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

M O R G A N S T A N L E Y R E S E A R C H

G L O B A L E C O N O M I C S

Morgan Stanley & Co. International plc

Joachim Fels [email protected] +44 (0)20 7425 6138

Manoj Pradhan [email protected] +44 (0)20 7425 3805

Global Economics Team

Global

August 17, 2011

Global Economics Dangerously Close to Recession

We cut our global GDP growth forecasts to 3.9% in 2011 and 3.8% in 2012, from 4.2% and 4.5%, respectively. DM growth looks set to average only 1.5% this year and next (down from 1.9% and 2.4% previously), making the BBB recovery even more bumpy, below-par and brittle.

EM isn’t immune, but generates 80% of global growth: We now see EM growth decelerating from 7.8% in 2010 to 6.4% (6.6% previously) this year, and further to 6.1% (6.7%) in 2012. Given its 50% (PPP) weight in global GDP, EM generates 80% of global GDP growth. EM policy-makers are likely to cushion domestic growth, but drastic policy stimulus remains unlikely.

A policy-induced slowdown: The main reasons for our growth downgrade, apart from disappointing incoming data, are recent policy errors in the US and Europe plus the prospect of further fiscal tightening there in 2012. This is eroding business and consumer confidence and has weighed down on financial markets. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making.

Dangerously close to recession, but not our base case: Our revised forecasts show the US and the euro area hovering dangerously close to a recession – defined as two consecutive quarters of contraction – over the next 6-12 months. It won’t take much in the form of additional shocks to tip the balance. Still, recession is not our base case because: i) the corporate sector looks healthy; ii) household real incomes will be supported by lower headline inflation; and iii) we expect more action from central banks, including rate cuts and more non-standard easing from the Fed and the ECB.

Why this is not 2008: Initial conditions are better now – household, corporate and bank balance sheets were much weaker, monetary policy was tight, and the Lehman collapse meant that the financial system totally seized up. Any plausible recession scenario in 2011-12 should be much shallower than in 2008-09.

Revising Down Global GDP Growth 2009 2010 2011E 2012E % New Old New Old

Global -0.7 5.1 3.9 4.2 3.8 4.5 G10 -3.6 2.6 1.5 1.9 1.5 2.4 United States -2.6 3.0 1.8 2.6 2.1 3.0 Euro Area -4.1 1.7 1.7 2.0 0.5 1.2 Japan -6.3 4.0 -0.6 -1.2 1.3 2.9 UK -4.9 1.4 1.2 1.2 1.4 1.8 EM 2.6 7.8 6.4 6.6 6.1 6.7 China 9.2 10.3 9.0 9.0 8.7 9.0 India 7.2 9.0 7.3 7.3 7.4 7.8 Russia -7.8 4.0 4.7 5.0 5.2 5.5 Brazil -0.2 7.5 3.7 4.0 3.5 4.6

Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

Contents Page

Global Overview: Dangerously Close to Recession

2

US: Downgrading Our Growth Expectation 6

Euro Area: Growth Coming to a Standstill 7

UK: Slower Recovery, Later Rate Rises 8

Japan: Material 2012 GDP Downgrade 8

Australia: Growing Signs of Weakness 9

CEEMEA: Euro Spillovers Trigger Growth Downgrade

9

Asia ex-Japan: Continued Caution 10

Latin America: Risks to Abundance 11


August 17, 2011 Global Economics Dangerously Close to Recession

Dangerously Close to Recession Joachim Fels (44 20) 7425 6138 Manoj Pradhan (44 20) 7425 3805

Ever more BBB: We are cutting our global GDP growth forecasts by a combined full percentage point in 2011-12, to 3.9% from 4.2% in 2011, and to 3.8% from 4.5% in 2012 (see Exhibit 1). We now see growth in the developed market (DM) economies averaging only 1.5% this year and next (down from 1.9% and 2.4% previously) – markedly more sluggish than the 20-year trend growth rate in DM of 2.3%, and more than a full percentage point below the 2.6% rate in 2010 when the world rebounded from the Great Recession. While we had been calling for a BBB recovery in DM all along, the path now looks even more bumpy, below-par and brittle than previously thought.

Exhibit 1

Revising Down Global GDP Growth

2009 2010 2011E 2012E % New Old New Old

Global -0.7 5.1 3.9 4.2 3.8 4.5 G10 -3.6 2.6 1.5 1.9 1.5 2.4 United States -2.6 3.0 1.8 2.6 2.1 3.0 Euro Area -4.1 1.7 1.7 2.0 0.5 1.2 Japan -6.3 4.0 -0.6 -1.2 1.3 2.9 UK -4.9 1.4 1.2 1.2 1.4 1.8 EM 2.6 7.8 6.4 6.6 6.1 6.7 China 9.2 10.3 9.0 9.0 8.7 9.0 India 7.2 9.0 7.3 7.3 7.4 7.8 Russia -7.8 4.0 4.7 5.0 5.2 5.5 Brazil -0.2 7.5 3.7 4.0 3.5 4.6

Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

EM isn’t immune, but generating 80% of global growth: The great EM-DM growth divide continues, but EM economies won’t be immune to the DM slowdown, in our view. We now see EM growth decelerating from 7.8% in 2010 to 6.4% this year (6.6% previously), and further to 6.1% (6.7%) in 2012. While this keeps EM GDP cruising above its 20-year trend rate of 5%, it implies a significant further cooling of growth compared to last year’s bonanza. Remarkably, despite slowing growth, EM economies – which now account for half of global GDP (using PPP weights) – will generate fully 80% of global GDP growth we are forecasting for 2011-12 (see Exhibit 2).

A policy-induced slowdown: There are three main reasons for our downgrade. First, the recent incoming data, especially in the US and the euro area, have been disappointing, suggesting less momentum into 2H11 and pushing down full-year 2011 estimates. Second, recent policy errors – especially Europe’s slow and insufficient response to the sovereign crisis

and the drama around lifting the US debt ceiling – have weighed down on financial markets and eroded business and consumer confidence. A negative feedback loop between weak growth and soggy asset markets now appears to be in the making in Europe and the US. This should be aggravated by the prospect of fiscal tightening in the US and Europe.

Exhibit 2

EM Now Generates 80% of Global GDP Growth

Global real GDP growth, %

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-1

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1

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7

19

70

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72

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74

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76

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78

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86

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90

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92

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96

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98

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00

20

02

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04

20

06

20

08

20

10

20

12

DM Contribution EM Contribution Pre-Revision Global Period Average

MS fcast

Note: Shaded areas indicate recessions Source: IMF, Haver Analytics, Morgan Stanley Research estimates

US and Europe dangerously close to recession: Our revised forecasts show the US and the euro area hovering dangerously close to a recession – defined as two consecutive quarters of contraction – over the next 6-12 months. The US growth disappointment in 1H11, when GDP advanced by an annual average rate of less than 1%, illustrates the brittleness of the US recovery in the face of external shocks (oil, Japan earthquake), despite ongoing QE2 and fiscal stimulus at the time. While the current quarter should still show some rebound in growth to around 3% from the very low bar in 1H, much of this rebound is likely due to temporary factors such as the ramping up of auto production as supply disruptions from the Japan situation ease. The most critical period for the US economy will likely be 4Q11, when we may see some fallout from the heightened volatility of risk markets, and 1Q12, when we get an automatic tightening fiscal policy if, as our US team currently assumes, this year’s fiscal stimulus measures will expire (for more details, see page 6).

2



Exhibit 3

US GDP Growth: Critical Period Ahead in 4Q11/1Q12

US GDP growth

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q1-

2006

Q3-

2006

Q1-

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2008

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Q1-

2011

Q3-

2011

Q1-

2012

Q3-

2012

QoQ%, SAAR YoY%

MS fcast

Source: BEA, Haver Analytics, Morgan Stanley Research estimates

Europe’s woes to continue: The ECB’s past rate hikes and, more so, the sovereign crisis and the additional fiscal policy tightening as well as the banking sector funding stress it produces, will take an additional toll on growth, in our view. Our European team now sees euro area GDP broadly stagnating later this year and in early 2012. Thus, it won’t take much to tip the balance towards recession, especially as a final resolution of the debt crisis (in the form of fiscal transfers or common bond issuance) is likely to be very slow in coming. Against this backdrop, our European team has slashed its already below-consensus 2012 euro area GDP forecast from 1.2% to a mere 0.5% (see page 7). In our view, despite the problems in the US, the euro area is clearly the weakest link in the global chain.

Exhibit 4

Euro Area GDP to Stagnate in 4Q11/1Q12

Euro Area GDP growth

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q1-

2006

Q3-

2006

Q1-

2007

Q3-

2007

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2008

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2009

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2009

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2010

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2011

Q3-

2011

Q1-

2012

Q3-

2012

QoQ%, SAAR YoY%

MS fcast

Source: Eurostat, Haver Analytics, Morgan Stanley Research estimates

Dangerously close to recession, but not our base case: While we think that the US and the euro area will be dangerously close to recession over the next several quarters, we are not making recession our base case, for three reasons. First, companies are sitting on a pile of cash and display healthy profit margins. Second, the decline in oil prices from the peaks earlier this year should act as a partial stabiliser, lowering headline inflation over the next 6-12 months and supporting household real disposable incomes. Third, we expect the major central banks to lend additional support, with both the ECB and the Fed cutting interest rates and possibly implementing additional non-standard easing measures (for details, see pages 6-7).

Why this is not 2008: Initial conditions are better now. Back then, household, corporate and bank balance sheets were much weaker, employment in the US was already falling and unemployment rising, monetary policy was tight, and the Lehman collapse meant that the financial system, including trade finance, totally seized up. Against this, fiscal and monetary policy have less (though not zero) room for manoeuvre now. So, while a freefall of the economy similar to 2008 looks very unlikely, policy also has less potential for a shock-and-awe response, if needed. Surely, we should not take too much comfort from saying that this is not 2008 – after all, the recession that followed was the deepest since the Great Depression. However, it is important to point out that a plausible recession scenario in 2011-12 would be much shallower than the 2008-09 experience. To get a 2008-type recession, one would have to assume a major Lehman-type policy error, such as the default of a European sovereign, which could bring the whole financial system down. While this is not impossible, we currently attach a very low probability to such an outcome. We will elaborate more on bear and bull scenarios in the coming weeks as events evolve.

EM policy-makers to cushion the blow: The current slowdown in EM growth, caused by a run-up in inflation and the monetary policy response, now looks set to be prolonged into 2012 by the weaker DM outlook. However, with inflation at or close to a temporary peak, some policy easing in EM looks likely to provide a cushion for growth. EM policy-makers should be able and willing to help their own economies avoid a hard landing, but they won’t be able to bail out the world, in our view. Absent the kind of tail risks that were present in the world in 2008, and having barely emerged from a battle with inflation and overheating, EM policy-makers at this point will likely signal that they want to use just enough policy stimulus to help their own economies. In fact, given the constraints on DM policy-makers, EM policy-makers should really be ready

3


4


to act relatively more aggressively, but this is unlikely to happen, given lingering inflation risks (see Exhibit 5). If neither aggressive nor pre-emptive action is forthcoming, then a DM shock to growth could slow down EM economies significantly. Any policy action would then have to be aggressive. The good news? We believe that weaker DM growth will reinforce many EM policy-makers’ resolve to support the rebalancing towards domestically led EM growth and allow more rapid exchange rate appreciation.

Exhibit 5

We Expect Central Banks to Deliver…

Rate cuts Steady rates Rate hikes in 2011 in 2012 2011 and 2012 in 2011 in 2012

US Euro area Japan Sweden UK Australia Switzerland Canada Poland Czech Rep Russia Turkey Hungary NZ Israel S Africa Malaysia* Nigeria** Thailand* China Brazil India** HK Korea Taiwan Singapore Indonesia Mexico Chile Peru Columbia *Cut and hike later; **One hike and then hold Source: Morgan Stanley Research estimates

The early signs are encouraging if the recent moves in the renminbi are anything to go by, and they will be welcome relief for a slowing EM economy. Our AXJ team now expects further downside, particularly in 2012, to its below-consensus growth forecast (see Exhibit 6). Latin America and CEEMEA growth is now forecast to be 1% and 0.6% lower than previously expected. Regional giants China, India and Russia all show better resilience than their respective regions, with growth now lower by 0.3%, 0.4% and 0.3%, respectively than previously expected (see Exhibit 1). Growth in Brazil, however, has been marked down from 4.6% to 3.5% in 2012, a little lower than the downgrade for the region as a whole.

Exhibit 6

EM Growth Lower in 2012

2012 EM growth, %

0

1

2

3

4

5

6

7

8

Emerging Markets CEEMEA Asia ex-Japan Latin America

New Old

Source: Morgan Stanley Research estimates

Inflation, not deflation: While near-term inflation expectations have eased, reflecting weaker growth and lower commodity prices, longer-dated forward measures of inflation expectations (such as five-year five-year-forward breakevens) have remained elevated during the recent turmoil. This is good news as it suggests that a Japan-type negative feedback loop between weaker growth and deflation expectations can most likely be avoided. The difference to Japan, despite other similarities, is that monetary policy has acted much more aggressively much earlier in this crisis, thus nurturing expectations of positive inflation and pushing real interest rates into negative territory.



Key Quarterly Forecast Profiles: GDP, CPI and Policy Rates

2011 2012

Real GDP (%) 1Q11 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

Global (YoY) 4.5 3.8 3.8 3.6 3.5 3.8 3.8 4.1

G10 (QoQ, SAAR) 0.9 1.0 2.6 1.4 1.0 1.8 1.9 1.9

United States 0.4 1.3 3.0 2.4 1.2 2.4 2.4 2.6

Euro Area 3.4 0.8 0.8 0.0 0.0 0.8 1.2 1.4

Japan -3.6 -1.3 4.8 0.4 1.5 1.4 1.1 0.6

UK 1.9 0.8 2.2 1.2 1.2 1.4 2.2 0.6

EM (YoY) 7.4 6.6 6.4 6.1 5.6 6.1 6.3 6.7

China 9.7 9.5 9.0 8.1 7.8 8.4 8.8 9.3

India 7.8 7.6 7.2 6.8 7.1 7.4 7.6 7.6

Brazil 4.2 3.5 3.9 3.4 3.0 3.2 3.3 4.4

Russia 4.1 3.4 5.7 5.4 5.7 6.1 4.7 3.9

Consumer Price Inflation (% YoY)

Global 4.0 4.3 4.1 3.5 3.0 2.8 3.0 3.1

G10 2.1 2.8 2.8 2.5 1.9 1.4 1.6 1.7

United States 2.2 3.3 3.6 3.3 2.5 1.6 2.0 2.1

Euro Area 2.5 2.8 2.4 2.2 1.8 1.5 1.8 1.8

Japan -0.8 -0.3 -0.2 -0.6 -1.0 -1.3 -1.2 -1.0

UK 4.1 4.4 4.7 4.5 3.4 3.1 2.9 2.6

EM 6.2 6.3 6.1 5.1 4.8 4.9 4.9 5.0

China 5.1 5.7 5.5 3.6 3.3 3.2 3.5 4.2

India 9.0 8.9 8.1 7.0 7.1 7.4 6.5 6.2

Brazil 6.3 6.7 6.9 6.1 5.6 5.0 5.2 5.2

Russia 9.5 9.5 8.5 8.2 7.2 8.5 8.8 7.7

Monetary Policy Rate (% p.a.)

United States 0.125 0.125 0.125 0.0 0.0 0.0 0.0 0.0

Euro Area 1.00 1.25 1.50 1.50 1.25 1.00 1.00 1.00

Japan 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05

UK 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00

China 6.56 6.56 6.56 6.56 6.56 6.56 6.56 6.56

India 6.75 7.50 8.25 8.25 8.25 8.25 8.25 8.25

Brazil 11.75 12.25 12.50 12.50 12.50 12.50 12.00 11.50

Russia 8.00 8.25 8.25 8.25 8.50 8.50 8.50 8.50 Note: Global and regional aggregates are GDP weighted averages, using PPPs. Japan policy rate from 4Q10 is a range from 0.00-0.10%, with 0.05% as the midpoint. Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

5



Regions in Focus

US: Downgrading Our Growth Expectation ................... p 6

Euro Area: Growth Coming to a Standstill .................... p 7

UK: Slower Recovery, Later Rate Rises ....................... p 8

Japan: Material 2012 GDP Downgrade ........................ p 8

Australia: Growing Signs of Weakness ........................ p 9

CEEMEA: Euro Spillovers Trigger Growth Downgrade... p 9

Asia ex-Japan: Continued Caution............................. p 10

Latin America: Risks to Abundance........................... p 11

US: Downgrading Our Growth Expectation

David Greenlaw (1 212) 761 7157

We are downgrading our growth expectation for the US in response to a number of factors – including concerns about the willingness of businesses to hire and invest. We now see GDP expanding at a sub-3% pace during 2H11 and moderating to about a +2.25% pace over the four quarters of 2012.

To be sure, we continue to expect some improvement in economic activity during 2H11 relative to the low bar that was set during 1H11. However, this largely reflects temporary factors – specifically, a sharp turnaround in motor vehicle production and support from lower fuel prices. Eventually, these special factors will give way and the underpinnings for sustained economic growth will be dependent on job creation.

Revising down average job growth forecast: Previously, we expected average job growth of about 200,000 per month (quite close to where we were running during the first four months of the year). Now, we see employment gains running closer to +125,000 per month, leading to a slower pace of income and spending growth.

We are still assuming expiration of the payroll tax cut, unemployment benefit extension and the accelerated depreciation provision of the December 2010 stimulus legislation: If these measures are extended, we would boost our 2012 GDP forecast by 0.5-1.0pp.

We are making a number of changes to our Fed outlook: First, we are assuming that the Fed soon implements a modest portfolio extension programme along the lines that Bernanke and others have publicly discussed. However, we believe that the impact of a duration shift in the SOMA portfolio will be relatively limited and look for only a slight decline in 10-year Treasury yields (compared to current levels) once it is implemented. We are also now assuming that the interest rate on excess reserves (IOER) is reduced to 0bp later this year and thus expect the effective fed funds rate to hold near zero through the end of the forecast horizon in 2012.

We assume that the Fed will not restart large-scale purchases of Treasury securities and, even if it does, the purchases probably wouldn’t have any significant impact on our growth or inflation forecasts. However, other – more creative – policy measures could have a meaningful impact on the outlook. In particular, we believe that efforts to unclog the mortgage refinancing pipeline would have the most bang for the buck since this would involve repair of an important transmission mechanism for monetary policy.

6



Euro Area: Growth Coming to a Standstill

Elga Bartsch (44 20) 7425 5434

We are revising down our growth forecasts for 2011 and 2012: Disappointing data for 1H11 and a deteriorating outlook cause us to cut our below-consensus GDP estimates by a full percentage point for this year and next. Instead of 2.0%, we now expect the euro area economy to expand by only 1.7% on average this year. In addition, we are lowering our below-consensus forecast for next year to just 0.5%, down from 1.2% before. If accurate, this would put the coming winter on par with the 2002/03 period, a period initially considered a mini-recession in Europe based on the first set of GDP data reported. Today, however, after several rounds of data revisions, the data no longer show two subsequent quarters of negative GDP growth – the standard recession definition. But we still consider it to have been a very meaningful downturn.

There are several reasons for the downward revision to our growth numbers:

Over the last few days we had a series of disappointing 2Q GDP outturns in the euro area: Between April and June, domestic demand softened meaningfully in the core countries, raising questions about their ability to act as a locomotive for the euro area as whole.

Manufacturing indicators are showing a marked deceleration heading into the 3Q throughout the region, suggesting that there is a slowdown in global trade momentum underway. Several of our proprietary indicators are signaling a turning point in the business cycle at present. The downturn in manufacturing seems to be broad-based across the region.

As documented extensively by our banks team, presently many banks cannot access term funding markets at reasonable rates: As a result, commercial banks continue to tighten their credit conditions, albeit marginally, to both their corporate and their retail clients. The risks are rising that a lack of credit availability could dent domestic demand growth further.

The rising risk of contagion towards the core has pushed funding costs higher, caused the ECB to extend the scope of its bond purchase programme, and induced the Italian, Spanish and French governments to commit to additional austerity measures. Genuine uncertainty about the eventual policy response from governments will likely weigh on the propensity of companies and consumers to go ahead with larger investment projects.

These four factors come on top of the headwinds the euro area was already facing and which led us to lower our forecast for the first time back in April (see Clouds Gathering Over Growth Outlook, April 7, 2011). Back then, we took on board the headwinds created by elevated commodity prices, an overvalued euro and rising ECB policy rates. It now turns out that our forecasts were still too optimistic and that a period of outright stagnation over the winter seems more likely than a below-trend growth rate of around 1%. With the euro area as a whole teetering on the brink of recession territory, we think the risks of another shock pushing the region over the edge are significant. Parts of the euro area, notably several countries in the periphery, will likely find themselves back in recession.

Alas, the sovereign debt crisis will not allow governments to use fiscal policy proactively to fend off a decline in economic activity, we think. Instead, the shortfall in growth compared to government projections might even necessitate further fiscal tightening to ensure that stated budget targets are met. Such a pro-cyclical policy stance might be necessary to regain market confidence.

Slower growth, falling capacity utilisation and rising unemployment will likely put a dampener on underlying inflation in the euro area: A marked drop in oil futures across the curve shaves several tenths off our headline inflation forecasts such that our 2012 inflation forecast eases to 1.7%, compared to 2% on the previous forecasts and 2.5% this year. Especially in early 2012, we see inflation easing meaningfully such that there is a risk that inflation could fall below the ECB inflation tolerance of “below, but close to 2%”.

With risks to growth tilting to the downside, such a benign inflation outlook could allow the ECB to reverse the course of its monetary action and start to cut interest rates in early 2012, when inflation falls meaningfully below 2%. Thus far, we had expected the ECB to be hiking further from the present policy rate of 1.5%, probably at the October meeting, and then staying on hold for most of 2012. We now think that the next ECB policy will likely be refi rate cut rather than a hike. That said, the possibility of the ECB raising rates once in October more cannot be completely dismissed yet.

Our bear case scenario is a full-blown recession in 2012: An important wildcard in our growth outlook and for the ECB policy path is the evolution of the sovereign debt crisis and the policy responses that it might trigger. Our base case for the purpose of our growth projections is that the sovereign debt crisis won’t be allowed escalate further and that it also won’t dissipate quickly. However, as policy-makers will likely remain reactive rather the proactive, we view the risk to our forecasts as being asymmetrically tilted to the downside.

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UK: Slower Recovery, Later Rate Rises

Cath Sleeman (44 20) 7425 1820

Weaker growth… The UK economy is likely to recover more slowly over 2012 than we had previously forecast. That’s because the outlook for global growth has deteriorated substantially in recent months, due to both policy errors and the prospect of further fiscal tightening in the US and Europe. This is likely to weigh on the UK’s ‘export-led recovery’ and so we cut our 2012 growth forecast by 0.4pp to 1.4%.

…and low rates for longer… Based on our own forecasts for an even slower recovery and a deceleration in export growth, we think that the BoE will continue to be disappointed on leading activity indicators. This will likely discourage the MPC from raising rates in the near term; it has identified “insufficient demand” as the key downside risk to meeting the inflation target.

…with a first hike in August 2012: We expect inflationary pressures to dissipate more slowly than on the BoE’s forecasts. A lack of spare capacity, continued pressure from global inflation and a further rise in inflation expectations keep inflation above target throughout 2012, on our forecasts. By August, we expect these pressures to persuade a majority on the MPC to raise rates (with a second rate rise in November 2012).

Big picture remains ‘an uncomfortable year for the BoE’: We continue to look for a pattern of weak (but positive) growth, though coupled with persistent inflationary pressures, making 2012 another uncomfortable year for the Bank of England.

UK: Our Outlook for GDP Growth

-6

-4

-2

0

2

4

6

85 90 95 00 05 10

%Y

Source: ONS, Morgan Stanley Research estimates

Japan: Material 2012 GDP Downgrade

Takehiro Sato (81 3) 5424 5367

Main message: We have substantially reduced our outlook for 2012 in light of weakening prospects for the global economy, a delay in post-quake reconstruction activities, and a forecast for tighter electricity supply-demand conditions over the medium-to-long term. Our updated estimates for domestic GDP growth are -0.6% in 2011 (0.0% for F3/12) and +1.3% for 2012 (+1.2 for F3/13).

Background to revisions: We base our revisions on: i) medium and long-term fiscal austerity in the US and European countries due to sovereign debt problems and increased concerns about a slowdown in economic growth; ii) delays in formulating a large supplemental budget for post-quake reconstruction due to recent political turmoil on the domestic front; and iii) the possibility of electricity shortages during peak usage periods over the medium-to-long term because of political difficulties in resuming operation of nuclear power plants following periodic inspections.

Risks: Primary downside risks are: i) worsening deflation, not only due to CPI rebasing but also a wider output gap; ii) forced implementation of rolling power outages due to tighter-than-expected electricity supply-demand conditions; and iii) further delay of a large supplemental budget due to debates on fiscal resources, and concerns regarding higher taxes exerting downward pressure on household and business sentiment. Meanwhile, the upside risk is more proactive fiscal and monetary policy thanks to a shift in the political situation.

Japan: Lowering Our 2012 Outlook Substantially

2.9

1.31.9

2.9

-2

-1

0

1

2

3

4

5

Mar 10 May 31 May 19Jun 9

Aug 17

Post-quake Post-quake Post-quake Post-quake

2012 e

Within-Year Growth

Base Effects

Real GDP Growth

Source: Morgan Stanley Research estimates

8



Australia: Growing Signs of Weakness

Gerard Minack (61 2) 9770 1529

Revising down our forecasts: We have revised down our GDP forecasts for 2011 due to increasing downside risks of a policy-induced slowdown and a weaker-than-expected rebound following the natural disasters in 1Q.

Growing signs of weakness: There are growing signs of weakness across the non-mining-related sectors of the economy due to restrictive monetary and fiscal policy, the strength of the currency and adverse wealth effects as house prices are falling. The building boom in mining-related capex remains on track, but we do not expect it to offset softness in other sectors in the short term.

Consumer spending is the key risk factor, in our view: Consumer sentiment has deteriorated significantly in recent months and household savings levels are high. Global financial volatility and a heated domestic policy atmosphere have the potential to continue to subdue consumer spending in 2Q11 and raise the prospects of higher unemployment.

We now expect the RBA to cut the cash rate by 50bp in 1H12, with the key catalyst being rising unemployment.

Australia: Employment and Job Advertisements

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-0.4

-0.2

0.0

0.2

0.4

0.6

1987 1990 1993 1996 1999 2002 2005 2008 2011

-10

-8

-6

-4

-2

0

2

4

6

Employment (lhs) ANZ job ads (rhs)*

1M% trend 1M% trend

Source: ABS, ANZ; *Newspaper and internet; leading by four months

CEEMEA: Euro Spillovers Trigger Growth Downgrade

CEEMEA Economics team

We have lowered the aggregate real GDP growth forecast for our region to 4.3%Y for 2012: Our global GDP forecasts have been cut substantially, for both 2011 (3.9%Y versus 4.2%Y) and 2012 (3.8%Y versus 4.5%Y). More relevant from CEEMEA’s standpoint, our euro area colleagues have sharply downgraded their GDP growth forecast to just 0.5%Y for 2012. In response to these changes, we have lowered the aggregate real GDP growth forecast for our region to 4.3%Y for 2012 (from 4.9%Y previously). For the current year, the change was marginal, with a slight cut to 4.7%Y from 4.9%Y.

Given that the region is so diverse, the extent of revisions varies noticeably across countries: However, the two key inputs that affected our forecasts were: i) the further weakness in growth in Europe; and ii) a lower oil price assumption for the coming year. The former is a key driver of growth for countries in Central Europe as well as for Turkey, Israel and South Africa, especially as our colleagues in European Economics expect stagnation in 4Q11 and 1Q12. The latter clearly takes a higher priority for Russia, Nigeria and to some extent Kazakhstan: we now assume an average oil price of US$103/bbl (based on oil futures) for 2012, which is some 10% lower that our previous assumption. While lower oil prices, along with other factors such as policy measures, result in lower growth rates in these countries, other countries in the region fare well from it in terms of inflation and the current account outlook (Turkey among others). Overall, the aggregate CPI inflation forecast for 2012 remains unchanged at 6.7%Y following a marginal improvement of 0.2pp to 6.9%Y for 2011.

Varying policy responses: In terms of policy response, most of the central banks in the region, with the exception of Russia, Ukraine and Kazakhstan, are likely to be easing rates (Poland, Turkey and Israel) and/or keeping rates unchanged for a considerable period (Czech Republic, Hungary, South Africa and Nigeria). That said, we need to underscore that the diverse nature of economies in CEEMEA might call for varying degrees of responses. For instance, using non-interest rate measures such as the reserve requirement ratio to address deteriorating growth prospects (in Turkey), or even hiking the policy rate in extreme cases should a deteriorating risk environment lead to undesired and disorderly moves in the currency (e.g., in Hungary, though not our base case).

9



Asia ex-Japan: Continued Caution

Chetan Ahya (852) 2239 7812

Our core thesis for Asia ex-Japan has been that of caution for some time: For over six months, we have been highlighting the view that inflation will continue to be a challenge for longer than what the market was ready for. Since July 2011, however, we have been arguing that the downside risks to growth are worrying us more than the upside risks to inflation. Indeed, the recent developments in the US and Europe imply that those downside risks are now materialising. We are now cutting our GDP growth estimates for the Asia ex-Japan region to 7.6% in 2011 and 7.3% in 2012, from 7.7% and 7.8%, respectively. The weaker growth estimates for the region come about due to a significant slowdown in the developed world growth, which is now expected to be 1.5% for 2011 and 2012 (down from 1.9% and 2.4%, respectively). Reflecting this weaker environment in the US and Europe, we believe that the countries which are more externally oriented such as Korea, Singapore, Malaysia, Taiwan and Thailand will see a greater adjustment in their growth outlook compared with the economies with higher dependence on domestic demand, such as China, India and Indonesia.

Alongside the cuts to our GDP growth estimates, we have also tweaked our monetary policy outlook for the region: The renewed uncertainties over the external environment likely mean that policy-makers will be more hesitant in raising rates. Hence, we now no longer expect any more rate hikes in the region in 2011 with the exception of India, against our previous expectations of further rate hikes in India, Korea, Malaysia, Taiwan and Thailand. For India, we believe that the RBI will continue with its anti-inflationary stance with one more 25bp hike in order to anchor inflation expectations decisively, barring a further deterioration in the growth outlook.

Where we are in the growth cycle: The AXJ region has already begun to see signs of moderation in growth over the last few months. The domestic demand engine has been slowing on account of tighter monetary policy and the loss of purchasing power due to higher inflation. Recall that as the global recession unfolded, policy-makers relied more on reflating domestic demand via monetary policy easing and fiscal expansion to offset the collapse in external demand. We believe that the policy-driven push to domestic demand lasted too long and lacked the productivity dynamic of the private sector-led growth, invoking the challenges of managing relatively strong growth without a concomitant rise in inflationary pressures. Hence, policy-makers have had to withdraw policy support, balancing growth considerations with inflation risks.

To deal with the negative spillover effects from expansionary policies, policy-makers in the region have had to initiate other targeted administrative measures such as tightening LTV ratios to rein in rapid asset price appreciation and controlling domestic demand growth to fight inflationary pressures. Alongside this monetary tightening, fiscal policy has also begun to tighten. A combined impact of these developments is likely to slow domestic demand meaningfully in 2H11. Moreover, this moderation in domestic demand is taking place alongside a simultaneous slowdown in external demand for the region. Indeed, exports for the region have seen close to zero growth on month-on-month basis over since March 2011.

What policy options are available to boost growth? As the downside risks to growth materialise, we expect policy-makers to take action to contain these downside risks. However, we do not expect a very aggressive policy response like we saw in 2008. In terms of their options, policy-makers in the region can choose to ease monetary policy, increase government spending or in some instances undertake structural reform to raise potential growth rates. In this cycle, we believe that policy-makers could be somewhat constrained on the monetary policy front as policy-makers, particularly in China and India, still have to deal with the trailing inflation stress and hence would be hesitant to move first on this front. However, policy-makers in the region do have some fiscal room, hence we believe that the fiscal policy response, particularly in China, will be key this time. While policy-makers are concerned with the implementation of policy tools to contain the downside risks to growth, we believe that it is also important to focus on the productivity dynamic. As we have highlighted previously, the policy push to boost domestic demand in the previous cycle lacked the productivity dynamic of a private sector-led recovery, hence resulting in the macro problem of inflation. In this context, we believe that policy-makers should focus on some of the difficult structural reforms that will help to boost consumption, improve the investment climate and improve the economic competitiveness. Balance of risks still tilted towards the downside: At this juncture, the balance of the risks remains firmly skewed to the downside. As our global economics team has highlighted, the bumpy and brittle recovery and a near-stagnation in the developed world mean that it would not take much to tip the balance towards recession. Indeed, any further shocks to the developed world would also imply further downside risk to the growth outlook of the region. Moreover, we are concerned that trailing inflation problem may mean there is a possibility that even if the developed world faces a deeper-than-expected slowdown in growth, policy-makers in the region may not be as swift in responding.

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11


Latin America: Risks to Abundance

Gray Newman (1 212) 761 6510

Here we go again: the spectre of a more pronounced global downturn is rising and with it questions on the impact in Latin America: Our global economics team has slashed its forecasts for growth in the developed world to reach only 1.5% this year and next – well below real GDP trend growth in the developed world whether measured over the past 20 (2.3%) or 40 years (2.8%). And with the slowdown, we see little alternative but to reduce our forecasts throughout Latam.

We now expect Latin America to grow by 4.4% in 2011 and 3.6% in 2012, from 4.6% in each year previously: Our reduction in growth in 2011 is modest: after all, Latin America has largely performed in line with our call – indeed we have spent most of the year exploring the ‘risks of abundance’ in the region. But we fear that the difficult economic narrative set out by our global economics team will take its toll on the region during 2012. The ‘risks to abundance’ seem set to rear their head once again.

Across the region, we are taking GDP growth in 2012 down by around 1pp – with the exception of Chile – largely reflecting our concerns that the prolonged softening in demand in the US and euro area will take its toll on commodity prices. We do not expect a repeat of the 2008 turmoil, but expect that weakened developed economies will feed through to weaker demand for Chinese exports and produce softer Chinese import demand and a softening in the terms of trade throughout Latin America. We are removing any hiking cycles – most notably Brazil, where we now see the central bank engaging in a modest rate-cutting cycle, despite our concerns that the move may be premature.

There are many uncertainties still embedded in our new global forecasts: Will the US and euro area be able to skirt the stall speed without tipping into recession? How soon and in what ways will China act if weakened developed market demand for its products begins to call into question its growth path? But despite this, we believe there are three facts about Latin America that investors should not lose sight of.

First, Latin America is in better shape than most developed countries to deal with a global downturn: This may seem obvious, but it is worth repeating: however you measure vulnerability – debt burden, budget financing needs, current account deficit – Latin America looks much better than its developed counterparts. (I’m not going to argue that Latin America’s relative position of strength is due to superior policy-making – it may largely be due to the fact that the region had an underdeveloped banking system which didn’t need bailing out. But the starting point remains: the balance sheet is in better shape than in most of the developed economies.)

Second, Latin America is in better shape today than in the past – indeed, rarely has the region been in better shape to deal with a global downturn. Compared to 2008, sovereigns have smaller budget financing needs in some countries (Brazil), and a bit larger in others (Mexico and Colombia), while current account shortfalls are still largely limited, and reserves as a percentage of GDP are generally in much better shape.

Third, however, the fact that balance sheets are strong doesn’t mean Latam won’t suffer on the growth front: And here I would warn to be careful in reviewing the lessons from 2008/09. There is a common misperception that Brazil was not hit nearly as hard as Mexico – after all, Brazil GDP only contracted by 0.2% in 2009 while Mexico fell by 6.1%. The problem with annual numbers is that they mask the size of the initial hit: Brazil saw an annualised decline in GDP of nearly 16% in 4Q08 – smaller than Mexico’s 24% fall in 1Q09 (when it suffered the most) but still a serious downturn. And Brazil’s industrial plant’s downturn peak-to-trough was much more severe (-21%) than in the case of Mexico (-11%).

We are watching three developments as signposts for Latin America – US industrial production, Chinese import demand and commodity prices: It’s not US GDP that concerns us the most, but what happens to US industrial production, which is where Mexico’s link is strongest. And we aren’t smart enough to know how much of the commodity story is Chinese demand-driven and how much is related to other speculative flows, so we are watching both. Just beware of currency or market calm in the region at the present: recall in the run-up to the problems in late 2008, Latam currencies and markets not only held up but actually rallied in most cases before a sudden fall in Chinese exports and imports corresponded to a sharp correction in commodity prices. Again, we are not saying that 2011 will produce the same kind of seizing up in markets, but only that delays are possible.

Bottom line: For much of the past two years we’ve focused on the ‘risks of abundance’ – the risks policy-makers and investors face in a region awash in inflows. We did so for two reasons: first, we felt that the ‘risks of abundance’ were much less understood than the trio of risks from abroad; and second, because we felt that the ‘risks to abundance’ were fairly clear – if the US, euro area or China veered from the relatively benign path envisioned by our global team, there should be little debate regarding the impact on Latin America. Despite all the uncertainty involved in our global forecasting effort, there is little doubt that Latam cannot escape without seeing its growth path suffer if the globe weakens. A Latam slowdown may not seem like good news to some, but for those who have followed the region for decades, the ability of the region to simply suffer from a business cycle downturn and not a fully fledged financial crisis is still reason for praise.



GDP Forecasts

2010A 2011E 2012E

% New Old New Old

Global Economy 5.1 3.9 4.2 3.8 4.5

G10 2.6 1.5 1.9 1.5 2.4

US 3.0 1.8 2.6 2.1 3.0

Euro Area 1.7 1.7 2.0 0.5 1.2

Japan 4.0 -0.6 -1.2 1.3 2.9

UK 1.4 1.2 1.2 1.4 1.8

Canada 3.2 2.8 3.1 2.2 2.8

Sweden 5.7 4.5 4.9 2.0 2.8

Australia 2.7 1.9 2.1 3.7 3.7

Emerging Markets 7.8 6.4 6.6 6.1 6.7

CEEMEA 4.6 4.7 4.9 4.3 4.9

Russia 4.0 4.7 5.0 5.2 5.5

Poland 3.8 3.7 4.2 3.2 3.6

Czech Republic 2.2 2.1 1.5 1.7 2.3

Hungary 1.2 1.6 2.6 1.4 2.0

Ukraine 4.2 4.6 5.0 4.2 5.0

Kazakhstan 7.0 7.0 7.0 6.0 7.0

Turkey 8.9 5.9 5.5 3.5 4.5

Israel 4.7 4.8 4.8 3.4 4.0

South Africa 2.8 3.0 3.5 3.0 3.5

Nigeria 7.9 8.4 8.4 8.0 8.5

Asia ex-Japan 9.4 7.6 7.7 7.3 7.8

China 10.3 9.0 9.0 8.7 9.0

India 9.0 7.3 7.3 7.4 7.8

Hong Kong 7.0 5.0 6.0 4.0 4.0

Korea 6.2 3.8 4.5 3.6 4.0

Taiwan 10.8 4.2 5.0 3.6 4.2

Singapore 14.5 5.3 6.0 3.8 6.5

Indonesia 6.1 6.3 6.5 5.8 6.5

Malaysia 7.2 4.7 5.0 4.0 5.5

Thailand 7.8 4.5 4.8 4.0 5.3

Latin America 6.3 4.4 4.6 3.6 4.6

Brazil 7.5 3.7 4.0 3.5 4.6

Mexico 5.5 3.7 4.7 3.2 4.1

Chile 5.2 6.1 5.9 4.4 4.5

Peru 8.8 5.9 5.9 4.9 6.2

Colombia 4.4 4.7 4.9 4.1 5.1

Argentina 9.2 7.1 6.2 4.3 5.8

Venezuela -1.9 3.0 3.0 2.3 3.6 Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

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CPI Forecasts

2010A 2011E 2012E

% New Old New Old

Global Economy 3.4 4.2 4.2 3.3 3.5

G10 1.4 2.5 2.7 1.7 1.9

US 1.6 3.1 3.2 2.1 2.3

Euro Area 1.6 2.4 2.5 1.7 2.0

Japan -1.0 -0.5 0.2 -1.1 -0.5

UK 3.3 4.4 4.3 3.0 2.9

Canada 1.8 2.8 3.0 2.2 2.5

Sweden 1.2 3.1 3.3 2.3 2.7

Australia 2.8 3.6 3.3 2.8 2.9

Emerging Markets 5.6 5.9 5.7 4.9 5.1

CEEMEA 6.5 6.9 7.1 6.7 6.7

Russia 6.9 8.9 9.0 8.1 8.0

Poland 2.6 4.1 4.4 2.7 3.4

Czech Republic 1.5 1.9 2.0 2.9 2.1

Hungary 4.9 3.9 4.2 3.3 3.6

Ukraine 9.4 9.3 9.7 9.1 9.5

Kazakhstan 7.1 8.5 9.0 9.0 7.4

Turkey 8.6 5.7 5.8 6.4 6.4

Israel 2.7 3.6 3.7 2.9 3.2

South Africa 4.3 5.0 5.0 5.7 6.0

Nigeria 13.8 10.3 10.8 10.4 10.7

Asia ex-Japan 5.1 5.5 5.1 4.2 4.4

China 3.3 5.0 4.6 3.6 4.0

India 12.1 8.3 7.6 6.8 6.2

Hong Kong 2.3 4.7 4.7 4.8 4.8

Korea 3.0 4.3 3.9 2.7 2.9

Taiwan 1.0 2.0 2.0 1.0 1.6

Singapore 2.8 4.4 4.2 2.2 2.3

Indonesia 5.1 5.7 5.9 6.3 6.8

Malaysia 1.7 3.3 3.4 2.4 2.5

Thailand 3.3 3.7 3.7 3.0 3.6

Latin America 6.2 6.6 6.4 5.9 6.2

Brazil 5.0 6.5 5.6 5.3 5.5

Mexico 4.2 3.6 3.7 3.5 3.7

Chile 1.4 3.1 3.5 2.9 3.4

Peru 1.5 3.4 2.9 2.9 2.5

Colombia 2.3 3.3 3.3 2.9 3.3

Argentina 10.5 9.7 11.0 10.1 11.0

Venezuela 26.1 25.1 25.1 22.5 22.5 Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

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Monetary Policy Rate Forecast

2011 2012

% 1Q11 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

United States 0.125 0.125 0.125 0.00 0.00 0.00 0.00 0.00

Euro Area 1.00 1.25 1.50 1.50 1.25 1.00 1.00 1.00

Japan 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05

United Kingdom 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00

Canada 1.00 1.00 1.00 1.00 1.25 1.50 1.75 2.00

Switzerland 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Sweden 1.50 1.75 2.00 2.25 2.25 2.25 2.25 2.25

Australia 4.75 4.75 4.75 4.75 4.50 4.25 4.25 4.25

New Zealand 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00

Russia 8.00 8.25 8.25 8.25 8.50 8.50 8.50 8.50

Poland 3.75 4.50 4.50 4.50 4.25 4.00 4.00 4.00

Czech Republic 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75

Hungary 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

Turkey 6.25 6.25 5.75 5.75 5.50 5.50 5.50 5.50

Israel 3.00 3.25 3.25 3.25 3.00 2.75 2.75 2.75

South Africa 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50

Nigeria 7.50 8.00 9.00 9.00 9.00 9.00 9.00 9.00

China 6.06 6.31 6.56 6.56 6.56 6.56 6.56 6.56

India 6.75 7.50 8.25 8.25 8.25 8.25 8.25 8.25

Hong Kong 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50

Korea 3.00 3.25 3.25 3.25 3.25 3.25 3.25 3.25

Taiwan 1.75 1.88 1.88 1.88 1.88 1.88 1.88 1.88

Singapore 0.44 0.44 0.40 0.40 0.40 0.40 0.40 0.40

Indonesia 6.75 6.75 6.75 6.75 6.75 6.75 6.75 6.75

Malaysia 2.75 3.00 3.00 3.00 2.50 2.50 2.75 3.00

Thailand 2.50 3.00 3.50 3.50 3.00 3.00 3.25 3.50

Brazil 11.75 12.25 12.50 12.50 12.50 12.50 12.00 11.50

Mexico 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50

Chile 4.00 5.25 5.25 5.25 5.25 5.25 5.25 5.25

Peru 3.75 4.25 4.25 4.25 4.25 4.25 4.25 4.25

Colombia 3.50 4.25 4.50 4.50 4.50 4.50 4.50 4.50 Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

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Quarterly GDP Profile

2011 2012

%Y 1Q11 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

GLOBAL 4.5 3.8 3.8 3.6 3.5 3.8 3.8 4.1

G10 1.9 1.3 1.4 1.4 1.5 1.7 1.5 1.6

United States 2.2 1.6 1.7 1.7 2.0 2.3 2.1 2.2

Euro Area 2.5 1.7 1.5 1.2 0.4 0.4 0.5 0.9

Japan -1.0 -1.0 -0.7 0.1 1.4 1.8 1.1 1.0

United Kingdom 1.6 0.8 0.7 1.5 1.4 1.5 1.5 1.4

Canada 2.9 2.8 2.8 2.7 2.1 2.3 2.3 2.3

Sweden 6.4 5.4 4.2 3.4 2.8 2.7 2.7 2.8

Australia 1.0 1.3 2.7 2.7 4.7 3.7 3.1 3.1

Emerging Markets 7.4 6.6 6.4 6.1 5.6 6.1 6.3 6.7

CEEMEA 6.1 3.9 4.4 6.1 4.8 5.4 4.5 4.3

Russia 4.1 3.4 5.7 5.4 5.7 6.1 4.7 3.9

Turkey 11.0 3.7 0.7 8.9 2.8 4.2 3.1 3.8

South Africa 3.7 3.1 2.9 2.4 2.0 2.7 3.3 3.6

Nigeria 9.1 8.4 8.1 8.0 8.2 7.9 8.0 8.3

Asia ex Japan 8.2 7.8 7.5 6.8 6.4 7.0 7.5 7.9

China 9.7 9.5 9.0 8.1 7.8 8.4 8.8 9.3

India 7.8 7.6 7.2 6.8 7.1 7.4 7.6 7.6

Korea 4.2 3.4 4.1 3.7 2.0 3.3 4.1 4.7

Taiwan 6.5 4.9 3.6 2.1 0.8 3.1 4.4 5.8

Singapore 9.3 0.9 6.2 5.4 1.5 3.7 4.5 5.5

Indonesia 6.5 6.5 6.7 5.4 5.2 5.5 5.8 6.4

Malaysia 4.6 5.3 4.7 3.9 2.8 3.8 4.7 4.9

Thailand 3.0 4.4 5.7 5.0 3.5 3.6 4.2 4.8

Latin America 5.4 4.3 4.2 3.6 3.1 3.4 3.6 4.3

Brazil 4.2 3.5 3.9 3.4 3.0 3.2 3.3 4.4

Mexico 4.6 3.7 3.2 3.5 3.1 3.1 3.3 3.5

Chile 8.4 6.6 4.8 4.8 3.9 4.7 4.1 4.5

Peru 8.7 7.2 5.1 3.1 4.4 4.8 5.0 5.3

Colombia 5.1 4.0 5.4 4.4 3.5 4.2 4.4 4.2

Argentina 9.9 7.1 7.1 4.6 3.1 3.9 4.7 5.5

Venezuela 4.5 3.1 2.5 2.3 0.8 1.4 2.7 4.1 Source: Morgan Stanley Research; E = Morgan Stanley Research estimates

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16


Quarterly CPI Profile

2011 2012

%Y 1Q11 2Q11E 3Q11E 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E

GLOBAL 4.0 4.3 4.1 3.5 3.0 2.8 3.0 3.1

G10 2.1 2.8 2.8 2.5 1.9 1.4 1.6 1.7

United States 2.2 3.3 3.6 3.3 2.5 1.6 2.0 2.1

Euro Area 2.5 2.8 2.4 2.2 1.8 1.5 1.8 1.8

Japan -0.8 -0.3 -0.2 -0.6 -1.0 -1.3 -1.2 -1.0

United Kingdom 4.1 4.4 4.7 4.5 3.4 3.1 2.9 2.6

Canada 2.6 3.3 2.8 2.5 2.2 2.0 2.2 2.3

Sweden 1.9 3.3 3.4 3.1 2.2 2.1 2.3 2.6

Australia 3.3 3.6 3.6 3.9 3.1 2.8 2.6 2.5

Emerging Markets 6.2 6.3 6.1 5.1 4.8 4.9 4.9 5.0

CEEMEA 8.2 8.1 7.4 7.2 6.8 7.5 7.9 7.3

Russia 9.5 9.5 8.5 8.2 7.2 8.5 8.8 7.7

Turkey 7.3 6.5 6.0 5.7 6.4 6.4 6.5 6.4

Israel 2.8 3.1 3.4 3.6 3.4 3.1 3.0 2.9

South Africa 3.8 4.6 5.6 5.9 5.9 5.6 5.7 5.6

Nigeria 12.0 11.3 8.9 8.9 8.1 9.7 11.7 12.2

Asia ex Japan 5.6 5.9 5.6 4.3 4.1 4.0 4.0 4.3

China 5.1 5.7 5.5 3.6 3.3 3.2 3.5 4.2

India 9.0 8.9 8.1 7.0 7.1 7.4 6.5 6.2

Korea 4.5 4.2 4.5 4.0 2.6 2.7 2.9 2.6

Taiwan 1.3 1.6 2.2 2.3 1.0 1.1 1.2 0.7

Singapore 5.2 4.7 4.0 3.8 3.3 2.5 1.7 1.5

Indonesia 6.8 5.9 4.7 5.6 6.3 6.7 6.5 6.3

Malaysia 2.8 3.4 3.5 3.3 2.8 2.5 2.3 2.2

Thailand 3.0 4.1 4.0 3.8 3.4 3.0 2.8 2.8

Latin America 6.6 6.5 6.8 6.4 5.9 5.7 5.9 5.9

Brazil 6.3 6.7 6.9 6.1 5.6 5.0 5.2 5.2

Mexico 3.5 3.3 3.7 3.8 3.3 3.6 3.7 3.5

Chile 3.4 3.4 3.1 3.3 2.7 2.7 3.2 2.9

Peru 2.7 2.9 3.9 4.5 3.7 3.4 2.1 2.2

Colombia 3.2 3.2 3.7 3.2 3.0 2.7 2.8 3.1

Argentina 9.7 9.7 9.6 9.4 9.8 10.1 10.4 10.6

Venezuela 27.4 23.0 23.7 23.2 21.7 21.2 22.0 22.0 Source: Morgan Stanley Research; E = Morgan Stanley Research estimates



Global Economics Team Joachim Fels, Head of Global Economics

Global Fixed Income Economics

Joachim Fels Global [email protected] +44 (0)20 7425 6138

Alan Taylor Global/Senior Advisor [email protected] +1 212 761 5478

Arnaud Marès Global [email protected] +44 (0)20 7677 6302

Manoj Pradhan Global [email protected] +44 (0)20 7425 3805

Spyros Andreopoulos Global [email protected] +44 (0)20 7677 0528

Americas

David Greenlaw US [email protected] +1 212 761 7157

Ted Wieseman US [email protected] +1 212 761 3407

Dane Vrabac US [email protected] +1 212 761 1929

Gray Newman Latam, Brazil [email protected] +1 212 761 6510

Luis Arcentales Chile, Mexico [email protected] +1 212 761 4913

Arthur Carvalho Brazil [email protected] +55 11 3048 6272

Daniel Volberg Peru, Colombia, Argentina, Venezuela [email protected] +1 212 761 0124

Alberto Horihuela Latam [email protected] +1 212 761 8531

Europe & South Africa

Elga Bartsch Euro Area, ECB, Germany [email protected] +44 (0)20 7425 5434

Daniele Antonucci Italy, Spain, Greece, Portugal [email protected] +44 (0)20 7425 8943

Olivier Bizimana France, Belgium [email protected] +44 (0)20 7425 6290

Melanie Baker UK [email protected] +44 (0)20 7425 8607

Cath Sleeman UK [email protected] +44 (0)20 7425 1820 Tevfik Aksoy Turkey, Israel, MENA [email protected] +44 (0)20 7677 6917

Pasquale Diana Poland, Hungary, Czech, Romania [email protected] +44 (0)20 7677 4183

Michael Kafe South Africa, Nigeria [email protected] +27 11 587 0806

Andrea Masia South Africa [email protected] +27 11 587 0807

Jacob Nell Russia, Kazakhstan, Ukraine [email protected] +7 495 287 2134

Alina Slyusarchuk Russia, Kazakhstan, Ukraine, Baltics [email protected] +44 (0)20 7677 6869 Asia

Robert Feldman Japan [email protected] +81 3 5424 5385

Takehiro Sato Japan [email protected] +81 3 5424 5367

Takeshi Yamaguchi Japan [email protected] +81 3 5424 5387

Denise Yam China, Hong Kong [email protected] +852 2848 5301

Sharon Lam Korea, Taiwan [email protected] +852 2848 8927

Yuande Zhu China, Hong Kong [email protected] +852 2239 7820

Ernest Ho China, Hong Kong [email protected] +852 2239 7818

Jason Liu Korea, Taiwan [email protected] +852 2848 6882

Chetan Ahya Asia ex-Japan, India [email protected] +852 2239 7812

Deyi Tan ASEAN [email protected] +65 6834 6703

Derrick Kam Asia ex-Japan [email protected] +852 2239 7826

Seen Meng Chew ASEAN [email protected] +65 6834 6739

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