance (% of GDP)
Fiscal balance (% of GDP)
Reverse repo rate (%)
Exchange rate (USD/PHP)
3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 2Q25
3.3
1.3
1.3
1.4
1.5
0.7
1.7
1.8
5.9
4.4
5.3
7.5
5.6
5.0
5.4
5.8
5.0
4.7
4.5
4.5
4.9
4.3
4.4
5.1
6.7
5.3 14.0 20.3 15.9 12.0
7.1
8.4
7.9 10.0
5.8 15.7 14.1 11.6
9.6
9.3
2.6
-0.6
1.3
4.1
4.6
4.9
6.5
7.2
-1.3
6.9
4.6 11.1 12.6
9.9
6.7
8.1
6.4
-2.1
1.4
4.8
5.4
0.9
-10.8
-15.7
-3.1
-2.7
6.3
0.4
-2.5
4.7
4.5
-1.3
4.7
-16.7
-3.0
-3.3
6.7
-0.3
-1.5
4.8
4.0
5.7
-0.3
-16.4
-4.9
-3.3
10.5
0.8
-3.2
4.7
4.1
4.4
1.8
-16.0
-2.8
-3.1
9.0
0.5
-3.6
4.5
3.3
6.1
7.4
-17.0
-3.9
-3.2
7.3
0.0
-2.3
4.3
2.8
7.9
8.5
-18.2
-3.8
-3.3
6.6
-0.2
-1.0
4.7
2.5
4.2
9.2
-18.5
-5.2
-3.2
7.5
-0.4
-1.4
4.7
3.4
10.2
7.2
-16.7
-3.3
-3.2
6.25
57.0
6.50
55.3
6.50
54.8
6.50
54.5
6.00
54.0
5.50
54.0
5.00
53.8
5.00
53.5
2023
2024
2025
5.2
5.4
2.1
8.0
1.8
2.5
5.8
4.5
15.7
12.0
3.8
9.6
6.1
5.0
9.7
13.8
8.2
11.5
6.1
-0.5
-0.5
4.7
6.0
-2.7
-4.4
-65.6
-14.4
-3.3
-6.6
6.50
55.3
8.4
0.3
-2.7
4.6
3.5
6.1
4.4
-67.6
-15.4
-3.3
-5.9
5.50
54.0
8.5
-0.1
-2.4
4.6
3.3
8.2
8.4
-73.4
-16.3
-3.0
-5.3
5.00
53.0
Note: Numbers in bold are actual values; others forecast. “Inventories” component contribution to GDP also includes statistical discrepancies. Interest rate and currency forecasts
are end of period; other measures are period average. Quarterly current account balance (% of GDP) numbers are four-quarters rolling sum. All forecasts are modal forecasts
(i.e., the single most likely outcome). Table reflects data available as of 6 December 2023.
Source: CEIC, Nomura Global Economics.
Singapore: Core inflation pressures likely to persist
We expect the economic recovery to be buoyed by a turnaround in manufacturing due to
the global tech upcycle, although partly offset by a loss of momentum in the services
sector, which could face some headwinds later in the year, given the mild US recession
expected by our US economists. Core inflation should remain relatively elevated for some
time, as the impact of the second tranche of the GST hike in January is likely to be
compounded by persistent underlying pressures from high wage growth. All these factors
suggest the Monetary Authority of Singapore (MAS) will likely leave its policy stance
unchanged in 2024, albeit with some risk that MAS may need to ease in the latter part of
2024. Fiscal policy will also likely contribute to the policy tightening, as we forecast a
small fiscal surplus in FY24 for the government to meet its balanced budget rule.
A tale of two halves for growth momentum
We expect GDP growth to rebound to 2.8% in 2024 after the sharp slowdown to 0.9% in
2023 from 3.6% in 2022 (Consensus: 2.1%; government: 1.0-3.0%). This improvement
mainly reflects our tech team’s view of the global tech upcycle, driving a significant
turnaround in the manufacturing sector (Figure 172), which fell into recession this year
(electronics have a weighting of 45.3% in the industrial production index).
The recovery is, however, likely to be uneven, as we expect a moderation in services
growth, which has continued to trail the manufacturing slump over the last few quarters. In
addition, the boost from China’s re-opening, particularly as it relates to tourism-related
114
Nomura | 2024 Global Macro Outlook
11 December 2023
sectors, is now likely fading; we expect tourist arrivals to total 16mn in 2024 (83.7% of
pre-pandemic levels) up from 14mn in 2023 (we previously forecast 16mn). Moreover,
external demand overall should lose momentum into H2 2024, after the tech-led pickup in
H1, taking into account our house view of a mild US recession from Q3 and a modest
recovery in China. Despite still-elevated external uncertainty, we expect gross fixed
capital formation (GFCF) growth to turn slightly positive, helped by the continued
improvement in the construction sector, as supply is catching up with demand and as
foreign migrant workers return.
Only a gradual softening of labor markets with still-strong wage pressures
We expect labor market conditions to ease only gradually in coming quarters after remaining
relatively tight in 2023, despite the sharp economic slowdown, as indicated by our Nomura
Labor Market Conditions Indicator. We believe labor demand will likely remain robust,
maintaining upward pressure on wage growth, consistent with business surveys showing
that the majority of firms are still planning to raise wages by an average of 6% over the next
twelve months (see Singapore: More signs of persistent labor market tightness (part 2) , 13
September 2023). This compares to already-high wage growth of 6.3% y-o-y in the first
three quarters of 2023, and, in our view, reflects the need for companies to attract more
workers but also retain them, despite other cost pressures kicking in. This also supports our
forecast for the unemployment rate to average 2.1% in 2024, up only marginally from 1.9%
in 2023 and still below the pre-pandemic level of 2.2%.
Fig. 172: Singapore: Real GDP versus global chip sales
Fig. 173: Singapore: Core-core inflation versus wage growth
Source: CEIC, Nomura Global Economics.
Note: Core-core inflation excludes raw food, utilities, public and other transport.
Source: CEIC, Nomura Global Economics.
Higher for longer core inflation
As a result, we forecast average core inflation of 3.0% in 2024 (above our earlier forecast
of 2.6%), down from 4.1% in 2023 but still well above the historical average of 1.5% and
within the MAS forecast range of 2.5-3.5%. Our assumption is that wage growth will hold
up at around 5% in 2024, which would keep core-core inflation (which is our measure of
underlying inflation excluding energy and raw food prices in the core basket) elevated
despite base effects (Figure 173). In addition, the second tranche of the GST hike to 9%
from 8% in January will likely have more spillover effects than in the first tranche, given
stronger economic growth in 2024. In terms of trajectory, our forecast pencils sticky core
inflation throughout 2024 (i.e., ~3.0%), when the impact of the GST hike likely offsets
favourable base effects, before moderating gradually over subsequent quarters.
We forecast headline inflation at 2.5% for 2024 (up from 2.2%), down from our 2023
forecast of 4.8% and well below the MAS forecast range of 3.0-4.0%, taking into account
the sharp drop in car prices in line with certificate of entitlement (COE) premiums and
falling accommodation inflation, as rents are moderating amid increasing housing supply.
Stable FX policy and small fiscal contraction
Consistent with our view of sticky core inflation for an extended period, Craig Chan, our
global head of FX strategy, believes the MAS will leave its FX policy stance unchanged in
2024, due to MAS’ assessment that sufficiently tight policy is appropriate amid stillelevated core inflation and a rebound in GDP growth, but with some risk that MAS may
need to ease in the latter part of 2024.
115
Nomura | 2024 Global Macro Outlook
11 December 2023
We think some of the policy tightening will also be borne by the government’s fiscal
stance. We still forecast a fiscal surplus of 1.0% of GDP for FY24 (year ending March
2025), following small fiscal deficit in FY23 (Nomura and government: 0.1% of GDP
deficit). This is consistent with the improving economic outlook and premised on our view
that the government will run a fiscal deficit of 0.5% in FY25, ahead of the general
elections by November 2025, but still meet the balanced budget rule (i.e., our forecasts
imply a total fiscal deficit over the 2021-25 period of 0.0% of GDP). We expect the
government, in its budget announcement for FY24 in February, to rollout a more targeted
anti-inflation package and envisage a step-up in revenue collections, given the rising GDP
growth and other revenue-raising measures (see Singapore: Budget 2023 underlines
long-term fiscal sustainability , 15 February 2023).
Fig. 174: Singapore: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (sa, % q-o-q)
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, %)
Headline CPI inflation
MAS core inflation
Exports (BOP basis)
Imports (BOP basis)
Trade balance (US$bn, BOP basis)
Current account balance (% of GDP)
Fiscal Balance (% of GDP)
SORA 3m compounded average (%)
Exchange rate (USD/SGD)
3Q23
1.4
1.1
4.4
3.4
-0.7
-1.0
-1.2
4Q23
0.4
1.4
6.1
2.3
4.3
6.0
6.1
1Q24
0.9
2.7
6.4
-0.9
3.0
3.9
3.6
2Q24
0.7
3.4
3.6
6.9
2.4
4.4
6.4
3Q24
0.6
2.5
2.8
0.4
0.5
4.2
3.2
4Q24
0.3
2.5
3.2
0.2
1.2
4.2
3.2
1Q25
0.7
2.2
3.4
1.0
2.4
4.2
3.1
2Q25
0.7
2.3
3.6
2.0
2.4
4.2
3.1
2023
2024
2025
0.9
4.6
2.1
0.3
1.4
0.6
2.8
4.0
1.3
1.8
4.2
4.1
2.5
3.7
2.5
1.9
3.6
2.4
1.5
-0.4
0.0
2.0
4.1
3.4
-8.3
-13.4
38.6
18.0
3.1
-3.4
1.8
2.0
3.7
3.2
6.6
1.3
37.5
18.1
2.6
-1.4
1.6
2.0
3.3
3.2
1.1
-0.7
35.6
16.9
2.2
2.0
-0.9
2.0
2.6
3.0
8.0
10.0
42.3
16.9
1.0
-1.5
3.0
2.1
2.2
3.1
10.3
9.2
43.7
17.2
1.4
-1.8
3.0
2.1
2.0
2.8
8.3
7.2
41.8
17.5
1.8
-2.6
3.1
2.2
1.7
2.0
7.1
6.0
39.3
17.3
1.8
-2.7
3.2
2.2
1.6
1.8
6.3
5.1
46.3
17.1
3.70
1.36
3.25
1.33
3.00
1.31
2.75
1.29
2.75
1.28
2.75
1.28
2.75
1.27
2.75
1.27
1.9
-2.7
1.7
1.9
4.8
4.1
-5.0
-9.7
150.6
18.1
-0.1
3.25
1.33
2.0
-0.7
1.6
2.1
2.5
3.0
7.0
6.4
163.5
17.5
1.0
2.75
1.28
2.0
-2.6
3.0
2.3
1.5
1.8
5.2
4.0
177.2
16.6
-0.5
2.75
1.25
Note: Numbers in bold are actual values; others forecast. The contribution to GDP from the “inventories” component also includes statistical discrepancies. 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). MAS core inflation excludes
accommodation and private road transport costs. Our current account balance forecast as a % of GDP is based on a four-quarter rolling sum basis.Table reflects data available
as of 5 December 2023.
Source: CEIC, Nomura Global Economics.
Thailand: High fiscal risks
The FY24 fiscal deficit should widen significantly, as the government is resolved to
implement its digital wallet policy. With public debt ratios already surging above regional
peers after the pandemic, the large borrowing required will likely raise the risk of a credit
rating outlook downgrade to ‘negative’ as early as Q1. We estimate the fiscal multiplier,
however, to be small, and the tourism recovery to remain slow. As a result, GDP growth
will likely undershoot official forecasts substantially. Alongside CPI inflation that is
already turning negative, which we think is likely to persist, we forecast 25bp policy rate
cuts by BOT in each of June and August 2024.
Growth and current account recoveries remain subdued...
We cut further our 2024 GDP growth forecast to 3.0% (down from 3.8%), a more muted
improvement from our 2023 estimate of 2.0%, both well below the BOT’s forecasts of
3.8% and 2.4%, respectively (Consensus: 3.7% and 2.8%). Compared to the recovery in
other countries since the re-opening, Thailand’s has been by far the weakest in the
region, partly because of the slow tourism recovery amid China’s economic slowdown and
the post-election political uncertainty. We expect Thailand’s economic performance to
remain sub-par over the next few quarters.
Our forecasts reflect our lower assumption of foreign tourist arrivals, which we now expect
to increase only to 34.0mn in 2024 (was: 40mn; BOT: 34.5mn) from 28.0mn in 2023
(BOT: 28.3mn). Our 2024 forecast which is well below the pre-pandemic levels of 39.9mn
in 2019, after taking into account our cautious view of subdued economic performance in
China and a likely slow recovery of Chinese tourist arrivals to 6.0mn in 2024 from 3.5mn
in 2023 (2019: 11mn). We also continue to assume spending per tourist will pick up only
gradually to USD1,300 in 2024 from USD1,200 in 2023 (pre-pandemic: USD1,500), given
the economic slowdown across several major tourist source countries. In terms of the
116
Nomura | 2024 Global Macro Outlook
11 December 2023
trajectory, we expect total tourist arrivals of 9.0mn in Q1, 7.7mn in Q2, 8.3mn in Q3 and
9.0mn in Q4. Accordingly, we now expect a smaller improvement in the 2024 current
account surplus to 2.3% of GDP (was 3.7%) from 1.4% in 2023. Based on our arrival
assumptions and the boost from the electronics upcycle in H1, we expect the CAS to
increase to its peak of USD6.0bn in Q1 2024 from our forecast of USD4.3bn in Q4 2023,
before narrowing to USD0.6bn in Q2 due to seasonal dividend repatriation, followed by a
gradual improvement in H2 (Figure 175).
Fig. 175: Thailand: Current account balance and its sources
Fig. 176: Thailand: Contribution to real GDP growth
Source: CEIC, Nomura Global Economics.
Source: CEIC, Nomura Global Economics.
… while the fiscal drag is unlikely to reverse quickly despite stimulus plans
We remain cautious on the near-term growth outlook due to the impact of the budget delay,
which we think will dampen growth in H1 2024 (Figure 176). In line with official guidance, we
expect the FY24 budget bill to be passed only around May, eight months after start of the
fiscal year (October 2023). Without a new budget, the government can only re-enact the
FY23 budget, and no new capital expenditures can be made. After the 2019 elections, the
budget enactment was delayed only to February 2020; yet it resulted in a plunge in
government spending that contributed to a technical recession (see Thailand: Government
spending plunges at the start of FY2020 , 29 November 2019).
In addition, the government indicated that the THB500bn digital wallet policy (2.8% of
GDP) will only be implemented in May at the soonest and last for six months. The boost to
growth is nonetheless likely to be somewhat weak, in our view, given the limited multiplier
effect from direct transfers. In particular, the handout will be delivered in a digital currency,
for limited consumption spending (i.e., not including alcoholic, tobacco, utilities or fuel, and
cannot be converted into cash) and within the same district of residence. Furthermore, the
government expect firms to “cash in” digital receipts over a three-year period until April
2027, instead of immediately, which we think would further limit the multiplier effect (see
Box 32: The low fiscal multiplier of Thailand’s digital wallet policy ).
We expect BOT to cut rates as growth disappoints
We now expect BOT to deliver rate cuts of 25bp in each of June and August 2024, taking
the policy rate to 2.0% from the current 2.5%. Our forecast is premised on our view that
negative inflation surprises will not only persist into 2024 but that growth will also
disappoint BOT’s forecasts significantly in H1, justifying policy easing in Q2. The first cut
in June, in our view, will be preceded by a weak Q1 GDP outturn (released on 20 May).
In addition, we expect headline inflation to stay negative throughout 2024, averaging 0.4% in 2024, down from 1.3% in 2023 (Figure 177) and well below BOT’s 1-3% target
(Consensus: 1.9%, BOT: 2.2%). Our out-of-consensus forecast is premised on our
assumptions that the government will limit the electricity tariff hike to 5% in January, Brent
crude oil prices will average USD78.8/bbl in 2024 (2023: USD83.9/bbl) and the impact of
drought conditions on food price inflation will be limited.
We forecast core inflation at just 0.6% y-o-y in 2024 (was 0.4%), down from 1.3% in 2023
(BOT: 1.5%); this reflects our view that demand-pull pressures will remain subdued and
labor market conditions will remain soft. We assume wage growth averages 0.5% in 2024,
broadly unchanged from 2023 and below the 2015-23 average of 1.7%. We see a limited
impact from the daily minimum wage hike, which is likely to be effective in January but
117
Nomura | 2024 Global Macro Outlook
11 December 2023
capped at THB400, or at most a 19% increase from the 2023 median of THB335.
Previous wage hikes were much larger (i.e., 30% in 2012 and 35% in 2023) but did not
contribute to higher underlying inflation. (see Thailand: A likely limited impact from the 5%
hike in the minimum wage , 26 August 2022). We also expect the government to maintain
its price controls beyond the subsidy on energy prices.
Fig. 177: Thailand: CPI inflation and policy rate trajectory
Source: CEIC, Nomura Global Economics.
Fig. 178: Thailand: General government gross debt for BBBrated EM
Note: Data are based on the IMF's forecast, except for Thailand which is based on our forecast.
Source: Bloomberg, IMF, Nomura Global Economics.
The digital wallet policy adds to credit rating pressures
We expect the overall fiscal deficit – including both on- and off-budget spending – to
widen substantially to 5.2% of GDP in FY24 (up from our previous forecast of 3.9%) from
4.3% in FY23, before narrowing slightly to 4.8% in FY25 (up from 4.0%). Our forecasts
take into account the latest official announcement that the government will finance the
digital wallet policy by a special borrowing bill of THB600bn (see Thailand: PM
announces a larger-than-expected digital wallet policy , 10 November 2023). The
government, however, indicated that the borrowing will be spread out over three years, as
firms “cash in” over a three-year period. Our forecast assumes 60% of the THB500bn in
handouts will be financed by borrowing within FY24, 30% in FY25 and 10% in FY26 and
the remaining THB100bn for the capacity building fund will be implemented only in FY26.
By our estimate, the latest announcement implies public debt ratios will increase to 65.1%
of GDP in FY24 from 62.1% in FY23, and further to 69.2% by FY27 (previous forecast:
66.2%). This would be closer to the public debt ceiling of 70% and represent a further
divergence from the 55.8% median of peers with the same BBB credit rating, based on
IMF estimates (Figure 178). This underpins our view that at least one credit rating agency
will downgrade Thailand’s sovereign credit rating outlook to ‘negative’ from ‘stable’ in Q1
2024 (see Thailand: A smaller fiscal stimulus rollout is likely but credit rating pressures
may persist , 7 November 2023).
118
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 179: Thailand: Details of the forecast
% y-o-y growth unless otherwise stated
Real GDP (sa, % q-o-q)
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 (% nsa)
Headline CPI inflation
Core CPI inflation
Exports (BOP basis)
Imports (BOP basis)
Trade balance (US$bn, BOP basis)
Current account balance (US$bn)
Current account balance (% of GDP)
Fiscal balance (% of GDP, fiscal year)
Overnight repo rate (%)
10-year government bond yield
Exchange rate (USD/THB)
3Q23
0.8
1.5
8.1
-4.9
1.5
0.2
-10.2
4Q23
-0.6
2.1
7.9
-4.5
3.0
6.6
5.8
1Q24
1.0
1.4
6.7
-3.8
0.0
6.5
4.3
2Q24
1.1
2.3
4.1
1.4
6.0
7.3
3.4
3Q24
1.8
3.4
4.6
5.5
3.9
7.0
8.1
4Q24
0.9
4.8
4.1
3.1
3.0
3.6
2.9
1Q25
0.4
4.3
4.0
6.6
4.7
2.2
2.4
2Q25
0.4
3.6
3.7
1.8
3.2
4.3
-0.1
2023
2024
2025
2.0
7.5
-5.0
2.0
2.3
-2.1
3.0
4.8
1.7
3.1
6.1
4.6
3.0
4.1
5.2
1.4
2.9
1.0
4.0
-10.4
7.8
1.0
0.5
0.8
-2.0
-10.7
5.4
3.3
0.7
4.2
-2.6
0.5
1.0
-0.4
0.6
6.3
8.2
3.2
4.3
1.4
3.0
-3.1
1.5
1.0
-0.5
0.5
2.8
1.1
4.2
6.0
2.1
4.1
-4.3
2.6
1.0
-0.2
0.6
1.5
1.3
2.4
0.6
2.6
4.6
-0.7
-0.5
1.0
-0.7
0.7
2.0
5.4
3.3
2.7
2.4
3.5
0.9
0.5
1.0
-0.4
0.6
1.2
2.2
2.6
4.4
2.3
4.2
0.2
-0.1
1.0
-0.1
0.7
1.2
2.3
3.5
7.6
2.5
3.3
-2.8
3.1
1.0
0.4
0.7
1.7
-0.9
4.2
5.0
3.2
2.50
3.18
36.5
2.50
3.25
34.7
2.50
3.00
33.8
2.25
2.75
33.1
2.00
2.75
32.8
2.00
2.75
32.3
2.00
2.75
32.0
2.00
2.75
31.8
3.7
-4.4
2.7
1.0
1.3
1.3
-1.7
-1.8
13.7
7.1
1.4
-4.3
2.50
3.25
34.7
3.8
-2.1
1.2
1.0
-0.4
0.6
1.9
2.5
12.4
13.7
2.3
-5.2
2.00
2.75
32.3
3.5
-1.9
1.3
1.0
0.8
0.6
0.1
0.3
11.7
22.6
3.6
-4.8
2.00
2.75
31.2
Note: Numbers in bold are actual values; others forecast. The contribution to GDP from the “inventories” component also includes statistical discrepancies. Fiscal balance refers
to overall cash balance plus the disbursement of off-budget borrowing decrees. Interest rate and currency forecasts are end of period; other measures period average. All
forecasts are modal forecasts (i.e., the single most likely outcome). Our current account balance forecast as a % of GDP is based on a four-quarter rolling sum basis. Table
reflects data available as of 5 December 2023.
Source: CEIC, Nomura Global Economics.
119
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 32: The low fiscal multiplier of Thailand’s digital wallet policy
The BOT estimates the fiscal multiplier of the digital wallet policy at 0.3-0.6 (Source: Bangkok Post), which (we
understand from discussions with BOT officials) is based on a combination of its estimates of the marginal propensity
to consume, inputs from the social accounting matrix and a comparative analysis with other countries. We think the
fiscal multiplier is likely to be at the low end of that range, given various constraints such as low fiscal policy credibility
and a tight monetary policy stance. These factors tend to limit policy effectiveness, as previous regional studies have
shown: in Thailand, government spending has a weak impact on GDP growth, owing to a combination of factors such
as the high degree of openness, the flexible exchange rate regime, a lower degree of monetary accommodation and
weak fiscal policy credibility (see ADB Working Paper Series – Impact of Fiscal Policy on Selected ASEAN Countries,
Tang et al., 2010).
We cite two factors as most important for the digital wallet policy. First, public debt ratios surged after the pandemic
and will rise further with the implementation of this policy, raising concerns over debt sustainability and fiscal policy
credibility (see Thailand: A smaller fiscal stimulus rollout is likely but credit rating pressures may persist , 7 November
2023). The government also raised its medium-term fiscal deficit projections under a revised MTFF (Figure 180).
According to the ADB study, credibility supports effectiveness because it helps avert rising expectations of higher
interest rates and risk premia in bonds, which could lead to a crowding-out effect.
Second, we believe monetary policy is now restrictive rather than neutral, as BOT has assessed. Our Taylor Rule
estimate suggests the policy rate should be close to its pre-pandemic level of 1.5% in Q4 2023 (Figure 181), well below
the current level of 2.5%. A restrictive monetary stance could exacerbate the crowding-out effect when fiscal policy
credibility is lacking, as mentioned above. In addition, the digital wallet handouts are unlikely to boost consumption
spending at a time when household debt levels are high (86.4% of GDP in Q2 2023) and the debt service burden is
increasing in an environment of high interest rates. Recipients are not allowed to convert the handouts to cash or use
them to repay debt, but they could free up cash to repay debt.
We think these factors will constrain the effectiveness of the digital wallet policy, in terms of the stated goal of providing
short-term stimulus. In addition, we think that cash handouts in a digital form, which are only allowed for certain types
of consumption and within a limited area, will further limit its impact on growth. Moreover, firms will be allowed to
convert digital receipts into cash over the two- to three-year period, rather than immediately.
Fig. 180: Fiscal deficit projections
Fig. 181: Policy rate versus Taylor Rule estimate
Source: CEIC, Nomura Global Economics.
Source: CEIC, Nomura Global Economics.
120
Nomura | 2024 Global Macro Outlook
11 December 2023
Australia: 2024 economic outlook
Research Analysts
The economy held up better than expected in 2023, amid powerful opposing forces.
Elevated (post-Covid) stimulus savings, a surge in population growth and a surprising
rebound in dwelling prices helped cushion the impact of rate hikes. Elsewhere, higher
global food and energy prices did not hurt, given Australia is a net exporter of both. But
the latest GDP data highlight a loss of momentum, and we expect weak growth to
continue in 2024. The impact of higher rates continues to feed through, and we estimate
the continued reset of low-rate, fixed-rate mortgages will add another ~40bp to average
home loan rates over 2024-25. With sub-trend growth, the unemployment rate should rise
above NAIRU, helping to dampen domestically driven inflation pressures. There is some
risk of another near-term rate hike, but we think the rate hike cycle has most likely
ended. We forecast three 25bp cuts, from around August 2024, returning policy to a
broadly neutral setting. Uncertainty is higher than normal amid conflicting forces, and
against an uncertain geopolitical backdrop.
Andrew Ticehurst - NAL
Australia Economics
andrew.ticehurst@nomura.com
+61 2 8062 8611
The macro outlook for 2024 and 2025
Figures 182 and 183 below highlight contrasting developments, which characterise the
starting point as we head towards 2024. Dwelling prices fell by around 10% between mid2022 and early 2023, as interest rates rose – surprising many at the time – but have
largely recovered that lost ground. Dwelling prices have recorded three periods of
negative growth over the past seven years, but are nevertheless ~4% above year-ago
levels and ~ 20% above pre-Covid levels. While that might suggest a bullet-proof
economy, many statistics gloss over the pain-points that are currently being experienced.
While the level of real GDP is now an impressive 9pp above pre-Covid levels, growth has
been materially supported by a surge in population growth (~2.5% annualised), as
borders reopened and immigration rebounded. While quarterly GDP growth has remained
positive, Australia has, in fact, been experiencing a recession in per-capita terms. On our
forecasts, this should continue though 2024. In many ways, Australia has been getting
bigger, but not necessarily better, and we explore some of the side effects of the recent
population surge, in Box 33: Side effects of a surging population .
Fig. 182: Dwelling prices rebound, surprisingly
Fig. 183: An under-told story – per-capita recession
% m-o-m
% q-o-q
Source: CoreLogic
Source: ABS, Nomura
Constrained consumers
Real household disposable income growth is now negative (Figure 184), a function of
higher mortgage interest rates (causing an increase in net interest payments), higher
prices and increased tax payments. Personal income taxes account for a large ~50% of
total Commonwealth tax revenues; personal income tax brackets are not automatically
indexed in Australia, and higher wage growth causes “bracket creep”. Spending on
discretionary items has cooled, and nominal retail sales growth has slowed to a modest
1.2% y-o-y (negative in real terms). High household savings have provided a buffer, but it
is notable that consumers are now saving very little out of current income (Figure 185); at
121
Nomura | 2024 Global Macro Outlook
11 December 2023
1.1%, the household savings ratio has fallen to its lowest level since 2007. We also note
that, while mortgage offset account balances are still relatively high, they are held
unevenly, such that the period ahead will be painful for some consumers. Indeed, the
Australian Unity and Deakin University Wellbeing index, measuring satisfaction with the
economic situation, has fallen to the lowest level in its 22-year history, with satisfaction
declining steadily with income and age.
Rebounding tourism and international student numbers have been a boon for retailers, but
population growth will likely ease – following the post-Covid catch-up – providing less
support over the period ahead. Overall, we expect consumer spending to remain quite
subdued over the coming year or so. We expect high interest rates to continue to have an
impact, and note that some low-rate fixed-rate mortgages will continue to reset over 2024
and 2025. We estimate that this will add around 25-30bp to the average outstanding
mortgage interest rate in 2024 and another 10-15bp in 2025. Consumer sentiment is
already historically low – despite the currently low unemployment rate – and a
progressive easing of labour market conditions likely represents another notable
headwind for the consumer.
Fig. 184: Declining real household disposable income
% y-o-y (with contributions)
Source: RBA
Fig. 185: Consumers under real pressure; now saving very
little
Household savings ratio, per cent
Source: ABS
Broader pain from higher interest rates
We expect higher interest rates to impact the other interest sensitive sectors too: namely,
dwelling investment, and in time, business investment. Residential dwelling construction
has been subdued, in the context of earlier materials shortages and continuing labour
market shortages. Higher interest rates, and the earlier fall in dwelling prices, appear to
have weighed on builder sentiment, and there have been some notable builder failures,
with margins decimated by builders’ earlier acceptance of fixed price contracts. The level
of dwelling approvals, greenfield lot sales and new home sales (Figure 186) appear
historically subdued, though they have generally risen a little from recent lows. Given
typical lags in construction activity, we expect dwelling construction to remain soft in 2024,
before gradually rising through 2025.
Business investment spending, on both plant and equipment and non-dwelling
construction, has held up better to date. We think this reflects private sector involvement
in government-driven infrastructure projects, and that many firms have had some relative
rate pricing power, through the post-Covid rebound, and have been able to pass on higher
input costs. However, consumers now appear more resistant to higher prices, and we are
wary that business investment could become vulnerable in the face of further margin
compression. Labour and broader input cost pressures appear to be outpacing selling
prices (Figure 187).
122
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 186: Subdued housing activity indicators
Fig. 187: Margin compression (and higher rates) to hit capex
Detached housing
% change at a quarterly rate
Note: De-trended and rescaled to have the same mean as ABS approvals
Source: RBA
Source: NAB
Box 33: Side effects of a surging population
Population growth stalled in 2020-21 amid the Covid-related border restrictions but has accelerated to a 2.5%
annualised pace this year – above the 2023-24 budget estimate of 1.7% – driven overwhelmingly by net migration. This
has profound macro and sectoral implications, delivering both benefits and challenges.
With a larger population, the level of real GDP is larger than otherwise. Retailers have benefited from increased foot
traffic, and the education sector has rebounded, given a surge in foreign student arrivals.
Elsewhere, this is creating uncomfortable pressures in the housing market. Population growth has outstripped dwelling
construction and, when combined with other housing trends, such as the rise of services like Airbnb (reducing
permanent rental stock) and a reduction in the average number of people per dwelling (post-Covid), has resulted in the
rental vacancy rate declining to multi-year lows (around 1%, according to SQM Research). This has boosted both house
prices and rents, creating positive wealth effects and pushing up CPI inflation.
We think the impact on wage growth is less clear-cut, as stronger net migration is boosting both labour supply and
demand. Many of the arrivals are students, who are allowed to work in Australia. With the working age population
currently rising by around 50k per month, and an unchanged participation rate (near historic highs, around 67%), the
economy needs to create more jobs than normal (around 32k/month) to keep the unemployment rate steady (though
that is easier to achieve than otherwise, given rising demand from the growing population).
Some fiscal support
We expect little fresh fiscal expansion, in either the Commonwealth’s December midyear economic update, or in the next budget in May 2024. The budget is certainly in good
shape, with a surplus of AUD22bn (0.9% of GDP) in 2022-23, compared to an estimate of
AUD4bn (0.2% of GDP) in May, and with the 2023-24 budget currently tracking around
AUD6bn better than earlier forecast, due to stronger-than-forecast revenue growth (likely
reflecting higher wages and prices, including commodity prices, and most notably iron
ore). However, Australia is only mid-way through the current political cycle – with an
election not due until around May 2025 – so largesse may be retained for a later date,
closer to the next election and perhaps when the economy is weaker. Moreover, while
inflation is still high, it has peaked, and wage growth has picked up, so future cost of living
relief measures adopted by governments will likely be more modest. Finally, with the
unemployment rate still below NAIRU, and with well-publicised cost over-runs on
government infrastructure initiatives, the Commonwealth government would not want to
add to (nor be seen as adding to) inflation pressures.
A key fiscal and political focus is “Stage 3” tax cuts, passed by the Morrison
government in mid-2019, and scheduled to commence from 1 July 2024. This initiative
– with a large estimated cost of AUD320bn over 10 years – removes one tax bracket (for
individuals earning between AUD120-180k), increases the top income tax bracket (from
around 180k to 200k), and reduces the marginal tax rate on income between AUD45200k. As such, they favour higher-income earners. This is by-design, and follows Stage 1
123
Nomura | 2024 Global Macro Outlook
11 December 2023
and Stage 2 tax cuts for lower income earners. The current government has defended
these planned tax cuts, to this point, arguing they return bracket creep. However, they are
controversial, given still-elevated cost-of-living pressures, felt most acutely by lower
income earners. They were incorporated in previous budget projections (and current RBA
forecasts) and our assumption is that they will be introduced, in aggregate, though
perhaps with a fresh distributional “tweak”, away from the highest of income earners.
Another focus point is infrastructure spending. Amid labour and other resource
constraints, cost over-runs have been substantial, and the Commonwealth has proposed
deferring some projects and reallocating funding back to a smaller number of projects.
This would require coordination with, and cooperation from, State governments, all of
which have their own priorities and political objectives.
All up, we continue to expect a moderate but positive contribution to growth from
government spending over our forecast horizon.
Net exports, commodity prices and China
We have reflected our subdued domestic demand profile in our import growth forecasts
and think that a deliberate attempt to run down inventories will likely feature over the
coming year. We also project below-average growth in export volumes, given our house
view of a synchronised global slowdown. Tech-led Asian growth should not be especially
helpful for Australia, and China faces ongoing medium-term challenges, including those
related to the property sector and given demographic and geopolitical issues, although it
is still forecast to grow, and progressive policy stimulus should offer some support.
Australia’s terms of trade declined a little futher in Q3 of this year but has held up better
than expected. The price of iron ore, at around USD130/tonne, is currently well above
Budget estimates from May this year; the Budget assumed a steady decline to around
USD60/tonne by Q1 of 2024. The prospect of further China policy support, on “the three
new major projects”, including urban village renovation, public infrastructure and
government subsidised affordable housing, is a potential bright spot for iron ore.
Increased global defence spending and broader infrastructure spending, including that
associated with building out green energy infrastructure, is also positive for iron ore.
The labour market should continue to cool
The labour market has outperformed expectations, matching the broader economic trend.
However, lead indicators such as business surveys and vacancy data suggest we have
moved past the point of maximum momentum. Our labour market profile tracks our growth
estimates, with a typical 1-2 quarter lag; with below trend growth ahead, we estimate the
unemployment rate will move above NAIRU (around 4.25%, in our view) by mid-2024. Our
unemployment rate forecasts (peaking around 5.0%) are higher than the RBA’s (around
4.3%); the RBA has suggested that firms may opt to reduce worker hours, rather than
reduce headcount, over the period ahead.
Inflation pressures are set to gradually subside, with the “last mile” the hardest
Amid sub-trend growth, and the unemployment rate expected to rise above NAIRU, we
think that sticky service sector price inflation should gradually subside. The decline in
inflation will likely be gradual however, as unemployment does not move above NAIRU for
several quarters on our forecasts. Moreover, a downside from high population growth
–and the post-Covid trend of fewer people per dwelling – has been evident in the very
tight rental market and high rental CPI, and this represents almost 6% of the CPI basket.
With inflation expected to remain above the top of the 2-3% target band for at least four
years, it poses a risk of inflation expectations ratcheting higher. Longer-term structural
forces, including deglobalisation, higher energy costs associated with putting in place a
greener energy infrastructure, and higher insurance costs due to greater weather
variability will also likely hamper the RBA’s efforts to hit its inflation target. The RBA also
appears to be giving equal weight to its “maximum sustainable employment” objective;
this makes it less hawkish than some central banks, such as the RBNZ, which appear
prepared to pay a higher price to return inflation to target.
124
Nomura | 2024 Global Macro Outlook
Fig. 188: The labour market has started to soften, and we
expect that trend to continue
11 December 2023
Fig. 189: Core inflation generally peaked later, and has been
slower to decline
% y-o-y
Source: RBA.
Source: Bloomberg
RBA outlook: Most likely done, when do cuts come?
The RBA left its cash rate at 4.35% on 5 December, as widely expected, following a 25bp
hike in November. Recent communications from the governor – with respect to inflation –
appeared to tilt in a more-hawkish direction. However, December policy guidance
remained mild, in our view, with the governor discussing “whether” monetary policy might
need to be tightened again (or not).
Our base case remains that the tightening cycle is most likely over, and our cash
rate forecasts are more a function of our macro views and data than RBA guidance. We
concede some risk of a final hike – most likely in February, if this was to come – but
beyond that point, think that further signs of receding global inflation and weakening local
and global growth will reduce the risk of hikes as we move through 2024.
Moreover, as inflation falls to around 4%, by mid-2024, and with the RBA likely able to
project inflation falling towards the mid-point of its target band by that time, we think that a
gentle easing cycle could commence. We pencil in three 25bp rate cuts, from August,
returning monetary policy to a more neutral setting.
Active QT appears unlikely, certainly before H2 2024. The RBA’s balance sheet has
already fallen by more than AUD100bn, due to a large bond maturity and the expiry of
some low-rate Term Funding Facility (TFF) loans, and will fall by another ~100bn through
the first half of 2024 (mostly in the June quarter), with another large bond maturity and the
remaining TFF loans expiring. This will reduce excess liquidity and Exchange Settlement
balances notably, and the RBA may wish to study market functioning through this period
before making any decision on active bond sales. Active bond sales are controversial too,
given large mark-to-market losses. Nevertheless, 2024 will likely be a busy year for the
RBA, particularly as it moves to act on the RBA Review recommendations (see Box 34:
The RBA Review – implementation ).
125
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 34: The RBA Review – implementation
An independent review of the RBA was released in April 2023. This was the first such review in at least 30 years. The
Review contained multiple recommendations, and many should be progressively implemented over the coming
year. We summarise the key changes ahead, and how this could shape the policy outlook.
The Review recommends maintaining a dual mandate, giving equal weights to price stability and full employment,
with a flexible inflation target of 2-3%, but specifying the “welfare and prosperity” goal as an overarching purpose, rather
than a policy objective (Rec 1 & 2). It also notes the RBA has a responsibility to contribute to financial stability (Rec 5 &
6), and that it should take into account climate risks, but not use monetary policy to address those (Rec 7);
Rec 2.1 also states that the board should aim for the mid-point of the inflation target; this could be controversial in
the context of the RBA’s current forecasts, which project a decline in inflation to only 2.9% by end-2025. The governor
recently confirmed that the RBA would indeed be aiming for the midpoint of target band (22 November) and this would
be made explicit in the new Statement on the Conduct of Monetary Policy, jointly signed by the Treasurer and each new
RBA governor, on 8 December 2023. We note, however, that Rec 2.1 also states the board should have the flexibility to
vary the timeframe over which it aims to bring inflation back to the midpoint, taking into account the full employment
objective, when significant deviations occur.
The creation of an expert Monetary Policy (MP) Board, with greater economic and financial expertise, from 1 July
2024 (Rec 8). This will require changes to legislation. The MP board should consist of the governor, deputy governor,
treasury secretary (acting independently, and not at the Treasurers’ direction) and six external members, with the
governor as chair. External experts should have more “fire power” to question and challenge RBA insiders. The
governor, treasury secretary and a third party should recommend suitable candidates to the Treasurer. Existing board
members would transition to either the MP board or a new governance board;
Improving processes, moving to eight meetings per year (from 11 currently) to allow deeper consideration of issues
and research. Policy meetings will not be held in January, April, July and October; Quarterly Statements will continue to
be released according to the current schedule (Rec 9).
Communication and transparency, with press conferences following each policy meeting (rather than irregularly);
external monetary board members speaking publicly at least once each year; and board papers being released after
five years (Rec 10);
Oversight and accountability, with the creation of a governance board to oversee management, strategy, finance,
projects, resourcing and remuneration (Rec 11 & 12);
Forecast summary and risks ahead – a return to normal?
All up, we expect a return towards normality over 2024-25, with the economy cooling over
2024 but returning towards trend in 2025, inflation gradually declining to more normal
levels, and the cash rate returning to more neutral settings as this unfolds.
However, we concede that uncertainty is high, and risks abound. We think the world is still
far from normal, post-Covid, and there are wide disparities across the economy (by age
and by income), geopolitical and China risks remain, and policy continues to impact with
variable and unpredictable lags. The surprises seen through 2023 also temper our
confidence in our ability to make accurate forecasts.
In our base case, we expect the economy to record weak and sub-trend growth in 2024,
but to avoid outright recession. However, we acknowledge the risk of a harder landing; it
is not yet clear that the RBA (and others) will be able to “stick the landing” with respect to
both activity and inflation, and Australia remains vulnerable, given the jump in interest
rates, lofty house prices and leveraged consumers.
126
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 190: Australia: Details of the forecast
1Q23
2Q23
3Q23
4Q23
1Q24
2Q24
3Q24
4Q24
1Q25
2Q25
2022
2023
2024
2025
Real GDP (% y-o-y)
Real GDP (% q-o-q)
Personal consumption
Private investment
- Business investment
- Dwelling investment
Government expenditures
Exports
Imports
2.4
0.5
0.1
3.1
4.5
-0.2
0.7
0.5
3.3
2.0
0.4
0.1
1.0
1.2
0.5
2.0
4.5
1.8
2.1
0.2
0.0
1.1
1.5
0.2
1.0
-0.7
2.1
1.5
0.3
0.2
0.7
0.8
0.2
0.6
1.0
1.0
1.3
0.3
0.1
0.6
0.7
0.2
0.7
0.5
0.5
1.1
0.2
0.0
0.5
0.7
0.0
0.7
0.5
0.5
1.1
0.2
0.0
0.5
0.8
0.0
0.7
0.5
0.5
1.1
0.4
0.0
0.6
0.8
0.2
0.7
0.5
0.8
1.3
0.5
0.2
0.7
0.8
0.5
0.7
0.8
1.0
1.7
0.6
0.3
0.7
0.8
0.5
0.7
0.8
1.0
3.8
2.0
1.1
2.0
6.6
2.7
6.1
-4.0
4.8
2.5
12.8
1.2
5.8
9.0
-1.2
3.2
7.0
4.5
0.3
2.7
3.6
0.7
3.1
2.8
3.6
0.8
2.6
3.1
1.4
2.9
2.7
3.7
Unemployment rate
Employment, 000
Consumer prices
Trimmed mean
Weighted median
3.5
143
7.0
6.6
5.8
3.5
91
6.0
5.9
5.4
3.6
77
5.4
5.2
5.2
3.9
70
4.5
4.4
4.6
4.1
45
4.1
4.1
4.3
4.4
30
4.1
4.0
4.0
4.7
20
3.7
3.6
3.4
5.0
20
3.5
3.3
3.2
5.0
40
3.3
3.2
3.0
5.0
50
3.2
3.1
3.0
3.7
575
6.6
5.4
4.6
3.6
420
5.7
5.5
5.2
4.6
196
3.8
3.7
3.7
5.0
155
3.2
3.1
3.0
-1.4
1.1
0.9
0.8
-0.5
0.5
-1.3
0.0
3.10
3.26
3.40
3.68
4.05
0.68
4.35
4.40
4.00
4.00
4.30
0.67
3.60
3.55
3.20
3.30
4.10
0.71
3.60
3.75
3.60
3.85
4.10
0.71
% q-o-q
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
3.60
3.72
2.95
3.05
3.30
0.67
4.10
4.35
4.22
3.96
4.02
0.67
4.10
4.14
4.08
4.14
4.49
0.64
4.35
4.40
4.00
4.00
4.30
0.67
4.35
4.30
4.00
3.95
4.30
0.68
4.35
4.25
3.70
3.60
4.30
0.69
3.85
3.75
3.20
3.20
4.00
0.70
3.60
3.55
3.20
3.30
4.10
0.71
3.60
3.60
3.30
3.45
4.10
0.71
3.60
3.65
3.40
3.60
4.10
0.71
Note: Numbers in bold are actual values; others forecasts. Interest rate and currency forecasts are end of period; other measures are period average. Fiscal balance forecasts
are financial year forecasts, ie 2023 is the 2022-23 financial year ending 30 June 2023. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data
available as of 8 December 2023.
Source: Nomura.
127
Nomura | 2024 Global Macro Outlook
Key global FX/rates strategy trades running
into 2024
Our top seven FX and rates recommendations in Q1 2024 include short USD/JPY,
long AUD (versus EUR and USD), short USD/KRW, short CNH basket, long Indonesia
bond (15y), receive Korea (10y) and an Australian 5yr-10yr steepener (Figure 191).
Overall, we believe our trades are supported by our economics team’s view that the US
economy is slowing below trend, continues its disinflation path, and the Fed starts its
cutting cycle in June 2024. Other supports to our trades include our view of the BOJ
scrapping NIRP at the January BOJ meeting, the potential for more China policy stimulus,
space for increased EM/Asia asset allocation, broadly favourable FX/rates valuations (i.e.,
besides the USD), and scope for some reduced political risk premium (especially USChina). There are also a few challenges in the coming months (more details ahead) that
could lead to a few bumps on the recent lower USD path in Q1 2024.
From Q2 through to H2 2024, we believe our short USD and receive Asia rates (i.e., shortend rate outperformance) positions should remain intact for several reasons, including our
view that the Fed will cut rates from June 2024, our expectation of significant US growth
underperformance versus the euro area (EA) and consistent US disinflation. We also expect
the BOJ to scrap YCC in Q2 2024 (potentially April), while China’s economic recovery
should strengthen around mid-2024. Asset allocation and valuations (except the USD) are
likely to remain favourable. That said, there are a few political events/risks from Q2 onwards
that are asymmetric towards negativity (especially for some Asia markets).
We highlight some medium-term trades ahead, including short USD/IDR, short
USD/TWD, long FX spreads in USD/CNH and USD/IDR and long AUD/NZD. On rates,
long IGB, and pay HK vs US rates are our top medium-term trades. Overall, we expect
the DXY to fall by ~3.8% by mid-2024 and ~5.8% by end-2024 from current levels (see
Figure 214 in Appendix - Strategy for our FX forecasts).
Fig. 191: Outlook 2024: Top FX and rates trades
11 December 2023
Research Analysts
Global FX Strategy
Craig Chan - NSL
craig.chan@nomura.com
+65 6433 6106
Yujiro Goto - NSC
yujiro.goto@nomura.com
+81 3 6703 1120
Andrew Ticehurst - NAL
andrew.ticehurst@nomura.com
+61 2 8062 8611
Wee Choon Teo - NSL
weechoon.teo@nomura.com
+65 6433 6107
Yusuke Miyairi, CFA - NIplc
yusuke.miyairi@nomura.com
+44 20 710 24145
Vicky Chen - NSL
vicky.chen1@nomura.com
+65 6433 6540
Asia Rates Strategy
Albert Leung - NIHK
albert.leung1@nomura.com
+852 2252 1401
Nathan Sribalasundaram - NSL
nathan.sribalasundaram@nomura.com
+65 6433 9707
Clair Gao, CFA - NIHK
clair.gao@nomura.com
+852 2252 1081
Note: Conviction scale: 1 – Watch; 2 – Watch Closely; 3 - Positioned @ 1/3 desired; 4 – Positioned @ 2/3 desired; 5 –
Positioned @ 100% desired.
Source: Nomura.
Key themes and view for Q1 2024 and beyond
Views in Q1 2024...
We believe there are a few strong themes that support our view of a general softening in
USD in Q1 2024. These include:
1. Slowing US growth/inflation with the Fed to cut in June 2024: a) our US
economics team expects a significant slowdown in US GDP growth (% q-o-q SAAR)
in coming quarters. Its forecast of a US GDP slowdown will likely reduce US
outperformance over the euro area’s from 5.4% in Q3 2023 (US GDP at 5.2% vs. EA
at -0.2%) to only 1.7% in Q1 2024 (US growth of 1.3%; EA growth of -0.4%). This will
continue to narrow in the following quarters; b) our view that the US disinflation trend
128
Nomura | 2024 Global Macro Outlook
11 December 2023
will continue over the coming months, with core PCE and core CPI inflation to fall
towards 2.66% and 3.35% y-o-y, respectively by March 2024 (core PCE and core CPI
inflation were last at 3.501% and 4.03% respectively; Figure 192). Our economics
team sees these factors encouraging the Fed to start rate cuts from June 2024 and
historically, the USD has softened relatively consistently around three months before
the first cut (see Box 35: FX performance into and out of first Fed rate cut ).
2. BOJ ending NIRP in January 2024. Our economics team forecasts this based on: 1)
various news reports raising the probability of a “virtuous cycle between wages and
prices”; 2) benefits of the exit from monetary easing as discussed by Deputy Governor
Himino and; 3) Governor Ueda stating that the conduct of monetary policy will be
“more challenging” from the end of the year to next year. This will likely support most
of Asia FX.
3. China policy stimulus to continue. Even though a bazooka-type policy stimulus still
looks unlikely, the consistent packages announced show that policymakers are aware
of the downside economic risks. The authorities’ recognition of property sector risk is
clear from a Bloomberg report (14 November) that the PBoC may inject RMB1trn
(pledged supplementary lending) to policy banks for the property sector and from the
recent report of financing support for 50 property sector companies (Bloomberg, 20
November). Our China economics team believes this shows that the authorities could
further expand programs to target low-tier cities. We believe that a more stable growth
outlook for China and a possible rebound if the government provides more property
market support (especially lower tier) will be important for global/Asia growth
prospects, more stability in RMB/global FX, and support our view of a softer USD
(Figure 193).
4. Positioning and asset allocation potential. Our discussions and FX positioning
indicators (Asia FX , CTA , and CFTC data) suggest that the market is still likely
neutral on the USD in the G10 space (short JPY based on CFTC and CTA
measures). There is evidence of a shift in FX positioning in Asia, but we believe this
has been due to a reduction in short Asia FX positions rather than any significant
establishment of longs. In addition, we see scope for increased asset allocation into
EM/Asia. Real money bond allocation into Asia bonds (JPM EM GBI) has been
broadly underweight Asia since 2022, and we believe that could change owing to the
US macro/policy/rates outlook. Overall foreign equity and bond positioning also
remains light in our view, with Korea, Thailand, and Taiwan foreign equity ownership
as the % market cap being down by -5.7% (-USD45.9bn), -3.9% (-USD9.4bn), and 3.5% (-USD73.2bn) since the January 2020 peak in foreign holdings. Foreign
ownership of Indonesian bonds has fallen by 23.8% of outstanding (-USD13.0bn)
since the peak in February 2020, while foreign ownership of China’s bonds is down by
2.9% (-USD118.4bn) since February 2022 (Figures 194 and 195).
4. Unfavourable USD/favourable Asia FX valuations. Our FX valuation models show
the USD is 25.6% overvalued (average of FEER, PPP, REER, and REER adjusted for
productivity models). This is mainly against the JPY (22.7% undervalued) and Nordic
FX in G10 FX, while Asia FX is also broadly undervalued by an average 6.2%. Based
on our four models, TWD, RMB and KRW are the most undervalued at 16.4%, 15.4%
and 7.9%, respectively (Figure 196). On rates, valuation for Indonesian bonds is the
most attractive in the region with also the highest real yields.
5. Possible reduced political risk premia in Asia. President Xi’s visit to the US to
meet President Biden and business executives highlighted that (Biden, 15 November)
Xi had “no such plans for [an] invasion of Taiwan,” while in Xi’s speech to US
business executives (15 November) he said that China was ready to be a partner and
friend of the US and “will not fight a cold or a hot war” with any nation. We believe this
reduces geopolitical risks between China-Taiwan/Asia.
129
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 192: Slowing US growth and inflation
Fig. 193: Caixin manufacturing PMI and CNH CFETS
Source: Bloomberg, CEIC, Nomura.
Source: Bloomberg, CEIC, Nomura.
Fig. 194: Foreign equity holdings since Covid peak
Fig. 195: Foreign bond holdings since Covid peak
Foreign
Holding of
Bonds
Latest Holdings
(Nov 2023)
Date
% of total
USD bn
IDR
14.9%
53.6
THB
9.1%
26.5
KRW
21.1%
178.5
INR
3.3%
60.6
RMB
5.6%
382.3
Change from Covid peak
foreign holdings
Flows since Chg from peak
($bn)
(% outstanding)
Feb-20
-13.0
Mar-22
-5.7
Aug-22
+5.8
Jan-20
-11.3
Feb-22
-118.4
-23.8%
-2.7%
-1.1%
-2.3%
-2.9%
Note: Data for Korea and China foreign bond holdings are as of October 2023.
Source: Bloomberg, CEIC, Nomura.
Source: Bloomberg, CEIC, Nomura.
Risks to our view
There are a few risks to our view on the timing of the softer USD/lower long-end rates.
These include if near-term key US labour market and inflation data surprise on the upside
and raise near-term Fed hike risks (an accumulated 40bp of cuts priced by the May 2024
FOMC meeting). The other risk is US growth holding steady and the disinflation path
stalling (not necessarily reversing), which could support a “high for longer” Fed stance and
the long USD carry trade. The latter scenario is a risk that could see temporary
capitulations on the softer USD view in Q1 2024. The other global risk is whether the
Israel-Hamas conflict widens out (possibly negative for risk assets/EM FX/higher oil
prices), while locally in Asia, significant FX reserve losses for many central banks (FX
selling intervention) may see strong FX accumulation (particularly India and some risk to
Indonesia ).
… and views from Q2 2024 into end-2024
Based on our economics team’s view on the global macro backdrop and monetary policy
shifts (Fed to cut in June 2024), as well as upcoming political events and our
positioning/asset allocation/valuation rationale, we see scope for the USD to weaken
further from Q2 into H2 2024.
130
Nomura | 2024 Global Macro Outlook
11 December 2023
The key reasons for this include:
1. A significant slowdown in US economic growth and underperformance in the
EA. Our economics team forecasts US GDP growth (% q-o-q SAAR) turning negative
in Q3 2024 (-1.1%) with -1.9% growth in Q4 2024, while it expects euro area growth
to be less weak at +0.4% (% q-o-q SAAR) in Q3 and +0.8% (% q-o-q SAAR) in Q4
2024. This implies a relative euro area GDP outperformance in H2 2024 over the US.
2. Our economics team forecasts the first Fed rate cut to materialize in June 2024.
As demonstrated in the past, we believe this will be a source of support for our softer
USD view. There was consistency in the DXY weakening around eight months before
the Fed’s first rate cut in the five periods we analyzed and by an average 4.0% (July
1995, September 1998, January 2001, September 2007, and July 2019; see Box 35:
FX performance into and out of first Fed rate cut and Figure 221 in “Appendix –
Strategy”). In particular, the fall in the USD was even more consistent in the three
months before the first cut (by 3.1%).
3. BOJ should continue to normalize policy by abandoning YCC in Q2 (potentially
April), which could further support JPY appreciation. This policy shift would be
supported by the stronger outlook for the economy and the BOJ becoming more
confident about wages and prices (Figure 197).
4. China’s stronger recovery expected from around mid-2024. Another dip in China
would likely be met with more support packages from the government, but with our
China economics team forecasting growth to slow further into Q1, our team believes
that there will be more significant stimulus that will lead to a more notable economic
recovery from around mid-2024. A more stable China growth outlook will support Asia
/global FX.
5. Watch the political events. The major political event will be the US presidential
elections (5 November 2024), where if the market begins to expect the return of
former US president Trump, a few major themes could emerge. One is the risk of
more intensive China targeting and a trade war, which could see RMB begin to
depreciate, as the prospect of Trump returning grows. The other theme is whether a
Trump presidency leads to a stronger or weaker broad USD. Stronger USD
expectations could be from the US becoming more isolationist with possible negative
implications for EUR from a cut off in funding to Ukraine in its war with Russia.
However, we see many reasons for a weaker USD that could include: Trump talking
down the broad USD again (similar to his previous term); pressuring the Fed to cut
rates again; possibly selling arms to Ukraine (Politico, 24 Nov 23) vs. offering aid; and
a possible increase in the US twin deficits. There is also Japan’s Lower House
elections (likely in July 2024), where a Kishida/LDP win would likely sustain the BOJ’s
policy normalization path – positive for JPY.
Fig. 196: Overvalued USD versus undervalued Asia FX
Fig. 197: Japan’s export similarity with the rest of EM Asia
SITC L4 data
China
Hong Kong
India
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
2002
35%
40%
18%
24%
53%
38%
27%
45%
46%
40%
2004
37%
40%
23%
23%
57%
37%
28%
44%
49%
41%
2008
40%
34%
29%
20%
55%
30%
27%
41%
47%
41%
2012
39%
31%
29%
21%
60%
31%
31%
40%
48%
40%
2016
39%
29%
32%
23%
59%
35%
29%
41%
47%
46%
2020
40%
32%
34%
23%
63%
36%
32%
43%
48%
43%
2021
42%
28%
33%
22%
55%
33%
28%
44%
42%
45%
Source: Bloomberg, CEIC, Nomura.
Source: Bloomberg, CEIC, Nomura
131
Nomura | 2024 Global Macro Outlook
11 December 2023
Our top 7 FX and rates trades in 2024
• Short USD/JPY at 147.50; target 139 by end-Q1 (spot return: 5.8%; total return:
4.0%); Conviction level: 3/5.
We will look for opportunities to fade any upside in USD/JPY, given the growing market
expectation on the BOJ’s policy normalization. As for our FX forecast, we expect
USD/JPY to decline towards 142 by end-Q1, and 140 by mid-2024, although we believe
the pair could breach 140 earlier. Rationales for this trade include: 1) the BOJ should
proceed with its policy normalization process, 2) the market prices in the Fed rate cutting
cycle with the first Fed cut starting in June 2024, 3) an unwinding of JPY short positions is
likely, as US economic growth slows, and 4) the terms of trade recovery suggests JPY is
undervalued.
Rationales in detail:
1. The BOJ’s policy normalization is likely to start in earnest in 2024. Our Japan
economics team expects a scrapping of NIRP in January and YCC in Q2 2024 (likely
in April). BOJ Governor Ueda’s remarks on 7 December ignited market expectations
for NIRP to be terminated at the December meeting, at the earliest. We believe
market expectations such as these may be somewhat excessive, as the BOJ has
repeatedly argued that it still cannot foresee achieving its inflation target sustainably
with a high level of certainty. In this sense, there may be a scope for USD/JPY to
rebound to above 145.00 in the short term, which should be good timing to raise our
conviction level in being short USD/JPY into January meeting.
2. The impact on FX from the BOJ’s rate hike should be larger than from a YCC
tweak: The BOJ’s decision to scrap NIRP early next year can have a strong impact
on the FX market, in our view, as 1) the scrapping of NIRP is a more proactive
normalization step than a YCC tweak, which is passive reaction to higher global
yields, 2) the market will likely price in more rate hikes into 2025, which would push up
2yr and 5yr JGB yields (Figure 198), 3) uncertainty around the NIRP scrapping would
likely lead to higher volatility in JPY, encouraging position unwinding, and 4) BOJ
normalization next year will likely take place when other major foreign CBs start
lowering their policy rates, which should narrow rate spreads more aggressively.
3. We judge USD will continue to soften as the Fed begins to cut rates from June
2024, on weak growth and disinflation. Aggressive Fed hikes from 2022 to mid-2023
to tackle inflation pressures and the Fed’s “higher for longer” communication were the
primary reason behind USD/JPY strength, but a dovish shift in its narrative in Q1 next
year would likely lead to a fall in USD/JPY.
4. As we expect the Fed to cut in June and the US economy to enter recession in
H2 2024, major unwinds of USD/JPY long positions will likely take place during
this period. We expect JPY to benefit from relative ‘safe haven’ demand. This year,
the resilient US soft-landing expectations have supported market risk sentiment,
thereby the carry trade type activities have led USD/JPY higher. This is still being
observed, even at this moment when the market is pricing in more than a full 25bp
rate cut by the Fed starting next May. However, we forecast weaker US data going
forward, which would likely make the market to price in more Fed rate cuts and
deteriorate market risk sentiment. These factors should impact and strengthen JPY
against wide range of currencies, in our view.
5. From a valuation perspective, we note Japan’s terms of trade bottomed last
autumn, suggesting JPY REER should bottom as well (Figure 199). Indeed, the
improvement in terms of trade has been supporting the strong recovery in Japan’s
external balance, improving JPY supply-demand conditions in the FX market as well.
We have already seen some evidence of this in the USD/JPY price action in 2023, as
JPY has not weakened during Asian market hours, unlike in 2022.
Risks: US inflation re-acceleration; US economy resilience reducing the market’s pricing
of Fed rate cuts; the BOJ does not point to rate hikes beyond the scrapping of NIRP; and
China’s stimulus boosts global energy and raw material prices.
132
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 198: US-JP 5yr rate spread and USD/JPY
Fig. 199: Japan's terms of trade and JPY REER
Source: Bloomberg, Nomura
Source: Bloomberg, Nomura
• Long AUD against USD (50%) and EUR (50%); target ~5% gains by mid-January
(total return: 1.8%); conviction level: 3/5.
We expect AUD to outperform because of the following factors:
1. Key commodity prices (Figure 200) and rate differentials suggest AUD is undervalued.
We note that recent RBA communications (22 November) pivoted in a hawkish
direction, indicating greater inflation concerns, although the 5 December postmeeting press release appears to have caused some confusion, and contained
generally less hawkish guidance than expected.
2. The broad backdrop with respect to China appears to have steadied, from both an
economic and political perspective. The Australian Prime Minister has visited China
(the first time since 2016), tariffs and trade restrictions imposed over 2020 and 2021
are being progressively unwound and the relationship appears on a steadier footing.
Those trade restrictions had only a negligible macro impact on Australia, so we should
not expect a material boost to growth from their removal. Nevertheless, they did
adversely affect AUD sentiment at the time. Sentiment regarding China’s growth
prospects also appears to have steadied, and the Standing Committee’s approval of
1trn of additional CGB issuance (24 October) and spending directed towards the three
large projects should benefit Australia.
3. Australia should continue to record moderate growth (albeit supported by strong
population growth), while Europe appears likely to have already slipped into a mild
recession, according to our global colleagues, while our US colleagues continue to
forecast a mild technical recession from Q3 of 2024.
4. Australia continues to record trade and budget surpluses; while we do not expect
these to improve further, the contrast with the US twin deficits remains striking.
Australia’s AAA rating was also recently affirmed by Fitch.
5. Finally, in terms of more technical factors, we note that investors still appear to be
short AUD (Figure 201) and long USD, and AUD (and other risk currencies like NZD)
often perform well into year-end.
Risks: We think the biggest risks to this trade are global. AUD remains a global risk-off
proxy. If there was a sudden deterioration in global sentiment, we could consider rotating
our positive AUD view to long AUD/NZD to make this more of a “relative value” position,
to reflect our more cautious New Zealand macro and (associated) central bank views.
133
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 200: AUD/USD versus iron ore
Fig. 201: Investors are still short AUD
Source: Bloomberg, Nomura.
Source: Bloomberg, Nomura.
• Short USD/KRW; target: 1,250 by end-February 2024 (total return: 4.6%);
conviction level: 4/5.
We believe KRW will be a strong performer against USD going into Q1 2024 because of
the following factors:
1. Our view of a softer USD in Q1 2024. KRW (a high beta FX against USD within Asia
region) should benefit notably from factors such as: a) slowing US growth and inflation
trends and Fed to cut in June; b) rising market expectations for China’s policy
stimulus; c) potential for the BOJ to scrap NIRP in January; d) asset allocations into
EM/Asia; e) high USD valuations; and f) a potential reduction in political risk premia,
especially in Northeast Asia.
2. The strength in Korea’s current account surplus (CAS). This will be driven by
various factors including: a) strong tailwinds for Korea’s export growth, driven by tech
demand (see Korea: An export-led but uneven recovery ; Figure 202). Indeed, our
tech strategy team is more confident that the chip recovery is gathering momentum
and has raised its 2024 global chip sales projections substantially; b) secular AI
trend creating demand for Korea memory players’ high bandwidth memory products;
c) the bottoming out of the Asia export cycle and Asia’s export growth will likely be
frontloaded in Q1 and parts of Q2 2024 (see Asia: In pole position ); and d) Korea’s
primary income surplus (a component of the CA) which is supported by the tax
reforms that were enacted this year and that have led to larger dividend repatriation
by Korean corporations , with year-to-October repatriation totalling USD32.5bn
(USD21.9bn in the same period of last year). Indeed, our economics team forecasts
Korea’s H1 2024 CAS at USD19.3bn, which compares with only USD2.4bn in H1
2023 (USD45.2bn in 2024; 2.4% of GDP).
3. Potential foreigners’ allocation into Korea equity and bond markets (Figure 203).
a. The potential outperformance of memory players may encourage foreign equity
inflows into Korea’s tech equity sector. Foreign ownership of Korean
equities was only 28.9% of market capitalization as of end-November 2023, which
is 5.7pp below the peak ownership at the end of 2019 (corresponding with
USD45.9bn of equity outflows over that period).
b. Korea may be included in the FTSE Russell WGBI heading into the next review
in March 2024. This has been partly driven by Korea beginning its trial for
registered foreign investors to trade onshore spot/FX swaps from January 2024,
with specific days designated for longer trading hours (Korea Herald, 18 October),
before it officially kicks off in July 2024, with trading hours extended from the
current 9am to 3:30pm to 9am to 2am. Indeed, FTSE Russell’s September 2023
country classification review noted that FX reform is an area of focus if Korea is to
be upgraded. Bond inclusion could attract as much as USD50-60bn of passive
inflows into Korea’s bond market and possibly over a 12-18 month period (see
box on Impact of index inclusion on Asia Rates in our Asia Macro Outlook 2024 ,
6 December 2023).
134
Nomura | 2024 Global Macro Outlook
11 December 2023
4. The BOK may be more relaxed on FX owing to KRW undervaluation. The BOK
has been relatively active in selling USD throughout 2023 to lean against KRW
depreciation – a total of USD15.7bn since February 2023 (3.9% of January 2023 FX
reserves). Although, Korea’s FX reserve adequacy is ~100% and raises the risk that
the BOK may start to accumulate FX reserves, we believe the BOK would allow some
KRW appreciation, in view of its 7.9% undervaluation based on the average of our
models.
5. Reduction in Korea National Pension Service’s (NPS) USD demand. It is looking
more likely that NPS will not be accessing the market for USD from the start of 2024
(see KRW: Potential extension of BOK-NPS swap line, 8 December 2023). The
constructive talks between NPS and the BOK should help alleviate market concerns
over the impact on KRW from potentially sizeable NPS overseas investment of
around USD51bn for the whole of 2024. Even if the swap line is not extended, we do
not believe market demand for USD from NPS will be a game changer when
compared with the current account surplus, potential WGBI related bond inflows and
space for a pick-up in foreign equity market positioning.
Risks: Fed hawkishness/USD bid, China’s policy stimulus underwhelms, and Korea’s
NPS resuming its USD buying activity in 2024.
Fig. 202: Korea semiconductor export recovery
Source: Bloomberg, CEIC, Nomura.
Fig. 203: Current account and foreign portfolio flows should
turn more supportive for KRW
Source: Bloomberg, CEIC, Nomura.
• Short CNH against an abridged CFETS basket (USD, EUR, JPY, AUD, KRW);
target: 3% gains by end-February (total return: 3.2%); conviction level: 4/5.
• Weights: USD 31%; EUR 29%; JPY 15%; AUD 10%; KRW 15%; r-squared with full
CFETS basket at 93% in the past year; positive 1M annualized carry of 50bp.
We expect CNH to underperform the basket components because of the following factors:
1. Our softer USD view has CNH underperforming. We expect the basket
components to outperform CNH, as has been the case when USD is weak (Figure
204). We are forecasting USD/JPY at 142 by in Q1 2024 (risk of overshooting) and
USD/CNH at 7.12 in the same timeline.
2. Past the major negative gamma pockets. As we highlight, we dropped our
conviction on our short CNH basket on 17 November because of the risk of the
market being heavily short gamma (~7.23, 7.20, and down to 7.17). This position
adjustment/outperformance of RMB has emerged, reducing the risk of further
outperformance in the near-term.
3. Another dip in China’s economy remains our economics team’s view. The
media have reported support packages such as the RMB1trn PSL (Bloomberg, 14
November 2023) and financial assistance for 50 property companies (Bloomberg, 20
November 2023), but there is still a lack of details and uncertainty over whether these
packages (especially RMB1trn PSL) will even materialize.
135
Nomura | 2024 Global Macro Outlook
11 December 2023
4. Challenging BoP flows likely to remain. There has been an incremental
improvement in China’s capital flows recently (namely foreign bond flows ), but we
expect the overall balance of major flows to still be challenging (likely still negative;
see box on Simulation of China major flow components on another economic dip in
our Asia Macro Outlook 2024 , 6 December 2023). Despite the recent package
announcements, there has still been USD 2.9bn of net stock connect outflows from
the mainland (since 15 November – session after the PSL news; south minus north
bound). The other negatives still include the tourism deficit widening (average
USD16.8bn in the three months to October 2023; or -USD201bn annualized; or 93%
of 2019 levels), while net FDI has fallen into a deficit (-USD65.8bn in Q3 2023; USD144bn in the past year), with limited room for a rebound owing to the weak
economy, policy and political uncertainty. Trade settlement flows are still weak and
will take time to recover given importer USD buying restrictions in September (may
have relaxed around mid-November) and still weak exporter remittances.
5. USD/CNY fixing is likely to revert back to model projections . The lower fixing
regime since 26 June 2023 (114 sessions to 8 December 2023) has been showing
some signs of normalizing, with the gap between our fixing model and the actual fix
narrowing to an average of -305pips (14 sessions since 21 November) from a record 1560pips on 1 November 2023. Adding some confidence to our view of a gradual FX
policy normalization is an increase in onshore FX transaction volumes (average daily
USD24.9bn in 14 sessions since 21 November, average USD16.5bn from 12
September to 20 November 2023; Figure 205), which we believe reflects the rise in
importers’ USD demand (after suppression) and some improvement in
confidence/remittance from exporters.
6. Potential for state banks/PBoC to accumulate FX. We were increasingly
concerned over the authorities’ inability to prevent RMB from depreciating against the
USD owing to our view of the drainage in state bank FX holdings and a few
consecutive months of adjusted FX reserve falls towards USD3.1trn. However, with
Fed/USD sentiment turning since the 1 November FOMC meeting , we may see
some FX buying emerge. Financial institutions’ FX deposits peaked at USD1.05trn in
February 2022 and fell to USD784bn in October 2023 (fall of USD270bn), while
adjusted FX reserves (FX and coupon) have fallen by USD73bn in the four months to
October 2023. Indeed, we estimate the PBoC net bought USD22.0bn in spot FX
reserves in November, when broad USD was weakening.
Risks: These risks are unlikely, but some include the authorities intensifying the negative
error in the fixing regime again, a notable pickup in China’s stimulus measures, and a
near-term bounce higher in the USD.
Fig. 204: High correlation between DXY and CNH CFETS
Fig. 205: Normalising fixing error and onshore spot volume
Source: Bloomberg, Nomura.
Source: Bloomberg, Wind, Nomura.
• Long 15yr IndoGB (FR98), target 6.25% by end-Q1, conviction level: 4/5.
We retain our bullish long-end exposure on the IndoGB curve into 2024. At the current
juncture we see the most value in this part of the curve owing to the rich 10y and the front136
Nomura | 2024 Global Macro Outlook
11 December 2023
end being hampered by the yield on offer in the SRBIs; however, in Q2 and beyond we
would look to rotate into the short end (5y) Our rationale for being long is:
1. Because of global financial conditions easing, as noted above, we see the economic
outlook as supportive to our view of a weaker USD/Asia and lower back-end rates. BI
left rates unchanged at its November meeting, and we continue to believe it is going
to maintain the same stance throughout the majority of H1. Supply remains
manageable for 2024, and we estimate that the size of conventional auctions will be
around IDR24-26trn for 2024, while higher than the average for 2023, we see
downside risk. Furthermore, we are relatively conservative about the USD portion and
Sukuk portion of financing.
2. We expect inflows to return from non-residents over coming months. In the AugustOctober period, there was approximately USD2.5bn of outflows from IndoGBs from
non-residents, and around USD1.5bn subsequently returned. We believe there is
further scope for inflows, as our recent positioning indicator shows investors are still
underweight; thus, we believe there is scope for around USD1.0-1.5bn of inflows.
Finally, non-residents remain underweight in the long end of the curve (Figure 207).
3. Valuations remain attractive, with the highest real yields in Asia (Figure 206) and
some underperformance of the bonds in the region. We believe this makes IndoGBs a
relatively attractive proposition.
Risks: The main risk into Q1 comes from the upcoming presidential elections (First
Round: 14 February). Should the front-runner, Prabowo start pushing a more hardline
agenda the market may become more concerned over potentially wider fiscal deficits.
Beyond the local risk, a shift in the global sentiment back towards the ‘higher for longer’
theme would likely see pressure return to IndoGBs.
Fig. 206: Asia real yields
In %
Fig. 207: Non-resident ownership of IndoGB
Current level
Nomura 2024 CPI forecast
Currency
10y bond
Policy rate
Real 10y bond
Real policy rate
IDR
THB
PHP
INR
CNY
MYR
KRW
TWD
6.59
2.94
6.21
7.25
2.69
3.74
3.58
1.27
6.00
2.50
6.50
6.50
1.80
3.00
3.50
1.88
3.69
3.14
2.41
2.35
1.69
1.34
1.08
-0.93
3.10
2.70
2.70
1.60
0.80
0.60
1.00
-0.33
Source: Bloomberg, Nomura
Source: CEIC, Nomura.
• Korea receive 10y NDIRS; target 3.20% by end-February 2024; conviction level
3/5.
We expect long-end Korea rate to move lower into 2024 because of the following factors:
1. Compared with some other Asian economies such as Thailand, Korea’s government
is adopting a more conservative fiscal stance. According to a preliminary government
plan (Figure 208), gross KTB issuance is expected to drop from KRW165.5trn in 2023
to KRW158.8trn in 2024.
2. The other focus is on potential WGBI inclusion, which could boost offshore flows into
Korea bonds in the run-up to the next WGBI decision in March 2024, even though the
outcome of that review will likely be contingent on the trial extension of onshore FX
trading hours starting January 2024 being deemed successful (see box on Impact of
index inclusion on Asia Rates in our Asia Macro Outlook 2024 , 6 December 2023).
3. The market is underpricing the prospect of BOK easing in H2 2024. Nomura’s base
case is after being on hold in H1 2024, the BOK will cut policy rates by 100bp in H2
2024 on a property and consumption slowdown and as inflation moderates. Market is
137
Nomura | 2024 Global Macro Outlook
11 December 2023
currently pricing in modest cut for 2024. While in theory potential BOK cuts should
support the front-end, we expect long-end rates to rally first in Q1 before the short end
starts to catch up in Q2.
4. Valuation wise, 10y NDIRS looks relatively more attractive to receive than 10y KTBs.
The 10y KTB vs NDIRS spread is now around 20bp, compared with the average of
35bp since 2019 (Figure 209). With swap yield now high vs. bond yield, we believe
some lifers may start to show more interest in structured products as the latter
now may offer higher yields than KTBs of the same tenor. The hedging of some of
those structured products, such as simple callables, usually involve receiving the
long-end of the swap curve.
Risks: Besides a significant rebound in US rates, a strong extension of the current export
uptrend could be a risk to Korea receivers by delaying rate cut pricing. In theory, it should
affect the front-end more than long-end. But as the Korea curve is already inverted, longend rates can also be a little vulnerable if front-end rates move higher.
Fig. 208: Gross and net KTB annual supply (2018-2024F)
Fig. 209: 10y KTB - 10y NDIRS yield
Source: Korea MOEF, Nomura
Source: Bloomberg, Nomura
• Australia 5yr-10yr ACGB curve steepener; entry: 35bp; target: 60bp by end
June; conviction level: 3/5
We expect the ACGB November 2028 – ACGB November 2033 spread to widen due to
the following factors:
1. Our core theme for 2023, expressed in our December 2022 strategy outlook, was for
yield curve flattening. We judged that the RBA’s measured language would ultimately
provide a poor guide, with multiple rate hikes likely (and more than were priced), such
that we judged that short-dated bonds were expensive. However, fast-forward to now,
and we think the cycle is in the process of turning. We believe that the Fed, ECB and
RBA rate hike cycles have most likely concluded.
2. Our historical analysis of prior easing cycles indicates that yields have tended to fall,
led by the shorter end, by 90 days following the final rate hike, with more dramatic
moves (lower yields and steeper curves) evident in the subsequent 90 days (Figures
210 and 211). If history holds, and if the RBA rate hike in November 2023 was the
final one – our central case – then yields should be a little lower, and curves steeper,
by around February, with more dramatic moves evident by May.
3. We think the BOJ’s expected exit from YCC will also lead to curve steepening. It
is widely appreciated that Japanese investors are the single largest foreign holders of
AUD government bonds (see Box 21: Implications of BOJ policy normalization for
Asia ), and much of this has tended to be around the longer end (10-year plus part) of
the curve. In late December 2022, when the BOJ made the first of its surprise moves
on YCC, Australian bonds underperformed and the curve steepened.
4. Positioning could also provide some support for our steepening thesis. Our
interactions with global investors over recent months has highlighted that many
138
Nomura | 2024 Global Macro Outlook
11 December 2023
have been curious about the relative steepness of the Australian curve, in a G10
context. We understand that flattening trades in Australia, versus steepeners
elsewhere (particularly the US) have been popular trades, and the unwind of such
positions could also support Australian steepening.
Risks: If the RBA hikes in February or beyond, this would likely hurt our trade. This is a
risk, but is certainly not our central case.
Fig. 210: Yield changes around RBA turning points
Fig. 211: Curve changes around RBA turning points
Positive number = higher yields (bp)
OCR
2yr physical
10yr physical
2yr swap
5yr swap
10yr swap
Positive number = steeper curve (bp)
(t-180)
From 180 days
prior to the
final hike
(t-90)
From 90 days
prior to the
final hike
(t+90)
90 days
after the
final hike
(t+180)
180 days
after the
final hike
1.08
0.26
-0.22
0.47
0.17
-0.04
0.58
0.05
-0.04
0.20
0.12
0.07
0.00
-0.19
-0.04
-0.26
-0.23
-0.14
-1.08
-1.59
-0.69
-1.83
-1.29
-0.86
Source: Bloomberg, Nomura
(t-180)
From 180 days
prior to the
final hike
(t-90)
From 90 days
prior to the
final hike
(t+90)
90 days
after the
final hike
(t+180)
180 days
after the
final hike
OCR-2yr
-0.82
-0.53
-0.19
-0.51
2y10y physical
-0.48
-0.09
0.15
0.91
2s5s
-0.31
-0.07
0.02
0.54
5s10s
-0.21
-0.05
0.09
0.43
2s10s
-0.51
-0.13
0.12
0.97
Source: Bloomberg, Nomura
Medium-term views/opportunities on Asia FX and rates
Medium-term Asia FX trades
• Short USD/IDR: End-2024 USD/IDR forward is ~15,700. We forecast 14,700, which
implies a ~6% total return from short USD/IDR by end-2024. Two points of focus
include the Fed’s policy outlook (Nomura’s view of the first cut in June 2024) and the
14 February 2024 Indonesia presidential elections. If Prabowo wins the 14 February
election (assuming it goes to a second round) this could be a concern for investors
(though relatively well expected by now).
• Short USD/TWD: Our spot forecast for mid-2024 is 29.5 versus market pricing of
30.5, implying an ~3% total return. Our conviction will grow if KMT wins the 13
January 2024 elections. If not, we still see some possible reduction in US-ChinaTaiwan political risk premia, Taiwan exports benefiting from AI demand, return of
foreign equity inflows, softer USD/significant TWD undervaluation, and Taiwanese
lifers further increasing FX hedge ratios.
• Long Asia FX curves – CNH and IDR. These are trades that will perform (IDR
almost flat on carry; CNH only slightly negative) if there are more indications of the US
economy/inflation weakening and/or that the Fed may soon pivot. For China,
increased stimulus leading to more positivity for the local economic outlook will further
narrow the rate differential. For Indonesia, the FX forward curve is notably flat - 1x6M
USD/IDR spread is around -1.3SD over the past 6 months.
• Long AUD/NZD – The RBNZ hiked earlier and harder, and we expect the NZ
economy to turn down sharper, and faster. We judge that AUD/NZD is already
somewhat attractive at current levels (~1.07) based on current rate spreads, and
could rise to ~1.100-1.1200 by mid-2024.
• Long IGBs. The backdrop for IGBs owing to the index inclusion from JP Morgan and
potentially Barclays Bloomberg will provide a positive tailwind. Furthermore, our
economists continue to expect India’s growth to disappoint, meaning the onshore bid
for bonds will likely be strong. We are currently long the 7y IGB and will look to
increase our exposure and conviction in the coming months.
• Pay HK rates vs. US in 5-10y. Besides expecting HK rates to underperform the US
going into a potential Fed cut cycle. We believe fiscal risk in HK is bit underpriced with
fiscal reserves now at their lowest level since 2015, which could give rise to additional
government bond issuance in 2024 to finance the fiscal deficit. We believe 5-10y HK
rates can trade up to 50-75bp above US in H2 2024.
Please see Strategy portfolio update (16 November 2023) for our full portfolio.
139
Nomura | 2024 Global Macro Outlook
11 December 2023
Box 35: FX performance into and out of first Fed rate cut
Analyzing the first Fed cuts during the 1995, 2007 and 2019 rate cutting cycles, we find that on average, DXY and
USD/Asia weakened in the months before the first Fed cut, but remained somewhat unchanged in the months after
(Figure 212). Specifically, in the nine months into these first Fed rate cuts, DXY and USD/Asia fell by 3.8% and 2.5%
respectively on average, with the top performers being INR (6.1%), THB (4.0%) and PHP (3.7%) against USD.
We separated Fed’s first cut in September 1998 due to Asia FX volatility from the aftermath of the Asia Financial
Crisis (AFC), and in January 2001 as USD was on an almost uninterrupted appreciation path due to capital inflows
(Bloomberg, 11 Sep 2000,16 Mar 2001). That said, we also observed that DXY and USD/Asia were broadly
lower by 5.4% and 3.8%, respectively, three months into these two instances of first Fed rate cuts, with the top
performers being IDR (18.3%; note AFC-related volatility) and THB (5.3) against USD (Figure 213).
Fed’s first cut in 1995, 2007 and 2019 – USD broadly weakens several months ahead the first cuts
The first cut in September 2007 (5.25% to 4.75%: Figure 216 in Appendix – Strategy). Based on our economics
team’s forecast for the Fed to cut in June 2024 (11M from Jul 2023), there was similarly a long plateau between the
peak of Fed fund rates in June 2006 and the Fed’s first cut in September 2007 (15M). However, the long plateau and
limited expectations for Fed rate cuts initially (based on FF6M minus effective FFR) did not stop broad USD from
gradually weakening into and out of the first cut in September 2007. The slowing economy and drag from a
slumping US housing market (Bloomberg, 24 Nov 2006, 10 Jul 2007) were cited as reasons for USD weakness. Nine
months into this first Fed rate cut, INR and PHP were the top performers against USD.
The first cut in July 1995 (6.00% to 5.75%: Figure 217 in Appendix – Strategy). DXY weakened into the last Fed
hike in February 1995 and continued weakening into the first cut in July 1995, as the market pared down the Fed
hike expectations and priced in rate cuts. However, USD/Asia on average was flattish heading into this first Fed
cut. After the first cut, both DXY and USD/Asia rose, supported by joint major central banks’ intervention (Bloomberg,
15 Aug 1995), and expectations for the Bundesbank to cut rates on growth concerns (Bloomberg, 30 Nov 1995).
The first cut in July 2019 (2.50% to 2.25%: Figure 218 in Appendix – Strategy). USD broadly weakened into the last
Fed hike in December 2018, and was somewhat stable heading into and out of the first Fed cut in July 2019. However,
there was differentiation into this first Fed cut, with USD/THB, USD/PHP, USD/IDR and USD/INR lower, and
USD/KRW, USD/TWD, USD/SGD and USD/CNH higher into this first cut. The US-China trade war, which severely
intensified in May 2019 may be a factor weighing down on Northeast Asia FX.
Fig. 212: Average of 1995, 2007 and 2019 experiences
Fig. 213: Average of 1998 and 2001 experiences
Note: T is the month when Fed announced its first cut of the cycle.
Source: Bloomberg, CEIC, Nomura.
Note: T is the month when Fed announced its first cut of the cycle.
Source: Bloomberg CEIC, Nomura.
USD started to weaken only three months ahead of the Fed’s first cut in 1998 and 2001
The first cut in January 2001 (6.50% to 6.00%; intermeeting: Figure 219 in Appendix – Strategy). USD broadly
strengthened until three months before the first cut owing to capital inflows from higher US yields and relative economic
strength (Bloomberg , 11 Sep 2000). Notably, DXY was around 5.5% weaker in the three months to the first cut in
January 2001. Excluding KRW, which experienced outsized depreciation from corporate bankruptcies and banking
sector issues (Bloomberg , 23 Nov 2000), USD/Asia on average was lower by 1.4% over the same period. After the
cut, broad USD continued to strengthen, as the decline in global stock prices (i.e., Dotcom bubble) led to inflows into
US bonds and USD (Bloomberg , 16 Mar 2001).
The first cut in September 1998 (5.50% to 5.25%: Figure 220 in Appendix – Strategy). Similar to the January 2001
experience, broad USD only started to weaken three months ahead of the first cut, consistent with market pricing
in more cuts. Over this period, DXY and USD/Asia were lower by 5.2% and 6.2% respectively. That said, the
outsized move in USD/Asia may have been exaggerated by volatility stemming from the aftermath of the AFC (i.e.,
USD/IDR was lower by 37.8% over this period).
140
Nomura | 2024 Global Macro Outlook
11 December 2023
Appendix – Strategy
Fig. 214: G10/Asia FX forecasts
8-Dec
G10
US Dollar Index
Japanese yen
Euro
Swiss Franc
British Pound
Australian Dollar
Canadian Dollar
New Zealand Dollar
Norwegian Krone
Swedish Krona
Asia
Chinese Renminbi
Hong Kong Dollar
Indonesian Rupiah
Indian Rupee
Korean Won
Malaysian Ringgit
Philippine Peso
Singapore Dollar
Thai Baht
Taiwan Dollar
Q4 23
Q1 24
Q3 24
Q4 24
Q4 25
100.0
140
158
1.13
0.867
0.98
1.28
0.88
0.69
1.33
0.63
11.80
11.91
98.9
135
154
1.14
0.868
0.99
1.29
0.88
0.70
1.32
0.63
11.90
12.01
98.1
135
155
1.15
0.861
0.99
1.29
0.89
0.71
1.31
0.64
12.11
12.00
95.3
130
153
1.18
0.856 
1.01 
1.34
0.88
0.71
1.31
0.64
11.90
11.80
(DXY)
(USD/JPY)
(EUR/JPY)
(EUR)
(CHF)
(EUR/CHF)
(GBP)
(EUR/GBP)
(AUD)
(CAD)
(NZD)
(EUR/NOK)
(EUR/SEK)
103.8
144.2
155
1.08
0.88
0.94
1.26
0.86
0.66
1.36
0.62
11.71
11.23
102.3
144
158
1.10
0.88
0.97
1.27
0.87
0.67
1.35
0.62
11.50
11.20
(CNH)
(CNY)
(HKD)
(IDR)
(INR)
(KRW)
(MYR)
(PHP)
(SGD)
(THB)
(TWD)
7.17
7.11
7.81
15,510
83.4
1,310
4.66
55.3
1.339
35.3
31.4
7.15
7.15
7.80
15,400
83.0
1,285
4.61
55.3
1.325
34.7
31.0
7.12
7.12
7.78
15,200
82.0
1,250
4.56
54.8
1.305
33.8
30.0
6.95
6.95
7.77
15,100
81.5
1,220
4.53
54.5
1.290
33.1
29.5
6.92
6.92
7.76
14,900
81.0
1,200
4.45
54.0
1.280
32.8
29.3
6.90
6.90
7.75
14,700
81.0
1,180
4.40
54.0
1.280
32.3
29.0
6.70
6.70
7.75
14,400
80.0
1,140
4.29
53.0
1.250
31.2
28.5
10y CGB yield
10y KTB yield
10y TGB yield
10y ThaiGB yield
10y IndoGB yield
10y IGB yield
10y SIGB yield
Current
2.69
3.58
1.27
2.94
6.59
7.25
2.92
Q4 23
2.65
3.40
1.25
3.25
6.50
7.13
2.75
Q1 24
2.55
3.20
1.25
3.00
6.25
7.10
2.50
Q2 24
2.60
3.00
1.20
2.75
6.00
6.88
2.25
Q3 24
2.65
2.90
1.15
2.75
5.75
6.75
2.25
Q4 24
2.75
2.90
1.10
2.75
5.75
6.50
2.25








100.9
142
159
1.12
0.875
0.98
1.27
0.88
0.68
1.34
0.63
11.70
11.60
Q2 24
























Source: Nomura.
Fig. 215: Asia rates forecast
As of 06-Dec
CNY
KRW
TWD
THB
IDR
INR
SGD
Source: Bloomberg, Nomura
Fig. 216: USD/Asia and DXY before and after the first Fed cut on 18 September 2007
Note: T is the month when Fed announced its first cut of the cycle. Data represent the percent change with month of first cut as reference.
Source: Bloomberg, CEIC, Nomura.
141
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 217: USD/Asia and DXY before and after the first Fed cut on 6 July 1995
Note: T is the month when Fed announced its first cut of the cycle. Data represent the percent change with month of first cut as reference.
Source: Bloomberg, CEIC, Nomura.
Fig. 218: USD/Asia and DXY before and after the first Fed cut on 31 July 2019
Note: T is the month when Fed announced its first cut of the cycle. Data represent the percent change with month of first cut as reference.
Source: Bloomberg, CEIC, Nomura.
Fig. 219: USD/Asia and DXY before and after the first Fed cut on 3 January 2001
Note: T is the month when Fed announced its first cut of the cycle. Data represent the percent change with month of first cut as reference.
Source: Bloomberg, CEIC, Nomura.
Fig. 220: USD/Asia and DXY before and after the first Fed cut on 29 September 1998
Note: T is the month when Fed announced its first cut of the cycle. Data represent the percent change with month of first cut as reference.
Source: Bloomberg, CEIC, Nomura.
142
Nomura | 2024 Global Macro Outlook
11 December 2023
Fig. 221: USD/Asia and DXY on average before and after the first Fed cut in 1995, 1998, 2001, 2007 and 2019
Note: T is the month when Fed announced its first cut of the cycle. Data represent the percent change with month of first cut as reference.
Source: Bloomberg, CEIC, Nomura.
143
Nomura | 2024 Global Macro Outlook
11 December 2023
Appendix A-1
Analyst Certification
Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately reflect
his or her personal views about the subject securities and issuers. In addition, each research analyst identified in this report
hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific
recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking
transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
The terms "Nomura" and "Nomura Group" used herein refer to Nomura Holdings, Inc. and its affiliates and subsidiaries, including Nomura
Securities International, Inc. ('NSI') and Instinet, LLC ('ILLC'), U. S. registered broker dealers and members of SIPC.
Issuer
REPUBLIC OF INDONESIA
Disclosures
A4,A5,A6,A7
A4
The Nomura Group has had an investment banking services client relationship with the subject company during the past 12 months.
A5
The Nomura Group has received compensation for investment banking services from the subject company in the past 12 months.
A6
The Nomura Group expects to receive or intends to seek compensation for investment banking services from the subject company in the
next three months.
A7
The Nomura Group has managed or co-managed a public or private offering of the subject company's securities in the past 12 months.
Important Disclosures
Online availability of research and conflict-of-interest disclosures
Nomura Group research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, LSEG.
Important disclosures may be read at http://go.nomuranow.com/research/m/Disclosures or requested from Nomura Securities International, Inc.
If you have any difficulties with the website, please email grpsupport@nomura.com for help.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are
not registered/qualified as research analysts under FINRA rules, may not be associated persons of NSI, and may not be subject to FINRA Rule
2241 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDP) and Nomura International plc. (NIplc) are registered with
the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are
generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report.
ADDITIONAL DISCLOSURES REQUIRED IN THE U.S.
Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related
derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc. Personnel: The fixed
income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in
connection with obtaining liquidity and pricing information for their respective coverage universe.
Valuation methodology - Fixed Income
Nomura’s Fixed Income Strategists express views on the price of securities and financial markets by providing trade recommendations. These
can be relative value recommendations, directional trade recommendations, asset allocation recommendations, or a mixture of all three.
The analysis which is embedded in a trade recommendation would include, but not be limited to:
• Fundamental analysis regarding whether a security’s price deviates from its underlying macro- or micro-economic fundamentals.
• Quantitative analysis of price variations.
• Technical factors such as regulatory changes, changes to risk appetite in the market, unexpected rating actions, primary market activity and
supply/ demand considerations.
The timeframe for a trade recommendation is variable. Tactical ideas have a short timeframe, typically less than three months. Strategic trade
ideas have a longer timeframe of typically more than three months.
For the purposes of the EU Market Abuse Regulation, the distribution of ratings published by Nomura Global Fixed Income Research is as
follows:
56% have been assigned a Buy (or equivalent) rating; 67% of issuers with this rating were supplied material services* by the Nomura Group**.
0% have been assigned a Neutral (or equivalent) rating.
44% have been assigned a Sell (or equivalent) rating; 50% of issuers with this rating were supplied material services by the Nomura Group.
As at 03 Oct 2023.
*As defined by the EU Market Abuse Regulation
**The Nomura Group as defined in the Disclaimer section at the end of this report
Disclaimers
This publication contains material that has been prepared by the Nomura Group entity identified on page 1 and, if applicable, with the
contributions of one or more Nomura Group entities whose employees and their respective affiliations are specified on page 1 or identified
elsewhere in this publication. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. and its affiliates and subsidiaries including:
(a) Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan, (b) Nomura Financial Products Europe GmbH (‘NFPE’), Germany, (c) Nomura
International plc ('NIplc'), UK, (d) Nomura Securities International, Inc. ('NSI'), New York, US, (e) Nomura International (Hong Kong) Ltd.
(‘NIHK’), Hong Kong, (f) Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the
Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr, (g) Nomura Singapore Ltd. (‘NSL’),
Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore) (h) Nomura Australia Ltd. (‘NAL’), Australia
(ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services
licence number 246412, (i) Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia, (j) NIHK, Taipei Branch (‘NITB’), Taiwan, (k) Nomura
144
Nomura | 2024 Global Macro Outlook
11 December 2023
Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F,
Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: 91 22 4037 4037, Fax: 91 22 4037 4111; CIN No:
U74140MH2007PTC169116, SEBI Registration No. for Stock Broking activities : INZ000255633; SEBI Registration No. for Merchant Banking :
INM000011419; SEBI Registration No. for Research: INH000001014 - Compliance Officer: Ms. Pratiksha Tondwalkar, 91 22 40374904,
grievance email: india.compliance-in@nomura.com. FOR REPORTS WITH RESPECT TO INDIAN PUBLIC COMPANIES OR AUTHORED BY
INDIA-BASED NFASL RESEARCH ANALYSTS: (I) INVESTMENT IN SECURITIES MARKETS IS SUBJECT TO MARKET RISKS. READ ALL
THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. (II) REGISTRATION GRANTED BY SEBI, AND CERTIFICATION FROM
NISM IN NO WAY GUARANTEE PERFORMANCE OF THE INTERMEDIARY OR PROVIDE ANY ASSURANCE OF RETURNS TO
INVESTORS. (l) Nomura Fiduciary Research & Consulting Co., Ltd. ('NFRC') Tokyo, Japan. ‘CNS Thailand’ next to an analyst’s name on the
front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide
research assistance services to NSL under an agreement between CNS and NSL. ‘NSFSPL’ next to an employee’s name on the front page of a
research report indicates that the individual is employed by Nomura Structured Finance Services Private Limited to provide assistance to certain
Nomura entities under inter-company agreements. 'Verdhana' next to an individual's name on the front page of a research report indicates that
the individual is employed by PT Verdhana Sekuritas Indonesia ('Verdhana') to provide research assistance to NIHK under a research
partnership agreement and neither Verdhana nor such individual is licensed outside of Indonesia. For the avoidance of doubt and for the
purpose of disclosure, Nomura Orient International Securities Co., Ltd (“NOI”), a joint venture amongst Nomura Group, Orient International
(Holding) Co., Ltd and Shanghai Huangpu Investment Holding (Group) Co., Ltd is excluded from the definition of Nomura Group. An individual
name printed next to NOI on the front page of a research report indicates that individual is employed by NOI to provide research assistance to
NIHK under a research partnership agreement and neither NOI or such individual is licensed outside of Mainland China, PRC.
THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO
BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION WHERE
SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) OTHER THAN DISCLOSURES RELATING TO THE NOMURA GROUP,
BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY
NOMURA GROUP.
Other than disclosures relating to the Nomura Group, the Nomura Group does not warrant, represent or undertake, express or implied, that the
document is fair, accurate, complete, correct, reliable or fit for any particular purpose or merchantable, and to the maximum extent permissible
by law and/or regulation, does not accept liability (in negligence or otherwise, and in whole or in part) for any act (or decision not to act) resulting
from use of this document and related data. To the maximum extent permissible by law and/or regulation, all warranties and other assurances
by the Nomura Group are hereby excluded and the Nomura Group shall have no liability (in negligence or otherwise, and in whole or in part) for
any loss howsoever arising from the use, misuse, or distribution of this material or the information contained in this material or otherwise arising
in connection therewith.
Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including
the opinions and estimates contained herein, are subject to change without notice. The Nomura Group, however, expressly disclaims any
obligation, and therefore is under no duty, to update or revise this document. Any comments or statements made herein are those of the
author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation
in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The Nomura Group
does not provide tax advice.
The Nomura Group, and/or its officers, directors, employees and affiliates, may, to the extent permitted by applicable law and/or regulation, deal
as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other
derivative instruments based thereon, of issuers or securities mentioned herein. The Nomura Group companies may also act as market maker
or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of
market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will
be separately disclosed within the specific issuer disclosures.
This document may contain information obtained from third parties, including, but not limited to, ratings from credit ratings agencies such as
Standard & Poor’s. The Nomura Group hereby expressly disclaims all representations, warranties or undertakings of originality, fairness,
accuracy, completeness, correctness, merchantability or fitness for a particular purpose with respect to any of the information obtained from
third parties contained in this material or otherwise arising in connection therewith, and shall not be liable (in negligence or otherwise, and in
whole or in part) for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses,
legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use or misuse of any of the information
obtained from third parties contained in this material or otherwise arising in connection therewith. Reproduction and distribution of third-party
content in any form is prohibited except with the prior written permission of the related third-party. Third-party content providers do not, express
or implied, guarantee the fairness, accuracy, completeness, correctness, timeliness or availability of any information, including ratings, and are
not in any way responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use
or misuse of such content. Third-party content providers give no express or implied warranties, including, but not limited to, any warranties of
merchantability or fitness for a particular purpose or use. Third-party content providers shall not be liable (in negligence or otherwise, and in
whole or in part) for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses,
legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use or misuse of their content, including
ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do
not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.
Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this
information and any other MSCI intellectual property may not be duplicated, reproduced, re-disseminated, redistributed or used, in whole or in
part, for any purpose whatsoever, including creating any financial products and any indices. This information is provided on an "as is" basis. The
user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or
compiling the information hereby expressly disclaim all representations, warranties or undertakings of originality, fairness, accuracy,
completeness, correctness, merchantability or fitness for a particular purpose with respect to any of this material or the information contained in
this material or otherwise arising in connection therewith. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any
third party involved in, or related to, computing or compiling the information have any liability (in negligence or otherwise, and in whole or in part)
for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.
The intellectual property rights and any other rights, in Russell/Nomura Japan Equity Index belong to Nomura Fiduciary Research & Consulting
Co., Ltd. ("NFRC") and Frank Russell Company ("Russell"). NFRC and Russell do not guarantee fairness, accuracy, completeness, correctness,
reliability, usefulness, marketability, merchantability or fitness of the Index, and do not account for business activities or services that any index
user and/or its affiliates undertakes with the use of the Index.
Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be
viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a
number of different types of research product including, among others, fundamental analysis and quantitative analysis; recommendations
contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of
differing time horizons, methodologies or otherwise. The Nomura Group publishes research product in a number of different ways including the
posting of product on the Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products
and services from the research department depending on their individual requirements.
Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future or
likely performance. Where the information contains an expectation, projection or indication of future performance and business prospects, such
forecasts may not be a reliable indicator of future or likely performance. Moreover, simulations are based on models and simplifying
assumptions which may oversimplify and not reflect the future distribution of returns. Any figure, strategy or index created and published for
illustrative purposes within this document is not intended for “use” as a “benchmark” as defined by the European Benchmark Regulation.
Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived
from, the investment.
With respect to Fixed Income Research: Recommendations fall into two categories: tactical, which typically last up to three months; or strategic,
which typically last from 6-12 months. However, trade recommendations may be reviewed at any time as circumstances change. ‘Stop loss’
levels for trades are also provided; which, if hit, closes the trade recommendation automatically. Prices and yields shown in recommendations
are taken at the time of submission for publication and are based on either indicative Bloomberg, LSEG or Nomura prices and yields at that
time. The prices and yields shown are not necessarily those at which the trade recommendation can be implemented.
The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not
be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption
from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura
entity in your home jurisdiction.
145
Nomura | 2024 Global Macro Outlook
11 December 2023
This document has been approved for distribution in the UK as investment research by NIplc. NIplc is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a member of the London Stock
Exchange. This document does not constitute a personal recommendation within the meaning of applicable regulations in the UK, or take into
account the particular investment objectives, financial situations, or needs of individual investors. This document is intended only for investors
who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the UK, and may not, therefore, be
redistributed to persons who are 'retail clients' for such purposes.
This document has been approved for distribution in the European Economic Area as investment research by Nomura Financial Products
Europe GmbH (“NFPE”). NFPE is a company organized as a limited liability company under German law registered in the Commercial Register
of the Court of Frankfurt/Main under HRB 110223. NFPE is authorized and regulated by the German Federal Financial Supervisory Authority
(BaFin).
This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong
Kong by NIHK. This document is intended only for investors who are 'professional investors' for the purposes of applicable regulations in Hong
Kong and may not, therefore, be redistributed to persons who are not 'professional investors' for such purposes.
This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC.
This document has also been approved for distribution in Malaysia by NSM.
In Singapore, this document has been distributed by NSL, an exempt financial adviser as defined under the Financial Advisers Act (Chapter
110), among other things, and regulated by the Monetary Authority of Singapore. NSL may distribute this document produced by its foreign
affiliates pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the recipient of this document is not
an accredited, expert or institutional investor as defined by the Securities and Futures Act (Chapter 289), NSL accepts legal responsibility for the
contents of this document in respect of such recipient only to the extent required by law. Recipients of this document in Singapore should
contact NSL in respect of matters arising from, or in connection with, this document. THIS DOCUMENT IS INTENDED FOR GENERAL
CIRCULATION. IT DOES NOT TAKE INTO ACCOUNT THE SPECIFIC INVESTMENT OBJECTIVES, FINANCIAL SITUATION OR
PARTICULAR NEEDS OF ANY PARTICULAR PERSON. RECIPIENTS SHOULD TAKE INTO ACCOUNT THEIR SPECIFIC INVESTMENT
OBJECTIVES, FINANCIAL SITUATION OR PARTICULAR NEEDS BEFORE MAKING A COMMITMENT TO PURCHASE ANY SECURITIES,
INCLUDING SEEKING ADVICE FROM AN INDEPENDENT FINANCIAL ADVISER REGARDING THE SUITABILITY OF THE INVESTMENT,
UNDER A SEPARATE ENGAGEMENT, AS THE RECIPIENT DEEMS FIT.
Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer,
which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934.
The entity that prepared this document permits its separately operated affiliates within the Nomura Group to make copies of such documents
available to their clients.
This document has not been approved for distribution to persons other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ (as defined
by the Capital Markets Authority) in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or a ’Market Counterparty’ or a 'Professional Client' (as defined
by the Dubai Financial Services Authority) in the United Arab Emirates (‘UAE’) or a ‘Market Counterparty’ or a ‘Business Customer’ (as defined
by the Qatar Financial Centre Regulatory Authority) in the State of Qatar (‘Qatar’) by Nomura Saudi Arabia, NIplc or any other member of the
Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly,
by any person other than those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than ‘Authorised Persons’,
‘Exempt Persons’ or ‘Institutions’ located in Saudi Arabia or a ’Market Counterparty’ or a 'Professional Client' in the UAE or a ‘Market
Counterparty’ or a ‘Business Customer’ in Qatar. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE
or Saudi Arabia or Qatar.
For report with reference of TAIWAN public companies or authored by Taiwan based research analyst:
THIS DOCUMENT IS SOLELY FOR REFERENCE ONLY. You should independently evaluate the investment risks and are solely responsible
for your investment decisions. NO PORTION OF THE REPORT MAY BE REPRODUCED OR QUOTED BY THE PRESS OR ANY OTHER
PERSON WITHOUT WRITTEN AUTHORIZATION FROM NOMURA GROUP. Pursuant to Operational Regulations Governing Securities Firms
Recommending Trades in Securities to Customers and/or other applicable laws or regulations in Taiwan, you are prohibited to provide the
reports to others (including but not limited to related parties, affiliated companies and any other third parties) or engage in any activities in
connection with the reports which may involve conflicts of interests. INFORMATION ON SECURITIES / INSTRUMENTS NOT EXECUTABLE
BY NOMURA INTERNATIONAL (HONG KONG) LTD., TAIPEI BRANCH IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT BE
CONSTRUED AS A RECOMMENDATION OR A SOLICITATION TO TRADE IN SUCH SECURITIES / INSTRUMENTS.
This material may not be distributed in Indonesia or passed on within the territory of the Republic of Indonesia or to persons who are Indonesian
citizens (wherever they are domiciled or located) or entities of or residents in Indonesia in a manner which constitutes a public offering under the
laws of the Republic of Indonesia. The securities mentioned in this document may not be offered or sold in Indonesia or to persons who are
citizens of Indonesia (wherever they are domiciled or located) or entities of or residents in Indonesia in a manner which constitutes a public
offering under the laws of the Republic of Indonesia.
This document is prepared by Nomura Group or its subsidiary or affiliate (collectively, “Offshore Issuers”) that is not licensed in the People’s
Republic of China (“PRC”, excluding Hong Kong, Macau and Taiwan, for the purpose of this document) to provide securities research and this
research report is not approved or intended to be circulated in the PRC. The A-share related analysis (if any) is not produced for any persons
located or incorporated in the PRC. The recipients should not rely on any information contained in the research report in making investment
decisions and Offshore Issuers take no responsibility in this regard.
NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, REPRODUCED OR DUPLICATED IN ANY FORM, BY ANY MEANS;
OR (II) REDISSEMINATED, REPUBLISHED OR REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF THE
NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be
guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain
viruses. The sender therefore does not accept liability (in negligence or otherwise, and in whole or in part) for any errors or omissions in the
contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version.
The 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 regarding the methodologies or models used in the production of any investment recommendations contained
within this document is available upon request by contacting the Research Analysts of Nomura listed on the front page. Disclosures
information is available upon request and disclosure information is available at the Nomura Disclosure web page:
http://go.nomuranow.com/research/m/Disclosures
Copyright © 2023 Nomura International (Hong Kong) Ltd. All rights reserved.
146