18-07-10 Nomura Global Economic Outlook Monthly

Global Economic Outlook Monthly
ECONOMICS
The zenith Global Markets Research

10 July 2018
We believe global growth has peaked and, as it Visit Themes and Trades website for
slows, we are most cautious in EM. strategic cross asset ideas.
Research analysts
COUNTRY AND REGIONAL ECONOMIC OUTLOOKS
Global Economics
Global economic outlook | Summary ......................................................2 Lewis Alexander - NSI

lewis.alexander@nomura.com
Forecast summary ..................................................................................3 +1 212 667 9665
Our view in a nutshell .............................................................................4 George Buckley - NIplc

george.buckley@nomura.com
Australia | Gradual progress but rising risk .............................................5 +44 (0) 20 710 21800
Andrew Cates - NIplc
Brazil | Temporary or long-lasting shocks? .............................................6 andy.cates@nomura.com
+44 (0) 20 710 26022
Canada | Normalising amid rising tail-risks .............................................7
Takashi Miwa - NSC
China | Risks from credit defaults ........................................................... 8 takashi.miwa@nomura.com
+81 3 6703 1280
Czech Republic | Tightening the reins ....................................................9
Rob Subbaraman - NSL
Euro area | More pessimistic ................................................................ 10 rob.subbaraman@nomura.com
+65 6433 6548
Hong Kong | Tighter financial conditions ...............................................11
Hungary | Waiting for policy normalisation ............................................12
India | Still going strong, but risks lie ahead ..........................................13
Indonesia | More rate hikes coming ...................................................... 14
Japan | Justifying a longer way to go ....................................................15
Malaysia | Mounting headwinds ............................................................ 16
Mexico | AMLO era begins ...................................................................17
Philippines | Hiking cycle continues ...................................................... 18
Poland | Cyclical upswing .....................................................................19
Russia | VAT hike postpones rate cuts .................................................20
Singapore | Limited demand-pull inflation .............................................21
South Africa | Subdued economic activity .............................................22
South Korea | Delayed normalisation....................................................23
Taiwan | US-China trade tension weighs ..............................................24
Thailand | Not jumping on the hiking bandwagon ....................................25
Turkey | Inflation surges to 15-year high ...............................................26
United Kingdom | The best laid Brexit plans .........................................27
United States | Late-cycle surge ........................................................... 28
Rest of EEMEA ....................................................................................29
Rest of Latin America ...........................................................................30
Production Complete: 2018-07-10 09:07 UTC
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Global Economic Outlook Monthly 10 July 2018
Global economic outlook | Summary

We believe global growth has peaked and a slowdown now lies ahead.
Several clouds have appeared in recent weeks that have darkened the global Andrew Cates - NIplc
economic outlook, in our view. At the very least, these clouds suggest the annual andy.cates@nomura.com
+44 (0) 20 710 26022
pace of global GDP growth has now peaked and that a deceleration phase now lies
ahead. But those clouds also suggest – by definition – that the risks to our growth Rob Subbaraman - NSL
rob.subbaraman@nomura.com
forecasts are now tilted to the downside. We are specifically forecasting that global +65 6433 6548
growth will slow from an annual rate of 4.0% in 2018 to 3.7% in 2019. We have initiated
forecasts for 2020 for the first time this month and anticipate global growth will further
slow in that year to 3.6%.
We stress that, absent much higher inflation levels in the US and other advanced
economies and/or a bigger build-up of financial imbalances, the likelihood of any
deceleration phase morphing into a recessionary phase for the world economy is
still quite slim. In other words, the incentives that exist for policymakers to trigger a
major slowdown in response to overheating pressures are still small. That is particularly
apt for most European economies and Japan. Equally, moreover, the necessity for
households and companies to respond to tighter monetary policy with a major bout of
deleveraging is quite low. And that is particularly apt for the US.
However, we also note that inflation, financial imbalances, EM turbulence and monetary
policy are not the key reasons for concern at present. A number of factors have taken
hold in recent weeks that – when combined with one another – threaten to dent
confidence and increase uncertainty and in doing so derail private sector
spending growth. They include structurally-rooted factors such as an escalation in
global trade tensions, a breakdown in global policy coordination and a less certain
European political environment. They also include cyclical factors such as higher oil
prices, increasing signs of a growth slowdown in China, late-cycle US tensions and
broader EM fragility.
On the monetary policy outlook, we continue to expect two more hikes from the Fed
this year and two more in 2019 followed by a pause. For the ECB, a long period of
inaction over the next several months is likely to be followed by a hike of 15bp in the
deposit rate in September 2019, a further increase of 10bp in all rates in Q4 2019 and
another 10bp in all rates in Q2 2020. The BoJ, in contrast, is expected to remain on hold
throughout our forecast timeframe.
In emerging markets, we remain cautious, given the economic conditions described
above. The long period of historically low interest rates and quantitative easing attracted –
or some would claim, pushed – investors to EM in the search of yield, but with DM interest
rates rising and global quantitative easing set to switch to tightening in Q4, investors are
becoming more attentive to risks in EM. This, when EM growth seems close to rolling over,
suggests to us that market repricing of EM risk premia still has some way to go, particularly
around corporate credit risk, as leverage has risen in many countries. Several twin deficit
countries – Argentina, Mexico, Turkey, India and Indonesia – have raised rates in part to
defend currencies, which is tightening domestic financial conditions. Also, EM is generally
more exposed than DM to rising trade protectionism and the firming evidence of a slowing
China economy. The persistence of high oil prices is a boon for a handful of large net oil
exporters – Saudi Arabia, Russia, Venezuela, Nigeria and Colombia – but the majority of
EM economies are net oil importers, particularly in Asia.
In China, deleveraging is weighing on the economy, and we expect growth to slow
further, so policy is starting to be eased but in a targeted, gradual way. In Turkey, the
election went smoothly, but with high and rising inflation coupled with a widening current
account deficit, interest rates need to be raised further, although it is not clear whether
the central bank has the independence to deliver. In Brazil, the focus is on politics, with
the October election result highly uncertain and yet critical, as fiscal reforms are urgently
needed to lift the economy out of its low-growth rut. In India, Indonesia and the
Philippines, we expect further rate hikes in coming months.
From our longer-run 2020 GDP growth forecasts, it is noteworthy that we forecast growth in
excess of 4% in only six of 25 EM economies: China, India, Egypt, Malaysia, Indonesia and
the Philippines – a stepdown from 2007, when 23 economies were growing faster than 4%.
2
Forecast summary
Real GDP (% y-o-y) Consum er Prices (% y-o-y) Policy Rate (% end period)
2018 2019 2020 2018 2019 2020 2018 2019 2020
Global 4.0 3.7 3.6 3.0 2.8 2.7 3.01  3.17 3.16
Developed 2.4  2.0  1.5 2.1 1.9  1.9 1.04 1.41  1.49
Emerging Markets 5.3  5.1  5.0 3.7 3.5 3.3 4.52  4.47 4.36
Americas 2.8 2.4  1.9 2.9 2.7 2.8 3.39 3.91 3.96
United States* 3.1  2.5  1.7 2.6  2.3 2.5 2.38 2.88 2.88
Canada 2.0  1.5  1.5 2.5 2.0 2.0 1.75 2.25 2.25
Latin America† 2.3  2.3 2.4 3.9  3.8 3.7 6.48 7.08  7.23
Brazil 1.6  2.0 2.2 4.2  4.3 4.3 7.00 8.50 9.00
Chile 3.7 3.5 3.2 2.9 3.0 3.0 3.00 4.00 4.00
Colombia 2.6 3.0 3.0 3.0 3.0 3.0 4.25 5.00 5.00
Mexico 2.6 2.2 2.2 4.2  3.8 3.6 7.75 7.00  6.75
Peru 3.8 3.5 3.5 1.9 2.5  2.5 2.75 3.75 4.00
Asia/Pacific 5.6 5.4 5.3 2.5  2.5  2.4 2.66  2.73 2.76
Japan 0.9  0.9 0.7 0.9  0.5 0.5 -0.10 -0.10 -0.10
Australia 2.9 2.8 2.7 2.1  2.2  2.4 1.50 2.00 2.25
New Zealand 2.8 2.5 2.5 2.0 2.0 2.0 1.75 2.25 2.25
Asia ex Japan, Aust, NZ 6.3  6.0  5.90 2.6  2.8  2.6 3.03 3.07  3.09
China 6.6  6.3  6.1 2.0  2.2  2.0 1.50 1.50 1.50
Hong Kong*** 4.0 2.3 2.1 2.3 1.3 1.1 2.05 2.80 2.90
India 7.5 7.2  7.1 4.6 4.5 4.4 6.50 6.50 6.50
Indonesia 5.4 5.8 6.0 3.5 4.0 4.0 5.75  5.75  5.75
Malaysia 5.1 4.5 4.2 1.3 1.5 1.5 3.25 3.25 3.25
Philippines 6.9 7.1 7.0 4.6 3.5 3.5 3.75 3.75 3.75
Singapore*** 3.0 2.5 2.2 0.3 0.3 0.5 1.85  2.20  2.40
South Korea 3.0 2.7 2.5 1.5  2.0 1.8 1.75 2.00  2.00
Taiw an 3.0 2.5 2.3 1.5 1.3 1.3 1.50 1.63 1.63
Thailand 4.3 3.7 3.5 1.1  1.0  1.0 1.50 1.50 1.50
Western Europe 2.0 1.6  1.4 1.9  1.8  1.8 -0.22 0.07  0.24
Euro area 2.1 1.7  1.4 1.7 1.7  1.7 -0.40 -0.15  -0.05
Austria 2.8  1.6  1.4 2.1 2.7 2.7 -0.40 -0.15  -0.05
France 1.9  1.6  1.4 2.1  1.6  1.6 -0.40 -0.15  -0.05
Germany 2.0  1.6  1.4 1.9  1.9 1.9 -0.40 -0.15  -0.05
Greece 2.1  1.9  1.8 1.1  2.1  2.7 -0.40 -0.15  -0.05
Ireland 5.5  3.0  3.6 0.7  1.1  1.4 -0.40 -0.15  -0.05
Italy 1.3  1.2 1.1 1.2  1.2  1.0 -0.40 -0.15  -0.05
Netherlands 2.8  2.4  1.8 1.6  1.9  1.9 -0.40 -0.15  -0.05
Portugal 2.3  2.2  1.8 1.7  2.4  2.5 -0.40 -0.15  -0.05
Spain 2.7 2.4  1.8 1.8  1.7  1.6 -0.40 -0.15  -0.05
United Kingdom 1.4  1.6  1.6 2.4 2.0 2.0 0.75 1.25 1.75
EEMEA 3.0  2.5 2.5 7.2  6.3  5.9 9.08  8.46  7.87
Czech Republic 3.5 3.0  2.5 2.2  2.5  2.2 1.25 1.75  2.00
Hungary 4.0  3.0  2.5 2.8  3.3  2.7 0.90 0.90 1.15
Poland 4.5  3.2 2.8 1.9  2.5 2.4 1.50 1.75 2.00
Romania 3.5 3.0 2.5 4.9  3.3  2.5 2.75  3.00 3.25
South Africa 1.9 1.6 1.7 4.7 5.2 5.2 6.50 6.50 6.50
Turkey 4.0 2.7 3.0 13.3  11.9  10.6 19.00  18.00  16.50
Russia 1.7 1.4 1.5 2.7 4.0 4.0 7.25  6.75  6.00
Israel 2.8 2.9 3.0 0.8 1.3 1.6 0.10 0.75 1.50
Egypt 4.5 4.5 4.8 22.1 12.0 11.0 15.00 12.00 11.00
Notes: Aggregates are calculated using purchasing power parity (PPP) adjusted shares of world GDP (table covers about 84% of world GDP on a PPP basis); our
forecasts incorporate assumptions on the future path of oil prices based on oil price futures. Currently assumed Brent oil prices for 2018 and 2019 and 2020 are $74,
$74 and $69, respectively. Policy rate for China is 1yr deposit rate. Consumer prices for euro area countries are HICP measure.*The US policy rate forecasts for
2018, 2019 and 2020 are midpoints of the 2.25-2.50%,2.75-3.00% and 2.75-3.00% target federal funds rate range, respectively. **Policy rate for the Euro area is
deposit facility rate. ***For Hong Kong and Singapore, the policy rate refers to 3M Hibor and 3M Sibor, respectively. †CPI forecasts for Latin America are year-on-
year changes for December. The ↑↓arrows signify changes from last issue.
Source: Nomura Global Economics.
3
Our view in a nutshell
United States
• Tax cuts and increased federal spending will likely help keep growth above potential into 2019.
• Waning fiscal stimulus, tighter monetary policy and increased supply constraints should slow growth over 2019 and into 2020.
• Above-potential growth will likely push down the unemployment rate to 3.2% at end-2019 where it will remain through 2020.
• Core inflation should pick up gradually as labour markets tighten further and the economy runs beyond potential.
• We expect four hikes from the FOMC in 2018 and two hikes in 2019 before the FOMC takes an extended pause through 2020.
• The Fed balance sheet roll-off is likely to continue in the background, raising long-term interest rates only gradually.
• Notable risks include aggressive trade policy by Trump administration and a sharp deterioration in financial conditions.
Europe
• We are more downbeat about the EA medium-term growth outlook reflecting more negative cyclical and structural factors.
• We expect headline and core inflation to rise gradually in the coming months off more pressing capacity pressures.
• We expect the ECB to lift its deposit facility rate in September 2019, and then lift all policy rates by a further 10bp in Q4 2019.
• Recent political news has seen two key ministers resign following PM Theresa May’s proposal for a soft-style Brexit.
• Near term: slow UK domestic demand growth as above-target inflation and political uncertainty dominate stronger net exports.
• We expect UK GDP growth to average 1.5% over 2018 and 2019, with inflation falling as the FX impact wanes in 2018.
• August rate hike forecast, then a move every six months – pace slows during QE roll-off (to begin when rates reach 1.50%).
Japan
• The recovery in economic activities is still rolling on, but with weaker momentum than before.
• We expect core CPI inflation to remain below the targeted 2% level, though a gradual acceleration is likely for a while.
• Despite some speculation about earlier normalisation, we expect the current YCC policy to remain untouched in the longer run.
• The risk is continued yen appreciation caused by US fiscal unease and protectionism as well as domestic political instability.
Asia
• Our long-standing view has been that Q3 2018 is the highest risk quarter of a painful snapback as the risk premium is repriced.
• Asia’s economies are exposed to a high oil prices, rising US rates, trade protectionism and China resuming its slowdown.
• India and parts of Southeast Asia are the region’s new stars in terms of rising long-run potential growth.
• China: We expect moderate policy easing in coming months as the economy feels the pinch from deleveraging.
• Korea: We believe the BOK will hike in November 2018 and once more in 2019, taking the terminal rate to 2.00%.
• India: The macro outlook is likely to become murkier due to slower growth, higher interest rates and political uncertainty.
• Indonesia: We expect growth to rise, boosted by coordinated policy stimulus and reforms gaining more traction.
• Australia: Solid growth and a gradual rise in inflation should lead to a rate hike in early 2019.
EEMEA (Emerging Europe, Middle East and Africa) and Latin America
• South Africa: Growth disappointment in early 2018 puts the currency under pressure.
• Turkey: Erdogan becomes the executive president, focus shifts to cabinet formation.
• Hungary: The market seems to doubt the central bank will keep a loose policy stance but the policy is in line with fundamentals.
• Poland: Robust GDP growth has not yet translated into inflation, reducing the likelihood of hikes anytime soon.
• Czech, Romania: Positive output gaps urge for tighter monetary policies in both, but fundamentals are stronger in Czech Rep.
• Russia: CBR turns more hawkish on account of the recent VAT hike.
• Egypt: We expect a year of recovery under the IMF programme but hot money flows are potential flash points.
• Brazil: Economic and political conditions worsen as the October presidential election approaches.
• Mexico: The focus will be on the NAFTA negotiations.
• Colombia: We continue to expect a market-friendly outcome in the presidential election.
• Chile: Gradual economic recovery with still downward risks on inflation.
4
Australia | Gradual progress but rising risk

We expect modestly above-trend growth, with a gradual decline in spare capacity and
inflation grinding slowly higher. The policy rate should remain unchanged for some time.
Activity: Partial data for Q2 suggest a better quarter for consumer spending but no
Andrew Ticehurst - NAL
contribution to growth from net exports. Housing finance commitments and building andrew.ticehurst@nomura.com
dwelling approvals also point to some softening in dwelling construction ahead. We +61 2 8062 8611
continue to see conflicting forces in terms of the longer-term outlook, delivering a
somewhat uneven economic performance beneath a respectable headline GDP
outcome. The global economy is still growing solidly but the clouds are darkening and we
are carefully monitoring for any signs of flagging growth momentum in China and Asia
more broadly, which stands to weaken Australia’s exports. Increased infrastructure
spending remains a bright spot. Consumers, however, remain constrained by high debt
levels and relatively low wage growth, and the household savings rate has fallen further.
We will carefully monitor whether the consumer can get some respite from employment
growth, which has been strong, and a small personal income tax cut from 1 July.
Inflation: While structural forces and fierce retail competition continue to act as constraints,
a number of signs suggest CPI inflation should nevertheless grind slowly higher. The
Fair Work Commission recently ordered a 3.5% increase in minimum wages, effective 1
July; this was larger than the 3.3% increase granted last year and should impact around
one-quarter of all workers, adding to recent modest positive momentum to unit labour
cost growth. Also, the private consumption deflator edged higher to 1.6% y-o-y in Q1.
Policy: The Reserve Bank of Australia continues to forecast GDP growth at a little above
3% and CPI inflation moving slowly higher over time. However, downside risks to its
benign central case have risen, from both global and local sources, and its recent
communication does look more cautious, in our view. With inflation and asset prices
unlikely to accelerate aggressively, we believe it can exercise patience; we assign a low
probability to it "falling behind the curve". Against the rise in global and local risks, we
acknowledge that our conviction on our call for two 25bp rate hikes in 2019 has fallen.
Risks: The main global risks stem from US/China trade tensions or a regional setback.
Locally, we are watching out for any sustained increase in funding pressures or a
sharper-than-anticipated easing in the housing market.
Fig. 1: Australia: Details of the forecast

% q-o-q 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 2018 2019 2020
Real GDP (% y-o-y) 2.8 2.4 3.1 2.7 2.8 3.0 2.7 2.8 2.9 2.8 2.7
Real GDP (%q-o-q) 0.5 0.5 1.0 0.6 0.7 0.7 0.7 0.7
Personal consumption 0.6 1.0 0.3 0.6 0.6 0.6 0.7 0.6 2.6 2.6 2.6
Private investment 5.8 -1.5 1.2 0.7 0.6 0.8 0.8 0.8 3.5 3.2 4.3
Business investment 9.8 -2.1 1.3 1.1 1.2 1.2 1.4 1.5 5.3 5.5 6.4
Dw elling investment -2.1 -0.1 0.9 0.0 -0.5 0.0 -0.5 -0.75 -0.4 -1.9 -0.8
Government expenditures -1.7 2.1 0.8 0.9 0.8 0.8 0.8 0.8 3.6 3.3 3.1
Exports 0.7 -1.5 2.4 -1.00 1.75 1.50 1.50 1.50 2.9 5.3 4.3
Imports 2.6 1.6 0.5 -1.00 1.50 1.25 1.25 1.50 3.3 5.0 5.3
Unemployment rate 5.4 5.5 5.5 5.5 5.5 5.4 5.3 5.2 5.5 5.2 5.1
Employment, 000 107 106 32 62 63 63 60 57 288 237 210
Consumer prices 1.8 1.9 1.9 2.2 2.1 2.0 2.2 2.2 2.1 2.2 2.4
Trimmed mean 1.8 1.8 1.9 1.8 1.9 2.0 1.9 2.1 1.9 2.1 2.3
Weighted median 1.9 2.0 2.0 1.8 1.9 1.9 1.9 2.1 1.9 2.1 2.3
Fiscal balance (% GDP) -0.6 -0.1 0.4
Current account balance (% GDP) -2.1 -2.3 -2.3
RBA cash rate target 1.50 1.50 1.50 1.50 1.50 1.50 1.75 1.75 1.50 2.00 2.25
3-month bank bill 1.71 1.80 2.04 2.11 2.05 2.00 2.25 2.25 2.00 2.50 2.75
2-year government bond 1.94 2.00 2.00 1.99 2.00 2.00 2.25 2.25 2.00 2.50 2.65
AUD/USD 0.78 0.78 0.77 0.74 0.74 0.74 0.74 0.73 0.74 0.72 0.70
Numbers in bold are actual values; others forecasts. Interest rates and currency forecasts are end of period; other measures are period average. All forecasts are modal
forecasts (i.e., the single most likely outcome. Table reflects data available as of 5 July 2018.
5
Brazil | Temporary or long-lasting shocks?

The BCB holds while BRL weakens and electoral uncertainty remains very high.
Activity: Economic activity indicators point to a gradual recovery (from a very low
Joao Pedro Ribeiro - NSI
starting point and with ample spare capacity), but in a more challenging environment and Joao.Ribeiro@nomura.com
with worsening prospects than in the recent past. Although GDP growth in sequential +1 212 667 2236
terms was positive for the fifth consecutive quarter in Q1, we revise downwards our 2018
forecast on tighter financial conditions and lower confidence indicators. The truckers’
strike’s negative impact on growth was visible in May readings, even if one-off logistical
negative shocks should reverse in subsequent months. Thus, we lower our (once
pessimistic) year-end growth forecast to 1.6 % y-o-y from 1.8%.
Inflation: IPCA inflation registered the biggest monthly reading for June since 1995,
driven by higher food and fuel prices from the truckers’ strike and higher electricity costs.
With June’s 1.26% m-o-m reading, yearly inflation rose to 4.39% y-o-y (from 2.86%), the
highest level since March 2017, albeit still below the BCB’s 4.50% inflation target.
Despite the very high reading, the breakdown of the June release still showed well-
behaved services inflation. All-in-all, the (likely) temporary impacts of recent shocks are
somewhat mitigated by a very negative output gap and anchored market inflation
expectations. However, we also highlight the upside risks stemming from the weakening
BRL. We modestly revise upwards our 2018 inflation forecast (to 4.2% from 4.0%).
Policy: The Central Bank of Brazil (BCB) left rates unchanged at 6.50% on 20 June, as
expected by us and the market. The unanimous decision marked a consecutive meeting
in which rates were unchanged. It was also the first meeting since the BCB adopted a
more aggressive FX intervention stance in a challenging environment for BRL. The BCB
highlights that economic activity data in July and August should “indicate more clearly
the pace of recovery” – while May and June figures are “likely to reflect the effects” of the
strike. All-in-all, we still envisage a more uncertain environment that is more dependent
upon the behavior of FX and its possible impact on inflation expectations/forecasts. We
keep our call for stability at 6.50% in the 1 August meeting but also recognize that the
BCB has left door open for changes to the policy rate in the near term. We also continue
to think a hike in Q4 2018 is more likely than not; a call that would be dependent on the
currency’s behavior and the election. We may revisit this call depending on how these
two variables behave.
Risks: The electoral outlook remains highly uncertain. We still do not have much clarity
regarding the commitment of many of the main candidates to fiscal reform. Polls have
not moved meaningfully in the past month and the field still seems open to 4 or 5
potentially viable candidacies (Bolsonaro, Silva, Gomes, Alckmin and the PT candidate).
The campaign period (starting in mid-August) is an important signpost for further clarity.
Fig 2: Brazil: Details of the forecast

% y-o-y change unless noted Q317 Q417 Q118 Q218 Q318 Q418 Q119 Q219 2017 2018 2019 2020
Real GDP 1.4 2.1 1.2 1.8 1.6 1.9 2.3 2.1 1.0 1.6 2.0 2.2
Personal consumption 2.2 2.6 2.8 1.5 1.2 1.4 2.5 2.2 0.9 1.5 1.9 2.1
Fixed investment -0.5 3.8 3.5 3.0 2.0 2.4 2.5 2.0 -1.8 2.2 3.5 3.0
Government expenditure -0.6 -0.4 -0.8 0.1 0.0 0.2 0.0 0.1 -0.6 0.0 0.2 1.0
Exports 7.6 9.1 6.0 2.0 2.0 1.0 2.0 2.0 5.2 2.8 3.0 3.0
Imports 5.7 8.1 7.7 1.0 1.0 0.0 4.0 3.0 5.1 2.4 0.5 2.0
Contributions to GDP growth (pp)

Industry 0.0 0.5 0.5 0.8
Agriculture 0.6 0.2 0.3 0.2
Services 0.2 0.9 1.3 1.2
IPCA (consumer prices) 2.5 2.9 2.7 4.4 4.0 4.2 4.6 4.2 2.9 4.2 4.3 4.3
IGPM (wholesale prices) -1.5 -0.5 0.2 6.9 7.0 7.0 6.5 6.0 -0.5 7.0 5.0 5.0
Trade balance (US$ billion) 17 14 14 18 15 15 18 18 67 62 48 48

Current account (% GDP) -0.5 -0.8 -1.5 -1.7
Primary fiscal balance (% GDP) -1.7 -2.1 -1.8 -1.4

Gross government debt (% GDP) 74 76 78 81
Selic % 8.25 7.00 6.50 6.50 6.50 7.00 7.50 8.00 7.00 7.00 8.50 9.00
USDBRL 3.16 3.31 3.30 3.95 4.15 3.90 3.80 3.70 3.31 3.90 3.75 3.65
Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-over-year changes for December. Trade data are
period sums. Interest rate and currency forecasts are for end of period. Contributions to GDP do not include taxes. Numbers in bold are actual values, others forecast. Table
reflects data available as of 10 July 2018. Source: Nomura Global Economics.
6
Canada | Normalising amid rising tail-risks

Canada’s economic expansion continues, albeit at a slower pace. We expect higher
policy rates but slowing consumption growth to limit the pace the BoC can hike.
Activity: The Canadian economy continues to enjoy above-trend growth. Despite trade
Sam Bonney - NIplc
concerns, business investment remains solid and rising oil prices are likely to add further sam.bonney@nomura.com
tailwinds to growth. However, we do not think above-trend growth is likely to persist. +44 20 7103 4729
Consumption growth is likely to moderate to below-average levels in the quarters ahead,
as record-leveraged households adjust to the impacts of higher interest rates.
While exports should benefit from US fiscal stimulus over the coming quarters, trade
uncertainty provides an offset here. The US has imposed USD12.2bn worth of tariffs on
Canadian steel and aluminium exports, and Canada has retaliated proportionately –
further escalation would be negative for the Canadian economy. Clarity on the NAFTA
outcome is highly unlikely this year, providing further uncertainty on the outlook for
business investment (see US Trade Policy Monitor).
Inflation: Inflationary pressures are brewing. Our measures show that slack in the
economy has fallen significantly – particularly in the labour market. Wage growth has
accelerated, albeit moderating to 3.5% y-o-y in June. We expect core inflation to
continue to rise, though the pace of the increase should slow as growth rates start to
moderate. Headline inflation will rise temporarily due to substantial energy base effects.
Risks to the outlook include slowing consumption and global structural forces.
Policy: We still expect the BoC to hike at the July meeting (see BOC Preview). While the
tail-risks have increased, we expect continued tightening in the labour market and
above-trend growth to motivate a further 25bp increase in interest rates. Rising wage
growth and sturdy core inflation also support this. At the last meeting, the BoC removed
“cautious” from its monetary policy statement with respect to policy rate adjustments,
suggesting increased confidence in raising interest rates. However, while the BoC’s
modal scenario remains solid, we expect the Bank to express increasing concern around
the tail-risks. Mounting trade concerns pose risks to the outlook, and much uncertainty
remains around households’ sensitivity to interest rate increases. We expect another
hike at the October 2018 meeting, and two further hikes in 2019 – normalising at a
slower pace than the Fed.
Risks: US trade policy remains a key risk, particularly if the US moves to extend tariffs to
other sectors such as automobiles. FDI outflows to the US continue, which could be
further supported by US tax cuts. Canada’s large domestic imbalances – particularly in
the housing sector – also pose risks. The economy remains highly sensitive to a sharp
fall in house prices. House price growth has been moderating in recent months, but
remains positive. By contrast, sustained higher oil prices and stronger global and US
growth are upside risks.
Fig. 3: Canada: Details of the forecast

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 2018 2019 2020
Real GDP 1.3 2.9 1.9 1.7 1.2 1.2 1.3 1.5 1.6 1.5 1.5 1.4 2.0 1.5 1.5
Personal consumption 1.1 1.6 1.6 1.5 1.5 1.5 1.5 1.5 1.6 1.7 1.8 1.9 1.9 1.5 1.6
Non residential fixed invest 10.9 9.0 7.0 5.0 4.5 4.5 4.0 4.0 5.0 6.0 6.0 6.0 8.3 5.1 5.0
Residential fixed invest -7.2 2.5 0.8 0.5 0.4 0.4 0.5 1.5 3.0 3.0 3.0 3.0 1.0 0.7 2.2
Government expenditures 3.2 2.5 2.1 1.9 1.7 1.5 1.5 1.8 1.8 1.9 2.0 2.1 3.1 1.8 1.8
Exports 1.7 5.0 6.0 7.0 4.5 4.0 3.5 3.5 3.0 2.8 2.8 2.8 2.3 4.9 3.1
Imports 4.9 5.3 4.7 4.4 4.3 4.3 4.4 4.4 4.7 5.0 5.3 5.6 5.0 4.5 4.8
Contributions to GDP:
Domestic final sales 2.0 2.6 2.2 1.9 1.8 1.7 1.7 1.9 2.1 2.3 2.4 2.5 2.9 1.9 2.1
Inventories 0.5 0.5 -0.6 -0.9 -0.6 -0.4 0.0 0.0 0.2 0.1 0.1 0.0 0.0 -0.4 0.0
Net trade -1.1 -0.2 0.3 0.7 0.0 -0.2 -0.4 -0.4 -0.7 -0.8 -0.9 -1.1 -0.9 0.0 -0.6
Unemployment rate 5.8 5.9 5.6 5.5 5.5 5.4 5.4 5.4 5.5 5.6 5.7 5.9 5.7 5.4 5.7
Employment, 000 3 56 56 56 47 47 38 38 19 19 19 0 241 194 101
Consumer prices 2.1 2.5 2.7 2.6 2.2 1.8 1.9 2.2 2.0 1.9 2.0 2.0 2.5 2.0 2.0
Overnight target rate 1.25 1.25 1.50 1.75 1.75 2.00 2.00 2.25 2.25 2.25 2.25 2.25 1.75 2.25 2.25
3-month T-Bill 1.10 1.26 1.60 1.85 1.85 2.10 2.10 2.35 2.35 2.35 2.35 2.35 1.85 2.35 2.35
2-year government bond 1.77 1.91 2.00 2.13 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.00 2.13 2.25 2.00
USD/CAD 1.29 1.32 1.33 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35
Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized rates (saar). Inflation measures and calendar year GDP are year-over-year percent changes.
Interest rate forecasts are end of period. Numbers in bold are actual values. Source: Bank of Canada, Statistics Canada, Nomura Global Economics. Forecasts as of 9 July 2018
7
China | Risks from credit defaults

We judge that large-scale defaults are unlikely, but caution is warranted regarding
financial risks and growth stability. Beijing should consider stepping up policy easing.
Forecast changes: We mark-to-market our real GDP forecasts, revising up our 2018
Ting Lu - NIHK
growth forecast to 6.6% and our 2019 forecast to 6.3%. We have also recalibrated our ting.lu@nomura.com
activity, trade, inflation and credit forecasts for 2018 and 2019 accordingly. +852 2252 1306
Activity: We forecast real GDP growth to slow slightly to 6.7% y-o-y in Q2 from 6.8% in Wendy Chen - NIHK
wendy.chen@nomura.com
Q1, given resilient industrial production growth of 6.9% in April-May. That said, we see +86 21 6193 7237
further challenges ahead and expect a more marked slowdown in Q3 given rising credit
Lisheng Wang - NIHK
defaults, weaker end-demand as a result of deleveraging, a still-problematic property lisheng.wang@nomura.com
sector, a mounting debt burden and rising uncertainty over the export outlook. For Q4, +852 2252 2057
we expect growth to rebound slightly as earlier policy easing measures start to show in
the data (see China monthly: Exploring more obscure financing channels, 4 July 2018).
The rebound may extend into early 2019, but the overall gradual slowdown story remains
intact. We expect full-year real GDP growth of 6.6%, 6.3% and 6.1% over 2018-20.
Inflation: PPI inflationary momentum seems to be stronger than we had previously
expected, so we have raised our 2018 PPI inflation forecast to 3.0% to mark-to-market.
That said, after a rebound in Q2 due to both base effects and resilient industrial
production during the quarter, we expect PPI inflation to resume its moderation in H2 on
weakening domestic demand and to ease further in 2019-20. We expect CPI inflation to
be mild at 2.0% in 2018 as food price inflation has undershot our previous expectations,
with benign inflationary pressures extending through 2019-20.
Policy: Faced with external and internal challenges, the government has turned more to
an easing bias, as implied by the 50bp reserve requirement ratio (RRR) cut announced
in late June (see China: The PBoC’s RRR cut sends a clear signal of policy easing, 24
June 2018). We expect at least one more RRR cut (likely 100bp) this year, and believe
that the People’s Bank of China ultimately wants to lower the RRR to below 10% in
coming years. On the fiscal side, there is room for stimulus if growth slows significantly
and we expect Beijing to roll out more fiscal easing measures in H2 to offset downside
pressures on investment and production growth.
Risks: We see the risks to our revised 2018 growth forecasts as largely balanced.
Downside risks from rising credit defaults, Sino-US trade tensions and a sharp property
sector correction may be offset by upside risks from potentially stronger than expected
policy easing and the burgeoning new-economy industries.
Fig. 4: China: Details of the forecast

% y-o-y growth unless otherwise stated 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 2017 2018 2019 2020
Real GDP 6.8 6.8 6.8 6.7 6.4 6.5 6.5 6.4 6.9 6.6 6.3 6.1
Contributions to GDP (pp):
Final consumption 4.3 3.1 5.3 4.1 4.2 4.2 4.1
Gross capital formation 2.4 1.7 2.1 2.2 2.2 2.1 2.1
Net exports (goods & services) 0.1 2.0 -0.6 0.6 0.2 0.0 -0.1
CPI 1.6 1.8 2.2 1.8 1.9 2.0 2.2 2.4 1.6 2.0 2.2 2.0
Core CPI 2.2 2.3 2.1 1.9 2.1 2.2 2.2 2.2 2.2 2.1 2.1 2.0
PPI 6.2 5.9 3.7 4.1 3.2 1.1 1.1 0.9 6.3 3.0 0.1 -1.7
Retail sales (nominal) 10.3 9.9 9.8 8.9 9.4 9.5 9.8 9.6 10.2 9.4 9.6 9.6
Fixed-asset investment (nominal, ytd) 7.5 7.2 7.5 5.9 5.6 5.5 5.8 5.6 7.2 5.5 5.4 5.2
Industrial production (real) 6.3 6.2 6.8 6.8 6.3 6.5 6.5 6.3 6.6 6.6 6.2 5.6
Exports (value) 6.4 9.7 14.0 12.4 8.8 6.0 6.5 6.5 7.9 10.0 7.0 5.0
Imports (value) 14.6 12.5 18.9 24.2 20.0 17.0 13.0 14.0 15.9 20.0 15.5 10.0
Trade surplus (USD bn) 113.8 130.9 46.5 79.5 68.7 81.3 17.2 43.3 422.5 276.0 106.5 -16.0
Current account (% of GDP) 1.3 1.8 -1.1 1.0 0.4 0.5 -0.6 0.1 1.4 0.2 -0.4 -0.8
Fiscal balance (% of GDP) -3.7 -4.0 -4.0 -4.0
New RMB loans (CNY trn) 3.2 2.4 4.9 3.9 3.7 2.7 5.2 4.0 13.5 15.2 15.8 16.4
Aggregate financing (CNY trn) 4.5 3.8 5.6 3.3 4.0 3.8 5.2 4.2 19.4 16.7 17.3 17.5
Money supply M2 grow th 9.2 8.2 8.2 8.6 8.5 8.2 8.1 8.0 8.2 8.2 7.8 7.6
1-yr bank lending rate (%) 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35
1-yr bank deposit rate (%) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Reserve requirement ratio (%) 17.0 17.0 17.0 16.0 15.5 14.5 14.5 13.5 17.0 14.5 12.5 10.0
Exchange rate (CNY/USD) 6.65 6.51 6.28 6.62 6.70 6.50 6.53 6.58 6.51 6.50 6.68 6.68
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. The CNY/USD forecast is
for the spot rate. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 10 July 2018. Source: CEIC and Nomura Global
Economics.
8
Czech Republic | Tightening the reins

High inflation and strong GDP growth in 2018 suggest more policy tightening, but the
scale of interest rate hikes will depend on the strength of CZK.
Growth: Because of strong eurozone GDP growth and brisk domestic wage growth, we
Marcin Kujawski - NIplc
remain upbeat on the Czech Republic’s growth prospects for 2018. In Q1 2018 the marcin.kujawski@nomura.com
economy expanded by a healthy 4.2% y-o-y, fuelled primarily by domestic demand. This +44 20 710 28302
year, the economic expansion has been further boosted by stronger inflows of EU
cohesion funds to the economy, although this effect should fade into H2 2018 because of
the higher base in H2 2017. Supply constraints in the labour market, as evidenced by the
all-time low unemployment rate, should eventually reduce the pace of economic
expansion. Still, we think it will be more in 2019-20 than in 2018.
Rates and inflation: While inflation surprised to the downside over the first few months
of 2018, consumer price growth has bounced back recently and CPI inflation is now
above the Czech National Bank's (CNB) 2% target. Price pressures remain strong, as
the economy is growing at a healthy rate, while the labour market is very tight. In addition
higher oil prices and fairly weak CZK are providing another inflationary boost.
Consequently, we expect headline inflation to remain above 2% for the rest of the year
and rise even faster in 2019. In our view, above-target inflation in 2018-19 will lead the
CNB Board to hike interest rates once more this year, which would bring the main policy
rate to 1.25% by end-2018. Still, in light of CZK performance, we would not rule out one
extra hike over the remainder of the year. For 2019, we pencil in two 25bp hikes, though
the scale of rate increments will hinge on CZK developments. We look for a rise in
EUR/CZK to 26.50 by end-2018 and then see it falling back to 25.50 by end-2019 and
24.50 by end-2020, mainly reflecting a rising interest rate differential between Czech
Republic and the eurozone.
Political and policy: Following the parliamentary election in late 2017, the winning party
– the ANO movement – has been struggling to form a majority government. All other
parties in parliament have been reluctant to join the ruling camp, as ANO party leader
Andrej Babis may face prosecution for EU fund fraud. Although there have been initial
hurdles, the coalition negotiations between the ANO party and Social Democrats (CSSD)
eventually succeeded. Both parties have agreed to a common programme, and the ANO
party has accepted the CSSD's conditions on the division of ministries between the two
groupings. Also, the ANO party has declared it will dissolve the government if the CSSD
decides to step down from the coalition, which was one of the Social Democrats’ core
conditions for taking part in the government. Now, the new coalition cabinet is waiting for
a confidence vote.
Risks: Less CZK appreciation may result in more policy tightening via interest rate hikes
next year.
Fig. 5: Czech Republic: Details of the forecast Fig. 6: Inflation outlook

2017 2018 2019 2020
3
Real GDP % y-o-y 4.6 3.5 3.0 2.5
Nominal GDP USD bn 217.1 250.0 260.0 270.0 2.5
Current account % GDP 1.0 -0.5 -0.3 0.0 2
Fiscal balance % GDP 1.6 -1.0 -1.0 -1.0
CPI % y-o-y * 2.4 2.4 2.5 2.0 1.5
CPI
CPI % y-o-y ** 2.5 2.2 2.5 2.2 1 Core inflation
Unemployment rate % 2.9 2.2 2.4 2.4
0.5
Reserves EUR bn ** 123.4 120.0 118.0 122.0
Public debt % GDP 32.2 31.0 30.5 30.0 0
CNB policy rate %* 0.50 1.25 1.75 2.00
EURCZK* 25.50 26.50 25.50 24.50
*End of period, **Period average, Bold is actual data
Source: Source: CSO, CNB, Nomura
Source: CSO, CNB, Nomura
9
Euro area | More pessimistic

Structural and cyclical factors are darkening the outlook for Euro area growth.
Economic activity: The incoming data concerning Eurozone activity in Q2 2018 have
Andrew Cates - NIplc
been disappointing, denting investors’ optimism that growth would rebound strongly andy.cates@nomura.com
following some weakness in Q1. Although many forecasters, ourselves included, had +44 (0) 20 710 26022
thought the dip in growth in Q1 could be ascribed to temporary factors (e.g., cold Shinya Harui - NIplc
weather, strikes and sickness) it now seems more probable that more enduring cyclical shinya.harui@nomura.com
factors are – and may continue – to restrain economic activity. Those factors include +44 20 7102 0038
higher oil prices, a more acute slowdown in China together with greater fragility in world Chiara Zangarelli - NIplc
trade growth. We would also now add to that list of concerns the greater scope for chiara.zangarelli@nomura.com
+44 20 710 26025
political instability in the Eurozone, the more limited scope either for regional integration
efforts or for productivity-enhancing reforms alongside a recent breakdown in
international policy co-ordination. All these are liable to constrain confidence and inhibit
investment growth in the period ahead. We are now accordingly more downbeat about
the Eurozone’s medium-term growth outlook. And we have reflected that pessimism in a
downgrade to our GDP forecast for 2019 to 1.7% (from 1.9%). For 2020, forecasts for
which we publish for the first time this month, we expect GDP growth of just 1.4%.
Inflation: While headline inflation has risen back to the ECB’s 2% ceiling the core rate
remains weak for now. Despite that weakness, however, we believe core inflation will
pick up modestly in the coming months, owing to some waning of the impact from last
year’s euro appreciation. This, together with firming inflation expectations and some
further modest closure of the output gap should push core inflation a little higher in 2019
and 2020. We are specifically forecasting core inflation rates that are close to the ECB’s
average forecasts of 1.1% in 2018, 1.7% in 2019 and 1.9% in 2020.
Monetary policy: Having taken a further step toward normalising monetary policy in
June by announcing the end of its asset purchase programme (APP) in December we
now expect a long period of inaction. A first hike of 15bp in the deposit facility rate is then
expected in September 2019, which would be consistent the ECB’s new forward
guidance. Thereafter we now expect only a further 10bp hike in all key interest rates in
Q4 2019 (revised lower from our previous forecast of 25bp). And for 2020 we are
expecting only another 10bp of rate hikes specifically in Q2. This absence of any great
scope to normalise rates reflects some of the heightened pessimism about growth that
we discussed above. In short still-high levels of ECB activism are likely to be required in
order to incentivise households and companies to spend and invest at rates that help
achieve rates of growth that are consistent with the ECB’s inflation aims.
Fig. 7: Euro area: Details of the forecast

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 2018 2019 2020
Real GDP (% q-o-q) 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.3 0.3 2.1 1.7 1.4
Household consumption 0.5 0.3 0.3 0.3 0.4 0.4 0.4 0.3 0.3 0.3 1.4 1.4 1.3
Fixed investment 0.5 0.8 0.8 0.7 0.7 0.6 0.6 0.5 0.4 0.4 3.0 2.6 1.8
Government consumption 0.0 0.4 0.3 0.4 0.3 0.3 0.3 0.3 0.3 0.3 1.2 1.4 1.3
Exports of goods and services -0.4 1.3 1.0 0.9 0.9 0.8 0.8 0.8 0.7 0.7 4.0 3.6 2.8
Imports of goods and services -0.1 1.2 1.1 0.9 1.0 0.9 0.9 0.8 0.7 0.9 3.4 3.9 3.2
Domestic final sales 0.4 0.3 0.4 0.4 0.5 0.5 0.5 0.4 0.3 0.4 1.7 1.7 1.5
Inventories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net trade -0.1 0.1 0.0 0.0 -0.1 -0.1 -0.1 0.0 0.0 -0.1 0.4 0.0 -0.1
Real GDP (saar) 1.5 1.6 1.7 1.6 1.8 1.7 1.7 1.5 1.3 1.3 2.1 1.7 1.4
Unemployment rate 8.6 8.5 8.3 8.2 8.0 7.9 7.8 7.8 7.7 7.7 8.4 7.9 7.7
Compensation per employee 2.3 2.5 2.6 2.5 2.5 2.6 2.7 3.0 3.1 3.0 2.5 2.7 3.0
Labour productivity 1.1 0.8 0.6 0.3 0.5 0.6 0.7 0.8 0.8 0.9 0.7 0.7 0.8
Unit labour costs 0.8 1.5 1.9 2.1 2.0 2.0 2.0 2.1 2.2 2.2 1.7 2.0 2.1
Fiscal balance (% GDP) -0.7 -0.8 -1.0
Current account balance (% GDP) 3.2 2.8 2.9
Consumer prices 1.3 1.7 2.0 2.0 1.9 1.8 1.6 1.6 1.6 1.7 1.7 1.7 1.7
Core HICP 1.0 1.0 1.1 1.4 1.5 1.7 1.7 1.7 1.7 1.9 1.1 1.7 1.9
ECB main refi. rate 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.10 0.10 0.20 0.0 0.10 0.20
ECB deposit rate -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.25 -0.15 -0.15 -0.05 -0.4 -0.15 -0.05
3-month rates -0.33 -0.32 -0.30 -0.30 -0.30 -0.25 0.05 0.20 0.20 0.35 -0.3 0.20 0.35
10-yr bund yields 0.50 0.30 0.55 0.70 0.80 0.95 1.05 1.15 1.15 1.15 0.7 1.15 1.15
$/euro 1.23 1.17 1.25 1.30 1.33 1.35 1.38 1.40 1.40 1.40 1.30 1.40 1.40
Notes: Quarterly figures are % q-o-q changes. Annual figures are % y-o-y changes. Inventories include statistical discrepancy. Inflation is % y-o-y. Interest rates and currencies
are end-of-period levels. Numbers in bold are actual values; others forecast. Table updated on 9 July 2018. Source: Bloomberg, Nomura Global Economics.
10
Hong Kong | Tighter financial conditions

Low unemployment and strong inbound demand supported the economy in Q1, but we
believe growth will slow in coming quarters due to tighter financial conditions.
Activity: GDP growth accelerated to 2.2% (sa) q-o-q in Q1 2018 from 0.8% in Q4 2017,
Young Sun Kwon - NIHK
supported by solid household consumption and services exports. However, we believe youngsun.kwon@nomura.com
growth will slow in coming quarters as tighter financial conditions have taken their toll. +852 2252 1370
1m HIBOR rose sharply to 2.01% at end-June 2018 from 1.02% at end-May, mainly due Minoru Nogimori - NIHK
to an IPO pipeline-induced liquidity squeeze. Even if the temporary effect from IPOs minoru.nogimori@nomura.com
fades, we believe a resumption of intervention by the Hong Kong Monetary Authority +852 2252 6462
(HKMA) would push up local interest rates. Indeed, our property research team are
increasingly concerned over the likelihood of an increase in the Prime rate (see Hong
Kong Property - We might be ready for a Prime Rate hike, 27 June 2018). The whole-
economy PMI fell to 48.2 in Q2 from 51.1 in Q1, moving below the threshold of 50. The
average growth of retail sales value for April-May slowed to 12.6% y-o-y from 14.4% in
Q1, supporting our view that Q2 GDP growth will slow to 3.8% y-o-y from 4.7% in Q1.
Inflation and policy: Higher housing rents and oil prices, a tight labour market and a
weaker effective HKD should lift inflation further. We expect CPI inflation to rise to 2.3%
in 2018 from 1.5% in 2017. The Centa-City Leading Index of housing prices rose to a
record-high 186.3 for the week of 18 June. On 29 June, the government announced yet
another round of tighter housing measures, such as an additional tax on vacant housing
units, and reallocated nine land sites initially designated for private housing to the
building of public units. Still, housing supply shortages remain a fundamental problem.
Risks: The biggest downside risks to Hong Kong’s ultra-open economy appear to be
beyond the government’s control. These include credit default events amid corporate
deleveraging in China, escalating US-China trade tensions and an accelerated Fed
hiking cycle. A major depreciation of trading-partner currencies (notably RMB) would push
up the real effective HKD to extremely overvalued levels which, in our view, would likely
stretch domestic asset price valuations for Chinese investors, possibly triggering a major
profit-taking sell-off. In the event of large capital outflows, we believe the HKMA would
allow HIBOR to spike to defend the USD/HKD peg, which could trigger a major housing
market correction given already-stretched housing affordability. In terms of upside risks,
given Hong Kong’s solid banking system with its still-low loan-to-deposit ratio (74.9% in
May 2018), there is a risk that banks and property developers will compete in the
mortgage market and provide attractive incentives (rebates or lower spreads to HIBOR,
although banks should raise the prime rate) to new mortgage borrowers.
Fig. 8: Hong Kong: Details of the forecast

% y-o-y growth unless otherwise 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 2017 2018 2019 2020
stated
Real GDP (sa, % q-o-q) 0.7 0.8 2.2 0.0 0.8 0.6 0.6 0.6
Real GDP 3.6 3.4 4.7 3.8 3.9 3.7 2.0 2.6 3.8 4.0 2.3 2.1
Private consumption 6.3 6.3 8.6 4.2 4.1 3.6 3.1 3.3 5.5 5.1 3.1 3.3
Government consumption 4.5 3.2 3.9 4.5 5.0 4.0 4.0 4.0 3.4 4.3 3.8 3.6
Gross fixed capital formation -2.1 3.1 3.8 4.5 5.5 4.0 3.5 3.0 3.5 4.4 2.9 2.6
Exports (goods & services) 5.4 3.5 5.6 2.9 3.3 3.0 2.8 2.7 5.5 3.6 2.8 2.6
Imports (goods & services) 5.6 4.9 6.5 3.2 3.5 3.0 3.4 3.0 6.3 4.0 3.2 3.2
Contributions to GDP (% points)
Domestic final sales 4.0 5.1 6.9 4.5 4.3 3.7 3.3 3.4 4.8 4.8 3.1 3.2
Inventories -0.2 0.7 -0.7 0.0 0.0 0.0 0.0 0.0 0.5 -0.2 0.0 0.0
Net trade (goods & services) -0.2 -2.5 -1.5 -0.7 -0.4 0.0 -1.3 -0.8 -1.4 -0.6 -0.9 -1.1
Unemployment rate (sa, %) 3.1 2.9 2.9 2.9 2.9 2.9 2.9 2.9 3.1 2.9 2.9 2.9
Consumer prices 1.8 1.6 2.4 2.4 2.3 2.2 2.0 1.2 1.5 2.3 1.3 1.1
Exports 7.2 6.1 8.8 4.4 5.2 4.7 5.2 5.5 7.6 5.7 5.8 1.9
Imports 6.9 7.8 9.7 4.1 4.8 4.2 5.3 5.5 8.2 5.5 6.0 1.8
Current account balance (% of GDP) 8.8 2.2 2.4 2.9 8.7 2.9 1.7 2.6 4.3 4.2 3.8 3.7
Fiscal balance (% of GDP) 5.6 1.2 1.0 0.5
Discount rate (%) 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.00 1.75 2.75 3.25 3.25
3-month Hibor (%) 0.78 1.31 1.21 2.10 1.80 2.05 2.36 2.43 1.31 2.05 2.80 2.90
Exchange rate (USD/HKD) 7.81 7.81 7.85 7.85 7.85 7.84 7.84 7.84 7.81 7.84 7.83 7.82
Notes: Numbers in bold are actual values; others forecast. Interest rate and currency forecasts are end of period; other measures are period average. All forecasts are modal
forecasts (i.e., the single most likely outcome). Table reflects data available as of 5 July 2018. Source: CEIC and Nomura Global Economics.
11
Hungary | Waiting for policy normalisation

Looking at the inflation profile we think the MNB may embark on policy normalisation
around mid-2019 but we see it to be a very gradual process.
Central bank policy: Recent communications from Magyar Nemzeti Bank (MNB) had a
more hawkish tone, with the MNB MPC dropping its commitment to keeping policy loose marcin.kujawski@nomura.com
for a prolonged period and referring to the external environment as a potential source of +44 20 710 28302
uncertainty for the policy setup. In addition, policymakers underscored the importance of
inflation developments for their policy stance. With EURHUF at 330, concerns about the
inflation outlook have intensified, but following the recent HUF appreciation we do not
think policymakers are likely to begin to explicitly tighten policy in the near term. Looking
at our inflation forecasts we think the MNB may embark on Bubor rate normalisation
around mid-2019, as at the time we see scope for an upward surprise in core inflation
relative to the central bank's expectations. HUF weakening could bring tightening
forward; however, we think the bout of HUF depreciation in May-June was primarily
driven by speculative flows, which we believe have now been partly unwound.
Fundamentally, we believe HUF is poised to strengthen somewhat, as the current
account balance remains in a healthy surplus.
Policy, fiscal and politics: The ruling FIDESZ surpassed pre-election expectations by
gaining 133 of the 199 seats in parliament – the exact number of seats needed to amend
the constitution unilaterally. The election results mean few new developments are likely
on the economics front and suggest continuity of a fairly loose policy mix. The
government’s fiscal stance appears broadly under control as it seeks to stabilise debt
(though at high levels). Further ratings upgrades look unlikely however owing to relatively
high public debt, uncertainty about the sustainability of growth because of the structural
challenges (eg demographics).and concerns about the rule of law in the country.
Growth and inflation: In Q1 GDP rose 4.4% y-o-y, driven primarily by robust private
consumption. However, as the economy is running beyond its potential, we expect the
pace of growth to decelerate somewhat this year. At the same time, we see inflation (in
goods and asset markets, eg housing) creeping gradually higher, reflecting capacity
constraints. Nonetheless, core inflation – which mirrors domestically-driven price
pressures – is likely to reach the MNB’s 3% target only by the end of the year, partly
owing to corporate-supportive measures implemented by the government (a cut in the
corporate income tax rate and social contributions). Next year, we expect inflation (both
headline and core) to top the 3% target, but to remain within the +/- 1pp tolerance band.
Still core inflation will only be marginally shy of the MNB’s upper-end of the target for a
large part of next year which we expect to provide sufficient argument for policymakers
to withdraw monetary stimulus delivered over the last years gradually and push Bubor
rates up to the policy rate by the end of next year.
Fig. 9: Hungary: Details of the forecast Fig. 10: CPI inflation outlook
2017 2018 2019 2020
4.5
Real GDP % y-o-y 4.0 4.0 3.0 2.5
4.0
Nominal GDP USD bn 139.8 151.3 155.8 163.2
3.5
Current account % GDP 3.1 1.5 1.5 1.5
3.0
Fiscal balance % GDP -2.0 -2.4 -2.0 -2.0 2.5
CPI % y-o-y * 2.1 3.4 3.0 2.7 2.0
CPI % y-o-y ** 2.4 2.8 3.3 2.7 1.5
Unemployment rate % 3.8 3.5 3.2 3.0 CPI inflation
1.0
Reserves EUR bn 23.4 23.0 24.8 27.0 0.5 Core inflation
Public debt % GDP 72.1 72.0 71.0 70.0 0.0
MNB policy rate %* 0.90 0.90 0.90 1.00 -0.5
3m BUBOR %* 0.03 0.35 0.90 1.00
EURHUF* 310 315 325 325
Source: Nomura Note: *End of period, **Period average, Bold is actual data, Source: Nomura
***Includes IMF/EU funds
12
India | Still going strong, but risks lie ahead

Strong growth and high inflation lays the foundation for another rate hike in August, but
we are increasingly concerned about a cyclical growth slowdown ahead.
Activity: The cyclical growth recovery that kicked off in H2 2017 has persisted through
Sonal Varma - NSL
Q2. High-frequency indicators point towards strong investment and consumption demand, sonal.varma@nomura.com
although there are signs on the margin that rising fuel prices are starting to affect the +65 6433 6527
outlook (see India Proprietary Indicator Watch, 21 June 2018). The manufacturing PMI Aurodeep Nandi - NSL
averaged 52.0 in Q2, up from 51.8 in Q1, with the June print suggesting robust domestic aurodeep.nandi@nomura.com
and external demand. Export growth rose by more than expected in May (20.2% y-o-y +91 22 4037 4087
from 5.2% in April), with a pick-up observed in volumes. Overall, we project GDP growth
in Q2 will build on the 7.7% y-o-y growth in Q1 and grow by 7.8% but expect it to peak
entering H2 2018, as tighter financial conditions, adverse terms of trade and political
uncertainty will start to bite, resulting in a moderation to 6.9% by Q4.
Inflation: Inflation is on the rise. CPI inflation rose to 4.9% y-o-y in May from 4.6% in April
and is likely to inch up further in June. While a base effect is at play, underlying core
inflation pressures remain worryingly strong and, in our view, will remain elevated in the
near term on strong cyclical growth momentum, higher oil prices and currency weakness.
Food inflation has been in check, but on our estimates the recent hike in minimum support
prices (MSPs) for summer crops will add ~20-30bp to CPI inflation in case of limited
procurement, and ~ 70-90bp in the case of a more comprehensive procurement (see
India: Higher MSPs announced, but devil will be in the delivery, 4 July 2018).
Policy: In its June policy review, the monetary policy committee (MPC) voted
unanimously (6-0) to hike the repo rate by 25bp to 6.25% but kept its stance “neutral”
and remained equivocal on future rate action (see India: RBI minutes suggest one hike is
no guarantee for the next, 20 June 2018). We expect the RBI to perceive the MSP hikes
as marginally inflationary. Along with elevated oil prices, high demand-push pressures
and currency depreciation, we see merit in the RBI frontloading another rate hike of 25bp
in its upcoming policy meeting on 1 August. However, a subsequent fading of growth
momentum is likely to lead to a stabilisation of policy rates.
Risks: High crude oil prices, state elections and banking-sector woes remain key
downside risks. A farm sector recovery in response to MSP hikes remain an upside risk.
Fig. 11: India: Details of the forecast

% y-o-y growth unless otherwise stated 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 2018 2019 2020
Real GDP 6.3 7.0 7.7 7.8 7.4 7.0 6.9 7.1 7.5 7.2 7.1
Private consumption 6.8 5.9 6.7 8.0 8.4 8.3 7.5 7.5 7.9 7.8 7.5
Government consumption 3.8 6.8 16.9 15.0 11.5 10.0 6.0 6.0 13.2 7.2 8.9
Fixed investment 6.1 9.1 14.4 9.0 8.0 8.0 4.0 7.0 9.8 6.5 5.9
Exports (goods & services) 6.8 6.2 3.6 3.0 3.0 4.0 4.0 4.0 3.4 4.3 4.0
Imports (goods & services) 10.0 10.5 10.9 8.0 9.0 9.0 5.0 8.0 9.2 6.5 5.0
Domestic final sales 6.0 7.0 9.5 8.9 8.4 8.5 6.0 7.1 8.8 7.2 7.1
Inventories 1.1 1.1 -0.3 0.1 0.4 -0.2 1.2 1.2 0.0 0.6 0.4
Net trade (goods & services) -0.8 -1.1 -1.5 -1.3 -1.4 -1.3 -0.3 -1.1 -1.4 -0.7 -0.4
Wholesale price index 2.8 3.8 2.8 5.5 5.1 3.7 3.4 3.4 4.3 3.2 3.1
Consumer price index 3.0 4.6 4.6 4.8 4.9 4.2 4.5 4.5 4.6 4.5 4.4
Current account balance (% GDP) -1.1 -2.1 -1.9 -2.9 -2.5 -2.7 -2.6 -2.6 -2.5 -2.6 -2.3
Fiscal balance (% GDP) -3.3 -3.1 -3.0
Repo rate (%) 6.00 6.00 6.00 6.25 6.50 6.50 6.50 6.50 6.50 6.50 6.50
Reverse repo rate (%) 5.75 5.75 5.75 6.00 6.25 6.25 6.25 6.25 6.25 6.25 6.25
Cash reserve ratio (%) 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00
10-year bond yield (%) 6.82 7.32 7.40 7.90 7.95 8.00 8.20 8.20 8.00 8.20 8.20
Exchange rate (USD/INR) 65.4 63.9 65.2 68.5 69.9 69.0 69.0 68.8 69.0 68.0 65.0
Note: Numbers in bold are actual values; others forecast. The ‘inventories’ component in contribution to GDP also includes statistical discrepancy and valuables. Interest rate and
currency forecasts are end of period; other measures are period average. For Fiscal balance (% GDP), calendar year values refer to forthcoming fiscal year. Table reflects data
available as of 5 July 2018. Source: CEIC and Nomura Global Economics.
13
Indonesia | More rate hikes coming

After aggressive policy rate hikes, BI remained hawkish and steadfast in prioritising
macroeconomic stability. Supportive fiscal measures are next to be implemented.
Forecast changes: We now expect an additional 50bp of rate hikes in Q3.

Euben Paracuelles - NSL
Activity: The growth of exports, imports, motor vehicle production and retail sales all euben.paracuelles@nomura.com
+65 6433 6956
picked up in April and May, supporting our view that GDP growth should improve after
edging down to 5.1% y-o-y in Q1 from 5.2% in Q4 2017. We forecast an increase in GDP Brian Tan - NSL
brian.tan@nomura.com
growth to 5.4% in 2018 from 5.1% in 2017, as the economic outlook remains positive, +65 6433 6930
supported by a pick-up in private investment which, in turn, supports the quality and
Charnon Boonnuch - NSL
sustainability of the economic expansion. For similar reasons, we expect GDP growth to charnon.boonnuch@nomura.com
rise further to 5.8% in 2019. In politics, candidates that are either supportive of President +65 6433 6189
Joko Widodo and/or similarly reform-minded in key provinces (like East Java and West
Java) appear to have won in the 27 June regional elections. This bodes well for Mr
Widodo’s bid for a second term and, ultimately, the economy’s reform prospects.
Monetary policy and inflation: Headline CPI inflation edged down to 3.1% y-o-y in June
from 3.2% in May due to lower utilities inflation, while core inflation remained stable at
2.7%. Bank Indonesia (BI) raised its policy rate by a larger-than-expected 50bp on 28
June, citing rising external risks and the need to keep real rates high to attract more
capital inflows and support the currency. Despite this aggressive move and a cumulative
100bp of hikes since May, BI maintained its hawkish stance. This, coupled with our
house view that EM financial turbulence is going to get worse before it gets better, leads
us to change our “on hold” forecast and pencil in a further 50bp of rate hikes. While
timing is still difficult to foresee, we continue to think these hikes will likely be delivered in
Q3, when we see the potential for a larger “snap-back” in emerging markets.
Fiscal policy: On a 12-month rolling basis, we estimate the fiscal deficit narrowed to
2.2% of GDP in May from 2.5% in 2017. This was boosted by a 16.0% y-o-y surge in
revenue collection in January-May, as improvements in tax administration following the
tax amnesty program, are bearing fruit. This provides the government with scope to run a
more expansionary fiscal stance which we think is needed to help support the growth
outlook amid BI’s monetary tightening. We therefore continue to forecast a widening of
the fiscal deficit to 2.6% of GDP in 2018, above the budgeted 2.2% but still well within
the 3% limit. We believe that the plan to review (i.e. postpone) the import requirements of
public infrastructure projects will also prevent a concentration of pressure on the current
account deficit, complementing BI’s efforts to manage the impact on the currency.
Risks: Key downside risks to growth stem mainly from external factors, such as US trade
protectionism and a sharp China slowdown. Faster Fed rate hikes could lead to capital
outflows given large foreign bond holdings.
Fig. 12: Indonesia: Details of the forecast

Real GDP (sa, % q-o-q, annualized) 5.0 5.6 4.3 6.6 5.3 6.4 4.5 6.4
Real GDP 5.1 5.2 5.1 5.4 5.4 5.6 5.7 5.6 5.1 5.4 5.8 6.0
Gross fixed capital formation 7.1 7.3 7.9 13.8 13.8 14.9 13.8 15.2 6.2 12.7 14.2 15.0
Domestic final sales 5.2 5.7 5.5 7.5 7.6 8.5
4.9 7.37.98.4 8.6
8.9
Inventories -0.8 0.1 0.7 0.1 0.1 -0.5
-0.2 0.10.30.1 -0.1
-0.1
Net trade (goods & services) 0.6 -0.6 -1.1 -2.3 -2.3 -2.5
0.3 -2.5
-2.0 -2.7 -2.8
-2.8
Unemployment rate (% nsa) 5.5 5.1 5.1 5.0 5.0 4.9
5.4 5.04.94.8 4.8
4.7
Consumer prices 3.8 3.5 3.3 3.3 3.6 3.8
3.8 3.53.74.0 3.7
4.0
Exports (BOP basis) 24.3 13.1 8.9 12.0 5.1 8.2
16.9 8.53.5 5.2
4.8 13.6
Imports (BOP basis) 23.0 20.8 19.7 29.5 21.2 23.9 19.9
16.2 23.5 21.2 26.422.5
Trade balance (US$bn, BOP basis) 5.3 3.1 2.4 -0.6 -0.6 -3.3
18.8 -4.5 -8.4
-2.2 -32.7 -66.0
Current account balance (US$bn) -4.6 -6.0 -5.5 -8.0 -4.7 -3.0 -4.7 -9.0
-17.5 -21.2 -30.3 -36.6
Current account balance (% of GDP) -1.8 -2.3 -2.1 -3.0 -1.8 -1.1
-1.7 -1.7
-2.0 -2.6 -3.2
-2.8
Fiscal Balance (% of GDP) -2.5 -2.6 -2.8 -2.8
Policy rate, 7 day reverse repo rate (%) 4.25 4.25 4.25 5.25 5.75 5.75 5.75 5.75 4.25 5.75 5.75 5.75
Exchange rate (USD/IDR) 13492 13548 13756 14404 14800 14500 14350 14200 13548 14500 13850 13300
Notes: Numbers in bold are actual values; others forecast and inventories under the GDP components also includes statistical discrepancies. Interest rate and currency forecasts
are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 5 July 2018.
Source: CEIC and Nomura Global Economics.
14
Japan | Justifying a longer way to go

In its July Outlook Report, the Bank of Japan will try to justify maintaining the current
monetary policy by analysing why inflation has been undershooting its own forecasts.
Activity: Signs show that Japanese economic activity continues to expand but with Takashi Miwa - NSC
weaker momentum and increasing downside risks. Business conditions DIs were mixed takashi.miwa@nomura.com
for manufacturers and non-manufacturers in the June 2018 BOJ Tankan survey. The +81 3 6703 1280
current business conditions DI for large manufacturers was down 3 points from the Masaki Kuwahara - NSC
March 2018 survey to +21, while the DI for large non-manufacturers improved by 1point masaki.kuwahara@nomura.com
+81 3 6703 1295
from the previous survey to +24. Despite Japanese industries’ vigorous appetite for
capex, with capex plans for all industries and all enterprises (including software and R&D Yoshiyuki Suimon - NSC
yoshiyuki.suimon@nomura.com
spending) particularly strong at +9.1% y-o-y, the momentum of production activity looks +81 3 6703 1297
to be gradually declining. The Japanese manufacturing PMI for June came in at 53.0, up
Kengo Tanahashi - NSC
only 0.2 points from the May reading, which deteriorated 1.0 point m-o-m. What is kengo.tanahashi@nomura.com
worrying is the new export orders index (which is not included in the calculation of the +81 3 6703 1284
manufacturing PMI), which fell by 2.2 points m-o-m to 48.9, suggesting weaker Yusuke Miyairi - NSC
momentum in overseas demand. Increasing concerns over protectionism from the US yusuke.miyairi@nomura.com
administration could represent a further downside risk in this regard. +81 3 6703 1289
Inflation: The Tokyo core CPI (all items, ex fresh food) for June 2018 showed prices
increase by 0.7% y-o-y, representing a 0.2pp pick-up over the May reading. This was the
first pick-up in Tokyo core CPI in four months. The Tokyo area CPI excluding fresh food
and energy (the BOJ's preferred measure of core-core CPI) rose by 0.4% y-o-y in June,
a pick-up of 0.2pp over the May reading. Core CPI inflation is being pushed up by a
growing contribution from higher energy prices. At the core-core level, however, we
expect inflation to remain stalled for the time being, due to the sustained impact from the
gains made by the yen between end-2017 and March 2018 and as vulnerable consumer
spending remains weak.
Policy: Several media reports indicated that the BOJ will perform an in-depth analysis
on why inflation has been undershooting the bank’s own forecasts and is likely to revise
the forecast down in the July Outlook Report. We expect that this is an effort by BOJ to
justify a continuance of the current monetary policy regime as well as to subdue possible
political demands to further ease monetary policy. As such, the central bank may also
brace for potential downside risks to the global economy, likely accompanying a renewed
appreciation of JPY.
Risks: The key risk to our view is continued JPY appreciation caused by concerns over
the sustainability of US fiscal policy and US trade protectionism.
Fig. 13: Japan: Details of the forecast

% 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 2018 2019 2020
Real GDP (% q-o-q, annualized) 2.0 1.0 -0.6 1.8 1.3 0.7 1.0 0.8 0.6 0.5 0.8 0.8
Real GDP (% q-o-q) 0.5 0.3 -0.2 0.4 0.3 0.2 0.2 0.2 0.2 0.1 0.2 0.2 0.9 0.9 0.7
Private consumption -0.7 0.3 -0.1 0.2 0.1 0.1 0.1 0.1 0.2 0.2 0.1 0.1 0.2 0.5 0.5
Private non res fixed invest 1.0 0.7 0.3 1.4 1.0 0.8 0.8 0.8 0.8 0.8 0.7 0.7 3.4 3.6 2.9
Residential fixed invest -1.6 -2.7 -1.8 -0.1 0.8 -0.9 -1.2 -0.6 -0.6 -0.6 -0.6 -0.7 -4.3 -2.4 -2.6
Government consumption 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.4 0.4
Public investment -2.6 -0.4 -0.1 -0.3 1.1 -1.7 2.6 0.1 -1.3 -2.8 0.4 1.0 -0.7 0.4 -2.4
Exports 2.0 2.2 0.6 1.6 1.3 1.0 0.8 0.8 0.8 0.7 0.6 0.6 5.4 3.7 2.6
Imports -1.3 3.1 0.3 0.5 1.3 0.6 1.0 0.7 0.7 0.5 0.7 0.7 3.5 3.3 2.4
Contributions to GDP: (ppt, q-o-q)
Domestic final sales -0.4 0.2 -0.1 0.3 0.3 0.1 0.3 0.2 0.2 0.1 0.2 0.2 0.6 0.8 0.7
Inventories 0.4 0.2 -0.2 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0
Net trade 0.5 -0.1 0.1 0.2 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.1 0.0
Consumer prices (% y-o-y) 0.6 0.6 1.3 0.7 0.9 0.7 0.3 0.7 0.6 0.5 0.5 0.6 0.9 0.5 0.5
Core CPI 0.6 0.9 0.9 0.8 0.9 0.9 0.9 0.7 0.6 0.5 0.5 0.5 0.9 0.7 0.5
Fiscal balance (fiscal yr, % GDP) -6.6 -6.6 -6.6
Current account balance (% GDP) 3.9 3.7 3.7
Policy rate -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
JGB 5-year yield -0.08 -0.10 -0.11 -0.11 -0.10 -0.10 -0.10 -0.10 -0.15 -0.15 -0.15 -0.15 -0.10 -0.15 -0.15
JGB 10-year yield 0.06 0.05 0.05 0.03 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05
JPY/USD 112.5 112.7 106.3 110.8 110.0 110.0 112.0 115.0 112.0 110.0 110.0 110.0 110.0 110.0 110.0
Note: Unemployment rate is as a percentage of the labour force. Inflation measures and CY GDP are year-on-year percent changes. Interest rate forecasts are end of period.
Fiscal balances are for fiscal year and based on general account. Table reflects data available as of 5 July 2018.
Source: Cabinet Office, Ministry of Finance, Statistics Bureau, BOJ and Nomura Global Economics.
15
Malaysia | Mounting headwinds

External uncertainties are rising at a time when underlying economic growth looks set to
slow and fiscal slippage could raise the risk of a sovereign credit rating downgrade.
Activity: Industrial production growth rose to 4.6% y-o-y in April from 3.1% in March. This
is in line with our view that Q2 GDP growth was likely supported by the government’s euben.paracuelles@nomura.com
spending ahead of the 9 May general election, the return of fuel subsidies and the zero- +65 6433 6956
rating of the goods and services tax (GST) in June. However, beyond Q2, the boost to Brian Tan - NSL
private consumption is likely to be modest and is unlikely to offset the hit to growth from brian.tan@nomura.com
significant government spending cuts to offset the loss in GST revenue. We forecast full- +65 6433 6930
year GDP growth slowing from 5.9% in 2017 to 5.1% in 2018 and 4.5% in 2019 (see Asia Charnon Boonnuch - NSL
Insights - Malaysia: Implications of reversing crucial fiscal reforms, 7 June 2018). charnon.boonnuch@nomura.com
+65 6433 6189
Monetary policy and inflation: With 2018 GDP growth set to undershoot Bank Negara
Malaysia’s (BNM) forecast of 5.5-6.0%, we continue to expect the policy rate to be left
unchanged at 3.25% through the rest of 2018 and 2019. Moreover, inflation remains low.
Taking into account the near-term disinflationary effects of fuel subsidies and the zero-
rating of the GST, and the planned reinstatement of the sales and services tax (SST) in
September (set to be less inflationary than the previous GST), we forecast benign CPI
inflation of 1.3% in 2018 and 1.5% in 2019, below BNM’s 2018 forecast of 2-3%. The
appointment of Nor Shamsiah Mohd Yunus as new BNM governor, following the
resignation of Muhammad Ibrahim, implies continuity in the direction and conduct of
monetary policy, in our view.
Fiscal policy: The new Pakatan Harapan government has moved swiftly to zero-rate the
GST in June and reinstate fuel subsidies. It intends to stick to the 2018 fiscal deficit target
of 2.8% of GDP with some help from higher oil prices and plans to reinstate the SST in
September. This implies large spending cuts which we believe could significantly hurt
economic growth, forcing a difficult trade-off between maintaining fiscal consolidation and
avoiding a sharp slowdown. We suspect the government will struggle to meet its 2018
deficit target or pursue further fiscal consolidation in 2019 when growth begins to
deteriorate more visibly. We therefore project some fiscal slippage in both years, moving
off-track from the medium-term fiscal consolidation agenda. We believe rating agencies will
provide time for the new government to find its footing before reassessing credit ratings –
for example, S&P reaffirmed the sovereign at A- Stable on 29 June – but further out we see
a rising risk of a downgrade.
Risks: A downturn in electronics exports, US trade protectionism and capital outflows
from Fed hikes, in addition to rising fiscal concerns in Malaysia, pose downside risks.
Fig. 14: Malaysia: Details of the forecast

Real GDP 6.2 5.9 5.4 5.8 5.0 4.2 4.3 4.6 5.9 5.1 4.5 4.2
Government consumption 3.9 6.8 0.4 6.0 -1.0 -1.0 -0.5 -0.5 5.4 0.9 -0.5 -1.0
Imports (goods & services) 13.3 7.3 -2.0 3.5 4.6 6.6 9.2 6.8 10.9 3.2 7.9 4.5
Inventories 0.0 0.1 -2.5 -3.8 -1.5 -1.9 -1.4 0.0 0.1 -2.4 -0.5 0.2
Net trade (goods & services) 0.2 0.2 4.0 2.6 1.5 1.8 1.1 0.0 -0.2 2.5 0.5 -0.3
Unemployment rate (% sa) 3.5 3.4 3.3 3.3 3.3 3.3 3.3 3.3 3.4 3.3 3.3 3.3
Consumer prices 3.6 3.5 1.8 1.5 1.1 0.8 0.8 1.5 3.7 1.3 1.5 1.5
Exports (BOP basis) 13.7 15.5 18.1 19.2 14.6 14.5 10.0 6.8 13.5 16.5 10.5 4.3
Imports (BOP basis) 14.3 16.1 11.6 17.8 13.3 12.1 11.3 9.6 13.9 13.7 11.9 5.0
Trade balance (US$bn, BOP basis) 7.4 8.2 9.1 7.7 9.1 10.4 9.5 6.9 27.2 36.3 37.5 37.6
Current account balance (US$bn) 3.0 3.3 3.8 2.8 2.9 3.7 3.0 1.5 9.4 13.3 13.9 12.0
Fiscal Balance (% of GDP) 0.2 -2.0 -3.3 -3.0 -3.0 -3.0 -3.0
Overnight policy rate (%) 3.00 3.00 3.25 3.25 3.25 3.25 3.25 3.25 3.00 3.25 3.25 3.25
Exchange rate (USD/MYR) 4.23 4.06 3.86 4.04 4.07 4.03 4.00 4.00 4.06 4.03 3.95 3.90
Notes: Numbers in bold are actual values; others forecast. “Inventories” component contribution to GDP also includes statistical discrepancies. Interest rate and currency
forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data available as of 5 July 2018.
16
Mexico | AMLO era begins

Opposition candidate Andres Manuel Lopez Obrador won the presidential election and is
scheduled to take office on 1 December.
Activity: We continue to expect GDP growth of around 2.6%/2.2% y-o-y in 2018/19.

Exports, and less so private consumption, are likely to be the main growth engines Joao.Ribeiro@nomura.com
growth in 2018. We think the US economy’s solid performance offers support to GDP +1 212 667 2236
growth in Mexico, even if there are uncertainties related to NAFTA and domestic policies.
Inflation: CPI inflation finished Q2 at 4.7 y-o-y, down from 6.8% in 2017 and 5.0% in Q1
2018. We continue to see the longer-term trend of lower inflation in place throughout H2,
and we forecast year-end inflation at 4.2%. We also note that the exchange rate
continues to be a key variable for the inflation outlook – and if the current level for
USDMXN remains for the remainder of the year, there is downside risk to our inflation
forecasts.
Policy: The central bank of Mexico (Banxico) increased the policy rate by 25bp to
7.75%, in line with the market and our view, on 21 June. In its communique, Banxico left
the door open for additional hiking in the remainder of the year, in our view, given the
upside risks that are still in play for the inflation outlook this year. That said, we also
continue to think the most likely scenario for rates is stability at 7.75% throughout the
year, given the combination of: a generally balanced output gap, already above-neutrality
interest rates and the expectation of inflation continuing to converge to lower levels in
H2. We also see a cutting cycle starting next year and taking the base rate to 7.0%
Risks: AMLO’s victory had been generally and widely expected for some time, given
polling results in the past several weeks. However, his electoral performance was still
noteworthy – as he won by a bigger-than-expected margin and with his coalition enjoying
majorities in both houses of Congress. His tone following the electoral result continued to
be generally conciliatory and with pro-market elements (on topics such as central bank
independence and fiscal responsibility). While we think it is unlikely that any dramatic
policy changes will occur in the near term, we highlight that there are still risks related to
policy-making under the new administration - in particular in topics related to the energy
sector, which could eventually curb private investment and negatively affect the outlook
for GDP growth. On a different front, we also highlight the ongoing uncertainty
surrounding the possibility of a NAFTA breakup – despite AMLO’s generally positive tone
on the negotiations conducted by the current administration.
Fig. 15: Mexico: Details of the forecast

% YoY change unless noted 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Q119 Q219 2017 2018 2019 2020
Real GDP 1.6 1.5 1.3 3.4 3.3 2.5 2.0 2.1 2.0 2.6 2.2 2.2
Personal consumption 3.1 2.5 2.2 3.7 1.9 2.0 1.8 2.2 3.0 2.5 2.0 2.0
Fixed investment -0.6 -2.4 -0.3 -0.9 -2.0 -1.7 1.0 1.0 -0.3 -1.2 1.4 1.0
Government expenditure -1.1 -0.2 -1.0 0.2 -0.4 0.4 1.0 0.5 -0.3 -0.2 0.8 0.5
Exports -0.4 2.5 3.4 8.0 13.9 12.3 5.0 5.0 3.8 9.4 5.0 6.0
Imports 5.5 7.1 4.2 7.8 5.1 8.0 4.0 4.0 6.4 6.3 4.5 3.0
Contributions to GDP (pp):

Industry 0.5 0.5 0.4 1.0 1.0 0.7 0.6 0.6 0.6 0.8 0.6 0.6
Agriculture 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
Services 1.0 1.0 0.8 2.2 2.1 1.6 1.3 1.3 1.3 1.7 1.4 1.4
CPI 6.3 6.8 5.0 4.7 4.3 4.2 4.0 4.0 6.8 4.2 3.8 3.6
Trade balance (US$ billion) -6.1 -3.5 -1.7 -3.1 -2.2 -2.2 -1.0 -1.0 -9.6 -9.2 -11.0 -8.0
Current account (% GDP) -1.8 -1.5 -1.8 -1.5
Fiscal balance (% GDP) -1.5 -2.5 -2.5 -2.4

Gross public debt (% GDP) 46.7 44.7 44.0 44.0
Overnight Rate % 7.00 7.25 7.50 7.75 7.75 7.75 7.50 7.25 7.25 7.75 7.00 6.75
USD/MXN 18.25 19.71 18.21 19.90 20.50 20.00 19.50 19.60 19.71 20.00 20.00 21.00
Notes: Annual forecasts for GDP and its components are year-over-year average growth rates. Annual CPI forecasts are year-over-year changes for December. Trade data are
period sums. Interest rate and currency forecasts are end of period. Contributions to GDP do not include taxes. Numbers in bold are actual values, others forecast. Table reflects
data available as of 10 July 2018. Source: Nomura Global Economics
17
Philippines | Hiking cycle continues

BSP delivered a second rate hike in June and we expect it to hike again in August, as
inflation and inflation expectations continue to climb.
Activity: Data in April and May continue to show strong growth momentum in Q2.
Industrial output growth remained robust at 21.3% y-o-y in May and 29.8% in April, euben.paracuelles@nomura.com
versus 17.7% in Q1. Government disbursements on capital outlays expanded by an +65 6433 6956
even stronger 60.8% y-o-y in April/May after growing by 33.9% in Q1. This supports our Charnon Boonnuch - NSL
view that growth will remain investment-led, with the government gaining more traction in charnon.boonnuch@nomura.com
addressing past under-spending problems and improving absorptive capacity of +65 6433 6189
implementing agencies. We maintain our GDP growth forecasts of 6.9% in 2018 and Brian Tan - NSL
7.1% in 2019, rising from 6.7% in 2017. In 2020, we forecast GDP growth to soften brian.tan@nomura.com
+65 6433 6930
slightly to 7.0%, as election-related spending from the 2019 mid-terms fades. We also
expect the current account deficit to continue widening from 1.7% of GDP in 2018, to
2.2% in 2019, and to 2.4% in 2020, reflecting the strength of domestic demand.
Inflation and monetary policy: Bangko Sentral ng Pilipinas (BSP) raised its policy rate
for a second time in June by 25bp to 3.50% and noted that it is ready to take further
policy action as needed. This suggests BSP has left the door open to more rate hikes,
supporting our forecast of another 25bp rate hike in August. Our forecast is also
supported by CPI inflation (2012 base year) accelerating to 5.2% y-o-y in June from
4.6% in May, now more than a full percentage point above the BSP's 2-4% target. Our
forecast for CPI inflation to average 4.6% this year implies an acceleration to 5.0% in H2
from 4.3% in H1. Further out, we expect inflation to moderate to a stable 3.5% in 2019-
20. We believe the risks around our CPI forecast for this year may now be tilted more to
the upside, raising the risk that BSP may hike rates more than once more this year.
Fiscal policy: The fiscal balance returned to a deficit of PHP32.9bn in May from a
surplus of PHP46.3bn in April which was partly due to seasonal tax payments. On a 12-
month rolling sum basis, the fiscal deficit stands at 2.6% of GDP. We maintain our full-
year forecasts for the fiscal deficit to widen to 2.8% of GDP in 2018 and then to 3.1% in
2019. Despite more significant progress on infrastructure spending, the fiscal deficit
remains manageable as the implementation of the TRAIN tax reform since the start of
2018 has led to higher-than-expected revenue collections, and gross general public debt
was only 38% of GDP last year.
Risks: A sharp downturn in the tech cycle would hurt an electronics-dominated export
sector, while faster-than-expected Fed rate hikes could spark capital outflows.
Fig. 16: Philippines: Details of the forecast

Real GDP 7.2 6.5 6.8 6.9 6.8 7.2 7.1 7.5 6.7 6.9 7.1 7.0
Exports (goods & services) 18.8 20.6 6.2 5.7 2.3 -2.8 2.5 5.2 19.5 3.0 5.5 3.2
Contribution to GDP growth (% points)
Inventories 0.5 -0.6 0.6 0.2 0.7 -0.5 -4.7 -1.1 0.0 0.2 0.0 0.0
Net trade (goods & services) -0.1 -1.1 -2.9 -2.3 -2.8 -1.9 -3.2 -4.9 -0.8 -2.4 -6.4 -5.2
Unemployment rate (nsa, %) 5.6 5.0 5.3 5.3 5.3 5.3 5.0 5.0 5.7 5.3 5.0 4.8
Consumer prices (2012=100) 2.7 3.0 3.9 4.8 5.2 4.8 3.8 3.2 2.9 4.6 3.5 3.5
Exports 17.2 13.4 7.0 5.7 0.9 -10.4 3.9 5.0 19.7 0.6 5.5 3.2
Imports 8.7 21.1 7.1 10.7 20.3 26.7 10.0 10.9 14.2 16.2 9.8 8.0
Merchandise trade balance (USDbn) -5.8 -9.8 -6.6 -7.1 -10.4 -18.7 -8.3 -9.0 -27.4 -42.5 -49.6 -57.0
Current account balance (USDbn) 1.9 -3.3 -0.2 -1.3 -1.7 -2.5 -1.4 -2.2 -2.5 -5.7 -8.2 -10.1
Current account balance (% of GDP) 2.5 -3.8 -0.3 -1.6 -2.1 -2.7 -1.7 -2.4 -0.8 -1.7 -2.2 -2.4
Reverse repo rate (%) 3.00 3.00 3.00 3.50 3.75 3.75 3.75 3.75 3.00 3.75 3.75 3.75
Exchange rate (USD/PHP) 51.1 49.9 52.2 53.5 54.0 53.5 53.0 52.8 49.9 53.5 51.8 51.0
18
Poland | Cyclical upswing

GDP growth in Poland is likely to remain buoyant in 2018. The brisk expansion should
lead to higher core and headline inflation eventually, but the MPC is unlikely to react.
Growth: The Polish economy started the year on a strong note, expanding 5.2% y-o-y in
Q1. Growth was primarily driven by domestic demand, with strong contributions from marcin.kujawski@nomura.com
household consumption and investment. Separately, inventories added 1pp to GDP +44 20 710 28302
growth in Q1 2018, and this may signal that the cycle is about to turn down. Growth is
likely to remain primarily driven by robust household spending, boosted by swiftly
advancing real disposable income, but investment should remain strong too. Exports
should benefit from a sustained recovery in the eurozone, though because of vigorous
domestic demand we think net exports will shave a few decimal points off GDP growth in
2018. Further out, labour shortages should start to constrain economic activity, in our
view. Still, we believe GDP growth of +3% is plausible in 2019 as the government is
likely to loosen its fiscal belt in a general election year.
Rates and inflation: Brisk economic growth accompanied by rising wages (reflecting an
extremely tight labour market) suggests price pressures are building. The strong inflow of
lower-paid Ukrainian workers in recent years has likely limited the pass-through of the
upturn in the job market to consumer price growth for the time being, however. We
expect CPI inflation to top the National Bank of Poland's (NBP) target of 2.5% in H1
2019. Despite prospects of faster inflation, the NBP MPC’s overall tone remains very
dovish, however. At the press conference in March NBP Governor Glapinski said that if
headline inflation remained below 3% y-o-y, interest rates in Poland may be kept on hold
until the end of 2020. As we believe policymakers do not intend to tighten their policy
stance anytime soon and we expect a cyclical slowdown in the economy in 2020, Poland
may not see any interest rate hikes in the next two years. We think, however, that a more
hawkish ECB will eventually encourage the NBP’s MPC to raise rates especially as core
inflation should also gather pace. Still, we pencil in just one 25bp hike in July 2019 and
another 25bp hike in 2020. The risks to our forecast are balanced, with the pro-inflationary
environment on the one hand and slowing growth in 2020 and beyond on the other.
Political and policy: The dispute between Poland and the European Commission over
the rule-of-law continues. The Commission sent another law to the European Court of
Justice under the infringement procedure. In addition, the member countries have been
discussing the state-of-play in Poland within the confines of the ‘Article 7’ framework. We
think Poland will avoid any serious sanctions, but continued negative narrative on the
country is not supportive for domestic assets. On the fiscal front, Poland had a very
robust year in 2017, with a fiscal deficit of only 1.5% of GDP and public debt falling to
50.6% of GDP. We expect fiscal balances to remain healthy this year, though they are
likely to deteriorate in 2019 as the looming parliamentary election may incline the ruling
camp to loosen the fiscal stance.
Risks: Faster inflation owing to swiftly growing labour costs and a positive output gap.
Fig. 17: Poland: Details of the forecast Fig. 18: GDP growth and CPI inflation forecast
2017 2018 2019 2020
6 % y/y
Real GDP % y-o-y 4.6 4.5 3.2 2.8
5
Nominal GDP USD bn 527.5 581.1 593.7 624.2
4
Current account % GDP 0.3 -1.5 -1.8 -1.1
Fiscal balance % GDP -1.5 -2.0 -2.5 -2.5 3
CPI % y-o-y * 2.1 1.8 2.7 2.2 2
CPI % y-o-y ** 2.0 1.9 2.5 2.4 1
GDP
Unemployment rate % 4.9 3.8 3.5 3.0 0
Reserves EUR bn ** 94.5 100.0 105.0 110.0 CPI
-1
Public debt % GDP 50.6 50.0 49.5 49.0 -2
NBP policy rate %* 1.50 1.50 1.75 2.00
EURPLN* 4.18 4.20 4.15 4.15
Notes: *End of period, **Period average, Bold is actual data. Source: Nomura Source: Nomura Global Economics.
19
Russia | VAT hike postpones rate cuts

The CBR sees inflation moving above target in 2019 due to the VAT hike and notes that
the transition to neutral monetary policy needs to be slower.
Geopolitics/domestic politics: The most important agenda item on the geopolitics front
Inan Demir - NIplc
is the meeting between Presidents Putin and Trump on 16 July in Helsinki. Although this inan.demir@nomura.com
is an important step forward, a significant easing of tensions remains unlikely given the +44 (0) 20 710 29978
strong anti-Russia sentiment in the US Congress. On the domestic politics front, in order
to fund the ambitious development goals announced by President Putin at his
inauguration, the government decided to increase the retirement age and hike the VAT
rate by 2 percentage points. The raising of the retirement age is especially unpopular
and may need to be revisited and moderated in the coming months.
Economic activity: May industrial production (IP) growth was a strong 3.7% y-o-y as
Rosstat revised the IP growth figures starting from 2017. The new series points to much
stronger growth than the previous series. IP growth in the first five months of the year
stands at 3.2% y-o-y compared with less than 2% reported under the old series for
January-April. Similarly, the new series shows 2017 IP growth at 2.1%, up significantly
from the 1% growth rate reported earlier. The size of the revisions to the IP series
suggests that there will be significant revisions to the GDP growth figures as well.
Monetary policy: In June, annual inflation eased to 2.1% from May’s 2.3% as the base
effects helped push inflation lower. Although June inflation figures showed inflation
moving further away from the official inflation target at 4%, the CBR is unlikely to
respond with a cut as the Bank shifted to a more hawkish stance in its most recent rate-
setting meeting on 15 June. The reason for the shift in policy stance was the VAT hike
(announced just one day before the CBR meeting but to come into effect in January
2019), which will add about 1 percentage point to headline inflation according to CBR
estimates. The central bank sees some of the impact materialising this year, before the
actual implementation of the VAT hike. Consequently, the Bank expects 2018 inflation in
a 3.5-4% range (from 3-4% in the April statement) and 2019 inflation in a 4-4.5% range
(from close to 4% in the April statement). In contrast to April, the June statement by the
CBR did not mention further key rate reductions or monetary policy becoming neutral this
year. If anything, the CBR noted that “monetary conditions are already close to neutral,”
and “transition to neutral monetary policy needs to be slower.” Before the change in CBR
rhetoric, we thought the easing cycle would resume later in the year with two 25bp cuts
in September and December. This is still not impossible, but the bar is now higher. For
the rate cuts to resume, the CBR will need to find comfort in incoming inflation and
activity indicators that the VAT hike impact is not showing up too early and its secondary
effects are manageable. Moreover, the CBR will want to see RUB resilience to
geopolitical risks, broader EM sentiment and the course of oil prices. Until there is
greater clarity on these, we assume that the Bank will stay on hold for the remainder of
the year.
Fig. 19: Russia: Details of the forecast Fig. 20: Annual inflation and CBR key rate
Source: Nomura. *End of period, **Period average, Bold is actual data Source: Bloomberg
20
Singapore | Limited demand-pull inflation

Rising trade frictions bode poorly for the ultra-open economy; our proprietary measure of
core-core inflation still points to subdued price pressures.
Activity: Industrial production growth rose to 10.1% y-o-y in April and May combined,
from 9.7% in Q1, but will likely fall in June due to an unfavourable base effect. euben.paracuelles@nomura.com
Electronics IP growth remained strong, which continues to contrast with declining +65 6433 6956
electronics exports. We believe this reflects the IP data’s inclusion of assembly work Brian Tan - NSL
done overseas by fabless semiconductor firms while domestic electronics production is brian.tan@nomura.com
likely better reflected by the weak export data. Taking into account data on construction +65 6433 6930
and services activities, we estimate Q2 GDP growth slowed to 3.8% y-o-y from 4.4% in Charnon Boonnuch - NSL
Q1. We continue to forecast a slowdown in full-year GDP growth to 3.0% in 2018 from charnon.boonnuch@nomura.com
+65 6433 6189
3.6% in 2017, in line with official forecasts of 2.5-3.5%. In our view, the economy
continues to face structural headwinds – including high domestic private debt and
deteriorating demographics – which leaves it susceptible to any escalation in trade
protectionism or a tech cycle downturn (see Asia Special Report - Singapore: What lies
beneath, 3 November 2017).
Inflation and monetary policy: In line with our view that underlying demand-pull inflation
pressures remain limited despite the pick-up in GDP growth, core CPI inflation remained
low at 1.5% y-o-y in May, up from 1.3% in April, despite high oil prices. Our proprietary
measure of core-core inflation also remained low at 1.3%, up from 1.1% in April. We
continue to forecast 2018 core inflation of 1.7%, which is in the upper half of the
Monetary Authority of Singapore’s (MAS) 1-2% forecast range. Therefore, the base case
forecast of our FX strategy team is that the MAS will further tighten its FX policy in its
October announcement, but there are several tail risks (see below) that could postpone
policy action.
Fiscal policy: Actual fiscal data suggest the government ran a fiscal surplus of 2.3% of
GDP in FY17, slightly larger than its 2.1% projection. For FY18, the government expects
a small 0.1% of GDP fiscal deficit, which implies an expansionary fiscal stance. While the
2018 budget stayed focussed on executing structural reforms, it also emphasised
addressing long-term fiscal pressures from an ageing population and infrastructure
needs (see Asia Insights – Singapore: Budget 2018… and beyond, 19 February 2018).
Risks: The balance of risks to growth are tilted to the downside, based on a slew of
factors such as an electronics down cycle, DM monetary policy normalisation, financial
market volatility, increased global trade protectionism and rising local interest rates.
Fig. 21: Singapore: Details of the forecast

Real GDP (sa, % q-o-q, annualized) 11.2 2.1 1.7 0.5 1.7 4.9 4.1 -1.0
Real GDP 5.5 3.6 4.4 3.8 1.5 2.2 2.8 2.4 3.6 3.0 2.5 2.2
Gross fixed capital formation -2.7 2.2 0.2 -3.0 -2.3 -2.5 -1.5 -1.7 -1.8 -1.9 -1.6 -1.1
Inventories 4.7 2.5 0.0 0.6 -1.0 -4.1 -2.5 1.0 3.3 -1.1 0.2 0.6
Net trade (goods & services) -0.9 -1.4 2.4 2.2 1.7 5.6 4.1 0.4 -0.7 3.0 1.2 0.3
Headline CPI inflation 0.4 0.5 0.2 0.3 0.5 0.4 0.5 0.4 0.6 0.3 0.3 0.5
MAS core inflation 1.5 1.4 1.5 1.5 1.9 2.1 1.9 1.8 1.5 1.7 1.5 1.5
Imports (BOP basis) 11.5 13.1 12.2 16.0 12.9 4.5 7.6 -0.2 12.5 11.2 3.3 2.1
Fiscal Balance (% of GDP) 2.3 -0.1 -0.5 -1.0
3 month SIBOR (%) 1.12 1.50 1.45 1.52 1.70 1.85 1.95 2.00 1.50 1.85 2.20 2.40
Exchange rate (USD/SGD) 1.36 1.34 1.31 1.37 1.40 1.36 1.34 1.33 1.34 1.36 1.31 1.30
Notes: Numbers in bold are actual values; others forecast. The contribution to GDP from the “inventories” component also includes statistical discrepancies. Interest rate and
currency forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). The table reflects data available
as of 5 July 2018. MAS core inflation excludes accommodation and private road transport costs.
21
South Africa | Subdued economic activity

Political transition should encourage the economy to move back to potential, but early
2018 growth data show this is an uphill battle.
Risks: 2018 represents a juncture between the December 2017 ANC elective
Inan Demir - NIplc
conference and 2019 national elections. The election of Cyril Ramaphosa as president of inan.demir@nomura.com
the ANC marks the removal of a set of downside risks and political power has now fully +44 (0) 20 710 29978
shifted to him as state president – yet we believe compromise and disputes will need to
be monitored. We expect a year of strong public relations and a reformist focus that may
keep ratings agencies on hold and may lead to cross-over and ‘tourist’ money inflows
into the country. Achieving real reform with a very split ANC remains challenging and so,
while we are tactically bullish, we fully recognise the difficulties in delivering long-term
reductions in inequality or unemployment. Not all risks depend on politics, however, with
fiscal heavy lifting remaining a challenge – both logistically and politically.
Politics: As widely expected, President Zuma was removed in February by a broad
coalition in the ANC's NEC, which likely had eyes on a strong performance in the 2019
elections and on removing cases of alleged corruption. The cabinet reshuffle saw a
degree of compromise overall, but allowed strong appointments to the finance ministry
and ministries of public enterprise (overseeing state-owned enterprises) and mining.
While there is a consensus in the NEC for a change in leadership of the state, there does
not appear to be any consensus for better policy or a reduction in neopatrimonialism, so
we see limited scope for more meaningful reforms. We expect Mr Ramaphosa to solidify
the ANC’s electoral position and hold onto around 60% of the vote in 2019, but this is as
much about inefficiency of the opposition as the ANC’s strength.
Growth: Q1 economic activity was much weaker than expected, with GDP falling 2.2%
q-o-q, well below expectations of a 0.5% contraction. The weakness seems to be a
supply-side phenomenon with agriculture and mining shaving a combined 1.5
percentage points off headline growth, and we expect Q1 weakness to give way to
recovery from Q2 onwards. Nonetheless, the weak GDP print should temper over-
optimistic expectations driven by the political transition.
Fiscal and ratings: The budget was just sufficient to stabilise debt-to-GDP below 60%,
but overall growth is doing most of the heavy lifting. The political transition should mean
agencies give some benefit of the doubt as evidenced by Moody's decision to leave its
ratings unchanged in March, but long-run ratings risk remains from Eskom and other
fiscal shocks such as public sector wages.
Rates and inflation: Underlying inflation should remain contained by lower real wage
increases and steady expectations, a stronger ZAR and lower electricity tariff awards.
We expect it to recover only slowly through 2018 towards 5.2% in the long term, though
offset by sticky food price inflation and higher oil prices. However, a 0.6 percentage point
pass-through of the VAT (plus other tax increases on top) should push up CPI inflation
for the year. Following the 25bp cut in March, the SARB remained on hold in May and
we expect the policy rate to stay unchanged for the remainder of the year.
Fig. 22: South Africa: Details of the forecast Fig. 23: Inflation outlook
7.1 Headline
Core
6.6
6.1
5.6
5.1
4.6
4.1
3.6
Jan-14 Dec-14 Nov-15 Oct-16 Sep-17 Aug-18 Jul-19
Notes: Fiscal years are for the April start. PSCE – Private sector credit extensions. Source: Nomura.
*End of period. **Period average. Bold is actual data. Source: Nomura
22
South Korea | Delayed normalisation

Due to low inflation, tepid job market and uncertainty over global trade protectionism, we
expect delayed rate hikes and lower our terminal rate forecast to 2.00% in 2019.
Forecast change: We lower our 2018 CPI inflation forecast from 1.7% to 1.5%,
deviating further from the Bank of Korea’s (BOK) 2% target. We push back our call for a youngsun.kwon@nomura.com
25bp policy rate hike from July to November 2018, and remove one hike from our 2019 +852 2252 1370
call, leaving one 25bp hike (thus taking our terminal rate forecast to 2.00% from 2.25%).
Activity: GDP rebounded by a solid 1.0% (sa) q-o-q in Q1 2018 after a 0.2% fall in Q4
2017. Recent data suggest growth will moderate only slightly in coming quarters. All
industries output (including industry, services and construction) grew by 0.3% (sa) m-o-m
in May after 1.5% increase in April. The FY18 extra budget (KRW3.8trn, 0.2% of GDP)
and the resumption of Chinese tourism should help counter three headwinds: tighter
measures on the housing market, a 35% quota cut on steel exports to the US (effective
May 2018) and corporate restructurings in the automobile and shipbuilding sectors. We
forecast GDP growth of 3.0% in 2018, which is above our potential growth estimate of 2.8%.
Inflation: CPI inflation fell by 0.2% m-o-m in June, as agricultural and tourism-related
services prices declined, which more than offset higher oil prices. We expect some public
services prices (e.g., city gas) to be hiked in coming months. Higher oil prices and a
weaker KRW should add some cost-push price pressure. Due to tepid job creation and
sluggish domestic demand, we expect CPI inflation to slow to 1.5% in 2018 from 1.9% in
2017 before rebounding to 2.0% in 2019.
Policy: We estimate that the output gap is positive and, coupled with high household
leverage, supports the case for monetary policy normalisation (i.e., less accommodative)
in a bid to increase policy space for the future. However, the tepid job market, low inflation
and high external uncertainty (e.g. trade protectionism) are likely, in our view, to keep the
BOK in wait-and-see mode for some time. We expect the BOK to hike the policy rate to
1.75% in November 2018 and further to a terminal rate of 2.00% in August 2019.
Risks: We acknowledge the non-negligible risk that the BOK does not hike rates any
further if an escalation of global trade frictions (especially between the US and China)
triggers a major, extended period of financial market turbulence (e.g., a prolonged equity
market selloff) as it would have a significant negative wealth effect on private
consumption and delay business investment on a global scale, which could add
significant downside risks to Korea’s export-driven growth outlook.
Fig. 24: South Korea: Details of the forecast

Real GDP (sa, % q-o-q, annualized) 5.7 -0.8 4.1 3.2 3.6 2.8 2.8 2.4
Real GDP (sa, % q-o-q) 1.4 -0.2 1.0 0.8 0.9 0.7 0.7 0.6
Real GDP 3.8 2.8 2.8 3.0 2.5 3.4 3.1 2.9 3.1 3.0 2.7 2.5
Construction investment 8.0 3.8 1.8 0.6 -1.5 0.3 -2.5 -3.0 7.6 0.2 -2.8 -2.5
Business investment 16.3 8.6 7.3 2.2 2.5 3.7 0.8 2.0 14.6 3.9 1.7 2.4
R & D investment 2.9 3.5 3.5 3.9 2.9 2.8 3.5 3.5 3.0 3.3 3.5 3.3
Exports (goods & services) 4.4 -0.6 1.6 3.5 4.4 5.3 1.6 3.0 1.9 2.3 2.6 2.9
Contributions to GDP growth (% points)
Inventories -0.1 0.9 0.2 0.0 0.4 -1.1 0.5 0.5 0.5 0.4 0.1 0.2
Net trade (goods & services) -1.4 -2.3 -1.4 -0.3 -1.6 -0.1 -2.9 -2.9 -2.5 -0.9 0.1 0.1
Consumer prices 2.3 1.5 1.3 1.5 1.4 1.8 2.1 1.9 1.9 1.5 2.0 1.8
Current account balance (USDbn) 25.6 17.2 11.8 12.9 26.9 23.5 19.2 16.5 78 75 85 75
Current account balance (% of GDP) 5.1 4.4 4.8 4.0
Fiscal balance (% of GDP) 1.4 1.2 1.3 1.0
Fiscal balance ex-social security (% of GDP) -1.1 -1.6 -1.8 -1.9
BOK official base rate (%) 1.25 1.50 1.50 1.50 1.50 1.75 1.75 1.75 1.50 1.75 2.00 2.00
Exchange rate (USD/KRW) 1120 1067 1063 1114 1150 1110 1090 1080 1067 1110 1060 1050
Notes: Numbers in bold are actual values; others forecast. The “Inventories” component contribution to GDP also includes statistical discrepancy. Interest rate and currency
forecasts are end of period; other measures are period average. All forecasts are modal forecasts (i.e., the single most likely outcome). Table reflects data as of 5 July 2018.
Source: Bank of Korea, CEIC and Nomura Global Economics.
23
Taiwan | US-China trade tension weighs

We see upside risks to our Q2 GDP forecasts, but see downside risks to our growth
forecasts for H2, due to the escalation of US-China trade tensions.
Activity: The manufacturing PMI rose to 54.5 in June from 53.4 in May, remaining well
above the expansion/contraction threshold of 50. The April-May average for industrial youngsun.kwon@nomura.com
production growth rose to 7.9% y-o-y, up from 3.7% in Q1. These indicate upside risks to +852 2252 1370
our view that Q2 GDP growth will edge up to 3.1% y-o-y from 3.0% in Q1. However, we Minoru Nogimori - NIHK
see downside risks to our growth forecasts for H2, due to the escalation of US-China minoru.nogimori@nomura.com
trade tensions. Following the imposition of tariffs on steel (25%) and aluminium (10%) +852 2252 6462
imports to the US on 23 March, the US plans to apply 25% tariffs on USD50bn worth of
Chinese goods (the tariffs will be applied in two stages; the first will apply to Chinese
goods worth USD34bn and go into effect on 6 July, but the second is still under review).
Taiwan is one of the largest suppliers of high value-added parts and components to
China (6.3% of Taiwan’s GDP), which are then assembled and re-exported to the US.
We estimate that the combined direct (from tariffs on steel and aluminium) and indirect
(from tariffs on Chinese goods) impact could trim Taiwan’s nominal GDP by 0.33pp in
2018. We therefore maintain our 2018 GDP growth forecast of 3.0%, as the upside risks
to our Q2 GDP growth are balanced out by the downside risks from trade tensions.
Inflation and monetary policy: We expect CPI inflation to rise to 1.5% in 2018 from
0.6% in 2017, as higher oil prices should add cost-push inflation pressures. We expect
the Central Bank of China (CBC) to start to raise its policy rate (10-day discount rate)
very gradually, by 12.5bp to 1.500% in Q4 2018 and to 1.625% in H2 2019 to build some
policy room for the future, but we also believe that such rate hikes would be merely
symbolic and therefore short-term market interest rates may remain very low unless
excess reserves are sufficiently absorbed as tight liquidity conditions are seemingly
against the CBC’s mandate on financial and FX stability (see Asia Insights - Taiwan:
Monetary policy to retain “safety first” approach, 30 May 2018).
Risks: Along with US-China trade tensions, a spike in cross-Strait tensions is another
major downside risk due to the implementation of the Taiwan Travel Act in the US
(effective 16 March).This is not our base case, but if these downside risks materialise
and are significant, we would expect the CBC to stay on hold for a considerable time and
the government to implement targeted fiscal stimulus.
Fig. 25: Taiwan: Details of the forecast

% y-o-y growth unless otherwise 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 2017 2018 2019 2020
stated
Real GDP (sa, % q-o-q) 1.0 1.2 0.2 0.7 0.9 0.9 0.4 0.5
Real GDP 3.2 3.4 3.0 3.1 3.0 2.7 3.0 2.8 2.9 3.0 2.5 2.3
Government consumption 0.9 -1.7 6.6 2.0 2.0 1.2 1.2 1.2 -1.1 2.8 1.2 1.3
Gross fixed capital formation -2.7 -3.5 0.5 1.5 1.5 1.0 1.3 1.0 -0.3 1.1 1.1 0.8
Contributions to GDP grow th (% points)
Inventories -1.4 -0.3 -0.6 -0.1 0.2 0.0 0.0 0.0 -0.2 0.0 0.0 0.0
Net trade (goods & services) 3.6 3.1 1.0 1.0 0.8 1.4 1.6 1.6 2.0 1.0 1.1 0.8
Exports 17.4 10.4 10.6 6.1 -2.0 -2.8 -3.6 -0.1 13.2 2.6 1.1 3.1
Imports 11.3 6.9 11.0 11.8 -1.7 -5.7 -2.2 1.1 12.4 3.5 2.6 3.3
Merchandise trade balance (US$bn) 17.8 17.3 11.8 9.2 17.2 18.8 10.3 8.3 58.0 57.0 53.6 54.7
Consumer prices 0.7 0.4 1.6 1.8 1.5 1.3 1.5 1.0 0.6 1.5 1.3 1.3
Unemployment rate (%) 3.7 3.7 3.7 3.7 3.6 3.6 3.6 3.6 3.8 3.7 3.6 3.6
Discount rate (%) 1.375 1.375 1.375 1.375 1.375 1.500 1.500 1.500 1.375 1.500 1.625 1.625
Exchange rate (USD/TWD) 30.3 29.7 29.1 30.5 31.0 30.7 30.5 30.1 29.7 30.7 29.8 29.7
24
Thailand | Not jumping on the hiking bandwagon

With inflation still near the low end of the target range and growth tracking slower with
rising downside risks, we still expect policy rates to remain stable over 2018-19.
Forecast change: We raised our 2018 and 2019 headline inflation forecasts to 1.1%
and 1.0%, respectively; both were 0.7% previously. euben.paracuelles@nomura.com
+65 6433 6956
Activity: The current account surplus narrowed to USD1.0bn in May from USD1.4bn in
April, driven by dividend repatriation and a slowdown in tourist arrivals. We expect these Charnon Boonnuch - NSL
charnon.boonnuch@nomura.com
seasonal factors to fade in June, and the current account surplus should widen. On the +65 6433 6189
domestic front, the manufacturing production index (MPI) grew by 3.2% y-o-y in May and
Brian Tan - NSL
3.1% in April, slowing from 4.1% in Q1. MPI growth remains considerably below export brian.tan@nomura.com
growth, implying a more subdued underlying picture for overall domestic demand. We +65 6433 6930
maintain our 2018-19 GDP growth forecast at 4.3% and 3.7%, respectively. Further out,
we expect growth to soften further to 3.5% in 2020, led by exports due to a slowdown in
external demand as China slows further. As a result, the current account surplus should
narrow further from 9.4% of GDP in 2018 to 7.0% in 2019 and 6.8% in 2020.
Monetary policy and inflation: CPI inflation eased to 1.4% y-o-y in June from 1.5% in
May, due to the drop in food prices, which fell by 1.8% y-o-y after a 0.2% gain in May.
Core inflation was unchanged in June at a still-low 0.8% y-o-y. In H1 2018, CPI inflation
averaged 1.0% y-o-y, above our expectations, driven by rising oil prices. We revise up
our 2018 and 2019 CPI inflation forecasts to 1.1% and 1.0%, respectively, from 0.7% for
both years. In 2020, we expect CPI inflation to stay stable at 1.0%, due to structural
domestic headwinds mitigating demand-pull pressures. Because inflationary pressures
remain muted, we expect the Bank of Thailand (BOT) to leave its policy rate unchanged
through 2018-20. The minutes of the June Monetary Policy Committee meeting set two
conditions that need to be in place for policy normalisation, namely 1) the economy must
continue to expand and 2) inflation must move “more firmly” within target. In our view,
neither of these conditions are unlikely to be met any time soon (see Asia Insights -
Thailand: Minutes reveal BOT discussion of policy normalisation, 4 July 2018).
Fiscal policy: The risk of delayed disbursements still looms but the THB150bn
supplementary budget (0.9% of GDP) should continue to lend support to the economic
recovery. We maintain our forecast for the fiscal deficit to narrow from 3.2% of GDP in
2018 to 2.6% in 2019. In 2020, the new government will likely turn to fiscal stimulus,
increasing the fiscal deficit to 3.0% of GDP, in response to an export-led slowdown.
Risks: Medium-term political risks remain ahead of and after the election (scheduled for
February 2019), warranting a cautious approach to the short-term economic uplift. Other
downside risks are from trade protectionism, a China slowdown and rising oil prices.
Fig. 26: Thailand: Details of the forecast

Real GDP 4.3 4.0 4.8 3.9 4.1 4.3 3.4 3.6 3.9 4.3 3.7 3.5
Inventories 0.8 1.6 3.1 -0.7 -0.8 -1.5 0.1 0.2 2.2 0.1 0.4 0.0
Net trade (goods & services) 1.1 0.5 -1.1 2.1 1.8 3.4 1.1 1.0 -0.2 1.5 1.1 1.1
Unemployment rate (% nsa) 1.2 1.1 1.2 1.3 1.5 1.5 1.4 1.4 1.2 1.4 1.4 1.4
Consumer prices 0.4 0.9 0.6 1.3 1.4 1.1 1.4 1.0 0.7 1.1 1.0 1.0
Imports (BOP basis) 13.0 13.4 16.3 13.8 12.6 12.5 11.4 11.4 14.0 13.7 11.4 3.5
Current account balance (US$bn) 13.9 12.5 15.0 8.0 10.8 11.1 13.0 4.0 49.3 44.8 36.2 36.1
Fiscal balance (% of GDP, fiscal year) -3.1 -3.2 -2.6 -3.0
Overnight repo rate (%) 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Exchange rate (USD/THB) 33.4 32.7 31.2 33.2 33.5 32.8 32.5 32.3 32.7 32.8 32.0 32.0
Notes: Numbers in bold are actual values; others forecast. The contribution to GDP from the “inventories” component also includes statistical discrepancies. Fiscal balance refers
to overall cash balance. Interest rate and currency forecasts are end of period; other measures period average. All forecasts are modal forecasts (i.e., the single most likely
outcome). Table reflects data available as of 5 July 2018. Source: CEIC, Nomura Global Economics.
25
Turkey | Inflation surges to 15-year high

Annual inflation accelerated to 15.4%, its highest level since 2003, while core inflation
also increased to 14.6%.
Politics: President Erdogan was re-elected in the first round of presidential elections on
Inan Demir - NIplc
24 June, securing 52.6% of the vote. The parliamentary elections held on the same day inan.demir@nomura.com
were less favourable for his AKP party, support for which declined from 49.5% in 2015 to +44 (0) 20 710 29978
42.6%. As a result, AKP won 295 of 600 seats and lost its parliamentary majority.
However, its ally, the nationalist MHP, won 49 seats; so the AKP/MHP alliance commands
a comfortable parliamentary majority. Following these elections, the market’s focus has
shifted to the formation of the cabinet. Although the transition to executive presidency
means the president will have more far reaching powers at the expense of both the
cabinet and the parliament, the markets will closely follow if Deputy PM Mehmet Simsek
and Finance Minister Naci Agbal have policy making roles in the new administration.
Economic activity and external balance: In Q1, Turkey’s economy expanded by 7.4%
y-o-y, maintaining the same pace of growth as in 2017. The composition of growth
illustrated the economy’s imbalances, with exports shaving off 3.6 percentage points from
headline growth. This was also evident in the current account deficit, which rose to 6.3%
of GDP in Q1 from 5.6% at end-2017. More recent data point to signs of an improvement
in the external deficit owing to steep TRY depreciation in Q2, as the monthly merchandise
trade deficit contracted in year-on-year terms in June, a first since July 2017.
Inflation and monetary policy: June inflation print was much worse than expected at
2.6% m-o-m, double the market expectation at 1.3%. This took annual inflation to 15.39%,
sharply higher from May’s 12.15%. The upside surprise was partly due to food prices,
which surged by an unseasonably large 6% in June. However, core inflation was also
much worse than expected, jumping from 12.6% to 14.6%, well above the market
consensus at 13.4%. June inflation figures point to a significant deterioration in price
setting behaviour and possibly a much larger exchange rate pass through coefficient
than the central bank assumption of 15%. This inflation print takes the real policy rate
back to its March level, which proved too low to prevent substantial currency depreciation
through Q2. Consequently, we think the central bank needs to deliver another large
policy rate hike at its July Monetary Policy Committee (MPC) meeting. However, we
recognise that the cabinet appointments and the general direction of economic policies
of the new administration will be important factors influencing the decision. Therefore, we
do not have a strong conviction that the MPC will deliver a large hike in July.
Fig. 27: Turkey: Details of the forecast Fig. 28: Annual inflation rates
Source: Nomura Note: *End of period; **Period average, *** Equal weighted Source: Turkstat
USD/TRY and EUR/TRY Bold is actual data. The policy rate is the weighted
average funding cost of TCMB
26
United Kingdom | The best laid Brexit plans

It remains to be seen how the government’s new Brexit plan will be received in Brussels.
But a softer approach could limit the economic fallout of leaving the European Union.
Brexit: The government’s latest gambit involves a shift to the softer side of Brexit. A
George Buckley - NIplc
short statement following the cabinet ‘away day’ sets out the government’s proposals for: george.buckley@nomura.com
i) a free trade area for goods, involving a “common rulebook”, ii) paying “due regard” to +44 (0) 20 710 21800
the ECJ with respect to EU rules, and iii) a facilitated customs arrangement, whereby UK
tariffs would apply to imports remaining in the UK, and EU tariffs apply to imports
destined for the EU. Complications in administering this model, as well as the EU’s likely
response (that it contradicts the indivisibility of the single market), suggest there is a long
way to go before both sides reach an agreement.
Economic growth: Still, if this plan heralds a move towards a softer Brexit, it could limit
the fallout on economic growth. As BoE Governor Carney argued in a recent speech, “if
there is progress towards the new, deep and special partnership the government is
seeking a boom in investment and potentially consumption could be unlocked, boosting
output”. Our current GDP forecasts envisage annual growth of broadly around 1.5% out
to 2020, with business investment falling at the end of 2018/early 2019 thanks to Brexit
uncertainty ahead of de jure exit, consumer spending growth slowly recovering as
inflation falls to 2% and wage growth responding to the upside to a tighter labour market.
Inflation: Evidence has been mixed on domestically generated inflation (DGI), with unit
labour cost growth moving back above 2% but our own ‘empiric’ measure (based on a
basket of inflation components that are least sensitive to currency shifts) remaining
muted. Still, as the margin of spare capacity falls and as wage growth pushes higher, we
expect that DGI will also rise. At the same time, the inflationary effect of past falls in
sterling is beginning to ebb. The combination of these two moves is, we think, likely to be
dominated by the latter, explaining our view of a slow move back to target (2%) inflation
towards the end of this year and remaining there in 2019 and 2020. Higher oil prices
suggest CPI inflation could move up modestly before falling in H2 2018.
Monetary policy: The minutes of the BoE’s June meeting were more hawkish than
expected, with three members voting for a rate hike and the Bank stating that it would be
willing to begin winding down QE from a lower level of Bank Rate (1.50%) than
previously expected (2.00%). We expect the Bank to raise rates by 25bp every six
months from next month’s meeting until early 2020. At that point, rates will have reached
1.50%, which is when our expectation for a passive unwinding of QE could limit the need
for rate hikes to one 25bp move every nine (rather than six) months.
Fig. 29: United Kingdom: Details of the forecast

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 2017 2018 2019 2020
Real GDP 0.2 0.4 0.5 0.4 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.3 1.8 1.4 1.6 1.6
Household consumption 0.2 0.3 0.4 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 1.8 1.2 1.8 1.6
Fixed investment -1.3 1.3 0.7 0.1 -0.2 0.4 0.6 0.9 0.7 0.6 0.5 0.3 3.4 1.2 1.3 2.6
Government consumption 0.4 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 -0.1 1.0 0.8 0.6
Exports 0.0 0.6 0.8 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 5.4 2.4 2.7 2.4
Imports -0.2 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 3.2 1.0 2.4 2.4
Domestic final sales -0.2 0.4 0.4 0.4 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.3 1.8 1.1 1.5 1.6
Inventories 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.5 0.0 0.0 0.0
Net trade 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.4 0.1 0.0
Real GDP (saar) 0.9 1.8 1.9 1.6 1.4 1.6 1.6 1.8 1.6 1.6 1.5 1.3 1.8 1.4 1.6 1.6
Unemployment rate 4.2 4.2 4.2 4.2 4.2 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.4 4.2 4.3 4.3
Consumer prices 2.7 2.4 2.3 2.1 2.0 2.0 1.9 1.9 2.0 2.0 2.0 2.0 2.7 2.4 2.0 2.0
Core consumer prices 2.4 2.0 1.8 1.9 2.0 2.0 2.0 1.9 2.0 2.0 2.0 2.0 2.4 2.0 2.0 2.0
BoE Bank Rate, % EOP 0.50 0.50 0.75 0.75 1.00 1.00 1.25 1.25 1.50 1.50 1.50 1.75 0.50 0.75 1.25 1.75
Asset purchase total, £bn EOP 435 435 435 435 435 435 435 435 435 435 422 422 435 435 435 422
2-yr Gilt yields 0.82 0.72 1.10 1.30 1.50 1.70 1.80 1.85 1.95 2.05 2.15 2.25 0.44 1.30 1.85 2.25
10-yr Gilt yields 1.35 1.28 2.00 2.50 2.70 2.80 2.90 3.00 3.00 3.00 3.00 3.00 1.19 2.50 3.00 3.00
EUR/GBP 0.88 0.88 0.87 0.88 0.89 0.89 0.90 0.90 0.90 0.90 0.90 0.90 0.89 0.88 0.90 0.90
GBP/USD 1.40 1.32 1.44 1.48 1.50 1.52 1.54 1.56 1.56 1.56 1.56 1.56 1.35 1.48 1.56 1.56
TWI 79.1 77.7 80.8 80.8 80.4 80.8 80.4 80.7 80.7 80.7 80.7 80.7 77.5 80.8 80.7 80.7
Notes: Quarterly figures are % q-o-q changes. Annual figures are % y-o-y changes. Inventories include statistical discrepancy. Inflation is % y-o-y. Interest rates and currencies
are end-of-period levels. Numbers in bold are actual values; others forecast. Table updated on 9 July 2018. Source: ONS, Bloomberg, Nomura Global Economics.
27
United States | Late-cycle surge

We believe the US late-cycle surge will continue into 2019, boosted especially by fiscal
policy. We expect four hikes from the FOMC in 2018 and inflation to climb gradually.
Economic activity: We expect the US economy to continue to grow significantly above

Lewis Alexander - NSI
potential in 2018 and 2019, supported by stimulative fiscal policy, before growth lewis.alexander@nomura.com
decelerates towards potential over 2019 and into 2020 (see Updating and Extending our +1 212 667 9665
Forecast, 9 July 2018). Job gains remain well above the long-term sustainable pace and Aichi Amemiya - NSI
will likely continue to put downward pressure on the unemployment rate through 2019 aichi.amemiya@nomura.com
before tighter monetary policy and financial conditions eventually slow employment +1 212 667 9347
growth. However, we expect slow productivity growth to persist, held down, in part, by Robert Dent - NSI
structural declines in underlying business dynamism, limiting wage growth. robert.dent@nomura.com
+1 212 667 9514
Inflation: Transitory factors that that held down inflation in 2017 have largely abated. For
Kenny Lee - NSI
2018-20, we expect core inflation to pick up gradually as labor markets tighten and the kenny.lee@nomura.com
economy moves towards potential. Core PCE inflation may pick up slightly faster than +1 212 436 8146
core CPI as healthcare service inflation could accelerate while rent inflation gradually
slows. With upside risk to healthcare prices as well as expected further labor market
tightening, we expect core PCE inflation to reach 2.4% in Q4 2020.
Policy: Facing strong momentum in aggregate demand, tightening labor markets and
inflation at the 2% symmetric target, we expect the Fed to hike two more times in 2018
and two times in 2019 before taking a pause through 2020. With our neutral rate
estimate between 2-2.25%, we believe monetary policy will remain in a slightly restrictive
stance for some time, tightening financial conditions. We think the roll-off of the balance
sheet will continue to exert upward pressure on long-term interest rates (see
“Normalizing” the Fed’s Balance Sheet, 31 August 2017), as will the large increase in the
federal budget deficit.
Risks: Financial conditions remain accommodative but recent market activity, and
history, suggest they can turn quickly. In our view, protectionist US trade policy remains
a key risk as US-China tariffs take effect and the US moves forward with an investigation
into imports of autos and auto parts (see US Trade Policy Monitor, 29 June 2018). In
addition, waning fiscal stimulus in 2019, with the possibility of a fiscal cliff in 2020, could
create market angst.
Fig. 30: United States: Details of the forecast

% 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 2018 2019 2020
Real GDP 2.0 4.8 3.2 3.1 2.2 1.9 1.9 2.0 1.7 1.7 1.5 1.4 3.1 2.5 1.7
Personal consumption 0.9 3.0 3.0 2.8 2.5 2.4 2.5 2.5 2.2 2.1 1.9 1.8 2.5 2.6 2.2
Non residential fixed invest 10.4 6.7 5.2 5.0 4.6 3.8 3.0 3.2 2.9 2.5 2.2 2.1 7.1 4.4 2.8
Residential fixed invest -1.1 0.5 -1.0 -0.4 -0.2 0.1 0.3 0.5 1.0 1.5 1.8 1.9 0.8 -0.1 1.0
Government expenditure 1.3 2.8 5.2 3.7 1.3 1.3 1.3 1.4 0.9 0.7 0.6 0.5 2.4 2.3 1.0
Exports 3.6 10.6 4.6 3.6 2.0 1.3 0.6 1.1 1.0 1.1 1.3 1.4 5.4 2.7 1.0
Imports 3.2 -0.3 6.9 5.4 3.6 3.1 2.8 2.7 2.7 2.6 2.5 2.4 4.5 3.8 2.6
Final sales 2.0 4.8 3.1 2.8 2.2 2.0 2.0 2.1 1.8 1.7 1.5 1.5 3.1 2.5 1.8
Net trade 0.0 1.3 -0.5 -0.4 -0.3 -0.3 -0.4 -0.3 -0.3 -0.3 -0.2 -0.2 0.0 -0.3 -0.3
Inventories 0.0 0.0 0.2 0.3 0.0 -0.2 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 -0.1
Nonfarm payrolls, 000 218 211 195 190 180 165 150 140 130 120 110 100 204 159 146
Housing starts, 000 saar 1317 1318 1317 1315 1305 1305 1295 1304 1309 1312 1315 1317 1317 1302 1313
Consumer prices (y-o-y) 2.3 2.7 2.8 2.7 2.4 2.3 2.3 2.3 2.4 2.5 2.5 2.5 2.6 2.3 2.5
Core CPI (y-o-y) 1.9 2.2 2.3 2.4 2.3 2.5 2.6 2.6 2.7 2.8 2.8 2.8 2.2 2.5 2.8
PCE Deflator (y-o-y) 1.8 2.2 2.3 2.2 2.1 2.1 2.1 2.1 2.1 2.2 2.2 2.2 2.1 2.1 2.2
Core PCE (y-o-y) 1.6 1.9 2.0 2.1 2.1 2.1 2.2 2.2 2.3 2.4 2.4 2.4 1.9 2.2 2.4
Federal budget (% GDP) -3.9 -4.6 -5.1
Current account balance (% GDP) -2.6 -2.9 -3.3
Fed securities portfolio ($trn) 4.18 4.10 4.00 3.88 3.78 3.66 3.54 3.44 3.35 3.26 3.16 3.08 3.88 3.44 3.08
Fed funds target 1.50-1.75 1.75-2.00 2.00-2.25 2.25-2.50 2.50-2.75 2.50-2.75 2.75-3.00 2.75-3.00 2.75-3.00 2.75-3.00 2.75-3.00 2.75-3.00 2.25-2.50 2.75-3.00 2.75-3.00
TSY 2-year note 2.27 2.52 2.75 3.00 3.13 3.13 3.13 3.00 3.00 3.00 3.00 2.88 3.00 3.00 2.88
TSY 5-year note 2.56 2.73 3.00 3.13 3.25 3.13 3.13 3.00 3.00 3.00 3.00 2.88 3.13 3.00 2.88
TSY 10-year note* 2.74 2.85 3.25 3.25 3.38 3.25 3.13 3.00 3.00 3.00 3.00 2.88 3.25 3.00 2.88
*The forecast range for 10yr UST is as follows: Medium term (post-1 month to 3 month range) = 2.75-3.25%. Notes: Quarterly real GDP and its contributions are seasonally adjusted annualized
rates. The unemployment rate is a quarterly average as a percentage of the labor force. Nonfarm payrolls are average monthly changes during the period. Inflation measures and calendar year
GDP are y-o-y percent changes. The Fed securities portfolio is end-of-period. The annual interest rate forecasts are end-of-period. Housing starts are period averages. Numbers in bold are
actual values. Table reflects data available as of 9 July 2018. Source: Nomura Global Economics, BEA, BLS, Federal Reserve, Bloomberg.
28
Rest of EEMEA
Romania: Reality check Marcin Kujawski - NIplc
Fiscally-induced GDP boom is coming to an end leaving the country vulnerable marcin.kujawski@nomura.com
+44 20 710 28302
Fig. 31: Romania: Details of the forecast

• Romania’s economy looks set to slow in 2018. The fiscal
boost has been smaller than in previous years because of
limited budget space, while the central bank has tightened its
policy stance. Because of the strong external environment we
expect solid GDP growth of 3.5% in 2018 and 3% in 2019.
• We expect inflation to average 4.9% in 2018, well above the
Banca National a Romaniei’s (BNR) target of 2.5%. The
central bank has responded to mounting inflation risks with
75bp in policy rate hikes this year. We expect another 25bp
hike in August and see rates being kept on hold for the
remainder of the year.
• On FX we expect some RON depreciation because of the
country’s weak fundamentals, though recent central bank
action may provide some support to the currency.
Source: INSSE, BNR, Nomura Global Economics
Inan Demir - NIplc
Egypt: Inflation well inside the target range inan.demir@nomura.com
Favourable base effects kick in and push inflation lower +44 20 7102 9978
Fig. 32: Egypt: Details of the forecast

• Year-on-year inflation continued to slide, declining to 11.4% in
May from 13.1% in April and the 2017 peak of 33% in July.
• Ongoing disinflation has been driven by favourable base
effects caused by the devaluation in late-2017 and the
introduction of VAT in early-2017.
• With the May print, year-on year inflation is now firmly in the
lower half of the Central Bank of Egypt’s (CBE) target range of
13% +/- 3%.
• The CBE, having lowered its policy rate by a cumulative
200bp at its February and March meetings, has held steady
since then, keeping the policy rate at 16.75%.
• On politics, President Sisi secured another four-year term after
gaining 97% of the vote in the elections in late-March. Sisi’s
vote share was unchanged from the previous elections in
2014; however, the turnout declined to 41% from 47% in 2014.
Source: IMF, Nomura Global Economics
Inan Demir - NIplc

Israel: Inflation edging up inan.demir@nomura.com
Central bank holds back from discretionary FX intervention +44 20 7102 9978
Fig. 33: Israel: Details of the forecast

• Headline inflation inched up to 0.5% year-on-year in May from
this year’s low of 0.1% in January.
• In the coming few months, inflation may exceed 1% – the
lower bound of the Bank of Israel’s (BoI) target range – due to
higher oil prices and adverse base effects.
• However, we expect inflation to ease later in the year to end
2018 at 1%. With inflation barely at the lower end of the target
range, we expect the BoI to remain on hold well into 2019.
• After intervening aggressively to weaken the currency in
January, the BoI has largely refrained from discretionary FX
purchases since then while continuing to buy FX under its
natural gas programme.
• Against the BoI intervention, the current account surplus that
ended 2017 at 3% of GDP is lending fundamental support to
ILS.
Source: BoI, Nomura Global Economics.
29
Rest of Latin America

Colombia: Cutting over? Joao.Ribeiro@nomura.com
Solid domestic conditions amid a more challenging external setting. +1 212 667 2236
20142017 2015 2018 2016 2019 2017 2020 2018 • We continue to expect GDP growth to
Real GDP % y-o-y 4.4 3.1 2.3 3.2 3.5improve in 2018, in line with the
Real GDP % y-o-y 1.8 2.6 3.0 3.0
Consumption % y-o-y 4.7 3.9 2.6 3.5 3.7acceleration in H2 2017 and ending a four-
Consumption % y-o-y 0.6 1.5 3.0 3.0
Gross Investment % y-o-y 11.7 2.6 -0.5 2.0 2.5year (2014-17) run of slowing growth. That
Gross Investment % y-o-y 1.0 2.5 4.5 4.0
Exports % y-o-y -1.7 -0.7 3.0 9.0 12.0said, we do not expect a recovery anywhere
Exports % y-o-y 6.0 12.0 14.0 10.0
Imports % y-o-y 9.2 3.9 0.8 6.0 7.8near the 2011-14 pace of 4% y-o-y.
Imports % y-o-y 0.5 4.8 11.0 5.0
CPI % y-o-y * 3.7 6.8 6.5 4.5 • Banrep remained on hold at 4.25% in its
3.6
CPI % y-o-y * 4.1 3.0 3.0 3.0
CPI % y-o-y ** 2.9 5.0 7.6 4.7 4.0June meeting, in line with our/consensus
CPI % y-o-y **
Budget balance % GDP -2.6
4.3 -3.1
3.1 -4.0
3.0 -3.6 3.0 -3.3
expectations. We expect the policy rate to
Budget balance
Current % GDP
account % GDP -3.6
-5.2 -6.4 -3.4 -5.6 -3.2 -4.6 -3.0 -4.0remain unchanged at the current level until
Current account
Policy Rate % * % GDP 4.50-3.3 5.75 -3.0 7.50 -3.0 6.50 -3.0 5.50year-end. While we still see generally
Policy Rate
USDCOP * %* 4.75
2,376 3,175 4.25 3,350 5.00 3,650 5.00 3,700benign inflation conditions, a riskier external
USDCOP * 2,985
* End of period, ** Period average, Bold is actual data 2,750 2,800 2,750 scenario and solid growth warrant the
* End of period, ** Period average, Bold is actual data stability, in our view.
Source: Haver, Bloomberg, Nomura
Chile: Continued good signs for growth Joao.Ribeiro@nomura.com
+1 212 667 2236
Chile’s growth is accelerating and the CB is preparing to start a hiking cycle.
2017 2018 2019 2020 • The economy is rebounding strongly. Q1

Real GDP % y-o-y 1.5 3.7 3.5 3.2 GDP expanded by 4.2% y-o-y, supported by
Consumption % y-o-y 2.7 3.0 3.5 3.0 exports, which grew by 7.2% y-o-y. Gross
fixed capital formation posted the second
Gross Investment % y-o-y -1.3 5.7 4.5 4.0
straight positive growth rate in Q1 at 3.6%.
Exports % y-o-y -0.9 5.0 10.5 5.0
Imports % y-o-y 4.8 7.1 12.0 5.0 • We believe the output gap will start to close
in Q3 2018 and push inflation up to the 3.0%
CPI % y-o-y * 2.3 2.9 3.0 3.0
target within the two-year horizon for
CPI % y-o-y ** 2.2 2.4 2.9 3.0
monetary policy. However, with CLP
Budget balance % GDP -2.8 -2.7 -2.2 -2.0
weakness and higher oil prices, we expect
Current account % GDP -1.5 -1.5 -2.0 -2.0 the central bank to raise the policy rate by
Policy Rate % * 2.50 3.00 4.00 4.00 50bp (previously a 25bp hike) over the
USDCLP * 615 630 610 600 remainder of the year.
* End of period, ** Period average, Bold is actual data
Joao.Ribeiro@nomura.com
Peru: Economy recovering strongly despite political noise +1 212 667 2236
Political tension remains to some extent, even with solid growth figures.
20142017 2015 2018 2016 2019 2017 2020 2018 • We remain optimistic on the GDP outlook
Real
Real GDP
GDP % %y-o-y
y-o-y 4.42.5 3.1 3.8 2.3 3.5 3.2 3.5 3.5for 2018 as we expect growth to accelerate
Consumption
Consumption% %y-o-y
y-o-y 4.72.3 3.9 3.8 2.6 4.0 3.5 4.0 3.7to 3.8% from 2.5% in 2017. The push will
Gross
Gross Investment%
Investment %y-o-y
y-o-y 11.7-0.5 2.6 4.0 -0.5 5.5 2.0 6.0 2.5likely come mainly from investment, as we
Exports % y-o-y -1.7 -0.7 3.0 9.0 12.0forecast an acceleration in public spending.
Exports % y-o-y 7.6 5.2 4.0 5.0
Imports % y-o-y 9.2 3.9 0.8 6.0 • The BCRP left interest rates unchanged at
7.8
Imports % y-o-y 4.0 5.5 7.5 5.0
CPI % y-o-y * 3.7 6.8 6.5 4.5 3.62.75% at its June meeting. This took place
CPI % y-o-y * 1.4 1.9 2.5 2.5
CPI % y-o-y ** 2.9 5.0 7.6 4.7 4.0in an environment of still low inflation
CPI % y-o-y ** 2.8 1.3 2.2 2.5
Budget balance % GDP -2.6 -3.1 -4.0 -3.6 -3.3(1.4%) despite strong growth figures. We
Budget balance % GDP -3.2 -3.6 -3.0 -3.0
Current account % GDP -5.2 -6.4 -5.6 -4.6 -4.0expect stability in rates until year-end and a
Current account % GDP -1.3 -1.7 -1.5 -1.5
Policy Rate % * 4.50 5.75 7.50 6.50 5.50tightening cycle to begin only in 2019.
Policy Rate % * 3.25 2.75 3.75 4.00
USDCOP * 2,376 3,175 3,350 3,650 3,700
USDPEN * 3.24 3.24 3.26 3.30
30
Appendix A-1
Analyst Certification
We, Lewis Alexander, George Buckley, Andrew Cates, Takashi Miwa and Robert Nemmara Subbaraman, hereby certify (1) that
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33
Global Economic Outlook Monthly
Economists
North America
Lewis Alexander US Chief Economist lewis.alexander@nomura.com 1-212-667-9665
Aichi Amemiya United States aichi.amemiya@nomura.com 1-212-667-9347
Europe
Andrew Cates Euro area andy.cates@nomura.com 44-20-7102-6022
George Buckley United Kingdom george.buckley@nomura.com 44-20-7102-1800
Japan
Takashi Miwa Chief Economist Japan takashi.miwa@nomura.com 81-3-6703-1280
Masaki Kuwahara masaki.kuwahara@nomura.com 81-3-6703-1295
Yoshiyuki Suimon yoshiyuki.suimon@nomura.com 81-3-6703-1297
Kengo Tanahashi kengo.tanahashi@nomura.com 81-3-6703-1284
Yusuke Miyairi yusuke.miyairi@nomura.com 81-3-6703-1289
Kazuki Miyamoto kazuki.miyamoto@nomura.com 81-3-6703-3880
Asia
Rob Subbaraman Chief Economist Asia rob.subbaraman@nomura.com 65-6433-6548
Ting Lu China ting.lu@nomura.com 852-2252-1306
Young Sun Kwon South Korea, Hong Kong and Taiwan youngsun.kwon@nomura.com 852-2536-7430
Euben Paracuelles Southeast Asia euben.paracuelles@nomura.com 65-6433-6956
Sonal Varma India sonal.varma@nomura.com 65-6433-6527
Emerging Markets
Inan Demir EEMEA inan.demir @nomura.com 44-20-7102-9978
Joao Pedro Ribeiro LatAm joao.ribeiro@nomura.com 1-212-667-2236
Nomura Global Economics 34 10 July 2018

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Global Economic Outlook Monthly

The zenith Global Markets Research

slows, we are most cautious in EM. strategic cross asset ideas.

Global economic outlook | Summary ......................................................2 Lewis Alexander - NSI

Our view in a nutshell .............................................................................4 George Buckley - NIplc

Global economic outlook | Summary

Our view in a nutshell

Australia | Gradual progress but rising risk

Fig. 1: Australia: Details of the forecast

Brazil | Temporary or long-lasting shocks?

Fig 2: Brazil: Details of the forecast

Contributions to GDP growth (pp)

Trade balance (US$ billion) 17 14 14 18 15 15 18 18 67 62 48 48

Primary fiscal balance (% GDP) -1.7 -2.1 -1.8 -1.4

Canada | Normalising amid rising tail-risks

Fig. 3: Canada: Details of the forecast

China | Risks from credit defaults

Fig. 4: China: Details of the forecast

Czech Republic | Tightening the reins

Fig. 5: Czech Republic: Details of the forecast Fig. 6: Inflation outlook

Euro area | More pessimistic

Fig. 7: Euro area: Details of the forecast

Hong Kong | Tighter financial conditions

Fig. 8: Hong Kong: Details of the forecast

Hungary | Waiting for policy normalisation

India | Still going strong, but risks lie ahead

Fig. 11: India: Details of the forecast

Indonesia | More rate hikes coming

Forecast changes: We now expect an additional 50bp of rate hikes in Q3.

Fig. 12: Indonesia: Details of the forecast

Japan | Justifying a longer way to go

Fig. 13: Japan: Details of the forecast

Malaysia | Mounting headwinds

Fig. 14: Malaysia: Details of the forecast

Mexico | AMLO era begins

Activity: We continue to expect GDP growth of around 2.6%/2.2% y-o-y in 2018/19.

Fig. 15: Mexico: Details of the forecast

Contributions to GDP (pp):

Fiscal balance (% GDP) -1.5 -2.5 -2.5 -2.4

Philippines | Hiking cycle continues

Fig. 16: Philippines: Details of the forecast

Poland | Cyclical upswing

Russia | VAT hike postpones rate cuts

Singapore | Limited demand-pull inflation

Fig. 21: Singapore: Details of the forecast

South Africa | Subdued economic activity

South Korea | Delayed normalisation

Fig. 24: South Korea: Details of the forecast

Taiwan | US-China trade tension weighs

Fig. 25: Taiwan: Details of the forecast

Thailand | Not jumping on the hiking bandwagon

Fig. 26: Thailand: Details of the forecast

Turkey | Inflation surges to 15-year high

United Kingdom | The best laid Brexit plans

Fig. 29: United Kingdom: Details of the forecast

United States | Late-cycle surge

Economic activity: We expect the US economy to continue to grow significantly above

Fig. 30: United States: Details of the forecast

Fig. 31: Romania: Details of the forecast

Fig. 32: Egypt: Details of the forecast

Inan Demir - NIplc

Fig. 33: Israel: Details of the forecast

Rest of Latin America

2017 2018 2019 2020 • The economy is rebounding strongly. Q1