HSBC - Why pump-priming isn’t working

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					  Global

  ECONOMICS                                                                             Macro
                                                                             Global Economics
                                                                                      Q4 2012




   Why pump-priming isn’t working
   Blocked economic arteries in the developed world...
   ...thanks to a deteriorating “supply-side” performance...
   ...suggest that traditional pump-priming will have only a limited effect...
   ...leaving recovery in the balance and world trade on its knees




                                                     By Stephen King, Karen Ward and Madhur Jha




Disclosures and Disclaimer This report must be read with the disclosures and analyst
 certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
   Macro
   Global Economics                                                                                             abc
   Q4 2012




Summary

From demand to supply: the new economic constraint
What was once merely an absence of demand is now becoming a shortage of supply. The longer the
industrialised world has endured economic permafrost, the more its difficulties have become structural in
nature. Investors, however, don’t seem to have quite grasped the impotence of monetary policy in a world
of supply-side problems. From labour market weakness to fiscal nightmares, our growing economic
difficulties cannot be easily resolved simply by a wave of the monetary magic wand.

Once a vibrant and dynamic economy, the US has now endured almost a decade of lower-than-forecast
economic growth accompanied by surprisingly sticky inflation. This deteriorating trade-off suggests that
no longer should American economic problems be regarded as purely cyclical in nature. Already
struggling to cope with elevated commodity prices – in part, an unintended consequence of earlier
quantitative easing – the US is now dealing with a decidedly sick labour market.

A massive increase in long-term unemployment has been accompanied by a persistent decline in the
participation rate, suggesting that some workers have simply given up looking for employment. This
seemingly structural deterioration has left employment depressed, activity weak and the economy
seemingly unable to respond to the Fed’s financial temptations. On top of all that, uncertainties over fiscal
sustainability and, in particular, the impact of the ‘fiscal cliff’ have hardly helped.

The UK’s labour market is equally peculiar, although for rather different reasons. Employment has risen
but, paradoxically, output has fallen. Although, in time, some of this inconsistency might eventually be
revised away, it may be that companies either too short of credit or too lacking in confidence have
decided to hire labour rather than engage in strategic investment decisions. The resulting drop in
productivity, however, suggests that any near-term labour market improvement may not last, as
collapsing productivity seriously damages the UK’s growth prospects.

The response from the Federal Reserve has been more quantitative easing and a commitment to keep
short-term interest rates close to zero through to 2015. Yet the evidence increasingly suggests that
quantitative easing in its various forms is not delivering the expected results. Official economic
projections in both the US and the UK have proved far too optimistic over the last couple of years.

While supply-side problems have plagued the developed world, global demand-side problems have hit the
emerging world. We have cut our emerging market growth forecasts in this publication primarily because
of a dramatic deterioration in export performance following the stellar numbers recorded in 2010 and
2011. Our numbers for China, India and Brazil have all come down considerably since earlier in the year.
They have proved more sensitive than expected to the absence of recovery in the developed world.




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    Global Economics                                                                                                   abc
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HSBC growth and inflation forecasts
                                      __________A colossal muddle __________   ______________ Latest _______________
                                           2012f                2013f               2012f                2013f
World                                        2.1                2.5                  2.2                 2.4
Developed                                    1.0                1.3                  1.2                 1.2
Emerging                                     5.2                5.8                  4.9                 5.6
US                                           1.8                1.7                  2.2                 1.7
UK                                           0.1                1.8                 -0.1                 1.1
Eurozone                                    -0.6                0.3                 -0.6                -0.1
Japan                                        1.9                1.1                  2.0                 1.6
Brazil                                       2.5                3.8                  1.7                 3.8
Russia                                       3.0                2.5                  3.0                 2.5
India                                        5.9                7.1                  5.5                 6.5
China                                        8.4                8.8                  7.8                 8.6

Inflation                             __________A colossal muddle __________   ______________ Latest _______________
                                           2012f                2013f               2012f                2013f
World                                        2.7                 2.6                 2.7                 2.7
Developed                                    1.8                 1.6                 1.9                 1.6
Emerging                                     5.5                 5.6                 5.5                 5.7
US                                           2.0                 1.9                 2.1                 2.0
UK                                           2.7                 1.9                 2.7                 2.5
Eurozone                                     2.3                 1.6                 2.5                 1.8
Japan                                       -0.2                -0.1                 0.0                -0.1
Brazil                                       5.2                 5.5                 5.3                 5.2
Russia                                       5.0                 7.5                 5.2                 7.4
India*                                       9.3                 8.0                 9.8                 7.8
China                                        2.9                 2.6                 2.9                 3.1
Source: HSBC estimates




Beware unwinding imbalances
In China’s case, slowing exports have contributed to a further narrowing of its current account surplus
this year, suggesting a further easing of global imbalances. Yet China’s story has changed. Back in 2010,
its narrowing current account surplus was primarily a reflection of surging imports, spurred on by an
extraordinary boost to infrastructure investment and remarkably loose monetary conditions. Although
there are now signs of renewed policy easing, it seems unlikely that the Chinese are prepared to offer
stimulus on the same scale as before. There is no appetite for a repeat of the elevated inflation, property
bubbles and non-performing loans that followed the last flirtation with excessive stimulus. Put another
way, the latest decline in China’s current account surplus says more about weakness in the rest of the
world than anything about a Chinese domestic boom.

Imbalances are narrowing elsewhere but, again, for bad rather than good reasons. Current account deficits
in southern Europe have fallen rapidly not so much because of a sudden – and highly desirable –
improvement in competitiveness but, instead, as a result of collapsing domestic demand. Countries that
were already under the yoke of fiscal austerity have, more recently, found themselves completely
abandoned by their creditors as fears of an eventual eurozone break-up built a head of steam. Their
weakness, however, is now beginning to infect other parts of the eurozone: recent business surveys have
suggested that, despite its fabled competitive advantage, Germany industry is beginning to feel the strain.




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   Macro
   Global Economics                                                                                            abc
   Q4 2012




Limited policy options
When it looked as though the primary problem facing economies in the developed world was a lack of
demand, a combination of interest rate cuts, fiscal stimulus and quantitative easing seemed to be the
perfect way of bringing some sanity back to proceedings. Alas, the approach has not worked as well as
expected. While it is easy enough to blame the traumas afflicting the eurozone for weakness elsewhere in
the world, it increasingly appears that at least part of any disappointment is home grown, thanks to
deteriorating supply-side conditions.

Under these circumstances, the best that can be expected from quantitative easing in its various guises is
the avoidance of collapse rather than the beginnings of recovery. That, perhaps, is the best way of
regarding the European Central Bank’s decision to carry out so-called Official Monetary Transactions. By
driving down interest rates in the periphery, the immediate risk of eurozone break-up is reduced. Yet the
sovereign problems at the heart of the eurozone crisis are far from being resolved: at the end of the day, a
central bank acting on its own is no substitute for the political and fiscal union that might ultimately be
required to safeguard the euro’s future.



The forecasts
Our biggest forecast changes this quarter are for the emerging world. With world trade growth having
collapsed and with an excessive accumulation of inventories, many emerging nations have been hit hard,
thanks to a substantial slowdown in export growth. Growth in the developed world remains, at best,
paltry. And although central banks have offered help, their willingness to buy government bonds may
merely have locked in large budget deficits for the long term, making the rest of the developed world look
uncannily like Japan.




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    Global Economics                                                 abc
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  Macro
  Global Economics                                                         abc
  Q4 2012




Contents
Key forecasts                                6    Country and Territory sections
                                                  US                               36
Monetary & fiscal policy                          Canada                           38
                                                  Mexico                           39
assumptions                                  7    Brazil                           40
                                                  Argentina                        42
Why pump-priming isn’t                            Chile                            43
working                                      8    Eurozone                         44
Turning conventional wisdom on its head       8   Germany                          46
The role of commodity prices                  9   France                           48
Supply potential not what it was              9   Italy                            50
Imbalances unwinding for the wrong reasons   12   Spain                            52
The forces of darkness                       13   UK                               54
Drug dependency                              15   Norway                           56
Permafrost: the big long-term challenge      17   Sweden                           57
                                                  Switzerland                      58
Global economic forecasts                    19   Hungary                          59
                                                  Poland                           60
GDP                                          20
                                                  Romania                          62
Consumer prices                              22
                                                  Czech Republic                   63
Short rates                                  24
                                                  Russia                           64
Long rates                                   25
                                                  Turkey                           66
Exchange rates vs USD                        26
                                                  Egypt                            68
Exchange rate vs EUR & GBP                   27
                                                  Israel                           69
Consumer spending                            28
                                                  Saudi Arabia                     70
Investment spending                          29
                                                  UAE                              71
Exports                                      30
                                                  South Africa                     72
Industrial production                        31
                                                  Japan                            74
Wage growth                                  32
                                                  Australia                        76
Budget balance                               33
                                                  New Zealand                      77
Current account                              34
                                                  China                            78
                                                  India                            80
                                                  Hong Kong                        82
                                                  Indonesia                        83
                                                  Malaysia                         84
                                                  Philippines                      85
                                                  Singapore                        86
                                                  South Korea                      87
                                                  Taiwan                           88
                                                  Thailand                         89
                                                  Vietnam                          90

                                                  Disclosure appendix              94
                                                  Disclaimer                       95


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     Global Economics                                                                                                                                                                 abc
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Key forecasts
Key forecasts
                                                       __________________ GDP_________________                                  _______________ Inflation ________________
                                                         2010       2011      2012f      2013f                                   2010       2011         2012f       2013f
World (nominal GDP weights)                                 4.0               2.6               2.2               2.4              2.4               3.5               2.7      2.7
World (PPP weights)                                         5.3               3.7               3.0               3.3              3.3               4.3               3.4      3.2
 Developed                                                  2.8               1.3               1.2               1.2              1.4               2.6               1.9      1.6
 Emerging                                                   7.7               6.3               4.9               5.6              5.6               6.4               5.5      5.7
  North America                                             3.0               1.9               2.2               1.8              1.6               3.1               2.1      2.0
         US                                                 3.0               1.8               2.2               1.7              1.6               3.1               2.1      2.0
         Canada                                             3.1               2.8               1.9               1.9              1.8               2.9               1.5      1.7
  Latin America                                             6.8               4.2               2.9               3.5              7.1               7.8               7.9      8.2
         Mexico                                             5.5               3.9               3.6               3.2              4.2               3.4               4.1      3.9
         Brazil                                             7.5               2.7               1.7               3.8              5.0               6.6               5.3      5.2
         Argentina                                          9.2               8.9               3.0               3.0             23.7              23.3              22.5     22.0
         Chile                                              6.1               6.0               5.0               4.8              1.4               3.3               3.1      2.8
  Western Europe                                            2.1               1.4              -0.3               0.3              1.8               2.9               2.2      1.7
     Eurozone                                               2.0               1.5              -0.6              -0.1              1.6               2.7               2.5      1.8
         Germany                                            4.0               3.1               0.9               0.9              1.2               2.5               2.1      2.1
         France                                             1.6               1.7               0.2               0.9              1.7               2.3               2.3      1.8
         Italy                                              1.8               0.5              -2.5              -1.1              1.6               2.9               3.4      2.3
         Spain                                             -0.3               0.4              -1.5              -2.0              2.0               3.1               2.4      2.5
  Other Western Europe                                      2.3               1.4               0.5               1.4              2.5               3.3               1.9      2.0
         UK                                                 1.8               0.8              -0.1               1.1              3.3               4.5               2.7      2.5
         Norway                                             1.8               2.5               3.6               3.0              2.4               1.3               0.7      1.6
         Sweden                                             6.3               3.9               0.8               2.1              1.2               3.0               1.1      1.2
         Switzerland                                        3.0               1.9               0.9               1.4              0.7               0.2              -0.6      0.3
  EMEA                                                      4.5               4.7               2.8               2.9              6.0               6.3               5.3      5.7
         Czech Republic                                     2.6               1.7              -0.9               1.0              1.5               1.9               3.3      2.0
         Hungary                                            1.3               1.6              -1.0               1.3              4.9               3.9               5.7      3.7
         Poland                                             3.9               4.3               2.5               2.0              2.6               4.3               3.9      2.7
         Russia                                             4.3               4.3               3.0               2.5              6.8               8.5               5.2      7.4
         Turkey                                             9.2               8.5               2.7               3.8              8.6               6.5               9.0      7.3
         Ukraine                                            4.2               5.2               2.0               3.0              9.4               8.0               2.8      7.9
         Romania                                           -1.7               2.5               1.1               2.5              6.9               5.8               3.1      3.5
         Egypt*                                             5.1               1.8               2.2               3.2             11.7              11.0               8.7      6.8
         Israel                                             4.8               4.7               2.9               2.6              2.7               3.5               1.9      1.8
         Saudi Arabia                                       4.1               6.6               5.4               4.0              5.3               5.0               4.4      4.9
         UAE                                                1.3               4.1               3.7               4.0              1.8               1.5               1.2      1.6
         South Africa                                       2.9               3.1               2.5               3.1              4.3               5.0               5.5      5.4
  Asia-Pacific                                              6.9               3.9               4.5               4.9              2.2               3.1               2.5      2.6
         Japan                                              4.5              -0.8               2.0               1.6             -0.7              -0.3               0.0     -0.1
         Australia                                          2.5               2.1               3.5               3.2              2.8               3.4               2.0      3.2
         New Zealand                                        1.8               1.3               2.6               2.9              2.3               4.0               1.4      2.6
  Asia ex Japan                                             9.1               7.4               6.2               7.1              4.8               5.9               4.6      4.6
         China                                             10.4               9.3               7.8               8.6              3.3               5.4               2.9      3.1
  Asia ex Japan & China                                     7.8               5.3               4.4               5.3              5.8               6.2               5.7      5.5
         Hong Kong                                          7.1               5.0               2.0               5.2              2.3               5.3               5.3      4.8
         India                                              8.9               7.5               5.5               6.5             10.4               8.4               9.8      7.8
         Indonesia                                          6.2               6.5               6.1               6.1              5.1               5.4               4.6      5.6
         Malaysia                                           7.2               5.1               5.2               4.7              1.7               3.2               1.6      1.5
         Philippines                                        7.6               3.9               5.7               5.7              3.8               4.7               3.4      4.9
         Singapore                                         14.8               5.0               2.2               4.3              2.8               5.2               4.4      2.9
         South Korea                                        6.3               3.6               2.6               3.8              2.9               4.0               2.2      3.5
         Taiwan                                            10.7               4.0               1.3               5.4              1.0               1.4               2.0      2.0
         Thailand                                           7.8               0.1               6.3               4.5              3.3               3.8               3.2      4.0
         Vietnam                                            6.8               5.9               5.0               5.3              9.2              18.6               8.6      8.4
Notes: Calendar year; except for * which is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain nominal GDP (USD) weights
Source: Thomson Reuters Datastream and CEIC, HSBC estimates




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Monetary & fiscal policy
assumptions
Monetary policy
                                             Q1 2012               Q2 2012               Q3 2012               Q4 2012f             Q1 2013f             Q2 2013f         Q3 2013f                 Q4 2013f
US
Targeted Fed funds                         0.00 to 0.25          0.00 to 0.25          0.00 to 0.25          0.00 to 0.25         0.00 to 0.25         0.00 to 0.25         0.00 to 0.25         0.00 to 0.25
Japan
Overnight call rate                                  0.05                0.05                  0.05                  0.05                 0.05                 0.05                 0.05                 0.05
Eurozone
Repo rate                                            1.50                1.00                  0.75                  0.50                 0.50                 0.50                 0.50                 0.50
UK
Bank rate                                            0.50                0.50                  0.50                  0.50                 0.50                 0.50                 0.50                 0.50
Canada
Overnight rate                                       1.00                1.00                  1.00                  1.00                 1.00                 1.00                 1.00                 1.00
Source: Thomson Reuters Datastream, HSBC estimates

Fiscal policy

Country         2012                                                                                               2013
US              FY2012 ended in September with the deficit for the year close to USD1.12trn, or                    The outlook for the FY2013 budget is particularly uncertain because of the end-2012
                roughly 7.1% of nominal GDP, down from 8.6% in 2011. Although an improvement, the                  scheduled expiration of a series of tax cuts. Also, sizable cuts in federal spending
                deficit is still far above 3.0% of GDP, the level that would prevent the total amount of           are scheduled to start in January 2013, which may be postponed or severely reduced.
                federal debt from rising relative to GDP. Currently, the outlook for the deficit is                All will be decided following the outcome of the national elections in November. We
                particularly uncertain, since future tax and spending policies depend to a greater extent          are projecting a budget deficit of about USD920bn for FY2013; roughly 5.6% of
                than usual on the outcome of the November Presidential and Congressional elections.                GDP, lifting the federal debt to GDP ratio to c 76% from an estimated 73% in 2012.
Japan           Reconstruction activity started in earnest in early 2012, with funds being dispersed               Fiscal policy is likely to become an outright drag on economic growth as support for
                under four supplemental budgets approved during 2011. The restarting of the ‘green                 reconstruction activity fades and the need for overall fiscal consolidation begins.
                car’ purchase support programme helped the local car industry, although, after a                   Other tax hikes are also on the agenda as fiscal consolidation becomes a more
                strong start in 2012, the winding up of this scheme along with a slowdown in external              pressing concern. A pick-up in private consumption and housing investment, in
                demand is likely to affect activity in the coming quarters.                                        anticipation of the tax hike may compensate for the drag from government spending.
Eurozone        Austerity continues and is likely to amount to nearly 1.5% of eurozone GDP in 2012. The            With the 2012 budget deficit likely to come in at close to 4% of GDP further austerity is
                recession is expected to hinder the consolidation efforts of peripheral countries in particular,   expected to be on the cards for 2013, but with growth remaining weak we do not
                and is also necessitating further budget cuts in other countries, such as the Netherlands.         expect the eurozone to succeed in lowering the deficit below the targeted 3% of GDP.
Germany         The deficit is likely to fall to 0.8% this fiscal year from 1.0% last year. In H1 2012 the         The contribution rates to the pension insurance will be cut from 19.6% to 19.0%,
                government achieved a small surplus of EUR8.3bn due to an excess in the social security            starting in January 2013. Despite this burden for the social security system, we expect
                system. The economic slowdown in H2 will be a drag on the whole year deficit figure.               the deficit to fall to 0.6 % of GDP, supported by a pick-up of the economy.
France          In July, the new socialist government presented its first finance bill for 2012 to                 Even on our 0.9% GDP growth forecast for 2013, higher than the government
                demonstrate its determination to reduce the public deficit to 4.5% of GDP in 2012. It              expectation of 0.8%, a further EUR10bn worth of austerity measures will be needed
                announced EUR7bn additional tax hikes. The OAT bond yield reached a historical                     in order to achieve a deficit of 3% of GDP in 2013. Without additional austerity
                low, helping reduce the debt burden. Therefore, the 4.5% public deficit target in                  measures, the public deficit could reach 3.5% and the debt-to-GDP ratio 91.9% on
                2012 could be reached, and the public debt could represent 90.5% of the GDP.                       our calculations.
Italy           Ongoing austerity measures (c 2% of GDP) should lead to a larger primary surplus but               Further tightening is slated for 2013. Few details are available yet but another 2% rise in
                higher interest payments and little or no nominal growth will mean the budget deficit is           VAT is planned for July 2013, which will take its toll on GDP growth, and further cuts in
                likely to only just fall below 3% of GDP.                                                          govt spending will be required to ensure the deficit continues to narrow.
UK              The government faces some difficult decisions before the Autumn Statement on 5 Dec.                Headline public sector borrowing should rise in FY2013/14, despite further spending
                2012 growth looks likely to be much worse than the official OBR forecast of 0.8%. It               cuts because there is no windfall from the Royal Mail Pension Fund. We expect
                must either tighten policy in a weak economy or accept it is off track and take the                PSNBex to rise to 7.1% of GDP. This is much higher than the OBR’s forecast of 5.9%
                political hit, blaming weak global activity. We raise our forecast of PSNBex for FY2012/13         and it will no doubt raise this estimate when it publishes its new forecasts in December.
                to 6.6% of GDP from 6.2%. This includes a one-time windfall from the transfer of                   Significant revisions to the OBR’s forecasts could undermine the credibility of the UK’s
                around GBP28bn of Royal Mail Pension Fund assets. Excluding this, public sector                    deficit reduction strategy. As the year progresses, the weak environment and slippage
                net borrowing would deteriorate to 8.4% of GDP this year from 7.9% last year.                      in fiscal targets could put the UK’s AAA credit rating under renewed pressure.
Canada          The federal government is on track to steadily reduce the budget deficit and return to             In 2013, the focus will be on limiting the growth of programme spending. The March
                surplus in FY2015/16. Through the first three months of FY2012/13, the federal                     2012 budget projected a decline in the budget deficit to CAD10.2bn in FY2013/14.
                budget deficit has totalled CAD2.0bn, less than half the comparable deficit in                     We see the risks the deficit is closer to CAD12bn, or 0.6% of GDP. The projections
                FY2011/12. The recent slowdown in GDP growth through suggests that the fiscal                      for the March budget were based on 2013 GDP growth of 2.4% y-o-y. We anticipate
                year deficit is still expected to approach CAD21bn. Austerity programmes suggest                   growth remaining below 2.0% y-o-y in the autumn and so a downward adjustment to
                that government spending will continue to drag on GDP through H2 2012.                             this projection.
Source: HSBC




                                                                                                                                                                                                            7
    Macro
    Global Economics                                                                                       abc
    Q4 2012




Why pump-priming isn’t
working
 Blocked economic arteries in the developed world...
 ....thanks to a deteriorating ‘supply-side’ performance...
 …suggest that traditional pump-priming will have only a limited effect...
 …leaving recovery in the balance and world trade on its knees



Turning conventional wisdom                          In theory, that means more in the way of spare
on its head                                          capacity, pointing towards lower than expected
                                                     inflation. Instead, inflation has constantly
The economic ‘rules of the game’ have been torn
                                                     surprised on the upside. Chart 3 shows the US
up. No longer are economies performing in line
                                                     story. Other countries have had similar
with the conventional wisdom. After the financial
                                                     experiences.
crisis, new challenges have emerged. New ways
of thinking are required. Cyclical weakness is in    That the deteriorating trade-off between growth
danger of being replaced by structural woe.          and inflation – at least relative to consensus
                                                     forecasts – set in long before the onset of the
As a result, monetary policy is looking
                                                     financial crisis, suggests that the ‘new paradigm’
increasingly impotent. It may be able to prevent
                                                     of the late-1990s did little to improve the
economic meltdown, but it has been less
                                                     structural performance of the world’s biggest
successful at promoting economic recovery. Too
                                                     economy.
many of our difficulties are now so entrenched
that they cannot easily be resolved via a simple     The ‘output gap’, conceptually a useful way of
flick of a monetary switch.                          analysing the business cycle, has in reality proved
                                                     next to useless. If economists had known in
The symptoms of upheaval are all around us.
                                                     advance how weak growth was going to be, they
Since the onset of the financial crisis, growth in
                                                     would – wrongly – have been forecasting
the western world has come in persistently lower
                                                     unusually low, not persistently sticky, inflation.
than consensus expectations. For some nations,
the rot set in even earlier. In every single year
since 2003, US economic growth has been lower
than expected, a remarkable cumulative error over
almost a decade (see Chart 2).




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     Global Economics                                                                                                                                 abc
     Q4 2012




1. Nominal growth may have been broadly in line with
expectations in the last decade…
                                                                                 The role of commodity prices
%Yr                            US nominal growth                          %Yr    This deteriorating split between output and
8                                                                           8    inflation partly reflects the impact of buoyant
6                                                                           6    commodity prices. In times past, a weaker US
4                                                                           4    economy would have led to dramatically lower
2                                                                           2    energy, food and metals prices, reflecting
0                                                                           0    America’s status as the world’s main commodity-
-2                                                                          -2   consuming nation. The latest economic cycle has
-4                                                                          -4   not stuck to this historical pattern. Although
      1999      2001      20 03     2005        200 7     2009      2 011
                                                                                 commodity prices temporarily fell in 2009, they
             Consensus at sta rt of the yea r                    Actual
                                                                                 thereafter rebounded extraordinarily quickly
Source: Consensus Economics, Thomson Reuters Datastream                          (Chart 4), thanks to a strong showing from the
                                                                                 emerging economies that was egged on by the
2. …but real growth has been much weaker,                                        (unintended) global impact of quantitative easing
underperforming consensus estimates since 2003…
                                                                                 in all its various forms. Higher commodity prices
%Yr                                US GDP                                 %Yr    imposed an indirect tax on western consumers,
6                                                                           6
                                                                                 lifting prices relative to wages. Growth ended up
4                                                                           4
                                                                                 lower than expected.
2                                                                           2
                                                                                  4. Commodity prices are only part of the sticky inflation story
0                                                                           0
                                                                                  Index, 2002=100                                  Index, 2002=100
-2                                                                          -2    800                                                          400
                                                                                  700                                                          350
-4                                                                          -4
                                                                                  600                                                          300
      1999      2001      2003      2005        2007      2009      2011          500
                                                                                                                                               250
             Consensus at start of the year                      Actual           400
                                                                                                                                               200
                                                                                  300
                                                                                  200                                                          150
Source: Consensus Economics, Thomson Reuters Datastream
                                                                                  100                                                          100
                                                                                    0                                                          50
3. …yet inflation has been consistently stronger                                      02 03 04 05 06 07 08 09 10 11 12
%Yr                               US inflation                            %Yr             Metals (LHS)                 Oil (LHS)   Foodstuffs (RHS)
5                                                                           5
                                                                                  Source: Thomson Reuters Datastream
4                                                                           4
3                                                                           3
                                                                                 Supply potential not what it
2                                                                           2
1                                                                           1
                                                                                 was
0                                                                           0    Yet higher commodity prices are not the only
-1                                                                          -1   problem for the developed world. The fabled
      1999      2001      2003      2005        2007      2009     2011
                                                                                 ‘flexibility’ of ‘Anglo-Saxon’ labour markets no
             Consensus at start of the year                      Actual
                                                                                 longer seems to be working. Once upon a time,
Source: Consensus Economics, Thomson Reuters Datastream
                                                                                 any sudden recession-induced rise in US
                                                                                 unemployment would be quickly followed by a
                                                                                 sustained decline: those who lost their jobs would
                                                                                 find new employment opportunities relatively
                                                                                 quickly. A year after a recessionary peak, the


                                                                                                                                                        9
     Macro
     Global Economics                                                                                                             abc
     Q4 2012




unemployment rate would, on average, drop by            5. There are structural problems…unemployment is persistent
1.4 percentage points (Chart 5). Following the          Peak                  Unemployme            After 1   After 2   After 3
                                                                                   nt rate            year     years     years
October 2009 peak, however, the drop was only
                                                        September-54                          6.1      4.1        3.9       4.4
0.5 percentage points. Progress since then has          July-58                               7.5      5.1        5.5         7
been painfully slow. The US unemployment rate           May-61                                7.1      5.5        5.9       5.1
                                                        August-71                             6.1      5.6        4.8       5.5
has now been above 8% for 43 consecutive                May-75                                  9      7.4          7         6
                                                        July-80                               7.8      7.2        9.8       9.4
months, by far the worst experience in the post-        December-82                          10.8      8.3        7.3         7
war period (Chart 6). And while the                     June-92                               7.8        7        6.1       5.6
                                                        June-03                               6.3      5.6          5       4.6
unemployment rate has recently come down, this          October-09                             10      9.5        8.9      8.1*
superficially welcome result is not so much a           * August 2012
                                                        Source: Thomson Reuters Datastream
reflection of new job creation but, instead, a result
of people leaving the labour force altogether
(Chart 7). For some, the labour market offers no
hope whatsoever: they have become                         6. The unemployment rate has never been above 8% for such
                                                          a long period of time
‘disenfranchised’ workers.
                                                          %                           US Unemployment                      %
Why have things been so bad for the US labour             12                                                               12

market? After all, there has been an economic             10                                                               10

recovery (of sorts) which is more than can be said         8                                                               8
for many European nations. One possibility is              6                                                               6
simply that the US labour market rotated away              4                                                               4
from manufacturing jobs (which were lost to                2                                                               2
China and other low-cost producers thanks to
                                                           0                                                               0
heightened capital mobility) and towards                       50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10
construction-related jobs. The numbers certainly
support this view, with losses in manufacturing           Source: Thomson Reuters Datastream

and other related occupations almost exactly
offset by gains in construction between 2000 and
2007, before the onset of the sub-prime crisis.           7. Participation continues to decline
Another is that the weakness of the US housing
                                                           %             US civilian labour force participation rate       %
market has led to a huge increase in negative             68                                                               68

equity, stymieing the fabled geographical mobility        66                                                               66
of US labour. Either way, it increasingly looks as
                                                          64                                                               64
though part of the rise in US unemployment is in
danger of becoming a permanent feature of the             62                                                               62
economic landscape (Chart 8), unresponsive to             60                                                               60
macroeconomic policy stimulus. In other words,
                                                          58                                                               58
there has been a rise in the natural rate of
                                                               50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10
unemployment which may go some way to
explaining why the growth/inflation trade-off is          Source: BLS

not as encouraging as it once was.




10
   Macro
   Global Economics                                                                                                                           abc
   Q4 2012




 8. Long-term unemployed (out of work for more than 27               10. …giving rise to a productivity puzzle
 weeks) at levels never seen before

  % of unemployed                 US             % of unemployed      Index 2008=100               Productiv ity          Index 2008=100
 50                                                            50    108                                                                108
 45                                                            45    106                                                                106
 40                                                            40    104                                                                104
 35                                                            35    102                                                                102
 30                                                            30
                                                                     100                                                                100
 25                                                            25
 20                                                            20     98                                                                98
 15                                                            15     96                                                                96
 10                                                            10     94                                                                94
  5                                                            5      92                                                                92
  0                                                            0           08             09              10         11            12
       60      66   72     78   84     90   96    02   08                          UK                     Eurozone                 US

 Source: BLS                                                         Source: ONS, Eurostat, BLS



The UK hasn’t had such a painful labour market                      This ‘productivity puzzle’ can be partly explained
experience, but its economic behaviour is                           by the composition of employment. Much of it
increasingly paradoxical. In the first half of 2012,                has been part-time when workers really want a
employment rose even as output fell (Chart 9). It                   full-time job, so labour isn’t being fully utilised.
appeared that firms were hiring labour even
                                                                     11. The weakness of real wages offers some explanation as
though, en masse, they were producing less. This                     workers have priced themselves into work

doesn’t make a lot of sense. It suggests a collapse                                               UK real w ages
                                                                     Index , 2000=100                                     Index , 2000=100
in productivity which, in turn, cannot bode well
                                                                     130                                                               130
for long-term economic growth (Chart 10). Future
data revisions might eventually help resolve the                     120                                                                120

apparent paradox but, to make sense of the                           110                                                                110
numbers, the revisions would have to be
                                                                     100                                                                100
unusually large.
                                                                      90                                                                90
 9. Employment has held up better than expected in the UK…
                                                                           00 01 02 03 04 05 06 07 08 09 10 11 12
  % Yr                   UK GDP and employment             % Yr
 12                                                          5       Source: Thomson Reuters Datastream
                                                             4
  8                                                          3
  4                                                          2      Yet full-time employment has also increased.
                                                             1
  0                                                          0      Another explanation comes from wages. From
                                                             -1
  -4                                                         -2     their peak in 2009, real wages – adjusted for the
  -8                                                         -3     effects of inflation – have fallen 17% (Chart 11).
                                                             -4
 -12                                                         -5     In other words, even if workers are less
       60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11        productive, they are offering themselves more
               Real GDP (LHS)               Employment (RHS)
                                                                    cheaply to firms. Meanwhile, because investment
 Source: ONS
                                                                    has been so dismally low in recent years –
                                                                    reflecting a lack of both credit and confidence –
                                                                    firms perhaps are hiring more staff to compensate
                                                                    for a depleted capital stock. Overall productivity
                                                                    has suffered as a consequence.



                                                                                                                                                11
     Macro
     Global Economics                                                                                                                  abc
     Q4 2012




Imbalances unwinding for the                                     13. China isn’t delivering the import boom that lifted global
                                                                 growth in 2009
wrong reasons
                                                                 %3m/Yr                               Chin a                  %3m/Yr
                                                                 80                                                              80
The performance of Anglo-Saxon labour markets
                                                                 60                                                              60
isn’t the only puzzle. Global imbalances have
                                                                 40                                                              40
diminished, yet, despite this apparent
                                                                 20                                                              20
improvement, the economic crisis persists (Chart
                                                                   0                                                             0
12). A handful of years ago, a smaller Chinese
                                                                 -20                                                             -20
current account surplus would have been greeted
                                                                 -40                                                             -40
with tremendous enthusiasm. Everyone, from the
                                                                       07        08        09            10       11     12
Americans to the Europeans to the IMF, thought a                                         Ex ports              Imports
lower Chinese surplus could only be a good thing,
                                                                 Source: Thomson Reuters Datastream
reflecting China’s journey from export-led to
domestic demand-led growth. And as China’s                      The policy brakes were slammed on and the
newly-enfranchised consumers opened their
                                                                domestic economy inevitably began to slow.
purses and wallets, so it was believed western                  Despite this new-found restraint, which presaged
nations would be able to export their way out of
                                                                much weaker import growth, China’s current
their debt difficulties.                                        account surplus has continued to decline. In 2012,
 12. Imbalances are improving but for the wrong reasons         the surplus is likely to be only USD210bn, down
 USDbn                 Current account balance        USDbn     from a peak of GBP426bn in 2008. No longer,
     500                                               500
                                                                however, is this fall a ‘good news’ story about
                                                                domestic stimulus and the rebalancing of the
       0                                               0        Chinese economy. Instead, it’s symbolic of
                                                                China’s vulnerability to dark economic forces
     -500                                              -500
                                                                elsewhere in the world.
 -1000                                                 -1000
            1980 1984 1988 1992 1996 2000 2004 2008

              US            Eurozone         China         UK

 Source: Thomson Reuters Datastream



At first, the story seemed to be working. In the
first half of 2009, in the depths of the economic
crisis, China turbocharged its domestic economy,
thanks to aggressive monetary stimulus and huge
infrastructure projects. Even as exports began to
recover at the end of that year, so imports surged
(Chart 13). The current account surplus duly
declined. But then China bumped into problems
more typically associated with the boom-bust
economics of the capitalist west: too much
inflation, a disruptive property bubble and a
worrying increase in debt.



12
      Macro
      Global Economics                                                                                                                          abc
      Q4 2012




The forces of darkness                                                   from the reluctance of formerly-generous
                                                                         creditors to offer peripheral nations loans on
In the first half of 2012, those dark forces
                                                                         reasonable terms.
emanated mostly from within the eurozone. While
popular debate has focused mostly on ‘internal’                            15. Again imbalances are improving in the eurozone but
                                                                           through a contraction in trade and overall output
eurozone issues – Greek departure, sovereign
default, complete break-up, fiscal and political                            USDbn              Current account balance             USDbn
                                                                           300                                                         300
union – the eurozone crisis has also had a hugely-
negative impact on world trade (Chart 14). In the                          200                                                         200

first half of 2012, the eurozone crisis has been                           100                                                         100

associated with a deceleration of world trade by                              0                                                        0
more than the US sub-prime crisis did in 2008,                            -100                                                         -100
pre-Lehman: although each country in the                                  -200                                                         -200
eurozone has only a modest impact on global                                       1980 1984 1988 1992 1996 2000 2004 2008
activity, the aggregate effect of a systemic crisis                                  Germany            Greece           Spain         Italy
for the eurozone as a whole has, not surprisingly,                         Source: IMF

proved far greater.

Current account deficits in the periphery have
shrunk dramatically, but not for the right reasons
(Chart 15). Rather than reflecting a sustained
improvement in competitiveness, deficits have
declined thanks to a collapse in domestic demand
which, in turn, was fuelled by massive capital
outflows as fears grew over the euro’s eventual
demise. Starved of private sector funding, and
thus facing ludicrously high interest rates,
peripheral nations simply had to batten down the
hatches: the need for austerity stemmed in part


 14. The eurozone crisis has reduced world trade by more than the sub-prime crisis pre-Lehman

 pp contribution                                               Global import growth                                        pp contribution
 6                              Bear Stearns                                                                                               6
               Northern Rock                     Lehman
 4                                                                                                                                         4
                                                 brothers
 2                                                                                                                                         2
 0                                                                                                                                         0
 -2                                                                                                                                        -2
 -4                                                                                                                                        -4
 -6                                                                                                                                        -6
 -8                                                                                                                                        -8
        2007                          2008              2009               2010                       2011                  2012

                  US                           Southern eurozone                     Total eurozone                        US & euro

 Source: Thomson Reuters Datastream




                                                                                                                                                  13
     Macro
     Global Economics                                                                                                                                 abc
     Q4 2012




The effects of peripheral eurozone weakness have                                   17. German activity turning down…

not only been seen in China. Some of the                                            Index                                                   %Yr
bellwether nations with respect to world trade                                     115                                                       7.5
                                                                                   110                                                       5
have seen dramatic export reversals during the                                     105
course of this year. Table 16 shows some of the                                    100                                                       2.5
                                                                                     95                                                      0
main casualties: measured in terms of lost
                                                                                     90                                                      -2.5
momentum, the hardest hit included Taiwan,                                           85
                                                                                                                                             -5
China, Mexico and Singapore. And, as summer                                          80
                                                                                     75                                                      -7.5
turned into autumn, there were signs that some of
                                                                                        91 93 95 97 99 01 03 05 07 09 11
the eurozone’s supposedly more robust economies
                                                                                               Ifo business expectations (LHS)     GDP (RHS)
were succumbing to economic weakness: in
                                                                                   Source: Macrobond, HSBC
particular, the IFO survey revealed that German
industry had taken a turn for the worse (Chart 17).                              18. …as peripheral austerity starts to bite
More than anything, this showed that northern                                    German exports by destination                   % of total exports
Europe was hardly immune to developments in                                      Peripheral Europe                                             11%
the south. For all of Germany’s much-vaunted                                     France                                                        10%
                                                                                 Netherlands                                                    7%
competitiveness, its export sector remains heavily                               UK                                                             7%
                                                                                 Austria                                                        6%
exposed to the world trade cycle and, by                                         US                                                             6%
implication, to losses of demand in the eurozone                                 China                                                          5%
                                                                                 Switzerland                                                    5%
periphery (Chart 18). Overall, however, the                                      Belgium                                                        5%
deceleration in world trade has been very much a                                 Sweden                                                         2%
                                                                                 Source: IMF
problem for the emerging world.

16. There has been a major trade deceleration globally                           Export losses have, not surprisingly, coincided
Export growth (%Yr)                       Mid-2010         Mid-2011   Mid-2012   with a major shift in the inventory cycle. Chart 19
Taiwan                                           32.9           4.9       -2.0   show how the inventory story has deteriorated
China*                                           40.8          22.0       10.5
Mexico                                           29.2           8.3        5.3   during 2012. Producers who presumably bought
Singapore                                        24.5           1.1        2.3   into the idea of sustained global economic
Japan                                            30.6          -5.3        8.7
Thailand                                         22.3          12.0        0.9   recovery ended up making too much and, as a
Hong Kong                                        19.6           1.3        0.3
Philippines                                      24.0           0.2        8.3
                                                                                 result, over-produced relative to available
Israel                                           19.8           7.0        5.6   demand. This involuntary rise in stocks will, at
Hungary                                          16.1           8.6        2.2
Malaysia                                         15.6           4.6        2.1   the very least, crimp production volumes in the
Czech Republic                                   17.3          12.9        3.9   months ahead, in some cases threatening a move
India                                            14.9          17.2        1.9
South Korea                                      15.0           8.3        3.2   into outright recession.
Switzerland                                      11.0           4.1       -0.8
Germany                                          16.7           6.7        5.5
Italy                                            12.4           6.5        1.4
Brazil                                            7.2           6.8       -2.1
Sweden                                           10.2           7.8        0.9
Spain                                            12.5           7.1        3.3
Note: *China trade data are values, all other are volume
Source: Thomson Reuters Datastream




14
   Macro
   Global Economics                                                                                                                              abc
   Q4 2012




 19. An involuntary inventory build needs to be worked           EUR-CHF peg, driving down yields on the
 through before production can recover
                                                                 northern European bonds it has been actively
 Ratio                      Global                       Ratio
                                                                 buying. Meanwhile, a further rise in sterling could
 1.8                                                       1.8
 1.6
                                                                 prompt further action from the Bank of England.
                                                           1.6
 1.4                                                       1.4
                                                                 The hundreds of billions of dollars and euros
 1.2                                                       1.2
                                                                 pouring into the system have provided some cheer
 1.0                                                       1.0
 0.8                                                       0.8   for the financial markets, but we have been here
 0.6                                                       0.6   so many times before and euphoria has quickly
       02 03 04 05 06 07 08 09 10 11 12                          faded. The unconventional policies simply have
                         Stocks ov er orders                     not delivered the positive outcomes forecast by
                                                                 central banks: in particular, the pace of recovery
 Source: Markit
                                                                 has been far weaker than anticipated (see Table
                                                                 20). And, as each additional dose of QE has been
                                                                 administered, the impact on financial markets and
Drug dependency                                                  confidence more generally appears to be subject
Meanwhile, across the western world, the                         to the law of diminishing marginal returns.
dependency on unconventional policy drugs has                    20. The medicine simply isn’t working in the way central banks
only grown. The further dose of quantitative                     hoped

easing delivered by the Federal Reserve in                                                                                 2011          2012

September (so-called QE3) may be focused                         BoE projections made in Nov 2010                            2.4           2.8
                                                                 OBR projections made in Nov 2010                            2.1           2.6
primarily on the housing market – via USD40bn                    Outturn for UK GDP                                          0.8         -0.5*
of monthly purchases of mortgage-backed                          Fed projections made in Nov 2010                            3.3            4
securities over the indefinite future – but it only              CBO projections made in August 2010                         2.1          4.1
                                                                 Outturn for US GDP                                          1.8         2.3*
serves to emphasise how far the western world is
                                                                 Note: *Annual growth in Q22012
from re-establishing its economic poise.                         Source: BoE, OBR, Federal Reserve, CBO and Thomson Reuters Datastream



The ECB has also joined the party, although                      This is not to say QE has been ineffective: in its
prompted by a different set of circumstances to                  absence the outcome might have been far worse.
that of the Fed. The deflationary risks were                     But it hasn’t kick-started economies in the way
growing but the most pressing concern was the                    central banks expected. Why not? While the great
breakdown in the transmission of monetary policy                 figureheads of the central banks may be reluctant
to the periphery caused by expectations of a                     to admit it, there are limits to what monetary
currency break up. Mario Draghi, the ECB                         policy can achieve when there are major problems
President, has a lot on his plate: neither the                   on the supply-side of the economy.
Federal Reserve nor the Bank of England has to
set monetary policy to prevent Texas or Cornwall                 Take Spain for example. One of the key economic
from leaving their respective currency unions.                   issues in Spain is the rigidity of its labour
                                                                 markets. Many wages are still indexed to inflation
These actions by the Fed and ECB have set off yet                so when a company sees oil prices rise, it has to
another battle in what is in danger of becoming an               deal with not only with the rise in costs thanks to
extended currency war. The Bank of Japan has                     the increase in energy prices but also the increase
had to increase its QE exploits while the SNB’s                  in wage that stems from the need to compensate
balance sheet continues to grow as it defends its


                                                                                                                                                   15
     Macro
     Global Economics                                                                                                           abc
     Q4 2012




workers for their increased cost of living. No         21. Japanese asset purchases helped keep rates low…

wonder unemployment has risen so steeply and           %                                                           Tn y en
                                                       3.0                                                            160
austerity is proving so hard to deliver. What can
the ECB possibly do about this? If ‘printing                                                                              140
                                                       2.0
money’ leaves the euro weaker than might                                                                                  120
otherwise have been the case, import prices will                                                                          100
                                                       1.0
end up higher, raising inflation and, hence, wage                                                                         80
growth. Any competitive gain through the               0.0                                                                60
nominal currency is quickly eroded through rising            1997 1999 2001 2003 200 5 2007 2009 2011
prices.                                                         10 y r bond y ield              BoJ balance sheet (RHS)

Perhaps of even greater concern, particularly for      Source: Thompson Reuters Datastream and BoJ

the Bundesbank, is that by reducing bond yields,
the ECB in fact reduces the likelihood that the        22. …and allowed the government to bury its head in the
                                                       fiscal sand
Spanish authorities actually address this
                                                       %                                                         % of GDP
underlying flaw in their economy.                      12                                                              220
Competitiveness never improves, and the Spanish        10
economy requires ever more handouts to get by.          8                                                                 180
                                                        6
This moral hazard is most acute for the ECB             4                                                                 140
because it is caught in the crossfire between the       2
creditor and debtor nations within the eurozone.        0                                                                 100
Other central banks, however, are facing similar             1997 1999 2001 2003 2005 2007 2009 2011
                                                                       Annual gov ernme nt borrow ing (LHS)
dilemmas. If they don’t support the bond markets                       Gross gov t. debt (RHS)
they will be accused of preventing the recovery        Source: OECD
and failing to meet their economic mandates. But
by removing the market discipline on                  Central banks are clearly damned if they do, and
governments they may simply facilitate bad long-      damned if they don’t. Either way, even if they
term economic decision making. The experience         aren’t prepared to admit it, central banks must be
of Japan in the last twenty years shows this issue    starting to realise there are limits to what
only too well. Asset purchases may have helped        monetary policy can achieve when the problem is
keep bond yields low and helped the government        one of poor micro fiscal management. The
run large deficits (Charts 21 & 22). But gross debt   market, however, doesn’t seem to have quite
is now approaching 220%, the politicians are          grasped the impotence of monetary policy in a
squabbling about raising VAT and this must be         world of supply-side problems.
having some impact on incentives to spend and
invest in Japan.




16
   Macro
   Global Economics                                                                                          abc
   Q4 2012




Permafrost: the big long-term                          have nevertheless cut our 2013 forecast from
challenge                                              5.8% to 5.6%. Neither China nor India is quite as
                                                       robust as we had previously expected.
Deep recessions are typically followed by
powerful recoveries. Modest recessions are, not        Within the developed world, it’s striking that one
surprisingly, typically followed by equally modest     of the better performers in 2013 is Japan, more a
recoveries. This latest economic cycle is,             reflection of weakness elsewhere, notably in
therefore, unique: an incredibly deep recession        Europe, than of any new-found spark in Japan
followed by only a very modest recovery even           itself. Permafrost prevails, suggesting that fiscal
though virtually all stimulus measures known to        consolidation will remain out of reach for yet
man have been used by policymakers to breathe          another year. On this basis, central banks will be
life back into the global economy.                     printing money not so much to furnish recovery
                                                       but, instead, to prevent sovereign risk from being
That process of offering life support is far from
                                                       a source of further economic catastrophe.
over. Whether it’s the Fed with QE3 or the ECB
with its Outright Monetary Transactions, central
banks are still applying their monetary
defibrillators in the hope that the heart of the
global economy will start beating again. Yet, even
if it does, success is likely to be modest: the
arteries and veins that are vital for economic
health are all clogged up. The problems
confronting the industrialised world no longer
reflect only an absence of demand: they now also
reflect a loss of supply.

And the emerging world is hardly immune.
Having struggled to contain inflation last year –
thanks to the global impact of quantitative easing
– the emerging nations find themselves once again
caught out by bad news in the developed world.
Whether in Asia, Latin America or Central
Europe, emerging nations’ economic prospects
have, in the near-term, dimmed thanks to their
vulnerability in the face of a major – eurozone-
induced – slowdown in world trade.

Our forecasts remain consistent with our message
of permafrost. Global growth of 2.2% this year
and 2.4% next year is hugely disappointing, well
down from rates of 3-4% per year before the onset
of the financial crisis. The main casualty relative
to last quarter is the emerging world: still growing
at four times the pace of the developed world, we



                                                                                                               17
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     Global Economics                                                 abc
     Q4 2012




                        This page has been left blank intentionally




18
Macro
Global Economics                abc
Q4 2012




                   Global economic
                           forecasts




                                   19
     Macro
     Global Economics                                                                                                                                                 abc
     Q4 2012




GDP
Annual
% Year                                                        2004              2005             2006              2007              2008           2009    2010   2011   2012f   2013f
World (Nominal GDP weights)                                    3.7               3.2               3.8               3.7                1.2          -2.6    4.0    2.6     2.2     2.4
World (PPP Weights)                                            5.0               4.7               5.4               5.6                2.9          -0.7    5.3    3.7     3.0     3.3
 Developed                                                     2.9               2.3               2.8               2.5               -0.1          -4.0    2.8    1.3     1.2     1.2
 Emerging                                                      7.0               6.6               7.7               8.2                5.7           2.0    7.7    6.3     4.9     5.6
  North America                                                3.5               3.1               2.7               2.0                0.0          -3.4    3.0    1.9     2.2     1.8
       US                                                      3.6               3.1               2.7               1.9                0.0          -3.5    3.0    1.8     2.2     1.7
       Canada                                                  3.1               3.0               2.8               2.2                0.5          -2.5    3.1    2.8     1.9     1.9
  Latin America                                                5.3               3.9               5.1               5.0                3.4          -2.9    6.8    4.2     2.9     3.5
       Mexico                                                  4.1               3.2               5.2               3.3                1.2          -6.2    5.5    3.9     3.6     3.2
       Brazil                                                  5.7               3.2               4.0               6.1                5.2          -0.3    7.5    2.7     1.7     3.8
       Argentina                                               9.0               9.2               8.5               8.7                6.8           0.9    9.2    8.9     3.0     3.0
       Chile                                                   7.0               6.2               5.7               5.2                3.3          -1.0    6.1    6.0     5.0     4.8
  Western Europe                                               2.3               2.0               3.3               3.1                0.1          -4.3    2.1    1.4    -0.3     0.3
     Eurozone                                                  2.0               1.8               3.3               3.0                0.3          -4.4    2.0    1.5    -0.6    -0.1
       Germany                                                 0.7               0.8               3.9               3.4                0.8          -5.1    4.0    3.1     0.9     0.9
       France                                                  2.3               1.8               2.6               2.2               -0.2          -3.1    1.6    1.7     0.2     0.9
       Italy                                                   1.6               1.1               2.3               1.5               -1.2          -5.5    1.8    0.5    -2.5    -1.1
       Spain                                                   3.3               3.6               4.1               3.6                0.9          -3.7   -0.3    0.4    -1.5    -2.0
  Other Western Europe                                         3.2               2.4               3.2               3.5               -0.5          -4.0    2.3    1.4     0.5     1.4
       UK                                                      3.1               2.0               2.6               3.4               -1.1          -4.4    1.8    0.8    -0.1     1.1
       Norway***                                               4.5               4.4               5.0               5.3                1.4          -1.5    1.8    2.5     3.6     3.0
       Sweden                                                  3.7               3.2               4.6               3.4               -0.8          -5.0    6.3    3.9     0.8     2.1
       Switzerland                                             2.4               2.7               3.8               3.8                2.2          -1.9    3.0    1.9     0.9     1.4
  EMEA                                                         6.5               5.7               6.5               5.7                3.8          -3.5    4.5    4.7     2.8     2.9
       Czech Republic                                          4.6               6.8               7.2               5.7                2.9          -4.5    2.6    1.7    -0.9     1.0
       Hungary                                                 4.8               4.0               3.9               0.1                0.9          -6.8    1.3    1.6    -1.0     1.3
       Poland                                                  5.3               3.6               6.2               6.8                5.1           1.6    3.9    4.3     2.5     2.0
       Russia                                                  7.2               6.4               8.2               8.5                5.2          -7.8    4.3    4.3     3.0     2.5
       Turkey                                                  9.4               8.4               6.9               4.7                0.7          -4.8    9.2    8.5     2.7     3.8
       Ukraine                                                12.1               3.0               7.4               7.6                2.3         -14.8    4.2    5.2     2.0     3.0
       Romania                                                 8.5               4.1               7.9               6.3                7.2          -6.6   -1.7    2.5     1.1     2.5
       Egypt*                                                  4.1               4.5               6.8               7.1                7.2           4.7    5.1    1.8     2.2     3.2
       Israel                                                  5.2               5.1               5.6               5.5                4.0           0.8    4.8    4.7     2.9     2.6
       Saudi Arabia                                            5.3               5.6               3.2               2.0                4.2           0.1    4.1    6.6     5.4     4.0
       UAE*                                                    9.6               4.9               9.8               3.2                3.2          -4.8    1.3    4.1     3.7     4.0
       South Africa                                            4.6               5.3               5.6               5.6                3.6          -1.5    2.9    3.1     2.5     3.1
  Asia-Pacific                                                 4.9               4.4               5.1               6.3                3.2           0.7    6.9    3.9     4.5     4.9
       Japan                                                   2.4               1.3               1.7               2.2               -1.0          -5.5    4.5   -0.8     2.0     1.6
       Australia                                               4.1               3.1               2.7               4.7                2.5           1.4    2.5    2.1     3.5     3.2
       New Zealand                                             4.3               3.1               2.3               2.9               -0.2          -2.4    1.8    1.3     2.6     2.9
     Asia ex Japan                                             7.9               8.0               9.1              10.4                7.2           5.8    9.1    7.4     6.2     7.1
       China                                                  10.1              10.2              11.6              14.2                9.6           9.2   10.4    9.3     7.8     8.6
     Asia ex Japan & China                                     6.1               6.1               6.9               7.1                4.8           2.4    7.8    5.3     4.4     5.3
       Hong Kong                                               8.5               7.1               7.0               6.4                2.3          -2.6    7.1    5.0     2.0     5.2
       India*                                                  6.7               8.5               9.6               9.5                8.2           6.4    8.9    7.5     5.5     6.5
       Indonesia                                               5.0               5.7               5.5               6.3                6.0           4.6    6.2    6.5     6.1     6.1
       Malaysia                                                6.8               5.6               5.6               6.3                4.8          -1.5    7.2    5.1     5.2     4.7
       Philippines                                             6.7               4.8               5.2               6.6                4.2           1.1    7.6    3.9     5.7     5.7
       Singapore                                               9.2               7.4               8.8               8.9                1.7          -1.0   14.8    5.0     2.2     4.3
       South Korea                                             4.6               4.0               5.2               5.1                2.3           0.3    6.3    3.6     2.6     3.8
       Taiwan                                                  6.2               4.7               5.4               6.0                0.7          -1.8   10.7    4.0     1.3     5.4
       Thailand                                                6.4               4.7               5.1               5.0                2.5          -2.3    7.8    0.1     6.3     4.5
       Vietnam                                                 7.8               8.4               8.2               8.5                6.3           5.3    6.8    5.9     5.0     5.3
Notes: * = fiscal year forecasts; ** = calendar year; *** = mainland. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: National sources, HSBC estimates




20
     Macro
     Global Economics                                                                                                  abc
     Q4 2012




Quarterly
% Quarter & % Year                                      Q3 11   Q4 11   Q1 12   Q2 12   Q3 12f   Q4 12f   Q1 13f   Q2 13f   Q3 13f   Q4 13f
    North America
        US*                               % Quarter       1.3     1.3     2.0     1.7      1.8      1.3      1.0      2.4      2.3      2.8
                                          % Year          1.6     1.6     2.4     2.3      2.4      1.7      1.4      1.6      1.8      2.2
          Canada*                         % Quarter       4.5     4.5     1.8     1.8      1.4      1.7      1.9      2.0      2.2      2.3
                                          % Year          2.5     2.5     1.8     2.5      1.7      1.7      1.7      1.7      1.9      2.1
    Latin America
         Mexico                           % Quarter       1.2     1.2     1.2     0.9      0.6     -0.4      1.7      0.6      1.3      0.6
                                          % Year          4.3     4.3     4.5     4.1      3.2      2.7      2.7      3.0      3.3      3.8
          Brazil                          % Quarter      -0.2    -0.2     0.1     0.4      1.4      1.4      1.4      0.6      0.4      0.5
                                          % Year          2.1     2.1     0.8     0.5      2.3      3.0      3.8      4.9      3.6      3.2
          Argentina                       % Quarter       1.0     1.0     0.9     0.0      0.8      1.0      1.0      0.4      0.7      0.8
                                          % Year          9.3     9.3     5.2    -0.5      3.2      4.3      1.7      2.9      3.8      3.7
          Chile                           % Quarter       0.4     0.4     1.3     1.7      1.0      0.6      1.2      1.4      1.5      1.4
                                          % Year          3.7     3.7     5.3     5.5      4.2      5.2      4.5      3.8      5.2      5.5
    Western Europe
      Eurozone                            % Quarter       0.1     0.1     0.0    -0.2     -0.3     -0.3      0.0      0.1      0.2      0.3
                                          % Year          1.3     1.3     0.0    -0.5     -0.9     -0.8     -0.8     -0.5      0.1      0.7
          Germany                         % Quarter       0.4     0.4     0.5     0.3      0.0     -0.1      0.3      0.3      0.5      0.5
                                          % Year          2.7     2.7     1.2     1.0      0.6      0.7      0.4      0.5      1.0      1.5
          France                          % Quarter       0.3     0.3     0.0     0.0      0.0      0.0      0.3      0.4      0.4      0.4
                                          % Year          1.6     1.6     0.3     0.3      0.0      0.1      0.4      0.8      1.1      1.5
          Italy                           % Quarter      -0.2    -0.2    -0.8    -0.8     -0.7     -0.5     -0.2      0.0      0.1      0.2
                                          % Year          0.4     0.4    -1.5    -2.6     -3.1     -2.9     -2.3     -1.4     -0.6      0.1
          Spain                           % Quarter       0.0     0.0    -0.3    -0.4     -0.5     -0.8     -0.6     -0.4     -0.2     -0.1
                                          % Year          0.6     0.6    -0.6    -1.3     -1.8     -2.1     -2.4     -2.4     -2.0     -1.3
    Other Western Europe
        UK                                % Quarter       0.5     0.5    -0.3    -0.5      0.9      0.3      0.2      0.2      0.3      0.4
                                          % Year          0.4     0.4    -0.2    -0.5     -0.3      0.4      0.9      1.6      1.0      1.1
        Norway                            % Year          2.6     2.6     4.2     3.7      3.5      3.0      2.6      2.5      3.3      3.7
        Sweden                            % Year          4.0     4.0     1.5     0.8     -0.1      0.6      0.8      0.9      2.4      4.2
        Switzerland                       % Year          1.5     1.5     1.2     0.6      0.9      0.8      0.8      1.3      1.7      1.9
    EMEA
        Czech Republic                    % Year          1.3     1.3    -0.5    -1.0     -1.1     -1.1      0.0      0.6      1.4      2.2
        Hungary                           % Year          1.4     1.4    -0.7    -1.3     -1.3     -1.7      0.2      0.7      0.9      1.1
        Poland                            % Year          4.2     4.2     3.5     2.4      2.2      2.2      1.5      1.9      2.6      3.0
        Russia                            % Year          5.0     5.0     4.9     4.0      2.2      1.3      1.3      2.4      3.1      2.8
        Turkey                            % Year          8.4     8.4     3.3     2.9      1.8      3.1      3.4      3.0      4.3      4.6
        Ukraine                           % Year          6.5     6.5     2.0     3.0      1.0      2.0      2.0      3.0      3.5      3.5
        Romania                           % Year          4.4     4.4     0.3     1.2      1.1      1.3      1.8      1.7      2.8      3.7
        Israel                            % Year          4.9     4.9     3.2     3.1      2.8      2.7      2.7      2.6      2.5      2.6
        South Africa                      % Year          3.0     3.0     2.1     3.0      2.7      2.5      2.8      2.8      3.1      3.4
    Asia-Pacific
        Japan                             % Quarter       1.7     1.7     1.3     0.2     -0.2      0.0      0.2      1.1      0.6      1.2
                                          % Year         -0.6    -0.6     2.9     3.2      0.8      1.4      0.4      1.3      1.8      3.1
          Australia                       % Quarter       1.1     1.1     1.4     0.6      0.5      0.5      0.9      1.0      0.9      0.9
                                          % Year          2.8     2.8     4.4     3.7      3.0      3.0      2.6      2.9      3.4      3.8
          New Zealand                     % Year          1.4     1.4     2.4     2.4      2.8      2.6      2.3      2.9      3.0      3.4
          China                           % Year          9.1     9.1     8.1     7.6      7.5      8.0      8.4      8.7      8.9      8.7
          Hong Kong                       % Year          4.4     4.4     0.7     1.1      1.8      4.1      5.1      6.3      5.8      3.9
          India                           % Year          6.7     6.7     5.3     5.5      5.9      5.5      5.8      6.2      6.7      7.2
          Indonesia                       % Year          6.5     6.5     6.3     6.4      6.4      5.5      6.1      6.0      6.1      6.3
          Malaysia                        % Year          5.7     5.7     4.9     5.4      5.5      5.2      4.7      4.5      4.7      4.7
          Philippines                     % Year          3.2     3.2     6.3     5.9      5.6      5.0      4.7      5.6      6.5      6.0
          Singapore                       % Year          6.0     6.0     1.5     2.0      1.8      3.4      2.1      3.5      5.3      6.0
          South Korea                     % Year          3.7     3.7     2.9     2.3      2.2      2.8      3.2      3.9      3.6      4.0
          Taiwan                          % Year          3.4     3.4     0.4    -0.2      0.9      4.0      5.7      5.7      6.0      4.5
          Thailand                        % Year          3.7     3.7     0.4     4.2      4.1     17.5      6.7      4.3      3.5      3.3
          Vietnam                         % Year          6.1     6.1     4.1     4.7      5.0      5.7      7.3      5.4      4.4      4.3
Note: * = quarter-on-quarter data has been annualised
Source: National sources, HSBC estimates




                                                                                                                                         21
     Macro
     Global Economics                                                                                                                                      abc
     Q4 2012




Consumer prices
Annual
% Year                                            2004               2005               2006               2007               2008    2009   2010   2011   2012f   2013f
World                                               2.5                2.7               2.8                 2.8                4.3    1.1    2.4    3.5     2.7     2.7
Developed                                           1.9                2.3               2.3                 2.1                3.3    0.0    1.4    2.6     1.9     1.6
Emerging                                            4.6                4.5               4.5                 5.3                8.0    4.9    5.6    6.4     5.5     5.7
  North America                                     2.6                3.3               3.1                 2.8                3.7   -0.3    1.6    3.1     2.1     2.0
       US                                           2.7                3.4               3.2                 2.9                3.8   -0.3    1.6    3.1     2.1     2.0
       Canada                                       1.9                2.2               2.0                 2.1                2.4    0.3    1.8    2.9     1.5     1.7
  Latin America                                     5.2                5.6               4.6                 4.8                7.8    6.1    7.1    7.8     7.9     8.2
       Mexico                                       4.7                4.0               3.6                 4.0                5.1    5.3    4.2    3.4     4.1     3.9
       Brazil                                       6.6                6.9               4.2                 3.6                5.7    4.9    5.0    6.6     5.3     5.2
       Argentina*                                   4.4                9.6              10.9                12.7               25.2   14.8   23.7   23.3    22.5    22.0
       Chile                                        1.1                3.1               3.4                 4.4                8.7    0.3    1.4    3.3     3.1     2.8
  Western Europe                                    1.9                2.1               2.2                 2.1                3.3    0.6    1.8    2.9     2.2     1.7
     Eurozone                                       2.2                2.2               2.2                 2.1                3.3    0.3    1.6    2.7     2.5     1.8
       Germany                                      1.8                1.9               1.8                 2.3                2.7    0.2    1.2    2.5     2.1     2.1
       France                                       2.3                1.9               1.9                 1.6                3.2    0.1    1.7    2.3     2.3     1.8
       Italy                                        2.3                2.2               2.2                 2.0                3.5    0.8    1.6    2.9     3.4     2.3
       Spain                                        3.1                3.4               3.6                 2.8                4.1   -0.2    2.0    3.1     2.4     2.5
  Other Western Europe                              1.1                1.7               2.0                 2.0                3.5    1.5    2.5    3.3     1.9     2.0
       UK                                           1.3                2.0               2.3                 2.3                3.6    2.2    3.3    4.5     2.7     2.5
       Norway                                       0.5                1.5               2.3                 0.7                3.8    2.2    2.4    1.3     0.7     1.6
       Sweden                                       0.4                0.5               1.4                 2.2                3.4   -0.5    1.2    3.0     1.1     1.2
       Switzerland                                  0.8                1.2               1.1                 0.7                2.4   -0.5    0.7    0.2    -0.6     0.3
     EMEA                                          6.1                6.5                6.2                 7.1               10.5    7.6    6.0    6.3     5.3     5.7
         Czech Republic                            2.8                1.9                2.5                 2.8                6.3    1.0    1.5    1.9     3.3     2.0
         Hungary                                   6.8                3.6                3.9                 8.0                6.1    4.2    4.9    3.9     5.7     3.7
         Poland                                    3.5                2.1                1.0                 2.5                4.2    3.5    2.6    4.3     3.9     2.7
         Russia                                   10.9               12.7                9.7                 9.0               14.1   11.7    6.8    8.5     5.2     7.4
         Turkey                                    8.6                8.2                9.6                 8.8               10.4    6.3    8.6    6.5     9.0     7.3
         Ukraine*                                  9.0               10.3                9.1                12.8               25.2   16.0    9.4    8.0     2.8     7.9
         Romania                                  11.9                9.0                6.6                 4.8                7.9    5.6    6.9    5.8     3.1     3.5
         Egypt**                                  14.3                8.9                4.2                11.0               11.6   15.5   11.7   11.0     8.7     6.8
         Israel*                                  -0.4                1.3                2.1                 0.5                4.6    3.3    2.7    3.5     1.9     1.8
         Saudi Arabia                              0.4                0.6                2.3                 4.2                9.9    5.1    5.3    5.0     4.4     4.9
         UAE                                       7.0                9.0               10.5                11.1                6.5   -0.4    1.8    1.5     1.2     1.6
         South Africa                              1.4                3.4                4.6                 7.1               11.0    7.2    4.3    5.0     5.5     5.4
     Asia-Pacific                                  1.7                1.4                2.0                 2.2                4.1    0.9    2.2    3.1     2.5     2.6
         Japan                                    -0.0               -0.3                0.2                 0.1                1.4   -1.3   -0.7   -0.3    -0.0    -0.1
         Australia                                 2.3                2.7                3.5                 2.3                4.4    1.8    2.8    3.4     2.0     3.2
         New Zealand                               2.3                3.0                3.4                 2.4                4.0    2.1    2.3    4.0     1.4     2.6
     Asia ex Japan                                 3.7                3.2                3.6                 4.5                6.8    2.9    4.8    5.9     4.6     4.6
         China                                     3.9                1.8                1.5                 4.8                5.9   -0.7    3.3    5.4     2.9     3.1
     Asia ex Japan & China                         3.5                4.3                5.3                 4.2                7.4    5.6    5.8    6.2     5.7     5.5
         Hong Kong                                -0.4                0.9                2.0                 2.0                4.3    0.6    2.3    5.3     5.3     4.8
         India*                                    3.9                4.2                6.8                 6.2                9.1   12.4   10.4    8.4     9.8     7.8
         Indonesia                                 6.1               10.5               13.1                 6.7                9.8    4.8    5.1    5.4     4.6     5.6
         Malaysia                                  1.4                3.0                3.6                 2.0                5.4    0.6    1.7    3.2     1.6     1.5
         Philippines                               4.8                6.6                5.5                 2.9                8.2    4.2    3.8    4.7     3.4     4.9
         Singapore                                 1.7                0.5                1.0                 2.1                6.6    0.6    2.8    5.2     4.4     2.9
         South Korea                               3.6                2.8                2.2                 2.5                4.7    2.8    2.9    4.0     2.2     3.5
         Taiwan                                    1.6                2.3                0.6                 1.8                3.5   -0.9    1.0    1.4     2.0     2.0
         Thailand                                  2.8                4.5                4.6                 2.2                5.5   -0.8    3.3    3.8     3.2     4.0
         Vietnam                                   7.7                8.3                7.4                 8.3               23.1    7.0    9.2   18.6     8.6     8.4
Note: * = end-year values; ** = fiscal year forecasts. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: National sources, HSBC estimates




22
     Macro
     Global Economics                                                                                          abc
     Q4 2012




Quarterly
% Quarter                                  Q3 11   Q3 11   Q1 12   Q2 12   Q3 12f   Q4 12f   Q1 13f   Q2 13f   Q3 13f   Q4 13f
   North America
        US                                   3.8     3.8     2.8     1.9      1.7      2.1      1.9      2.2      2.2      1.9
        Canada                               1.0     1.0    -1.3     0.1     -0.3      2.5      2.1      2.1      2.1      2.1
   Latin America
        Mexico                               3.4     3.4     3.9     3.9      4.6      4.4      4.0      4.5      4.0      3.8
        Brazil                               7.1     7.1     5.8     5.0      5.2      5.1      5.2      5.3      5.2      5.4
        Argentina                           24.5    24.5    22.9    22.5     22.4     22.8     22.7     22.3     22.0     21.7
        Chile                                3.0     3.0     3.6     3.6      3.4      3.1      3.0      3.3      3.2      3.1
   Western Europe
     Eurozone                                2.7     2.7     2.7     2.5      2.5      2.4      1.9      1.9      1.8      1.7
       Germany                               2.7     2.7     2.4     2.1      2.1      1.9      1.8      2.1      2.2      2.1
       France                                2.3     2.3     2.6     2.3      2.3      2.1      1.8      1.7      1.8      1.7
       Italy                                 2.7     2.7     3.5     3.6      3.3      3.1      2.5      1.8      2.5      2.3
       Spain                                 2.9     2.9     1.9     1.9      2.7      3.0      2.8      3.2      2.4      1.7
   Other Western Europe
       UK                                    4.7     4.7     3.5     2.7      2.4      2.4      2.3      2.6      2.6      2.5
       Norway                                1.5     1.5     0.8     0.4      0.5      0.9      1.1      1.4      1.9      2.0
       Sweden                                3.3     3.3     1.8     1.1      0.7      0.8      0.9      1.1      1.2      1.5
       Switzerland                           0.4     0.4    -0.9    -1.0     -0.6      0.0      0.0      0.3      0.5      0.5
   EMEA
      Czech Republic                         1.8     1.8     3.7     3.4      3.2      2.8      1.8      1.9      2.2      2.2
      Hungary                                3.4     3.4     5.6     5.5      6.0      5.5      3.8      3.5      3.6      3.7
      Poland                                 4.1     4.1     4.1     4.0      4.0      3.5      2.8      2.6      2.8      2.7
      Russia                                 8.1     8.1     3.9     3.8      5.4      7.0      7.9      8.0      7.4      6.5
      Turkey                                 6.4     6.4    10.5     9.4      8.9      7.2      7.5      7.7      7.6      6.3
      Ukraine                                8.5     8.5     2.9     0.9      1.6      5.3      7.6      8.0      8.0      8.0
      Romania                                4.2     4.2     2.6     1.9      3.7      4.3      4.0      3.7      3.2      3.3
      Egypt                                 10.0    10.0     9.3     8.2      6.5      6.7      6.7      8.9      8.9      9.2
      Israel                                 2.9     2.9     1.9     1.0      2.1      2.5      1.7      2.4      1.5      1.7
      South Africa                           5.4     5.4     6.1     5.7      5.0      4.9      4.9      5.2      5.6      5.7
   Asia-Pacific
       Japan                                 0.1     0.1     0.3     0.2     -0.3     -0.3     -0.2     -0.2     -0.0      0.1
       Australia                             3.5     3.5     1.6     1.2      2.2      3.1      3.5      3.6      2.8      2.7
       New Zealand                           4.6     4.6     1.6     1.0      1.0      2.0      2.2      2.6      2.9      3.0
       China                                 6.3     6.3     3.8     2.9      2.1      2.6      2.7      2.8      2.9      3.0
       India                                 9.2     9.2     7.2    10.1      9.6      9.9      9.8      8.2      7.9      7.8
       Hong Kong                             6.4     6.4     5.2     4.2      3.4      4.9      5.0      4.8      4.6      4.1
       Indonesia                             4.7     4.7     3.7     4.5      4.6      5.6      5.7      6.2      5.6      5.1
       Malaysia                              3.4     3.4     2.3     1.7      1.3      1.1      1.1      1.3      1.6      1.8
       Philippines                           4.7     4.7     3.1     2.9      3.6      3.9      4.8      5.1      4.9      4.8
       Singapore                             5.5     5.5     4.9     5.3      3.9      3.4      2.5      2.4      3.2      3.4
       South Korea                           4.3     4.3     3.0     2.4      1.5      1.8      2.6      3.4      3.5      3.6
       Taiwan                                1.3     1.3     1.3     1.7      2.6      2.5      2.3      2.1      1.9      1.6
       Thailand                              4.1     4.1     3.4     2.5      3.0      4.1      4.3      4.1      4.1      3.7
       Vietnam                              22.0    22.0    17.2    11.0      5.8      5.7      5.1      7.6      9.3      9.9
Source: National sources, HSBC estimates




                                                                                                                            23
     Macro
     Global Economics                                                                                                    abc
     Q4 2012




Short rates
3 month money
End period                                               2008   2009   2010   2011   ______ 2012 _______ ________________ 2013 _________________
                                                           Q4     Q4     Q4     Q4        Q3f        Q4f      Q1f       Q2f        Q3f       Q4f
North America
                                    US (USD)              1.4    0.3    0.3    0.5        0.4       0.4       0.4       0.4       0.4        0.4
                                    Canada (CAD)          1.9    0.5    1.2    1.4        1.3       1.3       1.3       1.3       1.3        1.3
Latin America
                                    Mexico (MXN)          7.9    5.5    4.6    4.4        4.4       4.4       4.4       4.4       4.4        4.4
                                    Brazil (BRL)         13.0    8.7   10.2   10.4        7.5       7.3       7.3       7.4       7.4        7.4
                                    Chile (CLP)           7.9    0.5    3.3    5.1        5.2       5.2       5.2       5.2       5.2        5.2
Western Europe
Eurozone                                                  2.9    0.7    0.9    1.3        0.2       0.2       0.2       0.2       0.2        0.2
Other Western Europe
                                    UK (GBP)              2.8    0.6    0.8    1.1        0.6       0.6       0.6       0.6       0.6        0.6
                                    Norway (NOK)          4.0    2.2    2.6    2.9        1.9       1.9       1.9       1.9       1.9        1.9
                                    Sweden (SEK)          2.5    0.5    1.8    2.7        1.9       1.8       1.8       1.8       1.8        1.8
                                    Switzerland (CHF)     0.6    0.3    0.2    0.1        0.1       0.1       0.1       0.1       0.1        0.1
EMEA
                                    Hungary (HUF)        10.0    6.0    5.9    7.2        6.7       6.5       6.0       5.8       5.8       5.8
                                    Poland (PLN)          5.8    4.2    4.0    5.0        4.8       4.6       4.2       4.3       4.3       4.3
                                    Russia (RUB)*        20.6    6.6    3.8    6.4        6.8       7.3       7.1       7.3       7.1       6.8
                                    Turkey (TRY)         15.5    7.5    6.7   10.1        8.5       6.0       6.5       7.0       7.2       7.5
                                    Ukraine (UAH)        20.0   16.1    9.1   15.8       17.0      12.0      12.0      12.0      12.0      12.0
                                    South Africa (ZAR)   11.4    7.1    5.5    5.5        5.1       5.2       5.2       5.3       5.3       5.4
Asia-Pacific
                                    Japan (JPY)           0.6    0.3    0.2    0.2        0.2       0.2       0.2       0.2       0.2        0.2
                                    Australia (AUD)       4.1    4.0    5.0    4.5        3.4       3.5       3.7       4.0       4.0        4.0
                                    New Zealand (NZD)     6.0    2.8    3.4    2.7        2.6       2.6       2.6       2.9       3.1        3.4
Asia ex Japan
                                    China (CNY)           1.7    1.7    2.3    3.1        2.6       2.6       2.6       2.6       2.6        2.6
Asia ex Japan & China
                                    India (INR)           9.2    3.7    7.2    8.5        8.1       7.9       7.6       7.6       7.6        7.6
                                    Hong Kong (HKD)       2.4    0.5    0.3   0.38       0.40      0.40      0.40      0.40      0.40       0.40
                                    Indonesia (IDR)      12.1    7.1    6.6    5.3        4.9       4.9       4.9       5.4       5.7        5.7
                                    Malaysia (MYR)        3.4    2.2    3.0    3.2        3.2       3.2       3.2       3.5       3.7        3.7
                                    Philippines (PHP)     6.1    3.9    0.8    1.6        3.7       3.7       4.0       4.2       4.2        4.2
                                    Singapore (SGD)       1.0    0.7    0.4    0.4        0.4       0.4       0.3       0.3       0.3        0.3
                                    South Korea (KRW)     5.5    2.8    2.8    3.6        3.2       3.2       3.2       3.2       3.8        3.8
                                    Taiwan (TWD)          1.0    0.5    0.7    0.9        0.9       0.9       1.1       1.2       1.4        1.5
                                    Thailand (THB)        3.6    1.4    2.2    3.2        3.1       3.1       3.1       3.6       4.1        4.1
Note: * = 1-month money
Source: National sources, HSBC estimates




24
     Macro
     Global Economics                                                                                             abc
     Q4 2012




Long rates
10-year bond yields
End period                                      2008   2009   2010   2011   ______ 2012________ _________________ 2013 __________________
                                                  Q4     Q4     Q4     Q4        Q3f        Q4f      Q1f        Q2f        Q3f        Q4f
Americas
                                 US              3.3    3.8    3.3    1.8        1.6        1.6       1.6        1.6       1.5        1.5
                                 Canada          3.3    3.6    3.2    1.9        1.8        1.8       1.7        1.7       1.6        1.6
                                 Chile           7.4    5.9    6.2    5.2        5.3        5.3       5.3        5.3       5.3        5.3
Western Europe
Eurozone                                         3.5    3.6    3.8    3.7        3.1        3.0       2.9        2.7       2.6        2.6
                                 Germany         3.2    3.4    3.0    1.9        1.5        1.5       1.4        1.3       1.2        1.2
                                 France          3.5    3.6    3.4    3.1        2.2        2.0       1.9        1.7       1.6        1.6
                                 Italy           4.0    4.0    4.5    6.4        5.2        5.0       4.8        4.7       4.6        4.5
                                 Spain           3.7    3.9    5.5    5.5        6.0        5.8       5.5        5.4       5.3        5.3
Other Western Europe
                                 UK              3.7    4.1    3.7    2.1        1.7        1.8       1.7        1.6       1.7        2.0
                                 Norway          4.1    4.4    3.7    2.2        2.3        2.0       2.0        2.1       2.2        2.3
                                 Sweden          3.3    3.3    3.3    1.5        1.6        1.5       1.4        1.5       1.6        1.7
                                 Switzerland     2.0    1.9    1.8    0.7        0.6        0.5       0.5        0.6       0.6        0.7
EMEA
                                 Hungary         9.3    8.0    8.0    9.8        7.5        7.5       7.0        6.8       6.5        6.5
                                 Poland          5.6    6.2    6.0    5.9        4.8        4.8       4.8        4.8       4.8        4.8
                                 Russia         11.3    8.7    7.7    8.3        8.0        8.1       7.8        7.8       7.6        7.1
                                 South Africa    7.3    9.0    8.4    8.1        6.8        7.0       7.1        7.2       7.2        7.4
Asia-Pacific
                                 Japan           1.3    1.3    1.2    1.0        0.8        1.0       1.0        1.0       1.0        1.0
                                 Australia       5.4    5.7    5.6    3.7        3.2        3.1       3.2        3.3       3.5        3.6
                                 New Zealand     5.6    6.0    5.8    3.8        3.6        3.5       3.5        3.6       3.8        4.0
Asia ex Japan
                                 India           5.3    7.7    8.0    8.5        8.1        8.0       7.9        7.9       7.8        7.7
                                 Hong Kong       2.4    2.6    2.9    1.5        0.8        0.8       0.8        0.9       1.0        1.1
                                 Indonesia      11.8   10.1    8.3    6.2        5.8        5.7       6.0        6.9       6.6        6.2
                                 Philippines     7.3    7.9    5.9    5.1        4.8        4.8       5.0        5.5       5.6        5.7
                                 Singapore       1.4    2.7    1.8    1.4        1.4        1.5       1.5        1.5       1.6        1.6
Source: National sources, HSBC estimates




                                                                                                                                       25
     Macro
     Global Economics                                                                                                                                            abc
     Q4 2012




Exchange rates vs USD
Exchange rates vs USD
End period                                                            2008        2009        2010 ____ 2011 _____ ____________ 2012 ____________        ___________ 2013_____________
                                                                        Q4          Q4          Q4     Q3      Q4     Q1      Q2       Q3f     Q4f         Q1f     Q2f     Q3f     Q4f
Americas
                                            Canada (CAD)              1.23         1.05        0.99       1.04    1.02    1.00    1.02    0.98    0.97    0.95    0.95    0.95    0.95
                                             Mexico (MXN)            13.81        13.08       12.36      13.88   13.97   12.80   13.34   13.80   13.50   13.35   13.20   13.05   12.90
                                               Brazil (BRL)           2.31         1.74        1.67       1.85    1.88    1.82    2.02    2.00    2.00    2.03    2.05    2.08    2.10
                                           Argentina (ARS)            3.45         3.80        3.97       4.21    4.30    4.38    4.53    4.66    5.00    5.22    5.45    5.70    6.00
                                               Chile (CLP)             637          507         468        521     520     489     501     475     490     500     500     500     500
Western Europe
                                           Eurozone (EUR)              1.39        1.43           1.34    1.34    1.30    1.33    1.27    1.30    1.35    1.37    1.38    1.39    1.40
Other Western Europe
                                                UK (GBP)               1.44        1.61           1.57    1.56    1.55    1.60    1.57    1.58    1.60    1.62    1.61    1.60    1.60
                                           Sweden (SEK)                7.91        7.14           6.72    6.87    6.86    6.64    6.90    6.38    6.00    5.91    5.83    5.79    5.75
                                           Norway (NOK)                7.00        5.78           5.81    5.87    5.97    5.70    5.94    5.58    5.26    5.11    5.04    5.00    4.93
                                        Switzerland (CHF)              1.06        1.03           0.93    0.91    0.94    0.90    0.95    0.92    0.89    0.88    0.87    0.86    0.86
EMEA
                                   Czech Republic (CZK)              19.31        18.40       18.70      18.42   19.65   18.66   20.12   19.62   18.52   18.25   17.75   17.48   17.14
                                         Hungary (HUF)               191.3        188.3       207.5      218.7   242.5   221.5   225.2   223.1   207.4   200.7   199.3   194.2   192.9
                                           Poland (PLN)               2.96         2.86        2.95       3.29    3.43    3.12    3.34    3.27    3.04    2.92    2.90    2.81    2.71
                                          Russia (RUB)                29.4         30.2        30.5       31.9    32.0    29.3    32.9    33.1    32.3    30.6    33.3    33.9    33.8
                                           Turkey (TRY)               1.54         1.50        1.54       1.86    1.89    1.78    1.81    1.80    1.80    1.75    1.70    1.70    1.65
                                         Ukraine (UAH)                7.80         8.00        7.97       8.02    8.03    8.03    8.03    8.10    9.90    9.90   10.10   11.00   11.00
                                             Israel (ILS)             3.78         3.75        3.68       3.70    3.80    3.70    3.65    3.90    3.85    3.80    3.75    3.70    3.65
                                            Egypt (EGP)               5.52         5.48        5.70       6.00    6.00    6.30    6.25    6.07    6.10    6.10    6.10    6.10    6.10
                                      South Africa (ZAR)              9.25         7.36        6.62       8.04    8.07    7.67    8.18    8.00    8.00    7.80    7.50    7.50    7.30

Asia/Pacific
                                              Japan (JPY)               91          93          81          77      77      82      80      75      74      72      72      72      72
                                         Australia (AUD)              0.70        0.90        1.03        0.97    1.03    1.04    1.03    1.00    0.95    0.95    0.95    0.95    0.95
                                      New Zealand (NZD)               0.58        0.73        0.78        0.76    0.78    0.82    0.80    0.75    0.73    0.72    0.72    0.72    0.72
                                              China (CNY)             6.82        6.83        6.59        6.38    6.29    6.30    6.35    6.33    6.30    6.28    6.26    6.24    6.22
                                       Hong Kong (HKD)                7.75        7.75        7.77        7.78    7.77    7.77    7.76    7.80    7.80    7.80    7.80    7.80    7.80
                                               India (INR)            48.6        46.4        44.7        49.0    53.0    50.9    55.5    56.0    52.0    51.0    50.0    49.0    49.0
                                         Indonesia (IDR)             11027        9425        9010        8790    9068    9144    9393    9700    9800    9750    9700    9650    9600
                                         Malaysia (MYR)               3.46        3.42        3.08        3.19    3.17    3.06    3.17    3.14    3.10    3.06    3.02    3.00    3.00
                                        Philippines (PHP)            47.47       46.50       43.65       43.73   43.84   42.93   41.93   41.60   41.40   41.20   41.00   41.00   41.00
                                        Singapore (SGD)               1.43        1.41        1.28        1.31    1.30    1.26    1.27    1.25    1.23    1.22    1.21    1.20    1.19
                                      South Korea (KRW)               1263        1166        1121        1181    1159    1132    1141    1140    1120    1110    1100    1090    1080
                                           Taiwan (TWD)               32.9        32.1        30.4        30.5    30.3    29.5    29.9    29.7    29.4    29.2    29.0    28.8    28.6
                                          Thailand (THB)             34.90       33.33       30.10       31.12   31.64   30.79   31.78   31.20   30.90   30.60   30.30   30.00   30.00
                                          Vietnam (VND)              16900       18200       19498       20830   21037   20825   20880   21500   21500   21500   21500   21500   21500
Note: Turkish currency (until then coded TRL) shed 6 zeros of its exchange rate in January 2005
Source: National sources, HSBC estimates




26
     Macro
     Global Economics                                                                                                                          abc
     Q4 2012




Exchange rate vs EUR & GBP

End period                                                     2008    2009    2010 ____2011 ____ ___________ 2012____________         ___________2013 ____________
                                                                 Q4      Q4      Q4    Q3      Q4    Q1      Q2     Q3f    Q4f           Q1f     Q2f    Q3f     Q4f
vs EUR
Americas
                                                 US (USD)       1.39    1.43    1.34    1.34    1.30    1.33    1.27    1.30    1.35    1.37    1.38    1.39    1.40
                                              Canada (CAD)      1.72    1.50    1.33    1.40    1.32    1.33    1.29    1.27    1.31    1.30    1.31    1.32    1.33
Europe
                                              UK (GBP)          0.97    0.89    0.86    0.86    0.84    0.83    0.81    0.82    0.84    0.85    0.86    0.87    0.88
                                         Sweden (SEK)          10.99   10.24    9.02    9.21    8.90    8.84    8.76    8.30    8.10    8.10    8.05    8.05    8.05
                                      Switzerland (CHF)         1.48    1.48    1.25    1.22    1.21    1.20    1.20    1.20    1.20    1.20    1.20    1.20    1.20
                                         Norway (NOK)           9.73    8.29    7.80    7.88    7.75    7.60    7.54    7.25    7.10    7.00    6.95    6.95    6.90
                                   Czech Republic (CZK)         26.8    26.4    25.1    24.7    25.5    24.9    25.5    25.5    25.0    25.0    24.5    24.3    24.0
                                         Hungary (HUF)           266     270     278     293     315     295     286     290     280     275     275     270     270
                                           Poland (PLN)         4.12    4.11    3.96    4.42    4.46    4.15    4.24    4.25    4.10    4.00    4.00    3.90    3.80
                                          Russia (RUB)         40.84   43.39   40.89   42.77   41.57   39.00   41.80   43.02   43.56   41.89   46.00   47.13   47.29
Asia/Pacific
                                            Japan (JPY)        126.0   133.6   108.8   103.4    99.9   109.6   101.3    97.5    99.9    98.6    99.4   100.1   100.8
                                         Australia (AUD)        1.99    1.60    1.31    1.38    1.27    1.29    1.24    1.30    1.42    1.44    1.45    1.46    1.47
                                      New Zealand (NZD)         2.38    1.97    1.72    1.76    1.66    1.63    1.58    1.73    1.85    1.90    1.92    1.93    1.94
Africa
                                       South Africa (ZAR)      12.85   10.56    8.88   10.79   10.48   10.22   10.38   10.40   10.80   10.69   10.35   10.43   10.22

vs GBP
Americas
                                                 US (USD)       1.44    1.61    1.57    1.56    1.55    1.60    1.57    1.58    1.60    1.62    1.61    1.60    1.60
                                              Canada (CAD)      1.77    1.69    1.56    1.62    1.58    1.60    1.60    1.55    1.55    1.54    1.53    1.52    1.52
Europe
                                            Eurozone (EUR)      0.97    0.89    0.86    0.86    0.84    0.83    0.81    0.82    0.84    0.85    0.86    0.87    0.88

                                              Sweden (SEK)     11.37   11.53   10.53   10.70   10.65   10.60   10.83   10.10    9.61    9.57    9.38    9.26    9.18
                                              Norway (NOK)     10.07    9.33    9.10    9.15    9.27    9.11    9.32    8.82    8.42    8.27    8.10    8.00    7.87
                                           Switzerland (CHF)    1.53    1.67    1.46    1.41    1.45    1.44    1.48    1.46    1.42    1.42    1.40    1.38    1.37

Asia/Pacific
                                            Japan (JPY)          130     150     127     120     120     131     125     119     119     117     116     115     115
                                         Australia (AUD)        2.06    1.80    1.53    1.60    1.52    1.54    1.53    1.58    1.69    1.70    1.69    1.68    1.68
                                      New Zealand (NZD)         2.46    2.22    2.00    2.04    1.99    1.95    1.95    2.11    2.19    2.25    2.23    2.22    2.22
Africa
                                       South Africa (ZAR)      13.29   11.89   10.36   12.52   12.55   12.26   12.83   12.66   12.81   12.62   12.07   11.99   11.65
Source: National sources, HSBC estimates




                                                                                                                                                                   27
     Macro
     Global Economics                                                                                                                                      abc
     Q4 2012




Consumer spending
Consumer spending
% Year                                           2004               2005               2006               2007                2008   2009    2010   2011   2012f   2013f
World                                              3.2                3.3                3.3                3.2                1.0    -0.9    2.9    2.3     2.0     2.2
 Developed                                         2.6                2.6                2.4                2.2               -0.1    -1.4    1.8    1.3     1.2     1.2
 Emerging                                          6.2                6.7                7.1                7.7                5.6     0.9    6.7    5.8     4.8     5.4
  North America                                    3.4                3.4                3.0                2.5               -0.1    -1.7    2.1    2.5     1.9     2.0
       US                                          3.5                3.4                2.9                2.4               -0.3    -1.9    2.0    2.5     1.9     2.0
       Canada                                      3.3                3.7                4.2                4.6                2.9     0.4    3.4    2.6     1.6     1.9
  Latin America                                    5.5                5.3                5.8                5.4                3.7    -2.2    6.5    5.3     4.0     4.7
       Mexico                                      5.6                4.8                5.7                4.0                1.7    -7.3    5.0    4.5     4.5     5.5
       Brazil                                      3.8                4.5                5.2                6.1                5.7     4.2    7.0    4.1     3.3     4.3
       Argentina                                   9.5                8.9                7.8                9.0                6.5     0.5    9.0   10.7     3.6     2.8
       Chile                                       8.4                8.5                7.8                7.6                5.2    -0.8   10.0    8.8     5.3     5.2
  Western Europe                                   1.8                1.9                2.1                1.9                0.1    -1.3    1.1    0.1    -0.4     0.3
     Eurozone                                      1.4                1.8                2.2                1.7                0.4    -1.0    1.0    0.1    -0.8    -0.2
       Germany                                     0.1                0.3                1.6               -0.2                0.6     0.3    0.8    1.7     0.9     1.2
       France                                      1.6                2.5                2.5                2.2                0.2     0.2    1.4    0.2     0.1     0.5
       Italy                                       0.8                1.2                1.3                1.1               -0.8    -1.6    1.2    0.2    -3.4    -1.3
       Spain                                       4.2                4.1                4.0                3.6               -0.6    -3.8    0.7   -1.0    -1.8    -1.8
  Other Western Europe                             2.8                2.2                2.0                2.7               -0.7    -2.2    1.7   -0.1     0.7     1.6
       UK                                          3.0                2.1                1.8                2.7               -1.5    -3.5    1.3   -1.0    -0.1     1.3
       Norway                                      5.2                4.9                5.1                5.4                2.0    -0.2    3.6    2.4     3.7     4.5
       Sweden                                      2.6                2.8                2.8                3.8               -0.1    -0.2    3.6    2.0     1.6     1.2
       Switzerland                                 1.6                1.7                1.6                2.2                1.2     1.8    1.6    1.2     2.3     1.6
  EMEA                                             8.3                7.7                8.4                9.7                6.4    -3.4    4.3    5.5     3.3     3.4
       Czech Republic                              3.2                3.1                4.4                4.2                2.8    -0.3    0.5   -0.5    -2.8     0.3
       Hungary                                     2.0                2.9                1.7               -1.0               -0.2    -5.7   -2.7    0.2    -1.3     0.2
       Poland                                      4.7                2.1                5.0                4.9                5.7     2.1    3.2    3.1     1.6     1.6
       Russia                                     12.5               12.2               12.2               14.3               10.6    -5.1    5.1    6.8     5.5     4.5
       Turkey                                     11.0                7.9                4.6                5.5               -0.3    -2.3    6.7    7.7     0.0     3.0
       Ukraine                                    13.0               20.1               15.9               17.2               13.1   -14.9    7.0   15.0    10.0     3.0
       Romania                                    12.9                9.7               11.5               10.1                8.8    -9.1   -0.3    0.7     0.1     2.1
       Egypt*                                      2.1                4.8                6.4                4.2                5.7     5.7    4.1    5.0     6.0     4.3
       Israel                                      5.0                3.5                4.2                6.3                2.8     1.4    5.3    3.6     1.7     1.7
       Saudi Arabia**                              5.3                8.8               10.2               17.7                3.5     6.7    3.2    5.0     4.2     4.0
       UAE**                                      22.5               14.1               21.8               25.4               22.1   -23.1    3.8    5.8     5.2     6.6
       South Africa                                6.2                6.1                8.3                5.5                2.2    -2.0    3.7    4.5     3.1     3.7
  Asia-Pacific                                     3.2                3.8                3.7                4.2                2.4     1.9    5.2    3.2     4.2     3.8
       Japan                                       1.2                1.5                1.1                0.9               -0.9    -0.7    2.6    0.1     2.3     0.6
       Australia                                   5.6                3.1                3.3                5.6                1.9     1.0    2.9    3.3     3.8     2.5
       New Zealand                                 5.4                4.3                2.8                3.6                0.1    -1.6    2.3    1.4     1.8     2.0
  Asia ex Japan                                    5.3                6.8                6.9                7.7                6.0     4.7    8.0    6.1     6.0     6.7
       China                                       7.2                8.5                8.7                9.0                8.9     8.0   10.9    8.8     8.5     8.7
  Asia ex Japan & China                            4.3                5.9                5.9                6.9                4.3     2.8    6.2    4.3     4.2     5.2
       Hong Kong                                   7.0                3.0                5.9                8.5                2.4     0.7    6.7    8.5     5.0     6.1
       India                                       5.2                8.6                8.5                9.4                7.2     7.2    8.1    5.5     5.5     7.2
       Indonesia                                   5.0                4.0                3.2                5.0                5.3     4.9    4.7    4.7     5.0     5.0
       Malaysia                                    9.8                9.3                6.6               10.4                8.7     0.6    6.6    7.1     8.4     6.8
       Philippines                                 6.0                4.4                4.2                4.6                3.7     2.3    3.4    6.3     5.2     5.1
       Singapore                                   6.1                3.6                5.0                6.8                3.3     0.1    6.5    4.1     2.6     4.3
       South Korea                                 0.3                4.6                4.7                5.1                1.3    -0.0    4.4    2.3     1.7     2.4
       Taiwan                                      5.2                2.9                1.5                2.1               -0.9     0.8    3.7    3.0     2.5     5.0
       Thailand                                    6.1                4.9                3.2                1.8                2.9    -1.1    4.8    1.3     6.1     4.6
       Vietnam                                     7.1                7.3                8.3               10.8                9.3     3.1   10.0    4.4     4.2     5.0
Note: * = fiscal year forecasts; ** = nominal growth. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: National sources, HSBC estimates




28
     Macro
     Global Economics                                                                                                                                                      abc
     Q4 2012




Investment spending
Investment spending
% Year                                            2004               2005               2006               2007               2008                  2009    2010   2011    2012f   2013f
World                                              7.3                 7.7                7.6                7.2                3.2                  -3.3    9.4    10.4     9.4    10.8
 Developed                                         4.2                 4.5                3.9                1.9               -3.4                 -14.1    1.6     3.4     3.3     3.2
 Emerging                                         16.8                16.5               16.6               18.8               15.8                  13.9   18.8    17.5    15.0    16.8
  North America                                    7.4                 6.7                2.7               -1.3               -5.7                 -18.1    3.2     6.5     8.2     5.3
       US                                          7.3                 6.5                2.3               -1.8               -6.4                 -18.8    2.6     6.6     8.8     5.4
       Canada                                      7.8                 9.3                7.1                3.5                1.4                 -11.8    8.3     5.3     3.7     4.3
  Latin America                                   10.6                 8.6               10.4               10.1                9.3                 -11.1   13.9     8.9     3.2     6.0
       Mexico                                      8.0                 7.5                9.9                6.9                5.5                 -11.8    6.2     8.9     7.2     5.7
       Brazil                                      9.1                 3.6                9.8               13.9               13.6                 -10.3   21.9     4.7    -0.9     6.6
       Argentina                                  34.4                22.7               18.2               13.6                9.1                 -10.2   21.2    16.6    -2.1     2.7
       Chile                                      11.4                23.5                4.3               10.8               17.9                 -12.1   14.3    17.6     8.2    10.2
  Western Europe                                   2.5                 3.5                6.2                5.4               -1.7                 -12.5    0.5     1.5    -2.0    -0.1
     Eurozone                                      1.8                 3.4                6.0                4.7               -1.4                 -12.7   -0.3     1.6    -3.3    -1.5
       Germany                                    -1.2                 1.0                8.9                5.0                0.6                 -11.5    5.6     6.4    -1.4    -0.0
       France                                      3.0                 4.4                4.3                6.3                0.1                 -10.4    1.0     3.5     0.6     1.8
       Italy                                       1.2                 1.9                3.7                1.3               -3.8                 -11.7    1.7    -1.2    -9.4    -4.8
       Spain                                       5.2                 6.6                8.0                4.3               -3.9                 -17.9   -5.5    -5.5    -9.4    -7.5
  Other Western Europe                             5.0                 3.7                6.7                7.8               -2.8                 -12.0    3.3     1.3     2.0     4.1
       UK                                          5.1                 2.2                6.7                8.2               -4.8                 -13.4    3.6    -1.3     1.1     4.7
       Norway***                                  10.6                12.2               10.5               13.4               -1.1                 -13.5   -2.5     8.0     4.8     5.5
       Sweden                                      4.9                 8.3                9.4                9.0                0.4                 -14.8    6.9     6.9     4.6     3.1
       Switzerland                                 4.2                 4.1                5.3                5.4                0.7                  -8.0    4.8     4.0     0.8     2.5
  EMEA                                            11.3                11.5               14.0               17.6                7.3                 -10.4    8.4     8.8     3.5     4.5
       Czech Republic                              2.5                 6.0                5.9               13.3                4.0                 -11.3    0.0    -1.2    -1.9     0.6
       Hungary                                     7.2                 4.7               -2.8                3.8                2.9                 -11.0   -9.7    -5.5    -7.0    -4.0
       Poland                                      6.4                 6.5               14.9               17.6                9.6                  -1.2   -0.2     8.1     1.6     0.3
       Russia                                     12.6                10.6               18.0               21.0               10.6                 -14.4    5.8     8.0     5.0     4.5
       Turkey                                     28.4                17.4               13.3                3.1               -6.2                 -19.0   30.5    18.3    -1.9     5.2
       Ukraine                                    20.4                 3.9               20.9               24.4               -1.2                 -50.5    4.9    10.1     6.0     4.0
       Romania                                    11.0                15.5               20.0               30.2               15.1                 -28.1   -2.1     6.3     5.7     5.5
       Egypt*                                      6.3                10.3               13.3               31.8               15.5                  -9.1    8.0    -4.4     5.0     3.4
       Israel                                      4.0                 4.0               13.1               14.6                4.2                  -4.1   13.6    16.2     4.0     1.5
       Saudi Arabia**                              2.5                18.5               17.0               18.8               12.6                  -4.6    3.6     7.5    10.0     9.0
       UAE**                                       6.8                20.2               16.3               53.6               12.7                  -0.8   21.7    13.1     5.7     7.6
       South Africa                               12.9                11.0               12.1               14.0               14.1                  -2.2   -1.6     4.4     5.2     4.5
  Asia-Pacific                                    10.8                11.6               11.7               13.5               11.8                  13.4   16.3    16.1    15.3    17.0
       Japan                                       0.4                 0.8                1.5                0.3               -4.1                 -10.6    0.1     0.8     4.4     5.4
       Australia                                   8.0                 9.2                4.7                9.3                8.2                  -3.0    4.9     7.1     8.1     7.2
       New Zealand                                12.5                 5.4               -2.0                6.9               -3.8                 -15.5    2.0     1.7     5.1    11.9
  Asia ex Japan                                   19.7                19.4               18.3               20.5               18.9                  22.7   20.9    19.6    17.5    19.1
       China                                      27.6                27.2               24.5               25.8               26.1                  30.5   24.5    23.8    20.0    21.5
  Asia ex Japan & China                            9.8                 8.2                7.9               10.1                2.7                   1.2    8.2     2.4     5.0     5.3
       Hong Kong                                   2.5                 4.1                7.1                3.4                1.0                  -3.9    7.7     7.6     3.5     3.7
       India*                                     20.2                16.2               13.8               16.2                3.5                   6.8    7.5     5.5     4.3     7.1
       Indonesia                                  14.7                10.9                2.6                9.3               11.9                   3.3    8.5     8.8    11.7     9.7
       Malaysia                                    3.6                 3.1                6.3               10.4                2.4                  -2.7   10.4     6.5    23.4     9.4
       Philippines                                 2.2                 2.4                5.4                5.2                3.2                  -1.7   19.1     0.2     5.6     4.3
       Singapore                                  10.1                 0.4               13.6               17.4               13.0                  -2.9    7.0     3.3     5.7     3.9
       South Korea                                 2.1                 1.9                3.4                4.2               -1.9                  -1.0    5.8    -1.1     1.4     2.1
       Taiwan                                     14.0                 2.7                0.1                0.6              -12.4                 -11.2   24.0    -3.9    -2.7     2.7
       Thailand                                   13.2                10.5                3.9                1.5                1.2                  -9.2    9.4     3.3    13.5     7.8
       Vietnam                                    10.4                 9.8                9.9               24.2                3.8                   8.7   10.9   -10.4     2.0     4.3
Note: * = fiscal year forecasts; ** = nominal growth; *** = mainland. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: National sources, HSBC estimates




                                                                                                                                                                                      29
     Macro
     Global Economics                                                                                                                                                  abc
     Q4 2012




Exports
Export volume growth (GDP basis)
% Year                                           2004               2005               2006               2007               2008                2009    2010   2011   2012f   2013f
World                                             11.5                8.7               10.7                8.8                 4.1              -12.2   14.3    7.9     3.2     4.4
 Developed                                         7.8                5.7                8.6                6.2                 1.8              -12.3   11.2    5.3     2.3     2.9
 Emerging                                         19.5               14.8               14.4               13.2                 7.9              -12.0   19.1   11.6     4.4     6.4
  North America                                    8.4                5.6                7.1                7.6                 3.9              -10.3   10.5    6.6     4.2     3.7
       US                                          9.5                6.7                9.0                9.3                 6.0               -9.4   11.3    6.7     4.1     3.7
       Canada                                      5.0                1.9                0.6                1.2                -4.6              -14.2    6.4    6.2     4.8     3.7
  Latin America                                   12.3                7.8                8.5                6.3                 0.5              -11.2   16.5    5.7     3.5     5.0
       Mexico                                     11.5                6.8               10.9                5.7                 0.5              -13.5   21.7    6.7     6.1     6.5
       Brazil                                     15.3                9.3                5.0                6.2                 0.5              -10.2   11.5    4.5    -0.1     1.5
       Argentina                                   8.1               13.5                7.3                9.1                 1.2               -6.4   14.6    4.3    -3.2     4.3
       Chile                                      14.0                2.8                5.1                7.2                -0.7               -4.5    1.4    4.6     6.0     6.2
     Western Europe                                6.9                5.7                9.2                5.5                1.0               -11.5    9.9    5.7     1.9     2.3
       Eurozone                                    7.3                5.4                9.1                6.6                0.9               -12.4   10.9    6.3     2.5     2.5
         Germany                                   9.7                8.0               13.5                8.3                2.3               -12.8   13.4    7.9     3.9     2.9
         France                                    4.1                3.1                5.5                2.3               -0.6               -11.8    9.2    5.5     2.6     3.2
         Italy                                     5.5                4.1                8.8                5.6               -2.8               -17.7   11.4    6.3     0.5     1.4
         Spain                                     4.2                2.5                6.7                6.6               -1.0               -10.0   11.3    7.6     1.1     1.7
     Other Western Europe                          5.6                6.7                9.3                1.9                1.5                -8.7    6.8    3.9     0.1     1.8
         UK                                        5.0                7.9               11.1               -2.6                1.0                -9.5    6.4    4.4     0.1     1.5
         Norway***                                 4.5                5.6                7.0                6.4                4.3                -8.3    7.9    0.2     1.8     2.8
         Sweden                                   10.0                7.0                9.4                6.3                0.4               -12.4   10.3    7.4    -0.4     2.2
         Switzerland                               7.9                7.7               10.1                9.9                2.9                -7.7    7.8    3.8    -0.6     2.4
     EMEA                                         17.2               12.3               12.5               12.1               11.3               -13.3   10.9   13.9     5.3     4.7
         Czech Republic                           13.2               11.8               14.2               11.2                3.6                -9.7   16.0   11.0     5.2     3.5
         Hungary                                  15.0               11.3               19.1               15.0                5.7               -10.2   14.3    8.4     2.9     5.0
         Poland                                   14.0                8.0               14.6                9.1                7.1                -6.8   12.1    7.5     3.0     4.9
         Russia                                   11.8                6.5                7.3                6.3                0.6                -4.7    7.0    0.4     1.0     2.0
         Turkey                                   11.2                7.9                6.6                7.3                2.7                -5.0    3.4    6.5    13.6    10.8
         Ukraine                                  40.8                4.8               11.1               28.1               35.7               -40.3   29.2   33.1     5.0    10.0
         Romania                                  14.0                7.7               10.4                8.0                8.1                -6.4   14.0    9.9    -0.5     4.5
         Egypt*                                   27.4               32.3               33.4               19.3               33.3               -14.3   -5.1   13.1    -0.1     5.5
         Israel                                   18.2                4.3                5.5                9.2                6.6               -12.6   13.4    4.9     1.8     3.7
         Saudi Arabia**                            9.1               14.0                3.4                2.7               -4.2                -7.3    8.3   11.0     4.0     2.0
         UAE**                                    35.5               28.9               24.1               22.7               33.9               -19.8   11.4   31.9     9.5     2.3
         South Africa                             27.4               17.4               14.6               18.0               14.7               -22.0   20.0   25.7     7.0     9.0
     Asia-Pacific                                 19.1               14.0               14.3               13.1                6.3               -13.5   22.3    9.3     3.5     6.7
         Japan                                    14.0                6.2                9.9                8.7                1.4               -24.2   24.3   -0.1    -0.6     4.1
         Australia                                 3.9                3.1                3.2                3.2                3.8                 2.1    5.9   -1.3     5.3     7.7
         New Zealand                               6.1               -0.5                1.7                4.0               -1.3                 2.2    3.1    2.0     2.2     4.8
     Asia ex Japan                                21.9               17.1               16.2               14.7                7.6               -11.6   22.7   11.6     4.2     7.1
         China                                    32.0               29.0               25.0               23.8               11.2               -17.9   29.4   18.3     3.8     6.0
     Asia ex Japan & China                        17.5               11.3               11.2                8.9                5.0                -6.9   18.1    6.6     4.6     8.1
         Hong Kong                                15.4               10.6                9.4                8.3                2.6               -10.1   16.7    4.2     1.0    11.9
         India*                                   27.2               26.1               20.4                5.9               14.6                -4.8   22.7   15.3     8.7    12.6
         Indonesia                                13.5               16.6                9.4                8.5                9.5                -9.7   15.3   13.6     0.3     1.5
         Malaysia                                 16.1                8.2                6.7                3.8                1.6               -10.9   11.3    4.2     0.8     1.0
         Philippines                              12.8                5.0               12.6                6.7               -2.7                -7.8   21.0   -4.2     8.4     5.4
         Singapore                                19.1               12.4               10.9                9.0                4.7                -7.8   19.1    2.6     2.2     8.6
         South Korea                              19.7                7.8               11.4               12.6                6.6                -1.2   14.7    9.5     3.5     9.8
         Taiwan                                   15.4                7.8               11.4                9.6                0.9                -8.7   25.6    4.5    -5.4     9.5
         Thailand                                  9.6                4.2                9.1                7.8                5.1               -12.5   14.7    9.5     0.7     3.8
         Vietnam                                  31.4               22.5               22.7               21.9               29.1                -8.9   26.5   34.2    15.9    19.8
Note: * = fiscal year forecasts; ** = nominal growth. We now calculate the weighting system using chain nominal GDP (USD) weights ***=mainland
Source: National sources, HSBC estimates




30
     Macro
     Global Economics                                                                                abc
     Q4 2012




Industrial production
Industrial production
% Year                                     2004   2005   2006   2007   2008    2009    2010   2011   2012f   2013f
World                                       6.5    5.0    6.4    6.5     1.1    -6.3    9.6    4.9     2.9     4.6
 Developed                                  2.5    2.0    2.9    2.9    -2.8   -13.3    7.2    2.7     1.2     2.2
 Emerging                                  11.5    8.6   10.5   10.7     5.7     2.1   12.4    7.4     5.0     7.5
  North America                             2.3    3.1    2.0    2.4    -3.8   -11.0    5.2    4.0     3.6     2.3
       US                                   2.3    3.2    2.2    2.7    -3.7   -11.1    5.3    4.1     3.8     2.3
       Canada                               1.5    1.7    0.0   -0.5    -4.5    -9.4    4.6    3.5     1.7     2.4
  Latin America                             7.2    3.9    4.7    4.9     1.5    -7.0    8.4    2.6     1.1     4.1
       Mexico                               3.7    2.8    5.7    2.0    -0.1    -7.7    6.1    3.8     3.5     3.1
       Brazil                               8.3    3.1    2.8    6.0     3.1    -7.4   10.4    0.3    -1.5     5.2
       Argentina                           10.7    8.0    8.4    7.5     1.0    -4.6    8.8    4.8     2.8     3.1
       Chile                                8.7    5.4    3.3    4.1     0.2    -6.7    3.0    7.2     2.8     4.0
  Western Europe                            2.0    1.0    3.5    3.4    -1.8   -13.9    6.6    3.1    -1.7     1.1
     Eurozone                               2.2    1.5    4.2    3.9    -1.7   -14.9    7.3    3.4    -2.0     1.1
       Germany                              2.5    2.9    5.7    5.9    -0.0   -15.5   10.1    8.0     0.1     2.3
       France                               1.3    0.2    1.3    1.2    -2.7   -13.9    4.5    3.1    -2.4     0.5
       Italy                               -0.2   -0.6    3.7    1.8    -3.7   -18.6    6.7    0.3    -6.7    -1.5
       Spain                                1.8    0.9    3.9    1.9    -7.5   -15.7    0.9   -1.4    -5.6    -2.6
  Other Western Europe                      1.6   -0.2    1.6    1.8    -2.0   -10.9    4.5    2.2    -0.8     0.8
       UK                                   1.0   -1.3    0.1    0.1    -2.8   -10.7    3.8    2.0    -1.0     0.3
       Norway                               0.7    2.7    5.7    5.8     2.9    -6.4    2.8    0.9     2.4     2.4
       Sweden                               4.1    2.3    3.5    4.0    -2.9   -17.9    8.8    5.7     0.2     2.0
       Switzerland                          4.0    2.7    7.8    9.5     1.3    -7.9    6.4    0.9    -0.6     2.2
  EMEA                                      8.7    4.3    6.6    5.9     1.7    -8.2   10.1    6.0     2.3     3.3
       Czech Republic                      10.5    3.9    8.3   10.8    -1.5   -13.2   10.2    7.1     0.3     4.0
       Hungary                              7.7    6.8    9.9    7.9    -0.2   -17.6   10.5    5.7     1.6     5.0
       Poland                              12.7    4.0   12.1    9.4     3.0    -3.6   11.1    7.0     3.3     3.5
       Russia                               6.6    3.2    4.0    3.7    -1.0   -10.3   10.3    4.1     2.7     1.8
       Turkey                               9.8    5.4    7.8    6.9    -0.9    -9.6   13.3    9.2     2.8     5.5
       Ukraine                             12.5    3.1    6.2    7.6    -5.2   -21.9   11.2    7.3     1.7     3.0
       Romania                              2.7   -3.0    9.2   10.4     2.8    -5.2    5.5    5.8     0.6     3.0
       Egypt                               15.8    7.6    9.7   16.4    21.9    17.8   18.1   11.3    -2.0     6.0
       Israel                               6.9    3.6    8.5    4.3     6.9    -6.2    8.6    2.2     2.1     3.5
       Saudi Arabia                         6.6    6.4    2.0   -0.2     4.4    -2.8    5.4    8.0     4.1     2.7
       UAE                                  9.3    3.9   13.7   -2.6     2.7    -6.6    1.7    4.8     1.5     2.9
       South Africa                         4.0    3.0    4.8    4.6     0.9   -12.6    4.9    2.4     2.5     3.2
  Asia-Pacific                             11.2    8.7   10.9   11.0     5.4     1.3   14.0    6.4     5.5     8.4
       Japan                                4.8    1.4    4.5    2.8    -3.3   -21.9   16.5   -2.4     1.4     5.6
       Australia                            0.5    1.6    2.0    2.9     2.5    -1.7    4.5   -1.2     1.5     0.9
       New Zealand                          1.1   -0.1    0.9    5.3   -10.5     3.8   -1.3   -1.1     3.8     1.4
     Asia ex Japan                         13.2   10.7   12.8   13.2     7.7     6.7   13.9    8.8     6.6     9.3
       China                               16.3   15.9   16.2   16.0    12.9    12.9   15.7   13.9    10.5    12.4
     Asia ex Japan & China                 10.2    5.4    9.3   10.4     2.3     0.4   12.1    3.6     2.6     6.2
       Hong Kong                            2.9    2.5    2.2   -1.5    -6.7    -8.3    3.5    0.7    -1.4     3.0
       India                               11.7    4.7   12.9   15.5     2.5     5.3    8.2    2.9     2.5     5.9
       Indonesia                            6.4    4.6    4.6    4.7     3.7     2.2    4.7    6.2     5.4     6.2
       Malaysia                            10.8    3.6    4.8    2.3     0.8    -7.6    7.2    1.2     3.1     0.3
       Philippines                          5.0    5.0    4.1    3.6     4.3    -4.8   11.2    4.7     5.5     7.5
       Singapore                           13.9    9.5   11.9    5.9    -4.2    -4.2   29.7    7.8     3.0     3.8
       South Korea                         10.1    5.9    9.3    7.0     3.3    -0.7   16.6    6.9     2.7     5.8
       Taiwan                               9.3    3.8    4.7    7.8    -1.8    -8.1   26.9    5.0    -3.0     8.5
       Thailand                            11.1    9.0    6.4    8.1     3.9    -7.2   14.3   -9.3     2.6     3.5
Note: * = manufacturing output
Source: National sources, HSBC estimates




                                                                                                                31
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Wage growth
Wage growth
% Year                                                 2004              2005                 2006   2007   2008   2009   2010   2011   2012f   2013f
World                                                   5.8               6.5                  6.5    7.2    7.1    3.2    5.5    5.6     5.3     5.5
  North America                                         3.7               3.3                  3.1    3.4    2.9    1.7    2.0    2.1     1.9     2.1
       US                                               3.8               3.2                  3.1    3.3    2.9    1.7    1.9    2.1     1.9     2.0
       Canada                                           2.7               3.9                  2.5    4.3    2.9    1.6    3.2    2.5     2.5     2.7
  Latin America                                         6.3              10.7                  9.2    9.7   11.1    8.3   11.2   13.9    10.5     9.7
       Mexico                                           4.7               3.8                  5.1    5.4    6.0    4.6    3.4    4.4     4.5     4.3
       Brazil                                           4.6               7.6                  7.2    7.3    9.9    8.4    9.2    9.4     9.6     8.3
       Argentina                                       11.0              26.0                 19.4   20.0   23.4   17.3   29.3   35.8    24.0    22.5
       Chile                                            2.7               6.3                  3.5    4.5    5.3    4.0    4.7    6.3     6.0     4.5
  Western Europe                                        2.7               2.9                  3.1    3.4    3.6    2.3    1.8    2.5     2.2     2.3
     Eurozone                                           2.2               2.4                  2.6    3.0    3.5    2.7    1.4    2.5     2.1     2.1
       Germany                                          0.8               1.1                  1.1    1.3    2.8    2.0    1.6    1.7     2.6     3.2
       France                                           2.5               2.8                  2.8    2.7    2.9    2.2    1.8    2.2     2.3     2.5
       Italy                                            2.8               3.1                  3.0    2.2    3.5    3.1    2.1    1.8     1.4     1.4
       Spain                                            3.9               3.0                  3.0    4.4    5.2    4.3    1.2    2.5     1.0     0.6
  Other Western Europe                                  3.7               4.0                  4.3    4.2    3.3    0.7    2.8    2.3     2.2     2.6
       UK                                               4.2               4.6                  4.9    4.7    3.5    0.0    2.7    2.0     2.0     2.5
       Norway                                           4.1               3.9                  4.1    6.3    5.6    4.3    3.6    4.5     3.9     3.7
       Sweden                                             -                 -                    -      -      -    2.9    2.4    2.3     2.7     2.9
  EMEA                                                 16.0              18.1                 17.4   20.1   20.1    6.2   11.8   11.5    10.3     9.9
       Czech Republic                                   6.3               5.0                  6.6    7.2    7.8    3.3    2.2    2.4     2.4     2.0
       Hungary                                          6.2               8.7                  8.2    8.0    7.6    0.5    1.3    5.2     5.0     4.0
       Poland                                           4.3               3.3                  4.8    9.1   10.6    4.2    3.5    4.9     3.6     3.0
       Russia                                          22.6              26.9                 24.3   27.8   27.2    7.8   12.4   12.2    13.6    11.7
       Turkey                                          11.7              12.5                 13.2   14.7   10.8   -1.9   15.7   15.0     7.0     9.0
       Ukraine                                         27.6              36.7                 29.2   31.9   33.7   11.6   17.7   16.2    12.8    10.9
       Romania                                         22.6              17.0                 18.8   22.0   24.6    8.8    2.5    5.0     5.0     5.5
       Israel                                           3.7               3.4                  1.5    5.6    3.0    1.0    3.6    3.9     4.0     4.3
       South Africa                                     7.5               6.5                  9.1    8.9   11.6    6.5    8.7    7.5     7.0     8.0
     Asia-Pacific                                       7.9               8.8                 12.3   13.3   13.1    5.4   12.3   11.3    11.5    12.6
         Japan                                         -0.7               0.6                  0.2   -1.0   -0.3   -3.9    0.6   -0.1     0.1     0.1
         Australia                                      3.6               4.0                  4.1    4.0    4.2    3.6    3.4    3.7     3.7     3.7
         New Zealand                                    2.3               2.8                  3.2    3.2    3.6    2.5    1.6    1.9     2.1     2.8
     Asia ex Japan                                     10.2              10.9                 11.8   13.1   12.7    6.0   11.7   10.9    11.1    12.2
         China                                         12.3              12.3                 14.0   16.2   15.8    9.0   13.0   13.0    12.0    13.5
     Asia ex Japan, China & India                       3.8               5.2                  4.3    3.7    3.5   -1.1    6.1    4.1     6.3     6.3
         Hong Kong                                     -0.3               1.6                  2.2    2.8    0.9    0.8    3.3    9.3     5.9     5.4
         Indonesia                                     16.7               8.5                  6.4    5.0    7.6    5.2   12.1    4.3     2.7     5.2
         Malaysia                                         -               3.5                  1.2    5.4   12.3    0.3    5.9    6.6     5.1     2.7
         Philippines                                    3.6               8.5                  7.9    4.5    5.3    2.2    3.4    6.0     6.5     6.5
         Singapore                                      1.7               3.6                  3.4    3.2    6.2    5.4   -2.7    5.6     4.0     4.5
         South Korea                                    6.5               6.4                  5.6    5.9    3.1    5.0    6.4    1.7     4.5     5.5
         Taiwan                                         2.9               2.8                  1.4    1.8   -0.3   -9.2    8.6    2.6     2.1     5.0
         Thailand                                       2.6               6.9                  5.8    3.0   10.5   -1.9    5.8    7.2    18.4    11.2
Note: Global and regional aggregates are calculated using the World Bank's 2004 PPP weights
Source: National sources, HSBC estimates




32
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     Q4 2012




Budget balance
Budget balance
% GDP                                             2004               2005               2006               2007          2008   2009    2010   2011    2012f   2013f
    North America                                  -3.2               -2.3               -1.7                -1.1        -3.0    -9.6   -8.5    -8.1    -6.7    -5.3
         US                                        -3.5               -2.6               -1.9                -1.2        -3.2   -10.2   -9.0    -8.7    -7.2    -5.7
         Canada*                                    0.7                0.8                1.0                 0.7        -0.4    -3.6   -2.8    -1.7    -1.1    -0.6
    Latin America                                  -0.9               -1.1               -0.9                -0.6        -0.5    -2.6   -2.0    -2.2    -2.3    -2.2
         Mexico                                    -0.2               -0.1                0.1                 0.0        -0.1    -2.3   -2.9    -2.5    -2.4    -2.0
         Brazil                                    -2.9               -3.6               -3.6                -2.8        -2.0    -3.3   -2.5    -2.6    -2.4    -2.7
         Argentina                                  2.6                1.8                1.8                 1.1         1.4    -0.6    0.2    -1.7    -2.5    -1.8
         Chile                                      2.1                4.6                7.7                 8.2         4.1    -4.2   -0.4     1.5    -0.1    -0.3
    Western Europe                                 -2.7               -2.2               -1.0               -0.5         -2.4    -2.3   -6.4   -4.8     -4.0    -3.6
      Eurozone                                     -3.0               -2.6               -1.3               -0.6         -2.0    -6.2   -6.3   -4.6     -3.9    -3.2
        Germany                                    -3.8               -3.3               -1.6                0.2         -0.1    -3.1   -4.3   -1.0     -0.8    -0.6
        France                                     -3.6               -2.9               -2.3               -2.7         -3.3    -7.5   -7.1   -5.2     -4.5    -3.5
        Italy                                      -3.5               -4.4               -3.4               -1.6         -2.7    -5.4   -4.6   -3.9     -2.9    -2.3
        Spain                                      -0.1                1.3                2.4                1.9         -4.1   -11.2   -9.3   -8.9     -6.8    -5.0
    Other Western Europe                           -1.7               -0.9               -0.1               -0.1         -3.7     9.8   -6.8   -5.4     -4.3    -4.7
        UK*                                        -3.3               -2.9               -2.3               -2.4         -6.7    11.2   -9.5   -7.9     -6.6    -7.1
        Norway                                     11.1               15.1               18.5               17.7         19.1    10.7   10.6   11.3     13.8    13.6
        Sweden                                      0.6                2.2                2.3                3.6          2.2    -0.7    0.3    0.3     -0.4    -0.6
    EMEA                                           -0.4                2.3                3.0                1.8          2.6    -5.7   -3.6    -0.4    -0.7    -1.3
        Hungary                                    -6.5               -7.9               -9.5               -5.1         -3.7    -4.5   -4.3     4.2    -3.0    -3.5
        Poland                                     -5.4               -4.1               -3.6               -1.9         -3.7    -7.3   -7.8    -5.1    -3.4    -3.0
        Russia                                      4.3                7.5                7.4                5.4          4.1    -6.0   -4.0     0.8     0.0    -1.1
        Turkey                                     -5.4               -1.3               -0.5               -1.6         -1.8    -5.5   -3.6    -1.4    -2.2    -1.5
        Ukraine                                    -3.3               -1.8               -0.8               -1.0         -1.4    -2.1   -1.1    -1.8    -2.0    -1.9
        Romania                                    -1.2               -1.2               -2.2               -2.9         -5.7    -9.0   -6.8    -5.2    -2.8    -2.5
        Egypt*                                     -9.5               -9.6               -8.2               -7.3         -6.8    -6.9   -8.1    -9.8   -10.8   -10.6
        Israel                                     -3.9               -1.9               -0.9                0.0         -2.1    -5.2   -3.7     3.3     4.1     3.8
        Saudi Arabia                               11.4               18.4               21.0               12.2         32.5    -6.1    6.5    13.9    12.1     7.6
        UAE                                         5.9               15.1               18.9               16.0         16.8   -12.8   -2.2     3.1    12.3     7.6
        South Africa                               -2.0               -0.6                0.5               -0.8         -1.2    -6.3   -5.2    -4.9    -4.7    -4.2
    Asia-Pacific                                   -2.7               -2.4               -1.9               -1.0         -2.5    -4.7   -3.9    -3.9    -3.9    -3.4
        Japan                                      -7.0               -6.2               -5.4               -5.1         -7.0   -10.8   -9.0   -11.8   -10.0    -9.0
        Australia                                   1.2                1.4                1.3                2.1          0.5    -4.1   -4.8    -3.4    -3.0     0.1
        New Zealand                                 1.0                1.6                1.0               -0.3         -0.1    -5.0   -6.8    -9.4    -4.1    -3.6
    Asia ex Japan                                  -1.8               -1.7               -1.2               -0.2         -1.6    -3.3   -2.6    -2.1    -2.5    -2.2
        China                                      -1.3               -1.2               -1.0                0.6         -0.4    -2.2   -2.5    -1.1    -1.6    -1.5
    Asia ex Japan & China                          -2.3               -2.1               -1.5               -0.9         -2.8    -4.5   -2.7    -3.0    -3.4    -2.9
        Hong Kong                                   1.7                1.0                4.0                7.7          0.1     1.6    4.3     3.9     3.0     4.0
        India*                                     -3.9               -4.0               -3.3               -2.5         -6.0    -6.5   -4.9    -5.8    -5.8    -5.3
        Indonesia                                  -1.0               -0.5               -0.9               -1.3         -0.1    -1.6   -0.7    -1.2    -2.4    -1.8
        Malaysia                                   -3.9               -3.4               -3.2               -3.1         -4.6    -6.7   -5.4    -4.8    -4.8    -4.5
        Philippines                                -3.7               -2.6               -1.0               -0.2         -0.9    -3.7   -3.5    -2.0    -2.4    -2.3
        Singapore                                  -1.1               -0.3                0.5                3.1          1.5    -1.0    0.2     1.3     0.4     0.7
        South Korea                                 0.7                0.4                0.4                3.2          1.3    -2.1    1.6     1.7     1.7     1.1
        Taiwan                                     -2.2               -0.6                0.1               -0.0         -0.5    -3.5   -2.3    -1.9    -2.4    -1.6
        Thailand                                   -0.9               -0.6                0.7               -2.6         -1.9    -3.8   -0.9    -1.9    -4.0    -2.8
        Vietnam                                    -0.2               -1.3                0.3               -2.2         -0.5    -7.2   -5.2    -2.7    -3.6    -2.6
Note: * = fiscal year forecasts. Global and regional aggregates are calculated using the World Banks' 2004 PPP weights
Source: National sources, HSBC estimates




                                                                                                                                                                  33
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     Global Economics                                                                                                                                  abc
     Q4 2012




Current account
Current account
% GDP                                             2004               2005                2006               2007         2008    2009   2010   2011    2012f   2013f
     North America                                 -4.7                -5.3               -5.4               -4.6         -4.3   -2.7   -3.2    -3.0    -3.1    -2.8
          US                                       -5.3                -5.9               -6.0               -5.1         -4.7   -2.7   -3.2    -3.1    -3.1    -2.9
          Canada                                    2.3                 1.9                1.4                0.8          0.4   -2.9   -3.1    -2.1    -3.0    -2.3
     Latin America                                  1.1                 1.1                1.3                0.4         -1.1   -0.2   -0.9    -1.4    -1.4    -1.4
          Mexico                                   -0.7                -0.7               -0.5               -1.1         -1.6   -0.6   -0.4    -1.0    -0.7    -0.8
          Brazil                                    1.8                 1.6                1.3                0.1         -1.7   -1.5   -2.2    -2.1    -2.6    -2.6
          Argentina                                 2.3                 3.1                3.8                2.8          2.1    3.6    0.8    -0.0     1.1     1.1
          Chile                                     2.7                 1.6                4.8                4.3         -3.2    2.0    1.5    -1.3    -2.7    -3.0
     Western Europe                                 0.9                0.4                0.1                 0.3        -0.9     0.1    0.3    0.3      0.5     0.4
       Eurozone                                     0.8                0.1               -0.1                 0.1        -1.6    -0.2   -0.1   -0.0      0.5     0.5
         Germany                                    4.7                5.1                6.3                 7.4         6.2     5.9    6.0    5.7      5.7     5.3
         France                                     0.5               -0.5               -0.6                -1.0        -1.8    -1.3   -1.6   -2.0     -2.2    -2.1
         Italy                                     -0.3               -0.9               -1.5                -1.3        -2.9    -2.0   -3.5   -3.3     -1.3    -1.1
         Spain                                     -5.3               -7.4               -9.0               -10.0        -9.6    -4.8   -4.5   -3.5     -2.7    -2.7
     Other Western Europe                           1.3                1.3                1.0                 0.8         1.0     1.3    1.4    1.4      0.5     0.1
         UK                                        -2.1               -2.6               -3.4                -2.6        -1.6    -1.7   -2.1   -1.9     -3.0    -3.3
         Norway                                    12.6               16.5               16.4                12.5        15.9    10.8   12.4   14.5     14.7    12.0
         Sweden                                     6.5                6.8                8.4                 9.2         8.8     7.0    6.9    6.4      6.2     6.0
         Switzerland                               13.0               13.6               14.4                 8.6         2.1    10.6   14.3   10.5     10.4    10.1
     EMEA                                           3.6                5.0                3.6                 1.2          1.2    0.4    0.7     1.3     1.0    -0.1
         Czech Republic                            -5.0               -1.0               -2.0                -4.3         -2.1   -2.4   -3.9    -2.9    -1.3    -2.2
         Hungary                                   -8.6               -7.5               -7.4                -7.3         -7.3   -0.2    1.2     1.4     2.2     3.2
         Poland                                    -5.2               -2.4               -3.8                -6.2         -6.5   -3.9   -4.7    -4.2    -4.3    -4.2
         Russia                                    10.0               11.1                9.5                 5.9          6.1    4.0    4.8     5.3     4.7     2.6
         Turkey                                    -3.7               -4.6               -6.1                -5.9         -5.7   -2.3   -6.5   -10.0    -7.6    -7.1
         Ukraine                                   10.5                2.9                1.0                -3.6         -7.2   -1.5   -2.2    -5.6    -5.6    -3.7
         Romania                                   -8.4               -8.6              -10.4               -13.4        -11.6   -4.2   -4.4    -4.4    -4.1    -4.9
         Egypt*                                     4.3                3.3                1.6                 1.7          0.5   -2.4   -2.0    -2.6    -3.1    -4.0
         Israel                                     2.2                3.2                5.1                 2.9          1.4    3.7    3.9     0.5    -1.9     0.0
         Saudi Arabia                              15.4               29.0               27.9                24.5         27.9    6.2   15.7    27.3    25.8    18.0
         UAE                                        7.1               13.5               16.2                 7.6          7.1    3.0    2.6     8.9     8.0     3.8
         South Africa                              -3.2               -3.8               -6.4                -7.3         -7.4   -4.0   -4.6    -3.6    -5.1    -5.5
     Asia-Pacific                                   2.8                3.8                5.1                 6.0          4.4    3.7    3.2     1.8     1.2     1.2
         Japan                                      3.7                3.6                3.9                 4.9          3.3    2.9    3.7     2.0     1.0     1.1
         Australia                                 -6.1               -5.7               -5.3                -6.2         -4.4   -4.2   -2.9    -2.3    -4.2    -5.9
         New Zealand                               -5.8               -7.9               -8.4                -8.2         -8.7   -2.7   -3.6    -4.2    -5.0    -6.4
     Asia ex Japan                                  3.0                4.2                5.9                 6.7          5.1    4.2    3.3     1.9     1.5     1.6
         China                                      3.6                7.1                9.3                10.6          9.4    5.7    5.1     2.8     2.5     2.0
     Asia ex Japan & China                          2.4                1.3                2.4                 2.8          0.7    2.7    1.4     1.0     0.4     1.1
         Hong Kong                                  9.5               11.4               12.1                12.3         13.7    8.6    5.5     5.3     4.0     8.5
         India*                                     0.1               -1.2               -1.0                -0.7         -2.5   -1.9   -3.1    -3.3    -3.4    -2.3
         Indonesia                                  0.6                0.1                3.0                 2.4          0.0    2.0    0.7     0.2    -2.8    -1.7
         Malaysia                                  11.6               14.4               16.1                15.4         17.1   15.5   11.1    11.0     4.8     4.3
         Philippines                                1.0                1.9                4.4                 4.7          2.1    5.6    4.5     3.2     4.4     3.4
         Singapore                                 17.1               21.4               24.5                25.8         13.9   16.2   24.4    21.9    17.4    20.2
         South Korea                                4.4                2.2                1.5                 2.1          0.3    3.9    2.9     2.4     2.5     2.1
         Taiwan                                     5.8                4.8                7.0                 8.9          6.9   11.4    9.3     8.9     9.0     8.2
         Thailand                                   1.7               -2.7                0.7                 4.8          0.6    6.1    3.3     1.3    -0.9     2.9
         Vietnam                                   -3.5               -1.1               -0.3                -9.9        -11.8   -6.3   -3.6     0.1     0.7    -2.5
Note: * = fiscal year forecasts. Global and regional aggregates are calculated using the World Banks' 2004 PPP weights
Source: National sources, HSBC estimates




34
     Macro
     Global Economics                                                                                                                                        abc
     Q4 2012




Current account
USDbn                                             2004               2005               2006               2007           2008     2009     2010     2011    2012f    2013f
    North America                               -607.1             -726.6             -780.3             -712.8          -702.3   -416.2   -520.3   -514.8   -541.2   -512.7
         US                                     -630.0             -748.0             -798.4             -724.7          -707.2   -376.6   -470.9   -465.9   -486.4   -467.5
         Canada                                   22.9               21.4               18.1               11.9             4.9    -39.6    -49.4    -48.9    -54.8    -45.2
    Latin America                                 12.5               15.6               24.3                4.9           -44.7    -14.8    -45.8    -66.8    -69.6    -73.2
         Mexico                                   -5.2               -5.9               -4.5              -11.1           -17.3     -5.1     -4.5    -11.1     -8.1    -10.1
         Brazil                                   11.7               14.0               13.6                1.6           -28.3    -24.3    -47.5    -52.5    -59.8    -61.2
         Argentina                                 3.4                5.6                8.0                7.4             6.8     11.0      2.9     -0.0      5.5      6.2
         Chile                                     2.6                1.9                7.1                7.1            -5.8      3.5      3.3     -3.2     -7.2     -8.2
    Western Europe                               153.4               91.5               58.6               70.9          -132.6    56.1    101.1    115.6    176.3    109.2
      Eurozone                                    81.9               12.7              -16.6               10.8          -199.5   -31.4     -9.1     -3.0     61.7     66.3
        Germany                                  137.8              132.8              190.9              264.5           213.6   201.7    201.9    190.5    203.7    198.7
        France                                    11.5              -10.0              -13.8              -27.4           -47.0   -35.6    -41.1    -51.0    -61.5    -61.4
        Italy                                     -6.3              -14.9              -29.5              -29.1           -62.4   -43.3    -73.3    -67.0    -27.7    -23.5
        Spain                                    -57.2              -79.5             -113.9             -153.7          -145.5   -72.3    -63.6    -50.6    -39.3     -9.6
    Other Western Europe                          71.6               78.7               75.3               60.1            66.9    87.6    110.2    118.6    114.6     42.9
        UK                                       -45.2              -58.9              -83.1              -73.2           -47.3   -36.7    -48.5    -30.6    -38.7    -30.5
        Sweden                                    23.0               23.9               27.2               30.6            25.6    21.4     25.4     27.5     25.0     27.0
        Switzerland                               60.4               65.3               72.9               46.6            11.8    58.5     81.9     61.5     61.5     61.0
    EMEA                                          66.4              153.0              154.2               66.7          110.9     26.4     55.1    150.9    148.3     36.1
        Czech Republic                            -5.7               -1.3               -3.0               -7.7           -4.8     -4.7     -6.1     -4.8     -2.6     -4.8
        Hungary                                   -8.8               -8.2               -8.3               -9.9          -11.3     -0.3      1.4      2.0      2.9      4.9
        Poland                                   -13.3               -7.2              -13.1              -26.5          -35.0    -17.2    -21.9    -22.1    -21.8    -24.7
        Russia                                    59.9               84.3               94.3               77.2          102.3     49.0     71.1     98.9     89.5     51.3
        Turkey                                   -14.4              -22.3              -32.2              -38.4          -42.0    -14.0    -47.1    -77.2    -62.1    -66.2
        Ukraine                                    6.8                2.5                1.1               -5.2          -12.9     -1.7     -3.0     -9.2    -10.0     -5.8
        Romania                                   -6.4               -8.5              -12.9              -23.1          -24.0     -7.0     -7.2     -8.3     -7.5    -10.2
        Egypt*                                     3.4                2.9                1.8                2.3            0.9     -4.4     -4.3     -6.1     -7.9    -11.0
        Israel                                     2.7                4.3                7.4                4.9            2.9      7.2      8.5      1.1     -4.5      0.0
        Saudi Arabia                              38.6               91.4               99.6               94.3          133.0     23.4     70.4    160.1    165.0    116.1
        UAE                                       10.5               24.4               36.0               19.6           22.3      7.8      7.2     30.7     29.0     14.1
        South Africa                              -6.9               -9.2              -16.4              -20.7          -20.5    -11.8    -14.0    -14.1    -21.5    -27.6
    Asia-Pacific                                 301.9              363.9              507.0              690.4          617.5    548.6    608.8    401.6    257.2    357.1
        Japan                                    172.1              166.1              170.9              212.1          159.8    146.5    204.1    119.4     59.3     72.4
        Australia                                -39.5              -41.6              -41.6              -58.6          -47.3    -43.7    -31.1    -34.5    -67.0    -14.6
        New Zealand                               -5.8               -8.9               -9.1              -10.8          -11.2     -3.2     -5.0     -6.7     -8.1    -10.4
    Asia ex Japan                                175.1              248.3              386.7              547.6          516.2    449.0    440.9    323.4    273.1    309.6
        China                                     68.7              160.8              253.3              371.8          426.1    284.1    305.4    201.1    210.0    190.0
    Asia ex Japan & China                        106.4               87.4              133.5              175.8           90.1    164.9    135.5    122.3     63.1    119.6
        Hong Kong                                 15.7               20.2               22.9               25.6           29.5     18.0     12.4     12.9     10.0     22.4
        India*                                     0.8              -10.3               -9.3               -8.1          -31.0    -25.9    -52.2    -62.8    -63.4    -51.0
        Indonesia                                  1.6                0.3               10.9               10.5            0.1     10.6      5.1      1.7    -24.5    -16.8
        Malaysia                                  15.1               20.7               25.4               29.2           39.5     31.4     27.4     31.8     14.7     14.1
        Philippines                                0.9                2.0                5.3                7.1            3.6      9.4      8.9      7.1     10.8      9.6
        Singapore                                 19.3               26.8               35.8               46.0           26.4     30.2     55.6     57.1     47.2     61.3
        South Korea                               32.1               18.4               13.9               21.6            3.1     32.5     29.1     26.3     28.3     26.3
        Taiwan                                    19.7               17.6               26.3               35.2           27.5     42.9     39.9     41.6     43.1     43.1
        Thailand                                   2.8               -7.6                2.3               15.7            2.2     21.9     13.2      5.3     -4.2     14.6
        Vietnam                                   -1.6               -0.6               -0.2               -7.0          -10.8     -6.1     -3.8      1.3      1.0     -4.0
Note: * = fiscal year forecasts. Global and regional aggregates are calculated using the World Banks' 2004 PPP weights
Source: National sources, HSBC estimates




                                                                                                                                                                         35
     Macro
     Global Economics                                                                                                                                               abc
     Q4 2012




US
QE: anti-recession manoeuvre                                                                               in turn, should have a positive impact on household      Kevin Logan
                                                                                                                                                                    Chief US Economist
                                                                                                           finances and help strengthen consumer confidence.        HSBC Securities (USA) Inc.
In mid-September, the Federal Reserve launched a
                                                                                                                                                                    +1 212 525 3195
new quantitative easing programme to steer the                                                             We expect the Fed’s accommodative policy to offset       kevin.r.logan@us.hsbc.com
economy away from developments that are                                                                    some of the negative effects on GDP growth               Ryan Wang
                                                                                                                                                                    Economist
threatening to pull it back into recession. The new                                                        emanating from government fiscal consolidation,          HSBC Securities (USA) Inc.
programme is an open-ended plan to purchase                                                                slowing net exports and a deceleration in business       +1 212 525 3181
                                                                                                                                                                    ryan.wang@us.hsbc.com
USD40bn of agency mortgage-backed securities per                                                           investment spending – three factors that will hold
month until there is a “substantial” improvement in                                                        back GDP growth in 2013. All in all, we continue to
labour market conditions. Since it is unlikely that the                                                    expect average GDP growth in a range of 1.5% to
labour market will show substantial improvement in                                                         2.0% for the year ahead.
the short term, we believe that this purchase
                                                                                                           A run-up in crude oil prices caused by adverse
programme is likely to last until at least late 2013.
                                                                                                           weather developments and geo-political instability in
Since the new QE programme is focused on MBS                                                               the Middle East has quickly fed through to higher
and since the purchases are likely to add up to                                                            energy prices for US consumers. Headline inflation,
several hundred billion dollars in the coming year,                                                        after dropping to 1.4% in July, should average about
the programme should hold down mortgage interest                                                           2.0% in the coming year. Core inflation remains
rates and give a boost to the demand for both new                                                          subdued because of weak labour markets and
and existing homes. Average house prices, which                                                            declining prices for imported goods. Even with the
have recently begun to stabilise after falling for six                                                     Fed’s new QE programme, core inflation is likely to
consecutive years, should also find some support                                                           remain at close to 2.0% for the rest of this year and
from the Fed’s new programme. Rising house prices,                                                         for 2013 as well.


% q-o-q annualised
                                                          2011f            2012f             2013f         Q3 12f    Q4 12f   Q1 13f    Q2 13f   Q3 13f    Q4 13f
Consumer spending                                           2.5              1.9               2.0             2.1      1.8       1.4      2.3       2.4      2.6
Government consumption                                     -3.1             -2.0              -1.7            -1.5     -1.6      -2.0     -1.6      -1.8     -1.7
Private fixed investment                                    6.6              8.8               5.4             5.0      4.2       3.6      7.2       6.9      9.1
Housing                                                    -1.4             11.4              11.9            10.0     12.0       9.0     16.0      13.0     16.0
Stockbuilding (ppt contribution)                           -0.2              0.1              -0.1            -0.1     -0.2      -0.2      0.1       0.1      0.1
Domestic demand                                             1.7              2.2               1.7             1.8      1.3       1.0      2.5       2.4      2.9
Exports                                                     6.7              4.1               3.7             3.4      2.7       3.5      4.4       3.7      4.0
Imports                                                     4.8              3.3               3.0             3.0      2.5       2.5      3.8       3.4      3.4
GDP (year)                                                  1.8              2.2               1.7             2.4      1.7       1.4      1.6       1.8      2.2
GDP (% quarter annualised)                                    -                -                 -             1.8      1.3       1.0      2.4       2.3      2.8
Industrial production (% year)                              4.1              3.8               2.3             3.4      2.6       1.6      1.7       2.6      3.1
Unemployment (%)                                            8.9              8.2               7.9             8.2      8.2       8.1      8.0       7.9      7.7
Consumer prices (% year)                                    3.1              2.1               2.0             1.7      2.1       1.9      2.2       2.2      1.9
Employment costs (% year)                                   2.1              1.9               2.0             1.9      1.9       2.0      2.0       2.0      2.0
Current account (USDbn)                                  -465.9           -486.4            -467.5          -112.3   -119.4    -119.9   -114.8    -113.6   -119.2
Current account (% GDP)                                    -3.1             -3.1              -2.9            -2.9     -3.0      -3.0     -2.8      -2.8     -2.9
Budget balance (% GDP)*                                    -8.7             -7.2              -5.7               -        -         -        -         -        -
3-month money (%)                                           0.5              0.4               0.4             0.4      0.4       0.4      0.4       0.4      0.4
10-year bond yield (%)                                      1.8              1.6               1.5             1.6      1.6       1.6      1.6       1.5      1.5
Source: Bureau of Economic Analysis and Bureau of Labor Statistics, HSBC estimates. Note * = Fiscal year




36
  Macro
  Global Economics                                                                                                                                    abc
  Q4 2012




Average house prices are off their post-recession lows                              House prices no longer falling
2006=100                                                                2006=100     Average house prices peaked near the end of 2005 and then
110                                                                           110     fell for six consecutive years. There are now signs that
                                                                                      average prices are beginning to stabilise.
100                                                                           100    Temporary tax subsidies for home purchases in 2009 and
  90                                                                          90      2010 put a temporary floor under average house prices. After
                                                                                      the expiration of the subsidies, house prices fell further in
  80                                                                          80      2011.
  70                                                                          70     Now, however, a gradual reduction in the inventory of homes
  60
                                                                                      for sale has shifted the supply and demand balance in the
                                                                              60
                                                                                      housing market in a manner that supports higher house
        03     04         05    06    07      08     09       10   11   12            prices without any direct government subsidies.
                                                                                     Gradually increasing house prices should help strengthen
                               Core Logic House Price Index
                                                                                      household balance sheets in the year ahead.
Source: Core Logic




Declining export orders point to a drop in net exports                              Global growth slowdown leads to fewer export orders
3m av g, 4m lead                                                             %Yr     US exports to emerging market economies in Asia and Latin
                                                                                      America recovered strongly after 2009 and the end of the
30                                                                            65
                                                                                      global recession. However, exports to Europe recovered
20                                                                            60      much more slowly.
10                                                                            55
                                                                                     Exports to the eurozone have never returned to the peak
  0                                                                           50      reached in 2008. In the past year, they have fallen about
-10                                                                           45      4.0% as the recession in the eurozone has intensified.
-20                                                                           40     The growth in exports to every region of the world, except
-30                                                                           35      for the OPEC countries, has slowed over the past year.
       07            08          09        10            11        12                The recent decline in the ISM index of exports orders
                                                                                      suggests that net exports will soon start to be a drag on US
                               US ex ports (RHS)                                      GDP growth.
                               ISM ex port orders index (LHS)

Source: Institute for Supply Management, Census Bureau




New orders for capital equipment are starting to ebb                                Businesses are becoming more cautious
                                                                                     A decline in new orders for capital goods is often a
 USDbn                                                                   USDbn
                                                                                      precursor to contraction in economic growth.
70                                                                          70
                                                                                     New orders for capital equipment excluding aircraft are
65                                                                            65      down about 6% from the level a year ago.
60                                                                            60     New orders for industrial machinery, which makes up nearly
                                                                                      half of all shipments of non-aircraft capital goods, have
55                                                                            55
                                                                                      fallen 12% y-o-y.
50                                                                            50     Corporate profits and profit margins are high in absolute
45                                                                            45
                                                                                      terms, but profit growth has slowed.
      00 01 02 03 04 05 06 07 08 09 10 11 12                                         Uncertainty about the federal fiscal outlook and legislation
           Monthly capital goods orders (non-defence ex-air)                          regarding corporate income taxes may be adding to
           6-month average                                                            businesses’ caution over new investment expenditure at this
                                                                                      juncture.
Source: Census Bureau




                                                                                                                                                        37
     Macro
     Global Economics                                                                                                             abc
     Q4 2012




Canada
A sluggish start to H2                                                 slower pace of import growth. Nonetheless, export          David Watt
                                                                                                                                  Chief Economist
                                                                       growth will be constrained by lacklustre US                HSBC Bank Canada
After three quarters of 1.8% q-o-q annualised GDP
                                                                       domestic demand, and sluggish global growth that           +1 416 868 8130
growth, we expect Canada’s economic expansion to                                                                                  david.g.watt@hsbc.ca
                                                                       will limit international trade. We forecast net exports
cool to 1.4% q-o-q annualised in Q3. We expect
                                                                       to make little contribution to Q3 growth after
consumer expenditure and business investment to
                                                                       subtracting 1.9pp from GDP growth in Q2.
remain key drivers of the expansion.
                                                                       Government spending will again be a small negative
We expect consumption to rebound after a sharp
                                                                       for growth, as a result of efforts to decrease budget
decline in spending on durables in Q2, due to still
                                                                       deficits by federal and provincial governments.
favourable labour market conditions, rising earnings,
                                                                       Inventories are expected to decline after a
and accommodative financial conditions. Overall,
                                                                       surprisingly robust increase in Q2. A moderately
we forecast consumption to contribute about one
                                                                       more aggressive Q3 inventory run-down could limit
percentage point to GDP growth in coming quarters.
                                                                       Q3 GDP growth to around 1.2%. Consumer price
Also contributing to Q3 GDP growth will be                             inflation has declined in recent quarters, although it
business investment, non-residential investment in                     is expected to bottom at 1.2% y-o-y in Q3. Core
particular. Residential investment is expected to cool                 inflation is expected to remain between 1.5% and
in coming quarters, reflecting federal measures to                     2.0% y-o-y over the coming quarters.
restrain the housing market expansion, concern over
                                                                       With global growth risks still predominantly to the
elevated levels of household debt, and an anticipated
                                                                       downside, and moderate inflation risks, we expect
slowdown in new housing construction.
                                                                       the Bank of Canada to remain on hold through 2013.
In Q3, we expect a modest export rebound, and a


% q-o-q annualised
                                            2011f    2012f    2013f     Q3 12f   Q4 12f    Q1 13f    Q2 13f    Q3 13f    Q4 13f
Consumer spending                              2.6      1.6     1.9        1.7      1.8       2.0       2.1       2.1       2.2
Government consumption                         1.1     -0.5     0.1       -0.5     -0.2       0.2       0.3       0.4       0.7
Investment                                     5.3      3.7     4.3        4.2      4.0       4.4       4.0       4.2       4.5
Stockbuilding (% GDP)                         -0.0      0.9     0.8        1.0      0.9       0.9       0.8       0.7       0.7
Domestic demand                                2.2      1.7     2.0        1.4      1.7       1.9       1.9       2.1       2.3
Exports                                        6.2      4.8     3.7        4.2      3.8       3.5       3.8       4.1       4.5
Imports                                        4.4      4.0     3.6        3.8      3.5       3.2       3.2       3.5       4.0
GDP (% year)                                   2.8      1.9     1.9        1.7      1.7       1.7       1.7       1.9       2.1
GDP                                              -        -                1.4      1.7       1.9       2.0       2.2       2.3
Industrial production                          3.5      1.7      2.4       2.2      2.4       2.4       2.4       2.4       2.4
CPI                                            2.9      1.5      1.7      -0.3      2.5       2.1       2.1       2.1       2.1
Average earnings                               2.5      2.5      2.7       3.6      2.4       2.4       2.4       2.4       2.4
Unemployment (%)                               7.5      7.3      7.2       7.3      7.3       7.2       7.2       7.1       7.1
Current account (USDbn)                     -48.9    -54.8    -45.2          -        -         -         -         -         -
Current account (%GDP)                        -2.1     -3.0     -2.3         -        -         -         -         -         -
Budget balance (%GDP)*                        -1.7     -1.1     -0.6         -        -         -         -         -         -
CAD/USD                                      1.02     0.97     0.95       0.98     0.97      0.95      0.95      0.95      0.95
3-month money (%)                              1.4      1.3      1.3       1.3      1.3       1.3       1.3       1.3       1.3
10-year bond yield (%)                         1.9      1.8      1.6       1.8      1.8       1.7       1.7       1.6       1.6
Note: * = Fiscal Year
Source: Statistics Canada, HSBC estimates


38
     Macro
     Global Economics                                                                                                                  abc
     Q4 2012




Mexico
Fine-tuning our forecasts                                                     We have also raised our inflation projections to         Sergio Martin
                                                                                                                                       Economist
                                                                              4.1% from 3.9% for 2012 and to 3.6% from 3.4%            HSBC México, S.A
Europe’s economic weakness continues, although                                                                                         +52 55 5721 2164
                                                                              for 2013. Our inflation revisions were prompted by
the ECB’s recent announcement about the bond-                                                                                          sergio.martinm@hsbc.com.mx
                                                                              unforeseen pressures on food prices because of
buying programme has contributed to reducing, for
                                                                              year-to-date international price rises of 33% for
now at least, volatility in financial markets. In the
                                                                              wheat and 24% for corn, as well as an epidemic
meantime, unconvincing economic data from the US
                                                                              that has affected the production of eggs. The pass-
have prompted the Fed to adopt an aggressive policy
                                                                              through of peso depreciation into inflation is also
to further ease monetary and financial conditions
                                                                              pushing prices up.
until the outlook for the labour market improves.
Alongside these developments, US industrial                                   We now expect the monetary policy rate to remain
production outlook is better than we had estimated                            on hold until Q4 2014 instead of Q3 2013, as a
and Mexican domestic demand is consistently                                   consequence of the global economic slowdown and
robust. In view of this, we have revised our GDP,                             the generalised response of easier monetary policy in
inflation and monetary policy calls.                                          major economies. At end-2014, we may start to see
                                                                              price pressures and the central bank may well opt to
We have raised our GDP growth projections to 3.6%
                                                                              address this with a rate hike. The increase could be
from 3.4% for 2012 and to 3.2% from 3.0% for
                                                                              pre-emptive and total two 25bp hikes, taking the rate
2013. Our fine-tuning was prompted by: an
                                                                              to 5.0%, we believe.
improvement in the US industrial outlook; better-
than-expected auto demand in the US, which has
partly offset the impact of the global slowdown on
Mexican exports; and more dynamic domestic
demand, which has compensated relatively well for
the reduction in momentum from the external sector.


% Year
                                                              2008    2009           2010          2011         2012f         2013f
Private consumption                                             1.7    -7.3            5.0           4.5           4.5           5.5
Public consumption                                              1.1     3.2            2.4           0.6           8.6           4.5
Gross capital formation                                         5.5   -11.8            6.2           8.9           7.2           5.7
GDP                                                             1.2    -6.2            5.5           3.9           3.6           3.2
Industrial production                                          -0.1    -7.7            6.1           3.8           3.5           3.1
Unemployment (%)                                                4.3     4.8            4.9           4.5           4.2           4.0
Consumer prices                                                 5.1     5.3            4.2           3.4           4.1           3.9
Exports                                                         0.5   -13.5           21.7           6.7           6.1           6.5
Imports                                                         2.6   -18.4           20.5           6.7           5.8           6.7
Current account (USDbn)                                       -17.3    -5.1           -4.5         -11.1          -8.1         -10.1
Current account (% GDP)                                        -1.6    -0.6           -0.4          -1.0          -0.7          -0.8
Budget balance (% GDP)                                         -0.1    -2.3           -2.9          -2.5          -2.4          -2.0
MXN/USD                                                        13.8    13.1           12.4          14.0          13.5          12.9
3-month money (%)                                               8.2     4.6            4.6           4.4           4.4           4.4
Source: INEGI, Banxico, Ministry of Finance, HSBC estimates




                                                                                                                                                           39
     Macro
     Global Economics                                                                                                    abc
     Q4 2012




Brazil
Economic policy focus shifts to                              government has unveiled a series of measures and            Constantin Jancsó
                                                                                                                         Economist
supply-side constraints                                      initiatives to reduce business costs and support            HSBC Bank Brasil S.A.
                                                             investment.                                                 +55(11)3371-8183
Economic data for the past few months have been                                                                          constantin.c.jancso@hsbc.com.br

disappointing, and we recently downgraded our                These include a renewed effort to attract private           Sabrina Rocha Andrade
                                                                                                                         Economist
GDP growth forecast for 2012 to 1.7%.                        investment in transportation infrastructure by              HSBC Bank Brasil S.A.
                                                             offering railway, road, port and airport concessions.       +55(11)3847-5190
It is becoming increasingly clear that the main driver                                                                   sabrina.r.andrade@hsbc.com.br
                                                             The government also lowered payroll taxes on
of the current downturn has been the weakness of
                                                             labour-intensive manufacturing sectors, allowing
fixed capital investment, reflecting waning business
                                                             firms to pay a fixed social security tax of 2% on their
confidence and the erosion of competitiveness of the
                                                             gross revenues instead of the traditional charge on
manufacturing sector.
                                                             their payroll expenditure. In addition, it has acted to
Uncertainty regarding the outlook for the global             reduce energy costs by lowering taxes on electricity
economy certainly weighed on business confidence,            as of 2013.
while the weakening in manufacturing
                                                             It will take some time for these initiatives to translate
competitiveness probably has much to do with the
                                                             into actual investment, but the shift towards a more
tightness of the job market and the fact that wages
                                                             balanced economic policy aimed at both demand and
are rising faster than productivity.
                                                             supply-side issues will probably benefit business
The good news is that, after focusing almost                 sentiment. The timing is particularly good, as the
exclusively on stimulating consumer demand, which            current easing cycle is close to ending and the
remained relatively solid throughout the downturn,           economy will require other drivers to consolidate the
economic policy is now turning towards supply-side           moderate recovery that is emerging only now, at the
issues. This has not been limited to attempts at             end of Q3 2012.
increasing public investment expenditure, as the


% Year
                                      2008           2009            2010          2011           2012f          2013f

Private consumption                     5.7            4.2            7.0            4.1            3.3            4.3
Gross capital formation                13.6          -10.3           21.9            4.7           -0.9            6.6
GDP                                     5.2           -0.3            7.5            2.7            1.7            3.8
Industrial production                   3.1           -7.4           10.4            0.3           -1.5            5.2
Unemployment (%)                        6.8            6.8            5.3            4.7            4.6            4.2
Consumer prices*                        5.7            4.9            5.0            6.6            5.3            5.2
Exports (% change)                      0.5          -10.2           11.5            4.5           -0.1            1.5
Imports (% change)                     15.4          -11.5           36.2            9.7            3.3            5.8
Current account (USDbn)               -28.3          -24.3          -47.5          -52.5          -59.8          -61.2
Current account (% GDP)                -1.7           -1.5           -2.2           -2.1           -2.6           -2.6
Budget balance (% GDP)                 -2.0           -3.3           -2.5           -2.6           -2.4           -2.7
BRL/USD                                2.31           1.74           1.67           1.88           2.00           2.10
3-month money                          12.7            9.7           10.2           10.5            7.3            7.4
Note: * = average
Source: IBGE, HSBC estimates




40
   Macro
   Global Economics                                                                                                                                                      abc
   Q4 2012




Rising unit labour cost (of the manufacturing sector)                                               … reflects an erosion in industrial competitiveness
                                                                                                     The spike in unit labour costs (ULC) in 2009 reflected
Index                            Unit Labor Cost                                        Index         the sudden halt in manufacturing output. Once output
130                                                                                         130       levels normalised after the crisis, ULC returned to pre-
                                                                                                      crisis levels.
120                                                                                         120      The gradual rise of ULC since 2009-10 reflects the
                                                                                                      combination of wage inflation (where manufacturing
110                                                                                         110       wages climbed faster than productivity growth) and
                                                                                                      some labour hoarding by manufacturing firms.
100                                                                                         100      The erosion of the competitiveness of the manufacturing
                                                                                                      sector not only helps explain the lacklustre performance of
 90                                                                                         90        industrial activity (because of market share losses to
                                                                                                      imports), but is also a disincentive for investment.
      2000         2002         2004          2006          2008         2010
                                                                                                     The 15-20% weakening of the BRL since mid-2011 more or
                                                                                                      less compensates for the 15% rise in the ULC of the
                                                                                                      manufacturing sector since 2010.
Source: IBGE and HSBC, Note: Unit labour cost defined as the ratio of total real labour costs (in
BRL) to real output in the manufacturing sector.




Investment is short of the level needed to sustain growth                                           …and financing higher levels of investment remains a
above 4%                                                                                            challenge
%GDP                       Inv estment and Sav ings                                  %GDP            As a rule of thumb, to sustain GDP growth of around 4.5%,
20                                                                                                    Brazil would have to raise investment/GDP to 22-23%.
                                                                                  18.7 20
                                                                                                     After rising more or less consistently in 2005-11,
18                                                                                            18      investment’s share in GDP has been falling in 2012,
                                                                                                      dragging growth along with it.
16                                                                                            16     Although raising investment (especially in infrastructure)
                                                                                15.7                  now appears to be a policy objective, it will be difficult to
14                                                                                            14      boost domestic savings to a level that is sufficient to fund the
                                                                                                      desired level of investment. Brazil’s investment plans will
12                                                                                            12      have to be partially funded by foreign savings.
      2000         2002         2004 2006                2008 2010                 1H12              Designing mechanisms (such as the newly created tax-
                                Inv estment                 Sav ings                                  exempt infrastructure debentures) to attract long-term
                                                                                                      investors remains a challenge.
Source: IBGE




Central bank has indicated it may end the easing cycle                                              We expect the authorities to resist hiking rates in 2013
                                                                                                     The central bank has indicated that, if any, further easing will
                                                                                                      be done with “extreme parsimony”. We forecast a final 25bp
12m %chg.                IPCA Consumer Price Index                             12m %chg.              policy rate cut in October.
20%                                                                                        20%       Despite weak economic activity, inflation is resisting any fall
                                                                                                      below 5.0-5.5%, indicating a worsening in the trade-off
15%                                                                                        15%        between growth and inflation.
                                                                                                     If the economic rebound forecast for H2 2012/2013
10%                                                                                        10%
                                                                                                      materialises, inflation will likely remain a key investor
 5%                                                                                        5%         concern.
                                                                                                     In our view, the authorities will be satisfied with inflation at
 0%                                                                                        0%         about 5.0-5.5%, and will resist hiking the policy rate in 2013,
     Jan-08                 Jul-09                    Jan-11                   Jul-12
                                                                                                      in part because of concern that this could lead to BRL
                                                                                                      appreciation. Tax relief measures will help prevent the IPCA
                          Serv ices                   Food                   IPCA
                                                                                                      inflation index from rising to discomfort levels (for example,
                                                                                                      the tax cut on electricity will lower consumer electricity bills
                                                                                                      by about 15% as of 2013).
Source: IBGE and HSBC




                                                                                                                                                                           41
     Macro
     Global Economics                                                                                                                                          abc
     Q4 2012




Argentina
Watch out for the downside                                                                           Peso holders who would like to seek protection from       Javier Finkman
                                                                                                                                                               Economist
                                                                                                     high inflation– rates are highly negative in real terms   HSBC Bank Argentina S.A
We expect a mild rebound in activity in H2 2012 as
                                                                                                     –via the purchase of reserves, durable goods or real      +54 11 4344 8144
the effects of the poor harvest – caused by a severe                                                                                                           javier.finkman@hsbc.com.ar
                                                                                                     estate. However, these markets have been affected
drought – recede. The base of comparison will also                                                                                                             Jorge Morgenstern
                                                                                                     by the FX restrictions, which have left sellers of        Economist
be poorer, especially for Q4 2011. The rebound                                                                                                                 HSBC Bank Argentina S.A
                                                                                                     inflation-hedge assets less willing to trade unless the
should be consolidated in 2013 due to two                                                                                                                      +54 11 4130 9229
                                                                                                     assets are repriced to a much higher exchange rate.       jorge.morgenstern@hsbc.com.ar
exogenous factors: A 2012-13 harvest that we
                                                                                                     Companies and families thus end up with more
estimate at over 110 million tonnes, half of it soy;
                                                                                                     pesos than they want; meanwhile, the money is
and, at last, a recovery in Brazil’s growth rate. This
                                                                                                     circulating less and being taxed more heavily by
‘mechanical’ view of the recovery is our base
                                                                                                     inflation.
scenario and it is aligned with consensus.
                                                                                                     Therefore maintaining stable money demand is
Nevertheless, our expectations are restricted by
                                                                                                     increasingly dependent on the coordination and
highly effective FX controls, and demand is limited
                                                                                                     control of expectations.
by supply restrictions, leading to the ‘trapped peso
                                                                                                     It is easy to envisage an ‘out-of-the-model’ shock
problem’: an excess supply of money, combined
                                                                                                     that could push inflation and/or devaluation
with a paradoxical reduction in the velocity of
                                                                                                     expectations upwards from current controlled levels
circulation.
                                                                                                     so that money is passed on faster and faster via the
We see several symptoms of repressed demand for
                                                                                                     exchange of goods: These could include
dollars. For individuals, the gap between the spot
                                                                                                     significantly lower commodity prices, unanchored
official rate and the parallel rate is 34% at the time of
                                                                                                     wage negotiations or an electoral-led spending spree.
writing. For corporates, the balance of payments
                                                                                                     Should any of these occur, our base scenario would
reports dividends of USD3.7bn for H1 2012 on an
                                                                                                     shift towards weaker activity, higher inflation or a
accruals basis, but payments in the exchange rate
                                                                                                     combination of both.
market (BCRA data) were just USD60m.

% Year
                                                                       2008                  2009           2010           2011          2012f         2013f

Consumption                                                             6.5                    0.5           9.0           10.7            3.6           2.8
Gross fixed capital formation                                           9.1                  -10.2          21.2           16.6           -2.1           2.7
GDP                                                                     6.8                    0.9           9.2            8.9            3.0           3.0
Unemployment (%)                                                        7.3                    8.4           7.3            6.7            7.5           7.7
Industrial production                                                   1.0                   -4.6           8.8            4.8            2.8           3.1
Consumer prices*                                                       25.2                   14.8          23.7           23.3           22.5          22.0
Exports                                                                 1.2                   -6.4          14.6            4.3           -3.2           4.3
Imports                                                                14.1                  -19.0          34.0           17.8           -3.0           4.3
Current account (USDbn)                                                 6.8                   11.0           2.9           -0.0            5.5           6.2
Current account (% GDP)                                                 2.1                    3.6           0.8           -0.0            1.1           1.1
Budget balance (% GDP)                                                  1.4                   -0.6           0.2           -1.7           -2.5          -1.8
ARS/USD                                                                3.45                   3.80          3.97           4.30           5.00          6.00
1-month money (%)**                                                    19.1                    9.8          11.1           18.8           16.0          13.0
Note: * = average of provincial estimates, ** = end-year 30-day deposit
Source: INDEC, Provincial statistics offices, BCRA, Ministry of Finance and HSBC estimates




42
     Macro
     Global Economics                                                                                                 abc
     Q4 2012




Chile
Postponed slowdown                                             Our view is that uncertainty about the global          Jorge Morgenstern
                                                                                                                      Economist
                                                               economy will linger. In that context, we expect        HSBC Bank Argentina, S.A
The performance of the Chilean economy                                                                                +54 11 4130-9229
                                                               job creation to decelerate, foresee a weakening in
surpassed our expectations in the first half of the                                                                   jorge.morgenstern@hsbc.com.ar
                                                               the optimism of private sector agents and
year. We therefore now expect GDP growth of
                                                               highlight the risk of currency depreciation. In
5.0% in 2012, in line with the economy’s
                                                               sum, we expect several of the factors supporting
potential, in our view.
                                                               the recent pace of growth to dissipate in the short
The resilience of domestic demand was the most                 term. On our estimates, this would lead to GDP
notable factor in the surprise. Real wage gains and            growth somewhat below potential in the following
positive job creation anchored the purchasing                  quarters, resulting in a 4.8% expansion in 2013.
power of consumers, while firm copper prices
                                                               Inflationary pressure arising from the tight labour
supported investment decisions. Related to this, a
                                                               market should also ease progressively. We expect
strong currency made imported goods more
                                                               the rise in commodity prices to bring a positive
affordable, adding a positive wealth effect to the
                                                               contribution from ‘non-core’ items to the CPI.
mix.
                                                               Nonetheless we maintain that risks to both
The flipside, though, has been deterioration in the            inflation and the GDP growth outlook are tilted to
current account balance, for which we expect a                 the downside.
deficit of close to 3% of GDP in 2012 and 2013.
                                                               In our base-case scenario, we expect the central
This gap is easily funded by the strong capital
                                                               bank to remain on the sidelines, both regarding a
flows going into the country, but makes Chile
                                                               potential interest rate cut and intervention in the
vulnerable to any deterioration in external
                                                               FX market. However, we could easily see
conditions liable to reduce that stream.
                                                               intervention if the CLP strengthens much further.




% Year
                                               2008    2009           2010         2011         2012f         2013f

Private consumption                              5.2    -0.8          10.0           8.8          5.3           5.2
Fixed investment                                17.9   -12.1          14.3          17.6          8.2          10.2
GDP                                              3.3    -1.0           6.1           6.0          5.0           4.8
Industrial production                            0.2    -6.7           3.0           7.2          2.8           4.0
Unemployment (%)                                 8.5    10.0           7.1           6.6          6.5           7.0
Consumer prices                                  8.7     0.3           1.4           3.3          3.1           2.8
Exports                                         -0.7    -4.5           1.4           4.6          6.0           6.2
Imports                                         11.2   -16.2          27.4          14.4          6.7           6.4
Current account (USDbn)                         -5.8     3.5           3.3          -3.2         -7.2          -8.2
Current account (% GDP)                         -3.2     2.0           1.5          -1.3         -2.7          -3.0
Budget balance (% GDP)                           4.1    -4.2          -0.4           1.5         -0.1          -0.3
CLP/USD                                        637.0   507.5         468.0         519.5        490.0         500.0
3-month money (%)*                              7.86    0.48          3.26          5.08         5.15          5.15
Note: *= end-year 3-month central bank paper
Source: BCCh, INE, Dipres, HSBC estimates




                                                                                                                                         43
     Macro
     Global Economics                                                                                                                      abc
     Q4 2012




Eurozone
Breathing space                                                                       will hinge on the debtor countries’ ability to       Janet Henry
                                                                                                                                           Economist
                                                                                      meet the conditions of their programmes and the      HSBC Bank plc
The ECB has announced a framework that
                                                                                      willingness of all of the member states to make      +44 20 7991 6711
could provide a backstop for the eurozone as                                                                                               janet.henry@hsbcib.com
                                                                                      further progress on the roadmap for future
long as governments deliver on their side of the
                                                                                      financial sector integration and fiscal
bargain. By committing to buy unlimited                                               centralisation. Already the likely timing for a
amounts of government bonds through its OMT
                                                                                      banking union appears set to be delayed.
(Outright Monetary Transactions) programme,
the ECB can try to address the "convertibility"                                       Meanwhile the growth picture remains
(euro break-up) risk while governments attempt                                        worrying. The eurozone was a little more
to lower their credit risk by undertaking                                             resilient than we had expected in H1 2012,
structural reforms and fiscal consolidation. But                                      thanks to net exports which offset a domestic
the ECB can’t purchase any bonds until a                                              contraction, but our GDP forecast remains
country requests an EFSF/ESM programme, and                                           unchanged at -0.6% for 2012 as we now expect
with spreads having narrowed sharply, the                                             the external environment to be a little weaker in
Spanish government appears in no hurry to ask.                                        H2. Our 2013 forecast has also edged down
                                                                                      further, with virtually all of the mild upturn
Even once Spain goes into a programme (most
                                                                                      expected to come from a gradual export revival.
likely in October) and the ECB starts buying
bonds, the long-term sustainability of the euro

% Year
                                                    2011           2012f   2013f   Q3 12f   Q4 12f    Q1 13f   Q2 13f   Q3 13f    Q4 13f

Consumer spending                                     0.1           -0.8    -0.2     -1.0     -0.6      -0.5     -0.2     -0.1       0.2
Government consumption                               -0.1            0.1    -0.8      0.2      0.0      -0.4     -0.8     -0.9      -0.9
Fixed investment                                      1.6           -3.3    -1.5     -3.7     -4.0      -2.9     -2.2     -0.9       0.1
Final domestic demand                                 0.3           -1.1    -0.6     -1.3     -1.1      -0.9     -0.8     -0.4      -0.1
Stockbuilding (% GDP)                                 0.1           -0.1    -0.3     -0.2     -0.3      -0.3     -0.3     -0.2      -0.3
Domestic demand                                       0.5           -1.3    -0.7     -1.5     -1.4      -1.3     -1.1     -0.5      -0.1
Exports                                               6.3            2.5     2.5      1.8      2.1       2.0      1.5      2.7       3.7
Imports                                               4.1           -0.3     1.5     -0.6      0.8       1.3      1.0      1.5       2.3
GDP                                                   1.5           -0.6    -0.1     -0.9     -0.8      -0.8     -0.5      0.1       0.7
GDP (% quarter)                                         -              -       -     -0.3     -0.3       0.0      0.1      0.2       0.3
Industrial production                                 3.4           -2.0     1.1     -2.9     -1.0      -0.1      1.0      1.4       2.2
Unemployment (%)                                     10.2           11.4    12.1     11.7     11.8      12.0     12.1     12.2      12.3
Wages                                                 2.5            2.1     2.1      2.4      2.3       2.2      2.1      2.0       1.9
Inflation                                             2.7            2.5     1.8      2.5      2.4       1.9      1.9      1.8       1.7
M3                                                    2.1            3.4     3.0      3.2      3.9       3.5      3.3      2.6       2.8
Current account (% GDP)                              -0.0            0.5     0.5        -        -         -        -        -         -
Budget balance (% GDP)                               -4.6           -3.9    -3.2        -        -         -        -        -         -
Debt (% GDP)                                         89.3           91.9    93.5        -        -         -        -        -         -
ECB refi rate*                                       1.00           0.50    0.50     0.75     0.50      0.50     0.50     0.50      0.50
3-month money (%)                                     1.3            0.2     0.2      0.2      0.2       0.2      0.2      0.2       0.2
10-year bond yield (%)**                              3.7            3.0     2.6      3.1      3.0       2.9      2.7      2.6       2.6
USD/EUR                                              1.30           1.35    1.40     1.30     1.35      1.37     1.38     1.39      1.40
Note. * = Period-end; ** = Weighted average of big 4, period-end
Source: Thomson Reuters Datastream, HSBC estimates




44
     Macro
     Global Economics                                                                                                                             abc
     Q4 2012




 Promise of ECB action has caused rates to converge...                            … but the ECB can only buy time
 %                            10yr Bond yields                              %     Since ECB head, Mario Draghi committed to do
 8                                                                           8
                                                                                   whatever it takes to preserve the euro there has been a
                                                                                   significant convergence of eurozone government bond
                                                                                   yields.
 6                                                                           6
                                                                                  The ECB can provide a backstop for the eurozone as
 4                                                                           4
                                                                                   long as governments deliver on their side of the bargain.
                                                                                   The ECB can try to address the "convertibility" (euro
                                                                                   break-up) risk, while governments attempt to lower their
 2                                                                           2
                                                                                   credit risk by undertaking structural reforms and fiscal
                                                                                   consolidation.
 0                                                                           0
                                                                                  Governments will also need to show convincing
     07          08          09            10        11        12
                                                                                   progress in drawing up a credible roadmap and timeline
                Eurozone                    Germany                 Spain          for future financial sector and fiscal integration.
 Source: Thomson Reuters Datastream




 Despite the LTRO, loan growth continues to weaken…                               … and country divergences persist
  EURbn, 3m sum                    Eurozone               EURbn, 3m sum           Recent monetary growth has revived a little, with M3
 200                                                                200            accelerating to 3.8% from 3.2% in June.
 150                                                                  150         However, loan growth remains extremely weak with no
                                                                                   evidence that the three-year LTROs have found their way
 100                                                                  100
                                                                                   into an improving availability of credit. Household loan
     50                                                               50           growth has slowed to 1.1% y-o-y and corporate sector
      0                                                               0            lending to -0.2%. The monthly flows were also still falling.
     -50                                                              -50         The positive financial market response to the ECB’s OMT
                                                                                   programme should help to improve confidence, but the
 -100                                                                 -100
                                                                                   country divergence in lending activity is set to persist
           04    05     06    07      08        09   10   11   12                  given the recessions and banking sector restructurings in
                Corporate loan flow                   Household loan flow          the periphery. Spain’s loan growth slowed to -5% y-o-y in
                                                                                   July while Germany’s has revived to 1.8%.
 Source: ECB




 The contraction in GDP...                                                        … does not fully reflect how weak the economy is
                                                                                  Despite the upside surprises to German and French
Index                                              % Qtr                           GDP, eurozone GDP contracted by 0.2% q-o-q in Q2 as
65                                                  1.5                            the recessions elsewhere in the eurozone intensified.
60                                                  1.0
55                                                  0.5                           Growth was still supported in Q2 by exports, particularly
50                                                  0.0                            to non-eurozone countries, such as China, but the world
45                                                  -0.5                           trade cycle is now showing a more marked weakening.
40                                                  -1.0                           This is likely to take a greater toll on the German and
35                                                  -1.5                           eurozone industrial sectors in the coming months.
30                                                  -2.0
25                                                  -2.5                          Despite the ECB’s planned OMT we still expect a
20                                                  -3.0                           continued contraction in H2 2012, and, with official
   99 00 01 02 03 04 05 06 07 08 09 10 11 12                                       growth forecasts for 2012-13 likely to be revised down
               Eurozone composite PMI output (LHS)                                 further, more questions will be raised about whether
               Eurozone GDP (RHS)                                                  member states can realistically expect to meet their
                                                                                   fiscal targets.
 Source: Markit, Eurostat




                                                                                                                                                    45
     Macro
     Global Economics                                                                                                            abc
     Q4 2012




Germany
Cracks beneath the surface                                              Nonetheless, with employment marking a post-             Stefan Schilbe
                                                                                                                                 Economist
                                                                        reunification record high, and wages and salaries        HSBC Trinkaus & Burkhardt AG
While hard German economic data, such as industrial
                                                                        showing y-o-y growth rates of almost 4%,                 +49 211910 3137
orders and production, have held up remarkably well                                                                              stefan.schilbe@hsbc.de
                                                                        consumption should continue to contribute positively
recently, there are some cracks beneath the surface.                                                                             Rainer Sartoris
                                                                        to growth. Buying intentions (a subcomponent of          Economist
The intensifying crisis in the eurozone has already                                                                              HSBC Trinkaus & Burkhardt AG
                                                                        GfK consumer climate) largely maintained their           +49 211910 2470
left its mark on ifo export expectations, which in
                                                                        elevated level over the last couple of months.           rainer.sartoris@hsbc.de
September fell to its lowest level since July 2009. Net
                                                                        Disposable income should receive a further boost
exports, a substantial driver of GDP growth in H1
                                                                        from a cut in the contribution rates for pension
2012, will, in our view, fail to support in H2. This
                                                                        insurance from 19.6% to 19.0% to take place in
also has negative implications for business fixed
                                                                        January 2013.
investment for which growth has already declined in
the last two quarters. The outlook for companies in                     Due to the strong first half, our 2012 full-year GDP
the capital goods sector has deteriorated substantially                 growth forecast of 0.9% looks achievable. Even so,
as a result of falling capacity utilisation in the                      the combination of weaker net exports and business
manufacturing sector, hinting at lower capital                          fixed investment should lead to stagnation in the
spending ahead, despite favourable financing                            second half. Even if we pencil in a rebound in
conditions. Consequently, the willingness to hire has                   activity starting in Q1, the lower than anticipated
receded further, pointing towards slow or no growth                     base makes cutting our growth forecast for 2013
in employment in future.                                                from 1.5% to 0.9% necessary.


% Year
                                              2011    2012f   2013f   Q3 12f   Q4 12f    Q1 13f    Q2 13f    Q3 13f     Q4 13f
Consumer spending                               1.7     0.9     1.2      0.4      1.0       1.2       1.1       1.2        1.2
Government consumption                          1.0     1.1     0.7      1.1      0.7       0.7       0.7       0.7        0.8
Investment                                      6.4    -1.4    -0.0     -2.1     -3.2      -2.1      -0.8       0.9        1.9
Machinery & equipment                           7.2    -3.6    -2.1     -6.3     -7.5      -6.6      -4.0      -0.0        2.5
Construction                                    6.0     0.1     1.2      1.1      0.2       1.2       1.7       1.1        0.8
Stockbuilding (% GDP)                           1.6     0.9     0.5      0.6      0.5       0.5       0.5       0.4        0.4
Domestic demand                                 2.8    -0.2     0.3     -0.9     -0.9      -0.5      -0.2       0.8        1.2
Exports                                         7.9     3.9     2.9      3.1      3.5       2.7       1.2       2.9        4.6
Imports                                         7.5     2.9     3.3      2.2      2.7       3.5       2.3       2.9        4.4
GDP                                             3.1     0.9     0.9      0.6      0.7       0.4       0.5       1.0        1.5
GDP (% quarter)                                   -       -       -      0.0     -0.1       0.3       0.3       0.5        0.5
Industrial production                           8.0     0.1     2.3     -0.9      1.1       2.1       2.7       2.2        2.4
Unemployment (%)                                7.1     6.8     6.7      6.8      6.8       6.7       6.7       6.7        6.7
Average earnings                                1.7     2.6     3.2      3.0      3.0       3.1       3.1       3.2        3.2
Producer prices                                 5.7     2.0     2.0      1.1      1.6       1.4       1.6       2.4        2.4
Consumer prices                                 2.5     2.1     2.1      2.1      1.9       1.8       2.1       2.2        2.1
Current account (EURbn)                       146.6   150.9   144.0     27.0     45.2      39.0      35.0      28.0       42.0
Current account (% GDP)                         5.7     5.7     5.3      4.1      6.8       5.8       5.1       4.1        6.1
Budget balance (% GDP)                         -1.0    -0.8    -0.6        -        -         -         -         -          -
3-month money (%)*                              1.3     0.2     0.2      0.2      0.2       0.2       0.2       0.2        0.2
10-year bond yield (%)*                         1.9     1.5     1.2      1.5      1.5       1.4       1.3       1.2        1.2
Note: * = Period-end
Source: Thomson Reuters Datastream, HSBC estimates




46
    Macro
    Global Economics                                                                                                                                                   abc
    Q4 2012




Weakening global trade to undermine German exports                                                 Exports
%                                                                                       Index      The outlook for German exports has clearly deteriorated: the
                                                                                                    ‘new exports orders’ component of the global manufacturing
 30                                                                                        70
                                                                                                    PMI has fallen to its lowest level since April 2009. The main
 20                                                                                                 culprit is the deep recession in some eurozone countries, but
                                                                                           60
 10                                                                                                 demand from non-eurozone economies has also begun to
  0                                                                                        50       fade notably.
-10                                                                                                The current level is consistent with a falling annual export
                                                                                           40
-20                                                                                                 growth rate, a view that is supported by the more pessimistic
-30                                                                                        30       export expectations of companies questioned by ifo.
      01 02 03 04 05 06 07 08 09 10 11 12                                                          Further progress in the labour market will be difficult to
                                                                                                    achieve as a consequence – the unemployment rate clearly
           German ex ports (LHS)                                                                    shows signs of bottoming out.
           Global manufacturing PM I - new ex port orders* (RHS)

Source: Macrobond, HSBC
Note: *After 3 months




Capital goods sector feels the crisis                                                              Investment
                                                                                                   The more negative export outlook is starting to filter through
%                                                                                          %        into investment companies’ spending behaviour: Firms´
 30                                                                                       20        assessment of the next three months in the capital goods
 15                                                                                                 sector has fallen sharply, indicating negative yearly business
  0                                                                                       0         fixed investment rates ahead.
-15                                                                                                Capacity utilisation rates fell from 84.5% to 83.2% in Q3
-30                                                                                       -20       2012, undershooting the long-term average for the first time
-45                                                                                                 since Q4 2010.
-60                                                                                       -40
                                                                                                   As leading indicators in manufacturing business show no
      95      97      99      01      03        05        07        09        11                    signs of stabilisation yet, companies will be reluctant to
                                                                                                    expand capacity.
            IFO capital goods sector - ex pectations for production
            acitiv ity in the nex t 3 months
            Business fix ed inv estment

Source: Macrobond, HSBC




Money is cheap                                                                                     Financing conditions
%        Interest rates for new non-financial corporate loans*                             %       Financing conditions for German companies (and
                                                                                                    households) as a result of a loose monetary policy are
7                                                                                             7
                                                                                                    extremely favourable on a nominal and real basis, especially
6                                                                                             6
                                                                                                    when compared to countries like Italy and Spain.
                                                                                                   Despite an intensifying debt crisis in the eurozone, the
5                                                                                             5     Bundesbank lending survey and the ifo credit hurdle do not
                                                                                                    point to restrictive lending behaviour by banks in Germany.
4                                                                                             4    Given that key interest rates in the eurozone are likely to stay
                                                                                                    extremely low for a prolonged time, credit growth should pick
3                                                                                             3     up sharply in Germany, if and when signs of a global
    03     04      05      06      07      08        09        10        11        12               recovery emerge, thus supporting business fixed investment
                                                                                                    as well as residential investment.
            Spain               Germany                        Italy                France

Source: Macrobond, HSBC
Note: *Loans over 5 years, up to EUR1mn




                                                                                                                                                                         47
     Macro
     Global Economics                                                                                                          abc
     Q4 2012




France
Neither recession nor growth?                                           In 2013, the tax hikes to be introduced to meet the    Mathilde Lemoine
                                                                                                                               Economist
                                                                        target of a public deficit of 3% of GDP in 2013,       HSBC France
GDP is likely to remain stable in H2 2012, as it                                                                               +33 1 40 70 32 66
                                                                        despite the downward revision in GDP growth            mathilde.lemoine@hsbc.fr
was in H1 2012. Indeed, we expect a rise in
                                                                        forecasts, will shave 0.3pp off growth in gross
consumer spending in Q3 and Q4 2012, boosted
                                                                        disposable income on our calculations. But at the
by a 25% rise in the allowance for children going
                                                                        same time, social benefits will continue to grow,
back to school in August and by a 2% hike in the
                                                                        as there is no target of cutting public spending,
minimum wage on 1 July. In addition, the savings
                                                                        merely of restricting its real growth (to 0.8% in
rate could drop slightly after the presidential
                                                                        2013 from 2.3% per year before the crisis).
elections as after previous presidential elections.
                                                                        We also assume that France will adjust its
That said, we forecast weak growth in consumer
                                                                        position on fiscal integration and come to an
spending in 2013 because income tax will hike
                                                                        agreement with Germany on giving the European
and because the unemployment rate should
                                                                        Commission the power of prior approval of all
continue to rise until the beginning of 2013.
                                                                        budget proposals, and not just in the case of
Moreover, industrial production could continue to
                                                                        excessive deficit procedures. If such an agreement
fall in H2 2012, as business investment declines;
                                                                        is reached, the uncertainty created by the lack of
the recession in southern Europe is hitting
                                                                        institutional clarification will be reduced,
exports, and the fall in the capacity utilisation rate
                                                                        improving the prospects for economic activity and
to 77% in August, from an average of 80% in
                                                                        investment.
2011, will weigh on business investment.




% Year
                                        2011         2012f   2013f   Q3 12f   Q4 12f    Q1 13f    Q2 13f    Q3 13f    Q4 13f
Consumer spending                         0.2          0.1     0.5      0.2       0.4      0.3       0.7       0.5       0.6
Government consumption                    0.2          1.2     0.9      1.3       1.4      1.1       0.8       0.8       0.8
Investment                                3.5          0.6     1.8      0.6      -0.8      0.7       0.9       2.3       3.4
Stockbuilding (% GDP)                     0.4         -0.2     0.0     -0.1      -0.2     -0.1      -0.0       0.1       0.2
Domestic demand                           1.7         -0.1     1.1     -0.0       0.8      0.9       0.9       1.1       1.5
Exports                                   5.5          2.6     3.2      2.1       1.4      2.2       3.0       3.5       4.1
Imports                                   5.2          1.4     3.6      1.7       3.9      4.1       3.2       3.3       3.9
GDP                                       1.7          0.2     0.9      0.0       0.1      0.4       0.8       1.1       1.5
GDP (% quarter)                             -            -       -      0.0       0.0      0.3       0.4       0.4       0.4
Manufacturing output                      3.1         -2.4     0.5     -2.6      -1.4     -0.4       0.7       0.6       0.9
Unemployment (%)                          9.7         10.2    10.5     10.4      10.4     10.5      10.5      10.4      10.4
Average earnings                          2.2          2.3     2.5      2.4       2.5      2.3       2.5       2.5       2.5
Consumer prices                           2.3          2.3     1.8      2.3       2.1      1.8       1.7       1.8       1.7
Trade account (EURbn)                   -72.2        -69.9   -68.5    -17.0     -17.2    -16.9     -17.0     -17.2     -17.4
Current account (% GDP)                  -2.0         -2.2    -2.1     -2.2      -2.2     -2.1      -2.1      -2.1      -2.2
Budget balance (% GDP)                   -5.2         -4.5    -3.5        -         -        -         -         -         -
3-month money (%)*                        1.3          0.2     0.2      0.2       0.2      0.2       0.2       0.2       0.2
10-year bond yield (%)*                   3.1          2.0     1.6      2.2       2.0      1.9       1.7       1.6       1.6
Note: * = Period end
Source: Thomson Reuters Datastream, HSBC estimates




48
  Macro
  Global Economics                                                                                                                            abc
  Q4 2012




France’s small open economy and the scale of                             ... should help avoid a fall in consumer spending in
economic stabilisers...                                                  2013, despite higher taxes
                                                                         Exports account for only 27% of French GDP, compared
                                                                          to 50% in Germany, limiting the impact of the slowdown
%Yr                                                             %Yr
                                                                          in world trade on final domestic demand.
 6                                                                6
                                                                         Moreover, public spending represented 56% of GDP in
 4                                                                4
                                                                          2012, and a third of household gross disposable income
 2                                                                2       (GDI) comes from redistribution. As a result, the impact
 0                                                                0       of rising unemployment on income is limited. Since the
-2                                                                -2      1990s, during periods of rising unemployment, GDI has
-4                                                                -4      risen by an average of 2.6% y-o-y, compared to an
-6                                                                -6      average of 4% y-o-y during periods of falling
-8                                                                -8      unemployment.
   00 01 02 03 04 05 06 07 08 09 10 11 12                                Thus in 2013, on our calculations, the rise in social
               Germany: GDP growth (LHS)                                  benefits could offset the negative impact of tax hikes
               France: GDP growth (LHS)                                   (new 45% and 75% income tax bands for incomes
                                                                          greater than EUR150,000 and EUR1,000,000 a year
                                                                          respectively).
Sources: Destatis, INSEE, HSBC




But the restructuring of the French car industry…                        … could limit industrial production growth in 2013
                                                                         The recession in Italy and Spain will continue to hit exports
Index, 100 = 2000                                Index, 100 = 2000
                                                                          to these countries which currently represent 15% of French
130                                                               130     exports.
120                                                               120    In addition, the positive effect on exports of a 7% decline in
110                                                               110     the euro against the dollar between February and July 2012
100                                                               100     will start to diminish in Q2 2013.
 90                                                               90
                                                                         Lastly, French car makers are involved in a period of
 80                                                               80
                                                                          restructuring. According to the OECD, there is 20% excess
 70                                                               70      capacity in the French auto industry. Moreover, the negative
 60                                                               60      trade balance in this sector has reduced the need for
 50                                                               50      production capacity still further. As a result, we expect car
      00 01 02 03 04 05 06 07 08 09 10 11 12                              production, which amounts to 8% of industrial production, to
               French IP                  French car production           continue to decline by some 11% per year between 2013
                                                                          and 2015 on our calculations.
Sources: INSEE, HSBC




France’s acceptance of deeper fiscal integration...                      ... could clarify the way in which Europe works and
                                                                         reduce the systemic risk premium
                                                                         Since the beginning of the crisis, we consider that
           Sovereign credit default swaps in France, Germany              institutional clarification is essential to allow the eurozone to
                               and the US                                 function properly. This clarification includes the acceptance
Bps                                                               Bps
200                                                               200
                                                                          by Europeans of the existence of supra-national decisions
                                                                          that are applicable at the national level for banking, fiscal
150                                                               150     and economic topics.
                                                                         However, the Spanish Prime Minister is prevaricating on a
100                                                               100     clean-up in the banking industry, limiting the scope of any
                                                                          agreement on banking union. And France, to date, has
 50                                                               50
                                                                          resisted a transfer of sovereignty over fiscal policy.
  0                                                               0       Significant moves in these two countries could boost a
      08           09             10      11         12
                                                                          European desire to introduce the reforms that would allow
                                                                          the eurozone to function. Therefore, the eurozone systemic
              France                   Germany                 US         risk premium could decrease and drive business investment
                                                                          and stockbuilding.
Sources: Bloomberg, INSEE, HSBC




                                                                                                                                                49
     Macro
     Global Economics                                                                                                             abc
     Q4 2012




Italy
Going it alone                                                             to resist any calls for more aggressive fiscal         Janet Henry
                                                                                                                                  Economist
                                                                           consolidation, and will therefore remain very          HSBC Bank plc
The Italian government bond market has already                                                                                    +44 20 7991 6711
                                                                           reluctant to submit to EFSF/ESM conditionality.
benefited greatly from the ECB’s announcement                                                                                     janet.henry@hsbcib.com
                                                                           The various tax increases have lifted inflation
that it is willing to undertake unlimited bond
                                                                           above 3.5% for much of this year, implying a
purchases. Ten-year yields are now hovering just
                                                                           severe squeeze on real wages at a time when the
above 5.2%, well down from their late July peak of
                                                                           unemployment rate is rising to new highs (10.7% in
6.6%. The market is currently waiting for Spain to
                                                                           July). Hence the contraction in consumer spending
request a precautionary EFSF/ESM programme
                                                                           has deepened, and the latest indicators show little
and trigger the ESM programme, but Italy is also
                                                                           sign that spending will see an upturn any time soon.
viewed as a potential candidate for requiring such
assistance in the coming months.                                           We expect Mr Monti to continue with the various
                                                                           reforms to raise long-term potential growth, which
The budget deficit is much smaller than that of
                                                                           should help to reassure the market. Nonetheless,
Spain: even with a deep contraction in GDP of
                                                                           the elections looming in April 2013 could lead to
about 2.5% in 2012 Italy’s budget deficit should
                                                                           some political uncertainty and mean that some kind
come in below 3% of GDP. But, given the size of
                                                                           of precautionary programme for Italy cannot be
its debt stock and low potential growth rate, this
                                                                           ruled out.
level of borrowing costs means Italy still faces
enormous challenges. The negative impact that
austerity is already having on the economy means
that the Prime Minister, Mario Monti, will continue


% Year
                                        2011            2012f   2013f   Q3 12f   Q4 12f    Q1 13f    Q2 13f    Q3 13f    Q4 13f
Consumer spending                         0.2            -3.4    -1.3     -3.8      -3.3      -2.5     -1.6      -0.9      -0.4
Government consumption                   -0.9            -1.0    -1.5     -0.8      -0.6      -1.1     -1.7      -1.6      -1.6
Investment                               -1.2            -9.4    -4.8    -10.8     -10.0      -7.6     -6.2      -3.6      -1.6
Stockbuilding (% GDP)                    -0.6            -0.9     0.3     -0.8      -0.7      -0.6     -0.6      -0.5      -0.5
Domestic demand                          -0.8            -4.9    -1.7     -5.1      -4.3      -2.8     -2.0      -1.3      -0.7
Exports                                   6.3             0.5     1.4     -0.6      -0.5       0.5      0.9       1.7       2.5
Imports                                   1.0            -7.3    -0.8     -7.0      -4.8      -1.2     -1.0      -0.7      -0.3
GDP                                       0.5            -2.5    -1.1     -3.1      -2.9      -2.3     -1.4      -0.6       0.1
GDP (% quarter)                             -               -       -     -0.7      -0.5      -0.2      0.0       0.1       0.2
Industrial production                     0.3            -6.7    -1.5     -7.8      -5.7      -3.6     -2.0      -0.6       0.3
Unemployment (%)                          8.4            10.6    11.5     10.8      11.1      11.3     11.4      11.5      11.6
Hourly wage rate                          1.8             1.4     1.4      1.5       1.4       1.4      1.4       1.4       1.3
Consumer prices                           2.9             3.4     2.3      3.3       3.1       2.5      1.8       2.5       2.3
Current account (EURbn)                 -51.5           -20.5   -17.0     -4.0      -2.0     -12.0     -1.0      -3.0      -1.0
Current account (% GDP)                  -3.3            -1.3    -1.1     -1.0      -0.5      -3.1     -0.3      -0.8      -0.3
Budget balance (% GDP)*                  -3.9            -2.9    -2.3        -         -         -        -         -         -
3-month money (%)**                       1.3             0.2     0.2      0.2       0.2       0.2      0.2       0.2       0.2
10-year bond yield (%)**                  6.4             5.0     4.5      5.2       5.0       4.8      4.7       4.6       4.5
Note: * = National measure ** = Period-end
Source: Thomson Reuters Datastream and HSBC estimates




50
    Macro
    Global Economics                                                                                                                            abc
    Q4 2012




Sharp fall in yields...                                                          ...in response to ECB’s plans
%                            Italian 2y r Bond Yields                   %        Italian bond yields have fallen sharply since ECB head,
                                                                                  Mario Draghi, committed to do “whatever it takes” to
8                                                                           8     preserve the euro.
             3y r LTROs announced               Draghi commits
                                                to do "w hatev er                Italy has given no indication that it intends to request an
6                  SMP starts                        it takes"              6
                                                                                  EFSF/ESM programme which could be needed for the
                                                                                  ECB to start buying Italian government bonds. The rally
4                                                                           4     has allowed the government to tap the market at much
                                                                                  more reasonable rates. It raised EUR4bn of 10-year
2                                                                           2     bonds on 3 September at about 5% and around
                                                                                  EUR1.5bn of 3 and 9-year inflation linked bonds on 25
0                                                                           0     September at 2.46% and 3.68% respectively.
Jan 11                    Jul 11          Jan 12             Jul 12              While the caretaker government of Mario Monti will be
                                                                                  very reluctant to submit to EFSF/ESM conditionality, the
                                                                                  elections due to be held in April 2013 could lead to some
                                                                                  political uncertainty and mean that some kind of
                                                                                  precautionary programme cannot be ruled out.
Source: Bloomberg




The recession is deepening...                                                    ...with consumption and investment falling sharply

%                          Contribution to % Yr Growth                 %         The recession in Italy continues, with GDP contracting by
 4                                                                      4
                                                                                  a further 0.8% q-o-q in Q2 following the 0.8% fall in Q1
 3                                                                      3         and 0.7% q-o-q drop in Q4.
 2                                                                      2        Overall GDP fell 2.6% y-o-y in Q2, but the domestic
 1                                                                      1         situation is even weaker, with consumer spending falling
 0                                                                      0         3.6% y-o-y and investment down 9.5% y-o-y.
-1                                                                      -1
                                                                                 The caretaker government of Mario Monti is pressing
-2                                                                      -2
-3                                                                      -3        ahead with implementing the required reforms to raise
-4                                                                      -4        long-term potential growth, but will resist any pressure to
-5                                                                      -5        deliver even more austerity. This is just one of the
     Q1 10          Q3 10     Q1 11    Q3 11                Q1 12                 reasons why he will wish to avoid requesting
                                                                                  EFSF/ESM/ECB assistance if he can.
     Priv con          Govt cons    Investment                Net exports


Source: Bank of Italy, Thomson Reuters Datastream




Inflation has been very sticky...                                                ...and further VAT rises will squeeze wages further

 % Yr                                  Italy                          % Yr       Italy has been registering one of the highest rates of
 5                                                                      5         inflation in the eurozone over the past year, because of
 4                                                                      4         methodological changes and VAT increases, as well as
 3                                                                      3         the higher energy prices which have impacted on all of
 2                                                                      2         the eurozone.
 1                                                                      1        With rising unemployment keeping a lid on nominal wage
 0                                                                      0         growth, this rise in inflation has contributed to a very
-1                                                                      -1        sharp squeeze on real wages and contracting consumer
-2                                                                      -2        spending.
-3                                                                      -3
                                                                                 Assuming stable energy prices, inflation has now peaked,
   05        06     07    08             09         10    11     12
                                                                                  and should slow steadily, but, the further 2% rise in VAT
            HICP (LHS)                                Nominal wages (RHS)         planned for July 2013 means inflation is unlikely to slow
            Real wages (RHS)                                                      below 2%, implying real wage growth will remain
                                                                                  negative.
Source: Eurostat, Istat




                                                                                                                                                  51
     Macro
     Global Economics                                                                                                            abc
     Q4 2012




Spain
A soft bailout                                                          forecast. This, together with some base effects          Madhur Jha
                                                                                                                                 Economist
                                                                        resulting from lower 2011 GDP growth, has                HSBC Bank plc
The ECB has opened the door for ‘conditional’
                                                                        implied that the contraction in 2012 will be             +44 20 7991 6755
support to the Spanish sovereign, and it appears                                                                                 madhur.jha@hsbcib.com
                                                                        shallower than we had previously forecast.
only a matter of time before Spain formally
requests assistance. It is clear that the Spanish                       However, this only means that there is more pain
government is trying to distinguish itself from                         to come next year. The government will have to
countries that have sought Troika assistance by                         step up the implementation of austerity plans once
outlining a detailed and comprehensive                                  it asks for assistance, implying a bigger drag from
austerity/reform programme. This, it hopes, will                        government spending over the next few quarters.
be sufficient to appease European partners who                          At the same time, there are clear indications that
could then offer Spain a more concessionary                             the world trade cycle has turned down, implying a
(precautionary) form of assistance than a full-                         softer contribution to growth from net exports.
scale Troika programme, which would come with
                                                                        While tail risks relating to Spain have ebbed, the
much stricter conditionality (and loss of face).
                                                                        focus over the coming quarters will increasingly
While expectations of a soft bailout for Spain                          turn to how politicians and trade unions react to
helped calm market sentiment, the real side of the                      the deepening recession and rising
economy continues to deteriorate. Spanish GDP                           unemployment, which in turn could call into
growth held up better than we had expected in H1                        question the government’s commitment to
2012 as net exports grew strongly and the                               reforms.
government delivered less austerity than we had


% Year
                                        2011         2012f   2013f   Q3 12f   Q4 12f    Q1 13f    Q2 13f    Q3 13f    Q4 13f
Consumer spending                       -1.0          -1.8    -1.8     -2.0      -1.7      -2.5     -1.9      -1.7        -1.2
Government consumption                  -0.5          -3.1    -4.6     -2.5      -3.4      -4.0     -4.7      -5.0        -4.8
Investment                              -5.5          -9.4    -7.5    -10.8     -10.1      -9.9     -8.2      -6.8        -4.9
Domestic demand                         -1.9          -3.7    -4.0     -4.0      -3.8      -4.8     -4.2      -3.8        -3.1
Exports                                  7.6           1.1     1.7     -0.6      -0.9       1.5      0.6       1.8         2.8
Imports                                 -0.9          -6.2    -2.8     -7.5      -5.9      -4.4     -3.4      -2.1        -1.2
GDP                                      0.4          -1.5    -2.0     -1.8      -2.1      -2.4     -2.4      -2.0        -1.3
GDP (% quarter)                            -             -       -     -0.5      -0.8      -0.6     -0.4      -0.2        -0.1
Industrial production                   -1.4          -5.6    -2.6     -5.9      -3.8      -2.9     -2.0      -2.5        -3.0
Unemployment (%)                        21.7          25.0    27.2     25.3      26.0      26.6     27.0      27.3        27.8
Average earnings                         2.5           1.0     0.6      0.6       0.6       0.6      0.6       0.6         0.6
Consumer prices                          3.1           2.4     2.5      2.7       3.0       2.8      3.2       2.4         1.7
Trade account (EURbn)                  -46.3          -8.3    -8.3     -7.5      -7.0      -9.0     -8.5      -8.0        -7.5
Current account (EURbn)                -37.5         -29.1    -7.1     -4.5      -7.5     -10.5     -7.0      -6.5        -4.5
Current account (% GDP)                 -3.5          -2.7    -2.7        -         -         -        -         -           -
Budget balance (% GDP)                  -8.9          -6.8    -5.0        -         -         -        -         -           -
3-month money (%)*                       1.3           0.2     0.2      0.2       0.2       0.2      0.2       0.2         0.2
10-year bond yield (%)*                  5.5           5.8     5.3      6.0       5.8       5.5      5.4       5.3         5.3
Note: * = Period-end
Source: Thomson Reuters Datastream, HSBC estimates




52
     Macro
     Global Economics                                                                                                                                   abc
     Q4 2012




Net exports…                                                                              … have been the only source of growth for Spain
%pts                            Contribution to GDP                               %qtr    Government spending proved to be less of a drag in H1
                                                                                           2012 than in H2 2011. However, we expect the drag
1.8                                                                               0.2      from government spending to rise as the government
1.2                                                                               0.0      steps up austerity implementation.
0.6                                                                                       Domestic demand overall remained very weak, though,
                                                                                  -0.2     as consumer spending fell sharply, more than reversing
0.0
                                                                                  -0.4     the gain seen in Q1 2012.
-0.6
                                                                                          Net exports added a strong 1.0pp to Q2 2012 GDP, not
-1.2                                                                              -0.6     only because of a further collapse in imports but also a
              Q2 11       Q3 11          Q4 11       Q1 12         Q2 12                   recovery in exports. We expect net trade to provide less
                                                                                           support to growth over the next few quarters, with
            Consp                        Gov t                          GFCF               exports likely to be much softer.
            net trade                    GDP (RHS)

Source: Thomson Reuters Datastream




Regional budget performance remains a big concern…                                        … despite the recent improvement
% GDP                                                                         % GDP       Regional governments managed to halve their
                                                                                           deficit/GDP ratios in H1 2012 (-0.8% of GDP) as
0                                                                                   0
                                                                                           compared to H1 2011 (-1.7% of GDP).
-1                                                                                  -1    While this suggests that regional governments are doing
                                                                                           more to tighten their belts, we hesitate to draw any
                                                                                           conclusions about the full-year fiscal performance as
-2                                                                                  -2
                            -4.25                                                          changes in the way that regions receive transfers from
                                                                                           the central government reduce the comparability of
-3                                                                                  -3     performance between H1 2011 and H1 2012.
        Cataluna
       Cantabria



       Ex tremad




            Total
        Asturias
       Andalucia
         Aragon




          Galicia
          Madrid
          Murcia

        La Rioja
       Valencian
         C-La M
        Beleares
       Canarias




             Pais
           CyL




        Navarra




                                                                                          Despite that, Murcia, Extremadura and Navarra face an
                                                                                           uphill battle improving budget positions, with the budget
                                                                                           deficit/GDP ratio already crossing 1.5%, the target for
                   H1 11                                         H1 12                     the year as a whole.
Source: MHAP
Note: C-La M refers to Castilla-La Mancha, C y L refers to Castilla y Leon




Unemployment set to rise further…                                                         …as public sector jobs are cut back too
                                                                                          Public sector employment continued to grow even up until
                                 Spain Employment                                          2011 even though the private sector has shed jobs rapidly
  Index 2005 Q1 =100
                                                                                           since the triple crisis hit Spain.
120                                                                                120
115                                                                                       But austerity is forcing cutbacks in employment both at
                                                                                           the central and regional government levels. This is mainly
110                                                                                110
                                                                                           being achieved through the non-renewal/shedding of
105                                                                                        temporary roles
100                                                                                100
                                                                                          We estimate that the unemployment rate could surpass
 95                                                                                        30% by end -2013 unless the government is able to push
 90                                                                                90      through more reforms that allow for some of the
       05       06        07        08        09        10        11         12            adjustment in personnel costs to come through wage
                                                                                           moderation (See Spanish labour reforms: protest or
               Public Sector                                 Priv ate sector               progress)

Source: INE




                                                                                                                                                          53
     Macro
     Global Economics                                                                                                                                                    abc
     Q4 2012




UK
Accepting limitations                                                                                           about it? Monetary policy is already very loose,         Simon Wells
                                                                                                                                                                         Chief UK Economist
                                                                                                                and it will take time to assess the impact of new        HSBC Bank plc
GDP fell sharply in Q2 2012, largely due to an extra
                                                                                                                credit easing schemes, particularly the untested         +44 20 7991 6718
Bank Holiday for the Queen’s Jubilee. This was the                                                                                                                       simon.wells@hsbcib.com
                                                                                                                Funding for Lending Scheme.
third consecutive quarterly contraction, but it should
be the last for a while, and we expect a bounce                                                                 Unfortunately, ever-looser monetary policy is not a
back in Q3. However, looking past erratic factors,                                                              miracle cure for the UK’s economic ills. More QE
underlying growth remains weak. High uncertainty,                                                               entails risks and possibly some negative side-effects.
tight credit conditions, fiscal consolidation and an                                                            It is also possible that the incremental benefit may
increasingly challenging international                                                                          be waning. Given that policy is already ultra-
environment continue to restrain activity.                                                                      loose, there may be practical constraints on what
                                                                                                                more it can do. We expect no further QE this year.
Trade surveys suggest the difficult export conditions
are set to continue, as the Asian and eurozone                                                                  Fiscal policy is also highly constrained. With low
markets slow. And with commodity prices putting                                                                 growth also meaning the public finances may be
upward pressure on inflation and the labour                                                                     getting off-track, the government may find it hard
market remaining weak, there is likely to be little                                                             to meet its own targets without a further tightening
growth in real wages during 2013. Therefore                                                                     of policy, let alone some form of loosening. So
consumption is unlikely to drive a strong recovery.                                                             the UK is in a bind, and may need to accept that
                                                                                                                this is still the hangover from the pre-crisis boom
So it seems that 2013 will be another year of very
                                                                                                                years. There may be limits to what policy can do.
slow growth. The question is, what can policy do

% Year
                                                           2011             2012f              2013f            Q3 12f      Q4 12f   Q1 13f   Q2 13f   Q3 13f   Q4 13f
Consumer spending                                           -1.0              -0.1                1.3               0.6        0.5      0.9      1.5      1.2      1.3
Government consumption                                       0.1               2.9                0.0               3.3        2.6      0.7      0.5     -0.3     -0.8
Investment                                                  -1.3               1.1                4.7               0.6        3.0      2.4      6.7      5.2      4.6
Stockbuilding (%GDP)                                         0.3              -0.2               -0.2              -1.0        0.0      0.4     -0.8     -0.3     -0.2
Domestic demand                                             -0.5               0.5                1.3               0.2        1.4      1.5      1.3      1.2      1.1
Exports                                                      4.4               0.1                1.5               1.9       -0.8      0.9      2.6      0.9      1.5
Imports                                                      0.5               2.4                1.9               3.5        2.4      3.0      1.7      1.4      1.5
GDP growth                                                   0.8              -0.1                1.1              -0.3        0.4      0.9      1.6      1.0      1.1
GDP % Quarter                                                  -                 -                  -               0.9        0.3      0.2      0.2      0.3      0.4
Manufacturing output                                         2.0              -1.0                0.3              -0.6       -0.2     -0.3      0.7     -0.2      1.0
Unemployment rate end-year                                   8.1               8.1                8.2               8.0        8.3      8.3      8.3      8.2      8.1
Average earnings                                             2.0               2.0                2.5               2.8        2.1      2.2      2.7      2.5      2.6
RPI                                                          5.2               3.1                2.9               2.9        2.8      2.8      3.0      3.0      2.9
CPI, average                                                 4.5               2.7                2.5               2.4        2.4      2.3      2.6      2.6      2.5
Current account (%GDP)                                      -1.9              -3.0               -3.3                 -          -        -        -        -        -
PSNB (%GDP)*                                                -7.9              -6.6               -7.1                 -          -        -        -        -        -
USD/GBP                                                     1.55              1.60               1.60              1.58       1.60     1.62     1.61     1.60     1.60
GBP/EUR                                                     0.84              0.84               0.88              0.82       0.84     0.85     0.86     0.87     0.88
Base rate (%)**                                             0.50              0.50               0.50              0.50       0.50     0.50     0.50     0.50     0.50
10-year bond yield                                           2.1               1.8                2.0               1.7        1.8      1.7      1.6      1.7      2.0
Notes: * = Public borrowing numbers are shown in fiscal years and exclude financial sector interventions ** = Period-end.
Source: Thomson Reuters Datastream, HSBC estimates




54
     Macro
     Global Economics                                                                                                                        abc
     Q4 2012




Despite the deficit reduction plan, government                          … and with trade slowing, the composition of growth
consumption has grown as the economy has slowed …                       remains worrying
                                                                        Net trade has started to drag on growth as global activity
% Yr                      Contributions to growth             % Yr       cools and the eurozone’s recession begins to bite. Trade
4                                                                4       surveys point to a drop in export orders suggesting the drag
3                                                                3       from trade will continue.
2                                                                2      Consumption is yet to add to four-quarter growth. This
 1                                                                1      reflects a prolonged period of inflation outpacing wage
 0                                                                0      growth. But with commodity prices rising, inflation will not fall
-1                                                                -1     as far or as fast as we had previously expected, so real
-2                                                                -2     wages will barely grow and consumption will stay weak.
      2010 2010 2010 2010 2011 2011 2011 2011 2012 2012                 Growth in 2012 has been affected by a number of one-off or
       Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2                                     erratic factors. Excluding these factors, growth appears to
       Consumption        Government         Investment                  have been slow but positive. We expect a big bounce back
       Stocks             Net Trade                                      in Q3, with slow growth resuming in Q4 and continuing into
                                                                         2013.
Source: ONS, HSBC




The UK’s productivity performance has become more                      … which increasingly suggests the crisis may have had a
puzzling as employment has held up …                                   larger negative impact on the UK’s supply potential
 Index              Productivity in UK recessions             Index     Lower output combined with a modest amount of job
120                                                              120     creation through 2012 means the UK’s dismal productivity
                                                                         performance has continued. If this simply reflects a large
115                                                              115     amount of spare capacity in the economy, then demand can
110                                                              110     be stoked without fear of fuelling inflation.
105                                                              105    But the fact that UK productivity has flat-lined for three years
                                                                         increasingly points to a period of weak growth in potential
100                                                              100
                                                                         productivity. Supply-side weakness is not something that
 95                                                              95      can be addressed by ever-looser monetary policy.
 90                                                          90         Weak productivity also implies a risk of unemployment rising
         t     t+2    t+4    t+6     t+8 t+10 t+12 t+14 t+16             again if some firms have been hoarding labour in the hope
                                                                         that demand will pick up. Another year of weak demand
              70s                  80s          90s          00s
                                                                         could be the final straw, forcing firms to reduce headcount.

Source: ONS, BoE




The Bank of England is as puzzled as anyone, and it has                 … although the MPC’s implied probability of deflation in
never before been this uncertain about growth outlook …                 two years’ time is way below 2009 levels

        Implied probability of growth below zero 2-years-ahead          The outlook remains highly uncertain. Indeed, the MPC’s
                                                                         published forecast data show it has never been more
18%                                                              18%
                                                                         uncertain about the outlook. In turn, its implied probability of
15%                                                              15%     a GDP contraction in two years’ time is at an all-time high.
                                                                        High uncertainty calls for cautious policy-making. Looser
12%                                                              12%
                                                                         monetary policy is not a one-way bet, and there are risks to
 9%                                                              9%      piling ever-more risk onto the central banks’ balance sheet.
                                                                         Now would be a good time to pause QE and make a
 6%                                                              6%
                                                                         meaningful assessment of existing policy measures.
 3%                                                              3%     Only if the MPC fears a really bad outcome would
 0%                                                              0%      aggressive policy be needed. This was the case in 2009.
                                                                         Currently, the probability of deflation appears considerably
       04     05     06     07     08   09   10     11   12
                                                                         lower, meaning less need to take risks with policy.

Source: BoE, HSBC




                                                                                                                                               55
     Macro
     Global Economics                                                                                                                      abc
     Q4 2012




Norway
Bucking the trend                                                                    strong krone should all further limit export          Janet Henry
                                                                                                                                           Economist
                                                                                     growth. However, this should be offset by a           HSBC Bank plc
Domestic growth is allowing Norway to decouple
                                                                                     stronger domestic environment and low interest        Sakshi Gupta
from European economic weakness. Thanks to its                                                                                             Economics Associate
                                                                                     rates, resulting in trend GDP growth in 2012.         Bangalore
domestic strength, we expect output to remain
solid through H2 2012. This health will also be                                      The inflation rate remains low (at 0.5% y-o-y in
reflected in the continued strength of the krone.                                    August) and we expect it to hover around 0.6% in
                                                                                     2012. In the housing sector, the house price index
Norway saw another quarter of strong growth,
                                                                                     rose to 6.7% y-o-y in Q2 while household
registering 1.0 % q-o-q in Q2. This was backed by
                                                                                     indebtedness continued to rise faster than income.
strong investment and consumption. Employment
continued to grow at a solid pace, as did wages.                                     Thus strong consumption patterns, rising
                                                                                     household debts and housing prices speak in
This is not to say that Norway has been
                                                                                     favour of higher rates. However, the problems
completely immune to the downfall of its major
                                                                                     stemming from the eurozone crisis are far from
trading partner. The effects of eurozone weakness
                                                                                     resolved and continue to pose a risk for the
were felt in lower demand for Norwegian exports
                                                                                     Norwegian economy. Balancing these risks, we
in the second quarter. In addition, given the
                                                                                     expect Norges Bank to keep rates on hold this
uncertain global environment, deposits and loans
                                                                                     year and start its tightening bias in 2013.
to and from Norway also saw a marked fall in Q2.
In the coming months, we do not expect these
challenges to abate, and rising labour costs and a



% Year
                                                     2011            2012f   2013f   Q3 12f   Q4 12f   Q1 13f   Q2 13f   Q3 13f   Q4 13f
Consumer spending                                      2.4             3.7     4.5      3.9      4.2      4.1      4.1      4.6      5.2
Government consumption                                 1.5             2.0     2.0      2.0      2.7      3.2      2.4      1.6      0.8
Mainland investment                                    8.0             4.8     5.5      5.8      5.6      8.7      6.5      4.6      2.5
Stockbuilding (% GDP)                                  2.8             2.1     1.5      1.5      1.5      1.5      1.5      1.5      1.5
Mainland domestic demand                               3.2             3.4     4.0      3.8      4.0      4.7      4.1      3.8      3.5
Mainland exports*                                      0.2             1.8     2.8      0.8      0.5      2.0      2.5      3.0      3.5
Mainland imports*                                      3.0             4.2     4.5      4.3      4.3      4.0      4.6      4.7      4.8
Mainland GDP                                           2.5             3.6     3.0      3.5      3.0      2.6      2.5      3.3      3.7
Mainland GDP (% quarter)                                 -               -       -      0.5      0.3      0.8      0.8      1.3      0.7
Manufacturing production                               0.9             2.4     2.4      3.5      2.7      2.6      2.0      2.3      2.7
Unemployment (%)**                                     2.7             2.5     2.3      2.5      2.6      2.2      2.1      2.3      2.5
Average earnings                                       4.5             3.9     3.7      3.3      2.5      1.3      3.3      4.3      5.9
Consumer prices                                        1.3             0.7     1.6      0.5      0.9      1.1      1.4      1.9      2.0
Current account (% GDP)                               14.5            14.7    12.0     13.0     13.0     12.0     12.0     12.0     12.0
Budget balance (% GDP)                                11.3            13.8    13.6        -        -        -        -        -        -
NOK/EUR                                               7.75            7.10    6.90     7.25     7.10     7.00     6.95     6.95     6.90
3-month money (%) **                                   2.9             1.9     1.9      1.9      1.9      1.9      1.9      1.9      1.9
10-year bond yield (%) **                              2.2             2.0     2.3      2.3      2.0      2.0      2.1      2.2      2.3
Note: * = Travel and non-oil related goods and services; ** = Period-end
Source: Statistics Norway and HSBC forecasts




56
     Macro
     Global Economics                                                                                                               abc
     Q4 2012




Sweden
Miracle or mirage?                                                      The Riksbank’s surprise 25bps repo rate cut in              John Zhu
                                                                                                                                    Economist
                                                                        September should mitigate the upward pressure on            HSBC Bank PLC
Sweden had been seen as something of a safe haven
                                                                        the krona, which has risen sharply in 2012 and              +44 20 7991 2170
in Europe this year, but the massive downward                                                                                       john.zhu@hsbcib.com
                                                                        neared all-time highs against the euro in August. But
revision to Q2 GDP (from 1.4% q-o-q to 0.7%)
                                                                        given the weak external demand environment, rising
indicates that while the Swedish economy is still one
                                                                        unemployment and low inflation, we think the
of the best-performing in Europe since the financial
                                                                        Riksbank will continue to ease, and expect the repo
crisis, it does not seem to have decoupled. A trade
                                                                        rate to fall by another 25bps in Q4 to 1%. This
slowdown could lead to a recession in H2 2012.
                                                                        should help to lower the real interest rate, which is
Net exports were revised down in Q2 but still made                      still positive, and support investment.
a positive contribution to growth. However, the
                                                                        Policymakers may not be able to stop a trade-
momentum is of a slowdown in imports rather than
                                                                        induced slowdown, but Sweden still has relatively
stronger export growth. Latest survey data for export
                                                                        strong government finances, low debt and a top
orders point to a sharp contraction, and this is likely
                                                                        credit rating in its favour. The government’s new
to be the main drag on GDP in H2. Wages, retail
                                                                        budget announced cuts to corporation tax and
sales and house prices will be weighed down by
                                                                        infrastructure investment (although projects start
deteriorating labour market conditions. Recent
                                                                        from 2014). So although the government’s GDP
downside data surprises mean unemployment could
                                                                        forecasts look optimistic, the fact that it is delivering
rise to 8% by the end of the year.
                                                                        stimulus rather than austerity will soften the blow.



% Year
                                           2011      2012f   2013f   Q3 12f    Q4 12f     Q1 13f     Q2 13f     Q3 13f     Q4 13f
Consumer spending                           2.2        1.6     1.2      2.2       1.8        0.9        1.1        1.3        1.6
Government consumption                      1.9        1.2     2.4      1.1       1.5        2.3        2.5        2.5        2.2
Investment                                  6.9        4.6     3.1      2.7       3.4        1.2        2.5        3.2        5.5
Stockbuilding (%GDP)                        1.0        0.1     0.0      0.1      -0.3       -0.1       -0.0        0.1        0.2
Domestic demand                             3.4        1.1     1.8      1.4       0.8        1.0        1.3        2.0        3.1
Exports                                     7.4       -0.4     2.2     -3.1      -0.1       -0.1        0.4        2.8        5.6
Imports                                     6.3        0.1     1.6     -0.4       0.1        0.2        1.0        1.9        3.3
GDP growth                                  3.9        0.8     2.1     -0.1       0.6        0.8        0.9        2.4        4.2
GDP (% quarter, sa)                           -          -       -     -0.4      -0.3        0.8        0.9        1.1        1.4
Industrial production                       5.7        0.2     2.0      1.3       1.9        2.1        1.0        1.4        3.7
Unemployment rate*                          7.5        8.1     7.5      7.9       8.1        8.0        7.9        7.7        7.5
Average earnings                            2.3        2.8     2.8      2.8       2.6        2.7        2.7        2.8        2.9
CPI, average                                3.0        1.1     1.2      0.7       0.8        0.9        1.1        1.2        1.5
Current account (%GDP)                      6.4        6.2     6.0      5.6       5.6        6.9        5.6        6.2        5.6
Budget balance (% GDP)                      0.3       -0.4    -0.6        -         -          -          -          -          -
State debt (% GDP)                         38.3       38.0    37.5        -         -          -          -          -          -
SEK/USD                                    6.86       6.00    5.75     6.38      6.00       5.91       5.83       5.79       5.75
SEK/ EUR                                   8.90       8.10    8.05     8.30      8.10       8.10       8.05       8.05       8.05
3-month money (%) *                         2.7        1.8     1.8      1.9       1.8        1.8        1.8        1.8        1.8
10-year bond yield *                        1.5        1.5     1.7      1.6       1.5        1.4        1.5        1.6        1.7
Note: * = Period-end.
Source: Thomson Reuters Datastream, HSBC estimates




                                                                                                                                                          57
     Macro
     Global Economics                                                                                                           abc
     Q4 2012




Switzerland
CHF to remain stable thanks                                             In 2013, we expect growth to pick up gradually as       François Letondu
                                                                                                                                Economist
to the SNB                                                              exports should cease to be a drag and monetary          HSBC France
                                                                        policy remains very accommodative. Indeed, the          +33 1 40 70 39 33
Growth is likely to remain hampered by weak                                                                                     francois.letondu@hsbc.fr
                                                                        SNB has used unsterilized interventions to defend
foreign demand for Swiss goods and services. In
                                                                        its 1.20 EUR-CHF floor, creating ample liquidity
Q2, GDP fell 0.1% q-o-q, because of a sharper-
                                                                        within Switzerland. We anticipate that
than-expected drop in exports. The recession in
                                                                        appreciation pressure on the CHF will persist, and
the eurozone periphery and meagre growth
                                                                        that the central bank will defend this floor until at
elsewhere in Europe and in the US are expected to
                                                                        least the end of 2013, to prevent further losses of
prevent any rapid recovery in exports, at least
                                                                        export competitiveness and combat deflation risks.
until a lasting solution to the eurozone crisis is
                                                                        Furthermore, the 0-0.25% target range for 3-month
found. Equipment investment is likely to remain
                                                                        LIBOR should be increased only once the EUR-
depressed by those weak export prospects.
                                                                        CHF floor has been lifted. Overall, this should
Households have benefited in recent quarters from                       provide a boost to investment. The upside potential
falling consumer prices allowing them to increase                       for housing investment should, however, remain
consumption. But with weak exports, we expect                           limited. Indeed, since a Federal Council decision
the unemployment rate to keep ticking upwards in                        in June 2012, the SNB can force banks to build
the last few months of 2012, and so consumer                            countercyclical capital buffers if needed. This
spending growth will be slower in the coming                            measure is designed to limit credit growth without
quarters. As a result, we anticipate that GDP will                      forcing the SNB to tighten monetary policy and
be flat in Q3.                                                          abandon its currency management.


% Year
                                        2011         2012f   2013f   Q3 12f   Q4 12f     Q1 13f    Q2 13f    Q3 13f    Q4 13f
Consumer spending                         1.2          2.3     1.6      2.4      1.9        1.4       1.5       1.7       1.7
Government consumption                    2.0          1.9     0.7      1.4      0.8        1.3       0.4       0.5       0.4
Investment                                4.0          0.8     2.5      1.4      1.0        1.8       2.5       2.8       2.7
Stockbuilding (% GDP)                    -0.6         -0.5    -0.5     -0.5     -0.5       -0.5      -0.5      -0.5      -0.5
Final domestic demand                     2.0          1.9     1.7      2.1      1.5        1.5       1.6       1.8       1.8
Exports                                   3.8         -0.6     2.4     -0.2     -0.1        0.9       1.5       2.9       4.3
Imports                                   4.2          1.3     3.1      0.3      1.1        1.8       2.6       3.4       4.5
GDP                                       1.9          0.9     1.4      0.9      0.8        0.8       1.3       1.7       1.9
GDP (% quarter)                             -            -       -      0.0      0.3        0.5       0.5       0.4       0.5
Industrial production                     0.9         -0.6     2.2      0.2     -0.5        0.0       3.0       2.8       2.8
Unemployment (%)                          2.8          2.9     3.1      2.9      3.0        3.1       3.1       3.1       3.1
Consumer prices                           0.2         -0.6     0.3     -0.6      0.0        0.0       0.3       0.5       0.5
Current account (EURbn)                  49.9         51.1    50.8     10.8     11.7       12.5      12.5      12.5      13.3
Current account (% GDP)                  10.5         10.4    10.1      8.8      9.5       10.1      10.0      10.0      10.6
CHF/USD                                   0.9          0.9     0.9      0.9      0.9        0.9       0.9       0.9       0.9
CHF/EUR                                   1.2          1.2     1.2      1.2      1.2        1.2       1.2       1.2       1.2
3-month money (%)*                        0.1          0.1     0.1      0.1      0.1        0.1       0.1       0.1       0.1
10-year bond yield (%)*                   0.7          0.5     0.7      0.6      0.5        0.5       0.6       0.6       0.7
Note: * = period-end
Source: Thomson Reuters Datastream, HSBC estimates




58
    Macro
    Global Economics                                                                                                            abc
    Q4 2012




Hungary
Still waiting                                                        We have lowered our GDP growth forecast for this           Agata Urbanska
                                                                                                                                Economist
                                                                     year and next, given the weaker-than-expected              HSBC Bank plc
Weak economic growth is a significant risk to the
                                                                     economic performance to date, uncertainty over the         +44 20 7992 2774
debt stabilisation strategy. We still lack confidence                                                                           agata.urbanska@hsbcib.com
                                                                     outcome of the IMF negotiations, and our reduced
that Hungary will reach an agreement with the IMF,
                                                                     forecast for growth in Germany in 2013. To date,
even though markets seem to have mostly priced that
                                                                     industrial production and exports growth has shown
in following the opening of negotiations in July.
                                                                     a small positive impact from new export capacities.
The 2013 budget is the main near-term risk. The                      The current account is recording a significant surplus
government is under increasing pressure to deliver                   but this is still unlikely to offset the capital outflow
stimulus to a weakening economy. The opinion polls                   (deleveraging).
show that the popularity of the ruling party, Fidesz,
                                                                     In this environment, the Monetary Council’s
is declining. The Prime Minister promised earlier
                                                                     decision to start cutting its policy rate in August was
this year that fiscal consolidation would come to an
                                                                     a risky one. We expect the easing cycle to pause
end; however, more measures are necessary to
                                                                     after September until an IMF deal is secured. A high
secure the 3% budget deficit ceiling.
                                                                     wage growth rate is a sign of second round effects
While the 2013 budget has apparently assumed some                    from persistently high inflation and will likely limit
savings from lower debt servicing costs resulting                    the scope of total policy easing even in the positive
from an IMF deal, it also includes more spending                     scenario of an IMF deal in place. Having said that,
(labour market support programme) financed by                        this will still be determined by the changes in CB
special taxes (financial transaction tax), something                 management due next year.
that the IMF has criticised.



% Year
                                                     2008    2009         2010           2011           2012f           2013f
Private consumption                                   -0.2    -5.7        -2.7             0.2           -1.3             0.2
Government consumption                                -0.2     2.6         1.1            -2.4           -1.0             0.0
Fixed Investment                                       2.9   -11.0        -9.7            -5.5           -7.0            -4.0
Exports                                                5.7   -10.2        14.3             8.4            2.9             5.0
Imports                                                5.5   -14.8        12.8             6.3            0.8             3.0
GDP                                                    0.9    -6.8         1.3             1.6           -1.0             1.3
Industrial Production                                 -0.2   -17.6        10.5             5.7            1.6             5.0
Unemployment rate*                                     8.0    10.5        10.8            10.7           11.1            10.9
Consumer prices                                        6.1     4.2         4.9             3.9            5.7             3.7
Budget balance (% GDP)                                -3.7    -4.5        -4.3             4.2           -3.0            -3.5
Public debt (% GDP)                                   72.9    79.7        81.3            80.6           76.0            75.0
Current account (% GDP)                               -7.3    -0.2         1.2             1.4            2.2             3.2
External debt (% GDP)                                116.8   149.9       141.7           130.0          123.0           113.0
CB policy rate*                                      10.00    6.25        5.75            7.00           6.50            5.50
HUF/EUR                                              265.9   270.2       278.3           314.8          280.0           270.0
10-year bond yield (%)*                                8.3     8.0         8.0             9.8            7.9             6.5
Note: * = period-end
Source: Thomson Reuters DataStream, HSBC estimates




                                                                                                                                                   59
     Macro
     Global Economics                                                                                                        abc
     Q4 2012




Poland
Slowdown triggers policy                                            GDP this was close enough to the threshold for           Agata Urbanska
                                                                                                                             Economist
response                                                            Poland to meet the 2012 EDP requirement.                 HSBC Bank plc
                                                                                                                             +44 20 7992 2774
Monthly activity data show no indication of the                     We have made another cut to our 2012 growth              agata.urbanska@hsbcib.com

economic slowdown bottoming out, while the decline                  forecast from 2.7% to 2.5% but reduced 2013 more
in domestic demand in Q2 2012 highlights downside                   significantly from 3.1% to 2.0%. Growth in H1 2012
risks. Policymakers have responded accordingly. In                  was largely in line with expectations, but recent
May, the National Bank of Poland had raised rates; in               monthly economic data show a stronger than
September, it adopted an easing policy bias. In April,              expected slowdown. Also the growth composition in
the government had adopted a medium-term fiscal                     Q2 was significantly worse than expected, with
objective of reducing the budget deficit to 0.9% of                 domestic demand declining. Destocking was the
GDP by 2015. Currently, however, it is only                         main driver, in line with weakening consumer and
planning to make the minimum deficit reduction that                 business sentiment indicators. Labour market data
would allow it to exit the excessive deficit procedure              has been weaker than expected. Finally, the outlook
(EDP). Along with its medium-term target set in                     for global and European growth has worsened. All
April, the government aimed at a budget deficit at                  these factors contributed to our 2013 forecast change,
2.2% of GDP in 2013. This has been raised to 3% of                  but downside risks remain as there are no signs of the
GDP, the level required under the EDP. In January                   slowdown abating, and leading business and
this year the European Commission forecast Poland’s                 consumer confidence indicators are unsupportive.
2012 budget deficit at 3.3% of GDP, compared to the
                                                                    Monetary policy has room to respond with easing,
government’s then target of 2.9%. It said, however,
                                                                    and we pencil in 75bp rate cuts to 4% in the coming
that taking account of the cost of pension reform (the
                                                                    months.
annual transfers to private pension fund) at 0.6% of

% Year
                                                     2008   2009        2010           2011           2012f          2013f
Private consumption                                   5.7     2.1        3.2             3.1            1.6            1.6
Government consumption                                7.7     1.8        4.6            -1.0           -0.2            0.4
Fixed Investment                                      9.6    -1.2       -0.2             8.1            1.6            0.3
GDP                                                   5.1     1.6        3.9             4.3            2.5            2.0
Exports                                               7.1    -6.8       12.1             7.5            3.0            4.9
Imports                                               8.0   -12.4       13.9             5.8           -1.0            2.9
Industrial Production                                 3.0    -3.6       11.1             7.0            3.3            3.5
Unemployment rate*                                    9.5    12.1       12.4            12.5           13.0           13.0
Consumer prices                                       4.2     3.5        2.6             4.3            3.9            2.7
Budget balance (% GDP)                               -3.7    -7.3       -7.8            -5.1           -3.4           -3.0
Public debt (% GDP)                                  47.1    50.9       54.9            56.0           55.0           54.0
Current account (% GDP)                              -6.5    -3.9       -4.7            -4.2           -4.3           -4.2
External debt (% GDP)                                56.9    59.6       65.8            72.5           67.0           63.0
CB policy rate*                                      5.00    3.50       3.50            4.50           4.50           4.00
PLN/EUR                                               4.1     4.1        4.0             4.5            4.1            3.8
10-year bond yield (%)*                               5.6     6.2        6.0             5.9            4.8            4.8
Note: *= period-end
Source: Thomson Reuters DataStream, HSBC estimates




60
     Macro
     Global Economics                                                                                                                                abc
     Q4 2012




Destocking pushed domestic demand into contraction in Q2                       GDP is not likely to bottom until early 2013
2012
                                                                               Following 4.3% expansion in 2011, GDP growth dropped to
Contribution to GDP grow th (ppt)                                 % y -o-y      3.5% in Q1 2012 and 2.4% y-o-y in Q2 2012.
                                                                               Both private consumption and investment growth slowed, but
 5                                                                       5      the main drag in Q2 2012 came from destocking. Domestic
 3                                                                       3      demand growth turned sharply recording a 0.2% y-o-y
 1                                                                       1      contraction compared to 2.7% growth in Q1 2012.
-1                                                                       -1    On the value added side the biggest drag on growth in Q2 2012
-3                                                                       -3     came from trade and construction. Construction growth slowed
                                                                                from 11.8% y-o-y in 2011 and 9.6% in Q1 2012 to 1.4% in Q2
-5                                                                       -5
                                                                                2012. It is most likely to turn negative in H2 2012. Growth of the
     1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12                               value added component in trade slowed to 0.3% y-o-y in Q2
        Priv cons                   Gov cons                                    2012 from 5.5% in Q1 2012 and 4.6% in 2011.
        Investm ents                In v entories                              Given no bottoming out of the monthly activity data, we
        Net exports                 GDP (rhs)                                   continue to see downside risk to our new, lower growth
        Dom estic dem and (rhs)                                                 forecast.

Source: National sources, HSBC estimates




Labour market still in a downward trend                                       A risk of more slowdown in private consumption
                                                                               Employment growth has been slowing since early 2011 (from
% y -o-y , real                                             % y -o-y, real
                                                                                4% average in Q1 2011) to zero in July 2012.
8                                                                        15    The seasonal summer unemployment rate drop was smaller
                                                                                than average. We forecast the unemployment rate at 13% in
6                                                                        10     December 2012, its highest in five years, and no improvement
                                                                                in 2013.
4                                                                        5     July data showed wage bill growth in the corporate sector
                                                                                slowing further from 0.1% y-o-y real growth in Q2 2012 to a
2                                                                        0      contraction of 1.5%.
                                                                               Private consumption growth halved from 3.1% in 2011 to 1.5%
0                                                                        -5     in Q2 2012. In q-o-q terms, however, private consumption
    1Q05   1Q06      1Q07     1Q08         1Q09    1Q10 1Q11      1Q12          growth has stabilised at a 0.3% average rate in the last four
                                                                                quarters, and we do not expect the slowdown to go much
                     Priv ate consumption                                       further, but the developments in the labour market are a
                     Wage bill, whole economy (rhs)                             downside risk.
                     Wage bill, enterprices (rhs )

Source: National sources, HSBC estimates




Inflation to fall into a 2.5% +/-1 range in November                          MPC signals policy easing
                                                                               Having raised rates in May, and having upheld an unofficial
% y-o-y                                                           % y -o-y
                                                                                hawkish policy bias in July, the Monetary Policy Council has
5                                                                        5      signalled that there will be policy easing in September if
                                                                                incoming data confirm further weakening of economic
4                                                                        4      conditions and limited inflationary pressure.
3                                                                        3     We expect the MPC to cut its policy rate by 50-75bp in the
2                                                                        2      coming months. We marginally favour the easing starting in
                                                                                November, when the new Inflation Report is published, followed
1                                                                        1      by two more cuts in the first months of 2013. However, we see
                                                            Forecast
 0                                                                       0      a risk that the MPC will continue to disappoint markets and cut
                                                                                later and by less than is currently priced in.
-1                                                                       -1    The risk to this scenario is that the MPC waits until January, to
      05     06      07       08       09         10   11    12                 see inflation at least back in the +/-1pp range around the 2.5%
                                                                                target, before starting the easing.
           CPI                C B infla tion target            Core CPI

Source: Thomson Reuters Datastream, HSBC estimates




                                                                                                                                                       61
     Macro
     Global Economics                                                                                                      abc
     Q4 2012




Romania
Positive domestic demand                                             Credit growth is therefore likely to remain weak,     Agata Urbanska
                                                                                                                           Economist
                                                                     and is unlikely to support economic recovery in       HSBC Bank plc
We forecast 1% GDP growth for Romania in                                                                                   +44 20 7992 2774
                                                                     2013. The rush to spend EU money has produced
2012, which is good relative to forecasts for other                                                                        agata.urbanska@hsbcib.com
                                                                     some irregularities, and the EC has suspended
EU members. Domestic demand continues to be
                                                                     some funds.
the main growth driver in Romania, in contrast to
what is seen in other Central European EU                            The approaching parliamentary elections should
member countries. Wage bill growth is positive in                    not bring any surprises. The tentative promises of
real terms, supported by public sector wage hikes.                   a fiscal loosening are a risk though. Lower VAT
Romania’s focus on spending the funds granted                        and personal taxes would boost consumption, not
by the European Union has lifted investment                          necessarily investments, drive inflation higher and
activity in the last few quarters. Together, these                   probably fuel the current account deficit,
factors should continue to support the economy in                    repeating the pattern of unbalanced growth seen in
2013. Exports might well be slowing, but this is                     Romania before the 2008 global financial crisis.
less important for the economy in Romania than it
                                                                     The key policy challenge is to support balanced
is for the Czech Republic or Hungary.
                                                                     economic growth. Inflation is set to double in the
The banking sector remains weak. Labour market                       second half of 2012, breaching the central bank’s
conditions are better than in Romania’s Central                      3% +/-1pp target in December and generally
European peers, but this has not significantly                       staying close to the upper ceiling in 2013.
diminished the problem of non-performing loans.
Also, banks’ balance sheets are still unbalanced,
with loans to deposit ratios exceeding 100%.


% Year
                                                     2008    2009        2010          2011          2012f         2013f
Private consumption                                    8.8    -9.1        -0.3           0.7           0.1           2.1
Government consumption                                 5.9     9.5       -10.1          -3.4          -0.6           2.0
Fixed Investment                                      15.1   -28.1        -2.1           6.3           5.7           5.5
Exports                                                8.1    -6.4        14.0           9.9          -0.5           4.5
Imports                                                7.3   -20.5        11.9          10.5          -1.3           5.0
GDP                                                    7.2    -6.6        -1.7           2.5           1.1           2.5
Industrial Production                                  2.8    -5.2         5.5           5.8           0.6           3.0
Unemployment rate*                                     4.4     7.8         6.9           5.1           5.0           5.0
Consumer prices                                        7.9     5.6         6.9           5.8           3.1           3.5
Budget balance (% GDP)                                -5.7    -9.0        -6.8          -5.2          -2.8          -2.5
Public debt (% GDP)                                   13.4    23.6        31.0          33.0          36.0          36.0
Current account (% GDP)                              -11.6    -4.2        -4.4          -4.4          -4.1          -4.9
External debt (% GDP)                                 51.8    68.7        74.7          74.0          72.0          71.0
CB policy rate*                                      10.25    8.00        6.25          6.00          5.25          5.50
RON/EUR                                                4.0     4.3         4.3           4.3           4.4           4.3
3-month money (%)*                                    15.5    10.7         6.2           6.1           5.2           5.3
Note: * = period-end
Source: HSBC estimates, Thomson Reuters Datastream




62
    Macro
    Global Economics                                                                                                       abc
    Q4 2012




Czech Republic
Recession in 2012, shallow                                          the Czech Republic less likely. Net exports have       Agata Urbanska
                                                                                                                           Economist
recovery in 2013                                                    been contributing positively to growth in the last     HSBC Bank plc
                                                                    several quarters, mostly on weak imports. But in       +44 20 7992 2774
GDP growth did not rebound in Q2 2012 despite a                                                                            agata.urbanska@hsbcib.com
                                                                    the coming months exports will continue to
very weak Q1 reading. That prompted us to
                                                                    decelerate and net exports’ contribution to growth
reduce our growth forecasts for this year as well
                                                                    will start to decline.
as next. We now expect close to 1% economic
contraction in 2012 and only weak recovery in                       The policy makers have very limited scope for
2013.                                                               responding to this deterioration. We cut our
                                                                    central bank policy rate forecast to a record low of
The very weak confidence indicators, both on the
                                                                    0.25% back in May, and we do not believe that
consumer and business side, have continued to
                                                                    there are many other instruments at the central
gradually worsen in recent months. That has been
                                                                    bank’s disposal that could support the economy
accompanied by a further weakening of activity
                                                                    effectively.
indicators. In particular, labour market data
deteriorated, as indicated by the poor level of the                 The recession is creating stress in domestic
consumer confidence index, and justifying an                        politics; the government is struggling to pass a
earlier drop in consumer spending.                                  tight 2013 budget in the parliament, and the fall of
                                                                    the government is a risk.
The near-term outlook for growth remains poor,
and despite reducing our forecasts we continue to
see the balance of risks tilted to the downside. The
downward revision to HSBC’s 2013 German
growth forecast has made a substantial recovery in


% Year
                                                     2008   2009        2010           2011          2012f         2013f
Private consumption                                   2.8    -0.3         0.5          -0.5           -2.8           0.3
Government consumption                                1.2     3.8         0.6          -1.4           -1.1          -0.5
Fixed Investment                                      4.0   -11.3         0.0          -1.2           -1.9           0.6
Exports                                               3.6    -9.7        16.0          11.0            5.2           3.5
Imports                                               2.4   -11.4        15.7           7.5            2.5           3.0
GDP                                                   2.9    -4.5         2.6           1.7           -0.9           1.0
Industrial Production                                -1.5   -13.2        10.2           7.1            0.3           4.0
Unemployment rate*                                    6.0     9.2         9.6           8.6            8.8           8.8
Consumer prices                                       6.3     1.0         1.5           1.9            3.3           2.0
Budget balance (% GDP)                               -2.2    -5.8        -4.8          -3.1           -2.9          -2.9
Public debt (% GDP)                                  28.7    34.4        38.1          41.2           44.0          45.0
Current account (% GDP)                              -2.1    -2.4        -3.9          -2.9           -1.3          -2.2
External debt (% GDP)                                42.2    43.7        46.9          48.6           52.0          50.0
CB policy rate*                                      2.25    1.00        0.75          0.75           0.25          0.25
CZK/EUR                                              26.8    26.4        25.1          25.5           25.0          24.0
10-year bond yield (%)*                               4.2     3.9         3.9           3.6            2.2           2.2
Note: * = period-end
Source: Thomson Reuters Datastream, HSBC estimates




                                                                                                                                              63
     Macro
     Global Economics                                                                                                          abc
     Q4 2012




Russia
A lonely hawk                                                         days. Yet, loan growth stays high at about 20% y-        Alexander Morozov
                                                                                                                               Economist
                                                                      o-y in real terms, which looks excessive for the         HSBC Bank (RR), Moscow
GDP growth in Russia eased to less than 3% y-o-y                                                                               +7 495 783 8855
                                                                      slowly growing Russian economy. If it continues,
in July. The high base set by H2 2011 and a poor                                                                               alexander.morozov@hsbc.com
                                                                      such strong credit growth could trigger a spike in
harvest are likely to prompt further slowing of
                                                                      NPL and a credit crunch. That would be
economic activity in the coming months. Private
                                                                      detrimental for the banking sector’s stability and
sector fixed investment growth has paused this
                                                                      economic growth sustainability. Therefore, some
year, which could further restrain GDP growth in
                                                                      cooling of credit growth is warranted.
the medium term.
                                                                      Even more important for the rate hike decision
In August 2012, Russia officially became a World
                                                                      was the fact that inflation had breached the CBR’s
Trade Organisation member, finally ending its
                                                                      6.0% ceiling for the year. All three broad CPI
long accession saga. Will this boost economic
                                                                      components – food, non-food and services – have
growth? We think immediate material positive
                                                                      made a U-turn, signalling broad-based inflation
implications for the economy from WTO
                                                                      acceleration. Moving towards inflation targeting,
membership are unlikely. Apart from a few non-
                                                                      the CBR has to provide an adequate policy
energy exporting sectors, the rest of the Russian
                                                                      response to the surge in order to start building up
economy would only be able to reap the benefits
                                                                      its credibility as an inflation fighter.
of WTO accession in the medium to long term if
the government uses it as an opportunity to                           Finally, the CBR’s repo rates, which are the key
improve the business climate and the                                  policy rates in Russia, are likely to remain
competitiveness of the Russian economy.                               negative in real terms after the cumulative 75bp
                                                                      policy rate hikes that we expect in the coming
Against the backdrop of slowing economic
                                                                      months, as inflation is to gain more than the
growth, the Central Bank’s (CBR) decision to
                                                                      policy rates. So, despite some notional monetary
hike its policy rates in September might appear
                                                                      tightening, the CBR’s policy will remain
controversial, at a first glance. Indeed, the Russian
                                                                      accommodative.
Central Bank is probably the only hawk these



% Year
                                                       2008   2009            2010         2011        2012f        2013f
Private consumption                                    10.6    -5.1            5.1          6.8          5.5             4.5
Government consumption                                  3.4    -0.6           -1.4          1.5          1.0             0.5
Fixed Investment                                       10.6   -14.4            5.8          8.0          5.0             4.5
GDP                                                     5.2    -7.8            4.3          4.3          3.0             2.5
Exports                                                 0.6    -4.7            7.0          0.4          1.0             2.0
Imports                                                14.8   -30.4           26.1         20.3          1.3             5.1
Industrial Production                                  -1.0   -10.3           10.3          4.1          2.7             1.8
Unemployment rate                                       7.8     8.2            7.2          6.1          5.8             5.7
Consumer prices                                        14.1    11.7            6.8          8.5          5.2             7.4
Source: Rossat, MOF, CBR and Reuters, HSBC estimates




64
     Macro
     Global Economics                                                                                                                                                                                abc
     Q4 2012




GDP growth (ex-crops sector) has been moderating                                                                                    Poor harvest weighs on GDP growth in H2 2012

%, y-o-y                                                                                                     %, y-o-y                The official GDP growth rate has been steady at 4.3%
                                              Real GDP                                                                                over past two years, which gave a (wrong) impression of
6                                                                                                                  6
                                                                                                                                      economic growth stability. Yet, the crops sector
3                                                                                                                              3      performance, affected by weather conditions, has been
0                                                                                                                              0
                                                                                                                                      uneven: it was better than its historical average in 2011
                                                                                                                                      but worse than its average in 2010 and 2012. We found
-3                                                                                                                             -3     that Russia’s GDP growth rate adjusted for the crops
                                                                                                                                      sector has been declining since 2010.
-6                                                                                                                             -6
                                                                                                                                     A weaker performance of the crops sector this year will
-9                                                                                                                             -9     weigh on economic growth in H2 2012 and may result in
               2008              2009                2010                   2011                      2012                            temporary economic stagnation in Q3 q-o-q sa, when
                                                                                                                                      the crops sector contribution to GDP is highest.
                                     Actual              Counterfactual*

Note:*Counterfactual assumes crop harvest at 79 mln tns, average for 2001-2007
Source: Rosstat, Ministry of Agriculture, HSBC




Inflation breached the official target in September                                                                                 Repo rates matter, refinance rate does not
                                                                                                                                     The CPI growth rate accelerated to 6.3% y-o-y in early
% (%, y-o-y)                      Policy rates and CPI                                               % (%, y-o-y)                     September, breaching the official inflation range of 5-
12                                                                                                                             12     6%. Moreover, the continuing rise in food prices has the
                                                                HSBC CPI f orecast                                                    potential to speed up headline inflation further to 7.5% y-
                                                                                                                                      o-y in December 2012 and 8.2% in March 2013, taking
 9                                                                                                                             9
                                                                                                                                      into account the second-round effect.
                                                                                                                                     In a similar situation in 2010, the CBR increased its
 6                                                                                                                             6
                                                                                                                                      refinance rate only when inflation exceeded it by a wide
                                                                                                                                      margin. Now, with the CBR caring much more about
 3                                                                                                                             3      inflation targeting than before, it made a rate hike
               Dec-09




                                            Dec-10




                                                                              Dec-11




                                                                                                                      Dec-12
                                                       Apr-11




                                                                                           Apr-12
     Aug-09



                        Apr-10

                                  Aug-10




                                                                  Aug-11




                                                                                                        Aug-12




                                                                                                                                      decision much earlier. It follows that, first, the CBR’s
                                                                                                                                      response function has become more sensitive, and
                    Refinancing rate                                                Headline CPI                                      second, it is the CBR’s (low) repo rates rather than
                    Fix ed REPO                                                     CBR's inflation ceiling                           (high) refinance rate that serve as an inflation
                                                                                                                                      benchmark.
Source: Rosstat, CBR, HSBC




Policy cross: exchange rate and interest rate bands                                                                                 More FX volatility, less interest rate volatility
                                                                                                                                     Efficient inflation targeting in a country with an open
RUB                                                                                                                       bps         capital account requires a fairly flexible exchange rate
8                                                                                                                          500        and low interest rate volatility. The CBR is moving
                                                                                                                                      exactly in this direction; it has been steadily widening the
6                                                                                                                          400        RUB band while reducing the interest rate band (defined
                                                                                                                                      as the difference between the fixed repo rate and
4                                                                                                                          300        deposit rates).
                                                                                                                                     The CBR has not shrunk its interest rate band since last
2                                                                                                                          200
                                                                                                                                      year, while it has widened its RUB band twice this year.
                                 Dec-10




                                                                           Dec-11
      Mar-10
               Jun-10
                        Sep-10


                                           Mar-11
                                                     Jun-11
                                                                Sep-11


                                                                                       Mar-12
                                                                                                    Jun-12
                                                                                                                 Sep-12




                                                                                                                                      This suggests the growing probability of a faster rise in
                                                                                                                                      deposit policy rates than in repo rates in the coming
                                 RUB band w idth (LHS)                                                                                months. We think that the RUB staying in the middle or
                                 CBR policy rates band w idth (RHS)                                                                   upper part of the FX band is a pre-condition for that
                                                                                                                                      happening.
Source: Reuters, CBR, HSBC




                                                                                                                                                                                                       65
     Macro
     Global Economics                                                                                                abc
     Q4 2012




Turkey
Rebalancing starts to hurt                                      On the inflation front, food prices surprised        Melis Metiner
                                                                                                                     Economist
                                                                positively in the third quarter. Even as global      HSBC Turkey
Q2 GDP growth came in at 2.9% y-o-y, driven                                                                          +90 212 376 4618
                                                                agricultural commodity prices spiked, processed
exclusively by net foreign demand. In annual                                                                         melismetiner@hsbc.com.tr
                                                                and unprocessed food prices in Turkey did not
terms, exports were up by 19.8% in Q2 (from
                                                                rise much above their seasonal averages in the
11.9% in Q1), adding 5.7pp to headline growth.
                                                                June-August period. As a result, we nudge down
Meanwhile, the contribution from domestic
                                                                our year-end inflation forecast from 7.9% to
demand turned negative for the first time in 10
                                                                7.2%. Average CPI forecasts for 2012 and 2013,
quarters, shaving 2pp off headline GDP.
                                                                which appear in the table below, are little
With two quarters of actual data, we now raise our              changed. But larger-than-expected administered
whole-year growth forecast to 2.7%, from our                    price and tax hikes, along with rising commodity
cautious expectation of 2.0%. For 2013, we only                 prices, could push CPI higher.
make a minor revision, taking our forecast from
                                                                Aggressive monetary easing by the central bank is
3.5% to 3.8%. Domestic demand growth is likely
                                                                a risk factor. In September, the CBRT started to
to be nearly flat in both Q3 and Q4 this year, but
                                                                narrow the overnight interest rate corridor and
could pick up slightly in early 2013 as the impact
                                                                manage liquidity conditions using a new iteration
of looser monetary policy is felt. Export
                                                                of its reserve requirement framework. This could
performance was stronger than we expected in the
                                                                leave the lira vulnerable during bouts of risk
first half of 2012, and our increased GDP forecast
                                                                aversion. It could also interrupt the rebalancing
reflects this. Going forward, we expect exports to
                                                                process that has been on track since the start of
remain resilient, but the pace of growth is likely to
                                                                the year.
slow, in line with the deterioration in global trade.
The main downside risk here is weaker demand
from the MENA region.

% Year
                                                 2008   2009          2010         2011f        2012f        2013f
Consumer spending                                -0.3    -2.3           6.7          7.7          0.0          3.0
Government consumption                            1.7     7.8           2.0          4.5          2.5          2.9
Fixed investment                                 -6.2   -19.0          30.5         18.3         -1.9          5.2
Domestic demand                                  -1.5    -5.1          10.8         10.2         -0.2          3.5
Exports                                           2.7    -5.0           3.4          6.5         13.6         10.8
Imports                                          -4.1   -14.3          20.7         10.6          0.0          9.4
GDP                                               0.7    -4.8           9.2          8.5          2.7          3.8
Industrial production                            -0.9    -9.6          13.3          9.2          2.8          5.5
Consumer Prices*                                 10.4     6.3           8.6          6.5          9.0          7.3
Producer Prices*                                 12.7     1.4           8.5         11.1          6.2          6.5
Current account (% GDP)                          -5.7    -2.3          -6.5        -10.0         -7.6         -7.1
Budget deficit (% GDP)                           -1.8    -5.5          -3.6         -1.4         -2.2         -1.5
TRY/USD                                          1.54    1.50          1.54         1.89         1.80         1.65
3-month money (%)**                              15.5     7.5           6.7         10.1          6.0          7.5
Note: * = Year average, ** = Average
Source: CEIC, National sources, HSBC estimates




66
    Macro
    Global Economics                                                                                                                                                                             abc
    Q4 2012




The rebalancing in the economy was on track in H1 2012                                                                             Growth was driven exclusively by net foreign demand
pp                                                                                                                           pp    The shift in the growth outlook became more
                                    Contribution to growth
                                                                                                                                    pronounced in the second quarter: the contribution from
 20                                                                                                                         20
 15                                                                                                                         15      domestic demand turned negative as private
 10                                                                                                                         10      consumption contracted by 0.5% y-o-y, and private
  5                                                                                                                         5       investment by 7.9% y-o-y.
  0                                                                                                                         0      Consumer confidence, credit growth and durable goods
 -5                                                                                                                         -5      sales all suggest demand weakness continued in Q3.
-10                                                                                                                         -10    This has prompted a policy response from the central
               1Q10
                          2Q10
                                    3Q10
                                                4Q10
                                                          1Q11

                                                                          2Q11
                                                                                     3Q11
                                                                                               4Q11
                                                                                                          1Q12
                                                                                                                    2Q12



                                                                                                                                    bank.

                 Domestic demand                                                         Net foreign demand
                 Change in inv entories                                                  Headline GDP (% Yr)

Source: Turkstat




The CBRT’s priority has now shifted to supporting                                                                                 Monetary easing is in the pipeline
growth
%                                                                                                                            %     Between June and August, the central bank gradually
                                   CBRT's average funding rate                                                                      reduced the average cost of funding provided to the
13                                                                                                                           13     banking sector by more than 400bp.
12
                                                                                                                                   In its communication, the CBRT also made it clear that it
11                                                                                                                           11
                                                                                                                                    now prioritises supporting domestic demand growth.
10
 9                                                                                                                           9     In September, the CBRT cut the top end of the interest
 8                                                                                                                                  rate corridor, the overnight lending rate, by 150bp to
 7                                                                                                                           7      10.0%. We expect more easing to follow, but its pace
 6                                                                                                                                  will depend on the strength of risk appetite. Reduced
 5                                                                                                                           5      rate support could pose risks for the lira in case of risk
                                                                                                                                    aversion.
                 Oct-11


                                    Dec-11
      Sep-11




                                              Jan-12
                                                       Feb-12
                                                                 Mar-12
                                                                            Apr-12


                                                                                               Jun-12
                                                                                                         Jul-12
                                                                                                                  Aug-12
                          Nov-11




                                                                                      May-12




Source: CBRT




Even though food prices behaved favourably in Q3                                                                                  …there are signs that inflation is becoming sticky
                                                                                                                                   Food inflation averaged 9.4% in the first eight months of
% Yr                                                                                                                       % Yr     the year. While this is above the central bank’s 7%
                             Consum er inflation breakdown                                                                          average food inflation forecast for 2012, it was better
13                                                                                                                           13     than HSBC’s expectations.
11                                                                                                                           11    Even though processed and unprocessed food prices
                                                                                                                                    did not rise sharply, there are signs that service prices
 9                                                                                                                           9      are becoming sticky. In August, service inflation rose to
 7                                                                                                                           7
                                                                                                                                    6.9% y-o-y (from 5.7% in August 2011), while rent
                                                                                                                                    inflation came in at 5.2%, its highest level in more than
 5                                                                                                                           5      two years.
 3                                                                                                                           3     Inflation expectations are also high at 6.6% for 12-
                                                                                                                                    months forward and 6.2% for 24-months forward. We
      06


                          07

                                             08


                                                           09


                                                                                 10

                                                                                                11


                                                                                                                  12




                                                                                                                                    expect year-end inflation in 2012 to remain above the
                                   Goods                                                                Serv ices                   CBRT’s 5% target.

Source: CBRT




                                                                                                                                                                                                   67
     Macro
     Global Economics                                                                                                                    abc
     Q4 2012




Egypt
Moving on                                                                        The growing authority of the new government             Simon Williams
                                                                                                                                         Economist
                                                                                 opens the way for the normalisation of                  HSBC Bank Middle East
The re-energising of the post-revolution political
                                                                                 policymaking, a recovery in domestic and                Limited, Dubai
transition process has driven a significant                                                                                              +971 4423 6925
                                                                                 international investor confidence and, crucially,       simon.williams@hsbc.com
improvement in Egypt’s near-term outlook. The key
                                                                                 the completion of negotiations with bilateral and       Liz Martins
to this has been the easing of tensions between the                                                                                      Economist
                                                                                 multilateral agencies over the release of
military – which had held executive power since the                                                                                      HSBC Bank Middle East
                                                                                 concessional funds. This has had a direct, positive     Limited, Dubai
downfall of President Hosni Mubarak in early 2011                                                                                        +971 4423 6928
                                                                                 bearing on the outlook for the currency and should      liz.martins@hsbc.com
– and the newly elected government led by the
                                                                                 prove positive for growth over the longer term.
Muslim Brotherhood. As recently as June, those
tensions looked set to derail the emergence of a new                             However, while recent developments appear to
political order as the military oversaw the dissolution                          mark the beginning of Egypt’s political transition,
of parliament and increased its own executive power                              the challenges that the next phase will bring are
at the expense of the populist Islamist movement.                                substantial. Politically, Egypt must agree on a new
                                                                                 constitution and elect a new parliament in the
Rather than deepening the divide, however, the
                                                                                 months ahead – developments that may bring
election of the Brotherhood’s Mohammed Morsi
                                                                                 renewed volatility and could lead to changes in
as president in late June and the subsequent
                                                                                 the direction of policy. Economically, addressing
formation of a new permanent government, has
                                                                                 Egypt’s soaring budget and trade shortfalls is
seen the military reduce its involvement in day-to-
                                                                                 imperative, but will likely prove difficult given
day political affairs. Indeed, the retirement of long-
                                                                                 the political importance of restoring growth and
serving armed forces leader, Field Marshall
                                                                                 enhancing social welfare. Any delay in acting,
Tantawi and other senior members of the military
                                                                                 however, could jeopardise IMF support, triggering
may mark a generational shift within the still
                                                                                 renewed pressure on rates and the currency and
powerful organisation, which could presage a
                                                                                 rapidly reversing the recent improvement in the
longer-term shift in its political goals.
                                                                                 near-term outlook.


% Year
                                                                 2008   2009            2010         2011          2012f        2013f
Consumer spending                                                 5.7      5.7           4.1           5.0            6.0          4.3
Government consumption                                            2.1      5.6           4.5           3.8            3.0          3.9
Fixed investment                                                 15.5     -9.1           8.0          -4.4            5.0          3.4
Exports                                                          33.3   -14.3           -5.1          13.1          -0.1           5.5
Imports                                                          37.8     -4.6          -2.7          10.4            8.5        12.6
GDP                                                               7.2      4.7           5.1           1.8            2.2          3.2
Consumer prices                                                  11.6    15.5           11.7          11.0            8.7          6.8
Current account balance (USDbn)                                   0.9     -4.4          -4.3          -6.1          -7.9        -11.0
Current account (% GDP)                                           0.5     -2.4          -2.0          -2.6           -3.1         -4.0
Budget balance (% GDP)                                           -6.8     -6.9          -8.1          -9.8         -10.8        -10.6
EGP/USD                                                          5.52    5.48           5.70          6.00          6.10         6.10
3-month money (%)                                                 7.0      9.3           8.9           9.4          10.0           9.3
Note: Fiscal years, where 2012 refers to FY2011/12 (July-June)
Source: CBE, HSBC estimates




68
     Macro
     Global Economics                                                                                               abc
     Q4 2012




Israel
Stable growth, for now                                     addition, we believe net FDI is likely to be stable in   Dr. Murat Ulgen
                                                                                                                    Economist
                                                           2013 (around 2.5% of GDP we forecast for 2012)           HSBC Bank plc
Growth surprised on the upside in H1 2012.
                                                           due to rapid investment into high tech start-up          +44 20 7331 5321
Following GDP growth of 2.8% (saar) in Q1 2012,                                                                     muratulgen@hsbc.com
                                                           companies. We expect the fiscal deficit to widen to
growth accelerated modestly to 3.2% in Q2 2012.
                                                           4.1% of GDP in 2012 (from 3.3% in 2011) as tax
This was mostly due to the new Intel factory
                                                           revenues disappoint and spending remains elevated,
commencing production and boosting exports,
                                                           pushing the public debt level to 75% of GDP in 2012
although private consumption per capita grew by
                                                           (from 74% in 2011). Restoring fiscal credibility will
3.7% as well. Recent economic indicators have been
                                                           require significant consolidation, a rather difficult
mixed, but do suggest fairly stable growth in Q3
                                                           task, politically, in the year before an election.
2012 as job creation remains steady, demand for
housing strong, and imports for raw materials stable,      BOI Governor Fischer's pro-active style, coupled
despite exports trending downwards. We forecast            with a fairly dovish MPC, has pushed rates down by
GDP growth of 2.9% in 2012, followed by some               100bps since September 2011 to 2.25%. The present
deceleration to 2.6% in 2013 on the back of slowing        monetary bias appears to be in neutral mode due to
investments and weaker consumer demand caused              some acceleration in inflation and renewed housing
by higher unemployment and taxation. Exports are           demand. We expect one more rate cut at the end of
expected to improve due in part to a more                  2012 (or early 2013) as growth slows.
competitive ILS, as well as some improvement in
                                                           The geopolitical environment remains uncertain, and
global trade. As the economy slows, we think
                                                           the threat of an escalation of the situation with Iran
unemployment is likely to rise from 7.0% in 2011 to
                                                           persists. Nevertheless, sometime in early 2013, with
7.4% in 2012 and 7.8% 2013. The current account
                                                           gas production expected to commence in H2 2013,
deficit is expected to reach 1.9% GDP in 2012, but
                                                           markets are likely to price in the expected impact of
should decline to a balanced position in 2013 on
                                                           Israel’s huge natural gas reserves on the current
stronger export growth, and a reduction in energy
                                                           account, energy prices, and fiscal revenues.
imports, as natural gas production kicks in. In


% Year
                                           2008     2009          2010          2011          2012f         2013f
Consumer spending                           2.8      1.4           5.3           3.6            1.7           1.7
Government consumption                      1.9      2.4           2.5           3.7            3.8           2.7
Fixed investment                            4.2     -4.1          13.6          16.2            4.0           1.5
Exports                                     6.6    -12.6          13.4           4.9            1.8           3.7
Imports                                     2.3    -14.0          12.6          10.6            3.8           2.0
GDP                                         4.0      0.8           4.8           4.7            2.9           2.6
Industrial production                       6.9     -6.2           8.6           2.2            2.1           3.5
Consumer Prices*                            4.6      3.3           2.7           3.5            1.9           1.8
Current account (% GDP)                     1.4      3.7           3.9           0.5           -1.9           0.0
Budget deficit (% GDP)                     -2.1     -5.2          -3.7           3.3            4.1           3.8
ILS/USD                                    3.78     3.75          3.68          3.80           3.85          3.65
Note: * = year average
Source: National sources, HSBC estimates




                                                                                                                                      69
     Macro
     Global Economics                                                                                                         abc
     Q4 2012




Saudi Arabia
The regional leader                                               in oil prices should leave the government with a            Simon Williams
                                                                                                                              Economist
                                                                  double-digit budget surplus over 2012-13 despite            HSBC Bank Middle East
Our long-standing optimism over Saudi Arabia’s
                                                                  marked gains in expenditure. Recent benign inflation        Limited, Dubai
near-term economic prospects and confidence in its                                                                            +971 4423 6925
                                                                  readings will also likely leave the authorities             simon.williams@hsbc.com
capacity to withstand weak global conditions
                                                                  comfortable with maintaining their expansionary             Liz Martins
remains intact. Indeed, at a time when most major
                                                                  fiscal stance.                                              Economist
emerging markets have seen their growth outlook                                                                               HSBC Bank Middle East
                                                                                                                              Limited, Dubai
deteriorate, we have revised our forecast for 2012-13             In contrast to most other parts of the Middle East,         +971 4423 6928
growth upward.                                                    growth in the kingdom is also being supported by the        liz.martins@hsbc.com
                                                                  financial sector, which continues to deliver robust
The adjustments are driven in large part by higher-
                                                                  expansion in credit to the domestic economy. With
than-expected oil output – a trend that will boost net
                                                                  policy rates negative in real terms, the banking sector
exports, but have relatively little direct impact on the
                                                                  still liquid and local confidence strong, we expect the
broader economy. However, all available data
                                                                  pace of credit expansion to continue to build speed.
suggest that the non-oil sector also continues to grow
strongly and maintain its momentum. At just under                 We also expect Saudi Arabia’s accumulation of
60 points, for example, Saudi Arabia’s PMI score                  foreign assets to persist as high oil prices drive large
has not only remained one of the strongest of all of              trade and current account surpluses that will be
the global PMIs in the past quarter, but has also been            recycled through SAMA into high-grade – primarily
one of the few not to lose pace. Although a high base             developed market – financial instruments. At over
meant that headline real growth slowed a little in y-             USD600bn, we expect the value of its asset stock by
o-y terms in Q2 2012, it was firm q-o-q, driven by                year-end to equate to more than 110% of GDP or
rising non-oil output.                                            more than two years of public spending, providing
                                                                  the kingdom with a valuable buffer against any
The key to the growth performance remains the
                                                                  unexpected downturn in oil prices or regional
government’s expansionary fiscal stance and we see
                                                                  political order.
little reason for it to be reined in. The recent pick-up



% Year
                                        2008           2009               2010          2011           2012f          2013f
Consumer spending                         3.5               6.7            3.2            5.0            4.2            4.0
Government consumption                    6.0               1.0            1.0            4.0            4.0            4.0
Fixed investment                         12.6              -4.6            3.6            7.5           10.0            9.0
Exports                                  -4.2              -7.3            8.3           11.0            4.0            2.0
Imports                                   9.7              -6.3            4.2            7.0            5.5            6.0
GDP                                       4.2               0.1            4.1            6.6            5.4            4.0
Consumer prices                           9.9               5.1            5.3            5.0            4.4            4.9
Current account balance (USDbn)         133.0              23.4           70.4          160.1          165.0          116.1
Current account balance (% GDP)          27.9               6.2           15.7           27.3           25.8           18.0
Budget balance (% GDP)                   32.5              -6.1            6.5           13.9           12.1            7.6
SAR/USD                                  3.75              3.75           3.75           3.75           3.75           3.75
3-month money (%)*                        2.5               0.8            0.8            0.8            1.0            1.1
Note: *End year
Source: HSBC estimates




70
     Macro
     Global Economics                                                                                                  abc
     Q4 2012




UAE
Surprising to the upside                                     Instead, high oil prices will drive further growth in     Simon Williams
                                                             the emirate’s foreign asset stock, with most of the       Economist
Despite being more exposed to the European                                                                             HSBC Bank Middle East
                                                             UAE-wide USD40bn current account accruing                 Limited, Dubai
slowdown than any other Gulf state, the UAE has                                                                        +971 4423 6925
                                                             directly to the emirate and likely flowing into Abu       simon.williams@hsbc.com
demonstrated resilience over the first three
                                                             Dhabi’s sovereign wealth funds.
quarters of 2012. Indeed, we have raised our                                                                           Liz Martins
                                                                                                                       Economist
forecasts for growth in both 2012 and 2013, lifting          For Dubai, externally driven growth is coming from        HSBC Bank Middle East
                                                                                                                       Limited, Dubai
the pace of expansion to close to the regional               the service sector, which continues to shrug off the      +971 4423 6928
average.                                                     global slowdown: Tourism, retail and real estate          liz.martins@hsbc.com

                                                             have all gained pace over the last six months.
With none of the monetary or fiscal stimulus that
                                                             Occupancy rates in hotels remained high even over
is driving growth elsewhere in the GCC, the UAE
                                                             this year’s hot summer months, passenger traffic
continues to rely heavily on external demand. In
                                                             through Dubai Airport hit a record high and cargo
Abu Dhabi, this takes the form of oil sector
                                                             volumes were also up.
growth. Crude output was just shy of 2.7 mbpd in
June 2012 (up from an average 2.5mbpd over                   While this externally driven growth model is
2011), boosting export volumes even as global                working for now, we are aware of the vulnerability it
prices have risen.                                           represents. With interest rates already close to zero,
                                                             the banking sector still reluctant to lend and
Incremental revenues add to a very strong fiscal
                                                             governments looking reluctant to increase spending,
position for the Abu Dhabi government, but we see
                                                             any material softening in external demand would
little evidence so far of a pick-up in (still subdued)
                                                             cause the upward revisions in growth to be quickly
capital expenditure. Abu Dhabi has ample means of
                                                             reversed.
driving growth via expansionary spending, but not,
for now at least, the motive. The emirate’s non-oil
sector will continue to see only sluggish growth.


% Year
                                       2008          2009           2010           2011          2012f         2013f
Consumer spending*                     22.1          -23.1           3.8            5.8            5.2           6.6
Government consumption*                18.5           34.1           0.9            4.5            4.2           5.1
Fixed investment*                      12.7           -0.8          21.7           13.1            5.7           7.6
Stocks*                                21.9          -17.4           9.3           21.0            6.3           1.9
Exports*                               33.9          -19.8          11.4           31.9            9.5           2.3
Imports*                               33.4          -15.1          10.0           22.8            9.0           8.0
GDP                                     3.2           -4.8           1.3            4.1            3.7           4.0
Consumer prices                         6.5           -0.4           1.8            1.5            1.2           1.6
Current account balance (USDbn)        22.3            7.8           7.2           30.7           29.0          14.1
Current account balance (% GDP)         7.1            3.0           2.6            8.9            8.0           3.8
Budget balance (% GDP)                 16.8          -12.8          -2.2            3.1           12.3           7.6
AED/USD                                3.67           3.67          3.67           3.67           3.67          3.67
3-month money (%)**                     4.2            1.9           2.2            1.5            1.5           1.5
Note: *Nominal growth. **End year
Source: HSBC estimates




                                                                                                                                          71
     Macro
     Global Economics                                                                                                   abc
     Q4 2012




South Africa
Mining unrest adds to macro                                 private – has been doing better than production,            Dr. Murat Ulgen
                                                                                                                        Economist
woes                                                        when compared to the pre-crisis average. This is            HSBC Bank plc
                                                            because consumption is supported by very low real           +44 20 7331 5321
The South African economy is, at best, muddling                                                                         muratulgen@hsbc.com
                                                            interest rates by historical standards, while
through. In the first half of 2012, GDP expanded by
                                                            production and exports face severe external
a paltry 2.5%, while inflation moderated to 4.9% y-
                                                            headwinds on the manufacturing front and are
o-y as of July from 6.3% in January. HSBC’s 2012
                                                            dragged down by domestic unrest in the mining
GDP forecast is 2.5% growth, given strong external
                                                            sector. Another reason for the difference is the large
headwinds and a weak start to production in Q3. For
                                                            servicing need for external borrowings that have
inflation, while sluggish activity argues for downside
                                                            funded the deficit in the past, such as dividend and
risks, cost pressures, such as food, energy, utility
                                                            interest payments.
price hikes and a weaker currency, are likely to
counterbalance this and keep inflation slightly above       The unrest in the mining sector comes at a critical
the mid-point of the South African Reserve Bank’s           juncture ahead of the ruling party’s elective
3.0-6.0% target band.                                       conference in December. At this stage, we are not
                                                            very worried about the direct economic impact, as
In the meantime, the country’s macro performance
                                                            the mining sector makes up only 5.0% of GDP,
presents a conundrum. The current account deficit
                                                            while fiscal performance is also so far on track.
has widened sharply to 6.4% of GDP (saar) from its
                                                            However, we are concerned about the potential
nadir of 1.5% in Q4 2010, not too far off its pre-
                                                            indirect implications for the economy due to
crisis peak of 7.0-8.0%. This is surprising in an
                                                            uncertainty over elections and the eventual policy
economy that is growing sub-par with private
                                                            direction, the possibility of a stricter version of the
investments way below their pre-crisis levels. One of
                                                            new mining charter, and potential fiscal slippage in
the main reasons for the deficit is that the
                                                            the future.
consumption side of the economy – both public and


% Year
                                          2008      2009           2010           2011           2012f          2013f

Consumer spending                          2.2       -2.0            3.7            4.5            3.1            3.7
Government consumption                     4.7        4.8            4.9            4.4            4.1            4.0
Fixed investment                          14.1       -2.2           -1.6            4.4            5.2            4.5
Exports                                   14.7      -22.0           20.0           25.7            7.0            9.0
Imports                                   10.4      -26.9           24.0           20.5           21.0           23.0
GDP                                        3.6       -1.5            2.9            3.1            2.5            3.1
Industrial production                      0.9      -12.6            4.9            2.4            2.5            3.2
Consumer prices                           11.0        7.2            4.3            5.0            5.5            5.4
Current account (% GDP)                   -7.4       -4.0           -4.6           -3.6           -5.1           -5.5
Budget balance (% GDP)                    -1.2       -6.3           -5.2           -4.9           -4.7           -4.2
ZAR/USD                                   9.25       7.36           6.62           8.07           8.00           7.30
3-month money (%)*                        11.4        7.1            5.5            5.5            5.2            5.4
10-year bond yield (%)*                    7.3        9.0            8.4            8.1            7.0            7.4
Note: * = year average
Source: CEIC, Bloomberg, HSBC estimates




72
Macro
Global Economics                                                 abc
Q4 2012




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                                                                   73
     Macro
     Global Economics                                                                                                   abc
     Q4 2012




Japan
                                                                                                                        Izumi Devalier
A test of patience                                             Looking forward, the slowdown should abate in            Economist
                                                               2013, as the global economic recovery lifts exports,     The Hongkong and Shanghai
After a strong start to 2012, the Japanese economy                                                                      Banking Corporation Limited,
                                                               and the planned April 2014 VAT increase from 5%          +852 2822 1647
is poised for a considerable slowdown in the                                                                            izumidevalier@hsbc.com.hk
                                                               to 8% causes spikes in consumer spending and
second half of the year. Revised data showed GDP                                                                        Tushar Arora
                                                               housing investment. We therefore expect the
growth of 0.2% q-o-q sa in Q2 2012, down from                                                                           Economics Associate, Bangalore
                                                               economy to expand 1.6% in 2013. Growth will
1.3% in Q1 2012. While reconstruction spending
                                                               continue into Q1 2014, after which the tax hike will
and steady consumption helped make up for the
                                                               hurt domestic demand, causing zero or negative
drag from external demand, there have been signs
                                                               quarterly GDP growth for the rest of the year.
that domestic demand has already begun
weakening in the third quarter, and will continue to           With parliamentary elections expected in the coming
lose steam, registering negative to flat sequential            months, policy uncertainty abounds, despite the
growth for the remainder of the year.                          pressing need for further decision making on the
                                                               country’s fiscal and energy future. Although the
The Bank of Japan’s recent JPY10trn asset
                                                               passage of the VAT bill marked a modest step
purchase programme expansion likely signals a
                                                               towards fiscal consolidation, proposals addressing
new direction in the board’s decision-making,
                                                               long-term issues on the spending side were shelved.
away from its cautionary stance. Tepid Q4 growth
                                                               According to the government’s own projections,
prospects and bearish inflation data should force
                                                               without any meaningful adjustment on other fronts,
the BoJ to add more stimulus in order to keep up
                                                               the VAT increase will not be enough to help Japan
with its US and European counterparts and relieve
                                                               achieve a primary surplus by 2020. The new
the persistent upward pressure on the yen. We
                                                               government must make swift progress on social
have pencilled in another JPY5trn expansion for
                                                               security reform to tackle the roots of Japan’s fiscal
Q4 2012.
                                                               problem.

% Year
                                    2011    2012f   2013f   Q3 12f    Q4 12f    Q1 13f    Q2 13f    Q3 13f     Q4 13f
Consumer spending                     0.1     2.3     0.6      1.7       0.7      -0.4      -0.5       0.8        2.3
Government consumption                2.0     2.0     0.7      1.9       1.7       1.2       0.7       0.5        0.3
Investment                            0.8     4.4     5.4      4.7       4.0       4.6       5.7       6.3        5.0
Stockbuilding (% GDP)                -0.7    -0.4    -0.1     -0.3       1.1      -2.3       1.1      -0.3        1.1
Domestic demand                       0.2     2.8     2.2      2.8       1.3       3.8       0.7       1.9        2.5
Exports                              -0.1    -0.6     4.1     -8.3      -3.0      -2.5       1.3       8.0       10.1
Imports                               6.3     5.5     6.7      2.6       4.4       5.2       6.0       9.3        6.1
GDP                                  -0.8     2.0     1.6      0.8       1.4       0.4       1.3       1.8        3.1
GDP (% quarter)                         -       -       -     -0.2       0.0       0.2       1.1       0.6        1.2
Industrial production                -2.4     1.4     5.6     -4.0       0.1       0.5       3.4       8.5       10.1
Unemployment rate                     4.5     5.0     5.0      5.0       5.0       5.0       5.0       5.0        5.0
CPI                                  -0.3    -0.0    -0.1     -0.3      -0.3      -0.2      -0.2      -0.0        0.1
M2                                    2.7     3.1     3.5      3.5       3.5       3.5       3.5       3.5        3.5
Current account (JPYtrn)              9.5     4.6     5.2        -         -         -         -         -          -
Current account (% GDP)               2.0     1.0     1.1      0.7       0.7       0.9       0.8       1.0        1.7
Budget balance (% GDP)              -11.8   -10.0    -9.0        -         -         -         -         -          -
JPY/USD                              76.9    74.0    72.0     75.0      74.0      72.0      72.0      72.0       72.0
3-month money (%)                     0.2     0.2     0.2      0.2       0.2       0.2       0.2       0.2        0.2
Source: CEIC, IMF, HSBC estimates

74
    Macro
    Global Economics                                                                                                                       abc
    Q4 2012




GDP growth in Q2 was not as good as in Q1…                                …as the boost from domestic demand is fading away
                                                                           Having grown 0.7% on an annualised basis in Q2 2012,
                                                               %            Japan’s economy has so far outpaced the growth of
     100%                                                           10
                                                                            most G7 countries. However, the boost to domestic
         50%                                                        5       demand that came from the eco-car subsidy programme
                                                                            is waning, and the slowdown is already underway.
         0%                                                         0      Slackening demand from the eurozone and China has
                                                                            left its mark on Japanese export levels. The current
        -50%                                                        -5      account balance for the month of July was 40% lower on
                                                                            an annual basis, and this kind of weakness will persist
    -100%                                                           -10
                                                                            for much longer than expected earlier.
           Dec-09          Dec-10                Dec-11
            Pv t Cons                           Gov t Cons                 Looking ahead, we see the economy in standstill mode,
            Inv                                 Net Ex ports                with -0.1 % q-o-q sa growth expected in Q3 and 0.0% in
            GDP grow th (RHS)                                               Q4.
  Source: CEIC, HSBC




 A lull on the horizon…                                                   …due to slow demand for exports
  2005=100                                                2005=100         Industrial production contracted 1.2% m-o-m sa in July,
                        IP index: manufacturing
                                                                            following a 0.4% gain in June.
  120                                                              120
                                                                           A deteriorating outlook for industry is further indicated by
  110                                                              110      weak manufacturing PMI data. The seasonally adjusted
  100                                                              100      index fell to a 47.7 in August from 47.9 in July, the lowest
                                                                            level since April 2011.
   90                                                              90
                                                                           We expect Q3 2012 to be the bottom of this cycle. The
   80                                                              80       upsurge in demand from China in the latter part of this year
                                                  Sep-2012                  is expected to put the floor under this downturn.
   70                             M arch-2011                      70
   60                                                              60
     Mar-06             Mar-08        Mar-10          Mar-12

  Source: CEIC, METI, HSBC




 Annual deflation persists…                                               …monetary policy to ease further
                                                                           The current 2013 inflation forecast of policy board
  %Yr                                                              %Yr
                                                                            members is 0.5% to 0.7%. The focus is on the headline
  0.5                                                              0.5      inflation excluding fresh food – a ‘semi-core’ measure.
  0.0                                                              0.0     The goal of 1% thus lies above members’ own forecasts
  -0.5                                                             -0.5     and significantly above the current level of core (semi)
                                                                            inflation, which came in at -0.3% y-o-y in July 2012.
  -1.0                                                             -1.0
                                                                           In its commitment to achieving the goal of 1% over the
  -1.5                                                             -1.5     “medium to long term”, we expect the BoJ to remain
  -2.0
                                                                            accommodative and further expand its asset purchase
                                                                   -2.0
                                                                            programme.
     Mar-06              Mar-08        Mar-10           Mar-12
                       Core Core CPI (ex Food and Energy )

Source: CEIC, HSBC




                                                                                                                                             75
     Macro
     Global Economics                                                                                              abc
     Q4 2012




Australia
Growth moderating                                            particularly in LNG production.                       Paul Bloxham
                                                                                                                   Economist
                                                                                                                   HSBC Bank Australia Limited
Growth in the Australian economy was strong in               To absorb the mining boom, Australia’s economy        +612 9255 2635
the first half of the year, supported by mining              has seen some non-mining sectors crowded out.         paulbloxham@hsbc.com.au

investment and household consumption. We expect              With some easing in mining expansion, as well as      Luke Hartigan
                                                                                                                   Economist
it to moderate in H2 2012, given lower commodity             below average interest rates and a broadly steady     HSBC Bank Australia Limited
prices and China’s slowdown. Looking further                 AUD, we expect some rebalancing of growth as          +612 9084 2993
                                                                                                                   lukehartigan@hsbc.com.au
ahead, we see growth returning to around trend in            we go into 2013. This should see support for the
2013, as lower interest rates and a modest pick-up           housing market as well as the manufacturing,
in China’s growth provide some support.                      tourism and education industries, which have been
                                                             weak recently.
The mining story is not yet over for Australia,
although it will start to contribute less to growth          Despite an expected moderation in growth in H2
than it has in the past year or so. Rising mining            2012, we have raised our 2012 growth forecast to
investment will continue to support growth in                3.5% (from 3.3%) as H1 2012 growth was
2013. While commodity prices have peaked, they               stronger than expected. We expect growth to slow
are still at high levels relative to history and much        to 3.2% in 2013, largely as a result of weaker
of the investment pipeline is made up of medium-             expected growth in China.
term projects that are yet to be completed but
                                                             With inflation remaining well contained, we expect
highly unlikely to be cancelled. Beyond this
                                                             the RBA to lower rates by a further 25bp in coming
horizon, growth will be supported by a ramp up in
                                                             months, partly in response to persistent downward
resource exports, as capacity comes on line,
                                                             pressure on inflation due to the high AUD.

% Year
                                   2011   2012f   2013f   Q3 12f   Q4 12f    Q1 13f    Q2 13f   Q3 13f    Q4 13f
Consumer spending                   3.3    3.8     2.5      3.4       3.3      2.2       2.3       2.7      2.9
Government consumption              2.5    3.0     2.5      3.3       3.0      3.1       2.1       2.5      2.4
Investment                          7.1    8.1     7.2      4.5       7.2      5.5       6.8       8.2      8.4
Final domestic demand               4.2    4.8     3.9      3.7       4.4      3.3       3.6       4.3      4.4
Stockbuilding (% GDP)               0.3    0.3     0.2      0.2       0.2      0.2       0.2       0.2      0.2
Domestic demand                     4.6    4.8     3.7      3.8       4.0      3.0       3.4       4.1      4.2
Exports                            -1.3    5.3     7.7      5.1       3.6      7.1       7.2       7.7      8.8
Imports                            11.5    7.4     9.0      4.3       5.6      7.1       8.8      10.4      9.8
GDP                                 2.1    3.5     3.2      3.0       3.0      2.6       2.9       3.4      3.8
GDP (% quarter)                       -      -       -      0.5       0.5      0.9       1.0       0.9      0.9
Industrial production              -1.2    1.5     0.9      1.0       0.5      1.0       0.5       1.0      1.0
CPI                                 3.4    2.0     3.2      2.2       3.1      3.5       3.6       2.8      2.7
Unemployment                        5.1    5.2     5.0      5.2       5.2      5.2       5.1       4.9      4.8
Average earnings                    3.7    3.7     3.7      3.9       3.7      3.7       3.6       3.6      3.6
Current account (% GDP)            -2.3   -4.2    -5.9     -4.5      -5.5     -5.8      -5.9      -6.0     -5.8
Budget balance (% GDP)             -3.4   -3.0     0.1        -         -        -         -         -        -
USD/AUD                            1.03   0.95    0.95     1.00      0.95     0.95      0.95      0.95     0.95
3-month money (%)                  4.51   3.25    3.90     3.40      3.50     3.70      4.00      4.00     4.00
10-year bond (%)                   3.67   3.10    3.60     3.20      3.10     3.20      3.30      3.50     3.60
Source: ABS; RBA; HSBC estimates




76
     Macro
     Global Economics                                                                                                         abc
     Q4 2012




New Zealand
Expect modest growth                                                 assets, such as New Zealand government bonds.            Paul Bloxham
                                                                                                                              Economist
                                                                     The elevated NZD remains a challenge for                 HSBC Bank Australia Limited
The local economy held up well in the first half of                                                                           +612 9255 2635
                                                                     exporters and industries competing with imports,
the year, despite a weaker global backdrop.                                                                                   paulbloxham@hsbc.com.au
                                                                     particularly given that soft commodity prices have
Looking forward, we have edged down our GDP                                                                                   Luke Hartigan
                                                                     fallen, which has also lowered local incomes. On         Economist
growth forecast for 2013 (from 3.4% to 2.9%), as                                                                              HSBC Bank Australia Limited
                                                                     the flip side, the higher NZD has helped contain         +612 9084 2993
we expect weaker growth in China and some
                                                                     inflation, allowing the RBNZ to keep the cash rate       lukehartigan@hsbc.com.au
moderation in growth for Australia – New
                                                                     at low levels for most of the past three years.
Zealand’s two major trading partners.
                                                                     There are some early signs that low interest rates
Encouragingly, the post-earthquake rebuild in
                                                                     are starting to lift asset prices and credit growth,
Canterbury is gathering pace with a pick-up in the
                                                                     with housing prices rising solidly in Auckland in
number of building consents issued in the region.
                                                                     particular. History has shown that keeping rates
The recently unveiled NZD2bn Christchurch
                                                                     too low for too long can cause problems of its
central business district (CBD) plan is an
                                                                     own. Governor Bollard, whose term has just
important milestone in the reconstruction process.
                                                                     ended, has been reluctant to lift interest rates,
The rebuild remains a key support for the local
                                                                     given concerns about the high NZD, but we
growth story over the forecast horizon.
                                                                     expect that the new Governor, Graeme Wheeler,
Reconstruction activity is expected to peak in late
                                                                     may need to start lifting interest rates as soon as
2014 and moderate thereafter.
                                                                     the first half of 2013, to head off potential
The NZD is being driven up by global capital                         inflation and asset price concerns.
flows in search of relatively safe high-yielding

% Year
                                          2011    2012f   2013f   Q3 12f    Q4 12f    Q1 13f    Q2 13f     Q3 13f    Q4 13f
Consumer spending                           1.4     1.8     2.0      1.0       1.3       1.8       1.9        2.1       2.1
Government consumption                      0.1     0.7     1.2      0.4       1.4       1.1       1.1        1.2       1.2
Investment                                  1.7     5.1    11.9      8.0       9.4      10.8      12.4       12.7      11.7
Final domestic demand                       1.3     2.3     4.0      2.3       3.0       3.6       4.1        4.3       4.1
Domestic demand                             1.0     2.6     3.7      0.4       3.7       3.0       3.7        3.8       4.1
Exports                                     2.0     2.2     4.8      3.3       1.4       4.3       4.6        5.1       5.4
Imports                                     6.5     6.3     6.5      4.2       8.3       5.8       6.4        6.9       6.7
GDP                                         1.3     2.6     2.9      2.8       2.6       2.3       2.9        3.0       3.4
GDP (% quarter)                               -       -       -      0.8       0.2       0.8       1.0        1.0       0.6
Industrial production                      -1.1     3.8     1.4      1.7       4.1       2.6       1.9        1.5       1.4
Consumer prices                             4.0     1.4     2.6      1.0       2.0       2.2       2.6        2.9       3.0
Unemployment                                6.5     6.7     6.3      6.7       6.6       6.4       6.3        6.2       6.2
Average earnings                            1.9     2.1     2.8      2.2       2.3       2.5       2.8        2.8       2.9
Current account (% GDP)                    -4.2    -5.0    -6.4     -6.1      -5.8      -6.4      -6.3       -6.7      -6.2
Budget balance (% GDP)                     -9.4    -4.1    -3.6        -         -         -         -          -         -
NZD/USD                                     0.8     0.7     0.7      0.8       0.7       0.7       0.7        0.7       0.7
3-month money (%)*                         2.69    2.60    3.35     2.60      2.60      2.60      2.85       3.10      3.35
10-year bond (%)*                          3.81    3.50    4.00     4.20      3.40      3.60      3.50       3.50      3.60
Note: *= Period-end.
Source: Statistics New Zealand; HSBC estimates




                                                                                                                                                  77
     Macro
     Global Economics                                                                                            abc
     Q4 2012




China
Stronger policy response                                 5.5% to RMB496bn, implying accelerating                 Qu Hongbin
                                                                                                                 Economist
                                                         growth in the coming months, given that the             The Hongkong and Shanghai
The latest data out of China are disappointing.
                                                         actual investment in the year to August only            Banking Corporation Limited
Export growth has dropped steeply over the last                                                                  (HK)
                                                         represented 46% of the total amount. The State          +852 2822 2025
two months, while imports have contracted for the                                                                hongbinqu@hsbc.com.hk
                                                         Council announced eight measures to stabilise
first time since the global financial crisis. Not
                                                         growth of foreign trade.
only is global demand decelerating fast, but
Chinese exporters are also losing market share to        The effect of these new easing measures will start
other, cheaper, countries. This, plus cooling            to filter through in Q4 2012 and will have a full
property markets, has slowed industrial                  impact in H1 2013. As a result, we trim 2012 full
production to a 39-month low of 8.9% y-o-y,              year GDP growth forecast to 7.8% y-o-y (from
forcing more companies to cut jobs.                      8%) and modestly raise our 2013 forecast to 8.6%
                                                         y-o-y (from 8.5%).
This sharper-than-expected deceleration in export
growth, and increasing pressure on the labour            With over RMB1trn fiscal surplus in the first eight
market, has prompted Beijing policy makers to            months (versus a budget deficit of RMB800bn for
step up easing. On top of monetary easing in the         2012), fiscal measures should play a bigger role in
form of a capital injection in the open market           the government’s bid to achieve sustainable
operation (which is a short-term substitute for an       growth and employment stability. This, plus
RRR cut), the National Development and Reform            further monetary easing through additional open
Commission (NDRC) has announced its approval             market operation activities, more RRR cuts and
of new infrastructure projects (mainly subway,           one more 25bp rate cut in the coming months,
highway and sewage plants), worth around                 should help lift growth to our expected 7.5% y-o-y
RMB1trn. The planned infrastructure investment           in Q3 and to 8% y-o-y in Q4.
in railway for 2012 has recently been increased by


% Year
                                       2008      2009           2010         2011         2012f         2013f

Consumer spending                       8.9        8.0          10.9           8.8          8.5            8.7
Government consumption                  9.8       20.7          11.0           9.8          8.8            9.4
Fixed asset investment                 26.1       30.5          24.5          23.8         20.0           21.5
Exports                                11.2      -17.9          29.4          18.3          3.8            6.0
Imports                                 8.5      -16.3          33.6          19.9          1.1            5.0
GDP                                     9.6        9.2          10.4           9.3          7.8            8.6
Industrial production*                 12.9       12.9          15.7          13.9         10.5           12.4
CPI**                                   5.9       -0.7           3.3           5.4          2.9            3.1
Current account (% GDP)                 9.4        5.7           5.1           2.8          2.5            2.0
Budget balance (% GDP)                 -0.4       -2.2          -2.5          -1.1         -1.6           -1.5
CNY/USD                                6.82       6.83          6.59          6.29         6.30           6.22
1-year time deposit (%)                2.25       2.25          2.75          3.50         2.75           2.75
1-year lending (%)                     5.31       5.31          5.81          6.56         5.75           5.75
Note: * = excluding small businesses
Source: CEIC, HSBC estimates




78
     Macro
     Global Economics                                                                                                                        abc
     Q4 2012




Exports growth has fallen off a cliff…                                          …due to the European debt crisis
                                                                                 As the global trade cycle weakens, China's export
%Yr                                                                   %Yr
                                                                                  growth has decelerated sharply from 10.5% y-o-y in Q2
 60                                                                       60      to 1-2% y-o-y in July and August. In particular, Chinese
 45                                                                       45      exporters were hit hard by the European crisis, with
                                                                                  shipments to the EU dropping by around 15% y-o-y in
 30                                                                       30
                                                                                  July-August.
 15                                                                       15
                                                                                 Shipments of major labour-intensive products contracted
     0                                                                    0       over recent months, underperforming total exports.
-15                                                                       -15     Chinese exporters are also losing market share to other
-30                                                                       -30     cheaper countries.
                                                                                 The collapse of the new exports orders component of
         96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
                                                                                  the HSBC PMI suggests even stronger external
               Ex ports to EU                        Total ex ports               pressures ahead, requiring additional easing measures
                                                                                  to counterbalance them.
Source: CEIC, HSBC




IP growth hit a 39-month low in August…                                         …putting pressure on the job market
                                                                                 Industrial production (IP) growth hit a 39-month low of
 %Yr, 3mma                                                     %Yr, 3mma
                                                                                  8.9% y-o-y in August. Growth of electricity production
25                                                                        60
                                                                                  remained low at 2.7% y-o-y in August, despite the
20
                                                                          55
                                                                                  marginal improvement from the previous month.
15                                                                               Thanks to the weakening external demand, a cooling
                                                                          50      property market, and ongoing destocking, China’s
10                                                                                manufacturing activities slowed in 3Q at a moderated
 5
                                                                          45      pace, as reflected in the latest HSBC manufacturing
                                                                                  PMI.
 0                                                                        40
                                                                                 This is putting pressure on the job market. The
     05       06      07       08      09       10      11     12                 employment sub-index of the HSBC manufacturing PMI
                    IP (Lhs)
                    HSBC Manufacturing PM I (R hs)
                                                                                  has been in contractionary territory for seven months in
                    HSBC Manufacturing PM I - Employ ment (Rhs )                  a row, which has only happened before during the
                                                                                  financial crisis.
Source: CEIC, Markit, HSBC




The slowdown of FAI growth is stabilising…                                      …thanks to the pick-up of infrastructure spending
                                                                                 After declining since mid-2009, fixed asset investment
%Yr, 3m ma                                                   %Yr, 3m ma
                                                                                  (FAI) growth in the year to August stabilised at around
 60                                                                       60      20.2%, as a result of the earlier easing policy.
 50                                                                       50
                                                                                 Infrastructure investment continued to pick up (15.1% y-
 40                                                                       40      o-y in August), counterbalancing the weakness of
 30                                                                       30      property and manufacturing investment. Meanwhile, the
 20                                                                       20      investment in newly started projects quickened, and the
 10                                                                       10      growth of funding improved as well, mainly on better
  0                                                                       0       lending growth.
-10                                                                       -10    Fixed investment growth holds the key for growth
         05    06       07      08     09       10     11      12                 recovery. But the growth rate is expected to be stable
                                                                                  due to the recent acceleration of new projects approval,
               T otal FAI            Property            Infrastructure           the rebound of new lending and Beijing’s further easing
                                                                                  measures.
Source: CEIC, HSBC




                                                                                                                                               79
     Macro
     Global Economics                                                                                                                        abc
     Q4 2012




India
Some action, some traction                                                          Looking ahead, we expect growth to recover very          Leif Eskesen
                                                                                                                                             Economist
                                                                                    gradually, held back by the lagged effects of            The Hongkong and Shanghai
India’s economy picked up slightly in Q2 2012, with                                                                                          Banking Corporation Limited
                                                                                    monetary policy tightening and global economic
GDP growing at 5.5% y-o-y (versus 5.3% y-o-y in                                                                                              (Singapore)
                                                                                    conditions. Gradual traction on key structural           +6566588962
Q1). However, growth eased sequentially (1.3% q-o-                                                                                           leifeskesen@hsbc.com.sg
                                                                                    reforms will help support a moderate recovery.
q seasonally adjusted versus 1.4% in Q1).                                                                                                    Prithviraj Srinivas
                                                                                    However, growth will remain below ‘historical            Economics Associate,
Surprisingly, private consumption (4.0% y-o-y
                                                                                    standards’ at 5.7% in 2012/13 before recovering          Bangalore
versus 6.1% in Q1) slowed, while government
                                                                                    to 6.9% in 2013/14.
consumption was brisk (9.0% y-o-y versus 4.1% in
Q1). Investment growth remained lacklustre (0.7%                                    WPI inflation remains above 7%, and the new CPI
y-o-y versus 3.6% in Q1), partly due to base effects,                               shows even higher inflation. Inflation remains
and net exports were a drag on growth. However, a                                   high due to the weaker exchange rate and tight
large statistical discrepancy suggests caution is                                   capacity. In coming months, inflation is expected
needed in interpreting the demand-side components.                                  to rise due to the diesel price hike, and as deficient
                                                                                    monsoons pushes up food prices.
High-frequency indicators point to broadly steady
growth so far during Q3 2012. However, there has                                    We do not expect progress on fiscal consolidation
been divergence between sectors. While HSBC’s                                       despite the recent hikes in subsidised diesel prices,
PMI for the services sector has shown a pick-up in                                  unless additional savings are identified. This
activity and credit growth is holding up, the                                       leaves little room for the RBI to cut policy rates.
manufacturing PMI and official industrial                                           The room is also limited due to the upside risks to
production data indicate that growth in the goods                                   inflation, the maturity of the credit cycle, and the
producing industries has continued to be slow.                                      wide current account deficit. Further progress on
This is because the manufacturing sector is more                                    structural reforms is important to alleviate supply
affected by global weakness, power outages, and                                     constraints and re-invigorate investment. Absent
supply side constraints than the services sector.                                   progress, rate cuts would carry the risk of pushing
                                                                                    up inflation while doing little to raise growth.



% Year
                                                                     2008    2009          2010          2011          2012f         2013f
GDP*                                                                   8.2    6.4           8.9            7.5           5.5           6.5
GDP (Financial year)**                                                 6.7    8.4           8.4            6.5           5.7           6.9
Consumer prices**                                                      9.1   12.4          10.4            8.4           9.8           7.8
Current account (% GDP)**                                             -2.5   -1.9          -3.1           -3.3          -3.4          -2.3
Budget balance (% GDP)**                                              -6.0   -6.5          -4.9           -5.8          -5.8          -5.3
Broad money supply**                                                  20.5   19.2          16.2           15.8          12.2          16.1
INR/USD                                                               48.6   46.4          44.7           53.0          52.0          49.0
3-month money** (%)                                                   4.71   3.68          7.19           8.48          7.85          7.60
10-year bond yield** (%)                                              5.30   7.74          7.95           8.55          8.00          7.60
Note: * = Calendar year, ** = Based upon Indian fiscal year (April-March)
Source: CEIC, HSBC estimates




80
    Macro
    Global Economics                                                                                                                                abc
    Q4 2012




  GDP growth picked up in the first quarter of                                       …but is expected to recover only moderately
  FY2012/13...

  % y -o-y contribution                              % y -o-y contribution           Agricultural output is expected to decline in annual terms
  12                                                                    12            in October-December due to the deficient monsoons.
                                            Forecast                                 Industrial production is projected to recover moderately
   9                                                                          9
                                                                                      during the second half of the fiscal year on the back of
   6                                                                          6
                                                                                      global economic stabilisation and some progress on
   3                                                                          3       structural reforms.
   0                                                                          0      Service sector growth is also projected to pick-up pace
                                                                                      during the second half, led by trade-related, financial and
  -3                                                                          -3      community-related services.
        10           11           12          13         14              15
             Agriculture                         Industry
             Serv ices                           GDP grow th % y -o-y

  Source: CEIC, HSBC




  Inflation has held steady in recent months                                         …and core inflation has picked up

        % y -o-y                                                   % y -o-y          Inflation has declined since 2011, but remains high, and
  15                                                                           15     WPI inflation remains above 7%.
                                                                                     Food inflation has picked up in annual terms after base
  10                                                                           10     effects pushed it down earlier in the year. Deficient
                                                                                      monsoons have also added to upward pressures on
    5                                                                          5      food prices.
                                                                               0     Fuel and energy are set to increase further as the
    0
                                                                                      government lifts prices on subsidised diesel to contain
   -5                                                                          -5     the budget deficit.
                                                                                     Given the supply-led slowdown in growth, capacity
        06       07         08         09     10      11           12
                                                                                      remains tight. This is likely to keep core inflation firm.
                 WPI                  WPI:Core             New CPI
  Source: CEIC, HSBC




  While policy rates are expected to be cut                                         …the room for easing is limited
                                                                                     The tightening of monetary policy has helped slow
        %                                             Forecast
                                                                         %            growth and gradually eased inflation.
   10                                                                         10
                                                                                     However, the room to cut rates is limited by the
    5                                                                         5       persistence of inflation, which partly reflects the
                                                                                      increasingly structural nature of inflation due to the slow
    0                                                                         0       progress on supply-side reforms in recent years.
                                                                                     The structural nature of the slowdown in growth and the
   -5                                                                         -5      high level of inflation also imply that premature policy
                                                                                      easing could quickly increase inflation pressures.
  -10                                                                         -10
                                                                                     The scope to ease monetary policy is also limited by the
        05      06     07        08     09    10    11        12        13            wide current account and fiscal deficits.
                 Real policy rate             Nominal policy rate                    As a result, we expect further cuts to the policy rate
                                                                                      totalling only 50 basis points.
Source: CEIC, HSBC estimates




                                                                                                                                                      81
     Macro
     Global Economics                                                                                            abc
     Q4 2012




Hong Kong
Putting up a good fight                                  important employer, providing 15% of jobs.              Donna Kwok
                                                                                                                 Economist, Greater China
                                                         China accounts for half of Hong Kong’s                  The Hongkong and Shanghai
Despite increasing pressures from the troubles in                                                                Banking Corporation Limited
                                                         merchandise exports and a quarter of its services
Europe, and a slow recovery playing out in China,                                                                + 852 2996 6621
                                                         exports. Hong Kong’s domestic economy has               donnahjkwok@hsbc.com.hk
Hong Kong’s domestic markets are standing firm,
                                                         closer interlinkages with the Mainland than other       Danvir Suri
underpinned by continued wage growth. Hong                                                                       Economics Associate,
                                                         countries in Asia have.
Kong’s August PMI expanded again to 50.5 (July:                                                                  Bangalore

50.3); this stood in sharp contrast to China’s           Visitors to Hong Kong from China hit a new high
manufacturing PMI which fell to its lowest since         of 3.3 million in July, but retail sales in the city
March 2009. and Taiwan’s PMI which stayed                grew at their slowest pace in almost three years
below 50 for the second straight month.                  that month. This was probably due to two factors:
                                                         Mainland visitors spending less on high-end
But with fast-cooling eurozone demand holding
                                                         luxury items; and local households starting to rein
back China’s pace of recovery, Hong Kong is
                                                         in spending in response to financial market
inevitably starting to see a ripple effect, first
                                                         turbulence. Expect the resilience of Hong Kong’s
working its way through its trade sectors, and now
                                                         domestic demand to be tested in the coming
through (some) domestic sectors. Hong Kong
                                                         months.
stands to lose not only from a reduction in the
volumes of merchandise and services exports, but
also from fewer retail purchases and a lower level
of investments being made by Mainland visitors.

Trade accounts for around a fifth of Hong Kong’s
overall economy, and is the second most

% Year
                                   2008         2009            2010         2011f         2012f         2013f
Consumer spending                     2.4          0.7           6.7           8.5            5.0          6.1
Government consumption                1.8          2.4           2.8           1.8            2.7          1.9
Fixed investment                      1.0         -3.9           7.7           7.6            3.5          3.7
Stockbuilding (% GDP)                 0.5          1.4           2.2           0.8           -0.0          0.1
Domestic demand                       1.6          0.8           7.5           6.0            3.5          5.3
Exports                               2.6       -10.1           16.7           4.2            1.0         11.9
Imports                               2.3         -9.0          17.3           4.7            1.7         12.1
GDP                                   2.3         -2.6           7.1           5.0            2.0          5.2
Industrial production                -6.7         -8.3           3.5           0.7           -1.4          3.0
Unemployment* (%)                     4.1          5.0           3.9           3.3            3.3          3.3
Retail sales                        10.6           0.6          18.3          24.8          13.7          14.8
Consumer prices                       4.3          0.6           2.3           5.3            5.3          4.8
Goods & services balance (% GDP)        -            -             -             -              -            -
Budget balance (% GDP)                0.1          1.6           4.3           3.9            3.0          4.0
HKD/USD                             7.75         7.75           7.77          7.77          7.80          7.80
3-month money (%)                   2.36         0.45           0.25          0.27          0.40          0.40
Prime rate (%)                     5.313        5.000          5.000         5.000         5.000         5.000
Note: * = average
Source: CEIC, HSBC estimates




82
     Macro
     Global Economics                                                                                                      abc
     Q4 2012




Indonesia
Balancing act                                                cycle, but the question is one of degree, as overly           Su Sian Lim
                                                             loose monetary conditions at home are keeping                 Economist
We maintain our 2012 growth forecast of 6.1%, but                                                                          The Hongkong and Shanghai
                                                             domestic final import demand buoyant.                         Banking Corporation Limited,
have trimmed our 2013 projection to the same level,                                                                        (Singapore)
from 6.3% previously. Although overall growth                Fortunately, BI now recognises the role that its              +65 6658 8783
                                                                                                                           susianlim@hsbc.com..sg
surprised to the upside in H1, net exports are proving       overly accommodative policy has played in
                                                                                                                           Namrata Mittal
to be a greater drag than we had expected. In the first      widening the trade and current account deficits to            Economics Associate, Bangalore
six months alone, net exports deducted 1.3pp from            record levels. As a result, it has used various tools
overall growth of 6.3% – double the drag we had              other than the benchmark policy rate, including
projected for the full year. It now looks as if net          macro-prudential measures in June, and an
exports could subtract nearly 3pp for 2012.                  unexpected 25bp hike in its deposit rate (FASBI) in
                                                             August, to 4% to tighten policy.
Export growth has been soft, and although our
HSBC PMI survey was pointing to a ‘less worse’               This slow and steady approach to tightening is likely
contraction in new export orders in August, other            to continue, with the FASBI lifted every 2-3 months
regional PMIs – particularly in key markets such as          until symmetry in the policy corridor is reached, at
China – still suggest a more pronounced decline lies         4.75% (BI lends at 6.75%). However, this may not
ahead. As it stands, Indonesia’s commodity-heavy             be enough to eradicate a current account deficit that
exports have been underperforming the region since           is also widening on the back of significant outward
August 2011, when Asia’s export cycle last peaked.           income payments. It may also not be enough to cool
                                                             mounting inflationary pressures. There is some risk
By contrast, import growth has been robust this year,
                                                             of a breach in early 2013, amid elevated inflation
spurred initially by local demand for raw materials
                                                             expectations and rapid credit growth.
and, more recently, capital goods. Import growth is
now also starting to soften in line with the external

% Year
                                       2008          2009           2010           2011          2012f         2013f
Consumer spending                        5.3           4.9            4.7            4.7           5.0               5.0
Government consumption                  10.4          15.7            0.3            3.2           5.8               5.6
Fixed investment                        11.9           3.3            8.5            8.8         11.7                9.7
Stockbuilding (% GDP)                    0.1          -0.1            0.5            0.9           2.4               1.4
Domestic demand                          7.6           5.2            5.9            6.2           8.7               5.3
Exports                                  9.5          -9.7          15.3           13.6            0.3               1.5
Imports                                 10.0         -15.0          17.3           13.3            7.9               4.3
GDP                                      6.0           4.6            6.2            6.5           6.1               6.1
Industrial production                    3.7           2.2            4.7            6.2           5.4               6.2
Unemployment (%)*                        8.4           7.9            7.1            6.6           6.0               5.7
Consumer prices                          9.8           4.8            5.1            5.4           4.6               5.6
Current account (% GDP)                  0.0           2.0            0.7            0.2          -2.8              -1.7
Budget balance (% GDP)                  -0.1          -1.6           -0.7           -1.2          -2.4              -1.8
IDR/USD                               11027          9425           9010           9068          9800              9600
3-month money (%)*                      12.1           7.1            6.6            5.3           4.9               5.7
Note: * = end period
Source: CEIC, HSBC estimates




                                                                                                                                                  83
     Macro
     Global Economics                                                                                                  abc
     Q4 2012




Malaysia
Politics muddies the waters                                Leading indicators, such as our regional PMIs, point        Su Sian Lim
                                                                                                                       Economist
                                                           to a more pronounced weakening in global demand             The Hongkong and Shanghai
We are raising our full-year growth forecast for 2012
                                                           ahead. Our Asian Electronics Lead Indicator also            Banking Corporation Limited,
again, after momentum surprised in H1. We now                                                                          (Singapore)
                                                           suggests that electronics, which account for over           +65 6658 8783
look for growth of 5.2%, up from 4.2% previously.                                                                      susianlim@hsbc.com.sg
                                                           one-third of Malaysia’s exports, are particularly
The upside surprise in H1 stemmed from domestic                                                                        Namrata Mittal
                                                           vulnerable.                                                 Economics Associate, Bangalore
demand, which added nearly 10pp to overall growth
                                                           Despite above-trend growth since Q4 2011, inflation
of 5.1% y-o-y, significantly offsetting the drag from
                                                           remains low and benign, thanks in part to price
net exports. This large domestic buffer should
                                                           controls and subsidies. This should prompt the BNM
continue to help temper the impact of an
                                                           to keep rates on hold for at least for the remainder of
increasingly negative contribution from net exports
                                                           2012. In 2013, however, it may start tightening at the
(particularly in H2 2012), ensuring a moderate rather
                                                           earliest opportunity, as housing prices and household
than sharp slowdown in sequential growth in the
                                                           debt levels are still high.
next few quarters.
                                                           Beyond this sweet mix of robust growth and low
For the remainder of 2012, we expect consumption
                                                           inflation, however, political uncertainty is starting to
to continue to benefit from pre-election government
                                                           muddy the waters. A general election must be called
handouts, and a relatively tight labour market.
                                                           before March 2013, and the most likely window
Meanwhile the ongoing rollout of two long-term
                                                           appears to be after the 2013 budget announcement
development projects – the Economic and
                                                           on 28 September. Polls are currently indicating only
Government Transformation Projects – should keep
                                                           a narrow victory for the ruling party, leading to
public and private investment at robust levels.
                                                           concerns that fiscal and governance reforms might
By contrast, net exports are likely to continue to         be slowed/reversed.
subtract from overall growth at least until Q2 2013.

% Year
                                     2008          2009           2010           2011           2012f          2013f
Consumer spending                      8.7           0.6            6.6            7.1            8.4            6.8
Government consumption                 6.9           4.9            2.9           16.1            5.2            5.3
Fixed investment                       2.4          -2.7           10.4            6.5           23.4            9.4
Stockbuilding (% GDP)                  0.2          -1.4            1.2            0.5            0.5           -0.6
Domestic demand                        6.4          -1.6           10.4            7.3           11.9            6.2
Exports                                1.6         -10.9           11.3            4.2            0.8            1.0
Imports                                2.3         -12.7           15.6            6.2            6.8            2.3
GDP                                    4.8          -1.5            7.2            5.1            5.2            4.7
Industrial production                  0.8          -7.6            7.2            1.2            3.1            0.3
Unemployment (%)*                      3.1           3.5            3.2            3.0            3.0            3.1
Consumer prices                        5.4           0.6            1.7            3.2            1.6            1.5
Current account (% GDP)               17.1          15.5           11.1           11.0            4.8            4.3
Budget balance (% GDP)                -4.6          -6.7           -5.4           -4.8           -4.8           -4.5
MYR/USD                               3.46          3.42           3.08           3.17           3.10           3.00
3-month interbank rate (%)*           3.37          2.17           2.98           3.22           3.20           3.70
Note: *end-period
Source: CEIC, HSBC estimates




84
     Macro
     Global Economics                                                                                                   abc
     Q4 2012




Philippines
Finishing strong                                            a slowdown in the growth of exports and                     Trinh Nguyen
                                                                                                                        Economist
                                                            remittances. However, fiscal spending has remained          The Hongkong and Shanghai
Globally few economies have seen growth that have                                                                       Banking Corporation Limited, (HK)
                                                            strong and is likely to accelerate further in Q4 2012.      + 852 2822 2956
surprised on the upside recently but the Philippines’
                                                            So far, the deficit is smaller than the projected deficit   trinhdnguyen@hsbc.com.hk
was a pleasant exception in Q2. The economy
                                                            of PHP279.1bn for 2012, so the government has
expanded by a robust 5.9% y-o-y in Q2, making H1
                                                            plenty of room to speed up expenditure.
2012 growth 6.1%. The country has remained
                                                            Remittances, while likely to decelerate slightly in
resilient to global pressures due to timely fiscal and
                                                            Q3, should still hold up thanks to their resilient
monetary policy adjustments, as well as resilient
                                                            nature. We expect inflows to expand by 5% in 2012.
remittances.
                                                            Headline inflation managed to stay at the bottom of
Private consumption accelerated as a result of
                                                            the BSP’s target in the H1 thanks to low food and
supportive monetary policy – interest rates were at a
                                                            energy prices. Core inflation, however, remained
record low 4.0% in H1. Rates were cut once again in
                                                            elevated as the recent rise in oil prices, domestic
July to a historic low of 3.75% to further stimulate
                                                            electricity hikes and short-term supply shocks
growth as well as stem inflows. The business process
                                                            pushed inflation higher. Consequently, the window
outsourcing (BPO) sector also kept exports of goods
                                                            for cutting rates closed in August when inflation
and services growing, as many firms in developed
                                                            jumped to the middle of the BSP's 3-5% target
economies are turning to the Philippines’ top-ranked
                                                            range. Monetary officials have been ahead of the
voice services to reduce costs.
                                                            curve by making timely policy adjustments to
Looking ahead, we expect Q4 2012 to be a relatively         counter the global slump. We expect the BSP to hold
strong quarter, despite global pressures; external          rates steady for the rest of the year.
demand remains a challenge, and there is likely to be



% Year
                                       2008          2009           2010           2011          2012f          2013f
Consumer spending                       3.7           2.3            3.4            6.3            5.2            5.1
Government consumption                  0.3          10.9            4.0            1.0            9.6            6.7
Fixed investment                        3.2          -1.7           19.1            0.2            5.6            4.3
Stockbuilding (% GDP)                  -0.5          -1.8            0.0            1.6           -0.3           -0.3
Domestic demand                         6.6           1.1            8.2            4.5            5.7            5.1
Exports                                -2.7          -7.8           21.0           -4.2            8.4            5.4
Imports                                 1.6          -8.1           22.5            0.2            3.5            4.2
GDP                                     4.2           1.1            7.6            3.9            5.7            5.7
Industrial production                   4.3          -4.8           11.2            4.7            5.5            7.5
Unemployment (%)*                       7.7           7.3            7.4            7.2            6.9            6.9
Consumer prices                         8.2           4.2            3.8            4.7            3.4            4.9
Current account (% GDP)                 2.1           5.6            4.5            3.2            4.4            3.4
Budget balance (% GDP)                 -0.9          -3.7           -3.5           -2.0           -2.4           -2.3
PHP/USD                                47.5          46.5           43.6           43.8           41.4           41.0
3-month money (%)                       5.6           4.2            3.6            1.4            2.7            4.1
Note: * = average
Source: CEIC,HSBC estimates




                                                                                                                                                85
     Macro
     Global Economics                                                                                              abc
     Q4 2012




Singapore
Feeling the global pinch                                  Despite slower growth, inflation remains high and        Leif Eskesen
                                                                                                                   Economist
                                                          persistent. This was initially attributable to rising    The Hongkong and Shanghai
GDP growth rose to 2.0% y-o-y in Q2 2012 (versus
                                                          housing costs and policy-engineered increases in car     Banking Corporation Limited
1.5% in Q1 2012), but contracted on a seasonally                                                                   (Singapore)
                                                          prices. However, inflation is relatively broad-based     +65 6658 8962
adjusted sequential basis (-0.2% q-o-q versus 2.3%                                                                 leifeskesen@hsbc.com.hk
                                                          owing to tight labour markets. Moreover, the
in Q1 2012). Private consumption (1.8% y-o-y                                                                       Prithviraj Srinivas
                                                          second-order impact of rising input costs, including
versus 4.7% in Q1) and fixed investment (1.8% y-o-                                                                 Economics Associate
                                                          from higher foreign worker levies and high oil           Bangalore
y versus 17% in Q1) slowed, partly due to base
                                                          prices, have added to the mix. While the slower pace
effects. Public consumption (-0.9% y-o-y versus -
                                                          of growth will help ease inflation, we expect it to
4.1% in Q1) and net exports contributed negatively
                                                          decline only gradually.
to growth, but less than in Q1.
                                                          With the global economic outlook still faced with
We expect growth in Singapore’s high-beta
                                                          downside risks and inflation persistent, the Monetary
economy to remain moderate in the coming quarters,
                                                          Authority of Singapore (MAS) has to walk a
constrained by weak global economic conditions.
                                                          tightrope. In our central scenario of a mild recession
While private consumption growth is likely to find
                                                          in the eurozone, the MAS is likely to maintain a tight
some support from the still favourable labour market
                                                          monetary policy stance, although it now probably
conditions, consumers are likely to exercise more
                                                          accepts somewhat higher inflation on the back of the
caution. Moreover, wage growth has eased.
                                                          tight supply of housing, cars and labour. However, if
Investment and export growth will also be hampered
                                                          downside risks to Europe materialise – and quickly –
by the weakening global trade cycle. In light of the
                                                          it may need to change tack and ease monetary
more protracted global economic recovery, we have
                                                          policy.
cut our growth forecast for 2012 to 2.2% (from
2.6%) and for 2013 to 4.3% (4.8%).


% Year
                                     2008         2009           2010          2011          2012f         2013f
Consumer spending                     3.3           0.1           6.5            4.1           2.6           4.3
Government consumption                6.4           3.6          11.0            0.9          -0.3           3.2
Fixed investment                     13.0          -2.9           7.0            3.3           5.7           3.9
Stockbuilding (% GDP)                 2.4          -2.6          -2.7           -1.3           0.7           0.5
Domestic demand                      11.6          -7.0           6.9            5.4           6.3           3.7
Exports                               4.7          -7.8          19.1            2.6           2.2           8.6
Imports                               9.5         -11.1          16.2            2.4           3.6           9.1
GDP                                   1.7          -1.0          14.8            5.0           2.2           4.3
Industrial production                -4.2          -4.2          29.7            7.8           3.0           3.8
Unemployment (%)*                     2.7           2.3           2.2            2.0           2.1           2.0
Consumer prices                       6.6           0.6           2.8            5.2           4.4           2.9
Current account (% GDP)              13.9          16.2          24.4           21.9          17.4          20.2
Budget balance (% GDP)                1.5          -1.0           0.2            1.3           0.4           0.7
SGD/USD                              1.43          1.41          1.28           1.30          1.23          1.19
3-month money (%)*                   0.96          0.68          0.44           0.39          0.35          0.30
10-year bond yield (%)*              2.05          2.66          1.80           1.40          1.50          1.60
Note: * = end-period
Source: CEIC, HSBC estimates




86
     Macro
     Global Economics                                                                                                  abc
     Q4 2012




South Korea
Stuck in the mud                                             limited for two reasons. First, the funding will come     Ronald Man
                                                                                                                       Economist
                                                             from the existing budget, and so these measures do        The Hongkong and Shanghai
As a country that is trade-dependent, Korea
                                                             not represent new spending. Second, the cost as a         Banking Corporation Limited,
cannot keep growing more rapidly when global                                                                           (HK)
                                                             proportion of the 2012 budget is small.                   +852 2996 6743
growth slows. Exports have started to contract                                                                         ronaldman@hsbc.com.hk
                                                             Consequently, fiscal support is unlikely to lift
after staying flat in H1 2012, although the drop is
                                                             growth in the remainder of this year meaningfully.
not as sharp as in 2009. Korean manufacturers are
still waiting for a Chinese-led recovery, which is           A shift of the Bank of Korea’s stance from inflation
taking longer than expected to arrive, and this              to growth was clear following its surprise rate cut in
poses downside risks to our growth forecasts.                July and its latest press releases. Governor Kim said
                                                             that the central bank will play an “active role” in
A fall in exports also slows down domestic
                                                             supporting the economy, which we believe may be a
activity. Inventory levels remain relatively high,
                                                             prelude to further monetary easing.
signalling excess supply. This has depressed
business sentiment to a three-year low, prompting            Headline CPI dipped to a 12-year low, providing
companies to push back investment. Private                   room for the central bank to cut rates. However,
consumption, too, was constrained by high rents              price pressures will build quickly due to higher food
and interest repayments on household debt.                   and commodity prices, given the country’s low self-
                                                             sufficiency. A low base effect is also set to push up
In September, the government announced more
                                                             inflation readings. Therefore, the current easing
economic support measures to sustain consumption,
                                                             cycle is likely to be less aggressive than the one
building on earlier measures announced in June. We
                                                             following the outbreak of the global financial crisis.
believe the impact of these new measures will be


% Year
                                     2008            2009           2010           2011         2012f          2013f
Consumer spending                      1.3            -0.0            4.4            2.3          1.7            2.4
Government consumption                 4.3             5.6            2.9            2.1           3.6           2.2
Fixed investment                      -1.9            -1.0            5.8           -1.1          1.4            2.1
Stockbuilding (% GDP)                  1.3            -1.7           -0.3            0.4          0.2           -0.0
Domestic demand                        1.4            -2.7            6.2            2.0          1.7            2.1
Exports                                6.6            -1.2          14.7             9.5          3.5            9.8
Imports                                4.4            -8.0          17.3             6.5          1.6            7.1
GDP                                    2.3             0.3            6.3            3.6           2.6           3.8
Industrial production                  3.3            -0.7          16.6             6.9          2.7            5.8
Unemployment (%)                       3.2             3.7            3.7            3.4           3.4           3.3
Retail sales                           6.8             4.0            9.6            8.4          3.9            6.1
Consumer prices                        4.7             2.8            2.9            4.0           2.2           3.5
Current account (% GDP)                0.3             3.9            2.9            2.4          2.5            2.1
Budget balance (% GDP)                 1.3            -2.1            1.6            1.7           1.7           1.1
KRW/USD                              1263            1166           1121           1159          1120          1080
3-month CD yield (%)**                 5.5             2.6            2.7            3.4          3.4            3.3
5-year treasury yield*                 3.8             4.9            4.1            3.5          2.9            3.7
Note: *=Period-end; ** = average
Source: CEIC, HSBC estimates




                                                                                                                                             87
     Macro
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Taiwan
Best line of defence                                        price and inflation pressures bubbling beneath the        Donna Kwok
                                                                                                                      Economist
                                                            surface, an already negative real interest rate and       The Hongkong and Shanghai
The global trade cycle is unlikely to recover any                                                                     Banking Corporation Limited
                                                            still loose liquidity conditions, we think the
time soon – hence the government’s recent                                                                             + 852 2996 6621
                                                            deterioration in Taiwan’s growth outlook isn’t            donnahjkwok@hsbc.com.hk
downgrade of its 2012 GDP forecast to 1.7% from
                                                            severe enough to push its central bank into risking       Danvir Suri
2.1%. Nevertheless, policymakers still expect                                                                         Economics Associate,
                                                            a rate cut just yet.                                      Bangalore
GDP to expand in both Q3 and Q4, suggesting
that they, like us, think Taiwan's domestic                 We expect the recent pick-up in announcements of
economy is stronger than when the last rate cut             new fiscal support programmes to continue in the
cycle kicked off in late 2008.                              coming months (a TWD10bn or USD333m support
                                                            plan for traditional industries including tourism was
From both a monetary and fiscal perspective, we
                                                            announced in early September). We also expect
believe there’s wiggle room. The policy rate is not
                                                            other monetary tools, such as a reduction in
at a record low, so there’s still room to cut. And
                                                            issuance of certificates of deposits or further cuts to
although Taiwan’s budget deficit has worsened
                                                            the overnight rate, to be used to buffer Taiwan’s
since 2007, its fiscal health is better than in the
                                                            economy from the impact of slower trade flows. We
late 1990s, and better than its regional peers, such
                                                            retain our call for the Central Bank of the Republic
as Malaysia or Thailand.
                                                            of China (Taiwan) to keep rates on hold through Q4
But would a rate cut really help, given how loose           2012, and for GDP to grow by 1.3% this year,
monetary conditions are already? Money market               although with risks to the downside. A gradual rates
rates are still far below the policy rate, so there’s       normalisation process should resume in early 2013,
no guarantee they will fall further with the policy         once global trade flows have found a firmer footing.
rate if that were cut. Moreover, given property


% Year
                                      2008          2009           2010          2011f         2012f          2013f
Consumer spending                      -0.9           0.8           3.7            3.0           2.5            5.0
Government consumption                  0.8           4.0           0.6            1.9           3.2            1.7
Fixed investment                      -12.4         -11.2          24.0           -3.9          -2.7            2.7
Stockbuilding (% GDP)                   1.0          -1.0           1.0            0.2           0.4            0.6
Domestic demand                        -2.4          -3.7           9.8            0.3           1.7            4.3
Exports                                 0.9          -8.7          25.6            4.5          -5.4            9.5
Imports                                -3.7         -13.1          28.2           -0.7          -7.0            9.2
GDP                                     0.7          -1.8          10.7            4.0           1.3            5.4
Industrial production                  -1.8          -8.1          26.9            5.0          -3.0            8.5
Unemployment (%)*                       4.1           5.8           5.2            4.4           4.3            4.3
Consumer prices                         3.5          -0.9           1.0            1.4           2.0            2.0
Current account (% GDP)                 6.9          11.4           9.3            8.9           9.0            8.2
Budget balance (% GDP)                 -0.5          -3.5          -2.3           -1.9          -2.4           -1.6
TWD/USD                                32.9          32.1          30.4           30.3          29.4           28.6
3-month CD (%)                          2.1           0.5           0.6            0.9           0.9            1.2
Policy rate (%)                        2.00          1.25          1.63           1.88          1.88           2.38
Note: * = average
Source: CEIC, HSBC estimates




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Thailand
Impressive momentum                                         will be cut a further 3pp. Meanwhile, consumer             Su Sian Lim
                                                            spending remains well-supported by rising wages.           Economist
Our concerns about a sharp fade-out in the post-                                                                       The Hongkong and Shanghai
                                                            Aside from hikes in the minimum wage and civil             Banking Corporation Limited,
flood recovery have proven to be unfounded. After                                                                      +65 6658 8783
                                                            service pay, labour market tightness is also keeping       susianlim@hsbc.com.sg
surging nearly 11% q-o-q (sa) in Q1 2012, growth
                                                            incomes up. Next year, the near-40% increase in the
remained exceptionally strong in Q2, at over 3% q-                                                                     Namrata Mittal
                                                            minimum wage will be rolled out across the                 Economics Associate,
o-q (4.2% y-o-y), as domestic demand helped to                                                                         Bangalore
                                                            remaining 70 provinces. The government’s rice
more than offset a decline in net exports. Following
                                                            mortgage scheme is also set to run until July 2013,
the out-turn, we have raised our 2012 forecast to
                                                            providing ongoing support to rural incomes.
6.3%, from 5.5% previously. 2013 remains in line
with our earlier projection, at 4.5%.                       In addition, fiscal efforts are likely to be ramped up
                                                            in the coming quarters, as flood-related delays in
Domestic demand will inevitably return to more
                                                            budgetary expenditure this fiscal year (ending
‘normal’ levels, but it should nonetheless continue to
                                                            September 2012) have led to under-spending.
cushion the economy against a more pronounced
downturn in external demand. We have therefore              Against this backdrop, we see BOT’s dovish rhetoric
pencilled in slower sequential growth in the coming         as reflecting necessary policy prudence, rather than
quarters, with activity bottoming-out at a slightly         translating into actual rate cuts. Unless external
sub-trend pace of 0.6% q-o-q (sa) in Q1 2013 before         developments deviate significantly below the central
stepping up again, in line with a global recovery.          bank’s assumptions and/or start to infect domestic
                                                            activity, the chances are that it will leave rates
Some flattening-out in private investment activity is
                                                            unchanged this year.
now evident, but business confidence remains high
and stable. And no wonder: the corporate tax was
slashed 7pp this year to 23%, and next year taxes

% Year
                                      2008          2009           2010           2011          2012f          2013f
Consumer spending                      2.9           -1.1            4.8           1.3            6.1            4.6
Government consumption                 3.2            7.5            6.4           1.1            6.9            6.4
Fixed investment                       1.2           -9.2            9.4           3.3           13.5            7.8
Stockbuilding (% GDP)                  1.6           -2.4            0.8           0.2            2.5            2.6
Domestic demand                        4.3           -6.9           10.3           1.0           11.1            5.7
Exports                                5.1          -12.5           14.7           9.5            0.7            3.8
Imports                                8.9          -21.5           21.5          13.7            6.9            5.6
GDP                                    2.5           -2.3            7.8           0.1            6.3            4.5
Industrial production                  3.9           -7.2           14.3          -9.3            2.6            3.5
Unemployment (%)                       1.4            0.9            0.7           0.4            0.8            0.7
Consumer prices                        5.5           -0.8            3.3           3.8            3.2            4.0
Current account (% GDP)                0.6            6.1            3.3           1.3           -0.9            2.9
Budget balance (% GDP)                -1.9           -3.8           -0.9          -1.9           -4.0           -2.8
THB/USD                               34.9           33.3           30.1          31.6           30.9           30.0
3-month interbank rate (%)            2.95           1.35           2.15          3.22           3.10           4.10
Note: * = Period-end
Source: CEIC, HSBC estimates




                                                                                                                                              89
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Vietnam
Preparing for a rebound                                                                                       Consequently, year-to-date credit growth is still                                                    Trinh Nguyen
                                                                                                                                                                                                                   Economist
                                                                                                              significantly below target, and barely exceeds 1%.                                                   The Hong Kong and Shanghai
For many close observers of Vietnam, the recent                                                                                                                                                                    Banking Corporation Limited, (HK)
slowdown is not cause for concern but rather reason                                                           The timing of Vietnam’s deleveraging process                                                         + 852 2996 6975
                                                                                                                                                                                                                   Trinhdnguyen@hsbc.com.hk
for optimism. The government has shown that it is                                                             could be better: the eurozone is contracting, US
willing to sacrifice rapid growth for macroeconomic                                                           recovery is sluggish, and even China, the world’s
stability. Inflation has slowed to a single-digit rate                                                        largest growth engine, is slowing due to the global
and will likely stay there. Foreign reserves have                                                             slump and a confluence of domestic factors (high
climbed to help Vietnam offset risk. The VND has                                                              debt levels and lower consumption). The recent
stabilised, increasing the State Bank of Vietnam’s                                                            PMI reading reflects this, contracting for a fifth
credibility and showing its commitment to long-                                                               straight month. But what is positive is that the
term stability.                                                                                               contraction was much shallower in August. Most
                                                                                                              importantly, Vietnam retains its bright spots.
But this has come at a cost: growth slowed to less
                                                                                                              Exports have slowed, but still grew at a double-digit
than 5% in H1 2012, significantly below Vietnam’s
                                                                                                              rate in the year to date.
long-term trend of 7.1%. This was mainly because
of weak domestic demand, caused by consumers’                                                                 With inflation slowing but still elevated, the SBV
and corporations’ diminished appetite for                                                                     will keep rates steady for the rest of the year. It is
consumption. The real estate sector, in particular, is                                                        committed to price stability. The focus of the central
hard-hit by the drop in demand, leaving many office                                                           bank will be on how to clean up Vietnam’s bad
buildings vacant in major cities. Lending rates have                                                          debts in the banking system. The earlier it speeds up
remained high, reflecting the high risk attached to                                                           reform to do so, as well as improve the performance
loans. Many borrowers are either reluctant to take                                                            of SOEs, the more quickly the economy will
on addition debt, trying to deleverage, or lack the                                                           recover.
collateral to acquire much-needed loans.

% Year
                                                                       2008                       2009                      2010                       2011                     2012f                      2013f
Consumer spending                                                        9.3                       3.1                       10.0                       4.4                        4.2                       5.0
Government consumption                                                   7.5                       7.6                       12.3                       7.2                        5.0                       3.0
Fixed investment                                                         3.8                       8.7                       10.9                     -10.4                        2.0                       4.3
Exports - Goods                                                         29.1                      -8.9                       26.5                      34.2                       15.9                      19.8
Imports - Goods                                                         28.6                     -13.3                       21.3                      25.8                        7.6                      22.9
GDP                                                                      6.3                       5.3                        6.8                       5.9                        5.0                       5.3
Industrial production*                                                  14.6                       7.6                       14.0                         -                          -                         -
Unemployment (%)                                                         4.7                       4.6                        4.3                       4.5                        4.6                       4.4
Consumer prices                                                         23.1                       7.0                        9.2                      18.6                        8.6                       8.4
Current account (% GDP)                                                -11.8                      -6.3                       -3.6                       0.1                        0.7                      -2.5
Budget balance (% GDP)                                                  -0.5                      -7.2                       -5.2                      -2.7                       -3.6                      -2.6
VND/USD                                                               16900                     18200                      19498                     21037                      21500                     21500
Policy rate (OMO) (%)                                                   9.00                      8.00                      10.00                     14.00                       8.00                     10.00
5-year interest rate (%)**                                             10.00                     11.70                      11.50                     12.60                          -                         -
Note: *Due to the discontinuation of the old series, which measured year to date industrial production (IP), and the introduction of the new series, which has data from 2008 and uses an index , we do not feel
that we have enough historical data to forecast IP using the new series, ** = As at year-end
Source: CEIC, HSBC estimates




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Notes




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Notes




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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Stephen King, Karen Ward, Madhur Jha, Janet Henry, Lothar
Hessler, Mathilde Lemoine, Ryan Wang, Hongbin Qu, Frederic Neumann, Alexander Morozov, Murat Ulgen, Javier Finkman,
Jorge Morgenstern, Andre Loes, Stefan Schilbe, Rainer Sartoris, Sergio Martin, Jun Wei Sun, Kevin Logan, Simon Williams,
Donna Kwok, Constantin Jancso, Paul Bloxham, Melis Metiner, Elizabeth Martins, John Zhu, Artem Biryukov, Leif Eskesen,
Claudia Navarrete, Francois Letondu, Agata Urbanska, Simon Wells, David Watt, Su Sian Lim, Izumi Devalier, Trinh
Nguyen, Ronald Man, Ramiro Blazquez, Lorena Dominguez, Xiaoping Ma, Sabrina Andrade and Luke Hartigan

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Additional disclosures
1     This report is dated as at 27 September 2012.
2     All market data included in this report are dated as at close 26 September 2012, unless otherwise indicated in the report.
3     HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
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94
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    Q4 2012




Disclaimer
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                                                                                                                                                                 [344290]




                                                                                                                                                                            95
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Global Economics Research Team
Global                                                Global Emerging Markets
Stephen King                                          Pablo Goldberg
Global Head of Economics                              Head of Global EM Research
+44 20 7991 6700    stephen.king@hsbcib.com           +1 212 525 8729     pablo.a.goldberg@hsbc.com

Karen Ward                                            Bertrand Delgado
Senior Global Economist                               EM Strategist
+44 20 7991 3692   karen.ward@hsbcib.com              +1 212 525 0745     bertrand.j.delgado@us.hsbc.com
Madhur Jha                                            Emerging Europe and Sub-Saharan Africa
+44 20 7991 6755    madhur.jha@hsbcib.com
                                                      Murat Ulgen
                                                      Chief Economist, Central & Eastern Europe and sub-
Europe & United Kingdom                               Saharan Africa
Janet Henry                                           +44 20 7991 6782    muratulgen@hsbc.com
Chief European Economist                              Alexander Morozov
+44 20 7991 6711   janet.henry@hsbcib.com             Chief Economist, Russia and CIS
Simon Wells                                           +7 495 783 8855     alexander.morozov@hsbc.com
Chief UK Economist                                    Artem Biryukov
+44 20 7991 6718   simon.wells@hsbcib.com             Economist, Russia and CIS
Astrid Schilo                                         +7 495 721 1515     artem.biryukov@hsbc.com
+44 20 7991 6708    astrid.schilo@hsbcib.com          Agata Urbanska
John Zhu                                              Economist, CEE
+44 20 7991 2170    john.zhu@hsbcib.com               +44 20 7992 2774    agata.urbanska@hsbcib.com

Germany                                               Melis Metiner
Stefan Schilbe                                        Economist, Turkey
+49 211910 3137     stefan.schilbe@hsbc.de            +90 212 376 4618    melismetiner@hsbc.com.tr

France                                                Middle East and North Africa
Mathilde Lemoine
                                                      Simon Williams
+33 1 4070 3266     mathilde.lemoine@hsbc.fr
                                                      Chief Economist
                                                      +971 4 423 6925     simon.williams@hsbc.com
North America
                                                      Liz Martins
Kevin Logan                                           Senior Economist
Chief US Economist                                    +971 4 423 6928     liz.martins@hsbc.com
+1 212 525 3195    kevin.r.logan@us.hsbc.com
                                                      Latin America
Ryan Wang
+1 212 525 3181     ryan.wang@us.hsbc.com             Andre Loes
                                                      Chief Economist, Latin America
David G Watt                                          +55 11 3371 8184     andre.a.loes@hsbc.com.br
+1 416 868 8130     david.g.watt@hsbc.ca
                                                      Argentina
Asia Pacific                                          Javier Finkman
                                                      Chief Economist, South America ex-Brazil
Qu Hongbin                                            +54 11 4344 8144    javier.finkman@hsbc.com.ar
Managing Director, Co-head Asian Economics Research
and Chief Economist Greater China                     Ramiro D Blazquez
+852 2822 2025      hongbinqu@hsbc.com.hk             Senior Economist
                                                      +54 11 4348 5759    ramiro.blazquez@hsbc.com.ar
Frederic Neumann
Managing Director, Co-head Asian Economics Research   Jorge Morgenstern
+852 2822 4556      fredericneumann@hsbc.com.hk       Senior Economist
                                                      +54 11 4130 9229    jorge.morgenstern@hsbc.com.ar
Leif Eskesen
Chief Economist, India & ASEAN                        Brazil
+65 6658 8962        leifeskesen@hsbc.com.sg          Constantin Jancso
                                                      Senior Economist
Paul Bloxham                                          +55 11 3371 8183    constantin.c.jancso@hsbc.com.br
Chief Economist, Australia and New Zealand
+61 2925 52635      paulbloxham@hsbc.com.au           Mexico
                                                      Sergio Martin
Donna Kwok                                            Chief Economist
+852 2996 6621      donnahjkwok@hsbc.com.hk           +52 55 5721 2164    sergio.martinm@hsbc.com.mx
Trinh Nguyen                                          Claudia Navarrete
+852 2996 6975      trinhdnguyen@hsbc.com.hk          Economist
                                                      +52 55 5721 2422    claudia.navarrete@hsbc.com.mx
Ronald Man
+852 2996 6743      ronaldman@hsbc.com.hk             Central America
                                                      Lorena Dominguez
Luke Hartigan
                                                      Economist
+612 9255 2635      lukehartigan@hsbc.com.au
                                                      +52 55 5721 2172    lorena.dominguez@hsbc.com.mx
Sun Junwei
+86 10 5999 8234    junweisun@hsbc.com.cn
Sophia Ma
+86 10 5999 8232    xiaopingma@hsbc.com.cn
Su Sian Lim
+65 6658 8963       susianlim@hsbc.com.sg
Izumi Devalier
+852 2822 1647      izumidevalier@hsbc.com.hk

96
Principal contributors

            Stephen King
            Chief Economist
            HSBC Bank plc
            +44 20 7991 6700
            stephen.king@hsbcib.com

            Stephen is the HSBC Group’s Global Head of Economics and Asset Allocation research. He joined the company
            in 1988, having previously worked as an economic adviser at the UK Treasury. Stephen is a regular economics
            commentator on television and radio and frequently writes columns for the Financial Times and The Times.
            Stephen’s first book, Losing Control: the Emerging Threats to Western Prosperity is now available from Yale
            University Press.


            Karen Ward
            Senior Global Economist
            HSBC Bank plc
            +44 20 7991 3692
            karen.ward@hsbcib.com

            Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with
            responsibility for monitoring challenges facing the global economy and their implications for financial markets.
            Before joining HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the
            Monetary Policy Committee. She has an MSc Economics from University College London.


            Madhur Jha
            Global Economist
            HSBC Bank plc
            +44 20 7991 6755
            madhur.jha@hsbcib.com

            Madhur is HSBC's Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA
            markets. She has gained experience in emerging markets economics research from her stints as Fixed income/FX
            strategist at a leading research consultancy in London and at the largest private sector bank in India, where she
            also worked in FX derivative sales.

				
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posted:10/24/2012
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Description: Blocked economic arteries in the developed world... ...thanks to a deteriorating “supply-side” performance... ...suggest that traditional pump-priming will have only a limited effect... ...leaving recovery in the balance and world trade on its knees