BNP Paribas - Macro Matters by riteshbhansali


The contrast between the resilient consumption data in the US and the weaker Q1 GDP data in the eurozone was one of
last week’s main macro themes, as was the slowdown in inflation around the globe.

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									                                                         MARKET ECONOMICS | GLOBAL WEEKLY

                                                              Macro Matters
                                                                               Issue 32, 16 May 2013

THE BIG PICTURE                                                                                                                             2-3
The contrast between the resilient consumption data in the US and the weaker Q1 GDP data in the eurozone was one of
last week’s main macro themes, as was the slowdown in inflation around the globe.

THEMES OF THE WEEK                                                                                                                      4-16
ECB: Negative vibes                                                                                                                         4-5
A negative deposit rate seems an increasing possibility for the ECB. It has disadvantages, but the core countries would
probably prefer it to balance-sheet expansion.
Germany: The Japan effect                                                                                                                   6-7
The JPY’s 3.9% weighting in Germany’s nominal effective exchange rate is relatively small. The yen’s depreciation will
only bring the German NEER back to its long-term average.
UK and France: In the balance                                                                                                               8-9
The French current account is on a deteriorating trend, but still a bit better than the UK’s. The UK private sector is running
a more favourable cashflow than that of France, but the French fiscal position is far stronger than the UK’s.
US: Fiscal gain and pain                                                                                                              10-11
The US federal deficit is now projected to be just 4.2% of GDP in FY2013. Bigger revenues and GSE windfall are putting
off the day of reckoning on the debt ceiling. Negotiations on the next debt ceiling and FY2014 budget are likely to coincide.
Japan: Will there ever be an exit from QE?                                                                                            12-13
Even if Japan’s 2% inflation target is easily achieved, the BoJ may not be able to end its ZIRP or its JGB purchases out of
concern over the impact on the government’s finances.
China: From the outside                                                                                                               14-15
Australia, South Korea and Taiwan are heavily exposed to developments in China. Their economic performance
contains information about China’s. The overwhelming evidence is that China has slowed sharply since end 2012.
Chile: Cutting time cometh                                                                                                                  16
We now expect two 25bp cuts in the Chilean policy rate in July and August. Inflation is below the IT band floor and
growth is slowing to near-trend pace. The risk of overheating that has kept the central bank on hold has diminished.

DATES AND DATA                                                                                                                     17-32

One-week calendar           17-19                   Economic forecasts                    29                      Contacts           31

Key data preview            20-25                   Recently published research           30                      Disclaimer         32

Central bank watch          26-28

                                Please refer to important information at the end of the report.
The big picture
Mixed data on activity …             The contrast between the resilient consumption data in the US and the weaker Q1 GDP data in
                                     the eurozone was one of last week’s main macro themes. Combined with noise from the press
                                     and hawkish remarks by Philadelphia Fed President Charles Plosser, the US data helped revive
                                     the debate on the timing of a Fed exit from quantitative easing. Conversely, the eurozone GDP
                                     figures fuelled the debate on the need for additional monetary easing by the ECB.
… but inflation is trending          US manufacturing indicators were less encouraging, however, showing the manufacturing sector
lower                                in modest contraction, while inflation continues to slow; inflation in April fell to 1.1% y/y from 1.5%.
                                     In this context, concerns over an imminent tapering of bond purchases by the Fed are overdone,
                                     in our opinion, and we are sticking with our view that a slowdown in the pace of bond purchases
                                     will be announced only in December, to start next year.
                                     Yet, the market reaction to Jon Hilsenrath’s piece in the Wall Street Journal over the weekend,
                                     which focused on the Fed’s need to keep flexibility to alter its monthly pace of purchases as it sees
                                     fit, highlights how tricky it will be for the Fed to manage the exit and how important an effective
                                     communications strategy will be in this phase. Next week will see Fed communications in action,
                                     with a Tuesday speech from New York Fed President William Dudley, testimony before the
                                     Congressional Joint Economic Committee on the economic outlook from Fed Chairman Ben
                                     Bernanke on Wednesday, along with the minutes of the May FOMC meeting. We expect all to
                                     emphasise that an eventual tapering is not a tightening of policy, in the Fed’s view, rather a
                                     slowing of easing. Any talk of tapering may well spook markets – flows matter.
A deposit rate until an
Fed to stay putcut is the            In the eurozone, GDP data for Q1 came in on the weak side of expectations. Adverse weather
end of the year
increasing possibility               conditions probably played a role, exacerbating the already sluggish underlying trend in domestic
                                     demand. The problem, however, is that typically reliable leading indicators point to more of the
                                     same in Q2. The flash PMIs and the German Ifo for May next week are unlikely to change this
                                     picture; we expect both indicators to be broadly in line with their April reading, consistent with a
                                     continued contraction in euro-area GDP. The risk to the already grim 0.5% decline in GDP that we
                                     have been forecasting for 2012 as a whole is very much to the downside.
                                     Combined with lower-than-expected inflation, these trends will increase the pressure on the ECB
                                     to ease monetary conditions. The route of more unconventional monetary-policy measures in the
                                     form of ABS-based support for SMEs, hinted at by ECB chief Mario Draghi at the last ECB press
                                     conference, may prove challenging. Direct purchases would leave the ECB’s balance sheet
                                     vulnerable to credit risk and probably face vetoes by a number of influential members of the board.
                                     Other alternatives, like the direct involvement of the EIB, are more likely, but not free of problems.
                                     Against this backdrop, we continue to expect another cut in the ECB’s refinancing rate at the July
                                     meeting. A negative deposit rate also looks an increasing possibility. While such a course of action
                                     would have microeconomic disadvantages for many core countries, it may still be preferable to
                                     balance-sheet expansion as a macroeconomic tool.
                                     Developments on inflation hold the key to ECB policy. The sharp deceleration of inflation in April
                                     was instrumental in the decision to cut rates at the May meeting. We expect inflation to rebound

                 Chart 1: Eurozone HICP (% y/y)                                              Chart 2: Manufacturing PMIs

Source: Reuters Ecowin Pro, BNP Paribas                                    Source: Reuters Ecowin Pro, BNP Paribas

Luigi Speranza                                                                                                                           16 May 2013
Macro Matters                                                          2                                   
                              over the next few months, as some of the temporary effects at play in April related to the timing of
                              Easter, such as the sharp fall in recreation and culture prices in Germany, fade. However, it should
                              resume its downward trend later on in the year, reaching 1% in the autumn.
BoJ to front-load JGB         In Japan, real GDP expanded a robust 3.5% q/q in Q1, thanks, among other things, to the wealth
purchases?                    effect arising from the surge in stock prices, although a jump in the import bill caused by the sharp
                              depreciation of the yen meant that real national income growth was much more modest.
                              Meanwhile, with the yen breaching the 100 mark against the greenback, volatility in the JGB
                              market has increased. The BoJ’s intervention restored market calm, but it will likely remain jittery
                              amid reduced liquidity. Should bond yields start surging again, the BoJ may decide to significantly
                              front-load its planned JGB purchases.
UK: The last King speech      In the UK, as one would expect, BoE Governor Mervyn King’s last press conference was a holding
                              operation. The bank revised up its growth forecasts moderately, but lowered its inflation forecasts
                              a little. The former underpins the ‘wait-and-see’ stance adopted by the MPC, while the latter
                              leaves BoE Governor-in-waiting Mark Carney some room for manoeuvre. The decisions the MPC
                              will make on guidance and how to interpret the word “flexible” in “flexible inflation targeting” will be
                              key in shaping the BoE’s monetary policy stance under Mr Carney. Perhaps significantly, the
                              “GDP deflator” was mentioned for the first time in several years at the press conference, indicative
                              perhaps of more weight on this in future analysis under Mr Carney, if not targeting.
China: Stronger credit, but   Chinese data continue to show measures of activity underperforming while credit growth is
slower GDP growth             ballooning. Total social financing was RMB 250bn stronger than consensus in April, when the
                              seasonal pattern alone would have suggested some downside risk and activity data were
                              generally below expectations. China’s leadership has highlighted downside risks to growth, but
                              has opted to rely on market liberalisation to boost private-sector activity, which may take longer to
                              bear fruit than traditional stimulus.
                              The upcoming release of the HSBC/Markit manufacturing PMI merits close attention. We expect
                              the headline index to edge down to 50.2 from 50.4. However, the key is the new-orders-less-
                              inventories balance, which leads a number of indicators, not only in China, but elsewhere in the
                              region. This could improve on the month, as inventories are already close to a record low and
                              should soon start to recede. If they rise further, it would be a bearish signal for near-term growth.
China weakness affecting      Weakness in China is affecting the likes of Australia, Korea and Taiwan, too. Taiwanese GDP fell
Australia, Korea, Taiwan      0.8% q/q in Q1. Next week’s expenditure breakdown should show weak exports were partly to
                              blame, in large part due to faltering demand in mainland China; exports there have fallen 14% in
                              USD terms since end 2012.

                              Elsewhere in the region, Indian WPI inflation continues to improve more quickly than expected.
                              Persistently weak growth is dragging down core inflation and, on our measure, is at a 40-month
                              low. However, with CPI inflation still close to the double digits, inflation expectations uncomfortably
                              high and a wide current-account deficit that needs funding, the RBI is likely to be cautious about
                              easing policy at this stage.
More rate cuts to come in     In CEEMEA, with the notable exception of Hungary, where the rebound in Q1 GDP signalled that
CEEMEA                        the macroeconomic rebalancing is probably over, Q1 activity data were generally on the weak
                              side, underlining the scope for further monetary easing after the recent 50bp rate cut from the
Brazil: Strong inflationary   In Latam, conditions for rate cuts are gradually falling into place in both Mexico and Chile, as
pressures                     weaker US demand for manufactured products weighs on Mexican growth and softer copper
                              prices hurt the Chilean economy. Mexico is likely to report deflation for the first two weeks of May,
                              supporting our view that annual inflation peaked in April and will fall below the 4% tolerance
                              threshold in July. In contrast, strong inflation pressures have forced Brazil to start hiking rates
                              already and we think there is more to come on the back of what we expect to be relatively strong
                              Q1 GDP data.

Luigi Speranza                                                                                                            16 May 2013
Macro Matters                                                   3                           
ECB: Negative vibes
                               A negative deposit rate seems an increasing possibility for the ECB. It has disadvantages,
                               but the core eurozone countries would probably prefer it to balance-sheet expansion.
                               Lower-than-expected inflation and growth are upping the pressure on the ECB to deliver easier
                               monetary conditions. A mildly negative deposit rate may be preferable to the alternatives.
                               If it comes, the timing will be difficult to predict. The evolution of the bloc’s inflation data will
                               be key, but tactical considerations, such as the German elections, make things tricky.
                               If a negative depo rate were to be delivered, it could come as soon as July (when we see a refi
                               rate cut).
                               An alternative, were it to materialise, would be to wait until near year-end for a two-step cut of
                               25bp, first in the refi and then the depo rate.

Negative ECB deposit rate   The subject of a negative ECB deposit rate has come back on the agenda recently. ECB chief
back on the agenda          Mario Draghi stoked speculation at last week’s press conference that such a move could be
                            made when he said, “on the deposit facility rate, we said it in the past: we are technically ready.
                            There are several unintended consequences that may stem from this measure. We will address
                            and cope with these consequences if we decide to act. We will look at this with an open mind
                            and we stand ready to act if needed.”

                            This is a very different tone to that in March, when he was asked about the possibility of a
                            negative deposit rate. “The unintended consequences of a measure like that can be serious, as
                            similar experiences in other monetary jurisdictions have shown,” he said. “I think in the past I
                            have described this as ‘uncharted waters’, which is all I can say on the matter.”
Growth and inflation are    Why the change in tone? The main reason, we believe, is that it looks like the ECB will, again
lower than expected         have to put back its estimate of when the economy will stabilise before embarking on a slow
                            recovery. Secondly, and importantly, inflation has turned out lower than expected, with the 1.2%
                            y/y rise in April a negative shock. While the low number had to do in part with seasonality and
                            the timing of Easter, it looks like inflation is coming in lower than expected. And because of
                            base effects in the second half of the year, the possibility of inflation going below 1% cannot be
                            discounted. This would clearly be in breach of the ECB’s mandate to keep inflation below, but
                            close to, 2%. Thirdly, the refi rate has been cut to 50bp and the economy looks like it needs
                            further stimulus. The ECB has four choices:

                               Don’t cut rates or, indeed, do anything at all.
                               Don’t cut rates, but deliver unconventional easing in the form of, say, a five-year LTRO or a
                               large ABS programme.
                               Cut the refi rate and narrow the corridor between the refi and the depo rates to 25bp.
                               Cut both the refi and depo rates by 25bp each, maintaining the corridor.
                            Increasingly, with a weak economy, political disquiet over the lack of growth and rising
                            unemployment and subdued inflation, doing nothing is not an option.
Unconventional easing       Unconventional easing would tackle the issue of the transmission mechanism in the south of the
could be problematic        bloc and would, therefore, probably meet with the favour of several peripheral central banks. It
                            could, however, be subject to heavy criticism in Germany and other core countries. Our
                            perception is that while the ECB might engage in repo activity in ABS, it is not willing to take the
                            first loss on SME debt. Repo activity with, say, the EIB (which has a banking licence) would be
                            more likely, but could be slow to start and grow – the economy needs more than that.
Outrights in ABS would be   Undertaking outrights in ABS would be difficult for the ECB for two further reasons. First, it lacks
difficult for the ECB       the expertise to assess the assets wrapped in the ABS; the risk is that banks would give it
                            lemons. Second, ECB outrights in ABS have run into opposition in Germany and the ECB would
                            probably want to avoid stirring this pot when the German Constitutional Court is already about
                            to embark on considering the legality of the OMT bond-buying programme.

Paul Mortimer-Lee                                                                                                       16 May 2013
Macro Matters                                                4                            
Narrowing the corridor        Narrowing the corridor between the refi rate and the repo rate is, of course, possible, but the
could be difficult, too       ECB is uncomfortable already with effectively being the central counterparty in the money
                              market. Narrowing the corridor would entrench this and would work against its objective of
                              overcoming the fragmentation of the monetary union in recent years.
A negative deposit rate       Therefore, while a negative deposit rate would have some adverse consequences, some would
may be the least bad option   argue that it could be the least bad option from the ECB’s point of view, if further easing were
                              needed. The ECB has implemented many measures in the past that it had not undertaken
                              before and which had adverse side effects (such as the OMT and moral hazard), but it has
                              weighed the pros and cons of the alternatives and has taken steps people would not have
                              thought possible only a short time ago.
There are issues with a       What are the unintended consequences? We have examined these in depth before (please see
negative deposit rate         ECB: The negative rates debate, 18 July 2012) and the ECB has also commented, so we will
                              only briefly run through the issues:

                                 A negative deposit rate may discourage banks from competing for deposits and may lead to
                                 cash leaving bank deposits and heading under the mattress. Credit growth could be worsened.
                                 We think this would be a possibility if deposit rates were to become significantly negative, but
                                 we doubt that charging banks 25bp on excess deposits would be enough to overcome the
                                 convenience and time-saving advantages of holding a bank deposit.
                                 Banks’ net interest-rate margins might be hurt, so they might reduce credit availability or raise
                                 rates (BoE Governor Sir Mervyn King cited such considerations as being behind his opposition
                                 to a negative deposit rate in the UK). The risks of this could be mitigated, e.g. by mopping-up
                                 operations or charging -25bp only on excess reserves over a certain size.
                                 There would be distributional consequences, hurting most those banks with excess deposits
                                 (in Germany, for example) and so stoking political opposition. The perception that savers were
                                 being penalised could be a problem politically, too, especially ahead of the German election.
                                 A negative deposit rate could be seen as ‘financial repression’. Arguably, this kicks in when
                                 interest rates turn negative in real terms, not at zero.
                                 Technical difficulties, such as bank software not being able to cope with negative rates, have
                                 faded as an objection with time and programme updates.
                              There are also advantages to take into account: lower rates for borrowers and a boost to activity
There are also advantages,    from the declining incentive to save. The exchange rate would end up softer. There would be an
though                        incentive to put money to work that is currently locked up in banks. There would be an
                              intensification of the search for yield, likely leading to further spread narrowing. Finally, taking
                              such a step would symbolise the ECB’s determination to stick to its inflation target and to
                              stimulate growth.
                              Overall, we think that the advantages exceed the disadvantages. The uncertainty is whether
Not clear if the ECB will     such an opinion will emerge at the ECB, too. We think the northern eurozone objectors to
cut the deposit rate          further easing could adopt the view that this is the least bad alternative and that the southerners
                              who might prefer balance-sheet action could come to accept that this is unlikely at this stage.
                              In terms of which way the decision goes, and of the timing, the economic data will be important,
We see a 25bp refi rate cut   especially inflation data in the next couple of months. A bounce back in inflation to around 1½%
in July                       would reduce the need for a further cut quickly, while failure to bounce would signal increased
                              downside risk to inflation and would accelerate the timetable and increase the chances of a
                              negative deposit rate. Money-market considerations – the need to reintegrate the eurozone –
                              argue for cutting the depo at the same time as the refi. We expect a refi cut in July and will
                              consider our depo-rate view in the light of our upcoming forecast round.
                              However, is riling the German electorate a risk worth taking if the same job can be
We think any depo rate cut    accomplished in a two-step move? This would argue for cutting the refi in July, but leaving the
would be after a refi cut     depo unchanged until later in the year. As inflation is probably going to be 1% at that point, and
                              maybe below, ‘selling’ the negative depo rate as a response to low inflation rather than a cause
                              of high inflation would be easier. If a negative deposit rate comes, it will probably not be a
                              unanimous decision.

Paul Mortimer-Lee                                                                                                       16 May 2013
Macro Matters                                                 5                           
Germany: The Japan effect
                                          The JPY’s 3.9% weighting in Germany’s nominal effective exchange rate (NEER) is relatively
                                          small. The yen’s depreciation will only bring the German NEER back to its long-term average.

                                          The 2002-07 episode of JPY depreciation against the EUR did not lead to German export-
                                          market losses. While Japanese exporters squeezed mark-ups, the Germans did not.
                                          The two countries’ production specialisation looks similar at an aggregate level. But past
                                          experience suggests specialisation has made demand for German exports less elastic.
                                          Increases in German unit labour costs and slower global growth, especially in motor-vehicle
                                          demand, pose greater risks to German exporters than yen depreciation.

                                     How much should German exporters fear JPY depreciation? Potentially less than some
                                     commentators assume. They are competitive and well positioned in export growth markets,
                                     including the US and China. The risk to their business stems more from structural issues, such
                                     as domestic competitive loss and demand growth, than the exchange rate.
JPY weighting in German              The most direct effect of JPY depreciation will come via Germany’s nominal effective exchange
NEER is relatively small             rate (NEER), in which the JPY has a weighting of 3.9% (ECB index). Exports to and imports
                                     from Japan only account for 1.5% and 2.4% of total German trade, respectively. The EUR, in
                                     contrast, has a weighting of 48% of Germany’s NEER, while the weighting of the USD is 8.7%,
                                     6.7% for the GBP and 9.7% for the RMB. According to our FX forecasts, JPY depreciation will
                                     bring EURJPY from its current level of around 130 to a peak of EURJPY 141 in Q1 2014. This
                                     means that the JPY will remain relatively expensive and that EURJPY will stay well below pre-
                                     financial-crisis levels, when the JPY was so cheap that EURJPY hovered around 170. And even
                                     at that time, German exporters recorded slightly stronger growth than their Japanese peers.
JPY depreciation will not            The JPY is only one of 20 currencies in the German NEER and taking all of our FX forecasts
bring it back to 2007 levels         into account, the bulk of NEER appreciation from a German perspective has already happened.
                                     Since last August, it has appreciated 3.2% and there is only another 1% to come. Overall, then,
                                     we do not only expect the bilateral EURJPY rate to remain below previous levels, but it will also
                                     leave the NEER very close to its long-term average, rather than fuel hefty appreciation. Based
                                     on our export elasticity estimate of 0.2, the effect on German export growth in excess of what
                                     we have already included in our 2.1% annual export growth forecast this year should be limited.
German export shares not             Japan has similar export elasticity to its exchange rate, but is still less successful in holding onto
JPY sensitive                        export market share. Even during the JPY depreciation of 2002-07, Japan’s share of world
                                     exports fell from some 7½% to 5% (and 4½% now), although in addition to the depreciation, unit
                                     labour costs were cut by some 14%. Its terms of trade, a comparison of export to import prices,
                                     deteriorated by more than 25% over the same period. Meanwhile, Germany increased its export
                                     market share from 8½% in 2000 to 9½% in 2007 (7½% now), while the NEER appreciated and
                                     unit labour costs were only cut by a cumulative 3%. It benefited from broadly unchanged terms

            Chart 1: Exchange-rate developments                                        Chart 2: Shares of world exports (%)

Source: Reuters Ecowin Pro, BNP Paribas                                   Source: Reuters Ecowin Pro, BNP Paribas

Evelyn Herrmann                                                                                                                         16 May 2013
Macro Matters                                                         6                                   
                                     of trade, giving German exporters the luxury of passing on import price changes to their export
                                     prices without affecting mark-ups. Chinese and US market shares tell the same story. In 2000,
                                     12% of US imports came from Japan. By 2012, that share had fallen to 6.4%. Germany’s share
                                     of US imports, meanwhile, hovered around a stable 4.7%. Japan also failed to hold onto its
                                     market share in booming China. Japan had tripled the share of its exports to China from 2000,
                                     but still lost nearly 50% of its share of Chinese imports to now just under 10%. German
                                     products, meanwhile, now account for 5.1% of all Chinese imports, up from 1.6% in 2000.
German share of Asia                 Put another way, Germany, as a regional outsider, successfully managed to integrate its Asian
bigger than Japan’s of EU            trading markets, while Japan never really made its way into Germany’s geographic neighbours.
                                     Even if Japanese exporters now stand ready to compete for German export market share with a
                                     weaker currency, German exporters are also prepared with ‘real hedges’. They have increased
                                     production in the US and China, allowing them to ‘price to market’ and thereby exchange-rate
                                     fluctuations. FX moves will only affect German profits once they are repatriated into EUR. So
                                     far, however, Germany’s balance-of-payments income account has remained very resilient to
                                     exchange-rate fluctuations, growing steadily to EUR 6.2bn in February 2012, around EUR 1.5bn
                                     more than in 2013.
Export mixes similar, but            Can price competition make the difference, then, or is the product mix different? The export mix
differences in the detail            looks fairly similar from a macro perspective. Motor vehicles account for 17.3% of German
                                     exports compared with 19.5% in Japan. Machinery accounts for 14.9% of German exports
                                     compared with 17.9% in Japan. Chemical products account for 9.5% of German exports and for
                                     10% of Japan’s, while electrical machinery in the broader sense makes up some 14% of
                                     German exports and 18% of Japan’s. In both countries, these four product classes, alone,
                                     account for well over half of total exports. However, macro-level similarities are often quite
                                     different at the very micro-level. When Japanese production suffered a shut-down after the
                                     Fukushima disaster, German exporters did not benefit from any more export growth than others.
                                     This suggests that that Germany’s export products are, indeed, different to Japan’s and not
                                     easily substitutable from a consumer perspective.
Motor vehicles one of the            Can we conclude the same for demand for cars, which are a key product to German domestic
most important markets               and international trade growth? More than 50% of the total German trade surplus (7% of GDP)
                                     is generated by its automobile industry. Japan runs a trade deficit of nearly 1½% of GDP, but
                                     the auto trade still posts a 1.7%-of-GDP surplus (see Chart 2). The German Automotive
                                     Industry Association (VDA) says that German car exporters do not need to fear exchange-rate
                                     movements or loss of market share in the US or China, its two key growth markets, because
                                     vehicle production, again, is already half-relocated abroad and demand is inelastic.
More risk from labour                Competitiveness losses through the exchange rate should, therefore, remain limited for German
costs and global demand              exporters. Other export growth determinants are more of a concern at this stage. Domestic unit
                                     labour costs are currently rising quite rapidly (and the metal labour union just settled on a 3.4%
                                     pay rise for 3.4 million employees from 1 July), affecting export competitiveness, potentially by
                                     more than the exchange rate. The other is demand. Slow global growth is limiting the scope for
                                     German export growth and, so far, the global manufacturing cycle is failing to show the rebound
                                     we were hoping for.

    Table 1: German and Japanese export markets (%)                         Chart 3: German and Japan trade balance (% of GDP)
                   Share of      Share of  German       Japanese
2012 data          German       Japanese import share import share
                   exports       exports   of total      of total
France                 9.5          0.8         0.2        0.0
US                     7.9         17.6         4.7        6.4
UK                     6.6          1.7        12.5        1.7
Netherlands            6.5          2.0        13.9        2.5
China                  6.1         18.1         5.1        9.8
Austria                5.2          0.1        42.1        0.6
Italy                  5.1          0.5        15.7        0.9
Switzerland            4.4          0.5        29.7        2.2
Belgium                4.1          0.8        14.2        1.9
Poland                 3.8          0.2        27.3        0.6
Total                 59.3         42.3
Source: Reuters Ecowin Pro, BNP Paribas                                  Source: Reuters Ecowin Pro, BNP Paribas

Evelyn Herrmann                                                                                                                        16 May 2013
Macro Matters                                                        7                                   
UK and France: In the balance
                                      The French current account is on a deteriorating trend, but is still a bit better than in the UK.
                                      The UK private sector is running a more favourable cashflow than that of France, reflecting
                                      greater retrenchment after earlier excesses.

                                      The French fiscal position is far stronger than the UK’s. OECD figures challenge the popular
                                      view that the UK is relatively more austere than France.

                                   This is an abbreviated version of a report of the same name, also published 16 May 2013.
Comparing balances                 We are often asked to make comparisons between the UK and France. In UK and France: A
                                   tale of two labour markets on 25 April, we looked at how their GDP growth and labour-market
                                   performance compared. In this article, we look at how the various sectoral balances compare.
                                   First, let’s look at the public-sector balances. Here, France has clearly performed better than the
                                   UK in recent years. Prior to the great financial crisis, their public-sector balances were very
                                   similar. In 2007, the French deficit was 2.7% of GDP, while the UK the deficit was 2.8% of GDP.
The UK has more to do on           The UK suffered a worse recession than France. Between 2007 and the worst year, 2009, the
its deficit than France            French deficit expanded by some 5pp of GDP, the UK’s by over 8pp. 2010 saw the deficits edge
                                   down in both countries, to 7.1% of GDP in France and to 10.1% of GDP in the UK. In 2011, the
                                   deficits in both countries improved by about 2pp to 5.2% of GDP in France and 8.3% of GDP in
                                   the UK. 2012 was an election year in France and the deficit came down from 5.2% to 4.5% of
                                   GDP, less than half the improvement seen in the UK, where the deficit shrank to 6.6% of GDP.
UK structural deficit is big       While the UK underwent a sharper recession than France (Chart 1), its structural budget deficit
                                   is also larger. This was not at all the case in 2005, when the UK had a structural primary deficit

                    Chart 1: UK vs. French GDP                                         Chart 2: UK vs. French budget deficit

Source: Reuters Ecowin Pro, OECD                                       Source: Reuters Ecowin Pro, OECD

           Chart 3: UK vs. French government debt                             Chart 4: UK vs. French debt issuance (% of GDP)
                                                                                Ma tu rin g d eb t
                                                                                Bu d g et D e ficit
                                                                         18     Tota l fin a n cin g n e e d









                                                                                UK                Fra nce      UK   Fra n ce   UK      Fran ce

Source: Reuters Ecowin Pro                                             Source: Reuters Ecowin Pro

Paul Mortimer-Lee                                                                                                                        16 May 2013
Macro Matters                                                      8                                      
                                     of 1.1% of GDP, according to the OECD, compared with a structural gap of 1.7% of GDP in
                                     France. Prior to the financial crisis, there was a loosening in the UK relative to France. By 2007,
                                     the UK‘s primary structural deficit was 2.6% of GDP, while France’s stayed flat at 1.7%.
Financial crisis hit UK              From 2007 to 2009, the UK’s structural primary deficit ratio rose by 4.7pp to 7.3% of GDP. The
harder than France                   increase in France was 2pp less, going from 1.7% of GDP in 2007 to 4.4% of GDP in 2009.
                                     Compared with the high points in 2009, by 2012, the French structural primary deficit ratio had
                                     shrunk by 3.7pp to 0.7% of GDP in 2012. The UK had trimmed its figure by 2.7% of GDP and in
                                     2012 had a structural primary deficit of 4.6% of GDP, that is, worse than France at its worst.
UK gross funding need                The UK’s steeper recession and poorer underlying fiscal performance have both contributed to
lower than France                    its inferior headline deficit. The consequence has been a very sharp worsening of the debt-to-
                                     GDP ratio in the UK relative to France (Chart 3). In 2007, OECD figures show that the ratio of
                                     government gross financial liabilities to GDP was 73% in France compared with 47% in the UK.
                                     By 2012, both were registering ratios of 105% of GDP. Despite its bigger budget deficit (and
                                     larger net funding need), the UK’s gross funding need, as a percentage of GDP, is lower than
                                     France’s, due to its much lower volume of maturing debt (Chart 4). This results from a lower
                                     level of debt in 2007 and a longer average maturity.
UK public-sector losing is
France has been deficit              The UK traditionally has posted a worse current-account position than France (Chart 5). At the
larger                               start of the millennium, France’s current account-to-GDP ratio was about 5pp better than that of
                                     the UK. However, while the UK’s deficit is showing no real trend, the same cannot be said of
                                     France; its deficit has been deteriorating. By 2012, the gap was only 1pp.
French private-sector                In any economy, all the various sectoral financial surpluses and deficits should sum to zero. It
surplus has declined                 follows that if we know the budget deficit and the current account position, we can work out the
                                     private sector’s surplus or deficit. Chart 6 shows the private-sector financial surpluses and
                                     deficits in the UK and France. The French private-sector surplus shrank prior to the global
                                     financial crisis and then rose sharply. The surplus has declined in the last three years.
UK private-sector balance            The private-sector balance of the UK has been more variable. In the run-up to the financial
more variable                        crisis, it was far lower than in France. This shows greater financial excesses in the UK. When
                                     the crisis came, the retrenchment in the UK was, therefore, much sharper than in France,
                                     leading to a deeper recession in the UK and a bigger deterioration in the budget.
In terms of debt-to-GDP,             In terms of surpluses and deficits, which country is in the best position? In public debt-to-GDP
there is little between them         terms, there is not a lot between them. In terms of the current account, the adverse trend in
                                     France is of concern, but its present position is still better. If we look at the private sector’s net
                                     cashflow, it is almost the same in France and the UK, though the UK just edges it.
France scores higher on              So, in the UK, the private sector and the overseas sector both have slightly bigger surpluses
the fiscal front                     than in France. One is good (bigger private-sector surplus), the other bad (bigger current-
                                     account deficit), so they net out. Where France scores is fiscally. It is clear that France, with its
                                     much lower primary structural deficit, is in the better position of the two countries.

           Chart 5: UK vs. French current account                                Chart 6: UK vs. French private-sector balance

Source: Reuters Ecowin Pro, BNP Paribas                                   Source: Reuters Ecowin Pro, BNP Paribas

Paul Mortimer-Lee                                                                                                                       16 May 2013
Macro Matters                                                         9                                   
US: Fiscal gain and pain
                                              The Federal deficit is now projected to be just 4.2% of GDP in FY 2013.

                                              Stronger revenues and GSE windfall push off the day of reckoning on the debt ceiling.

                                              Negotiations over the next debt ceiling and FY 2014 budget are likely to coincide.

Lower deficits                         The CBO released a bombshell of an update to its budget projections on Tuesday. Their FY 2013
                                       budget forecast was revised to reflect stronger revenues and nearly a USD 100bn transfer from
                                       the government-owned mortgage giants Fannie Mae and Freddie Mac. The CBO’s projected
                                       deficit dropped USD 203bn to just USD 642bn, or 4.0% of GDP for FY 2013, with the federal
                                       government’s debt-to-GDP ratio ending the CBO’s 10yr window at 73.6% -- 3.4pp lower than the
                                       CBO’s February estimate. Some of the revenue pop is a pull forward of taxes as households
                                       realize taxable events in the 2012 tax year in order to avoid higher, marginal tax rates effective
                                       beginning in 2013. We are less optimistic that the strength will persist and look for lower revenues
                                       than the CBO projects this fiscal year. Thus, we expect a slightly larger deficit of 4.2% in FY 2013,
                                       still a massive 2.8pp improvement from the FY 2012 deficit, and noticeably better than our
                                       previous estimate of 5.5%. Beyond the budgetary outlook, we will hit the expiration of the debt
                                       ceiling suspension this weekend, and the Treasury is expected to implement its extraordinary cash
                                       management measures and bide some time for Congress to pass a new limit.

                                       In the midst of ongoing budget and debt ceiling negotiations, the political infighting is only getting
Damage control…
                                       worse. The mishandling of the Benghazi attack, the IRS discrimination against conservative
                                       groups and the Justice Department’s seizure of Associated Press telephone records have all
                                       shifted the president’s priorities to damage control. We interpret this to mean that Republicans will
…not budget control                    be less willing to compromise if they see that their chances of gaining seats is improving. We
                                       expect more of the same: no grand bargain, no tax overhaul, no entitlement reform and very few
                                       tweaks to current law as we ride out the current spending resolution until the end of the fiscal year.

                                       The details of the CBO’s latest projections for revenues include a USD 105bn increase in FY 2013
Revenues and GSEs
reduce FY 2013 deficit                 and another USD 95bn over the following 10 years. The 2013 increase was a result of some high-
                                       income taxpayers locking in 2012 tax rates in anticipation higher, future tax rates as well as
                                       “reasons not related to changes in tax provisions.” On the outlays side, FY 2013 savings came
                                       from a USD 95bn transfer from Fannie Mae and Freddie Mac. For the 2014-23 period, the CBO
                                       reduced expected entitlement spending across the board with Social Security outlays cut by USD
                                       86bn, Medicare cut by USD 85bn and Medicaid cut by USD 77bn, the result of a reduction in the
                                       number of expected beneficiaries and lower medical costs. In addition, the CBO cut its projection
                                       for net interest costs by USD 193bn during 2013-23, as a result of the smaller deficits.

         Table 1: Federal budget outlooks (% of GDP)                                       Chart 2: Revenues vs expenditures (% of GDP)
                                     2011      2012 2013(1) 2014(1) 2015(1)
BNP Paribas                                                                         26                                                             Forecast -->
 Surplus(+)/Deficit(-)                 -8.7     -7.0      -4.2   -4.2   -3.7        24
 Primary Surplus(+)/Deficit(-)         -7.2     -5.6      -2.8   -2.8   -2.2
   Revenues                            15.4     15.8      17.4   17.9   19.0        22
   Spending                            24.1     22.8      21.6   22.1   22.7                                          Expenditures
 Nominal GDP (FY Growth)                4.0      4.1       3.4    3.9    4.0        20
 Debt to GDP                           67.8     72.5      74.6   76.0   76.8
CBO Baseline
 Surplus(+)/Deficit(-)                 -8.7     -7.0      -4.0   -3.4   -2.2        16
 Primary Surplus(+)/Deficit(-)         -7.2     -5.6      -2.6   -1.9   -0.7                                          Revenues
   Revenues                            15.4     15.8      17.5   18.2   19.6
   Spending                            24.1     22.8      21.5   21.6   21.7        12
 Nominal GDP (FY Growth)                4.0      4.1       3.1    3.8    5.9         Q2 1992 Q2 1995 Q2 1998 Q2 2001 Q2 2004 Q2 2007 Q2 2010 Q2 2013
 Debt to GDP                           67.8     72.5      74.9   75.9   75.7
Source: Haver Analytics, CBO, BNP Paribas; (1) forecast                             Source: Reuters Ecowin Pro, BNP Paribas

Bricklin Dwyer                                                                                                                                    16 May 2013
Macro Matters                                                                  10                                   
4.2% FY 2013 deficit                      Our expectations for the federal government’s deficit are a little less sanguine than the CBO’s. As
                                          noted above, we anticipate a slightly weaker pace of revenues in the remainder of the year. The
                                          CBO assumes current law, which means that it expects the full impact of the next tranches of
                                          Sequester budget cuts that will come into effect after 2013, whereas we assume some of the
                                          impact will be dialled back as was the case this year. Similarly the CBO does not include the
                                          extension of the Medicare fix that Congress has repeatedly extended. On the other hand, the CBO
                                          does not factor in the planned reduction of troops in Iraq and Afghanistan, which will lead to a
                                          lower path of defence spending. On balance, we look for somewhat more spending and larger
                                          deficits than the CBO projects.

                                          Over the forecast horizon, a structural imbalance remains between revenues and expenditures
Structrual imbalances
remain                                    that illustrates why entitlement spending, which now accounts for 58.2% of government spending,
                                          will have to be dealt with in order to balance the budget. Not much room exists for reducing deficits
                                          when defence spending (which is already being reduced by the Sequester) and net interest
                                          payments (which Congress has no control of) account for another 25.7% of the budget. To
                                          balance the budget over 10 years without touching entitlements or defence spending (again), the
                                          remaining 16.1% of the budget, or 3.9% of GDP in discretionary spending that remains, would
                                          have to be reduced by a staggering 95%.

                                          The smaller projected deficit for 2013 is likely to change little this year in terms of the impact from
Still 1.2pp in fiscal
tightening in 2013                        fiscal tightening on GDP. We currently expect around 1.2pp in fiscal tightening; the profit transfer
                                          from Fannie and Freddie and the bringing forward of tax revenues do not imply less of a drag on
                                          growth. Scheduled budget cuts will still take effect and tax arbitrage still reflects a higher tax
                                          burden, which will weigh on growth.

                                          On 18 May, the suspension of the debt ceiling will expire and it will be reset to reflect the level of
Debt ceiling will reset on
18 May                                    debt outstanding on that day. In order to not breech the new limit, the Treasury has already begun
                                          to implement its “extraordinary” cash management measures in order to avoid a potential default.
                                          With the help from the one-off profits from the GSEs and higher tax revenues mentioned above,
                                          fiscal coffers will be larger than usual and the Treasury will be able to avoid default for a longer
                                          period than usual.
Default day in                            Combined with the roughly USD 230-250bn in traditional extraordinary measures, the roughly
October/November                          USD 100bn from Fannie and Freddie (by October) and the USD 60bn in starting cash, the
                                          Treasury will have close to USD 400bn in additional cash room that is likely to push the
                                          potential default date to October or November, nicely coinciding with a new fiscal year.

Less risk of a downgrade                  It almost goes without saying that the rapid improvement in the US fiscal position pushes back,
                                          if not eliminates the possibility of a further downgrade this year. Moody’s released a note saying
                                          that it is maintaining its negative outlook, but we think it much less likely they will follow through
                                          with a downgrade this year as the real fiscal issues confronting the US are three to five years
                                          down the road.

        Chart 3: Spending share of budget (% of total)                                     Chart 4: Entitlement spending (as % of GDP)

100                   Forecast -->                                               17.0                                                                                  9.5
                                                                                                                                                        Forecast -->
 90                                     Other                                    16.5                                                                                  9.0
                                                                                               Population Aged 65 and Over (% of Total)
 80                                  Net Interest                                16.0
 70                                   Defense                                    15.5
                                                                                 15.0                                                                                  8.0
 50                                                                              14.5          Social Security and Medicare Outlays                                    7.5
                                                                                                       (as % of GDP, RHS)
 40                                                                              14.0                                                                                  7.0
 30                                                                              13.5
                                     Entitlements                                                                                                                      6.5
 20                                                                              13.0
 10                                                                              12.5                                                                                  6.0
  0                                                                              12.0                                                                                  5.5
            2012             2013                   2014       2015                     1987         1992        1997       2002          2007   2012         2017
Source: Reuters Ecowin Pro, BNP Paribas                                         Source: Reuters Ecowin Pro, BNP Paribas

Bricklin Dwyer                                                                                                                                                 16 May 2013
Macro Matters                                                              11                                               
Japan: Will there ever be an exit from QE?
                                      If Japan achieves 2% inflation, the debt-to-GDP ratio may grow at a somewhat slower pace.

                                      The budget deficit, however, will grow at a faster clip, as debt-servicing costs surge on rising
                                      interest rates, resulting in increased JGB issuance to cover the shortfall.

                                      Even if the 2% inflation target is easily achieved, the BoJ may not be able to end its ZIRP or
                                      its JGB purchases out of concern over the impact on the government’s finances.

                                      Whether Japanese monetary policy has succumbed to fiscal dominance, whereby fiscal
                                      conditions dictate any policy exit, will be clear once the 2% inflation target is achieved.

Can there be a smooth exit         As we have argued before, we are concerned that the BoJ’s aggressive easing could lead to an
at 2% inflation?                   asset bubble or uncontrollable yen depreciation. But even if these risks do not materialise, there
                                   is another worry: the BoJ could be prevented from smoothly unwinding its policy once the target
                                   of 2% inflation is achieved, due to concerns that the nation’s fiscal condition could be
                                   aggravated by lifting the zero interest-rate policy (ZIRP) and ending the massive JGB purchases.

Policy rate should climb to        Whether Japan’s fiscal condition is sustainable or not when 2% inflation is achieved will greatly
3% when inflation hits 2%          depend on the level of interest rates. When deflation ends, the economy will likely be
                                   overheating (the current deflationary gap will be replaced by a widening inflationary gap).
                                   Assuming monetary policy is being conducted with price stability as the primary aim, the Taylor
                                   rule dictates that the policy rate should be raised before long to around 3% to reflect inflation
                                   (2%) and the equilibrium real interest rate (roughly 1%). After factoring this in, the long-term rate
                                   should climb above the 3% level on the inclusion of some sort of risk premium.

If the interest rate rises         If the BoJ were to start tightening, it might pull the plug on the overheated economy and trigger
with inflation, the debt           a recession. However, for illustrative purposes, we have conducted a simulation based on an
ratio could improve a bit          optimistic assumption, under which a recession is averted and the long-term rate rises roughly
                                   on a par with inflation. If this were to happen, the debt-to-GDP ratio would improve over a
                                   baseline scenario of continued ZIRP and deflation, as (a) tax receipts would increase as a result
                                   of the bracket creep-induced inflation tax, (b) budgetary outlays would not initially keep pace
                                   with inflation owing to institutional factors like the “macro-slide” mechanism for pensions, and (c)
                                   that government would not immediately roll over all of its debt, so even if the long-term interest
                                   rate were to rise, there would be a time lag before debt-servicing costs were fully impacted.

BoJ’s JGB purchases                Point (c) needs to be treated with caution, though. If we view the government and the BoJ as
shorten the duration of            one entity, the ‘consolidated government’, it is clear that the more government debt the central
state-sector liabilities           bank holds, the smaller the benefit gradual debt refinancing has on curbing the interest burden
                                   becomes. When the BoJ exits its current policy, it is expected to hike the interest rate paid on
                                   excess reserves alongside the policy rate to siphon off liquidity and the result will be an instant
                                   rise in BoJ interest payments. Put differently, when the BoJ purchases huge amounts of long-
                                   term JGBs, the liabilities of the consolidated government are shortened, as long-term JGBs are
                                   converted into reserves with the BoJ, which are short-term liabilities. As a result, when the BoJ
                                   starts to normalise interest rates, the interest-payment burden for the consolidated government
                                   sector rises rapidly. Meanwhile, because the BoJ’s holdings of JGBs were purchased at high
                                   prices and, thus, have low yields, the result is a negative spread that could result in the BoJ
                                   making losses for an extended period. Theoretically, a central bank can operate in capital deficit,
                                   but the BoJ will be unable to make payments to the state as long as these losses continue.

Inflation will not change          As for factors (a) and (b), the impact on reducing the debt ratio will be limited as long as inflation
the path of public debt            remains mild. Moreover, as both represent fiscal tightening in real terms, doubts remains as to
                                   whether they will be tolerated politically in the long run. In any event, the main reason Japan’s
                                   fiscal conditions continue to deteriorate is because the social-welfare systems and the tax
                                   structure have not been overhauled in line with Japan’s changing demographics. So, even if the
                                   long-term rate rises on a par with inflation, improvements in Japan’s fiscal metrics will be limited
                                   and it will be impossible to hide the fact that public debt is on track to explode.

Ryutaro Kono / Hiroshi Shiraishi                                                                                              16 May 2013
Macro Matters                                                      12                           
Japan has been able to                Even so, Japan has so far been able to avert fiscal crisis. And, as indicated above, theoretically,
avert a fiscal crisis, but …          as long as the long-term rate rises commensurate with inflation, the path of the debt-to-GDP
                                      ratio could improve slightly. Therefore, one could argue that the BoJ, if it handles its dialogue
                                      with the market correctly, should be able to unwind its policy without causing any turbulence.

When the nominal interest             However, the reason the severity of Japan’s fiscal plight is not readily apparent today is
rate rises, nominal debt-             because the nominal interest rate is steady at a very low level, with the result that nominal debt-
servicing costs will soar             serving costs are constrained, allowing the authorities to maintain their cap on new JGB
                                      issuance. When the nominal interest rate starts to rise alongside inflation, even if the real
                                      interest rate remains largely unchanged, the resulting rise in annual nominal debt-serving costs
                                      will make the deteriorating fiscal conditions clear for all to see. Even without any increase in
                                      discretionary spending, escalating interest payments will still cause the budget deficit to
                                      snowball. In the bond market, the government will have to automatically increase new JGB
                                      issuance each year to cover the ballooning interest burden. Of course, if those earning this
                                      interest continue to reinvest in JGBs, long-term rates will not spike. But with the situation looking
                                      more and more like a Ponzi scheme and the peace of mind of the BoJ’s regular purchases no
                                      longer in place, funds may stop flowing smoothly into the JGB market.

The collapse of some                  There also is the risk that fall in bond prices triggered by the BoJ’s exit could damage the
financial institutions could          capitalisation of financial institutions and that this, in turn, could destabilise the bond market.
trigger a chain reaction              Our analysis shows that most city and regional banks would not be capital deficient if the long-
                                      term rate climbed to only 3%, but that some financial institutions, which are effectively forced to
                                      maintain huge JGB holdings for regulatory reasons, could face solvency issues. If the
                                      government were to rescue these institutions by injecting capital raised by issuing yet more
                                      JGBs, the result could be a chain reaction linking financial-sector turmoil to a fiscal meltdown.

Fiscal factors will dictate           Even if the target of 2% inflation is realised smoothly, for the BoJ to move to a policy exit, it
the BoJ’s exit strategy               must first be convinced that these risks on the fiscal front will not materialise. This will require
                                      the government to devise a credible plan for fiscal restructuring. Unfortunately, from a political-
                                      economic perspective, it will probably take a crisis to get politicians moving in this regard. To
                                      prevent the long-term rate from climbing, the government is likely to first pressure the BoJ to
                                      maintain ZIRP and its JGB purchasing operations. The BoJ will have to accede to this to stave
                                      off turmoil in the financial sector. In other words, when the inflation target is achieved, the BoJ
                                      will probably face fiscal dominance. At that juncture, the BoJ will effectively have to abandon
                                      inflation targeting. There is, however, a limit on a central bank’s ability to control bond yields
                                      when inflation is on the rise. So, the government will probably have to resort to outright financial
                                      repression, namely, enacting various rules and/or incentives to semi-compel financial
                                      institutions to continue to buy and hold low-yielding government bonds.

Policy off-ramp will not              While merely stoking inflation has only a limited effect on curbing the growth of public debt, the
come, as financial                    impact can be large if the long-term rate can be held down and a negative real interest rate is
repression is likely                  realised. This is something the authorities will soon come to realise. In short, because debt
                                      management will be the most pressing issue, the timing of the BoJ’s policy exit will likely be
                                      determined by progress on lowering the public debt. Even if inflation tops 2%, the policy off-
                                      ramp will probably not come for a considerable period of time.

                Chart 1: Fiscal deficits (% of GDP, FY)                                                     Chart 2: Public debt (% of GDP, FY)
   0                                                                                           340
                                                                                               320                                        Inflation : 2%, interest rate : 5.3%
  -4                                                                                           280
                                           Inflation : -0.3%, interest rate : 1%                               Inflation : 2%, interest rate : 3.3%

  -8                                                                                           220
 -10                                                                                           180                                             Inflation : 2%, interest rate : 1%
                                             Case2:                                            160
                                             Inflation : 2%, interest rate : 3.3%
 -14                                                                                           120
       00         05        10        15              20             25             30               00       05           10             15            20            25            30

Source: Cabinet office, MoF, BNP Paribas                                                      Source: Cabinet office, MoF, BNP Paribas

Ryutaro Kono / Hiroshi Shiraishi                                                                                                                                         16 May 2013
Macro Matters                                                                            13                                       
China: From the outside
                                                 Australia, South Korea and Taiwan are heavily exposed to developments in China. Their
                                                 economic performance, therefore, contains information about China’s.

                                                 Korea and Taiwan have both seen exports to China fall in recent months. The BoK cited
                                                 weakness in China as reason for its surprise rate cut.

                                                 Prices of commodities often thought to reflect growth conditions in China have also been
                                                 falling. The overwhelming evidence is that China has slowed sharply since end 2012.

The BoK cited China in its                Chinese data have been volatile since the start of the year, with the variable timing of Chinese
decision to ease policy                   New Year, the over-invoicing of exports and more working days this April than last all having
                                          affected various measures of growth. We have, therefore, looked at data from three other
                                          countries tied to China to gauge the underlying trend in Chinese growth at present. These are
                                          Australia, South Korea and Taiwan, all of which have high export exposures to China (Chart 1),
                                          timely data and, in the case of Australia and South Korea, have delivered surprise rate cuts in
                                          the past couple of weeks. The Bank of Korea explicitly cited disappointing Chinese growth as a
                                          factor in its decision.

Taiwanese exports to                      Taiwan has the highest trade exposure to China in the region, with 27% going directly to the
mainland China are down                   mainland and 13% to Hong Kong (some of which are also destined for the mainland).
                                          Taiwanese data are also affected by the timing of Chinese New Year, although the statistical
                                          authorities do provide some seasonally adjusted data, for which the effects of New Year are
                                          largely removed. For the purposes of assessing developments on the mainland, the most useful
                                          series are exports and industrial production. In USD terms, exports have fallen for three of the
                                          four months published thus far this year, down a total of 4.6%. In part, this reflects a weakening
                                          of the TWD, with exports in TWD terms down only 2.1%. Still, this is a poor performance and, as
                                          best we can tell when we seasonally adjust the data ourselves, has much to do with demand in
                                          mainland China. Exports there in USD terms have fallen by 14% since the end of 2012.

Taiwanese industrial                      The weakness in exports to China correlates well with a renewed slowdown in Taiwanese
production is falling                     industrial production volumes, which fell by 3.8% annualised in Q1 (Chart 2). Moreover, exports
                                          to mainland China rose smartly late in 2012 before turning down again this year. The pattern is
                                          similar to that seen in the likes of the Chinese Markit PMI and the NBS leading indicator.

Korean exports to China                   In its May statement, the BoK noted that “the trends of improvement in economic indicators in
are giving up prior gains                 emerging market countries such as China have been weaker than initially anticipated”. Although
                                          the 3mma for y/y growth in exports to China and Hong Kong looked solid at 7.2% in March, up
                                          from c. -5% six months earlier, it belies a more recent slowdown. Once seasonally adjusted,
                                          exports to China and Hong Kong show clear signs of weakening since November. We estimate
                                          that they have fallen 9%, largely unwinding the gains from July to November (Chart 3). Exports
                                          to the US were weak in March, but the trend since October last year has been more positive.

                        Chart 1: Exposed to China                                               Chart 2: Taiwan turning down
 45                           Export shares (2012, %)

 40                                 Hong Kong







          South Korea                Australia              Taiwan

Source: Reuters Ecowin Pro, BNP Paribas                                        Source: Reuters Ecowin Pro, BNP Paribas

Dominic Bryant                                                                                                                               16 May 2013
Macro Matters                                                             14                                   
Korea is likely to slow                   Some Korean data have remained more positive in recent months. Q1 GDP and business
again through mid-year                    surveys have led the way. However, increasingly, this looks likely to be the result of lags. Since
                                          the global financial crisis, there has been a strong link between the Markit manufacturing PMIs
                                          for China and Korea with a lag of 2-3 months (Chart 4). On this basis, the Korean PMI looks set
                                          to weaken in the coming months. Industrial production, which has been particularly weak of late,
                                          may catch up, masking the impact of softening confidence in the manufacturing sector, but
                                          Korea will probably see overall growth slow in Q2 and Q3, in part because of weaker demand
                                          from China. This is an important factor behind our forecast that the BoK will cut the repo rate by
                                          a further 25bp late in Q3 or early in Q4.

Commodity prices have                     The RBA’s 25bp cut also took the market by surprise. It did not explicitly cite China as a reason
fallen …                                  for easing policy, although weaker Chinese data were a key reason we had forecast the move.
                                          It is difficult to believe concerns about China did not weigh on the RBA’s decision given the
                                          clear role China plays in driving Australian commodity and export prices (Charts 5). The
                                          Australian local commodities price index has, until recently, been supported by a strong
                                          rebound in iron ore prices since their low in September last year. However, other commodity
                                          prices that are often viewed as tied to China have fared less well: copper, coal and steel prices
                                          are all back at those levels seen at their weakest in 2012. In fact, depending on the measure
                                          used, steel prices are in free fall (Chart 6). Weakness in steel prices may reflect significant over-
                                          capacity in the sector in China, rather than solely demand trends. However, this does not make
                                          the story more positive, as at some point, steel production will have to slow sharply.

… confirming that China                   Despite loose monetary policy globally, commodity prices that had previously been thought to
has slowed sharply                        reflect growth developments in China in recent years are now back at the levels seen when
                                          markets were worried about the potential for a hard landing of the Chinese economy. Overall,
                                          therefore, combined with the drop in China’s leading indicators, such as the PMI, and evidence
                                          that exports to China from the likes of Taiwan and Korea are now falling, commodity prices
                                          confirm that Chinese growth has slowed sharply since the start of the year. The government is
                                          likely to roll out some modest expansionary measures, such as supporting infrastructure
                                          projects, which may prop up growth in H2, but run contrary to rebalancing the economy.

            Chart 3: Korean exports to China falling                                                          Chart 4: Delayed reaction
 200                       South Korean exports (Index 2009=100)

 180                                                           US




                             China & Hong Kong

   Jan-07       Jan-08   Jan-09      Jan-10       Jan-11           Jan-12   Jan-13

Source: Reuters Ecowin Pro, BNP Paribas                                                   Source: Reuters Ecowin Pro, BNP Paribas

                         Chart 5: Price setter                                                               Chart 6: Down, down, down

Source: Reuters Ecowin Pro, BNP Paribas                                                   Source: Reuters Ecowin Pro, BNP Paribas

Dominic Bryant                                                                                                                                          16 May 2013
Macro Matters                                                                        15                                   
Chile: Cutting time cometh
                                          We now expect two, 25bp cuts in the policy rate in July and August.

                                          Inflation is below the IT band floor, and growth is slowing to a near-trend pace. The risk of
                                          overheating that has kept the central bank on hold has diminished substantially.

                                     We have changed our consensus-matching call of no policy rate changes this year and now
                                     forecast that the central bank of Chile (BCCh) will reduce its policy rate by 50bp, with one 25bp
                                     cut in July and another in August. Consensus still believes that the next move will be a hike in
                                     March 2015. Our new call sees earlier rate cuts than what the market has priced in.

Chile’s real interest rate is        April deflation of 0.5% m/m reduced annual inflation to 1% y/y -- the lowest in three years.
the highest in the region            Adding a policy rate of 5.0% would make Chile’s real interest rate the highest in the region
                                     (Chart 1). In the coming months, inflation will be revised up, due to methodological issues
                                     related to the CPI basket. Despite the proposed corrections in CPI methodology, inflation will
                                     remain close to the floor of the 3%±1pp target band for most of the year.

                                     As central banks around the world have eased, BCCh has been sidelined by above-trend
                                     growth and a widening current account deficit. These two constraints to rate cuts are becoming
                                     less binding and could soon turn supportive of lower rates, in our view.

Signs of a slowdown exist            On the growth front, signs of a slowdown exist beyond the calendar effect that adversely
beyond the calendar effect           affected Q1. Growth decelerated to 3.1% y/y in March, the slowest pace since July 2011. A
                                     rebound should occur in April and Q2, but 2013 growth will be about 1pp below last year’s 5.6%
                                     pace. Private consumption remains buoyant on the back of a solid labour market and strong
                                     sentiment, but credit conditions are tightening and the real estate market is softening.

                                     The boom in copper prices may be ending, which would increase downside risks to growth.
                                     Copper prices have fallen 11% year to date, not including a partial recovery in May. Falling
                                     copper prices and rising production costs, in part due to higher energy and labour costs, will
                                     likely lower the pace of investment in the sector, dampening growth as a result.

Narrowing the interest rate          The CLP’s strength amidst a significant correction in copper prices is contributing to the current
differential could help              account deficit (Chart 2). Portfolio reshufflings away from USD-denominated assets may have
reduce CLP appreciation              played a role, but the CLP’s strength is rooted in Chile’s triple-A credit, its 5% policy rate and
                                     ample global liquidity. Narrowing the interest rate differential with advanced economies could
                                     reduce appreciation pressure on the CLP. This would help lower Chile’s current account deficit
                                     in the short run as the price effect (due to the exchange rate) will outweigh the income effect
                                     (through the interest rate) near term. The longer-term impact is ambiguous, but the cooling of
                                     demand now underway could partially offset the stimulative impact of lower rates on imports.

                                     Faster-than-expected growth may remove the rate-cutting option, but we see risks skewed
                                     towards more cuts, given the CLP strength and Chile’s high real interest rate.

           Chart 1: Policy rate vs headline inflation                              Chart 2: CA Balance (4Q acc) vs Chilean Peso
                                                                             10                                  Current Acc. Bal. (USDbn)       400
  8                                                                           8                                  CLP inverted, rhs
                                                                              6                                                                  450
  4                                                                           2                                                                  500
                                                                             -2                                                                  550
  0                                                                          -4
                                  Policy Rate                                -6                                                                  600
                                  CPI y/y                                    -8
 -4                                                                         -10                                                                 650
  Jan 01      Jan 03   Jan 05    Jan 07     Jan 09   Jan 11   Jan 13          Q2 2005     Q4 2006    Q2 2008     Q4 2009       Q2 2011    Q4 2012
Source: Reuters Ecowin Pro, BNP Paribas                                     Source: Reuters Ecowin Pro, BNP Paribas

Nader Nazmi                                                                                                                               16 May 2013
Macro Matters                                                          16                                   
Economic calendar: 17 – 24 May
                                                      HIGH-INCOME ECONOMIES
                 GMT      Local                                                                 Previous           Forecast     Consensus
Fri 17/05                          Norway     Public holiday
                 23:50    08:50    Japan      Core machinery orders m/m: Mar                          7.5%              3.5%            3.5%
                 09:15    11:15   Eurozone    ECB's Coeuré speaks in Orleans
                 09:30    11:30               ECB's Asmussen speaks in Berlin
                 10:15    12:15               ECB's Praet speaks in Brussels
                 10:30    11:30               ECB's Mersch speaks in London
                 12:30    08:30    Canada     CPI m/m: Apr                                           0.2%               0.4%            0.0%
                 12:30    08:30               CPI y/y: Apr                                           1.0%               1.0%            0.6%
                 12:30    08:30               BoC core CPI m/m: Apr                                  0.2%               0.1%            0.2%
                 12:30    08:30               BoC core CPI y/y: Apr                                  1.4%               1.1%            1.2%
                 13:55    09:55      US       Michigan sentiment (prel): May                          76.4               77.0            78.0
                 14:00    10:00               Leading indicators: Apr                               -0.1%                               0.2%
                 17:45    12:45               Minneapolis Fed’s Kocherlakota speaks on panel in Chicago, IL

Sat 18/05       15:00     11:00      US       Fed Chairman Bernanke delivers commencement speech at Bard College at Simon’s Rock, MA

Mon 20/05                          Holiday    Germany, France, Netherlands, Belgium, Norway, Switzerland, Canada
                17:00     12:00      US       Chicago Fed’s Evans speaks on economy in Chicago, IL

Tue 21/05       01:30     11:30   Australia   RBA MPC minutes
                07:25     09:25   Eurozone    ECB's Liikanen speaks in Helsinki
                08:30     09:30      UK       CPI m/m: Apr                                            0.3%              0.4%            0.5%
                08:30     09:30               CPI y/y: Apr                                            2.8%              2.6%            2.7%
                08:30     09:30               RPI m/m: Apr                                            0.4%              0.6%            0.7%
                08:30     09:30               RPI y/y: Apr                                            3.3%              3.2%            3.3%
                08:30     09:30               Output PPI (nsa) m/m: Apr                               0.3%                              0.4%
                08:30     09:30               Output PPI (nsa) y/y: Apr                               2.0%                              1.6%
                08:30     09:30               Output PPI core (nsa) y/y: Apr                          1.3%                                n/a
                16:30     12:30               BoE Governor-designate Mark Carney speaks in Montreal
                16:30     17:30      US       St. Louis Fed’s Bullard speaks on monetary policy in Frankfurt
                17:00     13:00               New York Fed’s Dudley speaks in New York

Wed 22/05        23:50    08:50     Japan     Trade balance (nsa) : Apr                       JPY -362.4bn     JPY -684.5bn     JPY -684.5bn
                 03:30    12:30             BoJ rate announcement
                 07:30    09:30 Netherlands Consumer confidence: May                                -35                -32                n/a
                 08:00    10:00  Eurozone Current account: Mar                             EUR 16.3bn           EUR 22.0bn                n/a
                 16:30    12:30             ECB's Praet speaks on monetary policy in Washington
                 08:30    09:30     UK      BoE MPC minutes
                 10:00    11:00             CBI monthly industrial trends: May                      -25                                  -18
                 12:30    08:30   Canada    Retail sales m/m: Mar                                 0.8%                  0.3%           0.2%
                 12:30    08:30             Retail sales m/m: Mar                                 0.7%                  0.2%           0.2%
                 14:00    10:00     US      Existing home sales: Apr                            4.92mn                5.00mn         4.97mn
                 14:00    10:00             Fed Chairman Bernanke testifies on the economic outlook
                 18:00    14:00             FOMC minutes

Thu 23/05       07:00     09:00   Eurozone    ECB's Noyer speaks in Paris
                07:30     08:30               ECB's Draghi speaks in London
                08:00     10:00               PMI manufacturing (flash): May                         46.7               46.8            47.0
                08:00     10:00               PMI services (flash): May                              47.0               47.1            47.2
                08:00     10:00               PMI composite (flash): May                             46.9               47.0             n/a
                09:15     11:15               ECB's Nowotny at Austrian central bank press conference
                11:05     13;05               ECB's Liikanen speaks in Copenhagen
                12:50     14:50               ECB's Coeuré speaks in Copenhagen
                14:00     16:00               Consumer confidence (flash): May                      -22.3               -21.5           -22.0

Market Economics                                                                                                                   16 May 2013
Macro Matters                                                         17                             
Economic calendar: 17 – 24 May (cont)
                                                                            HIGH-INCOME ECONOMIES
                   GMT          Local                                                                             Previous                               Forecast        Consensus
Thu 23/05          08:30        09:30             UK            GDP (rev) q/q: Q1                                    0.3% (p)                                 0.3%            0.3%
cont               08:30        09:30                           GDP (rev) y/y: Q1                                    0.6% (p)                                 0.6%            0.6%
                   08:30        09:30                           Retail sales inc autos m/m: Apr                         -0.7%                                -0.6%            0.1%
                   08:30        09:30                           Retail sales incl. autos y/y: Apr                       -0.5%                                 1.4%            2.0%
                   12:30        08:30             US            Initial claims                                           360k                                 345k              n/a
                   10:05        11:05                           St. Louis Fed’s Bullard speaks on monetary policy in London
                   14:00        10:00                           New home sales: Apr                                      417k                                  430k               425k

Fri 24/05          06:00        08:00         Germany           GDP (final) q/q: Q1                                  0.1% (p)            0.1%             0.1%
                   06:00        08:00                           GDP (final) y/y: Q1                                 -0.2% (p)           -0.2%            -0.2%
                   08:00        10:00                           Ifo business climate: May                               104.4           104.4            104.5
                   08:00        10:00                           Ifo current conditions: May                             107.2           107.5            107.2
                   08:00        10:00                           Ifo expectations: May                                   101.6           101.5            101.6
                   06:45        08:45         France            Industry survey: May                                        88              89              n/a
                   08:00        10:00          Italy            ISAE consumer confidence: May                             86.3            87.0              n/a
                   10:00        12:00        Eurozone           ECB's Weidmann speaks in Paris
                   11:30        13:30           UK              BoE Governor Mervyn King participates in debate on the crisis hosted by the Bank of Finland
                   12:30        14:30                           ECB's Constancio speaks on financial regulation in Brussels
                   12:30        08:30             US            Durable goods orders m/m: Apr                           -5.9%           -1.7%             1.8%
                   12:30        08:30                           Durable goods orders ex transports m/m: Apr             -1.5%            0.1%             0.8%
                   12:30        08:30                           Core capital goods shipment: Apr                         0.5%           -0.9%               n/a
                   13:00        15:00         Belgium           Business confidence: May                                 -14.7           -13.7              n/a
Release dates and forecasts as at c.o.b. prior to the date of publication; see Global Daily Spotlight for any revisions; (p) preliminary                               Source: BNP Paribas

                   GMT          Local                                                                                                  Previous          Forecast        Consensus
Mon 20/05          02:30        10:30         Thailand          GDP q/q: Q1                                                                  3.6%            -0.7%            -1.6%
                   02:30        10:30                           GDP y/y: Q1                                                                 18.9%             6.5%             5.3%
                   08:30        16:30       Hong Kong           Unemployment rate: Apr                                                      3.5%               3.5%              3.5%

Wed 22/05          09:00        17:00         Malaysia          CPI y/y: Apr                                                                  1.6%             1.7%              1.7%

Thu 23/05          01:45        09:45          China            HSBC PMI manufacturing (flash): May                                             50.4            50.2                n/a
                   05:00        13:00        Singapore          CPI y/y: Apr                                                                    3.5%           2.9%                 n/a
                   08:00        16:00         Taiwan            Industrial production m/m: Apr                                                 -2.6%             1.5                n/a
                   08:00        16:00                           Industrial production y/y: Apr                                                 -3.3%            -0.1             -0.3%

Fri 24/05                                     Vietnam           CPI y/y: May                                                                   6.6%            6.6%                 n/a
                   09:00        17:00         Taiwan            GDP (final) q/q: Q1                                                        -0.8% (p)          -0.8%                n/a
                   09:00        17:00                           GDP (final) y/y: Q1                                                        1.5% (p)            1.5%              1.5%

During           20-24/05                    Singapore          GDP (final) q/q annualised: Q1                                             -1.4% (p)          -1.4%              -1.4%
week                                                            GDP (final) y/y: Q1                                                        -0.6% (p)          -0.6%              -0.5%
Release dates and forecasts as at c.o.b. prior to the date of publication                                                                                              Source: BNP Paribas

 For our four-week calendar, please click here

Market Economics                                                                                                                                                            16 May 2013
Macro Matters                                                                                     18                                         
Economic calendar: 17 – 24 May (cont)
                   GMT          Local                                                                                    Previous        Forecast       Consensus
Fri 17/05                                      Russia          GDP y/y: Q1                                                    2.1%            1.1%           1.2%

Mon 20/05          12:00        14:00          Poland          Corporate employment y/y: Apr                                  -0.9%           -0.9%             -0.9%
                   12:00        14:00                          Corporate wages y/y: Apr                                        1.6%            2.0%              2.2%

Tue 21/05          07:00        09:00 South Africa Leading Indicator y/y: Mar                                                 133.3           135.0                n/a
                   12:00        14:00   Poland     Industrial production y/y: Apr                                             -2.9%            4.2%              3.0%
                                                   PPI y/y: Apr                                                               -0.6%           -1.3%             -1.5%

Wed 22/05                               Russia     Industrial production y/y: Apr                                              2.6%            2.7%             1.9%
                   07:00        09:00  Hungary     Gross wages y/y: Mar                                                        2.7%            3.0%             3.1%
                   08:00        10:00 South Africa CPI y/y: Apr                                                                5.9%            5.7%             5.7%

Thu 23/05                                  South Africa SARB MPC repo rate announcement                                        5.0%            5.0%             5.0%
                   11:00        14:00        Turkey     MPC minutes

Fri 24/05                                      Russia          Retail sales y/y: Apr                                           4.4%            4.4%             4.5%
                                                               Unemployment rate: Apr                                          5.7%            5.6%             5.5%
Release dates and forecasts as at c.o.b. prior to the date of publication                                                                             Source: BNP Paribas

                                                                                     LATIN AMERICA
                   GMT          Local                                                                                    Previous        Forecast       Consensus
Fri 17/05          19:00        16:00        Argentina          Economic activity index y/y: Mar                               2.3%            2.5%             2.7%
                   20:00        18:00        Colombia           Retail sales y/y: Mar                                          0.6%           -1.2%             -0.1%
                   20:00        18:00                           Industrial production y/y: Mar                                -4.5%           -5.4%             -3.5%
                   16:00        10:00          Mexico           GDP y/y: Q1                                                    3.2%            0.8%              1.1%
                   16:00        10:00                           Global economic indicator IGAE: Mar                            0.4%           -1.2%             -0.7%

Mon 20/05          12:30        9:30           Chile            GDP y/y: Q1                                                    5.7%            4.4%                n/a
                   19:00        16:00        Argentina          Unemployment rate: Q1                                          6.9%            7.4%                n/a

Wed 22/05          19:00        16:00        Argentina          Trade balance: Apr                                        USD0.5bn       USD 1.6bn                 n/a
                   11:00        9:00           Brazil           IBGE CPI IPCA-15 m/m: May                                    0.51%          0.49%                  n/a
                   11:00        9:00                            IBGE CPI IPCA-15 y/y: May                                        n/a        6.51%                  n/a
                   12:30        10:30                           Current account: Apr                                     USD -6.9bn
                   12:30        10:30                           FDI: Apr                                                 USD 5.7bn
                   16:00        10:00          Mexico           Retail sales y/y: Mar                                         -2.6%            1.8%                n/a

Thu 23/05                                       Peru            GDP y/y: Q1                                                    5.9%            4.7%             5.1%

Fri 24/05          19:00        16:00        Argentina          Industrial production y/y: Apr                                 0.2%            2.1%                n/a
                   12:30        10:30          Brazil           Credit report: Apr

During                                      Venezuela           GDP y/y: Q1                                                    5.5%
Release dates and forecasts as at c.o.b. prior to the date of publication; see Daily Latam Spotlight for any revisions                                Source: BNP Paribas

 For our four-week calendar, please click here

Market Economics                                                                                                                                           16 May 2013
Macro Matters                                                                                    19                          
Key data preview: Europe
UK: Consumer prices (April)                                                                                                                                           BNP Paribas forecast: Down
                                                                                                                                                           Apr (f)       Mar          Feb         Jan
         (% y/y)
                                                              R P IX
                                                                                                                              CPI (% m/m)                   0.4          0.3          0.7         -0.5
 5                                                                                                                            CPI (% y/y)                   2.6          2.8          2.8          2.7
 4                                                                                                                            RPI (% m/m)                   0.6          0.4          0.73        -0.41
                                   R PI

                                                                                                                              RPI (% y/y)                    3.2          3.3         3.2          3.3

 2                                                                                                                            RELEASE DATE: Tuesday 21 May
                                                                                                                                UK consumer prices rose 0.4% in March, meaning annual inflation
                                                                                                                              remained at 2.8%. Core inflation picked up, to 2.4% in March from 2.3%
 0                                                                                                                            in February. Upside pressure on inflation on the month came from
                                                                                                                              recreation and cultural goods, clothing and footwear, and housing and
                                                                                                                              household services.
-2                                                                                                                              April is likely to have seen downward pressure from an Easter timing
         02        03        04           05        06    07           08    09        10       11        12
                                                                                                                              effect, as well as lower petrol prices. The April BRC Shop Price Index fell
                                                                                                                              sharply, suggesting some core weakening as well.
Source: Reuters EcoWin Pro

UK: Retail sales (April)                                                                                                                                              BNP Paribas forecast: Weak
10 .0                                                                                                          11
                                                                                                                                                           Apr (f)       Mar          Feb         Jan
                                                                                   R etail S ale s (% y/y)     10
                                                                                                                              Ret sales ex fuel (% m/m)     -0.6         -0.8         2.1         -0.4
 7 .5
                                                                                                                8             Ret sales ex fuel (% y/y)      1.2          0.4         3.2          0.4
 5 .0
                                                                                                                7             Ret sales (% m/m)             -0.6         -0.7         2.1         -0.7
                                                                                                                              Ret sales (% y/y)              1.4         -0.5         2.5         -0.5

 2 .5
                                                                                                                4             RELEASE DATE: Thursday 23 May
 0 .0
                                                                                                                                After a sharp drop in March, there ought to have been limited
                                                                                                                              downside to retail sales in April. However, survey evidence from the
 -2 .5        B R C T otal S ales (% y/y, R H S )                                                               0
                                                                                                                              BRC and CBI, as well as the timing of Easter, suggest the data could
                                                                                                               -1             once again be fairly soft.
 -5 .0                                                                                                         -2               We look for a 0.6% decline in retail sales, taking the year-on-year rate
          98     99     00    01     02        03   04   05     06     07   08    09   10     11     12
                                                                                                                              of growth to 1.2%.
Source: Reuters EcoWin Pro

Eurozone: ‘Flash’ PMI (May)                                                                                                                          BNP Paribas forecast: Disappointingly flat
                                                                                                                                                           May (f)       Apr         Mar         Feb
                                                                                                                              Manufacturing                 46.8         46.7        46.8        47.9
                                                                                                                              Services                      47.1         47.0        46.4        47.9
                                                                                                                              Composite                     47.0         46.9        46.5        47.9

                                                                                                                              RELEASE DATE: Thursday 23 May
                                                                                                                                Eurozone PMIs are converging. Peripheral indicators are improving,
                                                                                                                              while the core countries’ indicators are deteriorating. Both combined
                                                                                                                              should leave the eurozone aggregate figures broadly unchanged.
                                                                                                                                Growth-wise, the implication of the weak PMIs is disappointing.
                                                                                                                              Instead of a slowing contraction or even moderate growth, we should
                                                                                                                              now be prepared ourselves for a contraction in Q2 similar to that of Q1.

Source: Reuters EcoWin Pro

Germany: Ifo business climate (May)                                                                                                  BNP Paribas forecast: Approaching zero growth levels
                                                                                                                                                           May (f)      Apr          Mar         Feb
                                                                                                                              Business climate             104.4       104.4        106.7       107.4
                                                                                                                              Expectations                 101.5       101.6        103.6       104.7
                                                                                                                              Current conditions           107.5       107.2        109.9       110.2

                                                                                                                              RELEASE DATE: Friday 24 May
                                                                                                                                German economic sentiment has deteriorated quite rapidly since
                                                                                                                              February, but should stabilise going forward.
                                                                                                                                The Ifo business climate index improved too much in Q1 and has fallen
                                                                                                                              back to more fundamental levels.
                                                                                                                                Current levels, which we expect to remain broadly unchanged, suggest
                                                                                                                              slow, but just-above-zero growth in the economy in Q2.

Source: Reuters EcoWin Pro

Market Economics                                                                                                                                                                              16 May 2013
Macro Matters                                                                                                                  20                              
Key data preview: North America
Canada: CPI (April)                                                                                              BNP Paribas forecast: Just below target
                                                                                   m/m%                             Apr (f)    Mar         Feb         Jan
                                                                                   Headline CPI                      0.4       0.2         1.2         0.1
                                                                                   Bank of Canada Core               0.1       0.2         0.8         0.1

                                                                                   RELEASE DATE: Friday 17 May
                                                                                     Inflation is expected to pick up to 0.4% m/m after last month’s soft
                                                                                   0.2% print. Gasoline prices rose in both March and April, and are
                                                                                   expected to feed through to higher headline prices as core prices slow to
                                                                                   just 0.1% m/m – more consistent with the tempered economic activity.
                                                                                   The y/y pace of total inflation is expected to remain just below the BoC’s
                                                                                   lower-bound target of 1.0%, while the core measure drops to 1.1%.
                                                                                     Wages are weak, economic activity is modest and the persistent
                                                                                   strength of the Canadian dollar will keep underlying inflation limited.
Source: Reuters EcoWin Pro

US: U of Mich. consumer sentiment (May, preliminary)                                                               BNP Paribas forecast: Small increase
                                                                                                                   May (f)    H2 Apr     Apr (p)      Apr
                                                                                   Michigan sentiment               77.0       80.5       72.3        76.4

                                                                                   RELEASE DATE: Friday 17 May
                                                                                     The University of Michigan index of consumer confidence jumped to
                                                                                   80.5 in the second half of April from 72.3 in the preliminary reading. We
                                                                                   anticipate some payback to consumer optimism, and expect the
                                                                                   University of Michigan index to ease to 77.0 in the beginning of May, a
                                                                                   level still slightly above the 76.4 average for April.
                                                                                     Stock prices continued to rise. However, economic data were mixed in
                                                                                   the beginning of May, which should limit the expected increase in
                                                                                   consumer confidence in the month.

Source: Reuters EcoWin Pro

US: Existing and new home sales (April)                                                                                        BNP Paribas forecast: Up
                                                                                                                    Apr (f)    Mar        Feb          Jan
                                                                                   Existing HS (millions saar)       5.00      4.92       4.95         4.94
                                                                                   New HS (thousands saar)           430       417        411          445

                                                                                   RELEASE DATE: Wednesday 22 & 23 Thursday May
                                                                                     We expect existing home sales to increase by 1.6% m/m to 5.00mn
                                                                                   saar in April. Pending home sales rose 1.5% m/m in March. We expect a
                                                                                   modest increase in resales on the back of past strength in contract
                                                                                      New home sales should see a solid increase in April after a subdued
                                                                                   increase in March, as the colder-than-usual weather likely dampened
                                                                                   sales in the beginning of the spring buying season. We expect new
                                                                                   home sales to rise to 430k in April from 417k in March.

Source: Reuters EcoWin Pro

US: Durable goods (April)                                                                                         BNP Paribas forecast: Sequester drag
                                                                                   % m/m                            Apr (f)    Mar          Feb         Jan
 40                                           Core Capital Goods Orders            Durable Goods                     -1.7      -5.9         4.3        -3.7
       % 3m/3m ar
                                                                                   Ex-Transport                       0.1      -1.5        -1.8         3.0
 20                                                                                Core Cap Goods Ship               -0.9       0.5         1.8        -0.7

  0                                                                                RELEASE DATE: Friday 24 May
                                                                                     The trend in durable goods orders is likely to be near flat in April, due
-20                                                                                to weak aircraft and government orders.
                    Core Shipments                                                  Ex-transport orders are expected to post a 0.1% m/m increase for the
                                                                                   month, after the previous two month’s staggering 1.5% m/m and 1.8%
                                                                                   m/m declines.
  Feb 01      Feb 03        Feb 05   Feb 07   Feb 09      Feb 11          Feb 13     Capital goods shipments are expected to decline by 0.9% m/m – a
                                                                                   slightly above-average increase for the first month of a quarter.

Source: Reuters EcoWin Pro

Market Economics                                                                                                                                   16 May 2013
Macro Matters                                                                       21                               
Key data preview: Asia
Thailand: GDP (Q1)                                                                                                                  BNP Paribas forecast: Payback
   30                                                                                        % y/y                          Q1 (f)         Q4         Q3           Q2
                                           Private Investment Index PII (% y/y 3MMA)
   25                                                                                        GDP growth                       6.5         18.9         3.1         4.4
   20                                                                                        RELEASE DATE: Monday 20 May
                                                                                               Flood-linked base effects should flatter Q1 headline GDP growth, though
   10                                                                                        less than it has in the past, as the capital stock replacement/upgrading
    5                                                                                        cycle is nearing completion. Public- and private-sector components are
    0                                                                                        expected to be key supports. Net exports could drag on headline growth.
   -5                                                                                          A degree of technical payback from a very strong Q4 2012, coupled
  -10                                                    PII (% 3mth avg/3mth avg, sa)       with a weak external environment, indicate the economy will shrink on a
                                                                                             sequential basis (we forecast -0.7% q/q sa).
  -20                                                                                          Fiscal authorities may use a weak quarterly figure to put more pressure
        06        07        08        09          10        11         12         13         on the BoT for policy easing ahead of the May 29 policy meeting.

Source: CEIC, BNP Paribas

Japan: Trade balance (April)                                                                      BNP Paribas forecast: Smaller seasonally-adjusted gap
 (sa, JPY billion )                                                                         JPY bn                       Apr (f)        Mar        Feb          Jan
 1500                                                                                       Trade balance (nsa)          -684.5        -362.4     -779.5      -1633.5
                                                                                            Trade balance (sa)           -728.4        -922.0    -1092.5       -731.8
                                                                                            RELEASE DATE: Wednesday 22 May
                                                                                              In April, we expect the seasonally-adjusted trade deficit to have
                                                                                            shrunk, but the unadjusted deficit to have expanded.
                                                                                              Based on data through mid-month, seasonally adjusted nominal
  -500                                                                                      exports are likely to have been generally flat, while nominal imports
                                                                                            probably declined from March.
 -1000                                                                                        Although nominal exports were bolstered by higher prices as a result
                                                                                            of the weak yen, real exports are projected to have contracted.
                                                                                              Real exports are proving slow to recover because the upturn in the
         05       06    07       08          09        10        11         12         13
                                                                                            Chinese economy, Japan’s largest export market, remains weak.
Source: MoF, BNP Paribas

Taiwan: Industrial production (April)                                                                                       BNP Paribas forecast: Rebounding
                                                                                                                          Apr (f)        Mar        Feb          Jan
                                                                                            Ind. production (% m/m)         1.5          -2.6        -0.5        0.7
                                                                                            Ind. production (% y/y)        -0.1          -3.3       -11.6        19.0
                                                                                            RELEASE DATE: Thursday 22 May
                                                                                              In April, we expect Taiwanese industrial production to have rebounded
                                                                                            by 1.5% m/m, consistent with the monthly export data already in hand.
                                                                                              However, this would follow a cumulative 3.1% in the previous two
                                                                                            months and pull the 3m/3m rate down to -6.2% annualised, consistent
                                                                                            with renewed weakness in the main Chinese indicators.
                                                                                              However, with the unfavourable base effect reversing, the annual pace
                                                                                            of contraction in industrial production is likely to have slowed to -0.1% in
                                                                                            April from -3.3% in March.
Source: Reuters EcoWin Pro, BNP Paribas

Market Economics                                                                                                                                             16 May 2013
Macro Matters                                                                                22                               
Key data preview: CEEMEA
Russia: GDP (Q1)                                                                                       BNP Paribas forecast: Sharp slowdown
                                                                            % y/y                        Q1 13 (f)      Q4 12        Q3 12         Q2 12
                                                                            GDP                             1.1           2.1          2.9         4.0

                                                                            RELEASE DATE: Friday 17 May
                                                                               We share the MinEcon’s expectation of a sharp slowdown in growth and
                                                                            expect it to have decelerated sharply to 1.1% y/y in Q1 2013 (below
                                                                            Bloomberg’s consensus of 1.3%).
                                                                              Oil prices USD100-110/bbl (Urals) are at a comfortably high level, but
                                                                            unable to fuel a strong economic rebound due to weak investment
                                                                            demand, sluggish exports and a negative base effect.
                                                                              We expect economic growth to decelerate to 2.6% this year as the ability
                                                                            of personal consumption to drive growth is gradually waning.

Source: FSSS, Reuters EcoWin Pro, BNP Paribas

Poland: Industrial production (April)                                               BNP Paribas forecast: Stronger on working-days effect
                                                                            % y/y                          Apr f         Mar          Feb          Jan
                                                                            Industrial production           4.2          -2.9         -2.1          0.4

                                                                            RELEASE DATE: Tuesday 21 May
                                                                              We expect industrial production to have risen by 4.2% y/y in April,
                                                                            mostly due to a supportive working-days effect. However, in seasonally
                                                                            adjusted terms, we see much softer output growth, reflecting the
                                                                            absence of domestic demand and very weak external demand.
                                                                              At the same time, we expect construction output to have continued to
                                                                            fall at a double-digit pace suggesting a weak start to total GDP growth in
                                                                            Q2 2013.

Source: Reuters EcoWin Pro

Russia: Industrial production (April)                                                                      BNP Paribas forecast: Stable growth
                                                                            % y/y                          Apr (f)       Mar          Feb          Jan
                                                                            Industrial production           2.7           2.6         -2.1         -0.8

                                                                            RELEASE DATE: Wednesday 22 May
                                                                              We expect growth in industrial production to accelerate slightly to
                                                                            2.7% y/y in April (above Bloomberg’s consensus of 1.9%) on the back of
                                                                            a calendar effect.
                                                                              Investment demand remains poor affecting industrial growth.
                                                                            Consumer spending is more robust.
                                                                              We continue to expect IP to grow 2.0% in 2013 as a whole but do not
                                                                            expect a substantial rebound before H2 2013.

Source: FSSS, Reuters EcoWin Pro,

South Africa: CPI inflation (Apr)                                                                                    BNP Paribas forecast: Slower
                                  CRY Index (ZAR) vs. CPI                                                  Apr (f)       Mar          Feb          Jan
          80                                                           12
                                                                            % y/y                            5.7         5.9          5.9          5.4
          60                                                           10

                                                                       8    RELEASE DATE: Wednesday 22 May
                                                                       6      Although the petrol price rose 10c in April, the petrol price inflation rate
                                                                            slowed from 16.5% y/y in March to 10.2% y/y in April and will contribute
  % y/y

          0                                                                 0.36pp less to inflation this month.
      ‐20                                                                     In May, petrol price inflation has slowed to 1.5% y/y and will contribute
                                                                            0.5pp less than it did in April.
      ‐40                                                              ‐2
                                                                              Our expectation that strikes will reoccur in 2013 seems to be playing
      ‐60                                                              ‐4   out. This will subject the ZAR to bouts of weakness.
                                                                              Concerns about another ratings downgrade will also mount.
                  CRY (ZAR) Index lagged 2 months           CPI %Y/Y          Risks to inflation should be countered by weak domestic demand.
Source: Statistics South Africa

Market Economics                                                                                                                               16 May 2013
Macro Matters                                                                23                                
Key data preview: CEEMEA (cont)
Russia: Unemployment (April)                                                         BNP Paribas forecast: Decline
                                                %                          Apr (f)       Mar         Feb         Jan
                                                Unemployment                5.6          5.7         5.8         6.0

                                                RELEASE DATE: Friday 24 May
                                                  The unemployment rate is likely to have continued to decline to 5.6%
                                                in April mainly driven by seasonal factors, in particular the higher
                                                number of economically active agents typical for Q2.
                                                  The labour market generally remains strong and we do not expect the
                                                unemployment rate to exceed 5.5%, on average, in 2013.
                                                  The regional composition is less favourable – with highs in the
                                                unemployment rate of 40-50% in the depressed Caucasus regions.

Source: FSSS, Reuters EcoWin Pro, BNP Paribas

Russia: Retail sales (April)                                                BNP Paribas forecast: Stable growth
                                                % y/y                      Apr (f)       Mar         Feb         Jan
                                                Retail Sales                4.4          4.4         3.0         4.2

                                                RELEASE DATE: Friday 24 May
                                                 We expect retail sales growth to have been unchanged at 4.4% y/y in
                                                April (slightly below Bloomberg’s consensus of 4.5%).
                                                  An acceleration is unlikely as credit growth is slowing.
                                                 We expect robust retail sales growth of around 4% in 2013 as a whole.
                                                Consumption will remain the main locomotive of economic growth in

Source: FSSS, Reuters EcoWin Pro, BNP Paribas

Market Economics                                                                                             16 May 2013
Macro Matters                                    24                            
Key data preview: Latam
Colombia: IP and retail sales (March)                                                                                   BNP Paribas forecast: Weak
                                                                                                              Mar (f)        Feb         Jan         Dec
                                                                                IP (% y/y)                     -5.4         -4.5        -1.6         -3.0
                                                                                RS (% y/y)                     -1.2          0.6         1.3          3.6

                                                                                RELEASE DATE: Friday 17 May
                                                                                  We expect another large y/y contraction in industrial output in March,
                                                                                reflecting both a calendar effect and continued weakness in activity.
                                                                                 If our projections are correct, this would be the fifth straight month of
                                                                                annual contraction in IP.
                                                                                  We also project a contraction in retail sales in March, due to a calendar
                                                                                effect and still-weak consumer sentiment.

Source: DANE and BNP Paribas.

Chile: Real GDP (Q1)                                                                                          BNP Paribas forecast: Decelerating
                                                                                                              Q1 (f)        Q4           Q3          Q2
     20                                        q/q, saar                        GDP (% y/y)                   4.4%         5.7%         5.8%        5.7%
     15                                                                         RELEASE DATE: Monday 20 May
     10                                                                          We expect GDP growth to decelerate in Q1, following weak activity,
                                                                                due to the calendar effect in March and February.
                                                                                 This will likely correspond to a 1.8% q/q saar growth in Q1,
         0                                                                      substantially below Chile’s potential growth of 5.0%.
      -5                                                                          Net exports were likely a major drag on Q1 growth, as weaker external
                                                                                demand, reflected in a large drop in copper prices, lowered exports by
      Q4 2004           Q4 2006      Q4 2008       Q4 2010        Q4 2012       0.6% over a year ago, while imports rose 6.2% y/y in Q1 on strong
                                                                                domestic demand.

Source: DANE and BNP Paribas.

Mexico: Retail Sales (March)                                                                                     BNP Paribas forecast: Bottoming
    20%                               Consumer                       10.0%                                  Mar (f)        Feb         Jan          Dec
                                      Confidence                               % y/y                        1.80%        -2.60%       1.80%       -1.80%
    15%                                                              8.0%
    10%                                                              6.0%      RELEASE DATE: Wednesday 22 May
     5%                                                              4.0%
                                                                                 We expect retail sales growth to rebound 1.8% y/y in March, following
     0%                                                              2.0%      a 2.6% y/y drop in February.
     -5%                                                             0.0%        On the positive side, sales at Walmex stores (+5.4% y/y) and Antad
   -10%                                                              -2.0%     affiliates (+5.9% y/y) were strong in the month. However, domestic auto
   -15%                                                              -4.0%     sales contracted 1.0% y/y in March.
   -20%                                    Retail Sales (sa)         -6.0%       Higher wages, more jobs and better confidence will likely underpin
   -25%                                                               -8.0%    improved retail sales going forward.
      Oct-05         Apr-07      Oct-08   Apr-10    Oct-11       Apr-13

Source: Reuters EcoWin Pro

Peru: Real GDP (Q1)                                                                                           BNP Paribas forecast: Decelerating
   30                                                                     12
                                                                                                            Q1 (f)       Q4          Q3          Q2
             Investment (%, y/y)
                                                                                GDP (% y/y)                  4.7%        5.9%        6.8%        6.5%
   20                                                                           RELEASE DATE: Thursday 23 May
   15                                                                     8       We expect GDP growth to have decelerated in Q1. However some
   10                                                                           of the decline will be due to calendar effects.
                                                                                  If our forecast is right it will likely correspond to a 2.4% q/q, saar,
     0                                                                    4     growth in Q1, a significant drop from the rate of growth posted in
    -5                                                                          previous quarters.
  -10                                            GDP (%, y/y)                     Net exports were possibly a major obstacle during Q1, on the back
  -15                                                                     0     of feeble external demand which impacted negatively both metal
          Q4      Q4       Q4       Q4     Q4       Q4      Q4      Q4          prices and terms of trade. Exports dropped by 17.1% year-on-year
         2005    2006     2007     2008   2009     2010    2011    2012
                                                                                while imports rose 6.2% y/y in Q1 on strong domestic demand.
Source: DANE and BNP Paribas.

Market Economics                                                                                                                                16 May 2013
Macro Matters                                                                  25                               
Central bank watch
                     Current     Date        Next change
Interest rate         rate      of last       in coming                                      Comments
                       (%)      change       six months
                                                            The comments at the 2 May press conference left the door open for lower policy
                                  -25bp         -25bp
Refinancing rate      0.50                                  rates. Given the weak economy and low inflation, we expect the refi rate to be cut
                                 (2/5/13)      (4/7/13)
                                                            to a new low of 0.25%, with July the most likely timing.

                                                            QE was increased by GBP 75bn in October 2011, GBP 50bn in February
                                  -50bp                     2012 and GBP 50bn in July 2012. We expect another GBP 100bn of QE
Bank rate             0.5                     No change
                                 (5/3/09)                   over the year from August this year. Further credit-easing measures will also
                                                            be announced.
                                                            Tentative signs of an improvement in leading indicators globally, which
Repo rate                         -25bp       No change     should benefit Sweden via greater confidence and the trade channel,
                                                            suggest the probability of further rate cuts has waned.
                                                            The solid pace of growth and strong fundamentals suggest Norges Bank will
Sight deposit rate                -25bp
                      1.50                    No change     embark on a hiking cycle next year, unlike most other high-income economies.
                                                            We expect the first rate hike to come in Q4.
                                                            The SNB maintains a minimum exchange rate of 1.20 to the euro. We do not
3m LIBOR target                   -50bp
                     0-0.25                   No change     expect a shift in the policy stance, but emphasis on rising imbalances in the
range                            (3/8/11)
                                                            real estate market is likely to increase in upcoming statements.

                                                          NORTH AMERICA
                                 Date of     Next change
Interest rate                      last       in coming                                       Comments
                     rate (%)
                                 change      six months
                                  -75bp                     The FOMC will continue its USD 85bn per month pace of QE purchases through
Fed funds rate        0-0.25                  No change
                                (16/12/08)                  the end of 2013 and then taper gradually throughout 2014 for a total of
                                                            USD 1.6trn in net balance-sheet expansion. We expect the Fed to hold the
Discount rate          0.75                   No change     balance sheet steady in H1 2015 and then allow maturing securities to shrink the
                                                            balance sheet as it raises the Fed funds target in H2 2015.
                                  +25bp                     Inflation has fallen sharply, as wage pressures remain subdued and growth has
Overnight rate        1.00                    No change
                                 (8/9/10)                   disappointed. Still, the BoC has maintained a hiking bias, as high household debt
                                  +25bp                     and risks in the domestic housing market remain key vulnerabilities.
Bank rate             1.25                    No change
                                 (8/9/10)                   Nevertheless, we expect the BoC to keep its policy rate on hold until mid-2014.

                     Current       Date      Next change
Interest rate         rate        of last     in coming                                       Comments
                       (%)       change      six months
                                  -10bp                     The BoJ took very bold easing measures at its first meeting under new
Call rate             0-0.10                  No change     leadership, expanding the size, maturity and type of paper it plans to buy.
                                                            While the Bank seems set to take a wait-and-see approach for the time
Basic loan rate                   -20bp
                       0.30                   No change     being, it will likely act aggressively again should downside risks arise.
                                                            Low inflation and a persistently strong AUD prompted the RBA to cut in May. It
                                  -25bp         -25bp
Cash rate              2.75                                 will likely have to cut again due to disappointing Chinese growth and weak
                                 (7/5/12)      (3/9/13)
                                                            business investment, in part reflecting the peaking of the mining boom.

Market Economics                                                                                                                   16 May 2013
Macro Matters                                                    26                                
Central bank watch (contd)
                                                            ASIA (cont)
                       Current      Date      Next change
Interest rate           rate       of last     in coming                                       Comments
                         (%)      change      six months
                                                            PBOC chief Zhou Xiaochuan said China’s monetary policy stance was shifting to
                                                            neutral. Financial conditions to January were unduly loose and were tightened in
1y bank lending rate    6.00                   No change    February. We expect no hikes in the RRR or interest rates this year, but lending
                                                            and broader credit growth are likely to slow as a result of this guidance. It could
                                                            present challenges for investment, limiting the upside for growth.
                                                            The HKMA base rate moves in step with the US Fed funds rate given the
HKMA base rate          0.50                   No change    currency board. We do not expect the Fed to raise rates for the next couple of
                                                            years, implying no change in Hong Kong rates.
                                                            With industrial spare capacity widening sharply and household inflation
                                   -25bp         -25bp      expectations pulling back, inflation risks should continue to retreat, allowing
Repo rate               7.25
                                  (3/5/13)     (30/7/13)    space for at least one further 25bp rate cut. Any further easing beyond this would
                                                            likely require an acceleration of the government’s delivery of structural reforms.
                                                            Tighter monetary conditions are key to minimising pressure on the balance of
                                   -25bp                    payments and upside risks to inflation. With short-term market rates well below
1m BI rate              5.75                   No change
                                  (9/2/12)                  the BI rate, tightening will be in the form of hikes in the deposit facility rate. We
                                                            expect a cumulative 75bp of hikes in the deposit facility rate in 2013.

Overnight policy                   +25bp                    The BNM has cited heightened downside risks to global growth and slowing
                        3.00                  No change
rate                              (5/5/11)                  external demand as reasons for keeping rates on hold.

                                                            The BSP cut rates for the fourth time this year in October to new lows.
Overnight borrowing                -25bp                    Increased risks due to weaker external demand were a key factor in the move.
                        3.50                  No change
rate                             (25/10/12)                 However, unless these risks crystallise, solid domestic demand, record low
                                                            rates and pending power-rate adjustments mean further easing is unlikely.
                                                            The MAS maintained the SGD NEER policy settings at its meeting on 12
                         –       (13/4/12)    No change     October, citing inflationary pressures and a reduction of external risks. We do
                                                            not expect any move for the time being.
                                                            Korean inflation remains well below target and is unlikely to rise for some time.
Seven-day repo                     -25bp         -25bp
                        2.50                                Growth has picked up, but the recovery faces headwinds from soft conditions
rate                              (9/5/13)     (12/9/13)
                                                            in major export markets. The BoK is likely to ease again later in the year.
                                                            Taiwanese growth is recovering from a weak patch and should rise to an
Discount rate on 10-              +12.5bp
                        1.875                 No change     above-trend rate in 2013. However, there is some spare capacity, and inflation
day loans                        (30/6/11)
                                                            will remain contained, as the recent spike in food prices will unwind.
                                                            Domestic demand growth remains solid while credit and wage growth is strong
One-day repo rate       2.75                  No change     and inflation is within the target range. As the decision to cut rates in October
                                                            was a split one, we do not expect any further policy easing.

                                      CENTRAL AND EASTERN EUROPE, MIDDLE EAST
                       Current      Date      Next change
Interest rate           rate       of last     in coming                                       Comments
                         (%)      change      six months
                                                            The CNB cut its repo rate to 0.05% and its Lombard rate to 0.25% in
Repo rate               0.05                   No change    November. The scope for further conventional monetary easing has been
                                                            exhausted and we expect the CNB to now focus on the exchange rate.

Market Economics                                                                                                                      16 May 2013
Macro Matters                                                    27                                  
Central bank watch (contd)
                                                   CENTRAL AND EASTERN EUROPE, MIDDLE EAST
                             Current             Date      Next change
Interest rate                 rate              of last     in coming                                         Comments
                               (%)             change      six months
                                                                           We expect the NBH to continue its salami-slicing approach to interest-rate cuts
                                                 -25bp        -25bp
Base rate                      4.75                                        and deliver the next 25bp move at its meeting on 28 May. We see the trough
                                               (23/4/13)    (28/5/13)
                                                                           for the main policy rate at 4.00% by the summer.
                                                                           The MPC resumed its easing cycle in May, cutting interest rates by 25bp.
                                                -25bp         -25bp
Repo rate                      3.00                                        Stagnation and disinflation support the case for further rate cuts. We see the next
                                               (8/5/13)      (5/6/13)
                                                                           move of 25bp in June and expect a main policy rate of 2.00% by year end.
                                                                           The CBR is likely to keep rates unchanged in the coming months as inflation
                                                                           substantially exceeds the targeted range. We expect the rate-easing cycle to
                                                +25bp         -25bp
Refinancing rate               8.25                                        start in Q3 2013, however, as the economic slowdown is significant, the
                                               (13/9/12)   (July 2013)
                                                                           government is trying to rein in energy price growth and the new CBR governor
                                                                           is likely to prioritise economic growth.
                                                                           The Ukraine’s deflation scenario has materialised and recession has become
                                                 -25bp       -25bp
Refinancing rate                7.5                                        evident. Deflation is a strong argument for the NBU to restart monetary easing
                                               (22/3/12)   (May 2013)
                                                                           with another 25bp rate cut in Q2 2013, when the IMF deal is expected.
                                                              -50bp        We expect the MPC to cut rates by 50bp in July or September, although there is
Repo rate                      5.00                          (July or      a chance it could cut next week. Financial conditions are tight relative to the repo
                                                           September)      rate and the output gap is still negative, giving the MPC some room to cut.
                                             -50bp            -25bp
One-week repo rate            4.50%
                                           (16/05/13)       (18/06/13)     The CBRT cut its key rates by another 50bp in line with market expectations
Overnight lending                            -50bp            -25bp        and left the door open for further rate cuts. The CBRT seems keen to use any
                              6.00%                                        policy room provided by the decline in global commodity prices and is likely to
rate to PD                                 (16/05/13)       (18/06/13)
Overnight borrowing                          -50bp            -25bp        cut rates further as long as the TRY remains stable.
rate                                       (16/05/13)       (18/06/13)
Sources: BNP Paribas, Cadiz, TEB, UkrSibbank

                                                                         LATIN AMERICA
                             Current             Date      Next change
Interest rate                 rate              of last     in coming                                         Comments
                               (%)             change      six months
                                                                           The BCB cut rates by 525bp from mid-2011 until October 2012. It then
                                                +25bp        +25bp
Selic overnight rate           7.50                                        planned to stay on hold for a while. However, inflation forced central bank to
                                               (17/4/13)    (29/5/13)
                                                                           hike rated in April, although timidly. There is more to come.
                                                                           Growth is softening to around trend, while inflation is stuck below the floor of
                                                 -25bp        -25bp
Overnight rate                 5.00                                        the IT band. We expect the BCCh to reduce its policy rate by 50bp, with one
                                               (12/1/12)    (11/7/13)
                                                                           25bp cut in July and another in August.
                                                                           Although activity remains weak, monetary policy has been accommodative for
Overnight rate                 3.50                         No change      some time, with the real interest rate hovering near zero. While another 25bp
                                                                           cut cannot be ruled out, a long pause is the most likely outcome, in our view.
                                                                           Banxico lowered its policy rate by 50bp in March. We expect another 50bp cut
                                                -50bp         -25bp
Overnight rate                 4.00                                        in two instalments of 25bp each in September and October on concerns about
                                               (8/3/13)     (06/09/13)
                                                                           weaker growth and wide interest-rate differentials to advanced countries.

                                                +25bp                      With near-trend growth and on-target inflation, the central bank is set to remain
Overnight rate                 4.25                         No change
                                               (12/5/11)                   on hold over the forecast period.

Source: BNP Paribas

Market Economics                                                                                                                                    16 May 2013
Macro Matters                                                                   28                                 
Economic forecasts (GDP & CPI)
                         Table 1: GDP forecasts (% y/y)                                                                  Table 2: CPI forecasts (% y/y) (1)
                                                                              (1)          (1)                                                                                       (2)     (2)
                                         2010     2011      2012       2013         2014                                                   2010        2011       2012   2013    2014
           (2)                                                                                                   (3)
World                                      5.2       4.0        3.1         3.1            3.7        World                                   3.5         4.6        3.5     3.1      3.4
                 (2)                                                                                           (3)
Advanced                                   3.0       1.6        1.3         1.1            1.9        Advanced                                1.5         2.7        2.0     1.5      1.9
                                   (2)                                                                                             (3)
Emerging & developing                      7.5       6.5        5.0         5.1            5.6        Emerging & developing                     5.5        6.7        5.1            4.9    5.0
     (2)                                                                                                   (3)
G7                                         2.8       1.5        1.4         1.2            1.9        G7                                        1.4        2.6        1.9            1.5    2.0
                       (2)                                                                                              (3)
Asia ex Japan                              9.4       7.6        6.0         6.4            6.9        Asia ex Japan                             4.5        5.8        3.6            3.5    3.8
                             (2)                                                                                          (3)
CEE and Russia                             4.8       5.0        2.2         2.3            3.3        CEE and Russia                            6.4        7.9        6.5            5.6    5.1
           (2)                                                                                              (3)
Latam                                      6.3       4.5        2.9         3.5            3.7        Latam                                     6.3        6.8        6.2            7.2    7.5
US                                         2.4       1.8        2.2         1.8            2.5        US                                        1.6        3.2        2.1            1.6    2.1
Eurozone                                   2.0       1.5       -0.5        -0.5        0.8            Eurozone                                  1.6        2.7        2.5            1.7    1.3
Japan                                      4.7      -0.6        2.0         0.9            1.0        Japan                                    -0.7       -0.3        0.0            0.0    2.2
China                                     10.4       9.3        7.8         7.9            8.1        China                                     3.3        5.4        2.6            3.2    3.5
Eurozone countries                                                                                    Eurozone Countries
Germany                                    4.0       3.1        0.9         1.0            1.8        Germany                                   1.2        2.5        2.1            2.0    1.8
France                                     1.6       1.7        0.0         0.0        0.9            France                                    1.7        2.3        2.2            1.3    1.7
Italy                                      1.7       0.5       -2.4        -1.4            0.3        Italy                                     1.6        2.9        3.3            1.7    1.3
Spain                                      -0.1      0.4       -1.4        -1.6            0.2        Spain                                    2.0         3.1        2.4            1.6    0.7
Netherlands                                1.6       1.0       -1.0        -0.8        0.8            Netherlands                              0.9         2.5        2.8            2.5    1.6
Belgium                                    2.4       1.8       -0.2         0.0        1.0            Belgium                                  2.3         3.4        2.6            1.3    1.3
Austria                                    2.1       2.7        0.7         0.9        1.7            Austria                                   1.7        3.6        2.6            2.2    2.4
Portugal                                   1.3      -1.5       -3.2        -2.9        -0.5           Portugal                                  1.4        3.6        2.8            0.3    0.1
Finland                                    3.3       2.8       -0.2         0.3        1.6            Finland                                   1.7        3.3        3.2            2.4    2.2
Ireland                                    -0.8      1.4        0.7         1.0            2.2        Ireland                                  -1.6        1.2        1.9         1.1        1.2
Greece                                     -4.8     -7.1       -6.4        -4.8        -0.5           Greece                                    4.7        3.1        1.0        -0.7       -0.7
Other Europe                                                                                          Other Europe
UK                                         1.8       1.0        0.3         0.9        1.6            UK                                        3.3        4.5        2.8            2.8    2.5
Sweden                                     6.3       3.8        1.2         1.8        2.5            Sweden                                    1.2        3.0        0.9            0.3    0.9
Norway                                     0.2       1.3        3.0         2.0        2.2            Norway                                    2.4        1.3        0.7            1.7    2.3
Switzerland                                3.0       1.9        1.0         1.8        2.3            Switzerland                               0.7        0.2       -0.7            0.0    1.0
CEEMEA                                                                                                CEEMEA
Russia                                     4.3       4.3        3.4         2.6            3.6        Russia                                    6.9        8.5        5.1            7.0    6.2
Ukraine                                    4.2       5.2        0.2         1.5        3.5            Ukraine                                   9.4        8.0        0.6            2.5    4.2
Poland                                     3.8       4.5        2.0         0.7        2.3            Poland                                    2.6        4.3        3.7            0.8    1.5
Hungary                                    1.3       1.7       -1.7         0.6            2.2        Hungary                                   4.9        3.9        5.7            2.0    2.8
Czech Republic                             2.3       1.8       -1.2        -0.9        1.5            Czech Republic                            1.5        1.9        3.3            1.5    1.4
Turkey                                     9.2       8.8        2.2         3.5        4.0            Turkey                                    8.6        6.5        8.9            7.0    5.9
South Africa                                3.1      3.5         2.5          2.8          2.9        South Africa                              4.3        5.0        5.6            6.2    5.8
Saudi Arabia                                4.7      8.5         6.8          4.0          4.8        Saudi Arabia                              5.3        4.9         4.5           4.0     4.1
United Arab Emirates                        1.3      4.2         3.9          3.0          3.1        United Arab Emirates                      0.9        0.9         0.7           1.2     1.9
Qatar                                      16.7     13.0         6.2          4.0          4.3        Qatar                                    -2.4        1.9         1.9           4.1     5.2
Asia Pacific                                                                                          Asia Pacific
Australia                                  2.6       2.4        3.6         2.5        2.7            Australia                                 2.9        3.3        1.8            2.4    2.4
India                                      9.8       7.3        5.1         5.5            7.2        India                                     9.6        9.5        7.5            5.5    5.8
South Korea                                6.3       3.6        2.1         2.7            3.8        South Korea                               2.9        4.0        2.2            1.9    2.1
Indonesia                                  6.2       6.5        6.2         6.0        5.9            Indonesia                                 5.1        5.4        4.3            5.3    4.6
Taiwan                                    10.8       4.1        1.7         4.5            4.0        Taiwan                                    1.0        1.4        1.8            1.0    1.2
Thailand                                   7.8       0.1        6.4         5.9            4.8        Thailand                                  3.3        3.8        3.0            4.1    4.2
Malaysia                                   7.2       5.1        5.6         5.7            5.0        Malaysia                                  1.6        3.2        1.7            1.8    2.8
Hong Kong                                  6.8       4.9        1.4         4.4            3.3        Hong Kong                                 2.3        5.3        4.1            4.1    4.8
Singapore                                 14.8       5.2        1.4         3.3        4.4            Singapore                                 2.8        5.2        4.6            3.7    3.6
Philippines                                7.6       3.9        6.6         5.9        5.2            Philippines                               4.1        4.7        3.1            4.0    3.9
Vietnam                                    6.8       6.0        5.0         6.0        6.2            Vietnam                                   9.2      18.7         9.1            7.5    7.2
Americas                                                                                              Americas
Canada                                     3.2       2.6        1.8         1.4        2.1            Canada                                    1.8        2.9        1.5            1.1    1.9
Brazil                                     7.5       2.7        0.9         3.0        3.5            Brazil                                    5.0        6.6        5.4            6.6    6.3
Mexico                                     5.3       3.9        3.9         3.8            4.1        Mexico                                    4.2        3.4        4.1            3.8    3.6
Colombia                                   4.3       6.6        3.9         4.8        5.2            Colombia                                  2.3        3.4        3.2            3.4    3.0
Chile                                      6.1       6.0        5.6         5.2        5.0            Chile                                    1.4         3.3        3.0        2.4        3.2
Argentina                                  9.2       8.9        2.0         3.0        2.0            Argentina                               10.5         9.8       10.0       12.0       14.0
Peru                                       8.8       6.9        6.3         6.8        6.7            Peru                                     1.7        3.5         3.7        2.6        2.9
Venezuela                                  -1.5      4.2        5.5         1.0            1.0        Venezuela                               28.7       26.1        21.1       29.0       32.0
(1) Forecast (2) BNPP estimates based on weights calculated using PPP valuation                       (1) HICP where available, India WPI (2) Forecast (3) BNPP estimates based on
of GDP in IMF WEO April 2013                                                                          weights calculated using PPP valuation of GDP in IMF WEO April 2013

Source: BNP Paribas                                                                                   Source: BNP Paribas

Market Economics                                                                                                                                                                     16 May 2013
Macro Matters                                                                                    29                                         
Recently published research
Hungary and Poland: Trading places                          Michal Dybula                                           15 May 2013

Russia: Creating room for monetary manoeuvre                Julia Tsepliaeva, Kirill Mavrin                         15 May 2013

Russia: Rouble to become more volatile                      Julia Tsepliaeva, Kirill Mavrin                         15 May 2013

Ukraine: New Tobin tax on FX purchases?                     Serhii Yahnych                                          15 May 2013

South Africa: Repo rate vs. the ZAR & power outages         Kim Silbermann                                          15 May 2013

UK: Holding operation                                       Paul Mortimer-Lee                                       15 May 2013

France: The reformation                                     Dominique Barbet                                        15 May 2013

Australia: A dose of reality                                Dominic Bryant                                          15 May 2013

India: Trade balance upset by gold buying spree             Mole Hau                                                14 May 2013

Mexico policy rate: More cuts this year                     Nader Nazmi                                             13 May 2013

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US FOMC: Timing is everything                               Laura Rosner                                             9 May 2013

US FOMC: An inconvenient truth                              Julia Coronado                                           9 May 2013

Mexico throws a fiesta, Brazil suffers a hangover           Marcelo Carvalho, Nader Nazmi                            9 May 2013

Japan: BoJ banking on a shift in the Phillips curve         Ryutaro Kono, Makoto Watanabe                            9 May 2013

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Eurozone: The next (baby) step                              Ken Wattret                                              9 May 2013

Poland: Bond rally continues                                Michal Dybula                                            8 May 2013

GCC: Diversification pays off                               Selim Çakir, Nazli Karamollaoglu                         8 May 2013

Russia: Political liberalisation, Moscow style              Julia Tsepliaeva, Kirill Mavrin                          8 May 2013

Turkey: Another cut on the way                              Selim Çakir, Emre Tekmen                                 8 May 2013

Malaysia: The fake sound of progress                        Philip McNicholas                                        6 May 2013

Financial and Monetary Conditions Index                     Michelle Lam, Mole Hau, Gustavo Arruda                   3 May 2013

ECB: Door left open                                         Ken Wattret                                              2 May 2013

Eurozone inflation: Gone in a flash                         Gizem Kara, Evelyn Herrmann                              2 May 2013

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Sweden: Midsummer Mildness                                  David Tinsley                                            2 May 2013

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  Global outlook: Balancing act        CEEMEA sniper        Global rates plus

Market Economics                                                                                                   16 May 2013
Macro Matters                                          30                            
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