Global Economic Weekly - Puls Biznesu · Global Economic Weekly Slow ride, take it easy 23 October...

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Global Economic Weekly

Slow ride, take it easy

23 October 2015 Corrected

Global: slow ride, take it easy We conduct due diligence on our global forecasts and conclude that growth is still likely to pick up modestly next year. We expect 3.1% global growth for 2015, and have trimmed 2016 global growth by 0.2pp to 3.4%

United States: GDP: trim, crew cut or close shave? We are cutting our estimate for 3Q GDP growth to 1.2%, lowering 2015 average growth by 0.1pp to 2.4%. We have also cut growth for next year by 0.2pp to 2.5%, as global shocks continue to undercut an otherwise healthy domestic economy.

Europe: still decent, but accelerating no more In spite of resilient domestic demand, we cut our GDP forecast for 2016 by 0.2pp to 1.7% due to less world growth and the lagged effect of euro re-appreciation. Another layer of ECB accommodation, to come in December, will provide support, but our forecast is dependent on a weaker EUR, itself conditional on Fed lift-off.

China: lower but more balanced growth We are lowering our real GDP forecasts slightly to 6.9% and 6.6% for 2015 and 2016, respectively, from 7.0% and 6.8% previously. We expect policymakers to adopt more targeted fiscal measures to promote an innovation-led economy, and two more interest rate cuts in the next 12 months. China’s growth is lower but has become more balanced. Reforms remain key to maintain potential growth in the long run.

Japan: recovery continues, albeit more slowly than expected We lower our growth forecasts for 2015 and 2016 to reflect a larger negative contribution from net exports and tardy domestic demand due a rise in the savings rate. But we still believe Japan's recovery will continue through 2016 supported by (1) a healthier corporate sector; (2) fiscal and monetary policies; (3) improved terms of trade; and (4) solid demand for labor.

Emerging Asia: India still offers relative value India remains relative value. We see slow recovery with growth set to clock 5.5% in FY16 and 6.5% in FY17 in old GDP series. Relative faster growth, however, will see India overtake Brazil and Russia in GDP to become the 2nd largest EM after China. The next trigger will be an urban consumption recovery of 1% of GDP in coming months rather than a turn in the capex cycle.

Emerging EMEA: GDP revision: no tricks or treats We cut our 2016 GDP for EEMEA commodity importers in line with a G-10 growth revision. Commodity exporters stay unchanged as we already had been highly cautious on them. Heading into 2016 we are still below consensus in most places, while we are about in line on the CE-4.

Latin America: growth mindset Latin America will likely experience another tough year in 2016 in terms of economic growth. Brazil will suffer another year of sharp economic contraction. In our view, lack of political coordination plus plunging investment and weaker labor markets will likely lead to a 3.5% GDP contraction. Mexico will likely experience a modest acceleration as industrial production in the US picks up.

Australia: an inflation outlier Unlike other central banks, the Reserve Bank of Australia (RBA) has a targeted inflation rate that is fulfilling its mandate. We expect this will be one more factor that sees it unlikely to ease policy further on economic grounds.

Economics Global Table of Contents

Global overview 2

Global economic calendar 5

United States 6

Europe 9

China 13

Japan 16

Emerging Asia 19

Emerging EMEA 22

Latin America 25

Australia 31

Global Economic forecasts 35

Monetary policy forecasts 37

FX forecasts 38

Research Analysts 41

Ethan S. Harris Global Economist MLPF&S +1 646 855 3755 [email protected] Michael S. Hanson Global & US Economist MLPF&S +1 646 855 6854 [email protected] Global Economics Team MLPF&S See Team Page for Full List of Contributors

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This report is an extract of a report of the same name published 23 October 2015

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2 Global Economic Weekly | 23 October 2015

Global overview Michael S. Hanson MLPF&S +1 646 855 6854 [email protected]

Slow ride, take it easy • We conduct due diligence on our global forecasts and conclude that growth is still

likely to pick up modestly next year. We continue to expect 3.1% global growth in 2015, and trim 2016 global growth by 0.2pp to 3.4%.

• Domestic sources of growth have slightly less momentum in the US and China. Ongoing political uncertainty leads to Brazil experiencing the largest reductions to 2016 growth.

• In most of the other economies globally, including Europe, Japan and much of EM, softer trade is the main reason for a modest deceleration in growth.

Just a little less lift This week we recalibrate our growth expectations around the globe for 2015 and 2016. The net effect is a modest 0.2pp reduction to 3.4% for 2016 aggregate global growth; 2015 global growth remains the same at 3.1%. Importantly, these changes represent a tactical trim, not a major capitulation. Specifically, we have modestly cut our growth expectations for the US and China, and that has spilled over into other countries, notably emerging markets. However, we still see solid domestic demand in the US and we expect China to avoid a hard landing. We also expect continued policy easing around the world to boost growth slightly next year.

A bit more shocking The global economy has been buffeted by a number of shocks over the past year, including large commodity price declines and significant currency moves. The drop in commodity prices has hurt producing countries, but does not seem to have provided the expected lift to consumer countries. Thus a further boost to consumer spending among the commodity-importing economies constitutes a potential upside risk to the 2016 outlook.

Additionally, global trade has weakened overall, reflecting both the above factors as well as softer aggregate global demand this year. The deceleration in Chinese growth is one important part of this picture, as is the softer-than-expected rebound in the US. Note

Table 1: New vs old GDP forecasts—global aggregates (% yoy)

2015F 2016F New Old Change Consensus New Old Change Consensus Global and Regional Aggregates Global 3.1 3.1 0.0 3.2 3.4 3.6 -0.2 3.5 Global ex US 3.3 3.3 0.0 3.3 3.6 3.8 -0.2 3.7 Developed Markets 1.9 2.0 -0.1 1.9 2.1 2.3 -0.2 2.1 G5 1.9 1.9 0.0 1.9 2.1 2.3 -0.2 2.1 Emerging Markets 4.0 4.0 0.0 4.0 4.4 4.6 -0.2 4.5 Emerging Markets ex China 2.6 2.6 0.0 2.7 3.3 3.5 -0.2 3.6 Europe, Middle East and Africa (EMEA) 1.4 1.4 0.0 1.4 2.0 2.1 -0.1 2.1 European Union 1.9 1.9 0.0 1.9 2.0 2.2 -0.2 1.9 Emerging EMEA 1.0 1.0 0.0 1.1 2.1 2.1 0.0 2.3 PacRim 5.4 5.4 0.0 5.4 5.6 5.6 0.0 5.5 PacRim ex Japan 6.0 6.0 0.0 6.0 6.1 6.1 0.0 6.0 Emerging Asia 6.1 6.1 0.0 6.1 6.2 6.3 -0.1 6.1 Americas 1.5 1.6 -0.1 1.6 1.7 2.1 -0.4 2.0 Latin America -0.4 -0.4 0.0 -0.3 -0.2 0.9 -1.1 0.8 Source: BofA Merrill Lynch Global Research Note: Developed markets consensus forecasts are from Bloomberg. Emerging market consensus forecasts are from Consensus Economics.


Global Economic Weekly | 23 October 2015 3

that developed markets experienced the larger cuts on average this time around: we trimmed 0.1pp from 2015 growth and 0.2pp from 2016 growth in DM (Table 1). That brings DM growth down to just 1.9% for this year and 2.0% for next year. Emerging market growth for 2016 also declined 0.2pp, to 4.4%; it was unchanged for 2015.

Below we briefly discuss some main themes across the various regions and economies that contributed to the forecast revisions.

Trimming domestic demand: US and China In the two largest economies, domestic demand has disappointed slightly this year, helping trigger a modest reassessment of next year’s growth (Table 2). However, the US is still likely to grow above trend in our view, whereas China is running below trend. Additionally, US growth should accelerate modestly into 2016 even as Chinese growth slows. However, in neither country do we anticipate a sharper deceleration.

The decline in 2015 US growth to 2.4% is mostly a technical change reflecting a large inventory adjustment in 3Q. Underlying domestic demand still remains solid, as strong services and housing activity offset weakness in the globally-sensitive goods sector. Momentum is not quite as strong as our US team had expected earlier in the year, yet the overall domestic backdrop remains favorable for continued above-trend growth; we expect 2.6% growth in 2016. As a result, we still look for the Fed to start a very gradual hiking cycle at its December meeting.

In contrast, both cyclical and structural factors are contributing to a slower growth path in China. Resilient consumers and a growing service sector should help support a more balanced growth mix going forward. Our China team trimmed its forecasts to 6.9% for 2015 and 6.6% for 2016. In the near-term, we look for Chinese policy makers to adopt more targeted fiscal measures and cut interest rates twice over the next year. We also look for them to pursue structural reforms that should eventually improve potential growth. Importantly, we believe policy makers have the tools to ensure that a modest slowdown does not turn into a hard landing for China.

Table 2: New vs old GDP forecasts—selected countries(% yoy)

2015F 2016F New Old Change Consensus New Old Change Consensus G5 US 2.4 2.5 -0.1 2.5 2.5 2.7 -0.2 2.6 Euro area 1.6 1.6 0.0 1.5 1.7 1.9 -0.2 1.6 Japan 0.7 0.8 -0.1 0.7 1.2 1.6 -0.4 1.2 UK 2.4 2.4 0.0 2.6 2.5 2.7 -0.2 2.4 Canada 1.2 1.2 0.0 1.2 1.8 1.8 0.0 2.0 Asia Pacific China 6.9 7.0 -0.1 6.8 6.6 6.8 -0.2 6.5 Malaysia 4.6 4.6 0.0 4.8 4.3 4.5 -0.2 4.6 Philippines 5.5 5.5 0.0 5.7 5.5 5.7 -0.2 5.9 Singapore 1.6 1.6 0.0 2.0 2.0 2.2 -0.2 2.4 Hong Kong 2.0 2.0 0.0 2.3 2.4 2.8 -0.4 2.2 Latin America Brazil -3.3 -3.3 0.0 -2.8 -3.5 -1.4 -2.1 -1.0 Mexico 2.2 2.2 0.0 2.3 2.5 2.8 -0.3 2.8 Argentina 0.8 0.8 0.0 0.9 0.0 0.6 -0.6 0.8 Venezuela -4.0 -4.0 0.0 -7.8 1.9 3.9 -2.0 -3.7 Peru 2.3 2.3 0.0 2.7 3.0 3.3 -0.3 3.5 Ecuador -0.7 -0.8 0.1 0.9 -3.0 -2.7 -0.3 1.5 EEMEA Turkey 2.7 2.6 0.1 2.9 2.8 3.0 -0.2 2.8 Poland 3.5 3.5 0.0 3.5 3.5 3.7 -0.2 3.5 Ukraine -11.0 -8.0 -3.0 -10.8 0.0 0.0 0.0 0.8 Czech Republic 3.9 4.1 -0.2 4.1 2.6 2.9 -0.3 2.6 Hungary 2.8 3.0 -0.2 2.8 2.5 2.9 -0.4 2.4 Source: BofA Merrill Lynch Global Research


QE support, external drag: Euro area and Japan In Japan we also see some slowing of domestic demand, as the saving rate (both household and corporate) rose more than expected. This contributes to the 0.4pp reduction in 2016 Japanese growth to 1.2%. However, the main drag on Japan will be external, as slowing global growth is likely to deliver less of a trade boost than previously anticipated. The same is true for the Euro area, where softer trade is the main explanation for a 0.2pp trim to 2016 growth, taking it to 1.7%.

Yet domestic sources of growth remain strong in each region, in our view. In addition, continued easing by the respective central banks has been supportive, even if the currency channel may not be as potent as previously expected. QE by the ECB has helped spur a recovery in loan origination. In addition, both economics previously had experienced tighter fiscal policy, but that has faded more recently. Austerity in the Euro area has given way to a small net loosening in 2016, while we anticipate further fiscal easing by the Abe government after an earlier consumption tax shock that slowed growth measurably this year. In the end, GDP growth should remain resiliently above trend in both economies.

Brazil: a broken BRIC The country that experienced the largest revision to growth in our forecast is Brazil. Here, continued uncertainty on the political front is expected to sharply depress private consumption and investment. In addition, tighter credit availability, higher taxes, a weaker labor market, and higher inflation should all take a toll on growth. David Beker has sliced 2.1pp from the 2016 outlook for Brazil, taking growth down to -3.5% from -1.4% previously. This revision puts us sharply below consensus forecasts. The combination of a recession with high inflation ties the hands of the Brazilian Central Bank until the second half of 2016, in our view. At that point, the drop in growth will help to pull down inflation and give the BCB some breathing room. Overall, Brazil is largely the exception that proves the rule: a number of idiosyncratic domestic factors are restraining growth there, but do not represent the think wedge of a much more pernicious decline in global growth.

Divergence among emerging markets A similar story holds for most other emerging market economies. Many EM economies saw small or no changes to their forecasts. Table 2 highlights most of the countries with some revisions this year or next. There are two classes of downward revisions. First are the spillovers from weaker global trade — this accounts for most of the revisions. Mexico was downgraded on the back of slower US growth; several East Asian economies have decelerated along with China; and a number EEMEA economies face slightly weaker prospects as Euro area growth was trimmed. These spillover effects are not particularly large for most economies.

Second are the idiosyncratic stories: in addition to Brazil, both Argentina and Venezuela are dealing with domestic political challenges. Ukraine sees the largest reduction in 2015 growth among our revisions, in large part due to geopolitical issues. The shocks facing these economies do not pose a meaningful downside risk to global growth.

Bottom line: glass half full All told, it is important to note that, after an extensive dual diligence on our global growth forecasts, we still expect solid 3.1% growth for this year and a modest acceleration to 3.4% in 2016. That isn’t to say that there are not some further downside risks to global growth, but our modal global forecasts remain resilient.


Global economic calendar The week ahead Key events in the week ahead

NYT Country Data/Event For BofAMLe Cons. Previous Monday, 26 October

5:00 Germany IFO Business Climate Oct 107.9 -- 108.5 9:00 Mexico Economic Activity IGAE yoy Aug 2.38% -- 1.95% 10:00 Israel BoI rates decision - 0.10% 0.10% 0.10% 17:00 Argentina Economic Activity Index yoy Aug 2.50% -- 2.70%

Tuesday, 27 October 5:00 Euro area M3 Money Supply (yoy) Sep 5.0% -- 4.8% 5:30 UK GDP (qoq, a) 3Q 0.5% -- 0.7% 8:30 US Durable Goods Orders (mom) Sep -3.5% -1.2% -2.3% 10:00 US Consumer Confidence Oct 102.0 102.8 103.0

- Poland Official election results due - - - - Wednesday, 28 October

3:00 Germany GfK Consumer Confidence Nov 9.5 -- 9.6 3:45 France Consumer Confidence Oct 98 -- 97 5:00 Italy Consumer Confidence Index Oct 113 -- 112.7 8:30 US Advance Goods Trade Balance Sep -$66.3bn -$64.8bn -$66.6bn 14:00 US FOMC Rate Decision — 0.00-

0.25% 0.00-0.25%

0.00-0.25%

19:50 Japan Industrial production (sa, mom) Sep -0.5% - -1.2% - Turkey Quarterly inflation report - - - -

Thursday, 29 October 4:00 Spain Retail Sales (sa, yoy) Sep 2.7% -- 3.1% 4:00 Spain CPI EU Harmonised (mom, p) Oct 0.3% -- 0.4% 4:55 Germany Unemployment Change (000's) Oct -2 -- 2

5:30 UK Mortgage Approvals (sa, units/persons, 000's) Sep

71.7 -- 71

6:00 Euro area Economic Confidence Oct 105 -- 105.6 8:30 US GDP (qoq, ann.) 3Q A 1.2% 1.7% 3.9% 8:30 US Core PCE (qoq) 3Q A 1.4% 1.4% 1.9% 8:30 Brazil COPOM Monetary Policy Meeting Minutes - - - - 9:00 Germany CPI (mom, p) Oct -0.2% - -0.2% 9:00 Brazil National Unemployment Rate Aug 8.70% - 8.60% 15:00 Mexico Overnight Rate 29-Oct 3.00% 3.00% 3.00% 19:30 Japan Unemployment rate (sa) Sep 3.4% - 3.4% 19:30 Japan Nationwide CPI, BoJ-style core (yoy) Sep -0.2% - -0.1% 20:05 UK GfK Consumer Confidence Oct 4 - 3

Brazil Central Govt Budget Balance Sep - - -$5.1bn Friday, 30 October

4:00 Spain GDP (qoq, p) 3Q 0.7% - 1.0% 5:00 Italy Unemployment Rate (p) Sep 11.9% - 11.9% 6:00 Euro area Unemployment Rate Sep 11.0% - 11.0% 6:00 Euro area CPI (yoy, p) Oct 0.0% - -0.1% 6:30 Russia Key Rate - 10.50% 11.0% 11.0% 8:30 US Personal Spending (mom) Sep 0.2% 0.2% 0.4% 8:30 Chile Central Bank Meeting Minutes - - - - 10:00 US U. of Michigan Confidence Oct F 92.5 92.6 92.1

. Japan BoJ monetary policy meeting - - - - Colombia Overnight Lending Rate 30-Oct 5.00% 5.00% 4.75%

Source: Bloomberg, BofA Merrill Lynch Global Research

For the full-week calendar, see here.

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United States Ethan S. Harris MLPF&S +1 646 855 3755 [email protected]

Emanuella Enenajor MLPF&S +1 646 855 9322 [email protected]

GDP: trim, crew cut or close shave? • We are cutting our estimate for 3Q GDP growth to 1.2%. This lowers average

growth this year by 0.1pp to 2.4%.

• We have also cut growth for next year by 0.2pp to 2.5%, as global shocks continue to undercut an otherwise healthy domestic economy.

• Despite the growth haircut, we continue to expect above-trend-growth, higher inflation, and the first rate hike in December.

A softer outlook The economy has faced some strong headwinds this year, including a sharp rise in the dollar, weaker-than-expected global growth and sharp cuts in oil sector investment. Further, the economy is in the middle of an inventory correction. Weaker data, particularly for inventories, has contributed to lower GDP tracking (Table 3), and we are now incorporating that weakness into our official forecast, cutting 3Q real GDP growth by 0.8pp to 1.2%. This lowers 2014 annual GDP growth to 2.4% from 2.5%. Looking past trade and inventories, domestic demand is expected to remain strong, rising by 3.5% in 3Q 2015, and by 3.0% in 2015 as a whole.

Global gale winds Global shocks are having a big negative impact on the industrial sector (which includes resource extraction, utilities, and the production of manufactured goods). Although this sector only accounts for a shrinking, 16% share of GDP (Chart 1), the data have been weak enough to slow the overall economy. Year-over-year growth in industrial production has been decelerating since late 2014 and has now slowed to just 0.4% yoy, marking the slowest pace since late 2009. The ISM manufacturing index has also been dropping and is currently 50.2, just barely above the 50 breakeven level. Core capital goods orders are down 5.9% yoy while shipments are down 2.9% yoy.

Some sectors of manufacturing are even weaker. Ross Gilardi, the Equity Research Analyst covering machinery, has noted a substantial deterioration in the industrial sector. Surprisingly weak demand early in the year created an inventory overhang for

Table 3: BofA Merrill Lynch Global Research 3Q real GDP tracking (%)

2.8 July 30th 3Q GDP forecast

-0.5 Trade

-0.5 Industrial production

-0.5 Business / wholesale inventories

-0.2 Durable goods / factory orders

-0.1 Personal spending

-0.1 Construction

-0.1 Existing home sales

0.2 Autos

0.2 Retail sales

1.2 October 22nd 3Q GDP forecast Source: BofA Merrill Lynch Global Research

Chart 1: Industrial sector (% of GDP)

Source: BofA Merrill Lynch Global Research, Bureau of Economic Analysis

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many manufacturing firms. This not only discouraged new production, it cut demand for machinery used in production. The associated downward pressure on machinery prices further discouraged demand as would-be buyers defer purchases in anticipation of machinery price declines. Capex in manufacturing and resource extraction accounts for roughly 2.5% of GDP, but spillover effects into other sectors suggests a larger sector footprint. Thus, we see some downside risk to the outlook for capex ahead.

Steady oil prices should help stabilize energy-related investment, which has been a key drag to growth earlier this year. However, we don’t expect energy to become a positive economic force any time soon: energy-sector employment and oilfield machinery investment continue to fall, a sign that the sector is still in pain (Chart 2).

In light of these risks from continued weakness in industrial production and spillovers from the decline in energy-related investment, we are cutting our forecast for 2016 GDP growth by 0.2pp to 2.5% (Chart 3). Given all the gloomy data out of the industrial sector, why not cut growth even further? Stepping back, we see three reasons for continued above-trend growth.

Big headwinds fade, smaller headwinds build First, while the economy faces new global headwinds, the fundamental backdrop for the domestic economy has improved significantly. Post-crisis deleveraging has largely run its course. The housing and banking sectors are back on their feet. And Washington is no longer a major source of austerity and confidence shocks: Federal and state and local fiscal policy has shifted from a 1% or higher GDP headwind to a small tailwind and Americans have learned to largely ignore the budget battles in Washington. In our view, the new global headwinds—a strong dollar, weak growth in emerging markets and weak commodity prices—have less impact on US growth than the fading domestic headwinds –deleveraging, crippled banking and housing sectors and fiscal shocks.

Already gone…and I’m feelin’ strong Second, it is important to get the timing of the various shocks right. In our view, most of the hit to growth from global developments has already happened. The strong dollar is an ongoing drag on growth, but model simulations suggest a hump-shape pattern, with small effects last year, a peak drag on growth this summer and diminishing drag in the quarters ahead. On a similar vein, the biggest hit from the collapse in oil prices is behind us, with the collapse in mining investment in the first half of the year. Going forward, we expect a small net effect from low prices as a slow decline in mining related activity is offset or more than offset by consumers spending more of their savings from lower gas prices. The same applies to the inventory adjustment: almost all of the correction came in 3Q. The only shock that builds, rather than diminishes, going forward

Chart 2: Energy sector continues to consolidate (Energy-related employment and machinery investment)

Source: US BLS, Census Bureau

Chart 3: Quarterly GDP growth forecasts, old and new (annualized GDP growth rate)

Source: BEA, BofA Merrill Lynch Global Research

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is the trade and confidence shocks from weakness in China and the rest of emerging markets. Our hope and expectation is that these effects will be small.

At your service Third, much of the gloom and doom around US growth is because of excessive focus on the industrial sector. Services account for more than 80% of GDP and 86% of employment. The US statistical mills produce a steady diet of data on industrial activity, but service sector indicators are few and far between. Meanwhile the service sector is booming. Over the past year services jobs are up 2.4% and the ISM nonmanufacturing index has been bouncing around above 55 for the last year. Historically, this is consistent with 3.0% GDP growth.

Some analysts suggest that the weakness in the industrial sector will ultimately dominate and pull down the service sector. However, simple granger causality suggests the opposite: services lead the industrial sector. In Dazed and confused, we tested this by regressing growth for each major sector on its own lags and lags of growth in other sectors. The results were clear: lagged growth in services helps predict industrial growth, but not the other way around. How is this possible? It is because the service sector is so much bigger—it is a huge jobs and income generator—so when it is strong, demand for goods rises. In other words: the tail does not wag the dog.

Reverse engineering Fourth, some of the doom and gloom comes from extrapolating from the weak stock market to the overall economy. Pessimists ask: if earnings and stock prices are weak, isn’t there something really wrong in the economy? Not necessarily. The corporate sector is much more vulnerable to global shocks than the overall economy. Major corporations get a big chunk of their revenue from overseas, but trade is a small part of GDP. Weak oil prices may be a net negative for the equity market given the importance of oil companies and their suppliers, but cheap oil is a big positive to for the consumer and probably a net positive for the economy. This is why despite a very weak 3Q earnings season, and a correction in the stock market, the economy still looks fine.

Fed fumble Finally, in our view, the Fed has inadvertently added to the doom and gloom with some awkward communication. Prior to the September meeting, Fed officials were underscoring the importance of the solid labor market and were trying to convince the markets that one rate hike was not a big deal. Then at the meeting they justified the decision to delay hiking by pointing to the risky global backdrop. Many observers (understandably) misinterpreted the Fed’s message. They argued that the Fed must be really worried about global risks and much less focused on the healthy labor market. They noted that the Fed was so worried it was not even willing to take the tiny step of hiking by 25bp. The stock market sold off on the news and worries about China grew.

Starting with the press conference, Yellen and her allies have tried to recover the fumble, arguing that there baseline view is still cautiously optimistic and they are still on track to hike this year. However, there is no instant replay in monetary policy. The bond market seems to have adopted a very negative view of growth—reinforced by the soft September payrolls—and clearly does not believe the Fed’s funds rate dot plot.

December is still the most likely starting point Given the Fed’s confusing messaging and its promise to go much slower than normal, the probability distribution of Fed meeting moves is extremely flat. The probability of a hike at next week’s meeting seems very low—the Fed will want to do its first move with a press conference. Therefore, December remains the most likely starting point, although even then the probability of a move may be less than 50%. The key to that call remains the jobs market: if payrolls pick up a bit and if the global back drop does not get worse, we expect the Fed to move.

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Europe Gilles Moec MLI (UK) [email protected]

Ruben Segura-Cayuela MLI (UK) [email protected]

Evelyn Herrmann MLI (UK) [email protected]

Chiara Angeloni MLI (UK) [email protected]

Still decent, but accelerating no more • In spite of resilient domestic demand, we cut our GDP forecast for 2016 by 0.2pp to

1.7% due to lower world growth and the lagged effect of euro re-appreciation.

• Another layer of ECB accommodation, to come in December, will provide support, but our forecast is dependent on a weaker EUR, itself conditional on Fed lift-off.

• The distribution of the revision across countries follows the sensitivity to world demand: Germany loses 0.3 pp, against 0.1 pp for France and Italy in 2016.

Losing external support Our reasonable bullish case for the Euro area was based on the combination of three growth engines which had switched on at the same time: 1) the end of all-out fiscal austerity and a shift toward a small net loosening next year; 2) a recovery in loan origination; and 3) a weak euro compounding the effect of decent volume of external demand. The first two elements are solid, in our view, which we expect will keep domestic demand on sound footing, but we are losing the third one. Our colleagues in EM and the US have just revised down their own forecasts, while the euro exchange rate (broad index) has already rebounded 8% from a trough in April 2015, taking out roughly half of the depreciation engineered since the peak of March 2014. Even if this corrects in the coming months, we already need to factor in a cost over 2015/2016.

The re-appreciation of the currency and an increase in unused capacity at the global level weigh on European inflation dynamics. Beyond the immediate effect of these exogenous shocks, long term price expectations also remain stubbornly low. Domestically, a shift in the Phillips curve continues to affect core inflation in we think a lasting manner. This means that ex ante real interest rates are rising, with an adverse effect on investment, which in any case is likely to be negatively affected by a downward revision in the international outlook.

We have thus cut our GDP forecast for next year to 1.7% from 1.9%. In other words, the Euro area's growth rate would not accelerate from 3Q15 onwards. Still, we think there is enough resilience in domestic demand – with our expected additional support from the ECB – to keep it above potential.

The Euro-dollar question While this is a relatively small revision, risks to this outlook are biased to the downside, given the many fronts open for the region. From the impact of the VW difficulties and uncertainty related to the refugee crisis, together with the extent of the weakness abroad, the future path of the currency is another source of significant risk. Our forecasts are dependent on our FX strategists' call for the EURUSD to go to parity by 1Q next year, which in turn clearly depends on the Fed moving in December.

If the Fed delays the initial hike further and/or the EURUSD does not move much from current levels, we would see growth in 2016 pretty much identical to that of 2015, if not lower. Indeed, as a counterfactual, if instead the EURUSD did not move much from current levels, we would be expecting a NEER around 5% stronger in 2016. This, given






the typical elasticities, would have an additional cost of 10-20bp in terms of GDP growth, bringing our forecast for 2016 to 1.5-1.6% of GDP.

We continue to expect the European Central Bank (ECB) to announce QE2 in December, and this view was strengthened by ECB President Mario Draghi's very dovish and forceful performance this week.

We still believe the central bank should have acted already given the deterioration in the data flow, but it seems that the Governing Council could offset this tardiness by delivering a powerful form of QE2, going beyond a mere extension of the purchases after September 2016.

Still, while this may curb the adverse market developments looking ahead, we do not think this can completely offset the damage already done by the re-appreciation of the currency and the rebound in real interest rates (Chart 4). In addition, while the central bank remains supportive and responsive, we would not expect as strong a confidence effect from QE2 as we had in January of this year when the ECB crossed the Rubicon of bonds purchases. There are diminishing returns to psychological effects, in our view.

Inflation still very weak Our forecasts for inflation remain unchanged, and hence we are still expecting 0.8% inflation in 2016. Given the very weak traction of the Philips Curve, our GDP forecast has only a marginal impact on our inflation forecast, namely bringing core slightly higher, which is compensated by a slightly higher contribution of oil.

Meanwhile, risks to the inflation outlook also remain biased to the downside, as we have thoroughly discussed before. The currency also matters, since the most important source of higher core inflation in the months ahead was coming from the pass-through into industrial goods prices in the ECB’s scenario.

Also, it remains to be seen, given the uncertainty still surrounding oil prices, the extent of the base effects towards the end of the year, which were supposed to bring inflation temporarily to 1% in January 2016. If oil prices did not move much from here, we would expect inflation to average 0.6% yoy in 2016, 20bp below our current baseline scenario (Chart 5).

Chart 4: Monetary conditions have tightened over recent months

Source: BofA Merrill Lynch Global Research

Chart 5: Oil price related base effects matter for inflation forecasts

Note: In the alternative scenario, we assume oil prices to remain constant at USD 48.6 per barrel over the forecast horizon. Source: BofA Merrill Lynch Global Research

-2.5

-2

-1.5

-1

-0.5

0

MCI Index based on 1Y1Y inflation swaps

MCI index based on 1Y10Y inflation swaps

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

Sep-

15Oc

t-15

Nov-1

5De

c-15

Jan-

16Fe

b-16

Mar-1

6Ap

r-16

May-1

6Ju

n-16

Jul-1

6Au

g-16

Sep-

16Oc

t-16

Nov-1

6De

c-16

Alternative scenario Baseline scenario


Country details

Germany In Germany, we continue to expect 1.6% growth in 2015, but lowered 2016 forecast by 0.3pp to 1.8%. August industry data showed first signs of spillovers from emerging markets, although mom volatility probably overstated the weakness. Growth acceleration in key export markets, such as the Euro area, US and UK now looks less likely, making compensating for weaker Chinese growth more challenging from a German exporter’s perspective. We argued in the past that global growth matters much more for German exports than the exchange rate. Explaining exports as a function of trade weighted GDP growth and the exchange rate, we find a factor of 3.4 for the former and -0.4 for the latter in the long term. The downward revision in world growth by 0.2pp, therefore, explains two thirds of our German GDP growth revision.

Higher uncertainty also means that capex growth should be even less spectacular than we previously thought – we now expect 1.7% capex spending this year (-0.2pp) followed by 2.3% next (-0.7pp). Downside risks to our forecast stem from global growth and the uncertainty on ramifications of the VW story. The refugee influx, a political challenge in the short term, could turn out positive for short-term growth as it forces the government’s hand to more spending. Households, too, continue to benefit from robust employment growth and real wage growth. The German economy is no longer about export growth, only. We expect domestic demand to grow 1.7% yoy this year and next.

France While GDP has been unusually volatile in 1H 2015, owing to wide gyrations in inventories, it stood on average at 1.4% in annualized terms, and the recent data flow points to continued strengthening in domestic demand, with activity in retail trade and services accelerating nicely into the beginning of the autumn according to the INSEE indicators. This largely reflects a decent response from households to the falling oil prices, offsetting still wobbly signals from the labor market.

We revise our GDP growth forecasts for 2015 and 2016 by only 10bp, ie, less than for the Euro area on aggregate. This would reflect the fact that France, with a lower share of manufacturing in GDP than Germany, and a trade matrix much more "euro centric" is usually quite shielded against shocks affecting non-euro demand.

This is to some extent offset by the fact that French exports are highly sensitive to the exchange rate, which means that it would be a clear victim of the recent re-appreciation of the euro. Actually, the yoy growth rate in exports has fallen from 8% at the beginning of the summer to less than 4% in August, the first sign of lesser foreign traction. This means that our forecast for this country is highly dependent on the FX call towards parity.

Risks on the domestic demand side are balanced. Fiscal policy continues to be a drag, but the pace of austerity is now somewhat slower. On the upside, the supply-side tax policies boosting corporate profits could start having a positive effect on investment and hiring, though this is conditional on decent Euro area demand.

Italy While leaving 2015 forecasts unchanged at 0.8% yoy, we revised our GDP projections for 2016 slightly downward to 1.3% yoy from 1.4% yoy growth. However, we remain above-consensus and upbeat about the continuation of the growth momentum in Italy. In the first half of the year, the economic recovery was helped by three important tailwinds: ECB’s QE (which eased lending standards), weak oil prices (which supported households’ spending) and weak exchange rate (which helped price competitiveness of Italian firms). For the second half of 2015 and for 2016, slower global growth and a tightening in Euro area monetary conditions might pose downside risks to export and


investment dynamics, in our view. Thus, we revised down capex to 1.1% yoy from 1.2% yoy and exports to 3.7% yoy from 3.9% yoy in 2016.

With the risks of softer international trade and lower path of investments, we reiterate our view that the growth engine for this and next year remains stronger domestic demand. Consumer confidence reached a new record peak in September since 2002, and it continues to be supportive for private consumption expenditure. HHs’ sentiment is boosted by raising expectations toward a rosier economic outlook and by the recent positive data from the labor market. The unemployment rate fell to 11.9% in August, amid the combined effects of the cyclical recovery, the improved flexibility enhanced by the Job Act and the fiscal incentives for the newly hired employees introduced at the beginning of the year. Meanwhile, manufacturing and service activity data remained strong in 3Q. In the three months May to July, industrial orders improved 6.6% yoy while industrial turnover accelerated 2.4% yoy. Overall, producer sentiment remains upbeat, as also highlighted by the latest PMIs and Istat business confidence indicators. Moreover, we think that measures proposed in the draft 2016 Budget Plan, if confirmed, will help the ongoing domestic demand momentum by increasing incentives for investment and by reducing the tax burden on private sector.

Spain We have cut our forecasts for Spain marginally, from 3.2% GDP growth in 2015 and 2.6% in 2016 to 3.1% and 2.5%, respectively. We expect the economy to have decelerated to 0.7% QoQ GDP growth in 3Q, from 1.0% in 2Q, This has been driven by still very robust internal demand, with consumption growing at similar rates as in 2Q but investment decelerating a bit. Meanwhile, given the exposure of the country to regions where the weakness in the global economy is more noticed, exports probably lost some dynamism.

Going forward this should be the ongoing theme. Internal demand, mostly consumption, should remain strong. Capex should decelerate further on the back of political uncertainty, the global slowdown, and tighter financial conditions. We remain convinced fiscal targets will be missed this year and next. Inflation will remain very subdued and will only reach levels not too far from 1% in the forecasting horizon.

And this time, we feel risks are biased to the downside. Any effects of the German auto industry challenges remain to be seen, given Spain is an active participant in the production chain. Also, we are conservative on the impact of political uncertainty on our numbers. And finally, it remains to be seen, after the negative opinion of the European Commission on the Spanish budget, whether the upcoming government will need to add further austerity to the policy mix.


China Helen Qiao Merrill Lynch (Hong Kong) [email protected]

Xiaojia Zhi Merrill Lynch (Hong Kong) [email protected]

Sylvia Sheng Merrill Lynch (Hong Kong) [email protected]

Lower but more balanced growth • We are lowering our real GDP forecasts slightly to 6.9% and 6.6% for 2015 and

2016, respectively, from 7.0% and 6.8% previously.

• We expect policymakers to adopt more targeted fiscal measures to promote an innovation-led economy, and two more interest rate cuts in the next 12 months.

• China’s growth is lower but has become more balanced. Reforms remain key to maintain potential growth in the long run.

Adjusting our growth and policy forecasts We are lowering our real GDP growth forecasts to 6.9% yoy and 6.6% yoy for 2015 and 2016, respectively, down from 7.0% yoy and 6.8% yoy previously. This reflects the potential drag from weak investment and manufacturing sector growth, in addition to a smaller contribution from the property and financial sectors to overall growth, especially in the next two quarters. On the positive side, we believe terms of trade gains will likely remain positive for the rest of 2015 and 2016, with further fiscal expansion and monetary easing buffering significant downside risks.

We cut our CPI inflation forecasts to 1.6% yoy for 2015 and 1.8% yoy for 2016, from 1.7% yoy and 2.4% yoy previously. Relative to our expectation, CPI inflation did not hold up well on the back of better-than-expected GDP growth in 3Q15. As non-food price inflation seemed anchored with stabilizing trends in fuel and rental equivalence, food price inflation remained muted due to weak aggregate demand. As a result, we trimmed our inflation forecast levels while maintaining the expectation of a growth-led rebound in 2H16.

Chart 6: GDP growth trapped in a downward channel with policy driven mini-cycles

Source: BofA Merrill Lynch Global Research, CEIC, NBS

0

5

10

15

20

25

1Q06

1Q07

1Q08

1Q09

1Q10

1Q11

1Q12

1Q13

1Q14

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1Q16

GDP (% yoy) GDP (% qoq, saar)%

Forecast





Effective countercyclical measures are needed China has undergone a tough period of growth deceleration in actual and potential terms in the last four years (Chart 6). Coincidentally, its economy has become more balanced with the help of resilient consumption and growing service sectors. There are a few signs of growth stabilization from auto sales, property sales and land purchases in recent months, in our view (Chart 7 and Chart 8). However, the stabilizing force from consumption and service sectors is not strong enough to offset the drag from industrial sector deceleration in the near term. Continued import contraction, persistent PPI deflation, and industrial sector profit deterioration still suggest growth has yet to return to firm footing.

Short term catalyst #1: Further easing measures We believe there is still room for policymakers to adopt countercyclical measures including increasing fiscal expenditure, cutting property related fees and taxes, as well as monetary easing to help narrow the negative gap, in the next few quarters. The faster pace of public spending year to date implies a potentially higher level of fiscal deficit than in previous years, along with tax reduction initiatives introduced for housing and auto purchases.

In our view, the central bank will likely cut benchmark interest rates twice (each by 25bp) in the coming 12 months, to reduce funding costs further in real terms. Our FX strategists also expect further CNY depreciation against the dollar to 6.5 by the end of 2015 and 6.9 by the end of 2016.

Admittedly, exchange rate movements are likely to become more event-driven and expectation-dependent. As public expectation shifted away from chronic yuan appreciation after the USDCNY move on 11 August, it triggered capital outflow in late summer. In view of these changes, our FX strategists expect a notable depreciation of the CNY against the USD to 6.5 by the end of 2015 and 6.9 by the end of 201

To anchor expectations, especially ahead of the IMF decision on CNY inclusion in the SDR (special drawing right) basket in November, we expect dollar exchange rate stability to be a higher priority in the near term. With that said, small depreciation that occurs periodically after extended episodes of dollar pegging cannot be fully ruled out.

Short term catalyst #2: Terms of trade gains China averaged 11.3% in import price declines year to date, resulting in material gains from terms of trade improvement. Before any meaningful pickup in commodity prices take place, China will likely continue to benefit from terms of trade gains. According to the IMF, China’s terms of trade grains from lower commodity prices will reach 1.0% of GDP this year.

Chart 7: Deflationary pressure persists


Chart 8: Housing market held up better in tier-1 and 2 cities


-10-8-6-4-202468

1012

2008 2009 2010 2011 2012 2013 2014 2015CPI PPI

% yoy

-1.5-1.0-0.50.00.51.01.52.02.53.03.5

Jan-

11Ma

y-11

Sep-

11Ja

n-12

May-1

2Se

p-12

Jan-

13Ma

y-13

Sep-

13Ja

n-14

May-1

4Se

p-14

Jan-

15Ma

y-15

Tier-1 Tier-2 Tier-3

Prices, % mom


Risks to our forecasts In the near-term, risks on the upside of our growth and inflation forecasts will likely increase if the rebound in property sales expands into lower-tier cities and triggers more property development activities. In addition, policy easing with more fiscal expansion toward year-end on the expenditure side could reverse the deceleration in infrastructure investment growth, especially if additional efforts are exerted to ensure funding availability for public sector projects. However, weaker external demand, potential disorderly capital outflow triggered by narrower interest rate differentials and/or exchange rate movements could escalate risks on the downside.

Growth is lower but more balanced in the long run In our view, the gradual slowdown in the last four years was due to the potential growth rate grinding lower and cyclical pressures on the economy. That implies there is both room to support potential growth with structural reforms as well as room to make counter-cyclical policy measures more effective. If proper initiatives were implemented, there could be further upside to the current growth level in both the short term and long term. On the other hand, a further slide in potential growth and mismanagement of business cycles could result in downside risks to growth.

Long term catalyst #1: Reforms offer an opportunity for TFP growth It is important for China to heed how to maintain a high level of TFP growth during the transition from a manufacturing-led to a service-led economy . As demographic dividends fade and the accumulation of physical and human capital slows naturally, the key for China is to continue to induce high TFP growth with structural reforms and services sector deregulation in years to come, which includes fiscal and financial reforms, SOE reforms, as well as introducing more competition into protected service sectors (eg, financial services, telecom, healthcare, etc).

Judged by relative development of the service sector, we believe there is still a long way to go before the Chinese economy is mature enough with service sectors at comparable size and efficiency with those in other major economies in the world. We remain hopeful that upcoming structural changes after the fifth plenum of the 18th Communist Party Congress (CPC) will lend support to efficiency gains in both manufacturing and service sectors to hold potential growth up, and create new growth engines through innovation.

Long term catalyst #2: More investment is necessary at the right place To counteract the common perception of a China over-invested story, we argue there are still ample opportunities for investment in service sectors as well as in environment protection and infrastructure, including public transportation, urban underground sewage/pipeline development, etc. The well-known urban problems of air pollution, traffic congestion, inadequate healthcare facility, and over-crowded highway and tourist destinations during national golden week holidays are more likely to be tell-tale signs of underinvestment than overinvestment.

However, this is not to deny the presence of overinvestment in certain sectors in certain regions. As investment demand weakened over the past few years, overcapacity spread from steel, cement, ship making, and glass, to include energy, optical fiber, and even part of the consumer space. Our view is the capacity excess resulted from both structural and cyclical causes, but from an aggregate demand perspective, China still has more catching up to do in capital stock accumulation as it presses forward in the urbanization mega trend.


Japan Masayuki Kichikawa Merrill Lynch (Japan) [email protected]

Recovery continues, albeit more slowly than expected • We lower our calendar year growth forecasts for 2015 from 0.8% to 0.7% and for

2016 from 1.6% to 1.2%.

• Two factors behind slower-than-expected growth are a larger negative contribution from net exports and tardy domestic demand due a rise in the savings rate.

• We still believe Japan's recovery will outpace the potential growth rate through 2016 supported by: (1) structural improvements in the corporate sector; (2) fiscal and monetary policies; (3) improved terms of trade; and (4) solid demand for labor.

Revise down 2015-16 growth forecasts The Japanese economy recorded rapid growth of 4.5% qoq (annualized) in 1Q15, but this fell back to a decline of 1.2% in 2Q, and we forecast growth of close to zero or only marginally positive in 3Q. In this report, we consider why expansion is proving more sluggish than expected, while we lower our calendar-year growth forecasts for 2015 from 0.8% to 0.7% and for 2016 from 1.6% to 1.2%. However, Japan's economy rests on better fundamentals than it did before Abenomics, and we still believe that recovery will continue through next year.

Two factors behind lower-than-expected growth Growth has been slower than expected since 2Q15 for two broad reasons. The first lies in overseas factors. Chart 9 plots the volume of Japanese exports by region. Growth in exports to the US and Europe made up for the decline in exports to China through 1Q15, but exports to the US and to Asia outside China have also turned down yoy since 2Q, and it has no longer been possible to offset the impact of falling exports to China. We attribute this mainly to a downward revision to materials industry capital expenditure associated with falling resource prices, and to a certain constraint on the US economy caused by the stronger dollar.

Chart 9: Export volume by country/region (yoy, %)

Source: MoF

Chart 10: Higher income vs. lower propensity to consume

Source: Statistics Bureau, BofAML Global Research

3.8

3.6

7.9

4.6

-4.9

-0.6

-0.7

4.4

0.4

-3.3

-2.8

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1.0

-2.6

-5.4

-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0

Total

US

EU

Asia

China

Jan-Mar Apr-Jun Jul-Sep

72

73

74

75

76

77

78

79

95

96

97

98

99

100

101

102

Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

Disposable income (2010=100, LHS)

Average propensity to consume (%, RHS)



The second reason for the undershoot is that we think the savings rate has risen further than expected. Corporate earnings are hitting record-high levels, but capital expenditure growth is comparatively sluggish, and the corporate capex-to-cash-flow ratio is thus running at a historical low. Among households, too, disposable income is rising but the average propensity to consume is falling (Chart 10), and the savings rate is on the increase, thus suggesting that momentum in consumption recovery has slowed. Higher tax revenue than budgeted likely implies a fall in the government budget deficit (a smaller negative savings). A somewhat higher Japanese current account surplus than expected despite a shortfall in external demand also tallies with a rise in the domestic segment's savings rate. Incomes have improved, but the increased savings rate has resulted in sluggish domestic demand growth, keeping the current account surplus correspondingly high.

Looking ahead, we estimate that the Japanese economy's sensitivity to external factors (the impact on the Japanese economy of a 1% change in individual countries' or regions' growth rates) is about 0.3ppt for the US and around 0.2ppt for China. The US growth rate may rebound more gently than we previously envisaged, as China's expansion continues to slow gradually, and we have therefore revised our forecast for the contribution to growth from external demand (exports less imports) in 2016 from -0.1ppt to -0.3ppt (affecting the growth rate by 0.3ppt because of rounding), and this is the main element in the latest revision to our forecasts.

We are more optimistic on domestic demand than on external demand (for reasons discussed in more detail in the next section). However, although the BoJ's September Tankan clearly showed upward revisions to FY3/16 capital expenditure plans, August machinery orders surveyed at just about the same time were well below expectations. Growth was only sluggish in 2Q and 3Q, so although companies have upbeat capital expenditure plans, they are probably delaying implementation. We have trimmed our 2015 and 2016 growth forecasts by about 0.1ppt for this tardy domestic recovery.

Four factors sustaining recovery We have not changed our basic message that Japan's recovery will outpace the potential growth rate through 2016, even though we have revised down our forecasts. There are four reasons for this. First, the non-financial corporate sector sharply reduced fixed

Chart 11: Recurring profit margin in the non-financial corporate sector and compensation of employees (yoy, %)

*4q moving average Source: MOF, MHLW

Chart 12: Terms-of-trade index(export price index/import price index)

Source: BoJ

-9.0

-6.0

-3.0

0.0

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5.0

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1991 1994 1997 2000 2003 2006 2009 2012 2015

Recurring profit margin*, LHS

Total cash earnings + Regular workers, RHS

80

85

90

95

100

105

2011 2012 2013 2014 2015


costs through measures such as cutting surplus capacity at the time of the 2008 financial crisis and during the subsequent period of abnormal yen strength, substantially lowering break-even points and improving profitability.

Second, government policies will likely provide an effective cushion for the economy. Judging from statements by PM Abe, government leaders, and the PM's advisors, the Abe administration fully recognizes the problems of surplus savings and insufficient demand, and is likely to waste little time in drawing up a package to stimulate the economy after the 3Q15 GDP announcement (16 November). Our baseline scenario is for the BoJ to maintain its current monetary policy framework, but there could also be a monetary policy response if the yen strengthens to ¥115/$ or beyond, if the stock market is unstable, or if economic data are weaker than expected.

The third reason is the impact of improved terms of trade associated with lower resource prices. Reductions in capital expenditure related to natural resources handling may be adversely affecting the Japanese economy via capital goods exports. However, imports account for the majority of Japan's supply of resources, and lower resource import prices are providing a considerable boost to domestic income via improved terms of trade (about ¥7–8trn just from mineral fuel imports, 1.4–1.6% of GDP). For example, the positive impact on households' real purchasing power from falling energy prices has started to outweigh the negative impact of rising food prices. We think this factor will likely support consumption recovery through 2016.

The fourth point is solid demand for labor. We attribute this not only to economic recovery since 2013 but also to the fact that the ongoing pick-up in the economy is mainly in the non-manufacturing sector. The service sector is labor intensive, with lower average productivity per worker than in manufacturing. Consequently, employment increases even under gentle growth, tightening up the labor market. With corporate earnings at record-high levels, the perceived labor shortage in the BoJ Tankan has reached its most acute since the bubble era, and this is likely to feed through to growth in labor-saving capex and to rising wages and consumption. Continued growth in employment should also cap the rise in the savings rate attributable to more cautious household sentiment. Further, although we have lowered our growth rate forecasts this time, we believe the labor market will remain tight, and we have revised down our CPI estimate by only the 0.1ppt associated with the cut to our crude oil price assumption.


Emerging Asia Abhishek Gupta DSP Merrill Lynch (India) +91 22 6632 8682 [email protected]

Indranil Sen Gupta DSP Merrill Lynch (India) +91 22 6632 8653 [email protected]

• Week in review: China’s September macro data releases suggested that the overall

economy held up better than expected in 3Q. GDP growth came in slightly above expectations at 6.9% yoy in 3Q from 7.0% yoy in 2Q. However, other macro data were mixed with industrial production (IP) growth and fixed asset investment (FAI) growth particularly disappointing and retail sales growth slightly better than estimates.

• Week ahead: Taiwan’s 3Q15 GDP likely continued to decline from -0.5% yoy in 2Q15. Thailand’s custom exports probably remained weak, falling 7%yoy, but with a small gain month-on-month. Thailand’s September current account surplus likely narrowed to $1.4bn. We expect Singapore’s industrial production to have declined by 5% yoy in September, on the back of weak manufacturing.

India still offers relative value India still offers relative value in a slow-growth world. We see a very shallow recovery at home, with growth clocking 5.5% in FY16 and 6.5% in FY17 (old GDP series). At the same time, this relatively faster growth is allowing India to overtake Brazil and Russia in GDP terms to emerge as the second-largest EM after China. The next trigger should come from an urban consumption recovery of 1% of GDP ahead rather than an upturn in the capex cycle, in our view.

Slow bottoming out on delayed global recovery, lending rate cuts We see a slow recovery in India on a delayed global recovery and lending rate cuts. Growth will likely clock 5.5% in FY16, the same as FY15 in the old GDP series. We see a turnaround to 6.5% for FY17, assuming better rains and lending rate cuts feeding through. We have also marginally cut our growth forecast to 7.4% in FY16, close to FY15’s 7.3% (in the new GDP series) (Table 4 and Chart 13). India, of course, is growing faster than most EM peers (Chart 14) (see 7%/ 5% growth: Very very slow recovery on track 01 Sep 2015).

Table 4: Growth bottoming out slowly

Weight FY14 FY15 4QFY15 1QFY16 FY16E FY17E Agriculture, Forestry and Fishing 14.9 3.7 0.2 -1.4 1.9 1.0 4.0 Industry 21.5 5.3 6.6 7.2 6.4 7.1 6.4

Mining and Quarrying 2.7 5.4 2.4 2.3 4.0 2.5 2.5 Manufacturing 16.7 5.3 7.1 8.4 7.2 8.0 7.0 Electricity, Gas & Water Supply 2.1 4.8 7.9 4.2 3.2 6.0 6.0

Services 56.0 8.1 9.4 8.0 8.6 9.1 9.4 Construction 7.5 2.5 4.8 1.4 6.9 4.0 4.0 Trade, Hotels, Transport & Comm 17.9 11.1 10.7 14.1 12.8 10.5 11.0 Finance, Real estate & Prof. serv 18.9 7.9 11.5 10.2 8.9 11.0 10.0 Public admin, Defense & Other

serv 11.7 7.9 7.2 0.1 2.7 7.0 9.0 GVA at basic prices 92.3 6.6 7.2 6.1 7.1 7.3 7.8 Net taxes on products 7.7 10.2 8.7 18.9 6.5 8.0 8.0 GDP at market prices 100.0 6.9 7.3 7.5 7.0 7.4 7.9 Source: BofAML Global Research Estimates, MoSPI.



http://research1.ml.com/C?q=I!qowu141ZgABUOHMNcrYw

http://research1.ml.com/C?q=I!qowu141ZgABUOHMNcrYw


Chart 13: Shallow recovery…

Source: BofAML Global Research Estimates, MoSPI

Chart 14: … but overtaking China as fastest growing BRIC

* For India, data is reported on FY basis. 2009 stand for FY2009-10 and so on. Source: BofA Merrill Lynch Global Research estimates.

Three event risks: Fed, earnings, Bihar polls We, however, expect FX equity flows to stall until markets price in our three event risks:

• Fed rate hike: Our US economists expect the Fed to hike in December.

• Earnings: Markets will watch December results for signs of a turnaround in earnings. Our equity strategists expect FY16 earnings to grow 8-10% from 2% in September.

• Bihar polls: Out on November 8, will impact the market's perception of reforms.

Lead indicators signal slow recovery Our lead indicators also continue to point to a slow recovery (Table 5). We had shifted our call to growth bottoming in early 2012 and growth bottoming out in August 2014. At the same time, there has been no material improvement since then. Real cash demand, a key lead indicator, has clearly bottomed out. Confidence is also improving with our (M1/M3) indicator (ie, active money/total money stock) picking up. Our BAML India Economics Conditions Index also supports our view that the economy is bottoming out

4.04.55.05.56.06.57.07.58.08.59.0

Jun-

12

Sep-

12

Dec-

12

Mar

-13

Jun-

13

Sep-

13

Dec-

13

Mar

-14

Jun-

14

Sep-

14

Dec-

14

Mar

-15

Jun-

15

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15E

Dec-

15E

Mar

-16E

GDP (market price) GVA (basic price)

-5

-3

-1

1

3

5

7

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12

Dec-

12

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13

Sep-

13

Dec-

13

Mar

-14

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14

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15

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15E

Dec-

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16E

Sep-

16E

Dec-

16E

Brazil Russia India China

%YoY

Table 5: Lead indicators signal bottoming out

Sector 9-Apr 10-Jan 11-Dec 12-Apr 14-Aug Now Real cash demand + + - + + + Industrial production Industry <--> + - - <--> <--> Credit Industry, services - <--> <--> - <--> <--> Capex Industry <--> + - - - - Confidence Index Industry, services + + - - + + Earnings Industry, services <--> + - <--> <--> <--> Construction Industry, services <--> + <--> <--> <--> <--> Traffic Industry - + <--> <--> <--> <--> Telecom subscribers Services <--> <--> <--> <--> <--> <--> OECD lead indicator Industry, services - + - <--> <--> <--> Source: BofA Merrill Lynch Global Research estimates


Chart 15: India will become 2nd largest BRIC after China in 2015

Source: BofA Merrill Lynch Global Research estimates.

Table 6: India's stagflation less acute than most BRICs + TIMs

Growth CPI Inflation (% yoy avg)

Inflation/ Growth

Pre-crisis

(2007)

Crisis (2009)

Current (2015E)

Pre-crisis

(2007)

Crisis (2009)

Current (2015E)

Current (2015E)

BRICs India* 9.3 8.6 7.4 6.3 12.4 5.2 0.7 Brazil 6.0 -0.2 -3.3 3.6 4.9 8.7 -2.6 Russia 8.1 -7.9 -3.7 9.0 11.7 15.3 -4.1 China 14.2 9.2 7.0 4.8 -0.7 1.7 0.2 TIMs Turkey 4.7 -4.7 2.6 8.8 6.3 7.5 2.9 Indonesia 6.3 4.7 4.8 6.0 4.9 7.2 1.5 Mexico 3.1 -4.7 2.2 4.0 5.3 2.8 1.3 *For India, data is reported on FY basis. 2009 stand for FY2009-10 and so on. Source: BofA Merrill Lynch Global Research estimates.

…but India remains relative value; 2nd largest EM after China We see the glass as half full rather than half empty. Table 6 shows that India is a rare economy in today’s world in that it is not in stagflation. It is poised to overtake Brazil this year after having overtaken Russia last year in nominal GDP terms to emerge as the second-largest EM after China (Chart 15).

Rate cuts drive cyclical recovery; reforms support 5-10 years We still argue that lending rate cuts hold the key to cyclical recovery. Reforms remain important, but more from a medium 5-10 year perspective. For example, the 1991 reforms led to a structural break only in 2001.

We expect the RBI to cut another 25bp in February after it meets its under-6% January 2016 inflation mandate. This will bring the RBI repo rate, at 6.5%, to below medium-term 7% CPI inflation. The focus should now shift to permanent liquidity as the RBI still needs to inject ~US$33bn by March 2016 to fund 5.5% growth. Assuming it does, we expect banks to cut 50bp in the April-September 2016 slack season. Our Asia rates strategist expects the 10y to slip to 7.3% with further RBI rate cuts and a US$5bn hike in FPI G-sec limits by January.

Consumption recovery next trigger We expect the next trigger for recovery to come from a pick-up in consumption of 1% of GDP rather than an upturn in the capex cycle. This will be driven by four factors: (1) softer lending rates; (2) public sector salary hikes of 0.3-0.5% of GDP on the VIIth Pay Commission award; (3) household savings of 0.4% of GDP due to falling oil prices; and (4) a possible hike in wheat MSP to implement the Swaminathan formula before the early 2017 Punjab/UP polls.

The week in preview Focus will be on Taiwan’s 3Q15 GDP, which likely continued to decline from -0.5% yoy in 2Q15. Thailand’s custom exports probably remained weak, falling 7%yoy, but with a small gain month-on-month. We expect to see a pick-up in vehicle exports. Thailand’s September current account surplus likely narrowed to $1.4bn due to rising imports and outflow from the service account. We expect Singapore’s industrial production to have declined by 5% yoy in September, on the back of weak manufacturing. Also watch out for Hong Kong September export growth.

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Emerging EMEA David Hauner, CFA MLI (UK) [email protected]

Turker Hamzaoglu MLI (UK) [email protected]

Mai Doan MLI (UK) [email protected]

Vadim Khramov MLI (UK) [email protected]

GDP revision: no tricks or treats We cut our 2016 GDP forecasts for the EEMEA commodity importers (CE-4, Israel, Turkey) in line with a G-10 growth revision. However, the commodity exporters stay unchanged as we already had been highly cautious on them. We started 2015 below consensus on EEMEA GDP as in most of the previous years, and unfortunately, pessimism again proved warranted. Heading into 2016, we are still below consensus, including on the GCC, Israel, S Africa and Turkey, while we are about in line on the CE-4. Table 7 shows the new vs old forecasts, which we discuss in more detail below.

From a market perspective, we should not be too negative on 2016, as the second derivative of growth is turning positive for the first time since 2011. We forecast improvement in PPP-GDP-weighted EEMEA growth from [1.0%] to [2.0%], primarily due to the FX-led rebalancing in Russia, but also in South Africa and Turkey. In USD terms, the region has been in recession in 2014-15, and if the USD has peaked, this would arithmetically support USD-denominated growth, which is crucial for asset prices.

Russia: just cut, stable now We recently cut GDP growth in Russia in line with oil to 0.3% in 2016 despite a supportive base from 2015. However, with another downward leg in oil, Russia would likely return to recession. According to Economics Ministry estimates, real GDP remained flat in July-August and posted 0.3% mom sa growth in September for the first time this year. We expect a cumulative 250bp rate cut by 1Q16 eopbut believe that the CBR could cut even more provided a lack of negative market shocks.

Israel: structural slowdown In Israel, the 2Q data show material slowdown, with growth of only 0.1%, driven mainly by consumption, and not only exports. The BoI recently repeated that it considers the slowdown to be driven by temporary factors and stated there is no evidence that low GDP growth is related to weak aggregate demand. In our view, the slowdown in GDP is likely to be structural, not cyclical or temporary, as the BoI thinks. Therefore, we cut our GDP forecast to 2.5% from 2.7% in 2015 and to 2.8% from 3.0% in 2016.

Table 7: New vs old BofAML forecasts As of Sep'15 New (as of Oct'15) Change 2015F 2016F 2015F 2016F 2015F 2016F Israel 2.7 3.0 2.5 2.8 -0.2 -0.2 Poland 3.5 3.7 3.5 3.5 0.0 -0.2 Hungary 3.0 2.9 2.8 2.5 -0.2 -0.4 Czech Rep 4.1 2.9 3.9 2.6 -0.2 -0.3 Romania 4.0 3.3 3.5 3.1 -0.5 -0.2 Turkey 2.6 3.0 2.7 2.8 0.1 -0.2 Source: BofA Merrill Lynch Global Research

Chart 16: Israel - no rate hikes for long

Source: Haver, BofA Merrill Lynch Global Research

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CEE: domestic strength cushions external headwinds, Poland most resilient We lower CEE’s 2016 GDP forecasts by 0.2-0.4pp in view of weaker global growth momentum. Poland still records the highest and most stable growth rates of 3.5% thanks to its diversified economic structure, while we cut Hungary’s GDP most, in view of weaker momentum in IP and foreign orders, as well as the Volkswagen fallout. Most of the downward revisions are in concentrated in exports and investment, as a double whammy of China slowdown and the Volkswagen crisis likely exacerbates the downside risks to CEE’s external demand, weighing on firms’ investments. Households come to the rescue this time around, with a solid cyclical recovery, underpinned by stronger financial positions after several years of balance sheet repair. Private consumption will thus replace net exports/investments as the biggest contributor to growth in 2016.

Poland is the most resilient economy due to its relatively less open economy and more diversified export base. We keep our 2015 GDP, and cut 0.2pp from 2016 to see a steady growth rate of 3.5% in both years. Activity data for 3Q15 were on average on the soft side of expectations, but to some extent dragged by the summer drought. We estimate that the economy was still expanding at 3.5% rate last quarter, suggesting GDP is on track to our forecasts. Consumer and business surveys continue to reveal high levels of confidence, providing comfort about the underlying momentum. For 2016, weaker global growth will likely undermine exports and exacerbate the technical slowdown in investments (as EU funds drawdown slows at the start of the new allocation period). Meanwhile, households’ consumption, benefiting from labor market improvement, lower rates and weaker inflation, will likely maintain a growth rate of 3% next year, contributing 2.3pp to 2016 GDP.

Hungary and the Czech Republic are most exposed to foreign demand and the auto sector, leading us to cut 2016 GDP growth by 0.4% and 0.3%, to 2.5% and 2.6%, respectively. Meanwhile, Romania will likely see growth moderation to 3% from 3.5% this year. Net exports contribution is set to turn more negative next year as significant fiscal easing makes private consumption the sole driver of growth.

Weaker but still solid growth should keep the regional central banks on a dovish bias but not rushing into concrete easing action yet. Our baseline sees steady policy rates in all countries, but in an alternative scenario of global, and thus regional growth disappointment, easing risks are tangible in 2016. The National Bank of Poland and the National Bank of Hungary are more likely to act. We have been flagging that a new MPC in Poland from 2016 will likely be more dovish than the current one. Further insight on PiS’ monetary policy agenda as well as the October MPC meeting means that the risks of rate cuts in 2016 are higher than we had previously thought. We would reassess our rate call after the elections. Logistics of MPC changeover suggests that if rate cuts were to come, the earliest timing is likely 2Q16. Meanwhile, the NBH holds a clear pro-growth bias and is already working on unconventional measures to support growth.

Chart 17: Consumption gains more importance as key driver of GDP (ppt)


Chart 18: CZ and HU has high trade openness, most exposed to auto

Source: WTO, Haver, BofA Merrill Lynch Global Research

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Turkey: domestic politics play a key role in macro outlook We have suggested that political risks are likely to have peaked for now following our meetings in Ankara in early October. Given that both Turkish assets and the real economy have suffered from increased political uncertainty for almost two years now, this is an important proposition, if it proves to be correct.

The initial impact of stabilizing politics is the expectations channel. Since 80% of GDP is domestic consumption and 24% is investments, we do not underestimate the importance of the expectations channel in Turkey. Then the composition of policies the new government will adopt will determine the underlying trends for the growth outlook.

Opinion polls suggest that elections on 1 November will not yield a significantly different outcome compared to June, and that means coalition talks will resume soon. Given the large disappointment after June elections when parties failed to form a coalition, the first landmark markets would be watching is the formation of the next government. Since the nationalist MHP clearly rules out any coalition with the pro-Kurdish HDP, a coalition without AKP is not possible. We believe markets will initially enjoy both AKP-CHP or AKP-MHP coalitions, as AKP will be the large coalition partner anyway. Then the policies and priorities of the government will be in the spotlight as Turkey faces a challenging political and economic outlook.

GDP growth to slow down in 4Q15 While the government believes that stronger external demand will push GDP growth to 4% next year, we disagree given our downbeat global growth outlook and expectation of relatively tight monetary and fiscal policies. We see GDP growth inching higher to only 2.8% in 2016 from 2.7% this year.

Real GDP growth has been holding up relatively well year-to-date despite the political turmoil and weak global backdrop, but we expect it to weaken markedly in 4Q15. GDP growth has averaged 3.1% in 1H15, and we expect 3Q GDP growth to be slightly below that. However, the weaker TRY and increased political uncertainty over the summer is likely to take its toll with a lag in 4Q15.

Fiscal and monetary policies unlikely to introduce large stimulus Turkish fiscal policy has been tight, and we do not expect it to get much more accommodative, even under a coalition government. The opposition has been offering some generous spending pledges in the run-up to elections, but the budgeted 2016 deficit of 1.6% of GDP is neutral when cyclically adjusted. CBT on the other hand has been suggesting that it will move policy rates higher following the Fed. We expect the lift-off in December 2015 and penciled in a 100bp hike then and another 100bp in early 2016. Chart 19: Recovery is delayed given weaker sentiment


Chart 20: Pressures on CBT to normalize monetary policy

Source: Haver, Bloomberg, BofA Merrill Lynch Global Research

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Latin America Claudio Irigoyen MLPF&S [email protected]

Ezequiel Aguirre MLPF&S [email protected]

David Beker Merrill Lynch (Brazil) [email protected]

Carlos Capistran Merrill Lynch (Mexico) [email protected]

Francisco Rodriguez MLPF&S [email protected]

Sebastian Rondeau MLPF&S [email protected]

LatAm in Focus: growth mindset We believe Latin America will likely experience another tough year in 2016 in terms of economic growth. In our view, Brazil will suffer another year of sharp economic contraction. We believe lack of political coordination plus falling investment and weaker labor markets will lead to a 3.5% GDP contraction, much worse than expected by consensus. We think Mexico will experience a modest acceleration as industrial production in the US picks up. However, growth will likely be constrained by cuts in public spending. We expect Chile will likely see mediocre growth for the third consecutive year.

Focus this weekend will be on the presidential election in Argentina, where Daniel Scioli is the front-runner. Regional elections will also take place in Colombia, which will largely be a test of forces between former President Álvaro Uribe’s Centro Democratico and Vice President Germán Vargas Lleras’ Cambio Radical party. PDVSA is due to amortize $3.4bn over the next two weeks.

Brazil: deeper and longer recession We now forecast the recession to intensify and last longer, with activity only recovering in late 2016. We still expect GDP to contract 3.3% in 2015, but revised down our 2016 GDP forecast to a 3.5% contraction from a 1.4% contraction previously. With no political consensus in sight, we believe the government will face challenges passing fiscal measures in Congress. Political uncertainty remains high, depressing confidence and inhibiting investment. We expect real disposable income will likely decline further, given higher inflation, weaker labor market and higher taxes, while credit availability continues to tighten. Activity is unlikely to turn until 4Q16, in our view.

The main drivers of our GDP revision are investment and private consumption. Our equity analysts forecast major Brazilian companies will reduce capex by 4.6% in nominal terms in 2016, although cheaper assets should cushion the contraction in investment. We forecast investment declines of 9.4% in 2015 and 7.6% in 2016. For consumption, we expect the weakening labor market combined with high inflation will likely lower real wages, as several unions are accepting wage readjustments equal or even lower than inflation. Slower credit growth also contributes to lower consumption, which we expect to contract in 2016. We now expect private consumption to decline 4.7% in 2016 from 3.4% in 2015.

Our GDP forecasts reflect a deeper recession than consensus for 2015 and an even harsher one than consensus for 2016 (consensus at -3% and -1.22%, respectively) and imply the first two consecutive GDP declines since 1930/1931. We are not changing our inflation and Selic forecasts at this point. In 2016, we believe a deep recession and decelerating inflation should allow the Brazilian Central Bank (BCB) to cut rates in 2H, bringing the Selic to 12.75% by year-end.

Next week, the Copom minutes and the primary fiscal result will be the focus points, along with inflation and unemployment releases. We expect the minutes’ tone to remain neutral, in line with the BCB’s strategy to hold the Selic at 14.25% for a prolonged period so








inflation converges to 4.5% in the relevant monetary policy horizon. We anticipate September’s primary fiscal deficit to deteriorate from R$7.3bn in August as revenues continue to underperform. Inflationary pressures should remain high and we forecast October’s IGPM to rise 10.1% yoy (vs 8.35% in September), driven by BRL depreciation and higher fuel prices. The labor market should continue to loosen following the activity deceleration, and we expect August’s unemployment rate (PNAD) at 8.7% (vs 8.6% in July).

Mexico: slow but steady for 2016 We cut our GDP growth forecast for 2016 following the cut to expected GDP growth by our US economics team. Yet, we still expect growth to accelerate moderately next year versus 2015. We now expect GDP to grow 2.5% in 2016, from 2.8% previously, but we keep our 2.2% forecast for 2015.

Growth will be marginally higher next year as we expect US industrial production to accelerate to 2% in 2016 from 1.5% in 2015, despite US GDP growth remaining at around 2.5%. Also, oil production will stabilize at around 2.2-2.3 million barrels/day, in contrast to the reduction in oil production seen in 2014 and 2015. However, growth will face headwinds due to a 1% of GDP cut to government expenditure in 2016, set to fall mostly on public investment. The cut is part of the consolidation program of the public sector in response to lower oil prices. Private consumption is growing more than GDP and will probably continue to do so, but at a more moderate pace.

We do not see demand pressures on prices because we expect output gap to remain negative throughout 2016. We do see inflation picking up to 3.5% in 2016 from 2.5% currently, mostly due to base effects, a change in gasoline pricing and some FX pass-through. Despite this increase, we expect core inflation close to 3%, Banxico’s target.

We still expect Banxico to remain on hold in 2015, but now expect it to hike only 75bp in 2016, 50bp less than before. We expect the hikes to occur in three steps of 25bp, most likely in March, June and December 2016. Our US economics team expects the Fed to hike 100bp in four steps from December 2015 to December 2016. In our view, Banxico has some room to support the economy by hiking less than the Fed given there are no domestic pressures to hike rates and the pass-through has been limited.

Given that the MXN has stabilized somewhat and the remarkable behaviour of inflation, we expect the FX commission to reduce intervention in the FX market in 2016, eliminating the auctions to sell dollars with no minimum price, but maintaining the auctions with a minimum price. The current program is set to expire in November 2015, but it is likely to be extended to December 2015 if the Fed does not hike in October.

Colombia: hawkish tone continues The latest data, with stronger than expected retail sales and industrial production, and a slight recovery in consumer confidence and import numbers that were not as weak as expected, lend support for a continued tightening by Banrep at the 30 October meeting. Several board members stated they expect inflation to continue high and possibly accelerate, as pass-through effects from depreciation are not over. These statements communicating the idea that the price shock is temporary, yet also conveying the central bank’s concern to rein in expectations and setting the stage for another hike.

Keep an eye on Sunday’s regional elections. This is largely a test of forces between Uribe’s Centro Democratico and Vice President Germán Vargas Lleras’ Cambio Radical party. Two key races are those for the mayor of Bogotá, where Vargas Lleras’ ally Enrique Penalize is locked in a tight race with two other contenders, and that of Medellin, where Uribe’s candidate, Juan Carlos Velez, commands a strong lead in polls.

Chile: the adjustment bureau We expect growth to remain mediocre for 2015 and 2016. Growth for Chile’s main trading partners weakened in the last two years and the country’s terms-of-trade is down nearly 20% since 2011. After a 10-year period (2004-2013) where domestic growth averaged

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4.75%, the economy looks set for its third consecutive year of close to 2% growth in 2016, after likely growth of 2.1% in 2015.

Investment has been the main force pulling the economy down. It is now 10% below compared to 4Q12. Worryingly, the decline has been concentrated in machinery and equipment rather than on the more interest rate-sensitive construction sector, implying loose monetary policy may not be all that effective. The mining sector has also been hit hard by lower commodity prices. Mining investment will not increase significantly unless copper prices or Chinese growth recover strongly, but we do not expect either to happen.

Government spending will provide less of a boost than in 2015. The 2016 budget bill assumes a 4.4% increase in public expenditure, less than half the increase in 2015. According to FinMin Rodrigo Valdes a more challenging external outlook the government will slow down the increase in spending for several years to achieve a structural balance.

Argentina: decision time We expect a modest negative market reaction if Daniel Scioli is elected president and a positive reaction if a second round vote is needed. If elected, Scioli will implement a gradual adjustment program initially, implying major execution risks given the magnitude of imbalances and low reserves. His government will likely accelerate the FX depreciation pace (maybe accompanied by small jumps), complemented by a “fiscal” devaluation (tax cuts for exporters and less dollars for savers and tourism). We also expect him to cut energy subsidies to high income households by about 1% of GDP. Gradualism’s feasibility relies on alternative sources of funding, such as additional loans from China, international organizations and a settlement with holdouts to gain market access (we do not expect the capital repatriation plan will work initially). If Mauricio Marci is elected, he will likely move faster to correct the ARS misalignment and implement a more aggressive fiscal plan.

Opinion polls show Scioli close to the thresholds needed to be elected president in the first round, i.e., more than 45% or at least 40% with more than 10% distance versus the runner-up (see Argentina in Focus: The final countdown). Argentines will also elect one third of the Senate and one half of the Lower House and the governors of several provinces, including Buenos Aires. Preliminary results will be known Sunday night, but official results will take at least a week.

Venezuela: uncertainty looms as elections get closer PDVSA is due to amortize $3.4bn in the next two weeks (28 October and 2 November), payments the market expects it to make. Nevertheless, there are potential signs of noise around the payments. One risk is that they lead to a decline in international reserves. Reserves are already at a 12-year low of $15.2bn, and a further decline would signal stress. We do not expect this to happen – PDVSA payments are made from its own accounts and not from central bank reserves, which are typically used to make sovereign debt service payments – yet if it did happen, it would definitely be a negative signal.

The other risk involves policy announcements on debt management operations. According to President Nicolas Madura a financing and debt management strategy for 2016-2018 will soon be announced. We expect the government will honor payments and avoid default at all costs, but it is also interested in reducing the weight of amortizations in coming years via voluntary liability management operations. Venezuela and PDVSA had traditionally done this type of operations. However, at current spreads, the willingness of the market to voluntarily accept such proposals may be less than what authorities believe.

Polls continue to point to a solid opposition victory, with the parliamentary election now just over a month away. We expect the government to try increasingly aggressive strategies as Election Day looms. Next week, authorities have said they will unveil a new price control policy for goods and services intended to reduce the speculation that they believe is at the root of inflation. We are skeptical that the implementation of this plan will in any way change the electoral landscape, and would therefore keep an eye out for other government initiatives.


Australia Alex Joiner Merrill Lynch (Australia) [email protected]

Australia an inflation outlier • Unlike other central banks, the Reserve Bank of Australia (RBA) has a targeted

inflation rate that is fulfilling its mandate. We expect this will be one more factor that sees it unlikely to ease policy further on economic grounds.

Inflation suggests further scope is limited There is a distinct lack of any inflationary pulse in many developed economies globally. Consequently, inflation-targeting central banks have no urgency to tighten policy, in the case of the US, or indeed are able to provide continued or increased policy accommodation in the case of many others. However, despite this global environment of low or no inflation, Australia is somewhat of an outlier, and in our view will continue to be so.

Unlike its global counterparts the RBA’s preferred and targeted measures of inflation are well within its target band. With economic growth rates likely having bottomed out, wages growth having stabilized, and the AUD lower in trend terms, it is difficult to envisage any further deceleration of inflation in the Australian context. Although we think that the RBA’s primary focus is the growth and employment outlook, we think it needs to be at least watchful of inflation. Equally, we think that it should only be concerned in a policy sense if any acceleration in inflation is being driven by domestic factors.

Inflation outlook, not too hot and not too cold With September quarter inflation released next week, below we outline both our short and medium term expectations for inflation. Our forecast is for inflation for the past quarter is on the headline measure 0.8% qoq and 1.8% yoy, and 0.6% and 2.5% on core measures. Price pressures emanating from the domestic economy are few. This is demonstrated by our diffusion index in which a below-average 60% of the 87 categories in the CPI is experiencing quarterly price increases – a number consistent with little broad-based inflationary pressure. These increases are relatively modest, as only around 36% of categories are running at an annual inflation rate above the mid-point of the RBA’s target band at 2.5%. This diffusion index result supports our assertion that domestically generated inflationary pressure should stay benign for some time yet. However, what will accelerate in our forecasts is the rate of imported inflation flowing through the tradables side of the CPI.

Chart 23: Headline and core inflation forecasts Headline inflation to accelerate markedly

Source: BofA Merrill Lynch Global Research, ABS, RBA

Chart 24: Headline CPI diffusion index Price pressures are currently few


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Key domestic drivers are benign but not collapsing As a result, in our view the RBA will keep rates on hold for an extended period with tighter policy becoming a consideration in late 2016 or early 2017. There is no strong indication from the domestic economy that price pressures will emerge in any material way. But equally, no further downside seems likely either.

Further output gap downside appears limited The output gap is clearly negative from an economy-wide perspective, with real GDP growth running at 2.0% yoy in the year to June. Even if we do assume trend/potential growth in the economy is lower than the 3-3¼% historically thought currently, growth is still significantly weaker than any downward revision to that measure. However, we would suggest that further downside from the output gap is likely to be limited. This is because the current decline in resources sector investment likely sees headline GDP growth overstate the output gap, whereas annual growth in private sector domestic demand excluding resources sector investment has stabilized modestly since bottoming out in late 2013.

Wage inflation shows signs of bottoming Wage inflation has decelerated markedly, yet we think this too is showing signs of bottoming out at or around 2¼% yoy. This has occurred as the unemployment rate and indeed the underutilization rate has risen (as we have noted before on the latter, “underemployment” continues to rise due to the record high proportion of part-time employees, many of whom want more hours to work). This spare capacity in the labor market is expected to be eroded only gradually, which should keep wage inflation low for some time.

Increased productivity needed There is also a need for businesses to improve productivity in the absence of significant wage gains to improve competitiveness. That is to keep the current low rate of unit labour cost growth entrenched. This will be important for international competitiveness in particular as we cannot and should not expect a lower A$ to solve the challenges that the economy has had in this space and continues to have going forward.

As an aside, this weak wage growth should keep cost-push inflation subdued, but also, the below-average growth in household incomes that results should prevent much demand-pull inflation. This is as retailers have little pricing power to push through cost increases to consumers, especially in the discretionary space.

The only significant non-administered price category that is contributing materially to headline CPI is new dwelling prices. This is as builders face increased costs at what is more than likely the very top of a record residential construction cycle.

Chart 25: Output gap and inflation Growth not deteriorating any further


Chart 26: Wages & underutilization Ample labour market spare capacity

Source: BofA Merrill Lynch Global Research, ABS

Chart 27: ULC and domestic inflation Unit labour costs exerting downward pressures


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This is significant given the relatively large weight this sector has in the overall CPI basket. Yet another consequence of this construction cycle is the additions it provides to the housing and in particular the rental stock. Rental vacancies rose and the rates of rent growth decelerated markedly to just 1.8% yoy – the weakest rate since 2003. We expect this offsetting trend to become entrenched as supply continues to come on-stream.

Tradable and retail inflation – pass through slow to come, but it will Despite domestic price pressures remaining contained, there is ongoing upward pressure on tradable prices due to A$ pass-through. These pressures may intensify – especially as we forecast a further depreciation in the A$ to US$0.68 by the end of 2015 and US$0.65 at year-end 2016. This pass-through is clear in consumer good prices “across the docks”, which have risen 6.6% yoy to June in response to a 16.6% yoy decline in the exchange rate.

However, to date, the acceleration in tradables inflation in the CPI index has been inconsistent and relatively subdued. So far, any acceleration of the rate of tradables inflation (excluding volatile items) as the AUD declined below parity has seemingly peaked in mid 2014 at just 1.2% yoy and decelerated thereafter. This may reflect several factors including better product management from importers; better hedging strategies; and difficulty in passing on rising costs in an environment of subdued consumer demand.

This relatively modest rate of pass-through has the RBA relatively relaxed about the prospect of inflation breaking out. The RBA noted, “Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate,” or some variation of this phrase in every monthly board meeting press release since July 2013. Although it is also the RBA’s assertion that, “The direct effects of the exchange rate depreciation since early 2013 are expected to add around ½ percentage point to underlying inflation over each year of the forecast period.” This has resulted in recent revisions higher in the RBA’s August Statement on Monetary Policy (SoMP). This is as the bank’s forecasters have revised down their exchange rate technical assumption to US$0.74 in the latest SoMP from US$0.93 in late 2014.

The RBA’s more qualitative assessment also underpins this forecast expectation with the RBA noting, “The lower exchange rate is expected to continue to place upward pressure on the prices of tradable items over the next few years. Indeed, liaison suggests that some firms may now be starting to pass on their higher costs to rebuild or retain margins.” We agree with this assertion, and it is a key driver of our inflation

Chart 28: Import prices and the AUD More to come if our A$ forecast is correct

Source: BofA Merrill Lynch Global Research, ABS, Bloomberg

Chart 29: Import prices by sector Retailer margin could be under pressure

Source: BofA Merrill Lynch Global Research, ABS

Chart 30: Tradables inflation and retail Food retailers have more pricing power than durables


0.45

0.55

0.65

0.75

0.85

0.95

1.0585

90

95

100

105

110

115

0001020304050607080910111213141516

Index March 2000=100 AUDUSD (inverse)

6.6%

3.7%

2.1%

7.8%

13.1%

8.1%

4.6%

16.6%

0.0% 5.0% 10.0% 15.0% 20.0%

Consumption goods total

Food & beverages

Household electricalitems

Motor vehicles

Textiles, clothing &footwear

Toys, books & leisuregoods

Other goods

A$ depreciation

yoy% -4

-3

-2

-1

0

1

2

3

4

5

6

03 04 05 06 07 08 09 10 11 12 13 14 15

Durable retail deflatorFood retail deflatorTradable inflation ex-vols CPI

yoy%


forecast for 2016. However, there is little evidence yet to support it in key business surveys in which final product prices and input purchase costs remain subdued.

The RBA’s looks for inflation to be contained but risks becoming more balanced Much of the RBA’s recent communications has been devoted to either the domestic growth outlook or global volatility/growth concerns. There has been little commentary on inflation, which suggests that it is low on the bank’s list of concerns. After the June CPI release, the RBA noted, “Inflation in the June quarter had been broadly as expected and domestic inflationary pressures had remained well contained.” The Bank has maintained that, “Inflation was expected to remain consistent with the target over the forecast period.” Nonetheless, it has had to upgrade its underlying inflation forecast for 2016 to the mid-point of the target band, as the exchange rate has depreciated.

We expect further downside than the RBA to the AUD by year-end, with it likely to be another 10% lower than the current technical assumption of US$0.74. This suggests that there should be some upside risk to the RBA’s 2½% yoy underlying inflation forecast in 2016 on this basis. Although we do not think the RBA will need to be raising rates in any hurry because of this, it does reduce the “scope” for the bank to reduce rates further.

Chart 31: RBA A$ forecast assumption Is there any further downside?

Source: BofA Merrill Lynch Global Research, Bloomberg, RBA

Chart 32: Surveyed final product prices and market price CPI Little pressure coming from businesses

Source: BofA Merrill Lynch Global Research, NAB, RBA

0.65

0.75

0.85

0.95

1.05

Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15

Actual AUDAUD assum,ption in RBA forecasts

AUDUSD

0

1

2

3

4

5

6

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Surveyed finalproduct prices

Market goods &services ex-volsCPI

mom%, sa, trend yoy%


Global Economic forecasts Global economic forecasts GDP growth, % CPI inflation*, % Short term interest rates**, % 2013 2014 2015F 2016F 2013 2014 2015F 2016F Current 2014 2015F 2016F Global and Regional Aggregates Global 3.3 3.4 3.1 3.4 3.2 3.0 2.6 2.9 3.76 4.10 3.99 4.08 Global ex US 3.7 3.6 3.3 3.6 3.5 3.3 3.2 3.1 4.57 4.99 4.80 4.73 Developed Markets 1.1 1.7 1.9 2.1 1.4 1.4 0.2 1.5 0.19 0.22 0.30 0.65 G5 1.0 1.6 1.9 2.1 1.3 1.3 0.2 1.5 0.14 0.16 0.25 0.61 Emerging Markets 5.0 4.5 4.0 4.4 4.5 4.1 4.3 3.9 6.35 6.95 6.66 6.51 Emerging Markets ex China 3.8 3.3 2.6 3.3 5.3 5.1 5.6 4.9 7.25 7.62 7.73 7.78 Europe, Middle East and Africa (EMEA) 1.4 1.7 1.4 2.0 3.1 3.0 3.7 3.2 3.50 4.31 3.53 3.46 European Union 0.3 1.4 1.9 2.0 1.6 0.6 0.0 0.9 0.25 0.31 0.25 0.34 Emerging EMEA 2.6 2.2 1.0 2.1 4.6 5.5 7.6 5.6 8.19 10.03 8.27 7.95 PacRim 5.8 5.5 5.4 5.6 3.8 3.2 2.4 2.8 4.30 4.85 4.28 4.11 PacRim ex Japan 6.4 6.3 6.0 6.1 4.3 3.3 2.6 2.9 4.83 5.47 4.81 4.59 Emerging Asia 6.5 6.4 6.1 6.2 4.3 3.4 2.6 3.0 4.91 5.57 4.89 4.66 Americas 1.9 1.9 1.5 1.7 3.1 4.1 2.9 4.9 3.17 2.79 3.99 4.64 Latin America 2.8 0.7 -0.4 -0.2 4.6 5.0 6.0 5.5 10.16 8.55 12.26 13.08 G5 US 1.5 2.4 2.4 2.5 1.5 1.6 0.1 2.0 0.13 0.13 0.38 1.13 Euro area -0.2 0.9 1.6 1.7 1.4 0.4 0.0 0.8 0.05 0.05 0.05 0.05 Japan 1.6 -0.1 0.7 1.2 0.4 2.6 0.7 1.3 0.10 0.10 0.10 0.10 UK 2.2 2.9 2.4 2.5 2.6 1.5 0.1 1.3 0.50 0.50 0.50 1.00 Canada 2.0 2.4 1.2 1.8 0.9 1.9 1.2 2.1 0.50 1.00 0.50 0.25 Euro area Germany 0.4 1.6 1.6 1.8 1.6 0.8 0.1 1.1 0.05 0.05 0.05 0.05 France 0.7 0.2 1.1 1.5 1.0 0.6 0.1 0.8 0.05 0.05 0.05 0.05 Italy -1.7 -0.4 0.8 1.3 1.3 0.2 0.1 0.7 0.05 0.05 0.05 0.05 Spain -1.2 1.4 3.1 2.5 1.5 -0.2 -0.6 0.8 0.05 0.05 0.05 0.05 Netherlands -0.4 1.0 2.1 1.6 2.6 0.4 0.1 0.6 0.05 0.05 0.05 0.05 Belgium 0.3 1.1 1.2 1.2 1.2 0.5 0.4 1.1 0.05 0.05 0.05 0.05 Austria 0.3 0.5 0.7 1.4 2.1 1.5 0.9 1.5 0.05 0.05 0.05 0.05 Greece -4.0 0.7 -0.5 -2.3 -0.9 -1.4 -1.2 -0.1 0.05 0.05 0.05 0.05 Portugal -1.1 0.9 1.6 1.8 0.4 -0.2 0.1 0.8 0.05 0.05 0.05 0.05 Ireland 1.4 4.1 3.6 3.8 0.5 0.3 0.0 1.0 0.05 0.05 0.05 0.05 Finland -1.1 -0.4 0.2 1.2 2.2 1.2 0.1 1.2 0.05 0.05 0.05 0.05 Asia Pacific China 7.7 7.3 6.9 6.6 2.6 2.0 1.6 1.8 4.60 5.60 4.60 4.10 India 6.9 7.3 7.4 7.9 9.5 6.0 5.2 5.5 6.75 6.75 6.75 6.75 Indonesia 5.6 5.0 4.8 5.1 6.4 6.4 6.6 5.0 7.50 7.75 7.25 7.00 Korea 2.9 3.3 2.7 3.4 1.3 1.3 0.8 2.2 1.50 2.00 1.50 1.75 Australia 2.2 2.5 2.3 2.8 2.4 2.5 1.7 2.8 2.00 2.50 2.00 2.25 Taiwan 2.2 3.8 1.2 2.1 0.8 1.2 -0.5 0.4 1.75 1.88 1.75 1.75 Thailand 2.8 0.9 2.5 3.5 2.2 1.9 -0.7 1.5 1.50 2.00 1.50 1.75 Pakistan 3.7 4.1 4.2 4.6 7.4 8.6 4.6 6.0 6.50 10.00 6.50 6.00 Malaysia 4.7 6.0 4.6 4.3 2.1 3.1 2.3 2.5 3.25 3.25 3.25 3.25 Philippines 7.2 6.0 5.5 5.5 2.9 4.3 1.5 2.7 4.00 4.00 4.00 4.50 Singapore 4.4 2.9 1.6 2.0 2.4 1.0 -0.3 0.2 - - - - Hong Kong 2.9 2.5 2.0 2.4 4.3 4.4 3.2 3.5 0.40 0.39 0.60 1.60


Global economic forecasts GDP growth, % CPI inflation*, % Short term interest rates**, % 2013 2014 2015F 2016F 2013 2014 2015F 2016F Current 2014 2015F 2016F Latin America Brazil 2.7 0.1 -3.3 -3.5 6.2 6.3 8.9 7.4 14.25 11.75 14.25 12.75 Mexico 1.4 2.1 2.2 2.5 3.8 4.0 2.8 3.8 3.04 3.00 3.00 3.75 Argentina 3.5 -2.6 0.8 0.0 10.6 21.4 15.9 28.9 21.75 19.98 40.00 35.00 Colombia 4.9 4.6 2.4 1.8 2.0 2.9 4.8 4.9 4.75 4.50 5.25 4.00 Venezuela 1.3 -3.8 -4.0 1.9 40.6 62.2 124.3 153.9 15.00 6.39 15.00 50.00 Chile 4.2 1.9 2.1 2.0 1.8 4.4 4.3 3.9 3.25 3.00 3.25 3.75 Peru 5.8 2.4 2.3 3.0 2.8 3.2 3.4 3.3 3.50 3.50 3.75 5.25 Ecuador 4.6 3.8 -0.7 -3.0 2.7 3.6 3.9 2.0 0.20 0.20 0.20 0.20 Uruguay 5.1 3.5 0.9 1.4 8.5 8.3 9.0 8.5 - - - - EEMEA Russia 1.3 0.6 -3.7 0.3 6.7 7.8 15.3 7.2 11.00 17.00 10.00 8.50 Turkey 4.2 2.9 2.7 2.8 7.5 8.9 7.7 7.6 7.50 8.25 8.50 9.50 Nigeria 5.4 6.3 3.0 3.0 8.5 8.1 9.5 10.3 13.00 13.00 13.00 15.00 Egypt 2.1 2.2 4.1 3.8 6.9 10.1 11.0 10.0 8.75 8.25 8.75 9.25 Poland 1.7 3.4 3.5 3.5 0.9 0.0 -0.8 1.4 1.50 2.00 1.50 1.50 South Africa 2.2 1.5 1.4 1.6 5.8 6.1 4.7 5.7 6.00 5.75 6.00 6.50 Iraq 6.6 -2.1 0.5 1.8 1.9 2.2 2.5 3.0 6.00 6.00 6.00 6.00 Romania 3.3 2.9 3.5 3.1 4.0 1.1 -0.6 -0.6 1.75 2.75 1.75 1.75 Ukraine 0.0 -6.8 -11.0 0.0 -0.3 12.1 35.0 21.3 22.00 14.00 30.00 20.00 Czech Republic -0.5 2.0 3.9 2.6 1.4 0.4 0.4 1.6 0.05 0.05 0.05 0.25 Israel 3.3 2.6 2.5 2.8 1.5 0.5 -0.3 0.9 0.10 0.25 0.10 0.10 Hungary 1.6 3.6 2.8 2.5 1.7 -0.2 0.0 2.1 1.35 2.10 1.35 1.80 Ghana 7.3 4.0 3.0 3.0 11.6 15.5 17.2 16.1 25.00 21.00 25.00 26.00 GCC 3.4 3.9 3.1 2.8 2.0 2.5 2.4 2.0 - - - -

Notes: Global and regional aggregates are based on the IMF PPP weights unless stated otherwise. Countries within each region are ordered according to these weights.

* Annual averages. The HICP measure of inflation is used for Euro area economies. ** Central bank target rate, year-end, where available, short-term rates elsewhere.


Real GDP growth, qoq annualized % 1Q 2014 2Q 2014 3Q 2014 4Q 2014 1Q 2015 2Q 2015 3Q 2015 4Q 2015 2014 2015 2016 Developed Markets United States -0.9 4.6 4.3 2.1 0.6 3.9 1.2 2.8 2.4 2.4 2.5 Euro Area 0.8 0.3 1.0 1.6 2.1 1.4 1.7 1.7 0.9 1.6 1.7 Japan 4.5 -7.6 -1.1 1.3 4.5 -1.2 1.0 1.3 -0.1 0.7 1.2 United Kingdom 2.5 3.8 2.6 3.0 1.5 2.6 2.2 2.4 2.9 2.4 2.5 Canada 1.0 3.4 3.2 2.2 -0.8 -0.5 2.7 1.7 2.4 1.2 1.8 Australia 3.6 2.5 1.5 2.2 3.6 0.7 3.0 2.3 2.5 2.4 3.1 Emerging Markets China 6.6 7.8 7.8 6.1 5.8 7.3 7.2 6.8 7.3 6.9 6.6 Korea, Republic Of 4.4 2.0 3.2 1.1 3.3 1.2 4.7 4.3 3.3 2.7 3.4 Argentina 8.2 6.1 -2.0 -1.2 0.8 1.2 4.1 2.0 -2.6 0.8 0.0 Brazil 2.7 -4.4 0.4 0.2 -3.0 -7.2 -5.7 -1.4 0.1 -3.3 -3.5 Mexico 2.0 3.7 2.4 2.8 1.7 2.0 2.0 1.6 2.1 2.2 2.5 Turkey 7.4 -1.8 1.6 3.5 3.5 2.5 5.5 3.7 2.9 2.7 2.8 South Africa -0.6 0.5 2.1 4.1 1.3 -1.3 1.4 1.6 1.5 1.4 1.6



Monetary policy forecasts Key meeting dates and expected rate change (bp) Current Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-15 Developed Markets Fed 0.25 — unch 28th — +25 (16th) 27th ECB 0.05 — unch unch — 3rd 21st BoJ 0.10 unch unch 30th 19th 18th 29th BoE 0.50 unch unch unch 5th 10th — BoC 0.50 — unch unch — 2nd 20th Riksbank -0.35 — unch 28th — -15 (15th) — SNB -0.75 — unch — — 17th — Norges Bank 0.75 — -25 — 5th 17th — RBA 2.00 unch unch unch 3rd 1st — RBNZ 2.75 — -25 29th — -25 (10th) 28th Emerging Asia China (deposit rate) 4.60 -25 — -25 — — — Req. res. ratio* 18.00 -50 — -50 — -50 — India** Repo rate 6.75 unch -50 — — 1st — Cash res. ratio 4.00 unch unch — — 1st — Korea 1.50 unch unch unch 12th 10th — Indonesia 7.50 unch unch unch 17th 17th — Taiwan 1.75 — -13 — — 31st — Thailand 1.50 unch unch — 4th 16th — Malaysia 3.25 — unch — 5th — — Philippines 4.00 unch unch — 12th 17th — Latin America Brazil 14.25 — unch unch 25th — -50 (20th) Chile 3.25 unch unch +25 12th +25 (17th) 14th Colombia 4.75 unch 25th 30th 27th -25 (18th) -25 Mexico 3.00 — unch 29th — 17th +25 (28th) Peru 3.50 unch +25 unch 12th +25 (10th) +25 Emerging EMEA Czech Republic 0.05 unch unch — 5th 16th — Hungary 1.35 unch unch unch 17th 15th 26th Israel 0.10 unch unch 26th 23rd 28th 26th Poland 1.50 — unch unch 4th 2nd 6th Romania 1.75 unch unch — 5th — 7th Russia 11.00 — unch 30th — 11th — South Africa 6.00 — unch — 19th — +25 (26th) Turkey 7.50 unch unch +50 (21st) 24th 22nd +50 (31st)

Note: Bolded data are expectations in basis points. “—“ denotes no meeting. TBA: MPC meeting not yet set. *Major five banks. **Reverse repo rate.

Source: BofA Merrill Lynch Global Research, Central Banks


FX forecasts Quarterly forecasts – G10 currencies

Spot 15-Dec 16-Mar 16-Jun 16-Sep 16-Dec G3 EUR-USD 1.11 1.05 1.00 1.00 1.00 1.00 USD-JPY 121 125 125 127 125 123 EUR-JPY 134 131 125 127 125 123 Dollar Bloc USD-CAD 1.31 1.32 1.35 1.35 1.35 1.35 AUD-USD 0.72 0.69 0.68 0.67 0.66 0.65 NZD-USD 0.68 0.63 0.62 0.61 0.61 0.60 Europe EUR-GBP 0.72 0.71 0.69 0.69 0.69 0.68 GBP-USD 1.54 1.48 1.45 1.45 1.45 1.47 EUR-CHF 1.08 1.08 1.08 1.09 1.10 1.10 USD-CHF 0.97 1.03 1.08 1.09 1.10 1.10 EUR-SEK 9.39 9.30 9.25 9.20 9.15 9.10 USD-SEK 8.45 8.86 9.25 9.20 9.15 9.10 EUR-NOK 9.21 9.15 9.10 9.00 8.90 8.80 USD-NOK 8.29 8.71 9.10 9.00 8.90 8.80 Source: Spot exchange rate as of day of publishing. The left of the currency pair is the denominator of the exchange rate. Currency forecasts are for end of period. Source: BofA Merrill Lynch Global Research

Quarterly forecasts – EM currencies

Spot 15-Dec 16-Mar 16-Jun 16-Sep 16-Dec Latin America USD-BRL 3.91 4.10 4.20 4.30 4.40 4.50 USD-MXN 16.49 16.85 16.90 17.00 17.00 17.00 USD-CLP 689 715 720 730 740 750 USD-COP 2904 3200 3300 3400 3450 3500 USD-ARS 9.51 11.00 12.00 13.00 14.50 16.00 USD-VEF 6.29 35.00 35.00 128.70 141.60 155.70 USD-PEN 3.26 3.40 3.50 3.60 3.65 3.70 Emerging Europe EUR-PLN 4.25 4.10 4.05 4.00 3.95 3.90 EUR-HUF 310 300 300 295 290 285 EUR-CZK 27.08 27.10 27.10 27.00 27.00 26.00 USD-UAH 22.35 23.80 24.40 25.00 25.60 26.20 USD-RUB 62.58 61.50 61.50 61.75 62.00 62.00 USD-ZAR 13.40 13.00 12.75 13.00 13.25 13.00 USD-TRY 2.87 2.95 2.90 2.95 2.90 3.00 EUR-RON 4.43 4.40 4.40 4.40 4.35 4.30 USD-EGP 8.03 8.25 8.25 8.25 8.25 8.25 USD-ILS 3.88 4.00 4.00 4.00 4.00 4.00 USD-AED 3.67 3.67 3.67 3.67 3.67 3.67 USD-KWD 0.30 0.28 0.28 0.28 0.28 0.28 USD-SAR 3.75 3.75 3.75 3.75 3.75 3.75 USD-QAR 3.64 3.64 3.64 3.64 3.64 3.64 Asian Bloc USD-KRW 1139 1,190 1,220 1,230 1,240 1,250 USD-TWD 32.50 32.50 33.00 33.50 33.75 34.00 USD-SGD 1.39 1.42 1.44 1.46 1.47 1.48 USD-THB 35.58 36.50 37.00 37.50 37.75 38.00 USD-HKD 7.75 7.81 7.82 7.82 7.82 7.82 USD-CNY 6.36 6.50 6.60 6.70 6.80 6.90 USD-IDR 13,640 14,000 14,300 14,600 14,800 15,000 USD-PHP 46.53 46.30 46.80 47.80 48.80 48.80 USD-MYR 4.28 4.05 4.13 4.18 4.23 4.28 USD-INR 65.13 65.00 64.00 64.00 64.00 64.00 Source: Spot exchange rate as of day of publishing. The left of the currency pair is the denominator of the exchange rate. Currency forecasts are for end of period. Source: BofA Merrill Lynch Global Research


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Research Analysts Global Economics Ethan S. Harris Global Economist MLPF&S +1 646 855 3755 [email protected] Michael S. Hanson Global & US Economist MLPF&S +1 646 855 6854 [email protected] North America Economics Michelle Meyer US Economist MLPF&S +1 646 855 6261 [email protected] Emanuella Enenajor North America Economist MLPF&S +1 646 855 9322 [email protected] Lisa C. Berlin US Economist MLPF&S +1 646 855 8027 [email protected] Alexander Lin US Economist MLPF&S +1 646 855 6499 [email protected] Developed Europe Economics Gilles Moec Europe Economist MLI (UK) +44 20 7996 7574 [email protected] Ruben Segura-Cayuela Europe Economist MLI (UK) +44 20 7995 2102 [email protected] Robert Wood UK Economist MLI (UK) +44 20 7996 7415 [email protected] Evelyn Herrmann Europe Economist MLI (UK) +44 20 7996 7008 [email protected] Chiara Angeloni Europe Economist MLI (UK) +44 20 7996 7670 [email protected] Japan Economics Masayuki Kichikawa Japan Economist Merrill Lynch (Japan) +81 3 6225 8214 [email protected] Setsuko Yamashita Japan Economist Merrill Lynch (Japan) +81 3 6225 7139 [email protected] Australia Economics Alex Joiner Australia Economist Merrill Lynch (Australia) +61 3 9659 2377 [email protected]

Global Emerging Markets Fixed Income Strategy and Economics Alberto Ades GEM FI/FX Strategy, Economist MLPF&S +1 646 855 4044 [email protected] Pablo Villanueva GEM Strategist MLPF&S +1 646 855 8819 [email protected] Emerging Asia Economics Hak Bin Chua ASEAN Economist Merrill Lynch (Singapore) +65 6678 0409 [email protected] Helen Qiao China & Asia Economist Merrill Lynch (Hong Kong) +852 3508 3961 [email protected] Indranil Sen Gupta India Economist DSP Merrill Lynch (India) +91 22 6632 8653 [email protected] Jaejoon Woo Korea Economist Merrill Lynch (Hong Kong) +852 3508 3369 [email protected] Marcella Chow Emerging Asia Economist Merrill Lynch (Hong Kong) +852 3508 7236 [email protected] Abhishek Gupta India Economist DSP Merrill Lynch (India) +91 22 6632 8682 [email protected] Sylvia Sheng China Economist Merrill Lynch (Hong Kong) +852 3508 3419 [email protected] Xiaojia Zhi China Economist Merrill Lynch (Hong Kong) +852 3508 7815 [email protected] Jojo Gonzales ^^ Research Analyst Philippine Equity Partners +63 2 640 6767 [email protected] Supavud Saicheua Emerging Asia Economist Phatra Securities +66 2 305 9193 [email protected] EEMEA Cross Asset Strategy and Economics David Hauner, CFA EEMEA Cross Asset Strategist MLI (UK) +44 20 7996 1241 [email protected] Turker Hamzaoglu Turkey, Frontier Economist MLI (UK) +44 20 7996 2417 [email protected]






























Vladimir Osakovskiy Russia, CIS Economist Merrill Lynch (Russia) +7 495 662 6168 [email protected] Matthew Sharratt South Africa Economist Merrill Lynch (South Africa) +27 21 815 2625 [email protected] Oyinkansola Anubi Sub-Saharan Africa Economist MLI (UK) +44 20 7996 7585 [email protected] Mai Doan CEE Economist MLI (UK) +44 20 7995 9597 [email protected] Gabriele Foa EEMEA Cross Asset Strategist MLI (UK) +44 20 7996 7231 [email protected] Vadim Khramov EEMEA FI/FX Strategist MLI (UK) +44 20 7996 7448 [email protected] Jean-Michel Saliba MENA Economist MLI (UK) +44 20 7995 8568 [email protected] Latin America Economics Claudio Irigoyen LatAm FI/FX Strategy/Economist MLPF&S +1 646 855 1734 [email protected] David Beker Brazil Economist, FI Strategy Merrill Lynch (Brazil) +55 11 2188 4371 [email protected] Carlos Capistran Mexico Economist Merrill Lynch (Mexico) +52 55 5201 3350 [email protected] Francisco Rodriguez Andean Economist MLPF&S +1 646 855 5910 [email protected] Ana Madeira Brazil Economist Merrill Lynch (Brazil) +55 11 2188 4127 [email protected] BofA Merrill Lynch participated in the preparation of this report, in part, based on information provided by Philippine Equity Partners, Inc. (Philippine Equity Partners). ^^Philippine Equity Partners employees are not registered/qualified as research analysts under FINRA rules. >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions.













Global Economic Weekly - Puls Biznesu · Global Economic Weekly Slow ride, take it easy 23 October...

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Transcript of Global Economic Weekly - Puls Biznesu · Global Economic Weekly Slow ride, take it easy 23 October...