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TRANSCRIPT
August 31, 2015
For important disclosures, refer to the Disclosures Section, located at the end of this report.
M O R G A N S T A N L E Y R E S E A R C H
Global Macro Outlook Growth Gets Stuck in Middle Gear With growth still sluggish and new risks emerging, the global economy seems to be stuck in middle gear. As policy-makers are approaching key decisions, the macro debate has zoomed in on China, EM more broadly and the Fed. The growth trajectory shifts down, but still points up. Inflation is pulled lower by commodities. While 1Q15 likely marked the trough for growth and inflation, we are cutting our estimates and see the risks skewed to the downside.
Growth: Not gaining much momentum: After the spring revival, growth failed to pick up more momentum over the summer. Taking on board US benchmark GDP revisions, new FX projections and a weaker trend in China’s industrial activity, we are lowering our 2015 global growth forecast from 3.4%Y to 3.1%Y. For 2016, we are cutting our forecast from 3.9%Y to 3.4%Y. Easy monetary policy, falling oil prices and looser fiscal policy should support growth. However, we remain cautious on EM, where the slowdown in China and future Fed rate hikes will likely create new cyclical challenges.
Inflation: DM reflation, despite downward pressure in core goods: Tighter labour markets and improving wage growth in DM economies should keep services inflation well supported and allow DM economies to stay on a reflationary path, where inflation gradually returns to the central bank target ranges. We expect inflationary pressures in EM to abate, helped by moderation of highflation in the commodity-exporting countries. Meanwhile, inflation remains low and stable for EM commodity importers.
Central banks: To remain accommodative, slower pace of rate hikes for Fed and BoE: Even while we anticipate that the Fed will hike rates in December, followed by the BoE next February, the pace of rate hikes should be slower compared to past cycles and previous forecasts. Moreover, full implementation of QE by the ECB (and a promise to adjust its programme if needed) and the BoJ should keep global liquidity conditions abundant. On the EM side, we expect China to cut rates once more in 4Q15 (with the risk of more) and to cut the required reserve ratio further to maintain comfortable liquidity conditions.
Key risks: China adjustment, Fed exit, stalling EM recovery: Policy choices feature prominently as risks to our baseline. Opting for a quicker pace of adjustment in cutting excess capacities in China, an unexpectedly sharp rise in US rates and a slowing or even stalled pace of reforms in EM, considering the current political uncertainties, could all pose risks to our base case view of a more modest but continued recovery.
M O R G A N S T A N L E Y R E S E A R C H G L O B A L E C O N O M I C S T E A M
Coordinators of this publication Chetan Ahya Elga Bartsch Manoj Pradhan Patryk Drozdzik Sung Woen Kang Pratyancha Pardeshi
Morgan Stanley Real GDP Forecasts 2015e 2016e 2017e 18-20 %Y Jul Sep Jul Sep GLOBAL 3.4 3.1 3.9 3.4 3.7 3.8 G10 2.0 1.8 2.4 1.9 1.7 1.6 US 2.5 2.4 2.7 1.9 1.8 1.8 EA 1.4 1.3 2.2 1.9 1.8 1.4 Japan 1.0 0.5 1.9 1.6 0.8 1.2 UK 2.7 2.7 1.9 1.9 2.1 2.3 EM 4.4 4.1 5.1 4.6 5.1 5.3 China 7.0 7.0 7.0 6.8 6.7 6.6 India 7.7 7.4 8.2 7.9 8.0 7.8 Brazil -1.7 -2.4 0.3 -1.2 1.4 2.0 Russia -4.2 -4.2 -1.2 -1.3 1.6 1.5
MW Global 2.5 2.3 3.1 2.5 2.7 3.0 Source: Morgan Stanley Research forecasts.
Note: Red (green) indicates downwards (upwards) revision from previous forecast.
The above aggregates are PPP-weighted. MW Global is weighted by long-term market exchange rates and is given here for comparison.
Country Focus US: Sobering Up on Supply Side ............... p 16
Euro Area: Waiting for Capex to Kick in ...... p 17
Japan: Sailing Against Four Headwinds ...... p 18
UK: Just 50bp a Year ................................. p 19
Canada: Waiting to Export ......................... p 20
Australia: Housing Card Played,
Challenges Remain .................................... p 21
China: Disinflationary Trend to Persist
amid a Gradual Rebalancing ...................... p 22
India: One of the Few Bright Spots in EM .. p 23
Korea: Low Growth for Longer ................... p 24
Indonesia: Still in a Lower Growth Channel . p 25
Russia: The Second Blow from Oil ............ p 26
Turkey: Uncharted Waters......................... p 27
Brazil: The Long and Winding Road .......... p 28
Mexico: The Spectre of Further Poor
Growth ....................................................... p 29
M O R G A N S T A N L E Y R E S E A R C H
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August 31, 2015 Autumn Global Macro Outlook
Growth Gets Stuck in Middle Gear Chetan Ahya & Elga Bartsch
Global Growth Outlook: All Eyes on EM Sluggish demand growth and limited inflationary pressures still characterise the global economy. In recent weeks, the macro debate has shifted towards the change in the RMB exchange rate management approach in China, its ramifications for the global economy, the prospects for the Federal Reserve to exit its zero interest rate policy and the likely path of policy rates after Fed liftoff. This investor debate now clearly centres on EM economies, but it also extends to the repercussions of weaker EM growth for DM economies.
While 1Q15 likely marked the low point for global GDP growth and headline inflation, we are reducing our estimates, acknowledging that the global growth trajectory has shifted lower and headline inflation has been pulled lower again by falling oil prices. That said, in our view, the bumpy, brittle and below-par ‘BBB’ global economic expansion and the DM reflation it is bound to bring remain intact (see Global Economics: From Deflation Scare to Reflation Run, June 13, 2015). This should be even more visible in the coming six months. As we feared, 2015 should mark the second consecutive year of cyclical divergence as DM growth improves and EM growth deteriorates. We expect this cyclical divergence to reverse only in 2016.
Exhibit 1 Global GDP Growth Set to Recover after a Little Lull
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Q1/2005 Q1/2007 Q1/2009 Q1/2011 Q1/2013 Q1/2015 Q1/2017
DM EM
Forecasts
Source: National data, IMF, Morgan Stanley Research forecasts
On average, 2015 will likely bring slower global real GDP growth as on our new estimates global growth slows from 3.4%Y in 2014 to 3.1%Y in 2015, falling further below the historical norm of 3.7%Y. The slowdown is coming entirely
from EM economies, where growth slows from 4.8%Y to 4.1%Y. Given that we already have the quarterly GDP data for 1Q15 and 2Q15 for most key countries, the margin of error in these estimates is relatively small. The remaining two quarters only account for about 20% of the annual average. In 2016, we expect global growth to recover to 3.4%Y, led by the EM complex picking up pace to 4.6%Y. Growth in DM economies, by contrast, is only expected to accelerate by 0.1pp to 1.9%Y in 2016. Alas, we estimate that it will only be in 2017 that global growth reaches the historical average of 3.7%Y again.
Our Key Forecast Changes at a Glance
Growth: Taking on board US benchmark GDP revisions, new FX projections and a weaker trend in China’s industrial activity, we are lowering our 2015 global growth estimate from 3.4%Y to 3.1%Y. For 2016, we are cutting our forecast from 3.9%Y to 3.4%Y. The changes in the growth forecasts are broad-based across DM and EM. The reduction in our 2015 estimates reflects larger cuts in our Japan and Brazil growth projections on top of smaller adjustments in our US, euro area and Indian numbers. The bigger and more relevant reduction in our 2016 forecasts is a major cut in our US forecasts (in reaction to the GDP benchmark revisions), and more modest adjustments in the euro area and Japan. In EM, we had to slash our Brazilian forecasts, while also lowering our Chinese and Indian forecasts somewhat. On the whole, we expect DM to expand by 1.9%Y next year and EM by 4.6%Y.
Inflation: Our forecasts for global inflation have not changed materially despite a renewed fall in oil prices and the change in the RMB exchange rate management approach. This year, we expect inflation still to average 3.1%Y while next year we have increased our inflation forecast from 3.4%Y to 3.5%Y on the back of forecasts upgrades in the US and EM. Our first stab at inflation in 2017 projects inflation inching higher towards almost 4%Y globally, led by DM across the board but particularly Japan and to a lesser extent the US.
Monetary policy: As before, we expect the first Fed rate hike in 4Q15, but have lowered the policy path after lift-off a little, bringing our end-2016 fed funds rate forecast down 25bp to 1.375%. We expect EM monetary policy-makers to cut more aggressively than previously forecast; in particular, we expect the PBOC to cut rates by 50bp in 2H15, versus 25bp in our previous forecast, with the next cut coming in 4Q15.
M O R G A N S T A N L E Y R E S E A R C H
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August 31, 2015 Autumn Global Macro Outlook The annual average growth rates mask a more distinctive quarterly growth profile. As expected, global growth accelerated in 2Q15, led by DM countries, notably the US (see Spring Global Macro Outlook: Dealing with Demand Deficiency, April 12, 2015). Looking ahead, we expect DM quarterly GDP growth to accelerate from 1.4% in 1Q15 in sequential, seasonally adjusted annualised terms to 1.9% in 4Q15. Next year, the DM quarterly GDP growth is likely to bump sideways at or slightly below the 2% mark as Japan’s growth pulls further ahead while US and UK growth slow down. The latter is forecast to decelerate quite markedly on the back of further fiscal consolidation, while the former slows moderately on the back of tighter financial conditions brought on by the Fed’s monetary policy. In Europe, a stronger-than-expected euro, higher-than-expected bond yields, weaker global growth and softer incoming data are impacting growth.
In EM, by contrast, the slowdown is still in full motion and it probably won’t be before 4Q15 that we are going to see a notable pick-up in annual GDP growth. A general lack of policy support to boost aggregate demand has meant that EM growth is likely to remain weak in the near term. In addition, EM will likely remain in an adjustment phase over the next few quarters. For China, we are pencilling in a slower growth rate in 2016, while for Brazil, we are expecting the recession to be both deeper and longer than before. Eventually, however, we are projecting a marked acceleration in EM growth from a cycle low of 3.9%Y in 3Q15 to almost 4.8%Y by the end of 2016. The general pattern across the BRICs – except Brazil – is that the last two quarters of 2015 are likely to be the worst over the forecast horizon. Brazil, by contrast, will continue to see its recession deepening until 1Q16, on our forecasts.
Exhibit 2
EM PMIs Set to Dip Below 50, DM Still Holding Up
46
48
50
52
54
56
58
60
2010 2011 2012 2013 2014 2015
DM and EM Mfg PMI (SA, 50+=Expansion)
EM DM Source: Markit, Morgan Stanley Research
However, in the medium term, the global economy is unlikely to return to the long-term average seen before the global financial crisis. In our view, global potential growth has likely declined materially and thus far policy-makers have not been able to lift labour productivity growth meaningfully as that will require productivity-boosting supply-side reforms as well as material capital-deepening (see Japan Economics: J-Insight: Autumn Agenda: How Much Capex Does Abenomics Need? August 19, 2015).
Exhibit 3 Potential Output Growth Headed Lower Especially in EM, DM Subdued
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1996–1998 1999–2001 2002–2004 2005–2007 2008-2010 2011-2014 2015-2020
Potential Output Growth, %Y
DM EM Global
5ots refer to thelatest aS 9stimates
Source: IMF, Morgan Stanley Research forecasts
The deceleration in potential output growth has already set in before the global financial crisis, in particular in DM economies. Initially, however, potential output growth was still rising in EM economies due to them being increasingly integrated into global supply chains and international trade. Without a noticeable pick-up in business investment, new policies to boost labour force growth and foster human capital accumulation, potential output growth is unlikely to improve significantly any time soon from the current pace of about 1.25%Y in DM and around 5.25%Y in EM, on our estimates. In EM, additional headwinds stem from distortionary regulations and direct government intervention in the investment process, which contributed to a misallocation of investment in the past. This leaves global potential output growth around 3%Y, making the 3.7%Y historical average look rather ambitious.
In addition, several cyclical factors explain the below-par performance at present: For starters, the structural EM adjustment process recently got more painful with the Chinese economy slowing down and USD appreciating sharply. The renewed EM weakness is starting to transmit into DM via a number of channels:
M O R G A N S T A N L E Y R E S E A R C H
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August 31, 2015 Autumn Global Macro Outlook • International trade: Exports destined for EM economies
have weakened materially. In addition, the ratio between trade growth and GDP growth has collapsed in recent years, particularly in Asia, suggesting some unwinding of globalisation.
• Currencies: EM currency depreciation pushed DM currencies, notably USD, higher in trade-weighted terms. Together with deflationary pressures in AXJ, this is weighing on DM goods inflation, especially in the US.
• Multinational companies: DM corporates have increased their exposure to EM meaningfully over the last decade in terms of FDI. As a consequence, weaker growth in EM is also felt via foreign affiliate sales. Together with the translation effect created by weaker EM currencies, this has led to slower profit growth – though lower commodity prices offer relief.
• Business sentiment and risk appetite: DM equity markets seem to be more strongly affected by EM turbulence and geopolitical uncertainties these days owing to their rising EM exposure.
Exhibit 4 Weak EM Demand Drags on DM Export Growth
-2%
0%
2%
4%
6%
8%
Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15
Exports to DM
Exports to EM
Combined Exports of US, Japan and Europe, YoY% 6MMA
Source: CEIC, Morgan Stanley Research
Against a backdrop of both structural and cyclical challenges, it is the capex recovery where the rubber of corporate decision-making meets the macroeconomic road. Over the last couple of years, the capex recovery has fallen short of the historical norm, especially in DM (see Exhibit 6). A considerable part of this is can be explained by the steep slump in activity during the global financial crisis, the muted recovery thereafter and the low rate of resource utilisation (see IMF 2015). Part of the DM capex weakness can likely be attributed to corporates increasingly investing overseas as EM economies were integrated into global supply chains. That said, the current EM capex recovery also flattens (see Exhibit 7). Finally, a cutback in public sector infrastructure investment, a steep increase in credit constraints and a broad-based
Exhibit 5
Investment Slump Concentrated in Capex, Not Resi
-35
-30
-25
-20
-15
-10
-5
0
5
DM United States Euro Area Japan United Kingdom
Decomposing the Investment Slump Since 2008Business Residential Total
Source: IMF, Morgan Stanley Research
Exhibit 6 DM Capex Lacklustre Compared to Past Recoveries
85
90
95
100
105
110
115
t 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34Quarters after peak in real investment
Ratio of DM Capex to GDP
4Q 1973 4Q 1981 3Q 2000 1Q 2008
Source: OECD, Morgan Stanley Research
Exhibit 7 EM Investment Spending Trails Behind Past Norms
0
50
100
150
200
250
300
350
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33
EM Real Investment Spending
Q2-97 Q3-00 Q1-08
vuarters after the cyclical peak in investment spending Source: National statistics, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
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August 31, 2015 Autumn Global Macro Outlook increase in uncertainty will likely have added to sub-par capex trajectory in some places. Looking ahead, we expect global capex to recover to 4.3%Y in 2016, up from 3.1%Y in 2015, supported by DM capex growth increasing from 3.2%Y to 3.9%Y and even more so EM capex growth, which we see rising from 3.2%Y this year to 4.8%Y next year.
In our view, the capex conundrum has important consequences for investors. First, capex tends to be a high-beta play on the business cycle and thus essentially allows looking at the business cycle through a magnifying glass.
Second, the capex cycle shows where corporates see opportunities to create value. Their more cautious assessment contrasts with the more exuberant assessment seen until recently in many equity markets.
Third, over time capex affects potential output growth. In the absence of so-called capital-deepening, i.e., without an increase in the capital-labour ratio, labour productivity growth – and hence the scope for wage increases – is likely to suffer.
Fourth, even though only about half of the intangible investments, such as R&D and innovation, are captured in the national accounts, the weakness raises concerns about so-called total factor productivity growth.
Finally, as a recent study shows, globally equity markets don’t seem to reward companies for expanding capex. Companies with high capex tend to underperform companies that favour dividends and share buybacks (see OECD 2015).
DM: Doubts About Pace of Growth, but Not About the Recovery
Europe and Japan Still Seen Driving the Recovery in 2016 Within DM, we expect growth in the euro area and Japan to accelerate most meaningfully in 2016. This recovery to an above-trend pace is already well under way. In the euro area, we remain more bullish than the consensus despite lowering our forecast from 2.2%Y to 1.9%Y. Our forecast is based on the expectation that the recovery in the euro area will broaden from consumer spending to corporate capex and net exports.
In Japan, after a rollercoaster ride in quarterly GDP growth in 1H15 due to one-off effects and a massive swing in inventories, we expect the economy to return to a mild recovery path. In 2016, we expect GDP to expand by 1.6%Y on average, helped by stronger consumer spending growth and higher real wage increases. In addition, some indicators of business investment are improving even though the export demand growth is still somewhat patchy. In 2017, a scheduled
hike in the consumption tax postponed in November 2014 is likely to reduce domestic demand by about 1%, leaving full-year GDP growth barely positive. Inflation should rise to 2.6%Y in 2017 in part due to the impact of the consumption tax hike. A deepening labour shortage will also likely keep underlying inflationary pressures in 2017 intact, even as the consumption tax hike weighs on demand.
However, in the US, the recent benchmark GDP revisions cause us to rejig our growth outlook materially. The US economics team is lowering its 2016 growth forecast from 2.7%Y to 1.9%Y. The revisions are broad-based across consumer spending, government outlays, capex and net exports. They largely reflect a more bearish outlook for productivity growth post the benchmark revisions and weaker export demand. As a result, the team now also pegs potential growth in the US only at around 1.5%.
An Alternative Metric of Global GDP Growth
Going forward, we will also present our country forecasts in another global growth aggregate. In addition to the traditional aggregation, using purchasing power-adjusted exchange rates, we will use the market-based exchange rates prevailing over a 10-year period. On this metric, global growth is quite a bit lower at 2.3%Y in 2015 and 2.5%Y in 2016 than on the PPP-based metric (see Exhibit 8).
This is for two reasons: For starters, the aggregate growth dynamics in EM are lower. Second, the weight of EM in the global aggregate is also lower. The smaller weights are due to fact that the national income levels (which define the purchasing power) are no longer levelled across countries.
While both aggregation methods are valid, which one is more appropriate to use depends on the question at hand. The aggregation based on market exchange rates might be the more relevant one for investors interested in financial flows or global sales dynamics than the PPP-based ones.
Exhibit 8 Morgan Stanley Growth Forecasts PPP vs. MW
2015 2016 2017 MW PPP MW PPP MW PPP Global 2.3 3.1 2.5 3.4 2.7 3.7
G10 1.8 1.8 1.9 1.9 1.8 1.7 EM 3.1 4.1 3.3 4.6 3.7 5.1
Note: MW = 10y FX market exchange rate-weighted, PPP = purchasing power parity-weighted; Actuals and Morgan Stanley FX forecasts used to obtain MW. Source: Bloomberg, Morgan Stanley Research forecasts
M O R G A N S T A N L E Y R E S E A R C H
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August 31, 2015 Autumn Global Macro Outlook Exhibit 9
Global Growth Cycle: DM Leading, EM Lagging Growth Cycle
SWE
Growth bottoming
RUS. MAL, THL
ISR
US, UK
SAFUKR
TUR
Growth peaking
MEX
EA, JPN
KOR, CHL
IND, THL
CEE
BRA, NGR
CHN, AUS
COL
IDN, TWN, TUR
PER
Source: Morgan Stanley Research; position corresponds to country's stage in growth cycle.
EM: As Pressure Intensifies, Policy Is Likely to Act EM Growth to Recover to Long-Run Average Only in 2016 EM is still in a multi-year adjustment phase, a process that began about three years ago and that has recently become more painful. The structural challenges are crystallising as: i) Weak productivity growth; ii) Excess capacity especially in Asia, elevated debt levels and adverse demographics; as well as iii) A negative terms-of-trade shock for the commodity exporters. Consequently, EM growth is likely to fall further to just 4.1%Y in 2015, down from 4.8%Y in 2014 and almost 0.75pp below its long-run average of 4.9%Y.
Exhibit 10
Uncertainty on the Rise in EM, Still Elevated in DM
-4
-3
-2
-1
0
1
2
3
4
5
6
7
1997 1998 1999 2000 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014
Global Policy Uncertainty
DM EM
First principal component of the 9conomic tolicy Uncertainty Indices for US, UK, D9R, FRA, ITA for 5a and China, India and Russia for 9a
stdev rel to LT Avg
Source: www.policyuncertainty.com, Morgan Stanley Research
The quarterly growth profile underscores that at the current juncture it is all about EM (see Key Forecast Profile on page 15). This marks an important shift from the macro debate six months ago, which was mainly about DM growth. Recent developments that have contributed to the shift in the focus to EM include:
• Concerns about a sharp slowdown in China and confusion as to whether the new currency management approach is mostly a competitive currency depreciation or whether it is mainly a strategic step towards establishing RMB as a reserve currency. In our view, it is the latter. And what’s more, it will likely be complemented by additional expansionary monetary and fiscal policies.
• In recent months investors saw material data disappointments in a number of larger EM economies, e.g., China, Brazil, Korea, Taiwan, Turkey and South Africa. Notwithstanding the structural and cyclical challenges that these countries face, we deem these data disappointments to be largely behind us now.
• Worries about the repercussions of the Fed ending its seven-year zero interest rate policy for EM funding when it will be raising the fed funds rate for the first time since June 2006. We believe that the Fed will likely wait until December before raising rates and will likely proceed cautiously thereafter.
• While EM central banks have been relatively slow to respond to disinflationary pressures or were forced to fend off material currency pressures, many of them still have material room for manoeuvre.
In China, while headline GDP growth shows a relatively small deceleration over the last 12 months, there has been a much more pronounced deceleration in our proprietary MS-CHEX growth indicator (see China Economics: Another dip in MS-CHEX calls for more pro-growth measures, August 13, 2015). Looking ahead, we expect MS-CHEX to stabilise in the current quarter and to start recovering in the final quarter of this year. To this end, we expect additional monetary policy easing (comprising significant RRR cuts and one additional rate reduction), and fiscal stimulus through accelerated fiscal spending. The recent change in the RMB exchange rate management approach redistributes disinflationary pressures globally, but in particular in AXJ and the US. The impact will likely be most acutely felt in EM, where Asia will experience additional disinflationary pressures and where commodity exporters are facing yet another terms-of-trade deterioration.
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August 31, 2015 Autumn Global Macro Outlook As a result, two large EM commodity exporters, Brazil and Russia, are likely to experience a deeper recession in 2015. In the case of Brazil, the recession is also likely to last longer than previously thought and positive GDP growth is unlikely to materialise before summer 2016. The downward revision to our forecasts reflects the decision of the administration to shelve its fiscal consolidation plan, which in our view increases the risk of downgrade and hence higher long-term interest rates materially. In Russia, where we lowered our forecasts just in July, we continue to see a persistent, deep recession, led by the plunge in domestic demand, which is only marginally cushioned by stronger net exports.
We remain constructive on the outlook for India as the economy moves towards higher growth and lower inflation. The recovery should be led by capex, with first signs of revival already visible in 2015. As the capex cycle gains momentum, we expect the recovery to broaden to private consumption helped by stronger job creation and lower inflation.
Inflation – Complexities Beyond the Headline
Why Has Global Inflation Been Weak? Despite an expansionary monetary policy stance, inflation in the global economy has remained largely subdued and decisively below trend in both DM and EM (see Exhibit 12). A key explanation circles back to the issue of demand deficiency that has been inflicting the global economy (see Spring Global Macro Outlook: Dealing with Demand Deficiency, April 12, 2015) and the resulting economic slack which has been exerting downward pressure on inflation. Moreover, the transmission mechanism of monetary policy has been constrained in the post-credit crisis financial system.
Just as with the global growth environment, inflation in DM economies was more of a drag on the global inflation trajectory in the earlier phases of the cycle. While this is now reversing, a large part of EM, particularly AXJ, has been experiencing persistent disinflationary pressure arising from excess capacity and will likely pose a drag on the global inflation trajectory.
Four Trends Are Masked by Gradually Rising Headline Inflation, We Think We expect global headline inflation to continue on a modest, gradual upward trajectory in the coming quarters, averaging 3.1%Y in 2015 and 3.5%Y in 2016. However, this modest acceleration in headline CPI inflation masks four divergent trends. Part of the improvement in headline inflation is also driven by a projected (by oil futures) stabilisation in oil prices, which reduces the drag from lower energy costs.
Where We Differ from Consensus
Developed markets: On the one hand, we continue to be moderately more bullish than markets/consensus on the euro area and Japan’s macroeconomic picture. On the other hand, we seem materially more bearish on the outlook for the US and the UK. In the US, our forecast for not even 2%Y growth next year compares to the current Bloomberg consensus of 2.7%Y. However, we would expect consensus estimates for the US to come down as more forecasters rerun their models following the GDP benchmark revisions. Our out-of-consensus call for the Fed hiking only in December is now being embraced by markets. Contrary to the market, we expect more rate hikes over 2016 though.
When it comes to inflation, we are significantly below consensus in the US in 2016, at 1.5%Y versus consensus expectations of 2.0%Y. Our inflation forecasts are also lower than consensus for China, where we are more concerned about disinflationary pressures. We also expect no further easing from the BoJ, while the majority of forecasters expect some form of additional easing. Tapering, by contrast, is unlikely until autumn 2016 at the earliest, we think. In the euro area, we expect inflation to rise closer to the ECB’s price stability norm by end-2016. By contrast, the market still seems to believe that inflation will stay way below the ECB’s norm and that QE will continue well beyond 4Q16.
Emerging markets: In EM we are moderately more optimistic on China and India, but materially more bearish on Brazil and Russia. We expect China’s PBOC and India’s RBI to continue cutting rates more than the consensus. These calls reflect China’s deceleration in growth and India’s lower CPI inflation trajectory.
Exhibit 11 2016 Growth Forecasts: MS versus Consensus
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Global G10 US EA Japan UK EM China India Brazil Russia
%Y
Consensus MS Note: Global, G10 and EM consensus aggregates are calculated using the same PPP weights and country subsample as MS aggregates. Consensus aggregates are not comparable to those directly available on Bloomberg. Source: Bloomberg, Morgan Stanley Research forecasts
M O R G A N S T A N L E Y R E S E A R C H
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August 31, 2015 Autumn Global Macro Outlook 1) Rising inflation in DMs (from low levels) while EMs face both lowflation and highflation: Commodity importers in EM are facing lowflation conditions because of excess capacity and also the transmission of lower commodity prices into their consumer price baskets. EM commodity exporters are however facing highflation challenges as the reversal in commodity prices has adversely impacted their terms of trade and resulted in currency depreciation, leading to imported inflation. With EM commodity importers accounting for 37% in global GDP (as compared to 45% for DM and 18% for commodity exporters), the trend in overall global inflation will likely be weighed down by the commodity importers. Indeed, global inflation would rise by a more modest 20bp (from 2.6%Y in 2015 to 2.8%Y in 2015) instead of 40bp if we take out the hyperinflation economies of Venezuela and Argentina (we expect inflation in these economies to average 97%Y and 31%Y, respectively in 2016).
Exhibit 12 Morgan Stanley Global Inflation Forecasts
2015e 2016e 2017e Jul Sep Jul Sep Sep GLOBAL 3.1 3.1 3.4 3.5 4.0
G10 0.3 0.3 1.7 1.5 2.1 US 0.1 0.1 1.8 1.5 2.2 EA 0.2 0.1 1.6 1.3 1.7 Japan 0.6 0.6 1.3 1.3 2.6 UK 0.2 0.1 1.5 1.4 1.6
EM 5.3 5.3 4.7 5.1 5.3 China 1.3 1.5 1.8 1.5 1.5 India 4.8 4.8 4.9 4.9 4.5 Brazil 8.7 8.7 6.3 6.3 5.0 Russia 15.1 15.5 7.9 8.6 7.2
Source: IMF, Morgan Stanley Research forecasts
Exhibit 13 Global Inflation Cycle: Reaching a Turning Point
Inflation Cycle
EA, CEE, ISR, AUS
Inflation bottoming
Inflation peaking
US, JPN, MEX
TUR, IDN
SAF
IND
BRA, CHL
CHN, UK, AUS, SWE, KOR, TWN, THL
RUS
MAL
PER, COL
Source: Morgan Stanley Research; position corresponds to country’s stage in inflation cycle, colour to current inflation level relative to central bank’s inflation target (red ≥ target ceiling, amber within the target range, green < target).
Exhibit 14 Global Inflation: On a Gradual Upward Trajectory
0%
1%
2%
3%
4%
5%
6%
7%
8%
2005 2007 2009 2011 2013 2015 2017
Global Inflation (%)
Global Global ex VEN and ARG
aS F'cast
Note: Venezuela and Argentina have been excluded due to the hyperinflation trends there. Source: Haver Analytics, Morgan Stanley Research forecasts
2) DM inflation trajectory – core versus headline: In the DM economies, core inflation has already troughed earlier this year, in line with our expectations. However, headline inflation in the key DM economies remains depressed due to the continued transmission of lower energy prices into headline CPI. Our expectations are that core inflation will likely continue on a modest upward trajectory, led by the services segment, while headline inflation will also move higher as we approach 2016 as the effects of lower energy prices fade out from the %Y comparisons of the consumer price index. In addition to the wedge between headline and core inflation, our US economics team has also highlighted the growing wedge between CPI and PCE, and analysed how this would evolve and its implications for the Fed (see US Economics & Strategy Insights: Inflation: The CPI-PCE Wedge, June 25, 2015).
3) EM commodity importers versus commodity exporters: For EM as a whole, we think that headline inflation does not do justice in indicating the underlying trends. The group has seen a totally diverse trend in inflation, with commodity exporters’ (EM-X) inflation rising to highs seen in 2008 and commodity importers (EM-M) facing a lowflation trend seen last in 2009. For commodity exporters, the deterioration in the terms of trade and currency depreciation has been the key driver of inflation as domestic demand has been decelerating sharply. Indeed, two of the large commodity-producing EMs – Russia and Brazil – are going through a contraction in domestic demand. As the terms of trade stabilise for these commodity exporters, we expect headline inflation for EM-X to moderate to 6.4%Y in 2016 from 9.0%Y in 2015.
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August 31, 2015 Autumn Global Macro Outlook On the other hand, we expect the EM-M group, which is largely represented by the AXJ region, to face the lowflation trend, with inflation averaging 2.7%Y in both 2015 and 2016. However, Asia’s lowflation challenge is not just a mere reflection of lower commodity prices but also a sharp deceleration in its domestic demand. Indeed, we believe that a weaker trend in commodity prices is partly a reflection of this deceleration in Asian demand. Asia is facing entrenched disinflationary pressures, with PPI in deflation for nine out of ten economies in the region. For most of these nine countries, PPI excluding the commodity components is also in deflation. Indeed, seven of the economies in the region have their GDP deflator closer to zero. The key drivers of this deflationary pressure are over-investment and excess capacities (see Asia Economics: Intensified Deflationary Pressures Require Further Monetary Easing, August 19, 2015).
4) Transmission of disinflationary pressures from EM to DM via trade, currencies and commodities: The final divergent trend lies between services inflation, which is largely domestically oriented and has been relatively stable, and core goods prices, which have been subdued. Our base case for DM reflation reflects our view that inflation in the services segment will offset and outweigh the weaker inflation trajectory in the goods segment.
Services inflation has been supported by a gradual improvement in utilisation of economic resources, normalising wage growth and to some extent rising asset prices. However, core goods inflation has been weighed down by imported disinflation from trade partners, particularly from the AXJ region, where persistent deflation in producer prices has been transmitted, via the trade channel, to weakness in import prices for its trading partners. Given AXJ’s relatively high share of 41% and 32% in global manufacturing output and in global exports, respectively, disinflationary pressure from AXJ is transmitting through the trade chain back to other parts of the world.
In addition, currency effects have amplified these trends in core goods inflation. As a case in point, the steady appreciation of USD (on a trade-weighted basis) has amplified the deflation in core goods prices in the US. While the euro area and Japan have been able to ward off these disinflationary pressures, to a large extent core goods inflation has been supported by the trailing currency depreciation.
In recent weeks, the deflationary pressures in China have intensified, with the producer price index moving to a post credit crisis low of -5.4% for July, after having been in deflation territory for 41 consecutive months. Moreover, the move by the PBOC on August 11 to target a stable trade-weighted exchange rate instead of a stable USDCNY could
Exhibit 15 Inflation: Rising Gradually in DM, Decelerating in EM
-2%
0%
2%
4%
6%
8%
10%
2005 2007 2009 2011 2013 2015 2017
Global Inflation (%)
DM EM EM ex VEN and ARG
aS F'cast
Source: Haver Analytics, Morgan Stanley Research forecasts
Exhibit 16 Diverging Inflation Trends in DM, EM Commodity Importers and Exporters
-2%
0%
2%
4%
6%
8%
10%
12%
2005 2007 2009 2011 2013 2015 2017
Global Inflation (%)
EM Commodity Exporters EM Commodity Importers DM
aS F'cast
Source: Haver Analytics, Morgan Stanley Research forecasts
Exhibit 17 EM Commodity Exporters: Weaker Terms of Trade Weighing on Currencies
85
90
95
100
105
110
115
90
100
110
120
130
140
150
2003 2005 2007 2009 2011 2013
EM Commodity Producers - ToT and NEER (2003 = 100)
ToT NEER (rhs) Source: National Sources, JP Morgan, Haver Analytics, Morgan Stanley Research
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August 31, 2015 Autumn Global Macro Outlook exert upward pressures on the trade-weighted exchange rates of its key trading partners and tighten financial conditions (see box alongside).
Finally, EM economies are large consumers of commodities globally. China by itself accounts for anywhere between 42-55% of global industrial commodities such as aluminium, copper, iron ore and steel. The slowdown in China specifically and EMs more broadly has led to a persistent downward trend in commodity prices, which have therefore translated into disinflationary pressures for the rest of the global economy, save for exporters of commodities. However, as commodity exporters account for 18% of global GDP in our coverage, the effect of lower commodity prices would be disinflationary, on balance.
Exhibit 18 AXJ: Seven Out of Ten Economies Have GDP Deflators Close to or Below 0%
4.64.5
3.50.8
0.10.0
0.0-0.5
-0.6-1.4
-2.5 -0.5 1.5 3.5 5.5
Hong KongIndonesia
TaiwanKorea
SingaporeIndia
PhilippinesChina
ThailandMalaysia GDP Deflator,
1H15*
*Data for Korea and India for 2Q15 are Morgan Stanley Research forecasts. Source: National Sources, CEIC, Morgan Stanley Research forecasts
Exhibit 19 Downward Pressures on US Import Prices Emanating from Asia
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
9.0%
Jul-06 Jul-08 Jul-10 Jul-12 Jul-14
From ChinaFrom Asian NIEsFrom ASEAN
US Import Prices, YoY%
Source: US Bureau of Labour Statistics, CEIC, Morgan Stanley Research
What Are the Global Economic Implications of the RMB Move?
In the months prior to August 11, China’s nominal effective exchange rate (NEER) has appreciated at a relatively fast pace, due to the implicit objective of maintaining a stable USDCNY. However, the appreciating NEER has led to China absorbing deflationary pressures from abroad, adding to its existing challenges of excess capacity. The adoption of a new fixing mechanism allows the exchange rate to move more in line with market forces but also likely reflects a shift in the exchange rate framework to one that will be closely anchored to achieving relative stability in the trade-weighted RMB index. In this regard, the trajectory of the RMB NEER will be largely determined by China’s macro environment and also the strength of the US dollar. While further easing measures will likely lead to a stabilisation in growth over the next 6-12 months, overall aggregate demand is still not expected to be strong enough to warrant an appreciating NEER.
While not our base case, if policy-makers instead aim to depreciate the exchange rate on a trade-weighted basis, and not take up easing measures in a way that stabilises growth in China, the currency move, just by itself, will lead to tightening financial conditions elsewhere in the world (by way of appreciation of other economies’ trade-weighted indices) and could prolong the impact of disinflationary forces. We expect this impact to be felt most materially in the AXJ region and also in the US (given the close trade linkages). For the euro area, the main impact would likely come through increased import competition, although the effect would be cushioned by the fact that the euro has already eased materially over the last year or so, as is the case in Japan. As the benefits to China’s trade will take time to accrue, in the near term EM commodity exporters (lower commodity demand) will have adverse results, although with some relief further down the line. That relief, however, is unlikely to be enough to bring about a quick turnaround in EM growth as China’s domestic demand, while expected to stabilise, is unlikely to be strong enough to benefit other EMs in a manner that will help them to overcome their domestic adjustment problems.
For more details, see Economics and Strategy Insights: Renminbi Moves: Implications for Global Macro and Markets, August 14, 2015.
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August 31, 2015 Autumn Global Macro Outlook Exhibit 20 US: Core Goods Prices in Deflation, Services Inflation Holding Up
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14
Core
Core Goods
Core Services
Source: US Bureau of Labour Statistics, Haver Analytics, Morgan Stanley Research
Exhibit 21 Euro Area: Services Inflation Steady, Goods Inflation Ticking Up from Low Levels
-0.1
0.4
0.9
1.4
1.9
2.4
2.9
3.4
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14
Non-Energy Manufactured goodsServices
YoY, 3MMA
Source: Eurostat, Haver Analytics, Morgan Stanley Research
Risks to the Inflation Outlook Skewed to the Downside In our base case, we expect the trend of gradual acceleration in headline inflation to continue in the quarters ahead, as inflation in DM continues on its modest upward trajectory while inflation, particularly in the tradeables segment, will be held back by persistent disinflationary pressures arising from AXJ. While EM commodity exporters will continue to face relatively high rates of inflation, inflation has likely peaked and should move towards more normalised levels, though still higher than DM and commodity importers. Given that growth risks are skewed towards the downside, we also view the risks to the global inflation outlook as being skewed towards the downside (i.e., towards lower inflation), particularly for the EM commodity importers. In addition, the renewed downward movement in oil prices (and in oil futures as well) in recent weeks, persistence of disinflationary pressures in AXJ and its
potential transmission of these pressures via the manufacturing and trade channel and the movement of currencies in trade-weighted terms will pose additional risks to the inflation outlook, in our view.
Global Monetary Policy Stance to Remain Accommodative
Against a background of the unwinding of leverage cycles in both DM and EM, a more gradual pace of recovery and no signs of major inflationary pressures, we expect the global monetary policy stance to remain accommodative. Given the high debt levels and the gradual recovery in aggregate demand trends in the post global financial crisis period, central banks have had to actively manage the real interest rates so as to ensure that the deleveraging cycle proceeds smoothly. The easing bias from global central banks is represented by our forecasts that close to 60% of the central banks under our coverage are expected to either maintain or cut rates further until the end of 2016.
DM – Slower Pace of Tightening by the Fed and BoE, Continued Implementation of QE by the ECB and BoJ DM central banks stepped up the fight against lowflation risks, with the ECB announcing QE and a number of DM central banks easing aggressively at the beginning of the year. We expect the DM central banks to keep their accommodative monetary policy settings as core inflation, which is still below target at the moment, climbs gradually back to central banks’ target ranges. We expect the US Federal Reserve and the Bank of England – the two central banks who are among the first globally to engage in QE – to hike interest rates, with the Fed expected to implement the first rate hike in December 2015, to be followed by the BoE in February 2016.
Specifically on the Fed, we have maintained our view that the first rate hike will be in December 2015, as the incoming data on inflation, the trailing strength of the dollar and resulting tightening of financial conditions will not be able to provide enough confidence for the Fed to declare that it is now “reasonably confident” that inflation has turned the corner. However, after liftoff, we expect a more gradual pace of rate hikes for both central banks, with policy rates expected to reach 1.375% for the US and 1.0% for UK (versus 1.675% and 1.25% previously) by the end of next year. We expect both the ECB and BoJ to taper their respective QE programmes by autumn 2016. However, the ECB has made it clear that it stands ready to adjust its QE programme should it either detect an unwanted tightening in financial conditions or face some fresh downside risks to price stability, though this is more of a near-term than a long-term risk.
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August 31, 2015 Autumn Global Macro Outlook EM – Still in Selective Easing Mode EM central banks should remain in selective easing mode. While policy-makers in China have stepped up the pace of policy easing in recent months (cutting policy rates by 140bp and the reserve requirement ratio by 200bp), the persistence of disinflationary pressures, particularly at the producer price level, has meant that real interest rates in the industrial sector (about 36% of GDP) remain at elevated levels. The industrial sector accounts for the bulk of the leverage within the corporate sector, which stands at 178% of GDP. We expect one more policy rate cut for the remainder of this year and see the possibility of one additional rate cut (25bp) in 1Q16. We also expect several more required reserve ratio (RRR) cuts in the coming quarters as policy-makers seek to maintain comfortable liquidity conditions. Among the policy tools available, RRR is the most important tool that the PBOC has to manage disinflationary pressures (currently the RRR is at 17.5% and every 1pp reduction in the RRR will release US$209 billion of liquidity into the banking system.
Exhibit 22 Revisions to Our Key Monetary Policy Calls
US More gradual easing in 2016; 100bp of hikes (125bp prev.) EA No change in profile but easing bias UK 50bp of hikes in 2016 (75bp prev.) Australia 25bp of extra cuts in 2016 China One more 25bp cut in 4Q15; Eop 4.35 vs 4.60 prev. Korea One more 25bp cut in 4Q15; Eop 1.25 vs 1.50 prev. Indonesia Hawkish slant in 2016 Russia Hawkish in ’15 (eop 10.5 vs 9.0) and ’16 (eop 8.50 vs 8.0) Turkey More hikes in ’15 (eop 9.5 vs 7.5) and ’16 (eop 11.0 vs 8.0) Brazil Rates on hold in 2015, easing in 2016 but by less
Source: Morgan Stanley Research forecasts; green = easier policy; red = tighter policy
Elsewhere in the AXJ region, where disinflationary pressures remain strong and persistent, we expect the central banks of Korea and India to cut interest rates by 25bp and 50bp, respectively. In Indonesia, as inflation normalises after the effects of the fuel price hike fall out of the YoY rates, it should provide the central bank room to cut rates by 50bp in 2016. Brazil and Russia are the two central banks who will cut interest rates by the largest magnitude in the EM space, on our forecasts, though the ongoing RUB exchange rate volatility and the more lax fiscal policy in Brazil have reduced the room to cut rates in the near term. Over the next five quarters, we expect 250bp and 225bp of rate cuts from Russia and Brazil, respectively. We expect the remaining central banks in the EM space to either keep rates on hold or hike them by 100bp or less over the course of the next five quarters, with the notable exceptions of Turkey (350bp), Nigeria, Peru, Mexico (150bp each), who we see hiking interest rates by a larger magnitude.
Exhibit 23 Monetary Policy Remains Accommodative Monetary Policy Stance and Bias (row and colour, respectively)
Supp
orts
gr
owth
/inf
latio
n
Stance: Contractionary
MildlyContractionary
Neutral
Mildly Expansionary
Expansionary
SAF
CZE
POL
HUN
KOR
COL
ISR
IND
CHN
NGR
UKR
BRA
MAL
US
JPN
AUS
EA
IDN
MEX
CAN
RUS
NZ
GHA
PER
UKROM
Bias: Tightening No BiasEasing
THL
CHL
TUR
SWE
Dam
pens
gr
owth
/inf
latio
n
PHP
NORTWN
Source: Morgan Stanley Research; Note: Colour corresponds to monetary bias, where ‘red’ stands for tightening bias, ‘orange’ for no bias and ‘green’ for easing.
To sum up, despite some differentiation in the direction of policy decisions both across and within regions, global monetary policy should remain very expansionary as central banks continue to provide support for the prevailing trend of weak aggregate demand. Even though the Fed and BoE are moving towards removing monetary accommodation, we still expect the pace of rate hikes to be gradual. The extent of monetary accommodation should continue to lend support to a gradual global recovery and help ensure that economic slack is getting utilised in our base case. However, given that global inflation is still running below trend in both DM and EM, the risks to the inflation outlook, in particular the economies with a starting point of lowflation, are still skewed to the downside. This in turn implies that more monetary easing or an even slower pace of removal of monetary accommodation than is currently expected in the base case could materialise if the downside risks to the inflation outlook were to come to fruition.
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August 31, 2015 Autumn Global Macro Outlook Risks: China Adjustment, Fed Exit, Stalled EM Recovery
As ever, the global economy faces a number of risks that could derail the expansion. In our view, the three key risks which can hold back the modest global recovery we are expecting in our base case are a sharper-than-expected slowdown in China, faster-than-expected tightening by the Fed, spilling over into a wider EM shock, and a stalled recovery in EM.
Exhibit 24 Uncertainty about China’s Macro Outlook and Fed Policy on the Rise
-3
-2
-1
0
1
2
3
4
2005 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
China EPU
Market Uncertainty about Fed Policy- 1Y implied vol on US2Y Note
Source: www.policyuncertainty.com, Bloomberg Morgan Stanley Research
China adjustment: While a ‘known unknown’, China’s growth outlook remains a key risk to the global economic outlook, particularly if policy-makers opt to accelerate the pace of adjustment in addressing the challenge of cutting excess capacities and correspondingly taking up an accelerated pace of provisioning in the banking system. While such a move would lift the medium-term outlook and address the disinflation challenge head-on, it could risk creating a period of a sharper and deeper slowdown in the economy.
Fed exit: The risk is that a data-dependent Fed moves rates in an unexpectedly sharp manner, negatively affecting risk attitudes among investors globally, causing material corrections in asset prices and reversals in capital flows. Moreover, the rise in US rates could potentially trigger a faster pace of adjustment in exposed EM economies, posing risks to the broader economic outlook.
A stalled recovery in EM: EM growth has decelerated in recent years due to a weak productivity dynamic, which has been affected in different ways across EM. While policy-makers are taking up the required reforms in lifting productivity growth, the risks remain, considering the current political uncertainty in various EM economies, and so the pace of reforms could slow or even stall, holding back the recovery in EM.
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August 31, 2015 Autumn Global Macro Outlook
Exploring the Bull and Bear Cases Bear Case: Weaker Global Trade, Rising Risk-Aversion, Negative Policy Shocks Our bear case is a combination of less favourable global and idiosyncratic domestic conditions. We assume global trade growth to be 3pp below the baseline (0.9%Y in 2016 and 1.4%Y in 2017), a further rise in risk-aversion and country-specific shocks in terms of economic policies and in some cases also productivity. In the US, a premature Fed rate hike causes financial conditions to tighten sharply, pushing the economy towards recession. Another capex recovery gets aborted in Europe due to global economic concerns, local political concerns and productivity disappointments. In Japan, our bear case assumes a further material slowdown in reforms, causing GDP to stall. In China, weaker global growth and a faster decline in property markets cause growth to weaken further. In India and Brazil, a slower pace of reforms triggers capital outflows, while in Russia an escalation of the Ukraine crisis causes new sanctions, higher rates and higher risk premia. In sum, our bear cases result in global GDP growth at 2.3%Y in 2016, below the recession threshold of 2.5%Y, and a very timid 2.6%Y in 2017.
Bull Case: Faster Global Trade, Falling Risk-Aversion, Positive Policy Developments In our bull case scenario, global trade grows 3pp faster than in our baseline assumption (6.9%Y in 2016, 7.4%Y in 2017). In the US, falling savings and rising house prices boost domestic demand, allowing the Fed to raise rates at a faster clip. In Europe, supply-side reforms boost capex, productivity and growth such that the ECB raises rates in early 2017. New reform momentum boosts growth in Japan to the 2% goal of Abenomics. In China, policy stimulus ramps up property sales and domestic demand. In India, a faster pace of reforms boosts growth and a successful fiscal adjustment paves the way for looser monetary policy in Brazil. A resolution of the Russian security crisis causes rates and risk premia to fall while a weaker RUB boosts net exports. Globally our bull case GDP growth comes to a solid 4.3%Y in 2016 and 4.5%Y in 2017.
Bull-bear skew points to downside risks to base case: The skew of our global growth forecasts is to the downside, especially for 2017. While there is some differentiation across countries, the downside risks seem to have a bigger downward skew in DM than in EM. While the downward skew also applies for both 2016 and 2017 in DM, in EM the risks are seen as broadly balanced in 2016. Globally, the inflation risks are perceived to be contained. This masks a wider range in DM, where the risks to the inflation outlook
around the base case are tilting to the downside, and lower inflation in the EM bull case than in the EM bear case, as the negative terms of trade shock endured by many commodity countries dissipates.
Exhibit 25 Growth Risks: Renewed DM Recession Risks Real GDP (%Y) 2016E 2017E Bear Base Bull Bear Base Bull Global 2.3 3.4 4.3 2.6 3.7 4.5 G10 0.6 1.9 2.6 0.6 1.7 2.6 US 0.6 1.9 2.5 0.5 1.8 2.7 Euro Area 0.7 1.9 2.8 0.6 1.8 2.6 Japan 0.2 1.6 2.1 0.1 0.8 1.2 UK 1.1 1.9 2.6 1.4 2.1 2.8 EM 3.6 4.6 5.5 4.0 5.1 5.9 China 6.2 6.8 7.1 6.0 6.7 7.1 India 6.5 7.9 9.0 6.5 8.0 9.0 Brazil -1.8 -1.2 0.5 0.8 1.4 1.9 Russia -3.0 -1.3 1.5 0.5 1.6 3.0
Source: Morgan Stanley Research forecasts
Exhibit 26 Risks to Growth Are Skewed to the Downside
0
2
4
6
8
10
12
14
16
18
20
0.33 0.4 0.5 0.67 1 1.5 2 2.5 3 More
Freq
uenc
y
Bull/Bear spread ratio
2016 GDP bull/bear spread ratio
Source: Morgan Stanley Research forecasts
Exhibit 27 Inflation Risk: Stagflation in EM, Lowflation in US/EA
CPI (%Y) 2016E 2017E Bear Base Bull Bear Base Bull Global 3.6 3.5 3.5 4.2 4.0 3.8 G10 1.1 1.5 1.9 1.4 2.1 2.5 US 1.4 1.5 2.0 2.0 2.2 2.7 Euro Area 0.9 1.3 1.6 0.8 1.7 2.2 Japan 0.1 1.3 1.9 0.8 2.6 2.9 UK 1.2 1.4 1.9 1.2 1.6 2.1 EM 5.5 5.1 4.7 6.2 5.3 4.7 China 0.7 1.5 2.5 0.5 1.5 2.7 India 6.0 4.9 4.0 6.0 4.5 4.0 Brazil 7.0 6.3 5.3 5.5 5.0 4.5 Russia 10.5 8.6 6.8 8.5 7.2 5.5
Source: Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook
Key Forecast Profile Global Economics Team
Quarterly Annual 2015 2016 2017 2015E 2016E 2017E
Real GDP (%Q, SAAR) 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE
Global* 2.8 2.9 3.4 3.4 3.1 3.4 3.7 3.8 3.6 3.2 3.7 3.9 3.1 3.4 3.7 G10 1.4 2.0 1.7 1.9 2.0 1.8 1.9 2.0 2.0 1.2 1.6 1.7 1.8 1.9 1.7 US 0.6 3.7 2.0 1.7 1.9 1.8 1.8 1.9 1.8 1.8 1.8 1.7 2.4 1.9 1.8 Euro Area 1.5 1.2 1.6 2.0 2.0 2.0 2.0 2.0 1.8 1.6 1.6 1.6 1.3 1.9 1.8 Japan 4.5 -1.6 0.6 1.9 2.2 1.8 1.8 2.0 2.9 -3.7 0.1 1.2 0.5 1.6 0.8 UK 1.5 2.8 3.0 2.5 1.8 1.0 1.0 1.8 2.4 2.8 2.4 1.8 2.7 1.9 2.1 EM (%Y) 4.4 4.1 3.9 4.0 4.2 4.6 4.7 4.8 5.0 5.0 5.0 5.1 4.1 4.6 5.1 China 7.0 7.0 6.9 7.1 7.0 6.9 6.8 6.7 6.8 6.7 6.6 6.7 7.0 6.8 6.7 India 7.5 7.3 7.4 7.6 7.9 7.9 7.9 8.1 8.3 7.9 7.9 8.1 7.4 7.9 8.0 Brazil -1.6 -1.8 -2.7 -3.3 -3.5 -1.6 -0.4 0.5 1.2 1.6 1.6 1.4 -2.4 -1.2 1.4 Russia -2.2 -4.6 -5.2 -4.6 -3.7 -1.2 -0.4 -0.1 0.7 1.4 1.9 2.3 -4.2 -1.3 1.6
Consumer price inflation (%Y)
Global 3.0 3.1 3.1 3.3 3.4 3.4 3.6 3.8 3.9 3.9 3.7 3.7 3.1 3.5 4.0 G10 0.2 0.1 0.2 0.5 1.2 1.2 1.5 1.8 2.0 2.1 2.1 2.2 0.3 1.5 2.1 US -0.1 0.0 0.2 0.3 1.3 1.3 1.4 1.9 2.2 2.2 2.2 2.4 0.1 1.5 2.2 Euro Area -0.3 0.2 0.1 0.5 1.1 1.0 1.4 1.7 1.7 1.7 1.6 1.7 0.1 1.3 1.7 Japan 2.1 0.1 -0.2 0.2 0.9 1.1 1.5 1.6 1.7 2.9 2.9 2.8 0.6 1.3 2.6 UK 0.1 0.0 0.1 0.3 1.1 1.3 1.5 1.8 1.7 1.6 1.5 1.5 0.1 1.4 1.6 EM 5.1 5.3 5.2 5.4 5.1 5.0 5.2 5.2 5.3 5.3 5.0 4.8 5.3 5.1 5.3 China 1.2 1.4 1.5 2.0 1.9 1.7 1.4 1.1 1.2 1.4 1.6 1.8 1.5 1.5 1.5 India 5.3 5.1 3.9 4.9 4.8 5.0 5.0 4.7 4.9 4.4 4.5 4.2 4.8 4.9 4.5 Brazil 7.7 8.5 9.5 9.3 7.8 6.3 5.4 5.5 5.4 5.2 4.8 4.6 8.7 6.3 5.0 Russia 16.2 15.8 15.5 14.5 8.6 8.4 9.0 8.5 8.0 7.5 7.0 6.4 15.5 8.6 7.2
Monetary policy rate (% p.a.)
Global 3.51 3.31 3.25 3.22 3.28 3.30 3.31 3.34 3.38 3.39 3.45 3.54 3.22 3.34 3.54 G10 0.21 0.21 0.19 0.28 0.41 0.51 0.63 0.74 0.87 0.98 1.16 1.36 0.28 0.74 1.36 US 0.125 0.125 0.125 0.375 0.625 0.875 1.125 1.375 1.625 1.875 2.125 2.375 0.375 1.375 2.375 Euro Area 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.25 0.50 0.05 0.05 0.50 Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 UK 0.50 0.50 0.50 0.50 0.75 0.75 1.00 1.00 1.25 1.25 1.50 1.50 0.50 1.00 1.50 EM 6.28 5.92 5.81 5.69 5.70 5.64 5.56 5.52 5.50 5.41 5.37 5.38 5.69 5.52 5.38 China 5.35 4.85 4.60 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 India 7.50 7.25 7.00 6.75 6.75 6.75 6.75 6.75 7.00 7.00 7.00 7.00 6.75 6.75 7.00 Brazil 12.75 13.75 14.25 14.25 14.25 13.50 12.50 12.00 11.50 10.50 10.50 11.00 14.25 12.00 11.00 Russia 14.00 11.50 11.00 10.50 10.00 9.50 9.00 8.50 7.75 7.25 6.50 6.00 10.50 8.50 6.00 Note: Global and regional aggregates for GDP growth are GDP-weighted averages, using PPPs; Japan CPI includes VAT; Japan policy rate is the interest rate on excess reserves; CPI numbers are period averages. *G10+BRICs+Korea. Source: IMF, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
US: Sobering Up on Supply Side Ellen Zentner (1 212) 296 4822 US Economics Team
We have revised lower our estimate for 2015 growth to 2.4%Y (2.0% 4Q/4Q) compared with 2.5%Y (2.3% 4Q/4Q) in our April outlook owing primarily to a mark-to-market for transitory headwinds early in the year. We have also sharply lowered our growth forecast for 2016 by 0.8pp to 1.9%Y (1.8% 4Q/4Q) to account for weaker global trade and what we believe to be undeniable evidence of a lower sustainable trend growth rate for the economy.
We maintain our expectation that the Fed first raises rates at the December 2015 meeting, but we have lowered our assumption for the Fed’s end-2016 target range by 25bp to 1.375% compared with 1.625% in our April baseline. We have also removed an additional 25bp in balance sheet equivalent tightening by moving out our assumption of the timing the Fed begins tapering reinvestments in MBS to 4Q16. With this forecast update, we initiate our take on growth in 2017 at 1.8%Y (1.8% 4Q/4Q).
Throughout the forecast horizon, growth persists above the economy’s potential, which we currently peg at around 1.5%Y. Lower potential growth is associated with a lower neutral real rate, which we expect to rise gradually over the coming years as persistent headwinds fade. The Fed will aim to move in line with the estimated drift higher over time. This gradual path of tightening puts the Fed’s target range at 2.375% by end-2017.
We expect the rate of productivity growth to improve to around 1%Y in 2016 after remaining flat in the prior two years on a lack of capital deepening. A steady participation rate in 2016 would suggest that average monthly payroll gains slow to about 175k compared with 200k in 2015. But as the downtrend in participation resumes, we expect average job gains to slow materially to 50k per month by late 2017 – just enough to hold the unemployment rate about steady.
Productivity gains coupled with sluggish global growth lead to improved but moderate overall investment, while the drag from energy investment diminishes. Commercial building and R&D activity are the bright spots for growth in investment.
After being on a tear since late summer 2014, we expect the trade-weighted USD to rise moderately in 2016, before flattening out as global growth picks up steam. Growth in core PCE remains at a low of 1.3%Y through 3Q before bumping up to 1.4%Y in 4Q15 and rises only gradually to reach 1.9%Y by end-2017.
Key message: Domestic momentum will be enough to lead the Fed to deliver a December rate hike as downside risks to inflation ease. Thereafter, cyclically depressed productivity and lower potential GDP take centre stage.
Household formation rates have finally moved back above the 1 million mark, credit conditions are slowly improving and residential investment is a bright spot in our outlook. Growth in home prices continues to whittle away at negative equity, while years of strong job gains coupled with lower energy expenses and prudent control over balance sheets keep consumer liquidity elevated. The personal savings rate moves down a bit below 5% over our forecast horizon, supporting a moderate pace of spending.
Risks to the outlook: In our bull case, households pick-up the pace of spending more than expected. Seeing the sustained pick-up in demand and expecting more, business investment accelerates and cyclically depressed productivity rebounds closer to historical norms. An optimal control policy informs the Fed to embark on a path of tightening that is cautious at first, then plays catch-up with the Fed’s target, reaching 3.625% by end-2017.
Our bear case sees a mild US recession within the next 12 months. On a leap of faith, the Fed hikes rates in September, but after only one hike, it is apparent the Fed has moved too soon. GDP growth slows, but a cautiously optimistic Fed points to external drag as the culprit and remains focused on domestic momentum. Signs of a more material weakening appear, the Fed backs out the only rate hike it had executed, but a short-lived recession in 2H16 is already locked in.
Forecast Summary (4Q/4Q % change) 2014 2015E 2016E 2017E Real GDP 2.5 2.0 1.8 1.8 Final sales 2.6 2.1 2.0 1.8 Final domestic demand 3.0 2.6 2.2 1.9 PCE 3.2 2.5 2.0 2.0 Business fixed investment 5.5 3.1 3.1 2.6 Residential fixed investment 5.1 11.3 8.9 3.5 Exports 2.4 1.1 2.2 3.8 Imports 5.4 4.6 3.9 4.1 Government 0.4 1.1 1.1 0.6 CPI 1.2 0.3 1.9 2.4 Core PCEPI 1.4 1.4 1.6 1.9 Unemployment* 5.7 5.1 4.8 4.8
Source: Bureau of Economic Analysis, Morgan Stanley Research forecasts; *4Q average
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Euro Area: Waiting for Capex to Kick in Elga Bartsch (44 20) 7425 5434
Above-trend GDP growth tempered by stronger EUR… As expected, euro area GDP growth has expanded at an above-trend rate in 1H15. A number of factors cause us to slightly lower our growth forecasts for the remainder of this year though. On the back of a much stronger-than-expected EUR, a weaker global trade outlook and softer incoming activity data, we marginally lower our 2016 real GDP forecast from 2.2%Y to 1.9%Y. Our 2015 GDP growth forecast stays almost unchanged at 1.3%Y and our first pass at 2017 comes in at 1.8%Y. Despite the downgrade, our 2016 forecast still stays above the consensus, albeit less so than before.
…which could once again derail the capex recovery: While we continue to see the consumer as the backbone of growth in the euro area, we are starting to become concerned about potential shortfalls in net export demand and, more importantly, in investment spending. Already last year, we saw the capex recovery being aborted as companies shelved their investment plans in reaction to the escalating conflict with Russia. This year, uncertainty about the Fed tightening cycle, its repercussions on emerging markets and the outlook for the Chinese economy could cause companies to once again adopt a wait-and-see strategy regarding capex. If the capex recovery was derailed once again, the weakness in investment spending would also cast doubts on Europe’s growth potential, which currently is probably only around 1%Y.
Peripheral reformers continue to pull ahead: We continue to see strong growth for peripheral reformers, Spain and Ireland, where we are reiterating our strong near-term forecasts. Since the spring of this year, we are also more constructive on the Italian economy, which should benefit from favourable cyclical tailwinds and structural reforms. After catching up with France in terms of growth on our forecasts in 2016, Italy should be catching up with Spain in 2017 as the latter is starting to slow materially. We remain concerned about France and its hesitant pace of reforms in the face of material structural problems. Germany suffers more from the slowdown in Asia and EM generally thanks to its stronger export orientation. In addition, more and more bottlenecks are likely to be emerging in Europe’s largest economy in the latter part of the forecast horizon. In Greece, we forecast a deep recession and remain concerned about the Grexit risk even after another bailout has been agreed.
Inflation pulled lower, but still moving back to target: Lower oil prices and a stronger EUR are pulling headline inflation below our forecast profile in the near term. That said, core inflation is being pushed higher by rising core goods
Key message: The recovery should maintain its above- trend pace, but capex could potentially be cause for concern. Inflation will climb back to the ECB’s norm, allowing the ECB to end QE as planned in late 2016.
prices (which are likely reflecting at least in part the past EUR weakening) and increasing core services prices (which are likely benefitting from falling unemployment and normalising wage inflation). Despite the current headwinds for headline inflation, it seems to us that HICP inflation has troughed and that gradual reflation lies ahead. Looking ahead, a rise in oil prices implied by the futures and the ongoing recovery should push headline inflation back towards the ECB’s inflation objective of below but close to 2%Y by late 2016. Note that a large part of the inflation turnaround will stem from a swing in energy prices. In total, we are tweaking our inflation forecasts to 0.1%Y for this year and 1.3%Y (from 1.6%Y before) for next year. In 2017, we project inflation to average 1.7%Y.
ECB to complete QE in late 2016, ready to add near term: A continued expansion at a pace that is clearly above potential and an upward trajectory for inflation – albeit a gradual ascent – towards the ECB’s inflation norm of below but close to 2%Y should challenge the market’s perception that the ECB will be forced to engage in QE for much longer than it currently envisages. The ECB has made clear though that it stands ready to adjust its QE programme should it either detect an unwanted tightening in financial conditions or face some fresh downside risks to price stability. In our view, this is more of a near-term than a long-term risk. On balance, we still deem the QE programme sufficiently effective to end in 2H16. As we believe it unlikely that the ECB would end its asset purchase programme abruptly, the ECB still has the flexibility to start tapering earlier, i.e., in summer 2016, or to leave tapering until later, i.e., start only in autumn 2016.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 0.9 1.3 1.9 1.8
Private consumption 1.0 1.7 1.6 1.6 Government consumption 0.6 1.0 0.7 0.8 Gross fixed investment 1.2 2.0 3.7 3.7
Contribution to GDP (pp) Final domestic demand 0.9 1.6 1.8 1.8 Net exports 0.0 -0.2 0.3 0.3 Inventories -0.1 -0.1 -0.2 -0.3
Unemp. rate (% labour force) 11.6 11.0 10.5 10.0 Current account (% GDP) 2.2 2.8 2.4 2.3 HICP (%Y) 0.4 0.1 1.3 1.7 Policy rate (eop, %) 0.05 0.05 0.05 0.50 Genl. govt. balance (% GDP) -2.6 -2.0 -1.7 -1.5 Genl. govt. debt (% GDP) 91.7 91.5 89.9 88.2
Source: Eurostat, ECB, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Japan: Sailing Against Four Headwinds Robert A. Feldman (81 3) 6836 8400 Takeshi Yamaguchi (81 3) 6836 5404 Shoki Omori (81 3) 6836 5466
The Japanese economic recovery is sailing against four headwinds: i) Global market weakness; ii) Trading partner economic jitters; iii) The increased reform pace needed to achieve Abenomics’ goals; and iv) A political calendar that complicates reform. We think that Japan will overcome these winds. However, the resulting recovery will likely be moderate and uneven.
The four headwinds: Global market weakness is primarily a threat to consumer and business sentiment. Although low oil prices benefit Japan, market contagion jitters are likely to postpone domestic demand. Should global market weakness reverse, sentiment should improve.
Trading partner economic jitters are more serious: True, the recent depreciation of CNY has only a minor impact on price competitiveness of Japan. However, China/Hong Kong take 23% of Japan’s exports. Other Asian countries, which suffer from the China slowdown, take 31%. The US takes another 20%. The impact of a slowdown in these foreign markets could slow Japanese growth.
Domestic demand faces challenges from the sheer breadth of needed reforms: Capex growth must rise to near double-digits in order to accelerate productivity; easing demographic pressure requires basic changes in labour law; spiralling pension and medical needs require painful cuts in spending, tax hikes, or both – while other measures must prevent demand contraction. A bright spot is exit from deflation; two of the three core inflation measures are progressing steadily, hopefully spurring demand.
Bull/Base/Bear Scenarios %Y
2015E 2016E 2017E
Real GDP growth
Bear -0.3 0.2 0.1
Base
0.5 1.6 0.8
Bull 1.0 2.1 1.2
CPI
Bear 0.2 0.1 0.8
Base
0.6 1.3 2.6
Bull 1.0 1.9 2.9
Policy rate (eop, %)
Bear 0.1 0.1 0.1
Base
0.1 0.1 0.1
Bull 0.1 0.1 0.1
Source: Morgan Stanley Research forecasts
Key message: Trust but verify. Despite the negative new news, the positive old news remains valid. There are still many reasons to trust, but there are more points to verify.
Finally, politics may hinder needed action: The Upper House election next year is tilting policy away from reform this year. The heavy focus on national security legislation has created tensions within the ruling coalition that may hinder economic reforms. And the drop in PM Abe’s Cabinet Support Rate may reduce the political capital he can use for economic reforms.
Economic outlook: In light of these four headwinds, the outlook for Japanese economic recovery is more subdued, with more downside risk, even after policy reaction is taken into account. For 2015, we reduce our real GDP growth forecast from 1.0%Y to 0.5%Y, with a modest cut for 2016 as well – despite the increased likelihood of a supplementary budget this autumn of about JPY 3-4 trillion. On prices, we retain our view of exit from deflation as tight labour markets push wages up, and prices then follow; we still see the BoJ reducing its over-monetisation of fiscal deficits in autumn 2016. However, the risks to this forecast are skewed to the downside, because the potential negative shocks are strongly correlated, while the positive ones may be less so.
Trust but verify: Despite the negative new news, the positive old news remains valid. Corporate earnings are better, labour markets are tighter and significant reforms are ongoing in corporate governance, agriculture, education and taxes. There remain many reasons to trust, but there are more points to verify.
Forecast Summary (Calendar Years) 2014 2015E 2016E 2017E Real GDP (%Y) -0.1 0.5 1.6 0.8
Private consumption -1.3 -0.9 1.4 0.7 Private capital expenditure 3.9 2.3 5.0 4.0 Public investment 3.8 0.7 -0.8 -2.1 Net exports (cont.) 0.3 0.3 0.2 0.1
Nominal GDP (%Y) 1.6 2.9 2.7 2.5 CPI (Ex. fresh food) 2.6 0.6 1.3 2.6 CPI (Ex. fresh food, Ex. VAT) 2.6 0.1 1.3 1.6 CPI (Ex. food, energy & VAT) 0.6 0.5 1.3 1.6 Current account (% GDP) 0.5 3.3 3.4 3.2 Unemployment rate (%, e.o.p) 3.5 3.0 2.9 3.0 Policy rate (eop, %) 0.1 0.1 0.1 0.1 For reference:
Fiscal year real GDP (%Y) -0.9 0.9 1.9 0.2 Source: Cabinet Office, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
UK: Just 50bp a Year Jacob Nell (44 20) 7425 8724 Melanie Baker (44 20) 7425 8607 Jonathan Ashworth (44 20) 7425 1820
Tighter policy and Brexit uncertainty slow 2016 growth: With the economy close to full employment, rising real wages and growth running above trend, the UK recovery looks secure. Consensus forecasts growth continuing at current levels. By contrast, we expect a marked 2016 slowdown in both consumption and investment, as fiscal policy tightens and as rates start to rise, leading to weaker house prices. We think the slowdown will be amplified by the impact of the UK’s in/out referendum on EU membership. Although the timing remains uncertain, we have assumed that it will be held in 3Q16. We think that the result remains uncertain, and expect the significant risk of a Brexit to have a negative effect on business investment in particular.
Exiting lowflation, but struggling to return to target: With weaker energy prices and the stronger pound, we see inflation hovering around zero until late 2015, before rising sharply to above 1%Y in 1Q16 as the fall in oil prices drops out of the annual comparison. However, with growth running below trend, we see inflation struggling to return to the 2%Y target, with inflationary pressure muted by external disinflation, and weak domestic reflation.
February 2016 liftoff: We expect the timing of the first hike to be driven by the evolution of pay and inflation data, and the resulting balance of MPC opinion. In short, it will be ‘data-dependent’. We expect more external members, including Weale and Forbes, to join the vote for a hike through the autumn. However, we think the core group of bank officials, including Governor Carney, will wait for more sustained evidence of reflation. Assuming headline inflation pushing above 1%Y in early 2016, we expect a February 2016 liftoff.
Fiscal Tightening Set to Slow Growth, We Think
-1.6
-1.2
-0.8
-0.4
0.0
0.42014-15 2015-16 2016-17 2017-18 2018-19 2019-20
OBR forecast: July 2015
Change from year to year in cyclically adjusted primary deficit as % of GDP
Source: OBR, Morgan Stanley Research
Key message: We expect growth to slow below trend, and inflation to rise but struggle to return to target, allowing the MPC to support a gentle pace of rate normalisation, running at just 50bp per annum.
Just 50bp a year: Thereafter, we expect a gradual pace of tightening – running at just two 25bp hikes or 50bp per annum. This is just one-third of the pace of rate hikes in policy tightening cycles before the financial crisis (140bp per annum). It is also 25bp less in 2016 than in our previous forecast. This reflects our expectation of weaker inflation, which in turn partly reflects greater near-term externally generated disinflation from a strong trade-weighted GBP and weaker oil. More importantly, it reflects our expectation of more muted domestic reflation. We do expect labour costs to rise as the labour market tightens and the minimum wage increases. But we think greater labour market supply and recovering productivity will restrain the pace of wage growth, and the consequent feedthrough to domestic inflation (for more details, see UK Economics and Strategy: Labour Market: Deep Dive (1): “Limited and Gradual”, June 24, 2015).
Bear and bull: In our base and bull cases, the UK votes to stay in the EU. In our bear case, as well as weaker global trade growth, the UK votes to exit the EU, which acts as a major and protracted drag on investment, as a result of high uncertainty. With weaker growth and inflation, the MPC struggles to hike rates at all, raising once in early 2016 and once in late 2017. In our bull case, with stronger global trade growth, the economy continues to expand at the current rate, driving pay and inflation higher. At the same time, a more robust recovery in productivity restrains the pick-up in inflation, and allows a still gentle, if somewhat faster, pace of rate normalisation of 75bp per annum.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 3.0 2.7 1.9 2.1
Private consumption 2.5 3.0 1.9 2.0 Government consumption 1.6 1.7 0.1 0.0 Gross fixed investment 8.6 5.0 2.6 3.0
Contribution to GDP (pp) Final domestic demand 3.3 3.2 1.7 1.8 Net exports -0.6 -0.1 0.0 0.5 Inventories 0.3 -0.5 0.2 -0.2
Unemp. rate (% labour force) 6.2 5.6 5.4 5.3 Current account (% GDP) -5.9 -4.6 -3.5 -3.7 CPI (%Y) 1.5 0.1 1.4 1.6 Policy rate (eop, %) 0.5 0.5 1.0 1.5 Genl. govt. balance (% GDP) -5.1 -4.2 -2.7 -2.2 Genl. govt. debt (% GDP) 88.4 87.6 87.7 86.9
Source: ONS, BoE, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Canada: Waiting to Export Robert Rosener (1 212) 296 5614
We have marked down our forecasts for growth in 2015 and 2016 as the Canadian economy continues to make slow progress in adjusting to lower oil prices and the terms of trade shock. A longer and slower adjustment process keeps the Bank of Canada in easing mode, and we expect that persistent below-potential growth will lead the BoC to cut rates for a third time this year to 0.25%.
The economic outlook for Canada depends on stronger export growth and momentum in the non-energy sector: Our 1.0%Y GDP forecast in 2015 reflects a full percentage point markdown since April. The Canadian economy likely contracted in 1H15, and we expect only a modest rebound, with growth averaging 1.5%Y in 2H15. This more tepid outlook is largely due to the slowdown in the energy sector. Cutbacks in energy sector investment contributed to a 15.5%Y decline in business investment in 1Q15, and the headwind from the energy sector is likely to persist. Western Canada Select oil prices are now down more than 50% from the assumption embedded in the Bank of Canada’s latest forecast for a 40%Y decline in energy sector investment this year.
Activity in the non-energy sector has not been significant enough to offset this weakness. Non-energy exports have been lacklustre, and foreign demand has been the most important factor cited by firms in recent surveys as restraining their investment. But a gradual acceleration in export growth beginning in 2H15 and into 2016 should help to boost Canadian investment spending. Business investment will likely be a 0.7pp drag on growth in 2015, but we look for that drag to flatten out in 2016, and to turn positive in 2017.
Household spending has remained solid thus far, but weaker growth exacerbates the risks emanating from imbalances in the heavily indebted Canadian household sector. Still, we expect lower interest rates to keep household spending on trend through the forecast horizon, while plans for new housing construction point to residential investment tapering off in 2016 after growing by 2.3%Y in 2015.
A slower recovery means that growth is likely to remain below potential until 2H17, and persistent slack increases the downside risks to Canada’s inflation outlook: Core inflation has been elevated recently, and we expect that it will remain above 2%Y throughout the forecast horizon, largely driven by upward pressures from exchange rate depreciation. While transitory factors boost measured inflation, the BoC has emphasised the disinflationary pressures from persistent economic slack, and it currently judges “that the underlying trend in inflation is about 1.5 to 1.7 per cent”.
Key message: A slower recovery means that growth is likely to remain below potential until late 2017. We expect that persistent slack will lead the Bank of Canada to cut rates for a third time this year to 0.25%.
Against this backdrop, we expect the BoC to cut rates for a third time this year to 0.25%: The BoC has been straightforward with its reaction function – if growth underperforms relative to its forecasts, and the projected path for getting the Canadian economy back to full capacity is pushed out, policy should ease. We expect the Canadian economy to return to operating at full capacity only in late 2017. Policy tightening is likely off the table until that time.
Risks to the outlook: In our bull case, stronger external demand adds momentum to growth and Canadian manufacturing exports finally gain traction, boosted by a lower CAD. Business investment and hiring ramps up to meet this increased demand. Inflationary pressures begin to emerge in late 2016 as economic activity heats up and pass-through from exchange rate depreciation puts even more upward pressure on prices and risks destabilising inflation expectations. The Bank of Canada begins a gradual tightening cycle in 4Q16.
In our bear case, weaker global growth means slower export growth for Canada, which weighs heavily on business investment. The energy sector weakens further, and persistently slow growth puts strains on the household sector. As the labour market weakens, rising unemployment adds to concerns about high household debt levels and financial stability. After cutting to its effective lower bound on interest rates, the Bank of Canada looks at alternative monetary policy strategies, including forward guidance and asset purchases.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 2.5 1.0 1.5 1.9
Private consumption 2.7 1.8 2.0 2.5 Government consumption 0.2 0.5 1.9 1.8 Gross fixed investment 0.2 -2.3 -1.6 2.1
Contribution to GDP (pp) Final domestic demand 1.6 0.7 1.5 2.7 Net exports 1.1 0.4 0.4 -0.2 Inventories -0.3 -0.1 -0.5 -0.5
Unemp. rate (% labor force) 6.9 7.1 7.0 6.8 Current account (% GDP) -2.1 -3.8 -3.7 -3.6 CPI (%Y) 1.9 1.4 2.1 2.4 Policy rate (eop, %) 1.00 0.25 0.25 0.50 Genl. govt. balance (% GDP) -0.2 0.1 0.5 0.7 Genl. govt. debt (% GDP) 66.5 72.7 72.3 70.7
Source: Statistics Canada, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Australia: Housing Card Played, Challenges RemainDaniel Blake (61 2) 9770 1579 Chris Nicol (61 3) 9256 8909 Morgan Stanley Australia Limited
Cutting the 2016 outlook: Australia’s growth dynamic looks familiar on the surface, but with housing now being reined in, we disagree with the consensus that ‘next year will be better’. The resources capex unwind remains at full force until mid-2016, while the housing boom has been largely responsible for filling the gap (especially after our hopes of a public infrastructure boom were dashed). Policy-makers are now putting the brakes on the housing market through macro-prudential measures, and we expect they will prove successful in slowing price growth and construction activity, with some impact on related-consumption into 2016. Adding the regional spillover of China’s hard landing, we cut our GDP forecasts by 0.1pp to 2.0%Y in 2015 and 0.5pp to 1.9%Y in 2016, taking us back to the bottom of consensus. As part of a more hawkish overall policy shift, we think the RBA will try to look through weak growth in 2Q-3Q15, but ultimately we think signs of a housing slowdown and weak trading-partner growth will see our forecast cut in 4Q15 delivered, alongside another in 2Q16.
Macro-prudential steps up: After upgrading our housing forecasts in the past two Global Macro Outlooks, we now see policy-makers getting serious about a tighter macro-prudential framework, after RBA Governor Stevens noted that “some of what’s happening [in Sydney] is crazy”, and Treasury Secretary Fraser stated that “it’s unequivocally the case” that Sydney is in a housing price bubble. Alongside the 10% speed limit for investment-property lending, mortgage capital requirements have been lifted (with a subsequent repricing of some loans), while APRA is further tightening underwriting standards behind the scenes. This credit squeeze should see house price growth slow to around flat in 2016-17 (with Sydney the most resilient). Approvals should also drop from the current 225k run rate (10% above previous peaks) to around 175k by 4Q16.
Macro-Prudential to Hit Australia’s Growth Engine
-15
-10
-5
0
5
10
15
20
100
120
140
160
180
200
220
240
1985 1989 1993 1997 2001 2005 2009 2013 2017Macro-pru tightening RBA easing+trough cycleBuilding approvals (lhs) Real house prices (rhs)
% yoy'000s, trend
Source: ABS, RBA, Morgan Stanley Research
Key message: Australia has seen a housing boom absorb much of the impact of the resources capex unwind, but now macro-prudential policies are being tightened materially. As a result, we cut our 2016 GDP forecast to 1.9%Y and bottom of consensus. While the RBA resists further easing near term, we assume fiscal policy does not step up, and see 50bp of cuts coming in 4Q15 (conditioned on Sydney housing) and 2Q16.
Patchy elsewhere: This shock to the housing market brings the final aspect of our ‘Lost in Transition’ thesis into play, along with shocks from commodity prices, fiscal disappointment and weak household income. While the lower AUD is supporting tourism and education exports (around +0.5pp of GDP to 1Q15), the macro outlook remains fragile, with further job losses in the manufacturing industry still to come through 2016.
Employment mystery: Labour market resilience has been surprising – wage flexibility has been a factor, as has a sharp fall in net migration (creating the risk of a housing oversupply by 2H16). Weak productivity has also contributed, perhaps reflecting the jobs growth in lower-skilled industries, such as household services. However, our weaker growth outlook still sees peak unemployment up at 6.7%, albeit not until 4Q16.
RBA puts policy ball in fiscal court: The RBA has recently flagged diminishing marginal returns of further easing, and in a speech on June 10, Governor Stevens echoed our call for fiscal policy to build (see The Missing Fiscal Link, April 30, 2015). However, on this front we still see little sign of the public infrastructure agenda outside of a laudable pipeline in NSW. As such, we retain our 4Q15 cut, and add another in 2Q16.
Bottom of consensus, but risks still balanced: We see an even balance of risks from our below-consensus forecast. Our bull case hinges on a public infrastructure stimulus, with the election due in late 2016 a potential catalyst. The bear case sees the housing slowdown drag the economy into recession.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 2.7 2.0 1.9 2.4
Private consumption 2.5 2.7 1.2 1.8 Government consumption 2.0 1.7 2.3 2.7 Gross fixed investment -2.2 -3.6 -1.6 0.8
Contribution to GDP (pp) Final domestic demand 1.1 0.8 0.7 1.7 Net exports 1.6 1.0 1.2 0.7 Inventories 0.0 0.1 0.0 0.0
Unemp. rate (% labour force) 6.1 6.3 6.6 6.4 Current account (% GDP) -2.8 -4.1 -3.5 -3.0 Headline CPI (%Y) 2.5 1.5 2.4 2.5 Policy rate (eop, %) 2.50 1.75 1.50 1.50 Genl. govt. balance (% GDP) -2.1 -2.6 -2.4 -1.9 Genl. govt. debt (% GDP) 31.0 34.1 36.4 37.3
Source: ABS, RBA, Commonwealth Treasury, Morgan Stanley Research forecasts
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Country Focus
August 31, 2015 Autumn Global Macro Outlook
China: Disinflationary Trend to Persist amid a Gradual Rebalancing Chetan Ahya (852) 2239 7812 Junwei Sun (852) 2239 7820 Yin Zhang (852) 2239 7818
We believe that managing disinflationary pressures remains the key challenge for China: PPI has now been in deflation for 41 months in a row and recorded a new post-GFC low of -5.4%Y in July. In our view, overestimating of potential growth since the mid-2000s and excess investment are at the heart of this deflationary trend. Meanwhile, weak exports exacerbate the excess capacity and disinflation problem. The entrenched disinflationary trend means funding costs in real terms remain elevated, putting downward pressure on growth. We expect that policy-makers have the tools to take up a slower pace of adjustment, maintaining control over credit aggregates. However, a slower pace of adjustment will entail embracing persistence in the disinflationary trend, making it difficult to manage the debt dynamic, and hence delay the transition towards a productive growth cycle.
Underlying growth remains sluggish, with July activity growth data showing broad-based weakness and our proprietary MS-CHEX indicator falling to a four-month low at -0.3%Y in July. We have noted that policy-makers have already been stepping up monetary and fiscal easing, which is aimed at addressing the weak trends in aggregate demand. In our base case, we expect more policy easing that keeps 2015 real GDP growth at 7.0%Y, and we revise our 2016 forecast down to 6.8%Y (versus 7.0%Y previously) in view of slower investment growth. We see risks titled to the downside. In our bear case, we assume further weakness in growth due to relatively weaker-than-expected external demand and weakness in the property market, taking GDP growth to 6.2%Y in 2016. In such an environment, we would expect the PBOC to implement three more rate cuts. In our bull case, the filtering through of policy easing supports a property sales recovery and domestic demand growth. Together with firmer external demand growth, this helps to stabilise GDP growth at around 7.1%Y in 2016.
Headline CPI inflation will likely remain subdued: We slightly revise our 2015 CPI inflation forecast up to 1.5%Y to reflect the higher pork prices and revise it down to 1.5%Y for 2016. Slugging aggregate demand and lower global commodity prices should keep overall CPI inflation well below 2%Y in 2015 and 2016. We estimate that a 10% drop in oil prices is likely to lower headline CPI by 0.3pp.
Key message: We expect more easing with one more rate cut, significant RRR cuts and more fiscal measures to prevent a sharper slowdown in our base case. But the slow adjustment means disinflation risks persist.
More easing likely in an effort to prevent a sharper slowdown: We expect the core CPI and PPI trend to warrant more monetary easing. In our base case, we expect one more rate cut, likely in 4Q15. We see the possibility of one additional rate cut (25bp) in 1Q16, considering the risk of potential persistence of the disinflationary trend. We expect several more RRR cuts in the coming quarters to maintain stable liquidity conditions. On the fiscal front, following the recent tax cuts for small and medium-sized enterprises, we expect more tax breaks and a faster pace of fiscal spending.
More liberalisation and reforms expected: We expect more financial liberalisation in view of China’s efforts to get RMB included in SDR, whose chance has been significantly increased after the RMB fixing reform, we believe. Meanwhile, the SOE reform plan is likely to be unveiled, with the prospect of establishing Temasek-style state-owned asset management companies. These measures will work towards improving the efficiency of capital allocation and growth productivity. In addition, the 5th Plenum will be held in October, with the key agenda on the 13th Five-Year-Plan (2016-2020).
The RMB exchange rate is likely to depreciate against USD as China has adopted a new framework of maintaining relative stability in the trade-weighted RMB index since the RMB fixing reform on August 11. We expect USD/CNY to reach 6.60 at end-2015 and 6.91 at end-2016. The trajectory of the RMB NEER will be largely determined by China’s macro environment and the strength of the US dollar.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 7.4 7.0 6.8 6.7
Consumption 7.1 7.4 7.1 6.9 GCF 7.6 6.3 5.9 5.7
Contribution to GDP (pp) Consumption 3.7 3.8 3.7 3.7 GCF 3.6 3.0 2.8 2.7 Net exports 0.1 0.1 0.3 0.4
Foreign trade Exports (%Y, US$ terms) 6.1 1.4 4.2 4.8 Imports (%Y, US$ terms) 0.5 -6.7 1.7 2.3 Trade balance (US$ bn) 382.5 548.5 617.4 693.0
Current account (% of GDP) 2.1 3.4 2.8 3.0 CPI (%Y) 2.0 1.5 1.5 1.5 Policy rate (eop) 5.60 4.35 4.35 4.35 Fiscal deficit (% of GDP) -2.1 -2.3 -2.3 -2.3
Source: NBS, CEIC, Morgan Stanley Research forecasts
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Country Focus
August 31, 2015 Autumn Global Macro Outlook
India: One of the Few Bright Spots in EM Chetan Ahya (852) 2239 7812 Upasana Chachra (91) 6118 2246
India better positioned in an EM context: EM GDP growth is likely to be below the 30-year average in 2015, in our view. Most of the large EM economies are still in the adjustment phase, a process that began almost three years ago. In this context, India appears to be one of the better-positioned EM economies as it achieves a relatively high productive growth trajectory.
Marking down growth trajectory due to bad weather and weak external environment: We revise downwards our growth estimates, mainly because of: i) Poor weather affecting agriculture output and the related impact on consumption recovery; and ii) A drag from external growth. We bring down our growth estimates for 2015 to 7.4%Y (7.7%Y earlier) and for 2016 to 7.9%Y (8.2%Y earlier). We estimate 2017 growth at 8%Y. While we are revising lower our growth estimates slightly, we continue to build in an acceleration in growth (versus 2014). As we have highlighted earlier, given the difficulty in reconciling the past growth rates as per the new series of national accounts with other indicators of growth, we continue to provide growth estimates based on the old series of national accounts. We lower our estimates based on the old series of national accounts to 5.9%Y for 2015 (6.3%Y earlier) and 6.4%Y for 2016 (6.8%Y earlier). We estimate growth for 2017 at 6.5%Y.
Investment growth on track, consumption recovery to be sluggish and external demand to be a drag: The weak rainfall trend in the summer crop-sowing season is likely to adversely impact summer crop output growth, which accounts for 50% of total agriculture output. While we expect farm sector growth to be weak, we are building in a pick-up in non-farm GDP growth. We expect non-farm GDP growth to pick up, driven by an increase in investment demand, as the consumption recovery remains slow (slowing rural wages, poor farm growth) and external demand weakness continues. Indeed, the government has focused on reviving investment through measures such as: i) Acceleration in the project-related approval process; ii) Improvement in ease of doing business; and iii) Reforming the industrial sector’s policy environment. Encouragingly, we are already seeing signs of a revival in the capex cycle, with improvement in high-frequency indicators such as acceleration in projects under implementation, decline in stalled projects, pick-up in new investment projects and positive trend in capital goods imports. We believe that a capex recovery will be primarily led by public capex as weakness in external demand will weigh on
Key message: We expect a pick-up in capex and improvement in the productivity dynamic to drive the improvement in the macro outlook.
private manufacturing sector capex. We expect rural consumption growth to be on a weaker footing, given that it faces the headwinds of slower wage growth and a poor summer crop outlook. While urban consumption is holding up better, deflationary pressures facing the corporate sector have constrained its ability to increase wages. We believe that as the capex cycle and hence employment creation gathers momentum, the private consumption recovery will pick up pace.
Inflation expected to decelerate sustainably, no change in our expectation of another 50-75bp of rate cuts: We continue to believe that CPI inflation will remain on the path of moderation, reaching 4.8%Y by QE Mar-16, compared with the RBI’s estimate of 6.1%Y and consensus estimate of 5.5%Y. A number of systemic drivers of inflation such as significantly lower rural wage growth, fiscal consolidation, deceleration in property prices, the decline in global commodity prices and the favourable trend of food inflation drivers should support the deceleration in inflation. Moreover, while CPI inflation has been decelerating, WPI (akin to PPI) has remained in negative territory over the last nine months, thus intensifying the deflationary pressures in the economy. This deepening deflationary pressure could impact corporates’ ability to manage debt in highly leveraged sectors as they face elevated real interest rates. We thus maintain our expectation that the central bank will cut rates by a further 50-75bp by Mar-16, as inflationary pressures remain benign.
Risks to our outlook: We believe that the upside and downside risks to our forecasts will be influenced by two key factors: i) The pace of policy actions to revive the productivity dynamic; and ii) The strength of external demand recovery and global capital market environment.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) (old base)* 5.3 5.9 6.4 6.5 Real GDP (%Y) (new base) 7.1 7.4 7.9 8.0 Consumption 6.2 6.2 7.0 7.1 GCF 2.4 5.8 8.1 8.9 Foreign trade Exports (%Y, US$ terms) 3.1 -12.4 8.7 11.9 Imports (%Y, US$ terms) -2.0 -10.6 9.4 12.3 Trade balance (US$ bn) -143.1 -134.0 -148.5 -177.1 Current account (% of GDP) -1.4 -0.5 -0.8 -1.3 CPI (%Y) 6.7 4.8 4.9 4.5 Policy rate (eop) 8.0 6.75 6.75 7.0 Fiscal deficit (% of GDP) -6.3 -5.9 -5.9 -5.5 Source: CSO, RBI, Morgan Stanley Research forecasts; *Real GDP is at factor cost
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Country Focus
August 31, 2015 Autumn Global Macro Outlook
Korea: Low Growth for LongerSharon Lam (852) 2848 8927 Sung Woen Kang (852) 2848 5652
In GDP Downgrade – The Export Growth Engine Falling Apart, July 8, 2015, we pointed out that Korea’s export growth engine was broken. We believe that this broken model is a structural problem and will thus have a negative impact on Korea’s growth for longer than previously expected. So, we lower Korea’s GDP growth forecasts further, to 2.3%Y from 2.5%Y for 2015 and to 2.2%Y from 3.2%Y for 2016, implying no recovery expected next year. We introduce our 2017 forecast at 2.9%Y – another year of below-potential growth.
Revisiting the broken export growth machine: In the last decade, China was a major growth driver for Korea, to the extent that Korea overtook Japan to become China’s number one import source in 2013. We think that this is no longer the case. In fact, China is no longer a positive factor, but could even be a negative drag. Although Korea has not lost market share to other importers, the changing growth model in China indicates substantially less demand for Korean-made products. The latest developments in China – including the RMB depreciation – suggest this will be a lingering concern.
In summary, China is proving to be a major source of problems for Korea for three reasons: i) Slower, specifically investment-led growth in China means less demand for Korea’s exports. The shift from investment- to consumption-led growth has been bumpy in China due to correcting asset prices; ii) China has been stepping up its R&D investment in recent years, while moving up the value chain. ‘Made in 2025’ reforms mean China’s dependence on imports should only reduce further; and iii) Overinvestment in China has led to overcapacity in the heavy/industrial sectors, forcing China to turn from a net importer to a net exporter. Korean exporters will continue to feel the heat of Chinese competition, we think.
China Has Become a Negative Drag on Growth
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
2001 2003 2005 2007 2009 2011 2013 2015H1Remaining Contribution Contribution from Exports to China
Korean GDP growth (%Y)
Source: CEIC, Morgan Stanley Research
Key message: We think Korea suffers from structural issues that will lead to lower export growth for longer, which could also eventually affect the domestic economic recovery. Thus, we now expect one more rate cut of 25bp in 4Q15.
Property market recovery to keep supporting domestic economy: Meanwhile, the domestic economy has so far been supported by the property market recovery, low interest rates and pent-up demand. The risk is that subdued exports spill over to consumption via a stock market correction and higher unemployment. However, we think the property market recovery is likely to remain on track, as long as the government retains its easing bias on the market and expectations do not reverse. We saw little speculative inflows into the Korean property market in the aftermath of global QE, and so the downside impact from capital outflows should be lower than for other countries in the region. Similarly, the stock market has been underperforming and so destabilising effects of capital outflows from the stock market should also be relatively less. Ultimately, a record-high current account surplus means the economy is able to defend such outflows, in our view.
One more rate cut of 25bp in 4Q15: As growth is likely to disappoint, we now expect the BoK to cut rates once again in 4Q15 to bring the policy rate to an unprecedented 1.25%. We believe that the rate cut can come as early as October. Since the slowdown is driven by exports, cutting rates more aggressively is not the best solution. Rather, we’d like to see more KRW depreciation, which can be achieved more efficiently by encouraging capital outflows: this has been the policy direction for the authorities this year. Furthermore, we do not think that the BoK will be more aggressive on rate cuts due to the need to monitor household loan growth. Lastly, the BoK will need to save its bullets for emergency use in order to retain its monetary policy flexibility, in our view.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 3.3 2.3 2.2 2.9
Private consumption 1.8 1.8 1.6 2.2 Government consumption 2.8 3.5 4.0 4.0 Facility investment 5.8 5.5 1.0 5.0 Construction investment 1.0 2.0 2.5 3.0 Exports 2.8 -0.5 -0.2 2.1 Imports 2.1 0.6 0.1 1.6
Contribution to GDP (pp) Final domestic demand 2.8 2.9 2.3 2.5 Net exports 0.5 -0.6 -0.2 0.4 Inventories 0.0 0.4 0.2 -0.3
Current account (% GDP) 6.3 8.9 7.1 6.7 CPI (%Y) 1.3 0.8 1.5 2.0 Policy rate (eop, %) 2.00 1.25 1.25 1.25
Source: CEIC, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Indonesia: Still in a Lower Growth ChannelDeyi Tan (65) 6834 6703 Zhixiang Su (65) 6834 6739
Downgrading to reflect incoming trajectory and a more subdued outlook: We are downgrading our GDP growth forecasts from 5.3%Y to 4.6%Y for 2015 and from 5.5%Y to 4.8%Y for 2016, and we roll out our 2017 GDP growth forecast at 5.1%Y. The downward revisions reflect both a weaker incoming trajectory as well as a more subdued growth pace going forward. Indeed, 1H15 GDP growth has been weaker than expected on the back of what looks like a global soft patch (exports) and weak domestic demand. Government spending and implementation of structural reforms have been slow and the effects of still-falling commodity prices appear to be percolating within the domestic economy.
We believe that the 2H15 outlook is likely to remain subdued as still-falling commodity prices present a further negative terms-of-trade shock, the first glimpse of 3Q15 trade data continues to show contraction and domestic demand is unlikely to be revving. Thereafter, we expected a muted pick-up in 2016 to be driven by the following factors. We expect global GDP growth to improve somewhat from 3.1%Y in 2015 to 3.4%Y in 2016, and %Y momentum in Indonesia’s non-commodity exports, which is still in negative territory, should begin to look up as the IDR REER adjusts. Separately, government spending has been slow this year as the merger of ministries resulted in a need for budgeting rearrangements earlier. However, this should see improvement as earlier logistical difficulties move out of the way.
Structural reforms needed to break out from the lower growth channel… Overall, the big-picture story for Indonesia is that growth is likely to be stuck within a lower growth channel than before, and any growth pick-up in 2016/17 is likely to be within this channel. Indeed, the two global headwinds which had been present for a while should continue to be at play, leading to the downshift in Indonesia’s growth channel from the 6.0-6.5%Y seen in earlier years. The transition of China’s growth model from investment to consumption continues to exert a collateral impact in the commodity space, leading to a negative terms of trade for Indonesia. Moreover, as the commodity income shock is under way, normalisation of Fed policy also presents liquidity headwinds for Indonesia.
Key message: Any growth pick-up in 2016 is likely to be muted, with the economy staying in a lower growth channel. A growth hard-landing looks unlikely, but structural reforms will need to accelerate for Indonesia to break out from this lower growth channel.
In order for Indonesia to break out from this lower growth channel, we believe that accelerating structural reforms to help the economy re-industrialise and increase competitiveness in non-commodities will be needed to offset the slack from lower commodity prices as well as keep its current account balance manageable.
…but growth hard-landing looks unlikely: Separately, we think that a growth hard-landing in Indonesia is unlikely for the following reasons. The policy rate and the exchange rate have already been adjusted since 2013, narrowing the external funding gap faced by the economy and reducing macro-stability risks in the process. Moreover, Indonesia does not face the policy and leverage excesses seen in other economies. Adjusted for GDP per capita, bank credit and public sector debt (% of GDP) are low relative to the rest of the region.
Where could we be wrong? We think that growth risks are skewed to the downside and risk factors we would watch out for include: i) China’s growth story and its implications for commodity prices; ii) The pace of global recovery and its implications for global real rates; and iii) The political environment and the pace of structural reforms.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 5.0 4.6 4.8 5.1 Private consumption (%Y) 5.3 4.7 4.9 5.2 Public consumption (%Y) 2.0 2.8 4.3 4.5 Gross capital formation 4.4 2.3 4.1 5.1 Gross fixed capital formation (%Y) 4.1 3.7 3.9 4.6 Exports (%Y) 1.0 0.0 2.4 4.0 Imports (%Y) 2.2 -4.0 1.2 4.0 Domestic demand (%Y) 4.7 3.7 4.6 5.1 Current account (% of GDP) -3.1 -1.8 -2.1 -2.1 CPI (%Y) 6.4 6.7 5.2 5.3 Policy rate (eop)* 7.75 7.50 7.00 7.00 Fiscal deficit (% of GDP -2.2 -2.2 -2.0 -2.0 Source: CEIC, Morgan Stanley Research forecasts; *We think that BI has scope to cut policy rate by 50-75bp. The figures in the table here show a 50bp cut.
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Russia: The Second Blow from Oil Alina Slyusarchuk (44) 207 677 6869
A two-year recession: While the 2Q GDP release of -4.6%Y was better than we expected and the constructive IP print in July showed signs of stabilisation, we see this now offset by the impact of lower oil prices, which will weigh on growth in 2H15 and 2016. Our oil assumption, based on the forward curve, fell to average US$55/barrel in 2015 and 2016 from US$62 and US$67 previously. In 2017, we assume an average oil price at US$60. As a result, we have kept our 2015 forecast unchanged at -4.2%Y. We revise our 2016 forecast down marginally from -1.2%Y to -1.3%Y and see a muted 1.6%Y recovery in 2017.
We expect household consumption to be down by 11.1%Y in 2015 and 4.1%Y in 2016 on higher inflation, tight social spending and a belated labour market adjustment as the unemployment rate starts to rise. Fixed investment growth should also remain in negative territory into 2016 on a higher interest rate assumption and weak economic sentiment. However, we expect the deeper domestic demand contraction to be cushioned by the net exports contribution. In 2016, we no longer expect imports to rebound, while exports should remain positive despite weaker external demand from China.
RUB adjustment as the policy response: Given that policy-makers are focused on imports substitution, we expect them to let RUB weaken together with the oil price. So far the exchange rate has been an efficient tool to cushion the oil and gas budget revenues contraction and to rebalance the current account, suppressing imports. Moreover, the risk of FX market destabilisation, as seen in December 2014 with uncontrolled RUB depreciation, is lower as households have fewer spare resources to create additional demand for FX and key exporters have been regularly selling FX to the market, which we think is a sign of compliance with unofficial surrender requirements.
FX weakness shifts our inflation forecast up from a 15.1%Y average in 2015 to 15.5%Y, and we see inflation slowing down only to 13.0%Y by the end of the year, compared to 12.3%Y before. In 2016, we expect inflation to average 8.6%Y, up from 7.9%Y previously.
Monetary policy: Higher rates for longer: We believe that the higher inflation profile and ongoing exchange rate volatility will mean a pause in the CBR easing cycle in September and will allow for only a 50bp rate cut by the end of the year. As a result, we expect rates to go down to only 10.5% in 2015 and to 8.5% in 2016 versus 9.0% and 8.0% previously.
Key message: Given the weaker oil and RUB outlook, we see a pause in the CBR easing cycle. We now expect rates down to only 10.5% by end-2015 and 8.5% by end-2016, as the inflation profile shifts higher. Our growth forecast is broadly unchanged, helped by a better 2Q print and stronger net exports contribution. We expect a two-year recession with a 4.2%Y contraction in 2015 and a milder 1.3%Y decline in 2016.
A second wave of fiscal tightening ahead: On the fiscal front, we expect a decisive tightening in the 2016 budget forced by the flat oil price outlook, constrained financing and the unwillingness of the government to deplete the oil funds. We see the main saving items being below-inflation indexation of social spending, a reduction in state sector employment and tighter financing of infrastructure projects.
Bull and bear: We see upside risks to our forecast in case of a higher oil price, as oil above US$70 could push growth into positive territory already in 2016. Also, a credible resolution of the Ukraine crisis and normalisation of economic links with the West would significantly improve access to long-term lending, business sentiment and investment. We see downside risks coming from a fall in oil prices, destabilisation of the FX market, which might force another emergency hike from the CBR, or further escalation of the Ukrainian crisis, which could trigger further sanctions.
We see medium-term growth restricted to 1%Y: First, there are structural headwinds coming from a flat oil and gas production outlook as well as a declining working-age population. Second, current sanctions weigh further on the production outlook as they ban technology imports for Arctic and shale gas. Finally, we expect the government growth strategy focused on imports substitution to restrict modernisation and productivity growth in the medium term (see Russia Economics: Searching for a New Growth Model, June 22, 2015).
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 0.6 -4.2 -1.3 1.6 Private consumption 1.3 -11.1 -4.1 2.4 Government consumption -0.1 -3.5 -7.0 1.0 Gross fixed investment -2.0 -11.0 -2.8 3.7 Exports -0.1 2.0 0.5 1.2 Imports -7.9 -26.1 0.6 5.5 Unemp. rate (% labour force) 5.3 5.9 6.5 6.1 Current account (% GDP) 3.1 5.3 5.4 4.7 CPI (%Y) 7.8 15.5 8.6 7.2 Policy rate (eop, %) 17.0 10.5 8.5 6.0 Genl. govt. balance (% GDP) -1.2 -3.9 -3.1 -2.5 Genl. govt. debt (% GDP) 10.5 11.5 12.7 13.0
Source: Rosstat, CBR, Haver Analytics, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Turkey: Uncharted Waters Ercan Erguzel (90) 212) 398 0223
Fourth elections in less than two years: In Spring Global Macro Outlook: Dealing with Demand Deficiency, April 12, 2015, we defined three risk factors for 2015 as politics, monetary policy and lower economic growth creating economic imbalances. As we are getting towards the end of year, it is obvious that political risk has outweighed the others by far. Following 13 years of single-party government, AKP lost its simple majority in parliament and Turkey is heading towards its fourth elections in less than two years.
Ongoing political uncertainty has taken its toll on financial markets, specifically on the currency: Turkey has underperformed its emerging market peers by far in all major asset classes, such that TRY has weakened by 21% against USD year to date compared to an 11% depreciation for CEEMEA currencies on average. Similarly, 10-year government bond yields are up by 236bp year to date, compared to a 43bp increase for CEEMEA on average.
Although major economic indicators have been broadly stable so far, we expect to see deterioration in GDP growth and inflation in the remainder of the year: In terms of the former, relatively strong growth in 1H15 mainly stemmed from robust domestic demand. However, the deterioration in consumer and business confidence on the back of political uncertainty and a weaker TRY is likely to create additional downward pressure on already subdued economic activity. Therefore, we lower our 2015 GDP expectation to 2.2%Y from 3.0%Y previously. Some of the leading indicators such as banking sector loan growth are in line with our expectations.
The recent decline in headline CPI was mainly due to a normalisation in food prices. However, currency depreciation is likely to damage the inflation outlook in the last quarter of the year. In line with this, we increase our year-end CPI expectation to 8.0%Y from 7.6%Y previously (and the annual average from 7.6%Y to 7.7%Y). In other words, updates to our GDP and inflation forecasts mean a worsening of the already undesirable combination of lower economic growth and higher inflation. Thus, while the average inflation target was 5.1%Y in the last five years, actual CPI on average was 8.04%Y (with the assumption of 8.0%Y for 2015).
Despite the unfavourable outlook, we still keep our 2016 forecasts broadly unchanged: However, although it is not our base case, 2016 can be another bumpy year depending on three major risk factors:
Key message: Updates to our GDP and inflation forecasts point to further deterioration in the growth and inflation figures. Although not in our base case, this picture may worsen in 2016 depending on three major risk factors.
• Political uncertainty lingering towards 2016: Recent opinion polls show that we are likely to see a very similar parliament combination after repeat elections. Therefore, the most likely scenario following snap elections is a coalition government between either AKP and CHP or AKP and MHP. Yet, two months is a long time in Turkish politics, and we may see many changes before the elections.
• A rating downgrade from Fitch and/or Moody’s: We have a very busy schedule in terms of rating reviews, starting with Fitch (investment grade, neutral) on September 18, continuing with S&P (sub-investment grade, negative) on November 6 and ending with Moody’s (investment grade, negative) on December 4.
• Too little, too late rate hike from the CBT: The CBT recently gave clear guidance regarding its game plan. It will introduce a combination of liquidity and interest rate tightening in the months ahead. However, if the CBT continues to manage things through implementing some tweaks on the FX side and doing too little in terms of policy rate hikes, we may experience much sharper TRY depreciation, increasing financial stability concerns especially due to corporates’ massive open FX position.
In summary, Turkey is at the midst of uncharted waters – a combination of political uncertainty, deteriorating economic indicators, volatile local financial markets and the global rise in interest rates. In other words, a more simple policy rate is likely to be a necessary but not sufficient condition in this new environment; we also may need materially higher policy rates and they should come at the right time.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 2.9 2.2 3.0 2.8 Private consumption 1.3 2.4 3.1 2.8 Government consumption 4.6 2.6 4.0 3.0 Gross fixed investment -1.3 -0.8 2.2 2.9 Exports 6.8 1.1 4.3 2.8 Imports -0.2 0.6 4.2 2.9 Unemp. rate (% labour force) 10.0 11.5 11.6 11.7 Current account (% GDP) -5.7 -4.9 -5.0 -5.5 CPI (avg,%Y) 8.9 7.7 7.2 5.4 Policy rate (eop, %) 8.3 9.5 11.0 11.0 Genl. govt. balance (% GDP) -1.3 -1.3 -1.0 -1.3 Genl. govt. debt (% GDP) 35.0 33.9 33.1 32.5
Source: CBT, Turkstat, Haver Analytics, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Brazil: The Long and Winding Road Arthur Carvalho (55 11) 3048 6272 Thiago Machado (55 11) 3048 6249
Brazil is going through a combination of an external shock along with domestic political and economic difficulties: The negative terms of trade shock that Brazil is currently facing is daunting enough, due to not only the depreciating pressure on the currency but also the negative pressure on investment. However, Brazil is also facing a hangover from excesses created due to excessively lax fiscal, quasi-fiscal and monetary policy, which in turn have created a political situation that is clouding the outlook even further.
The triple tightening certainly created negative pressure on growth on the short run as expected, but the back-pedaling on the fiscal consolidation (see Economics and Strategy Update: Fiscal Backpedaling Challenges Brazilian Outlook, July 23, 2015) has created problems for the medium-term growth outlook. Without fiscal consolidation, Brazil’s investment grade status is no longer our base case and consequently it is unlikely to see a material reduction in the long-term cost of capital. This lower cost could have been a powerful driver for a pick-up in investment; without this, and still needing to keep fiscal policy somewhat tight, Brazil has been deprived of growth drivers.
The combination of an insufficiently hawkish policy mix and a turbulent political situation has led us to cut our GDP growth forecast to -2.4%Y in 2015 and -1.2%Y in 2016: On top of the high cost of capital, Brazilian corporates are facing a higher degree of uncertainty due to the ongoing political situation. The inability of the current administration to pass critical bills in Congress in order to boost medium-term productivity and the impact of the ongoing corruption investigation on infrastructure investment have proven to be more damaging to short-term growth than we previously thought.
This challenging growth outlook will likely put further pressure on Brazil’s debt dynamics: Weak growth not only hurts the revenues outlook, but also the debt/GDP ratio. Finally, a steeper yield curve as a reaction to the more lax fiscal policy should keep adding pressure on interest rate expenditures over the next few years. Add to this the inability of the current administration to pass through structural expenditure cuts in Congress, and this leads us to believe that Brazil will lose its investment grade status within the next 12 months.
Key message: Brazil is facing an external shock due to lower terms of trade; added to the current ongoing domestic economic and political situation, this creates a bleak outlook. We expect a second year of recession, which would continue to hurt the administration and business confidence further.
The bright side of the deep domestic demand recession Brazil is experiencing is that we believe inflation will come down materially in 2016: Although historically Brazil has experienced highly inertial inflation, making it hard to bring inflation down following a material shock, we believe that this time things are different. The fact that the labour market is undergoing such a deep correction is creating less room for the past inflation shocks to be passed through entirely for workers. Beyond this, corporates are also struggling to pass through the cost pressures from the weaker exchange rate to consumers; as a result, we believe that inflation will decelerate from an average of 8.7%Y this year to 6.3%Y in 2016. The bulk of this move will be due to a sharp fall in administered prices, which should move from above 15%Y to close to 6%Y, but market prices will also contribute to this downward path.
Given this inflationary scenario, we believe that the central bank will find room to cut rates in 2016 despite the materially weaker currency: We believe that the Brazilian central bank will cut by 225bp in 2016, from 2Q onwards, taking the Selic rate to 12% by year-end. We believe that the more lax fiscal policy has reduced materially the room to cut rates aggressively in Brazil. Indeed, we believe that the risks have moved from being skewed to more rate cuts to fewer rate cuts in the face of the recent move in fiscal policy.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 0.1 -2.4 -1.2 1.4
Private consumption 0.9 -2.6 -1.3 1.8 Government consumption 1.4 -1.9 0.3 1.6 Gross fixed investment -4.5 -7.7 -4.3 2.5
Contribution to GDP (pp) Final domestic demand -0.2 -3.7 -1.7 0.1 Net exports 0.1 1.6 0.8 -0.1 Inventories 0.3 -0.3 -0.3 0.0
Current account (% GDP) -3.9 -3.6 -3.1 -2.5 CPI (%Y) 6.3 8.7 6.3 5.0 Policy rate (eop, %) 11.75 14.25 12.00 11.00 Genl. govt. balance (% GDP) -6.2 -7.0 -6.0 -5.5
Source: IBGE, BCB, Morgan Stanley Latam Economics forecasts
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August 31, 2015 Autumn Global Macro Outlook Country Focus
Mexico: The Spectre of Further Poor Growth Luis Arcentales (1 212) 761 4913 Maria Bendana (1 212) 296 5220
The Mexican economy has not been able to leave behind its poor string of sluggish growth of the past three years. At barely 1.9%Y on average, the 2013-15 period – we have downgraded our 2015 growth outlook to just 2.2%Y from 3.0%Y – would mark the weakest three-year performance during periods of expansion since at least the start of the 1980s. Prudent policy-making and modest imbalances should allow the country to successfully navigate a challenging global environment, but the spectre of poor growth should continue to haunt Mexico in 2016.
Mexico’s dim growth prospects reflect an economy that is struggling to cope with a world stuck in middle gear: There are several headwinds that should keep growth subdued during the rest of this year and in 2016. The first one is persistently weak global trade, which meant industrial exports from Mexico plunged by 8% annualised in 1H15. Indeed, soft external demand – with negative implications for manufacturing and associated services – is part of why we are concerned that the encouraging acceleration in consumption seen during 2015 may have run its course (see Mexico: Second Half, Another Mixed Half, August 21, 2015). The second headwind comes from a slower US economy, the destination of 80% of Mexican exports (see Mexico: Revisiting the Link, July 31, 2015). Given that the downgrade reflects expectations of lower potential growth, it means that Mexico cannot rely on a stronger US economy to lift it out of its sluggish growth tunnel (see our US outlook on page 16). And this is why it is important for Mexico to properly execute its reforms, an area where progress so far has been slow.
Domestic Demand Set to Catch Up to External Weakness?
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15
Domestic Demand Non-Oil Exports (RHS)
3mma seasonally adjusted, %Y change
Source: INEGI, Morgan Stanley Latam Economics
Key message: Mexico’s poor growth prospects reflect an economy struggling to cope with a world stuck in middle gear.
The benefits from the structural reform push that has anchored investor sentiment may not materialise fast enough to lead to much improvement in 2016, in our view. Lower oil prices and output have forced fiscal austerity that should intensify in 2016; falling crude output should knock off almost half a point from GDP growth in 2015 (see Mexico: Fiscal Austerity – the Good, the Mixed and the Ugly, February 13, 2015). Lower oil has also dimmed prospects for energy reform, which has also played a role in our forecast for slower growth next year of 2.5%Y – well below consensus of 3.19%Y – from 3.2%Y previously (see Mexico: Oil Auctions – Barrels Half Full or Half Empty? July 24, 2015). Shortcomings with the rule of law and public security, importantly, have weighed on consumer and business sentiment (see Mexico: Mexico’s Trying Moment, November 14, 2014).
Despite low inflation and subdued growth, Banco de Mexico faces a complex outlook: The combination of record foreign holdings of local government bonds and currency weakness (and volatility) have led to mounting concerns about financial stability within the central bank (see Mexico: Managing Reforms and the Exit, April 12, 2015). With the peso at historically weak levels, the risk of a pre-emptive rate hike has been rising; in fact, there is already support within the board for such ‘risk management’ action. While market conditions, and outflows from local bonds in particular, could force Banxico’s hand, we maintain our view that the central bank will follow the Fed in December, matching its tightening cycle one-to-one throughout 2016; thereafter, Banxico should feel comfortable enough to remain on hold at 4.50%.
Forecast Summary 2014 2015E 2016E 2017E Real GDP (%Y) 2.1 2.2 2.5 2.9
Private consumption 2.0 3.2 2.7 2.9 Government consumption 2.6 2.6 -0.1 0.7 Gross fixed investment 2.3 4.0 2.5 4.1
Contribution to GDP (pp) Final domestic demand 1.7 1.9 2.3 2.8 Net exports 0.3 0.4 0.2 -0.1 Inventories 0.1 -0.1 0.0 0.2
Unemp. rate (% labour force) 4.8 4.5 4.5 4.4 Current account (% GDP) -2.0 -2.9 -2.7 -2.8 CPI (%Y) 4.0 2.9 3.7 3.3 Policy rate (eop, %) 3.00 3.25 4.50 4.50 Fiscal balance (% GDP) -3.2 -3.5 -3.5 -3.2 Government debt (% GDP) 40.9 44.9 46.4 48.7
Source: Banxico, INEGI, SHCP, Morgan Stanley Latam Economics forecasts
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August 31, 2015 Autumn Global Macro Outlook
Monetary Policy Rate Forecasts Current 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17
US 0.125 0.125 0.375 0.625 0.875 1.125 1.375 1.625 1.875 2.125 2.375
Euro Area 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.25 0.50
Japan 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
UK 0.50 0.50 0.50 0.75 0.75 1.00 1.00 1.25 1.25 1.50 1.50
Canada 0.50 0.50 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50
Norway 1.00 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00
Sweden -0.35 -0.35 -0.45 -0.45 -0.45 -0.45 -0.45 -0.25 0.00 0.25 0.50
Australia 2.00 2.00 1.75 1.75 1.50 1.50 1.50 1.50 1.50 1.50 1.50
New Zealand 3.00 2.75 2.75 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50
Russia 11.00 11.00 10.50 10.00 9.50 9.00 8.50 7.75 7.25 6.50 6.00
Poland 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.75 2.00
Czech Rep. 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.25 0.50
Hungary 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.50 1.75 2.00
Romania 1.75 1.75 1.75 1.75 1.75 1.75 1.75 2.00 2.25 2.50 2.50
Turkey 7.50 8.50 9.50 10.50 11.00 11.00 11.00 11.00 11.00 11.00 11.00
Israel 0.10 0.10 0.10 0.25 0.25 0.50 0.50 0.50 0.75 0.75 1.00
S. Africa 6.00 6.00 6.25 6.50 6.50 7.00 7.00 7.50 7.50 7.50 7.50
Nigeria 13.00 13.00 13.00 13.00 14.00 14.50 14.50 14.50 14.50 14.00 13.50
Ghana 24.00 24.00 24.00 24.00 24.00 24.00 24.00 22.00 21.00 21.00 21.00 Kenya 11.50 11.50 11.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.50
China 4.60 4.60 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35
India 7.25 7.00 6.75 6.75 6.75 6.75 6.75 7.00 7.00 7.00 7.00
Hong Kong 0.50 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 2.75
S. Korea 1.50 1.50 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25 1.25
Taiwan 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875
Indonesia 7.50 7.50 7.50 7.25 7.00 7.00 7.00 7.00 7.00 7.00 7.00
Malaysia 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25
Thailand 1.50 1.25 1.25 1.25 1.25 1.25 1.50 1.75 2.00 2.00 2.00
Philippines 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.00 3.00 3.00
Brazil 14.25 14.25 14.25 14.25 13.50 12.50 12.00 11.50 10.50 10.50 11.00
Mexico 3.00 3.00 3.25 3.50 3.75 4.00 4.50 4.50 4.50 4.50 4.50
Chile 3.00 3.00 3.00 3.25 3.75 4.00 4.00 4.00 4.00 4.00 4.00
Peru 3.25 3.50 4.00 4.25 4.50 4.75 4.75 5.00 5.00 5.00 5.00
Colombia 4.50 4.50 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 Source: National Central Banks, Morgan Stanley Research forecasts; Note: Japan policy rate is the interest rate on excess reserves.
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August 31, 2015 Autumn Global Macro Outlook
GDP Forecasts: Base, Bear, Bull Scenarios
Source: Morgan Stanley Research forecasts
%Y 2015E 2016E 2017E 2018-20E
Bear Base Bull Bear Base Bull
GLOBAL 3.1 2.3 3.4 4.3 2.6 3.7 4.5 3.8 G10 1.8 0.6 1.9 2.6 0.6 1.7 2.6 1.6
United States 2.4 0.6 1.9 2.5 0.5 1.8 2.7 1.8
Euro Area 1.3 0.7 1.9 2.8 0.6 1.8 2.6 1.4
Japan 0.5 0.2 1.6 2.1 0.1 0.8 1.2 1.2
United Kingdom 2.7 1.1 1.9 2.6 1.4 2.1 2.8 2.3
Canada 1.0 -0.1 1.5 2.0 1.1 1.9 2.7 1.7
Norway 1.1 0.5 1.0 1.5 0.9 1.7 2.4 1.8
Sweden 2.8 2.0 3.2 4.1 1.4 2.6 3.4 2.5
Australia 2.0 0.5 1.9 3.5 1.1 2.4 3.9 2.8
Emerging Markets 4.1 3.6 4.6 5.5 4.0 5.1 5.9 5.3 CEEMEA -0.3 -0.1 1.7 3.7 1.3 3.0 4.4 3.3
Russia -4.2 -3.0 -1.3 1.5 0.5 1.6 3.0 1.5
Poland 3.5 2.3 3.2 4.0 2.3 3.5 4.7 3.5
Czech Republic 4.4 1.7 2.7 3.4 1.8 3.0 4.0 3.0
Hungary 2.9 1.4 2.4 3.2 1.3 2.6 3.7 2.8
Ukraine -11.7 -3.5 1.6 4.0 0.5 2.6 4.5 4.0
Kazakhstan 0.9 2.0 2.5 3.5 3.0 3.9 5.0 4.5
Turkey 2.2 0.0 3.0 5.0 0.0 2.8 5.0 3.5
Israel 2.9 2.8 3.3 3.8 1.5 3.0 4.2 3.5
South Africa 1.7 0.4 2.4 4.4 0.7 2.7 4.7 2.8
Nigeria 4.0 4.3 5.5 6.7 4.0 5.5 7.0 6.2
Ghana 3.0 3.5 6.0 8.5 6.0 8.5 11.0 6.0
Kenya 5.5 4.0 6.0 8.0 4.2 6.2 8.2 5.0
Asia ex Japan 6.1 5.3 6.2 6.9 5.4 6.4 7.0 6.4 China 7.0 6.2 6.8 7.1 6.0 6.7 7.1 6.6
India 7.4 6.5 7.9 9.0 6.5 8.0 9.0 7.8
Hong Kong 2.0 1.2 2.3 3.5 1.5 2.5 3.5 2.5
Korea 2.3 0.5 2.2 3.5 2.0 2.9 4.0 3.2
Taiwan 1.0 1.4 1.7 3.2 1.3 2.4 3.7 2.7
Singapore 2.3 1.2 2.8 4.2 1.5 3.1 4.5 3.8
Indonesia 4.6 4.1 4.8 5.3 4.4 5.1 5.6 5.5
Malaysia 4.5 3.1 4.5 5.5 3.4 4.8 5.8 5.0
Thailand 2.4 1.8 3.2 4.2 2.2 3.6 4.6 4.0
Philippines 5.5 4.9 5.7 6.3 5.2 6.0 6.6 6.0
Latin America 0.0 -0.3 0.3 1.6 0.8 1.7 2.4 2.7 Brazil -2.4 -1.8 -1.2 0.5 0.8 1.4 1.9 2.0
Mexico 2.2 2.0 2.5 2.7 2.1 2.9 3.5 3.3
Chile 2.3 2.2 2.7 3.0 2.5 3.2 3.7 3.5
Peru 2.8 3.0 3.6 3.9 2.8 3.2 3.7 4.5
Colombia 2.9 2.0 2.4 2.7 2.5 3.0 3.3 3.5
Argentina 0.5 0.5 -1.0 2.5 -1.0 0.5 1.5 3.0
Venezuela -3.0 -10.0 -5.5 -2.0 -5.0 -2.5 -1.0 1.5
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August 31, 2015 Autumn Global Macro Outlook
CPI Forecasts: Base, Bear, Bull Scenarios
Source: Morgan Stanley Research forecasts; Note: Japan CPI includes VAT
%Y 2015E 2016E 2017E 2018-19E
Bear Base Bull Bear Base Bull
GLOBAL 3.1 3.6 3.5 3.5 4.2 4.0 3.8 3.3 G10 0.3 1.1 1.5 1.9 1.4 2.1 2.5 1.9
United States 0.1 1.4 1.5 2.0 2.0 2.2 2.7 2.0
Euro Area 0.1 0.9 1.3 1.6 0.8 1.7 2.2 1.7
Japan 0.6 0.1 1.3 1.9 0.8 2.6 2.9 2.0
United Kingdom 0.1 1.2 1.4 1.9 1.2 1.6 2.1 2.0
Canada 1.4 1.7 2.1 2.2 2.0 2.4 2.9 2.0
Norway 1.9 1.7 2.2 2.7 1.4 1.9 2.4 2.5
Sweden 0.2 1.1 1.5 1.7 0.8 1.7 2.2 2.0
Australia 1.5 1.3 2.4 3.3 1.9 2.5 3.2 2.6
Emerging Markets 5.3 5.5 5.1 4.7 6.2 5.3 4.7 4.3 CEEMEA 10.7 8.0 7.7 7.1 6.5 6.3 5.8 5.7
Russia 15.5 10.5 8.6 6.8 8.5 7.2 5.5 5.5
Poland -0.9 0.7 1.2 1.5 1.3 2.1 2.7 2.5
Czech Republic 0.5 1.2 1.7 2.0 1.1 1.9 2.5 2.0
Hungary 0.1 1.9 2.3 2.7 1.9 2.7 3.3 3.0
Ukraine 48.5 20.0 16.5 14.0 12.0 9.1 7.0 8.0
Kazakhstan 6.8 14.0 12.7 10.0 8.0 6.8 6.0 6.0
Turkey 7.7 5.0 7.2 8.2 4.4 5.4 6.8 5.5
Israel -0.3 0.5 1.0 2.0 0.5 1.2 2.2 2.0
South Africa 4.8 4.3 6.2 8.1 4.0 5.9 7.8 5.3
Nigeria 9.0 10.8 9.6 8.4 10.7 9.2 7.7 9.3
Ghana 16.5 10.5 13.2 15.9 9.1 11.8 14.5 11.0
Kenya 6.9 5.0 7.2 9.4 4.2 6.4 8.6 6.5
Asia ex Japan 2.5 2.5 2.6 3.0 2.4 2.6 3.1 3.5 China 1.5 0.7 1.5 2.5 0.5 1.5 2.7 3.0
India 4.8 6.0 4.9 4.0 6.0 4.5 4.0 4.5
Hong Kong 3.3 1.2 2.0 3.4 1.3 1.8 2.5 3.0
Korea 0.8 1.2 1.5 1.8 1.5 2.0 2.3 2.3
Taiwan -0.6 0.2 0.5 1.0 0.5 1.0 1.4 1.5
Singapore -0.3 0.2 0.9 1.5 0.6 1.3 1.9 2.0
Indonesia 6.7 5.9 5.2 4.7 6.0 5.3 4.8 5.0
Malaysia 2.4 4.3 3.5 2.9 3.8 3.0 2.4 2.5
Thailand -0.6 2.0 2.3 2.9 2.3 2.6 3.2 3.0
Philippines 1.6 2.2 2.8 3.4 2.6 3.2 3.8 3.5
Latin America 11.0 16.5 13.2 10.0 23.0 16.8 10.7 6.5 Brazil 8.7 7.0 6.3 5.3 5.5 5.0 4.5 5.0
Mexico 2.9 3.6 3.7 3.9 3.0 3.3 3.5 3.3
Chile 4.2 4.0 3.7 3.9 2.9 3.3 3.5 3.1
Peru 3.5 3.4 3.1 3.2 2.1 2.5 2.9 2.5
Colombia 4.4 4.0 3.6 3.8 3.0 3.3 3.6 3.0
Argentina 16.2 15.0 31.3 25.0 45.0 38.0 18.0 10.0
Venezuela 71.9 180.0 96.5 60.0 200.0 126.9 75.0 30.0
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August 31, 2015 Autumn Global Macro Outlook
Government Budget Balance and Debt Forecasts General government budget balance (% of GDP) Primary general government budget balance (% of GDP) 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E
DM US -2.8 -2.5 -3.0 -3.1 -1.5 -1.2 -1.5 -1.4 Euro Area -2.6 -2.0 -1.7 -1.5 0.2 0.6 0.7 0.7 Japan -6.6 -5.1 -4.6 -4.4 -5.9 -4.6 -4.0 -3.9 UK -5.1 -4.2 -2.7 -2.2 -3.6 -2.6 -0.9 -0.2 Canada -0.2 0.1 0.5 0.7 -0.4 2.1 1.0 1.5 Sweden -1.9 -1.7 -0.9 -0.4 -1.2 -0.8 0.0 0.5 Australia -2.1 -2.6 -2.4 -1.9 -1.3 -1.7 -1.4 -0.9
BRICs Russia -1.2 -3.9 -3.1 -2.5 0.1 NA NA NA China* -2.1 -2.3 -2.3 -2.3 NA NA NA NA India -6.3 -5.9 -5.9 -5.5 -2.3 -1.9 -1.9 -1.5 Brazil -6.2 -7.0 -6.0 -5.5 -0.6 0.0 0.5 1.0
Gross general government debt (% of GDP) Net general government debt (% of GDP) 2014 2015E 2016E 2017E 2013 2015E 2016E 2017E
DM US 104 104 104 105 73 73 73 74 Euro Area 92 92 90 88 73 NA NA NA Japan 245 245 245 246 127 127 127 128 UK 88 88 88 87 49 48 48 47 Canada 67 73 72 71 34 35 33 31 Sweden 44 43 42 41 -31 NA NA NA Australia 31 34 36 37 13 16 19 20
BRICs Russia 11 12 13 13 3 NA NA NA China* 15 NA NA NA NA NA NA NA India 66 67 65 63 NA NA NA NA Brazil 59 NA NA NA 35 NA NA NA
Source: IMF, Morgan Stanley Research forecasts; Note: *Central government
Gross General Government Debt
0
20
40
60
80
100
120
140
US EA JPN UK CAN SWE AUS2015 2016
% of GDP JPN: 245% ('15), 245% ('16)
Source: Morgan Stanley Research forecasts
General Government Budget Balance
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
US EA JPN UK CAN SWE AUS2015 2016
% of GDP
Source: Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook
GDP Forecasts: Consumer Expenditure and Investment Spending Quarterly Annual 2015 2016 2017 2015E 2016E 2017E
Private Consumption (%Q, SA) 1Q 2QE 3QE 4QE 1QE 2QE 3QE 4QE 1QE 2QE 3QE 4QE
Global* 0.6 0.6 0.9 0.8 0.9 0.8 0.9 1.0 1.1 0.8 0.9 1.0 3.0 3.4 3.8 G4 0.5 0.4 0.6 0.5 0.5 0.4 0.4 0.5 0.6 0.1 0.4 0.4 2.1 1.9 1.7 US 0.4 0.8 0.7 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 3.0 2.3 2.0 Euro Area 0.5 0.4 0.4 0.4 0.4 0.5 0.4 0.4 0.4 0.4 0.4 0.4 1.7 1.6 1.6 Japan 0.3 -0.8 0.3 0.4 0.5 0.4 0.4 0.7 1.6 -2.4 0.0 0.1 -0.9 1.4 0.7 UK 0.9 0.7 0.6 0.6 0.6 0.2 0.2 0.3 0.8 0.6 0.5 0.4 3.0 1.9 2.0 BRIC 0.7 0.8 1.2 1.2 1.5 1.1 1.4 1.5 1.6 1.5 1.5 1.6 4.3 5.2 6.2 China - - - - - - - - - - - 7.3 7.1 7.0 India 3.2 0.9 1.6 1.2 2.8 1.2 1.6 1.8 2.1 1.5 1.6 2.2 6.6 7.1 7.3 Brazil -1.5 -1.4 -1.0 -0.7 -0.3 0.1 0.3 0.4 0.5 0.6 0.5 0.5 -2.6 -1.3 1.8 Russia -9.0 -3.0 -0.3 -0.5 -1.7 -1.5 -0.4 0.6 0.9 1.0 1.0 1.0 -11.1 -4.1 2.4 Private Consumption (%Y) Global* 3.3 3.3 3.0 2.9 3.3 3.5 3.5 3.6 3.8 3.8 3.9 3.9 3.0 3.4 3.8 G4 1.9 2.3 2.2 2.0 2.0 2.0 1.8 1.8 2.0 1.7 1.6 1.6 2.1 1.9 1.7 US 3.3 3.1 3.0 2.5 2.6 2.3 2.1 2.0 2.0 2.0 2.0 2.0 3.0 2.3 2.0 Euro Area 1.7 1.8 1.7 1.6 1.6 1.6 1.6 1.7 1.7 1.6 1.6 1.6 1.7 1.6 1.6 Japan -4.0 0.2 0.2 0.3 0.4 1.6 1.6 2.0 3.1 0.3 0.0 -0.6 -0.9 1.4 0.7 UK 3.4 3.2 2.8 2.8 2.5 2.0 1.6 1.3 1.5 1.9 2.2 2.3 3.0 1.9 2.0 BRIC 5.0 4.4 4.0 4.2 4.8 5.2 5.3 5.7 5.8 6.2 6.3 6.5 4.3 5.2 6.2 China - - - - - - - - - - - 7.3 7.1 7.0 India 7.5 5.9 5.9 7.1 6.6 6.9 7.0 7.6 6.9 7.3 7.2 7.6 6.6 7.1 7.3 Brazil -0.9 -1.6 -2.8 -4.6 -3.4 -1.9 -0.6 0.5 1.3 1.8 2.0 2.1 -2.6 -1.3 1.8 Russia -8.9 -10.2 -12.3 -12.4 -5.4 -3.9 -4.0 -3.0 -0.4 2.1 3.5 4.0 -11.1 -4.1 2.4 Investment (% Q, SA) Global* 0.8 0.7 0.8 0.9 1.0 1.1 1.2 1.1 1.2 0.8 1.1 1.1 3.1 4.3 4.5 G4 0.8 0.7 0.9 0.9 0.7 0.8 0.9 0.8 1.0 0.4 0.7 0.7 3.2 3.9 3.3 US 0.4 0.8 1.1 0.8 0.5 0.7 0.9 0.9 0.7 0.6 0.6 0.6 3.9 4.5 3.5 Euro Area 0.8 0.5 0.7 1.0 1.0 1.0 1.0 0.9 0.9 0.9 0.9 0.9 2.0 3.7 3.7 Japan 1.8 0.7 0.5 1.1 1.1 1.1 1.1 0.8 2.1 -1.9 0.1 0.8 2.8 2.6 1.6 UK 2.0 0.9 1.6 0.9 0.4 0.4 0.2 0.2 1.3 0.8 0.8 0.8 5.0 2.6 3.0 BRIC 0.8 0.7 0.6 0.9 1.2 1.4 1.4 1.5 1.5 1.2 1.7 1.6 3.2 4.8 5.9 China - - - - - - - - - - - 7.0 6.5 5.9 India 1.5 2.0 1.1 1.2 2.1 2.4 2.0 1.9 1.9 1.1 2.8 2.5 5.0 7.5 8.0 Brazil -1.3 -3.0 -3.5 -1.8 -1.0 -0.3 0.5 1.0 0.9 0.5 0.4 0.3 -7.7 -4.3 2.5 Russia -4.2 -4.0 -2.2 -1.4 -0.9 -0.5 0.3 0.5 1.0 1.2 1.2 1.2 -11.0 -2.8 3.7 Investment (% Y) Global* 2.8 3.2 2.9 3.3 3.5 3.9 4.2 4.5 4.8 4.4 4.4 4.4 3.1 4.3 4.5 G4 2.1 2.9 2.7 3.4 3.3 3.4 3.4 3.4 3.6 3.2 2.9 2.8 3.2 3.9 3.3 US 3.9 3.6 2.4 3.1 3.2 3.1 3.0 3.1 3.3 3.2 2.9 2.6 3.9 4.5 3.5 Euro Area 0.8 1.8 2.4 3.0 3.2 3.7 4.0 3.9 3.8 3.7 3.6 3.6 2.0 3.7 3.7 Japan -3.1 2.2 3.2 4.2 3.5 3.9 4.5 4.1 5.2 2.0 1.0 1.0 2.8 2.6 1.6 UK 5.0 4.9 4.6 5.5 3.8 3.3 2.0 1.2 2.2 2.6 3.2 3.8 5.0 2.6 3.0 BRIC 3.7 3.4 3.1 3.4 3.8 4.4 5.1 5.8 6.0 5.8 6.0 6.1 3.2 4.8 5.9 China - - - - - - - - - - - 7.0 6.5 5.9 India 4.3 4.5 5.1 6.0 6.6 6.9 7.9 8.6 8.4 7.1 7.9 8.5 5.0 7.5 8.0 Brazil -6.6 -5.3 -8.2 -9.3 -9.0 -6.5 -2.6 0.2 2.1 2.9 2.8 2.1 -7.7 -4.3 2.5 Russia -7.5 -10.8 -12.0 -11.3 -8.3 -4.9 -2.5 -0.6 1.3 3.0 4.0 4.7 -11.0 -2.8 3.7 Note: Global and regional aggregates GDP-weighted averages, using PPPs; *G4+BRICs. Quarterly consumption and investment data for China is unavailable; hence, there are no official forecasts. Source: IMF, Morgan Stanley Research forecasts
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August 31, 2015 Autumn Global Macro Outlook
Morgan Stanley Government Bond Yield/Spread Forecasts Global Interest Rate Strategy Team
2-Year 5-Year 10-Year 3Q15 4Q15 1Q16 2Q16 3Q16 3Q15 4Q15 1Q16 2Q16 3Q16 3Q15 4Q15 1Q16 2Q16 3Q16US 0.70 1.00 1.25 1.40 1.50 1.55 1.75 1.95 2.10 2.15 2.15 2.30 2.45 2.55 2.60
Germany -0.20 -0.10 0.00 0.05 0.15 0.05 0.10 0.30 0.70 0.90 0.70 0.80 1.10 1.40 1.50
Japan 0.02 0.08 0.10 0.12 0.15 0.10 0.20 0.30 0.35 0.40 0.40 0.60 0.80 0.90 1.00
UK 0.80 0.95 1.15 1.35 1.50 1.50 1.70 1.95 2.10 2.20 1.95 2.10 2.25 2.35 2.40
Australia 1.95 2.00 2.00 2.10 2.15 2.10 2.40 2.40 2.45 2.50 2.75 3.00 3.00 3.10 3.15
New Zealand 2.45 2.40 2.45 2.60 2.90 2.65 2.80 2.95 3.10 3.15 3.30 3.40 3.50 3.60 3.65
Austria* 7 7 7 8 8 7 7 8 8 9 27 26 27 28 29
Netherlands* 4 4 4 5 5 5 5 6 6 7 18 18 19 20 21
France* 10 9 9 9 9 13 11 12 13 14 31 30 31 32 33
Belgium* 9 8 7 7 7 14 12 13 14 15 32 32 33 33 33
Ireland* 19 18 18 17 17 38 36 36 36 36 60 60 60 60 60
Spain* 47 46 45 44 43 90 88 85 85 85 128 125 120 120 120
Italy* 44 43 42 41 41 82 80 80 80 80 120 115 115 115 115
Portugal* 62 60 59 58 57 121 117 115 115 115 175 170 165 165 165
2-Year 5-Year 10-Year 3Q15 4Q15 1Q16 2Q16 3Q16 3Q15 4Q15 1Q16 2Q16 3Q16 3Q15 4Q15 1Q16 2Q16 3Q16Russia 11.70 11.50 10.90 10.50 10.00 11.70 11.25 10.80 10.35 9.90 11.40 11.00 10.60 10.20 9.80
Poland 1.80 1.85 2.00 2.20 2.40 2.40 2.30 2.50 2.70 2.80 2.85 2.70 2.90 3.05 3.20
Czech Rep. 0.05 0.20 0.40 0.60 0.80 0.20 0.25 0.40 0.70 0.90 0.85 0.90 1.20 1.40 1.60
Hungary 2.10 2.10 2.30 2.50 2.70 2.60 2.45 2.60 2.70 2.90 3.50 3.30 3.40 3.50 3.60
Turkey 10.50 10.20 10.30 10.40 10.60 10.20 10.00 10.10 10.30 10.50 9.90 9.80 10.00 10.20 10.40
Israel 0.20 0.40 0.60 0.80 0.90 0.80 0.70 0.90 1.10 1.30 2.00 1.90 2.10 2.30 2.40
S. Africa 7.30 7.20 7.30 7.50 7.60 7.95 7.80 8.00 8.15 8.30 8.30 8.10 8.30 8.40 8.50
China 2.40 2.20 1.90 1.85 1.80 3.05 2.85 2.45 2.35 2.30 3.50 3.25 2.80 2.75 2.70
India 7.85 8.20 8.00 7.70 7.60 8.10 8.50 8.20 7.90 7.80 8.00 8.40 8.10 7.80 7.70
Hong Kong 0.48 0.65 0.80 0.90 0.95 1.30 1.40 1.60 1.65 1.70 1.76 1.90 2.05 2.10 2.15
S. Korea 1.69 1.69 1.65 1.65 1.70 1.95 1.95 2.05 2.10 2.15 2.25 2.40 2.55 2.60 2.65
Taiwan 0.55 0.50 0.45 0.43 0.40 0.80 0.78 0.75 0.72 0.70 1.12 1.15 1.18 1.20 1.22
Indonesia 8.50 8.80 8.60 8.40 8.20 9.10 9.40 9.20 8.90 8.80 9.20 9.60 9.30 9.00 8.90
Malaysia 3.60 3.50 3.50 3.50 3.50 4.15 4.20 4.20 4.25 4.25 4.50 4.65 4.55 4.50 4.50
Thailand 1.50 1.40 1.50 1.60 1.60 2.05 2.10 2.15 2.20 2.25 2.75 2.80 2.90 3.00 3.10
Brazil 13.80 14.10 13.80 13.40 13.00 13.75 14.00 13.75 13.35 12.95 13.75 13.75 13.25 13.00 12.75
Mexico 4.40 4.70 4.95 5.10 5.30 5.50 5.50 5.65 5.75 5.95 5.90 5.80 5.90 6.00 6.20
Chile 3.60 3.90 4.15 4.30 4.40 4.05 4.25 4.50 4.60 4.70 4.50 4.60 4.80 4.90 5.00
Peru 4.25 4.55 4.80 4.95 5.05 5.75 6.00 6.25 6.40 6.50 7.10 7.30 7.50 7.65 7.80
Colombia 6.25 6.55 6.80 6.95 7.05 6.75 6.85 7.05 7.25 7.30 7.50 7.35 7.50 7.70 7.70 Source: Morgan Stanley Global Interest Rate Strategy forecasts; *Yield spread to German Bunds
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August 31, 2015 Autumn Global Macro Outlook
Morgan Stanley Global Currency Forecasts Global FX Strategy Team
3Q15 4Q15 1Q16 2Q16 3Q16 4Q16EUR/USD 1.15 1.13 1.11 1.08 1.03 1.00USD/JPY 122 121 122 123 124 125GBP/USD 1.58 1.54 1.53 1.52 1.49 1.48USD/CHF 0.96 0.99 1.02 1.06 1.11 1.15USD/SEK 8.13 8.10 8.15 8.33 8.69 8.85USD/NOK 8.17 8.32 8.42 8.52 8.74 8.90USD/CAD 1.35 1.38 1.40 1.42 1.44 1.45AUD/USD 0.71 0.70 0.69 0.68 0.66 0.65
NZD/USD 0.63 0.63 0.61 0.59 0.57 0.56EUR/JPY 140 137 135 133 128 125EUR/GBP 0.73 0.73 0.73 0.71 0.69 0.68EUR/CHF 1.10 1.12 1.13 1.14 1.14 1.15EUR/SEK 9.35 9.15 9.05 9.00 8.95 8.85
EUR/NOK 9.40 9.40 9.35 9.20 9.00 8.90USD/CNY 6.46 6.60 6.69 6.77 6.85 6.91USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80USD/IDR 14100 14400 14500 14700 14900 15000USD/INR 66.00 67.00 66.50 67.00 68.00 69.00USD/KRW 1200 1230 1250 1270 1290 1300USD/MYR 4.20 4.30 4.40 4.48 4.55 4.60USD/PHP 46.80 45.90 46.40 47.10 46.20 46.70USD/SGD 1.42 1.44 1.45 1.47 1.48 1.49USD/TWD 33.50 34.30 34.80 35.30 35.80 36.00
USD/THB 36.00 37.00 37.40 37.70 38.10 38.50USD/BRL 3.50 3.65 3.75 3.85 3.95 3.85USD/MXN 16.90 17.20 17.35 17.50 17.40 17.30USD/ARS 9.00 11.00 14.00 14.00 15.00 16.00USD/VEF 6.30 25.00 25.00 50.00 50.00 50.00USD/CLP 690 705 715 725 730 725USD/COP 3200 3250 3300 3350 3300 3250
USD/PEN 3.30 3.38 3.50 3.60 3.65 3.70USD/ZAR 13.05 13.30 13.50 13.60 13.70 13.70USD/TRY 2.95 3.00 3.05 3.09 3.12 3.15USD/ILS 3.85 3.90 3.95 3.90 3.80 3.70
USD/RUB 69.50 70.00 71.00 72.00 72.00 73.00EUR/PLN 4.20 4.25 4.16 4.08 4.02 3.96EUR/CZK 27.05 27.15 27.25 27.00 27.00 27.00EUR/HUF 310 310 306 302 298 294
EUR/RON 4.45 4.45 4.45 4.40 4.35 4.30DXY Index 94 96 97 99 103 105
MS AXJ Index 96 95 94 93 92 91
2016
Source: Morgan Stanley Global FX Strategy forecasts
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August 31, 2015 Autumn Global Macro Outlook Global Economics Team Global Co-Heads of Economics Chetan Ahya [email protected] +852 2239 7812 Elga Bartsch [email protected] +44 (0)20 7425 5434
Global Economics Manoj Pradhan Global [email protected] +44 (0)20 7425 3805 Patryk Drozdzik Global [email protected] +44 (0)20 7425 7483 Sung Woen Kang Global, Korea, New Zealand, Taiwan [email protected] +852 2848 5652 Pratyancha Pardeshi Global [email protected] +44 (0)20 7677 0528
Americas Ellen Zentner US [email protected] +1 212 296 4822 Ted Wieseman US [email protected] +1 212 761 3407 Paula Campbell Roberts US [email protected] +1 212 761 3043 Robert Rosener US [email protected] +1 212 296 5614 Luis Arcentales Latam, Chile, Mexico [email protected] +1 212 761 4913 Arthur Carvalho Latam, Brazil [email protected] +55 11 3048 6272 Maria Bendana Latam [email protected] +1 212 296 5220 Thiago Machado Brazil [email protected] +55 11 3048 6249
Europe & Africa Elga Bartsch Euro Area, ECB, Germany [email protected] +44 (0)20 7425 5434 Daniele Antonucci Italy, Spain, Greece, Portugal [email protected] +44 (0)20 7425 8943 Carmen Nuzzo Sustainability, France [email protected] +44 (0)20 7677 0209 Marcus Gedai Germany, Sweden, Austria [email protected] +44 (0)20 7425 9668 Joao Almeida Italy, Spain, Greece, Portugal [email protected] +44 (0)20 7425 6838 Jacob Nell UK [email protected] +44 (0)20 7425 8724 Melanie Baker UK [email protected] +44 (0)20 7425 8607 Jonathan Ashworth UK [email protected] +44 (0)20 7425 1820 Pasquale Diana Poland, Hungary, Czech, Romania [email protected] +44 (0)20 7677 4183 Michael Kafe South Africa, Ghana, Nigeria, Kenya [email protected] +27 11 587 0806 Andrea Masia South Africa, Nigeria [email protected] +27 11 282 1593 Alina Slyusarchuk Russia, Kazakhstan, Ukraine [email protected] +44 (0)20 7677 6869 Ercan Erguzel Turkey, Israel [email protected] +90 212 398 0223 Georgi Deyanov Bulgaria, Serbia, Croatia [email protected] +44 (0)20 7425 7006
Asia Chetan Ahya Asia ex-Japan, India [email protected] +852 2239 7812 Derrick Kam Asia ex-Japan, Hong Kong [email protected] +852 2239 7826 Jenny Zheng Asia ex-Japan [email protected] +852 3963 4015 Junwei Sun China [email protected] +852 2239 7820 Yin Zhang China [email protected] +852 2239 7818 Robert Feldman Japan [email protected] +81 3 6836 8400 Takeshi Yamaguchi Japan [email protected] +81 3 6836 5404 Shoki Omori Japan [email protected] +81 3 6836 5466 Upasana Chachra India [email protected] +91 22 6118 2246 Sharon Lam Korea, Taiwan [email protected] +852 2848 8927 Deyi Tan ASEAN [email protected] +65 6834 6703 Zhixiang Su ASEAN [email protected] +65 6834 6739 Daniel Blake Australia [email protected] +61 2 9770 1579 Morgan Stanley entities: London/South Africa – Morgan Stanley & Co. International plc; New York – Morgan Stanley & Co. LLC; Hong Kong/Shanghai – Morgan Stanley Asia Limited.; Singapore – Morgan Stanley Asia (Singapore) Pte.; Japan – Morgan Stanley MUFG Securities Co., Ltd.; India – Morgan Stanley India Company Private Limited; Brazil – Morgan Stanley C.T.V.M. S.A.; Australia – Morgan Stanley Australia Limited
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