Our View on 2010 in a Nutshell
Global
• The developed-world recovery looks set to be weak given de-leveraging forces and other legacies of the crisis.
• With good fundamentals and a lack of aftermath issues, the emerging world, particularly Asia, is set to grow strongly.
• Developed-world inflation should stay low amid ample spare capacity, but exchange-rate-targeting central banks risk bubbles.
• The main downside risks include a re-eruption of financial distress, a commodity price bubble and premature fiscal tightening.
• A possible upside surprise: animal spirits stir and, with monetary conditions super-loose, help release pent-up demand.
• We forecast an average Brent oil price of $72 in 2010 and $75 in 2011, after $62 in 2009.
• We expect further dollar weakness, especially vs EM, but the yen should gradually trade weaker on MOF intervention.
United States
• The “Great Recession” has ended, but the after-effects of the financial crisis are likely to weigh on the recovery.
• Job market conditions are improving, but business uncertainty should limit job growth and keep the unemployment rate high.
• Typical of the first phase of recovery, ample capacity is likely to put downward pressure on inflation.
• We expect the Fed to focus on an orderly exit from credit easing, but not to hike rates until early 2011.
• Proposals for a jobs-focused fiscal policy must overcome resistance from those worried about adding more to a record deficit.
Europe
• We expect sub-par growth given household de-leveraging in the UK and feeble domestic momentum in the euro area.
• The fiscal policy challenge: deliver short-term stimulus within a credible framework of medium-term consolidation.
• Headline inflation is set to rise in the UK and euro area, but underlying inflation is likely to stay very weak.
• We expect the ECB to start gradually removing exceptional liquidity measures but not to start hiking rates until October 2010.
• The BoE MPC faces uncertainties on both sides and we do not expect rate hikes until November 2010.
Japan
• We expect the Japanese economy to slow again through H1 2010 but for growth to pick up again in the second half.
• Faster-than-expected excess supply corrections and expanding exports, particularly to Asia, should drive a recovery in H2.
• Given a wider negative output gap, we expect CPI deflation to persist for the foreseeable future.
• The BOJ is likely to adopt additional easing measures, such as increasing long-term JGB purchases, in H1 2010.
Asia
• Things look ripe for a paradigm shift – domestic demand is replacing exports as the main growth driver, led by China.
• China: The investment and consumption booms are set to continue and to deliver double-digit growth.
• Korea: We see an inflationary economic recovery in 2010, driven by a prolonged macro stimulus and strong China demand.
• India: With both growth and inflation headed towards 8%, we expect the RBI to lead Asia in tightening monetary policy.
• Australia: Despite less expansionary policies, we see GDP growth quickening on stronger capex, exports and housing.
• SE Asia: Bullish on Indonesia, Singapore and the Philippines; less so on Thailand and Malaysia; concerned about Vietnam.
EEMEA (Emerging Europe, Middle East and Africa) and Latin America
• Key themes in 2010 are the removal of supranational support, fiscal sustainability and the effects of exit strategies on rates.
• CEE will likely be the slowest region to recover. Vulnerabilities persist, especially with banks’ NPLs set to peak in Q2 2010.
• Elections in CEE are a risk, with knock-on effects for fiscal policy sustainability. We see Poland entering ERM-II in Q4 2010.
• South Africa: World Cup and restocking will mask a weak recovery in consumption; we see a change in the SARB mandate.
• Russia should return to stable, if subdued, growth in 2010, supported by oil prices and pent-up domestic demand.
• Turkey should show a strong rebound in 2010, allowing some policy normalisation. Inflation should remain in check.
• Middle East: The Dubai story is a key test of investor confidence in the region; growth momentum should be maintained.
• LatAm: Strong growth in Asia and expansive monetary and fiscal policy are leading to a cyclical recovery.
NOMURA 2010 Global Economic Outlook a Tale of Two Recoveries
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