bumps on the recovery road - home | nomura · on the future path of oil prices based on oil price...

Please see analyst certifications and important disclosures on the last page of this report.

Nomura Securities International Inc.

Global Weekly Economic Monitor N O M U R A G L O B A L E C O N O M I C S

Bumps on the recovery road Worldwide, recent data show the global expansion has slowed but we expect this “soft patch” to be transitory.

GLOBAL LETTER Summertime blues 5 A tortuous debate over the debt ceiling is likely to last most of the summer.

REGIONAL ROUNDUPS

United States Uncertainty still clouds the housing market 6 An ample supply of vacant homes makes it likely home-building will remain weak.

Europe Greece’s jigsaw puzzle 8 Another official financing deal looks imminent but domestic politics remain a risk.

Japan Conditions for a V-shaped rebound 10 Supply disruptions are easing and suggest a V-shaped bounce may soon be in place.

Asia South Korea: BOK’s asymmetric preference 12 We now expect the BOK to hike rates by 25bp over the rest of 2011.

Emerging Markets EEMEA: A soft patch of its own 14 Recent signs of slower activity in Q2 do not seem to be a fundamental pullback.

3 June 2011

DATA AND OUTLOOKS Forecast summary ...................... 2

Our view in a nutshell ................. 3

Economic data calendar .............. 4

United States ........................... 16

Europe ..................................... 20

Japan ....................................... 24

Asia ......................................... 26

Emerging Markets ..................... 32

Contacts .................................. 45

Nomura Global Economics 2 3 June 2011

Global Weekly Economic Monitor

Forecast Summary

Note: Aggregates calculated using purchasing power parity (PPP) adjusted shares of world GDP; our forecasts incorporate assumptions on the future path of oil prices based on oil price futures, consensus forecasts and Nomura in-house analysis. Currently assumed average Brent oil prices for 2011 and 2012 are $109 and $107 respectively, after $80 in 2010. *2011 and 2012 policy rate forecasts are midpoint of 0-0.25% target federal funds rate range. **Inflation refers to wholesale prices. ***For Hong Kong and Singapore, the policy rate refers to 3M Hibor and 3M Sibor, respectively. †Policy rate forecasts in 2011 and 2012 are midpoint of BOJ’s 0-0.10% target unsecured overnight call rate range. †† CPI forecasts for Latin America, Egypt and Saudi Arabia are year-on-year changes for Q4. The ↑↓ arrows signify changes from last week. Source: Nomura Global Economics.

Real GDP (% y-o-y) Consumer Prices (% y-o-y) Policy Rate (% end of period)2010 2011 2012 2010 2011 2012 2010 2011 2012

Global 5.0 4.2 4.5 3.4 4.5 3.7 3.08 3.77 ↓ 4.28 ↓Developed 2.7 2.1 2.6 1.5 2.6 1.6 0.59 0.91 1.36Emerging Markets 7.6 6.6 6.6 5.7 6.6 6.0 5.97 6.96 ↓ 7.40 ↓Americas 3.7 3.0 2.9 3.4 4.2 3.1 2.24 2.59 2.89United States* 2.9 2.5 2.6 1.6 2.7 1.2 0.13 0.13 0.13Canada 3.1 2.9 2.5 1.8 2.7 2.1 1.00 1.75 3.25Latin America†† 6.2 4.5 4.0 8.8 8.7 8.4 8.43 9.57 10.28

Argentina 9.2 8.0 4.0 25.9 24.4 25.4 10.81 12.00 11.00Brazil 7.5 3.9 4.5 5.9 5.9 4.9 10.75 12.25 12.25Chile 5.2 6.5 5.0 3.0 4.5 3.0 3.25 6.00 6.00Colombia 4.3 5.0 4.5 3.2 3.5 3.7 3.00 5.00 7.00Mexico 5.5 4.0 3.4 4.4 3.9 4.0 4.50 4.50 6.50Venezuela -1.4 1.5 3.0 27.2 30.1 32.0 17.80 20.00 22.00

Asia/Pacif ic 8.1 ↑ 6.3 7.1 3.6 4.8 4.4 4.26 5.20 ↓ 5.51 ↓Japan† 4.0 -0.5 3.3 -0.7 0.3 0.4 0.05 0.05 0.05Australia 2.7 3.4 4.0 2.9 3.7 3.4 4.75 5.25 5.25New Zealand 1.5 0.9 3.5 2.3 4.2 2.6 3.00 2.50 3.50Asia ex Japan, Aust, NZ 9.3 ↑ 7.9 8.1 4.6 5.8 5.3 5.20 6.31 ↓ 6.62 ↓

China 10.3 9.4 9.2 3.3 4.9 4.8 5.81 6.81 7.31Hong Kong*** 7.0 6.0 4.7 2.4 4.9 5.2 0.28 0.40 0.40India** 9.0 ↑ 7.9 8.3 9.6 9.1 7.0 6.25 7.75 7.75Indonesia 6.1 6.5 7.0 5.1 5.7 6.3 6.50 7.25 7.50Malaysia 7.2 5.2 5.5 1.7 3.5 3.6 2.75 3.25 3.25Philippines 7.6 ↑ 5.1 ↓ 5.7 3.8 6.1 6.4 4.00 5.00 6.50Singapore*** 14.5 6.0 5.8 2.8 4.5 3.4 0.44 0.35 0.35South Korea 6.2 3.5 5.0 2.9 4.4 3.6 2.50 3.25 ↓ 3.50 ↓Taiw an 10.9 5.2 5.2 1.0 2.7 3.4 1.63 2.13 2.63Thailand 7.8 4.1 5.0 3.3 4.7 4.8 2.00 3.25 4.00Vietnam 6.8 6.5 7.1 9.2 18.0 12.0 10.00 16.00 11.00

Western Europe 1.7 2.1 2.1 1.9 3.0 2.0 0.94 1.66 2.67Euro area 1.7 2.1 2.1 1.6 2.7 1.9 1.00 1.75 2.75

France 1.4 2.1 2.0 1.7 2.2 1.8 1.00 1.75 2.75Germany 3.5 3.4 2.3 1.2 2.4 1.6 1.00 1.75 2.75Greece -4.4 -3.7 0.3 4.7 2.9 0.8 1.00 1.75 2.75Ireland -1.0 -0.8 1.4 -1.6 1.1 0.7 1.00 1.75 2.75Italy 1.2 0.9 1.3 1.6 2.8 2.1 1.00 1.75 2.75Netherlands 1.8 2.1 1.8 0.9 2.4 2.0 1.00 1.75 2.75Portugal 1.4 -2.0 -1.8 1.4 3.7 1.3 1.00 1.75 2.75Spain -0.1 0.8 1.0 2.0 3.2 1.9 1.00 1.75 2.75

United Kingdom 1.3 1.7 2.3 3.3 4.5 2.7 0.50 1.00 2.00Denmark 2.1 1.6 1.8 2.3 3.1 1.7 1.05 1.80 2.80Norw ay 2.1 2.5 3.4 2.5 2.1 2.0 2.00 2.75 4.00Sw eden 5.4 4.4 2.4 1.3 2.9 2.1 1.25 2.50 3.50Sw itzerland 2.6 2.1 ↓ 2.2 0.7 0.8 1.1 0.25 0.75 1.75EEMEA 4.6 4.6 4.2 6.1 6.8 6.3 5.75 6.32 6.94Czech Republic 2.3 1.4 2.6 1.5 1.9 3.8 0.75 1.25 2.00Egypt†† 5.3 1.2 3.1 10.3 12.1 9.5 8.25 8.25 9.00Hungary 1.2 2.5 2.7 4.9 4.5 4.4 5.75 5.50 5.50Israel 4.5 4.0 4.0 2.7 3.3 3.4 2.00 3.50 4.00Kazakhstan 7.0 6.5 5.5 7.2 8.4 6.7 7.00 7.50 7.50Poland 3.8 4.4 ↓ 4.3 ↓ 2.7 4.4 ↓ 3.6 ↓ 3.50 5.00 5.50Qatar 16.5 20.2 14.0 1.5 3.6 3.5 1.50 1.50 2.00Romania -1.2 1.5 2.5 6.1 5.8 3.5 6.25 6.25 7.50Russia 4.0 4.4 3.9 6.9 8.8 7.5 7.75 8.50 9.00Saudi Arabia†† 4.0 6.0 4.5 5.4 5.6 5.0 2.00 2.00 2.00South Africa 2.8 3.8 ↓ 4.1 ↓ 4.3 4.8 6.1 5.50 6.00 8.00Turkey 8.9 6.0 4.4 8.6 6.0 7.0 6.50 7.25 8.25Ukraine 4.1 4.8 5.0 9.4 10.5 ↑ 10.3 ↓ 7.75 7.75 7.50United Arab Emirates 2.3 4.8 4.0 -0.3 2.0 3.0 2.00 2.00 2.50


Our View in a Nutshell (changes from last week highlighted)

Global

• Despite being hit by multiple shocks, we expect the global recovery to continue but to remain muted in the developed world.

• We expect most of the emerging world, led by Asia, to keep up its brisk growth after parts navigate a slow path.

• We see high headline inflation in Europe leading the BoE and ECB to hike rates several times before the Fed and BOJ start.

• We see inflationary pressures continuing to mount in EM, with policymakers risking falling behind the curve.

• Downside risks: euro-area fiscal crisis escalates; investment pulls back in China; US fiscal gridlock unnerves markets.

• An upside surprise? Animal spirits stir and crisis-calibrated monetary policies help release pent-up developed world demand.

• The dollar is set to recover some of its early-2011 losses as risk assets face headwinds and euro-zone tensions persist.

United States

• We expect the high level of household debt to restrain growth as it has in recoveries after previous financial crises.

• A long-overdue focus on tax and entitlement reforms should lead to more budgetary restraint.

• Supply-chain disruptions and high gas prices have slowed growth but we expect a lively rebound in the second half of 2011. .

• The job market has improved but ample unused capacity should restrain core inflation and contain inflation expectations.

• We expect the Fed to maintain the size of its securities holdings into early 2012 but not to start hiking rates until early 2013.

Europe

• We see the euro area staying intact and fiscal austerity backed by ongoing official financing helping prevent periphery default.

• We expect euro-area growth in 2011 to be sustained by stronger investment and net trade despite fiscal headwinds.

• We expect a continued gradual recovery in UK growth despite the damping effect of deleveraging and fiscal consolidation.

• Inflation will likely stay around double the target during 2011 in the UK and move to 1pp above the 2% target in the euro area.

• We expect the ECB, having raised rates in April, to hike by a further 50bp this year; we expect the BoE’s first hike in August.

Japan

• We expect the economy to slow sharply in H1 2011, but we expect a V-shaped recovery in H2 led by restoration demand.

• We expect core CPI growth to be lowered by about 0.5pp by August’s five-yearly rebase.

• Given supplementary budget delays, we push back our forecast for the timing of further BOJ easing from June to August.

• The main risks relate to the nuclear plant and power shortages, a US/China slowdown and deterioration in the Middle East.

Asia

• The economies are entering a soft patch but it should be short-lived and we expect central banks to remain hawkish.

• China: Despite concerns over slower growth, we expect the authorities to keep tightening monetary policies to tame inflation.

• Korea: We see inflation exceeding the 4% target ceiling in 2011 as we believe inflation expectations will remain unchecked.

• India: High core inflation will force the central bank to maintain its hiking cycle, at the cost of slower GDP growth.

• Australia: We see GDP growth recovering from natural disasters assisted by much stronger capex in the resource sector.

• Indonesia: With robust growth, inflation risks and capital inflows, we expect policy rate hikes and further capital controls.

EEMEA (Emerging Europe, Middle East and Africa) and Latin America

• South Africa: With a need to see evidence of second-round inflation pressures, the MPC risks being late in hiking policy rates.

• Hungary’s anti-growth fiscal policy is concerning and with a more political MPC and pension changes, markets will be volatile.

• Poland has a monetary and fiscal policy credibility deficit after a number of mistakes – in spite of strong growth.

• Russia’s economy will be propped up by the higher commodity prices; pre-election spending should support consumption.

• Turkey: We see strong domestic demand and bigger imbalances, resulting in core inflation and current account pressures.

• Middle East: Political unrest is rising across the region, leading to economic challenges and increasing risk premia.

• Rising commodity prices and the need to reduce inflation expectations should lead Brazil to hike policy rates by 150bp in H1.

• Mexico stands to reap the most from a US recovery in 2011, the pick-up in domestic demand set to add momentum to growth.

• With the output gap closed, Argentina’s strong growth is likely to keep inflation high in 2011.



Economic Data Calendar

The Week at a Glance For more detail see country and regional data previews

Previous, Nomura, Consensus

Mon 6 June Tue 7 June Wed 8 June Thu 9 June Fri 10 June

Nor

th A

mer

ica

US Consumer credit (Apr) $bn 5.0, n.a., 6.0

USFed Beige Book

USTrade balance (Apr) $bn -48.2, -50.9, -48.6 US Wholesale inventories (Apr) %m-o-m 1.1, 1.0, 1.0

US Import prices (May) %m-o-m 2.2, -0.6, -0.7 US Federal budget (May) $bn -135.9, -101.1, -160.0 Canada Employment (May) k 58.3, 32.0, 25.0

Euro

pe (e

x-U

K)

Euro area Producer prices (Apr) % y-o-y 6.7, n.a., 6.6 ECB Trichet speaks at a forum in Montreal, Canada

Germany Factory orders (Apr) % m-o-m, sa -4.0, 2.3, 2.0 European Commission assesses euro-area budget plans

Euro area GDP (Q1-2nd) % q-o-q, sa 0.8, 0.8, 0.8 Germany Industrial production (Apr)% m-o-m, sa 0.7, -0.8, 0.2

ECB Governing Council meeting (Jun) % 1.25, 1.25, 1.25

France Industrial production (Apr)% m-o-m, sa -0.9, 0.4, 0.4 Italy GDP (Q1-2nd) % q-o-q, sa&wda 0.1, 0.1, 0.1 ECB Trichet speaks at a conference in Frankfurt

UK

BoE MPC meeting(Jun) % 0.50, 0.50, 0.50 Global goods trade balance (Apr) £mn -7660, -7598, -7549

Manufacturing production(Apr) % m-o-m, sa 0.2, -0.3, -0.1 PPI input (May) % m-o-m, nsa 2.6, -2.0, -1.0

Japa

n

Economic coincident index (Apr) Index 103.5, 103.7, 103.7

M2 (May) % y-o-y 2.7, 2.7, 2.7 Current account (Apr) ¥bn 1679.1, 192.5, 200.0 Current economic conditions (May) Index 28.3, n.a., 33.0

Real GDP (Q1-2nd) % q-o-q, saar -3.0, -3.1, -3.1 Consumer confidence (May) Index 33.1, n.a., 34.5

CGPI (May) % y-o-y 2.5, 2.6, 2.5 Tertiary industry activity index (Apr) % m-o-m -6.0, 2.6, 2.7

Asi

a

Philippines CPI (May) % y-o-y 4.5, 5.3, 5.0 Australia RBA cash rate (Jun) % 4.75, 4.75, 4.75

South Korea GDP (Q1-2nd) % y-o-y 4.7, 4.2, n.a. Taiwan Exports (May) % y-o-y 24.6, 17.0, 7.4

Indonesia Central bank mtg (Jun) % 6.75, 6.75, 6.75 New Zealand Reserve bank mtg (Jun) % 2.50, 2.50, 2.50

South Korea Central bank mtg (Jun) % 3.00, 3.00, 3.13 China Exports (May) % y-o-y 29.9, 21.0, 21.8

Emer

ging

Mar

kets

Czech Republic Industrial output (Apr) % y-o-y 9.5, 7.9, 8.0 Czech Republic Trade balance (Apr) CZKbn 21.5, 15.0, 15.0

South Africa Gross reserves (May) US$bn 50.6, 51.0, 50.7 Hungary Industrial output (Apr) % y-o-y 9.2, 8.5 , 8.8 Brazil IPCA inflation (May) % y-o-y 6.5, 6.6, 6.6

HungaryCentral bank MPC minutes Poland NBP MPC meeting (Jun) % 4.25, 4.50, 4.50 Brazil Central bank SELIC target (Jun) % 12.00, 12.25, 12.25

Czech Republic CPI (May) % y-o-y 1.6, 1.8 , 1.8 Hungary Trade balance (Apr) €mn 840, 675, 563 Mexico CPI (May) % y-o-y 3.4, 3.3, 3.3

Romania CPI (May) % y-o-y 8.3, n.a., 8.5 Mexico Central bank MPC minutes

Sources for consensus forecasts: Bloomberg.



Global Letter David Resler

Summertime blues The US has reached its statutory debt limit, but the debate over fiscal policy is likely to continue through the summer.

In February 2010, Congress, for the tenth time since 1998 and the third since President Obama took office, raised the statutory debt ceiling by $1.9trn. A fortnight ago and less than 15 months after this record increase, borrowing to finance continuing record deficits had lifted the volume of US Treasury debt outstanding to its statutory limit of $14.294trn. Facing a seemingly endless path of deficits, Congress must once again raise the debt ceiling to allow for the borrowing needed to pay for the operations and programs already authorized by previous laws. Yet, this week the House of Representatives rejected a proposed $2.4trn increase in the debt ceiling by an overwhelming (and bi-partisan) 221-vote margin (318 against and just 97 for).

To those unacquainted with the US political system – and perhaps to many who are all too familiar – such an action might seem to be the very definition of fiscal irresponsibility. In fact, however, this week’s vote was but a small step in a process that optimists hope will restore fiscal rectitude to the US budget process. The House rejected this latest effort – and the Senate deemed passage too hopeless to warrant even calling a vote – because it did not, in any way, attempt to bind law makers to limit future deficits. That nearly as many Democrats voted against or abstained as supported the bill underscores the complicated nature of the debate over the debt limit.

Treasury Secretary Geithner has asserted that Congress must act by 2 August to avert a possible default, but many Republicans insist that the Treasury will have sufficient tax receipts if the Secretary elects to prioritize meeting the government’s debt obligations. The necessity of averting a government shutdown or default makes the debt ceiling the ultimate lever for those fervently hoping to set the nation on a course of fiscal responsibility. Thus, Republicans insist that a credible commitment to reduce the path of federal spending must be enacted as part of any increase in the debt ceiling. To enforce that objective, they seek measures that might automatically compel cuts in various spending programs if government outlays exceed firm targets. President Obama also supports a deficit reduction mechanism, but one that would also require automatic tax increases as well as spending cuts in the event hard deficit targets are breached.

Republicans and Democrats alike understand that the current path of deficits projected indefinitely into the future must be altered. Moreover, leaders of both parties acknowledge that cutting future deficits will require significant reforms to the income tax code as well as to the major “entitlement” programs – Social Security, Medicare, and Medicaid. But even though the various expert advisory groups, including the Bowles-Simpson panel commissioned by President Obama, have offered detailed outlines of credible reforms, agreement by elected officials has proven elusive.

The reason is both simple and profound: the two parties essentially embrace conflicting and incompatible views about the role of government. One would minimize government’s role while the other would expand it. This fundamental philosophical conflict dates at least to the nation’s earliest days and, throughout US history, the relative importance of each has waxed and waned. Indeed, today’s budget crisis reflects the electorate’s inconsistent desire for supportive federal programs alongside an unobstructive tax code. Opinion polls consistently show Americans want low taxes and less spending as long as it maintains “essential” programs, especially for the elderly (Social Security and Medicare). They mistakenly believe that their past taxes have funded these programs and that they are therefore entitled to the benefits. In fact, however, most of those taxes were transferred to earlier generations of beneficiaries and not used to “fund” promised future benefits.

The budget deficits now shine a bright spotlight on these inconsistencies. If the US hopes to resolve this conflict through the ballot box, both sides must engage in vigorous and open debate. We see the current stalemate over the debt ceiling as a vital preamble in a protracted debate that is likely to continue until the 2012 elections. But as the debate intensifies this summer, the financial markets are likely to be increasingly vulnerable to “blind-side” headlines about progress – or lack thereof – toward an increase in the debt ceiling. We suspect the debate will persist up to the 2 August “deadline” (if not beyond) before some sort of agreement is reached. We also predict that the agreement to raise the debt ceiling will come without the sort of comprehensive and credible commitment to deficit reduction that both sides claim to seek. Most likely, it will trade a modest increase in the ceiling for firm but modest near-term cuts in spending.




United States ⏐ Roundup David Resler⏐Aichi Amemiya

Uncertainty still clouds the housing market The home-building sector shows no hint of recovery and an ample supply of unoccupied property will need to be absorbed before new production approaches normal levels.

While the US economy has finally surpassed the Q4 2007 business cycle peak level of real GDP, the home-building sector remains stalled. (See US roundup: “Blame Mother Nature,” Global Weekly Economic Monitor, 27 May 2011). Indeed, real investment in residential buildings fell last quarter to a level it first reached in Q3 1971 and had last touched in Q2 1983, while housing starts have languished below a 600 million annual production pace for more than two years (Figure 1). The contrast with past business cycles is striking. For instance, in the first half of 1983, housing starts surged to a level nearly 80% above their 1982 first half level and helped power the overall economy out of a deep and protracted recession. By contrast, housing starts in the most recent two quarters were more than 5% lower than a year earlier.

Accounting for the shifting demographic profile of the US makes the contrast in housing activity even more striking. In 2010, the 20- to 34-year-old civilian population – a critical age group accounting for most new net household formation – reached a record level of nearly 62 million and has grown by nearly 4.1% since the housing cycle peak in 2006. In 1984 (also about four years from the previous peak in home-building), that population stood at about 60.7mn. Although it had grown by about 6.1% over the trailing 4-year span, by 1983 the population of 20- to 34-year olds was entering an abrupt slowdown as “baby boomers” aged out of that group. Despite that slowing growth, that age group played a critical role in the housing recovery, accounting for fully 25% of the increase in the number of households (defined to be “occupied housing”). In contrast, the number of households formed by this age cohort has declined in each of the last three years. As a result, the proportion of this age cohort heading a household has fallen from 43.6% in 2006 to 41.1% in 2010, the lowest since 1992. One consequence has been an abrupt reversal of the long downtrend in average household size (Figure 2). This suggests that there may be considerable “pent-up demand” for housing that could be unleashed once home prices stabilize and employment conditions improve.

In general, the underlying demand for housing is determined by both household formation and the need to replace the existing housing stock that is no longer economically viable. Although replacement needs depend on the pace of demolition and rate of condemnation of housing stock, the annual net “loss rate” has averaged about 0.24% of total housing stock since 1980, which generates an annual demand for about 300,000 thousand housing units. While replacement is a stable source of demand for housing, the pace of household formation generates most of the demand for housing and, as the discussion above illustrates, demographics are particularly important. To derive a demographically-adjusted estimate of housing demand, we assume that the headship rate by age group remained unchanged from the previous year. We then calculated the hypothetical number of newly generated households per year as a function of demographic factors (Figure 3). This analysis of demographics reveals that annual household formation under normal economic conditions results in demand for about

The housing sector has lagged behind the overall economy

Figure 1. Housing starts and residential investment Figure 2. Household size (persons per household).

Source: BEA; Census Bureau; Nomura Global Economics. Source: Census Bureau; Nomura Global Economics.

Slowdown in household formation

Demographic factor does matter

0

200

400

600

800

0

500

1000

1500

2000

2500

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Housing starts (lhs)

Residential investment (rhs)

Untis, thous bn, 2005$

2.70

2.75

2.80

2.85

2.90

1980

1983

1986

1989

1992

1995

1998

2001

2004

Q2-

2006

Q1-

2007

Q4-

2007

Q3-

2008

Q2-

2009

Q1-

2010

Q4-

2010

Ratio

http://www.nomura.com/research/getpub.aspx?pid=439650




1.2 million housing units. Thus, we estimate that about 1.5mn new housing units (0.3 from replacment +1.2 from demographics) are required annually to fulfill fundamental demand.

However, the combination of strict lending standards for mortgages and a tepid growth rate for personal income per capita has constrained household formation since the 2008 financial crisis Figure 4). Given the elevated unemployment rate for the younger generation in the labor force (Age 20-24) stands at 15.2%, it comes as no surprise that young adults are finding it especially difficult to form households. . For instance, the headship rate for the under 25-year age group peaked at 27% in Q3 2005 and has since been trending lower. As a result of a stressful economic environment, only 357,000 households were formed during the year ending March 2010, which is less than one-third the normal pace. Combined with needs for replacement outdated housing stock, the size of newly generated demand for housing has been about 0.6 million units in 2010, less than half of our estimate of the normal level. Confronting this weak demand, home builders have markedly curtailed construction over the past few years. Looking ahead, widespread expectations of further declines in house prices and a weak job market makes it likely that the pace of household formation will remain sub-normal for some time.

This suggests that the home-building industry will not fully recover until both household financial conditions and the labor market improve significantly. In past business cycles, housing market recoveries marked the origin of economic recoveries. When the economy entered a period of economic stagnation, easing monetary policy helped revive lending and the housing market. The recovery then typically spread to consumer spending on durable goods, such as automobiles and furniture. But now, the housing market trails rather than leads recovery elsewhere, and, in effect, household formation will likely remain the laggard of in the current recovery.

What characterizes the recent development of today’s housing market is that a recovery in housing construction activity is concentrated in rental housing (See US special topic: “An encouraging surprise in the housing sector” Global Weekly Economic Monitor, 29 October 2010). The fact that the home ownership ratio is lower means that more and more households are choosing to live in rental houses. Benefiting from lax mortgage lending standards since the late 1990s, an abundance of households transitioned to owning from renting. As a result, the home ownership ratio climbed to a quarterly average of 69.4% in Q2 2004. Though, in the fallout from the collapse of the housing bubble, many households lost access to mortgage financing or gave up home ownership altogether, e.g., via foreclosure. Consequently, more and more people are opting to rent rather than buy housing. Assuming that the homeownership rate by age group has been constant since 1994, before the aggregate home ownership began rising, we calculate an “equilibrium” home ownership rate by controlling for the impact of the housing boom on the ownership rate of each age cohort. As shown in Figure 4, that equilibrium value stands at 65.7% in 2011, but the actual value of 66.5% is still far above that equilibrium level. This suggests that until the home ownership ratio retreats to its equilibrium level, demand for the rental housing is likely to expand, while ownership may shrink even further.

Demand for housing was well below the normal level of 1.5mn

Housing sector is the laggard of the recovery

Figure 3. Household formation and housing completions Figure 4. Homeownership rate

Source: Census Bureau; Nomura Global Economics. Source: Census Bureau; Nomura Global Economics.

Strong demand for rental houses continues

0.5

1.0

1.5

2.0

2.5

3.0

Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

Units, mn Actual household formation +replacement demand

Housing completions (including mobile homes)

Normal household formation + replacement demand

61

62

63

64

65

66

67

68

69

70

Jan-70 Jan-77 Jan-84 Jan-91 Jan-98 Jan-05

%

Homeownership rate

Assuming constant headship rate foreach age group as of 1994




Europe ⏐ Roundup Dimitris Drakopoulos

Greece’s jigsaw puzzle Events are moving quickly in June with political leaders set to agree on new official financing. Domestic political risk remains the major obstacle to the jigsaw piecing together. On 17 May 2011 (see “Pressuring Greece,” Euro area Comment) we discussed developments in Greece, when the quarterly review by the EC/IMF/ECB (‘Troika’) on the 5th disbursement was taking place. The Troika is currently set to conclude its review and we think it will most likely indicate that the final decision on the continuation of the Greek programme will be taken at the 20 June Eurogroup meeting. With this in mind we examine the jigsaw pieces that need to fit together for Greece to receive a positive assessment by the Eurogroup.

Next key date is the finance ministers meeting on 20 June

We think that the concessions that the Troika members will be able to extract from the Greek government in terms of fiscal plans and privatisations will be sufficient to convince some of the more sceptical euro area governments to continue supporting Greece, for now. Therefore, we continue to expect additional loans from the EU and IMF to be agreed on by end-June. We also expect that any new financing agreement will have as a prerequisite voluntary rollovers of Greek debt by participants keen on ensuring the programme’s success (mainly Greek domestic banks and potentially some EU commercial banks). The domestic political situation and the risk of a government collapse and elections remain the most important event risk.

We believe a new package will be agreed

The pieces of the puzzle The Medium Term Fiscal Plan 2012-2015 (MTFS) and additional measures for 2011. A revised set of measures totalling €28.4bn was announced early last week to reduce the deficit to 1% of GDP in 2015 from a targeted 7.5% in 2011 and a realised 10.5% in 2010. Those measures will have to be approved by the Greek parliament, probably by 20-22 June before the EU Council on 24 June. These plans have not yet been finalised, but in the already released plans, revenue measures remain a significant part of the programme, accounting for over 39% of the total measures, with expenditure cuts making up 45% and the remaining 16% left unspecified so far. Recent media reports suggest that some revenue-neutral reductions in the headline VAT rate have been discussed to reduce the opposition’s (New Democracy) complaints. However, we continue to think the main opposition party is unlikely to support most of the revenue-raising elements of the MTFS. At the same time we also think that their own fiscal plans, which contain large tax cuts, are unlikely to be viewed favourably by the Troika.

A cross party agreement on MTFS is unlikely

The €50bn (20% of GDP) privatisation plan. The back-loaded nature of the privatisation programme and its short time-frame appear to be extremely ambitious to us. The programme envisages proceeds of €15bn until 2013 (this target might move to 2012) and €50bn by 2015. The targets include almost €35bn in real estate assets, which for the most part are unregistered and their commercial viability has not even been evaluated. A national wealth agency will be created with the state as the only shareholder, at least initially. According to Reuters (2 June), the new programme “would stop short of intrusive international supervision of the agency.“

The privatisation plan remains very ambitious

However, we think the statement above may be excessive, as Greece’s funding for the next few years is heavily dependent on the EU and IMF, which may link privatisation revenue with the amount of their official support. In other words the failure to implement a privatisation plan will probably find EU governments unwilling to cover new financing gaps with new official loans and inevitably this will increase the need for more private sector involvement to cover the gaps. Besides the operational difficulties, there is also considerable political risk. The implementation of a front-loaded privatisation programme requires a reduction in the state’s stake in politically “sensitive” publicly owned companies (e.g. energy and water companies) sooner rather than later. This is expected to unsettle the MPs of the governing PASOK.

Poor implementation may lead to financing problems

The upcoming financing gap. Because of officials’ recent public statements we have a clearer idea on how euro area leaders are thinking about closing Greece’s financing gap. In a recent interview (FT, 29 May) ECB executive board member Mr Bini Smaghi indicated that the financing gap could be covered by a 50:50 distribution between the official and private sector. This means that euro area governments would provide two-thirds of the official part and the IMF the remainder. A large proportion of the private sector’s contribution (at least half) would be from privatisation and securitisations. The remaining gap would be covered through the rollover of government bond positions, in particular by Greek banks and some increased T-bill issuance.

EU officials have hinted at a 50:50 split in funding




Reuters also reported that Greece will receive a one-year extension in its current programme to Q2 2014. What remains unclear is when Greece will face its next funding gap. In other words, when will it regain partial access to the bond markets. Although the current programme finishes in Q2 2013, partial market access is assumed from Q1 2012, mainly to repay the 20 March 2012 €14.5bn bond redemption. A one-year extension of the programme could mean the next funding gap is in Q1 2013. If that is the case, in exactly one year from now it could be the same situation with the IMF unwilling to continue funding Greece unless the upcoming funding gap is somehow guaranteed either by restructuring or more official financing.

First funding gap in the new programme is key

Restructuring talks: It appears that a consensus among EU politicians is emerging in terms of private sector involvement in financing packages pre July 2013 (when ESM starts). The only constant theme in EU politicians’ public statements is that any involuntary debt restructuring, including haircuts, before the ESM is not possible.

Anything pre July 2013 should be in voluntary terms

According to Bloomberg (1 June) a roll-over agreement will include incentives and/or disincentives for bondholders that will not trigger a credit event. Investors may be offered preferred creditor status, higher coupon payments or collateral as inducements to buy bonds with at least a three-year maturity replacing Greek debt maturing between 2012 and 2014. Although we have discussed in more detail the idea of sweeteners in restructuring (See “Hellenic art of restructuring,” European Rates Insights, 18 May 2011), we are puzzled by the suggestion that higher coupons or explicit preferred status may be considered. We think the former will increase sustainability concerns, while the benefits will be minimal. We believe that the bonds’ borrowing rates will be set similar to EU loans, i.e. Euribor+ 200/300bp for three-year maturities. We think an explicit mention of preferred creditor status on the new bonds will trigger CDS, which seems to be an unwanted outcome for EU policymakers.

Little room for incentives for participation

Pressure for wider political support. The EU and the IMF have called on PM Papandreou to secure multiparty support for the MTFS. Despite efforts last week, this seems very unlikely at this point. In our view, domestic politics is clouded with risks. Even a small number of dissents among the PASOK MPs could lead the prime minister to call an early election, which we would regard as a disruptive event as a clear majority government is unlikely to be formed based on current polls.

Early elections could be a disruptive event

At the time of writing this, 16 PASOK MPs had signed a letter requesting the PM to discuss the government’s plans in more detail. In particular, they do not want the MTFS to be presented as a single bill in parliament, in order for them to vote selectively in favour of or against different aspects of it. The optimistic scenario is that any dissenters will resign and be replaced before the vote if they have problems with voting yes. A more pessimistic scenario is that there will be 3-4 dissidents from PASOK, effectively pushing Papandreou into calling early elections in early autumn. The very pessimistic scenario is that the vote breaks down and the measures needed to secure additional official financing cannot be passed by parliament in June. For now we think a sufficient number of MPs will be found (even at the last minute and not necessarily only from PASOK) to avert a disorderly outcome.

We believe enough MPs will support the bill

More importantly, besides the MTFS a whole new Memorandum of Understanding (MoU) might have to be signed by the government in the next month in order to agree to the new financing package. We consider it highly likely that euro area governments will request more explicit agreement with the main opposition parties on this new MoU. This approach is understandable because of the level of cross-party agreement reached in Portugal, Greece’s even larger fiscal consolidation needs ahead and that any new financing will run well after the next scheduled elections in September 2013.

A longer-term agreement might be needed for the MoU

What next? The next important event will be the Eurogroup meeting on the 20 June, where the details of the terms of the package will be finalised and the assessments of the Troika mission will be discussed. The most important meeting will occur on 23-24 June, when EU leaders must agree to the new package. They will be then be called to discuss this agreement with their own parliaments. However, we think that the concessions made by Greece will be sufficient to convince some of the more sceptical euro area governments. In the meantime the most important risk remains in Greek domestic politics, as politicians will need to show sufficient commitment to pass the MTFS through parliament, probably by 20-22 June and show sufficient political support behind any terms in a new lending agreement.

We believe the EU will deliver; the ball is in Greece’s court




Japan ⏐ Roundup Shuichi Obata

Conditions for a V-shaped rebound The conditions for a substantial reduction in supply constraints, one of the three conditions for Japan's economy to rebound in a V-shaped pattern, could be in place by early fall, at the latest.

Japan's economy has been contracting in the first half of 2011, but we think it is poised for a sharp rebound in the second half. The three conditions for a V-shaped rebound, in our view are: 1) a substantial elimination of supply constraints, 2) solid overseas demand and a recovery of domestic demand, and 3) the emergence of reconstruction demand, with an assist from government policies. With respect to the first condition we think supply constraints are likely to diminish substantially soon.

Three conditions for a V-shaped rebound

Damaged production facilities, disrupted supply chains, and shortages of electric power resulted in supply constraints after the earthquake. An April METI survey shows that about 90% of the companies that responded expect their quake-damaged production facilities to be back up and running by July. About 85% of companies in basic materials industries and 71% of those in processing industries think they will be able to get sufficient supplies by October. More recently, production and supply operations have been recovering much more quickly than in April.

Supply constraints easing at a fast pace

The auto industry suffered the most severe supply-chain disruptions after the earthquake, as autos are made from a large number of parts and involve a broad range of related industries. The earthquake also damaged plants that manufacture automotive microcontroller units. Overall output in the transport equipment industry declined 46.7% m-o-m in March and then by another 1.5% in April (Figure 1). Auto output, one component, shrank 54.2% in March and then 10.7% in April to about 40% of the level in February, before the earthquake.

Auto output fell to 40% of pre-quake levels

Transport equipment companies expect their output to rebound sharply, by 35.7% in May and 36.7% in June. Companies in the information communications equipment and electronic component/device industries, which also suffered output declines in April, also expect solid increases in output. Hence, supply-chain problems have started to ease for many companies. If production goes as planned, June output in the industries noted above could recover to at least 90% of their February levels. Industrial production overall looks likely to recover to the February level.

Auto output likely to recover to pre-quake levels in June

The government has asked major electric power users in the areas sereved by Tokyo Electric Power and Tohoku Electric Power to cut peak power usage this summer by 15% y-o-y. We do not think electricity supply shortages will be a serious production bottleneck for four reasons.

Limited impact of electricity supply shortages

Figure 1. Breakdown of industrial production by industry % q-o-q

CY: 10 11 Jun forecast relative to Feb Q3 Q4 Q1 Q2E Mar Apr May E Jun E

Industrial production -1.0 -0.1 -2.0 -2.2 -15.5 1.0 8.0 7.7 -0.8 % y-o-y (13.3) (6.9) (-2.4) (-8.6) (-13.1) (-12.8) (-5.8) (3.0) Steel -5.9 1.7 6.4 -6.9 -10.2 -2.0 0.5 3.2 -8.7 Nonferrous metals -3.5 1.6 -1.6 -9.3 -16.5 2.2 1.9 -3.5 -16.1 Metal products -0.6 -0.8 0.2 -1.0 -10.7 2.3 5.1 -0.1 -4.1 General machinery 4.7 2.4 -0.1 14.9 -14.5 12.8 17.0 1.8 14.9 Electrical machinery 1.9 0.8 -1.0 1.9 -10.2 4.6 2.5 6.8 2.8 Information & communications equipment 1.6 0.0 -16.3 -17.3 -8.0 -17.2 7.8 14.3 -6.1 Electronic parts, devices -3.7 -0.4 6.1 -11.3 -6.6 -12.7 5.5 7.1 -7.9 Transportation equipment -4.6 -4.9 -7.3 -11.1 -46.7 -1.5 35.7 36.7 -2.7 Chemicals (ex pharmaceuticals) -0.3 2.1 -1.7 -5.3 -11.2 -1.4 1.7 4.5 -7.0 Pulp & paper -1.1 0.5 0.8 -4.8 -8.3 -0.4 -2.0 6.7 -4.4

Note: Q2 2011 estimate and June forecast relative to Feb level based on May-Jun production plans. Source: Ministry of Economy, Trade & Industry, Nomura Global Economics.




First, power conservation plans have relieved the rolling blackouts that came immediately after the earthquake. Suspension of power supplies due to rolling blackouts would require 10 days for production lines in some industries to start operating again. With these power conservation plans manufacturers can adjust the utilization of their production lines without having to completely suspend them.

Second, to minimize the loss of their output, companies have adopted new measures to conserve power. Some for example have been using their own power sources in the early morning and evening. Auto companies have announced shifts to rest days on Thursday and Friday instead of Saturday and Sunday. As a result, companies are likely to be able to maintain output even though peak electric power usage is declining.

Third, the outlook for electricity supply capacity in the summer has improved substantially. Tokyo Electric announced on 13 May that it expects its peak electricity supply capacity to improve to 55.2GW in July (Figure 2). That amount should be sufficient, given that the average peak demand in the summer in the past five years is 55GW, although demand could be as high as the peak of 60GW in the summer of 2010, when temperatures hit record highs. If the electric utilities' forecasts are on the mark, electricity supply shortages will probably prove to be a major problem after the summer demand period.

Fourth, in the Kanto and Tohoku regions, production may not rebound to levels where electricity supply shortages are a serious supply constraint. Major power users in the Kanto area used 41,372Gwh in March, about 17% less than the usage of 48,428Gwh, which represents a 15% reduction of the amount used in July 2010. For the amount of electricity usage to recover to the same level in Apr-Jun, the average amount used per month would have to increase by 5.4%, which would mean production would have to increase by a monthly average of 6.4%, based on the elasticity of production relative to electricity usage (1.2; 5.4 x 1.2 = 6.4). Such a strong rebound will be very difficult, but not impossible, to achieve in light of the production plans detailed in Figure 1. Hence, in the quake-devastated Tohoku region, electricity supply shortages are unlikely to develop.

As noted above, production facilities are resuming operations; supply-chain problems look likely to be substantially eliminated; and electricity supply shortages are unlikely to have a serious impact in the summer demand period. We accordingly expect supply constraints to be substantially eliminated by the early fall, after the summer demand peak subsides.

No rolling blackouts

No impact on output from power conservation plans

Rebound in electricity supply capacity

Production is unlikely to bump against supply constraints

Figure2. Electricity supply forecasts for late July 2011 (fromTokyo Electric)

Figure3. Production and power usage by major users in the Kanto area

Source: Ministry of Economy, Trade & Industry and Tokyo ElectricPower data, Nomura Global Economics.

Note: Our estimates based on a regression of March industrial production against power usage. Source: Ministry of Economy, Trade & Industry and Federation of Electric Power Companies data, Nomura Global Economics.

3746.5

52 55.2

0

10

20

30

40

50

60

70

3/12 (actual) 3/25 4/15 5/13

GW

m/d

Possible peak demand (60GW)

35,000

40,000

45,000

50,000

55,000

60,000

60

70

80

90

100

110

03 04 05 06 07 08 09 10 11 12 CY

(Nomura estimates)

65,000120Gwh2005 = 100

15% cuts

Usage in Jul 2010

Nomura Global Economics 12


3 June 2011

Asia ⏐ Roundup Young Sun Kwon

South Korea: BOK’s asymmetric preference We reduce our expectation of total rate hikes in the next 18 months to 50bp from 100bp, as we believe that the BOK will focus more on downside risks to growth than upside risks to inflation.

We drop our call for a June hike April industrial output fell unexpectedly, indicating that Korea’s two-speed economy, with solid exports and weak domestic demand, is slowing. CPI inflation was 4.1% y-o-y in May, the fifth straight month above the Bank of Korea’s (BOK) target (2%-4%). These data support our 2011 forecasts of below-consensus 3.5% GDP growth and above-consensus 4.4% CPI inflation.

Given our finding that the BOK is weighing downside risks to growth more heavily than upside risks to inflation, we now expect only one 25bp rate hike in August 2011 (we drop our call for a June hike) and another 25bp hike next February (we drop one 25bp hike in Q2 2012). Our forecast for the terminal rate of the current tightening is 3.50% (previously 4.00%) by end-2012.

Asymmetric monetary policy responses Modern monetary theory holds that a central bank’s objective (or loss) function is to minimize the deviations of inflation from its target (i.e., inflation gap) and the deviations of real economic activity from its natural rate level (i.e., output gap). The “Taylor-rule,” which is one representation of this theory, specifies a symmetric policy response to each gap. In reality, however, the BOK has been more aggressive in cutting rates when the output or inflation gap is negative, versus hiking rates when the output or inflation gap is positive to the same magnitude (Figure 1).

If the degree of price and wage rigidities is flexible downward and sticky upward, such a concave short-run Philips curve can explain the BOK’s asymmetric behaviour. Indeed, nominal wages were cut sharply after the 2008 financial crisis, but have not yet recovered fully despite the strong economic rebound in 2009-10. But, overall service prices show downward rigidity (i.e., once prices rise, they seldom fall), which suggests that the BOK’s asymmetric preferences, not the inflation-employment dynamics, has driven its behaviour. We posit three explanations.

First, the BOK may be placing a great emphasis on risk management. After unexpectedly deciding to hold rates in May, BOK Governor Kim highlighted that policy must give greater weight to the downside growth risks (e.g., European fiscal crisis, non-performing project finance loans by Korean mutual saving banks and the household debt burden) than to the upside risks.

Second, while the BOK aims for the mid-point (3%) of its 2%-4% inflation target band, the BOK seems to have been quite tolerant with inflation between 3%-4%. This leniency appears to have influenced expectations. The BOK’s survey of CPI inflation expectations has averaged 3.5% in 2002-11, higher than the 3.1% average actual inflation (Figure 2). In the past, it seems that good luck (e.g., benign external disinflationary shocks in 2005-07; see Figure 1) has helped bring inflation back toward 3%, and may explain the BOK’s inflation tolerance, but it may also help

Growth slows while inflation remains high

We now expect only one 25bp hike for the remainder of 2011

BOK policy has been asymmetric to output and inflation gaps

BOK has asymmetric preferences

Risk management weighs downside risks more heavily

Figure 1. Korea’s output gap, inflation and policy rate Figure 2. Korea’s actual and expected inflation

Note: Output gap is calculated by estimating potential by using the Hodrick-Prescott filter. Last data point is for Q1 2011. Source: CEIC and Nomura Global Economics.

Note: The BOK conducts a consumer survey, asking respondents their expected CPI inflation in the next 12 months. Last data point is May 2011. Source: BOK and Nomura Global Economics.

BOK may be too complacent on cost-push inflation

-6

-5

-4

-3

-2

-1

0

1

2

3

0

1

2

3

4

5

6

Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10

Output gap, rhsCPI inflation, lhsBOK policy rate, lhs

%

0

1

2

3

4

5

6

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

Inflation expectationHeadline CPI inflation

% y-o-y



3 June 2011

explain the huge build-up of domestic debt in Korea.

Third, the inherently pro-growth Korean government may have influenced the BOK’s monetary policy to a large extent, given the low level of the BOK’s independence. One seat on the seven-member Monetary Policy Committee (MPC) has remained vacant for more than a year, an unprecedented duration. Although The Bank of Korea Act specifies a single mandate of price stability, Governor Kim has highlighted both objectives of high employment and stable inflation.

Three key things are missing When inflation deviates from target after a shock, flexible inflation targeting implies that the central bank must 1) make a strong commitment to bring high inflation down to the target 2) within an optimal policy horizon (the time at which inflation should be back on target in the future when the central bank aims at minimising its loss function; BOK economists’ estimate 4-8 quarters) 3) with clear communication (signalling the monetary policy bias to the market).

In this regard, the BOK’s current strategy may not be optimal, as the BOK’s discretionary monetary policy seems largely to be missing those three key ingredients. As a result, the BOK could start to find it more difficult to consistently follow an optimal interest rate path over time. If cost-push price pressures intensify and inflation expectations rise further, the result could be a more serious combination of lower growth and higher inflation, i.e. stagflation.

If financial disruptions are set to occur, the BOK’s risk management approach can be optimal. But even the policy effectiveness against financial disruption requires that inflation expectations are well-anchored and unlikely to rise during the resulting period of monetary easing. Otherwise, it might create the perception that the BOK is too focused on stabilizing economic activity and not enough on price stability, which might lead to higher inflation expectations.

Vulnerable to two tail risks We are concerned that the BOK’s strategy may have made the Korean economy more vulnerable than otherwise to two tail risks. On one hand, the BOK, in our view, neglected opportunities to normalize policy in Q4 2009-Q1 2011 when the output gap closed, inflation expectations rose, and the financial markets expected tighter monetary policy. Given the zero-bound limit (nominal policy rates cannot be negative), the current 3% nominal policy rate leaves the BOK with less ammunition should the downside risks to growth intensify substantially.

On the other hand, prolonged negative real policy rates have the potential for the development of a credit bubble ahead of the elections in 2012, unless policymakers pursue macro-prudential measures to limit credit growth (Figure 3). Although Korea’s domestic debt grew in line with nominal GDP last year, its very high level (352% of GDP in 2010) still imposes a threat to sustainable growth and the financial system, especially were a larger inflation shock to occur.

The BOK’s discretionary policy-making makes it a close call, but we now expect no rate hike in June based on our view of its asymmetric preference and increasing downside risks to growth.

The BOK has low monetary policy independence

BOK has fallen short on all three…

…which in our view raises the risk of policy mistakes

Well-anchored inflation expectations are key against shock

There is less room to cut rates in the event of a sharp downturn

Otherwise, negative real rate has potential for a credit bubble

We now expect no rate hike in June

Figure 3. Nominal and real BOK policy rate Figure 4. Korea’s total domestic debt % of GDP

Note: Real BOK policy rate is BOK policy rate less headline CPI inflation. Source: CEIC; Nomura Global Economics estimates.

Note: Domestic debt includes both local and foreign currency denominated financial liabilities (excluding equity and trade credit) for general government, non-financial corporate and individuals. Source: CEIC; Nomura Global Economics.

-3

-2

-1

0

1

2

3

4

5

6

2000 2002 2004 2006 2008 2010 2012

Real BOK policy rateBOK policy rate

F

%

100

150

200

250

300

350

400

1970 1975 1980 1985 1990 1995 2000 2005 2010

% of GDP



Emerging Markets ⏐ Roundup Ann Wyman ⏐ Icaro Rebolledo

EEMEA: A soft patch of its own This week’s PMI releases point to some slowing of activity in Q2 after strong Q1 GDP data. This looks like a moderation of growth momentum rather than a meaningful pullback.

High frequency data released in the EEMEA region this week showed a marked slowing of growth momentum, despite the release of some encouraging Q1 GDP data. Purchasing managers’ indices (PMIs) from manufacturers in Central and Eastern Europe (CEE), Turkey, South Africa and Russia all fell—many for the second or third consecutive month in a row—and in some cases now sit close to their 12-month lows (Figure 1). Despite these softer data, however, we do not expect the weaker headline readings to translate into a meaningful growth slowdown in the region. For now the data would appear to be evidence of consolidation in the relatively strong growth earlier in the year, which looks to have become self-sustaining, but in some countries remains vulnerable to softer economic performance in the euro area.

When evaluating the data, we note that the sources of weakness have varied across the region. In the CEE3 (Czech Republic, Hungary and Poland), exports orders look to have been the main culprit, falling off more noticeably than domestic demand components. As exports were the leading edge of recovery after the 2008-09 crisis, this moderation is not so surprising. In Russia and especially Turkey, however, it is domestic demand that has seen the most softening in recent months.

Comparing EEMEA with the rest of the emerging markets, it is clear that the recent drop in activity has been more precipitous than in either Latin America or Asia, after having performed somewhat better earlier in the year. But the post-recession recovery in much of EEMEA remains lacklustre compared with the other EM regions and is still a few points behind its pre-crisis peak (Figure 2), with the important exception of Turkey. Generally sluggish, albeit improving, credit growth (again, excepting Turkey, where it has been extremely strong) has also contributed to the weaker relative performance vis à vis other emerging markets (Figure 3).

Looking at the aggregate of EEMEA PMI indices compared with that of the G-4 (Figure 4), the performance of the two looks relatively synchronised, likely the result of strong linkages to Europe in many countries in the region, particularly in the CE3 (for a more thorough discussion of CEE3 linkages with both Europe and Asia, see “CEE: Different sorts of linkages,” Global Weekly Economic Monitor, 31 May 2011). The weaker PMIs in the euro area over the past few months, and especially in May, were the result of higher energy costs and declining confidence, resulting from concerns about the sovereign debt crisis.

Some EEMEA countries were hit by the same negative forces as their counterparts in developed Europe. Moreover, somewhat similar policy responses to the stronger activity earlier this year—including lightly applying fiscal and monetary brakes in some cases—are also having a dampening effect. In addition, unemployment, while having declined from the post-crisis peaks,

Manufacturing surveys point to slowing growth

The fall in EEMEA PMIs has been more pronounced

Weak EEMEA PMIs are in synch with developed Europe

Figure 1. PMIs EEMEA countries Figure 2. Emerging markets GDP growth

Source: Datastream; Nomura Global Economics. Source: Bloomberg; Nomura Global Economics. Note: LatAm3= GDP weighted average for Brazil, Mexico and Chile; AEJ= GDP weighted average for China, India, Korea and Indonesia. *Forecasts for Q1 2011 GDP were used for Brazil and Turkey.

44

46

48

50

52

54

56

58

60

Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11S. Africa RussiaTurkey PolandHungary Czech Republic

PMI

-20

-15

-10

-5

0

5

01/03/2007 01/04/2008 01/05/2009 01/06/2010

10

15

LatAm3 Asia ex-JapanTurkey CEE3

% y-o-y

http://intranet.nomuranow.com/research/getpub.aspx?pid=440112



3 June 2011

has not yet embarked on a clearly improving trend. This, together with recent higher headline inflation (on the back of strong commodity price increases), has been an important constraint on household budgets.

Assessing individual countries, the weaker readings in Russia over the past couple of months (the most recent reading was 50.7 for May, which marks an almost 5 point decline since March) have been largely the result of faltering domestic demand as the export sector has been performing well. Industrial production data have also been looking somewhat patchy, continuing the trend of a lacklustre recovery, even with the assistance of higher oil prices. Recent retail sales data have given some room for optimism, but further confirmation of improvement in other domestic demand components is necessary before a more positive assessment of growth conditions can emerge.

In the CEE3, Poland’s PMI dropped for a second month. This followed a solid first quarter GDP result released earlier in the week of 4.4%, led by a strong increase in investment. Export demand slowed (and imports increased) leading to a drag on growth from net trade. Poland’s growth picture remains relatively strong, despite slightly weaker private demand than we had expected and the recent drop in the PMI. As price pressures continue, the central bank of Poland has hiked rates at each of its last two meetings. The effect of tighter monetary policy on growth momentum is still to be seen, but the possibility of a slightly weaker outlook for the global economy and hence Polish exports could be a further drag as the year wears on.

This week’s PMI readings in Hungary and the Czech Republic were also weak. Hungary registered its lowest index since September 2010—though it is still above 50 at 52.3. Meanwhile the Czech Republic’s index hit a 16-month low of 55.9. Tighter policy and slowing growth in major export destinations, especially Germany, look to have hit exports in both countries.

In South Africa, the PMI declined for the third consecutive month—though the index is still above 50, where it has been since last November. The employment situation remains an important drag, with its reading still below 50. These data follow on from a solid 4.8% q-o-q saar Q1 GDP result, which showed slightly stronger-than-expected net export growth, but a still weak investment picture. Ultimately, we see the South African economy on a stable, if not dynamic growth path over the course of the year, with unemployment remaining one of the most important challenges.

Turkey remains the regional outperformer and, we believe.it shows signs of overheating. In particular, inflation momentum continued recently, reaching 7.2% y-o-y from 4.3% y-o-y the month before. This is at a time when unemployment data continue to approach levels that prevailed pre-crisis, and automobile sales for the first four months of the year have risen 75% from the same period last year. Indeed, the country also appears to be the region’s top credit growth performer with consumer loans growing at a pace of around 41% y-o-y. For further analysis of Turkey’s overheating risks, please see: “Turkey: If this is not overheating, what is?,” EEMEA Country View, 17 May 2011.

Russian growth prospects remain lacklustre

Polish growth is still strong, but may have moderated in Q2

Hungarian and Czech PMIs have come off considerably

South Africa remains dogged by unemployment

Turkey remains the regional outperformer

Figure 3. EEMEA credit growth to the private sector Figure 4. PMIs EEMEA, rest of EM and G4

Source: EMED; Nomura Global Economics. Source: Datastream; Nomura Global Economics.

-20Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11

-10

0

10

20

30

40

50

60

CZ HU PL

RU ZA TR

% y-o-y

30

35

40

45

50

55

60

01/01/2008 01/12/2008 01/11/2009 01/10/2010

EEMEA

G-4

rest of EM

PMI




United States ⏐ Economic Outlook David Resler ⏐ Aichi Amemiya

Bumps on the recovery road Although we suspect the recent weakness is a temporary phenomenon, partially a result of supply chain disruptions from Japan, risks to our forecast are tilted toward the downside. Activity: As the economy has advanced from recovery into the expansionary phase of the business cycle, sustained strength in profits has bolstered business confidence and encouraged new investment in both labor and capital. With households continuing to focus on trimming an inordinately large amount of debt, a newly revived labor market remains critical to a self-sustaining expansion. After a slowdown in Q1, US exports are likely to grow more vigorously over the rest of this year, providing a helpful lift to production. The housing sector, however, remains weak and is a downside risk to the outlook. Budgetary pressures continue to limit state and local government spending and hiring, and lawmakers’ newfound resolve toward austerity is likely to limit federal government spending. A more immediate concern has emerged as the lagged effects Japan’s 11 March earthquake and tsunami have begun to show up in the incoming economic data, but we continue to stress the transitory nature of these temporary disruptions.

Inflation: Surging commodity prices have raised headline inflation, but if the recent retreat in oil prices proves to be the start of a new downtrend, headline inflation could soon reverse some of its earlier rise. Meanwhile, “underlying inflation” remains relatively stable. Since last October when 12-month core CPI inflation hit a record low of 0.6%, it has risen to 1.3%, but is still below levels believed to be consistent with “maximum employment and price stability.” A temporary supply/demand imbalance in the vehicle market resulting from the disruption of the auto parts supply-chain after the Japan earthquake and tsunami has accounted for much of this acceleration in the “core.”

Policy: We expect the Fed to maintain the size of its portfolio after completing its purchases of long-term securities at the end of June (so-called “QE2”). With underlying inflation likely to remain tepid amid persistent economic slack and growth that is barely above the economy’s potential, we doubt the Fed will begin raising its policy rates – the fed funds rate and the rate paid on excess reserves – before the end of 2012.

Risks: Powerful headwinds persist and tilt the balance of risks to the downside. In particular, the threat of further declines in real estate prices could bring renewed distress to the financial system while the lingering effects of high gasoline prices could hurt discretionary spending.

Details of the forecast

Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). The unemployment rate is a quarterlyaverage as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures andcalendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Housing starts are period averages.Numbers in bold are actual values. Table reflects data available as of 2 June 2011. Source: Nomura Global Economics.

% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 2.6 3.1 1.8 2.6 3.2 3.0 2.0 2.5 2.9 2.5 2.6 Personal consumption 2.4 4.0 2.2 2.7 3.2 2.7 0.8 1.9 1.7 2.9 2.1 Non residential f ixed invest 10.0 7.7 3.4 6.8 7.9 6.2 7.5 6.7 5.7 6.8 6.7 Residential f ixed invest -27.3 3.3 -3.3 3.9 5.4 7.4 0.3 1.9 -3.0 -1.2 3.2 Government expenditure 3.9 -1.7 -5.1 -3.2 -2.0 -1.8 -1.8 -2.3 1.0 -1.9 -1.8 Exports 6.7 8.6 9.2 6.5 5.7 9.1 9.8 9.1 11.7 6.8 8.7 Imports 16.8 -12.6 7.5 1.0 2.5 3.8 1.7 2.1 12.6 3.0 2.8

Contributions to GDP: Domestic f inal sales 2.6 3.3 0.6 2.0 2.8 2.4 1.0 1.6 1.9 2.3 2.4 Inventories 1.6 -3.4 1.2 0.0 0.1 0.1 0.0 0.0 1.4 -0.1 0.0 Net trade -1.7 3.3 0.0 0.7 0.3 0.5 1.0 0.9 -0.5 0.4 0.2Unemployment rate 9.6 9.6 8.9 8.8 8.7 8.5 8.4 8.3 9.6 8.7 8.3Nonfarm payrolls, 000 -73 234 159 225 200 175 190 170 76 190 190Housing starts, 000 saar 584 539 580 560 585 586 583 582 586 578 592Consumer prices 1.2 1.2 2.2 3.3 2.9 2.5 1.5 0.9 1.6 2.7 1.2 Core CPI 0.9 0.6 1.1 1.3 1.3 1.5 1.2 1.2 1.0 1.3 1.3Federal budget (% GDP) -8.9 -10.1 -8.1Current account balance (% GDP) -3.2 -3.6 -3.2Fed securities portfolio ($trn) 2.04 2.16 2.40 2.64 2.64 2.54 2.44 2.34 2.16 2.54 2.14Fed funds 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.253-month LIBOR 0.29 0.30 0.30 0.35 0.35 0.35 0.35 0.35 0.30 0.35 0.85TSY 2-year note 0.42 0.61 0.82 0.65 0.65 0.75 0.80 1.00 0.61 0.75 1.50TSY 5-year note 1.26 2.01 2.27 1.85 2.00 2.00 2.05 2.25 2.01 2.00 2.60TSY 10-year note 2.51 3.36 3.47 3.15 3.25 3.25 3.15 3.25 3.36 3.25 3.6530-year mortgage 4.32 4.86 4.86 4.90 4.75 4.85 4.65 4.75 4.86 4.85 5.15



United States ⏐ Data Preview David Resler ⏐ Aichi Amemiya

The week ahead In a relatively light data week, numerous Fed speakers, including Chairman Bernanke, and the Beige Book, could offer insight into the agenda for the 21-22 June FOMC meeting.

Consumer credit (Tuesday): After falling to record depths during the financial crisis, consumer credit began growing in October. Growth has been one-sided, fueled by non-revolving credit, the majority of which represents auto and student loans. Revolving credit (i.e. credit cards) remains largely out of favor with households, increasing in only two of the past 31 months. In March, consumer credit expanded by $6.0 billion and we expect another similar, $5.0 billion increase in April. As usual, the majority of the increase should come from non-revolving credit.

Weekly chain-store sales (Tuesday): The Johnson Redbook retail sales index beat the target, indicating healthy May spending activity in the face of elevated gasoline prices. We await the sales figures for the first week of June to see whether consumers are buying more now that gas prices have fallen slightly, and if retailers will beat the target in back-to-back months.

Mortgage applications (Wednesday): Demand for mortgages and interest rates are near historical lows. Some borrowers, who missed out on previous drops in rates, may see the low average 30-year fixed rate (4.58% last week) as a another chance to refinance.

Fed Beige Book (Wednesday): Given the recent spate of downbeat US economic data, it will be particularly interesting to read comments from the various Federal Reserve Districts to gauge how much is attributable directly to Japan’s 11 March earthquake and tsunami, and how much represents knock-on effects. Districts that are heavily laden with manufacturing are likely to make note of that sector’s drag on the local economy. In addition, we are bound to hear about the continuing decline of housing prices in most regions, as well as the lingering effects of higher energy prices on both business and household spending decisions, despite falling prices in recent weeks. In the 13 April Beige Book, “economic activity generally continued to improve” across all Districts, though by June that assessment may not be as rosy.

Trade balance (Thursday): The US trade deficit on goods and services widened to $48.2 billion in March. There is much uncertainty surrounding the direction of change in the April deficit given that it will reflect the first month in which trade data would reveal the flow disruptions following the 11 March Japan earthquake and tsunami. Although April trade figures reported by Japan showed roughly a $2.5 billion decline in exports from a year ago, inbound container data reported by US ports pointed to a solid increase in goods imports in the month. Moreover, petroleum import prices were still on the march upward in April and should exert negative pressure on the trade deficit. Against this backdrop, we forecast a $50.9 billion deficit for April, which is $2.7 billion wider than the previous month.

Initial jobless claims (Thursday): We do not expect next week’s initial claims for unemployment insurance to be affected in any significant way by special factors, such as bad

Source: Bloomberg; Haver Analytics; Nomura Global Economics. Note: Eastern Daylight Time (EDT) .

Units Period Prev 2 Prev 1 Last Nomura ConsensusNo indicators

13.00 TSY 3-year auction $bn n.a. 32 n.a.15.00 Consumer credit $bn Apr 4.4 7.6 5.0 n.a. 6.015.45 Chairman Bernanke speech

7.00 Mortgage purchase applications %w -o-w 3-Jun 7.8 1.1 -4.0 n.a. n.a.13.00 TSY 10-year auction $bn n.a. 21 n.a.14.00 Fed Beige Book

8.30 Initial jobless claims 000s 4-Jun 414 428 422 n.a. n.a.8.30 Trade balance $bn Apr 47.0 -45.4 -48.2 -50.9 -48.610.00 Wholesale inventories %m-o-m Apr 1.0 1.0 1.1 1.0 1.013.00 TSY 30-year auction $bn n.a. 13 n.a.

8.30 Import prices %m-o-m May 1.7 2.6 2.2 -0.6 -0.7Friday 10 June

Tuesday 7 June

Wednesday 8 June

Monday 6 June

Thursday 9 June

8.30 Import prices ex-petroleum %m-o-m May 0.7 0.4 0.6 n.a n.a.14.00 US budget $bn May -135.9 -165.0 -160.0


weather. As a result, claims will likely fall to the lower end of the recent 410k-430k range in the coming weeks, but stay above the 300k-level of March.

Wholesale inventories (Thursday): Wholesale inventories are largely affected by increases in commodity prices, and prices were still on the rise in April. Most likely wholesale inventories rose by another 1.0%, similar to the trend in place since the end of 2010. Sales, too, can be inflated by rising prices and we expect an increase of 0.5% in April on top of 2.9% in March. April represents the first month that supply disruptions from Japan caused volatility in inventories. the auto parts industry in the US initially hoarding supplies; liquidation as the pipeline dried up; sales constrained by lack of availability in key inputs to finished goods. As such, downside risks are prevalent for both measures. Fundamentally speaking, however, the year-over-year growth in sales continues to outstrip growth in inventories, which implies the need for further inventory building on the horizon.

Import prices (Friday): Import and export prices in May will reflect the first month of decline in commodity prices. For example, after peaking on Friday, 29 April, crude oil spot prices for West Texas Intermediate had fallen nearly 10% by the end of May. As a result, we expect import prices to decline by -0.6% on the month (compared to an increase of 2.2% in April) with ex-petroleum prices up 0.2%. Export prices will also feel the weight of lower commodity prices and come in flat in May, following an increase of 1.1% in April.

US budget (Friday): In May 2010, the Treasury reported a monthly budget deficit of -$135.9 billion, but we believe the May 2011 budget deficit will be a smaller -$101.1 billion. That estimate reflects a drop in tax refunds for individuals and corporations, sharply higher unemployment insurance and SSI receipts, and slower growth in outlays. Indeed, our tracking estimate shows that daily Treasury receipts ran nearly 25% higher in May 2011 compared to May 2010.




Canada ⏐ Economic Outlook Charles St-Arnaud

Sensitive to external factors Growth should remain strong in 2011, despite some negative impact from Japan. As excess capacity gradually fades, the BoC should resume tightening monetary policy. Activity: We expect activity to remain strong in 2011 and to be slightly above the long-term trend of 2.0%. However, the disruption to the supply chain due to Japanese earthquake, especially in the auto industry, will temporarily lower growth in Q2. Note that as the reconstruction takes place in Japan at the end of 2011 and 2012, Canadian exports will benefit from stronger demand for wood products, as Canada is one of the biggest suppliers of lumber to Japan. Consumer spending is expected to moderate gradually, as a result of high household indebtedness. Business investment in machinery and equipment is expected to remain robust over the forecast period, supported by the need to rebuild capital after almost two years of weak investment. In addition, the strong Canadian dollar provides an incentive to invest by reducing the cost of imported capital goods, reversing some of the competitiveness lost due to the higher dollar. However, strong domestic demand should continue to boost imports, while the gradual pick-up in global and US growth should provide some much needed support for exports. In addition, the gradual increase in commodity prices should boost Canada’s terms of trade and national income.

Inflation: The sizeable spare capacity in the economy and the strong Canadian dollar will keep inflationary pressures well contained. However, note that higher commodity prices, especially oil and food, will push headline inflation higher, reaching more than 3% by mid-year. Core inflation is expected to remain well below the BoC’s target and gradually converge to 2%.

Policy: With considerable monetary stimulus in place, a fairly positive growth outlook and an output gap that is expected to close in 2012, we believe the BoC will continue to gradually remove monetary stimulus over the next few years. We expect the BoC to resume tightening in Q3 2011 and to proceed very gradually, reaching 2.75% by year-end. On fiscal policy, the new government is to release a new budget on 6 June, which should contain measures for a return to a balance budget in 2014.

Risks: Most of the downside risks are linked to external factors. The risk of a slower US and global economy is the most important, given the impact on exports and commodity prices. The strong Canadian dollar also poses a risk, as it could dampen exports growth and lower import prices, leading to weaker inflation. This would result in less monetary tightening over the projection period. On the positive side, growth could surprise on the upside, and consumer spending and residential construction could prove more resilient than expected.


Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). The unemployment rate is a quarterly average as a percentage of the labour force. Employment is the average monthly change during the period. Inflation measures and calendar year GDP are year-over-year percent changes. Interest rate forecasts are end of period. Numbers in bold are actual values. Table reflects data available as of 26 May 2010. Source: Bank of Canada, Statistics Canada, Nomura Global Economics.

% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 1.8 3.3 3.8 2.2 2.9 2.6 2.6 2.5 3.1 2.9 2.5 Personal consumption 2.7 4.9 2.6 2.5 2.3 2.3 2.2 2.2 3.4 2.9 2.2 Non residential f ixed invest 18.6 10.4 8.0 7.5 7.5 7.5 7.3 7.3 5.2 9.9 7.4 Residential f ixed invest -3.9 -0.6 -2.0 2.0 4.0 3.0 4.0 4.0 10.4 -0.1 3.8 Government expenditure 2.2 3.5 1.7 0.3 0.3 0.3 0.3 0.3 5.0 1.7 0.3 Exports -1.7 17.1 12.4 3.3 6.7 5.7 5.2 4.8 6.4 8.2 5.1 Imports 7.8 0.5 10.9 4.3 5.8 5.2 4.8 4.6 13.4 6.7 4.9

Contributions to GDP: Domestic f inal sales 3.7 4.8 2.7 2.5 2.5 2.5 2.4 2.4 4.4 3.2 2.5 Inventories 0.9 -6.0 0.7 0.0 0.1 0.0 0.0 0.0 0.6 -0.7 0.0 Net trade -2.9 4.5 0.4 -0.3 0.3 0.2 0.1 0.1 -2.0 0.4 0.0Unemployment rate 8.0 7.7 7.8 7.6 7.4 7.2 7.0 6.9 8.0 7.5 6.9Employment, 000 58 19 101 80 80 90 90 70 70 88 70Consumer prices 1.8 2.3 2.6 3.1 2.8 2.5 2.3 2.1 1.8 2.7 2.1 Core CPI 1.6 1.6 1.3 1.6 1.6 1.8 1.9 2.0 1.7 1.6 2.0Federal deficit (% GDP) -4.9 -3.4 -2.1Current account balance (% GDP) -2.6 -1.5 -0.4Overnight target rate 1.00 1.00 1.00 1.00 1.25 1.75 2.25 2.75 1.00 1.75 3.253-month T-Bill 0.87 0.97 0.93 0.97 1.20 1.80 2.30 2.80 0.97 1.80 3.302-year government bond 1.36 1.67 1.82 1.75 2.00 2.30 2.70 3.10 1.67 2.30 3.505-year government bond 2.01 2.45 2.71 2.50 2.70 3.00 3.20 3.50 2.45 3.00 3.7010-year government bond 2.75 3.11 3.35 3.15 3.30 3.50 3.70 3.80 3.11 3.50 4.00USD/CAD 1.03 0.99 0.97 0.97 0.99 0.99 1.00 1.00 0.99 0.99 1.00



Euro area ⏐ Economic Outlook Lavinia Santovetti ⏐ Jens Sondergaard

Inflation blues Inflation is creeping higher but the ECB has hiked rates and we expect more to follow.

Activity: GDP rose by 0.8% q-o-q in Q1, but we expect activity in the euro area economy to lose some momentum in Q2. Regardless, the recovery seems to be broadening out: exports are triggering a pick-up in domestic demand. Q1 could mark a turning point for the investment cycle, which should gain more strength in the second half of 2011, supported by high business confidence and the corporate deleveraging cycle ending (see Europe Roundup: Lift-off or launch abort, 13 May 2011). Moreover, consumer spending looks set to increase, as labour market conditions improve and the unemployment rate continues to decline. However, the recovery looks set to remain unbalanced, with the core countries providing the impetus to growth, while deleveraging and fiscal tightening should keep growth subdued in the periphery.

Inflation: The past increases in commodity prices should continue to exert upward pressure on headline inflation in the months ahead. Moreover, improving labour market conditions should push up domestically generated price pressure. Finally, exchange rate pass-through effects from the past depreciation of the euro and potential further increases in indirect taxes should also drive inflation higher. We expect HICP inflation to gradually increase over the coming months, peak at 3% in the autumn and fluctuate around the target in 2012.

Policy: With current growth above trend, headline inflation hovering above the target in 2011 and medium-run inflation risks crystallising, the ECB hiked the main policy rate by 25bp in April. We expect another 25bp hike in July, followed by rate increases of 25bp every quarter until Q4 2012, taking the main rate to 2.75%. We expect full normalisation of liquidity by the end of 2011. However, risks are titled towards a slightly slower tightening cycle in H2 2011.

Risks: Risks surrounding the outlook for activity are balanced. Investment may continue to surprise on the upside, but the recent commodity price increases may constitute a stronger headwind for households and firms. In addition, any further exacerbation of the sovereign debt crisis – including contagion to Spain and Italy – pose downside risks. However, we think that the core economies will prove strong enough to offset the weakness in the periphery.


Notes: Quarterly real GDP and its contributions are seasonally adjusted annualised rates. Unemployment rate is a quarterly average as a percentage of the labour force. Compensation per employee, labour productivity, unit labour costs and inflation are y-o-y percent changes. Interest rate and exchange rate forecasts are end of period levels. Numbers in bold are actual values, others forecast. Table reflects data available as of 27 May 2011. Source: Eurostat, ECB, DataStream and Nomura Global Economics.

% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 1.4 1.1 3.2 1.9 1.3 2.1 2.1 2.3 1.7 2.1 2.1 Household consumption 0.7 1.6 0.8 0.6 0.8 1.3 0.9 1.2 0.8 0.9 1.1 Fixed investment -0.9 -2.1 7.4 1.5 2.4 2.7 4.0 4.3 -1.0 2.6 3.6 Government consumption 1.6 0.4 -0.2 -0.2 -0.4 0.0 0.0 0.0 0.7 0.2 -0.1 Exports of goods and services 8.4 6.3 6.1 6.3 5.3 6.9 7.0 7.3 10.9 7.2 6.9 Imports of goods and services 5.8 3.9 4.1 3.6 4.5 5.3 5.6 6.1 9.0 5.1 5.6

Contributions to GDP: Domestic f inal sales 0.6 0.6 1.8 0.6 0.9 1.2 1.3 1.5 0.4 1.1 1.4 Inventories -0.4 -0.6 0.4 0.0 0.0 0.0 0.0 0.0 0.4 0.0 0.0 Net trade 1.2 1.1 1.0 1.3 0.5 0.8 0.8 0.7 0.8 1.0 0.7

Unemployment rate 10.1 10.1 9.9 9.8 9.8 9.7 9.6 9.5 10.1 9.8 9.5 Compensation per employee 1.6 1.7 1.8 1.6 2.1 2.1 2.4 2.6 1.8 1.9 2.7 Labour productivity 2.1 1.8 1.6 1.0 1.0 1.2 1.3 1.3 2.1 1.2 1.4 Unit labour costs -0.4 -0.1 0.2 0.5 1.1 0.9 1.1 1.3 -0.3 0.7 1.3

Fiscal balance (% GDP) -6.0 -4.2 -3.1 Current account balance (% GDP) -0.4 -0.8 -0.5

Consumer prices 1.7 2.0 2.5 2.8 2.7 2.7 2.0 1.7 1.6 2.7 1.9

ECB main refi. rate 1.00 1.00 1.00 1.25 1.50 1.75 2.00 2.25 1.00 1.75 2.75 3-month rates 0.89 1.01 1.24 1.43 1.70 2.03 2.35 2.60 1.01 2.03 3.10 10-yr bund yields 2.26 2.89 3.35 3.25 3.55 3.70 3.80 3.90 2.89 3.70 4.10 $/euro 1.31 1.32 1.40 1.43 1.40 1.45 1.45 1.45 1.32 1.45 1.45





United Kingdom ⏐ Economic Outlook Philip Rush⏐Peter Westaway

The treacherous track to tighter policy Underlying activity is slowly picking up but the extent is uncertain and it remains weak. This is paralysing the MPC in the face of persistently high inflation, but should prompt a rate hike soon.

Activity: Payback from Q4’s bad weather boosted Q1. Although headline growth appears disappointing given this effect, the composition was favourable. Underlying growth (excluding the volatile construction sector) is better. Loose monetary policy and the persistent weakness of sterling continue to provide considerable stimulus throughout our forecast horizon. Headwinds come from the fiscal consolidation programme, poor credit availability, a deterioration of real wages and a shaky housing market, but we think the tailwinds will win out. Together, these considerable offsetting gales should provide an environment conducive to rebalancing.

Inflation: Inflation has been and should continue to be boosted by “one-off” shocks such as changes to VAT and surging commodity prices. Inflation’s surprisingly large resurgence in April was caused by higher travel costs, which were partly holiday related. But the elevated level of inflation is unlikely to change any time soon and the Bank is likely to miss its inflation target to the upside for at least the next couple of years. Beyond that, the persistently large output gap and base effects should drag CPI inflation back toward the target. However, if realised, inflation will have been above 3% for over two years and averaged 3.1% over the preceding five.

Policy: In its May Inflation Report, the MPC indicated that it currently considers a hike in H2 2011 to be consistent with balancing the risks around its inflation target. Heightened caution stopped the MPC from raising rates in May, but we expect it to deliver the first 25bp rate hike in August. By delaying until then, the MPC is treading a fine line between being considered cautious and dithering. Unfortunately, we think the probability of it leaning toward the latter is increasing. Fiscal consolidation plans were broadly unchanged in Budget 2011 and remain consistent with aims to take the current structural deficit into surplus by 2014-15. We expect fiscal policy to subtract 1.5% from GDP in fiscal year 2011-12.

Risks: Although the risks to our growth forecasts lie to the downside, we think that they lie to the upside for our inflation forecasts. The risks to our rate call are skewed to a later increase.

For full details of our UK view, please see UK Monthly Macro – June 2011.


Notes: Quarterly figures are % q-o-q changes at a seasonally adjusted annualised rate. Annual figures are % y-o-y changes. Inventories include statistical discrepancy. Inflation is % y-o-y. Interest rates and currencies are end-of-period levels. The fiscal deficit is based on the PSNB measure for the calendar year. Numbers in bold are actual values; others forecast. Table reflects data available as of 3 June 2011. Source: ONS, Bank of England, DataStream and Nomura Global Economics.

3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 2.9 -1.9 1.9 3.1 1.7 2.5 2.4 2.1 1.3 1.7 2.3 Private consumption -0.5 -1.2 -2.3 2.4 1.1 2.8 2.3 2.5 0.6 0.0 2.3 Fixed investment 15.0 -7.2 -16.5 5.6 3.4 4.7 7.3 5.5 3.0 -2.4 5.5 Government consumption -1.9 1.5 4.1 -1.2 -0.4 -1.1 -1.6 -1.6 0.8 0.7 -1.3 Exports of goods and services 6.7 7.1 15.6 5.3 5.4 4.5 4.4 5.1 5.3 8.7 4.9 Imports of goods and services 7.8 13.5 -9.0 4.5 3.6 3.4 3.5 4.1 8.5 3.0 3.7

Contributions to GDP: Domestic f inal sales 1.4 -1.6 -3.3 2.1 1.1 2.2 2.2 2.0 1.0 -0.2 2.0 Inventories 1.9 1.7 -2.0 0.9 0.1 0.0 0.0 -0.1 1.3 0.4 0.0 Net trade -0.5 -2.0 7.1 0.1 0.4 0.3 0.2 0.2 -1.0 1.4 0.3

Unemployment rate 7.7 7.9 7.7 7.7 7.7 7.6 7.6 7.5 7.9 7.7 7.5

Fiscal balance (% GDP) -10.1 -7.6 -6.1Current account balance (% GDP) -2.5 -0.8 -0.8

Consumer prices (CPI) 3.1 3.4 4.1 4.5 4.7 4.6 3.3 2.8 3.3 4.5 2.7Retail prices (RPI) 4.7 4.7 5.3 5.4 5.5 5.4 4.0 3.6 4.6 5.4 3.6

Official Bank rate 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50 0.50 1.00 2.0010-year gilt 3.69 3.17 3.69 3.35 3.55 3.75 3.90 4.05 3.17 3.75 4.25£ per euro 0.84 0.85 0.87 0.87 0.86 0.85 0.84 0.83 0.85 0.85 0.82$ per £ 1.56 1.56 1.62 1.64 1.63 1.71 1.73 1.74 1.56 1.71 1.77



Europe ⏐ Data Preview Philip Rush⏐Jens Sondergaard⏐Stella Wang

The week ahead Focus this week is on the vigilance of the ECB. Other highlights include industrial production data for various major economies and the probable silence around the Bank of England decision.

Note: London time. Source: Bloomberg, Reuters and Nomura Global Economics.

Units Period Prev 2 Prev 1 Last Nomura Consensus06-10 UK Halifax house prices % m-o-m, sa May -0.9 0.0 -1.4 n.a. 0.306-10 UK Halifax house prices % y-o-y, 3mma May -2.8 -2.9 -3.7 n.a. -4.0

Units Period Prev 2 Prev 1 Last Nomura Consensus8.00 Spain Industrial production % y-o-y, wda Apr 2.8 3.3 -0.9 n.a. 1.89.00 Euro area ECB Constancio gives lecture at European University Institute in Florence10.00 Euro area Producer prices % y-o-y Apr 6.0 6.6 6.7 n.a. 6.617.00 Euro area ECB Trichet speaks at International Economic Forum of the Americas in Montreal, Canada19.00 Euro area EU Rehn, Eurogroup Juncker speak to European Parliament's Economic and Monetary Committee

8.15 Switzerland CPI % y-o-y May 0.5 1.0 0.3 0.3 0.310.00 Euro area Retail sales % m-o-m, sa Apr 0.2 0.2 -0.9 n.a. 0.311.00 Germany Factory orders % m-o-m, sa Apr 3.1 1.9 -4.0 2.3 2.112.00 Euro area European Commission assesses euro-area budget plans14.00 Euro area Barroso speaks about G8 Summit during the question time at the European Parliament

Global World Economic Forum on Europe and Central Asia 2011 in Vienna (to 9 June)Greece Unemployment rate % Mar 14.8 15.1 15.9 n.a. n.a.

6.45 Switzerland Unemployment rate % sa May 3.4 3.3 3.1 n.a. 3.17.00 Germany Exports % m-o-m, sa Apr -1.0 2.8 7.3 n.a. -3.78.00 Euro area EU Rehn speaks at European Parliament debate on economic governance10.00 Euro area GDP % q-o-q, sa Q1-2nd 0.4 0.3 0.8 0.8 0.810.00 Euro area GDP % y-o-y, sa Q1-2nd 2.0 2.0 2.5 2.5 2.511.00 Germany Industrial production % m-o-m, sa Apr 1.5 1.7 0.7 -0.8 0.114.00 Belgium GDP % q-o-q, sa, wda Q1-2nd 0.4 0.5 1.0 1.0 n.a.17.00 Euro area EU Rehn speaks at FT Deutschland conference

Greece GDP % q-o-q, sa Q1-2nd -1.6 -2.8 0.8 n.a. n.a.Greece HICP inflation % y-o-y May 4.2 4.3 3.7 n.a. n.a.Portugal GDP % q-o-q, sa Q1-2nd 0.3 -0.6 -0.7 n.a. n.a.

6.30 France Nonfarm employment % q-o-q Q1-fin 0.1 0.2 0.4 n.a. n.a.8.30 Netherlands HICP inflation % y-o-y May 2.0 2.0 2.2 2.2 n.a.8.30 Netherlands Industrial production % m-o-m, sa Apr 1.8 1.7 -2.0 0.3 n.a.9.30 UK Global goods trade balance £mn Apr -7597 -6988 -7660 -7598 -75499.30 UK Total trade balance £mn Apr -3666 -2655 -3005 -2820 -290010.00 Portugal HICP inflation % y-o-y May 3.5 3.9 4.0 n.a. n.a.11.00 Ireland HICP inflation % y-o-y May 0.9 1.2 1.5 n.a. n.a.12.00 UK BoE MPC meeting - policy rate % Jun 0.50 0.50 0.50 0.50 0.5012.00 UK BoE MPC meeting - QE £bn Jun 200 200 200 200 20012.45 Euro area ECB Governing Council meeting % Jun 1.00 1.25 1.25 1.25 1.25

7.00 Germany HICP inflation % y-o-y May-fin 2.3 2.7 2.4 2.4 2.47.00 Germany Consumer price index % y-o-y May-fin 2.1 2.4 2.3 n.a. 2.37.45 France Industrial production % m-o-m, sa Apr 1.0 0.5 -0.9 0.4 0.47.50 Euro area ECB Trichet speaks at ECB Watchers conference in Frankfurt9.00 Italy GDP % q-o-q, sa & wda Q1-2nd 0.3 0.1 0.1 0.1 0.19.00 Italy GDP % y-o-y, sa & wda Q1-2nd 1.4 1.5 1.0 1.0 1.09.30 UK Industrial production % m-o-m, sa Apr 0.4 -1.2 0.3 -0.3 0.19.30 UK Industrial production % y-o-y Apr 4.4 2.5 0.7 1.0 1.49.30 UK Manufacturing production % m-o-m, sa Apr 0.9 0.0 0.2 -0.3 0.09.30 UK Manufacturing production % y-o-y Apr 6.6 5.0 2.7 3.3 3.59.30 UK PPI input % m-o-m May 1.4 3.8 2.6 -2.0 -1.09.30 UK PPI input % y-o-y May 14.9 14.8 17.6 15.4 16.29.30 UK PPI output % m-o-m May 0.5 1.1 0.8 0.4 0.39.30 UK PPI output % y-o-y May 5.3 5.6 5.3 5.4 5.39.30 UK PPI output core % m-o-m May 0.0 0.5 0.6 0.3 0.39.30 UK PPI output core % y-o-y May 3.1 3.1 3.4 3.3 3.49.30 UK BoE/GfK Inflation attitude survey11.00 Ireland Industrial production % m-o-m, sa Apr 0.0 -2.0 -1.0 n.a. n.a.12.00 Euro area ECB Gonzalez-Paramo speaks in Madrid13.50 Euro area EU Rehn speaks at European research conference in Brussels

Sometime in the week

M onday 6 June

Tuesday 7 June

Wednesday 8 June

Thursday 9 June

Friday 10 June



Germany factory orders (Tuesday): We expect Germany factory orders to bounce back by 2.3% m-o-m in April. This partly reflects a payback effect from the sizable decline (4%) in March and partly the broadly improving industrial orders survey data conducted by the Ifo institute.

Euro-area Q1 GDP second release (Wednesday): We expect the second release of euro-area GDP to confirm Q1’s strong growth of 0.8% q-o-q (sa). Details on expenditure breakdown are likely to reveal fixed investment and, to a lesser extent, exports as the main drivers, contributing to growth by 0.3pp and 0.2pp respectively. In contrast, domestic consumption seems to have remained muted, mainly owing to the ongoing deleveraging process in both household and government sectors. As for inventories, a pick-up from the rather low level looks likely and hence we expect a positive contribution to economic growth for the first time since Q2 2010.

Germany industrial production (Wednesday): After rising continuously in the first three months of 2011, German industrial production (including construction) is likely to decline in April, we think by 0.8% m-o-m. The significant fall in factory orders in March will have provided less of a cushion for April’s factory production. Moreover, German construction PMIs declined broadly in April, from civil engineering to commercial and housing activity, signalling a likely retreat in the sector.

Netherlands industrial production (Thursday): The output component in the Dutch manufacturing PMI inched up marginally in April. This seems to signal an equivalent increase in its industrial production. As such, we expect Dutch IP to grow by 0.3% m-o-m in April.

UK external trade (Wednesday): We expect the global goods trade deficit to hold close to March’s deteriorated position, at £7.6bn, with a slightly larger improvement in the goods and services deficit to £2.8bn (from £3bn).

BoE decision (Thursday): With June’s meeting only a month after the previous Inflation Report and an absence of news that we judge significant enough to alter policy perceptions, we expect no change in policy then. The MPC appears to need more evidence that the recovery is well grounded before delivering a hike, though we attach a 5% probability to one occurring in June.

ECB Governing Council meeting (Thursday): This month’s meeting is an important one. Despite signs of recent data softness, the tone has remained hawkish. We expect the words “strong vigilance” to appear in the introductory statement signalling that the ECB will hike interest rates at its July meeting. Given that tensions remain elevated in the European government bond markets, we see an 80% probability that the ECB governing council may decide, yet again, to delay its liquidity withdrawal exit by maintaining its 3M LTRO operations at full allotment for another quarter. We expect the assessment of the balance of risk to remain unchanged. Finally, we expect the ECB staff GDP and inflation forecasts to be revised up and we see the mid-range GDP growth projections as 2% for 2011 and 1.7% for 2012, and the HICP as 2.6% (2011), and 1.9% (2012).

France industrial production (Friday): We expect French industrial production to increase by 0.4% m-o-m in April, mainly reflecting improved survey data from the Bank of France and the manufacturing PMI.

Italian GDP (Friday): According to the preliminary estimate, Italian GDP ticked up by 0.1% q-o-q in Q1. The data seem difficult to reconcile with the strength of some survey indicators, most notably the manufacturing PMI, which in Q1 hit its highest level since 2000, and the services PMI which recovered some of the lost ground. As a result we would not rule out the possibility of an upward revision (by about 0.1pp) to the Q1 GDP growth rate in the second release.

UK industrial output (Friday): Manufacturing output was likely restrained in April by supply-chain disruptions related to the earthquake in Japan and the Royal Wedding holiday. We expect both manufacturing and overall industrial output to fall by 0.3% m-o-m. Although industrial production might be supported by extraction from the North Sea bouncing back after recent maintenance, we think the extent will be tempered by companies curbing extraction following a large tax increase. We also expect utilities output to weigh on headline industrial production.

UK producer prices (Friday): Commodity prices made a large retracement lower during May, which is likely to trigger rare weakness in producer prices. Crude oil, metals and textile prices all fell sharply in May, which we expect to cause PPI input prices to fall by 2.0% m-o-m. Because of the lags at work and lower weighting of these imported goods in factory gate prices, we expect the PPI output series to still rise by 0.4% m-o-m, with growth of 0.3% m-o-m in its “core” goods.




Japan ⏐ Economic Outlook Takahide Kiuchi

Return to a recovery path in H2 We expect Japan's largest earthquake to result in a major economic slowdown in H1 2011, but the economy to return to a recovery path in H2.

Forecast change: We have updated our forecast to reflect the second preliminary GDP estimates for Jan–Mar 2011.

Activity: Real GDP growth fell sharply in Q1 2011, with a 3.7% q-o-q annualized decline, because of the effects of the Great East Japan Earthquake, and we expect substantial negative growth to continue in Q2 2011. However, we think that exports and production will recover from mid-2011 as supply constraints disappear, and we expect reconstruction demand to materialize at the end of the year, causing the Japanese economy to experience a V-shaped recovery.

Inflation: We expect reduced supply capacity resulting from the earthquake to have only a limited impact on the supply-demand balance, and thus on consumer prices, as the earthquake has also reduced demand. However, the rise in raw material prices, itself stemming from the rise in international commodity prices, could feed through to product prices. We forecast growth in the core CPI (general, excluding fresh food) of 0.4% y-o-y in 2011 and 0.3% y-o-y in 2012.

Policy: Japan’s Diet has approved a ¥4trn first supplementary budget, but work on the compilation of the second supplementary budget is taking longer than previously expected. Even though real GDP growth for Q1 2011 was much weaker than consensus, the Bank did not indicate that it would move more quickly to ease monetary policy. Considering the delays in government debates in Japan on the second supplementary budget, we have revised the timing of our forecast for additional easing measures from June to August. We think the BOJ will increase its asset purchase program by a further ¥3-5trn as its next easing policy.

Risks: An upside risk is that emerging economies in Asia and elsewhere continue to expand at a stronger-than-expected pace. However, near-term downside risks include the situation at the Fukushima nuclear power plant, more electricity shortages and turbulent financial markets (especially in FX and equities). In the lead up to the summer, when the economy will be at its most fragile after the earthquake, other risk scenarios include events in the Middle East leading to further yen strength and equity weakness; or even that key overseas economies, particularly the US and China, slow down, which could then push the Japanese economy into recession.


Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates. Unemployment rate is as a percentage of the labor force. Inflation measures and CY GDP are y-o-y percent changes. Interest rate forecasts are end of period. Fiscal balances are for fiscal year and based on general account. Table last revised 2 June. All forecasts are modal forecasts (i.e., the single most likely outcome). Numbers in bold are actual values, others forecast. Forecasts for 2011 and 2012 do not reflect forecast changes in Q1 2011. Figures will be revised after the second preliminary GDP estimate which will be released 9 June. Source: Cabinet Office, Ministry of Finance, Statistics Bureau, BOJ, and Nomura Global Economics.

% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 3.8 -3.0 -3.1 -2.4 5.1 6.6 3.6 2.6 4.0 -0.5 3.3 Private consumption 3.3 -3.9 -2.2 -3.2 1.8 1.4 1.6 1.2 1.8 -1.3 1.2 Private non res fixed invest 4.4 0.5 -5.3 -5.5 8.7 10.0 9.1 7.0 2.1 1.0 7.0 Residential fixed invest 8.0 13.3 2.9 1.0 0.5 5.2 4.5 3.0 -6.3 4.5 3.2 Government consumption 1.3 1.5 3.9 1.9 2.2 2.9 0.5 -0.9 2.3 2.5 1.0 Public investment -9.6 -21.9 -12.6 35.3 10.7 63.5 14.0 6.5 -3.4 2.5 9.3 Exports 6.6 -3.3 2.8 -5.3 7.1 12.7 7.5 6.7 23.9 2.7 7.5 Imports 12.2 -1.3 8.2 0.7 5.6 8.9 6.4 2.8 9.7 5.6 5.5 Contributions to GDP: Domestic final sales 2.2 -2.6 -1.8 -0.1 3.1 4.9 2.9 1.8 1.6 0.1 2.4 Inventories 2.0 0.0 -0.5 -1.4 1.5 0.7 0.2 0.0 0.6 -0.4 0.3 Net trade -0.4 -0.4 -0.8 -0.9 0.5 1.0 0.5 0.8 1.8 -0.2 0.6 Unemployment rate 5.1 5.0 4.7 4.9 4.9 4.8 4.6 4.5 5.1 4.8 4.5 Consumer prices -0.8 0.1 0.0 0.3 0.6 0.4 0.4 0.3 -0.7 0.3 0.4 Core CPI -1.0 -0.5 -0.2 0.4 0.6 0.6 0.4 0.2 -1.0 0.4 0.3 Fiscal balance (fiscal yr, % GDP) -8.6 -10.1 -9.3 Current account balance (% GDP) 3.6 1.9 3.2 Unsecured overnight call rate 0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10 0-0.10JGB 5-year yield 0.26 0.40 0.49 0.45 0.50 0.55 0.60 0.65 0.40 0.55 0.70 JGB 10-year yield 0.93 1.11 1.26 1.20 1.35 1.45 1.45 1.50 1.11 1.45 1.55 JPY/USD 83.5 81.1 83.1 82.5 85.0 87.5 87.5 90.0 81.1 87.5 92.5



Japan ⏐ Data Preview Shuichi Obata

The week ahead We forecast that the second preliminary estimate of Q1 GDP will be revised up to -3.1% q-o-q annualized, reflecting an upward revision to inventory investment.

May Economy Watchers Survey (Wednesday): We expect to see a further rise in the current conditions DI and the future conditions DI in the May survey, owing to moves to increase electricity supply and reports that manufacturing production will resume sooner than expected. As the supply constraints that led to the economic downturn after the recent earthquake have eased, the focus is now on the demand side. In the household activity current conditions DI, which has been affected by self-restraint among consumers, we will look to see how much retail and services-related current conditions DIs rise after improving only slightly in May.

Second set of preliminary Q1 GDP estimates (Thursday): We expect Q1 2011 real GDP growth to be revised up from the first preliminary estimates of -3.7% q-o-q annualized (-0.9% q-o-q) to -3.1% q-o-q annualized (-0.8% q-o-q). We expect capex and public investment to be revised down and private inventory investment to be revised up. According to the Ministry of Finance’s Financial Statements Statistics of Corporations, capex (excluding software) edged down 0.2% q-o-q in Q1. However, the MOF said that these results may have overstated underlying capex, owing to revisions for companies hit by the earthquake. Private inventory investment pushed down real GDP sharply in the first preliminary estimate, but is likely to be revised up in the second preliminary estimate, owing to increases in semi-finished inventories. Indeed, we think increases in semi-finished inventories will be the main factor behind an upward revision to overall real GDP. We think a sharp decline in consumer spending and a negative contribution from external demand will still have a major downward impact on real GDP in Q1. However, there is often a divergence between changes in inventory investment and market expectations. Currently, we think a sharp increase in semi-finished inventories will lead to an upward revision of private inventory investment, though the size of the revision is unclear. (For further details, see 2011 Q1 second preliminary GDP estimates: We expect real GDP to be revised up to -3.1% q-o-q annualized, 2 June 2011.)

May corporate goods price Index (Friday): We forecast May’s domestic corporate goods price index to rise by 2.6% y-o-y, largely unchanged from April’s 2.5% increase. Crude oil prices and commodity prices have been correcting since the beginning of May, but because they take a while before they are reflected in domestic corporate goods prices, we think the positive contribution in May from petroleum and coal products will be only slightly smaller than in April. Meanwhile, we expect to see increases in the processed foodstuffs, textile products, chemicals and related products, and electric power, gas & water components. Although international commodity prices have corrected they remain high, and we think previous rises have yet to be reflected in processed foodstuff prices. We therefore need to continue watching for any rise in the prices of these products.

Note: Tokyo time. Source: Cabinet Office, Ministry of Economy, Trade, and Industry, BOJ, and Nomura Global Economics.

Units Period Prev 2 Prev 1 Last Nomura ConsensusNo indicators

14.00 Economic coincident index 2005=100 Apr 105.5 106.8 103.5 103.7 103.7

8.50 M2 % y-o-y May 2.4 2.6 2.7 2.7 2.78.50 Current account ¥bn Apr 461.9 1641 1679.1 192.5 200.014.00 Current economic conditions DI May 48.4 27.7 28.3 n.a. 33.0Thursday 9 June

Wednesday 8 June

Tuesday 7 June

Monday 6 June

8.50 Real GDP % q-o-q annlzd Q1-sec 0.2 3.8 -3 -3.1 -314.00 Consumer confidence index DI May 40.6 38.3 33.4 n.a. 34.5

8.50 CGPI % y-o-y May 1.7 2 2.5 2.6 2.58.50 Index of tertiary industry activity % m-o-m Apr -0.1 1 -6 2.6 2.7

Friday 10 June


Australia ⏐ Economic Outlook Stephen Roberts

V-shaped growth After bad weather hit export volumes in Q1 we expect a sharp lift in growth in Q2. The Reserve Bank remains close to hiking rates in our view, although now more likely in July than in June.

Activity: We believe that exports and output lost in Q1 from extensive flooding and cyclone Yasi will be largely recovered in Q2 and in full by year-end, assisted by massive reconstruction spending and rapidly rising resource project construction spending. From mid-2011 and in 2012 we expect persistently strong GDP growth, above the long-term trend (3.3%), primed by robust exports to Asia and a related mining boom and tempered by soft household spending. The earthquake aftermath in Japan and the likely need for more non-nuclear fuels add to our export, business investment and GDP growth forecasts, especially in 2012. We forecast GDP growth to lift from 3.4% in 2011 to 4.0% in 2012, but will review this after the 1.2% q-o-q fall in Q1 GDP

Inflation: Economic spare capacity is limited, especially in the labour market, where the unemployment rate has fallen below 5% – a level that in the past has been consistent with higher wage increases and rising inflation. While Australian dollar strength and forward-looking monetary policy tightening by the Reserve Bank (RBA) may limit how far inflation rises, we still expect CPI inflation to move above the RBA’s 2-3% target band in 2011 and 2012. We also expect underlying inflation to track above the top of the RBA’s 2-3% target band through 2012 and wage growth to accelerate further through 2011, adding to second-round inflation pressures.

Policy: We believe policymakers will have to deal further with the consequences of a significant, positive shock to national income and GDP growth from the terms of trade at a 140-year high. The FY12 budget was only mildly restrained. This leaves a greater reliance on monetary policy to deal with growth moving above trend and contributing to inflation at or above the RBA’s target. Even though the RBA did not hike as we expected in May, its subsequent monetary policy statement and the minutes of the May meeting were more hawkish. We still believe that the next rate hike is closer than the market expects. Although the precise timing is somewhat data-dependant, we expect the RBA to hike ahead of the Q2 CPI release in late July. We pencil in a 25bp cash rate hike to 5.00% in July, followed by another 25bp in September, bringing the policy rate to 5.25% well before year-end.

Risks: Another global financial risk flare-up through the channel of higher bank funding costs could intensify deleveraging in Australia’s heavily indebted household sector. Any major setback in Chinese growth, would also present downside risk, as would a worsening La Niña. A major improvement in risk-asset sentiment and a continued surge in commodity prices are upside risks to growth.

Details of the forecast (GDP forecasts will be reviewed next week taking into account the Q1 GDP print) % y-o-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP (sa, % q-o-q, annualized) 0.0 3.3 -4.8 7.6 6.8 5.2 3.2 3.6 - % q-o-q, sa 0.0 0.8 -1.2 1.9 1.7 1.3 0.8 0.9 - % y-o-y 2.7 2.7 1.0 2.6 4.2 4.8 5.8 4.7 2.7 3.4 4.0 Household consumption 3.3 3.0 3.4 2.3 2.4 2.4 2.7 2.7 2.8 2.4 2.4 Government (total spending) 8.7 6.0 1.5 -0.1 -1.1 -2.3 1.0 3.3 9.1 -0.6 1.7 Investment (private) 2.3 -1.1 5.0 9.7 11.6 16.4 16.2 11.8 0.2 10.5 9.9 Exports 4.2 4.5 -3.4 5.9 7.8 7.5 9.3 7.3 5.3 6.6 8.0 imports 13.4 9.0 9.0 8.6 4.5 3.9 8.2 8.7 13.4 6.1 7.8Contributions to GDP growth (% points): Domestic final sales 4.2 2.8 3.3 3.2 3.6 4.3 5.3 4.9 3.6 3.5 4.0 Inventories and statistical discrepancy 0.3 0.9 0.6 0.1 -0.2 -0.4 0.2 0.1 0.7 -0.3 -0.1 Net trade -1.8 -1.0 -2.9 -0.7 0.8 0.9 0.3 -0.3 -1.6 0.2 0.1Unemployment rate 5.2 5.2 5.0 4.9 4.8 4.7 4.6 4.5 5.2 4.9 4.5Employment, 000 35.4 28.7 14.6 30.0 30.0 30.0 33.0 33.0 30.2 27.5 33.0Consumer prices 2.8 2.7 3.3 3.5 3.7 4.1 3.4 3.4 2.9 3.7 3.4 Trimmed mean 2.4 2.2 2.3 2.6 2.7 3.1 3.1 3.2 2.6 2.7 3.2 Weighted median 2.4 2.2 2.2 2.5 2.9 3.1 3.1 3.2 2.6 2.7 3.2Federal deficit (% of GDP) FY end-June -4.3 -3.6 -1.5Current account deficit (% GDP) -2.6 -1.8 -2.3Cash rate 4.50 4.75 4.75 4.75 5.25 5.25 5.25 5.25 4.75 5.25 5.2590-day bank bill 4.97 5.02 4.89 5.00 5.40 5.50 5.50 5.50 5.02 5.50 5.503-year bond 4.75 5.17 5.04 5.30 5.80 6.20 6.20 6.10 5.17 6.20 6.0010-year bond 4.96 5.54 5.50 5.60 6.00 6.30 6.30 6.20 5.54 6.30 6.10AUD/USD 0.97 1.01 1.03 0.98 1.00 1.02 1.02 1.02 1.01 1.02 1.02

Note: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 3 June 2011. Source: Australian Bureau of Statistics; Reserve Bank of Australia and Nomura Global Economics.



China ⏐ Economic Outlook Tomo Kinoshita ⏐ Chi Sun

Soft landing ahead We expect growth momentum to pick up again in Q4 and believe the PBC will likely hike interest rates again in June to curb inflation.

Activity: Economic growth looks to be slowing in Q2, as suggested by lower industrial production growth in April (13.4% y-o-y versus 14.8% in March) and a low PMI reading in May (52.0 versus 52.9 in April and 53.4 in March). In our view, the growth slowdown is due to cautious bank lending; higher borrowing costs, notably outside the official banking sector; power shortages; shortages of key manufacturing import components from Japan; and external uncertainties. Importantly, we expect China’s growth slowdown to be short-lived, with growth momentum picking up in Q4 as some of the headwinds start to fade, such as the shortages of power and imports from Japan, along with the powerful forces of continued rapid economic development. But in line with our recent cut to our 2011 consumption forecast, progress on rebalancing the economy from investment to consumption is unlikely to gain traction until 2012.

Inflation: CPI inflation fell only slightly to 5.3% y-o-y in April from 5.4% in March, while non-food inflation remains at a 10-year high of 2.7% y-o-y, partly driven by residence inflation (rental prices plus utilities) of 6.1%. The PMI input price component fell to 60.3 from 66.2 in April, suggesting that PPI inflation may have eased in May, which should help to reduce the pipeline pressure on CPI inflation over the coming months. We expect headline CPI inflation to average 4.9% in 2011 and 4.8% in 2012, driven by rising input costs of raw materials and wages, utility price deregulation, excess liquidity and reduced overcapacity. We expect core CPI inflation to steadily climb from 2.5% in 2011 to 2.8% in 2012.

Policy: With growth set to remain strong and inflation structurally high, we believe that China is in the midst of a prolonged monetary tightening cycle. Over time, we expect monetary policy to rely less on quantitative measures and exchange rate targeting and instead to rely more on higher interest rates to curb inflation. We expect the PBC to continue hiking benchmark interest rates, by 25bp this month and again by 25bp in Q3. To help remove liquidity created by FX intervention, we also forecast a further 150bp of reserve requirement ratio hikes by year-end. In 2012, we expect 50bp of lending rate hikes, 100bp of deposit rate hikes and a continuance of the government’s tight policies on the property market. We believe the 12th Five-Year Plan will jump-start reforms which are designed to achieve higher quality and more sustainable growth.

Risks: Policymakers are walking a tightrope. If they overreact to inflation, investment could weaken sharply raising the risk of a hard landing. However, too lax a policy, like keeping the real deposit rates deeply negative, could fuel asset price bubbles which eventually burst. Surging financing activity outside the official banking sector (which is less regulated) would take on more risk, suggesting a greater danger of credit risk being mispriced.


% y-o-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 9.6 9.8 9.7 9.2 9.3 9.5 9.0 9.2 10.3 9.4 9.2 Consumer prices 3.5 4.7 5.1 5.4 5.1 4.2 4.3 4.5 3.3 4.9 4.8

Core CPI (excl. food & energy) 1.1 1.5 2.2 2.4 2.6 2.7 2.5 2.8 0.9 2.5 2.8 Retail sales (nominal) 18.4 18.8 16.3 17.3 18.0 18.2 18.7 18.4 18.4 17.5 18.5Fixed-asset investment (nominal, ytd) 24.0 23.8 23.0 23.5 22.5 22.0 20.5 22.5 23.8 22.0 20.0Industrial production (real) 13.5 13.3 14.4 13.6 14.0 14.5 14.2 14.0 15.7 14.1 13.9 Exports (value) 32.2 24.9 26.5 20.0 10.0 13.0 10.1 11.2 31.3 16.6 12.0Imports (value) 27.2 29.7 32.6 21.3 18.0 20.0 15.0 18.0 38.7 22.5 17.0Trade surplus (US$bn) 65.0 62.1 -1.0 44.8 42.2 43.4 -20.9 21.3 183 129 58Current account (% of GDP) 5.2 2.9 1.4Fiscal balance (% of GDP) -1.6 -1.3 -1.0 Net increase in RMB Loans (RMBtrn) 8.0 8.0 8.41-yr bank lending rate (%) 5.31 5.81 6.06 6.56 6.81 6.81 6.81 7.06 5.81 6.81 7.311-yr bank deposit rate (%) 2.25 2.75 3.00 3.50 3.75 3.75 3.75 4.25 2.75 3.75 4.75Reserve requirement ratio (%) 17.00 18.50 20.00 21.00 22.00 22.50 22.50 22.50 18.50 22.50 22.50Exchange rate (CNY/USD) 6.70 6.62 6.56 6.40 6.32 6.22 6.14 6.06 6.62 6.22 5.90

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table last revised 3 June 2011. Source: CEIC and Nomura Global Economics.



India ⏐ Economic Outlook Sonal Varma

A year of two halves We expect real GDP growth to moderate further, with a revival likely only from Q4 2011.

Activity: Real GDP growth fell to 7.8% y-o-y in Q1 2011 from 8.3% in Q4 2010, the slowest pace in five quarters. Investment activity came to a complete standstill, even as private consumption and exports remained robust. We expect GDP growth to remain below 8% in the next two quarters owing to high inflation, rising interest rates, supply-chain disruptions because of the disasters in Japan and the lagged effects of weak manufacturing output on the service sector. Although consumption has been strong, rising interest rates will likely slow discretionary purchases. Encouragingly, there are signs that this slowdown may be temporary. A revival in the industrial cycle, easing supply-chain disruptions, faster government decision-making after the Cabinet reshuffle and easing inflation should result in a pick-up in GDP growth from Q4 2011 onwards.

Inflation: Headline WPI inflation eased slightly to 8.7% y-o-y in April from 9.0% in March, largely because of positive base effects. Food price inflation reversed its fall and rose in April. Core inflation moderated, but remains above its medium-term average. We continue to see upside risks to inflation in the near term owing to recent petrol price hikes, an impending rise in diesel and electricity prices, continued margin pressure and uncertainty over the monsoon. The recent commodity price correction is positive for inflation, but its impact is only likely to take place with a lag. We expect WPI and CPI inflation to average 9.1% y-o-y and 9.4%, respectively, in 2011.

Policy: The RBI hiked policy rates by 50bp in May, deviating from its calibrated approach. From its trough in March 2010, the RBI has hiked the repo rate by 250bp during this cycle. The RBI has strongly signalled that lowering inflation, even at the cost of lower growth, takes policy priority. In the coming quarters, even as growth moderates, we expect inflation to remain high, prompting another 50bp hike in policy rates. On the fiscal front, with less scope for proceeds from asset sales and a higher subsidy burden, we expect the central government’s fiscal deficit to rise to 5.2% of GDP in FY12 (year ending March 2012), exceeding the official target of 4.6%.

Risks: A lack of an investment revival, a global slowdown and an uncertain monsoon are downside risks. Revival of the reform process and lower commodity prices are upside risks.


% y-o-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012

Real GDP (sa, % q-o-q, annualized) 10.5 3.8 8.9 8.4 8.6 7.5 7.9 9.3 Real GDP 8.9 8.3 7.8 7.9 7.6 8.2 8.1 8.4 9.0 7.9 8.3 Private consumption 8.9 8.6 8.0 7.0 7.0 7.7 8.0 8.5 8.3 7.4 8.2 Government consumption 6.4 1.9 4.9 2.5 3.0 3.0 4.0 5.0 5.1 3.4 4.4 Fixed investment 11.9 7.8 0.4 5.5 8.5 10.0 12.5 15.0 14.0 5.9 14.1 Exports (goods & services) 10.7 24.8 25.0 22.0 18.0 15.0 14.0 18.0 13.7 19.9 16.5 Imports (goods & services) 11.6 0.4 10.3 12.0 14.5 12.0 13.0 15.0 11.3 12.2 14.5 Contributions to GDP (% points) Domestic final sales 9.6 3.5 5.3 6.5 7.7 7.9 8.0 7.8 8.5 6.9 8.0 Inventories 0.3 0.2 0.2 0.2 0.2 0.1 0.3 0.7 0.7 0.2 0.6 Net trade -1.0 4.6 2.3 1.2 -0.4 0.2 -0.3 -0.2 -0.3 0.8 -0.3 Wholesale price index 9.3 8.9 9.3 9.0 9.6 8.5 6.8 7.1 9.6 9.1 7.0 Consumer price index 10.3 9.2 9.0 9.5 9.5 9.5 9.3 7.8 12.0 9.4 7.9 Current account balance (% GDP) -3.2 -3.4 -3.5 Fiscal balance (% GDP) -4.7 -5.2 -4.5 Repo rate (%) 6.00 6.25 6.75 7.50 7.75 7.75 7.75 7.75 6.25 7.75 7.75 Reverse repo rate (%) 5.00 5.25 5.75 6.50 6.75 6.75 6.75 6.75 5.25 6.75 6.75 Cash reserve ratio (%) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 10-year bond yield (%) 7.90 7.95 7.99 8.20 8.40 8.25 8.10 8.10 7.95 8.25 8.10 Exchange rate (INR/USD) 44.9 44.8 44.6 44.1 43.5 43.2 42.8 42.7 44.8 43.2 41.6

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. CPI is for industrial workers. Fiscal deficit is for the central government and for fiscal year, eg, 2011 is for year ending March 2012. Table reflects data available as of 3 June 2011. Source: CEIC and Nomura Global Economics.



Indonesia ⏐ Economic Outlook Yougesh Khatri ⏐ Euben Paracuelles

A robust outlook Growth momentum is still sound, but interest rates are likely on hold as headline inflation eases.

Activity: Q1 2011 GDP growth continued at a robust pace of 6.5% y-o-y, still driven by private consumption and investment. The contribution of net exports fell to 0.1 percentage points (pp) from 1.6pp in Q4, but was more than offset by contributions from inventories and the “statistical discrepancy”. In the longer term, favourable demographics, a rapidly expanding middle class, IDR strength and credit growth are expected to support consumption, which in turn should encourage investment – as should political stability, booming commodity exports and further sovereign credit rating upgrades (another upgrade would take Indonesia to investment grade). We believe the government’s aim of 7%-plus growth may be achieved by 2012 with progress on infrastructure development and the favourable consumption and investment dynamics above. Higher imports and “income” outflows may eventually lead to a current account deficit.

Inflation and monetary policy: Lower food prices again helped slow headline inflation in May to 6.0% y-o-y from 6.2% in April. Bank Indonesia (BI) remained on hold in May and we expect it to remain on hold in June. BI’s June policy statement was less hawkish but pointed to inflation risks; IDR gains are helping to curb imported inflation; and likely further macro-prudential measures in the context of capital inflows. We expect BI to remain on hold in June, with 25bp hikes in Q3 and Q4, taking the policy rate to 7.25% by year-end. The path will depend critically on inflation, external developments and government policy on administered fuel prices. We also believe further increases in the reserve requirement (RR) on IDR deposits are imminent (to help manage liquidity and contain sterilization costs), while a second RR hike on FX deposits from 5% to 8% is already scheduled for June. We expect recent strong capital inflows (the Q1 balance of payments surplus was nearly US$8bn, with a record accumulation of FX reserves in April) to trigger further capital-flow management measures such as more stringent constraints on short-term external debt inflows.

Fiscal policy: There is likely to be a fiscal tailwind this year with increases in infrastructure spending – the 2011 deficit target is 1.8% of GDP versus the 2010 outturn of 0.6% of GDP – together with government plans to raise expenditure realization rates. Deferral of the plan to ban private cars from buying subsidized fuel, together with likely higher oil prices and fuel consumption than assumed in the budget, will add to the fuel-subsidy costs (but the higher oil price is roughly neutral for the general government deficit as higher oil and gas revenues offset higher fuel subsidies). The Ministry of Finance will likely soon propose a revised budget with new macro assumptions including for oil prices (currently USD80/bbl) and the exchange rate.

Risks: Progress with infrastructure development and budgeted expenditure disbursements are key upside/downside risks to the outlook. Higher international oil prices could trigger administered fuel price increases and a stepped increase in inflation. The problems in Japan may affect Indonesia via auto parts shortages and lower trade, investment and tourism flows.


% y-o-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 5.8 6.9 6.5 6.0 6.4 7.1 6.5 6.9 6.1 6.5 7.0 Private consumption 5.2 4.4 4.5 5.0 5.1 5.2 5.3 5.3 4.6 4.9 5.3 Government consumption 4.8 7.3 3.0 3.0 4.0 5.0 6.0 5.0 0.3 3.9 4.9 Gross fixed capital formation 9.2 8.7 7.3 8.7 10.9 11.7 11.7 12.0 8.5 9.7 11.9 Exports (goods & services) 9.6 16.1 12.3 11.5 10.7 10.7 10.7 11.5 14.9 11.3 11.3 Imports (goods & services) 12.2 16.9 15.6 12.0 12.0 12.4 12.6 12.6 17.3 12.9 12.6Contributions to GDP (% points): Domestic final sales 5.5 5.5 4.5 5.1 5.8 6.4 6.1 6.2 4.7 5.5 6.3 Inventories 0.4 -0.2 0.5 0.0 0.0 0.0 0.0 0.0 0.4 0.1 0.0 Net trade (goods & services) 0.1 1.6 0.1 0.9 0.6 0.6 0.3 0.7 0.8 0.6 0.7Consumer prices index 6.2 6.3 6.8 5.8 4.9 5.3 5.3 6.8 5.1 5.7 6.3Exports 26.9 27.3 30.2 22.6 20.1 13.0 12.8 11.4 32.1 20.9 12.8Imports 31.9 43.2 32.6 25.4 23.6 20.2 15.4 13.6 43.7 25.0 15.1Merchandise trade balance (US$bn) 7.6 9.2 8.4 7.6 8.0 7.8 8.5 7.6 30.6 31.7 32.1Current account balance (% of GDP) 0.7 0.6 1.0 0.9 0.7 -0.2 0.8 0.8 0.8 0.6 0.5Fiscal Balance (% of GDP) -0.6 -1.7 -1.6Bank Indonesia rate (%) 6.50 6.50 6.75 6.75 7.00 7.25 7.25 7.50 6.50 7.25 7.50 Exchange rate (IDR/USD) 8908 8996 8708 8500 8450 8400 8430 8300 8996 8400 8100

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 3 June 2011. Source: CEIC and Nomura Global Economics.



South Korea ⏐ Economic Outlook Young Sun Kwon

Two-speed economy to slow We see CPI inflation averaging above 4% in 2011, exceeding the BOK’s target band, and weakening domestic demand. Growth momentum will slow in coming quarters, in our view.

Forecast changes: We drop our call for a June rate hike and now expect only one 25bp move in August; in 2012 we expect a 25bp hike in February and drop one 25bp hike in Q2 2012.

Activity: After accelerating in Q1, sequential GDP growth is set to slow in coming quarters, in our view, as we believe weaker domestic demand will outweigh solid exports. Solid emerging market and strengthening US and euro area demand should more than offset any loss of competitiveness from KRW/USD appreciation, but higher inflation and policy rates, resulting in a heavier debt-servicing burden for the leveraged household sector, should slow private consumption growth. Construction investment will likely suffer from banks’ tightening credit standards due to problems in project-financing loans. Business investment also looks likely to slow as a higher production-cost burden or thinner margins forces some firms to delay or reduce planned capex. We expect GDP growth to slow to 3.5% in 2011 before rising to 5.0% in 2012.

Inflation: Interest rate hikes coupled with a stronger KRW and some administrative measures should partly offset inflation pressures. But elevated inflation expectations, nominal wage growth and housing rents are also adding to inflation. We forecast CPI inflation to rise from 2.9% in 2010 to 4.4% in 2011, before easing to 3.6% in 2012.

Policy: Ahead of the elections in 2012, we expect policymakers to focus on price stability, economic equity and household debt management, rather than simply ”going for growth”. On the monetary policy front, we now expect the Bank of Korea (BOK) to deliver two more 25bp hikes; one in August and another in February, lifting the terminal policy rate to 3.50% by end-2012.

Risks: Korea’s economy is heavily reliant externally: in 2010, exports comprised 51.6% of GDP; its external debt is relatively high (37.4% of GDP) and it is one of Asia’s largest net importers of oil (6.3% of GDP). As such, the economy is vulnerable to sudden changes in global economic conditions, credit markets and commodity prices. Domestically, we see a risk of vicious monetary tightening: if the BOK hikes rates too slowly, the transmission mechanism fails (KRW does not appreciate), actual inflation rises and it is forced to hike sharply later. On North Korea, we view a major escalation of geopolitical tensions as a low probability, but admittedly a high-risk event.


% y-o-y growth unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP (sa, % q-o-q, annualized) 2.6 2.0 5.6 2.8 2.4 3.2 6.1 6.1 Real GDP (sa, % q-o-q) 0.6 0.5 1.4 0.7 0.6 0.8 1.5 1.5 Real GDP 4.4 4.8 4.2 3.2 3.2 3.5 3.6 4.5 6.2 3.5 5.0 Private consumption 3.3 3.2 3.0 2.6 1.8 2.1 2.5 4.2 4.1 2.3 4.0 Government consumption 2.8 3.9 1.6 2.4 4.0 5.9 5.6 6.7 3.0 3.5 6.3 Business investment 24.3 16.0 12.0 4.8 -0.3 1.2 3.0 3.0 25.0 4.1 5.2 Construction investment -2.3 -4.7 -11.9 -9.3 -9.1 -7.6 0.0 3.0 -1.4 -9.6 3.1 Exports (goods & services) 11.1 14.9 16.8 10.5 9.7 9.1 8.2 9.3 14.5 11.4 9.6 Imports (goods & services) 14.7 14.6 10.8 6.5 4.8 6.3 7.7 8.8 16.9 7.1 9.3Contributions to GDP growth (% points): Domestic final sales 4.4 3.4 1.3 1.1 0.0 1.0 3.6 3.0 4.8 0.1 3.9 Inventories 0.3 -0.5 -0.2 -0.3 0.4 0.6 -0.8 0.4 2.0 0.8 0.1 Net trade (goods & services) -0.3 1.7 3.1 2.5 2.8 1.9 0.9 1.1 -0.6 2.6 1.0Unemployment rate (sa, %) 3.6 3.4 3.9 3.6 3.5 3.4 3.4 3.4 3.7 3.6 3.4Consumer prices 2.9 3.6 4.5 4.4 4.7 4.1 3.7 3.9 2.9 4.4 3.6Current account balance (% of GDP) 2.9 1.5 0.6Fiscal balance (% of GDP) -1.9 -0.2 0.4Fiscal balance ex-social security (% of GDP) -2.6 -2.1 -1.1Money supply (M2) 8.6 7.4 5.3 5.0 6.0 6.5 7.5 8.5 8.7 5.7 9.0House prices (% q-o-q) -0.1 1.1 2.3 0.7 0.5 0.5 1.0 1.0 1.9 4.0 3.0BOK official base rate (%) 2.25 2.50 3.00 3.00 3.25 3.25 3.50 3.50 2.50 3.25 3.503-year T-bond yield (%) 3.37 3.38 3.74 3.50 3.50 3.50 3.75 3.75 3.38 3.50 3.755-year T-bond yield (%) 3.76 4.08 4.12 3.90 4.00 4.00 4.15 4.15 4.08 4.00 4.15Exchange rate (KRW/USD) 1180 1134 1097 1060 1040 1020 1005 990 1134 1020 960

Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 3 June 2011. Source: Bank of Korea; CEIC and Nomura Global Economics.




Asia ⏐ Data Preview Sonal Varma

The week ahead In China, we expect softer export growth and a slower rate of new RMB loans, while we forecast CPI inflation in the Philippines and Taiwan to surprise on the upside. We expect central banks in Australia, Korea, Indonesia and New Zealand to remain on hold, although there is a non-trivial risk of a rate hike in Australia and Korea.

China: We expect export growth to slow in May due to weak foreign demand, lower commodity prices and adverse base effects. The trade surplus likely widened to US$20.3bn in May from US$11.4bn in April. We expect M2 growth to ease in May because of less accommodative monetary policy, slower credit creation and increasing disintermediation. New RMB loans should ease to RMB650bn in May, partly a seasonal payback after a sharp surge in April.

Activity: We expect industrial production in Malaysia to rebound as exports remain strong. By contrast, weak capital goods orders likely moderated India’s industrial output growth in April. We expect a strong labour market report in Australia in April, supporting our call that the economy rebounded strongly in early Q2. Taiwan’s export growth should ease in April, but we think the consensus is overestimating the impact of the Japan-led supply-chain disruptions.

CPI: In the Philippines, we expect CPI inflation to accelerate to 5.3% y-o-y in May, above the central bank’s target range of 3-5%, due to elevated oil prices and the lagged effect of rising wholesale prices. Higher commodity prices should also push Taiwan’s May CPI inflation higher.

Policy: We expect the Reserve Bank of Australia to keep the cash rate on hold in June given the weaker than expected detraction in exports in Q1 and weak growth in homebuilding approvals. However, we believe it will still be difficult for it to hold past the Q2 CPI release in late July as inflation might persistently be at the top of the 2-3% target band, or higher. While it is a close call, we expect the Bank of Korea to keep rates unchanged at 3.00%, as downside risks to growth outweigh the upside risks to inflation. Finally, we expect both Bank Indonesia and the Reserve Bank of New Zealand to keep policy rates on hold.

Note: Hong Kong times. Source: Bloomberg, Reuters and Nomura Global Economics.

Units Period Prev 2 Prev 1 Last Nomura ConsensusChina Money supply, M2 % y-o-y May 15.7 16.6 15.3 15.2 15.3China New RMB loans RMBbn May 535.6 679.4 739.6 650.0 602.5

Asia No data release today

09.00 Philippines Consumer price index % y-o-y May 4.3 4.3 4.5 5.3 5.109.30 Australia NAB business confidence Index May 13.5 9.0 7.0 n.a. n.a.12.30 Australia Reserve Bank's cash rate % Jun 4.75 4.75 4.75 4.75 4.7516.00 Taiwan Consumer price index % y-o-y May 1.3 1.4 1.3 2.4 1.6

07.00 S. Korea Real GDP (revised) % q-o-q, sa Q1 1.4 0.6 0.5 1.4 n.a.07.00 S. Korea Real GDP (revised) % y-o-y Q1 7.5 4.4 4.7 4.2 n.a.08.30 Australia Westpac consumer confidence index Jun 104.1 105.3 103.9 n.a. n.a.09.30 Australia Home loans % m-o-m, sa Apr -6.4 -4.7 -1.5 0.5 2.316.00 Taiwan Exports % y-o-y May 27.3 16.7 24.6 17.0 7.416.00 Taiwan Imports % y-o-y May 28.7 16.7 25.7 16.1 11.116.00 Taiwan Trade balance US$bn May 0.9 1.8 3.0 3.9 2.5

Wednesday 8 June

Thursday 9 June

Sometime in the week

Monday 6 June

Tuesday 7 June

Indonesia Central bank policy meeting, policy rate, % Jun 6.75 6.75 6.75 6.75 6.7505.00 New Zealand Reserve bank's official cash rate % Jun 3.00 2.50 2.50 2.50 2.5009.30 Australia Employment change, '000 m-o-m, sa May -9.5 43.3 -22.1 25.0 25.009.30 Australia Unemployment rate % sa May 5.0 4.9 4.9 4.8 4.911.00 S. Korea Money supply, M2 % y-o-y Apr 6.5 5.0 4.3 4.0 n.a.12.01 Malaysia Industrial production % y-o-y Apr 0.6 5.2 2.4 3.0 n.a.

09.00 S. Korea Central bank policy meeting, base rate, % Jun 3.00 3.00 3.00 3.00 3.0009.00 Philippines Exports % y-o-y Apr 11.8 8.3 4.1 1.2 9.010.00 China Trade balance US$bn May -7.3 0.1 11.4 20.3 19.810.00 China Exports % y-o-y May 2.4 35.8 29.9 21.0 22.010.00 China Imports % y-o-y May 19.5 27.3 21.8 24.0 22.513.30 India Industrial production % y-o-y Apr 3.9 3.7 7.3 4.2 n.a.

Friday 10 June



Brazil ⏐ Economic Outlook Tony Volpon

Inflation risks challenge outlook Overly expansive fiscal policy combined with surging commodity prices has put the inflation outlook at risk. Policy rates will have to remain high to control inflation.

Activity: After a successful recovery due to pro-cyclical fiscal policies and continued Chinese demand for its exports, fiscal, wage and credit policies continued to be expansive even as the economy tallied growth of 7.5% in 2010. We expect growth to slow down to below potential in 2011 to around 3.9%. Continued strong export prices will assure a positive trade balance in 2011, even as the current account deficit stays in the 2.5% region. Slower growth and eventually lower real rates will slow down the rate of appreciation of BRL.

Inflation: At the beginning of 2010, headline inflation increased due to higher commodity (especially food) prices, only to see a collapse close to zero in the middle of the year. At the end of 2010 we saw inflation race ahead once again for basically the same reasons, leaving 2010 inflation at 5.91%, much above the 4.5% target. Inflation remained high in 1Q 2011, due to seasonal adjustments to contracts indexed to the wholesale IGPM index (which rose by 11.32% in 2010), as well as the rise in ethanol and gasoline prices. An aggravating factor has been how the decision to slow the nominal appreciation of BRL has allowed the recent surge in commodity prices to pass through. Nonetheless, we expect inflation pressures, on a month-over-month basis, to ease by the end of Q2 2011 as tighter policies are executed leading the economy to slow and inflation to close the year at 5.90%, above the 4.50% target but declining towards the end of 2011.

Policy: With a newly elected government and a new head of the Central Bank of Brazil (BCB), policy uncertainty is high. With strong headline inflation and doubts over the execution of tighter fiscal and wage policies, the BCB has tightened interest rates. Though the BCB signalled a willingness to let recently introduced macro-prudential measures lower demand, the recent highs in commodity prices and better prospects for world growth have generated a need to tighten rates to control inflation expectations.

Risks: The risks for inflation have deteriorated recently. International commodity prices remain elevated, and signs of moderating demand growth are still tentative. Our forecast models indicate that there is a fair chance for inflation to remain above target by the end of 2012, leaving little space for the BCB to cut rates after the present tightening cycle ends. The path of commodity prices, the strength of world economic growth and the government’s willingness to cut spending and moderate credit growth will be key for deciding the path of monetary policy and inflation.


Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-on-year changes for Q4. Trade data are a 12-month sum. Interest rate and currency forecasts are end of period. GDP components do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 06 May 2011. Source: Nomura Global Economics.

% y-o-y change unless noted 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 6.7 5.0 4.1 3.1 4.1 4.3 5.1 5.2 7.5 3.9 4.5 Personal consumption 5.9 7.5 7.1 8.0 5.8 4.5 4.5 4.7 7.0 6.3 4.3 Fixed investment 21.2 12.3 11.9 13.1 6.3 5.2 4.7 3.7 21.9 9.0 5.7 Government expenditure 4.1 1.2 -0.6 -1.5 1.9 0.6 4.1 4.1 3.3 0.1 2.4 Exports 11.3 13.5 13.3 10.8 10.7 8.5 11.4 12.9 11.5 10.7 10.6 Imports 40.9 27.2 14.1 9.7 5.2 5.2 6.3 7.4 36.2 8.2 8.2

Grow th of GDP components: Industry 8.3 4.3 0.2 -1.5 2.2 2.3 4.5 3.3 10.1 0.8 2.2 Agriculture 7.0 1.1 2.8 -2.1 4.4 9.4 6.6 11.1 6.5 2.8 4.9 Services 4.9 4.6 3.9 4.0 4.7 4.6 5.4 5.2 5.4 4.3 5.0IPCA (consumer prices) 4.70 5.91 6.30 6.73 6.92 5.92 5.33 5.08 5.91 5.92 4.87IGPM (w holesale prices) 7.77 11.32 10.95 8.74 7.90 6.15 5.12 5.12 11.32 6.15 4.49

Trade balance (US$ billion) 17 20 20 18 19 15 6 2 20 15 1Current account (% GDP) -2.3 -2.5 -3.0

Fiscal balance (% GDP) -2.6 -2.0 -2.0Net public debt (% GDP) 40.4 39.0 36.0

Selic % 10.75 10.75 11.75 12.25 12.25 12.25 12.25 12.25 10.75 12.25 12.25BRL/USD 1.75 1.66 1.63 1.65 1.65 1.62 1.60 1.60 1.66 1.62 1.60



Mexico ⏐ Economic Outlook Benito Berber

A stronger recovery on the way Mexico’s recovery is moderating. While the output gap will close in H2 2011 it should remain around zero until early 2012. We expect the first hike in the policy rate to come in Q1 2012.

Activity: With the prospect of the US recovery improving, the Mexican economy rebounded by 5.5% y-o-y in 2010, after collapsing 6.5% in 2009; we forecast it to expand by 4.0% in 2011. However, the combination of global growth concerns and a slow recovery in domestic demand implies Mexico will not be a star performer in EM in terms of relative GDP growth, at least for now. Domestic demand in Mexico is picking up at a fairly gradual pace, disappointing most analysts' expectations, as retail sales, which bottomed in 2009, have failed to reach pre-crisis levels even after two years. Still, Mexico remains an attractive story in its own right and is likely to grow by 3.5-4.0% over the coming years (versus potential growth of 3%) on the back of a very competitive manufacturing sector. In the remainder of the year, Mexico should keep posting decent growth, but we do not expect off-the-charts growth numbers like those witnessed last year.

Inflation: We continue expecting inflation to be slightly below 4.0% in 2011 due to the output gap taking a while to close, and as a more stable FX rate has a marginal effect in putting a cap on inflation. We estimate that administrative prices, which have been increasing at a rate of 5.0% y-o-y in 2010, will adjust to between 3.0% and 4.0% y-o-y in 2011, which would help headline inflation stay below 4.0% y-o-y.

Policy: Banxico will keep the policy rate unchanged at 4.5% during 2011, in our view. We expect the tightening cycle to start in Q1 2012 because of the negative output gap (actual GDP being below potential GDP) projected for at least half of 2011, stable medium-term inflation expectations and a gradual appreciative trend of the MXN. Two months ago, the market was pricing in around 100bp of hikes, expecting Banxico to start tightening as early as Q3. Currently, the market prices in only one 25bp hike at the end of Q4. The Finance Ministry will target a fiscal deficit of 2.5% of GDP in 2011, slightly higher than in 2010.

Risks: The main risk to Mexico is a double dip recession in the US economy. In terms of inflation, we see the following risks to our call: (1) rising commodity prices; (2) increases in administrative prices, particularly high gasoline prices; and (3) a sizable depreciation of the exchange rate.


Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-over-year changes for Q4. Trade data are period sums. Interest rate and currency forecasts are end of period. Contributions to GDP do not include taxes. Numbers in bold are actual values, others forecast. Table reflects data available as of 20 May 2011. Source: Nomura Global Economics.

% y-o-y change unless noted 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012

Real GDP 5.1 4.4 4.6 4.1 3.3 3.6 3.3 3.2 5.5 4.0 3.4 Personal consumption 5.0 4.6 6.5 5.4 3.8 3.6 3.4 3.3 4.2 4.8 3.5 Fixed investment 3.8 6.2 4.4 6.2 6.8 7.0 5.1 5.0 1.1 6.1 5.1 Government expenditure 2.5 2.0 5.8 3.5 3.8 3.6 3.4 3.4 4.5 4.2 3.4 Exports 27.1 15.4 22.9 19.5 17.5 17.0 15.6 15.0 28.4 19.0 15.6 Imports 22.5 15.5 20.1 18.8 17.5 17.0 15.5 16.0 24.2 18.3 15.6

Contributions to GDP (pp): Industry 2.0 1.4 1.5 1.4 1.3 1.2 1.0 1.0 2.0 1.3 1.0 Agriculture 0.3 0.4 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.1 0.1 Services 2.8 2.6 3.3 2.7 2.1 2.3 2.4 2.4 3.2 2.6 2.4

CPI 3.70 4.40 3.04 3.75 3.79 3.89 3.95 3.90 4.40 3.89 3.97

Trade balance (US$ billion) -2.3 -1.1 -1.7 -4.0 -5.0 -5.0 -4.0 -4.0 -3.1 -18.0 -12.0Current account (% GDP) -0.5 -0.9 -1.5

Fiscal balance (% GDP) -2.6 -2.5 -2.0Gross public debt (% GDP) 35.0 34.0 34.0

Overnight Rate % 4.50 4.50 4.50 4.50 4.50 4.50 5.00 5.50 4.50 4.50 6.50USD/MXN 12.59 12.34 11.90 11.90 11.70 11.50 11.30 11.20 12.34 11.50 10.90



Russia ⏐ Economic Outlook Tatiana Orlova

Relying on oil as usual This year’s focus is likely to be on year-end parliamentary elections, the announcement of the candidates for the presidential race and the possibility of WTO accession in H2 2011.

Activity: The sharp rise in oil prices should lift GDP growth above 4% this year. Rising inflation has reversed the benign trend in real wage growth and has dented consumer confidence. The government accepts that the economy’s development is being hindered by the high level of state ownership, and has announced a large privatisation programme for 2011-15, which should generate about $50bn in revenue. However, it is not planning to sell any controlling stakes in its state-owned flagship enterprises in 2011. With the Urals oil price above $110/bbl, and way above the $75/bbl pencilled in the budget, the government is revisiting a proposal to channel some of its windfall oil revenues into the sovereign wealth funds, and divert some of this revenue into a new fund, which will co-finance modernisation projects with foreign investors. Still, some of the extra revenues will likely be allocated for pre-election handouts. This should support household consumption, but fixed investment may remain anaemic, as companies are hit by an increase in the effective rate of social tax from 26% to 34%. Industry has responded to the tax increase with layoffs, which have already added an extra percentage point to the unemployment rate. Positively, Russia has nearly ironed out all differences with the EU and US, and WTO entry may take place in H2 2011; this would provide a boost to market confidence.

Inflation: Headline inflation peaked in January; the government’s intervention into petrol and grain markets has helped to bring inflation down, and will likely keep inflation in single digits this year. Still, we think the authorities are unlikely to attain their CPI inflation-target range of 6-7% y-o-y for end-2011. In H2 2011 we expect inflationary pressures to rise again because of substantial pre-election spending.

Policy: The Central Bank of Russia has been forced to react to lingering high inflation with 50bp of key policy rate hikes year to date and it may opt for another one of two preventative 25bp hikes in coming months. Rouble strength has also helped fight inflation. Forthcoming elections are likely to limit fiscal tightening; however, high oil prices should help revenues to significantly overshoot the budget target. Therefore, the budget, which now balances at a Urals price of above $105/bbl following years of fiscal expansion, will likely post a much smaller deficit than in 2009. The government successfully placed a debut rouble-denominated Eurobond in February. As public financing needs are likely to be more modest than previously expected, the government has trimmed down its external debt issuance plan to $3bn.

Politics: Although parliamentary elections are due at the end of 2011, the most interesting political question this year will be the identity of the candidates for the presidential election, which is expected in early 2012. Because of the weakness of the opposition and the high (7%) threshold for representation in the Duma, the ruling party, United Russia, we think there is a strong likelihood that it will retain a constitutional majority (or two-thirds of the seats) in the Duma. If Vladimir Putin puts himself forward as a presidential candidate, which we think is very likely, he will probably do it during the parliamentary campaign to boost United Russia’s popularity.

Figure 1. Details of the forecast Figure 2. Official fiscal projections for 2010-13

Source: Nomura Global Economics. Source: Russian Finance Ministry, Nomura Global Economics.

2009 2010 2011 2012Real GDP % y-o-y -7.9 4.0 4.3 4.0Contributions to GDP (pp)Consumption -4.9 3.6 1.8 2.8Gross investment -4.1 1.2 2.0 2.7Net exports 11.4 -4.3 -2.9 -3.2CPI % y-o-y ** 11.7 6.9 8.8 7.5Federal budget % GDP -6.8 -4.1 -1.2 -0.6Current account % GDP 3.8 5.0 4.8 4.2FX reserves, gross USD bn 439 479 555 590CRB policy rate %* 8.75 7.75 8.50 9.00USDRUB, end of period 30.27 30.53 27.90 26.90RUB Basket*** 36.20 35.17 33.50 32.30*End of period, **Period average, Bold is actual data.***45% EURRUB and 55% USDRUB

0

10

20

30

40

50

60

70

80

90

-10

-8

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013

Budget deficitReserve FundWelfare FundNet domestic borrowingNet external borrowingUrals, rhs

% of GDP $/bbl



South Africa ⏐ Economic Outlook Peter Attard Montalto

Rate hike markers set – in the distance Underlying growth is now sustainable but too slow to boost employment. Fiscal policy is the area to watch, especially its interaction with monetary policy where we see a November hike.

Activity: Despite suffering only a mild recession during the crisis, South Africa will probably only experience a sluggish recovery. We look for growth of 3.9% in 2011 after 2.8% in 2010. An early growth spurt in exports during the past year, led by Asian demand is not falling back as expected, while wider global growth is also being supportive despite a currency overvalued by some 25% in our view. Overall, we expect the recovery to be achieved largely through a renewed spurt in infrastructure investment and household spending, with corporates still deleveraging through much of H1. However, households will probably be constrained by the rise in employment taking much longer than the fall on the way down. Very high real wage growth however will offset this to some extent when combined with asset price appreciation. The economy will not fully close the output gap (potential growing at 3.75% now) until mid 2012.

Currency: The government has taken actions to weaken ZAR with exchange control relaxation and accumulating FX deposits. But given the global currency wars and yields in South Africa these measures are likely to only have a limited effect. However with oil where it is the currency debate has died down and we do not expect any further moves.

Inflation and rates: The rate cutting cycle has ended and the MPC has turned more neutral in its stance given commodity price pressures and a more sustainable domestic demand recovery. The MPC has now said however that it sees rates on hold for an extended period of time and will not hike until it sees actual evidence of second round effects despite the headline CPI pressures from the supply side. We think such evidence will be available by the November meeting and pencil in a hike then but risks are for later, not earlier as market is now pricing. Whilst questions remain over the role of monetary policy, the MPC does seem now far more flexible an inflation targeter than in the past. Overall, we see inflation breaching target in December of this year as second round effects and a weaker ZAR take hold but it may be volatile for H1 2012 around 6% which again can keep the MPC from aggressively hiking. The outlook for 2012 is more as the same pressures continue and we inflation ending 2012 outside its target at 6.5%. We see a slow pace of hikes in H1 2012 but then the MPC should accelerate as it is behind the curve.

Politics and fiscal: The focus in the year ahead will be the interplay between policy and the local elections (coming in May). We expect the ANC to lose some ground in terms of its control over the number of local authorities owing to the opposition DA. Such a move should re-energise the debate within the ANC about the New Growth Path, state intervention in industry and other developmental state interventions on jobs and education. Given the elections this year and a concentration on jobs the government has delayed fiscal consolidation by a year. We see a deficit of -4.8%GDP this year and -4.6% next year.

Figure 1. Details of the forecast Figure 2. CPI and underlying components

Source: Nomura Global Economics. Note: ECP is ex-cost push factors and excluding administered prices. Supercore is excluding all energy, commodities and housing.Source: Nomura Global Economics.

2009 2010 2011 2012Real GDP % y-o-y -1.8 2.8 3.8 4.1Current account % GDP -4.0 -2.8 -3.9 -5.6PSCE % y-o-y* -0.1 5.5 7.7 11.9Fiscal balance % GDP -6.8 -4.9 -4.8 -4.6FX reserves, gross USD bn* 39.7 43.8 53.4 56.1CPI(X) % y-o-y * 6.3 3.5 6.1 6.5CPI(X) % y-o-y ** 7.2 4.3 4.8 6.1Manufacturing output % y-o-y -12.9 4.9 4.8 7.1Retail sales output % y-o-y -3.6 5.2 3.7 3.3SARB policy rate %* 7.00 5.50 6.00 8.00EURZAR* 10.6 8.9 10.1 10.4USDZAR* 7.48 6.63 7.50 8.00*End of period, **Period average, Bold is actual dataPSCE- Private sector credit extentions

0

2

4

6

8

10

12

14

Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12

Supercore

Headline

ECP



Turkey ⏐ Economic Outlook Olgay Buyukkayali

Widening imbalances Loose monetary and fiscal policy has supported the continuation in domestic demand-led growth. Macro-prudential policy measures are unlikely to stop the widening of the current account deficit.

Activity: According to our forecasts Turkey has come out of the recession with relatively strong growth of 8.9% in 2010. We expect growth in 2011 to remain above-potential at 6.0%, driven largely by continued double-digit growth in private investment. Private consumption contribution should moderate reducing net import’s negative contributions to GDP. We think risks are on the upside owing to the strong policy response from construction and public investment ahead of the elections. Furthermore, our scenarios do not assume aggressive stock building, another upside risk for our base case. Our calculations suggest the output gap probably closed during Q4 2010.

Inflation: We expect food price disinflation and core inflation in 2011 that would still leave headline inflation above the 5.5% target at around 7.0% y-o-y. With pricing power rising, real wages together with lower unemployment are all pointing to risks on the upside for core inflation. Meat imports and base effects could bring some relief on food inflation.

Policy: Monetary and fiscal policy remains loose. The postmodern approach of policy rate cuts and macro prudential hikes have been paused and ended as a number of necessary conditions for postmodern policy success have been violated. From here, our baseline is an overall rise to 8.50% through 2012, with the first 25bp hike now taking place in May, then one more 25bp hike between June-July and three further 25bps from August to 7.50% by the end of 2011. Fiscal policy does not help the monetary authorities as much as it could – due to elections in June 2011 – with the government spending the cyclical revenue overshoots in the primary surplus during 2010 and 2011. Although the authorities are aware of the widening imbalances and seem to be addressing the issue, there are many elements being taken into account when setting policy rates and current account is only one of many. We think success could bring an investment grade rating as early as Q3 2011 by at least one agency, but uncertainty still reigns. The debt dynamics remain stable, and highlight the case for an investment grade rating by 2011 (which is largely priced in by the markets). Leverage in the economy, despite rapid loan growth, looks low.

Risks: Overheating and terms-of-trade shocks (oil prices) are the main risks because the current account deficit is running above 6% of GDP. Even though parliamentary elections are set for June 2011 the political climate looks extremely stable following the Constitutional Court referendum. An AKP majority government is our base case in the elections. We think the risks of capital controls being implemented should the currency appreciate rapidly are extremely low.


Source: Turkish Statistical Institute, Nomura Global Economics.

% y-o-y unless otherwise stated 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2010 2011 2012Real GDP 5.2 9.2 7.8 5.7 7.4 3.3 5.4 5.5 8.9 6.0 4.4 Personal consumption 6.5 9.0 5.2 3.5 3.4 1.5 3.2 4.8 6.6 3.3 3.2 Private investment 34.2 49.5 28.8 23.6 22.1 7.4 13.0 10.3 33.5 19.5 10.0 Government expenditure 4.7 -0.9 3.2 1.5 2.9 2.9 -2.2 1.9 2.0 0.9 2.8 Exports 12.5 -1.6 4.3 9.8 5.3 16.7 10.9 12.0 3.4 10.8 12.1 Imports 19.2 16.2 25.4 21.0 19.2 17.2 10.4 11.5 20.7 16.6 12.3

Contributions to GDP (pp): Personal consumption 4.3 6.2 3.8 2.4 2.3 1.0 2.3 3.2 4.7 2.3 2.2 Private Investment 4.8 8.0 5.4 4.7 4.0 1.6 3.0 2.6 5.4 3.9 2.2 Government expenditure -0.1 0.4 0.2 0.3 0.3 -0.3 0.2 0.1 -0.2 0.4 -0.2 Stocks 3.4 0.0 -0.7 1.5 1.9 1.3 1.2 0.4 2.5 1.5 0.2 Exports 3.1 -0.4 1.1 2.3 1.3 3.9 2.7 2.9 0.9 2.6 3.1 Imports 4.9 3.9 6.7 5.7 5.3 4.6 3.1 3.5 5.2 4.6 3.8CPI (period end) 9.2 6.4 0.0 0.0 6.3 7.0 6.7 7.1 6.4 7.0 6.8CPI -ex- food (period end) 6.9 7.0 4.2 5.3 6.0 6.6 6.8 7.0 7.0 6.6 6.9CPI (period avg - 12m) 8.2 8.6 7.4 6.6 6.2 6.0 6.4 6.3 8.6 6.0 7.0

Current account (% GDP) -5.2 -6.7 -7.0 -7.4 -7.0 -7.0 -6.5 -6.8 -6.7 -7.0 -6Fiscal balance (% GDP) -3.1 -3.6 -3.2 -3.0 -2.7 -2.7 -2.8 -3.0 -3.6 -2.7 -3Net public debt (% GDP) 30.7 31.0 31.0 30.7 30.6 30.5 30.4 32.5 31.0 30.5 30

TCMB policy rate % 7.00 6.50 6.25 6.50 6.75 7.25 7.50 7.75 6.50 7.25 8.25TRY/USD 1.45 1.54 1.54 1.49 1.45 1.44 1.44 1.50 1.54 1.44 1.50



Rest of EEMEA ⏐ Economic Outlook Peter Attard Montalto

Hungary: Investor unfriendly policies dampen growth We believe the 2011 policy mix will not encourage growth and is investor unfriendly

Source: CSO, CNB, Nomura Global Economics.

• The economy looks set to have a second sluggish

year given the impact of government policy. Whilst headline growth is recovering on exports, we don’t see domestic demand turning positive till H2 with tax cuts being offset by new sectoral taxes. Investment is likely to remain soft.

• The FIDESZ government is turning economic policy on its head trying to target growth and fiscal consolidation at the same time. Whilst we think they will achieve a fiscal balance surplus in 2011 and reduce debt levels in the next two years, this is through distortive policy that is unsustainable after 2013.

• Inflation is increasing surprisingly fast on commodity price pressure even with no demand-side pressures. Hiking has already started but has probably already gone far enough, a new MPC in March may well cut rates back to 5.00% by year end in a political move.

Poland: Racing ahead, fiscal clouds Growth is unlikely to mask the fiscal policy fudge that is ongoing until after the elections

Source: CSOP, NBP, Nomura Global Economics

• Poland should be able to maintain its momentum

through 2011 as investment bounces back, inventories are built up and consumption accelerates.

• As one of the only economies with demand pressures, inflation start to rise rapidly from its cyclical base. With the NBP surprised to the upside by growth, we had expected the MPC to hike rates in a normalisation cycle to 5.00% by year end, but concerns about growth momentum will mean a stop-start cycle and FX intervention complicates matters.

• Politics and complacency around growth have led tofiscal slippage through 2009 and 2010, though the threat of breaching the 55% public debt limit this year has now abated with pension reforms. October parliamentary elections this year means more meaningful consolidation remains unlikely.

Czech Republic: Fiscal/growth trade-off The fiscally hawkish coalition will likely continue to correct the situation it inherited but growth will likely suffer

Source: CSO, CNB, Nomura Global Economics.

• A strong rebound in 2010 owing to stronger external

demand from the EU and Asia will probably dissipate in 2011 when fiscal austerity measures hit domestic demand, which we expect to fall throughout the year.

• We see inflation hovering just above target on commodity price pressures throughout the year, though tempered by a strong currency. However, lower GDP growth probably means rate rises are unlikely before Q4 2011 and will be slow.

• The surprise victory of the centre-right coalition in the election suggests fiscal consolidation in 2011 should be impressive and put the economy on a more solid course after more than a year of policy stagnation. While fiscal consolidation will drag on growth, it is an important boost to credibility, though a loss in domestic competiveness needs to be watched.

2009 2010 2011 2012Real GDP % y-o-y -6.3 1.2 2.5Nominal GDP USD bn 130.2 130.5 137.6 139.Current account % GDP 0.2 0.5 1.5 -1.0Fiscal balance % GDP -4.2 -4.2 +0.8 -4.4CPI % y-o-y * 5.6 4.7 4.5 4.0CPI % y-o-y ** 4.2 4.9 4.5 4.4Population mn 9.91 9.88 9.86Unemployment rate % 10.5 10.8 10.0 9.5Reserves USD bn *** 40.9 40.5 45.0 40.0External debt % GDP*** 124.1 112.6 94.3 86.1Public debt % GDP 78.3 81.3 71.3 67.0MNB policy rate %* 6.25 5.75 5.50 5.50EURHUF* 270 279 285 290*End of period, **Period average, Bold is actual data***Includes IMF/EU funds

2.76

9.84

2009 2010 2011 2012Real GDP % y-o-y 1.7 3.8 4.4 4.3Nominal GDP USD bn 435.4 447.0 510.5 545.8Current account % GDP -1.6 -1.8 -4.0 -5.0Fiscal balance % GDP -7.1 -7.8 -6.0 -4.0CPI % y-o-y * 3.7 3.2 4.6 3.3CPI % y-o-y ** 3.8 2.7 4.4 3.6Population mn 38.1 38.0 38.0 37.9Unemployment rate % 11.9` 9.5 9.0 8.0Reserves USD bn ** 69.4 85.0 90.0 100.0External debt % GDP 65.1 66.6 63.3 59.8Public debt % GDP 51.0 53.3 54.0 53.3NBP policy rate %* 3.50 3.50 5.00 5.50EURPLN* 4.10 3.96 3.80 3.70*End of period, **Period average, Bold is actual data

2009 2010 2011 2012Real GDP % y-o-y -4.5 2.3 1.4 .Nominal GDP USD bn 189.8 191.7 212.0 217.Current account % GDP -1.0 -0.5 -2.5 -3.5Fiscal balance % GDP -5.9 -5.0 -4.2 -3.8CPI % y-o-y * 1.0 2.3 1.9CPI % y-o-y ** 1.1 1.5 1.9 3.8Population mn 10.2 10.1 10.1 10.0Unemployment rate % 9.2 8.4 8.0 7.0Reserves USD bn ** 41.1 44.0 45.0 48.0External debt % GDP 43.3 45.7 45.9 45.9Public debt % GDP 35.4 41.2 43.8CNB policy rate %* 1.00 0.75 1.25 2.00EURCZK* 26.2 25 23.5 23.5*End of period, **Period average, Bold is actual data

2 63

3.6

45.3



Rest of EEMEA ⏐ Economic Outlook Tatiana Orlova | Peter Attard Montalto

Ukraine: Slow stabilisation The standby agreement with the IMF paves the way for reform, but the path may be thorny

Source: National Bank of Ukraine, Nomura Global Economics.

• The pace of recovery will likely remain gradual. The

government will have to balance the need to meet theharsh conditions of the IMF stand-by programme withpreserving political stability. Luckily, the next Rada elections are not until 2012. Pension reform remains key to keeping the IMF programme on track.

• The current account should remain in deficit, but renewed FDI inflows and IMF support should help keep the hryvnia stable. Inflation has returned to a single-digit pace, but utility tariff hikes will boost it in Q2.

• IMF funds and external borrowing will likely remain the main tools for financing the budget deficit, which the government has pledged to cut to 3.5% of GDP.

Kazakhstan: Driven by industrial recovery The change in the FX regime should not change the pace of KZT appreciation

Source: Agency of Statistics of the Republic of Kazakhstan, Nomura Global Economics.

• Manufacturing, which propelled the economy in 2010,

will likely retain some of its momentum in 2011. We expect robust growth supported by strong FDI inflows.

• In late February, the NBK announced a switch to a managed float. We expect it to intervene in the FX market to prevent USD/KZT from strengthening beyond 140.5 by year-end; this should translate into a further build-up in the National Fund and FX reserves.

• President Nazarbayev’s powers will likely be affirmed at the early presidential elections scheduled for 3 April. A government reshuffle is likely shortly after; if a new NBK governor is appointed, the tenge’s current strengthening path should not be affected.

Romania: A challenging road ahead Twin deficits leave little room for supporting growth

Source: Ministry of Statistics, Nomura Global Economics.

• The political background remains testing, with owing

to a more united opposition, fiscal challenges and heightening risk perceptions on periphery Europe. With a plethora of no confidence votes, early elections are still possible.

• Romania was one of the few countries to suffer three full years of contracting output and the expected rebound in headline growth in 2012 should be mainly due to base effects and FDI. Fiscal consolidation maydampen household demand, as may sluggish growth in periphery Europe.

• Core inflation should continue to ease given excess capacity and reduced wage pressures, but the VAT increase and commodity price pressures suggest inflation should remain high and sticky throughout the year. Yet, we see increased room for interest rate cuts in 2011, given that the appreciation of leu can help to maintain inflation pressures under control.

2009 2010 2011Real GDP % y-o-y -15.1 4.1 4.8Consumption, % y-o-y -14.2 0.2 2.5 2.8Gross investment -52.2 4.0 3.5 4.0Exports, % y-o-y -40.4 27.9 6.5 12.1Imports, % y-o-y -46.3 28.1 11.3 8.0CPI % y-o-y * 16.7 9.4 9.8 10.5Consolidated budget % GDP** -6.0 -5.0 -4.0Current account % GDP -0.6 -2.1 -3.5FX reserves, gross USD bn 29.1 34.6 31.0 33.2NBU discount rate %*** 10.25 7.75 7.75 7.50USDUAH* 7.99 7.94 8.00 7.90*Period average, ** Excluding Naftogaz, ***End of period, , Bold is actudata.

20125.0

-3.0-0.5

al

2009 2010 2011 20 2Real GDP % y-o-y 1.2 7.0 6.5Consumption % y-o-y -3.0 3.5 4.0 3.5Gross investment % y-o-y 1.9 9.1 7.8 11.0Exports % y-o-y -39.0 41.8 28.3 9.6Imports % y-o-y -25.0 5.9 26.0CPI % y-o-y ** 7.3 7.2 8.4Government budget % GDP -1.5 -2.6 -0.5 3.5Current account % GDP -3.2 3.2 6.9 5.9FX reserves, gross USD bn 20.6 28.2 36.7 44.7NBK official rate %* 7.00 7.00 7.50 7.50USDKZT* 149 147 141*End of period, **Period average, Bold is actual data.

15.5

21.36.7

135

2009 2010 2011 2012Real GDP % y-o-y -7.0 -1.2 1.5 2.5Current account % GDP -4.4 -4.8 -5.5 -6.0Fiscal balance % GDP -8.3 -6.4 -4.5 -4.0CPI % y-o-y * 4.7 8.0 3.9 3.2CPI % y-o-y ** 5.8 6.1 5.8 3.5External debt % GDP 69.3 73.0 70.0 70.0Public debt % GDP 28.2 30.8 36.0 34.0NBR policy rate %* 8.00 6.25 6.25 7.50EURRON* 4.23 4.28 4.18 4.20*End of period; **Period average; Bold is actual data



Rest of EEMEA ⏐ Economic Outlook Ann Wyman ⏐ Olgay Buyukkayali

Egypt: Anticipating political transition Growth prospects will be challenged in the post-Mubarak era as tourism and foreign investment slow

Source: Ministry of Finance, Nomura Global Economics.

• As a result of the political crisis, we have revised our

growth forecast down sharply for both 2011 and 2012. Activity in many sectors—from retail and wholesale trade to manufacturing to tourism—has ground to a halt.

• Inflation should remain high given supply disruptions and global oil price increases. Nonetheless, we doubt the central bank will increase interest rates in the near term because of the potentially destabilising impact, and an assessment that price pressures are likely temporary.

• Political focus should turn to ensuring a smooth transition to elections. Parliamentary elections are now expected in September, and presidential elections in December.

Israel: Growth continues to advance Israel’s output gap has closed, inflation pressures are rising

Source: BOI, Nomura Global Economics.

• Israel’s export-driven economy outperformed the

region in the post-crisis environment thanks to anaggressive monetary policy response resulting in a healthy domestic demand.

• Inflationary pressures remain fairly high, not only because of a housing market boom, but also because of a rise in real wages.

• Strong domestic demand not only risks inflation moving above the upper band of the target, but also shrinks the current account surplus. Monetary policy should continue to tighten in H1 2011: in our view the BoI is likely to hike policy rates by 50bp more in 2011.

Saudi Arabia: Oil supports fiscal stimulus Increasing oil prices help finance further fiscal stimulus, but regional political turmoil is weighing on sentiment

Source: Ministry of Statistics, SAMA, Nomura Global Economics.

• We have increased our growth forecasts for Saudi

Arabia on the back of higher global oil prices, increased production (to compensate for lost Libyan output), and substantial fiscal stimulus. Inflation may pick up modestly as a result, though investment toincrease the housing stock could help keep rental prices contained. .

• Non-hydrocarbon growth should continue to increase over the next five years, as should its share in output, driven by government-led infrastructure spending.

• Concerns about regional political unrest have taken their toll on the local equity markets. For now, concerns about the risks to production appear overdone, though investors are likely to focus on developments in neighbouring Bahrain as a bellwether for Saudi stability.

2009 2010 2011 2012Real GDP % y-o-y 4.8 5.3 1.2Nominal GDP, USDbn 187.4 212.0 239.6 269.CPI % y-o-y * 13.3 10.3 12.1 9.5Budget balance % GDP** -6.9 -8.3 -10.4 -8.9Public sector debt, % GDP 70.5 73.9 78.1 79.8Current account % GDP -3.0 -2.5 -3.2FX reserves, gross USD bn 30.0 35.1 29.0External debt % GDP 17.1 16.3 17.7 18.2Policy rate %* 8.25 8.25 8.25 9.00USDEGP* 5.50 5.80 6.10 6.40*End of period, **Fiscal year ending June, Bold is actual data

3.18

-2.731.0

2009 2010 2011 2012Real GDP % y-o-y 0.3 4.5 4.0 4.0Consumption % y-o-y -0.3 3.0 3.5 3.0Gross investment % y-o-y -6.5 2.5 3.2 3.8Exports % y-o-y -7.8 2.5 3.8 4.5Imports % y-o-y -5.0 3.3 4.0 3.9CPI % y-o-y * 2.8 2.7 3.2 3.5CPI % y-o-y ** 2.7 2.7 3.3 3.4Budget balance % GDP -5.3 -3.8 -3.5 -4.0Current account % GDP 3.7 3.0 2.5 2.0Policy rate %* 1.00 2.00 3.50 4.00USDILS* 3.79 3.52 3.50 3.60*End of period, **Period average, Bold is actual data

2009 2010 2011 2012Real GDP % y-o-y 0.2 4.0 6.0 4.5 Hydrocarbon % y-o-y -8.7 2.4 5.5 2.9 Nonhydrocarbon % y-o-y 3.0 3.7 3.5 3.2Nominal GDP, USDbn 370.1 443.7 492.5 524.0CPI % y-o-y ** 5.0 5.4 5.6 5.0Budget balance % GDP 0.9 4.5 2.0 3.5Current account % GDP 6.0 11.5 20.4 15.0External debt, USDbn 101.0 105.3 110.0 120.4External debt, % GDP 27.3 23.7 22.9 23.6Short-term interest rates % 0.70 2.00 2.00 2.00USDSAR* 3.75 3.75 3.75 3.75 **Period average, Bold is actual data



Rest of Latin America ⏐ Economic Outlook Boris Segura │Tony Volpon │ Benito Berber

Argentina: More moderate growth, but still high inflation High inflation is likely to remain the main macroeconomic policy challenge to authorities.

Note: Table reflects data available as of 15 April 2011. Source: Nomura Global Economics.

• Argentina’s growth is likely to decelerate only marginally from its rapid rate of growth in 2010. The output gap has already closed and, as such, we are unlikely to see any inflation relief.

• Fiscal and monetary policies remain lax and are likely to remain so until at least the general elections in October 2011.

• Favourable external conditions are likely to keep fiscal and external accounts well supported.

• Presidential elections in October might turn out to be relatively uneventful.

Chile: Growth and inflation are set to accelerate Continued strong external demand and durable goods consumption pushes growth up, but inflation is a risk.

Note: Table reflects data available as of 15 April 2011. Source: Nomura Global Economics.

• Chile’s economy has had a broad-based rebound from the crisis and last year’s earthquake, which proved to be positive for growth, especially for durable goods consumption and imports.

• Export demand has increased throughout 2010 as the prices of Chile’s commodity exports rose, and recently copper prices have reached new cyclical highs. This has allowed strong growth in exports. Nonetheless, higher commodity prices, especially oil, have driven up inflation in an environment of dynamic growth.

• The Central Bank of Chile (BCCh), after a brief pause in January, has resumed its monetary normalization process on the back of high commodity prices and accelerating inflation expectations. We expect the TPM policy rate will close the year at 6%.

Colombia: Strong recovery Economic recovery will likely continue in 2011 with robust FDI inflows supporting the currency.

Note: Table reflects data available as of 26 May 2011. Source: Nomura Global Economics.

• We forecast 2011 GDP to expand by 5.0% on the back of strong domestic demand. The central bank has started the tightening cycle in February to curb rising inflation expectations. We expect the policy rate rising to 5% by year-end.

• We think Congress will probably pass a fiscal rule in Q3 to address some of the weakness in the fiscal accounts. We expect the three major rating agencies to upgrade the credit rating to investment grade in H2 2011.

• Strong FDI inflows and conversion of dollar-cash reserves from pre-financed dollar debt should keep COP strong. We forecast the COP to appreciate to 1,760 by year-end 2011.

2009 2010 2011 2012Real GDP % y-o-y 0.9 9.2 8.0 4.0Consumption % y-o-y 0.5 9.0 8.6 5.8Gross Investment % y-o-y -10.2 21.2 17.1 9.3Exports % y-o-y -6.4 14.6 7.9 9.0Imports % y-o-y -19.0 34.0 5.5 9.0CPI % y-o-y * 7.7 10.9 10.9 10.8CPI % y-o-y ** 14.8 25.9 24.4 25.4Budget balance % GDP *** 1.5 1.7 -0.5 1.0Current account % GDP 3.7 1.8 1.3 1.0Policy Rate % 9.52 10.81 12.0 11.0USDARS 3.81 3.98 4.40 4.50* Off icial data, ** Private estimate, ***Primary budget balance, Bold is actual data

2009 2010 2011 2012Real GDP % y-o-y 2.1 5.2 6.5 5.0Consumption % y-o-y 5.7 8.0 9.0 6.0Gross Investment % y-o-y -11.9 20.0 15.0 18.0Exports % y-o-y -3.7 6.0 8.0 6.5Imports % y-o-y -4.0 14.0 12.0 12.0CPI % y-o-y * -1.5 3.0 4.5 3.0CPI % y-o-y ** 1.5 1.4 3.5 3.0Budget balance % GDP -3.4 -2.0 -1.0 1.0Current account % GDP 2.7 0.7 1.5 1.0Policy Rate % * 0.50 3.25 6.00 6.00USDCLP * 507.00 468.00 440.00 420.00* End of period, ** Period average, Bold is actual data

2009 2010 2011 2012Real GDP % y-o-y 2.5 4.3 5.0 4.5Consumption % y-o-y 2.0 6.0 5.0 4.5Gross Investment % y-o-y 3.0 10.0 8.0 9.0Exports % y-o-y -18.0 10.0 6.0 7.0Imports % y-o-y -11.4 30.0 8.0 9.0CPI % y-o-y * 2.0 3.2 3.5 3.7CPI % y-o-y ** 4.2 2.3 3.5 3.7Budget balance % GDP -2.7 -3.6 -3.4 -3.0Current account % GDP -2.2 -2.5 -3.0 -3.5Policy Rate % * 3.50 3.00 5.00 7.00USDCOP * 2044.00 1907.70 1760.00 1750.00* End of period, ** Period average, Bold is actual data



Emerging Markets │ Data Preview Peter Attard Montalto │ Benito Berber

The week ahead Central banks of Brazil, Egypt, Peru and Poland will make decisions on their policy rates, while Hungary, Mexico and Colombia will release MPC minutes, among other data releases.

Brazil, IPCA inflation (Tuesday): We expect May IPCA to come in at 0.48% m-o-m, or 6.57% y-o-y, breaching the 6.5% upper bound of the inflation target range. Although inflation in annual terms remains elevated due to the low base of comparison, we believe it will start to drop on a month-over-month basis, reaching its lowest point in August, as commodity prices, the main culprit behind the inflation run-up in the past few months, have started to fall sharply.

Poland, NBP MPC meeting (Wednesday): We look for rates to be hiked by 25bp to 4.50%. Little has changed since the last meeting on the data front although wage numbers should reinforce the concerns of a majority of MPC members about the labour market causing second-round inflation figures, and a minority of MPC members would also have been surprised to the upside by the Q1 GDP print. We think the MPC will continue with its accelerated tightening schedule while committing not to tighten more overall. Even if some members baulk at the idea of three hikes in a row, we think after last meeting’s 9-1 vote for a hike there are enough hawks or swing-hawks to be able to get a hike with a 6-4 vote anyway.

Brazil, Central bank Selic policy rate (Wednesday): We expect the central bank of Brazil (BCB) to raise Selic by 25bp to 12.25% and then pause its current tightening cycle. At its last meeting, the BCB hiked 25bp versus market expectations split between 25bp and 50bp, while unanimously promising a “sufficiently prolonged” adjustment to Selic. We believe the BCB has adopted an implicit “dual mandate” of fighting inflation while minimizing negative effects on

Note: All times are LDN. Source: Bloomberg, National Statistics Offices, Nomura Global Economics.

Period Prev 2 Prev 1 Last Nomura SurveyHungary Budget balance, YTD HUF bn May -560 -742 -666 -750 n.a.Russia CPI % y-o-y May 9.5 9.5 9.6 9.5 9.6Russia Trade balance USD bn Apr 14.9 17.4 17.3 18.6 18.2Ukraine CPI % y-o-y May 7.2 7.7 9.4 11.2 11.0

Period Prev 2 Prev 1 Last Nomura Survey8.00 Czech Republic Industrial output % y-o-y Apr 16.4 13.0 9.5 7.9 8.08.00 Czech Republic Trade balance CZK bn Apr 17.5 13.7 21.5 15.0 15.013.30 Chile IMACEC monthly GDP indicator % y-o-y Apr 6.8 6.9 15.4 n.a. 6.7

7.00 South Africa Gross Reserves USD bn May 47.3 49.3 50.6 51.0 50.78.00 Hungary Industrial Output % y-o-y Apr 10.6 14.6 9.2 8.5 8.813.00 Brazil IPCA inflation % m-o-m May 0.8 0.8 0.8 0.5 0.513.00 Brazil IPCA inflation % y-o-y May 6.0 6.3 6.5 6.6 6.613.30 Chile Trade balance USD mn May 1173 1217 1583 n.a. n.a.

8.00 Czech Republic Unemployment % May 9.6 9.2 8.6 8.3 8.28.00 Turkey Industrial production, NSA % y-o-y Apr 19.0 13.9 10.4 n.a. 9.89.00 Czech Republic Current account CZK bn 1Q -1.3 -3.6 -0.8 n.a. n.a.13.00 Hungary Central bank's minutes13.00 Chile CPI % y-o-y May 2.7 3.4 3.2 n.a. 3.2

Poland NBP MPC meeting %, policy rate Jun 3.75 4.00 4.25 4.50 4.50Russia Weekly CPI % w -o-w 06-Jun 0.1 0.1 0.1 0.1 n.a.Brazil Central bank SELIC target % 08-Jun 11.25 11.75 12.00 12.25 12.25

8.00 Czech Republic CPI % y-o-y May 1.8 1.7 1.6 1.8 1.88.00 Hungary Trade balance EUR mn Apr 401 831 840 675 56312.00 South Africa Manufacturing production % y-o-y Apr 1.7 5.7 4.6 3.8 4.815.00 Mexico CPI % y-o-y May 3.6 3.0 3.4 3.3 3.315.00 Mexico Core CPI % m-o-m May 0.4 0.3 0.1 0.1 0.2

Egypt CBE deposit rate % Jun 8.25 8.25 8.25 n.a. n.a.Egypt CPI % y-o-y May 10.7 11.5 12.1 n.a. n.a.Peru Reference rate % Jun 3.75 4.00 4.25 4.50 4.50

Some time this week

Monday 6 June

Tuesday 7 June

Wednesday 8 June

Thursday 9 June

Friday 10 June8.00 Romania CPI % y-o-y May 7.6 8.0 8.3 n.a. 8.513.00 Brazil Retail sales % m-o-m Apr 1.3 0.3 1.2 n.a. 0.415.00 Mexico Central Bank Monetary Policy Meeting Minutes

Colombia Central Bank Monetary Policy Meeting Minutes

Turkey Parliamentary electionsSunday 12 June


growth. Given the recent slowdown in economic activity and fall in commodity prices as well as inflation expectations, the BCB should have sufficient room for a pause after another 25bp hike.

South Africa, Manufacturing production (Thursday): We expect a sub-consensus 3.8% y-o-y print for April, also down on the previous month. The motor industry and various upstream manufacturers will likely be hit hard by supply-chain issues and falling export demand. Given the large degree of uncertainty around both these factors there is a surprisingly large spread of market forecasts. Such a print should keep the MPC in dovish mode (in private, even if in public it continues with a more hawkish communications strategy).

Mexico, CPI and core CPI (Thursday): We expect May headline CPI to come in at 3.31% y-o-y, or -0.68% m-o-m, due to the phase-in of electricity subsidies and plunging prices of some fruits and vegetables. Core CPI should also remain tame at 0.12% m-o-m, given anaemic domestic consumption and little inflationary pressure on the demand side.

Mexico, Central bank meeting minutes (Friday): The central bank of Mexico (Banxico) kept the policy rate unchanged at 4.5% and mentioned in the communiqué that the balance of risks for inflation has improved. Banxico’s tone on inflation pressure appears to have moderated recently, and we look to the minutes for more detailed information.

Colombia, Central bank meeting minutes (Friday): The central bank of Colombia (BanRep) hiked the policy rate by 25bp, taking it to 4%, and signalled a continuation of hikes because of the strength of domestic consumption. The minutes should shed more light on BanRep’s rationale.



DISCLOSURE APPENDIX A1 ANALYST CERTIFICATIONS Each research analyst principally responsible for the preparation and content of all or any portion of this report hereby certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst also certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company. Additional Disclosures required in the U.S The following are additional required disclosures in the U.S.: Principal Trading: Nomura Securities International, Inc and its affiliates will usually trade as principal in the fixed income securities (or in related derivatives) that are the subject of this research report. Analyst Interactions with other Nomura Securities International, Inc Personnel: The fixed income research analysts of Nomura Securities International, Inc and its affiliates regularly interact with sales and trading desk personnel in connection with their research, including to ascertain pricing and liquidity in the fixed income markets. VALUATION METHODOLOGY “Relative Value”-based recommendations is the principal approach used by Nomura’s Fixed Income Credit Research and Strategy divisions’ strategists/analysts when they make “Buy,” “Hold” and “Sell” recommendations to clients. These recommendations use a valuation methodology that is principally driven by opportunistic spread differences between the appropriate benchmark security and the security being discussed: (1) that have different maturities within a unique capital structure, (2) that have different collateral classes within a unique capital structure, or (3) that reflect a unique opportunity associated with a debt security. In addition, it is also not uncommon for a strategist/analyst to make an “Asset Swap” recommendation, such as a “Buy” and “Sell” recommendation between two securities from the same issuer/tranche/sector. DISCLAIMERS This publication contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or elsewhere identified in the publication. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), United Kingdom; Nomura Securities International, Inc. ('NSI'), New York, NY; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr ); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Capital Nomura Securities Public Company Limited (‘CNS’), Thailand; Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034); Banque Nomura France (‘BNF’); NIplc, Dubai Branch (‘NIplc, Dubai’); NIplc, Madrid Branch (‘NIplc, Madrid’) and OOO Nomura, Moscow (‘OOO Nomura’). THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION THAT WE CONSIDER RELIABLE. NOMURA GROUP DOES NOT WARRANT OR REPRESENT THAT THE PUBLICATION IS ACCURATE, COMPLETE, RELIABLE, FIT FOR ANY PARTICULAR PURPOSE OR MERCHANTABLE AND DOES NOT ACCEPT LIABILITY FOR ANY ACT (OR DECISION NOT TO ACT) RESULTING FROM USE OF THIS PUBLICATION AND RELATED DATA. TO THE MAXIMUM EXTENT PERMISSIBLE ALL WARRANTIES AND OTHER ASSURANCES BY NOMURA GROUP ARE HEREBY EXCLUDED AND NOMURA GROUP SHALL HAVE NO LIABILITY FOR THE USE, MISUSE, OR DISTRIBUTION OF THIS INFORMATION. Opinions expressed are current opinions as of the original publication date appearing on this material only and the information, including the opinions contained herein, are subject to change without notice. Nomura is under no duty to update this publication. If and as applicable, NSI's investment banking relationships, investment banking and non-investment banking compensation and securities ownership (identified in this report as 'Disclosures Required in the United States'), if any, are specified in disclaimers and related disclosures in this report. In addition, other members of the Nomura Group may from time to time perform investment banking or other services (including acting as advisor, manager or lender) for, or solicit investment banking or other business from, companies mentioned herein. Furthermore, the Nomura Group, and/or its officers, directors and employees, including persons, without limitation, involved in the preparation or issuance of this material may, to the extent permitted by applicable law and/or regulation, have long or short positions in, and buy or sell, the securities (including ownership by NSI, referenced above), or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives. For financial instruments admitted to trading on an EU regulated market, Nomura Holdings Inc's affiliate or its subsidiary companies may act as market maker or liquidity provider (in accordance with the interpretation of these definitions under FSA rules in the UK) in the financial instruments of the issuer. Where the activity of liquidity provider is carried out in accordance with the definition given to it by specific laws and regulations of other EU jurisdictions, this will be separately disclosed within this report. Furthermore, the Nomura Group may buy and sell certain of the securities of companies mentioned herein, as agent for its clients. Investors should consider this report as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Please see the further disclaimers in the disclosure information on companies covered by Nomura analysts available at www.nomura.com/research under the 'Disclosure' tab. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas;



recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise; it is possible that individual employees of Nomura may have different perspectives to this publication. NSC and other non-US members of the Nomura Group (i.e. excluding NSI), their officers, directors and employees may, to the extent it relates to non-US issuers and is permitted by applicable law, have acted upon or used this material prior to, or immediately following, its publication. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. The securities described herein may not have been registered under the US Securities Act of 1933, and, in such case, may not be offered or sold in the United States or to US persons unless they have been registered under such Act, or except in compliance with an exemption from the registration requirements of such Act. Unless governing law permits otherwise, you must contact a Nomura entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material. This publication has been approved for distribution in the United Kingdom and European Union as investment research by NIplc, which is authorized and regulated by the UK Financial Services Authority ('FSA') and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This publication may be distributed in Germany via Nomura Bank (Deutschland) GmbH, which is authorized and regulated in Germany by the Federal Financial Supervisory Authority ('BaFin'). This publication has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This publication has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This publication has also been approved for distribution in Malaysia by NSM. In Singapore, this publication has been distributed by NSL. NSL accepts legal responsibility for the content of this publication, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this publication should contact NSL in respect of matters arising from, or in connection with, this publication. Unless prohibited by the provisions of Regulation S of the U.S. Securities Act of 1933, this material is distributed in the United States, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This publication has not been approved for distribution in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates by Nomura Saudi Arabia, NIplc or any other member of the Nomura Group, as the case may be. Neither this publication nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into the Kingdom of Saudi Arabia or in the United Arab Emirates or to any person located in the Kingdom of Saudi Arabia or to clients other than 'professional clients' in the United Arab Emirates. By accepting to receive this publication, you represent that you are not located in the Kingdom of Saudi Arabia or that you are a 'professional client' in the United Arab Emirates and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the Kingdom of Saudi Arabia or the United Arab Emirates. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means; or (ii) redistributed without the prior written consent of the Nomura Group member identified in the banner on page 1 of this report. Further information on any of the securities mentioned herein may be obtained upon request. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Additional information available upon request NIPlc and other Nomura Group entities manage conflicts identified through the following: their Chinese Wall, confidentiality and independence policies, maintenance of a Restricted List and a Watch List, personal account dealing rules, policies and procedures for managing conflicts of interest arising from the allocation and pricing of securities and impartial investment research and disclosure to clients via client documentation. Disclosure information is available at the Nomura Disclosure web page: http://www.nomura.com/research/pages/disclosures/disclosures.aspx Nomura Securities International Inc. Two World Financial Center, New York, NY 10281-1198 Caring for the environment: to receive only the electronic versions of our research, please contact your sales representative.


http://www.nomura.com/research/pages/disclosures/disclosures.aspx



3 June 2011

Contacts Global

Paul Sheard Global Chief Economist [email protected] 1-212-667-9306

Alastair Newton Senior Political Analyst [email protected] 44-20-7102-3940

North America David Resler Chief Economist US [email protected] 1-212-667-2415

Aichi Amemiya United States [email protected] 1-212-667-9347

Jeffrey Greenberg United States [email protected] 1-212-667-2335

Charles St Arnaud Canada [email protected] 1-212-667-1986

Europe Peter Westaway Chief Economist Europe [email protected] 44-20-7102-3991

Dimitris Drakopoulos France, Greece, Ireland, Portugal [email protected] 44-20-7102-5846

Takuma Ikeda Switzerland [email protected] 44-20-7102-1605

Philip Rush United Kingdom [email protected] 44-20-7102-9595

Lavinia Santovetti Italy, Spain [email protected] 44-20-7102-6364

Jens Sondergaard Germany, Austria, Scandinavia [email protected] 44-20-7102-1969

Stella Wang Belgium, Netherlands [email protected] 44-20-7102-0599

Japan Takahide Kiuchi Chief Economist Japan [email protected] 81-3-6703-1280

Mika Ikeda [email protected] 81-3-6703-1287

Kenichi Kawasaki Senior Political Analyst [email protected] 81-3-6703-1277

Shuichi Obata [email protected] 81-3-6703-1295

Kohei Okazaki [email protected] 81-3-6703-1291

Ryota Takemoto [email protected] 81-3-6703-1296

Asia Rob Subbaraman Chief Economist Asia [email protected] 852-2536-7435

Tatiana Byrne Australia/New Zealand [email protected] 61-2-8062-8505

Yougesh Khatri Southeast Asia [email protected] 65-6433-6960

Tomo Kinoshita Deputy Head; China, Hong Kong, Taiwan [email protected] 852-2536-1858

Young Sun Kwon South Korea [email protected] 852-2536-7430

Euben Paracuelles Southeast Asia [email protected] 65-6433-6956

Stephen Roberts Chief Economist Australia/New Zealand [email protected] 61-2-8062-8631

Chi Sun China [email protected] 852-2536-7705

Sonal Varma India [email protected] 91-22-4037-4087

Emerging Markets Ann Wyman Head of EM Research, EMEA; Middle East [email protected] 44-20-7102-9287

Olgay Buyukkayali Head of EM Strategy, EMEA; Turkey, Israel [email protected] 44-20-7102-3242

Tony Volpon Head of EM Research, Americas; Brazil, Chile [email protected] 1-212-667-2182

Peter Attard Montalto South Africa, Central and Eastern Europe [email protected] 44-20-7102-8440

Benito Berber Mexico, Colombia [email protected] 1-212-667-9503

Tatiana Orlova Russia, Ukraine, Kazakhstan [email protected] 44-20-7102-0490

Boris Segura Argentina, Venezuela [email protected] 1-212-667-1375

bumps on the recovery road - home | nomura · on the future path of oil prices based on oil price...

Documents