1. society
2. work
3. unemployment

MORGAN STANLEY RESEARCH
Global Economics Team
Coordinators of this publication
Joachim Fels
[email protected]
+44 (0)20 7425 6138
Manoj Pradhan
[email protected]
October 22, 2014
Global
+44 (0)20 7425 3805
Patryk Drozdzik
The Global Macro Analyst
[email protected]
+44 (0)20 7425 7483
Sung Woen Kang
Trading Deflation
[email protected]
+44 (0)20 7425 8995
Earlier this year, we argued that the global export of
deflation was on the cards – A change in the US dollar
regime enables that surge in the global trade of
deflation.
An uneasy truce is the result Not everyone is
comfortable with a strengthening dollar. For some, it
will deliver the currency depreciation that they have
been trying to engineer with limited success for a while
now. For others, it won’t be quite as benign. And
whether the rising dollar is accompanied by rising or
stable US interest rates will matter for everyone. In
today’s note, we ask: (1) What is the genesis of the
deflationary risk that the global economy faces? (2)
Who among the euro area, Japan, China, EM and the
US itself will like or will struggle with US dollar
appreciation? (3) Could a strengthening US dollar
support or curtail the long economic expansion we
have been flagging?
Could the Fed stand in the way of this story? A
rising dollar is likely an endogenous reflection of a US
economy that is better in both absolute and relative
terms. However, the late, aggressive rise in the dollar
that elicited concerns from the Fed is likely to have
been perceived as an unwelcome deviation from a
more acceptable steady trend, and hence an
exogenous shock. Like last summer’s rapid climb in the
US 10-year yield postponed tapering but did not elicit
an effort to push yields lower, the US dollar’s ascent
may draw further comment in the future only when
deemed excessive.
Philipp Erfurth
[email protected]
+44 (0)20 7677 0528
Global Economics Forecasts
Real GDP (%)
2014E 2015E 2016E
Global Economy
G10
Emerging Markets
3.1
1.6
4.4
3.5
2.1
4.9
3.8
2.0
5.4
CPI inflation (%)
2014E 2015E 2016E
3.4
1.7
5.1
3.4
1.7
5.0
Source: Morgan Stanley Research forecasts
Global Macro Watch
UK: Sectoral Productivity – Even Less for MPC to
Worry about on Inflation ................................................. p 8
Greece: In for the Long Haul ......................................... p 8
EM: When Oil Meets an Out-of-Sync EM Cycle ............ p 9
Russia: Oil Risk Returns ............................................... p 9
Central Europe: No Help Against ‘Lowflation’ from FX p 10
South Africa: FX to Push SARB to Hike in Nov? ....... p 10
China: Underlying Growth Weakness Warrants
Continued Easing......................................................... p 11
India: Analysing Impact of Diesel Deregulation and
Hike in Gas Prices ....................................................... p 11
Korea: Déjà vu of 2004 Rate Cuts? ............................ p 12
Mexico: No Oil, No Trouble ......................................... p 12
Spotlight: US: Those Were the Weeks that Were
In most financial markets, the past few weeks were like
hurtling along a double-black-diamond downhill rather
than a roller coaster. That is, we wound up not where
we started, but at a much lower place. It seems best to
step back and put a few issues in perspective.
p5
The Morgan Stanley Global Economics View
p6
3.4
2.0
4.8
For important disclosures, refer to the
Disclosures Section, located at the end of
this report.
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Trading Deflation
Manoj Pradhan (44 20) 7425 3805
Joachim Fels (44 20) 7425 6138
Earlier this year, we argued that a surge in the global export
of deflation was on the cards (see The Global Macro Analyst:
A Surge in the Global Export of...Deflation, May 14, 2014).
The world economy faces deflationary or disinflationary risks
related to global excess savings. Having had limited success
in generating domestic growth to reflate their economies in
recent years, policy-makers in many countries have been
more than happy to let currency depreciation help them. It
was a good plan, and created some worries about a spurt of
competitive devaluations and ‘beggar-thy-neighbour’ policies,
but didn't have any teeth. Why? Because currencies are
relative prices - not all currencies can depreciate at the same
time, particularly not when the biggest central banks in the
world are all trying to do the same thing at the same time.
That was then. Fast-forward to today, and things are
different... thanks to a new regime for the US dollar as the US
economy has been gradually strengthening. We continue to
believe in the likelihood of a steady appreciation of the USD to
a new equilibrium that our FX strategy team has been flagging
(see FX Pulse: In USD We Trust, August 7, 2014). An
appreciating USD can soak up some of the deflationary
pressure from other parts of the world, thanks in no small part
to the relatively strong US economy that will likely remain in a
position to absorb this pressure. Few others, if any, are.
In today’s note, we ask three questions:
1.
The genesis: What’s driving global and local
deflationary risks?
2.
An uneasy truce: Will everyone appreciate USD
appreciation? We discuss the euro area, Japan,
China, EM and the US itself.
3.
A longer cycle: Does a strong USD counter or
support our arguments for a longer cycle?
The Genesis of Global Deflationary Risks
There is a global and local dimension to the disinflationary
trend.
As we see it, the origin of global deflationary pressures is
an excess of desired savings over desired investment. In
the advanced economies, many households want to save
more for old age given rising life expectancy and doubts about
public pension systems’ ability to cope with it. Meanwhile,
many EM economies (China et al.) aim at growth through
running current account surpluses, which mean domestic
savings exceed domestic investment. And those EM
countries running current account deficits have been actively
trying to reduce them following last year’s taper tantrum,
which means they have been absorbing less global savings.
While desired savings have increased, desired investment
has been falling around the world as governments in
developed countries have cut public investment spending and
companies have held back on capital expenditures. As a
consequence, the natural or equilibrium real interest rate that
would equate savings and investment ex-post at high
employment is very low and perhaps even negative. And as
nominal interest rates cannot fall below zero and inflation is
low, the market real rate is higher than the equilibrium real
rate, which depresses demand and exerts downward
pressure on prices.
To boot, there has been an upward momentum to global real
rates, thanks mostly to an improving US economy, which
adds to deflationary pressures. The negative impact of such a
trend (akin to an ‘income effect’) could then be offset
somewhat by USD appreciation. The latter transfers some of
the deflationary pressures set upon the rest of the world by
the former back to the US (mimicking a ‘substitution effect’).
There are local reasons too, for deflationary risks outside
the US We have addressed these for the euro area (bank
deleveraging), Japan (the legacy of two lost decades), China
(excess capacity in old China) and EM more generally in our
previous note. We direct interested readers to that note and
restrict our comments to simply saying that the reforms that
are needed to reverse such local risks have simply not shown
up in most places. Where they have, in the Reform Club of
Japan, China, Mexico and now India (see The Next India: Will
India Stumble Like the Rest of the 'Reform Club'?, October 6,
2014), the transition to higher and/or better trend growth is still
a work-in-progress. As a consequence, the local drive
towards reflation is itself not yet in train.
An Uneasy Truce – Who Will Appreciate USD
Appreciation?
If the USD is to reflect an improving US economy, chances
are that interest rates could rise too. If so, then assessing how
comfortable economies are with the package of a rising USD
and rising US rates is probably a better strategy – that’s the
one we use today. We hasten to add that rising interest rates
need not go hand-in-glove with the currency. If investment
2
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
flows into the US are strengthening the dollar, then they could
help keep downward pressure on interest rates (see US
Economics: What Has Changed? October 17, 2014). A
deflationary world will accept those lower rates willingly and
only have to deal with a rising dollar, but this is a less
interesting combination to analyze.
The euro area, Japan and stable/mature EMs will benefit
from a stronger dollar, and the euro area and Japan will
have relatively better control over domestic interest rates.
Policymakers in the euro-area and Japan will very likely
welcome a stronger USD. Fed up (excuse the pun) with
importing deflation for so many years and unable to reverse
deflation through stronger growth at home, at least part of the
monetary easing of the last two years could have been about
trying to export it somewhere else. The rising USD has given
them a reasonably willing accomplice.
Dealing with rising US interest rates, on the other hand, will
be more of a challenge. Since they have the ability to
financially repress investors, however, policy-makers in both
economies will have some control over domestic interest
rates. That will likely mean that domestic interest rates in
these economies will have a lower beta with respect to US
interest rates. As a result, the package of a stronger dollar
and rising US interest rates is likely to be an overall ‘win’ for
the euro area and Japan.
China won’t like a stronger USD, but could be more
sanguine on the interest rate front. Being pegged to the
USD for all practical purposes, China too would be importing
deflation from the rest of the world. With PPI deflation already
in place for over 30 months, that won’t be something policymakers will like.
Does that mean Renminbi depreciation is now likely? While
the risk has almost certainly risen, a sizeable depreciation
against the US dollar may not materialize. A depreciating
Renminbi would have political implications, would put
pressure on consumption growth and could leave the carrytrade into China at risk, the sudden reversal of which could
have an adverse effect on domestic financial stability. At the
same time, given China’s US dollar funding requirements are
now not small enough to be ignored, a large Renminbi
depreciation could raise the cost of funding for corporates at a
time when it is already stubbornly high.
When it comes to spillovers from rising US interest rates,
however, China’s policy-makers (like their counterparts in the
euro area and Japan) have the ability to financially repress
investors which gives them a good degree of control over
domestic interest rates.
Policy-makers in the most externally exposed EMs
(Brazil, Turkey and S. Africa and to a lesser extent
Indonesia) will dislike both trends Weaker EM currencies
will help with competitiveness, and therefore support exports
and domestic growth. But this gross effect could well be
overcome by an opposing set of effects. A much stronger US
dollar reduces the incentives for cross-border investment at
best and risks a disorderly depreciation of the currencies of
exposed EM economies at worst. A higher risk-premium and
a rise in funding costs thanks to more expensive US dollar
funding would work against the benefits of a weaker currency
on growth.
As US interest rates rise, policy-makers in the most exposed
EM economies will face pressure to raise domestic rates
because their external vulnerability has not adjusted enough
to assuage investors (see Emerging Issues: Is EM Better
Prepared for the Fed than It Was Last Summer?, September
15, 2014)
What about the US itself? If both the US dollar and rising
interest rates are endogenous, i.e., they accurately reflect
improving prospects for the US economy, there will be no
direct negative feedback to US economic growth. There
could, however, be feedback effects from the rest of the
world.
No economy will want to import too much deflation or growth
weakness when it has spent the last five years trying to
reverse both trends. But thanks to the success this it has had
in generating growth and stabilizing inflation, the US economy
may just be strong enough that a small dose of either or both
need not haunt US economic growth.
There are some benefits too. Importing some deflation will
ensure that price and wage pressures do not force the Fed to
hike earlier than it would like. In the words of our Chief US
Economist Vincent Reinhart, US dollar appreciation “extends
the length of the runway” that the Fed can taxi along before
policy rates lift off.
A Longer Global Expansion: Will a Stronger Dollar Help?
If we are to see the longest global expansion on record, a
sustained rise in the USD could actually be a necessary
condition. Why? Three reasons:
1. Globalizing the solution Given the global and local roots of
the deflationary problem, and the dearth of local-turnaround
stories, a global rebalancing that provides some local relief to
the world outside the US broadens the scope.
3
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
2. Buys more time for economic models to be fixed or
replaced by keeping monetary policy easy By extending the
Fed's runway, and incentivizing the ECB and the BoJ to retain
an easing bias against the risk of rising rates that could
oftentimes accompany a rising USD, it extends the umbrella
of monetary easing that much further. Whether more easing
bears fruit or not depends on whether fundamental
adjustments are made in the added time that the stronger
dollar buys. That story will remain an idiosyncratic one.
3. It keeps the parts of the global economy out-of-sync with
each other A collective build-up in growth over time usually
results in a global overheating that can result in a global
recession. By affecting different parts of the economy
differently, the US dollar could keep different economies outof-sync with each other, thereby avoiding a ‘melt-up’ further
down the line and prolonging the global economic expansion.
4
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Spotlight: US: Those Were the Weeks that Were
Vincent Reinhart (1 212) 761 3537
For some of the economists and strategists at Morgan Stanley,
the ground first shifted noticeably two weeks ago at our Macro
Day conferences in Paris and Frankfurt. I am accustomed to
clients pushing back on our long-standing and out-ofconsensus call that the Fed will put off the first rate hike
until early 2016. I always push right back, explaining that a
tepid cyclical pick-up in aggregate demand will be met by
some extra aggregate supply, limiting pressure on costs and
inflation in the near term. With the expectation of a drag on
prices from the external sector and Fed officials showing the
skittishness typical of central bankers about firing the first shot,
the date of first tightening slips into 2016.
But most clients wanted to understand why the Fed would ever
tighten. Doubts surfaced about the durability of the German
expansion and the ability of ECB President Draghi to deliver
sufficient policy accommodation, suggesting that unwelcome
further disinflation in the euro area was back in the picture.
Concerns were expressed about whether the leadership of
China and Japan would be able to navigate their difficult
economic transitions. And all this was against the backdrop of
mounting appreciation of the foreign exchange value of the
dollar and a freefall in important commodity prices.
For full disclosure, I may at the margin have added to this
angst as one of the authors of the most recent Geneva Report
on the World Economy, Deleveraging? What Deleveraging?
The report highlights that, in aggregate, deleveraging remains
a hope, not a reality. The global debt/GDP ratio is still rising.
The paper served as a sour set-up to the annual meetings of
the IMF and World Bank. Washington was its usual echo
chamber, this time of despair, as officials’ concerns –
repeated in meeting after meeting – proved mutually
reinforcing. More sizeable financial market moves followed.
The recent financial market repricing leaves a more decisive
imprint on the prices of goods and services. Dollar
appreciation and declines in oil and other commodity prices
impart a drag on domestic inflation. To a central banker,
currency appreciation is a request from trading partners to
share some of your domestic strength. The Fed is more
willing to accept such a request when: i) There is domestic
strength to share; and ii) Domestic policy is not seen as
hemmed in by the zero lower bound forever.
As opposed to a few years back, monetary policy-makers
likely view domestic momentum as more self-sustaining, and
an end to unconventional policy is in sight. As a result, they
can treat currency appreciation as an unfavourable demand
shift that merits keeping the funds rate lower for longer. That
is, FX and commodity price movements lengthen the
runway the Fed can use before it raises rates. However, a
pilot that uses more of the runway must climb more sharply
after take-off. So, we continue to think that the Fed starts at
the beginning of 2016 and hikes by 25bp at each meeting
thereafter for some time (see Fed Focus: The End of
Gradualism, September 26, 2014).
The main support to this call comes from what we
learned about Fed officials’ tolerance for adverse shocks
over the past few weeks. They don’t have much. They put
a dovish spin on the minutes of the September meeting,
expressing concerns about the dollar and foreign economies
that were absent in real time in the statement and Janet
Yellen’s press conference. Subsequent speakers stressed
three talking points: i) The risks are asymmetric, in that the
cost of tightening too soon and derailing the expansion is
considerably higher than waiting too long and dealing with a
pick-up in inflation; ii) The Fed’s 2%Y inflation goal is a goal,
not a ceiling; and iii) Decisions are data-dependent and made
meeting by meeting.
Here lies the major disconnect in current market pricing,
presumably evidence of the pessimism rampant among
investors. If the Fed really is data-dependent, many people
think that it may never get to its self-professed terminal funds
rate of 3.75%, at least judging from futures prices. Apparently,
the global economy does not now, nor will it ever have the
vigour to withstand sustained tightening.
This seems overdone, given our economic outlook. GDP
growth is running at about a 3% annual pace this quarter,
about where we track it for the prior quarter as well. At this
point, the fraying at the edges of global markets feels like
an elevated risk to the US outlook rather than a reason to
mark it much lower, a sense that the FOMC presumably
will convey in its next statement. After all, the direct drag is
relatively modest, as we are a relatively closed economy. The
more serious risk is to capital spending, the mechanism that
has boosted us into the 3% growth range after having been
stuck in a 2% rut for so long. It is hard to see why firms would
add to the capital stock if our trading partners stumble and oil
prices stay low. But if this is the adverse case, it is really not
that adverse in that we would revert to a 2% growth channel
under the watchful eye of an ever-accommodative Fed.
For full details, see US Economics: What Has Changed?
October 17, 2014.
5
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
The Morgan Stanley Global Economics View
Our Core Global Views
Lower but longer: Following a ‘breathtaking but bad’ 1H14, global growth is set to reaccelerate to a ‘boring but better’ 2H14, and is expected to maintain an average pace
of around 3.5%Q SAAR during 2015. Although we shaved our growth forecasts
slightly, our forecasts for 2016 and beyond suggest that the more muted, globally
unsynchronised global expansion could turn into one of the longest on record.
Two-speed DM, sluggish EM: In the DM world, we have cut our forecasts for the euro
area and Japan, while keeping the US and UK essentially unchanged. Growth appears to
have bottomed out in EM, but we expect it to remain sluggish by historical comparison.
Even within the EM world, we expect an uneven growth momentum: we see decent
reform-driven growth recovery in India and China growth to move broadly sideways, while
we forecast ongoing stagnation in Brazil and an outright recession in Russia. With further
upside risks to US rates and USD, we remain of the view that EM stands at risk. Should
an EM shock materialise, DM may not be as resilient as it was in the late 1990s.
Key Macro Risk Events
October 26, 2014
Second-round Brazil presidential elections
October 31, 2014
BoJ monetary policy meeting
November 4, 2014
US midterm elections
November 9, 2014
Possible referendum on Catalonia independence
November 2014
Japan PM’s final decision of next consumption tax hike to
10%
‘Lowflation’ here to stay: In our base case, global ‘lowflation’ continues to rule. In DM
economies, ample slack in goods and labour markets points to low producer price
pressures and wage growth. In the EM universe, monetary tightening in deficit
countries and excess capacity in ‘old’ sectors of China has also eased inflation
pressures. The Japanification of the euro area is still a serious risk, but can still be
avoided if policy-makers heed lessons from Japan’s past.
Global liquidity alive and kicking: We expect major central banks to keep monetary
policy accommodative as inflation remains below target, with additional action to come
from the ECB and BoJ. Meanwhile, the easy money ‘peloton’ is likely to dictate the
pace of the ‘brave hikers’ in DM, while it has also been quite persuasive in EM.
Monetary tightening will not be a global trend in 2016, despite the Fed’s rate hikes.
EM growth model broken – needs structural reform: EM economies face external
and internal challenges that render the old, export-led model of growth dysfunctional.
Weak DM consumers, onshoring of DM manufacturing and risks to external funding all
work against EMs externally.
EM Regional Themes
Despite some near-term stabilisation, there is much more adjustment due in EM to
progress recovery towards a more sustainable one and/or improve macro-stability.
Asia ex-Japan: China needs more policy easing to support the mini cycle and to focus
on pro-market reforms, economic rebalancing and deleveraging to improve the
medium-term outlook, which might come at the expense of short-term performance.
India is transitioning away from stagflation conditions, and the much-needed
combination of higher real rates, a more friendly investment environment and structural
reforms appears to be slowly coming together.
Latin America: Growth continues to soften in Brazil and, while near-term unravelling is
unlikely, we don’t expect a major policy shift necessary to fix ‘The Growth Mismatch’
before elections either. With better cyclical growth in Mexico, the passing of energyrelated legislation should help with structural tailwinds as well.
CEEMEA: Russia needs to deal with a Dutch Disease problem and an overvalued
REER and, while Turkey’s real rates have risen, its CAD remains exposed. South
Africa’s CAD will likely involve a painful adjustment for the domestic economy.
For our global forecasts, see Back-to-School Global Macro Outlook: Lower But Longer, September 7, 2014.
For our cross-asset views, see Global Strategy Outlook: Investing in an Out-of-Sync World, September 7, 2014.
6
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Key Forecast Profile
Global Economics Team
Quarterly
2014
Annual
2015
2016
2014E
2015E
2016E
Real GDP (%Q, SAAR)
1Q
2Q
3QE
4QE
1Q
2QE
3QE
4QE
1QE
2QE
3QE
4QE
Global**
2.0
3.1
3.8
3.4
3.1
3.3
3.9
3.0
3.7
3.5
3.8
3.6
3.1
3.5
3.8
G10
0.4
1.5
2.5
2.1
2.0
2.1
2.4
1.3
2.3
1.9
1.9
2.0
1.6
2.1
2.0
US
-2.1
4.2
3.1*
3.1
2.4
2.6
2.5
2.5
2.3
2.0
2.0
2.1
2.1
2.8
2.3
Euro Area
0.9
0.1
0.9
1.0
1.3
1.3
1.6
1.6
1.8
1.8
1.8
1.8
0.8
1.2
1.7
Japan
6.0
-7.1
2.8
0.7
1.6
1.4
3.7
-5.0
2.9
0.6
1.3
1.7
0.8
0.8
0.7
UK
3.3
3.4
3.0
2.8
2.8
2.4
2.4
2.4
2.7
2.5
2.0
2.5
3.1
2.7
2.5
EM (%Y)
4.7
4.5
4.3
4.3
4.7
4.7
5.0
5.0
5.2
5.4
5.4
5.4
4.4
4.9
5.4
China (%Y)
7.4
7.5
7.3
7.2
7.3
7.1
7.1
7.1
7.2
7.3
7.4
7.5
7.3
7.1
7.3
India (%Y)
4.6
5.7
5.5
5.6
6.1
6.2
6.5
6.6
6.8
6.8
6.9
6.9
5.3
6.3
6.8
Brazil (%Y)
1.9
-0.9
0.0
0.0
-0.4
0.2
0.6
0.8
1.7
2.0
2.3
2.0
0.2
0.3
2.0
Russia (%Y)
0.9
0.7
0.6
0.3
0.1
-0.5
-0.8
-0.6
0.3
0.9
1.4
1.6
0.6
-0.5
1.1
Global
3.2
3.2
2.6
2.9
3.1
3.3
3.1
3.6
3.5
3.5
3.5
3.4
3.4
3.4
3.4
G10
1.7
1.8
0.6
0.9
1.3
1.8
1.2
1.8
1.7
1.9
1.8
1.5
1.7
1.7
2.0
US
1.4
2.1
1.8
2.4
2.1
1.8
1.7
1.8
2.0
2.1
2.1
2.1
2.0
1.8
2.1
Euro Area
0.7
0.6
0.4
0.8
0.9
1.2
1.4
1.4
1.4
1.4
1.4
1.5
0.6
1.2
1.4
Japan
1.3
3.3
3.2
3.0
2.9
0.9
1.1
2.5
2.7
2.9
2.8
1.5
2.7
1.9
2.5
UK
1.7
1.7
1.6
1.6
1.6
1.7
1.9
2.0
2.0
2.1
2.2
2.2
1.7
1.8
2.1
EM
4.9
5.2
5.2
5.0
5.0
5.2
5.0
4.9
4.8
4.8
4.8
4.8
5.1
5.0
4.8
China
2.3
2.2
2.3
1.6
1.3
2.3
2.4
2.6
2.7
2.8
3.0
3.1
2.1
2.2
2.9
India
8.4
8.1
7.7
6.5
7.6
7.4
6.2
6.1
5.8
5.9
6.1
6.1
7.7
6.8
6.0
Brazil
5.8
6.4
6.6
6.5
6.8
6.5
6.7
6.5
6.3
6.1
5.8
5.8
6.3
6.6
6.0
Russia
6.4
7.6
7.6
7.6
7.8
7.0
6.6
6.3
6.0
5.4
5.2
5.1
7.3
6.9
5.4
Global
3.0
3.0
2.9
2.8
2.8
2.8
3.1
3.1
3.1
3.1
3.1
3.1
2.8
3.1
3.1
G10
0.5
0.5
0.5
0.4
0.4
0.3
0.3
0.3
0.2
0.2
0.3
0.3
0.4
0.3
0.3
US
0.125
0.125
0.125
0.125
0.125
0.125
0.125
0.125
0.625
1.125
1.625
2.125
0.125
0.125
2.125
Euro Area
0.25
0.15
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Japan
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
UK
0.50
0.50
0.50
0.50
0.75
0.75
1.00
1.25
1.25
1.50
1.75
2.00
0.50
1.25
2.00
EM
6.0
6.0
6.0
6.0
6.1
6.0
6.0
6.0
6.0
6.1
6.1
6.1
6.0
6.0
6.1
China
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
Consumer price inflation (%Y)
Monetary policy rate (% p.a.)
India
8.00
8.00
8.00
8.00
8.00
7.75
7.75
7.75
7.75
7.75
7.75
7.75
8.00
7.75
7.75
Brazil
10.75
11.00
11.00
11.00
11.50
11.75
10.75
10.25
10.00
10.00
10.00
10.00
11.00
10.25
10.00
Russia
7.00
7.50
8.00
8.50
8.50
8.50
8.25
8.00
7.75
7.50
7.25
7.00
8.50
8.00
7.00
Note: Global and regional aggregates are GDP-weighted averages, using PPPs. Japan policy rate is the interest rate on excess reserves; CPI numbers are period averages. *US GDP forecast for
the current quarter is a tracking estimate. **G10+BRICs+Korea
Source: Morgan Stanley Research forecasts
7
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global Macro Watch
Greece: In for the Long Haul
Daniele Antonucci (44 20) 7425 8943
Uncertain near term, constructive medium term: We think
that politics is unlikely to become less uncertain over the next
4-5 months. Yet the policy discussion around an earlier bailout
‘exit’ is likely to settle relatively soon, in our view, with a likely
compromise having a good chance to come through, and the
economy seems close to stabilisation.
The Greek trigger… The recent bout of market volatility,
according to some, appears to have started with concerns
around Greece’s situation along three key aspects: 1) the
uncertainty around the presidential election next February,
and risks that this may trigger an early political election
together with less market-friendly policy actions; 2) prospects
of Greece leaving its bailout programme sooner than
expected without a clear backstop and a way to close its
funding gap; and 3) a weaker-than-envisaged recovery.
…and debtflation fears: All this has been compounded by
concerns around debt sustainability, especially given that
Greece already is in deflation, and its economy keeps shrinking.
Yet deflation has to do with Greece’s economic rebalancing and
reforms. So, a downward adjustment in prices is not only
expected, but also welcome as competitiveness is recovered
and consumers and firms get some respite.
Missing the point? Should deflation last for a long time, the
concern is that the cost may well outweigh the benefit, i.e., as
nominal incomes continue to shrink, the debt-deflation spiral
becomes self-fulfilling. Yet the standard debt-sustainability
framework appears rather inappropriate to look at Greece’s
situation, in our view. This is because the ‘debt equitisation’
that’s happening in this specific case, as policy-makers
continue to lengthen the maturities of the official loans and
reduce interest rates, is the dominant force at play that keeps
the debt trajectory on a downward trend even in case of
sustained deflation.
Thinking through the endgame: In fact, ‘debt equitisation’,
of which we expect another round possibly in 1H15 as part of
the negotiations with the European policy-makers, is such that
the debt level too improves way beyond what appears when
one simply looks at the debt/GDP ratios. This is the endgame,
at least for quite some time: Greece’s official loans (not the
GGBs traded in the market) are becoming more and more
some sort of semi-perpetual debt.
UK: Sectoral Productivity – Even Less for
MPC to Worry about on Inflation
Jonathan Ashworth (44 20) 7425 1820
Melanie Baker (44 20) 7425 8607
Charles Goodhart (44 20) 7425 1954
There no longer exists that much of a productivity puzzle:
Productivity is now only modestly below its pre-crisis peak,
while excluding the oil & gas sector it would be broadly at it.
We continue to think it is unrealistic to compare productivity
with a continuation of its pre-crisis trend, given how far GDP is
below its own pre-crisis trend.
However, productivity has been weaker than expected:
The pick-up in aggregate productivity since the economic
recovery began in 1Q13 has been somewhat weaker than we
expected, though. This has raised concerns about future
inflation and potential growth.
However, we aren’t particularly worried: Apart from a few
sectors, most sectors appear to have recovered broadly in line
with what could be explained on cyclical grounds. Moreover,
there have been strong productivity rebounds in sectors likely
to be important for domestic inflationary pressures such as
wholesale & retail trade.
The major negative outlier has been the real estate
sector, where measured productivity has collapsed since
mid-2012: It has shaved over 0.2pp per quarter off whole
economy productivity growth since 1Q13. Government
services and financial & insurance have also been poor
performers. These sectors share a couple of key
characteristics. Output is traditionally notoriously difficult to
measure, while the productivity performance of these sectors
is unlikely to matter that much for inflation.
Our analysis further supports the view that domestically
generated inflation pressures are likely to remain very
subdued for some time yet: This adds to the lack of urgency
for a first MPC rate hike and should help to ensure that the
eventual monetary policy tightening cycle can be very gradual.
For full details, see The Gilt Edge, October 14, 2014.
For full details, see Greece: In for the Long Haul, October 21,
2014.
8
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global Macro Watch
EM: When Oil Meets an Out-of-Sync EM
Cycle
Patryk Drozdzik (44 20) 7425 7483
Manoj Pradhan (44 20) 7425 3805
America’s shale energy, the China and EM slowdown, a
relative containment of geopolitical risk – the list of
fundamental reasons for a lower oil price is convincing
enough. Whether this is enough to keep oil prices sustainably
lower is a different question (see Global Oil Fundamentals:
The Tide Is Turning, October 13, 2014). In this note, we opine
on three aspects of the decline in oil prices that matter for EM
if the oil price stays low long enough to make at least a
cyclical impact on growth, inflation and monetary policy.
Specifically, we ask:
• Is the decline in oil prices an aggregate demand shock or an
aggregate supply shock? The answer will be critical in figuring
out the impact on growth, inflation and monetary policy.
• Unconditionally, which economies stand to benefit the most,
and which ones are most adversely affected when it comes
to falling oil prices?
• Most importantly, on a cyclical horizon, how will falling oil
prices interact with EM economies that are at different points
along the growth, inflation and monetary policy cycle?
(see The Global Macro Analyst: EM – Out of Sync?
February 12, 2014).
We strive to make the point that the unconditional impact of
lower oil prices can be quite different from the impact
conditional on the position of an economy in its growth and
inflation cycles. Economies nearer the bottom may see a more
visible impact than ones where growth is already in a more
secure phase. Similarly, economies where inflation is above the
central bank’s target and at the peak of the cycle would
appreciate lower oil prices, and particularly so if they face a
positive supply impact rather than a negative demand impact.
When Oil Meets the EM Growth Cycle
Growth impact from a fall in oil
prices
Most positively
impacted
Most adversely
affected
More visible given early stage
of growth cycle
Less visible since recovery
more advanced
IND, THL, CHL
RUS
KOR, TWN, TUR
COL, MEX
Source: Morgan Stanley Research
For full details, see Emerging Issues: When Oil Meets an Outof-Sync EM Cycle, October 13, 2014.
Russia: Oil Risk Returns
Jacob Nell (7 495) 287 2134
Alina Slyusarchuk (44 20) 7677 6869
Adjustment to the Double Shock. Russia this year has been
subject to a double external shock from politics and more
recently from oil. The recent performance has been weak,
with growth falling and inflation rising. However, the 12%
weaker ruble has facilitated substantial adjustment, with the
fiscal and current accounts both about 1% of GDP stronger,
despite 1.2% weaker average oil prices. We see adjustment
continuing, given the major reduction in levels of CBR
intervention in August, and the tough proposed budget for
2015, including a public-sector wage freeze. A further rate
hike at the upcoming October 31 meeting – we expect at least
50 bps – would be a welcome further step.
Given renewed uncertainty about the oil price, we look at
a range of oil price scenarios in 2015/16 and find minor
risks to our forecast at US$95/bbl, manageable risks at
US$80/bbl, and a disruptive impact only in the improbable
event of US$50/bbl.
Minor adjustment. The $95/bbl scenario is reasonably close
to our current forecast, which is based on $100/bbl, although
weaker. We assume that the impact of the lower oil price is
broadly offset by the impact of the weaker-than-expected
RUB, with the current account weakening from 3.0% of GDP
in 2014 to 2.5% of GDP in 2015. We expect the budget deficit
to stay broadly balanced (-0.8% of GDP). We would see
upside risks to our inflation forecast (currently at average
6.9%Y for 2015). In terms of growth, while we see downside
risks increasing to our 2015 growth forecast of -0.5%Y, they
rather originate from the tighter budget.
New significantly lower target. In the $80/bbl scenario, we
would expect the current account to weaken from 3.0% of
GDP in 2014 to 1% of GDP in 2015, the budget deficit to
widen to 2.0% of GDP, inflation to increase to 9.0%, and the
RUB to weaken. In this scenario, we would see growth falling
to -2%Y next year. We would expect the policy reaction to
include a delay in the move to a floating RUB, further rates
hikes of 50-100 bps in response to higher inflation, and
greater use of the reserve fund to finance the budget.
Market-driven price. In the $50/bbl scenario, the shock is
more extreme, and the impacts and policy reactions are
harder to predict. We would expect the budget deficit to widen
to 5%, inflation to increase to 13-15%Y, and growth to
contract to -6%Y. For full details, see Economics & Strategy:
Russia: Oil Risk Returns, October 22, 2014.
9
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global Macro Watch
Central Europe: No Help Against
‘Lowflation’ from FX
South Africa: Will FX Push SARB to Hike in
November?
Pasquale Diana (44 20) 7677 4183
Michael Kafe (27 11) 587 0806
Andrea Masia (27 11) 282 1593
The dollar has posted significant gains versus CEE
currencies: Since July, USD has appreciated strongly against
CEE currencies, by just under 10%. However, the CEE
currencies have moved by much less versus EUR over the
same period, and the nominal effective exchange rate over
this period has barely moved. This does not mean that the
move stronger in USD is irrelevant for CEE, of course. Most of
Central Europe faces severe disinflationary pressures, which
are mostly imported. So, some FX depreciation on a basket
basis is better than no depreciation. However, the issue is that
the move stronger in USD has been accompanied by an
aggressive move lower in commodity prices. As a result, oil
prices when measured in local currencies are down around
20% since June. If sustained, the move lower in oil will likely
intensify deflationary pressures and more than offset the little
depreciation we have seen on the nominal effective FX front.
Recall that, on our estimates, a 10% move in oil prices will
lower CPI by around 0.4% over 12 months (see CEEMEA: Oil
on the Up: Should Central Banks Worry? March 14, 2011).
What can central banks do about the FX? Given the
severity of the deflationary pressures that central banks face,
it would seem only natural for them to welcome some FX
depreciation, mostly versus EUR. A combination of
aggressive rate cuts and/or FX reserve accumulation would
seem to be the ideal instruments to achieve this outcome. But
as always, the picture is more nuanced than this.
In Poland, although the NBP’s bias is probably for a weaker
PLN, it does not look keen to do much to weaken the zloty at
the moment. We continue to see modest easing ahead (25bp,
in November). In Hungary, the NBH has indicated clearly that
the rate-cutting cycle is over, which is in line with our view. We
would not be surprised if the authorities were to start
expressing their preference for a somewhat stronger forint as
we approach year-end. In the Czech Republic, we continue
to think that the CNB will err on the side of prudence and not
want to embark on another devaluation as long as it remains
comfortable with the growth picture.
For full details, see CEEMEA Macro Monitor (FX Spillovers
and Responses), October 17, 2014.
Watch USDZAR, but watch the NEER even closer: After
appreciating by some 9% following the January 2014 sell-off
that moved the Monetary Policy Committee of the SARB to
raise policy rates unexpectedly by 50bp earlier in the year,
ZAR subsequently gave up all its gains since May to print at a
high of USDZAR 11.34 in the first week of October, sparking
fears that the Committee, which is now under a conceivably
more hawkish governor, could tighten policy by 25-50bp. In
nominal effective terms, the ZAR exchange rate appreciated
by 10.2% for most of 1H14, and subsequently slid by a
somewhat less worrisome 4.8% since May, as the move was
more reflective of USD strength than ZAR weakness against
the basket. As far as policy is concerned, we think the MPC is
more likely to focus on the NEER than on USDZAR, as its
inflation model is based on movements in the NEER.
On our estimates, the recent depreciation, if sustained,
will add roughly 0.5pp to headline inflation, which we
expect to fall back into the target band at 5.8%Y in March
2015, and to remain sticky at around that level (i.e.,
uncomfortably close to the upper end of the country’s 3-6%Y
inflation target band) for the remainder of the year.
Indeed, our current baseline view is that monetary policy
will need to be tightened in the period ahead with the aim
to support macro rebalancing as growth normalises: We
believe that South Africa’s macro imbalances are arguably
supported by the relatively loose stance of monetary policy
either directly or indirectly, and a tighter policy stance as
growth normalises will no doubt help to reduce them – at least
in part. To be clear, we look for 75bp of tightening in three
clips of 25bp in 2015 (January, July and November), followed
by two 50bp of tightening in 2016 (May and September),
taking terminal rates towards 7.5% by the end of that year.
However, we do see a risk that the first rate hike is
brought forward to November 2014 if the currency was
to weaken significantly from here: Specifically, were UK
Brent crude oil prices to stay around current levels of some
US$83/bbl, a further 5-7% weakness in the FX – if sustained –
could place the prospects of a modest 25bp November rate
hike firmly on the cards. Such a move is also likely to
encourage the more hawkish MPC members to push for a
slightly higher 50bp rate hike at the January 2015 meeting –
especially if the MPC was to remain on hold in November.
For full details, see CEEMEA Macro Monitor (FX Spillovers
and Responses), October 17, 2014.
10
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global Macro Watch
China: Underlying Growth Weakness
Warrants Continued Easing
India: Analysing Impact of Diesel
Deregulation and Hike in Gas Prices
Helen Qiao (852) 2848 6511
Junwei Sun (852) 2848 5200
Yin Zhang (852) 2239 7818
Chetan Ahya (852) 2239 7812
Upasana Chachra (91 22) 6118 2246
Takeaways: The data release confirmed our view that
domestic demand growth remains weak, especially in
investment. While 3Q GDP growth beat market consensus
slightly, much should be attributed to the service sector, given
monthly average IP growth slipped below 8.0%Y. In addition,
deepened PPI deflation and sluggish FAI (especially in the
property sector) growth imply higher finished goods inventory.
Going forward, we expect policy-makers to focus on lowering
funding costs, supporting infrastructure investment selectively
and stabilising housing demand, all with the help of targeted
measures.
3Q GDP growth came in slightly higher than market
expectations: GDP growth moderated to +7.3%Y in 3Q, from
+7.5%Y in 2Q, slightly higher than consensus and our
expectations of +7.2%Y. In our view, the slowdown was likely
due to sluggish domestic demand growth and a higher base a
year ago. We believe that the consumption slowdown may be
related to slower household income growth, tracing weaker
investment growth. Notably, September Industrial
Production growth surprised on the upside. IP growth
improved to +8.0%Y in September (versus +6.9%Y in
August), higher than consensus expectations of +7.5%Y (but
lower than our forecast of +8.3%Y). We believe that the
rebound was mainly helped by better export growth and one
more working day in this September than last year.
Fixed Asset Investment (FAI) growth decelerated further
in September (+16.1%Y YTD versus +16.5%Y YTD in
August): The implied single month FAI growth remained weak
at +13.9%Y (versus +13.8%Y in August). The slowdown was
mainly driven by falling property investment growth.
For full details, see China Economics: Underlying Growth
Weakness Warrants Continued Easing, October 21, 2014.
Bottom line: The government’s announcements to
deregulate diesel prices, increase gas prices, and re-launch
the direct benefit transfer scheme are steps in the right
direction towards the broader objective of reforming the
energy sector. On balance, the net impact of these measures
on inflation is negligible.
On October 18, the Union government introduced the
following new policy actions:
• Deregulation of diesel prices, which will be marketdetermined, effective immediately.
• Revised the gas pricing formula and increased gas prices to
US$5.61/mmbtu from US$ 3.8/mmbtu (on the basis of
gross calorific value). The price rise will be effective from
November 1, and gas prices will be revised every six
months.
• Re-launch the direct benefit transfer (DBT) scheme for
transfer of subsidies on sale of LPG cylinders (cooking gas)
in 54 districts from November 10.
What’s the impact on inflation? The decline in diesel prices
will have a positive impact on WPI and CPI inflation, but the
rise in gas prices will raise prices for fertilizer and electricity.
However, the overall impact of the increase in electricity
prices should be much less, since gas-based power plants
account for ~9% of total power generation capacity and ~4%
of actual power generation.
WPI inflation: Assuming a direct impact of full pass-through
of the gas price hike on urea prices, electricity and
simultaneous reduction in diesel prices, WPI inflation on
balance would remain largely unchanged (impact of 0.4bp).
Moreover, the inflationary impact of the urea price hike could
be negated by falling international urea prices, since imported
consumption accounts for ~31% of total urea consumption.
CPI inflation: We can assess the direct (first-round impact)
on CPI using consumer expenditure weights. The net impact
of declining diesel prices and higher electricity costs should be
almost negligible at ~3bp. The second-round (indirect) impact
on CPI inflation is expected over a period of six months.
For full details, see India Economics: Analysing Impact of
Diesel Deregulation and Hike in Gas Prices, October 20,
2014.
11
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global Macro Watch
Korea: Déjà vu of 2004 Rate Cuts?
Mexico: No Oil, No Trouble
Sharon Lam (852) 2848 8927
Jason Liu (852) 2848 6882
Luis Arcentales (1 212) 761 4913
Maria Bendana (1 212) 296 5220
25bp rate cut: At the monetary policy meeting on October 15,
the Bank of Korea (BoK) cut the policy rate by 25bp to 2.0%.
This pushes the rate back to the historical low level set in
2009 during the global financial crisis. The difference is that
GDP growth in 1Q09 was -1.9%Y, while growth today is
trailing at around 3.5%Y. This was the second rate cut this
year, after the cut in August.
With crude quotes collapsing to multi-year lows, Mexico
watchers are growing increasingly concerned about the
risks to Mexico’s oil-addicted public sector: On the
surface, the fears appear to be well justified. After all, the
government relies on oil-related revenues for nearly a third of
its budget or the equivalent of roughly 7% of GDP. In light of
the persistent pressure on crude prices of late, Congress
decided to lower its oil price projection for 2015 – next year’s
budget discussions are currently taking place – by one dollar
to US$81 per barrel. And with the Mexican oil basket
approaching US$75 per barrel in mid-October, even the newly
downgraded 2015 budget target may appear somewhat
optimistic. The situation in the oil market has prompted
Mexico watchers to ask if the public sector is bound to
experience a meaningful budget adjustment next year, thus
becoming a headwind to growth at a time when the economic
recovery is finally starting to broaden beyond external-linked
sectors like manufacturing (see “Mexico: Broader and
Brighter”, Week Ahead in Latin America, October 3, 2014).
Why did the BoK cut rates? We think that the BoK cut the
rate for three reasons: i) Rising external macro
uncertainties recently, with strong outflows of foreign capital
along with stronger USD, and fears over the global economic
outlook after the IMF cut its forecasts for global GDP. ii)
Inflation is low: Korea’s headline CPI inflation declined to
1.1%Y in September (versus 1.4%Y in August), the lowest
level in seven months. For more than two years, Korea’s
inflation has been lower than the BoK’s target of 2.5-3.5%Y.
iii) Corporate investment is weak: With the fragile business
sentiment, Korea’s corporate investment turned weak in 3Q.
Equipment investment declined severely by 9.8%Y in August
(versus +2.8%Y in July), the biggest decline in 18 months.
Déjà vu of 2004 rate cuts? In 2004, the BoK also cut interest
rates twice, with a total of 50bp in 2H. We see some
similarities between now and then. First, both times saw
interest rates pushed to record-low levels in their respective
cycles. Second, the BoK cut rates when the economy was
already stabilising and higher GDP growth was expected.
Third, there was a major cabinet reshuffle in the government
prior to the BoK’s rate cuts, and monetary easing came
together with other stimulus packages.
We see less of an impact this time: We see some
similarities between now and 2004 and some key differences.
The swing factor is likely to be consumer loan growth. All in all,
we believe that the impact of the rate cuts in 2014 will be
much smaller than in 2004.
Looking ahead, we retain our view of no more rate cuts
for this cycle, as it does not make sense to push the rate to
another record low when GDP growth is expected to be above
trend next year. The BoK forecasts that Korea’s GDP will
grow by 3.9%Y in 2015 (versus our forecast of 4.1%Y), up
from the forecast 3.5%Y this year. We believe that Korea
needs structural reforms to boost long-term growth potential,
not more rate cuts.
For full details, see Korea Economics: Déjà vu of 2004 Rate
Cuts? October 15, 2014.
Despite sharply lower oil prices, concerns about the
fiscal accounts and deep budget cuts seem grossly
overblown, in our view. Our claim may seem surprising and
counterintuitive, but we estimate that if oil prices collapse to
US$71 per barrel in 2015 – a whopping US$10 below budget
– oil-related revenues would decline by just 0.3% of GDP, a
figure equivalent to just 1% of projected 2015 government
spending. And for those Mexico watchers concerned about
potential cuts to public works, 0.3% of GDP is equivalent to a
modest 7% of the investment purse in 2015. Simplistic
analyses assume that for the government, oil revenues are
just a function of crude production and market prices.
However, this ignores the interplay between domestic
controlled prices, falling exports and rising imports.
While any revenue shortfall from lower oil prices should
be manageable, policy-makers should not lose sight of
the need to effectively implement the energy reform as a
way to reverse the multi-year slump in crude production and,
with time, bring about lower energy costs. Rather than a sign
of strength, the current relative resilience to oil price swings
has been a function of rapidly rising domestic fuel prices –
which squeeze businesses and consumers alike – and a
worsening net oil exporter position as production stagnates
amid rising imports.
For full details, see Mexico: No Oil, No Trouble: Week Ahead in
Latin America, October 17, 2014.
12
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Inflation Target Monitor & Next Rate Move
Global Economics Team. Contact: [email protected]
US
Euro Area
Japan
UK
Canada
Switzerland
Inflation target
Latest
month
12M
MS
fcast
Next rate
decision
Current
rate
Market
expects
(bp)
MS
expects
(bp)
Risks to our call
2.0% PCE Price Index
1.5%
< 2% HICP (u)
0.3%
1.6%
29 Oct
0.125
0
0
No risks, same through mid-2015
1.5%
06 Nov
0.05
0
0
2% CPI (u)
Paving the way to full-blown QE
3.1%
1.0%
31 Oct
0.10
0
0
-
2%
1.2%
1.8%
06 Nov
0.50
1
0
-
1-3%
2.1%
1.9%
03 Dec
1.00
0
0
Data-dependent
<2% CPI (u)
0.0%
0.2%
12 Dec
0.00
-4
0
-
Sweden
2.0% CPI
-0.4%
1.4%
28 Oct
0.25
-14
0
Inflation surprises meaningfully to downside
Australia
2-3% over the cycle
2.3%
1.6%
04 Nov
2.50
-1
0
Risks low, RBA guiding to period of stability in monetary policy
3.50
1
0
-
New Zealand
1-3% CPI
1.6%
-
24 Oct
Russia
5% CPI
8.0%
6.3%
31 Oct
8.00
-
0
Rates on hold
Poland
2.5% (+/- 1%) CPI
-0.3%
1.5%
05 Nov
2.00
-25
-25
-
Czech Rep.
2.0% (+/-1%) CPI
0.6%
1.8%
06 Nov
0.05
-1
0
-
Hungary
3.0% CPI
0.2%
2.2%
28 Oct
2.10
0
0
-
Romania
2.5% (+/-1%) CPI
0.8%
3.0%
04 Nov
3.00
-
0
-
5%
8.9%
7.0%
23 Oct
8.25
-1
0
-
Israel
1-3%
0.0%
1.1%
27 Oct
0.25
-
0
-
S. Africa
3-6%
5.9%
5.8%
20 Nov
5.75
21
0
FX blow-out/growth recovery front-loads hikes
Nigeria
-
7.9%
8.6%
25 Nov
12.00
-
0
CBN hikes rates
Ghana
9% +/-2%
13.2%
11.5%
03 Nov
19.00
-
0
-
Kenya
5% +/-2.5%
6.6%
7.5%
03 Nov
8.50
-
0
China
-
1.6%
0.0%
N/A
6.00
-
0
-
India
-
6.5%
6.1%
02 Dec
8.00
-
0
-
Hong Kong
-
6.6%
3.9%
29 Oct
0.50
-
0
-
2.00
0
0
-
20
12.5
-
Turkey
S. Korea
Taiwan
2.5-3.5%
1.1%
2.5%
13 Nov
-
0.7%
1.8%
25 Dec
1.88
Indonesia
4.5% +/- 1.0%
4.5%
5.9%
13 Nov
7.50
-
0
-
Malaysia
-
2.6%
4.2%
06 Nov
3.25
9
25
Upside risk
Thailand
0.5-3.0% core CPI
1.8%
2.3%
05 Nov
2.00
-2
0
-
4% +/-1% CPI
4.4%
4.0%
23 Oct
2.50
-
25
-
4.5% +/-2.0% IPCA
6.8%
6.6%
29 Oct
11.00
9
0
-
3% +/-1% CPI
4.1%
3.6%
31 Oct
3.00
0
0
-
N/A
-
-
-
-6
-25
-
Philippines
Brazil
Mexico
Argentina
15.5-24.2% M2 growth
22.5%
32.5%
N/A
Chile
3% +/-1% CPI
4.5%
3.1%
15 Nov
3.00
Peru
2% +/-1% CPI
2.7%
2.8%
22 Nov
3.50
-
0
-
Colombia
3% +/-1% CPI
3.0%
3.1%
31 Oct
4.50
0
0
-
(u) = unofficial
Notes: Inflation numbers in red indicate values above target, green below; MS expectations in red (green) indicate our rate forecasts are above (below) market expectations. Japan policy rate is the
interest rate on excess reserves.
Source: National central banks, Morgan Stanley Research forecast
13
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global Monetary Policy Rate Forecasts
Current
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
US
0.125
0.125
0.125
0.125
0.125
0.125
0.625
1.125
1.625
2.125
Euro Area
0.15
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Japan
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
UK
0.50
0.50
0.75
0.75
1.00
1.25
1.25
1.50
1.75
2.00
Canada
1.00
1.00
1.00
1.00
1.25
1.50
2.10
2.50
3.00
3.60
Switzerland
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Sweden
0.25
0.25
0.25
0.25
0.25
0.25
0.50
0.75
1.00
1.25
Australia
2.50
2.50
2.50
2.50
2.50
2.75
3.00
3.25
3.50
3.50
New Zealand
3.50
3.50
3.50
3.75
4.00
4.25
4.25
4.25
4.25
4.25
Russia
8.00
8.50
8.50
8.50
8.25
8.00
7.75
7.50
7.25
7.00
Poland
2.00
1.75
1.75
1.75
1.75
2.00
2.25
2.50
2.75
3.00
Czech Rep.
0.05
0.05
0.05
0.05
0.05
0.05
0.25
0.50
0.75
1.00
Hungary
2.10
2.10
2.10
2.10
2.10
2.10
2.25
2.25
2.50
3.00
Romania
3.00
3.00
3.00
3.00
3.00
3.00
3.25
3.50
3.75
4.00
Turkey
8.25
8.25
8.25
8.50
9.00
9.00
8.50
8.50
8.50
8.50
Israel
0.25
0.25
0.25
0.75
1.25
1.75
2.00
2.00
2.00
2.00
S. Africa
5.75
5.75
6.00
6.00
6.25
6.50
6.50
7.00
7.50
7.50
Nigeria
12.00
12.00
12.00
11.50
11.00
11.00
11.00
11.00
11.00
11.00
Ghana
19.00
19.00
19.00
19.00
19.00
18.00
18.00
17.50
17.50
17.50
Kenya
8.50
8.50
8.50
8.50
8.50
8.50
8.00
8.00
8.00
8.00
China
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
6.00
India
8.00
8.00
8.00
7.75
7.75
7.75
7.75
7.75
7.75
7.75
Hong Kong
0.50
0.50
0.50
0.50
0.50
0.50
1.00
1.50
2.00
2.50
S. Korea
2.00
2.00
2.00
2.00
2.25
2.50
2.75
2.75
2.75
2.75
Taiwan
1.875
2.00
2.13
2.25
2.38
2.38
2.38
2.38
2.38
2.38
Indonesia
7.50
7.50
7.50
7.50
7.50
7.50
7.50
7.50
7.50
7.50
Malaysia
3.25
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
3.50
Thailand
2.00
2.00
2.00
2.00
2.00
2.50
2.75
2.75
2.75
2.75
Philippines
2.50
2.75
2.75
2.75
2.75
2.75
2.75
2.75
2.75
2.75
Brazil
11.00
11.00
11.50
11.75
10.75
10.25
10.00
10.00
10.00
10.00
Mexico
3.00
3.00
3.00
3.00
3.00
3.50
4.00
4.25
4.50
4.50
Chile
3.25
2.75
2.75
2.75
2.75
2.75
2.75
3.25
3.50
4.00
Peru
3.50
3.50
3.50
3.50
3.75
4.00
4.75
5.25
5.50
5.50
Colombia
4.50
4.75
4.75
4.75
4.75
4.75
5.25
5.50
5.50
5.50
Source: National Central Banks, Morgan Stanley Research forecasts; Note: Japan policy rate is the interest rate on excess reserves. Red (green) indicates policy rate hike (cut)
Fed and Eurosystem Balance Sheet Monitor
Source: Haver Analytics
Source: Haver Analytics
14
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
Global GDP and Inflation Forecasts
Real GDP (%)
CPI inflation (%)
2013
2014E
2015E
2016E
2013
2014E
2015E
2016E
Global Economy
3.1
3.1
3.5
3.8
3.2
3.4
3.4
3.4
G10
1.3
1.6
2.1
2.0
1.4
1.6
1.6
2.0
US
2.2
2.1
2.8
2.3
1.5
2.0
1.8
2.1
Euro Area
-0.4
0.8
1.2
1.7
1.4
0.6
1.2
1.4
Germany
0.1
1.5
1.6
1.8
1.5
1.1
1.8
2.0
France
0.4
0.4
1.0
1.6
0.9
0.6
0.9
1.1
Italy
-1.8
-0.2
0.8
1.0
1.2
0.4
0.6
0.8
Spain
-1.2
1.4
2.2
2.2
1.4
0.0
0.9
1.0
Japan
1.5
0.8
0.8
0.7
0.4
2.7
1.9
2.5
UK
1.7
3.1
2.7
2.5
2.6
1.5
1.5
2.1
Canada
2.0
2.2
2.4
2.3
0.9
1.9
2.0
2.0
Sweden
1.5
1.5
2.6
3.3
0.0
0.0
1.3
2.1
Australia
2.4
2.6
2.5
3.0
2.4
2.5
1.9
2.7
4.8
4.4
4.9
5.4
5.0
5.1
5.0
4.8
2.2
1.8
2.1
3.1
5.2
6.1
6.0
5.1
Russia
1.3
0.6
-0.5
1.1
6.8
7.3
6.9
5.4
Poland
1.6
3.0
3.3
3.8
0.9
0.1
1.2
2.1
Czech Rep
-0.9
2.6
2.4
2.7
1.4
0.4
1.7
2.0
Hungary
1.0
3.5
3.0
2.3
1.7
0.0
2.1
2.8
Ukraine
0.0
-7.3
1.2
5.0
-0.3
10.8
11.4
6.3
Kazakhstan
6.0
3.2
2.8
7.5
5.7
6.8
7.7
6.8
Turkey
4.0
3.4
3.8
3.8
7.5
8.9
7.3
6.0
Israel
3.3
2.2
2.7
3.0
1.5
0.7
1.2
1.7
South Africa
1.9
1.3
2.5
3.0
5.8
6.3
5.8
5.6
Nigeria
5.5
5.8
7.0
7.0
8.5
8.4
8.5
8.7
Ghana
7.1
6.5
7.5
7.8
11.4
14.8
12.0
11.0
Emerging Markets
CEEMEA
Kenya
4.7
4.8
5.5
5.8
5.7
7.3
7.5
6.5
Asia ex-Japan
6.1
6.0
6.3
6.5
4.2
3.4
3.3
3.7
China
7.7
7.3
7.1
7.3
2.6
2.1
2.2
2.9
India
4.7
5.3
6.3
6.8
10.1
7.4
6.4
6.1
Hong Kong
2.9
2.0
2.5
2.5
4.3
3.9
3.1
2.3
Korea
3.0
3.6
4.1
4.0
1.3
1.7
2.6
2.5
Taiwan
2.1
3.7
3.9
3.9
0.8
1.5
2.0
2.1
Singapore
3.9
3.3
3.7
3.8
2.4
1.7
1.8
2.0
Indonesia
5.8
5.1
5.3
5.5
6.4
6.1
6.0
5.9
Malaysia
4.7
5.8
5.3
5.4
2.1
3.1
3.6
3.0
Thailand
2.9
0.6
3.6
4.0
2.2
2.3
2.3
2.5
Philippines
7.2
6.1
6.3
6.3
2.9
4.3
4.0
4.0
2.5
1.1
2.2
3.0
7.4
10.2
10.4
8.9
Brazil
2.5
0.2
0.3
2.0
6.2
6.3
6.6
6.0
Mexico
1.1
2.3
4.1
4.0
3.8
3.9
3.5
3.2
Chile
4.1
1.9
3.1
3.8
1.9
4.1
3.1
3.0
Peru
5.0
3.3
5.3
4.8
2.8
3.3
2.9
2.7
Colombia
4.7
4.7
4.8
5.0
2.0
2.9
3.1
3.3
Argentina
3.0
-1.5
1.3
2.0
10.6
23.3
30.8
26.7
Venezuela
1.3
-2.0
-1.5
1.3
40.6
59.6
51.7
40.7
Latin America
Source: IMF, Morgan Stanley Research forecasts; Note: Colors correspond to risks to baseline forecasts, red (green) stands for downside (upside) risks, black to balanced outlook
15
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
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16
MORGAN STANLEY RESEARCH
October 22, 2014
The Global Macro Analyst
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