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Please see important disclaimer and disclosures at the end of the document

ECONOMICS

January 2015

Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independentinvestment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a research recommendation.This publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, SG is required to havepolicies to manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.

Quarterly Extract from a report

ountry Notes Update Janus-faced global debt

Hemera / Thinkstock

In the light of the plunge in oil prices, SGs commodity team has revised down its central scenario for the oil price outlook to2019 see Oil Drivers Price forecasts revised sharply lower, due to several persistent market forces.

To take account of these new oil price forecasts we have updated our country forecasts.

This document is being provided for the exclusive use of ADAM ROUTH (BARRON'S)
https://publication.sgresearch.com/en/3/0/224598/152721.html?sid=38672e4c9efc6a843a17ed36b0761b95https://publication.sgresearch.com/en/3/0/224598/152721.html?sid=38672e4c9efc6a843a17ed36b0761b95https://publication.sgresearch.com/en/3/0/224598/152721.html?sid=38672e4c9efc6a843a17ed36b0761b95https://publication.sgresearch.com/en/3/0/224598/152721.html?sid=38672e4c9efc6a843a17ed36b0761b95https://publication.sgresearch.com/en/3/0/224598/152721.html?sid=38672e4c9efc6a843a17ed36b0761b95https://publication.sgresearch.com/en/3/0/224598/152721.html?sid=38672e4c9efc6a843a17ed36b0761b95


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Country Notes Update

January 2015 2

COUNTRY NOTES

SG Growth Outlook ................................................................................................................................................................................. 3

SG Inflation Outlook ................................................................................................................................................................................. 4

SG Monetary Policy Outlook .................................................................................................................................................................... 5

UNITED S TATES .......................................................................................................................................................................................... 7

CHINA ....................................................................................................................................................................................................... 8

EURO AREA ................................................................................................................................................................................................ 9 GERMANY ................................................................ ................................................................. ............................................................... 10

FRANCE ................................................................................................................................................................................................... 11

ITALY ....................................................................................................................................................................................................... 12

S PAIN ..................................................................................................................................................................................................... 13

UK ......................................................................................................................................................................................................... 14

S WITZERLAND .......................................................................................................................................................................................... 15

Japan .................................................................................................................................................................................................... 16

INDIA ............................................................... ............................................................... ................................................................. ........ 17

INDONESIA ............................................................................................................................................................................................... 18

S OUTH K OREA .......................................................................................................................................................................................... 19

T AIWAN ................................................................................................................................................................................................... 20

A USTRALIA ................................................................ ................................................................ ............................................................... 21

BRAZIL .................................................................................................................................................................................................... 22

MEXICO ........................................................... ............................................................... .............................................................. ........... 23

CHILE ..................................................................................................................................................................................................... 24

RUSSIA ................................................................................................................................................................................................... 25

P OLAND .................................................................................................................................................................................................. 26

CZECH REPUBLIC ......................................................... .............................................................. ............................................................... 27

S LOVAKIA ................................................................................................................................................................................................ 28



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January 2015 3

SG Growth Outlook

Real GDP growth, PPP weighted Real GDP growth, PPP weighted

Source: SG Cross Asset Research

Real GDP2013 2014f P* 2015f P* 2016f P* 2017f P* 2018f P* 2019f

World (Mkt FX weights) 2.7 2.8 2.8 3.3 3.4 3.5 3.5 3.4 3.4 3.3 3.3 2.9World (PPP weights) 3.2 3.3 3.3 3.8 3.8 4.0 4.0 4.0 4.0 3.9 3.9 3.6Developed countries (PPP) 1.4 1.8 1.8 2.6 2.5 2.6 2.5 2.4 2.4 2.4 2.4 1.4Emerging countries (PPP) 4.7 4.4 4.4 4.6 4.8 5.0 5.1 5.1 5.1 5.0 5.0 5.1G5Euro area -0.4 0.8 0.8 1.1 1.0 1.5 1.4 1.5 1.5 1.5 1.5 1.4

Germany 0.1 1.5 1.4 1.0 0.9 1.4 1.4 1.3 1.4 1.3 1.3 1.2

France 0.4 0.4 0.4 0.8 0.8 1.4 1.3 1.5 1.5 1.5 1.5 1.5Italy -1.9 -0.4 -0.4 0.7 0.7 1.0 0.8 0.9 0.9 0.9 0.9 0.8Spain -1.2 1.3 1.3 1.6 1.5 1.5 1.4 1.4 1.5 1.5 1.5 1.4

US 2.2 2.5 2.3 3.9 3.6 3.3 3.3 3.1 3.1 3.1 3.1 0.9China 7.7 7.3 7.3 6.8 6.8 6.6 6.6 6.2 6.2 5.5 5.5 5.5Japan 1.6 0.2 0.4 1.6 1.5 2.1 2.1 1.3 1.3 1.5 1.5 1.5UK 1.7 2.6 2.6 2.6 2.6 2.0 2.0 1.8 1.8 1.6 1.6 1.7Other advancedSwitzerland 1.9 1.9 1.9 1.7 1.6 1.8 1.8 1.8 1.8 1.8 1.8 1.8Australia 2.1 2.8 2.8 2.9 2.9 3.3 3.3 3.1 3.1 3.0 3.0 3.0South Korea 3.0 3.4 3.4 3.7 3.7 3.8 3.8 3.6 3.6 3.4 3.4 3.2Taiwan 2.2 3.3 3.6 3.8 3.8 3.4 3.4 3.1 3.1 2.9 2.9 1.7Emerging economiesBrazil 2.5 0.0 0.1 0.6 1.3 1.5 1.9 2.0 2.1 2.3 2.3 2.6Russia 1.3 0.7 0.5 -3.5 -0.7 0.5 0.6 1.1 0.9 1.0 1.1 0.9Poland 1.5 3.3 3.3 3.4 3.4 3.5 3.5 3.6 3.6 4.0 4.0 3.8Czech Republic -0.7 2.3 2.3 2.3 2.3 2.9 2.9 2.5 2.5 2.2 2.2 1.9Slovakia 0.9 2.2 2.1 3.0 2.6 2.9 2.9 2.8 2.9 2.8 2.9 2.3Mexico 1.7 1.9 2.1 2.7 3.2 3.2 3.0 3.5 2.9 3.2 3.3 3.3Chile 4.1 1.7 1.7 2.5 2.7 3.3 3.4 3.3 3.2 3.3 3.3 3.1India 4.7 5.5 5.5 6.5 6.5 6.8 6.8 7.1 7.1 7.7 7.7 8.0Indonesia 5.8 5.1 5.1 5.3 5.3 5.8 5.8 6.0 6.0 6.4 6.4 6.8

P* : Q414 (Dec update) GEOforecast

-2

-1

0

1

2

3

4

5

6

7

00 02 04 06 08 10 12 14 16 18

Net contrib. to%yoy change

Real GDP grow th, PPP w eighted

Advanced Economies Dev eloping Economies

-4

-2

0

2

4

6

8

10

00 02 04 06 08 10 12 14 16 18

%yoy Real GDP grow th, PPP w eighted

Adv anced Econom ies Dev eloping Economies



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January 2015 4

SG Inflation Outlook

Consumer inflation, PPP weighted Consumer inflation, PPP weighted

Source: SG Cross Asset Research

CPI

2013 2014f P* 2015f P* 2016f P* 2017f P* 2018f P* 2019f

World (Mkt FX weights) 2.9 2.8 2.8 2.3 2.3 3.2 2.9 3.2 3.1 3.0 3.0 2.9World (PPP FX weights) 4.0 3.7 3.7 3.4 3.3 3.9 3.6 3.8 3.8 3.6 3.6 3.5Developed countries (PPP) 1.4 1.4 1.4 0.4 0.6 2.2 1.8 2.1 2.1 2.0 2.0 1.8Emerging countries (PPP) 6.1 5.5 5.5 5.6 5.3 5.0 5.0 5.0 4.9 4.7 4.6 4.7G5Euro area 1.4 0.4 0.5 -0.3 0.2 1.1 0.9 1.1 1.0 1.2 1.2 1.3

Germany 1.6 0.8 0.8 -0.2 0.2 1.1 1.1 1.2 1.1 1.3 1.3 1.5France 1.0 0.6 0.6 0.0 0.5 1.3 1.0 1.2 1.1 1.4 1.3 1.5

Italy 1.3 0.2 0.2 -0.1 0.3 1.4 1.2 1.1 1.0 1.0 1.0 1.1Spain 1.5 -0.2 -0.2 -1.0 -0.5 0.6 0.4 0.7 0.7 0.8 0.8 0.9

US 1.5 1.6 1.6 0.0 0.1 3.3 2.3 2.5 2.6 2.4 2.4 1.9China 2.6 2.0 2.0 1.9 1.9 2.6 2.6 3.1 3.1 2.6 2.6 2.8Japan 0.4 2.7 2.7 0.8 1.0 1.2 1.3 2.9 2.8 2.4 2.4 2.1UK 2.6 1.5 1.5 0.9 1.3 2.3 2.1 2.2 2.2 2.2 2.2 2.0Other advancedSwitzerland -0.2 0.0 0.0 -0.5 -0.1 0.2 0.5 0.8 0.8 1.0 1.0 1.1Australia 2.4 2.4 2.4 1.2 1.4 2.6 2.7 2.8 2.8 2.8 2.8 3.0S. Korea 1.3 1.3 1.3 1.4 1.9 2.6 2.2 2.2 2.1 2.1 2.1 2.1Taiwan 0.8 1.2 1.3 -0.1 1.2 1.8 1.5 1.4 1.4 1.0 1.0 0.7Emerging economiesBrazil 6.2 6.3 6.3 6.1 6.0 5.8 5.7 5.6 5.6 5.4 5.4 5.4Russia 6.6 8.5 8.0 13.2 8.1 6.9 5.5 6.6 5.1 6.1 4.7 5.7Poland 0.9 0.1 0.1 0.7 0.7 1.8 1.8 2.5 2.5 2.5 2.5 2.5Czech Republic 1.4 0.3 0.3 0.1 0.4 2.0 1.7 1.3 1.3 1.6 1.6 2.1Slovakia 1.5 0.0 -0.1 0.0 0.2 1.3 1.4 2.2 2.0 1.7 2.1 1.7Mexico 3.8 4.0 4.0 3.3 3.3 3.6 3.4 3.5 3.5 3.3 3.3 3.3Chile 2.1 4.4 4.4 3.3 3.5 3.0 2.9 3.3 3.2 3.4 3.4 3.4India 9.5 6.6 6.5 5.8 5.8 5.4 5.4 5.2 5.3 5.2 5.2 5.3Indonesia 7.1 6.4 6.3 7.3 7.4 5.5 5.7 5.5 5.5 5.3 5.3 5.4

P* : Q414 (Dec update) GEOforecast

0

1

2

3

4

5

6

7

00 02 04 06 08 10 12 14 16 18

Net contrib. to%yoy change

Consumer inf lation, PPP w eighted

Advanced Economies Dev eloping Economies

0

2

4

6

8

10

12

00 02 04 06 08 10 12 14 16 18

%yoy Consumer inf lation, PPP w eighted

Adv anced Economies Dev eloping Economies



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January 2015 5

SG Monetary Policy Outlook

United States No change

China

More monetary easing. Lower oil prices will probably offer some more scope formonetary policy easing. We continue to expect a total of 100bp cuts in the requiredreserve ratio in 2015. Now, we also expect one 25bp cut in the benchmark deposit rate inQ2, although part of the cut will likely be offset by further interest rate liberalisation.

Euro area No changeUnited Kingdom No change

Switzerland No change

Japan No change

India No change

Indonesia No change

S. Korea No change

Taiwan

We see Taiwans central bank slowing its return to neutral policy rates and resumingrate normalisation only in Q1 2016 , two quarters later than we previously expected. The

process will be gradual: one 12.5bp h ike every quarter until the neutral rate 2.5% isreached at the end of 2016.

Australia No change

BrazilMonetary policy set to tighten more than previously expected; we see the BCB raisingthe Selic target to 12.75% through Q2 15 (50bp each in Q1 and Q2).

Mexico No change

Chile No change

Russia No change

Poland

More dovish central bank . In our opinion, a significant slowdown in 2015 is very unlikely.We see downside risk to our rate forecast. A longer deflationary period with an unchangedor stronger PLN may impact undecided MPC members. Also, ECB decisions will b eimportant for future MPC decisions.

Czech Republic

Speculation about further monetary policy easing via a change in the EUR/CZK floor willincrease in the event that there is defla tion. If the central bank sees that defla tionaryexpectations are mounting among households and companies, it will move the EUR/CZKfloor up.

Monetary Policy change since December 2014 update



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January 2015 7

UNITED S TATES OIL-PRICE PLUNGE GIVES A FURTHER LIFTTO GROWTH , PARES INFLATION FORECASTS Key assumptions: Rapidly improving labour market conditions, accommodative monetary policyand now even lower petroleum prices are expected to support a prolonged period of above trendeconomic growth in the US over the next several years. Firmer financial asset prices, combinedwith increases in home values since the Great Recession, have shored up household and small-business balance sheets. Stunning declines in jobless measures and rapidly eroding slack implythat wage and price signals will be remain the key determinants of monetary policy. Our monetarypolicy calls remain unchanged. We expect the first hike in administered rates to occur at theFOMCs June meeting and that the federal funds rate target will end 2015 in a 0.75-1.0% range.

Slightly faster GDP growth: Revisiting our growth projections for 2015 in the wake of our oilanalysts most recent price -forecast markdowns, we have made yet another set of minor upward

adjustments to the above-consensus estimates we released in December. We expect sizablefurther reductions in gasoline and home heating oil costs through next spring to provide anextended tax cut to US consumers during the first half of this year. In contrast to the steady 3.2%annualized clip we had anticipated over the four quarters of 2015, we now forecast real PCE toclock in at an annualized clip of 3.6%. While investment in the oil sector will undoubtedly slow incoming months, this should be offset to a large degree by increased equipment spending by firmsbenefiting from lower energy costs. Also limiting the positive impact on reported on GDP growth,the trade gap likely will be wider than we previously thought, as cheaper foreign petroleumproducts are substituted for domestic output. All told, we now expect real GDP to expand by 3.9%on calendar-year basis. Our extended projections were left virtually unchanged. With labourmarkets improving in line with our previously published expectations. We made no alterations to

our unemployment rate forecasts and expect NAIRU, currently pegged at around 5.375%, to bereached by Q2.

Year-over-year inflation to move sharply negative through the winter: The pattern of our oilanalysts quarterly projections suggests that the year-to-year growth of the headline CPI, whichclocked in at 1.3% in November, will turn sharply negative over the next four months, bottoming at-1.9% in March. Rising prices for WTI from $42/bbl in Q1 to $60/bbl in Q4 should propel the 12-month growth rate back to 2,3% by next December. On an annual-average basis, the CPI isexpected to be unchanged in 2015, after a 1.6% increase last year.

Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015p 2016p 2017p 2018p 2019p

GDP (% qoq ann) 3.5 -2.1 4.6 5.0 3.4 3.7 3.7 3.7 3.7 2.3 2.2 2.5 3.9 3.3 3.1 3.1 0.9

C onsumer expenditure 3.7 1.2 2.5 3.2 3.0 3.6 3.6 3.6 3.6 1.8 2.4 2.4 3.4 2.9 2.6 2.6 1.7

Government expenditure -3.8 -0.8 1.7 4.4 1.8 1.0 1.0 1.2 1.4 -1.4 -2.0 0.1 1.6 1.5 1.7 1.8 3.0

Investment 6.3 0.2 9.5 7.7 6.9 6.2 6.6 6.3 5.7 8.3 4.7 5.5 6.8 5.6 5.2 5.3 -2.4

Exports 10.0 -9.2 11.0 4.6 1.0 5.0 4.0 4.0 5.0 3.3 3.0 3.0 4.2 5.8 6.6 6.7 0.8

Imports 1.3 2.2 11.3 -0.9 3.0 3.6 3.6 3.6 3.6 2.3 1.1 3.5 3.4 4.0 4.3 4.4 -1.7

Inventories* -0.3 -1.2 1.3 -0.1 0.3 0.0 0.0 0.0 0.0 -0.5 0.5 0.1 0.0 0.0 0.0 0.0 -0.5

Nominal GDP (% yoy) 4.6 3.3 4.3 4.3 4.3 5.5 5.3 5.4 5.7 4.2 3.7 4.0 5.5 5.7 5.3 5.3 2.9

CPI headline (% yoy) 1.2 1.4 2.1 1.8 1.1 -1.1 -0.8 0.3 1.6 2.1 1.5 1.6 0.0 3.3 2.5 2.4 1.9

CPI core (% yoy) 1.7 1.6 1.9 1.8 1.7 1.6 1.5 1.7 2.0 2.1 1.8 1.8 1.7 2.8 2.8 2.6 2.3

Unemployment rate (%) 7.0 6.6 6.2 6.1 5.7 5.5 5.3 5.2 5.1 8.1 7.4 6.1 5.3 4.8 4.6 4.4 4.8

Employment (%yoy) 1.7 1.7 1.8 2.0 2.1 2.3 2.3 2.3 2.3 1.7 1.7 1.9 2.3 2.0 1.7 1.5 0.7

Average hourly earnings (% yoy) 2.3 2.3 2.3 2.3 2.5 2.7 2.9 3.2 3.4 1.6 2.1 2.4 3.1 3.6 3.9 4.0 3.7

Savings rate (%) 4.4 4.9 5.1 5.0 5.5 6.3 5.8 5.7 5.5 7.2 4.9 5.1 5.8 5.9 6.4 7.4 8.3

Fiscal stance** (% of GDP) 0.4 1.8 0.9 0.2 0.1 0.1 0.1 0.1

Output gap (% of GDP) -3.4 -2.1 -1.2 0.5 1.5 2.4 3.2 2.3

Corporate profits before tax (% yoy) 11.4 4.2 -0.1 6.5 3.2 -0.4 -1.4 -11.0

Current account (% of GDP) -2.9 -2.4 -2.8 -2.7 -2.4 -2.2 -1.9 -1.5

Budget balance (% of GDP) -6.8 -4.1 -3.0 -2.8 -3.1 -2.7 -2.9 -3.2

Federal Debt (% of GDP) 71.8 73.5 75.7 75.4 75.1 74.3 74.0 74.4

Public Debt (% of GDP) 96.5 98.2 100.4 100.1 99.7 99.0 98.7 99.0

Fed Funds Target*** (%) 0.13 0.13 0.13 0.13 0.13 0.13 0.38 0.63 0.88 0.13 0.13 0.13 0.50 1.81 3.25 4.44 3.88Source: SG Cross A sset Resear ch. * Contribution to GDP ** Fiscal stance is def ined as the change in the cyclically adjus ted budget balance

* Contribution to GDP ** Fisc al stance is defined as the change in the cyclical ly adjusted budget balance *** Fed funds Target as yearly average

The estimates in this table reflect those published in the latest Monthly Country Notes. They may or may not be consistent w ith those published in the calendar on the previous pagew hich are updated in response to the latest economic releases.

neta Markowska(1) 212 278 66 [email protected]

Brian Jones(1) 212 278 69 [email protected]



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January 2015 9

EURO AREA NEGATIVE INFLATION IN H1 15

Main changes: Inflation outlook strongly revised down. We have revised down the inflationoutlook significantly to -0.3% in 2015. This revision provides a minor boost to growth in 2015 and2016 compared to our previous forecast. We revised our GDP growth estimate from 0.9% to 1.1%in 2015 and from 1.3% to 1.4% in 2016.

Growth forecasts: A few pp above potential. A lot of structural domestic headwinds remain andwill cap the cyclical recovery. Hence, we see yoy GDP growth rates printing at 1.5% yoy from 2015to 2019, that is only at a few pp above the potential growth rate (1.0% yoy).

Inflation forecasts: inflation below 1.5% in the foreseeable future . HICP inflation is set to fall to-0.6% yoy at the end of Q1 and to remain in negative territory until Q3 2015. Then, the combinedeffect of higher oil prices and weaker euro should slightly push euro area HICP inflation into positive

territory from Q4 15 onwards. Looking ahead, inflation is set to average 1.2% on average between2016 and 2019, far below the 2.0% benchmark, on the back of low core inflation pressures. About30pp of core price components should continue to show no inflation while wage growth is set toremain more muted that during past recoveries.

Key assumptions: Positives (oil, euro, budgetary consolidation) capped by structuralheadwinds. The drop in the oil price and the euro are supportive for growth, as is slow fiscalconsolidation. But those positives are largely offset by continued domestic headwinds: policyuncertainty (not only Greece), debt burden, slow reform. Political events are likely to play a role in2015 with the OMT ruling (14 January) and several elections (Greece, Spain, German Lander,potentially Italy and/or Greece, etc.). The Juncker 315bn investment plan is mainly a reshuffling ofexisting measures with a high leverage ratio. It is also going to be very slow in its implementation.The ECB is set to complement the ABSPP and CBPP3 through corporate bonds purchases early2015, and will then contemplate purchases of government bonds in order to increase its balancesheet by 1trn by end -2016. We also expect that lower nominal GDP growth will lead to meaningfulfiscal slippage across the euro area. Against that backdrop, the euro area remains very vulnerable,one shock away from deflation.

Economic Forecasts: Euro areaNominal GDP for 20 13 9 608bn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 1.0 1.3 0.3 0.6 0.7 1.2 1.4 1.6 1.6 -0.7 -0.4 0.8 1.1 1.5 1.5 1.5 1.4 Consumer expenditure 0.6 0.6 1.1 1.9 1.0 1.1 1.3 1.3 1.4 -1.3 -0.6 0.9 1.3 1.2 1.2 1.2 1.2 Government expenditure 1.4 0.5 1.1 1.2 0.5 0.9 0.9 0.9 0.9 -0.2 0.2 0.9 0.9 0.5 0.5 0.6 0.7 Investment 2.7 1.2 -2.6 -1.2 -0.1 0.4 1.0 1.3 1.5 -3.2 -2.4 0.6 0.2 1.7 1.9 2.0 2.1

Construction 0.4 20.7 -5.8 2.3 -0.4 0.5 0.7 1.4 1.2 -1.8 -0.5 4.5 0.3 1.5 1.9 2.0 2.1

Equipment 5.3 -17.6 1.4 -5.2 0.3 0.3 1.3 1.1 1.9 -4.6 -4.4 -3.7 0.0 2.0 2.0 2.1 2.2 Exports 3.0 1.6 5.6 5.3 1.3 2.8 3.0 3.3 3.5 2.6 2.1 3.6 3.1 3.7 4.0 4.1 4.0 Imports 0.9 1.6 5.3 5.8 1.4 2.3 2.7 3.0 3.1 -1.0 1.2 3.5 2.9 3.4 3.8 4.0 4.1Inventories* (%qoq ann) -1.1 0.5 -0.4 -0.5 0.0 0.0 0.1 0.1 0.0 -0.6 -0.1 -0.1 0.0 0.1 0.0 0.1 0.0Nomi nal GDP (% yoy) 1.4 2.1 1.6 1.6 1.4 0.9 1.2 1.5 1.6 0.6 0.9 1.7 1.3 2.5 2.6 2.6 2.5CPI headline (% yoy) 0.8 0.7 0.6 0.3 0.2 -0.1 -0.4 -0.4 -0.1 2.5 1.4 0.4 -0.3 1.1 1.1 1.2 1.3CPI core (% yoy) 0.8 0.8 0.8 0.8 0.7 0.7 0.8 0.8 1.0 1.5 1.1 0.8 0.8 1.0 1.1 1.1 1.2Unemployment rate (%) 11.9 11.8 11.6 11.5 11.5 11.5 11.4 11.3 11.3 11.3 12.0 11.6 11.4 11.1 10.7 10.2 9.9Employment (%yoy) -0.4 0.1 0.4 0.1 0.5 1.3 0.4 0.4 0.5 -0.6 -0.8 0.3 0.7 0.6 0.6 0.6 0.5Compensation per employee (% yoy 1.7 1.3 1.1 1.3 1.0 0.9 0.9 1.0 1.1 1.9 1.6 1.2 1.0 1.6 1.6 1.7 1.0Savings rate (%) 13.4 13.1 12.9 13.0 13.0 13.4 12.1 13.0 12.9 12.8 13.3 13.0 12.8 12.6 12.5 12.5 12.5Fiscal stance* (% of GDP) 1.1 1.3 0.0 0.0 0.1 0.0 0.0 -0.1Output gap (% of GDP) -2.0 -2.3 -2.4 -1.8 -1.3 -0.8 -0.4 0.0Corporate p rofits before tax (% yoy) 0.2 1.0 0.7 0.3 2.6 2.7 2.8 3.4Current account (% of GDP) 1.5 2.1 2.5 2.4 2.6 2.7 2.7 2.7Budget balance (% of GDP) -3.6 -2.9 -2.9 -2.7 -2.3 -2.0 -1.8 -1.7Public Debt (% of GDP) 90.8 93.1 94.7 96.2 96.3 96.0 95.5 95.0Main Central Bank rate (%) 0.25 0.25 0.15 0.05 0.05 0.05 0.05 0.05 0.05 0.88 0.50 0.13 0.05 0.05 0.10 1.13 2.63Source: SG Cross Asset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cyclically-adjusted budget balance

Michel Martinez(33) 1 42 13 34 21michel.martinez@s cib.com



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January 2015 10

GERMANY CONSUMERS SHOWING RESILIENCE

Strong labour market pushes back on uncertainty. Following the weakening of economicconfidence for most of last year, confidence has stabilised and improved at the end of last year.This is likely linked to the weakening of oil prices, expectations of more ECB action, the continuedstrength of the labour market and rising real disposable incomes. While consumer spending hasbeen resilient, activity in the industry remains subdued. This tug-of-war is likely to continue forsome time, but we see higher chances of economic activity returning to potential in the comingquarters. As before, we only see stronger private sector investment going into 2016. Downside risksremain elevated.

Fiscal policy to remain focused on a balanced budget in 2015. There has been much focus on apossible investment gap in Germany. If growth disappoints, we expect the government to take

additional steps, with a focus on infrastructure investment. In the medium-term, conditions forprivate sector investment and innovation should be improved.

Return to potential growth expected in late spring 2015. While growth is expected to have been1.5% last year, slightly higher than we had before, we forecast growth to reach only 1% in 2015,underlining the still fragile state of the recovery.

Inflation to dip on oil in 2015, with risks of weaker wage growth. With the sizeable slowdown inheadline inflation, we expect some limited second-round effects also on wages despite the stillstrong labour market. With our latest oil price assumptions, we see headline inflation at -0.2% thisyear (0.2% before) and core inflation at 1.0% (1.1% before). The big risk remains that wage growthwill moderate more significantly, with wage growth dropping below 3% again in Q3 last year.

Against this stands a very tight labour market but in which employees still dont have sufficiently

strong bargaining power to ensure a lasting improvement in the labour share. This also putsdownside risks to our inflation outlook for Germany.

Economic Forecasts: GermanyNominal GDP for 2013 2809bn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 1.8 3.1 -0.3 0.3 1.1 1.0 1.2 1.4 1.4 0.4 0.1 1.5 1.0 1.4 1.3 1.3 1.2 Consum er expenditure -1.2 2.2 0.4 2.9 1.9 1.2 1.2 1.2 1.2 0.6 0.9 1.2 1.5 1.2 1.1 1.0 1.0 Government expenditure -0.4 0.9 1.8 2.6 0.1 1.5 1.5 1.5 1.5 1.2 0.7 1.1 1.4 1.4 1.3 1.4 1.4 Investment 5.0 11.6 -7.1 -3.5 0.7 1.0 1.0 1.3 1.3 0.0 -0.4 2.9 -0.1 1.5 1.8 1.7 1.7

Construction 2.9 17.7 -14.7 -1.4 1.6 1.2 1.2 1.6 1.6 1.6 0.1 3.2 -0.1 1.9 2.3 2.0 2.0Equipment 10.9 7.1 1.8 -8.8 -2.0 0.4 0.4 0.8 0.8 -2.3 -2.1 3.1 -1.1 1.1 1.4 1.4 1.4

Exports 6.9 -0.6 4.7 8.0 0.6 3.3 3.5 3.7 4.2 3.5 1.7 3.7 3.6 4.3 4.7 4.8 4.9 Imports 2.9 -0.2 4.6 6.9 1.7 3.1 4.1 5.0 5.3 0.4 3.2 3.5 3.9 5.2 5.5 5.8 5.9Inventories* (%qoq ann) -0.4 -0.4 0.2 -2.1 0.3 -0.5 0.0 0.4 0.3 -1.4 0.1 -0.3 -0.2 0.2 0.2 0.2 0.2Nominal GDP (% yoy) 2.9 4.6 2.9 3.0 2.3 1.3 1.6 1.6 2.0 1.9 2.2 3.2 1.6 2.3 2.4 2.4 2.3CPI headline (% yoy) 1.3 1.0 1.0 0.8 0.4 0.0 -0.1 -0.5 -0.2 2.1 1.6 0.8 -0.2 1.1 1.2 1.3 1.5CPI core (% yoy) 1.1 1.1 1.1 1.2 1.0 0.9 1.2 0.9 1.2 1.3 1.2 1.1 1.0 1.1 1.2 1.2 1.2Unemployment rate (%) 6.9 6.8 6.7 6.7 6.6 6.6 6.5 6.5 6.5 6.8 6.9 6.7 6.5 6.4 6.4 6.2 6.2Employment (%yoy) 0.5 0.7 0.9 0.9 0.8 0.7 0.7 0.7 0.7 1.1 0.6 0.8 0.7 0.7 0.7 0.7 0.7Compens ation per employee (% y 1.2 1.9 1.4 1.4 1.2 1.5 1.8 1.9 2.0 1.3 1.0 1.4 1.8 2.2 2.2 2.1 2.1Savings rate (%) 8.9 9.2 9.2 9.1 8.9 9.2 9.2 9.3 7.6 9.4 9.1 9.1 8.8 8.8 8.8 8.6 8.4Fiscal stance* (% of GDP) 1.3 0.4 -0.2 0.2 -0.2 -0.1 0.0 0.0Output gap (% of GDP) 0.4 -0.4 -0.4 -0.7 -0.6 -0.5 -0.4 -0.4Corporate profits before tax (% yoy -3.3 0.9 5.6 0.8 1.9 2.4 2.6 2.6Current account (% of GDP) 7.1 6.7 6.9 7.4 6.8 6.7 6.4 6.0Budget balance (% of GDP) 0.1 0.1 -0.1 -0.1 -0.2 -0.3 -0.2 -0.2Public Debt (% of GDP) 79.0 76.9 74.9 73.7 72.3 70.9 69.5 68.0Source: SG Cross Asset Research/Economics. * Contribution to GDP (annualized).** Fiscal s tance is defined as the change in the cyc lically-adjusted budget balance

natoli nnenkov(44) 20 7762 [email protected]



11/30


January 2015 11

FRANCE W AITING FOR THE CONFIDENCE SHOCK

Main changes to our forecasts: HICP inflation revised down to 0.0% in 2015 and up to 1.3% in2016. 2015 GDP growth unchanged at 0.8% on the back of a lower Q1 15 GDP figure offset by abetter profile at the end of the year. GDP growth revised up by one tick to 1.4% in 2016.

Growth forecasts: Drag from the construction sector and muted capex. Lower oil prices will besupportive to consumption in the near term and to capex decisions over the medium to long term.Yet, we continue to believe that the French economy will slightly underperform the euro areathrough 2015 and then be in line with the euro area average from 2016 onwards. Q1 15 GDPgrowth is set to be disappointing, owing to low business confidence and also partly to the negativeimpact on consumption of the January terrorist attacks in Paris. Low consumer confidence will limitthe expected decline in the savings rate. The construction sector (both housing and public

investment) is likely to remain a drag medium term.Inflation forecasts: Subdued wage growth. The drop in oil prices will not offset other tariffincreases, including the electricity price hikes. Wage growth is set to be more subdued than duringpast recoveries, given high unemployment and lower expected minimum wage hikes.

Key assumptions: Confidence will take time to recover. Since the summer, policy uncertaintyhas increased (and this despite the cabinet reshuffle) while geopolitical tensions have not receded.This might explain why the drop in oil prices and in the exchange rate were less supportive thanexpected. Business leaders have remained unconvinced by the reform efforts. The hope is thatbusiness confidence improves when both the tax cuts and the lower oil prices start to boost profitmargins by end-2015, in particular in the manufacturing sector. With lower growth and inflationforecasts and a strong easing in the fiscal stance, the fiscal deficit will probably not be reduced tobelow 3.0% of GDP before 2018. Long term, measures to alleviate the tax burden on corporationsand other structural reforms will have a positive impact on potential growth. However, the 50bn insavings to public spending and the slow fiscal consolidation, if achieved, will have a negativeimpact medium term, therefore capping potential growth at the forecast horizon.

Economic Forecasts: FranceNominal GDP for 2013 2114bn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 0.8 0.1 -0.4 1.1 0.3 0.5 1.0 1.5 1.5 0.4 0.4 0.4 0.8 1.4 1.5 1.5 1.5 Consum er expenditure 1.5 -1.6 1.4 1.0 -0.5 0.8 1.2 1.6 1.6 -0.4 0.3 0.3 0.8 1.5 1.5 1.5 1.5 Government expenditure 2.3 1.6 1.9 3.2 1.6 0.8 0.8 0.8 0.8 1.7 2.0 2.0 1.3 0.6 0.4 0.4 0.4 Investment -0.2 -2.8 -3.3 -2.6 -2.4 -1.6 -0.1 0.4 0.5 0.3 -0.8 -1.7 -1.3 1.1 2.0 2.4 2.5

Construction -2.3 -5.6 -6.5 -5.6 -3.9 -3.9 -3.8 -2.7 -2.7 -1.7 -1.6 -4.1 -4.1 -1.5 0.4 1.1 1.2Equipment 1.5 -0.4 -0.6 0.0 -1.2 0.4 2.9 2.9 2.9 2.2 -0.2 0.3 0.9 3.1 3.3 3.3 3.4

Exports 4.6 1.9 -0.4 2.0 1.6 2.8 3.2 3.6 3.6 1.2 2.4 2.0 2.5 4.1 5.0 5.6 5.7 Imports 1.7 3.0 1.0 4.6 -1.6 2.0 2.4 2.4 2.4 -1.2 1.9 2.7 1.7 3.2 4.4 5.1 5.3Inventories* (%qoq ann) -1.3 1.6 -0.5 1.1 -0.2 0.0 0.0 0.0 0.0 -0.6 -0.2 0.3 0.1 0.0 0.0 0.0 0.0Nominal GDP (% yoy) 1.3 1.5 0.8 1.3 1.0 0.9 1.0 1.2 1.7 1.6 1.2 1.1 1.2 2.6 2.5 2.6 2.8CPI headline (% yoy) 0.8 0.9 0.7 0.5 0.4 0.1 -0.3 0.0 0.3 2.2 1.0 0.6 0.0 1.3 1.2 1.4 1.5CPI core (% yoy) 0.9 1.1 1.1 1.0 0.7 0.9 0.9 0.9 1.0 1.5 0.7 1.0 0.9 1.0 1.2 1.2 1.3Unemployment rate (%) 10.1 10.1 10.1 10.4 10.6 10.6 10.6 10.4 10.7 9.8 10.3 10.3 10.5 10.3 10.0 9.6 9.2Employment (%yoy) 0.0 0.2 0.3 0.3 -0.1 0.0 0.0 0.3 0.4 0.1 -0.2 0.2 0.2 0.5 0.6 0.7 0.7Compens ation per employee (% yoy 1.7 2.2 1.7 2.0 1.5 1.4 1.5 1.4 1.4 2.3 1.8 1.8 1.4 1.2 1.3 1.5 1.7Savings rate (%) 14.5 15.5 15.5 15.8 15.8 16.1 16.2 16.1 15.9 15.3 15.1 15.7 16.1 15.4 15.2 15.1 15.1Fiscal stance* (% o f GDP) 0.5 1.0 -0.1 0.0 0.3 0.4 0.3 0.1Output gap (% of GDP) -0.9 -1.5 -1.9 -1.9 -1.4 -1.0 -0.6 -0.2Corporate profits before tax (% yoy) -0.2 -2.0 -0.4 0.9 4.7 3.5 3.3 3.6Current account (% of GDP) -2.1 -1.3 -1.3 -0.8 -0.4 -0.2 0.1 0.3Budget balance (% o f GDP) -4.9 -4.1 -4.4 -4.4 -3.8 -3.2 -2.7 -2.4

Public Debt (% of GDP) 89.2 92.2 95.3 98.1 99.3 99.9 99.9 99.4Source: SG Cross Asset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cyclically-adjusted budget balance

ichel Martinez(33) 1 42 13 34 [email protected]



12/30


January 2015 12

ITALY SHORT -TERM POSITIVES JUST WON T BE

ENOUGH !Growth forecasts. Very low oil prices, a weaker euro and fiscal stimulus measures should favour arecovery next year. That being said, short-term prospects remain lacklustre (0.7% growth expectedin 2015, 1.0% in 2016). Medium term, we keep our below-consensus view that economic activitywill expand at an annual rate below 1%. Italy should have closed the output gap by 2019, but withvery weak potential growth.

Energy-led downward revisions to our inflation forecasts. The recent dip in commodity prices(oil prices in particular) will push monthly HICP readings into negative territory in 2015. This yearsmodest recovery and the subsequent weakening of the labour market will add to that and keep

inflationary pressures from wages and activity down for quite some time. Apart from that, weenvision a 2pp VAT rate hike in 2016, which should artificially push prices up at that time.

Key assumptions: Headwinds are numerous despite short-term positive factors. Importantly,short-term positives do not offset the numerous headwinds on the economy (delicate public financesituation, policy uncertainty, structural rigidities).

Public finances hurt by subdued price dynamics: In the low inflation environment, public financetargets are almost certain not to be met.

Economic Forecasts: ItalyNominal GDP for 2013 1560bn Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) -0.5 -0.1 -0.9 -0.6 -0.2 1.0 1.3 1.7 2.3 -2.3 -1.9 -0.4 0.7 1.0 0.9 0.9 0.8 Consum er expenditure 0.2 0.5 0.6 0.3 0.4 0.5 0.7 0.8 1.0 -4.1 -2.7 0.3 0.6 0.1 0.2 0.6 0.7 Governm ent expenditure 2.7 -1.0 0.5 -1.3 -0.6 -0.1 0.3 0.8 1.2 -1.5 -0.7 -0.3 -0.1 -0.4 -0.7 -0.4 -0.2 Investment -1.0 -4.2 -3.2 -3.9 -2.4 -1.0 0.4 1.8 3.2 -7.5 -5.4 -2.5 -0.9 1.4 0.6 0.7 0.8

Construction -4.3 -4.1 -4.2 -3.4 -1.0 -0.4 0.6 1.6 2.0 -6.8 -6.8 -3.2 -0.6 1.6 0.9 0.8 0.8Equipment 2.7 -4.2 -2.0 -4.5 -3.8 -1.6 0.2 2.0 4.6 -8.3 -3.8 -1.8 -1.3 1.1 0.1 0.5 0.8

Exports -1.6 0.8 5.3 0.9 1.4 2.4 3.3 4.3 5.3 1.6 0.9 1.8 2.8 4.0 3.8 3.1 2.6 Imports -2.4 -2.7 3.6 -1.2 1.2 1.5 1.8 2.1 2.4 -8.2 -2.6 0.3 1.4 1.6 1.5 1.6 2.1Inventories* (%qoq ann) -1.1 -0.4 -1.4 -0.4 0.0 0.6 0.3 0.0 0.0 -0.7 -0.1 -0.5 0.1 0.0 0.0 0.0 0.0Nominal GDP (% yoy) 0.1 0.7 0.0 -0.6 -0.3 -0.4 -0.1 1.2 1.6 -0.7 -0.6 -0.1 0.6 2.4 1.9 1.9 1.9CPI headline (% yoy) 0.7 0.5 0.4 -0.1 0.1 -0.2 -0.4 0.3 0.1 3.3 1.3 0.2 -0.1 1.4 1.1 1.0 1.1CPI core (% yoy) 1.1 0.9 0.9 0.5 0.6 0.8 0.5 1.1 0.8 2.0 1.3 0.7 0.8 1.1 1.0 1.0 1.0Unemployment rate (%) 12.4 12.7 12.5 12.8 13.0 13.2 13.2 13.2 13.3 10.8 12.2 12.8 13.2 13.4 12.9 12.0 10.9Employment (%yoy) -1.7 -0.8 -0.3 0.1 0.2 -0.1 -0.1 -0.2 -0.3 -0.3 -2.0 -0.2 -0.2 0.0 0.5 0.8 1.0

Compens ation per employee (% yoy 1.2 0.7 0.7 0.1 0.1 0.2 0.2 0.4 0.6 0.2 1.5 0.4 0.3 1.3 1.2 1.1 1.4Savings rate (%) 12.0 12.0 9.4 14.0 11.7 11.9 9.4 13.4 11.3 10.2 11.6 11.8 11.5 11.4 11.7 12.1 12.5Fiscal stance* (% of GDP) 1.5 1.1 -0.4 0.0 0.2 0.2 0.0 -0.2Output gap (% of GDP) -0.7 -2.4 -2.7 -2.1 -1.4 -0.9 -0.4 -0.1Corporate profits before tax (% yoy) -1.1 -0.8 -1.5 0.5 2.6 1.7 1.4 1.2Current account (% of GDP) -0.5 1.0 1.2 1.2 1.4 1.7 1.9 1.9Budget balance (% of GDP) -3.0 -2.8 -3.3 -3.0 -2.5 -2.0 -1.7 -1.7Public Debt (% of GDP) 122.2 127.8 132.5 135.1 134.6 134.1 133.3 132.5Main Central Bank rate (%)Source: SG Cross A sset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cy clically-adjusted budget balance

Yacine Rouimi(33) 1 42 13 84 [email protected]



13/30


January 2015 13

S PAIN A SMALL BOOST FROM LOWER OIL PRICES

ONLY ; BUT LOWER INFLATION TO WEIGH ON PUBLICFINANCES

Lower oil prices to push headline inflation to -1.0% in 2015. Weaker oil prices will have a furtherdrag on inflation in Spain in 2015. This together with lower-than-expected inflation figures recently,prompts us to adjust our 2015 headline inflation forecasts from -0.5% to -1.0%. Looking ahead,inflation is set to rebound into positive territory in early 2016 but to remain below 1.0% for theforeseeable future, as wage growth stays muted.

Only minor upward revisions to GDP growth. We have only marginally upgraded our growthforecasts for 2015 and 2016 (by one notch each to 1.6% and 1.5%). Indeed, the decline in oil pricesappears to be a temporary phenomenon only and mostly focus on the first half of 2015. Moreover,part of the decline comes from weaker demand, limiting the positive impact from lower oil prices ongrowth. That said consumption and investment will benefit from the lower cost of energy.

De-leveraging to continue to weigh on growth medium term. We maintain our below-consensusgrowth forecasts for 2015, as large public and private sector debt will continue to require furtherde-leveraging and a new round of austerity measures is due in 2016 onwards. We expect growth topick up only moderately over the coming years, leading to a gradual decline in unemployment.

Higher public deficit forecasts due to lower nominal growth. Given weaker inflation figures,nominal GDP growth is expected to be significantly lower than expected by the government for2015, 2016 and 2017 (0.5%, 1.7% and 2.4% vs. 2.7%,3.5% and 4.5%). As a result, we haveupgraded our public deficit forecasts, with the deficit at -5.5% of GDP in 2015 and only graduallydeclining towards -4.0% in 2018-19. Public debt is therefore likely to continue to increase, reachinglevels above 110% from 2017 onwards.

Nominal GDP for 2013 1,023bn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 1.1 1.4 2.0 2.0 1.7 1.8 1.7 1.1 0.9 -2.1 -1.2 1.3 1.6 1.5 1.4 1.5 1.4 Consum er expenditure 1.4 2.4 3.8 3.3 2.2 2.0 2.0 1.6 1.6 -3.0 -2.3 2.3 2.2 1.7 1.4 1.5 1.5 Government expenditure -0.5 4.6 -0.6 0.2 0.8 2.0 1.6 1.2 0.0 -3.7 -2.9 0.8 1.1 -0.8 -0.8 -0.4 0.2 Investment 0.7 0.3 7.0 4.3 2.8 1.6 2.0 0.8 1.2 -8.1 -3.8 2.6 2.4 1.8 1.7 1.8 1.6 Construction -0.9 -11.5 3.0 2.8 1.2 -2.0 -0.8 1.2 -1.2 -9.6 -9.5 -3.8 0.2 0.6 0.8 0.6 0.8 Equipment 7.9 9.9 1.2 29.9 4.8 6.1 5.4 0.3 4.0 -2.5 1.9 10.1 7.2 3.3 2.8 3.1 2.5 Exports -0.9 -0.1 5.1 14.9 2.0 0.8 0.8 0.8 0.8 1.2 4.3 4.4 2.9 3.7 4.4 4.3 2.9 Imports 0.9 2.1 10.7 20.3 3.2 1.6 2.0 1.6 1.6 -6.3 -0.5 7.7 4.7 3.1 3.5 3.7 2.7Inventories* (%qoq ann) 0.2 -0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 -0.1 0.0 0.1 0.1 0.0 0.0 0.0 0.0Nominal GDP (% yoy) 0.5 0.3 0.7 1.2 0.9 1.1 0.5 0.2 0.1 -1.9 -0.6 0.8 0.5 1.7 2.4 2.2 2.2

CPI headli ne (% yoy) 0.2 0.0 0.2 -0.4 -0.7 -1.0 -1.2 -1.1 -0.5 2.4 1.5 -0.2 -1.0 0.6 0.7 0.8 0.9CPI core (% yoy) -0.1 -0.1 0.0 -0.1 -0.2 -0.2 -0.3 0.3 0.7 1.3 1.3 -0.1 0.1 0.6 0.7 0.9 0.9Unemployment rate (%) 25.8 25.9 24.5 23.7 23.7 23.3 22.9 22.6 22.0 24.8 26.1 24.5 22.7 21.3 20.2 19.4 18.7Employment (%yoy) -0.9 0.8 1.1 1.4 1.5 1.9 1.1 0.7 1.2 -4.3 -2.8 1.2 1.2 0.9 0.6 0.5 0.3Compens ation per employee (% yoy 0.3 -0.1 -0.1 0.4 0.5 0.8 1.2 1.4Savings rate (%) 11.1 10.5 9.0 9.4 8.7 7.9 7.1 6.5Fiscal s tance* (% of GDP) -0.9 4.0 0.5 -0.3 0.2 0.2 0.0 -0.2Output gap (% of GDP) -4.9 -5.4 -4.5 -3.6 -2.7 -1.9 -1.4 -0.9Corporate profits b efore tax (% yoy) 1.8 1.0 0.8 0.5 0.1 2.4 3.0 2.8Current account (% of GDP) -1.6 1.5 0.8 0.2 0.5 0.5 0.4 0.4Budget balance (% of GDP) -10.3 -6.8 -5.7 -5.5 -4.9 -4.3 -4.0 -4.0Public Debt (% of GDP) 84.4 92.1 98.3 104.4 108.3 110.0 111.1 111.7Main Central Bank rate (%)Source: SG Cross Asset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is def ined as the change in the cyc lically-adjusted budget balance

van Mamalet(44) 20 7762 [email protected]



14/30


January 2015 14

UK OIL PUSHES INFLATION CLOSE TO ZERO ,

1ST

RATE HIKE STILL Q315 BUT RISK OF LATER Growth cooling - better balanced but as one risk fades another emerges The latest revision toour inflation forecasts provides a minor boost to growth in 2015 compared to our previous forecastbut that is offset by weaker than expected Q4 high frequency data which impart downward risks toour Q4 2014 forecast of 0.6% qoq so we have not changed our forecast from the previous,December, update. UK GDP growth is likely to have plateaued at 2.6% in 2014 and 2015. It falls to2% in 2016 and sub-2% thereafter. The new ESA2010 accounting conventions have solved thepuzzle of weak investment growth, the new data showing a much stronger rise in capital formation.Moreover, the behaviour of the housing market encourages us to believe that the revival in demandwill run its course without ending with the bursting of a bubble. However, a fresh risk is the fragilenature of the euro area recovery which could hurt external demand.

Inflation approaches zero in H1 2015 with oil at $45 in Q1 The rate of inflation should fall to only0.2% in February 2015 with the risk of it hitting zero. It should then bounce sharply to reach 2% bythe end of the year as the oil price rebounds to $65 in Q4. There has been a strong downwardimpact on goods inflation from the past appreciation of the pound versus the dollar. However, nowthis effect is starting to fade and the pound is on a declining trend so the effect should eventuallyreverse. Those two factors should push up goods price inflation during the course of 2015.

First rate increase still in Q3 2015 but with risk of later The latest reduction in inflation forecastsadds to the risk of a later start to tightening. If oil prices do not rebound significantly in the secondhalf of 2015, as we currently predict, then the MPC will delay the first hike even further, even though

the driving force will be a fall in non-core rather than core inflation.

Economic Forecasts: UKNominal GDP 2013 1713bn Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 1.6 2.5 3.3 3.0 2.6 2.2 2.6 2.6 2.6 0.7 1.7 2.6 2.6 2.0 1.8 1.6 1.7 Consu mer expenditure 1.3 2.4 2.3 3.9 2.8 2.4 2.4 2.4 2.0 1.1 1.7 2.3 2.6 1.8 1.4 1.4 1.0 Government expenditure -0.3 0.9 5.7 1.2 -3.9 0.0 -1.2 -1.2 -1.2 2.3 -0.3 1.2 -0.7 -1.4 -1.8 -1.7 -1.3 Investment 3.5 10.0 6.3 1.2 10.9 9.5 8.5 8.5 8.7 1.2 2.8 7.3 8.1 5.4 5.2 4.4 3.5 Non-residential 10.4 7.8 -0.3 6.2 6.9 8.7 8.7 8.8 9.0 2.2 2.3 6.3 7.5 5.7 5.3 4.5 3.7 Residential 8.2 15.2 23.0 -3.9 16.3 12.1 8.0 8.0 8.0 -3.6 6.0 12.1 9.8 4.7 5.0 4.3 3.2 Exports -5.2 2.4 -3.1 2.6 2.6 3.0 3.0 3.0 3.0 0.7 1.5 -1.2 2.5 3.0 3.0 3.0 3.0 Imports -5.5 1.7 -6.7 5.2 3.1 2.8 2.8 2.8 2.8 3.1 1.4 0.7 2.5 2.4 2.2 2.3 1.3 Inventories* 0.0 -1.0 -1.6 1.3 0.0 -0.3 0.0 0.0 0.0 0.1 0.3 0.3 0.0 0.1 0.1 0.0 0.0

Nominal GDP (% yoy) 4.5 4.7 4.1 4.7 4.1 3.5 3.7 4.0 4.7 2.3 3.5 4.4 4.0 4.6 4.2 4.3 4.3CPI headline (% yoy) 2.1 1.7 1.7 1.4 0.9 0.3 0.6 1.1 1.7 2.8 2.6 1.5 0.9 2.3 2.2 2.2 2.0CPI core (% yoy) 1.7 1.6 1.9 1.7 1.3 1.4 1.7 1.9 2.2 2.3 2.1 1.6 1.8 2.3 2.2 2.2 2.0Unemp loyment rate (%) 7.2 6.8 6.3 6.0 5.8 5.6 5.3 5.1 4.9 8.0 7.6 6.2 5.2 5.1 5.4 5.9 6.1Employment (%yoy) 1.3 2.3 2.5 2.3 2.0 1.6 1.6 1.6 1.7 1.1 1.2 2.3 1.6 0.9 0.3 0.3 0.4

Average weekly earnings (% yoy) 1.3 1.9 -0.2 0.8 1.8 2.1 2.6 2.7 3.0 1.4 1.2 1.1 2.6 2.8 3.0 3.0 3.0Savings rate (%) 6.2 5.5 7.5 7.0 6.8 6.7 6.7 6.6 6.5 8.0 6.4 6.7 6.6 6.4 6.2 6.2 6.0Fiscal s tance** (% of GDP) 2.4 0.3 0.3 0.0 0.3 0.3 0.3 0.3Output gap (% of GDP) -3.6 -3.2 -1.8 -0.6 -0.1 0.0 0.0 -0.2Profits (% yoy) 3.4 11.0 12.9 8.8 4.1 4.1 3.8 3.1Current account (% of GDP) -3.7 -4.5 -5.6 -5.5 -5.1 -4.7 -4.5 -4.2Budget balance (PSNBex,% GDP) 7.2 5.6 5.3 4.6 4.0 3.6 3.4 3.3Public Debt (% of GDP) 76.8 78.9 81.0 82.0 82.6 82.8 82.7 83.3Bank Rate (%) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.8 1.0 0.5 0.5 0.5 0.7 1.6 2.6 3.4 3.5Source: SG Cross Asset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cyclically-adjusted budget balance

rian Hilliard(44) 20 7676 [email protected]



15/30


January 2015 15

S WITZERLAND RELATIVE STRENGTH SUGGESTS

STRONGER CURRENCY Domestic economy continues to show strength. Following continued robust domestic demandand a recovery in net exports, GDP grew by 0.6% qoq in Q3 last year, setting up growth for about1.9% last year for a second consecutive year. We expect some moderation to feed through in early2015 but fundamentally, the Swiss economy is continuing to outperform despite the negativeheadwinds from the euro area and a strong currency. We expect domestic demand to continue todrive growth, supported by the robust labour market, low oil prices, low inflation and easy monetarypolicy. Importantly, while continued negative inflation is a concern for the SNB, it also supportsprice competitiveness.

Swiss National Bank again defending the currency floor. As feared, markets are still puttingpressure on the Swiss franc via safe haven capital inflows as uncertainty has increased in the euroarea. The latest measure by the SNB in mid-December was to take the deposit rate negative, withthe aim of taking the 3-month Libor rate into negative territory. Interestingly, this measure only hada temporary impact and the Swiss franc has quickly returned to levels close to the floor. In the longrun, the SNB may need to consider lowering the floor from its current 1.20 to the euro in order toavoid building up too much currency reserves and base money. While temporary safe haven flowsexplain much of the current strength, it would be worth communicating that there are alsoimportant economic reasons behind the continued appreciation pressure. We expect rates to startmoving up in H2 2016 although risks are for a later start of the tightening cycle.

Growth forecast revised up. Compared with our December update, GDP growth has been revised

up slightly in 2014 and 2015, boosted by weaker oil prices and continued strong domestic demand.Inflation forecast revised down. In contrast, headline inflation has been revised down, due tolower oil prices, to -0.5% this year (-0.1% before) and 0.2% next year (0.5% before).

Economic Forecasts: SwitzerlandNominal GDP for 2013 602.8bn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 2.1 1.8 1.1 2.6 2.0 1.2 1.6 1.6 1.5 1.1 1.9 1.9 1.7 1.8 1.8 1.8 1.8 Consum er expenditure 2.0 -0.6 1.2 2.5 1.1 1.6 1.4 1.3 1.3 2.8 2.2 1.0 1.5 1.6 1.6 1.6 1.6 Governm ent expenditure 3.9 -2.8 -0.6 3.7 0.2 1.3 1.3 1.3 1.2 2.9 1.4 1.0 1.3 1.3 1.3 1.3 1.3 Investment 3.0 0.8 -2.3 1.9 1.0 1.7 1.7 2.0 2.1 2.5 1.8 0.9 1.4 2.2 2.5 2.4 2.4 Exports -10.3 -7.2 -31.7 15.4 2.3 3.5 3.6 4.2 4.2 1.0 15.4 -9.5 2.1 3.9 4.0 4.1 4.1 Imports -18.6 4.9 -39.5 8.9 3.3 5.4 4.5 4.5 4.9 -2.7 13.6 -10.9 1.4 4.9 5.0 5.2 5.1Inventories* (%qoq ann) -4.5 10.8 -1.0 -4.4 1.3 0.3 0.3 -0.1 -0.1 -3.5 -2.5 1.5 -0.3 0.3 0.2 0.4 0.4Nominal GDP (% yoy) 2.0 2.6 1.5 2.0 1.7 1.3 1.2 1.1 1.2 1.0 1.7 1.9 1.2 2.1 2.5 2.6 2.6CPI headline (% yoy) 0.0 0.0 0.1 0.0 -0.1 -0.6 -0.6 -0.5 -0.4 -0.7 -0.2 0.0 -0.5 0.2 0.8 1.0 1.1CPI core (% yoy) 0.0 0.0 0.0 0.1 0.2 -0.3 -0.3 -0.4 -0.3 -1.0 -0.2 0.1 -0.3 0.0 0.4 0.7 0.8Unemployment rate (%) 3.2 3.2 3.2 3.0 3.2 3.3 3.3 3.4 3.4 2.9 3.2 3.1 3.4 3.3 3.3 3.1 3.0Employment (%yoy) 1.0 1.0 0.7 0.7 0.8 0.8 0.8 0.8 0.8 1.9 1.4 0.8 0.8 0.9 0.9 0.8 0.8Compens ation per em ployee (% yoy) 0.7 0.7 0.8 0.8 0.7 0.8 0.8 0.8 0.8 1.1 0.7 0.8 0.8 1.3 1.5 1.5 1.5Savings rate (%) 14.4 14.2 14.7 14.8 14.9 14.9 14.9 14.9Fiscal stance** (% of GDP) 0.3 -0.2 0.1 -0.1 -0.1 -0.1 -0.1 0.0Output gap (% of GDP) -0.4 -0.3 -0.5 -0.6 -0.5 -0.5 -0.4 -0.3Corporate profits before tax (% yoy)Current account (% of GDP) 9.9 10.7 5.7 7.9 7.4 7.1 6.8 7.2Budget balance (% of GDP) 0.3 0.2 0.3 0.1 0.0 0.0 0.0 0.0Public Debt (% of GDP) 49.2 48.3 47.2 47.6 47.0 46.4 45.8 45.1Main Central Bank rate (%) 0.0 0.0 0.0 0.0 0.3 0.8 1.5 2.0

Source: SG Cross A sset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cy clically-adjusted budget balance

natoli nnenkov(44) 20 7762 [email protected]



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January 2015 16

J APAN MOVING TOWARDS EXITING DEFLATION

Growth forecasts: Our FY15 GDP projection is changed from 2.3% to 2.4%. We are aboveconsensus on growth for FY15 (consensus is currently about +1.7% but is likely to rise). Key driversinclude aggregate wage expansion of around 3%, fiscal stimulus measures in H1 2015, a cut incorporate tax of around 2.5pp (the first fruitful success of Abenomics), restarting nuclear powerplants, and additional QQE measures by the BoJ in October 2015. Moreover, the lower oil price willimprove the terms of trade, and this should put stronger upward pressure on Japan s GDP deflator.

As a result, we have revised up our nominal GDP growth forecast for FY2015 from +3.0% to +3.4%.The second consumption tax (CT) hike has been postponed to April 2017. PM Abe promised thatthe hike would not be postponed for a second time, indicating his strong commitment to reflate theeconomy by April 2017.

Inflation forecasts: An underlying inflation rate of around 1% (excluding the effect of the CThike) is set to continue in the medium term, due to aggregate wage expansion and the effects ofyen depreciation. Inflation may be much weaker than this trend in the short term due to the fall in oilprices, and there is a possibility that it will temporarily fall close to 0% around mid-2015. We haverevised down our inflation outlook accordingly, from +0.7% to +0.4% for FY15 (consensus about+1.0%, likely to fall). It will be difficult to achieve the BoJ s price stability target of 2% by the end ofFY15, in our view. Inflation is likely to reaccelerate in H2 2015 but, as will probably be confirmed byOctober 2015, inflation should remain weak at under 1.0%, and therefore additional QQE measuresare likely. This would be similar to when the BoJ implemented additional QQE on 31 October 2014mainly due to the fall in oil prices. There are increasing risks that if the inflation rate looks set to fallbelow 0%, the BoJ could implement additional QQE earlier.

Key assumptions: Japan is moving steadily towards an exit from deflation. We believe a long-lasting exit from deflation will materialise in 2016. The impact of the lower oil price is a tailwind forthe Japanese economy which will help alleviate the negative effect on the terms of trade of yendepreciation. With the yen depreciation and falling oil prices, corporate profits will likely growsignificantly.

Economic Forecasts: JapanNominal GDP for 2013 478tn yen Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) -1.5 5.8 -6.7 -1.9 3.9 2.6 2.6 2.6 2.3 1.7 1.6 0.2 1.6 2.1 1.3 1.5 1.5 Consumer expenditure -0.3 8.9 -18.8 1.5 2.4 2.0 2.0 2.0 2.0 2.3 2.1 -1.1 0.6 2.0 1.0 0.9 1.4 Governmen t expenditure 1.5 -3.0 1.7 1.9 1.3 3.1 2.1 1.7 0.9 1.7 2.9 0.8 2.0 0.3 0.5 1.4 1.3 Investment 4.9 23.9 -20.7 -5.5 4.9 5.2 4.1 4.1 3.8 3.5 1.9 2.7 1.5 3.9 2.2 1.6 1.8 Investm ent (non-resi dential) 4.1 27.2 -17.6 -1.5 6.1 6.1 4.9 4.5 4.1 3.6 0.5 4.3 2.9 4.2 2.9 2.1 1.8 Investm ent (reside ntial) 9.0 9.6 -34.3 -24.4 -2.0 0.0 0.0 2.0 2.0 3.2 8.7 -4.6 -6.2 2.4 -1.8 -1.8 1.4

Exports 0.8 28.0 -1.8 5.2 10.4 5.3 5.3 5.3 4.9 -0.1 1.5 8.0 5.7 4.4 3.5 3.2 2.2 Imports 15.5 27.2 -19.9 3.0 0.0 4.1 4.1 4.1 4.1 5.3 3.1 6.5 1.5 3.5 2.5 1.5 1.9Inventories* (%qoq ann) -0.5 -2.6 5.8 -2.7 -0.4 -0.4 0.0 0.0 0.0 0.2 -0.4 -0.1 -0.2 0.0 0.0 0.0 0.0Nomi nal GDP (% yoy) 2.0 2.5 1.8 0.7 1.6 1.2 2.1 4.1 4.0 0.8 1.1 1.6 2.8 3.3 3.7 3.7 3.2CPI headlin e (% yoy) 1.4 1.5 3.6 3.3 2.5 2.5 0.3 0.0 0.5 0.0 0.4 2.7 0.8 1.2 2.9 2.4 2.1CPI core (% yoy) 0.5 0.6 2.3 2.3 2.1 2.3 0.5 0.5 0.6 -0.6 -0.2 1.8 1.0 1.1 2.5 2.1 1.9Unemployment rate (%) 3.9 3.6 3.6 3.8 3.3 3.5 3.4 3.6 2.9 4.3 4.0 3.6 3.3 3.1 2.9 2.7 2.7Emplo yment (%yoy) 1.1 0.7 0.7 1.9 1.3 0.9 1.0 1.0 1.2 -0.3 0.7 1.2 1.0 1.1 1.4 1.5 1.1Compensation per employee (% yoy) 0.5 -0.2 0.9 0.7 0.9 1.2 1.6 1.6 1.9 0.6 0.2 0.5 1.6 1.9 2.2 2.1 1.7Savings rate (%) 4.9 4.8 4.0 5.5 5.5 5.7 5.5 5.3Fiscal stance* (% of GDP) -1.1 0.2 0.5 0.0 0.0 1.0 0.5 0.7Output gap (% of GDP) -0.5 0.5 0.2 1.1 2.4 2.6 2.8 2.9Corporate profits before tax (% yoy) 19.6 36.5 12.0 17.4 12.2 12.8 14.9 3.2Current account (% of GDP) 1.0 0.7 0.2 0.8 0.9 1.1 1.2 1.3Budget balance (% of GDP) -8.6 -7.2 -5.5 -4.9 -4.2 -2.5 -1.4 0.0Public Debt (% of GDP) 234.3 241.0 249.1 256.3 262.6 266.5 268.8 269.1

Main Central Bank rate (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2Source: SG Cross A sset Research/Economics. * Contribution to GDP (annualized).** Fiscal s tance is defined as the change in the cy clically-adjusted budget balance

akuji ida(81) [email protected]

Kiyoko Katahira(81) 355 49 [email protected]



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January 2015 17

INDIA FURTHER ( TRANSITORY ) EASING OF CRUDE PRICESUNLIKELY TO BENEFIT INDIA MUCH

GDP growth: Following our mid-December forecast update to factor in the sharply falling crudeprices, we are not changing our growth forecast in response to our commodity teams call for aneven further (though transitory) slide in prices. Rather, there is a downside risk to our revisedforecast, as private investment has yet to pick up pace as we initially expected.Indias fiscal deficit worries to cease: We expect Indias FY15 fiscal deficit target of 4.1% ofGDP to be met (not improve further in spite of lower crude prices), although governmentfinances are under pressure. Lower oil prices will not lead to any further improvement in thegovernments oil subsidy expenditure as the budgeted subsidy for FY15 has already beenexceeded. On the other hand, lower crude prices would likely result in lower tax collection. Webelieve that, like his predecessor, the current finance minister Arun Jaitley could resort to non-conventional measures (postponing subsidies to next year, forcing public sector companies topay more dividends etc.) while at the same time opting for expenditure compression so as to beable to stick to the stiff target.

No material change in our inflation forecast: A sharp drop in crude prices since June has hada strong impact on Indias inflatio n trajectory. However, we do not expect any further passthrough of lower crude prices to domestic retail prices. Since mid November, the governmenthas raised the excise duty on petrol and diesel on three different occasions (without impactingthe retail price) to bridge the gaping fiscal hole rather than passing on the benefit of falling crudeprices to consumers, and we expect the same stance to continue. Because of this in fact, therehas been a minor uptick in our near term inflation forecast. Despite this, we expect overallinflation to comfortably meet both the RBIs short -term (8% by January 2015) and medium-term(6% by January 2016) targets and hence believe that the central bank will make its first easingmove in Q1 15.

Economic Forecasts: IndiaNominal GDP for 2013 113205bn Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2013 2014 2015f 2016f 2017f 2018f 2019f 2020f GDP (% yoy), expenditure 4.4 6.1 5.8 6.0 6.4 5.5 7.3 6.4 6.2 4.8 5.0 5.9 6.7 6.8 7.4 7.9 8.3 Consu mer expenditure 2.8 8.2 5.6 5.8 6.8 6.7 11.0 10.6 6.5 6.4 4.8 6.3 7.1 7.0 7.6 8.1 8.5 Government expenditure 3.6 -0.4 8.8 10.1 2.2 -1.8 6.3 4.6 2.1 4.3 3.8 4.5 4.9 4.8 5.1 5.0 5.3 Investment 0.2 -0.9 7.0 0.0 6.5 9.4 9.0 8.7 6.5 5.5 -0.1 5.8 7.4 8.6 9.1 9.6 10.6 Exports 11.3 10.5 11.5 -1.6 7.5 10.5 9.7 10.8 9.4 5.1 8.4 6.9 9.4 7.6 7.6 8.0 7.9 Imports -8.3 -3.7 -0.4 1.1 6.1 8.3 8.6 7.1 9.9 6.0 -2.5 3.7 7.7 9.7 10.6 9.9 10.5

GDP (% yoy), income 4.6 4.6 5.7 5.3 5.5 5.6 5.8 6.5 6.7 4.5 4.7 5.5 6.5 6.8 7.1 7.7 8.0 Agriculture 3.7 6.3 3.8 3.2 2.3 0.9 2.3 2.5 3.9 1.4 4.7 2.5 3.2 3.3 2.5 2.8 2.8Industry -0.4 -0.2 4.2 2.2 4.9 5.4 5.8 7.1 6.8 1.0 0.4 4.2 6.7 6.4 6.3 7.2 8.1Service 7.2 6.4 6.8 7.1 6.8 6.7 6.5 7.0 7.4 7.0 6.8 6.8 7.2 7.7 8.4 8.8 8.9Nomina l GDP (% yoy) 13.0 12.2 11.6 10.1 10.9 12.8 13.9 12.2 10.8 12.7 12.3 11.4 11.4 11.6 12.3 12.5 13.0WPI headline (% yoy) 7.0 5.4 5.8 3.8 0.9 1.5 1.8 1.3 4.4 7.3 6.0 3.0 3.0 4.5 4.4 3.6 4.5WPI core (% yoy) 3.1 3.7 4.0 3.4 2.4 2.4 2.1 1.7 2.1 4.9 2.9 3.0 2.0 1.9 2.4 2.4 2.6CPI headline (% yoy) 10.4 8.4 8.1 7.4 5.1 6.1 6.3 5.2 5.5 10.2 9.5 6.6 5.8 5.4 5.2 5.2 5.3Savings rate (%) 30.1 31.0 31.5 32.0 32.5 33.0 33.5 34.0Fiscal stance* (% GDP) -0.4 -0.4 -0.3 -0.2 -0.2 -0.2 -0.1 -0.1Output gap (% GDP) 0.3 -1.2 -1.5 -0.7 0.2 0.6 0.5 0.4Corporate profit (% yoy) 8.4 8.0 10.8 11.0 12.2 13.1 15.8 16.3Current account (% of GDP) -4.7 -1.7 -1.6 -2.0 -2.2 -2.2 -2.0 -2.0Budget balance (% of GDP) -4.9 -4.6 -4.1 -3.6 -3.3 -3.0 -2.7 -2.5Public Debt (% of GDP) 65.4 65.6 65.9 65.3 64.5 62.9 61.3 59.3

Repo rate 8.00 8.00 8.00 8.00 8.00 7.75 7.75 7.75 7.50 7.25 8.00 7.75 7.50 7.00 6.50 6.25 6.25Source: SG Cross Asset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cyclically-adjusted budget balance.

2013 refers to FY13

unal Kumar Kundu(91) 80 6716 [email protected]

https://publication.sgresearch.com/en/3/0/219197/152426.html?sid=29c9001b22f599d12d14f9ef76aea73ahttps://publication.sgresearch.com/en/3/0/219197/152426.html?sid=29c9001b22f599d12d14f9ef76aea73ahttps://publication.sgresearch.com/en/3/0/219197/152426.html?sid=29c9001b22f599d12d14f9ef76aea73ahttps://publication.sgresearch.com/en/3/0/219197/152426.html?sid=29c9001b22f599d12d14f9ef76aea73a


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January 2015 18

INDONESIA FURTHER EASING IN OIL PRICE TO HAVELIMITED IMPACT , THOUGH DEFICIT QUALITY WILL IMPROVE

Reformist president steams ahead. After firing the first salvo (with the intent of reining in therunaway oil deficit) by raising the retail price of subsidised fuels by 30% in November, Jokowiwent a step further in December 2014 (taking advantage of the plummeting crude price) andannounced the removal of the subsidy on low octane gasoline while capping the subsidy ondiesel to IDR1,000/ltr (against our expectation of IDR2,000/ltr). This is a big positive step andshould help enhance his reputation as a reformist.

Quality of budget deficit to improve. We expect the latest move to bring down the oil subsidysubstantially. The removal of the gasoline subsidy and the cap on the diesel subsidy shouldreduce Indonesias total oil subsidy for 2015 to under IDR90trn, less than a third of t he

governments earlier assumption of IDR276trn. This is unlikely, however, to lead to any furtherimprovement in budget deficit. Rather, the savings thus generated are to be used to incuradditional capital expenditure. In fact, the revised budget now assumes a doubling of capitalexpenditure for 2015, as compared to the previous estimate.

Growth expectation virtually unchanged . We have not changed our growth forecast vis--visour previous update. Persistently weak commodity prices should lead to lower privateinvestment in Indonesia, especially for the setting up of smelters as the viability of the projectsare likely to be impacted. Indonesias mineral exporters face a total export ban on unprocessedores from 2017 onward. However, the potential shortfall in private investment may be taken careby increased capital expenditure on the part of the government.

Effect of lower crude price on inflation to be felt in the later years. Indonesias December CPIrose sharply (2.5% MoM) on the back of an increase in the administered fuel price and theanticipated uptick in food and transportation prices. However, we believe that inflation has peaked.

And, with oil prices continuing to fall rapidly and the government deciding to allow retail prices formotor fuel to be determined by the market, we expect headline CPI to be a tad lower than ourprevious estimate.

Economic Forecasts: IndonesiaNominal GDP for 2013 9084 tn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% yoy), expenditure 5.7 5.2 5.1 5.0 5.1 5.5 5.4 5.4 5.0 6.3 5.8 5.1 5.3 5.8 6.0 6.4 6.8 Consumer expenditure 5.3 5.6 5.6 5.4 4.7 4.8 4.9 4.9 5.9 5.3 5.3 5.3 5.1 5.6 5.6 5.7 5.8 Government expenditure 6.4 3.6 -0.7 4.4 7.3 6.7 8.1 4.8 4.1 1.3 4.9 4.0 5.6 4.7 4.8 4.9 5.1 Investment 4.4 6.0 5.2 4.0 4.4 5.1 5.9 8.7 9.0 9.3 4.7 4.9 7.2 8.2 8.5 8.7 9.2 Exports 7.4 -0.4 -0.8 -0.7 -1.9 2.9 3.7 5.3 5.5 2.0 5.3 -1.0 4.4 7.0 7.3 9.0 10.0 Imports -0.6 -0.7 -5.1 -3.6 -1.0 3.2 4.5 4.2 2.3 6.7 1.2 -2.6 3.6 8.7 8.7 9.1 9.9Nomi nal GDP (% yoy) 13.2 12.1 12.3 11.0 10.3 11.5 12.0 11.7 11.8 10.9 10.4 11.4 11.8 11.6 11.4 11.6 11.6CPI headline (% yoy) 8.4 7.8 7.1 4.3 6.5 8.1 7.9 7.7 5.8 4.3 7.1 6.4 7.3 5.5 5.5 5.3 5.4CPI core (% yoy) 4.8 4.6 4.8 4.5 4.5 4.6 4.9 5.4 5.4 4.3 4.8 4.6 5.1 4.9 4.9 4.2 4.4Unemployment rate (%) 6.1 6.2 6.3 6.1 6.0 5.9 5.6 5.4Savings rate (% GDP) 32.6 31.2 30.3 31.1 32.1 32.8 33.3 33.9Fiscal stance* (% GDP) -0.3 -0.2 -0.2 -0.2 -0.2 -0.1 -0.1 -0.1Output gap (% GDP) 0.0 0.0 -0.3 -0.2 0.3 0.7 1.2 1.0Corporate profits (% yoy) 8.5 9.9 11.2 9.4 8.3 11.5 11.8 12.8Current account (% GDP) -2.7 -3.3 -2.9 -2.4 -2.2 -2.2 -2.2 -2.2Budget balance (% GDP) -1.7 -2.2 -2.5 -2.0 -1.8 -1.6 -1.5 -1.5Public Debt (% GDP) 24.5 25.5 26.5 26.0 25.5 25.0 24.5 24.5BI Rate (%) 7.50 7.50 7.50 7.50 7.75 7.75 8.00 8.00 8.00 5.75 7.50 7.75 8.00 7.75 7.25 7.00 6.50

Source: SG Cross As set Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is def ined as the change in the c yclically-adjusted budget balance

unal Kumar Kundu(91) 80 6716 [email protected]



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January 2015 20

T AIWAN DISINFLATION TO KEEP THE CENTRAL

BANK ON HOLD IN 2015Key assumptions: US economy to lead demand recovery: We think the US is entering asustained period of above-trend growth. The euro area will likely continue to recover, albeit at asnail s pace. Conversely, we expect a sharper growth deceleration than consensus in China.However, for Taiwan, the benefit of increasing exposure to Chinas tourism demand is likely tooutweigh the drag from Chinas investment slowdown in the short term.

Main changes: No rate hike in 2015: As d isinflationary pressure rises, we see Taiwans centralbank slowing its return to neutral policy rates and resuming rate normalisation only in Q1 2016, twoquarters later than we previously expected. The process will be gradual: one 12.5bp hike everyquarter until the neutral rate 2.5% is reached at the end of 2016.

GDP forecast: Growth apace thanks to lower energy costs: We expect the balanced recovery tocontinue in Taiwan. Plus, lower crude oil prices will probably give a slight boost to the economy andraise GDP growth to 3.8% in 2015. However, the additional impact of further oil price declines ongrowth will be marginal because the lift from consumption is likely to be offset by stronger importgrowth. Unlike the consensus, we expect economic growth to be modestly lower from 2016, giventhe slow progress on further economic liberalisation and the rapid ageing of the population. As aresult of partisan politics, policy uncertainties were even higher than we originally projected.

Inflation forecast: Oil price plunge and TWD strengthening to depress inflation rates:Continuing declines in crude oil price and bulk commodities prices will push headline CPI tonegative territory throughout the first three quarters in 2015. Core CPI is likely to weaken as well,

mainly because of the expectation of a stronger Taiwanese dollar in trade-weighted terms. Thatsaid, the labour market continued to improve. The unemployment rate declined to its lowest sincemid-2008 and the participation rate was at its highest level in the past decade. Therefore, thesoftness in core CPI will be modest (2015 0.9% vs. 2014 1.2%). In 2016, we expect both headlineand core inflation rates to rebound thanks to the anticipated rebound in oil prices and a tight labourmarket, with the headline up to 1.7% and the core up to 1.3%.

Economic Forecasts: TaiwanNominal GDP for 2013 $4 89bn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% yoy) 3.4 3.4 3.9 3.6 2.5 3.4 3.9 3.9 3.8 2.1 2.2 3.3 3.8 3.4 3.1 2.9 1.7 Cons umer expenditure 4.3 2.4 3.3 2.9 2.0 3.7 3.5 3.5 3.3 1.8 2.4 2.6 3.5 2.9 2.9 2.8 2.1 Government expenditure -1.5 4.2 2.3 3.8 2.5 0.0 2.3 3.0 2.5 2.2 -1.2 3.2 2.0 1.2 -0.2 -0.1 0.6

Investment 7.5 0.9 1.6 4.5 3.2 6.5 4.0 3.0 4.2 -2.6 5.0 2.6 4.4 3.0 2.3 2.2 0.8 Exports 3.6 4.3 5.0 7.5 5.2 4.5 4.4 4.8 4.5 0.4 3.5 5.5 4.6 3.8 3.8 3.0 0.6 Imports 4.8 2.9 4.7 9.1 7.0 5.0 3.9 4.2 4.1 -1.8 3.3 6.0 4.3 2.9 2.7 2.0 0.1Inventories 0.1 0.0 0.7 0.8 0.9 0.0 0.1 0.1 0.0 -0.1 -0.4 0.6 0.1 0.1 0.0 0.0 0.0Industrial produ ction (% yoy) 2.0 2.4 6.4 7.7 7.5 6.0 8.0 7.8 7.5 -0.2 0.7 6.1 7.4 6.0 4.0 3.0 1.0Nomin al GDP (% yoy) 2.7 3.4 5.4 7.5 5.1 4.0 3.4 1.9CPI headline (% yoy) 0.6 0.8 1.6 1.5 0.8 -0.4 -0.7 -0.2 0.8 1.9 0.8 1.2 -0.1 1.8 1.4 1.0 0.7CPI core (% yoy) 0.2 0.6 1.4 1.6 1.5 1.0 0.8 0.7 1.0 1.0 0.7 1.3 0.9 1.3 1.3 1.2 0.5M2 (% yoy) 5.9 5.8 6.0 5.5 5.5 5.8 5.8 5.5 5.5 4.2 4.8 5.7 5.6 5.4 5.1 4.8 4.2Unemp loyment rate (%) 4.2 4.1 4.0 3.9 3.9 3.9 3.9 3.9 4.0 4.2 4.2 4.0 3.9 4.0 4.0 4.2 4.7Employment (% yoy) 1.4 1.0 1.0 1.0 1.0 0.9 0.8 0.4Savings rate (%) 30.7 31.8 32.8 30.8 29.6 29.4 28.7 27.6Output gap (% of GDP) -0.5 -0.3 0.1 0.3 0.0 -0.2 -0.3 -1.0Current account (% of GDP) 10.6 11.7 12.6 10.5 9.5 9.5 9.0 8.0Budget balance (% of GDP) -2.5 -1.4 -1.5 -1.1 -0.8 -0.5 0.0 -0.5

Public debt (% of GDP) 48.0 47.8 46.9 44.7 43.3 42.2 40.8 40.5CBC benchmark interes t rate (%) 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 1.875 2.219 2.500 2.500 2.313Source: SG Cross A sset Research/Economics.

laire Huang(852) 2166 [email protected]



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January 2015 21

A USTRALIA OIL TAILWIND EVEN STRONGER

Energy price slide to push inflation well below target: Our new oil price forecasts down byanother USD15pb for 2015 have depressed inflation prospects even further. We now expectconsumer prices to rise just 1.2% in 2015, 0.2pp less than previously, and to drop to as low as0.8% yoy in Q2 2015. That is substantially below the RBAs target (2 -3%). We have also cut the2016 forecast, albeit only marginally. However, while core inflation will also likely be lower thanwe previously predicted, it is likely to remain target-consistent, as the weaker exchange ratemaintains upward pressure on imported goods and services prices. Indeed, the AUD hasweakened more quickly than we expected.

RBA call unchanged: We maintain our out-of-consensus view that the current 2.50% policyrate is the low in the cycle, given that we expect core inflation to remain within target. Moreover,

by the time we predict the first rate hike, in Q2 2016, headline inflation is likely to be back above2%.

Growth will benefit as well, albeit only marginally. Lower inflation implies stronger growth inhouseholds and most corporates purchasing power, and so we have lifted the privateconsumption forecast slightly for 2015, as well as the household savings rate. But the revisionwas not large enough to shift GDP growth rates discernibly. Lower oil prices have also improvedthe outlook for the current account. Although Australia is a net energy exporter, it is a netimporter of crude and oil products: our forecasts are up 0.2pp of GDP for 2015 and 0.1pp for2016.

Cheaper oil at the margin helpful for rebalancing. In its shift away from growth driven byresource investment and towards exports, non-resource investment, especially housing, andconsumption demand, lower oil prices are marginally helpful. In addition to the consumptioneffects mentioned above, they lessen the deterioration in the terms-of-trade, which is supportiveof domestic income. More broadly, we remain optimistic that this shift will progress successfully,meaning with growth only slightly below potential.

Economic Forecasts: AustraliaNominal GDP for 2 013 AUD1.6tn Q413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 3.4 4.1 2.0 1.4 3.3 3.3 3.2 3.2 2.6 3.6 2.1 2.8 2.9 3.3 3.1 3.0 3.0 Consum er expenditure 2.7 2.2 3.0 2.2 2.8 3.7 3.3 3.2 3.0 2.5 1.7 2.5 3.1 3.1 3.0 2.8 2.8 Governm ent expenditure 0.6 1.4 1.6 3.3 0.8 1.0 1.3 1.5 2.0 2.3 0.8 2.0 1.5 1.5 1.8 2.0 2.0 Investment -3.6 0.6 2.9 -10.5 -1.9 -3.0 -1.4 -1.5 -1.5 8.9 -2.1 -1.8 -2.9 -0.3 1.9 3.2 3.7 Residential investment 4.5 24.5 4.1 -3.7 17.0 9.5 9.1 8.2 8.2 -6.1 0.2 8.4 8.5 7.4 5.0 4.0 2.8

Non-residential investment -5.2 -3.9 2.6 -12.0 -5.9 -5.9 -3.9 -3.9 -3.9 12.4 -2.6 -3.9 -5.4 -2.4 1.0 3.0 4.0 Exports 7.3 16.6 -6.0 11.8 8.0 7.5 6.8 6.5 6.2 6.0 6.2 6.7 6.9 7.0 6.0 5.0 4.5 Imports -5.1 -3.8 10.0 -3.6 -2.5 -2.0 -1.0 -0.5 2.0 6.3 -1.9 -1.2 -1.0 1.0 3.5 4.5 4.2Inventories* (%qoq ann) 0.3 -2.1 3.9 -0.5 -0.1 -0.1 -0.1 0.0 0.0 0.0 -0.4 0.1 0.1 0.0 0.0 0.0 0.0Nom inal GDP (% yoy) 4.7 4.8 3.6 2.7 2.0 1.9 2.7 4.2 4.8 3.3 3.3 3.3 3.4 4.6 4.9 5.0 5.2CPI headlin e (% yoy) 2.7 2.9 3.0 2.3 1.5 1.0 0.8 1.2 1.8 1.8 2.4 2.4 1.2 2.6 2.8 2.8 3.0CPI core (% yoy) 2.7 2.7 2.6 2.6 2.2 2.1 2.1 2.1 2.2 2.1 2.6 2.5 2.1 2.6 2.8 2.8 2.9Unemployment rate (%) 5.8 5.9 5.9 6.1 6.3 6.2 6.1 6.0 5.9 5.2 5.6 6.0 6.1 5.7 5.4 5.1 5.0Empl oyment (%yoy) 0.8 0.7 0.9 1.1 1.2 1.4 1.6 1.9 2.3 1.2 1.0 1.0 1.8 2.3 2.2 2.0 2.0Wages (% yoy) 2.6 2.5 2.5 2.8 2.7 3.9 3.4 2.1 1.6 3.4 2.7 2.6 2.8 3.0 3.3 3.9 3.8Savings rate (%) 9.4 9.2 9.4 9.4 9.3 9.1 9.1 9.1 9.1 11.0 9.9 9.3 9.1 8.9 8.7 8.5 8.3Fiscal stance** (% of GDP) 0.9 0.3 0.3 0.6 0.7 0.8 0.6 0.3Output gap (% of GDP) 0.4 -0.4 -0.6 -0.8 -0.8 -0.7 -0.6 -0.5Corporate p rofits be fore tax (% yoy) -6.5 5.2 4.0 5.2 6.0 5.5 5.0 5.0Current account (% of GDP) -4.3 -3.3 -2.6 -1.3 -0.2 0.4 0.5 0.6

Budget balance (% of GDP) -3.5 -3.5 -4.1 -2.9 -2.1 -1.4 -0.6 -0.3Public debt (% of GDP) 27.0 29.6 32.8 34.7 35.3 35.0 34.0 32.7RBA cash rate target (%) 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 3.00 2.50 2.50 2.50 3.25 4.25 4.50 4.50Source: SG Cross A sset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cy clically-adjusted budget balance

laus Baader(852) 2166 [email protected]



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January 2015 22

BRAZIL LOSING HOPE OF NEAR -TERM RECOVERY

No additional gain on the inflation front from falling oil prices. Lower oil prices relieve thepressure on the government to raise transport prices (c.20% of IPCA prices) these were long keptsuppressed and allowed to rise moderately only recently. This removes one of the key near-termupside pressures on inflation. However, the BRL remains under acute pressure and, structurally,inflation continues to trend up irrespective of the downward impact from cyclical factors (includingongoing monetary tightening). We therefore do not expect any further decline in inflation due to anyfurther decrease in oil prices. In fact, we are revising up our 2015 and 2016 inflation forecastsmarginally to 6.1% and 5.8% (previously 6.0% and 5.7%).

Growth prospects have diminished significantly on worsening outlook for lower exports,government spending and investment. The prospect of an improvement in consumption spending

is completely outweighed by the worsening export and investment outlook. Furthermore, given thegovernments zeal to correct its balance sheet and the prospect of lower revenue growth, publicspending will likely be a net drag on growth. We reduce our 2015 and 2016 growth forecastssignificantly to 0.6% and 1.5% respectively (previously 1.3% and 1.9%).

Monetary policy set to tighten more than previously expected. In his recent speeches, the BCBGovernor Tombini raised the rhetoric on doing what it takes to bring inflation back to the target level.Such rhetoric is not new. However, it must be seen in the context of recent hikes post the re-election of President Rousseff, the appointment of a new and market-friendly team and some of therecent announcements on the fiscal side. Moreover, the twin deficit (current account and fiscal)continues to deteriorate sharply along with growth and, therefore, the currency remains underpressure, putting upside pressure on inflation. Finally, the impending beginning of the Feds

tightening cycle will put further pressure on the BRL. Consequently, it makes sense to anticipateadditional monetary tightening in such an environment. We see the BCB raising the Selic target to12.75% through Q2 15 (50bp each in Q1 and Q2).

Twin deficit in precarious state. The fiscal and current account deficits worsened sharply in Q4 14.Not only do they suggest a very difficult road to recovery (if indeed recovery is at all possible in themedium term), they also present significant risks to our key forecasts.

Economic Forecasts: BrazilNominal GDP for 2013 4845bn Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 1.9 -0.1 -3.1 0.4 0.0 -0.5 2.4 1.8 2.6 1.0 2.5 0.0 0.6 1.5 2.0 2.3 2.6 Consum er expenditure 3.3 -0.3 -1.1 -1.3 0.8 2.4 2.5 2.5 2.2 3.2 2.6 0.8 1.5 2.0 2.2 2.7 2.9 Governm ent expenditure 3.0 2.4 -4.4 6.2 -5.1 0.0 0.6 0.6 0.7 3.3 2.0 1.4 -0.3 0.5 0.9 1.3 1.5 Investment -4.8 -11.0 -20.3 3.5 4.8 -1.1 2.7 2.9 2.1 -4.0 5.1 -7.1 0.6 1.6 1.6 2.9 3.6 Exports 17.3 -16.3 15.5 3.2 -22.1 -5.9 3.9 0.9 8.7 0.7 2.3 0.6 -3.5 2.8 3.4 3.0 3.0 Imports -1.7 5.6 -10.8 12.2 -12.0 10.0 -4.0 6.0 2.0 0.3 8.2 -0.6 0.8 3.7 3.6 4.0 4.0Inventories* (%qoq ann) -1.1 0.4 0.2 0.0 0.0 0.2 0.0 0.0Nom inal GDP (% yoy) 10.8 7.6 4.4 6.1 4.9 6.2 8.8 7.1 7.6 6.0 10.3 5.7 7.5 7.3 7.5 7.7 7.9CPI headlin e (% yoy) 5.8 5.8 6.4 6.6 6.5 6.3 6.1 6.2 6.0 5.4 6.2 6.3 6.1 5.8 5.6 5.4 5.4CPI core (% yoy) 5.8 6.4 6.7 6.8 6.6 6.5 6.4 6.3 6.1 5.5 5.8 6.6 6.3 6.2 5.9 5.5 5.4Unemployment rate (%) 5.5 5.4 4.9 5.3 5.8 6.1 6.4 6.5Empl oyment (%yoy) 2.4 0.7 -0.4 0.0 0.6 0.7 0.8 1.0Compens ation per employee (% yoy 10.1 7.6 9.9 6.3 6.3 7.3 7.2 7.2Savings rate (%) 14.6 13.8 13.2 13.4 13.8 14.2 14.6 15.0Fiscal stance* (% of GDP) 0.4 -1.2 -0.6 0.3 0.5 0.2 0.0 0.2Output gap (% of GDP) -0.1 0.2 -1.6 -2.9 -3.5 -3.9 -4.2 -4.2Corporate p rofits before tax (% yoy) 5.1 10.9 3.5 5.5 5.7 7.5 8.0 8.0Current account (% of GDP) -2.2 -3.4 -4.0 -3.9 -3.3 -3.0 -2.9 -2.8Budget balance (% of GDP) -2.5 -3.6 -5.6 -4.4 -3.8 -3.5 -3.4 -3.3Public Deb t (% of GDP) 58.8 56.7 58.6 59.2 59.0 58.5 57.8 57.8Main Central Bank rate (%) 10.0 10.8 11.0 11.0 11.8 12.3 12.8 12.8 12.8 7.3 10.0 11.8 12.8 12.5 11.5 10.5 10.5Source: SG Cross A sset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cy clically-adjusted budget balance

ev shish(91) 80 2802 [email protected]



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January 2015 23

MEXICO GROWTH AND FISCAL OUTLOOK

DETERIORATE ON LOWER OIL PRICES Lower exports and government spending to hurt growth further. In our previous revision to ourgrowth forecast we mentioned the deteriorating investment outlook particularly in the miningsector in light of lower oil prices as the key reason for lower growth forecasts. In addition to that,export growth appears set to slow on lower oil prices despite a stronger US growth outlook, andpublic sector spending will take a hit on lower revenue from Pemex, the state oil company. Thepossibility that real consumption spending will gain from lower energy prices cannot compensatefor the drag to growth posed by other spending components. Following these changes, we revisedown 2015 growth forecast from 3.2% to 2.7%. However, our growth forecast for 2016 has risenfrom 3.0% to 3.2% mostly on the base effect.

Inflation forecasts remain largely unchanged as peso and energy prices pull consumer pricesin the opposite direction. Despite the risk of additional peso depreciation, our inflation forecastremains largely unchanged for 2015 (3.3%) as falling domestic transport prices (mostly on expectedline and after peaking in 2014) should mitigate the effect of minor pass-through inflation. Coreinflation appears a tad weaker at 3.1% in 2015 (vs 3.2% previously), but should rise to 3.3% in2016 (vs 3.2% earlier).

Monetary policy forecasts remain unchanged with first rate hike not expected until Q1 16.Despite the risk of additional fiscal pressure, a depreciating currency and the impending Fedtightening, a low growth and stable inflation scenario should keep rates from rising for aconsiderable time. We keep our forecast for no rate hike until Q1 16.

Fiscal situation to deteriorate further. Lower growth in general and lower revenue growth inparticular especially that associated with state oil company Pemex is likely to put pressure onthe fiscal situation in 2015. We now expect a deficit of -4.1% of GDP in 2015 as against the -3.8%expected in our earlier revision and the estimated deficit of -3.8% in 2014. The budget deficitshould improve to -3.7% of GDP in 2016.

Economic Forecasts: MexicoNominal GDP for 2013 16101bn Q413 Q114 Q214 Q314f Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f GDP (% qoq ann) 1.5 1.4 3.6 2.0 0.5 4.6 1.6 3.9 3.9 3.8 1.7 1.9 2.7 3.2 3.5 3.2 3.3 Consum er expenditure -0.7 2.5 5.1 3.8 1.3 3.3 3.0 2.8 3.1 4.7 2.5 2.2 3.0 2.9 3.0 3.1 3.2 Governm ent expenditure 4.5 -0.5 1.3 10.1 -4.5 3.0 0.8 2.5 3.2 3.3 1.6 2.4 1.8 2.7 2.8 3.1 3.2 Investment 1.7 -0.9 10.6 6.2 1.7 4.0 3.6 4.3 3.2 4.8 -1.5 1.8 4.1 2.6 4.1 3.5 3.6

Exports 4.6 -2.3 17.4 9.5 7.5 4.5 6.0 5.5 5.5 5.9 2.1 6.6 6.9 5.8 5.8 5.6 5.9 Imports 0.1 24.5 -4.9 2.8 4.5 4.5 4.5 4.5 4.5 4.6 2.9 5.0 3.7 4.8 5.0 5.6 6.0Inventories* (%qoq ann) 0.3 -0.1 0.7 0.2 0.0 0.0 0.0 0.0Nominal GDP (% yoy) 3.5 3.9 7.0 5.9 6.0 6.6 5.6 6.3 6.9 7.4 3.2 5.7 6.3 6.7 7.1 6.7 6.7CPI headline (% yoy) 3.7 4.2 3.6 4.1 4.2 3.7 3.2 3.2 3.0 4.1 3.8 4.0 3.3 3.6 3.5 3.3 3.3CPI core (% yoy) 2.6 3.0 3.1 3.3 3.3 3.0 3.1 3.2 3.2 3.4 2.7 3.2 3.1 3.3 3.2 3.0 3.0Unemployment rate (%) 4.9 4.9 4.8 4.3 4.3 4.3 4.4 4.4Employment (%yoy) 3.3 1.1 0.6 2.4 1.9 2.3 2.0 1.7Compens ation per employee (% yoy 4.3 3.9 4.4 4.8 5.0 5.2 5.5 5.7Savings rate (%) -1.3 14.0 19.7 19.6 19.4 19.6 19.6 19.9Fiscal stance* (% of GDP) -0.3 -0.2 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1Output gap (% of GDP) 1.0 -0.4 -1.5 -1.7 -1.7 -1.6 -2.0 -2.3Corporate profits before tax (% yoy) 7.0 2.3 6.0 8.0 9.0 10.0 10.0 10.0Current account (% of GDP) -1.3 -2.1 -2.2 -2.6 -2.7 -2.6 -2.6 -2.5Budget balance (% of GDP) -2.6 -2.3 -3.8 -4.1 -3.7 -3.3 -3.0 -2.8Public Debt (% of GDP) 43.2 44.2 45.8 47.2 48.0 48.2 48.2 48.0Main Central Bank rate (%) 3.5 3.5 3.0 3.0 3.0 3.0 3.0 3.0 3.0 4.5 3.5 3.0 3.0 4.0 5.0 5.0 5.0Source: SG Cross A sset Research/Economics. * Contribution to GDP (annualized).** Fiscal stance is defined as the change in the cy clically-adjusted budget balance

ev shish(91) 80 2802 [email protected]



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January 2015 25

RUSSIA RECESSION IS INEVITABLE

Lower oil in couple with high-stress scenario on the FX market are fettering ground:Consecutive sleuthing of market-clearing oil prices and deterioration of short term outlook forthe oil market reflected by SG Commodities Teams forecasts is one of two reasons for re visionof Russias economic projections. Nonetheless, a heavier one is extreme FX market volatilityobserved since the middle of December 2014. Given deterioration of overall sentiment related torequired repayment of external debt and cheaper oil prices capital outflow has intensifiedsignificantly. The CBR stepped in with an urgent rate hike by 650bp to 17%, however the overalltrend for consumption growth and investment recovery has highly likely been broken with aspike in pent up demand and reshuffling of saving accounts. The next year will be spent onreconstruction of economic balances to the normal level and accommodation to higher inflation.

Finally, the geopolitical crisis remains an on-going concern for the next year. Although tangencypoints are apparent, including peaceful settlement of the conflict in Ukraine and abetment inreforming the economy of the country, we do not witness a quick and upfront way out.Short term growth is losing its ground: Outlook for 2015 is downgraded sharply to -3.5% yoyto reflect potential income effects on household consumption (-5.7% yoy) and potentialcontraction of private and public investments (-6.5% yoy) in a framework with extremely highuncertainty regarding FX volatility and domestic demand. While tapping the Reserve Funds forthe next couple of years becomes inevitable, pronounced fiscal austerity (-1.5% yoy) will berequired in 2015 in order to preserve fast depletion of available reserves. Net exports will be theonly positive contributor the economic growth with odd import substitution to stay conditional togeopolitical outlook.

Inflation is running out of control: Inflation is moving higher driven by intensified pass-througheffect from weaker rouble. By the end of Q1 15 we anticipate inflation to hop over to 14.7% yoyand then stay in a range 13.0-14.0% till the the end of 2015. Except for technical pass-throughof inflation through tariff revision, potential increase of fuel excise duty might hamper inflationdeceleration driven by weaker demand-pull factors.Main changes in the medium term outlook: While lower oil prices will likely complicatekeeping pace of economic recovery in 2016 (0.3% yoy), the longer term growth is suppressedby technological sanctions and poor investment sentiment in non-oil industries. Structuralreforms are lagging the pace of productivity contraction that undermines potential growth tonearly 1.0-1.5% yoy in 2017-2019.

Evgeny Koshelev+7 495 725 56 [email protected]



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January 2015 26

P OLAND DEEPER AND LONGER DEFLATION

Longer deflation: The unexpectedly deeper deflation in November and December 2014 togetherwith the new oil price outlook prompt us to revise our inflation outlook. In our opinion, two factors:lower oil prices and the lack of food price pressure, will keep inflation in negative territory in the firsthalf of 2015. We expect deflation to persist: -0.7% in Q1 and -0.3% in Q2 15. Prices should start toincrease gradually in mid-2015. In our opinion, inflation may stabilise around zero in Q3 15 andperhaps remain below 1% in the second half of 2015 and below the central banks target until atleast 2017.

No changes in GDP growth forecast: We keep our GDP growth forecast unchanged at 3.4% for2015 and 3.5% for 2016. Higher private consumption could be partially driven partially by strongerimports. Economic and political uncertainty in the region (Russia and Ukraine) may limit the positiveeffect of lower oil prices. In our opinion, the overall impact on the real economy will be negligible.The upward revision to private consumption for 2015 (by 0.2 pp) will be accompanied by greaterimport growth.

More dovish central bank: We still keep our baseline scenario unchanged. We do not expect theCentral Bank to change rates this year. The Council does not rule out further adjustments tomonetary policy. Therefore, they need data which confirm a slowdown in economic activity. In ouropinion, a significant slowdown in 2015 is very unlikely. We see downside risk to our rate forecast.The Council will probably focus more on the inflation outlook. A longer deflationary period with anunchanged or stronger PLN may impact undecided MPC members. Also, ECB decisions will beimportant for future MPC decisions.

Economic Forecasts: PolandQ413 Q114 Q214 Q314 Q414f Q115f Q215f Q315f Q415f 2012 2013 2014f 2015f 2016f 2017f 2018f 2019f

GDP (% qoq ann) 3.0 3.4 3.5 3.3 3.0 3.2 3.3 3.5 3.6 2.0 1.5 3.3 3.4 3.5 3.6 4.0 3.8Consum er expenditure 2.4 2.9 3.0 3.2 3.0 3.0 2.9 3.0 3.0 1.3 0.8 2.6 3.0 3.2 3.2 3.6 3.4Government expenditure 2.2 0.1 3.7 3.5 3.0 2.8 2.5 2.0 2.0 0.2 2.8 1.0 2.3 2.0 2.0 2.0 1.8Investment 2.7 11.2 8.7 9.9 7.0 6.2 6.7 8.0 7.0 -1.6 -0.2 7.8 7.0 8.0 10.3 9.2 9.0

Construction 18.0 15.8 16.4 18.0 12.0 11.0 10.0 9.0 9.0 3.8 9.2 15.6 9.8 8.0 6.0 4.0 8.0Non cons truction -0.8 10.0 7.1 8.6 6.1 3.5 5.2 7.0 6.1 -2.8 -2.1 7.8 5.4 8.8 8.8 7.8 1.2

Exports 7.0 7.1 4.8 3.8 2.0 2.5 3.0 3.0 3.0 3.9 4.6 4.7 2.8 6.0 6.0 6.0 4.8Imports 4.2 7.3 9.4 7.3 6.0 5.0 4.0 4.0 4.0 -0.7 1.2 7.4 4.3 8.5 7.0 8.0 6.2Inventories* (%qoq ann) -2.3 -0.7 9.4 2.1 4.0 2.0 0.0 -0.5 -0.5 -2.4 -4.5 4.8 0.5 1.5 -0.5 -1.0 2.0

Nominal GDP (% yoy) 3.7 4.0 3.8 3.0 2.2 2.5 3.0 3.4 4.3 5.7 2.4 3.3 3.3 4.5 6.1 6.5 6.3CPI headline (% yoy) 0.7 0.6 0.3 -0.3 -0.8 -0.7 -0.3 -0.1 0.7 3.7 0.9 0.0 -0.1 1.0 2.5 2.5 2.5

CPI core (% yoy) 1.2 1.0 0.9 0.5 0.4 0.5 0.6 0.7 0.9 2.2 1.2 0.7 0.7 1.2 1.8 1.7 2.0Unemployment rate (%) 9.8 10.6 9.1 8.5 8.8 9.6 10.2 9.7 9.7 10.1 9.8 8.8 9.7 8.5 7.8 7.1 6

Janus Debts g Jan 2015

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