MORGAN STANLEY RESEARCH
Global Economics Team
Coordinators of this publication
Joachim Fels
Joachim.Fels@morganstanley.com
+44 (0)20 7425 6138
December 12, 2012
Manoj Pradhan
Manoj.Pradhan@morganstanley.com
Global
The Global Macro Analyst
+44 (0)20 7425 3805
Spyros Andreopoulos
Spyros.Andreopoulos@morganstanley.com
Macro Surprises for 2013
We pick up a tradition introduced nearly three decades
ago at Morgan Stanley by our legendary former US
strategist Byron Wien. Each year, Byron (now at
Blackstone) publishes his ten surprises for the upcoming
year. He defines a surprise as an event that the average
investor believes to have only at most a one in three
chance of happening, while Byron believes it has at least
a 50% likelihood of coming true. For our purposes, we
are bending Byron’s rules somewhat. First, reflecting the
many countries and regions we cover, we have more
than ten surprises. Second, these surprises do NOT
represent our base case. Rather, the events we describe
would come as a surprise to us as well. However, we do
believe that they depict plausible possible outcomes that
would represent a meaningful surprise to the prevailing
consensus. We outline the surprises below
p2
 Just When You Thought it Was Dead, Inflation Returns
 Debt Cancellation
 US Over the Cliff and Likes it
 US Housing Stalls Out
+44 (0)20 7677 0528
Global Economics Forecasts
Real GDP (%)
CPI inflation (%)
2012E
2013E
2014E
2012E
2013E
Global Economy
3.1
3.1
4.0
3.4
3.1
2014E
3.3
G10
1.2
0.7
1.9
2.0
1.4
1.7
Emerging Markets
5.0
5.4
5.9
4.7
4.8
4.8
Source: Morgan Stanley Research forecasts
Spotlight
Italy and the Political Cliff: A Winding Path to
Where?
The most pressing question for the next government is
how to strengthen Italy’s economic fabric, and achieve a
‘new normal’ with sustained growth. More than anything
else, this will determine the views of market participants
on the reform path of Italy’s next leaders.
p5
The Morgan Stanley Global Economics View
p6
 BoJ Adopts Rule-Based Monetary Policy
 BoJ First to Buy Euro Area Bonds
 Italian Politics Revives CRIC Cycle and Triggers OMT
Global Macro Watch
 From ‘Grexit’ to ‘Brixit’
Euro Area: ECB Watch – Not Christmas Yet ............. p 8
UK: Autumn Statement: Not Pleasant Reading .......... p 8
UK: Slow Progress through the Twilight...................... p 9
CEEMEA: 2013 Preview – Macro Views and Risks ... p 9
Latin America: Optimism Beyond the 2013 Cycle ... p 10
 The UK Formally Gives Up the Fight Against Inflation
 Recession Returns to Australia
 Not the Right Green Shoots in EM
 China’s Shocking Tightening
 The AXJ Productivity Booster
 Mexico’s Moment Arrives
 Brazilian Policy Shifts to Boosting Supply
 Turkey Goes Boringly Orthodox in Rates
 Back in the USSR
For important disclosures, refer to the
Disclosures Section, located at the end of
this report.
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Macro Surprises for 2013
Joachim Fels (44 20) 7425 6138
Over the past several weeks, we have been pushing our 2013
Outlook: Stuck in the Twilight Zone (November 19, 2012),
highlighting our twilight, day and night scenarios for the global
economy next year. In our base case, we expect global
growth to remain stuck in the twilight zone that divides
sustainable expansion from renewed recession. During 1H13,
as long as policy uncertainty prevails, markets may be
worrying more about a darker ‘night’ scenario, but during 2H,
if the right policy actions are taken, twilight may give way to a
better ‘day’ scenario and a better 2014.
However, in our last Global Macro Analyst for this year, we
pick up a tradition introduced nearly three decades ago at
Morgan Stanley by our legendary former US strategist Byron
Wien. Each year, Byron (now at Blackstone) publishes his ten
surprises for the upcoming year. He defines a surprise as an
event that the average investor believes to have only at most a
one in three chance of happening, while Byron believes it has
at least a 50% likelihood of coming true. For our purposes, we
are bending Byron’s rules somewhat. First, reflecting the
many countries and regions we cover, we have more than ten
surprises. Second, these surprises do NOT represent our
base case. Rather, the events we describe would come as a
surprise to us as well. However, we do believe that they
depict plausible possible outcomes that would represent a
meaningful surprise to the prevailing consensus.
Just When You Thought it Was Dead, Inflation
Returns (Joachim Fels/Charles Goodhart)
A strong economic rebound in China and the US, adverse
supply shocks in agriculture and worries about swelling
central bank balance sheets lead to a sharp rise in actual and
expected global inflation. Central banks don’t dare to respond,
given high debt levels and financial fragilities, and either
continue to ignore or abandon their inflation targets. Rising
wheat prices lead to bread riots. In the UK, Chancellor
Osborne advises the British to eat oatcakes instead.
Debt Cancellation (Spyros Andreopoulos)
The US Treasury, Japan’s Ministry of Finance and Her
Majesty’s Treasury jointly announce that the Treasury debt
held by the Federal Reserve, Bank of Japan and Bank of
England respectively as a consequence of QE purchases are
cancelled, and that these central banks will operate with
negative equity until further notice. As a consequence,
government debt/GDP ratios are brought down by 11pp, 18pp
and 25pp, respectively. Ratings agencies love it, as does the
bond market – until it realises that large-scale debt
monetisation has just taken place, and sells off sharply.
US Over the Cliff and Likes it (Vincent Reinhart)
The US goes over the fiscal cliff and likes it. A deal delayed to
early 2013 in which politicians compromise because of
concerns about financial markets would resolve uncertainty
more assuredly than the baseline of stop-gap legislation
followed by a plan later in the year. As a consequence,
confidence gets a boost, pent-up business investment kicks in
and the labour market improves more rapidly.
US Housing Stalls Out (David Greenlaw)
The burgeoning housing recovery in the US begins to stall
due to credit tightening. There is still no private mortgage
market at this point and financial problems are brewing at the
FHA which could lead to a dramatic reduction in credit
availability for first-time homebuyers. Meanwhile, putback risk
continues to cause originators to increase scrutiny for
conforming loans.
BoJ Leads World in Adopting Rule-Based Monetary
Policy, but Exit from Deflation Lags (Robert
Feldman/Takeshi Yamaguchi)
Following a change in its leadership, the Bank of Japan
switches to target the ex-food ex-energy CPI, adopts price
level targeting to make up for past deflation, and implements
a base money growth rule based on deviations of the actual
CPI from the desired path. However, the targeted CPI
measure remains negative year on year in December 2013,
and the BoJ maintains aggressive policy into 2014 and
beyond.
BoJ First to Buy Euro Area Bonds, ECB Left
Watching and Waiting (Elga Bartsch)
The Bank of Japan, as part of its more aggressive policy
stance to fight deflation (see above), starts to acquire euro
area government bonds in order to push down the yen before
the ECB is able to activate its OMT programme. While the
BoJ acts, the ECB waits in vain for the Spanish government to
apply for an ESM credit line and OMT bond purchases. The
BoJ focuses its purchases on ESM/EFSF bonds as well as
higher-yielding core and large peripheral markets and thus
effectively becomes a lender of last resort for the euro area.
2
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Italian Politics Revives the CRIC Cycle and Triggers
OMT (Elga Bartsch/Daniele Antonucci)
A lively anti-austerity campaign in the run-up to the early
elections causes investors to seriously worry as to whether
Italy could be contemplating an exit from the euro. The
convertibility risk, which the ECB’s OMT announcement had
reduced, returns and Italy is forced to seek an ESM credit line
and becomes the first country to trigger the OMT.
Unfortunately, the damage has been done as markets now
believe that the convertibility risk is political rather than
monetary. Investors sell the euro and peripheral assets and
stock up on tinned food and mood-boosting pills.
Complacency sets in and structural reforms to move away
from the broken, export-investment-led model are put on the
back-burner. The result? EM growth deteriorates shortly after.
China’s Shocking Tightening (Helen Qiao)
The Chinese government inadvertently tightens financial
conditions aggressively by applying a ‘shock therapy’ during
the early stage of the recovery. Off-balance sheet lending
activities are banned and forced to roll back onto commercial
banks’ balance sheets, causing a major liquidity freeze in the
system. More credit defaults occur, giving rise to higher
systemic risks. The economic recovery unravels.
From ‘Grexit’ to ‘Brixit’ (Elga Bartsch)
The AXJ Productivity Booster (Chetan Ahya)
Financial markets come round to the idea that Greece will
stay in the euro for the foreseeable future. Instead, investors
are getting increasingly concerned about the UK’s political
stance on Europe, especially in view of a possible referendum
on EU membership. Polls during 1H13 start to suggest that an
exit of the UK from the EU is now seen as more likely than an
exit of Greece from the euro. The London property market
wobbles as financial institutions start making contingency
plans for moving employees to Frankfurt and Paris.
Policy-makers in Asia ex-Japan move aggressively to
implement policy reforms, boosting the region’s productivity
dynamic. China accelerates the move up the value chain and
boosts consumption growth; India unveils more measures to
lift investment in the economy; and Indonesia initiates reforms
which improve the competitiveness of the non-commodity
sectors. This raises productivity growth in the region, which
has slowed significantly since the crisis, and results in higher
corporate profitability.
The UK Formally Gives Up the Fight Against
Inflation (Melanie Baker)
Mexico’s Moment Arrives in its Long-Troubled Oil
and Gas Industry (Gray Newman/Luis Arcentales)
As inflation looks set to remain well above 2% for yet another
year, the government begins to fear that targeting inflation at
the 2% level will mean an abrupt end to very low interest rates
in the not-too-distant future...or a sharp loss of Bank of
England credibility. MPs increasingly argue that embedding a
bit more inflation might be a good thing for helping the UK
economy out of its difficulties. The government raises the
MPC’s inflation target and, for good measure, it merges the
Monetary Policy Committee and Financial Policy Committee
together.
Newly inaugurated President Enrique Peña Nieto surprises
with a passage of aggressive constitutional change in
Mexico’s oil and gas industry – he gains the political upper
hand in energy and fiscal reform by starting his six-year term
with a big boost in social programmes and promises that
energy/fiscal reform will provide even more revenues for
social spending. MXN rallies on the prospects of a new FDI
wave and the sovereign sees an upgrade.
Recession Returns to Australia (Gerard Minack)
Australia hasn't had a recession for 21 years - arguably, one
is overdue. Markets view the risk as low: fixed income
markets are pricing in only 1-2 more rate cuts, and equities
have re-rated through 2012.
Not the Right Green Shoots in EM (Manoj Pradhan)
EM green shoots develop further, but from the ‘wrong’ sources
of growth. Better DM growth and/or an unwinding of the shock
to global exports stabilises EM exports and hence production.
Brazilian Policy Shifts from Stimulating Demand to
Boosting Supply, with Ambitious Infrastructure
Programme (Gray Newman/Arthur Carvalho)
President Dilma Rousseff surprises most Brazil watchers as
she follows through on her promise of an ambitious
infrastructure programme, lifting the globe’s sixth-largest
economy from near the bottom of the globe’s infrastructure
rankings. The technical details show attractive IRR triggering
large investment inflows from abroad. BRL rallies more than
expected on the news.
3
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Turkey Goes Boringly Orthodox in Rates (Tevfik
Aksoy)
The Central Bank of Turkey switches back to a conventional,
orthodox and less exciting monetary policy in 2013. It
removes the non-standard and creative tools designed to
achieve inflation and financial stability goals at the same time.
As a consequence, it faces new challenges of currency
appreciation, currency volatility and no meaningful decline in
the current account deficit. The experiment fails and policy
switches back to non-conventional measures later in the year
in an attempt to recoup the loss of credibility.
Back in the USSR (Jacob Nell)
Putin is successful in enticing Ukraine into the Eurasian
Customs Union in return for energy subsidies which reduce its
balance of payments financing need to a level which requires
neither painful policy adjustment nor a sharp FX adjustment.
This closes the door on EU entry for Ukraine, since you can’t
be a member of two customs unions at once, and leads to
economic reintegration of the main post-Soviet states –
Russia, Ukraine, Kazakhstan and Belarus. The removal of
trade and investment barriers – particularly if accompanied by
a pro-investment, pro-market set of Russian-led policies –
triggers higher growth across the region, while Russian
energy subsidies would stabilise the hyrvnia and ruble.
4
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Spotlight: Italy and the Political Cliff: A Winding Path to Where?
Daniele Antonucci (44 20) 7425 8943
Italy’s experiment with its one-year-old technocratic
government is coming to an end earlier than expected.
The chances are that an elected government will follow, with
elections possibly as soon as next February.
With austerity taking a toll on an already weak economic
fabric, the risk is that discontent might well continue to
rise, thus affecting the next government’s ability or willingness
to pursue bold reforms – or result in a tough anti-reform
election campaign at the very least.
Historical evidence indicates that, close to a government
collapse, the cumulative rise in short-term interest rates is
about 24bp. Similarly, equity markets fall by around 5% over
the same period. These effects have tended to reverse after a
government change.
Italian Political Events Do Move Italian Bond and
Equity Markets – Based on History
50
Asset Prices Before / After Gov't Changes*
40
39
Short-term interest rates (bp)
There are some tentative signs that the economy is shrinking
at a slower pace, as the bulk of the budget correction is
behind us. But one risk is that interest rates – which have
recently been lower than expected and better behaved – will
start rising again, as they’ve been doing over the past couple
of days.
Will the fiscal policy path change? Not really. Its direction
is set, we think. U-turns are unlikely. Could someone
envisage, say, a reduction in the pension age, now that it has
been raised and indexed to life expectancy? This seems too
far-fetched, as markets would punish such slippage, in our
view.
Sizeable Primary Surplus to Offset Interest
Expenses Almost Entirely Going Forward
Balance
of GDP)
BudgetBudget
Balance
& Gov't(%Debt
(% of GDP)
8
Interest spending
Primary budget balance
Overall budget balance
Equity returns (%)
30
24
20
4
20
10
If market pressure were to resume in full force, the OMT
backstop might be a possibility. But the hurdle to apply for
sovereign support – if needed – is probably higher than
elsewhere, and difficult to negotiate in the midst of an election
campaign.
10
MS Forecasts
8
3.0
0.6
0
0
-2.6
-4.1
-5.0
-10
2 weeks before Same day and Period between 2 weeks before Same day and
start of new
2 weeks after
end of old
2 weeks after end of old and
start of new
start of new
end of old
15
-8
Asset Prices Before / After External Events*
2002
2004
2006
2008
2010
2012
2014
Source: ISTAT, Bank of Italy, Morgan Stanley Research forecasts
11
10
The most pressing question for the next Italian
government is how to strengthen the country’s economic
fabric, and achieve a ‘new normal’ with sustained growth.
More than anything else, this is what will determine the views
of market participants on the reform path of Italy’s next
political leaders.
8
5
3
0.2
0
-0.4
Short-term interest rates (bp)
-0.4
Equity returns (%)
-5
1 week before event
-4
1 week after event
For full details, see Italy and the Political Cliff – A Winding
Path to Where? December 10, 2012.
2 weeks after event
Source: Adapted from Fratzscher and Stracca (2009), “Does It Pay to Have the Euro?” ECB
Working Paper No. 1064, Morgan Stanley Research; *Cumulative responses (1973-2007).
5
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
The Morgan Stanley Global Economics View
Our Core Global Views
Key Macro Risk Events
Global economy stuck in the ‘twilight zone’: The global economy remains stuck in
the twilight zone, the fuzzy region that separates sustainable growth from renewed
recession. Deleveraging in the DM world, broken EM growth models and huge
uncertainty around DM policy are to blame for taking us there. We will need both policy
action and traction by policy-makers to get us out of this zone.
December 13-14, 2012
Eurozone not out of the woods yet: We think that resolution of the euro area
sovereign and banking crisis requires both a fiscal union and a banking union coupled
with the ECB being willing and able to be the lender of last resort to governments.
While the ECB has taken a decisive step towards fulfilling this role, progress on fiscal
and banking union remains painfully slow and full of setbacks. Eurozone break-up,
although not our central case, remains conceivable.
Fiscal dominance: Don’t expect DM central banks to tighten soon – they are locked
into a regime of fiscal dominance, where increases in the real interest rate worsen
government debt sustainability, inflation targeting becomes unfeasible and monetary
policy is forced to remain super-accommodative.
EU Summit
January 1, 2013
US fiscal cliff – current law means 5pp of potential GDP
fiscal tightening
January 1, 2013
Deadline for legislative framework on eurozone Single
Supervisory Mechanism
February 2013
Italian parliamentary elections
Around February 2013
Successor to Bank of Japan Governor Shirakawa
announced
Mid-February 2013
Financial repression and inflation: Part of the solution to high government debt
levels can be imposing artificially low, or even negative, real returns on captive investor
groups – financial repression. Inflation – allowed by central banks constrained by fiscal
dominance into a passive monetary stance – could be part of this solution, too.
EM growth model broken – needs structural reform: EM economies face external
and internal challenges that render the old, export-led model of growth defunct. Weak
DM consumers, onshoring of DM manufacturing and risks to external funding all work
against EMs externally. Internally, the focus on export-led growth has meant that
important sources of domestic demand have been neglected. Aggressive policy
stimulus will probably make imbalances worse. For potential output growth to rise,
policy stimulus needs to go to the ‘right’ sources of domestic demand. There is some
progress in India and to lesser extent in Brazil, but the key remains China.
US government expected to reach debt ceiling
April 8, 2013
Shirakawa’s tenure as Bank of Japan governor ends
September 2013
German parliamentary elections
January 1, 2014
ECB to assume regulation of all eurozone banks
Regional Themes
Asia ex Japan: India and China need internal rebalancing – China needs to boost
consumption, India investment. This would be part of global rebalancing, too. While
China undergoes its policy transition, India’s administration has unveiled some reforms
that go in the right direction. However, the rebalancing is likely to be a drawn-out
process in both countries.
Latin America: Greater divergence in Latin America, with Brazil reaccelerating, Peru
and Colombia slowing, and Argentina and Venezuela recently suffering from weaker
domestic conditions and weaker commodity prices. Recent policy measures from Brazil,
and especially Mexico, are encouraging, but implementation remains a key risk.
CEEMEA: Growth is slowing everywhere in the region but countries are at different
stages of the cycle. Russia’s performance will depend on delivery of President Putin’s
pro-investment economic strategy, CEE’s on developments in the euro area.
For our global forecasts, see The Global Macro Analyst: 2013 Outlook: Stuck in the Twilight Zone, November 19, 2012.
For our cross-asset views, see Cross-Asset Strategy: 2013: Transition Path, December 12, 2012.
6
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Key Forecast Profile
Global Economics Team
Quarterly
2012
Real GDP (%Q, SAAR)
1Q
2Q
3QE
Annual
2013
2014
4QE
1QE
2QE
3QE
4QE
1QE
2QE
3QE
4QE
2012E
2013E
2014E
4.0
Global**
2.9
2.3
3.0
2.6
2.7
3.2
3.7
4.1
3.9
3.7
3.8
3.8
3.1
3.1
G10
1.7
0.4
1.1
-0.2
0.4
0.9
1.7
2.1
2.1
1.6
1.9
2.0
1.2
0.7
1.9
US
2.0
1.3
2.8
0.7*
0.8
1.2
2.2
2.8
2.8
2.9
2.9
2.9
2.2
1.4
2.7
Euro Area
0.0
-0.7
-0.5
-1.6
-0.8
0.0
0.6
1.0
1.0
1.0
1.0
1.0
-0.5
-0.5
0.9
Japan
5.2
0.3
-3.5
-0.2
0.6
1.7
1.9
2.3
2.0
-2.4
-0.2
0.9
2.0
0.4
0.8
UK
-1.2
-1.5
3.9
-1.2
1.2
0.0
1.6
1.6
1.9
2.0
1.2
1.2
-0.2
0.8
1.6
EM (%Y)
5.3
4.9
4.6
5.0
5.1
5.2
5.6
5.5
5.8
5.9
5.9
5.9
5.0
5.4
5.9
China (%Y)
8.1
7.6
7.4
7.7
8.0
8.2
8.4
8.2
8.1
8.1
7.9
7.7
7.7
8.2
8.0
India (%Y)
5.3
5.5
5.3
5.1
5.8
6.0
6.2
6.3
6.4
6.9
7.1
7.1
5.3
6.1
6.9
Brazil (%Y)
0.8
0.5
0.9
1.8
2.3
2.5
3.3
2.9
3.1
3.1
3.9
3.6
1.6
2.8
3.4
Russia (%Y)
4.9
4.0
2.9
2.7
2.6
3.0
3.1
3.5
4.0
4.3
4.3
4.1
3.6
3.1
3.7
3.3
Consumer price inflation (%Y)
Global
3.7
3.3
3.2
3.2
2.9
3.1
3.3
3.2
3.2
3.4
3.4
3.2
3.4
3.1
G10
2.4
1.8
1.7
1.9
1.4
1.4
1.4
1.3
1.5
1.7
1.7
1.7
2.0
1.4
1.7
US
2.8
1.9
1.7
1.9
1.2
1.5
1.4
1.3
1.5
1.5
1.6
1.6
2.1
1.3
1.6
Euro Area
2.7
2.5
2.5
2.5
2.1
1.8
1.8
1.8
1.9
2.0
1.7
1.6
2.5
1.9
1.8
Japan
0.1
0.0
-0.2
0.0
-0.3
-0.5
-0.5
-0.5
-0.4
1.4
1.5
1.6
0.0
-0.4
1.0
UK
3.5
2.8
2.4
2.7
2.6
2.7
2.8
2.5
2.5
2.6
2.5
2.1
2.8
2.6
2.4
EM
5.0
4.9
4.6
4.5
4.4
4.8
5.1
5.0
4.9
4.9
4.9
4.7
4.7
4.8
4.8
China
3.8
2.9
1.9
1.9
1.6
2.8
3.8
3.9
3.6
3.9
3.9
3.2
2.6
3.0
3.6
India
7.2
10.1
9.8
9.3
8.6
7.5
6.9
7.1
6.7
6.4
6.6
6.9
9.1
7.5
6.7
Brazil
5.8
5.0
5.2
5.5
5.6
5.8
5.7
5.5
5.8
5.8
5.7
5.9
5.4
5.6
5.8
Russia
3.9
3.8
6.0
6.6
7.0
7.2
6.5
6.0
5.5
5.1
5.2
5.4
5.1
6.7
5.3
3.2
Monetary policy rate (% p.a.)
Global
3.2
3.1
3.0
2.9
2.9
2.9
2.9
2.9
3.0
3.1
3.1
3.2
2.9
2.9
G10
0.6
0.6
0.5
0.5
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.4
0.5
0.4
0.4
US
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
Euro Area
1.00
1.00
0.75
0.75
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.75
0.50
0.50
Japan
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
UK
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.75
1.00
1.00
0.50
0.50
1.00
EM
6.1
5.9
5.7
5.6
5.6
5.5
5.5
5.5
5.6
5.8
5.9
5.9
5.6
5.5
5.9
China
6.56
6.31
6.00
6.00
6.00
6.00
6.00
6.00
6.25
6.50
6.75
6.75
6.00
6.00
6.75
India
8.50
8.00
8.00
8.00
7.75
7.25
7.25
7.25
7.00
7.00
7.00
7.00
8.00
7.25
7.00
Brazil
9.75
8.50
7.50
7.25
7.25
7.25
7.25
7.25
8.25
8.25
8.25
8.25
7.25
7.25
8.25
Russia
5.25
5.25
5.50
5.50
5.75
5.75
5.75
5.50
5.25
5.00
4.75
4.75
5.50
5.50
4.75
Note: Global and regional aggregates are GDP-weighted averages, using PPPs. Japan policy rate is a range from 0.00-0.10%, with 0.05% as the midpoint; CPI numbers are period averages. *US
GDP forecast for the current quarter is a tracking estimate. **G10+BRICs+Korea
Source: Morgan Stanley Research forecasts
7
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Global Macro Watch
Euro Area: ECB Watch – Not Christmas Yet
Elga Bartsch (44 20) 7425 5434
Contrary to our expectations, but in line with market
expectations, the ECB did not cut rates on December 6: In
addition, the press conference did not send the strong signal
for a rate reduction in 1Q13 that we hoped for either. Hence,
we need to acknowledge the risk that the ECB might simply
stay put going forward. Apparently, there were some Council
Members pushing for a rate reduction. But the prevailing
consensus was to keep rates unchanged. The rate cut
discussion also did not extend to an in-depth debate on a
depo rate cut.
Growth projections lowered markedly again, inflation
seen inside the target range: The new staff projections
show another marked reduction in the growth outlook and a
subdued inflation rate in 2014. The Governing Council now
sees the current weakness extending into next year and
expects a recovery to set in only in 2H13. Despite the marked
downward revisions, however, the outlook for price stability
has not changed materially in the view of the Governing
Council. Instead, ECB President Draghi stressed on several
occasions that the ECB’s policy stance is accommodative and
that the ECB has already taken far-reaching measures.
No encouraging policy signals from the ECB on rates or
unconventional measures at this stage: Unfortunately,
there was little in the press conference to give us hope on
additional ECB easing early in the New Year. Hence, we
might have to brace ourselves for the ECB staying on hold in
2013. Similarly, there were no clear hints on unconventional
measures of credit easing. In fact, when asked about
additional measures the ECB could take, Draghi rattled
through what the ECB has done in the past and the positive
impact that these measures have had.
For full details, see ECB Watch: Not Christmas Yet,
December 6, 2012.
Euro Area: New ECB Staff Projections
%Y
GDP
HICP
2012
2013
2014
-0.5
2.5
-0.3
1.6
1.2
1.4
UK: Autumn Statement: Not Pleasant
Reading
Melanie Baker (44 20) 7425 8607
Jonathan Ashworth (44 20) 7425 1820
As expected, the Autumn Statement and latest set of OBR
economic and fiscal projections did not make for
particularly pleasant reading: The fiscal projections are
broadly worse than in March and the OBR now judges that
the supplementary fiscal rule is unlikely to be met. We
continue to think that all this will lead investors to further
question the future of the UK’s credit rating.
The OBR sharply lowered its GDP growth forecasts and
revised its deficit and debt projections up: The deficit
numbers were not as bad as we’d expected for this and next
fiscal year largely because of additional special factors we
hadn’t anticipated (rather than any underlying improvements
in the fiscal position), including an earlier effect from the APF
cash transfer, 4G spectrum sale proceeds and Swiss tax
repatriation. Still, the deficit forecast at the end of this
parliament (2014-15) is now ~1pp higher than in March 2012
at 5.2% of GDP (3pp higher than in the current government’s
first budget). Public sector net debt as a percentage of GDP
peaks a year later on the new OBR forecasts, implying a
break of the fiscal rules.
Lots of policy measures – little effect on our economic
forecasts: These included a lower corporation tax rate and
the cancellation of the January fuel duty rise, partly offset by
additional departmental spending cuts and lower planned
increases in benefits. All in all, however, there was nothing in
this statement to materially change our forecasts for the
economy.
Big picture for the UK’s fiscal finances is unchanged:
None of this changes the big picture for UK public finances.
The fiscal numbers still look worrying to us. Austerity is set to
remain a significant drag on the economy for many years to
come. Partly as a result, we continue to find it hard to get too
excited about the UK’s near-term growth prospects.
For full details, see UK Economics: Autumn Statement: Not
Pleasant Reading, December 5, 2012.
Source: ECB
8
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Global Macro Watch
UK: 2013 and 2014 Outlook: Slow Progress
through the Twilight
CEEMEA: 2013 Preview – Macro Views and
Risks
Melanie Baker (44 20) 7425 8607
Jonathan Ashworth (44 20) 7425 1820
CEEMEA economics team
An untidy recovery, prone to setbacks… Our central case
is for untidy progress; for growth that grinds rather than
bounds higher; and for monetary policy that will have
increased traction over the period rather than given the
economy the kick-start it could do with at present. The
gradual rebalancing we envisage over the medium term is
likely to continue to make for an untidy recovery, especially
given that much of the rest of the world are keen to/need to
pull off a rebalancing act too.
…assumes policy-makers ‘stick to the programme’: For
the UK, we think we are close to the limits of policy
effectiveness and room for manoeuvre. Monetary policy
needs to be kept accommodative and fiscal austerity plans
need to remain in place.
Our central case outlook: We expect only 0.8% GDP growth
in 2013 and 1.6% in 2014, remaining below consensus. The
key drags on UK growth (the external environment, fiscal
austerity and credit conditions) seem set to drag a little less
over the next two years, and we think that there are good
reasons to expect a grind higher in consumer spending
growth. Whether or not we get more QE remains a finely
balanced call, but by mid-2014 we expect to see some
modest reduction in policy accommodation (including two
25bp rate rises).
Three things likely to make for a bumpy ride: In addition to
the ongoing need to rebalance, we think that inflation risks
may build quickly in a recovery as the economy bumps up
against capacity constraints and political developments could
well throw up challenges as we get closer to the May 2015
general election.
Three key themes: We suggest three themes that we think
will (continue to) be important for the next two years: i) Fiscal
slippage; ii) Resolution of the productivity puzzle; iii) Political
uncertainty and institutional change.
For full details, see UK Economics: 2013 and 2014 Outlook:
Slow Progress through the Twilight, December 11, 2012.
We analyse briefly the macro outlook for each country
under our coverage, with an emphasis on risk events in
2013: As always, we note that CEEMEA is a very diverse
region. We believe that the aggregate CEEMEA growth rate
(GDP-weighted average growth of the main countries) will
remain unchanged, at 2.6%Y (same as this year), but there
will be significant country differences.
For instance, we remain bearish on growth prospects for the
Central European countries. Essentially, we expect no
growth at all in Hungary and in the Czech Republic in 2013,
despite the fact that both countries contracted in 2012. Even
Poland, once a growth outperformer thanks to resilient
domestic demand, will see a mere 1.5%Y expansion in 2013
due to slower credit, consumption and investment.
On the other hand, we expect that other countries will perform
better. Turkey will accelerate and grow by 4%Y in 2013, the
fastest among the large CEEMEA economies, in our view.
Russia will grow by a respectable 3.1%Y, but still a clear
slowdown in comparison to 2010, 2011 and 2012. South
Africa is expected to improve its growth rate only marginally
to 2.5%Y in 2013 from 2.3%Y in 2012, partially due the impact
of the local strike action of late 2012.
On the policy front, we expect most central banks to deliver
monetary easing, in response to the benign interest rate
environment. We believe that policy rates will test new lows in
Central Europe and Turkey, they will be lowered in Nigeria,
Ghana and Kenya, and will stay on hold in South Africa. In
Russia, we see a modest hike in 1Q13 (25bp), followed by a
25bp rate cut in late 2013 as inflation declines to target.
As always in such a diverse region, there are a number of
country-specific risk/reward events, such as central bank
management changes in Russia and Hungary, IMF
negotiations in Ukraine and Hungary, geopolitical issues in
Turkey and Israel, investment initiatives in Russia and
Poland, political/election risks in South Africa, Romania, the
Czech Republic, Ghana and Kenya and our expectations of
a sovereign rating upgrade in Turkey and a downgrade in
Hungary.
For full details, see “CEEMEA 2013 Preview: Macro Views
and Risks”, CEEMEA Macro Monitor, December 7, 2012.
9
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Global Macro Watch
Latin America: Optimism Beyond the 2013
Cycle
Gray Newman (1 212) 761 6510
We expect Latin America to once again post above-trend
growth, even as the region’s pace of growth slows slightly
from 2012: Sounds familiar? The cyclical story for 2013 at face
value seems similar to the one we described a year ago as we
looked towards 2012 and even that of two years ago going into
2011. In both years, we argued that the region would slow, but
would still manage to produce above-trend growth. And once
again, as was the case last year, we argue that the greatest
risks to our forecast for Latin America lie outside the region –
what we have described as the Risks to Abundance (see “Latin
America in 2012: The Risks to Abundance Return”, This Week
in Latin America, November 28, 2011). For all the challenges
that Latin America faces, none are likely to have as great of an
impact on the cycle in 2013 as the global environment.
This year our global economics team has christened its
outlook as that of the Twilight Zone – the grey, fuzzy area
that divides sustainable recovery from a renewed recession
(see 2013 Outlook: Stuck in the Twilight Zone, November 19,
2012). By now, I suspect that all global watchers are familiar
with the trio of risks: the US ‘fiscal cliff’; the unfolding
sovereign crisis in Europe; and the uncertainty in China.
What makes this year different is our global team’s view
that the outlook for 2013 could change depending on the
actions taken by policy-makers: Indeed, our global team
recommends that investors should remain “nimble and
prepared” to switch between Night, Twilight and Day.
You might argue that there is little surprise that the globe
matters so much to the region: Yet a decade ago, I
remember when the idiosyncratic risks within the region were
much greater and were our central concern. Today, the
balance sheets of the region’s largest economies are simply
in strong enough shape that, with one or two exceptions
(Venezuela and perhaps Argentina), it is difficult to argue that
the greatest risks to the region are home-grown.
The good news and what sets our forecast for the region
for 2013 apart from our past forecasts is our optimism
that there may be significant upside to the outlook for the
region’s two largest economies – not so much in the 2013
cycle, but beyond next year. There is also the potential for a
stronger reform push in Colombia led by an ambitious
infrastructure programme as Daniel Volberg has argued, but I
think that the possible upside surprises in Brazil and Mexico
have the potential to have the greatest regional impact.
For full details, see “Latin America: Optimism Beyond the 2013
Cycle”, Week Ahead in Latin America, December 7, 2012.
10
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Inflation Target Monitor & Next Rate Move
Global Economics Team. Contact: Spyros.Andreopoulos@morganstanley.com
US
Euro Area
Japan
UK
Inflation target
Latest
month
12M MS
fcast
Next rate
decision
Current
rate
Market
expects
(bp)
MS
expects
(bp)
Risks to our call
2.0% PCE Price Index
1.6%
1.7%
30 Jan
0.15
-1
0
No risks, same through mid-2015
< 2% HICP (u)
2.2%
1.8%
10 Jan
0.75
-3
-25
ECB could wait to cut, esp. with depo rate
1% CPI (u)
0.0%
-0.5%
20 Dec
0.05
0
0
Easing in Dec MPM likely, but BoJ may wait until Jan
Some risk of a QE restart
2% CPI
2.6%
2.5%
10 Jan
0.50
-3
0
1-3% CPI
1.2%
1.8%
23 Jan
1.00
0
0
-
<2% CPI (u)
-0.2%
0.2%
13 Dec
0.00
-
0
-
Sweden
2.0% CPI
0.4%
0.7%
18 Dec
1.25
-8
-25
Cut in Feb instead
Norway
2.5% CPI
1.1%
-
19 Dec
1.50
-2
0
Balanced risks
2-3% over the cycle
2.0%
2.1%
05 Feb
3.00
-15
0
-
1-3% CPI
0.8%
-
31 Jan
2.50
-3
0
-
Canada
Switzerland
Australia
New Zealand
Russia
5-6% CPI
6.5%
6.1%
1-15 Jan
5.50
-
0
-
Poland
2.5% (+/- 1%) CPI
3.4%
2.5%
09 Jan
4.25
-
-25
-
Czech Rep.
2.0% (+/-1%) CPI
2.7%
2.6%
19 Dec
0.05
-
0
-
Hungary
3.0% CPI
5.2%
5.4%
18 Dec
6.00
-
-25
-
Romania
3.0% (+/-1%) CPI
4.6%
4.0%
07 Jan
5.25
-
0
-
5% CPI end-’12
6.4%
6.3%
18 Dec
5.75
0
-25
CBT might hold until 1Q13
Turkey
Israel
1-3%
1.8%
2.0%
24 Dec
2.00
-
0
-
S. Africa
3-6%
4.9%
6.0%
24 Jan
5.00
-
0
SARB GDP downgrade ushers in rate cut
Nigeria
-
11.7%
11.6%
Jan
12.00
-
0
Collapse in core CPI ushers in early rate cut
Ghana
8.7% CPI
9.2%
10.0%
23 Jan
15.00
-
0
CPI decelerates further, MPC cuts rates
China
-
2.0%
3.0%
N/A
6.00
-
0
Further deterioration in global growth outlook
India
-
7.5%
7.5%
18 Dec
8.00
-
0
-
Hong Kong
-
3.8%
5.6%
11-12 Dec
0.50
-
0
-
2-4%
1.6%
3.0%
13 Dec
2.75
-
0
Rate cut due to weak domestic demand
-
1.6%
1.5%
19 Dec
1.88
-
0
Rate cut as domestic demand and exports remain weak
S. Korea
Taiwan
Indonesia
4.5% +/- 1.0%
4.3%
5.4%
10 Jan^
5.75
-
0
Evenly balanced
Malaysia
-
1.3%
2.7%
31 Jan
3.00
-
0
Downside risks
Thailand
0.5-3.0% core CPI
2.7%
3.3%
09 Jan
2.75
-
0
Downside risks
Brazil
4.5% +/-2.0% IPCA
5.5%
5.5%
16 Jan
7.25
0
0
-
3% +/-1% CPI
4.2%
3.8%
18 Jan
4.50
0
0
-
15.5-24.2% M2 growth
10.2%
10.0%
NA
12.07
-
-
-
Chile
3% +/-1% CPI
2.2%
3.5%
13 Dec
5.00
0
0
Buoyant domestic demand pushing inflation
Peru
2% +/-1% CPI
2.7%
2.5%
10 Jan
4.25
0
0
-
Colombia
3% +/-1% CPI
2.8%
3.2%
21 Dec
4.50
0
0
-
Mexico
Argentina
(u) = unofficial
Notes: Inflation numbers in red indicate values above target; MS expectations in red (green) indicate our rate forecasts are above (below) market expectations. Japan policy rate is an interval of
0.00-0.10%; *Core measure. ^Approximate date.
Source: National central banks, Morgan Stanley Research
11
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Global Monetary Policy Rate Forecasts
Current
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
United States
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
0.15
Euro Area
0.75
0.75
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
Japan
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
United Kingdom
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.75
1.00
1.00
Canada
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
Switzerland
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.25
0.50
Sweden
1.25
1.00
1.00
1.00
1.00
1.25
1.25
1.50
1.50
1.75
Norway
1.50
1.50
1.50
1.50
1.75
1.75
2.00
2.00
2.25
2.50
Australia
3.00
3.00
2.75
2.50
2.50
2.50
2.50
2.50
2.75
3.00
New Zealand
2.50
2.50
2.50
2.50
2.75
3.00
3.25
3.25
3.25
3.25
Russia
5.50
5.50
5.75
5.75
5.75
5.50
5.25
5.00
4.75
4.75
Poland
4.25
4.25
3.75
3.25
3.25
3.25
3.25
3.25
3.25
3.50
Czech Republic
0.05
0.05
0.05
0.05
0.05
0.05
0.25
0.50
0.75
1.00
Hungary
6.00
5.75
5.25
5.00
5.00
5.00
5.00
5.00
5.00
5.00
Romania
5.25
5.25
5.25
5.25
5.25
5.25
5.50
5.75
6.00
6.00
Turkey
5.75
5.50
5.25
5.25
5.25
5.25
5.50
5.75
5.75
5.75
Israel
2.00
2.00
1.75
1.75
1.75
2.00
2.50
2.75
2.75
2.75
South Africa
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
Nigeria
12.00
12.00
10.50
9.00
9.00
9.00
9.00
9.00
9.00
9.00
Ghana
15.00
15.00
15.00
14.50
14.00
14.00
14.00
14.00
14.00
14.00
China
6.00
6.00
6.00
6.00
6.00
6.00
6.25
6.50
6.75
6.75
India
8.00
8.00
7.75
7.25
7.25
7.25
7.00
7.00
7.00
7.00
Hong Kong
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
0.50
S. Korea
2.75
2.75
2.75
2.75
2.75
2.75
3.00
3.25
3.50
3.50
Taiwan
1.88
1.88
1.88
1.88
1.88
2.00
2.13
2.25
2.38
2.38
Indonesia
5.75
5.75
5.75
5.75
5.75
5.75
5.75
5.75
5.75
5.75
Malaysia
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
3.00
Thailand
2.75
2.75
2.75
2.75
2.75
2.75
2.75
2.75
2.75
2.75
Brazil
7.25
7.25
7.25
7.25
7.25
7.25
8.25
8.25
8.25
8.25
Mexico
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
Chile
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.00
5.50
5.50
Peru
4.25
4.25
4.25
4.25
4.25
4.25
4.50
4.75
4.75
4.75
Colombia
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.75
5.00
5.00
Source: National Central Banks, Morgan Stanley Research forecasts; Note: Japan policy rate is an interval of 0.00-0.10%.
Fed and Eurosystem Balance Sheet Monitor
3,000
Federal Reserve (Bil.$)
3,500
Eurosystem (Bil.€)
3,000
2,500
2,500
2,000
2,000
1,500
1,500
1,000
500
1,000
Size of B/S
Size of B/S
Total Reserves
500
Excess Reserves
0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: Haver Analytics
0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: Haver Analytics
12
MORGAN STANLEY RESEARCH
December 12, 2012
The Global Macro Analyst
Global GDP and Inflation Forecasts
Real GDP (%)
CPI inflation (%)
2011
2012E
2013E
2014E
2011
2012E
2013E
Global Economy
3.9
3.1
3.1
4.0
4.4
3.4
3.1
2014E
3.3
G10
1.4
1.2
0.7
1.9
2.7
2.0
1.4
1.7
1.6
US
1.8
2.2
1.4
2.7
3.1
2.1
1.3
Euro Area
1.5
-0.5
-0.5
0.9
2.7
2.5
1.9
1.8
3.0
0.8
0.3
1.3
2.3
2.0
2.1
1.7
Germany
France
1.7
0.1
-0.1
0.8
2.1
2.0
1.4
1.7
Italy
0.6
-2.1
-1.2
0.5
2.8
3.1
1.7
2.2
0.4
-1.5
-1.5
0.8
3.2
2.5
2.1
1.4
Japan
Spain
-0.6
2.0
0.4
0.8
-0.3
0.0
-0.4
1.0
UK
0.9
-0.2
0.8
1.6
4.5
2.8
2.6
2.4
Canada
2.4
2.0
1.8
2.5
2.9
1.7
1.7
2.0
Sweden
3.9
0.8
1.4
2.3
3.0
0.9
0.7
2.1
Australia
2.4
3.5
3.3
3.8
3.3
1.8
2.6
2.4
6.6
5.0
5.4
5.9
6.2
4.7
4.8
4.8
5.1
2.9
3.1
4.1
6.9
5.7
5.9
5.4
Emerging Markets
CEEMEA
Russia
4.3
3.6
3.1
3.7
8.5
5.1
6.7
5.3
Poland
4.3
2.4
1.5
2.7
4.3
3.7
2.3
2.0
Czech Rep
1.7
-1.0
0.0
1.9
1.9
3.4
2.6
1.7
Hungary
1.7
-1.3
0.0
1.3
3.9
5.8
5.3
3.6
Ukraine
5.2
0.2
0.8
4.0
8.4
0.6
7.0
8.8
Kazakhstan
7.5
4.5
5.8
6.5
8.4
5.2
7.2
7.3
Turkey
8.5
3.0
4.0
5.0
6.5
8.9
6.2
6.1
Israel
4.7
2.8
3.0
3.4
3.5
1.8
2.1
2.1
South Africa
3.1
2.3
2.5
3.3
5.0
5.6
5.8
5.5
Nigeria
7.4
6.3
7.5
8.2
10.9
12.0
10.0
10.5
Ghana
14.4
7.5
7.5
7.0
8.7
9.2
9.6
10.3
Asia ex-Japan
7.6
6.2
6.8
7.0
5.8
4.1
4.0
4.2
China
9.3
7.7
8.2
8.0
5.4
2.6
3.0
3.6
India
7.5
5.3
6.1
6.9
8.9
9.1
7.5
6.7
Hong Kong
4.9
1.2
3.8
4.5
5.3
4.1
5.6
4.7
Korea
3.6
2.3
3.7
4.2
4.0
2.5
3.0
3.2
Taiwan
4.0
1.2
2.9
4.0
1.4
1.9
1.5
1.8
Singapore
4.9
1.5
2.3
4.0
5.2
4.7
3.6
3.6
Indonesia
6.5
6.2
5.6
5.9
5.4
4.4
5.4
5.4
Malaysia
5.1
5.1
4.0
4.5
3.2
1.7
2.5
2.5
0.1
5.2
4.0
4.7
3.8
3.0
3.4
3.2
Latin America
Thailand
4.5
3.0
2.9
3.8
6.7
6.2
6.5
6.6
Brazil
2.7
1.6
2.8
3.4
6.6
5.4
5.6
5.8
Mexico
3.9
3.8
3.2
4.2
3.4
4.2
3.9
3.8
Chile
6.0
5.1
4.2
4.7
3.3
3.2
3.5
3.1
Peru
6.9
6.4
5.5
5.8
3.4
3.8
3.0
2.5
Colombia
5.9
4.9
4.4
5.1
3.4
3.2
3.2
3.1
Argentina
8.9
1.1
0.5
2.5
9.8
10.1
10.1
10.1
Venezuela
4.2
4.8
2.1
1.7
26.1
20.8
24.9
28.0
Source: IMF, Morgan Stanley Research forecasts
13
MORGAN STANLEY RESEARCH
December 12, 2012
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