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Morgan Stanley -Back-to-School Global Macro Outlook

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					                                                                           MORGAN STANLEY RESEARCH



                                                                            Global Economics Team

                                                                            Coordinators of this publication
                                                                            Joachim Fels
                                                                            Joachim.Fels@morganstanley.com
                                                                            +44 (0)20 7425 6138


         September 2, 2013                                                  Manoj Pradhan
                                                                            Manoj.Pradhan@morganstanley.com
                                                                            +44 (0)20 7425 3805

Global   Back-to-School Global
                                                                      A Global Expansion Now Led by DM Growth
         Macro Outlook
                                                                                                                      Growth peaking


         Acceleration, Stabilisation
         and Accommodation                                                                                                              IDN, MAL
                                                                                                                                          CHL

         Our global narrative for the next 6-12 months rests                                                     US, CAN
         on three pillars: An acceleration of growth in DM,                                                    JPN, UK, SWE
         stabilisation in EM economies (with downside                                                      KOR, TWN, KEN
                                                                                                         TUR
         risks) and continued accommodation by central
                                                                         IND, BRA                       CHN, RUS, NGR, GHA
         banks.
                                                                                     THL CZE EA, MEX, POL, HUN, ISR, SAF, PER
         Downgrading global growth: Since our last global                                COL

         forecast update in June, better growth prospects for                    Growth bottoming
                                                                      Source: Morgan Stanley Research
         DM economies and related fears of less
         accommodative monetary policies have pushed up real          Morgan Stanley Real GDP Forecasts (%Y)
         interest rates, weighing down hard on EM assets,                                       2012          2013E                 2014E       2015E
         currencies and economies. As a consequence, we are                                               Jun-13 Sep-13         Jun-13 Sep-13
                                                                       Global                     3.2           3.1       2.9     3.9   3.5        3.7
         lowering our sights on economic growth.                         G10                      1.5           1.0       1.0     1.9   2.0        2.0
                                                                             US                   2.8           1.9       1.6     2.7   2.7        2.6
         A deeper divide between EM and DM: We now                           Euro Area           -0.5          -0.7      -0.5     0.9   0.9        1.2
         expect global GDP to grow by 2.9%Y this year and                    Japan                2.0           1.6       1.6     1.3   1.3        1.3
         3.5%Y in 2014, down from our previous forecast of                   UK                   0.2           1.0       1.4     1.4   2.4        2.1
                                                                         EM                       4.9           5.1       4.8     5.7   4.9        5.2
         3.1%Y and 3.9%Y. Illustrating the EM-DM divide, our
                                                                             China                7.7           7.6       7.6     7.6   7.1        6.9
         downgrade is driven entirely by dimmer prospects for                India                5.1           5.9       4.4     6.8   4.6        6.0
         virtually all EM economies. By contrast, we reiterate our           Brazil               0.9           2.5       2.1     3.2   1.7        1.6
                                                                             Russia               3.4           2.9       2.2     3.4   3.1        2.8
         ‘twilight to daylight’ call for DM economies.                Source: IMF, Morgan Stanley Research forecasts

         Cycle enters its second half under new leadership:
         Despite the EM downgrade, we maintain a cautiously             Country Focus
         optimistic view on this global economic cycle, which           US: A New Phase .................................................... p 9
         started after the Great Recession four years ago, led by       Euro Area: Slow Slog, Not a Growth Spurt .......... p 10
         China and EM, and is now entering its second half              Japan: Near-Term Headwinds for Abenomics ...... p 11
         under US and DM leadership.                                    UK: Pushing Ahead ............................................... p 12
         All eyes on real rates and China: Our global base              Australia: Lost in Transition .................................. p 13
         case crucially assumes that DM bond markets stabilise          Russia: Weaker but Resilient ............................... p 14
         and China slows down in a controlled fashion. By               Turkey: Facing Rough Seas, Strong Crosswinds . p 15
         contrast, our bear case explores the impact of: i) US          China: Acupuncture-Style Reform ........................ p 16
         bond yields surging to 4% in the next few months on
                                                                        India: Entering a Deeper Slowdown Cycle ........... p 17
         fears of earlier Fed rate hikes; and ii) Chinese growth
         rolling over to 5-6%Y quickly. The likely result, given        Korea: Lowering GDP on Weaker EM Demand ... p 18
         the still-fragile state of EM and the euro area – the next     Brazil: No Unravelling ........................................... p 19
         global recession.                                              Mexico: (Near) Recession and Reforms ............... p 20



                                                                          For important disclosures, refer to the
                                                                          Disclosures Section, located at the end of
                                                                          this report.
                                                                                      MORGAN STANLEY RESEARCH

                                                                                      September 2, 2013
                                                                                      Back-to-School Global Macro Outlook




Acceleration, Stabilisation and Accommodation
Joachim Fels (44 20) 7425 6138                                                        Exhibit 2
Manoj Pradhan (44 20) 7425 3805                                                       Large FX Depreciation for the ‘Fragile Five’
DM delivers, EM disappoints: In our Spring Global Macro                                110        EM FX depreciation versus USD, Jan 13 = 100
Outlook: From Twilight to Daylight, March 13, 2013, we
                                                                                       105
predicted an acceleration of global growth to an above-trend
pace in 2H13 and 2014. Six months on, the narrative starts to                          100
ring true for developed market (DM) economies, but certainly
                                                                                        95
not for the emerging market (EM) half of the global economy.
                                                                                        90
EM growth has surprised on the downside… While we had
been highlighting the broken growth models and the related                              85

structural challenges in many EM economies since the middle                             80
of last year, we’ve still been surprised on the downside by the
incoming data in EM since the spring. In our June forecast                              75
                                                                                         Jan-13     Feb-13 Mar-13     Apr-13 May-13   Jun-13    Jul-13   Aug-13   Sep-13
update, we therefore already cut the outlook for several large
EM economies including China, Brazil, Mexico, Korea and                                       BRL               IDR            INR              TRY           ZAR
                                                                                      Source: Morgan Stanley Research
South Africa, and highlighted further downside risks for EM
growth (see The Global Macro Analyst: Will the Fed Tighten                            In several EM countries, central banks have been forced to
EM Monetary Policy? June 19, 2013, for a summary).                                    tighten policy in an attempt to stem further capital outflows
                                                                                      and currency depreciation (explicitly in Indonesia, India and
 We are lowering our sights on EM growth further,
                                                                                      Turkey, and implicitly in Brazil, South Africa and EM
 implying a significant reduction to our aggregate
                                                                                      economies that have external balance sheet exposure). As a
 global GDP forecast.
                                                                                      consequence, we are lowering our sights on EM growth
                                                                                      further, implying a significant reduction to our aggregate
…as global real rates have risen: Since then, better growth                           global GDP forecast.
prospects for DM economies and related fears of less
accommodative monetary policy have pushed global real                                 We now expect global GDP to grow by 2.9%Y this year
interest rates significantly higher (see Exhibit 1), weighing down                    and 3.5%Y in 2014, down from our previous forecast of
hard on EM assets, currencies and economies (see Exhibit 2).                          3.1%Y and 3.9%Y (see Exhibits 3 and 4). Illustrating the EM-
                                                                                      DM divide (see Exhibit 5), our downgrade is driven entirely by
Exhibit 1
                                                                                      dimmer prospects for virtually all EM economies. We now
Back-Up in US Nominal and Real Yields                                                 forecast EM GDP growth of only 4.8%Y this year, three-tenths
 6.00                                                                                 less than previously, and a barely better 4.9%Y in 2014, down
          US nominal and real yields, %
                                                                                      from our earlier forecast of 5.7%Y. Our biggest cumulative
 5.00
                                                                                      forecast cuts in 2013-14 are in India, Brazil, Russia, Thailand,
 4.00                                                                                 Turkey, Mexico and Ukraine. We have also downgraded our
 3.00                                                                                 2014 China GDP forecast from 7.6%Y to 7.1%Y, but remain
 2.00
                                                                                      comfortable with our 7.6%Y forecast for this year, given the
                                                                                      recent signs of near-term stabilisation (see page 16).
 1.00

 0.00
                                                                                      Meanwhile, we reiterate our ‘twilight to daylight’ call for
                                                                                      DM economies as we see DM GDP growth doubling from
-1.00
                                                                                      1%Y this year to 2%Y in 2014:
-2.00
   Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013                     • Our full-year 2013 GDP forecast for the US has come down
        10-Year Treasury Note Yield at Constant Maturity (% p.a.)                       to 1.6%Y (from 1.9%Y previously), but this entirely reflects a
        10-Year Inflation Indexed Treasury Note Yield at Constant Maturity (% p.a.)     weaker-than-expected 1H13, and our 2014 US forecast
Source: FRB, Morgan Stanley Research                                                    remains at 2.7%Y (see page 9).


                                                                                                                                                                      2
                                                                                              MORGAN STANLEY RESEARCH

                                                                                              September 2, 2013
                                                                                              Back-to-School Global Macro Outlook




Exhibit 3                                                                                     • In the euro area, our 2013 estimate goes up marginally from
DM Contributing More to Global GDP Growth                                                       -0.7%Y to -0.5%Y, reflecting an earlier-than-expected return
                                                                                                to (fickle and fragile) growth in 2Q, while 2014 stays at
       Global real GDP growth, %
                                                                                                +0.9%Y (see page 10).
 7
                                                                                   MS
 6                                                                                 fcast      • Our Japan numbers are unchanged for both this year and
 5                                                                                              next, with some downside risk in the near term, given recent
 4                                                                                              weaker-than-expected consumer data, and some upside risk
 3                                                                                              for 2014 as the 3pp consumption tax hike due next April that
 2                                                                                              we have already fully incorporated into our numbers may not
 1                                                                                              be implemented in full (see page 11).
 0                                                                                            • We are making a meaningful upward revision to our UK
-1                                                                                              forecast, with 2013 GDP growth going from 1.0%Y to
-2                                                                                              1.4%Y, and 2014 from 1.4%Y to an above-consensus
      1970
      1972
      1974
      1976
      1978
      1980
      1982
      1984
      1986
      1988
      1990
      1992
      1994
      1996
      1998
      2000
      2002
      2004
      2006
      2008
      2010
      2012
      2014




                                                                                                2.4%Y. We think that the economy has finally progressed to
       DM Contribution          EM Contribution    Recession shading         Period Average
                                                                                                a sustainable recovery (see page 12).
Source: IMF, Morgan Stanley Research forecasts
                                                                                               Due to our ‘twilight to daylight’ view for DM economies,
Exhibit 4                                                                                      and despite the EM downgrade, we maintain a
Downgrading Global Growth: Dimmer Prospects for                                                cautiously optimistic view on the current global
Virtually All EM, ‘Twilight to Daylight’ for DM                                                economic cycle.
                           2012             2013E               2014E               2015E
 Real GDP (%Y)                         Jun-13   Sep-13     Jun-13   Sep-13
 Global                         3.2     3.1       2.9        3.9            3.5      3.7      Cycle enters its second half under new leadership: Due to
   G10                          1.5     1.0       1.0        1.9            2.0      2.0      our ‘twilight to daylight’ view for DM economies and despite
       US                       2.8     1.9       1.6        2.7            2.7      2.6      the EM downgrade, we maintain a cautiously optimistic view
       Euro Area               -0.5     -0.7      -0.5       0.9            0.9      1.2
       Japan                    2.0     1.6       1.6        1.3            1.3      1.3      on the current global economic cycle, which started after the
       UK                       0.2     1.0       1.4        1.4            2.4      2.1      Great Recession four years ago, led by China and EM, and is
   EM                           4.9     5.1       4.8        5.7            4.9      5.2      now entering its second half under US and DM leadership
       China                    7.7     7.6       7.6        7.6            7.1      6.9
       India                    5.1     5.9       4.4        6.8            4.6      6.0
                                                                                              (see Exhibit 6). In fact, our first stab at 2015 is a slight further
       Brazil                   0.9     2.5       2.1        3.2            1.7      1.6      pick-up in global GDP growth to 3.7%Y, from 2.9%Y this year
       Russia                   3.4     2.9       2.2        3.4            3.1      2.8      and 3.5%Y in 2014.
Source: IMF, Morgan Stanley Research forecasts

Exhibit 5                                                                                     Exhibit 6

A Deeper Divide Between EM and DM                                                             DM Takes Over Leadership in the Global Expansion
 62                                                                                                                                   Growth peaking
               DM and EM manufacturing PMI aggregates

 58

 54

 50                                                                                                                                                       IDN, MAL
                                                                                                                                                            CHL
 46
                                                                                                                                    US, CAN
 42                                                                                                                               JPN, UK, SWE
                                                                                                                                  KOR, TWN, KEN
 38
                                                                                                                                TUR
 34                                                                                             IND, BRA                 CHN, RUS, NGR, GHA
                                                                                                           THL CZE     EA, MEX, POL, HUN, ISR, SAF, PER
 30
      Jul-08          Jul-09          Jul-10      Jul-11           Jul-12         Jul-13                       COL
                                                                                                          Growth bottoming
                         EM                                          DM
                                                                                              Source: Morgan Stanley Research
Note: The aggregates include the following economies: DM - US, EA, JPN, UK, AUS, NZ,
SWZ, SWE, DEN. EM - RUS, POL, CZE, HUN, TUR, ISR, SAF, CHN, IND, HKG, KOR,
TWN, SGP, IDN, MAL, THL, BRZ, MEX, CHL. PPP-weighted.
Source: Haver Analytics, Morgan Stanley Research



                                                                                                                                                                     3
                                                                   MORGAN STANLEY RESEARCH

                                                                   September 2, 2013
                                                                   Back-to-School Global Macro Outlook




Acceleration, stabilisation and accommodation: Our                 Fiscal help is on its way in some key EM economies: In
global narrative for the next 6-12 months is built on three        addition to the ‘mini-stimulus’ in China, some other
pillars:                                                           governments in EM are now trying to counteract the slowdown
                                                                   with fiscal measures. In Mexico and Korea, government
• DM growth looks set to accelerate, with the US, UK and
                                                                   spending is likely to continue its pick-up in 2H13. Fiscal
  Japan all expected to show solid growth in the next few
                                                                   headwinds are likely to abate in Russia, thanks to a
  quarters and the euro area having just escaped from              suspension of the fiscal rule and some additional Oil Fund-
  recession (see Exhibit 6).                                       financed investment, and in Poland, thanks to suspension of
• EM growth should stabilise at a lower level as China’s           the debt limit and a broader recovery. Moreover, in Brazil (via
  selective stimulus measures lend (temporary) support and         spending on education and healthcare, and lending by state-
  the demand pull from DM eventually gets stronger.                owned banks) and India (thanks to a ‘food safety bill’), pre-
  However, we remain concerned about the structural and            election spending is likely to pick up. Taken together, China’s
  cyclical fragilities in EM.                                      mini-stimulus and some fiscal easing make EM stabilisation
                                                                   more likely over the next few quarters.
• Global monetary policy is likely to remain accommodative
  despite the onset of Fed tapering, as DM central banks are        The period of stabilisation over the next couple of
  likely to continue to push back on market expectations of         quarters is unlikely to be the last of the woes that EM
  earlier rate hikes.                                               growth could face.

Acceleration in DM: Looking at the DM growth profile in the        However, there are at least three reasons to treat the
next several quarters, US growth seems to have inflected           inflection point as cyclical rather than structural: In other
around mid-year and should accelerate to a quarterly pace of       words, the period of stabilisation over the next couple of
just below 3% in 2H13 and 2014, driven by the private sector       quarters is unlikely to be the last of the woes that EM growth
and, within that, notably capex. The biggest swing in growth       could face.
occurs in the euro area, from -0.5%Y this year to +0.9%Y next
year, but the recovery remains very fragile due to bank            First, the US economy appears to be on a trajectory
deleveraging, policy risks and a hesitant ECB. Japan should        towards sustainable growth: As the EM-DM growth divide
                                                                   continues, EM economies receive very little by way of benefits
continue to grow at decent pace in the next three quarters
                                                                   from a revival in US growth but see all the downside from the
followed by a setback due to an assumed 3pp hike in the
                                                                   higher US real rates and a stronger dollar that better US growth
consumption tax in April, pushing GDP growth temporarily into
                                                                   endogenously delivers. As the drive towards sustainable growth
negative territory in 2Q. Note, however, that our Japan team
                                                                   in the US proceeds, stronger data there could deliver financial
sees a good chance that the Abe government will adopt a
                                                                   headwinds for those EM economies that remain exposed to
more gradual approach to hiking the consumption tax, which
                                                                   foreign investor sentiment and their own funding needs.
suggests upside risks to our current 2014 forecast, which
assumes the full 3pp hike in April.                                Second, China’s growth momentum is likely to slow down
                                                                   again in 2014: Unless the administration announces
Against all odds, EM growth is likely to stabilise…for now
                                                                   significant structural reforms in November and implements
at least: EM growth has been stressed by structural issues as
                                                                   them soon thereafter, the downtrend in China’s growth is likely
well as a greater reluctance to adopt cyclical policy tools.
                                                                   to resume again (see page 16). Against a backdrop of
Against this stressed backdrop, a stabilisation of growth after
                                                                   banking sector deleveraging and the administration’s
the recent sharp slowdown is likely to provide welcome relief.     reluctance to use fiscal stimulus aggressively, structural drags
China’s ‘mini-stimulus’, directed towards shanty-town              on growth (thanks to capital misallocation) and imbalances
reconstruction and the usual infrastructure (in this instance      (thanks to the difficulties of transitioning to a consumption-led
railways), is already creating a growth bounce in 2H13. This       growth model) will create downside risks to growth that only
may counteract some of the downside to growth that the             structural reforms can alleviate.
tightening of financial conditions since May has created in some
major EM economies. As long as our bear case (of a further         Third, excessive EM credit growth needs to unwind:
spike in US real rates and a negative shock to China’s growth)     Strong credit growth in 2009-10 in China, India, Brazil and
                                                                   Turkey and more recently in ASEAN, Chile, Mexico and Brazil
doesn’t become more likely, offsetting forces could help EM
                                                                   needs to be unwound. At a time when EM growth models are
stability, though for some economies more than others.
                                                                   under scrutiny, excessive fiscal spending is unlikely to be
                                                                   looked at favourably by investors. In essence, we believe that


                                                                                                                                  4
                                                                   MORGAN STANLEY RESEARCH

                                                                   September 2, 2013
                                                                   Back-to-School Global Macro Outlook




cyclical tools will continue to provide a deteriorating            Exhibit 7
risk/reward to policy-makers, leaving structural reforms as the    Central Banks Still Accommodative, Except for
only tool that generates a sustainable and credible lift in        Select EM Economies
growth prospects.
                                                                   Monetary Policy Stance and Bias (row and colour, respectively)
In a nutshell, the elements of the ‘great EM unwind’ –
                                                                     Stance: Contractionary
unwinding US QE, China’s leverage and EM domestic
excess credit – are likely to remain in place until policy-
                                                                                                                             UKR
makers provide a credible response or a sustainable
rebalancing is seen to be under way.
Continued accommodation by major central banks: Global
monetary policy was on a clear easing path last year and in
                                                                     Mildly                                                NGR
the first half of this year. Looking ahead, the picture becomes      Contractionary
more differentiated:
                                                                                                                       GHN
• The Fed will likely start to wind down QE later this month
  and should end purchases and thus be done easing by mid-
  2014. However, we continue to see the first rate hike only in
  mid-2015, with the unemployment rate hitting the Evans                                                       CHL
  threshold in February 2015 on our forecasts.                      Neutral
                                                                                                        IND
                                                                                                 MEX
• Meanwhile, the Bank of Japan will probably have to extend
  its qualitative and quantitative easing beyond 2014 as we                               RUS
  don’t expect the (core, ex-VAT) CPI target of 2%Y to be                                BRA
  reached as planned.
                                                                                         IDN
• The ECB should cut rates one more time, but we continue to                         TUR
  expect it to shy away from full-blown QE (OMT is a                       PER
  possibility, but only for Ireland).                                              CHN
                                                                         MAL                                                 Mildly
                                                                                   THL                                       Expansionary
• In the UK, we are pushing back the first rate hike and                                        AUS
  additional easing is not completely off the table yet, even
                                                                         ISR KOR
  though our upgraded growth forecasts should make it less                                  UK NZ
  likely.                                                               TWN POL
                                                                                           EA SWE
                                                                       SAF      KAZ
 Central banks are likely to push back on expectations                                     US CAN
                                                                       KEN COL
 of earlier rate hikes in a global disinflationary                     HUN CZE
                                                                                           JPN NOR                               Expansionary
 environment.
                                                                   Source: Morgan Stanley Research; Note: Colour corresponds to monetary bias, where ‘red’
                                                                   stands for tightening bias, ‘orange’ for no bias and ‘green’ for easing.

All in all, despite Fed tapering, we expect the global
monetary stance to remain accommodative as central                  In our bull and bear cases we explore the implications
banks are likely to push back on expectations of earlier rate       of different US real rate and China deleveraging
hikes in a globally disinflationary environment (see Exhibit 7).    scenarios for global growth.

All eyes on real rates and China: In our view, the two key
uncertainties in our global forecast are: i) The path of US real   However, in our bull and bear cases we explore the
rates, given the onset of tapering and its implications,           implications of different US real rate and China deleveraging
particularly for EM; and ii) Whether or not the Chinese            scenarios for global growth (see Exhibits 8 and 9).
authorities will accomplish a controlled deleveraging of the       The bull case: Benign US rates, beautiful China
financial sector. Our global base case described above and in      deleveraging and EM reforms: Our global bull case
the country essays that follow crucially assumes that the Fed      narrative consists of three main elements:
manages to prevent a major further bond market sell-off
despite the start of tapering DM, and that China slows down in
a controlled fashion rather than unravels in disorderly fashion.

                                                                                                                                                         5
                                                                                           MORGAN STANLEY RESEARCH

                                                                                           September 2, 2013
                                                                                           Back-to-School Global Macro Outlook




Exhibit 8
Global Growth Bull/Bear Cases: Risks Still Skewed to the Downside
 Real GDP (%Y)                   2012                   2013E                                  2014E                             2015E             2016-18E
                                                 Bear   Base            Bull        Bear       Base        Bull       Bear       Base     Bull       Base
 Global Economy                   3.2            2.6    2.9             3.2         2.4         3.5        4.1        2.7         3.7      4.4       3.8
  G10                             1.5            0.8    1.0             1.2         1.1         2.0        2.6        1.0         2.0      2.7       2.0
    US                            2.8            1.6    1.6             1.7         1.9         2.7        3.3        1.8         2.6      3.4       2.5
    Euro Area                    -0.5            -0.7   -0.5            -0.3        -0.1        0.9        1.6        -0.2        1.2      1.8       1.3
    Japan                         2.0            1.1    1.6             1.8         0.3         1.3        1.8        0.2         1.3      1.9       1.0
    UK                            0.2            1.3    1.4             1.5         1.2         2.4        3.4        1.0         2.1      3.2       2.3
  Emerging Markets                4.9            4.2    4.8             5.1         3.6         4.9        5.6        4.2         5.2      5.9       5.4
    China                         7.7            7.0    7.6             7.7         5.8         7.1        7.3        6.3         6.9      7.5       7.0
    India                         5.1            4.1    4.4             4.6         3.3         4.6        5.5        5.0         6.0      6.8       6.8
    Brazil                        0.9            1.5    2.1             2.4         1.0         1.7        2.8        0.0         1.6      2.5       2.8
    Russia                        3.4            1.5    2.2             2.9         1.5         3.1        3.8        1.5         2.8      4.0       3.0
Source: IMF, Morgan Stanley Research forecasts
Exhibit 9                                                                                  • Capital flows to EM resume as a consequence, downward
Downside Risks Dominate EM Growth in 2014                                                    pressure on currencies and local asset markets abates, and
                                                                                             EM governments can focus again on implementing the
                       2014 GDP and CPI base-bull-bear scenarios
 8%    CPI (%)                                                                               necessary reforms to progress to new, sustainable growth
                                         LatAm
 7%                                                                                          models.

 6%                                                                                        In our bull case, global GDP growth accelerates to an above-
                                                        EM
                                                                                           trend rate of more than 4%Y in 2014 (against 3.5%Y in our
 5%
                                             CEEMEA                                        base case), with EM growth bouncing back to 5.6%Y (4.9%Y)
 4%                                                                                        and DM growth speeding up to 2.6%Y (2.0%Y).
                                             Global
 3%                                                                 AXJ
                                                                                           Our bear case: 4% US yields, China growth unravels,
                           G10
 2%                                                                                        global recession unfolds: Admittedly, our bear case
 1%                                                                                        scenario sounds more realistic than our bull case above. The
                                                                        GDP (%)            narrative is as follows:
 0%
      0%         1%       2%            3%        4%    5%         6%          7%          • US bond yields surge to around 4.0% in the next few
Source: Morgan Stanley Research forecasts                                                    months, caused by a combination of stronger near-term
• The incoming US data are in the sweet spot of continued                                    labour market data that bring forward the expected date of
  expansion and the Fed successfully accomplishes the                                        the Fed’s first rate hike, market confusion as the Fed starts
  separation between tapering and tightening. It begins                                      to taper, and a bumpy transition to a new Fed chair who is
  tapering but combines it with a strong signal of its intent to                             perceived as more hawkish. This rise in bond yields would
  keep rates low for a very long time (say by establishing a                                 be transmitted to other DM and EM markets to varying
  floor on inflation in its thresholds). There’s evidence of                                 degrees. It would likely be accompanied by a sell-off in risk
  economic lift-off, a smooth separation and continued thrust                                markets, thus tightening financial conditions
  from a low policy rate for a very long time. The
                                                                                           • China deleveraging becomes disruptive and the economy
  accompanying decline in bond yields would be transmitted
                                                                                             slows sharply in 2H13 and 1H14, with real GDP growth
  to other DM and EM markets to varying degrees and would
                                                                                             falling into a 5.5-6.0%Y range in late 2013 and much of
  likely be accompanied by a rally in risk markets, thus easing
                                                                                             2014.
  financial conditions.
• A soft take-off in growth starts in China in 2H13 and                                    • This combination of events leads to further severe capital
  continues into 1H14, with confidence being enhanced by                                     flight and currency depreciation in EM. Central banks there
  successful sector-specific stimulus and, more importantly,                                 are forced to tighten policy, thus pushing growth even lower,
  bold structural reforms announced after the November party                                 and structural reforms stall.
  congress that promote economic rebalancing towards                                       The likely result, given the fragile state of EM and the euro
  consumption. Real GDP growth accelerates back to around                                  area – the next global recession, with global GDP growth
  8%Y, led by consumer spending, while inflation stays                                     falling below the 2.5%Y recession threshold in 2014.
  benign. In addition to the reforms in China, other EM
  economies announce and implement structural reforms.

                                                                                                                                                           6
                                                                                                      MORGAN STANLEY RESEARCH

                                                                                                      September 2, 2013
                                                                                                      Back-to-School Global Macro Outlook




Exhibit 10                                                                                            Exhibit 13
Global Growth and Inflation Mix: 2013 Forecasts                                                       Main Regions: Higher 2014 Growth, Stable Inflation
                                         Venezuela           2013 (Size: Global PPP-weighting)         8.0          CPI, %
         CPI growth, %                  (CPI: 38.3%)                                                                                          LATAM
12.0                                                                 India
                                                                                                       7.0
10.0
                                                                                                       6.0
                                                     Turkey          Indonesia                                                           CEEMEA                               EM
  8.0                                          Russia
                                                                                                                                                                                                 AXJ
                                          Brazil                                                       5.0
  6.0                                                                                                                                                  Global
                                     Mexico                                            China           4.0
  4.0                        Euro Area     US
                                          Australia                                                    3.0
                                             Korea
                                        UK
  2.0                                                                                                                   G10
                                                                                                       2.0
  0.0
                                                                                                       1.0
                                              Japan                                                                                                                                           Real GDP, %
 -2.0
     -4.0          -2.0           0.0        2.0      4.0               6.0            8.0     10.0    0.0
                                          Real GDP growth, %                                                 0.0            1.0          2.0           3.0            4.0         5.0         6.0       7.0
                                                                                                                                  2013                                              2014

Exhibit 11                                                                                            Exhibit 14

Global Growth and Inflation Mix: 2014 Forecasts                                                       Main Regions: Recovery Proceeds in 2015
                                                             2014 (Size: Global PPP-weighting)          10         CPI, %
               CPI                                                                                       9
12.0                                Venezuela
               growth, %
                                   (CPI: 36.4%)
                                                                                                         8
10.0
                                                   India Indonesia                                       7                                                 Latam
  8.0                Brazil             Turkey                                                           6
                                  Russia                                                                                                                   CEEMEA
  6.0                                                                                                    5
                                       Mexico                                                                                                                                     EM
                             UK                                        China
  4.0            Japan         US Korea                                                                  4                                                                                 AxJ
                             Australia                                                                                                                       Global
              Euro Area
  2.0                                                                                                    3
                                                                                                                                         G10
                                                                                                         2
  0.0
                                                                                                         1                                                                                    Real GDP, %
 -2.0
        0.0               2.0                4.0              6.0                8.0           10.0      0
                                                                                                             0              1              2           3              4           5           6          7
                                            Real GDP growth %
                                                                                                                                  2014                                             2015

Exhibit 12                                                                                            Exhibit 15
Global Growth and Inflation Mix: 2015 Forecasts                                                       Main Countries: Higher 2014 Growth, Stable Inflation
                                                             2015 (Size: Global PPP-weighting)          12.0       CPI, %                                          IND
              CPI
12.0                                Venezuela
              growth, %
                                   (CPI: 29.2%)                                                         10.0
10.0

                                                                                                         8.0                                                 TRY            IDN
  8.0                                                       India
                                                       Indonesia
                    Brazil                                                                                                                      RUS
                                                   Turkey
                                Russia                                                                                                   BRA
  6.0                                                                                                    6.0
                                             Mexico
                         UK US                                       China
  4.0                                    Korea
                          Australia                                                                                                      MEX
               Euro Area Canada                                                                          4.0
  2.0                                                                                                                                                                                   CHN
                                                                                                                                         UK
                                                                                                                                                       AUS
                                                                                                         2.0                EA                 US
  0.0                                                                                                                                            CAN
                     Japan                                                                                                              POL                KOR
                                                                                                                                                                                                  Real GDP, %
 -2.0                                                                                                    0.0                       SWE          JPN
        0.0               2.0               4.0         6.0                      8.0           10.0         -2.0                  0.0           2.0             4.0           6.0           8.0          10.0
                                             Real GDP growth %
                                                                                                                                    2013                                               2014
Source for all charts: Morgan Stanley Research forecasts



                                                                                                                                                                                                              7
                                                                                                  MORGAN STANLEY RESEARCH

                                                                                                  September 2, 2013
                                                                                                  Back-to-School Global Macro Outlook




Key Forecast Profile
Global Economics Team
                                                                                      Quarterly                                                                     Annual
                                                      2013                                     2014                                   2015                 2013E      2014E      2015E
Real GDP (%Q, SAAR)                    1Q      2QE       3QE        4QE       1QE       2QE       3QE       4QE      1QE       2QE       3QE       4QE
Global*                               2.5       3.4       3.8       3.7        3.4      3.2           3.7   3.9       3.2       3.5          3.7    3.3      2.9           3.5    3.7
G10                                   0.9       2.1       1.7       2.1        2.3      1.5           1.9   2.1       2.0       2.1          2.2    1.8      1.0           2.0    2.0
US                                    1.1       2.5       2.1       2.7        2.8      2.9           2.8   2.8       2.5       2.6          2.6    2.6      1.6           2.7    2.6
Euro Area                             -1.1      1.2       0.4       0.9        0.9      1.0           1.2   1.2       1.2       1.2          1.2    1.2      -0.5          0.9    1.2
Japan                                 3.8       2.6       2.2       2.9        3.3      -3.5          0.3   1.3       2.0       2.3          2.8   -0.5      1.6           1.3    1.3
UK                                    1.1       2.9       3.6       2.0        2.4      2.0           2.0   2.0       2.0       2.4          1.6    2.4      1.4           2.4    2.1
EM (%Y)                               4.9       4.5       5.0       4.5        4.7      4.9           4.8   5.1       4.8       4.9          5.0    5.2      4.8           4.9    5.2
China (%Y)                            7.7       7.5       7.7       7.4        7.4      7.3           6.8   7.0       7.0       7.1          7.1    6.7      7.6           7.1    6.9
India (%Y)                            4.8       4.6       4.5       3.9        3.8      4.2           5.0   5.1       5.3       6.0          6.2    6.3      4.4           4.6    6.0
Brazil (%Y)                           1.9       3.3       1.8       1.5        1.9      0.6           2.3   2.0       1.7       1.3          1.5    1.8      2.1           1.7    1.6
Russia (%Y)                           1.6       1.3       2.4       2.9        3.4      3.9           3.0   2.8       2.9       3.9          4.9    5.9      2.2           3.1    2.8


Consumer price inflation (%Y)
Global                                3.3       3.2       3.2       3.3        3.2      3.5           3.3   3.3       3.5       3.6          3.4    3.1      3.3           3.0    3.1
G10                                   1.8       1.7       1.8       1.5        1.3      1.5           1.5   1.4       2.0       1.7          1.6    1.6      1.5           1.7    1.6
US                                    1.7       1.4       1.6       1.5        1.3      1.7           1.4   1.3       1.4       1.5          1.6    1.7      1.6           1.4    1.5
Euro Area                             1.9       1.4       1.4       1.5        1.6      1.8           1.5   1.4       1.3       1.4          1.5    1.5      1.5           1.6    1.4
Japan                                 -0.3      0.0       0.5       0.7        0.8      2.8           2.7   2.7       2.5       0.4          0.4    1.6      0.2           2.3    1.2
UK                                    2.8       2.7       2.8       2.6        2.6      2.8           2.8   2.6       2.4       2.3          2.2    2.2      2.7           2.7    2.3
EM                                    4.9       4.6       4.6       5.0        5.0      5.4           5.0   5.0       5.0       5.4          5.0    4.4      5.1           4.3    4.5
China                                 2.4       2.4       3.0       2.6        1.5      2.2           1.9   1.5       1.6       1.8          2.2    2.3      2.6           1.8    2.0
India                                 11.7     10.7      10.9       9.9        8.3      8.0           6.7   6.5       6.3       6.1          6.0    6.0     10.8           7.4    6.1
Brazil                                6.4       6.6       6.1       5.8        5.8      5.8           6.2   6.5       6.3       6.2          5.9    5.8      6.2           6.1    6.0
Russia                                7.1       7.2       6.1       5.5        5.2      4.8           4.7   5.0       4.9       4.7          4.5    4.3      6.5           4.9    4.6


Monetary policy rate (% p.a.)
Global                                3.1       3.0       3.0       2.9        2.8      2.9           2.8   2.9       2.9       2.9          2.9    2.9      2.9           2.9    2.9
G10                                   0.6       0.5       0.5       0.5        0.4      0.4           0.3   0.3       0.3       0.3          0.3    0.3      0.5           0.3    0.3
US                                    0.15     0.15      0.15       0.15      0.15      0.15      0.15      0.15     0.15      0.50      1.00      1.50     0.15       0.15      1.50
Euro Area                             0.75     0.50      0.50       0.25      0.25      0.25      0.25      0.25     0.25      0.25      0.25      0.25     0.25       0.25      0.25
Japan                                 0.05     0.05      0.05       0.05      0.05      0.05      0.05      0.05     0.05      0.05      0.05      0.05     0.05       0.05      0.05
UK                                    0.50     0.50      0.50       0.50      0.50      0.50      0.50      0.50     0.50      0.75      0.75      1.00     0.50       0.50      1.00
EM                                    5.9       5.7       5.7       5.4        5.4      5.5           5.5   5.5       5.5       5.5          5.5    5.6      5.4           5.5    5.6
China                                 6.00     6.00      6.00       6.00      6.00      5.75      5.75      5.50     5.50      5.25      5.25      5.25     6.00       5.50      5.25
India                                 7.50     7.25      7.25       7.25      7.25      7.25      7.25      7.25     7.25      7.25      7.25      7.25     7.25       7.25      7.25
Brazil                                7.25     8.00      9.00       9.75      9.75      9.75      9.75      9.75     10.50    11.00      11.00     11.00    9.75       9.75      11.00
Russia                                5.50     5.50      5.25       5.00      4.75      4.75      4.75      4.75     4.75      4.75      4.75      4.75     5.00       4.75      4.75
Note: Global and regional aggregates are GDP-weighted averages, using PPPs. Japan policy rate takes a mid range value; CPI numbers are period averages. *G10+BRICs+Korea
Source: Morgan Stanley Research forecasts




                                                                                                                                                                                    8
                                                                                          MORGAN STANLEY RESEARCH

                                                                                          September 2, 2013
                                                                                          Back-to-School Global Macro Outlook




Country Focus
US: A New Phase                                                                            Key message: The US economy shows a resilient
                                                                                           private sector and gaining investment prospects. We
Vincent Reinhart (1 212) 761 3537
                                                                                           think that the pieces are in place for growth to achieve
US Economics Team
                                                                                           potential over the forecast horizon, reaching a
We expect the trajectory of the US economy to mark a                                       sustainable 2.7% by early 2014.
transition to sustained growth in 2H13: In 1H13, real GDP
growth averaged about 1.8%, annualised. This pace may
                                                                                          Our baseline assumes an improved and steady path of
appear unimpressive from a cyclical perspective, but given
                                                                                          business investment: Businesses are sitting on substantial
substantial headwinds from policy-makers and faltering global
                                                                                          cash stores that served as insurance policies amid economic
growth, we read the 1H outcome as masking significant
                                                                                          uncertainty. As producers see sustained consumer strength
underlying momentum in private spending. The resilience of
                                                                                          and product demand, as well as reduced policy uncertainty,
the economy this year makes us more confident that
                                                                                          they’ll begin to deploy some of these funds. We forecast an
mechanisms are in place to lift the pace of expansion from its
                                                                                          acceleration of business fixed investment in 4Q13 to 7.0%Q
recent 2% rut. That is, the level of activity is marking an
                                                                                          before sustaining over 6% growth in 2014-15. However, this
upward inflection point right around now.
                                                                                          remains a key risk area to our outlook. As our bear case
In our baseline forecast, GDP growth increases through                                    explores, if retaining large cash stores represents a secular
the rest of 2013, expands above 2.7% through 2014, and                                    trend, we would pare back our expectations for capex
settles in near potential in 2015 (2.50-2.75%): The                                       spending.
substantial fiscal tightening from tax increases and
                                                                                          Growth near potential at 2.75% translates to an average
sequestration this year – worth nearly 1.75pp of nominal
                                                                                          pace of about 200K in payroll growth over the forecast
growth – was heavily front-loaded and peaked in 2Q. Along
                                                                                          horizon: We expect a mild rebound in the abnormally low
with fiscal consolidation impacts, the pall of the financial crisis
                                                                                          participation rate, eroding roughly 0.2pp in unemployment
continues to lift, notably reflected in the healing of the housing
                                                                                          gains by end-2014. Unemployment hits the 6.5% threshold in
market. Residential investment will continue to be an above-
                                                                                          early 2015. Meanwhile, with well-anchored price expectations,
trend contributor to growth, and despite a recent back-up in
                                                                                          and resource slack and energy futures pointing to a slight
mortgage yields, affordability measures remain appealing and
                                                                                          decrease in prices, CPI moves sideways, not rising above
activity surveys suggest a healthy housing outlook.
                                                                                          1.5%Y.
Adding to house price appreciation, equity gains have
                                                                                          Our forecast implies that the Fed will begin winding down
bolstered household wealth and improved consumer
                                                                                          the QE3 programme at the upcoming September meeting
confidence. We believe that already resilient private sector
                                                                                          and begin the process of rate normalisation in mid-2015,
spending will maintain its course with a growing wealth stock
                                                                                          ending the year at 1.50%: A further gradual rate increase
that restores damaged household balance sheets.
                                                                                          process is likely to follow, though a new Fed chair could raise
                                                                                          market jitters and add uncertainty to financial conditions.
Consumer Balance Sheets Continue to Rebuild
                                                                                          Forecast Summary
750                                                                                  90
         %                                                           US$ trillion          (4Q/4Q % change)                          2012      2013E        2014E    2015E
                                                                                     80
700                                                                                        Real GDP                                   2.0         2.1          2.8     2.6
                                                                                     70      Final Sales                              2.5         1.6          2.8     2.7
650                                                                                          Final domestic demand                    2.1         1.6          3.0     2.8
                                                                                     60
                                                                                             PCE                                      1.7         1.4          1.3     1.5
600                                                                                  50      Business fixed investment                5.0         2.0          6.8     5.8
                                                                                             Residential fixed investment            15.5        11.2         16.6     6.8
550                                                                                  40
                                                                                             Exports                                  2.4         4.1          4.9     5.2
                                                                                     30      Imports                                  0.1         3.2          5.9     5.3
500
                                                                                     20
                                                                                             Government                              -1.1        -2.3         -0.4     0.6
                                                                                           CPI                                        1.9         1.5          1.3     1.7
450
                                                                                     10    Core PCEPI                                 1.7         1.3          1.6     1.8
400                                                                                  0     Unemployment                               8.1         7.5          6.9     6.3
                                                                                          Source: Bureau of Economic Analysis, Morgan Stanley Research forecasts
  1990           1994          1998        2002          2006          2010
      Household Net Worth (Right)      Household Net Worth to Disposible Income (Left)
Source: Federal Reserve Board, Morgan Stanley Research




                                                                                                                                                                         9
                                                                                                        MORGAN STANLEY RESEARCH

                                                                                                        September 2, 2013
                                                                                                        Back-to-School Global Macro Outlook




Country Focus
Euro Area: Slow Slog, Not a Growth Spurt                                                                 Key message: Despite signs of a timid recovery, euro
                                                                                                         area growth remains vulnerable to external shocks and
Elga Bartsch (44 20) 7425 5434
                                                                                                         domestic policy challenges. The ECB is unlikely to act
Europe Economics Team
                                                                                                         aggressively despite very low inflationary pressures.
Despite the recovery arriving one quarter earlier than
expected, we stay cautious and reiterate our long-                                                      Unit labour costs will barely rise and core inflation will ease
standing call for a sub-par recovery that will eventually also                                          gradually as a result of the limited pricing power of companies
extend to the periphery. We remain cautious because we fail                                             and workers. Headline inflation should hold steady around
to see a sustainable engine for growth. Instead, we see                                                 1.5%Y, helped by a weaker EUR, but recent geopolitical
                                                                                                        events point to upside risks to our oil price assumptions.
multiple homemade headwinds in the quarters ahead from:
                                                                                                        At most, we expect the ECB to cut rates one more time:
• An undercapitalised banking system that still needs to
                                                                                                        Contrary to our previous call for aggressive monetary easing
  deleverage further and that faces several stress tests in
                                                                                                        by the ECB up to and including a deposit rate cut, we now
  1H14 as well as change in the resolution regimes;
                                                                                                        only see scope for one more rate reduction after the German
• A political system that shows serious signs of crisis fatigue,                                        election – in line with the ECB’s forward guidance. Afterwards,
  having already spent much political capital on austerity                                              we expect the bank to leave interest rates unchanged over the
  measures, structural reforms, bail-out packages and limited                                           whole forecast horizon. We would expect the bank to use
  institutional reforms of euro area governance;                                                        forward guidance to keep the money and bond markets
• An ECB that so far has not delivered significant additional                                           anchored, but are concerned about this not being sufficient to
  easing, already allows its balance sheet to shrink and might                                          prevent a marked rise in the EONIA rate once excess liquidity
  not be able to fend off spillovers from Fed tapering.                                                 falls below a certain threshold of €150-200 billion. In terms of
                                                                                                        the ECB’s OMT programme, we can see Ireland requesting
To these domestic policy concerns, investors can add a list of
                                                                                                        an ECCL that would make it eligible for OMT support, but at
worries about the global economy preparing for monetary
                                                                                                        this stage don’t see any other viable candidates for OMT. The
policy normalisation and the dislocations this might cause.
                                                                                                        hurdles to a LSAP remain very high in the euro area, we think,
Growth should stay at or a touch below its potential rate                                               and hence outright QE is not part of our base case. In fact, we
of growth, at an unchanged forecast of 0.9%Y for next year,                                             are concerned that the German Constitutional Court ruling on
following an upwardly revised -0.5%Y for this year. As a                                                OMT might erect additional hurdles to such an intervention.
result, we think the rate of capacity utilisation will stay rather
                                                                                                        We believe that fiscal policy will remain contractionary in
low, the rate of unemployment very high and there will be no
                                                                                                        most countries, with Germany being a notable exception
meaningful improvement in pricing power – if anything,
                                                                                                        next year. But the pace of austerity will likely slow materially
disinflationary, if not deflationary, pressures still dominate.
                                                                                                        (see Death of Austerity? May 21, 2013). As a result, we expect
Inflation will likely fall further over the forecast horizon as one-
                                                                                                        debt/GDP ratios to keep rising. However, to let austerity slip
off effects stemming from increases in indirect taxes and
                                                                                                        further or to consider outright fiscal stimulus would be unlikely
administrative prices fall out of the year-on-year comparisons.
                                                                                                        to be successful in boosting overall demand because the debt
Risks to Growth Baseline Tilted to the Downside                                                         crisis has raised the public awareness about the
                                                                                                        unsustainable nature of many fiscal policy trajectories.
 3
                 Base   Bull   Bear Case                                 Our estimates
                                                                                                        Forecast Summary
 2                                                                                                                                                   2012       2013E        2014E      2015E
                                                                                                         Real GDP (%Y)                               -0.5         -0.5          0.9       1.2
 1
                                                                                                          Private consumption                        -1.3         -0.5          0.2       0.5
                                                                                                          Government consumption                     -0.4         -0.3          0.2       0.5
                                                                                                          Gross fixed investment                     -4.2         -5.0         -0.6       1.3
 0                                                                                                       Contribution to GDP (pp)
                                                                                                          Final domestic demand                      -1.6         -1.2         0.1        0.6
                                                                                                          Net exports                                 1.6          0.6         0.3        0.6
 -1                              Bear case
                                 - Sharp rise in UST yields, spills into Bunds, widens periph spreads     Inventories                                -0.5          0.1         0.6        0.0
                                 - ECB action constrained by constitutional and political concerns       Unemp. rate (% labour force)                11.4         12.1        12.3       12.4
                                 - Export demand dented, negative spillovers into domestic demand
 -2                              Bull case                                                               Current account (% GDP)                      1.3          2.4         2.3        2.4
                                 - Decline in UST yields, spills into core mkts, compresses spreads      HICP (%Y)                                    2.5          1.5         1.6        1.4
                                 - ECB able to raise rates gradually in 2015, anchors bond markets
                                 - Export demand recovery spills into domestic demand (esp. capex)
                                                                                                         Policy rate (eop, %)                        0.75         0.25        0.25       0.25
 -3
                                                                                                         Genl. govt. balance (% GDP)                 -3.7         -3.1        -3.0       -2.8
      2007     2008     2009      2010        2011        2012         2013        2014         2015
                                                                                                         Genl. govt. debt (% GDP)                    91.4         94.5        96.5       96.2
Source: Eurostat, Morgan Stanley Research estimates
                                                                                                        Source: Eurostat, ECB, National Statistics, Morgan Stanley Research forecasts


                                                                                                                                                                                           10
                                                                    MORGAN STANLEY RESEARCH

                                                                    September 2, 2013
                                                                    Back-to-School Global Macro Outlook




Country Focus
Japan: Overseas Slowdown and                                         Key message: We see near-term downside risks from
Weakening Sentiment Create Near-Term                                 weaker exports and consumption spending. PM Abe’s
Headwinds for Abenomics                                              consumption tax hike decision and the second growth
                                                                     strategy report are key macro events in the near term.
Takeshi Yamaguchi (81 3) 5424 5387
Robert A. Feldman (81 3) 5424 5385
No change for now: We tentatively maintain our existing             monthly purchase values of JGBs and ETFs to accelerate
forecasts, last reviewed in August, for real GDP growth rates       monetary base growth. Alternatively, an explicit introduction of
in 2013-14, because of currently low policy visibility on the       forward guidance (linking exit conditions with economic
consumption tax and growth strategy details, and because            indicators such as inflation) could extend the market’s expected
April-June second preliminary data are not out yet (due             duration of easing, thereby further reducing long-term interest
September 9). However, we do see the risk of near-term              rates. That said, there is a hurdle in that consistency with the
growth in the Japanese economy undershooting our forecast.          current commitment to target inflation of 2%Y in about two
We also offer a tentative outlook for 2015, but plan to update      years would then become an issue. In case the Japanese
this once the picture is clearer on the consumption tax and         economy faces external shocks from rising crude oil prices,
growth strategy policy.                                             the BoJ will likely emphasise its focus on CPI excluding energy,
                                                                    rather than the Japan-style core, which includes energy items.
Downside risks to our forecast for F3/14, potential upside
for F3/15: We expect a boost from public spending to prevent        Second and third arrows already facing a test –
GDP growth from slowing sharply, but we see downside risks          consumption tax hike and growth strategy are key macro
that the growth trajectory will fall short of our forecast due to   events: In terms of the ‘second arrow’, or fiscal policy, the key
weakness in both external demand and domestic private sector        focus is PM Abe’s final decisions on the consumption tax hike,
spending. Reasons include: i) Signs that Japanese export            which he is expected to make by end-September to early
growth is waning due to the EM slowdown; and ii) Weaker             October (before the APEC meetings on October 7). Should a
consumption momentum, given some worsening of household             consumption tax hike proceed as planned, but coupled with
sentiment on the back of cost-push inflation and stock market       large supplementary budgets without visibility over reductions
gains letting up. If Middle East tensions fuel protracted growth    in social security costs and inefficiencies in spending, we see
in oil prices, this too could be a downside risk for the Japanese   a risk that the market starts to fear a fundamental shift in
economy that relies more heavily on energy imports after the        Abenomics towards a ‘tax & spend’, public sector-oriented
earthquake. By contrast, we see some scope to raise our             economic policy, especially if ‘third arrow’ structural reforms
outlook for F3/15, mainly if public investment beats our current    also fail to deliver meaningful changes. In this regard, the
expectation. At present, we tentatively assume a consumption        second phase of the growth strategy, about which the outline
tax hike as scheduled and a supplementary budget of JPY 2-3         is expected to be revealed by end-September, is worth
trillion, but the fiscal contraction could be less severe due to    watching. While the key component will likely be capex tax
either a large supplementary budget at around JPY 5 trillion or     cuts, ample inclusion of policies to encourage private sector-
a change to a gradual tax hike schedule.                            led growth, such as corporate tax cuts, would boost the
                                                                    market’s confidence in Abenomics, in our view.
Monetary policy outlook: In terms of the ‘first arrow’ of
Abenomics, we do not at this time see a strong possibility of       Forecast Summary
additional monetary easing in the short run, given prospective                                                  2012       2013E   2014E    2015E
improvement in the large enterprise/manufacturers DI in the          Real GDP (%Y)                               2.0         1.6      1.3      1.3
                                                                      Private consumption                        2.3         1.9      0.8      0.9
September BoJ Tankan on October 1 (based on July-August
                                                                      Government consumption                     2.0        -2.6      2.6      2.4
Reuters Tankan data, we estimate +8, versus +4 in the June            Gross fixed investment                    12.5        10.4      0.4     -3.2
Tankan). That said, we think it is still possible that the BoJ       Contribution to GDP (pp)
would opt for additional easing during 2013, should continued         Final domestic demand                      2.7         1.7      0.8      0.6
                                                                      Net exports                               -0.8         0.2      0.5      0.7
worsening of indicators such as exports and weakening of the          Inventories                                0.0        -0.3     -0.1      0.0
stock market heighten risk for the economy and prices.               Nominal GDP (%Y)                            1.1         1.0      2.8      2.0
                                                                     Current account (% GDP)                     1.0         1.3      1.9      2.1
As for actual additional easing methods, the most                    Unemployment Rate (%, e.o.p)                4.2         3.8      3.8      3.6
straightforward way seems to be to adjust the monetary base,         CPI (Ex. Fresh Food, Ex. VAT)              -0.1         0.2      0.7      0.4
the main operating target under the current quantitative and         CPI (Ex. Food, Energy & VAT)               -0.6        -0.4      0.3      0.2
                                                                     Policy rate (eop, %)                     0-0.10      0-0.10   0-0.10   0-0.10
qualitative easing. Specifically, the BoJ would likely raise the    Source: Cabinet Office, Morgan Stanley Research forecasts



                                                                                                                                               11
                                                                                             MORGAN STANLEY RESEARCH

                                                                                             September 2, 2013
                                                                                             Back-to-School Global Macro Outlook




Country Focus
UK: Pushing Ahead                                                                             Key message: We think that the UK is in a sustainable
Melanie Baker (44 20) 7425 8607                                                               recovery phase and revise up our UK forecasts for
Jonathan Ashworth (44 20) 7425 1820                                                           reasons including: stronger-than-expected momentum
                                                                                              so far; expecting a later first rate rise; and our more
Surprising momentum helps our new central case look
                                                                                              optimistic takes on both UK housing and productivity.
like our old bull case: We have been expecting the UK to
enter a sustainable recovery phase this year. But instead of                                 3) We now expect a later first rate rise from the BoE.
being a 2H story, the recovery started to take hold in 1H                                    4) We also bring into our central case some upside risks
already and survey indicators for 3Q suggest that GDP growth                                 highlighted in our UK housing (May 29) and productivity (July
has picked up even more (we now pencil in 0.9%Q). Hence,                                     15) reports. On the first, we bring the 0.3pp upward GDP risk
we make yet another upward revision to our 2013 GDP                                          seen in that report into our central case. Our productivity
forecast from 1.0%Y to 1.4%Y. We are also left feeling more                                  analysis made us more optimistic about the economy’s pace
optimistic about likely recovery momentum going into 2014.                                   of achievable growth before hitting inflationary ‘bottlenecks’.
For 2014, we revise up our forecast to 2.4%Y from 1.4%Y.
                                                                                             A first look at 2015: The small slowing we expect partly
Same three core drivers of the recovery as before: i) A                                      reflects an assumption that fiscal policy will drag a little more
better external backdrop – in particular, euro area stabilisation                            and that the economy responds to the first rate rise.
(the UK’s biggest trading partner); ii) Less of a drag from fiscal
                                                                                             A later rate rise from the BoE: The MPC does not intend to
policy this fiscal year and next; and iii) Better credit conditions.
                                                                                             raise interest rates until the unemployment rate has fallen to
2014 upward revision isn’t just about momentum: There                                        at least 7.0%, unless one of three ‘knockouts’ are hit. We
are several other specific drivers behind our upward revision:                               don’t expect to quite reach 7.0% by end-2015. But, we think
                                                                                             inflation expectations will nudge higher as the UK recovery
1) More of a virtuous circle: The stronger start to the UK
                                                                                             beds in and wage growth picks up (on an element of catch-up,
recovery should itself encourage a stronger further pick-up in
                                                                                             skills shortages re-emerging in some sectors and higher
credit demand and supply. Past stimulus (e.g., QE and FLS)
                                                                                             productivity growth); we expect one of the two inflation
may prove more effective as this part of the transmission
                                                                                             knockouts to be hit by 2Q15 and a first rate rise from the BoE
mechanism of monetary policy works a little better.
                                                                                             (a later start than we’d forecast previously (4Q14)).
2) We are less worried about financial conditions tightening.                                Bull-bear: In our bull case, faster global trade growth and
So far, UK quoted mortgage rates have not risen with higher                                  lower bond yields are accompanied by even stronger
bond yields. Forward guidance should help to keep front-end                                  productivity growth than in our base case (hence, the UK
yields relatively well anchored (and get a clearer ‘loose for a                              economy is able to grow faster than in our base case without
long time’ message on rates to households and firms).                                        generating significantly more inflation). Monetary policy is
                                                                                             therefore able to remain very accommodative. In our bear
Positive Momentum in Broad Range of UK Indicators                                            case, global trade growth is slower, bond yields are higher
                                                Abov e Trend                                 and productivity weaker than in our base case. The latter
                                                                                             makes it hard for the BoE to loosen policy further.
                                                                  4
                                                          5                                  Forecast Summary
                                            11                6
                                            13                        8
                                                       14
                                                              7
                                                                                                                                       2012        2013E   2014E   2015E
                                                        9
     Falling                                                                Rising            Real GDP (%Y)                             0.2          1.4     2.4     2.1
                                                3      12                                      Private consumption                      1.1          1.5     1.6     1.8
                                                                                               Government consumption                   2.8          1.6    -0.6    -1.5
                                                      2
                                            1                                                  Gross fixed investment                   0.5         -2.7     5.6     5.0
                                                                                              Contribution to GDP (pp)
                                       15
                                                                                               Final domestic demand                    1.4          1.0     1.7     1.5
                                                                                               Net exports                             -0.6          0.8     0.4     0.5
                                             Below Trend                                       Inventories                             -0.6         -0.3     0.3     0.0
Notes/Source: Falling/Rising = latest change in the 3M average of the indicator. Above
                                                                                              Unemp. rate (% labour force)              7.9          7.7     7.5     7.3
Trend/Below Trend = how far the 3M average is above its long-run average . All in standard    Current account (% GDP)                  -3.8         -2.7    -2.5    -1.9
deviations. Key: 1. Mortgage Approvals (BoE); 2. Consumer Conf. (GfK/NOP); 3 Real             CPI (%Y)                                  2.8          2.7     2.7     2.3
House Prices (%Y, Halifax/ONS); 4. New Buyer Enquiries (RICS); 5. Claimant Count
                                                                                              Policy rate (eop, %)                     0.50         0.50    0.50    1.00
(outflow/inflow, ONS); 6. Retail Sales (%M, ONS); 7. PMI Manufacturing (Markit); 8. PMI
Services (Markit); 9. Manufacturing Prodn (%3M/3M, ONS); 10.Govt. Receipts (ONS & MS);        Genl. govt. balance (% GDP)              -5.5         -6.1    -5.2    -4.4
11. Business Optimism (CBI); 12. Retail Sales Volumes (CBI); 13. Investment Intentions        Genl. govt. debt (% GDP)                 90.1         93.5    96.2    97.8
(Manf., BoE); 14. Total Orders (Manf., CBI); 15. M4 Lending (%M, BoE)                        Source: ONS, BoE, Morgan Stanley Research forecasts


                                                                                                                                                                      12
                                                                               MORGAN STANLEY RESEARCH

                                                                               September 2, 2013
                                                                               Back-to-School Global Macro Outlook




Country Focus
Australia: Lost in Transition                                                   Key message: We expect the Australian economy to
Chris Nicol (61 3) 9256 8909                                                    face another year of very weak domestic demand as it
Daniel Blake (61 2) 9770 1579                                                   transitions away from the resources investment boom.
Morgan Stanley Australia Limited                                                We believe the RBA will cut rates by a further 50bp to
                                                                                2.0% by 1Q14 in response to the rising output gap.
Net export fruits of the investment boom mask weak
                                                                                Along with AUD depreciation and a net export tailwind,
domestic demand: Headline GDP figures have held up
                                                                                outright recession risks should be mitigated.
reasonably well at +2.5%Y in 1Q13, but with net exports
contributing an extraordinary 2.1pp of this growth, we note                    Deleveraging (or, the recession we haven’t had): Structural
that the real picture has been one of GNE-recession over the                   reform, a floating exchange rate, successful Keynesian policy
past six months (-0.2% and -0.6% over the past two quarters).                  implementation and a good measure of luck have delivered
The mining investment boom has clearly peaked, and while                       Australia 22 years of uninterrupted growth and the fifth-
the RBA has continued to ease monetary policy, we forecast                     highest per capita income in the world (IMF, 2012). The
another 12 months of weak domestic demand growth before                        corollary is an increasingly uncompetitive cost structure,
recovery becomes entrenched.                                                   particularly in expensive property and labour markets. The
Capex boom rolls off as iron ore and LNG capacity come                         ongoing process of deleveraging (or consolidation at least)
onstream: However, the net impact is likely to exert a drag on                 should see some adjustment on these fronts. In particular,
the economy as the investment phase of the mining boom                         rising unemployment (we forecast a peak of 6.5% in late
tends to be more labour-intensive, with associated income                      2014) is lowering wage growth and AUD depreciation has
multipliers (despite the high share of imported capital). In                   lowered land costs on a global basis. Australia has typically
contrast, the benefits of the export ramp-up largely accrue to                 been a high interest rate economy, but we expect further
shareholders and MNCs, and will likely be moderated by a                       convergence with the global rate structure over 2014-15.
declining iron ore price profile. Of course, the taxman always                 New government agenda: After three years of an unpopular
wins, in this case through higher corporate tax revenues,                      but legislatively active minority Labor government, polls are
particularly in LNG. This windfall could ease the government’s                 pointing to a decisive victory for the centre-right Liberal-
task of returning the federal budget to surplus over the next
                                                                               National coalition in the September 7 election. High on the
three years, from a forecast deficit of 1.9% of GDP in FY14.
                                                                               work agenda are pledges to repeal the controversial mining
RBA the key defense against bear case: The RBA has                             and carbon tax/trading schemes. Given its largely pro-
continued its elongated easing cycle, cutting rates in May and                 business election platform and track record, we expect
August to a historical low of 2.5%. Given the prospect of falls                corporate confidence to improve over the course of 2014.
in total investment and our subdued outlook for household
                                                                               Confidence and China key to the outlook: Our bull case
and government consumption, we expect the RBA to cut rates
                                                                               scenario sees easier financial conditions and better sentiment
twice more to a trough rate of 2.0% by 1Q14. This puts us at
                                                                               translate into stronger consumption, initially out of savings,
the bottom of consensus, below current futures pricing, and
                                                                               while the bear case sees the income effects of a slowing
should take real interest rates into negative territory. Asset
                                                                               China and investment slowdown hit the leveraged household.
prices and disposable incomes should benefit as a result.

Domestic Demand Payback, but Light on the Horizon                              Forecast Summary
                                                                                                                        2012      2013E       2014E         2015E
 10%
            %Y                                                     Morgan       Real GDP (%Y)                             3.6         2.6        2.6          2.7
   8%                                                              Stanley       Private consumption                      3.3         1.8        2.3          2.8
                                                                   forecasts     Government consumption                   5.5         0.8        1.0          1.9
   6%
                                                                                 Gross fixed investment                   8.7        -2.1       -3.4         -2.5
   4%                                                                           Contribution to GDP (pp)
                                                                                 Final domestic demand                   4.7         0.5         0.5          1.2
   2%
                                                                                 Net exports                            -1.1         2.5         2.1          1.4
   0%                                                                            Inventories                             0.0        -0.4         0.1          0.1
                                                                                Unemp. rate (% labour force)             5.2         5.6         6.0          6.3
  -2%
                                                                                Current account (% GDP)                 -3.7        -2.2        -1.0         -0.4
  -4%                                                                           CPI                                      1.8         2.2         2.3          2.4
     1986        1990    1994    1998     2002   2006   2010   2014             Policy rate (eop, %)                    3.00        2.25        2.00         2.75
                   GDP                           Domestic demand                Genl. govt. balance (% GDP)             -2.1        -1.3        -1.7         -0.9
Source: ABS, Morgan Stanley Research forecasts                                  Genl. govt. debt (% GDP)                27.4        27.6        27.9         28.1
                                                                               Source: ABS, RBA, Commonwealth Treasury, Morgan Stanley Research forecasts


                                                                                                                                                               13
                                                                                        MORGAN STANLEY RESEARCH

                                                                                        September 2, 2013
                                                                                        Back-to-School Global Macro Outlook




Country Focus
Russia: Weaker but Resilient                                                             Key message: With a balanced budget and current
Jacob Nell (7 495) 287 2134                                                              account surplus, Russia is less dependent on external
Alina Slyusarchuk (44) 207 687 6869                                                      financing than EM peers. This gives the CBR policy
                                                                                         room, unlike many EM peers, to cut rates to support
Weak investment triggers a growth downgrade: While
                                                                                         growth as inflation falls back to target.
resilient consumption and the drag on growth from trade were
slightly better than expectations, investment has fallen                                Weak revenues drive budget downgrade: As a result of
sharply, reflecting mixed implementation of reforms and a                               widespread revenue weakness, particularly in profit and VAT
rundown in inventories. We now expect investment at 1.5%Y,                              receipts, we revise down our 2013 forecast for the fiscal
as compared to 4.5%Y previously, and downgrade 2013 growth                              balance from a 0.8% of GDP surplus to a 0.4% of GDP deficit,
to 2.2%Y from our previous 2.9%Y (consensus: 2.6%Y,                                     driven by an over 1% of GDP widening in the deficit of local
government: 2.4%Y) and 2014 growth to 3.1%Y from 3.4%Y.                                 governments. Although the deterioration is unwelcome, the
Falling inflation opens way for easier monetary policy:                                 budget remains broadly in balance, while tight control on
Inflation has fallen sharply over the summer, slightly more                             federal spending, higher oil prices and Russia’s significant
than expected, and we see it back in the 5-6%Y target zone                              fiscal policy room temper our concern.
from September. In this context, Russia’s resilient macro                               Capital outflows again the BoP surprise: The current
position, with a current account surplus and a broadly                                  account was slightly better than expected. Weaker-than-
balanced budget, gives it policy room. In contrast to other EM                          expected import growth (4.4% in 1H13), despite the WTO
central banks that are now hiking rates to defend their                                 tariff reductions and RUB appreciation, prompt us to raise our
currencies, we expect the CBR to cut rates to support growth.                           2013 forecast of the current account surplus from 2.3% to
Still, we think that new governor Nabiullina will err on the side                       2.7% of GDP. But, once again, we have been surprised by
of caution and pare the scale of the easing cycle from our                              private sector capital outflows. In 1H13, they were at the same
previous forecast of 100bp to 75bp.                                                     level as in 2012, despite greater political certainty, and we
Moderate growth pick-up ahead: We believe that growth                                   now expect them to rise 26% on 2012 to 3.2% of GDP. In
troughed in 2Q13, and see three reasons for it to pick up, from                         turn, this prompts us to reduce our RUB forecast from 30.9 to
1.4%Y at the end of 1H13 to 2.2%Y for the whole of 2013 and                             33 RUBUSD by end-2013, while the broad balance between
3.1%Y in 2014. First, the better harvest in 2013 should add                             the current account surplus and outflows means we now see
about 0.3pp. Second, we expect easier monetary policy to                                RUB as fairly valued rather than undervalued.
support a pick-up in corporate lending. Third, we expect                                Bull-bear: In our base case, we see growth in the 2-3%Y
investment to pick up, partly due to an unwinding of what we                            range, driven by consumption, with a fading drag from trade,
think was a 1H13 inventory rundown and partly due to policy                             and a modest pick-up in investment. Investment is, we think,
support from rate cuts and the wider public sector.                                     the key variable: In the bull case, with stronger investment,
                                                                                        growth could push up to 4%Y, and in the bear case, with
Slowdown Led by Declining Investment                                                    investment stagnant, growth could slow below 2%Y.
 20
        3mma, %Y
                                                                                        Forecast Summary
                                                                                                                                   2012       2013E       2014E   2015E
 15                                                                                      Real GDP (%Y)                               3.4         2.2        3.1     2.8
                                                                                         Private consumption                         6.8         5.6        4.0     3.6
                                                                                         Government consumption                     -0.2         1.5        1.3     1.6
 10
                                                                                         Gross fixed investment                      6.0         1.5        5.4     4.2
                                                                                         Contribution to GDP (pp)
  5                                                                                      Final domestic demand                      4.9          2.7        3.7     3.2
                                                                                         Net exports                               -1.8         -0.8       -0.5    -0.5
                                                                                         Inventories                                0.2         -0.9        0.1     0.0
  0                                                                                      Unemp. rate (% labour force)               5.1          5.5        5.5     5.5
                                                                                         Current account (% GDP)                    3.5          2.7        1.7     0.1
                                                                                         CPI (%Y)                                   5.1          6.5        4.9     4.6
 -5
                                                                                         Policy rate (eop, %)                       5.5          5.0       4.75    4.75
   Jan 11         Jul 11        Jan 12          Jul 12          Jan 13        Jul 13
                                                                                         Genl. govt. balance (% GDP)                0.4         -0.4       -0.4    -1.4
      Industrial output      Fixed investment            Transport       Construction    Genl. govt. debt (% GDP)                  10.3         10.6       11.2    11.6
Source: Rosstat, Morgan Stanley Research                                                Source: Rosstat, CBR, MinFin, Morgan Stanley Research forecasts




                                                                                                                                                                    14
                                                                     MORGAN STANLEY RESEARCH

                                                                     September 2, 2013
                                                                     Back-to-School Global Macro Outlook




Country Focus
Turkey: Facing Rough Seas and Strong                                  Key message: The growth outlook has dimmed
Crosswinds                                                            somewhat and a heavy reliance on external funding
Tevfik Aksoy (44 20) 7677 6917                                        should keep the currency vulnerable to shifts in global
                                                                      risk appetite. While the CBT might intend to keep rates
Weaker growth outlook: Turkey has been one of the main                fixed, market conditions might force it to act, we think.
beneficiaries of the global accommodative monetary policies,
easily funding its high external financing requirement and           Monetary policy is still key: CBT Governor Basci and his
achieving a high growth rate thanks to a negative domestic           team have come up with various innovative and effective
real interest rate. This is changing rapidly, with the well-known    measures in the past 2-3 years and they have achieved a
fears associated with the Fed tapering and the fading appetite       successful rebalancing in the economy, surprising even the
for EM risk dimming the prospects. On the back of our global         most sceptic. But most of the success of the unorthodox
growth revisions and specifically the higher interest rate           monetary policy implementation has taken place during a very
outlook in Turkey, we are revising down our GDP growth               different global environment at a time when the cost of funding
forecasts noticeably: We now expect 2013 growth to be                was very low and the risk appetite towards EM was high. This
3.6%Y (previously 4.4%Y) and 2014 to see only a moderate             time the situation will be much more challenging, especially
improvement at 4%Y (previously 4.8%Y). According to our              for those countries with high external funding needs. In such
projections, both in 2013 and in 2014 the contribution of net        an environment, Governor Basci’s recent comments
exports to growth will be negative, albeit slightly, and the         suggesting a cap on interest rates and the possible use of FX
economy will be driven by domestic demand. Especially after          reserves or an undisclosed set of tools did not bode well in
the recent comments by CBT Governor Basci, who indicated             improving confidence, in our view. At this juncture, we would
that policy rates would be capped at current levels, the             suggest a cautious approach, but we would not dismiss the
interest rate expectations seem to have become anchored for          possibility that the CBT might actually devise a mechanism to
now. This means that the ongoing expansion in credit                 lower currency volatility either.
(~28%Y) will be supporting private consumption even if it is
                                                                     Concerned about external financing? In short, yes. Given
likely to be losing steam in the upcoming quarters.
                                                                     the high external funding requirement, limited amount of
Fiscal room with a good view: Part of the reason why we              reserves and heavy reliance on portfolio flows, it is difficult to
think that the overall growth rate might remain relatively high      assume a calm outlook, especially if the interest rate weapon
is that we see ample room for manoeuvre on the fiscal front.         is not used by the CBT. That said, past experience suggests
We think that there is a considerable possibility that the fiscal    to us that banks and corporations will likely be rolling most of
authority might increase spending somewhat. Hence, we are            their external obligations by accepting to pay a higher risk
raising our full-year fiscal deficit projections to 2.5% of GDP      premium. However, this might not suffice to prevent the
for both 2013 (previously 1.9%) and 2014 (previously 2.0%).          currency from depreciating if portfolio outflows persist –
Taking into account the election cycle at hand (local elections      leading an eventual rise in interest rates in the order of 150-
in March 2014, presidential elections in August 2014 and             200bp, in our view.
general elections in 2015), we believe that the extent of the
deterioration can be considered mild. Overall, we think that         Forecast Summary
the fiscal position is solid and the debt/GDP ratio will remain                                                 2012       2013E    2014E   2015E
on a declining path (currently around 34% of GDP).                    Real GDP (%Y)                               2.2         3.6     4.0     4.7
                                                                       Private consumption                       -0.7         2.4     2.8     4.2
Inflation outlook is mixed: We believe that we have seen               Government consumption                     5.7         6.7     5.1     4.6
the peak in inflation at 8.9%Y and from August onwards we              Gross fixed investment                    -2.5         2.4     7.3     8.1
                                                                      Contribution to GDP (pp)
should be witnessing a declining trend towards 7.3%Y at year-          Final domestic demand                     -0.6         2.9     4.2     5.3
end. This is still considerably higher than the 5% official target     Net exports                                4.1        -0.1    -0.6    -0.5
and the CBT’s forecast of 6.2%Y. The weakness in the                   Inventories                               -1.3         0.8     0.4    -0.1
                                                                      Unemp. rate (% labour force)                9.2         9.9     9.5     9.2
currency is not going to be helping inflation, especially if oil      Current account (% GDP)                    -6.0        -6.6    -7.0    -6.8
prices remain elevated but with some lag, but the relatively          CPI (%Y)                                    8.9         7.4       6     5.7
lower growth rate might offset this to some extent.                   Policy rate (eop, %)                       5.50        4.50    5.50    5.50
                                                                      Genl. govt. balance (% GDP)                -2.1        -2.5    -2.5    -2.0
                                                                      Genl. govt. debt (% GDP)                     37          35    34.5      34
                                                                     Source: Haver Analytics, Morgan Stanley Research forecasts




                                                                                                                                               15
                                                                    MORGAN STANLEY RESEARCH

                                                                    September 2, 2013
                                                                    Back-to-School Global Macro Outlook




Country Focus
China: Growth Stabilisation Helps                                    Key message: We believe that growth stabilisation in
Acupuncture-Style Reform                                             the near term will offer a favourable backdrop for
                                                                     policy-makers to continue to roll out the acupuncture-
Helen Qiao (852) 2848 6511
                                                                     style reform measures.
Yuande Zhu (852) 2239 7820
Yin Zhang (852) 2239 7818
                                                                    A ‘shallow U-shaped’ deleveraging process is the more
We maintain our headline GDP growth forecast of 7.6%Y
                                                                    likely outcome: China has accumulated substantial leverage
for 2013: In our view, a more growth-friendly policy gesture
                                                                    in the corporate sector after three waves of investment
has helped to offset downside risks from the recent tightening
                                                                    expansion since 2008. The key problem is the slower
in financial conditions in the short term. We think it is
                                                                    productivity gains in recent years, which failed to boost equity
increasingly likely that China will be able to achieve the
                                                                    growth by as much as the liability increase. Experience from
government’s annual growth target of 7.5%Y this year.
                                                                    previous deleveraging episodes in China suggests that it is
We trim our 2014 growth forecast to 7.1%Y and set the               important to make room for higher private sector involvement
2015 forecast at 6.9%Y: On the other hand, the current              during deleveraging with sufficient policy cushions to prevent
growth rebound is unlikely to prove to be long-lasting in the       a hard landing. There is clear evidence that the current policy-
absence of major policy stimulus, especially if the global          makers have shifted towards a more balanced position of
demand recovery proves to be rather mild. We believe that           policy-making recently to implement both reforms and
more headwinds from sectoral over-capacity and excess               countercyclical policy adjustments.
leverage in the system will likely tip the risks on growth to the
downside in the medium term.                                        We expect no silver bullet, but many ‘silver needles’ for
                                                                    the ‘acupuncture-style’ reform: The new leaders have
Rebalancing more towards ‘good investment’ rather than              initiated multiple reform measures in various areas to help cut
consumption: The government’s recently introduced sector-           administrative red tape, promote SMEs and boost investment
specific policy measures seemed to aim at diverting resources       in railway and environment protection and energy
away from the areas suffering from over-capacity, and into          conservation. While the Third Plenary of the CPC will roll out a
environment protection, railway, broadband infrastructure and       full agenda of reforms for the next 10 years in November, we
dilapidated area reconstruction. Our GDP-by-expenditure             believe that the needle therapy will likely continue to help
forecasts largely reflect our view that while the pace of overall   improve resource allocation and increase efficiency in the
investment growth should moderate, it is unlikely to slump          near term. To ease the pain during deleveraging, we expect
sharply to make way to a consumption-driven growth model in         two cuts by 25bp each in benchmark interest rates in 2014,
the near future.                                                    one cut by 25bp in 2015, a slower pace in CNY appreciation
On a quarterly basis, we expect QoQ sequential growth to            and potentially a higher fiscal deficit in 2014.
rebound in 2H13, helped by restocking orders from
infrastructure and property investment, before slowing down         Forecast Summary
again in 1H14 when the policy effect tapers away. Yet, in                                                      2012        2013E   2014E   2015E
                                                                     Real GDP (%Y)                              7.7          7.6     7.1     6.9
year-on-year terms, growth will likely witness a modest
                                                                      Consumption                               8.3          7.6     7.3     7.0
decline of 7.5%, compared to 7.6% in 1H13, due to the high            GCF                                       8.3          8.5     7.7     7.5
base from last year.                                                 Contribution to GDP (pp)
                                                                      Consumption                               4.1          3.8     3.6     3.5
We keep the CPI inflation forecast unchanged at 2.6%Y                 GCF                                       3.9          4.0     3.6     3.6
                                                                      Net exports                              -0.2         -0.2    -0.1    -0.1
for 2013 and cut it to 1.8%Y for 2014: We expect CPI to
                                                                     Foreign trade
post a small surge in 3Q13, as a result of higher food prices         Exports (%Y, US$ terms)                   7.9          6.6     5.8     8.2
due to weather factors, before easing again in 4Q13.                  Imports (%Y, US$ terms)                   4.3          7.0     6.6     9.0
                                                                      Trade balance (US$ bn)                  231.1        240.2   238.6   241.3
Meanwhile, PPI deflation will likely ease gradually in both
                                                                     Current account (% of GDP)                 2.3          2.2     1.8     1.7
sequential and year-on-year terms in 2H13. Considering the           CPI (%Y)                                   2.6          2.6     1.8     2.0
CPI target of around 3.5%Y, the monetary authority will likely       Policy rate (eop)                         6.00         6.00    5.50    5.25
appreciate the fact that muted inflationary pressure in reality      USD/CNY (eop)                              6.3          6.2     6.1     5.9
                                                                     Fiscal deficit (% of GDP)                 -1.5         -2.1    -2.0    -1.0
leaves ample room for potential policy adjustment, if growth        Source: NBS, CEIC, Morgan Stanley Research forecasts
decelerates unexpectedly.


                                                                                                                                             16
                                                                                                                                            MORGAN STANLEY RESEARCH

                                                                                                                                            September 2, 2013
                                                                                                                                            Back-to-School Global Macro Outlook




Country Focus
India: Entering a Deeper Slowdown Cycle                                                                                                      Key message: We expect that growth will remain
Chetan Ahya (852) 2239 7812                                                                                                                  slower for longer as the corporate, banking and macro
Upasana Chachra (91) 6118 2246                                                                                                               balance sheets will take time to heal.

Cutting growth estimates for 2013 and 2014: Given the                                                                                       Corporate sector, banking sector and macro balance
challenging external and domestic macro environment, we are                                                                                 sheet will take time to heal: In addition to the weak GDP
cutting our growth estimates to 4.4%Y from 5.9%Y for 2013                                                                                   growth prints over the last two quarters, recent macro
and 4.6%Y from 6.8%Y for 2014. While we expect farm output                                                                                  developments suggest that growth could remain weak for at
growth to sustain at a higher level this year, we expect non-                                                                               least 2-3 more quarters. A weak growth trend lasting for 4-5
farm output growth to decelerate until QE Mar-14.                                                                                           quarters will increasingly lead to a vicious cycle, in our view.
                                                                                                                                            We expect this vulnerability to result in a rise in non-
The stagflation-type environment has continued for longer:
                                                                                                                                            performing assets, leading to risk-aversion in the domestic
The macro environment in India has remained challenging
                                                                                                                                            banking sector, increasing challenges in fiscal deficit
since the credit crisis. While policy-makers started to focus on
                                                                                                                                            management leading to pro-cyclical fiscal tightening and
improving the growth mix since September 2012, the recent
                                                                                                                                            continued external funding risks. We believe that this will
growth and inflation data indicate that the economy needs more
                                                                                                                                            accentuate the deceleration in non-farm output. While we
time to heal and come out of the stagflation-type environment.
                                                                                                                                            expect strong growth in farm output during the quarters
External funding risks leading to pro-cyclical tightening:                                                                                  ending September and December, we expect non-farm GDP
India has been running a persistently high current account                                                                                  growth to continue to decelerate until QE Mar-14, and to
deficit alongside negative real rates since the credit crisis. The                                                                          remain under 4%Y in QE Dec-13 and QE Mar-14. Moreover,
high current account deficit was being funded as long as the                                                                                we believe that the corporate sector, banking sector and
US ran negative real rates. However, the recent rise in US real                                                                             macro balance sheets will take time to recover and will
rates has exposed the economy to funding risks. The resulting                                                                               represent headwinds to growth. We thus expect growth to
sharp depreciation pressure on the currency has forced the                                                                                  recover gradually from QE Sep-14.
RBI to explicitly initiate monetary tightening and lift real rates.
                                                                                                                                            Bull-bear scenarios: We believe that our bear case outlook
We believe that India will remain exposed to the trend of the
                                                                                                                                            could be triggered by a further deterioration in the funding
US dollar and real interest rates as long as India’s current
                                                                                                                                            environment as the US 10Y yield rises sharply to 4% in a
account deficit remains higher than a more sustainable level
                                                                                                                                            short span of time. In such a scenario, we expect India’s GDP
of 2.5% of GDP and CPI remains higher than 7%Y. In the
                                                                                                                                            growth to fall further to 3.25%Y in 2014. On the other hand, if
near term (within six months), while we do expect some
                                                                                                                                            the external environment were to improve with lesser
moderation in CPI and the current account deficit, it should
                                                                                                                                            pressures from funding risks and stabilisation in the currency,
still remain high. During this period, the rupee and interest
                                                                                                                                            coupled with stronger domestic policy action to improve the
rate environment in India will remain highly dependent on the
                                                                                                                                            growth mix, we expect growth to increase to 5.5%Y in our bull
expectations of the Fed’s monetary policy action.
                                                                                                                                            case in 2014.

Persistent Negative Real Rates and Widening Deficit                                                                                         Forecast Summary
                                                                                                                                                                                      2012        2013E         2014E        2015E
 4%                                                                                                                                  10%
 3%                                                                                      Post credit crisis                          8%     Real GDP (%Y)*                             5.1           4.4          4.6           6.0
 2%                                                                                                                                  6%     Consumption                                5.4           2.9          3.1           4.2
 1%                                                                                                                                  4%     GCF                                        3.6           2.2          1.2           5.0
 0%                                                                                                                                  2%
                                                                                                                                     0%     Exports (%Y, US$ terms)                   -1.6           6.1         13.5          17.7
-1%                                                                                                                                         Imports (%Y, US$ terms)                    5.9          -0.2          5.7          13.2
                                                                                                                                     -2%
-2%                                                                                                                                  -4%    Trade balance (US$ bn)                  -201.5        -182.0       -167.5        -173.4
-3%                                                                                                                                  -6%
-4%                                                                                                                                         Current account (% of GDP)                -5.0          -4.0         -3.0          -2.6
                                                                                                                                     -8%
-5%                                                                                                                                  -10%   CPI (%Y)                                   9.3          10.8          7.4           6.1
-6%                                                                                                                                  -12%   Policy rate (eop)                         8.00          7.25         7.25          7.25
      Jun-00

               Jun-01

                        Jun-02

                                 Jun-03

                                          Jun-04

                                                   Jun-05

                                                            Jun-06

                                                                     Jun-07

                                                                               Jun-08

                                                                                        Jun-09

                                                                                                 Jun-10

                                                                                                          Jun-11

                                                                                                                   Jun-12

                                                                                                                            Jun-13




                                                                                                                                            3M T-bill Yield (eop)                      8.2          11.0          9.5          9.00
                                                                                                                                            Fiscal deficit (% of GDP)                 -7.2          -7.3         -7.0          -6.8
                                                                                                                                            Source: CEIC, CSO, Morgan Stanley Research forecasts; *Real GDP is at factor cost.
      CAD % of GDP, 12M trailing sum, LS                                      Real 10Y yield 12MMA, RS
      Real 3M yield 12MMA, RS
Source: RBI, Bloomberg, CEIC, Morgan Stanley Research


                                                                                                                                                                                                                                 17
                                                                         MORGAN STANLEY RESEARCH

                                                                         September 2, 2013
                                                                         Back-to-School Global Macro Outlook




Country Focus
Korea: Revising Down GDP on Weaker EM                                     Key message: Korea is exposed to the risks of weaker
Demand                                                                    EM, as 70% of its exports go directly to EM economies.
Sharon Lam (852) 2848 8927                                                However, private consumption could show continual
Jason Liu (852) 2848 6882                                                 improvement, and a greater stimulus effect to support
                                                                          the economic recovery from 2H13.
We retain our 2013 GDP forecast, but revise down 2014
GDP: Along with the GDP downgrade from our global
economics team, we revise down our Korea GDP forecast to                 We think that the conditions remains favourable for Korea’s
3.5%Y in 2014, from 3.9%Y previously. We retain our 2013                 consumption, due to: i) Improving consumer sentiment; ii) The
GDP forecast at 2.9%Y, due to the stronger-than-expected 2Q              lower debt-service burdens after the rate cut in 1H; iii) The low
GDP. The forecast cut in 2014 is mainly due to the likely                inflation environment; and iv) The resilient labour market,
weaker EM recovery, particularly in China and ASEAN, which               driven by better manufacturing employment. However, there
could affect Korea’s exports. We forecast Korea’s GDP to                 are lingering uncertainties over capex investment recovery.
expand by 3.7%Y in 2015.                                                 Korea’s business sentiment remains weak and companies are
                                                                         not willing to make investments. The weaker EM outlook may
30% of Korea’s exports go to China; 14% go to ASEAN:                     also affect corporate sentiment when they decide on capex
Korea has large export exposures to emerging markets.                    investment, in our view.
Based on our estimation, 70% of Korea’s exports went directly
to emerging markets in 2012, compared to only 50% in 2000.               More stimulus effect to support economy in 2H13 and
Exports to China accounted for 30% of total exports, and                 2014; upside surprise possible from construction
exports to ASEAN accounted for 14%. Besides, we think that               investment: The impact from the fiscal and monetary
a significant portion of Korea’s exports to China are for end-           stimulus in 1H could continue to support Korea’s economy in
demand in China, rather than for re-export purposes.                     2H13 and 2014, in our view. There is usually a time lag for
Therefore, with the rising uncertainties over EM in 2H13 and             the economy to actually ‘feel’ the stimulus. Therefore, we
2014, we think that Korea’s export recovery could be milder              think that there would be a greater stimulus effect for the
than expectations.                                                       economy from 2H13. Besides, the property market could be a
                                                                         wildcard. The government could relax the property market
Private consumption could continue to improve, but there                 measures more to support the industry. There is a likelihood
is uncertainty about capex investment: Despite the likely                that construction investment could rebound, driven by the
milder export recovery, we believe that Korea’s private                  better property market situation.
consumption should continue to improve in 2H13 and 2014.

70% of Korean Exports Went Directly to EM                                Forecast Summary
 75                                                                                                                2012    2013E   2014E   2015E
       Korea's exports to emerging markets, as % of total                 Real GDP (%Y)                              2.0     2.9     3.5     3.7
                                                                  70%      Private consumption                       1.7     1.9     2.5     2.5
 70
                                                                           Government consumption                    3.9     3.7     4.0     3.0
                                                                           Facility investment                      -1.9    -3.5     4.0     4.0
 65                                                                        Construction investment                  -2.2     4.5     3.0     2.0
                                                                           Exports                                   4.2     5.5     6.9     7.2
 60                                                                        Imports                                   2.5     3.9     5.8     6.5
                                                                          Contribution to GDP (pp)
                                                                           Final domestic demand                    1.0      1.9     2.7     2.4
 55
                                                                           Net exports                              1.1      1.2     1.2     1.1
                                                                           Inventories                              0.0      0.1    -0.4     0.2
 50                                                                       Current account (% GDP)                   3.8      4.9     4.1     4.6
       50%                                                                CPI (%Y)                                  2.2      1.6     2.5     2.8
 45
                                                                          Policy rate (eop, %)                     2.75     2.50    3.00    3.25
                                                                         Source: CEIC, Morgan Stanley Research forecasts

 40
      2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: CEIC, Morgan Stanley Research




                                                                                                                                              18
                                                                                 MORGAN STANLEY RESEARCH

                                                                                 September 2, 2013
                                                                                 Back-to-School Global Macro Outlook




Country Focus
Brazil: No Unravelling                                                            Key message: Structural challenges remain, such as
Arthur Carvalho (55 11) 3048 6272                                                 how to boost productivity and make the economy more
Latam Economics Team                                                              competitive. But the adjustment will likely be
                                                                                  postponed to after the elections in late 2014, and in the
Brazil watchers have had little relief from a series of bad                       meantime we expect higher inflation and lower growth.
news: More recently, the sharp exchange rate depreciation
seems to be for some the last stage before the total collapse
                                                                                 Growth in 2014 should continue to suffer from low
of the economy. Although we believe that this is indeed
                                                                                 investment and a tighter monetary policy: Although a
worrisome and will have consequences for the overall
                                                                                 looser fiscal policy should help to offset partially the tighter
economy, including higher interest rates, we think that if the
                                                                                 monetary policy, we believe that with weak investment
currency stabilises things are not about to fall apart. Indeed, at
                                                                                 recovery, growth will continue to be subdued. Although we
least for the consumer, with falling food inflation and despite
                                                                                 have been more confident about an investment recovery, led
the upcoming pass-through of the weaker FX, the second half
                                                                                 by infrastructure projects, this seems unlikely at this point. In
seems better than the first one.
                                                                                 part, the populist reaction to the protests in June, including not
The widespread protests witnessed in June and July have                          allowing toll prices to go up, but more importantly the low
changed the growth dynamics dramatically: Although we                            returns being offered in the concessions, are the ultimate
did not expect the growth pace from 2Q to be sustained, the                      obstacle to execute these projects in 2014.
shock caused by the protests will certainly dent growth much
                                                                                 Given the electoral calendar, we believe that the
further than previously expected. Two factors will affect
                                                                                 government will continue to try to support Brazil’s tight
growth: First, the retail sector has been hurt by several days
                                                                                 labour market and pervasive wage dynamics:
of early closures, followed by a fall in consumer confidence
                                                                                 Nevertheless, the current path is not sustainable and deeper
that likely hit sales further in July. Although we do not believe
                                                                                 adjustment will be necessary in 2015, in order to rein in
that this confidence shock is permanent, we think that
                                                                                 inflation. Higher unemployment will eventually lead to higher
consumer appetite will be depressed at the start of 3Q.
                                                                                 delinquencies and a negative feedback loop, in our view.
Second, the roadblocks of early July seem to have affected
industrial production: with a sharp fall in consumer and                         We believe that Brazil’s Achilles’ Heel will continue to be
business confidence as well as sales, we expected                                the currency: While fundamentals do not point to a much
manufacturers to be even more cautious in 3Q. We expect a                        weaker currency, a confidence crisis could push the currency
rebound in 4Q, as confidence normalises and the consumer                         further, requiring tighter monetary policy and a weaker growth
continues to benefit from lower food inflation.                                  outlook.

                                                                                 Brazil’s structural challenges remain and will continue to
Substantial Fiscal Tightening This Year
                                                                                 erode the growth outlook over the next few years, but this
 10.0%                   Brazil: GDP and CPI forecast (%Y)                7.0%   economy is also not about to unravel, in our view.

  8.0%                                                                    6.0%
                                                                                 Forecast Summary
  6.0%                                                                    5.0%                                            2012       2013E     2014E   2015E
                                                                                  Real GDP (%Y)                             0.9         2.1      1.7     1.6
                                                         Morgan Stanley
  4.0%                                                   forecasts        4.0%     Private consumption                      3.1         1.9      2.2     1.4
                                                                                   Government consumption                   3.2         1.3      2.7     2.0
  2.0%                                                                    3.0%     Gross fixed investment                  -4.0         5.5     -0.8     1.6
                                                                                  Contribution to GDP (pp)
                                                                                   Final domestic demand                    1.6         2.7      1.8     1.7
  0.0%                                                                    2.0%
                                                                                   Net exports                              0.0          -2     -0.3       0
                                                                                   Inventories                             -0.8         1.4      0.2    -0.1
  -2.0%                                                                   1.0%
                                                                                  Current account (% GDP)                  -2.4        -3.6     -4.2    -3.6
                                                                                  CPI (%Y)                                  5.4         6.2      6.1     6.0
  -4.0%                                                            0.0%           Policy rate (eop, %)                     7.25        9.75     9.75    11.0
      Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15              Genl. govt. balance (% GDP)              -2.5        -1.8     -2.5    -2.0
                   GDP (LHS)                                  CPI                Source: IBGE, BCB, Morgan Stanley Latam Economics forecasts
Source: IBGE, Morgan Stanley Latam Economics forecasts




                                                                                                                                                          19
                                                                                MORGAN STANLEY RESEARCH

                                                                                September 2, 2013
                                                                                Back-to-School Global Macro Outlook




Country Focus
Mexico: (Near) Recession and Reforms                                             Key message: The economy hit a wall during 2013, but
Luis Arcentales (212) 761 4913                                                   the year may ultimately be remembered for Mexico’s
                                                                                 Moment – namely the potential for the country to
This year was supposed to be the year of Mexico’s
                                                                                 regain momentum on the structural reform front.
Moment – the potential for the country to regain material
reform momentum – and we suspect that it still will be:
Despite some setbacks, in part triggered by street protests,                    The worst of the economic slump seems to be behind us
we continue to see an administration focused on advancing its                   as 2Q likely marked the cyclical trough. The factors
ambitious structural reform agenda (see Mexico: It’s Still                      underpinning our call for a 2H recovery are still at play, even if
Mexico’s Moment – Week Ahead in Latin America, August 16,                       the speed of the pick-up is likely to be more muted. Above all,
2013). The Executive’s recent energy proposal, which though                     the contraction in government spending, which has hit sectors
involving constitutional change caused disappointment as it                     like construction hard, appears to have run its course. Mexico
fell short of the opposition’s aggressive plan centred on                       should also benefit from firmer US manufacturing output,
concessions, still has the potential to energise Mexico’s                       where the link between both economies is strongest, after
stagnant oil and gas sectors by attracting much-needed                          weak export demand caused it to stall in the first half of the
capital and technology (see “Mexico: Energize it!”, Week                        year (see more on the US on page 9). These tailwinds should
Ahead in Latin America, August 16, 2013). If successful, these                  carry into 2014, allowing the economy to regain momentum
reforms – above all a comprehensive opening of the electricity                  after a disappointing performance in 2013. Importantly, weak
and petrochemicals sectors, as well as allowing private                         economic conditions will likely limit the appetite for an overly
participation in oil and gas – have the potential to boost                      aggressive fiscal reform package, as potentially higher taxes
growth and competitiveness in the medium term.                                  in early 2014 could deal a major blow to an economy that may
                                                                                be only starting to gather momentum.
But 2013 has also turned out to be the year of Mexico’s
near-recession: Our positive view on structural reforms, we                     Ultimately, 2013 may be remembered not as the year of
had argued, did not extend to the near-term growth outlook,                     (near) recession but instead the year of Mexico’s
though we were caught off-guard by the extent of the recent                     Moment: Given its potential in terms of investment, much
slump in activity: 2Q GDP plunged at a 2.9% annualised clip,                    attention has been centred on the energy reform; however,
the first contraction since the 2009 recession, while growth in                 the success of the reform push will depend on secondary laws
the first three months of the year was flat. Accordingly, we are                and, down the road, execution, in our view. Recent unrest by
slashing our 2013 GDP forecast in half to 1.3%Y from 2.6%Y                      teachers, who favour the status quo, has at least postponed
previously, while trimming 2014 to 3.7%Y from 3.9%Y.                            the vote on a key aspect of the education bill. While we
                                                                                suspect that this setback will not derail Mexico’s Moment, it
Substantial Fiscal Drag Starting to Ease                                        poses an important risk as it comes at a critical juncture as the
                                                                                Executive prepares the terrain for debates on the energy and
   Public sector spending (6mma, %Y change, real terms)                         fiscal fronts. The coming months are likely to determine
 20%
                                                                                whether Mexico stays the course of its reform agenda.
 16%
                                                                                Forecast Summary
 12%
                                                                                                                         2012       2013E     2014E   2015E
   8%                                                                            Real GDP (%Y)                             3.8         1.3      3.7     4.4
                                                                                  Private consumption                      3.3         2.7      3.2     3.9
   4%
                                                                                  Government consumption                   1.5        -0.2      1.7     1.4
                                                                                  Gross fixed investment                   5.9         1.8      5.8     7.7
                                                                                 Contribution to GDP (pp)
   0%
                                                                                  Final domestic demand                    3.6         2.2      3.5     4.5
                                                                                  Net exports                              0.1        -0.8      0.1    -0.2
  -4%
                                                                                  Inventories                              0.1        -0.1      0.1     0.0
                                                                                 Current account (% GDP)                  -1.2        -1.6     -1.8    -1.9
  -8%                                                                            CPI (%Y)                                  4.1         3.8      3.6     3.6
    Sep-99     Sep-01     Sep-03      Sep-05     Sep-07     Sep-09     Sep-11    Policy rate (eop, %)                     4.50        4.00     4.00    4.50
Source: SHCP; *Shaded areas indicate presidential and mid-term elections         Public sector balance (% GDP)            -2.6        -2.0     -2.0    -1.8
                                                                                Source: IBGE, BCB, Morgan Stanley Latam Economics forecasts




                                                                                                                                                         20
                                                                                                        MORGAN STANLEY RESEARCH

                                                                                                        September 2, 2013
                                                                                                        Back-to-School Global Macro Outlook




Monetary Policy Forecasts
                          Current                3Q13            4Q13            1Q14           2Q14      3Q14               4Q14           1Q15             2Q15            3Q15               4Q15
United States               0.15                 0.15            0.15            0.15           0.15       0.15              0.15           0.15             0.50             1.00              1.50
Euro Area                   0.50                 0.50            0.25            0.25           0.25       0.25              0.25           0.25             0.25             0.25              0.25
Japan                       0.05                 0.05            0.05            0.05           0.05       0.05              0.05           0.05             0.05             0.05              0.05
United Kingdom              0.50                 0.50            0.50            0.50           0.50       0.50              0.50           0.50             0.75             0.75              1.00
Canada                      1.00                 1.00            1.00            1.00           1.00       1.00              1.00           1.25             1.25             1.25              1.50
Switzerland                 0.00                 0.00            0.00            0.00           0.00       0.00              0.00           0.00             0.00             0.00              0.00
Sweden                      1.00                 1.00            1.00            1.00           1.00       1.00              1.25           1.25             1.50             1.50              1.75
Norway                      1.50                 1.50            1.50            1.50           1.50       1.50              1.75           1.75             1.75             2.00              2.25
Australia                   2.50                 2.50            2.25            2.00           2.00       2.00              2.00           2.00             2.25             2.50              2.75
New Zealand                 2.50                 2.50            2.50            2.75           3.00       3.25              3.50           3.50             3.75             4.00              4.00
Russia                      5.50                 5.25            5.00            4.75           4.75       4.75              4.75           4.75             4.75             4.75              4.75
Poland                      2.50                 2.50            2.50            2.50           2.75       3.00              3.25           3.50             3.75             4.00              4.00
Czech Republic              0.05                 0.05            0.05            0.25           0.50       0.75              1.00           1.25             1.50             1.75              2.00
Hungary                     3.80                 3.60            3.50            3.50           3.50       3.75              4.00           4.25             4.50             4.50              4.50
Romania                     4.50                 4.25            4.00            4.00           4.00       4.00              4.25           4.50             4.75             5.00              5.00
Turkey                      4.50                 4.50            4.50            4.50           4.50       5.50              5.50           5.50             5.50             5.50              5.50
Israel                      1.25                 1.25            1.25            1.25           1.25       1.75              1.75           1.75             2.50             2.50              2.50
South Africa                5.00                 5.00            5.00            5.00           5.00       5.00              5.00           5.00             5.00             6.00              7.00
Nigeria                    12.00             12.00               12.00           12.00          12.00     12.00              12.00          11.50            10.50           10.50              10.50
Ghana                      16.00             16.00               16.00           16.00          16.00     16.00              16.00          16.00            16.00           16.00              16.00
China                       6.00                 6.00            6.00            6.00           5.75       5.75              5.50           5.50             5.25             5.25              5.25
India                       7.25                 7.25            7.25            7.25           7.25       7.25              7.25           7.25             7.25             7.25              7.25
Hong Kong                   0.50                 0.50            0.50            0.50           0.50       0.50              0.50           0.50             0.50             0.50              0.50
S. Korea                    2.50                 2.50            2.50            2.50           2.50       2.75              3.00           3.25             3.25             3.25              3.25
Taiwan                      1.88                 1.88            2.00            2.13           2.25       2.38              2.38           2.38             2.38             2.38              2.38
Indonesia                   7.00                 7.00            7.75            7.75           7.75       7.75              7.75           7.75             7.75             7.75              7.75
Malaysia                    3.00                 3.00            3.00            3.00           3.00       3.00              3.00           3.00             3.00             3.00              3.00
Thailand                    2.50                 2.50            2.50            2.50           2.50       3.00              3.50           3.50             3.50             3.50              3.50
Brazil                      9.00                 9.00            9.75            9.75           9.75       9.75              9.75           10.50            11.00           11.00              11.00
Mexico                      4.00                 4.00            4.00            4.00           4.00       4.00              4.00           4.00             4.50             4.50              4.50
Chile                       5.00                 5.00            4.50            4.50           4.50       4.50              4.50           4.50             4.50             4.50              4.50
Peru                        4.25                 4.25            4.25            4.25           4.25       4.25              4.25           4.25             4.25             4.25              4.25
Colombia                    3.25                 3.25            2.75            2.75           3.00       3.50              3.75           4.00             4.25             4.50              4.50
Source: National Central Banks, Morgan Stanley Research forecasts; Note: Japan policy rate takes a mid range value.


Fed and Eurosystem Balance Sheet Monitor
4,000                            Federal Reserve (Bil.$)                                                 3,500
                                                                                                                                            Eurosystem (Bil.€)
3,500                                                                                                    3,000

3,000
                                                                                                         2,500
2,500
                                                                                                         2,000
2,000
                                                                                                         1,500
1,500                                                                                                                                               Size of B/S
                                                                                                         1,000
1,000                                                              Size of B/S                                                                      Total Reserves
                                                                                                           500
  500                                                              Excess Reserves

    0                                                                                                        0
     Jan-   Jul-   Jan-   Jul-     Jan-   Jul-     Jan-   Jul-    Jan-   Jul-    Jan-    Jul-                 Jan-    Jul-    Jan-   Jul-   Jan-     Jul-   Jan-    Jul-   Jan-   Jul-   Jan-     Jul-
      08    08      09     09       10     10       11     11      12     12      13      13                   08     08       09    09      10      10      11     11      12    12      13      13
Source: Haver Analytics                                                                                  Source: Haver Analytics




                                                                                                                                                                                                         21
                                                                         MORGAN STANLEY RESEARCH

                                                                         September 2, 2013
                                                                         Back-to-School Global Macro Outlook




GDP Forecasts: Base, Bear, Bull Scenarios
                  %Y                        2012          2013E                   2014E                        2015E          2016-18E
                                                   Bear   Base    Bull   Bear     Base       Bull      Bear    Base    Bull
GLOBAL                                       3.2   2.6     2.9    3.2    2.4       3.5        4.1       2.7     3.7    4.4      3.8
     G10                                     1.5   0.8     1.0    1.2    1.1       2.0        2.6       1.0     2.0    2.7      2.0
                United States                2.8   1.6     1.6    1.7    1.9       2.7        3.3       1.8     2.6    3.4      2.5
                Euro Area                   -0.5   -0.7   -0.5    -0.3   -0.1      0.9        1.6       -0.2    1.2    1.8      1.3
                Germany                      0.7   0.2     0.4    0.6    0.8       1.8        2.4       0.4     1.8    2.4      1.4
                France                       0.0   -0.2    0.0    0.5    -0.4      0.6        1.6       -0.1    1.2    2.1      1.6
                Italy                       -2.4   -1.9   -1.7    -1.5   -0.6      0.4        1.0       -0.7    0.7    1.3      0.9
                Spain                       -1.6   -1.5   -1.3    -1.1   -0.2      0.8        1.4       -0.3    1.1    1.7      1.2
                Japan                        2.0   1.1     1.6    1.8    0.3       1.3        1.8       0.2     1.3    1.9      1.0
                United Kingdom               0.2   1.3     1.4    1.5    1.2       2.4        3.4       1.0     2.1    3.2      2.3
                Canada                       2.0   1.5     1.8    1.9    2.0       2.5        2.9       1.9     2.4    3.0      3.0
                Sweden                       0.7   0.9     1.1    1.2    1.2       2.2        2.9       1.7     3.0    3.6      2.3
                Australia                    3.6   2.1     2.6    3.1    0.9       2.6        3.1       2.0     2.7    3.5      3.0
     Emerging Markets                        4.9   4.2     4.8    5.1    3.6       4.9        5.6       4.2     5.2    5.9      5.4
           CEEMEA                            2.7   1.7     2.5    3.1    2.0       3.6        4.4       2.4     3.7    4.8      3.7
                Russia                       3.4   1.5     2.2    2.9    1.5       3.1        3.8       1.5     2.8    4.0      3.0
                Poland                       2.0   0.5     1.0    1.5    1.5       2.7        3.5       1.8     3.2    4.4      3.2
                Czech Republic              -1.2   -1.5   -1.0    -0.5   1.0       2.1        3.0       1.1     2.5    3.7      2.3
                Hungary                     -1.7   0.0     0.5    1.0    0.1       1.5        2.5       -0.2    1.3    3.0      1.3
                Ukraine                      0.2   -0.8    0.3    0.8    0.5       1.8        3.0       3.0     3.2    4.0      4.0
                Kazakhstan                   5.0   4.0     5.3    6.0    3.0       6.7        7.5       3.0     6.2    7.5      5.0
                Turkey                       2.2   2.2     3.6    4.5    2.0       4.0        5.0       3.7     4.7    5.5      4.7
                Israel                       3.2   2.9     3.8    4.5    2.0       3.0        3.7       2.5     3.1    3.7      3.5
                South Africa                 2.5   1.5     2.0    2.5    1.5       3.0        4.0       1.5     3.5    4.5      2.8
                Nigeria                      6.5   6.7     6.8    6.9    6.5       7.8        8.0       6.8     7.5    7.8      7.2
                Ghana                        7.0   5.5     7.5    9.0    5.5       7.8        9.0       5.2     7.5    8.8      6.5
           Asia ex Japan                     6.2   5.5     6.0    6.2    4.5       5.9        6.4       5.4     6.1    6.8      6.4
                China                        7.7   7.0     7.6    7.7    5.8       7.1        7.3       6.3     6.9    7.5      7.0
                India                        5.1   4.1     4.4    4.6    3.3       4.6        5.5       5.0     6.0    6.8      6.8
                Hong Kong                    1.5   2.4     3.0    3.5    1.0       2.7        4.4       1.2     2.9    4.2      3.0
                Korea                        2.0   2.2     2.9    3.5    2.0       3.5        4.2       2.7     3.7    4.5      4.0
                Taiwan                       1.3   2.0     2.9    3.5    2.2       3.6        5.0       2.5     3.7    4.5      3.7
                Singapore                    1.3   2.7     2.9    3.1    1.1       3.6        5.1       2.6     4.0    5.2      4.0
                Indonesia                    6.2   5.5     5.6    5.7    4.3       5.1        5.5       5.0     5.5    5.8      5.8
                Malaysia                     5.6   3.9     4.1    4.3    2.5       4.3        5.2       3.9     4.8    5.4      5.0
                Thailand                     6.5   3.5     3.7    3.9    2.7       4.4        5.4       3.9     4.8    5.5      4.8
           Latin America                     2.8   2.1     2.8    3.1    2.1       3.0        3.7       1.7     3.0    3.6      3.4
                Brazil                       0.9   1.5     2.1    2.4    1.0       1.7        2.8       0.0     1.6    2.5      2.8
                Mexico                       3.8   0.9     1.3    1.7    2.5       3.7        4.4       2.9     4.4    4.8      4.0
                Chile                        5.6   3.8     4.2    4.4    2.5       3.9        4.8       2.8     4.3    5.4      4.5
                Peru                         6.3   3.9     4.9    5.4    4.3       5.4        6.0       4.4     5.5    6.1      5.5
                Colombia                     3.4   2.7     3.4    3.7    3.5       4.4        5.0       3.6     4.5    5.0      4.5
                Argentina                    1.9   5.4     6.8    7.4    2.4       3.0        3.3       1.6     2.0    2.2      3.0
                Venezuela                    5.5   1.5     1.9    2.0    2.0       2.5        2.8       1.8     2.2    2.4      2.0
Source: IMF, Morgan Stanley Research forecasts




                                                                                                                                   22
                                                                         MORGAN STANLEY RESEARCH

                                                                         September 2, 2013
                                                                         Back-to-School Global Macro Outlook




CPI Forecasts: Base, Bear, Bull Scenarios
                  %Y                        2012          2013E                   2014E                        2015E          2016-18E
                                                   Bear   Base    Bull   Bear     Base       Bull      Bear    Base    Bull
GLOBAL                                       3.3   2.9     3.3    3.4    2.0       3.0        3.6       2.1     3.1    3.9      3.2
     G10                                     1.9   1.4     1.5    1.6    1.4       1.7        2.0       0.7     1.6    2.2      1.9
                United States                2.1   1.5     1.6    1.6    1.1       1.4        1.7       1.2     1.5    1.8      2.0
                Euro Area                    2.5   1.5     1.5    1.6    1.5       1.6        1.6       -0.3    1.4    2.5      1.7
                Germany                      2.0   1.6     1.6    1.7    1.7       1.9        1.9       0.1     1.9    2.9      1.9
                France                       2.0   1.0     1.0    1.0    1.5       1.6        1.7       -0.3    1.4    2.5      1.8
                Italy                        3.0   1.4     1.4    1.5    1.4       1.5        1.6       -0.1    1.6    2.7      1.4
                Spain                        2.4   1.2     1.7    1.7    0.7       0.8        0.9       -0.3    1.4    2.5      1.5
                Japan                       -0.1   -0.1    0.2    0.4    1.6       2.3        3.1       0.2     1.2    2.8      1.8
                United Kingdom               2.8   2.7     2.7    2.7    2.5       2.7        2.9       2.1     2.3    2.4      2.2
                Canada                       1.5   1.0     1.6    2.2    1.5       2.0        2.5       1.1     1.6    2.3      2.0
                Sweden                       0.9   0.0     0.1    0.1    0.4       1.1        1.6       0.7     2.2    2.5      2.0
                Australia                    1.8   2.0     2.2    3.0    1.9       2.3        2.9       1.8     2.4    3.0      2.6
     Emerging Markets                        4.8   4.4     5.1    5.2    2.6       4.3        5.1       3.4     4.5    5.4      4.2
           CEEMEA                            5.6   5.0     5.2    5.6    5.0       4.9        5.7       4.6     5.0    5.9      4.7
                Russia                       5.1   6.0     6.5    7.0    4.5       4.9        6.0       4.0     4.6    6.0      4.0
                Poland                       3.7   0.9     1.1    1.4    1.7       2.2        2.9       1.8     2.5    3.3      2.5
                Czech Republic               3.3   1.4     1.6    1.8    1.0       1.5        2.2       1.2     1.9    2.7      2.0
                Hungary                      5.7   1.6     1.8    2.0    1.8       2.2        2.7       3.0     3.6    4.3      3.0
                Ukraine                      0.6   0.3     0.4    0.6    11.0      5.1        5.0       7.5     6.5    6.3      7.0
                Kazakhstan                   5.1   5.5     6.0    7.0    5.5       6.1        8.5       5.5     6.4    9.0      6.0
                Turkey                       8.9   7.0     7.4    8.0    5.2       6.0        7.0       5.0     5.7    6.7      5.5
                Israel                       1.7   1.3     1.5    1.8    1.4       2.2        3.0       1.5     2.0    2.7      2.1
                South Africa                 5.7   6.0     5.8    5.5    6.5       5.6        5.2       6.2     5.5    5.3      5.3
                Nigeria                     12.2   9.2     8.7    8.5    11.0      9.3        8.8      10.5    10.1    9.8      9.5
                Ghana                        9.2   12.5   11.0    9.5    10.5      9.0        8.0      10.5     9.0    7.0      10.5
           Asia ex Japan                     4.1   3.6     4.4    4.7    1.0       3.4        4.3       1.9     3.2    4.0      3.6
                China                        2.6   1.5     2.6    2.6    -2.0      1.8        3.0       0.2     2.0    2.9      3.0
                India                        9.3   10.2   10.8    11.6   6.8       7.4        8.2       5.6     6.1    7.0      5.5
                Hong Kong                    4.1   4.2     4.5    4.7    2.2       2.9        4.3       1.1     2.6    4.0      3.0
                Korea                        2.2   1.2     1.6    2.0    1.6       2.5        3.5       1.8     2.8    4.0      3.0
                Taiwan                       1.9   1.3     1.5    2.2    1.0       1.8        3.0       1.0     2.0    3.5      2.0
                Singapore                    4.6   2.2     2.4    2.6    1.8       2.5        3.2       1.9     2.6    3.3      2.5
                Indonesia                    4.3   7.1     7.3    7.5    8.6       7.6        7.3       7.1     6.5    6.2      6.0
                Malaysia                     1.7   1.8     1.9    2.0    2.0       2.4        2.8       2.0     2.4    2.8      2.0
                Thailand                     3.0   2.1     2.3    2.5    2.0       2.6        3.2       1.9     2.5    3.1      3.0
           Latin America                     6.2   6.5     7.3    6.4    6.1       7.1        7.4       7.7     8.9    10.1     6.3
                Brazil                       5.4   6.0     6.2    6.5    5.8       6.1        6.5       5.5     6.0    6.5      5.5
                Mexico                       4.1   3.6     3.8    4.0    3.2       3.6        4.5       3.2     3.6    3.9      3.3
                Chile                        3.0   1.5     1.8    2.2    2.5       3.1        3.3       2.3     3.0    3.4      3.0
                Peru                         3.7   2.5     2.7    3.6    2.4       2.7        3.6       2.0     2.4    2.7      2.5
                Colombia                     3.2   2.0     2.1    3.8    2.7       3.1        3.5       2.8     3.2    3.7      3.0
                Argentina                   10.0   9.1    10.5    11.0   9.5       10.0      11.0      25.0    30.0    35.0     10.0
                Venezuela                   21.1   31.0   38.3    18.0   25.0      36.4      32.0      24.8    29.2    33.6     30.0
Source: IMF, Morgan Stanley Research forecasts




                                                                                                                                   23
                                                                                             MORGAN STANLEY RESEARCH

                                                                                             September 2, 2013
                                                                                             Back-to-School Global Macro Outlook




Government Budget Balance and Debt Forecasts
                                       General government budget balance (% of GDP)                          Primary general government budget balance (% of GDP)
                                2011             2012     2013E       2014E         2015E                   2011        2012        2013E       2014E        2015E
DM
    US                          -10.2             -8.5     -5.8        -5.0           -4.7                  -8.3        -6.6         -3.9        -3.1         -2.8
    Euro Area                    -4.1             -3.7     -3.1        -3.0           -2.8                  -1.1        -0.6         -0.1        0.3          0.4
          Austria                -2.4             -2.5     -2.3        -1.9           -1.9                  0.2         0.1          -0.4        0.1          0.1
          Belgium                -3.7             -3.9     -2.7        -2.4           -1.1                  -0.4        -0.5         0.7         0.8          2.1
          Finland                -1.1             -2.2     -2.3        -2.4           -2.3                  0.3         -0.8         -0.9        -1.0         -0.5
          France                 -5.3             -4.8     -3.9        -3.5           -3.2                  -2.7        -2.3         -1.3        -0.9         -0.5
          Germany                -0.8             0.2      0.0         0.1             0.3                  1.8         2.6          2.2         2.2          2.4
          Greece                 -9.5            -10.0     -4.0        -3.6           -2.7                  -2.4        -1.3         0.1         1.2          2.6
          Ireland               -13.3             -8.1     -7.8        -4.9           -2.2                 -10.0        -4.6         -2.8        0.0          2.7
          Italy                  -3.8             -3.0     -3.3        -2.4           -2.2                  1.2         2.5          2.2         3.4          3.8
          Netherlands            -4.3             -4.0     -3.4        -3.5           -3.4                  -2.3        -2.2         -1.8        -1.8         -1.7
          Portugal               -4.4             -6.4     -5.7        -4.3           -2.8                  -0.4        -2.0         -1.3        0.2          1.6
          Spain                  -9.4            -10.6     -6.9        -6.0           -5.3                  -7.0        -7.7         -3.5        -2.3         -1.4
    Japan                        -9.9            -10.2    -10.8        -8.1           -7.2                  -9.1        -9.3         -9.9        -7.1         -6.1
    UK                           -7.8             -5.5     -6.1        -5.2           -4.4                  -5.0        -2.8         -3.0        -1.8         -0.8
    Canada                       -4.0             -3.2     -2.9        -2.8           -2.6                  -3.6        -2.6         -2.2        -2.1         -2.2
    Sweden                       0.3              -0.4     -2.1        -1.5           -0.5                  1.2         0.2          -0.9        0.2          1.1
    Australia                    -3.2             -2.1     -1.3        -1.7           -0.9                  -0.8        -1.3         0.0         0.1          1.5
BRICs
    Russia                      1.5              0.4       -0.4        -0.4           -1.4                  0.9         -0.2         -1.0        -1.0         -2.0
    China                       -1.8             -1.5      -2.1        -2.0           -1.0                  N/A         N/A          N/A         N/A          N/A
    India                       -8.2             -7.2      -7.3        -7.0           -6.8                  -3.8        -3.2         -3.0        -2.7         -2.5
    Brazil                      -2.9             -2.5      -1.8        -2.5           N/A                   3.1         2.4          2.1         1.3          N/A

                                         Gross general government debt (% of GDP)                                   Net general government debt (% of GDP)
                                2011             2012     2013E       2014E         2015E                   2011        2012        2013E       2014E        2015E
DM
    US                         102.3             106.3    108.7       109.0         108.7                   82.3        86.3         88.7        89.0         88.7
    Euro Area                   88.1              91.4     94.5        96.5         96.2                    60.6        63.3         N/A         N/A          N/A
          Austria               72.5              73.4     74.8        74.2         73.6                    46.6        51.7         N/A         N/A          N/A
          Belgium               97.8              99.6    100.5       100.3         98.2                    81.1        82.0         N/A         N/A          N/A
          Finland               49.0              53.0     56.8        59.5         61.7                   -54.1       -54.6         N/A         N/A          N/A
          France                85.8              90.2     93.6        95.3         95.8                    62.5        70.7         N/A         N/A          N/A
          Germany               80.6              81.3     80.3        81.6         81.6                    50.8        50.9         N/A         N/A          N/A
          Greece               170.3             156.9    168.8       171.6         172.8                  142.6       102.8         N/A         N/A          N/A
          Ireland              106.4             120.2    127.2       125.4         119.3                   N/A         N/A          N/A         N/A          N/A
          Italy                120.8             127.0    131.6       131.6         130.8                   97.5       112.9         N/A         N/A          N/A
          Netherlands           65.5              71.2     74.8        77.0         78.7                    38.7        42.0         N/A         N/A          N/A
          Portugal             108.3             123.6    131.8       134.4         135.1                   78.5        88.5         N/A         N/A          N/A
          Spain                 69.3              84.2     91.4        96.2         99.1                    49.7        61.0         N/A         N/A          N/A
    Japan                      229.1             237.9    246.3       247.6         250.0                  126.8       134.3        143.7       147.9        152.2
    UK                          82.3              90.1     93.5        96.2         97.8                    46.0        52.5         56.2        59.1         60.8
    Canada                      83.4              85.5     85.2        84.1         82.7                    32.3        34.5         36.5        35.4         34.0
    Sweden                      38.4              38.2     42.3        42.0         40.6                   -20.5       -23.3         N/A         N/A          N/A
    Australia                   23.9              27.4     27.6        27.9         28.1                    11.3        12.3         10.8        12.4         12.8
BRICs
    Russia                      9.0              10.3     10.6         11.2           11.6                  2.9         3.0          2.3         3.5          4.5
    China                       15.2             14.9     N/A          N/A            N/A                   N/A         N/A          N/A         N/A          N/A
    India                       64.7             64.9     65.9         66.1           65.6                  N/A         N/A          N/A         N/A          N/A
    Brazil                      54.2             58.7     N/A          N/A            N/A                   37.1        35.9         N/A         N/A          N/A
Source: IMF, Morgan Stanley Research forecasts




                                                                                                                                                                     24
                                                                                                   MORGAN STANLEY RESEARCH

                                                                                                   September 2, 2013
                                                                                                   Back-to-School Global Macro Outlook




Global Economics Team
Global Economics
Joachim Fels                     Global                                          Joachim.Fels@morganstanley.com                                       +44 (0)20 7425 6138
Manoj Pradhan                    Global                                          Manoj.Pradhan@morganstanley.com                                      +44 (0)20 7425 3805
Patryk Drozdzik                  Global                                          Patryk.Drozdzik@morganstanley.com                                    +44 (0)20 7425 7483
Sung Woen Kang                   Global                                          Sung.Woen.Kang@morganstanley.com                                     +44 (0)20 7425 8995


Americas
Vincent Reinhart                 US                                              Vincent.Reinhart@morganstanley.com                                   +1 212 761 3537
Ted Wieseman                     US                                              Ted.Wieseman@morganstanley.com                                       +1 212 761 3407
Dane Vrabac                      US                                              Dane.Vrabac@morganstanley.com                                        +1 212 761 1929
John Abraham                     US                                              John.A.Abraham@morganstanley.com                                     +1 212 761 5629
Gray Newman                      Latam, Brazil                                   Gray.Newman@morganstanley.com                                        +1 212 761 6510
Luis Arcentales                  Chile, Mexico                                   Luis.Arcentales@morganstanley.com                                    +1 212 761 4913
Arthur Carvalho                  Brazil                                          Arthur.Carvalho@morganstanley.com                                    +55 11 3048 6272
Daniel Volberg                   Peru, Colombia, Argentina, Venezuela            Daniel.Volberg@morganstanley.com                                     +1 212 761 0124

Europe & South Africa
Elga Bartsch                     Euro Area, ECB, Germany                         Elga.Bartsch@morganstanley.com                                       +44 (0)20 7425 5434
Daniele Antonucci                Italy, Spain, Greece, Portugal                  Daniele.Antonucci@morganstanley.com                                  +44 (0)20 7425 8943
Olivier Bizimana                 France, Belgium                                 Olivier.Bizimana@morganstanley.com                                   +44 (0)20 7425 6290
Tomasz Pietrzak                  Sweden, Norway, Denmark                         Tomasz.Pietrzak@morganstanley.com                                    +44 (0)20 7677 8445
Samar Kazranian                  Italy, Spain, Greece, Portugal                  Samar.Kazranian@morganstanley.com                                    +44 (0)20 7425 0546
Melanie Baker                    UK                                              Melanie.Baker@morganstanley.com                                      +44 (0)20 7425 8607
Jonathan Ashworth                UK                                              Jonathan.Ashworth@morganstanley.com                                  +44 (0)20 7425 1820
Tevfik Aksoy                     Turkey, Israel                                  Tevfik.Aksoy@morganstanley.com                                       +44 (0)20 7677 6917
Pasquale Diana                   Poland, Hungary, Czech, Romania                 Pasquale.Diana@morganstanley.com                                     +44 (0)20 7677 4183
Michael Kafe                     South Africa, Ghana, Nigeria                    Michael.Kafe@morganstanley.com                                       +27 11 587 0806
Andrea Masia                     South Africa, Nigeria                           Andrea.Masia@rmbmorganstanley.com                                    +27 11 282 1593
Jacob Nell                       Russia, Kazakhstan, Ukraine, Belarus            Jacob.Nell@morganstanley.com                                         +7 495 287 2134
Alina Slyusarchuk                Russia, Kazakhstan, Ukraine, Georgia            Alina.Slyusarchuk@morganstanley.com                                  +44 (0)20 7677 6869

Asia
Robert Feldman                   Japan                                           Robert.Tokyo.Feldman@morganstanleymufg.com                           +81 3 5424 5385
Takeshi Yamaguchi                Japan                                           Takeshi.Yamaguchi@morganstanleymufg.com                              +81 3 5424 5387
Chetan Ahya                      Asia ex-Japan, India                            Chetan.Ahya@morganstanley.com                                        +852 2239 7812
Helen Qiao                       China                                           Helen.Qiao@morganstanley.com                                         +852 2848 6511
Sharon Lam                       Korea, Taiwan                                   Sharon.Lam@morganstanley.com                                         +852 2848 8927
Yuande Zhu                       China, Hong Kong                                Yuande.Zhu@morganstanley.com                                         +852 2239 7820
Yin Zhang                        China                                           Yin.Zhang@morganstanley.com                                          +852 2239 7818
Jason Liu                        Korea, Taiwan                                   Jason.JL.Liu@morganstanley.com                                       +852 2848 6882
Deyi Tan                         ASEAN                                           Deyi.Tan@morganstanley.com                                           +65 6834 6703
Derrick Kam                      Asia ex-Japan                                   Derrick.Kam@morganstanley.com                                        +852 2239 7826
Daniel Blake                     Australia                                       Daniel.Blake@morganstanley.com                                       +61 2 9770 1579
Upasana Chachra                  India                                           Upasana.Chachra@morganstanley.com                                    +91 22 6118 2246


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                                                                                            Back-to-School Global Macro Outlook




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                                                                                          Back-to-School Global Macro Outlook




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                                                         MORGAN STANLEY RESEARCH




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