GEQ 2017 Q1 Great Expectations Many Limitations

ECONOMICS
GLOBAL
Q1 2017
By: Janet Henry and James Pomeroy https://www.research.hsbc.com
Global Economics
Great expectations, many limitations
A cyclical recovery and faith in a

dramatic shift in US fiscal policy are
driving market optimism…
…but political and policy risks are

high and the rise in global inflation
is likely to prove short-lived
Emerging economies face new

challenges but they still offer the
best long-term growth prospects
Play video with

Janet Henry
Disclaimer & Disclosures: This report must be read with the disclosures and the analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
ECONOMICS ● GLOBAL
Q1 2017
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Executive summary
As we head into 2017, there are many reasons to view prospects with distinct nervousness.
Plenty of uncertainty ahead…
Will the new US president follow through with his isolationist and protectionist rhetoric from the
campaign trail? How will growing populism affect the outcome of key eurozone elections, and
particularly the French presidential vote? There are huge uncertainties facing the UK over its
Brexit negotiations and the medium-term growth outlook. Moreover, very real challenges are
facing certain emerging markets, particularly those with high external debt levels and now
suffering from currency depreciation. All these give real cause for concern.
However, some things are going in the right direction, at least for now. Global PMIs are at their
…but cyclical data have
turned up
highest level for more than a year. The US economy is robust enough for the Fed to have just
carried out its second interest rate increase this decade. Growth in China has held up remarkably
well, defying financial market concerns at the start of 2016. Inflation, long thought dead, is showing
signs of stirring, albeit thanks to higher oil prices and varying degrees of FX depreciation. And
fiscal measures are supplementing monetary support in many key economies, led by the US
where a reflation trade is confidently underway in the expectation of broad-ranging tax cuts and
higher spending.
All of the above help explain why this quarter we can offer a rare treat: for the first time since
Global growth and inflation
forecasts raised
early 2012, we are increasing our forecasts for both global growth and inflation for the next two
years. Unfortunately, it is still a world where global growth is likely to hover around the mediocre
growth rates of the past few years.
The Trump factor
Political shocks typically mean uncertainty about the future direction of policy and a negative
Markets are more optimistic
impact on investor sentiment. Not this time. Since the election of Donald Trump as US
president, global markets have taken a clear view on what it means for policy and the real
economy. Concerns raised before the election over Mr Trump’s campaign pledges – such as
protectionism and limits on immigration – have been put on the back-burner, even though they
could change the world order in unpredictable ways. For now the mood is firmly risk on. Equity
markets have rallied. Bond markets have sold off and the dollar has strengthened across the
board. Signs of cyclical improvement evident in the global economy survey data before the
election have largely been confirmed and the expectation of a sizeable fiscal stimulus and
lighter-touch regulation have added to the optimism. The first positive prints for China’s
producer price inflation since early 2012 and the first deal between OPEC and non-OPEC
producers to cut oil supply for 15 years, pushing oil above USD55/barrel, are the icing on the
cake for the reflation flag wavers.
Some of this buoyancy is justified. We recently revised up our US growth forecasts for 2017-18
on the expectation that the Republican Congress will back some degree of tax cuts for US
households and companies. European growth is also expected to be stronger than had seemed
likely in the immediate wake of the UK’s Brexit vote.
Expectations may be getting too high though. An upturn in the global industrial cycle does not
Productivity still needs to rise
tell us much about long-term growth prospects. Nor do we doubt the ability of fiscal stimulus to
support near-term demand. Even the eurozone has demonstrated the extent to which higher
government spending can support growth over the past year. But fiscal stimulus is no free
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Q1 2017
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lunch. If it does not raise long-term nominal growth by supporting other structural policies to
improve productivity then it might just mean larger deficits that keep adding to government debt
stocks. So, while expansionary fiscal policy may erode spare capacity and mean the Fed can
raise rates a little more quickly (we expect two rate rises in 2017, rather than the one we
previously envisaged), the jury is still out on whether the incoming US administration’s policy
mix will raise long-term potential growth and the historically low natural rate of interest (r*).
Familiar limitations
Even in the near term there could once again be constraints on the Fed. The election of Donald
Fed will still be constrained
Trump may have been a vote in favour of more isolationist policies but the US is not (yet!) a
by global developments
closed economy and Fed policy will continue to be influenced by developments elsewhere. US
headline inflation will rise in the coming months as higher oil prices feed through and nominal
wage growth should tick up slightly, but we expect the strong dollar to keep down import prices
and therefore core goods prices.
In the other large developed economies, signs of cyclical improvement do not alter the
deflationary influence that the eurozone and Japan still exert: internal imbalances and external
surpluses are still too large and wage settlements too low.
Political risk in the coming year will focus on the eurozone, given the elections in some of its key
Political risk in Europe
economies: the Netherlands, France and Germany and, possibly, Italy. There is also a pressing
need for EU institutions to take decisions to address the population’s primary concerns of
immigration and terrorism, ideally through joint budgetary spending on defence.
But with the ECB having now extended QE until at least the end of 2017 and a very welcome
bout of yen depreciation having taken the pressure off the Bank of Japan to step up its
monetary easing any time soon, the immediate monetary policy risks will focus on EM.
Near-term risks for EM….
Given the broad-based currency declines since the US election, emerging economies with high
USD strength and higher rates
external debt and a high degree of foreign participation in local bond markets are most
puts the focus back on EM
vulnerable to a rise in debt service costs and capital outflow as US rates rise. Even for countries
that have less foreign-currency-denominated debt but which are still reliant on credit growth, a
slightly more active Fed and a stronger dollar imply less ability for many EM central banks to
provide support through monetary policy. We believe Brazil’s central bank will now be able to
deliver less easing than previously seemed likely. Many of the rate cuts we had been
forecasting in Asia have been removed, while Turkey has already started a rate-rising cycle we
did not envisage three months ago. Nor can emerging markets really pin their hopes on a big
boost to competitiveness from the currency as exchange rate weakness has been broadly
based across EM. They must be hoping there will be some kind of lift from stronger US demand.
The main boost on the demand side is likely to be to the US consumer from the planned tax cuts. To
Mixed blessings for the
US consumer
some extent the boost to disposable incomes will be offset by the rise in oil prices and a small rise in
debt service costs but at least the US consumer has undergone so much deleveraging and now
holds far fewer adjustable rate mortgages that the impact of modest rate rises should be limited and
slow to come through. Nonetheless the US will be a long way from regaining its former title of the
world’s consumer of last resort. The US now accounts for a much smaller share of global demand
than it did over a decade ago and its high income level and ageing population mean that more than
two-thirds of US consumer spending is now on services. There will also be the risk of protectionist
measures being put in place, particularly if the dollar continues to strengthen and the US current
account deficit widens significantly in the coming year.
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…but they still offer the best long-term growth prospects
Despite the clear risks for many emerging countries in the near term, the emerging market
Emerging markets still carry
strong longer-term growth
growth story is far from over given its superior long-term growth potential. In this report, we have
potential… re-visited the projections made for emerging economies in 2010 in our World in 2050,
11 January 2012 report. China, India and Indonesia are the main countries that have
surpassed our estimates of growth potential. The rest under-delivered and, as in much of the
developed world, disappointing investment growth has been a big part of the reason.
Demographics still look better in most EM countries though and other key drivers of future
growth – notably education levels and life expectancy – have improved. This implies that
potential per capita growth rates are still fairly high. As these countries develop and the nature of
growth becomes more domestically driven, the influence on developed markets may pick up
once more. Emerging market crises of one sort or another will no doubt feature from time to
time in the coming decades, as will unpredictable political developments. But these countries
should continue to gain in importance in terms of their share of global demand.
A changing mix for global growth
Turning to our actual growth forecasts, we have raised our developed world forecasts more or
…but for now we make
upgrades to developed
less across the board. Aside from the US, the biggest upgrades are in the UK (smaller near-
economies, downgrades in EM term damage following the Brexit vote) and Japan, but there also seems to be a bit more
momentum in the eurozone, particularly Germany and Spain. In the emerging world, the
revisions are mainly downwards, with the main exception of China where the recent run of data
have revived and we believe an additional bout of public spending will maintain growth at 6.5%
in 2017-18. In India, there is a near-term hit to growth from the government’s decision to abolish
the existing stock of high-denomination currency notes. The other notable revisions are in Latin
America due to weaker-than-expected recent activity data and the reduced scope for monetary
easing in the face of currency depreciation.
Key forecasts
% __________________ GDP __________________ ________________ Inflation _________________
2016 2017f 2018f 2016 2017f 2018f
World 2.2 (2.1) 2.5 (2.3) 2.6 (2.5) 2.6 (2.5) 3.0 (2.7) 2.7 (2.5)
Developed 1.6 (1.5) 1.7 (1.5) 1.8 (1.6) 0.8 (0.7) 1.9 (1.6) 1.7 (1.6)
Emerging 3.6 (3.8) 4.1 (4.3) 4.5 (4.6) 4.2 (3.9) 3.9 (3.5) 3.5 (3.3)
US 1.6 (1.5) 2.3 (2.1) 2.7 (2.2) 1.3 (1.2) 2.3 (2.1) 2.1 (2.0)
China 6.7 (6.7) 6.5 (6.5) 6.5 (6.5) 2.0 (1.9) 2.2 (1.7) 2.1 (1.8)
Japan 1.0 (0.6) 1.2 (0.9) 0.6 (0.5) -0.2 (-0.2) 0.9 (0.4) 1.1 (0.5)
India* 6.3 (7.5) 7.1 (7.3) 7.6 (7.6) 4.7 (4.8) 5.0 (5.1) 4.6 (4.8)
Eurozone 1.6 (1.5) 1.2 (1.0) 1.3 (1.0) 0.2 (0.2) 1.6 (1.0) 1.3 (1.0)
UK 2.0 (1.8) 1.2 (0.7) 1.3 (1.6) 0.6 (0.6) 2.8 (2.9) 2.6 (2.8)
Russia -0.5 (0.0) 1.0 (1.5) 1.5 (1.5) 7.1 (7.2) 4.7 (4.8) 4.0 (4.5)
Brazil -3.5 (-3.2) 0.7 (1.1) 2.5 (2.5) 8.8 (8.8) 4.8 (6.4) 4.9 (5.3)
Note: *India data in fiscal year (2012 = April 2012 to March 2013). GDP aggregates use chain nominal GDP (USD) weights and Inflation aggregates calculated using GDP PPP
(USD) weights. Parenthesis show forecasts from the Global Economics Quarterly Q4 2016 published in September.
Source: HSBC estimates.
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Contents
Great expectations 6 Eurozone 68

Hoping for the best 6 Eurozone 68
Familiar limitations 7 Germany 70
The dangers of anticipation 10 France 72
Financial conditions starting to Italy 74
tighten 11 Spain 76
Any global lift from US growth? 15 (For Greece, Portugal, please see European
Economics Quarterly)
EM still offer the best long-term
prospects 16
Other Western Europe 78
Global economic forecasts 21 UK 78
Switzerland 80
Country Outlooks Sweden 82
Norway 84
North America 38
US 38 CEEMEA 86
Canada 40 Poland 86
Russia 88
Asia Pacific 42 Turkey 90
China 42 Saudi Arabia 92
Japan 44 Nigeria 94
India 46 South Africa 96
Australia 48 (For UAE, Israel, Egypt, Kazakhstan, Czech
Republic, Romania, Ukraine, Hungary, Ghana,
South Korea 50 Kenya, please see CEEMEA Economics Quarterly)
Indonesia 52
Taiwan 54 Latin America 98
Thailand 56 Brazil 98
Malaysia 58 Mexico 100
Singapore 60 Argentina 102
Hong Kong 62 Colombia 104
Philippines 64 Chile 106
(For Peru, Venezuela, Uruguay, Panama, please
New Zealand 66 see Latin American Economics Quarterly)
(For Vietnam, Bangladesh, Sri Lanka, Mongolia,
please see Asian Economics Quarterly)
Disclosure appendix 110
Disclaimer 112
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Q1 2017
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Key forecasts
Key forecasts
_____________ GDP _____________ _____________ Inflation _____________
2016 2017f 2018f 2016 2017f 2018f
World (nominal GDP weights) 2.2 2.5 2.6 2.6 3.0 2.7
Developed 1.6 1.7 1.8 0.8 1.9 1.7
Emerging 3.6 4.1 4.5 4.2 3.9 3.5
North America 1.6 2.3 2.6 1.3 2.2 2.1
US 1.6 2.3 2.7 1.3 2.3 2.1
Canada 1.3 1.7 1.6 1.5 1.6 1.8
Asia-Pacific 3.9 4.0 4.0 2.2 2.6 2.5
Asia Big Three 4.2 4.4 4.3 2.3 2.7 2.5
China 6.7 6.5 6.5 2.0 2.2 2.1
Japan 1.0 1.2 0.6 -0.2 0.9 1.1
India* 6.3 7.1 7.6 4.7 5.0 4.6
Asia ex Big Three 2.8 2.9 3.0 1.6 2.2 2.3
Australia 2.4 2.8 3.2 1.3 2.5 2.6
South Korea 2.7 2.4 2.4 1.0 1.7 1.5
Indonesia 5.1 5.1 5.3 3.5 4.1 4.4
Taiwan 1.2 1.7 1.6 1.2 1.3 1.0
Thailand 3.0 3.2 3.2 0.2 1.7 2.0
Malaysia 4.0 3.8 3.6 2.0 2.5 2.6
Singapore 1.2 1.1 1.5 -0.6 0.8 1.6
Hong Kong 1.4 1.8 2.4 2.6 2.7 2.8
Philippines 6.8 6.5 6.5 1.7 3.6 3.6
New Zealand 3.2 3.0 2.9 0.6 1.7 1.9
Western Europe 1.7 1.3 1.3 0.3 1.7 1.5
Eurozone 1.6 1.2 1.3 0.2 1.6 1.3
Germany 1.7 1.6 1.7 0.4 1.8 1.7
France 1.2 0.9 1.1 0.3 1.4 1.3
Italy 0.9 0.6 0.8 -0.1 1.2 1.0
Spain 3.3 2.5 2.0 -0.4 1.8 1.2
Other Western Europe 2.0 1.3 1.4 0.8 2.3 2.1
UK 2.0 1.2 1.3 0.6 2.8 2.6
Switzerland 1.4 1.5 1.6 -0.4 0.3 0.7
Sweden 3.2 2.1 2.0 1.0 1.4 1.0
Norway** 0.7 1.1 1.2 3.3 1.8 1.7
EMEA 0.8 1.5 2.0 6.7 6.4 5.3
Russia -0.5 1.0 1.5 7.1 4.7 4.0
Turkey 2.2 2.3 2.5 7.7 9.1 7.8
Saudi Arabia 0.6 0.8 1.4 3.6 3.4 3.4
Nigeria -1.6 1.5 2.9 15.6 15.3 10.5
Poland 2.6 2.6 3.2 -0.6 1.5 1.6
South Africa 0.4 0.7 1.1 6.3 6.2 5.6
Latin America -0.5 1.5 2.6 10.1 6.6 5.8
Brazil -3.5 0.8 2.5 8.8 4.7 4.9
Mexico 1.9 1.7 2.5 2.8 3.7 3.8
Argentina -2.2 2.5 2.8 41.0 27.2 18.4
Colombia 1.8 2.0 3.2 7.5 4.4 3.7
Chile 1.5 2.0 2.5 3.8 2.7 2.9
Note: *India data in fiscal year (2012 = April 2012 to March 2013). GDP aggregates use chain nominal GDP (USD) weights and Inflation aggregates calculated using GDP PPP
(USD) weights. ** Mainland. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC estimates
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Great expectations
 Signs of a cyclical recovery are building and may soon be supported

by a shift in US fiscal policy…
 …but political and policy risks remain and the rise in global inflation is
likely to prove short-lived
 2017 promises new challenges for emerging economies but they still
offer the best prospects for long-term growth
Hoping for the best
Financial market optimism continues to rise. Since the election on 8 November of Donald Trump as
Financial market optimism
abounds
the 45th president of the United States, the S&P 500 has crossed record highs, led by the financials,
and the US 10-year yield breached 2.6% for the first time since September 2014. Admittedly, there
had already been some signs of cyclical improvement in the global economy before the election
(chart 1), but since 9 November the markets have been pricing in a much improved outlook for the
US economy, mostly hinged on the expectation of a sizeable fiscal stimulus.
Promises of tax cuts, spending increases and lighter-touch regulation offer the possibility that the
US economy could see a significant lift in 2017-18 after a year of just 1.6% growth in 2016. Threats
of immigration controls and the risk that tariffs or other trade barriers may deliver negative growth
and even stagflation are acknowledged but seem to be viewed as little more than tail risks. Markets
have for now taken the view that the glass is half full or maybe even more.
1. Signs of improving activity were already 2. …but much of the financial market
evident before US election… optimism reflects Trump’s policy promises
Index World PMI Index % Index
58 58 2.7 2300
US presidential
56 56 2.5 2250
election
2.3
54 54 2200
2.1
52 52 2150
1.9
50 50 1.7 2100
48 48 1.5 2050
2010 2010 2011 2012 2013 2014 2015 2016 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
Manufacturing Services US 10Y yield (LHS) S&P 500 (RHS)
Source: Markit Economics Source: Thomson Reuters Datastream
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We recently raised our US forecasts based on what we believe to be the most plausible
Actual policies will be clearer
after 20 January
direction of policy (see US economic outlook: Higher GDP forecasts; more Fed tightening,
21 November 2016) but the truth is our macro forecasts for the next two years carry more than
the usual degree of uncertainty. Our forecasts may have to be revisited after the policy priorities
become clearer following the presidential inauguration on 20 January and once negotiations
between the Congressional Republicans and the Trump White House lead to some kind of
budget agreement. Currently we expect slightly higher growth driven primarily by consumer
spending, fractionally more inflation and a bit more Fed tightening.
On the assumption that a fiscal package is delivered, we expect two 25bps Fed Funds
Fed tightening will still be
cautious
increases in 2017. But this merely reflects more confidence that the US economy will require
slightly less accommodative policy over the next year. It will still be a very cautious tightening
cycle as underlying inflationary pressures are likely to remain low with only a modest rise in
wage growth expected to materialise even as the unemployment rate edges even lower.
Particularly following the 10 December agreement between OPEC and non-OPEC producers,
higher oil prices will push up headline inflation in the US and elsewhere over the next few
months but we still expect the dollar appreciation to exert downward pressure on US core
inflation.
3. Oil prices will continue to raise headline 4. …but USD appreciation will keep a lid
inflation in coming months… on US core inflation
% Yr Oil Price annual change based end-2017 values % Yr Index, inv. US % Yr
100 100 70 2.5
80 80 USD depreciation
60 60 80 2.0
40 40
20 20
90 1.5
0 0
100 1.0
-20 -20 USD appreciation
-40 -40 110 0.5
-60 -60 10 11 12 13 14 15 16 17
Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 US core PCE (RHS)
$40/brl $50/brl $60/brl Trade weighted USD (1990 = 100, LHS)
$70/brl $80/brl
Note: Assumes linear move to given oil price until 31/12/2017. Source: Thomson Reuters Datastream
Source: Thomson Reuters Datastream, HSBC calculations.
Familiar limitations
Despite more Fed increases near term, we are not yet convinced that potential growth and
More near-term rate rises do
not mean higher long-term
therefore the long-term natural or equilibrium interest rate (r* or the inflation-adjusted Fed funds
natural rate rate, which is neither expansionary nor contractionary when the economy is operating at full
potential) will be higher as a consequence of the policy mix which is likely to be forthcoming.
Potential growth in the US is still low relative to the post-war average. We have discussed the
numerous reasons (slowing labour force growth, high debt, income inequality and dismal
productivity1) for this on many occasions in the past. With ageing populations, the only way to
raise living standards is to deliver policies – both appropriate fiscal measures and supply-side
reforms – that will raise productivity. But it seems to us that little has so far changed to address
this, either in the US or in other parts of the developed world.
The promise of a trillion dollar package of US infrastructure spending by the Trump administration
has been welcomed across the political spectrum and offers some hope of productivity
improvements further down the road. However, we expect some of the optimism regarding the
1
The Alchemist’s Puzzle: The monetary threat to productivity growth, 2 November 2016
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impact on near-term demand and commodity prices is overdone: even a trillion dollars over the next
decade is only what China spent on public investment in the first nine months of this year and in the
case of the US it will be primarily government guarantees for private investment. At a minimum it
should help to ease bottlenecks and improve transport links. Ideally it would also be used to expand
R&D spending and employment skills training too but this will take time to feed through into
higher productivity.
As for the impact of other policy proposals on private investment, the promise of corporate tax
Companies may not put extra
cuts and proposed incentives for US companies to repatriate offshore cash holdings could also
cash to work
help but this is far from certain. Recent business surveys have been encouraging but there is a
risk that the same concerns which have prevented companies from putting money to work in the
past few years – such as uncertainty over future demand and pricing power – do not quickly
disappear. Tax savings and profits may just find their way into higher corporate savings. Indeed,
the uncertainty over the impact of dollar appreciation and possible disruptions to supply chains
globally given the protectionist rhetoric of Donald Trump may be other reasons for caution.
5. Demographics are still deteriorating… 6. …and productivity growth remains

very low
% Yr Working age population growth % Yr % Yr Growth of labour productivity % Yr
per person employed
3 3 8 8
2 2 6 6
4 4
1 1
2 2
0 0 0 0
-1 -1 -2 -2
1950 1970 1990 2010 2030 2050 1990 1994 1998 2002 2006 2010 2014 2018
World DM EM World DM EM
Source: UN population division Source: Conference board
The Fed will also have to contend with the ongoing deflationary influence that the world’s major
Big surplus economies are
current account surplus economies (China, Japan, Germany and increasingly other parts of the
still deflationary for the world
eurozone) are likely to continue imposing on the rest of the world2. Running large surpluses
rather than using their high domestic savings to support a higher rate of domestic investment
was not such a pressing issue for the global economy in the pre-crisis years when the surplus
countries were lending to economies that were more than willing to borrow and spend. It raised
import demand which the surplus economies' exporters then benefited from. But now that even
the deficit economies are, for the most part, not eager to invest, it simply means weak growth in
the global economy and in world trade.
2
See: A tale of three surpluses: Local policies to curb the global savings glut, 15 September 2016.
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7. Excessive surpluses in DM remain a 8. Cyclically, eurozone activity seems to

deflationary influence on the world be turning up…
USD bn Current account balance USD bn Index Eurozone composite PMI Index
450 450 60 60
300 300
150 150 55 55
0 0
50 50
-150 -150
-300 -300
2005 2007 2009 2011 2013 2015 45 45
Japan Other Eurozone Germany 2010 2011 2012 2013 2014 2015 2016 2017
Source: National sources, Thomson Reuters Datastream Source: ECB
Eurozone activity data has Cyclically eurozone activity is generally surprising on the upside and, given the recent rise in the
been strong in recent months oil price, we think inflation looks set to breach 1.5% as soon as February but the rise in market
measures of longer-term inflation expectations seems to be overdone. Wage growth remains
disappointing with even pay demands in Germany softening in 2016. With growth expected to
remain muted in 2017 as the squeeze on real wages slows consumer spending, our eurozone
economists are projecting a renewed decline in inflation in 2018 after an oil-induced rise in
2017. In December even the ECB projected that eurozone inflation would still only be 1.7% by
2019 – more than a decade after the global financial crisis (chart 10).
9. …but wage growth is slowing despite 10. ECB inflation projections are
falling unemployment constantly being pushed out
% Yr Eurozone % Yr % ECB staff forecasts for HICP inflation %
3.5 13 2.0 2.0
3.0 12 1.6 1.6
2.5 11 1.2 1.2
2.0 10
0.8 0.8
1.5 9
0.4 0.4
1.0 8
0.5 7 0.0 0.0
00 02 04 06 08 10 12 14 16 2013 2014 2015 2016 2017 2018 2019
Compensation per employee (LHS) Legend refers to projections of inflation made at these dates
Unemployment rate (RHS) Dec-14 Dec-15

Mar-15 Dec-16
Source: National sources, Thomson Reuters Datastream Source: ECB
Political risk in the eurozone could also become a focus again, posing risks to the European
Elections will play a big role
in Europe in 2017
outlook and even the global one. At a minimum there will elections in the Netherlands, France
and Germany and, quite likely, Italy too. Non-traditional parties are gaining in the polls in each.
Hence there is also a pressing need for EU institutions to take decisions to address the
population’s primary concerns of immigration and terrorism. That would require political
agreement across member states. Joint spending on defence and immigration might be a good
place to start. Indeed, it would tick three boxes at once: (1) immediately address the primary
concerns of the EU electorate, (2) respond to criticism from the incoming US administration
regarding NATO contributions, and (3) be an important first step towards greater fiscal
integration within the eurozone.
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The dangers of anticipation
Despite these numerous political and policy uncertainties, financial markets are indicating few
Have markets got too
carried away?
signs of nervousness about economic prospects for 2017. Caution may be required as there are at
least three types of risks from markets anticipating significant policy changes before they have
even been agreed. One is that the policy promises are not kept. Another is that the policy mix
does not have the intended impact on the real economy. In each case, financial market excitement
would rapidly reverse. A third is that is that the moves in financial markets can start to impact
negatively on the real economy before the policies are even delivered.
Should any of these happen, the US would not be the first post-crisis example of a country
where the policy impact unfolded in an unpredictable way. Japan is a recent example.
Consensus growth forecasts for Japan in 2014 were revised up steadily in the course of 2013
following the election of Prime Minister Abe only to end the following year with actual growth
even weaker than before Abenomics was introduced (chart 11). Admittedly the April 2014
consumption tax rise was a policy error that has little prospect of being replicated in the US.
In the US the risks of disappointment are more likely to stem from the anticipated fiscal stimulus
not being delivered or because the tightening of US financial conditions slows the economy
before the fiscal stimulus has a chance of being put to work.
11. Abenomics did not deliver a sustained turnaround in Japan’s growth

Jan 12=100 Japan % Yr
145 2.0
Abe elected
135
1.5
125
1.0
115
0.5
105
95 0.0
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
Nikkei 225 in USD (LHS) Consensus GDP Growth for 2013 (RHS) Consensus GDP Growth 2014 (RHS)
Source: Thomson Reuters Datastream, Consensus Economics.
On the fiscal side we have taken a view that a Republican president, backed by a Republican
US debt ceiling may be raised
and a tax-cutting plan enacted
Congress and Senate, will allow the debt ceiling to be suspended to deliver a tax-cutting plan
for households and companies, which should be enacted by mid-year. This is likely to be closer
to the House tax plan than the larger tax-cutting plan proposed by Donald Trump (eg a
corporate tax rate cut from 35% to 20% rather than 15% as proposed by the president-elect). If
anything, it is the spending side of his plans, on infrastructure, that may disappoint in terms of
the speed and scale of what comes through quickly.
As for financial conditions, some elements have already tightened markedly, namely the rise in
short and long rates as well as the stronger dollar.
10
Q1 2017

Financial conditions starting to tighten
Debt service costs will rise only slowly in the US

Despite the rise in short and long-term interest rates and the USD appreciation, our measure of
Real rates have not risen as
much as nominal rates
US financial conditions is still loosening in y-o-y terms (chart 12). The rise in inflation means the
increase in real rates has been smaller than in nominal rates. The dollar has recently returned
to its January 2016 high, which in isolation would point to quite a negative impact on the real
economy (table 13). But whereas US financial conditions tightened in early 2016 as part of a
global risk-off move triggered by EM turmoil an important difference is that the post-election rally
has been a risk-on move. Equity markets have risen and bank lending standards continue to
loosen which are impacting on financial conditions more favourably.
12. US financial conditions are not yet tightening in y-o-y terms

% pts US Financial Conditions Indicator %pts
6 6
4 4
Looser
2 2
0 0
-2 -2
Tighter
-4 -4
-6 -6
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Real rates High yield spread Credit standards Real exchange rate Wealth Effects FCI
Source: Thomson Reuters Datastream, HSBC. Note: Chart shows estimated impact of changes in real short- and long-term interest rates, high-yield corporate bonds, lending
standards, the real exchange rate and wealth effects upon the annual GDP growth rate.
Therefore the USD may no longer be the automatic stabiliser for the US economy. For the past
Strong USD may have less
impact on US economy now
few years the USD has risen each time Fed rate rises get priced in but the currency
appreciation then slows the economy down and keeps inflation low so that rate expectations fall
and the dollar weakens again. Now, higher equity prices, looser bank lending standards and the
promised fiscal stimulus, assuming it materialises, may allow much of the economy to remain
resilient even in the face of a strong currency.
13. Estimates of the impact of USD strength on the US economy

Date Estimate
FRB/US model n/a A 10% increase in the exchange rate ripples through the economy gradually. In the first quarter after
the shock, growth is shaved by a negligible 0.08% and the inflation rate by 0.1 percentage point. After
two years, about 0.75% will have been taken off GDP.
New York Fed July 2016 A 10% appreciation in one quarter shaves 0.5 percentage point off GDP growth over one year
and an additional 0.2 percentage point in the following year if the strength of the dollar persists
Lael Brainard February 2016 The exchange rate appreciation and changes in equity valuations and long-term yields, over
mid-2014 to early 2016 meant the US experienced a tightening of financial conditions that is
the equivalent of an additional increase of over 75 basis points in the federal funds rate.
September 2016 20% appreciation of USD roughly equates to tighter financial conditions equivalent to a 200bps
fed funds increase
Source: HSBC, Federal Reserve, New York Fed
11
Q1 2017

As for the impact of the rise in rates that has already occurred and any further increases which
may lie ahead, a lot depends on the supply-side of the economy. If the rise in long-term rates
reflects a rise in r* then it does not amount to a tightening. In fact if growth potential is now
higher, rates would need to rise to prevent a loosening. At this point we simply can’t be sure.
In terms of the implications for debt service costs, the rise in rates (and our projection of a
Debt service costs of short-
term borrowers will rise most
further 75bps of Fed tightening in 2017-18) will be felt by short-term borrowers who have to roll
over debt in the next year or two. However, the effective rate for most borrowers (including the
government and most mortgage holders) will go up much more slowly as their debt will have
been contracted in an earlier period. The average maturity of US government debt is currently
7.5 years while for investment grade companies it is about 10.7 years. Even for US high-yield
corporate debt it is 6.3 years.
14. Public debt has grown as households 15. Low rates have lowered US interest
have deleveraged payments to historic lows
% GDP Debt by sector: US % GDP % GDP Interest payments: US % GDP
110 110 9 9
8 8
90 90
7 7
70 70 6 6
5 5
50 50
4 4
30 30 3 3
1977 1985 1993 2001 2009 2017 1977 1985 1993 2001 2009 2017
Household Corporate Government Household Corporate Government
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
As for consumers, household interest payments as a share of disposable income are still at
Interest payments are low as
a share of disposable income
multi-year lows, driven by deleveraging (chart 14) as much as low interest rates. Although there
will clearly be some impact on affordability of new mortgages, a rise in rates will not squeeze the
spending power of existing mortgage holders like it did in the run-up to the crisis as debt is
lower and floating rate (ARMs) mortgages have not been popular in the post-crisis, low rate
environment (chart 17). Since 2010 ARMs have accounted for less than 6% of mortgage
applications compared with more than a third just before the financial crisis.
16. US household deleveraging and low 17. Mortgage interest payments are much
long rates have lowered interest costs less sensitive to rate rises now
% disp. inc US % % US %
10 16 10 35
9 14
8 28
12
8
10 6 21
7
8 4 14
6
6
5 2 7
4
4 2 0 0
1976 1982 1988 1994 2000 2006 2012 2018 1990 1996 2002 2008 2014
H'hold interest payments as % disp'ble income (LHS) Fed Funds Rate (LHS)
US 30 year yield (RHS) ARMs applications as % total (RHS)
Source: Thomson Reuters Datastream. Note: Grey bars indicate recessions Source: Thomson Reuters Datastream. Note: Grey bars indicate recessions
12
Q1 2017

EM monetary conditions have tightened
The more immediate impact of higher US rates and a stronger dollar is already being felt across
Weaker currencies mean
tighter financial conditions
EM which had benefited again from strong capital inflows since early in 2016. Even countries
for EM with inappropriate policy mixes faced few problems financing their current account deficits with
cheap foreign funding in the six months or so before the US election but have now seen the
inflows reverse and currencies fall. Whereas FX depreciation in the likes of the eurozone and
Japan represents a loosening of monetary conditions, in EM it is a different matter. For banks
and non-banks in EM, this FX depreciation affects the supply and cost of foreign funding which
can lead to a tightening of financial conditions. This might well offset the impact of a fall in the
exchange rate on export growth, particularly in the face of weak global trade growth.
18. EM currencies have already fallen sharply since the US election

% FX change vs USD (*USD is trade weighted) %
6 6
4 4
2 2
0 0
-2 -2
-4 -4
-6 -6
-8 -8
-10 -10
-12 -12
ILS
INR
IDR
RUB
CAD
SEK
VND
THB
PHP
ZAR
CLP
NZD
PLN
NGN
HUF
KRW
AUD
TRY
JPY
COP
GBP
BRL
CHF
EUR
ARS
TWD
RMB
SGD
NOK
RON
MYR
MXN
USD*
Since 08 November 2016

Source: Thomson Reuters Datastream. Note: *USD is trade weighted.
Predictably, the currencies of the countries mentioned frequently in Mr Trump’s protectionist

Countries with high levels of
foreign currency external
rhetoric have been under pressure with the Mexican peso falling sharply and China’s authorities
debt face challenges tempering the decline in RMB through capital controls and exchange rate intervention.
Elsewhere the countries with the largest current account deficits, high short-term external debt
(especially foreign-currency denominated) and those with high foreign ownership of local asset
markets are most vulnerable to capital flight.
19. Many EM countries have increased their exposure to foreign currency debt
% GDP External debt by currency % GDP
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
South Africa
Korea
Thailand
Colombia
Argentina
Indonesia
Mexico
Russia
Turkey
India
Peru
Malaysia
Chile
Philippines
Romania
Foreign (Q2 2016) Domestic (Q2 2016) Total (foreign + domestic), Q2 2013
Note: Data are for Q2 2016.
Source: World Bank QEDS, National Central Banks
13
Q1 2017

Despite having lowered their external debt position since the ‘taper tantrum’ in 2013, Chile and
Turkey are the clear standouts (chart 19) and the share of the external debt that is foreign
currency denominated has continued to rise. According to the BIS, nearly 10% of EM USD-
denominated corporate debt is scheduled to mature in 2017, which means USD120bn will need to
be either rolled over or repaid. Debt service costs in some countries, including Malaysia and South
Africa, are less vulnerable to the exchange rate moves but they have similarly high levels of
external debt and a large share of their local debt market assets are held by overseas investors
(chart 20).
20. EM debt markets with high levels of foreign participation look vulnerable too
% Foreign ownership of local market debt %
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
Korea
Colombia
Russia
Brazil
Turkey
Mexico
Indonesia
India
Poland
Malaysia
Thailand
Hungary
South Africa
September 2016
Note: September 2016 latest comparable data point.
Source: National Central Banks.
Even for those countries with lower foreign-currency-denominated debt but which are still reliant
We now expect fewer rate
cuts in emerging markets
on credit growth, a slightly more active Fed and a stronger dollar imply less ability for many EM
central banks to ease further. Less than three months ago our economists had expected rate
cuts in most of Asia and some unwinding of previous tightening in Brazil and Colombia, but now
we expect no more rate cuts in China, Thailand and Malaysia, while Banco Central do Brasil
may be able to deliver less easing than previously expected. This means many emerging
markets will have less support from looser monetary policy and they can’t really pin their hopes
on a big boost to competitiveness vis-à-vis the currency as weakness has been broadly based
across EM. They must be hoping that there will be some kind of lift from stronger US demand.
21. Now less scope for central banks to cut rates in highly-leveraged EM
% GDP Priv ate Sector debt % GDP
250 250
200 200
150 150
100 100
50 50
0 0
Argentina
Malaysia
Thailand
Hungary
Mexic o
Russia
Brazil
South Africa
China
Czech Republic
Saudi Arabia
India
Indonesia
Turkey
Poland
Korea
Household Non-financial corporate 5 years ago (total)

Source: BIS
14
Q1 2017

Any global lift from US growth?
Typically, stronger US growth is good news for global growth as it tends to deliver an important
US growth may support DM
rather than EM
lift to the world trade cycle, benefiting export growth from much of the world. But the mix of
growth matters too. Much of the recent upgrade to our US forecasts came from the impact of tax
cuts on consumer spending, two-thirds of which is on services (more of which are domestically
provided) rather than goods. So the multiplier effect on import growth is much lower than for say
investment spending. It could also mean that EM benefit less than DM as more than 70% of US
services imports are from the developed world, while a rise in the demand for goods may be
more universally felt.
22. Developed economies are more tied into US demand for services imports
% US imports from: %
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
Goods Services
DM EM
Source: UN ComTrade, IMF DOTS
Moreover the US now makes up a smaller share of global demand. In the days when the US
And the US is no longer as
important as China to many
could single-handedly lift global trade in the 1980s it accounted for 18% of global imports. Now
countries’ fortunes it is just 12%. Whereas China only accounted for 1-2% of global imports in 1980s, it now
accounts for about 10%. Some of these may ultimately find their way back into the US in the
form of Chinese exports but quite simply many countries, particularly in EM, now rely more on
China’s growth than America’s.
23. For many EM, China is now a more 24. …particularly for commodities
important market than the US…
% Brazil share of exports to: % Share of global consumption in 2015 (%)
30 30 0 10 20 30 40 50 60 70
25 25 Soybean oil
Palm oil
20 20 Gas
Oil
15 15 Thermal Coal
Lead
10 10 Zinc
Iron ore
5 5 Nickel
Copper (refined)
0 0 Aluminium
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 0 10 20 30 40 50 60 70
China Axis Title US China US
Source: IMF DOTS Source: World Bank
15
Q1 2017

Nowhere is this more apparent than in demand for commodities. Commodity markets may have
been excited by all the talk of Trump’s infrastructure spending plans, but as mentioned above,
the reality of the situation is that the promised trillion dollars will be spread over the next decade
and is less than China has spent on public infrastructure over the past year. Chinese demand
will therefore remain much more important.
Commodity demand is more As our commodities economist, Paul Bloxham, highlighted in Trump and hard commodities,
influenced by China than US 16 November 2016, the bigger risk of a significant demand lift for commodities in the coming year or
two would be if China seriously steps up infrastructure spending in response to a slowing economy,
for instance, as a result of any protectionist action by the Trump administration.
25. Oil prices aren’t high enough for 26. …but will soon start to squeeze real
producers… wages for consumers
2017e fiscal breakeven oil price (USD/b) % Yr Real wage growth % Yr
Libya 164 3 3
Nigeria 126
Colombia
2 2
Algeria 1 1
Russia 0 0
Saudi Arabia
Qatar -1 -1
Iran -2 -2
UAE
-3 -3
Mexico
Iraq -4 -4
Kuwait 2010 2011 2012 2013 2014 2015 2016 2017 2018
0 25 50 75 100 USD/brl US UK Eurozone
Source: IMF, National Sources Source: Thomson Reuters Datastream, HSBC estimates
In the absence of a stronger acceleration in Chinese demand, commodity-producing emerging

USD55/barrel oil is still below
fiscal break-even level for
economies may be disappointed in the hopes for a bigger pick-up in prices. Oil producers in
many producers particular may be banking on a sharper rise driven by agreed supply cutbacks. Oil at around
USD55 per barrel is certainly an improvement on the levels early last year. However, it is well
below the level which will balance government budgets (chart 25) so will still imply big cutbacks
in public spending unless oil continues to rise to levels. This seems highly unlikely to be
reached in a world where US shale production can be stepped up quickly. The new US
administration’s policy promises suggest there may even be lighter regulation to support
hydrocarbon energy investment.
However, oil at USD55 per barrel is hardly ideal for the developed market consumer. With real
Real wage squeeze resuming
wage growth having picked up over the past couple years, helping to spur consumption, the
spike in headline inflation coming through in early 2017 (as seen in chart 26) will likely squeeze
real wage growth and therefore overall consumption. This poses a risk to our more optimistic
developed economy growth forecasts.
EM still offer the best long-term prospects
This all points to another challenging year for emerging economies. We still expect growth in
EM to be a little higher in 2017 than 2016 but less so than previously. Indeed the uncertainties
over US policy, in terms of the impact on global rates and exchange rates as well as global
trading relationships, mean there are risks of something much worse. Current account deficit
countries and/or those with less flexible exchange rates may be forced to change their existing
growth model and policy frameworks if they face a persistent reversal of capital inflows. Non-
market-friendly policy responses, such as capital controls, would not be a surprise in this world.
16
Q1 2017

Despite the clear risks for many countries in the near term, there are still reasons to believe that
EM still has tremendous
supply potential
the strong growth story in many emerging economies is far from over given their superior long-
term growth potential. Gauging potential growth in real time requires certain assumptions to be
made but we have made a simple cross-country estimate for the countries included in this
publication and the results are shown in chart 27. Assuming no improvement on the productivity
growth compared with post-crisis (the last five years) averages (based on data from the
Conference Board) and assuming working-age populations grow as the UN projects over the
next three years, then we can get a very simple approximation of potential growth over the next
few years. The chart makes it very clear that the emerging world’s long-term supply potential is
still higher than the developed world’s.
27. Supply potential remains far higher in EM than the developed world
% Yr ann. Productivity (2010-15) and population growth estimates (2017-2020) % Yr ann.
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
-2 -2
Brazil
Poland
Philippines
Indonesia
Nigeria
Japan
Saudi Arabia
Colombia
Mexico
France
Germany
Russia
Italy
India
South Korea
Turkey
Argentina
Singapore
New Zealand
Norway
Malaysia
Chile
Canada
US
UK
Spain
Sweden
China
Thailand
Australia
Hong Kong
Switzerland
South Africa
Productivity growth (EM) Productivity growth (DM) Working-age population growth (EM) Working-age population growth (DM)
Note: Productivity growth is a simple five-year average of the past five years (2010-2015) while population growth is taken from the UN population database and is the expected annualised
working-age (16-64) population growth rates in 2017-2020. The latter do not incorporate the impact of recent immigration which is likely to have a significant on some countries like Germany.
Source: HSBC estimates, The Conference Board, UN Population Division.
Admittedly, many emerging markets have, in recent years, undershot what we estimate to be
EM still growing at twice the
rate of DM
their potential, but on the whole, emerging markets have still outperformed developed ones. In
2015, despite registering the slowest pace of growth since the financial crisis, emerging markets
contributed more to global growth than developed markets. Near-term challenges lie ahead, but
our forecasts still expect aggregate EM growth to be more than double the pace of growth of
developed markets in 2017-18.
To examine whether these forecasts look realistic, we start by comparing the performance of
emerging markets to our estimates of their trend growth – from our The World in 2050
publication (11 January 2012) for which the underlying economic infrastructure is an important
input. As is clear from chart 28, most countries have underperformed the estimates of growth
potential, with only India, Indonesia, China and South Africa (in the latter due to weak
expectations rather than strong growth) exceeding the estimates we had back in 2010. This
geographical divergence strongly indicates that the model has been much more successful at
estimating growth in Asia than in other regions. Commodity producers such as Brazil and
Russia appear to have fared particularly poorly, which underlines the model’s shortcomings at
capturing external factors such as sharp moves in oil prices or unpredictable political factors
such as sanctions or political crises, rather than simply an index of “the rule of law”.
17
Q1 2017

28. Some have outperformed, but many EMs have disappointed since 2010
% Yr Real GDP growth (2010-15) % Yr
9 9
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
Russia
Brazil
Colombia
Indonesia
Mexico
Argentina
Poland
Turkey
South Korea
India
Chile
Malaysia
Philippines
Thailand
China
South Africa
HSBC World in 2050 projection Delivered
Source: HSBC report The World in 2050, Thomson Reuters Internationally Comparable data, Thomson Reuters Datastream
It is also worth noting that many economies have slowed significantly from their pre-crisis and
Some countries have fallen
away from their trend growth
initial post-crisis trend. This is evident in countries such as Brazil and Chile where the
economies were running at growth rates close to our longer-term estimates between 2010 and
2014 before they started to slow down. This again raises questions about the limitations of the
model in terms of being applicable to all regions.
29. Brazil’s GDP has veered away from 30. …whereas Chile’s has just moved to a
trend… lower trend
2010=100 Brazil 2010=100 2010=100 Chile 2010=100
130 130 150 150
125 125 140 140
120 120
130 130
115 115
120 120
110 110
105 105 110 110
100 100 100 100

2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Forecast Actual Forecast Actual
Source: HSBC estimates, Thomson Reuters Datastream Source: HSBC estimates, Thomson Reuters Datastream
Irrespective of the point estimates, however, for strong growth potential in EM to be maintained
Some economic infrastructure
is improving
there must be no weakening of the economic infrastructure. This is where there is still some scope
for optimism. As with most of the developed world, investment in many emerging countries has
been weak over the past few years but some key drivers of future growth have actually improved.
Most notable are education levels and life expectancy, as we can see in the table below. These
drivers should help to raise potential GDP per capita growth, even if the scope for catch-up lessens
as the level of GDP per capita converges towards developed world levels.
18
Q1 2017

31. EM economic infrastructure has actually improved over the past few years
Education
Working age Share of population with
GDP per capita population growth upper secondary or
(2010 USD) Life expectancy ___ Fertility rate ___ (annualised) higher
2010 Latest 2010 Latest 2010 Latest 2010-15 2015-20 2010 2015
China 4,515 6,416 75.0 75.8 1.5 1.6 0.3 -0.2 24% 28%
Brazil 11,121 11,159 73.3 74.4 1.9 1.8 1.2 0.9 35% 39%
Russia 10,675 11,039 68.9 70.4 1.6 1.7 -0.7 -1.0 86% 89%
India 1,388 1,806 66.5 68.0 2.6 2.4 1.7 1.4 31% 34%
Mexico 8,861 9,517 76.0 76.7 2.4 2.2 1.8 1.3 27% 31%
Indonesia 3,125 3,834 68.1 68.9 2.5 2.5 1.6 1.4 31% 35%
Turkey 10,112 11,525 74.1 75.2 2.1 2.1 1.6 1.1 32% 35%
Argentina 10,332 10,515 75.5 76.2 2.4 2.3 1.0 0.8 40% 45%
Poland 12,597 14,581 76.2 77.3 1.4 1.3 -0.5 -1.1 78% 82%
Thailand 5,112 5,775 73.7 74.4 1.5 1.5 0.4 -0.1 28% 31%
Colombia 6,251 7,448 73.3 74.0 2.0 1.9 1.5 1.2 41% 45%
South Africa 7,393 7,575 54.4 57.2 2.5 2.4 0.8 0.7 32% 35%
Malaysia 9,069 10,877 74.2 74.7 2.0 1.9 2.1 1.5 54% 62%
Chile 12,785 14,626 80.3 81.5 1.8 1.8 0.9 0.5 52% 56%
Philippines 2,145 2,635 67.8 68.3 3.1 3.0 2.2 2.0 58% 61%
OECD* 35,635 37,332 79.4 80.1 1.8 1.7 -0.2 -0.3 83% 84%
Note: Bold indicates higher level for latest data than in 2010. Ordered by GDP size. *OECD uses OECD data where available, but developed markets for population data and the US for
education data. Education data refers to duration of education, not necessarily final attainment.
Source: World Bank, UN Population Division
Plugging this latest economic infrastructure data into the same model we used in The World in
2050 (see page 32 of that document for information), we can see that there is plenty of reason
to believe that EM countries can still generate per capita growth roughly in line with the
projections made back in 2010, as shown in chart 32.
Better education levels, higher life expectancy and in many cases no deterioration in the rule of
Better economic infrastructure
should support growth
law or democracy scores mean the estimated potential per capita growth rates have not slowed
dramatically. Of course, this is only talking about potential, not whether this will necessarily be
achieved given the various factors not captured by the model. These include higher debt levels
as well as some factors we cannot capture such as political risk that may weigh on shorter term
growth rates.
32. GDP per capita potential is still high in the emerging world
% Yr GDP per capita growth forecasts % Yr
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
Poland
Brazil
South
Mexico
Korea
Russia
Indonesia
Colombia
Argentina
Turkey
India
Chile
Malaysia
Thailand
China
Philippines
South
Africa
From 'World in 2050' (for decade 2010-20) Using latest data (for 2016-20)
Note: Grey bars are those forecasts from “The World in 2050”, published 4 January 2011, for the whole decade 2010-20. The ‘latest’ bars use the same equation, as outlined within that
document, but update the data to use latest figures for education rates, democracy and rule of law scores, life expectancy, fertility rates, government spending as %GDP and trend inflation rates,
as well as updating the starting point in terms of GDP per capita, in order to make projections for 2016-2020.
Source: HSBC estimates.
So from a per capita perspective, the emerging world is still the main source of medium-term growth
potential for the world economy. This becomes even clearer when we turn to demographics.
19
Q1 2017

The demographic backdrop may not be quite as promising over the next five years as it was in
the recent past, but as we showed on chart 27, there is still a demographic dividend for much of
the emerging world, which should help to support growth. Some emerging markets will face
demographic challenges, as we discussed in The demographic divide: Which emerging markets
will get old before they get rich?, 4 May 2016, but on the whole the additional workers, consumers
and taxpayers create an advantage in terms of potential growth.
33. Demographics are still far better in EM than in the developed world
3.0
Nigeria
Working age population growth, % year ann., 2015-2020
2.5
Faster working age Saudi Arabia

2.0 Mexico
population growth than Philippines
1.5 previous 5 years India
Chile Indonesia Malaysia
Argentina Colombia
1.0 Turkey
Australia South Africa
New Zealand Norway Brazil Singapore
0.5 UK Switzerland
Sweden US Canada
France
0.0
Spain China South Korea
Italy
-0.5 Thailand
Germany Slower working age
Russia Hong Kong
Japan population growth than
-1.0
Poland
previous 5 years
-1.5
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0
Working age population growth, % year ann., 2010-2015
Source: UN Population Division. Note: EM in Red, DM in black. Note: The UN data do not incorporate the impact of recent immigration which is likely to have a significant on some countries, eg
Germany.
Chart 33 shows the demographic advantage enjoyed by the emerging world. While much of the
Emerging markets still have far
stronger demographics…
focus on global demographics focuses on the challenges faced by ageing populations in the
west such as in Japan and Germany, on the whole the emerging world should still enjoy a much
faster pace of working-age population growth over the next few years. Emerging market workers
will therefore become a larger part of the global workforce, and even more important for the
future growth rates of the world economy.
34. Emerging markets are becoming a 35. …as they drive more and more of
bigger share of global exports… global growth
% of total Exports to EM as a share of all exports % of total % Yr Real GDP growth % Yr
45 45 8 8
40 40 6 6
35 35 4 4
30 30 2 2
25 25 0 0
20 20 -2 -2
15 15 -4 -4
1981 1987 1993 1999 2005 2011 2017 1980 1986 1992 1998 2004 2010 2016
DM EM EM DM World
Source: IMF DOTS. Note: 12 month rolling sum. Source: HSBC, IMF
Equally, as these countries develop and the nature of growth becomes more domestically
…and EM consumers continue
to play a bigger role in global
oriented and consumer-led, such as we’re seeing in China, the influence on developed markets
growth may pick up once more. So, even though we have some new and some existing concerns about
many emerging markets over the course of our forecast horizon, and emerging market crises of
one sort another will no doubt feature from time to time in the coming decades, these countries
are still going to be gaining in importance for the rest of the world.
20
Q1 2017

Global economic forecasts
21
Q1 2017

GDP
Annual
% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World (Nominal GDP weights) 1.1 -2.3 4.0 2.7 2.1 2.2 2.6 2.7 2.2 2.5 2.6
World (PPP Weights) 2.6 -0.3 5.4 3.9 3.3 3.4 3.6 3.4 2.9 3.3 3.6
Developed -0.1 -3.7 2.6 1.4 1.1 1.2 1.8 2.1 1.6 1.7 1.8
Emerging 5.2 2.2 8.2 6.3 4.9 5.0 4.6 4.0 3.6 4.1 4.5
North America -0.2 -2.8 2.6 1.7 2.2 1.7 2.4 2.5 1.6 2.3 2.6
US -0.3 -2.8 2.5 1.6 2.2 1.7 2.4 2.6 1.6 2.3 2.7
Canada 1.0 -2.9 3.1 3.1 1.7 2.5 2.6 0.9 1.3 1.7 1.6
Asia-Pacific 2.8 0.9 7.0 3.9 4.2 4.5 4.0 4.1 3.9 4.0 4.0
Asia Big Three 2.9 1.1 7.2 4.0 4.5 4.9 4.1 4.5 4.2 4.4 4.3
China 9.6 9.2 10.4 9.3 7.7 7.7 7.3 6.9 6.7 6.5 6.5
Japan -1.1 -5.4 4.2 -0.1 1.5 2.0 0.3 1.2 1.0 1.2 0.6
India* 3.9 8.5 10.3 4.4 5.6 6.6 7.2 7.6 6.3 7.1 7.6
Asia ex Big Three 2.7 0.5 6.5 3.8 3.5 3.2 3.6 2.8 2.8 2.9 3.0
Australia 2.6 1.8 2.3 2.7 3.6 2.1 2.8 2.4 2.4 2.8 3.2
South Korea 2.8 0.7 6.5 3.7 2.3 2.9 3.3 2.6 2.7 2.4 2.4
Indonesia 6.0 4.6 6.7 6.2 6.0 5.6 5.0 4.8 5.1 5.1 5.3
Taiwan 0.7 -1.6 10.6 3.8 2.1 2.2 4.0 0.7 1.2 1.7 1.6
Thailand 1.7 -0.7 7.5 0.8 7.2 2.7 0.8 2.8 3.0 3.2 3.2
Malaysia 4.8 -1.5 7.5 5.3 5.5 4.7 6.0 5.0 4.0 3.8 3.6
Singapore 1.9 -0.7 15.3 6.2 3.7 4.6 3.3 2.0 1.2 1.1 1.5
Hong Kong 2.1 -2.5 6.8 4.8 1.7 3.1 2.6 2.4 1.4 1.8 2.4
Philippines 4.2 1.1 7.6 3.7 6.7 7.1 6.2 5.9 6.8 6.5 6.5
New Zealand -0.3 -1.6 1.5 2.0 2.6 2.4 3.7 2.5 3.2 3.0 2.9
Western Europe 0.2 -4.3 2.1 1.6 -0.3 0.3 1.6 2.0 1.7 1.3 1.3
Eurozone 0.3 -4.5 2.0 1.6 -0.9 -0.2 1.2 1.9 1.6 1.2 1.3
Germany 0.8 -5.6 3.9 3.7 0.7 0.6 1.6 1.5 1.7 1.6 1.7
France 0.1 -2.9 1.9 2.1 0.2 0.6 0.7 1.2 1.1 1.0 1.1
Italy -1.1 -5.5 1.6 0.7 -2.9 -1.7 0.2 0.7 0.9 0.6 0.8
Spain 1.1 -3.6 0.0 -1.0 -2.9 -1.7 1.4 3.2 3.3 2.5 2.0
Other Western Europe -0.1 -3.9 2.5 1.7 1.3 1.9 2.8 2.1 2.0 1.3 1.4
UK -0.6 -4.3 1.9 1.5 1.3 1.9 3.1 2.2 2.0 1.2 1.3
Switzerland 2.2 -2.1 2.8 1.9 1.1 1.8 2.0 0.8 1.4 1.5 1.6
Sweden -0.7 -5.1 5.7 2.7 0.1 1.2 2.7 3.8 3.2 2.1 2.0
Norway** 1.6 -1.4 1.8 1.9 3.6 2.4 2.2 1.0 0.7 1.1 1.2
CEEMEA 4.6 -2.7 5.6 6.7 3.7 3.5 3.0 1.7 0.8 1.5 2.0
Russia 5.2 -7.8 4.5 4.3 3.5 1.3 0.7 -3.7 -0.5 1.0 1.5
Turkey 1.7 -4.3 8.4 11.2 4.9 8.5 5.3 6.0 2.2 2.3 2.5
Saudi Arabia 8.4 1.8 7.4 10.0 5.4 2.7 3.6 3.4 0.6 0.8 1.4
Nigeria 6.0 7.0 8.0 5.3 4.2 5.5 6.2 2.8 -1.6 1.5 2.9
Poland 4.2 2.8 3.6 5.0 1.6 1.4 3.3 3.9 2.6 2.6 3.2
South Africa 3.2 -1.5 3.0 3.2 2.2 2.2 1.5 1.3 0.4 0.7 1.1
Latin America 3.3 -2.6 6.5 4.5 2.7 2.5 1.0 0.2 -0.5 1.5 2.6
Brazil 5.1 -0.1 7.5 4.0 1.9 3.0 0.5 -3.8 -3.5 0.7 2.5
Mexico 1.4 -4.7 5.1 4.0 4.0 1.3 2.2 2.5 1.9 1.7 2.5
Argentina 4.1 -5.9 10.1 6.0 -1.0 2.4 -2.5 2.5 -2.2 2.5 2.8
Colombia 3.5 1.7 4.0 6.6 4.0 4.9 4.4 3.1 1.8 2.0 3.2
Chile 3.3 -1.0 5.8 5.8 5.5 4.0 1.9 2.3 1.5 2.0 2.5
Notes: Real GDP. *India data in fiscal year (2012= April 2012 to March 2013). GDP data from 2012 onwards is as per the new series (2011-12 prices); **Mainland. We now calculate the weighting system using chain nominal GDP (USD) weights
22
Q1 2017

Quarterly
% Quarter & % Year Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16f Q1 17f Q2 17f Q3 17f Q4 17f
North America
US* % Quarter 2.0 0.9 0.8 1.4 3.5 2.1 2.0 2.3 2.5 2.6
% Year 2.2 1.9 1.6 1.3 1.7 2.0 2.3 2.5 2.2 2.4
Canada* % Quarter 2.3 0.5 2.7 -1.3 3.5 1.6 1.8 1.7 1.7 1.6
% Year 0.8 0.4 1.3 1.1 1.3 1.6 1.4 2.1 1.7 1.7
Asia-Pacific
China % Year 6.9 6.8 6.7 6.7 6.7 6.8 6.5 6.6 6.6 6.5
Japan % Quarter 0.2 -0.4 0.7 0.5 0.3 0.0 0.5 0.3 0.3 0.2
% Year 2.1 1.1 0.4 0.9 1.1 1.5 1.3 1.2 1.2 1.3
India % Year 7.6 7.2 7.9 7.1 7.3 5.0 6.0 6.8 7.1 7.1
Australia % Quarter 0.8 0.6 1.0 0.6 -0.5 0.9 0.9 0.9 0.8 0.7
% Year 2.4 2.6 2.5 3.1 1.8 2.1 2.0 2.3 3.6 3.4
South Korea % Year 2.8 3.1 2.8 3.3 2.6 2.3 2.6 2.3 2.2 2.4
Indonesia % Year 4.7 5.0 4.9 5.2 5.0 5.2 5.2 5.1 5.2 5.1
Taiwan % Year -0.7 -0.8 -0.2 1.1 2.0 2.0 2.0 1.7 1.7 1.7
Thailand % Year 2.9 2.8 3.2 3.5 3.2 2.3 2.6 3.0 3.4 3.8
Malaysia % Year 4.7 4.5 4.2 4.0 4.3 3.7 3.9 4.1 3.4 3.9
Singapore % Year 1.9 1.7 1.7 2.1 1.1 0.1 0.5 0.8 1.6 1.5
Hong Kong % Year 2.3 1.9 0.8 1.7 1.9 1.3 1.4 1.8 1.7 2.2
Philippines % Year 6.2 6.5 6.8 7.0 7.1 6.2 5.9 6.0 7.3 6.8
New Zealand % Year 2.3 2.3 3.0 3.6 3.5 3.2 3.2 3.1 2.8 2.8
Western Europe
Eurozone % Quarter 0.3 0.5 0.5 0.3 0.3 0.4 0.3 0.3 0.3 0.3
% Year 1.9 2.0 1.7 1.7 1.7 1.5 1.3 1.3 1.2 1.2
Germany % Quarter 0.2 0.4 0.7 0.4 0.2 0.4 0.5 0.4 0.4 0.3
% Year 1.7 1.3 1.8 1.7 1.7 1.7 1.5 1.5 1.7 1.6
France % Quarter 0.4 0.4 0.6 -0.1 0.2 0.5 0.1 0.2 0.4 0.3
% Year 1.1 1.3 1.4 1.2 1.0 1.2 0.7 1.0 1.1 1.0
Italy % Quarter 0.1 0.2 0.4 0.1 0.3 0.1 0.2 0.2 0.2 0.2
% Year 0.6 0.9 1.0 0.8 1.0 0.9 0.6 0.7 0.6 0.6
Spain % Quarter 0.9 0.8 0.8 0.8 0.7 0.8 0.6 0.5 0.5 0.5
% Year 3.4 3.6 3.4 3.4 3.2 3.2 3.0 2.6 2.4 2.0
Other Western Europe
UK % Quarter 0.3 0.7 0.4 0.7 0.6 0.4 0.2 0.1 0.1 0.3
% Year 1.9 1.7 1.9 2.1 2.2 2.0 1.9 1.3 0.8 0.7
Switzerland % Year 0.8 0.5 1.1 2.0 1.3 1.3 1.5 1.3 1.6 1.6
Sweden % Year 4.3 4.5 4.2 3.6 2.8 2.2 2.2 2.1 2.1 1.8
Norway** % Year 0.9 0.3 0.3 0.6 0.7 1.1 1.1 1.0 1.1 1.2
CEEMEA
Russia % Year -3.7 -3.8 -1.2 -0.6 -0.4 -0.2 0.4 0.9 1.1 1.4
Turkey % Year 5.9 7.4 4.5 4.5 -1.8 1.8 1.6 2.3 2.8 2.3
Nigeria % Year 2.8 2.1 -0.4 -2.1 -2.2 -1.7 1.3 2.3 2.2 2.1
Poland % Year 3.7 4.6 3.0 3.1 2.5 1.8 2.1 2.2 3.0 3.0
South Africa % Year 0.8 0.5 -0.1 0.7 0.7 0.7 1.2 0.5 0.8 0.7
Latin America
Brazil % Quarter -1.6 -1.3 -0.5 -0.4 -0.8 -0.3 0.1 1.5 0.5 0.0
% Year -4.5 -5.8 -5.4 -3.6 -2.9 -2.0 -1.4 0.5 1.9 2.2
Mexico % Quarter 0.6 0.5 0.5 0.1 1.0 -0.3 0.7 0.3 0.5 0.4
% Year 2.7 2.4 2.3 2.6 2.0 1.0 1.7 1.4 1.7 1.8
Argentina % Quarter -0.1 -0.4 -0.7 -0.7 -0.2 0.4 0.6 0.8 0.7 -0.1
% Year 3.5 2.3 0.4 -3.4 -3.8 -1.5 3.7 1.6 2.5 2.1
Colombia % Quarter 1.1 0.5 0.2 0.1 0.3 1.1 -0.2 0.8 0.5 1.4
% Year 3.3 3.3 2.5 2.0 1.2 1.7 1.3 2.0 2.2 2.5
Chile % Quarter 0.5 0.0 1.1 -0.4 0.0 -0.1 2.0 0.6 -1.2 1.1
% Year 2.5 1.7 2.3 1.6 1.6 0.7 1.6 2.5 1.3 2.5
Notes:*Quarterly annualised rate; **Mainland.
23
Q1 2017

Consumer prices
Annual
% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World 5.3 2.1 3.4 4.4 3.5 3.2 3.0 2.3 2.6 3.0 2.7
Developed 3.3 0.0 1.5 2.6 1.9 1.3 1.4 0.2 0.8 1.9 1.7
Emerging 7.7 4.4 5.4 6.2 5.0 4.8 4.4 4.1 4.2 3.9 3.5
North America 3.7 -0.3 1.7 3.1 2.0 1.4 1.6 0.2 1.3 2.2 2.1
US 3.8 -0.4 1.6 3.2 2.1 1.5 1.6 0.1 1.3 2.3 2.1
Canada 2.4 0.3 1.8 2.9 1.5 0.9 1.9 1.1 1.5 1.6 1.8
Asia-Pacific 5.6 2.2 3.9 4.8 3.6 3.6 3.1 2.1 2.2 2.6 2.5
Asia Big Three 5.5 2.3 4.3 5.2 3.9 3.9 3.1 2.2 2.3 2.7 2.5
China 5.9 -0.7 3.3 5.4 2.7 2.6 2.0 1.5 2.0 2.2 2.1
Japan 1.4 -1.3 -0.7 -0.3 0.0 0.4 2.7 0.8 -0.2 0.9 1.1
India* 9.1 12.3 10.7 9.2 9.9 9.4 6.0 4.9 4.7 5.0 4.6
Asia ex Big Three 5.4 1.7 2.7 3.4 2.6 2.6 2.8 1.8 1.6 2.2 2.3
Australia 4.4 1.8 2.9 3.3 1.8 2.4 2.5 1.5 1.3 2.5 2.6
South Korea 4.7 2.8 2.9 4.0 2.2 1.3 1.3 0.7 1.0 1.7 1.5
Indonesia 9.8 5.0 5.1 5.3 4.0 6.4 6.4 6.4 3.5 4.1 4.4
Taiwan 3.5 -0.9 1.0 1.4 1.9 0.8 1.2 -0.3 1.2 1.3 1.0
Thailand 5.5 -0.9 3.3 3.8 3.0 2.2 1.9 -0.9 0.2 1.7 2.0
Malaysia 5.4 0.6 1.7 3.2 1.7 2.1 3.1 2.1 2.0 2.5 2.6
Singapore 6.6 0.6 2.8 5.2 4.6 2.4 1.0 -0.5 -0.6 0.8 1.6
Hong Kong 4.3 0.6 2.3 5.3 4.1 4.3 4.4 3.0 2.6 2.7 2.8
Philippines 8.2 4.3 3.8 4.7 3.2 2.9 4.2 1.4 1.7 3.6 3.6
New Zealand 4.0 2.1 2.3 4.0 1.1 1.1 1.2 0.3 0.6 1.7 1.9
Western Europe 3.3 0.6 1.9 2.9 2.4 1.5 0.6 0.0 0.3 1.7 1.5
Eurozone 3.3 0.3 1.6 2.7 2.5 1.3 0.4 0.0 0.2 1.6 1.3
Germany 2.7 0.2 1.2 2.5 2.1 1.6 0.8 0.1 0.4 1.8 1.7
France 3.2 0.1 1.7 2.3 2.2 1.0 0.6 0.1 0.3 1.4 1.3
Italy 3.5 0.8 1.6 2.9 3.3 1.3 0.2 0.1 -0.1 1.2 1.0
Spain 4.1 -0.2 2.0 3.1 2.4 1.5 -0.2 -0.6 -0.4 1.8 1.2
Other Western Europe 3.5 1.6 2.7 3.6 2.1 1.9 1.2 0.1 0.8 2.3 2.1
UK 3.6 2.2 3.3 4.5 2.8 2.6 1.5 0.0 0.6 2.8 2.6
Switzerland 2.4 -0.5 0.7 0.2 -0.7 -0.2 0.0 -1.1 -0.4 0.3 0.7
Sweden 3.4 -0.5 1.2 3.0 0.9 0.0 -0.2 0.0 1.0 1.4 1.0
Norway 3.8 2.2 2.4 1.3 0.7 2.1 2.0 2.2 3.3 1.8 1.7
CEEMEA 11.1 8.4 7.0 7.0 6.4 5.7 6.0 8.0 6.7 6.4 5.3
Russia 14.1 11.7 6.9 8.5 5.1 6.8 7.8 15.6 7.1 4.7 4.0
Turkey 10.4 6.3 8.6 6.5 8.9 7.5 8.9 7.7 7.7 9.1 7.8
Saudi Arabia 9.9 5.1 5.3 5.0 4.5 3.5 2.7 2.2 3.6 3.4 3.4
Nigeria 11.5 12.6 13.8 10.9 12.1 8.0 8.1 9.0 15.6 15.3 10.5
Poland 4.2 3.5 2.6 4.3 3.7 0.9 0.0 -0.9 -0.6 1.5 1.6
South Africa 11.0 7.2 4.3 5.0 5.7 5.8 6.1 4.6 6.3 6.2 5.6
Latin America 7.8 6.0 6.1 7.0 6.8 7.0 8.7 8.3 10.1 6.7 5.8
Brazil 5.7 4.9 5.0 6.6 5.4 6.2 6.3 8.3 8.8 4.8 4.9
Mexico 5.1 5.3 4.2 3.4 4.1 3.8 4.0 2.7 2.8 3.7 3.8
Argentina** 23.8 15.6 21.6 22.2 24.0 25.3 38.6 28.1 41.0 27.2 18.4
Colombia 7.0 4.2 2.3 3.4 3.2 2.0 2.9 5.0 7.5 4.4 3.7
Chile 8.7 1.5 1.5 3.3 3.0 1.9 4.4 4.3 3.8 2.7 2.9
Note: *India data in fiscal year (2012= April 2012 to March 2013). **: Average of private estimates compiled by Congresspersons used from 2007 to 2016. GDP data from 2012 onwards is as per the new series (2011-12 prices). We now calculate
the weighting system using GDP PPP (USD) weights
24
Q1 2017

Quarterly
% Year Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16f Q1 17f Q2 17f Q3 17f Q4 17f
North America
US 0.1 0.5 1.1 1.0 1.1 1.8 2.5 2.3 2.4 2.1
Canada 1.1 1.3 1.6 1.6 1.3 1.5 1.6 1.5 1.7 1.7
Asia-Pacific
China 1.7 1.5 2.1 2.1 1.7 2.0 2.0 2.0 2.3 2.3
Japan 0.2 0.3 0.0 -0.3 -0.5 0.2 0.6 0.9 1.0 1.0
India 3.9 5.3 5.3 5.7 5.2 4.1 4.1 4.1 5.2 5.6
Australia 1.5 1.7 1.3 1.0 1.3 1.7 2.5 2.6 2.5 2.3
South Korea 0.7 1.1 1.0 0.9 0.8 1.3 1.6 1.9 1.9 1.4
Indonesia 7.1 4.8 4.3 3.5 3.0 3.3 2.9 4.3 4.2 4.8
Taiwan -0.3 0.3 1.7 1.3 0.7 1.2 1.5 1.5 1.2 1.2
Thailand -1.1 -0.9 -0.5 0.3 0.3 0.7 1.8 1.2 1.8 2.0
Malaysia 3.0 2.6 3.4 1.9 1.3 1.4 2.2 2.6 2.6 2.6
Singapore -0.6 -0.7 -0.8 -0.9 -0.4 -0.2 0.4 0.9 0.8 1.2
Hong Kong 2.3 2.4 2.9 2.7 3.5 2.3 2.3 2.4 2.7 2.7
Philippines 0.6 1.0 1.1 1.5 2.0 2.3 3.2 3.6 3.8 3.7
New Zealand 0.4 0.1 0.4 0.4 0.4 1.2 1.6 1.6 1.8 1.9
Western Europe
Eurozone 0.1 0.2 0.1 -0.1 0.3 0.7 1.6 1.6 1.6 1.5
Germany 0.0 0.3 0.1 0.0 0.4 0.9 1.8 1.9 1.8 1.6
France 0.1 0.2 0.0 0.1 0.4 0.7 1.5 1.4 1.4 1.3
Italy 0.3 0.2 0.0 -0.4 0.0 0.1 1.1 1.3 1.1 1.2
Spain -0.6 -0.5 -0.8 -1.0 -0.3 0.6 2.0 1.9 1.7 1.4
UK 0.0 0.1 0.4 0.4 0.7 1.2 1.9 2.6 3.2 3.6
Switzerland -1.4 -1.4 -1.0 -0.4 -0.2 -0.2 0.1 0.1 0.1 0.6
Sweden -0.1 0.1 0.7 0.8 1.0 1.4 1.5 1.4 1.4 1.2
Norway 2.0 2.5 3.2 3.4 4.0 2.4 1.9 1.8 1.8 1.8
CEEMEA
Russia 15.7 14.5 8.4 7.4 6.8 6.0 5.3 4.8 4.5 4.3
Turkey 7.3 8.2 8.6 6.9 8.0 7.2 7.7 9.2 9.3 10.1
Nigeria 9.3 9.4 11.3 15.3 17.6 18.6 18.1 15.7 14.0 12.5
Poland -0.7 -0.6 -0.9 -0.9 -0.8 0.1 1.6 1.8 1.5 1.2
South Africa 4.7 4.9 6.5 6.2 6.0 6.5 6.8 6.3 6.0 5.6
Latin America
Brazil 9.5 10.4 10.1 9.1 8.7 7.1 4.8 4.6 4.6 4.7
Mexico 2.6 2.3 2.7 2.6 2.8 3.2 3.4 3.7 3.9 3.8
Argentina* 26.5 26.0 33.1 44.0 44.5 41.8 36.3 27.4 23.8 23.2
Colombia 4.9 6.4 7.7 8.2 8.1 6.1 4.6 4.3 4.4 4.4
Chile 4.8 4.1 4.6 4.2 3.5 2.9 2.7 2.7 2.7 2.8
Note:*Average of private estimates compiled by Congresspersons used from 2007 to 2016
25
Q1 2017

Policy Rates
End period _____ 2016 ______ _________________ 2017 __________________ _________________ 2018 __________________
Q3 Q4f Q1f Q2f Q3f Q4f Q1f Q2f Q3f Q4f
North America
US* 0.375 0.625 0.625 0.875 0.875 1.125 1.125 1.375 1.375 1.375
Canada 0.50 0.50 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50
Asia-Pacific
China 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35
Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
India 6.25 6.25 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00
Australia 1.50 1.50 1.50 1.50 1.50 1.50 1.75 1.75 2.00 2.00
South Korea 1.25 1.25 1.25 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Indonesia 5.00 4.75 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Taiwan 1.375 1.375 1.250 1.125 1.125 1.125 1.125 1.125 1.125 1.125
Thailand 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
Hong Kong 0.75 1.00 1.00 1.25 1.25 1.50 1.50 1.75 1.75 1.75
Philippines 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
New Zealand 2.00 1.75 1.75 1.75 1.75 1.75 2.00 2.00 2.25 2.25
Western Europe
Eurozone (Refi) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Eurozone (Deposit) -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40
UK 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Switzerland -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25 -1.25/-0.25
Sweden -0.50 -0.50 -0.50 -0.50 -0.50 -0.50 -0.50 -0.25 -0.25 0.00
Norway 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
CEEMEA
Russia 10.00 10.00 9.50 9.00 8.50 8.00 7.50 7.00 7.00 7.00
Turkey 7.50 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00
Poland 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
South Africa 7.00 7.00 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25
Nigeria 14.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00 14.00
Latin America
Brazil 13.75 13.75 12.75 12.00 11.50 11.00 10.50 10.25 9.75 9.50
Mexico 4.75 5.75 5.75 6.25 6.25 6.75 6.75 6.75 6.75 6.75
Argentina** 27.00 24.75 23.00 21.00 19.25 17.75 16.25 14.75 13.75 13.00
Colombia 7.75 7.50 6.75 6.00 5.75 5.75 5.75 5.75 5.75 5.75
Chile 3.50 3.50 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
Note: *Midpoint of Federal Funds target range.** 1-month Lebac until end-2016, mid-point of 7-day repo rate thereafter.
26
Q1 2017

Long rates
10 year bond yields

End period 2015 _____________________ 2016 ______________________ _____________________ 2017_______________________
Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17f Q2 17f Q3 17f Q4 17f
Americas
US 2.3 1.8 1.5 1.6 2.5 2.5 2.3 2.0 1.4
Canada 1.4 1.2 1.1 1.0 1.7 1.4 1.3 1.1 1.0
Asia-Pacific
China 2.9 2.9 2.9 2.8 3.2 3.1 3.2 3.1 3.0
Japan 0.3 0.0 -0.2 -0.1 0.1 0.0 0.0 0.0 0.0
India 7.8 7.5 7.5 7.0 6.6 6.0 6.0 6.1 6.2
Australia 2.9 2.5 2.0 2.0 2.9 3.0 2.4 1.9 1.7
South Korea 2.1 1.8 1.5 1.4 2.1 2.5 2.3 2.1 1.9
Indonesia 8.9 7.7 7.5 7.1 7.9 8.1 7.9 7.7 7.5
Taiwan 1.0 0.9 0.8 0.7 1.3 1.4 1.5 1.5 1.5
Thailand 2.5 1.7 2.0 2.2 2.8 2.7 2.5 2.3 2.2
Malaysia 4.2 3.8 3.7 3.6 4.2 4.5 4.3 4.0 3.8
Singapore 2.6 1.9 1.9 1.8 2.5 2.4 2.2 1.8 1.3
Hong Kong 1.6 1.3 1.0 1.0 2.1 2.2 2.2 2.1 2.0
Philippines 4.1 4.7 4.2 3.6 4.6 4.7 5.2 5.5 5.3
New Zealand 3.6 3.0 2.4 2.3 3.5 3.4 2.5 2.0 1.9
Western Europe
Eurozone* 1.1 0.7 0.6 0.4 0.9 0.9 0.7 0.6 0.4
Germany 0.6 0.2 -0.1 -0.1 0.2 0.2 0.1 -0.1 -0.2
France 1.0 0.4 0.2 0.2 0.7 0.7 0.4 0.3 0.1
Italy 1.6 1.2 1.3 1.2 1.8 1.9 1.7 1.6 1.5
Spain 1.8 1.4 1.2 0.9 1.4 1.6 1.4 1.3 1.1
UK 2.0 1.4 0.9 0.7 1.3 1.8 1.6 1.5 1.4
Norway 1.5 1.1 1.0 1.2 1.8 1.9 1.9 2.0 2.1
Sweden 1.3 0.8 0.3 0.2 0.6 0.7 0.8 0.9 1.0
Switzerland -0.1 -0.3 -0.6 -0.6 0.0 0.0 0.0 0.1 0.2
CEEMEA
Russia 9.7 9.1 8.3 8.2 8.5 8.6 8.6 8.6 7.5
Turkey 10.5 9.7 9.0 9.5 11.2 11.0 12.0 12.0 12.0
Poland 2.9 2.8 2.9 2.9 3.6 3.6 3.6 3.6 3.4
South Africa 9.8 9.1 8.8 8.7 8.9 9.2 9.2 9.2 8.5
Latin America
Brazil 16.5 13.8 12.2 11.6 11.5 11.5 11.0 10.5 10.0
Mexico 6.3 6.0 5.9 6.0 7.6 8.0 8.2 8.1 8.1
Colombia 8.3 8.0 7.6 7.0 7.1 6.8 6.8 6.6 6.5
Chile 4.8 4.4 4.5 4.2 4.4 4.5 4.3 4.1 4.0
Note: *Weighted average of big-4
Source: HSBC estimates, Bloomberg
27
Q1 2017

Exchange rates vs USD
End period _____________ 2015 _______________ _____________ 2016 _______________ _____________ 2017 _______________
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1f Q2f Q3f Q4f
Americas
Canada (CAD) 1.27 1.25 1.34 1.38 1.30 1.30 1.31 1.35 1.40 1.45 1.40 1.40
Mexico (MXN) 15.27 15.69 16.91 17.23 17.28 18.47 19.34 20.64 21.25 22.00 21.50 21.00
Brazil (BRL) 3.20 3.11 3.96 3.96 3.56 3.18 3.24 3.25 3.35 3.50 3.42 3.35
Argentina (ARS) 8.82 9.08 9.42 12.94 14.59 14.94 15.26 15.88 16.25 16.75 17.25 18.00
Chile (CLP) 625 639 697 709 668 660 657 670 680 690 685 680
Asia/Pacific
Japan (JPY) 120 122 120 120 113 103 101 117 120 125 120 115
Australia (AUD)* 0.76 0.77 0.70 0.73 0.77 0.74 0.77 0.72 0.69 0.67 0.70 0.70
New Zealand (NZD)* 0.75 0.68 0.64 0.68 0.69 0.71 0.73 0.69 0.67 0.65 0.68 0.68
China (CNY) 6.20 6.20 6.36 6.49 6.45 6.65 6.67 6.95 7.05 7.10 7.15 7.20
Hong Kong (HKD) 7.75 7.75 7.75 7.75 7.76 7.76 7.76 7.76 7.80 7.80 7.80 7.80
India (INR) 62.3 63.6 65.5 66.2 66.1 67.5 66.6 68.0 69.0 70.5 69.5 69.0
Indonesia (IDR) 13074 13353 14637 13856 13118 13179 13020 13540 13800 14000 13800 13600
Malaysia (MYR) 3.71 3.74 4.39 4.30 3.87 3.99 4.13 4.49 4.50 4.50 4.50 4.50
Philippines (PHP) 44.7 45.1 46.7 46.9 46.0 47.1 48.3 49.6 50.5 51.0 50.5 49.5
Singapore (SGD) 1.37 1.35 1.42 1.42 1.35 1.35 1.36 1.45 1.47 1.49 1.47 1.45
South Korea (KRW) 1109 1118 1185 1176 1142 1152 1099 1208 1225 1250 1230 1210
Taiwan (TWD) 31.3 30.9 33.0 32.9 32.2 32.2 31.3 32.4 32.6 33.2 32.6 32.2
Thailand (THB) 32.6 33.8 36.4 36.0 35.1 35.1 34.6 35.9 36.2 36.6 36.0 35.6
Western Europe
Eurozone (EUR)* 1.07 1.12 1.12 1.09 1.14 1.11 1.12 1.05 1.01 1.05 1.07 1.10
UK (GBP)* 1.48 1.57 1.51 1.47 1.44 1.33 1.30 1.24 1.18 1.15 1.12 1.10
Sweden (SEK) 8.63 8.29 8.38 8.46 8.11 8.48 8.58 9.09 9.50 9.33 9.16 8.91
Norway (NOK) 8.06 7.84 8.54 8.85 8.27 8.38 8.00 8.62 8.61 8.29 8.13 7.91
Switzerland (CHF) 0.97 0.94 0.97 1.00 0.96 0.98 0.97 1.02 1.07 1.03 1.01 0.98
CEEMEA
Poland (PLN) 3.80 3.76 3.80 3.93 3.73 3.95 3.83 4.18 4.36 4.29 4.30 4.18
Russia (RUB) 58.2 55.3 65.5 72.9 67.2 63.9 62.9 61.2 57.0 57.0 62.0 65.0
Turkey (TRY) 2.60 2.68 3.03 2.92 2.82 2.87 3.00 3.53 3.70 3.80 3.80 3.85
South Africa (ZAR) 12.14 12.15 13.86 15.49 14.69 14.69 13.73 13.73 14.50 15.00 14.50 14.00
Nigeria (NGN) 197 197 197 197 197 281 315 315 320 330 340 350
Note: *Denoted XXX-USD
28
Q1 2017

Exchange rate vs EUR & GBP
End period ______________ 2015 ______________ ______________ 2016 ______________ ______________ 2017 _______________
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1f Q2f Q3f Q4f
vs EUR
Americas
US (USD) 1.07 1.12 1.12 1.09 1.14 1.11 1.12 1.05 1.01 1.05 1.07 1.10
Canada (CAD) 1.36 1.39 1.50 1.50 1.48 1.44 1.47 1.42 1.41 1.52 1.50 1.54
Asia/Pacific
Japan (JPY) 129 136 134 131 128 114 114 123 121 131 128 127
Australia (AUD) 1.41 1.45 1.59 1.49 1.48 1.49 1.47 1.46 1.46 1.57 1.53 1.57
New Zealand (NZD) 1.44 1.65 1.75 1.59 1.65 1.55 1.54 1.52 1.51 1.62 1.57 1.62
Europe
UK (GBP) 0.72 0.71 0.74 0.74 0.79 0.83 0.87 0.85 0.86 0.91 0.96 1.00
Sweden (SEK) 9.26 9.25 9.38 9.19 9.23 9.39 9.63 9.58 9.60 9.80 9.80 9.80
Switzerland (CHF) 1.04 1.04 1.09 1.09 1.09 1.08 1.09 1.07 1.08 1.08 1.08 1.08
Norway (NOK) 8.65 8.74 9.54 9.62 9.41 9.28 8.98 9.09 8.70 8.70 8.70 8.70
Poland (PLN) 4.07 4.19 4.25 4.27 4.25 4.37 4.30 4.40 4.40 4.50 4.60 4.60
Russia (RUB) 62.4 61.6 73.3 79.2 76.5 70.8 70.6 64.6 57.6 59.9 66.3 71.5
Africa
South Africa (ZAR) 13.03 13.55 15.50 16.83 16.72 16.27 15.42 14.49 14.65 15.75 15.52 15.40
vs GBP
Americas
US (USD) 1.48 1.57 1.51 1.47 1.44 1.33 1.30 1.24 1.18 1.15 1.12 1.10
Canada (CAD) 1.96 2.03 2.04 2.04 1.87 1.72 1.70 1.66 1.65 1.67 1.57 1.54
Asia/Pacific
Japan (JPY) 192 181 177 177 162 137 132 144 142 144 134 127
Australia (AUD) 2.04 2.16 2.02 2.02 1.88 1.78 1.69 1.71 1.71 1.72 1.60 1.57
New Zealand (NZD) 2.32 2.37 2.15 2.15 2.08 1.86 1.78 1.78 1.76 1.77 1.65 1.62
Europe
Eurozone (EUR)* 0.72 0.71 0.74 0.74 0.79 0.83 0.87 0.85 0.86 0.91 0.96 1.00
Sweden (SEK) 13.04 12.69 12.46 12.46 11.67 11.25 11.13 11.22 11.22 10.73 10.26 9.80
Norway (NOK) 12.32 12.92 13.04 13.04 11.90 11.12 10.38 10.65 10.16 9.53 9.11 8.70
Switzerland (CHF) 1.47 1.48 1.47 1.47 1.38 1.30 1.26 1.26 1.26 1.18 1.13 1.08
Africa
South Africa (ZAR) 18.02 19.11 20.98 22.82 21.15 19.48 17.81 16.97 17.11 17.25 16.24 15.40
Note: *Denoted XXX-GBP
29
Q1 2017

Consumer spending
Consumer spending
% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World 0.9 -0.5 2.7 2.3 1.9 2.0 2.2 2.5 2.4 2.4 2.6
Developed -0.1 -1.3 1.6 1.0 0.8 1.1 1.7 2.2 2.1 1.8 1.9
Emerging 4.8 2.5 6.4 6.6 5.2 4.7 3.6 3.4 3.2 4.2 4.7
North America -0.1 -1.5 2.1 2.3 1.5 1.5 2.9 3.1 2.7 2.5 2.7
US -0.3 -1.6 1.9 2.3 1.5 1.5 2.9 3.2 2.7 2.6 2.8
Canada 2.8 0.1 3.7 2.2 1.9 2.6 2.8 1.9 2.1 1.4 1.3
Asia-Pacific 2.1 2.7 4.6 3.6 4.1 3.9 2.7 3.4 3.5 3.8 3.9
China 7.7 11.3 8.1 9.3 8.0 6.4 6.4 7.5 7.2 7.4 7.3
Japan -1.0 -0.7 2.4 -0.4 2.0 2.4 -0.9 -0.4 0.5 0.9 0.7
India* 7.2 7.4 8.7 7.7 5.3 6.8 6.2 7.4 5.6 7.0 7.6
Australia 2.0 1.0 3.2 3.2 2.3 1.8 2.8 2.7 2.7 2.6 2.7
South Korea 1.4 0.2 4.4 2.9 1.9 1.9 1.7 2.2 2.4 1.8 2.1
Indonesia 3.2 3.9 4.4 5.1 5.5 5.4 5.2 5.0 5.0 5.2 5.4
Taiwan -1.7 0.0 3.8 3.1 1.8 2.3 3.4 2.7 1.9 1.8 1.8
Thailand 2.8 -1.3 5.0 1.8 6.7 1.0 0.6 2.1 3.1 2.4 2.4
Malaysia 8.7 0.6 6.8 6.9 8.3 7.2 7.0 6.0 5.6 3.7 4.1
Singapore 3.5 -1.1 5.9 4.3 3.6 3.1 2.2 4.5 0.9 0.0 1.0
Hong Kong 1.9 0.2 6.1 8.4 4.1 4.6 3.3 4.8 1.4 0.5 0.3
Philippines 3.7 2.3 3.4 5.6 6.6 5.6 5.5 6.3 7.3 7.1 6.4
New Zealand 1.0 -0.6 3.1 2.6 2.8 2.9 2.7 2.3 4.4 3.6 2.9
Western Europe 0.1 -1.3 0.9 0.0 -0.4 0.1 1.2 1.9 1.9 1.2 1.2
Eurozone 0.3 -1.0 0.7 -0.1 -1.2 -0.5 0.8 1.8 1.7 1.2 1.3
Germany 0.5 0.3 0.3 1.3 1.3 0.9 1.0 1.9 1.7 1.4 1.3
France 0.4 0.3 1.8 0.4 -0.2 0.6 0.7 1.5 1.8 0.9 1.2
Italy -1.1 -1.5 1.2 0.0 -4.0 -2.4 0.4 1.5 1.4 0.6 1.1
Spain -0.7 -3.7 0.2 -2.4 -3.6 -3.2 1.6 2.8 3.1 2.3 2.0
Other Western Europe -0.2 -2.2 1.3 0.1 1.9 1.8 2.0 2.3 2.4 1.3 1.0
UK -0.7 -3.2 0.6 -0.5 1.7 1.6 2.2 2.5 2.8 1.2 0.7
Switzerland 1.5 1.2 1.6 0.9 2.6 2.2 1.2 1.0 0.9 1.2 1.3
Sweden 0.2 0.4 3.8 1.9 0.9 1.9 2.2 2.6 2.1 2.1 2.4
Norway 1.9 -0.2 3.7 2.3 3.5 2.8 1.9 2.1 1.4 1.3 1.4
CEEMEA 4.3 -2.0 4.8 6.8 5.0 4.6 2.3 -1.0 0.0 2.0 2.6
Russia 10.6 -5.1 5.5 6.8 7.4 4.4 1.5 -9.6 -3.0 1.5 2.4
Turkey 0.5 -3.8 10.6 12.6 3.2 7.9 3.0 5.6 0.7 2.3 3.3
Saudi Arabia 12.0 7.0 3.8 1.7 11.7 3.2 6.1 6.7 2.0 2.0 2.3
Nigeria -34.3 6.4 -26.7 -3.1 0.0 21.1 2.0 -1.6 -1.9 1.7 3.0
Poland 6.7 3.5 2.6 3.3 0.8 0.3 2.6 3.2 3.7 4.1 3.4
South Africa 1.2 -2.6 3.9 5.1 3.7 2.0 0.7 1.7 0.9 0.5 1.0
Latin America 4.4 -1.4 6.7 5.5 3.9 3.2 1.0 0.5 -0.2 1.8 2.8
Brazil 6.5 4.5 6.2 4.8 3.5 3.5 2.3 -3.9 -4.1 1.0 3.2
Mexico 2.0 -6.5 5.7 4.8 5.0 2.2 1.8 3.2 3.0 2.3 2.6
Argentina 7.2 -5.4 11.2 9.4 1.1 3.6 -4.4 3.6 -1.3 2.8 2.8
Colombia 3.5 0.6 5.0 6.0 4.4 3.4 4.2 3.9 2.2 1.9 3.4
Chile 5.2 -0.8 10.8 8.9 6.1 5.5 2.4 1.9 2.0 1.5 1.4
Note: * India data in fiscal year (2012= April 2012 to March 2013). GDP data from 2012 onwards is as per the new series (2011-12 prices). We now calculate the weighting system using chain nominal GDP (USD) weights.
30
Q1 2017

Investment spending
Investment spending
% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World 1.8 -4.2 8.0 9.7 8.7 8.2 7.8 5.3 4.0 4.6 5.1
Developed -3.5 -13.0 1.0 3.8 3.8 2.2 3.4 2.6 1.4 2.1 2.4
Emerging 13.4 11.9 18.1 17.0 14.1 14.2 11.8 7.5 6.0 6.6 6.9
North America -6.1 -16.3 2.4 6.2 9.3 4.7 5.1 3.3 0.4 2.7 3.6
US -6.8 -16.7 1.5 6.3 9.8 5.0 5.5 4.0 0.7 2.9 3.7
Canada 1.4 -11.3 11.5 4.7 4.9 1.3 0.9 -4.6 -2.6 0.4 1.8
Asia-Pacific 9.5 11.2 15.4 15.0 14.3 14.0 11.7 7.5 6.4 6.7 6.7
China 25.9 30.0 24.5 23.8 20.6 19.6 16.0 10.0 8.3 8.0 8.0
Japan -3.8 -9.7 -1.6 1.7 3.5 4.9 2.9 0.1 0.9 2.4 0.6
India* 3.5 7.7 11.0 7.0 4.9 3.4 4.9 3.9 -0.5 5.8 7.3
Australia 7.8 -1.5 4.2 7.0 9.2 -2.3 -2.4 -3.9 -2.8 1.8 2.7
South Korea -0.9 0.3 5.5 0.8 -0.5 3.3 3.4 3.8 5.0 2.7 2.0
Indonesia 11.9 3.3 8.3 8.9 9.1 5.0 4.6 5.1 4.3 4.2 5.6
Taiwan -11.1 -8.8 19.3 -1.1 -2.6 5.3 2.1 1.6 2.1 2.4 2.3
Thailand 2.3 -10.9 11.6 4.9 10.7 -1.0 -2.4 4.7 1.6 1.3 1.6
Malaysia 2.4 -2.7 12.1 6.4 19.0 8.1 4.8 3.7 1.8 2.7 4.1
Singapore 11.3 3.5 8.0 5.0 8.5 5.6 -2.7 -0.9 -1.6 -1.5 -0.2
Hong Kong 1.4 -3.5 7.7 10.2 6.8 2.6 -0.1 -2.2 -1.8 -2.1 -2.7
Philippines 3.2 -1.7 19.1 -1.9 10.8 11.8 6.2 15.2 22.4 12.4 13.0
New Zealand -2.8 -12.7 0.6 6.5 6.9 5.1 10.9 2.8 5.9 4.4 3.8
Western Europe -1.6 -11.6 0.4 2.0 -1.8 -1.0 2.2 3.3 2.9 1.2 1.8
Eurozone -0.9 -11.2 -0.5 1.7 -3.3 -2.5 1.4 2.9 2.8 1.9 1.9
Germany 0.9 -10.0 5.0 7.4 -0.1 -1.1 3.4 1.1 2.0 1.5 2.0
France 0.6 -9.0 1.9 2.1 0.4 -0.7 -0.4 0.9 2.7 1.0 1.5
Italy -3.2 -10.0 -0.6 -1.7 -9.4 -6.6 -2.9 1.1 2.0 1.1 1.3
Spain -3.9 -16.9 -4.9 -6.9 -8.6 -3.4 3.8 6.0 3.7 3.5 3.4
Other Western Europe -4.1 -13.2 3.7 3.0 3.0 3.5 4.7 4.4 3.2 -0.6 1.3
UK -6.9 -14.9 4.7 1.6 3.2 4.9 5.6 5.1 2.2 -2.4 1.1
Switzerland 0.6 -7.5 4.3 4.3 2.9 1.2 2.8 1.5 2.5 1.0 1.4
Sweden 0.3 -13.3 5.6 5.8 0.2 0.6 5.6 6.5 6.6 2.9 2.0
Norway** 1.2 -10.7 -6.4 5.3 7.3 2.8 0.6 0.6 5.8 2.7 1.2
CEEMEA 8.2 -11.1 8.3 12.9 3.7 5.3 3.8 0.6 -2.7 0.2 2.5
Russia 10.6 -14.4 5.9 9.1 6.0 0.9 -2.6 -7.6 -3.9 2.1 3.0
Turkey -2.1 -20.2 21.8 25.0 2.9 14.0 5.5 9.1 2.2 -1.8 0.0
Saudi Arabia 15.1 -6.2 14.6 15.6 5.0 5.6 7.5 -1.5 -5.0 -0.2 3.5
Nigeria -6.8 9.1 -3.6 -8.2 2.6 7.9 13.4 0.6 -1.5 3.7 5.0
Poland 8.8 -2.7 0.0 8.8 -1.8 -1.1 10.0 6.1 -5.6 0.5 5.0
South Africa 12.8 -6.7 -3.9 5.5 2.6 7.0 1.5 2.5 -3.8 0.3 1.8
Latin America 8.8 -8.1 10.0 9.8 2.5 2.5 -0.7 -2.4 -3.5 1.3 2.9
Brazil 12.3 -2.1 17.9 6.8 0.8 5.8 -4.2 -13.9 -10.7 0.7 4.0
Mexico 5.2 -9.2 1.2 7.8 4.8 -1.5 2.8 3.9 0.5 0.5 1.5
Argentina 8.7 -22.6 26.3 17.4 -7.1 2.3 -6.8 4.2 -3.6 4.4 3.7
Colombia 9.9 -1.3 4.9 19.0 4.7 6.8 9.8 2.8 -2.4 5.1 6.4
Chile 17.9 -12.1 11.6 15.0 11.6 2.2 -4.2 -1.5 -0.1 -0.9 0.8
Note: *India data in fiscal year (2012= April 2012 to March 2013). GDP data from 2012 onwards is as per the new series (2011-12 prices); **Mainland. We calculate the weighting system using chain nominal GDP (USD) weights
31
Q1 2017

Exports
Export volume growth (GDP basis)

% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World 3.3 -11.7 14.4 8.2 3.2 3.0 4.0 2.2 0.4 1.0 2.0
Developed 1.5 -12.0 11.4 5.7 2.5 2.2 4.7 4.3 1.7 2.2 3.0
Emerging 6.3 -11.2 19.3 12.0 4.1 4.1 3.0 -0.9 -1.7 -1.0 0.4
North America 3.6 -9.6 10.9 6.5 3.3 3.3 4.5 0.7 0.6 1.5 2.6
US 5.7 -8.8 11.9 6.9 3.4 3.5 4.3 0.1 0.5 1.4 2.6
Canada -4.6 -13.0 6.6 4.8 2.6 2.7 5.8 3.4 0.9 1.9 2.3
Asia-Pacific 6.2 -13.0 21.3 9.9 3.6 4.5 4.2 -0.2 -1.9 -1.4 0.0
China 11.2 -17.9 29.3 18.3 5.9 5.8 4.0 -1.9 -8.0 -8.5 -5.0
Japan 1.6 -23.4 24.9 -0.2 -0.1 0.8 9.3 3.0 0.1 1.1 1.1
India* 14.6 -4.7 19.6 14.3 6.7 7.8 1.7 -5.2 4.6 7.0 8.5
Australia 3.5 2.3 5.8 0.1 5.8 5.9 6.9 6.1 7.2 8.9 9.1
South Korea 7.5 -0.3 12.7 15.1 5.1 4.3 2.0 0.8 1.6 2.0 2.4
Indonesia 9.5 -9.7 14.6 14.8 1.6 4.2 1.0 -2.0 -3.1 -0.9 2.2
Taiwan 0.6 -8.4 25.7 4.2 0.4 3.5 5.9 -0.3 0.2 -2.4 -2.4
Thailand 6.3 -12.5 14.1 9.2 5.0 2.7 0.2 0.2 2.7 1.6 2.4
Malaysia 1.6 -10.9 11.5 4.2 -1.7 0.3 5.0 0.6 -0.6 3.3 2.0
Singapore 4.6 -7.6 17.4 5.7 1.8 4.7 4.3 2.5 2.2 1.6 -0.2
Hong Kong 2.5 -10.0 16.8 3.9 1.9 6.2 0.9 -1.5 -0.3 1.2 0.6
Philippines -2.7 -7.8 21.0 -2.5 8.6 -1.0 11.7 9.0 8.6 7.2 7.3
New Zealand -1.3 2.1 3.3 2.6 1.9 0.8 3.0 7.0 2.8 2.3 3.3
Western Europe 0.8 -11.6 10.2 6.3 2.6 1.9 4.1 5.8 2.2 2.5 3.2
Eurozone 0.6 -12.3 11.1 6.7 2.9 2.2 4.4 6.2 2.4 2.7 3.4
Germany 1.3 -14.3 14.2 8.4 3.5 2.0 4.0 4.6 2.2 3.3 4.8
France 0.0 -11.1 8.7 7.1 2.7 1.9 3.4 6.0 0.7 0.7 1.4
Italy -3.3 -18.0 11.4 6.1 2.0 1.0 2.6 4.0 1.4 3.5 3.2
Spain -0.8 -11.0 9.4 7.4 1.1 4.3 4.2 4.9 4.2 3.5 3.9
Other Western Europe 1.4 -9.1 7.2 5.1 1.5 0.7 3.1 4.1 1.6 1.7 2.3
UK 1.1 -8.8 5.8 5.8 0.6 1.1 1.5 4.5 1.1 1.2 2.4
Switzerland 2.1 -7.2 7.6 3.7 3.0 0.0 5.2 2.0 5.1 2.4 2.7
Sweden 1.6 -14.3 11.4 6.2 1.6 -0.8 5.5 5.2 2.7 2.6 2.6
Norway** 1.3 -6.0 7.4 2.5 3.2 2.1 3.6 4.6 -5.0 0.9 0.8
CEEMEA 0.9 -6.1 7.1 7.7 4.8 2.3 3.8 4.0 1.4 1.7 2.6
Russia 0.6 -4.7 7.0 0.3 1.4 4.6 0.6 3.6 -0.9 1.0 1.0
Turkey 4.0 -3.4 4.6 16.0 18.1 4.0 10.9 6.6 0.2 1.8 4.0
Saudi Arabia -4.2 -7.3 4.7 10.2 3.4 0.2 -1.8 -1.5 2.0 -2.0 0.7
Nigeria -4.2 4.1 6.7 25.8 -3.6 -21.7 15.6 7.5 -6.9 4.6 1.5
Poland 7.1 -5.9 13.1 7.9 4.6 6.1 6.7 7.7 7.7 5.9 5.5
South Africa 3.5 -17.0 7.7 3.5 0.8 3.6 3.3 4.1 0.6 1.8 2.4
Latin America 6.9 -16.9 23.6 16.6 2.3 0.6 0.1 -7.5 0.0 3.7 4.1
Brazil 23.2 -22.7 31.5 26.9 -5.2 -0.2 -7.2 -15.2 -1.6 4.0 6.0
Mexico 7.2 -21.3 29.9 17.1 6.1 2.5 4.6 -4.1 -3.1 0.7 3.0
Argentina 25.1 -20.5 22.5 21.7 -3.6 -5.0 -10.0 -17.0 -0.6 6.7 3.6
Colombia*** 25.9 -11.7 20.0 42.9 5.7 -2.1 -5.6 -33.0 -10.0 13.8 7.9
Chile -5.9 -14.0 28.2 14.5 -4.5 -1.8 -1.9 -16.9 -5.4 9.6 2.6
Note: Real Exports of Goods & Services. * India data in fiscal year (2012= April 2012 to March 2013). GDP data from 2012 onwards is as per the new series (2011-12 prices); **Mainland. We now calculate the
weighting system using chain nominal GDP (USD) weights. ***Colombian exports are in nominal USD, as provided by The Statistics Institute (DANE).
32
Q1 2017

Industrial production
Industrial production
% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World 0.9 -5.9 11.8 4.9 2.6 2.5 3.2 1.5 1.5 2.9 3.4
Developed -2.5 -12.8 6.8 2.3 0.6 0.6 2.0 0.6 0.0 1.5 2.1
Emerging 4.9 1.7 16.9 7.4 4.4 4.2 4.2 2.3 2.6 4.0 4.4
North America -3.5 -11.5 5.5 3.1 2.6 1.9 3.0 0.2 -0.9 1.5 2.6
US -3.5 -11.5 5.5 2.9 2.8 1.9 2.9 0.3 -1.0 1.5 2.7
Canada -3.0 -11.3 6.0 4.8 0.0 2.2 4.0 -1.1 0.3 2.1 1.9
Asia-Pacific 4.8 1.0 13.5 6.4 5.2 4.7 5.2 3.2 3.6 4.5 4.5
China 12.9 12.9 15.7 13.9 10.0 9.7 8.3 6.1 6.1 6.0 5.9
Japan -3.4 -21.8 15.6 -2.8 0.6 -0.8 2.1 -1.2 -0.4 1.8 0.5
India* 2.5 5.3 8.2 2.9 1.1 -0.1 2.8 2.4 2.1 5.7 6.5
Australia 2.8 -1.1 4.6 1.2 3.3 2.1 4.5 1.6 2.9 1.2 3.8
South Korea 3.5 -0.8 16.5 6.0 1.7 0.4 0.7 -0.9 0.8 2.0 1.4
Indonesia 3.0 1.3 5.1 4.1 4.1 6.0 4.8 4.8 4.6 4.1 4.3
Taiwan -1.1 -7.9 24.2 4.4 -0.2 0.7 6.4 -1.7 0.5 -0.2 -0.5
Thailand 4.7 -7.0 14.2 -8.5 10.6 2.4 -5.2 0.3 0.3 1.3 1.2
Malaysia 0.8 -7.6 6.2 2.4 4.2 3.4 5.1 4.5 3.8 3.7 3.6
Singapore -3.8 -4.6 29.9 7.9 0.3 1.5 2.8 -5.2 0.7 -0.6 0.4
Hong Kong -6.7 -8.3 3.5 0.7 -0.8 0.1 -0.4 -1.5 -0.3 -0.1 -0.1
Philippines 4.3 -4.8 11.2 4.7 5.4 10.3 8.3 5.7 6.2 3.8 4.5
New Zealand -11.5 5.1 -4.5 0.6 0.5 1.8 2.9 0.9 2.1 3.3 2.1
Western Europe -1.4 -12.3 5.9 3.1 -1.8 -0.5 0.7 1.5 1.0 1.3 1.7
Eurozone -1.8 -14.9 7.2 3.6 -2.3 -0.7 0.9 2.0 1.2 1.7 2.1
Germany 0.0 -15.5 10.1 7.4 -0.4 0.1 1.5 0.5 1.2 2.0 2.4
France -3.3 -13.0 4.0 3.0 -2.3 -0.5 -0.9 1.6 0.3 0.7 2.0
Italy -3.7 -18.6 6.9 1.3 -6.2 -3.0 -0.6 0.9 1.5 1.8 1.5
Spain -7.7 -15.6 0.8 -1.5 -6.6 -1.6 1.2 3.2 1.9 2.2 2.6
Other Western Europe 0.2 -3.7 1.9 1.3 -0.3 -0.1 0.1 -0.1 0.1 0.3 0.6
UK** -2.8 -9.3 4.5 2.2 -1.4 -1.0 2.9 -0.1 0.3 0.8 0.5
Switzerland 3.3 -10.1 6.8 8.4 -1.0 0.4 0.5 -1.0 3.0 2.2 2.0
Sweden -3.3 -19.3 8.7 3.0 -3.2 -4.1 -2.2 2.7 1.6 0.1 1.2
Norway** 2.9 -6.4 2.8 0.8 2.8 3.8 3.2 -3.5 -4.7 1.1 2.8
CEEMEA 1.0 -5.4 37.7 7.5 3.0 1.1 3.4 0.7 0.8 1.5 2.0
Russia 0.6 -10.7 7.3 5.0 3.4 0.4 1.7 -3.4 0.1 1.2 1.8
Turkey -0.8 -10.4 12.7 9.9 2.4 3.5 3.5 3.1 2.0 2.5 2.5
Saudi Arabia 4.4 9.0 169.2 12.0 4.9 0.2 6.0 3.0 1.9 -0.5 0.3
Nigeria -1.3 0.4 0.3 8.3 1.5 0.0 5.5 0.3 -2.5 2.3 2.0
Poland 2.7 -3.8 11.1 6.7 1.2 2.3 3.5 4.8 2.3 3.6 5.3
South Africa -0.4 -13.8 4.6 2.8 2.3 1.4 0.1 0.0 1.0 0.7 1.0
Latin America 1.7 -6.0 7.4 3.7 -1.2 0.9 -1.7 -3.7 -3.4 2.0 3.4
Brazil 3.1 -7.1 10.2 0.4 -2.3 2.1 -3.2 -8.3 -7.0 1.6 3.6
Mexico -0.5 -6.2 4.6 3.4 2.9 -0.6 2.6 1.0 0.3 0.8 1.6
Argentina*** 5.0 0.1 9.7 6.5 -7.8 0.1 -1.8 1.9 -4.6 2.4 2.8
Colombia -3.3 -5.1 4.2 4.9 -0.3 -1.3 1.5 1.4 4.2 2.7 5.1
Chile** 0.2 -6.7 3.2 8.0 2.2 0.2 -1.1 -0.5 -0.4 2.4 3.2
Note: *Based on Indian fiscal year (April – March). We now calculate the weighting system using GDP PPP (USD) weights. **Manufacturing production. ***Argentina did not publish industrial production data in part of 2015 and 2016.
33
Q1 2017

Wage growth
Wage growth
% Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
World 6.4 3.8 5.9 6.4 6.1 5.5 4.9 4.1 4.1 4.2 4.2
Developed 2.9 1.1 1.8 2.1 1.8 1.5 1.7 1.7 1.7 1.9 2.0
Emerging 11.5 7.5 11.2 11.8 11.1 10.1 8.4 6.7 6.6 6.5 6.5
North America 3.0 1.7 2.0 2.1 2.0 1.9 2.1 2.1 2.1 2.4 2.4
US 3.0 1.7 1.9 2.0 1.9 1.9 2.1 2.1 2.3 2.5 2.5
Canada 2.9 1.5 3.6 2.5 2.5 1.8 2.6 1.8 0.4 1.1 1.8
Asia-Pacific 8.0 5.3 9.6 10.4 9.3 8.9 6.9 5.4 5.2 5.5 5.5
China 15.4 9.9 15.3 18.6 13.6 11.5 10.6 7.7 7.5 7.4 7.4
Japan 0.3 -4.8 0.6 -0.2 -0.8 0.0 0.8 -0.9 0.7 1.2 1.2
Australia 4.2 3.5 3.4 3.7 3.6 2.8 2.6 2.2 2.0 2.1 2.8
South Korea - 5.0 6.4 1.7 3.8 4.4 5.0 3.8 2.0 2.5 2.5
Indonesia 3.9 19.0 10.0 3.5 14.0 23.7 1.3 6.7 5.1 5.9 6.4
Taiwan -0.3 -9.3 8.4 2.3 0.8 0.3 3.2 3.4 2.0 2.2 2.1
Thailand 9.5 0.2 3.1 6.4 20.6 9.6 9.2 1.5 1.5 4.0 3.0
Malaysia 8.9 2.5 8.2 3.8 6.4 7.2 4.7 5.9 5.9 5.2 5.2
Singapore 4.0 4.0 6.3 6.0 2.3 4.2 2.3 3.5 3.7 3.1 2.6
Hong Kong 0.9 0.8 3.3 9.3 5.2 4.1 4.1 4.2 3.8 3.9 4.0
Philippines 5.3 2.2 3.4 6.0 4.5 5.2 4.4 4.7 2.8 5.1 4.7
New Zealand 3.5 2.2 1.6 2.0 2.1 1.7 1.8 1.8 1.7 1.9 2.3
Western Europe 3.5 2.0 1.7 2.6 2.3 1.4 1.4 2.1 1.5 1.5 1.7
Eurozone 3.7 2.6 1.7 2.7 2.5 1.4 1.4 2.1 1.2 1.4 1.5
Germany 2.9 2.1 1.8 1.8 2.7 2.5 2.9 2.3 2.1 2.5 2.6
France 2.9 2.2 1.8 2.2 2.1 1.7 1.4 1.2 1.1 0.8 1.0
Italy 3.5 3.1 2.1 1.7 1.5 1.4 1.2 1.2 0.6 0.7 0.7
Spain 4.9 3.2 0.3 0.9 0.5 -0.3 0.0 0.4 0.0 0.5 0.5
Other Western Europe 3.1 0.1 2.0 2.4 1.8 1.5 1.5 2.2 2.2 1.8 2.4
UK 3.5 -1.1 1.9 2.4 1.4 1.2 1.2 2.4 2.4 2.0 2.8
Switzerland 2.1 2.1 1.0 1.4 1.1 0.7 0.8 0.6 0.5 0.7 0.8
Sweden - 2.9 2.4 2.4 3.1 2.3 2.6 1.8 2.2 1.5 1.5
Norway 5.6 4.3 3.6 4.5 4.4 3.6 2.6 2.6 2.5 2.1 2.1
CEEMEA 19.0 5.7 11.8 10.6 11.7 10.1 9.2 7.2 9.6 9.1 8.5
Russia 27.2 7.8 12.4 11.5 14.0 11.9 9.1 4.7 7.7 6.6 6.5
Turkey 10.6 -1.9 15.8 15.0 15.0 13.2 14.0 14.0 17.1 16.3 14.0
Poland 10.5 4.2 3.6 4.9 3.5 2.7 3.8 3.5 4.2 5.0 5.3
South Africa 12.8 11.8 13.6 7.2 7.6 7.2 7.1 6.5 7.1 7.4 7.2
Latin America 8.1 6.9 7.5 8.4 8.7 7.1 8.3 6.3 6.0 5.3 5.3
Brazil 9.9 8.4 9.2 9.4 9.8 8.0 9.0 5.5 4.5 4.0 5.0
Mexico 5.3 4.2 3.3 4.3 4.3 3.9 4.4 4.2 3.9 4.3 4.2
Argentina 22.9 18.7 24.8 32.1 30.3 24.7 31.0 32.4 30.2 29.4 23.0
Colombia 4.9 6.9 5.6 3.5 6.0 3.4 2.6 4.0 7.0 5.0 4.0
Chile 5.3 4.0 4.7 6.3 6.3 5.5 7.2 5.2 5.0 4.0 4.0
Note: Global and regional aggregates are calculated using GDP PPP (USD) weights
34
Q1 2017

Budget balance
Budget balance
% GDP 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
North America -3.0 -9.6 -8.4 -8.1 -6.3 -3.7 -2.6 -2.3 -3.0 -3.2 -4.0
US -3.2 -10.1 -9.0 -8.7 -6.8 -4.1 -2.8 -2.5 -3.2 -3.4 -4.3
Canada -0.4 -3.5 -2.0 -1.5 -1.0 -0.3 0.1 -0.1 -1.2 -1.3 -1.2
Asia-Pacific -1.9 -4.3 -3.5 -3.3 -3.0 -2.9 -2.9 -2.5 -2.9 -3.2 -3.0
China -0.8 -2.8 -2.5 -1.8 -1.5 -2.0 -2.1 -2.3 -3.0 -4.0 -3.6
Japan -4.0 -10.0 -9.0 -9.4 -8.3 -8.1 -7.2 -4.2 -4.4 -4.5 -4.5
India -6.0 -6.5 -4.8 -5.9 -4.9 -4.5 -4.1 -3.9 -3.5 -3.0 -3.0
Australia 1.7 -2.1 -4.2 -3.4 -2.9 -1.2 -3.1 -2.4 -2.4 -2.2 -1.4
South Korea 0.0 0.0 0.0 1.5 1.5 1.1 0.6 0.0 0.2 1.0 1.5
Indonesia -0.1 -1.5 -0.7 -1.1 -1.8 -2.2 -2.1 -2.6 -2.6 -2.4 -2.4
Taiwan 0.2 -1.2 -1.1 -0.4 -1.5 -0.8 -0.8 -0.1 -0.9 -1.7 -2.2
Thailand -0.8 -4.0 -0.9 -1.0 -2.6 -1.9 -2.8 -2.4 -2.7 -3.3 -2.9
Malaysia -4.5 -6.4 -5.3 -4.7 -4.3 -3.8 -3.4 -3.2 -3.2 -3.0 -3.0
Singapore 1.0 -0.6 0.3 1.4 1.9 1.4 1.1 -0.7 -0.9 -0.2 0.0
Hong Kong 7.2 0.1 1.7 3.9 3.6 3.0 1.0 3.4 0.6 0.3 0.8
Philippines -0.9 -3.7 -3.5 -2.0 -2.3 -1.4 -0.6 -0.9 -2.2 -2.2 -2.4
New Zealand 3.0 -2.1 -3.2 -8.9 -4.3 -2.0 -1.2 0.2 0.7 0.7 1.2
Western Europe -2.3 -6.2 -5.9 -4.1 -3.7 -3.1 -2.7 -2.1 -2.0 -2.0 -1.6
Eurozone -2.2 -6.3 -6.2 -4.2 -3.6 -3.0 -2.6 -2.1 -2.0 -1.9 -1.8
Germany 0.0 -3.1 -4.1 -1.0 -0.1 -0.1 0.3 0.7 0.2 0.0 0.0
France -3.2 -7.2 -6.8 -5.1 -4.8 -4.0 -4.0 -3.5 -3.4 -3.7 -3.4
Italy -2.7 -5.3 -4.2 -3.7 -2.9 -2.7 -3.0 -2.6 -2.5 -2.6 -2.2
Spain -4.4 -11.0 -9.4 -9.6 -10.5 -7.1 -6.0 -5.2 -4.7 -3.8 -3.3
Other Western Europe -2.6 -6.0 -5.1 -3.9 -4.1 -3.4 -3.1 -2.4 -2.2 -2.1 -1.1
UK -6.1 -9.8 -8.6 -7.1 -7.3 -5.9 -5.2 -4.1 -3.8 -3.7 -2.2
Switzerland 0.5 1.8 0.4 0.3 0.0 0.2 -0.2 0.1 0.2 0.1 0.2
Sweden 2.2 -0.7 0.3 0.2 -0.5 -0.9 -1.1 -0.7 -0.5 -0.5 -0.5
Norway 18.7 10.3 11.0 13.4 13.8 10.8 8.8 6.4 6.4 6.4 6.4
CEEMEA 5.8 -5.6 -2.5 1.1 1.4 0.0 -1.7 -4.7 -4.9 -3.7 -3.2
Russia 4.1 -6.0 -3.9 0.7 -0.1 -0.5 -0.4 -2.4 -3.5 -2.0 -1.1
Turkey -1.8 -5.3 -3.5 -1.3 -1.9 -1.0 -1.1 -1.0 -1.6 -2.5 -2.2
Saudi Arabia 29.8 -5.4 4.4 11.6 13.6 6.5 -3.4 -15.0 -12.9 -8.3 -7.2
Nigeria -0.2 -3.3 -2.0 -1.8 -1.4 -1.4 -0.7 -1.6 -3.8 -3.0 -2.5
Poland -3.6 -7.3 -7.5 -4.9 -3.7 -4.0 -3.3 -2.6 -2.1 -3.2 -3.3
South Africa -0.9 -6.3 -4.3 -3.7 -4.3 -4.0 -3.5 -3.7 -3.5 -3.5 -3.5
Latin America 0.4 -3.3 -1.9 -1.4 -1.5 -2.1 -4.0 -6.3 -4.9 -4.4 -3.5
Brazil -2.0 -3.2 -2.4 -2.5 -2.3 -3.0 -6.1 -10.4 -7.0 -6.3 -4.9
Mexico -0.1 -2.3 -2.8 -2.4 -2.6 -2.3 -3.1 -3.5 -3.0 -2.5 -2.1
Argentina 1.3 -0.6 0.2 -1.4 -2.1 -1.9 -2.4 -3.6 -5.3 -5.5 -5.0
Colombia -2.3 -4.1 -3.9 -2.8 -2.3 -2.4 -2.4 -3.0 -3.9 -3.3 -2.7
Chile 5.0 -4.2 -0.4 1.3 0.6 -0.6 -1.6 -2.2 -2.7 -2.5 -2.1
35
Q1 2017

Current account
Current account
% GDP 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
North America -4.3 -2.7 -3.0 -3.0 -2.8 -2.3 -2.3 -2.6 -2.7 -2.7 -2.9
US -4.7 -2.7 -3.0 -3.0 -2.8 -2.2 -2.3 -2.6 -2.6 -2.7 -2.9
Canada 0.1 -2.9 -3.6 -2.8 -3.6 -3.2 -2.3 -3.2 -3.6 -3.3 -2.7
Asia-Pacific 4.2 3.2 2.8 1.3 1.1 1.3 2.0 2.9 2.7 2.4 2.2
China 9.3 4.9 4.0 1.9 2.6 1.5 2.6 3.1 2.3 2.2 2.1
Japan 2.9 2.8 3.9 2.1 1.0 0.9 0.8 3.1 3.7 3.3 3.0
India -2.3 -2.8 -2.8 -4.4 -4.8 -1.8 -1.3 -1.1 -0.7 -0.8 -1.2
Australia -4.9 -4.6 -3.6 -2.9 -4.1 -3.2 -2.9 -4.8 -2.8 -0.9 -1.0
South Korea 0.3 3.7 2.6 1.6 4.1 6.2 6.0 7.7 7.1 5.7 5.7
Indonesia 0.0 -2.9 0.7 0.2 -2.7 -3.2 -3.1 -2.0 -2.0 -2.3 -2.3
Taiwan 5.9 10.4 8.2 7.8 8.9 10.0 11.7 14.5 14.3 13.9 13.9
Thailand 0.3 7.9 3.4 2.5 -0.4 -1.2 3.7 8.1 10.7 7.0 6.4
Malaysia 16.5 15.1 10.1 10.9 5.2 3.5 4.4 3.0 1.5 1.8 2.0
Singapore 14.6 17.0 23.8 22.8 18.1 17.9 17.5 19.8 21.7 21.5 22.5
Hong Kong 15.0 9.9 7.0 5.6 1.6 1.5 1.3 3.1 3.4 3.8 5.9
Philippines 0.1 5.0 3.6 2.5 2.8 4.2 3.8 2.6 1.3 0.9 0.5
New Zealand -7.7 -2.2 -2.3 -2.8 -3.9 -3.1 -3.2 -3.3 -2.6 -1.7 -2.0
Western Europe -1.0 0.2 0.5 0.5 1.0 1.5 1.6 2.1 1.8 1.5 1.3
Eurozone -1.2 0.1 0.2 0.2 1.3 2.2 2.4 3.1 2.9 2.4 2.2
Germany 5.6 5.7 5.6 6.1 7.0 6.7 7.3 8.3 8.4 8.2 7.9
France -1.7 -1.3 -1.3 -1.7 -2.1 -1.3 -1.1 -0.2 -1.2 -1.4 -1.7
Italy -2.8 -1.9 -3.4 -3.0 -0.4 1.0 1.9 1.6 2.6 1.6 1.6
Spain -9.2 -4.3 -3.9 -3.2 -0.2 1.5 1.1 1.4 1.6 0.6 0.3
Other Western Europe -0.1 0.3 1.2 1.2 0.2 -0.4 -0.9 -1.1 -1.5 -1.4 -1.2
UK -3.5 -3.0 -2.7 -1.8 -3.7 -4.4 -4.7 -5.0 -4.9 -4.9 -4.6
Switzerland 3.0 8.0 14.9 7.7 10.3 11.1 8.8 11.1 8.2 7.9 7.8
Sweden 7.8 6.0 6.0 5.5 5.6 5.3 4.6 4.7 4.7 6.0 5.8
Norway 15.7 10.6 10.9 12.4 12.4 10.2 11.0 8.7 6.4 6.7 6.5
CEEMEA 6.1 2.3 2.6 4.2 4.2 2.8 1.4 -1.6 -2.3 -1.7 -1.9
Russia 6.3 4.1 4.4 4.8 3.3 1.5 2.9 5.2 2.0 2.7 2.4
Turkey -5.3 -1.9 -5.9 -9.0 -5.5 -6.9 -5.0 -3.7 -4.3 -5.3 -5.4
Saudi Arabia 25.4 4.9 12.7 23.6 22.4 18.2 9.7 -8.3 -8.0 -4.5 -4.0
Nigeria 14.2 8.3 4.0 3.1 4.2 3.9 1.2 -3.2 -0.5 -0.8 -1.7
Poland -6.7 -4.0 -5.4 -5.2 -3.7 -1.3 -2.1 -0.6 -1.0 -1.3 -1.4
South Africa -5.5 -2.7 -1.5 -2.2 -5.1 -5.9 -5.3 -4.3 -3.9 -3.9 -4.2
Latin America -2.1 -0.3 -1.5 -2.2 -2.8 -3.1 -3.2 -3.2 -2.0 -1.6 -2.0
Brazil -1.8 -1.6 -3.4 -2.9 -3.0 -3.0 -4.3 -3.3 -1.1 -1.6 -2.4
Mexico -1.9 -0.9 -0.5 -1.1 -1.3 -2.4 -1.9 -2.9 -3.0 -2.9 -2.9
Argentina 1.8 2.5 -0.4 -0.8 -0.2 -2.2 -1.6 -2.8 -3.3 -2.9 -2.6
Colombia -2.8 -2.2 -3.0 -2.9 -3.0 -3.2 -5.1 -6.5 -4.7 -2.9 -3.5
Chile -3.2 2.0 1.7 -1.2 -3.5 -3.7 -1.3 -2.0 -1.7 -0.4 -0.5
36
Q1 2017

Current account
USDbn 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
North America -689.3 -424.7 -499.9 -510.1 -512.3 -424.1 -432.6 -511.5 -540.4 -580.0 -622.7
US -690.8 -384.0 -442.0 -460.4 -446.5 -366.4 -392.1 -463.0 -486.0 -533.0 -580.0
Canada 1.5 -40.6 -57.9 -49.7 -65.7 -57.6 -40.5 -48.6 -54.4 -47.0 -42.7
Asia-Pacific 447.3 341.4 325.2 191.7 215.1 247.2 428.1 524.4 477.9 454.3 458.9
China 420.6 243.3 237.8 136.1 215.4 148.2 277.4 330.6 253.8 250.5 254.3
Japan 143.4 146.2 218.9 125.0 62.4 34.4 36.0 134.9 197.3 211.2 181.3
India -27.9 -38.2 -48.1 -78.2 -88.2 -32.4 -26.8 -22.2 -15.4 -18.4 -33.2
Australia -54.0 -44.5 -44.8 -44.4 -63.5 -49.6 -42.6 -59.4 -34.6 -12.0 -13.1
South Korea 3.2 33.6 28.9 18.7 50.8 81.1 84.4 105.9 99.7 79.9 81.5
Indonesia - - 5.1 1.7 -24.4 -29.1 -27.5 -17.6 -18.9 -22.4 -23.8
Taiwan 24.8 40.7 36.8 37.9 44.3 51.3 61.9 75.8 75.8 74.8 76.1
Thailand 0.9 22.2 11.5 9.4 -1.6 -4.8 15.1 32.1 42.9 28.6 27.4
Malaysia 39.4 31.4 25.7 32.5 16.3 11.3 14.8 8.9 4.5 6.2 7.4
Singapore 28.2 32.7 56.6 62.9 52.3 53.8 53.5 57.9 63.2 60.6 64.7
Hong Kong 32.9 21.2 16.0 13.8 4.1 4.2 3.8 9.6 10.9 12.3 19.8
Philippines 0.1 8.4 7.2 5.6 6.9 11.4 10.8 7.7 3.8 2.9 1.6
New Zealand -10.2 -2.7 -3.3 -4.6 -6.9 -5.7 -6.3 -5.6 -4.7 -3.2 -3.9
Western Europe -156.0 70.1 135.5 132.9 233.4 319.8 299.4 365.8 323.2 298.2 283.2
Eurozone -172.9 19.0 31.1 31.8 163.8 282.8 291.9 352.8 326.7 288.5 267.0
Germany 226.1 198.3 211.8 247.2 255.6 266.9 276.8 282.9 315.6 290.2 289.3
France -50.3 -35.5 -33.2 -49.0 -57.7 -36.5 -30.3 -4.7 -30.1 -32.4 -38.5
Italy -67.7 -41.4 -72.7 -68.7 -7.7 20.2 36.9 29.0 47.1 30.1 29.7
Spain -158.9 -70.4 -55.7 -46.2 -3.3 20.4 13.6 16.0 20.1 7.9 3.5
Other Western Europe 16.9 51.1 104.4 101.1 69.6 37.0 7.5 13.0 -3.5 9.7 16.2
UK -109.5 -64.4 -69.5 -45.5 -94.6 -123.5 -140.5 -125.2 -113.4 -109.3 -103.7
Switzerland 16.9 43.8 96.7 54.4 69.1 76.6 60.6 74.0 54.6 53.3 54.6
Sweden 37.2 29.5 30.6 30.9 32.0 30.4 28.2 29.9 31.3 41.3 41.3
Norway 72.3 42.2 46.6 61.3 63.1 53.5 59.2 34.3 24.0 24.4 24.1
CEEMEA 137.2 35.3 61.7 184.0 215.9 154.7 124.2 -20.3 -62.4 -27.6 -42.6
Russia 103.9 50.4 67.5 97.3 71.3 33.4 58.3 69.0 25.3 36.1 33.5
Turkey -40.5 -12.2 -45.4 -75.1 -48.5 -65.0 -45.9 -32.1 -35.7 -41.0 -43.2
Saudi Arabia 132.3 21.0 66.8 158.5 164.7 135.3 73.4 -54.0 -53.4 -31.0 -30.4
Nigeria 29.4 14.1 14.5 12.7 19.1 19.9 6.2 -15.4 -2.0 -2.5 -5.6
Poland -35.8 -17.9 -25.9 -27.4 -18.6 -6.7 -11.4 -2.9 -4.7 -6.0 -6.9
South Africa -15.7 -8.1 -5.5 -9.1 -20.3 -21.5 -18.5 -13.6 -11.4 -11.5 -12.6
Latin America -57.1 -28.3 -87.5 -108.4 -113.2 -140.4 -161.1 -132.6 -85.2 -84.3 -100.8
Brazil -30.6 -26.3 -75.8 -77.0 -74.2 -74.8 -104.2 -58.9 -20.8 -29.2 -44.6
Mexico -20.4 -8.7 -5.3 -14.1 -17.0 -31.0 -26.1 -33.2 -31.0 -29.3 -29.0
Argentina 6.6 8.2 -1.5 -4.5 -1.4 -12.1 -8.0 -16.8 -15.6 -16.2 -16.9
Colombia -6.9 -5.1 -8.7 -9.7 -11.2 -12.1 -19.5 -18.9 -13.6 -8.6 -8.9
Chile -5.8 3.5 3.8 -3.1 -9.4 -10.3 -3.3 -4.8 -4.2 -1.1 -1.3
37
Q1 2017

North America
US
Kevin Logan Fiscal activism likely to boost GDP growth

Economist
HSBC Securities (USA) Inc.
kevin.r.logan@us.hsbc.com Following Donald Trump’s victory in the November 2016 presidential election, we raised our GDP
+1 212 525 3195
forecasts for 2017 and 2018. We now expect faster growth in aggregate demand resulting from
Ryan Wang
Economist lower tax rates and higher government spending starting in the second half of 2017. Our GDP
HSBC Securities (USA) Inc. forecast for 2017 is 2.3%, anticipating a boost to consumption spending in the second half of
ryan.wang@us.hsbc.com
+1 212 525 3181 2017. The stimulus effect should be larger in 2018 as the full impact of tax cuts hits household
finances and business investment. We forecast GDP growth in 2018 to average 2.7%.
The actual timing of fiscal stimulus is uncertain. President-elect Trump will not take office until
20 January 2017. His budget proposals may reach Congress in late February. The Republican
Party holds a majority in both houses of Congress and should be able to pass the necessary
legislation to reform the tax code along the lines Trump has proposed. If Congress moves
swiftly, tax changes could be enacted by mid-summer; if Democratic members of Congress
vigorously oppose the tax changes, it could take longer. These uncertainties affect the timing of
the pick-up in demand that could lead to faster GDP growth. At the moment, we expect fiscal
stimulus to start in the second half of 2017, but it could be delayed until 2018.
Trump is proposing an increase in defence spending. Defence spending has shrunk from 4.7%
of GDP in 2010 to 3.2% in the past year, but there appears to be widespread support in
Congress for defence spending increases. By our estimates the likely boost in defence outlays
will probably add a few tenths of a percent to GDP growth once fully implemented in 2018. More
importantly for the macroeconomic outlook, Trump is proposing substantial individual and
business income tax reductions. Marginal income tax rates would be reduced, with the top rate
falling from 39.6% to 33%. He would also eliminate estate taxes and the alternative minimum
tax, which mostly affects high-income tax payers. We estimate that the likely package of tax
cuts would reduce federal revenue by approximately USD220bn in the first full year after it is
implemented. This would amount to roughly 1.5% of disposable personal income in the US.
Federal budget deficit has stopped falling, Trump Administration likely to ramp up
likely to rise under Trump Administration Defence spending as a % of GDP
% GDP Federal deficit % GDP % GDP Defence Spending % GDP

12 12 5 5
10 10
8 8 4 4
6 6
4 4 3 3
2 2
0 0 2 2
2002 2005 2008 2011 2014 2017 1992 1995 1998 2001 2004 2007 2010 2013 2016
Source: BEA, US Treasury Source: BEA, US Treasury
Source: HSBC with data from INEGI
38
Q1 2017

Policy issues
The corporate income tax rate may be reduced from 35% to 15% or 20% depending on whether
Trump’s proposal or a proposal by Republican tax writers in the House of Representatives is
enacted. Businesses would also be allowed to expense investment outlays in the year they are
made, rather than writing them off over time. This would lower the effective tax rate on business
investment. A ‘border adjustment’ proposed by Republican tax writers in the House would exempt
exports from corporate income tax and disallow imports as a business expense, effectively imposing
the corporate tax rate on imports. If enacted, this could have a significant impact on the demand for
domestically sourced inputs versus imported inputs.
Currently, foreign subsidiaries of US companies can defer the US corporate tax on their profits until
the profits are remitted to the parent company. Trump is proposing to eliminate the deferral of the tax
on foreign profits once the corporate tax rate is lowered. Accumulated foreign profits will be ‘deemed’
to have been repatriated and will be subject to a one-time tax of 10%. Whether the profits will actually
be repatriated to the US after the tax is paid will be up to the companies involved. If some profits do
flow back to the US, they could support more domestic investment spending.
With the anticipated pick-up in GDP growth, we expect the FOMC will tighten monetary policy a bit
faster than we previously anticipated. Following the 25bp rate hike at the December FOMC meeting,
we expect two 25bp rate increases in 2017, putting the target range for the federal funds rate at
1.00% to 1.25% at the end of 2017. We expect one more rate hike in the middle of 2018 if fiscal
stimulus unfolds as anticipated. The timing of the forecast rate hikes is uncertain since the FOMC will
also be reacting to the unpredictable timing of the roll-out of fiscal stimulus.
Risks
Trade policy will be surrounded by uncertainty in the year ahead. Mr Trump has indicated that he
intends to open up new trade negotiations with China, Mexico and other countries with which the US
has large bilateral trade deficits. If there is a lack of progress in these negotiations, he has indicated
that he will substantially raise tariffs, potentially disrupting both trade and capital flows. Risks for
growth and inflation could also emanate from the foreign exchange market. The USD has already
appreciated sharply in reaction to the prospect of a shift to an expansionary fiscal programme by the
Trump Administration. Further rapid appreciation of the USD against the currencies of major trading
partners could limit demand for US exports, squeeze profits, and potentially offset the stimulative
effects of fiscal policy changes.
Key forecasts
% q-o-q annualised 2016 2017f 2018f Q3 16 Q4 16f Q1 17f Q2 17f Q3 17f Q4 17f
GDP (% year) 1.6 2.3 2.7 1.7 2.0 2.3 2.5 2.2 2.4
GDP - - - 3.5 2.1 2.0 2.3 2.5 2.6
Consumer spending 2.7 2.6 2.8 3.0 2.7 2.1 2.4 2.7 2.7
Government consumption 0.8 1.1 2.0 0.8 0.7 1.3 1.6 1.7 2.0
Investment 0.7 2.9 3.7 0.1 3.9 3.6 3.5 3.5 3.5
Stockbuilding (% GDP) -0.4 0.1 0.0 0.5 0.4 0.3 0.0 0.0 0.0
Domestic demand 1.7 2.6 2.9 2.6 3.0 2.6 2.5 2.7 2.8
Exports 0.5 1.4 2.6 10.0 -2.8 -0.9 2.5 1.8 2.5
Imports 0.8 2.8 3.5 2.2 3.6 3.0 3.0 3.0 3.0
Industrial production (% year) -1.0 1.5 2.7 -1.0 -0.1 0.7 1.4 1.5 2.2
Unemployment (%) 4.9 4.6 4.4 4.9 4.7 4.7 4.6 4.6 4.5
Wage growth (% year) 2.3 2.5 2.5 2.2 2.5 2.4 2.5 2.5 2.5
Consumer prices (% year) 1.3 2.3 2.1 1.1 1.8 2.5 2.3 2.4 2.1
Current account (USDbn) -486.0 -533.0 -580.0 -113.0 -123.0 -135.0 -127.0 -136.0 -134.0
Current account (% GDP) -2.6 -2.7 -2.9 -2.4 -2.6 -2.8 -2.6 -2.8 -2.7
Budget balance (% GDP) -3.2 -3.4 -4.3 - - - - - -
Gross external debt (% GDP) 98.0 98.1 97.9 - - - - - -
Gross government debt (% GDP) 107.9 108.4 109.8 - - - - - -
3-month money (%)* 1.0 1.4 1.6 0.9 1.0 1.0 1.2 1.3 1.4
10-year bond (%)* 2.5 1.4 1.4 1.6 2.5 2.5 2.3 2.0 1.4
Note: *Period end
39
Q1 2017

North America
Canada
David Watt Export uncertainty amid US trade policy shake-up

Chief Economist
HSBC Bank Canada
david.g.watt@hsbc.ca The results of the US Presidential election reinforce our view that Canadian exports, already
+1 416 868 8130 showing little sustained momentum, will remain stuck in the weakest cyclical recovery in 50
years. US trade policy under Donald Trump is unclear but there are already signs that trade
frictions between Canada and the US might increase over the next couple of years. As we await
clarity on Trump's trade policies, exports and business investment face a period of increased
uncertainty. Accordingly, while we still see modest recoveries in exports and business
investment, we now expect both to be slightly shallower than we had anticipated previously.
We also look for residential investment to decline by 2.1% in 2017, a larger drop than previously
anticipated in part owing to the Federal Government's recent moves to tighten mortgage lending
rules. Overall, with the changes to exports, business investment and residential investment we
look for the economy to expand by 1.7% in 2017 and 1.6% in 2018, both slightly lower than our
last forecasts.
Domestically, consumer spending is expected to be held back by a debt overhang and sluggish
income growth. Household debt levels are historically high and are growing quickly enough to
prompt the Bank for International Settlements to express a specific concern. In our view, the
household sector is vulnerable to income and interest rate shocks. With full-time job growth
having stalled, and with part-time jobs having dominated job creation in 2016, income growth is
expected to slow down and reduce the consumption contribution to GDP growth.
Federal government stimulus is one category of domestic demand that is expected to provide
some economic lift, with projected deficits of between 1.0% and 1.5% of GDP in 2017 and 2018.
Although the infrastructure programme has been slow to roll out, we look for a clearer economic
boost over the next two years.
Amid subdued growth, we look for inflation to remain low, as inflation on the services side of the
economy is seen continuing to dip owing to ongoing excess slack. The risks of slipping into
deflation are small. First, HSBC’s FX team expects the Canadian dollar to weaken, putting some
renewed upward pressure on some currency-sensitive prices. Second, we do not expect energy
prices to be a source of disinflation this year.
Exports are mired in a historical weak … while household debt levels are
cyclical recovery … historically high
200 200 100 100

180 180
90 90
160 160
140 140 80 80
Prior peak
120 120 70 70
= 100
100 100
60 60
80 80
t-4 peak t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32 50 50
Max and min of past recoveries 00 02 04 06 08 10 12 14 16
Average of prior cycles
Current cycle Household debt (% personal disposable income)
Source: Statistics Canada, HSBC Source: Statistics Canada, HSBC
40
Q1 2017

Policy issues
Canada has been at the vanguard of calls for nations with the room to provide fiscal stimulus to
do so. However, the impact of fiscal stimulus has thus far been modest. The Canada Child
Benefit increase that took effect in July 2016 provided only a small boost to overly indebted
households. Federal stimulus aimed at the household sector might be used to repair balance
sheet positions rather than support increased spending. In our view, the focus of Federal fiscal
stimulus should be on infrastructure and boosting business investment. The next phase of
Federal spending will be tilted toward infrastructure. Even so, we think that the fiscal plan has
room to be increased. Proposed deficits of CAD25.1bn in FY2017 (year-end March),
CAD27.8bn in FY2018 and CAD25.9bn in FY2019, amount to between 1.0% and 1.5% of GDP.
We see room for more federal stimulus with a particular focus on crowding in business
investment. On monetary policy we still see the Bank of Canada cutting rates by 25 basis points
to 0.25%, most likely in January. Although Bank of Canada Governor Poloz has expressed a
reluctance to cut rates absent a significant negative shock, the bank actively discussed cutting
rates in October 2016. We see downside risks to the bank's forecasts, and see very little scope
to again lower the GDP forecast without prompting a monetary policy change.
Risks
Elevated household sector debt has been the primary potential source of downside risk to the
economy for several quarters. However, the US Presidential election has introduced political risks,
most notably related to US trade policy. Although Donald Trump has focused on Mexico and China
for possible trade actions, Canada, as the number 3 source of US imports, is also vulnerable to an
isolationist shift in the US. The increase in longer-term interest rates following the US Presidential
election, however, also reinforces concerns about the household sector. Interest rates might still be
historically low, but we nonetheless see the Canadian household as vulnerable.
Key forecasts
% q-o-q annualised 2016 2017f 2018f Q3 16 Q4 16f Q1 17f Q2 17f Q3 17f Q4 17f
GDP (% year) 1.3 1.7 1.6 1.3 1.6 1.4 2.1 1.7 1.7
GDP - - - 3.5 1.6 1.8 1.7 1.7 1.6
Government consumption 2.1 2.3 2.2 -1.2 2.8 2.7 2.6 2.5 2.2
Investment -2.6 0.4 1.8 -1.3 0.6 0.6 0.7 1.2 1.6
Stockbuilding (% GDP) 0.0 0.3 0.2 0.3 0.3 0.3 0.3 0.3 0.3
Domestic demand 1.0 1.4 1.6 0.9 1.3 1.3 1.4 1.5 1.6
Exports 0.9 1.9 2.3 8.9 1.5 2.6 2.6 2.3 2.3
Imports -0.5 1.6 1.8 3.3 0.8 1.2 1.6 1.8 2.0
Industrial production 0.3 2.1 1.9 10.9 2.0 1.3 1.9 2.0 2.0
Unemployment (%) 7.0 7.1 6.7 7.0 7.0 7.2 7.2 7.1 7.0
Wage growth (% year) 0.4 1.1 1.8 0.5 0.4 0.8 1.1 1.2 1.2
Consumer prices (% year) 1.5 1.6 1.8 1.3 1.5 1.6 1.5 1.7 1.7
CAD/USD* 1.35 1.40 1.40 1.31 1.35 1.40 1.45 1.40 1.40
3-month money (%)* 0.5 0.3 0.8 0.5 0.5 0.3 0.3 0.3 0.3
10-year bond (%)* 1.7 1.0 1.0 1.0 1.7 1.4 1.3 1.1 1.0
Note: *Period end
41
Q1 2017

Asia Pacific
China
Qu Hongbin Nominal growth recovery to continue

Chief China Economist
The Hongkong and Shanghai
Banking Corporation Limited Despite stable real GDP growth, China’s nominal GDP growth has recovered meaningfully in
hongbinqu@hsbc.com.hk
+852 2822 2025
2016. This is largely thanks to strong infrastructure investment, which grew by 18.3% y-o-y in
the first 10 months of 2016. The rebound in the property market also helped. We expect
Julia Wang
Economist expansionary fiscal policy to continue into 2017, supporting infrastructure investment growth.
Banking Corporation Limited
The property market may soften somewhat in the coming months, but the overall impact on
juliarwang@hsbc.com.hk growth will likely be quite modest given that the tightening measures have been quite selective.
+852 3604 3663
Against this backdrop, deflation pressures have eased materially. Producer prices emerged
from a four-year-long deflation period in September and have continued to edge up. As a result,
the GDP deflator, a broader measure of inflation for the whole economy, has swung from -0.9%
y-o-y in Q3 2015 to 1.1% y-o-y in Q3 2016. The improvement in prices has helped to support
corporate profits and stabilise business confidence. The Entrepreneur’s Expectation Index,
reported on a quarterly basis by the National Bureau of Statistics, has been on the rise since
Q2 2016. Industrial profit rose by 9.8% y-o-y in October 2016, up from -4.7% y-o-y in December
2015. We expect reflation to continue in 2017, supported by stable demand and continued
supply-side adjustment in heavy industries. The key challenge for policymakers is to broaden
the basis of the recovery to the private sector. Reducing corporates’ social insurance burden,
and even selective tax cuts, could help. A faster pace of reforms, including the shutting down of
zombie SOE companies and accelerating bad debt resolution, would also help to boost the
confidence of the private sector.
Despite more internal stability, the external environment looks more uncertain. More protectionist
trade policies, including higher tariffs or trade tension, could weigh on sentiment as well as
economic activity. Increased external uncertainty should give policymakers more reasons to
accelerate domestic reflation policies in order to anchor the growth outlook. Policymakers should
also speed up the process of forging more trade and investment ties with other emerging markets,
through initiatives such as the One Belt, One Road, and the AIIB, in order to create a more
favourable external environment for China’s increasingly globally minded companies.
Nominal growth is picking up Infrastructure investment still a key growth

pillar
% % YoY%, 3mma YoY %, 3mma

15 15 60 60
50 50
10 10
40 40
5 5 30 30
0 0 20 20
10 10
-5 -5 0 0
-10 -10 -10 -10
2000 2004 2008 2012 2016 2006 2008 2010 2012 2014 2016
CPI PPI GDP Deflator Infrastructure investments
Source: CEIC, HSBC Source: CEIC, HSBC
42
Q1 2017

Policy issues
Against the backdrop of easing deflation pressures, we now expect the PBoC to keep the policy
rate and Reserve Requirement Ratio (RRR) on hold in 2017. Given concerns over ‘asset price
inflation’, the PBoC may use more regulatory tools at its disposal to scrutinise and regulate
asset markets and guard financial stability. Select regulatory tightening aside, it is still too early
to worry about the economy ‘overheating’. China has just emerged from deflation and a broad-
based rise in inflation is still some way off.
Meanwhile, macro-prudential policies aimed at containing property market prices in big cities
may continue in 2017. After around 20 local governments introduced tightening measures in
October 2016, Shanghai and Tianjin further intensified their policy controls in the property
market in late November. It is possible that some other local governments may follow suit in the
coming months if current measures are not enough to cool down the market.
We expect fiscal policy to remain expansionary in 2017. In addition to more fiscal spending on
infrastructure investment, policymakers could also do more to reduce corporates’ tax and fee
charges. In January to October 2016, reforms to the VAT system reduced corporates’ tax burden by
RMB372bn. Together with fee reductions on enterprises’ contribution to municipal construction and
education, total savings may reach RMB500bn in 2016. We think more can be done in 2017.
Risks
The property market is a potential downside risk to growth. After the first round of tightening in
October, property sales in first tier cities have already started to moderate. Some of that may
translate into softer investment growth in the next few months, but we expect only a modest impact
on growth. If property investment falls more significantly, it would require much more aggressive
infrastructure spending to offset the impact, putting more pressure on fiscal policy.
External uncertainty will also likely continue, at least in the near term. Our base case scenario mostly
reflects a continuation of the sluggish external demand over the past few years. But if US trade
policies become materially more protectionist, it could mean additional downside risks to growth.
Key forecasts
% Year 2016 2017f 2018f Q3 16 Q4 16f Q1 17f Q2 17f Q3 17f Q4 17f
GDP 6.7 6.5 6.5 6.7 6.8 6.5 6.6 6.6 6.5
GDP (% quarter) - - - 1.8 1.6 1.4 1.8 1.6 1.5
Primary industry 3.9 3.7 3.7 3.6 3.9 2.9 3.0 3.7 3.7
Secondary industry 6.0 5.9 5.8 5.7 6.0 6.0 6.0 5.9 5.9
Tertiary industry 7.4 7.3 7.4 7.5 7.4 7.3 7.3 7.4 7.3
Consumer spending 7.2 7.4 7.3 - - - - - -
Government consumption 9.0 9.1 8.8 - - - - - -
Investment 8.3 8.0 8.0 - - - - - -
Exports -8.0 -8.5 -5.0 - - - - - -
Imports -2.0 -1.7 -1.0 - - - - - -
Wage growth 7.5 7.4 7.4 - - - - - -
Consumer prices 2.0 2.2 2.1 1.7 2.0 2.0 2.0 2.3 2.3
Current account (USDbn) 253.8 250.5 254.3 - - - - - -
Current account (% GDP) 2.3 2.2 2.1 - - - - - -
Budget balance (% GDP) -3.0 -4.0 -3.6 -5.7 -3.5 0.1 -3.5 -6.4 -5.6
CNY/USD* 6.95 7.20 7.20 6.67 6.95 7.05 7.10 7.15 7.20
3-month money market rate 2.9 3.5 3.5 2.8 2.9 3.3 3.5 3.5 3.5
10-year lending (%)* 3.2 3.0 3.0 2.8 3.2 3.1 3.2 3.1 3.0
Note: *Period end
43
Q1 2017

Asia Pacific
Japan
Frederic Neumann
Pressure’s off, for now
Economist
The Hongkong and Shanghai Things are looking up in Japan. True, the economy decelerated in the third quarter of 2016, partly
Banking Corporation Limited
fredericneumann@hsbc.com.hk reflecting another dip in investment. Still, Japanese firms appear to have taken the strength of the
+852 2822 4556 yen for much of 2016 in their stride, with export volumes proving remarkably resilient. Recent yen
Abanti Bhaumik weakness is providing welcome relief for the Bank of Japan and removes the need for further
Associate
Bangalore monetary easing for the time being. Meanwhile, a generous fiscal stimulus should help lift growth
above 1% in 2017, but momentum could fizzle out thereafter unless public spending and tax cuts
provide yet more support the following year.
High-frequency data point to welcome stabilisation of growth in Japan. Industrial production has
picked up steam amid a drop in inventory. Investment by private companies also appears to have
stabilised, even before the adopted fiscal stimulus has been rolled out. This, in part, reflects record-
high corporate profit margins (at least based on data going back to the mid-1980s), led by the
service sector.
Consumer spending, by contrast, continues to disappoint, not least given a tight labour market (the
unemployment rate is at an over two-decade low) and signs of mildly faster wage growth. Household
expenditure, on a GDP basis, has yet to recover from the slump suffered in the wake of the VAT hike
in April 2014. As a result, the household saving rate has climbed sharply in recent years, something
that will need to reverse if consumption is to fuel overall growth.
For the Bank of Japan, all this means that the pressure is off – at least for now. Growth appears
stable for the time being and should even pick up steam next year as the fiscal stimulus programme
is implemented. In addition, a weaker yen has bought breathing space, obviating, at least for a
while, the need for an aggressive further easing of monetary policy. The BoJ will likely stay on
hold through next year and possibly beyond, leaving fiscal policy to do the heavy lifting.
Even so, inflation, even with a weaker yen, will only track up gradually, and is still expected to fall
well short of the BoJ’s target of 2% for the foreseeable future. The good news, however, is that the
spell of negative surprises, and outright deflation on most price gauges, should come to an end
over the first half of 2017.
The expectation remains that this opening in the clouds over Japan’s economy will not slacken the
resolve to press ahead with structural reforms – especially now that the TPP has been
seemingly shelved.
BoJ's 2% CPI target still appears out of Unemployment rate has fallen to mid-1990s'
reach low
% Yr % Yr % %
3 3
6.0 6.0
2 2
1 1
4.5 4.5
0 0
-1 -1
-2 -2 3.0 3.0
-3 -3
2003 2005 2007 2009 2011 2013 2015 2017 1.5 1.5
Headline 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
BoJ core (ex fresh food, energy) Unemployment Rate: sa
BoJ target
44
Q1 2017

Policy issues
The Bank of Japan changed its monetary policy framework in September 2016, switching to a
yield-targeting regime and away from an iron-clad commitment, increasingly difficult to implement,
to buy JPY80trn in assets annually, mostly government bonds. The current framework appears
more sustainable given that it is not constrained by the volume of outstanding government bonds
that the central bank can buy. However, markets may still test the BoJ’s commitment to keep
10-year bond yields anchored at “around zero” per cent. Initially, yields dipped well below zero, but
have more recently risen back into positive territory. In principle, the BoJ should be able to keep
yields in a relatively tight range if it is committed to unlimited intervention. But, in practice,
markets may come to test the central bank’s resolve, especially if bond yields globally move
sharply. A failure to rein in a significant deviation of yields from the BoJ’s target may then prompt a
rethink of the monetary policy framework.
The current fiscal support programme, adopted by the Diet in the fall of 2016, is expected to add
about 0.6ppt to GDP growth in 2017. However, a key question over the course of the year will be
whether the government intends to adopt another supplemental, or far more accommodative, budget
for the subsequent fiscal year. If not, Japan might face a mini “fiscal cliff” in 2018, with growth again
slowing sharply.
Given the likely shelving of the TPP (on account of a US withdrawal from the agreement), a key
structural reform pillar of Abenomics has broken away. To fill the void, and take advantage of a
sizeable majority in both houses of parliament, the government will need to sharpen its focus on
key reforms, including with respect to the labour market, services, and immigration.
Risks
One prominent risk facing Japan in 2017 – along with other Asian and emerging market economies –
is growing protectionism in the US, with possibly targeted action taken against Japanese exporters.
On the positive side, however, an agreement between the EU and Japan to liberalise bilateral trade
could help to support exports.
Key forecasts
GDP 1.0 1.2 0.6 1.1 1.5 1.3 1.2 1.2 1.3
GDP (% quarter) - - - 0.3 0.0 0.5 0.3 0.3 0.2
Investment 0.9 2.4 0.6 1.1 2.0 2.9 1.8 2.3 2.4
Stockbuilding (% GDP) 0.3 0.1 -0.1 0.3 0.1 0.1 0.1 0.1 0.1
Domestic demand 0.6 1.1 0.7 0.3 1.1 1.0 0.8 1.2 1.3
Exports 0.1 1.1 1.1 0.4 0.7 0.9 1.8 0.7 0.9
Imports -2.0 0.1 2.1 -3.3 -1.9 -1.0 -0.5 0.8 1.0
Industrial production -0.4 1.8 0.5 0.4 1.6 2.1 1.9 1.5 1.9
Unemployment (%) 3.1 3.0 2.9 3.0 3.1 3.0 3.0 3.0 3.0
Wage growth 0.7 1.2 1.2 0.5 0.9 1.2 1.2 1.3 1.3
Consumer prices -0.2 0.9 1.1 -0.5 0.2 0.6 0.9 1.0 1.0
Current account (USDbn) 197.3 211.2 181.3 47.8 63.2 53.3 53.2 49.5 55.2
Current account (% GDP) 3.7 3.3 3.0 4.4 2.6 3.6 3.0 4.0 2.7
JPY/USD* 117 115 115 101 117 120 125 120 115
3-month money (%)* -0.1 -0.2 -0.2 2.0 -0.1 -0.2 -0.2 -0.2 -0.2
10-year bond (%)* 0.1 0.0 0.0 -0.1 0.1 0.0 0.0 0.0 0.0
Note: *Period end
Source: CEIC, Cabinet Office, MoF, BoJ, HSBC
45
Q1 2017

Asia Pacific
India
Pranjul Bhandari An India-style reform playbook

Chief India Economist
HSBC Securities and Capital
Markets (India) Private Limited India is likely to witness two big ‘reforms’ over the next year – the play-out of the demonetisation drive
pranjul.bhandari@hsbc.co.in and the implementation of the Goods and Services Tax (GST) bill. The hope is that both of these are
+91 22 2268 1841
followed up by necessary actions, which are critical to reaping long-term gains.
Dhiraj Nim
Associate The government’s decision to abolish the pre-existing stock of high denomination currency notes
Bangalore
(demonetisation) and issue new notes (remonetisation) could have a mixed impact on the macro
economy over a year. Using the cash elasticity of GDP, we estimate that growth could be about 2pp
lower in Q3 and Q4 of FY17 (ending March), given that effective currency in circulation has
contracted by 70% (as of end-November). As enough notes are printed, growth is likely to return to
the 7% ballpark. Lower growth for at least two quarters means that the output gap will take longer to
close, suggesting that the revival of the investment cycle, which is already very weak, could be
pushed out even further.
Longer-term gains depend on follow-up reforms. For instance, if the government wants to lower the
stock of black money substantially, it will have to attack other shelters of black money (real estate,
gold, foreign currencies). One easy action could be to bring real estate under the GST. If the
government wants to use this as an opportunity to increase digital payments adoption, it needs to
address bottlenecks, especially in rural India. If the government follows up with a spate of reforms,
gains could potentially be immense, as the official economy absorbs the parallel economy.
As if the demonetisation drive were not enough, the GST is likely to be implemented in 2017,
although the risk is that the April deadline will be missed and implementation will happen later in the
year. The government has decided on multiple tax rates and multiple exemptions, moving further
away from an 'ideal' structure. The near term could be messy, with adjustment costs for the private
sector, grappling with inter-sector implications. Service providers in particular will face an increased
tax burden. We believe that the medium-term addition to GDP growth from this reform will be about
40bps; this is sizeable, but lower than the 80bps calculated earlier. If the government is able to move
towards a lower number of rates and fewer exemptions over time, the lost punch will be regained.
Both reforms have Indian-style characteristics; an imperfect version is initially implemented and
is likely to be disruptive. The quantum of long-term gains will depend on follow-up action.
The investment cycle has weakened in 2016 Inflation is likely to remain contained over
H1 2017, opening up space for easing
% Yr Public versus private investment % Yr % Yr Trends in CPI inflation % Yr

25 25 forecast
20.6 9 9
20 20 8 8
15 15 7 7
10 10 6 6
5 4.0 5 5 5
0 0 4 4
-1.4 -4.4 3 3
-5 -5
FY13 FY14 FY15 FY16 FY17 (so 2 2
far) Jun-15 Oct-15 Feb-16 Jun-16 Oct-16
Overall Overall: Private Overall: Public Overall Food Refined core
46
Q1 2017

Policy issues
We expect GDP to grow 6.3% (7.5% previously) in FY17 and 7.1% (7.3% previously) in FY18
before climbing impressively to 7.6% (unchanged) in FY19. Lower growth over two years and
lower food prices on the back of ongoing food reforms mean that inflation will also be more
contained than before. We expect inflation to average 4.7% in FY17 and 5.0% (5.1% previously)
in FY18 before falling to 4.6% (4.8% previously) in FY19.
Growth concerns over the unfavourable mix in pre-demonetisation GDP growth prints, an output
gap that would be negative for longer following demonetisation, and lower inflation until then,
make us believe that there is some space for easing. We expect a 25bp rate cut in the February
meeting, taking the repo rate to 6.0%. The risk to our view is that much of the demonetisation-
led growth drag turns out to be temporary, not requiring an additional rate cut. But, until we see
some data that suggests this, we maintain our forecast.
There is much talk that the cancelled notes that are never returned to the banks, might be written
off in the RBI’s balance sheet and be transferred as a one-time fiscal bounty to the government.
However, neither the write-offs timing nor its quantum can be taken for granted. As long as the
RBI is open to exchanging old notes for new ones, it cannot extinguish the liability and transfer
funds to the government. Given the legal status of currency notes, it comes as no surprise that so
far, the RBI has not officially signed up for an end-date for the scheme. Having said that, if the
government collects higher taxes and penalties on returned notes and spends the proceeds, the
demonetisation will imply some redistribution of wealth in the economy.
Finally, even though the country is entering uncertain territory, investor confidence has not been
significantly dented. After all, the macro environment is much stronger now. Inflation is in single
digits, the twin deficits are under control and foreign exchange reserves are at comfortable levels.
Risks
If the demonetisation exercise has led to some permanent supply-side disruptions, growth could be
weaker for longer. If investment does not revive soon, inflation may begin to rise as growing
consumer demand hits the wall of supply-side constraints, frittering away hard-won macro credibility.
Key forecasts
GDP (calendar year) 6.8 6.8 7.5 7.3 5.0 6.0 6.8 7.1 7.1
GDP (% quarter) - - - 2.3 -1.9 3.2 3.0 2.7 -1.9
GDP (fiscal year) 6.3 7.1 7.6 7.3 5.0 6.0 6.8 7.1 7.1
Investment -0.5 5.8 7.3 -5.6 3.0 4.0 5.0 5.5 6.0
Domestic demand 4.1 7.2 7.6 3.4 3.8 5.0 6.3 7.2 7.5
Exports 4.6 7.0 8.5 0.3 7.3 7.5 7.0 7.0 7.0
Imports -0.9 7.0 9.5 -9.0 6.0 6.0 7.0 7.0 7.0
Industrial production 2.1 5.7 6.5 -0.8 4.2 4.4 5.1 5.5 6.0
Consumer prices 4.7 5.0 4.6 5.2 4.1 4.1 4.1 5.2 5.6
Current account (USDbn) -15.4 -18.4 -33.2 4.2 -10.8 -8.6 -4.7 -4.6 -4.9
Current account (% GDP) -0.7 -0.8 -1.2 0.8 -1.9 -1.4 -0.8 -0.8 -0.8
Budget balance (% GDP) -3.5 -3.0 -3.0 -4.3 -3.9 -3.7 -3.5 -3.4 -3.3
INR/USD* 68.0 69.0 69.0 66.6 68.0 69.0 70.5 69.5 69.0
3-month money (%)* 7.8 7.2 7.2 6.5 7.8 7.2 7.2 7.2 7.2
10-year bond (%)* 6.6 6.2 6.3 7.0 6.6 6.0 6.0 6.1 6.2
Note: India annual data for fiscal year (April-March) unless indicated otherwise; * Period end
47
Q1 2017

Asia Pacific
Australia
Paul Bloxham Commodity price rise to boost incomes

Economist
HSBC Bank Australia Limited
+612 9255 2635 Growth was considerably weaker in the third quarter of 2016 than was expected, with real GDP
paulbloxham@hsbc.com.au falling on the quarter for the first time since Q1 2011. However, the fall appears to reflect the
Daniel Smith coincidence of a number of one-off factors, including a temporary disruption to coal exports and
Economist
inclement weather affecting construction activity, rather than the beginning of a more significant
+612 9006 5729 downturn. Recent numbers for retail sales, business conditions and international trade already
daniel.john.smith@hsbc.com.au
suggest a solid pick-up in GDP growth is likely in Q4 2016.
In addition, there has been a substantial pick-up in coal and iron ore prices recently. Although
this rise did not arrive in time to support the Q3 2016 GDP numbers, it should flow through to a
significant boost in income growth in Q4 2016 and beyond. Australia’s commodity price index
has risen by 20% in AUD terms since Q3 2016. Our estimates suggest that the pick-up in
commodity prices should add around 2.0pp to nominal GDP over the coming year.
Overall, the strong rise in commodity prices and end of the mining investment decline are
changing the local growth story. For the past five years, the Australian economic story has been
about rebalancing growth away from being driven by mining investment at the end of the
commodity prices ‘super-cycle’. Lower interest rates and the fall in the AUD over recent years
have supported a housing boom and rising services exports, which have rebalanced growth.
The mining sector is now stabilising and is no longer set to drag on growth and incomes.
Given the recent downside surprise to GDP growth, we now expect growth of 2.4% in 2016
(previously 2.9%), rising to 2.8% in 2017 (previously 2.9%) and 3.2% in 2018 (unchanged).
Although local inflation is currently below the RBA’s 2-3% target and wages growth is sluggish, we
expect both to rise gradually through 2017. Supporting this, we see the rise in commodity prices as
likely to lift national incomes, tax revenues, corporate profits and wages growth. Non-mining
business investment is also already showing signs of rising modestly and, although the labour
market has spare capacity, it is worth keeping in mind that job creation tends to lag the cycle, rather
than lead it. We retain our view that the RBA is likely to keep its cash rate on hold at 1.50% through
2017 and have recently shifted our call for 2018, with 50bp of RBA hikes now pencilled in.
Real GDP fell in Q3 2016 Commodity prices to drive nominal GDP
% % % %
6 6 20 80
16 60
4 4 12 40
8 20
2 2 4 0
0 -20
0 0 -4 -40
-8 -60
-2 -2 2000 2004 2008 2012 2016
90 93 96 99 02 05 08 11 14 17 Nominal GDP growth, LHS
GDP growth q-o-q y-o-y Commodity prices growth, RHS
Source: ABS Source: ABS; RBA
48
Q1 2017

Policy issues
The Australian government has passed legislation to re-instate the Australian Building and
Construction Commission, which is an indication that there has been some progress on labour
market reform. This legislation was difficult to pass and was the trigger for the July 2016 ‘double
dissolution’ Federal election.
The government has also passed a number of fiscal reform measures, including the
‘backpacker tax’, with the measures set to save the government AUD21bn over the next four
years. Tax revenues are also expected to get a boost from rising commodity prices. Offsetting
these measures, slower-than-expected wages growth has weighed on the personal income tax
take. The government’s focus on fiscal reform has become more pressing since one of the
major rating agencies, Standard & Poor’s, put the Australian government on ‘negative outlook’
for its triple-A sovereign rating in July 2016.
Financial stability concerns remain an ongoing issue for the central bank, given a further recent
pick-up in housing prices and a modest revival in investment activity in Australia’s housing
market. The pick-up in housing market activity has occurred despite local prudential settings
having been tightened over the past two years. The pick-up in investor credit growth adds to the
case for the RBA to keep its cash rate unchanged over the next few quarters.
Risks
We view the risks to growth as evenly balanced. On the upside, the lift in commodity prices and
boost to incomes could provide more support for growth than we currently expect. On the
downside, slower-than-expected growth in China could weaken demand for Australian
commodities or services exports. The risks to our inflation outlook are tilted to the downside.
Changing patterns of employment could put more persistent downside pressure on wage
growth, and thus local underlying inflation, than we have currently factored into our central case.
Key forecasts
GDP 2.4 2.8 3.2 1.8 2.1 2.0 2.3 3.6 3.4
GDP (% quarter) - - - -0.5 0.9 0.9 0.9 0.8 0.7
Investment -2.8 1.8 2.7 -2.2 -1.6 -0.1 0.2 3.7 3.5
Stockbuilding (% GDP) - - - 0.2 0.2 0.2 0.2 0.2 0.2
Domestic demand 1.6 2.4 2.5 1.8 1.7 2.1 1.9 2.8 2.8
Exports 7.2 8.9 9.1 6.0 8.1 7.9 8.0 10.1 9.4
Imports 0.6 6.7 6.4 2.3 3.4 7.5 6.2 6.5 6.7
Industrial production 2.9 1.2 3.8 1.6 1.9 -1.1 1.4 2.0 2.5
Unemployment (%) 5.7 5.6 5.3 5.7 5.7 5.7 5.6 5.5 5.4
Wage growth 2.0 2.1 2.8 1.9 1.9 1.9 2.0 2.2 2.4
Consumer prices 1.3 2.5 2.6 1.3 1.7 2.5 2.6 2.5 2.3
USD/AUD* 0.72 0.70 0.70 0.77 0.72 0.69 0.67 0.70 0.70
3-month money (%)* 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8
10-year bond (%)* 2.9 1.7 1.7 2.0 2.9 3.0 2.4 1.9 1.7
Note: *Period end
r
49
Q1 2017

Asia Pacific
South Korea
James Lee
Growth to slow in 2017
Economist
The Hongkong and Shanghai GDP growth in 2016 has become increasingly dependent on construction and government
Banking Corporation Limited (HK)
james.dh.lee@hsbc.com.hk
consumption, drivers that we see fading in the coming quarters. In their absence, exports and
+852 2822 1647 investment would need to step up, yet the outlook for both remains tied to global demand, which
itself is likely to stay reasonably subdued. Hence, we forecast real GDP growth slowing from
2.7% in 2016 to 2.4% in 2017. Against this backdrop, the BoK should have room to ease
further, and thus we expect the Base Rate to be cut by 25bp to 1.00% in Q2 2017.
Construction activity is likely to slow down in the medium term, although it could remain
elevated for now as permits remain high from a historical perspective despite the recent decline.
Indeed, there are already preliminary signs that the strength in construction has reached its
limit, with permits peaking in Q4 2015 and a sharp rise in unsold homes in the past year.
Meanwhile, the 2017 budget implies only a mere 0.5% increase in expenditure.
Following some improvement in H1 2016, exports seem to be stabilising at low levels, although
the sequential momentum seemed to have peaked in mid-2016 with the 3m/3m growth rate
turning negative in November. Apart from higher prices of key export goods and technical
drivers, we remain cautious on the medium-term export outlook until there is a meaningful pick-
up in global demand. On the production front, the near-term outlook should be supported by
ongoing technical payback in the auto industry after the end of the workers’ strike as well as
restocking in the tech sector, led by low levels of inventories and price stabilisation. In fact,
semiconductor inventories are currently 30% lower than their peak level in late 2015. However,
the small boost in production should not result in a brighter capex outlook, with the operation
ratio low at 70.6% in October, down from an average 74% in 2015 and 76% in 2014.
The headline CPI should see some acceleration in the coming months, as the negative
contribution from lower global oil prices fades. However, this move should be short-lived given
limited pressures from the demand side. According to our estimates, assuming no change in oil
product prices, the contribution from oil product prices to headline CPI % y-o-y changes should
increase from -16bp in November to a peak of 36bp in March. The government has reduced
electricity tariffs by an average 11.6% retroactively from 1 December 2016, which will shave
0.2pp off headline inflation.
Construction and government spending Improvement in exports mostly price,

the only drivers of GDP growth while volumes remain stable
% Yr % Yr % Yr % Yr
4 4
20 20
3 3
10 10
2 2
0 0
1 1
-10 -10
0 0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
Government consumption -20 -20
Construction Jan-13 Jan-14 Jan-15 Jan-16
GDP ex construction and government contribution Volume Price Exports
50
Q1 2017

Policy issues
Low growth dynamics are likely to push the BoK into cutting the policy rate further. The impact from
the US presidential election has suggested more immediate downside risk to growth, in our view,
with the onshore rate notably higher while KRW NEER is barely moving. Despite market expectation
of some potential tightening, Korea’s strong external balance should allow the central bank to ease
further, if growth slows. However, there should be less room to ease due to more US rate rises, and
the timing of actual easing could be heavily dependent on financial market conditions. In all, our
forecast looks for the BoK to cut by 25bp to 1.00% in Q2 2017 and stay on hold thereafter.
The 2017 budget is not expansionary. Expenditure will only increase 0.5% to KRW400.5trn,
down from a 3.6% increase in 2016. Revenues are expected at KRW414.3trn (+3.3%), putting
the consolidated fiscal surplus at KRW13.8trn (0.8% of GDP) in 2017. The balance excluding
social security fund contributions, linked to KTB issuance, will narrow its deficit from
KRW36.9trn (-2.3%) in 2016 to KRW28.1trn (-1.7%) in 2017. Like 2016, the budget will be
frontloaded, with 68% spending allocated in 1H. Meanwhile, a supplementary is possible, with
some politicians already calling for one even before the start of the year.
Risks
The National Assembly passed the motion for impeachment of the President on 9 December
2016 and the Constitutional Court will have to make a final ruling within 180 days. This, at the
margin, should be negative for growth. However, the fact that the budget was approved as
scheduled suggests that economic policy-making continues. Moreover, although headline
consumer confidence fell sharply in November, the impact was yet to spill over into household
spending plans. As such, our read is that the political developments have had only a small
negative impact on the economy for now, although the possibility for any expansionary policy in
the near term is reduced. The risk is that the political situation could further weigh on consumer
sentiment, although a survey by Gallup showed 81% in favour of impeachment. Another key
risk is the high level of uncertainty on how the US trade policy could change. We believe the
downside risks seem to be much larger than upside potential for Korea.
Key forecasts
GDP 2.7 2.4 2.4 2.6 2.3 2.6 2.3 2.2 2.4
GDP (% quarter) - - - 0.6 0.4 0.7 0.6 0.5 0.6
Investment 5.0 2.7 2.0 5.3 6.2 5.2 2.8 1.3 1.7
Stockbuilding (% GDP) -0.3 0.4 0.4 -1.3 0.9 1.2 -0.4 -0.1 1.0
Domestic demand 1.8 2.8 2.1 1.5 2.6 3.8 3.0 2.7 1.9
Exports 1.6 2.0 2.4 2.7 1.0 2.4 1.9 1.7 2.0
Imports 3.1 2.1 1.7 4.9 2.2 5.0 2.8 0.4 0.2
Unemployment (%) 3.8 3.9 4.0 3.6 3.7 3.8 3.9 3.9 3.9
Wage growth 2.0 2.5 2.5 2.5 2.0 2.0 2.0 2.5 2.5
Consumer prices 1.0 1.7 1.5 0.8 1.3 1.6 1.9 1.9 1.4
Budget balance (% GDP) 0.2 1.0 1.5 -0.7 -4.7 -12.2 -6.6 2.4 1.8
KRW/USD* 1208 1210 1210 1099 1208 1225 1250 1230 1210
3-month money (%)* 1.4 1.2 1.2 1.3 1.4 1.4 1.2 1.2 1.2
10-year bond (%)* 2.1 1.9 1.9 1.4 2.1 2.5 2.3 2.1 1.9
Note: *Period end
51
Q1 2017

Asia Pacific
Indonesia
Su Sian Lim Cruising at low altitude

Economist
Banking Corporation Limited, Growth remains stable in Indonesia, albeit low by its own history and when compared to a long-term
(Singapore) trend pace of 6.0%. A slightly better-than-expected Q3 2016 GDP report sees us tweaking our
susianlim@hsbc.com.sg
+65 6658 8783 full-year 2016 growth forecast, raising it to 5.1% from 4.9%. But we retain our growth projections for
Abanti Bhaumik
2017 and 2018 at 5.1% and 5.3% respectively.
Associate
Bangalore Consumer spending has plodded along at a slightly sub-potential pace of around 1.2% q-o-q sa
since 2014, and in the near term is likely to continue traveling at this speed. Consumer confidence
reached a one-and-a-half-year high in October 2016, but in the subsequent months may have seen
some drag from global financial market uncertainty, and from (weather-related) upward price
pressures on certain staple foods. Total investment, too, could remain slightly below its long-term
trend pace of 1.1% q-o-q sa, constrained for the moment by the government's still-gradual outlays on
the infrastructure front. As of October 2016, the Public Works Ministry had disbursed 62% of its
allocated funds for the year, against an internal target of 81%. Export levels, meanwhile, look poised
to continue trending sideways judging by lacklustre global growth, and indications from the
manufacturing PMI survey that export orders are still shrinking slightly.
Further out, however, we think GDP growth could pick up to around 1.3% q-o-q sa or higher (hence
eventually bringing annual growth to 5.3% in 2018). 150bp of rate cuts by Bank Indonesia (BI) since
the start of 2016 has resulted in lending rates on average having declined by around 80-90bps for
working capital and investment loans, and by around 20bps for consumer loans. Although credit
growth remains sluggish, the low interest-rate environment has spurred greater non-bank financing,
such as corporate bond issuance. In time, such activity should help to bolster overall
economic growth.
Meanwhile, the government's tax amnesty programme – a crucial source of funding for its
longer-term infrastructure plans – is enjoying moderate success. Although the government's target
for a IDR165trn boost to revenue this year is not likely to materialise, the IDR99.4trn earned as of
6 December 2016, has already exceeded market expectations of IDR50trn-70trn. The next thing
the government needs to achieve in 2017 and 2018 is more optimal disbursement of these funds.
Evidence of this would present upside risk to our otherwise conservative growth forecasts.
In turn, S&P, which has had the sovereign on positive outlook since May 2015, could finally consider
upgrading Indonesia to investment grade in April/May 2017.
PMIs suggest mild domestic recovery But government infrastructure

disbursement still sub-optimal
Index sa Index sa % %
Indonesia PMIs Financial progress 2016 94.0
100 100
55 55
81.1
80 80
50 50 62
60 60
45 45 40 40
20 20
40 40
0 0
Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
PMI New export orders New orders Realized Targeted
Source: Markit, HSBC Source: MOF, HSBC
52
Q1 2017

Policy issues
Since November 2015, BI has cut its minimum (or primary) reserve requirement ratio twice, by a
total of 150bps, to 6.50%. In 2016 it also delivered six 25bp rate cuts (not counting the final
meeting on 15 December). The central bank remains eager to do its part to support growth and
the infrastructure push, and its tone has remained dovish although it has also indicated that the
easing cycle is coming to an end. Officials continue to take the view that sluggish domestic
growth and low inflation provide cause for further easing, but external factors – namely the
financial market uncertainty brought about by Mr Trump winning the presidential election in the
US – necessitate a pause for now. To this end, we have postponed our forecast for one final
25bp rate cut to Q1 2017 (to 4.50%), from an initial forecast for easing in December 2016. This
would give BI some time to assess the impact of Mr Trump's policies on the US and global
financial markets after he takes office on 20 January 2017.
Closer to home, domestic inflation may also complicate BI's intended policy path. We expect
inflation in 2017 to average 4.1%; this is even after factoring in slightly faster-than-usual gains in
utility prices between January and May to reflect the increase in electricity prices for users
deemed no longer eligible for the government subsidy on 900-watt electricity. Should the
government also crack down on usage of 450-watt electricity, however, this would affect a lot
more Indonesians and in turn nudge 2017 inflation even higher.
We maintain our budget deficit forecast of 2.6% of GDP for 2016, and 2.4% in 2017 and 2018.
Although the boost to government revenues from the tax amnesty scheme has exceeded our
IDR70trn assumption, other revenue components appear to have underperformed.
Risks
Much of the growth and fiscal outlook continues to hinge on the success of the tax amnesty
programme. If state revenues are significantly boosted by the time the amnesty programme
ends in March 2017, the government's infrastructure push could become stronger, offsetting the
drag from weak exports and slightly sub-potential consumption growth.
Key forecasts
GDP 5.1 5.1 5.3 5.0 5.2 5.2 5.1 5.2 5.1
GDP (% quarter) - - - 1.1 1.3 1.2 1.3 1.3 1.3
Government consumption 1.8 3.4 3.9 -3.0 1.5 2.1 2.4 3.9 4.3
Investment 4.3 4.2 5.6 4.1 2.5 3.0 3.9 4.5 5.3
Stockbuilding (% GDP) 1.4 1.7 1.6 2.5 -1.5 2.8 2.8 2.4 -1.2
Domestic demand 4.7 5.0 5.3 4.0 4.8 4.6 5.0 4.8 5.6
Exports -3.1 -0.9 2.2 -6.0 -0.4 -3.1 -2.7 0.8 1.2
Imports -3.6 -0.6 2.1 -3.9 -2.8 -3.2 -0.9 0.5 1.1
Unemployment (%) 6.3 6.2 5.9 - - - - - -
Wage growth 5.1 5.9 6.4 - - - - - -
Consumer prices 3.5 4.1 4.4 3.0 3.3 2.9 4.3 4.2 4.8
IDR/USD* 13540 13600 13600 13020 13540 13800 14000 13800 13600
3-month money (%)* 6.8 6.8 6.8 7.1 6.8 6.8 6.8 6.8 6.8
10-year bond (%)* 7.9 7.5 7.5 7.1 7.9 8.1 7.9 7.7 7.5
Note: *Period end
53
Q1 2017

Asia Pacific
Taiwan
Julia Wang Rebound delays policy easing

Economist
Banking Corporation Limited After three consecutive quarters of contraction, Taiwan’s economy rebounded in Q2 2016. It
juliarwang@hsbc.com.hk
+852 3604 3663
then grew at a faster pace of 2.0% y-o-y in Q3 2016. The stronger readings are a reflection of
the broad-based improvements in both domestic and external demand. Since the summer, the
Aakanksha Bhat external sector, on which Taiwan’s economy heavily relies, has benefitted from an
Economics Associate unseasonably strong tech cycle. Between June and November, export growth averaged 3.3% y-
Bangalore
o-y, compared with a contraction of 14.1% y-o-y over the same period last year. Improved
external demand has also supported manufacturing activity and the rebound in industrial
production. Although there are some signs that momentum is fading, economic activity will likely
continue to hold up better than in H1 2016. Following better data over Q2 and Q3, we expect a
slightly faster pace of GDP growth in 2016 (1.2% vs 1.1% previously). Our 2017 GDP growth
forecast is unchanged at 1.7%.
Meanwhile, improved demand conditions have also helped bring about a stabilisation in prices.
Headline CPI aside, core inflation (excluding Fruits, Vegetables & Energy) grew by 0.8% y-o-y
in Q3 2016 up from 0.6% y-o-y over the same period last year.
We however remain cautious in our outlook for 2017. The biggest risk to Taiwan continues to
stem from the external sector. The US election has thrown up considerable uncertainty around
US trade policy. Our base case view is that despite the proposal of extreme measures by
president-elect Donald Trump, an outright trade war will be averted. HSBC economists have
pencilled in higher growth in the US and continued stability in Mainland China. In such a
scenario, Taiwan would stand to benefit. However, there remains a possibility of rising
protectionism abroad, which would hurt Taiwan’s economic growth, given its high sensitivity to
global trade. Should things take a turn for the worse, policy support will still be warranted to
cushion the impact of a slowdown. Against this backdrop we now expect the central bank (CBC)
to deliver two rate cuts of 12.5bps each in Q1 and Q2 2017.
Growth momentum has improved External demand remains a key risk
Index Taiwan, industrial production, actual vs trend Index pp Taiwan, contributions to %YoY GDP growth pp
120 120 5 5
4 4
3 3
100 100
2 2
1 1
80 80 0 0
-1 -1
60 60 -2 -2
-3 -3
2013 2014 2015 2016
40 40
Consumption Investment
1996 2000 2004 2008 2012 2016 Government Net Exports
Industrial production SA Trend GDP
54
Q1 2017

Policy issues
The notable turnaround in data over the second half of the year provided justification for the
central bank’s (CBC) decision to pause its easing cycle and leave rates on hold at 1.375% at its
meetings in September and December 2016. Data have by and large continued to hold up.
Leading indicators such as the PMIs suggest that the positive momentum, although fading
somewhat from the summer months, has continued. Furthermore, inflation has stabilised to
some extent amidst improved demand conditions.
However, downside risks lurk on the horizon, particularly if global trade takes a turn for the
worse. Therefore further policy easing cannot be ruled out at this stage. We are still pencilling in
two more 12.5bps policy rate cuts in Q1 2017 and Q2 2017, respectively.
Aside from monetary easing, policymakers can also offer some more fiscal support and the
flexible application of macro-prudential measures. While the room for fiscal policy is limited by
the statutory debt ceiling of 40% of GDP (the debt in 2015 was around 38% of GDP), it does not
completely eliminate room for policy action on this front.
Risks
The state of the external sector continues to be a big downside risk to growth, at least in the near
term. Given Taiwan’s high sensitivity to global growth, and especially growth in US and China, any
extreme policies that threaten stability in these two countries (although not our base case), would
impact Taiwan’s economy negatively.
Key forecasts
GDP 1.2 1.7 1.6 2.0 2.0 2.0 1.7 1.7 1.7
GDP (% quarter) - - - 1.0 -0.2 1.0 0.9 0.5 0.0
Investment 2.1 2.4 2.3 3.4 4.6 3.9 3.8 1.2 1.2
Stockbuilding (% GDP) 0.1 -0.2 -0.4 -0.1 0.5 -0.1 -0.3 -0.5 0.0
Domestic demand 2.1 1.8 1.9 2.8 2.9 3.2 2.1 1.3 0.9
Exports 0.2 -2.4 -2.4 3.6 0.7 2.6 -0.7 -5.5 -5.5
Imports 1.4 -2.9 -2.4 5.3 1.9 4.3 -0.5 -7.2 -7.4
Industrial production 0.5 -0.2 -0.5 3.9 2.4 -2.0 -1.0 1.0 1.0
Unemployment (%) 4.0 4.0 4.0 3.9 4.0 4.0 4.0 3.9 3.9
Wage growth 2.0 2.2 2.1 - - - - - -
Consumer prices 1.2 1.3 1.0 0.7 1.2 1.5 1.5 1.2 1.2
Budget balance (% GDP)* -0.9 -1.7 -2.2 - - - - - -
Gross external debt (% GDP)* 34.5 37.6 38.9 - - - - - -
Gross government debt (% GDP)* 38.2 37.3 36.0 - - - - - -
TWD/USD* 32.4 32.2 32.2 31.3 32.4 32.6 33.2 32.6 32.2
3-month money (%)* 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7
10-year bond (%)* 1.3 1.5 1.5 0.7 1.3 1.4 1.5 1.5 1.5
Note: *Period end
55
Q1 2017

Asia Pacific
Thailand
Nalin Chutchotitham
Breathing easier
Economist
The Hongkong and Shanghai We now expect 2016 GDP growth to record 3.0% instead of 2.8%, and raise both our 2017 and 2018
Banking Corporation Limited,
Bangkok Branch GDP growth forecasts to 3.2%, from 2.8% and 3.0%, respectively.
nalin.chutchotitham@hsbc.co.th
+66 2614 4887 The Thai economy grew an average of 3.3% y-o-y in the first three quarters of 2016, better than our
earlier forecast, even if partly due to cheaper energy and weaker capital goods imports. The key
upside surprises were public investment, private consumption, and exports of services (mainly
tourism). These drivers also helped to offset the drag from sluggish exports of goods, private
investment contraction, and continued destocking.
In 2017, we expect public investment to remain one of the key drivers of GDP growth although it will
likely decelerate after a surge in 2016. Several infrastructure projects have advanced to either the
bidding or construction stage, thanks to the government’s annual ‘action plan’ which provided more
clarity on priority projects. Additionally, we expect a reversal of the destocking process which had
subtracted about 3.0pp from growth the first three quarters of 2016.
Lingering external uncertainties (eg US trade policy and Asia’s growth) will likely keep exports
subdued, but its drag on overall growth will likely be reduced from 2016. We note that export market
shares in most markets have been maintained so far. Meanwhile, tourism is likely to rebound after
the temporary effect from the crackdown of some illegal tourism schemes fades.
Our more positive outlook also takes into account the ample fiscal room. The planned FY17
(year-end September 2017) budget deficit of THB390bn (2.7% of GDP) can be legally raised by as
much as 50% if needed. The cabinet approved a THB190bn supplementary budget on
7 December, which is expected to be passed by the parliament by early February 2017, possibly
raising the deficit ratio to 3.3%. Still, we expect the public debt-to-GDP ratio to remain below 50%
at end-FY18. Liquidity will also remain abundant, supported by stable deposit growth and a large
current account surplus.
Nevertheless, the economy is unlikely to return to its pre-global financial crisis pace of growth soon
as high household debt and lower credit quality among the small and medium enterprises still weigh
on growth. Recall also the domestic demand recovery needed the support of several rounds of
stimulus measures, including an agriculture subsidy. Furthermore, structural problems remain, such
as low household saving, ageing demographics, and weaker export competitiveness.
Moderate growth and inflation to continue Tourism to recover from setback in Q4 16

% % m person 3mma indicators USD bn
8 16 3.2 24
6 12 2.8 22
4 8 2.4 20
2 4
2.0 18
0 0
1.6 16
-2 -4
1.2 14
-4 -8
2010 2011 2012 2013 2014 2015 2016 0.8 12
GDP y-o-y (RHS) Policy rate (LHS) 2010 2011 2012 2013 2014 2015 2016
CPI y-o-y (LHS) Tourist arrival sa (LHS)
Axis Title Export Import
Source: CEIC, HSBC Source: CEIC, HSBC. NB: Exports and imports are in BOP basis (f.o.b.)
56
Q1 2017

Policy issues
We do not expect any more rate cuts as the Bank of Thailand (BoT) still appears keen to maintain
policy room in case of unexpected events. But the monetary policy stance is likely to remain loose
and the policy rate is expected to remain at 1.5% until end-2018. This is because the BoT continued
to cite concerns about the fragile global recovery and uncertainty in major economies’ policies that
could induce financial market volatility and impede the economic recovery of Thailand’s trading
partners. Moreover, demand-pulled inflationary pressures should be limited, even if growth proves
more robust than expected. Inflation expectations have remained stable so far and both the core and
headline inflation rates surprised on the downside in 2016, partly due to businesses’ lack of pricing
power. Consequently, we have tweaked headline inflation forecasts for both 2017 and 2018,
reducing them to 1.7% and 2.0%, from 2.0% and 2.1%, respectively.
As for FX policy, we expect the BoT to continue to curb short-term USD-THB volatility, but not
aggressively lean against global financial market trends or significant changes in Thailand’s
economic fundamentals. So far, the THB Nominal Effective Exchange Rate has been fairly stable,
partly reflecting Thailand’s adequate FX reserves and sound external balances.
Risks
The key downside risks to our economic outlook are: (1) delay in public investment closer to the
election; (2) weaker global demand recovery; (3) global financial market volatility disrupting business
activities and decisions; and (4) reduced tourist arrivals due to Thailand’s political uncertainty or a
global economic slowdown.
With an election planned at around end-2017 or in early 2018, policy continuity with regards to
economic reforms will depend on the incoming government. However, some of the key reforms may
have been completed by the end of 2017, such as the new public finance legislation bill, amendment
to the competition law, and a new state enterprise law. These laws will allow for higher potential
growth through, for instance, more efficient state enterprises and a stronger business environment.
In any case, the public infrastructure investment plan and policies have changed but little in the past
and are unlikely to be overhauled now.
Key forecasts
GDP 3.0 3.2 3.2 3.2 2.3 2.6 3.0 3.4 3.8
GDP (% quarter) - - - 0.6 0.3 0.9 1.0 1.2 0.7
Government consumption 1.3 2.1 1.7 -5.8 2.8 0.2 2.8 7.4 -2.1
Investment 1.6 1.3 1.6 1.4 -2.8 -3.1 2.6 5.7 0.2
Stockbuilding (% GDP) -2.8 0.3 0.7 -3.5 1.4 1.5 -1.2 -1.0 1.9
Domestic demand 2.4 2.1 2.0 1.2 1.2 1.0 2.0 3.7 1.5
Exports 2.7 1.6 2.4 3.4 0.7 -1.5 -0.3 2.8 5.6
Imports -1.9 3.8 1.5 -1.3 0.2 4.1 3.7 4.6 2.7
Unemployment (%) 1.0 0.9 0.9 1.0 0.9 0.9 0.9 0.9 0.9
Wage growth 1.5 4.0 3.0 2.6 2.8 4.0 4.0 4.0 4.0
Consumer prices 0.2 1.7 2.0 0.3 0.7 1.8 1.2 1.8 2.0
Budget balance (% GDP)** -2.7 -3.3 -2.9 - - - - - -
THB/USD* 35.9 35.6 35.6 34.6 35.9 36.2 36.6 36.0 35.6
3-month money (%)* 1.3 1.4 1.4 1.6 1.3 1.4 1.4 1.4 1.4
10-year bond (%)* 2.8 2.2 2.2 2.2 2.8 2.7 2.5 2.3 2.2
Note: *Period end, ** Fiscal year (year-end September 2017)
57
Q1 2017

Asia Pacific
Malaysia
Su Sian Lim
A slow grind down
Economist
Banking Corporation Limited,
Malaysia's economic activity continues to weaken amid limited policy options to boost growth,
(Singapore) and we have cut our 2018 GDP forecast to 3.6% from 4.0% to reflect a slow downward grind.
susianlim@hsbc.com.sg
+65 6658 8783 This contrasts with a relatively flat forecast path earlier; we continue to expect growth of 4.0%
this year and 3.8% for 2017.
Maitreyi Das
Associate
Bangalore Although q-o-q GDP growth beat expectations at 1.5% q-o-q sa (4.3% y-o-y) in the third quarter,
the underlying data revealed a further deceleration in private consumption, to just 0.2% q-o-q
(6.4% y-o-y). Both government consumption and total investment also contracted sequentially,
nearly negating the gains made in Q2 2016. In short, the ‘upside’ surprise in the overall GDP
headline stemmed primarily from external demand. Exports jumped 2.9% q-o-q sa (-1.3% y-o-y),
partially making up for the declines seen in the prior two quarters. Mirroring weak domestic
demand, however, imports rose more modestly. This resulted in net exports contributing materially
to overall q-o-q GDP growth. Inventories, too, added more to growth than we had anticipated.
The jump in exports is unlikely to be sustained in the coming quarters. A gradual rise in exports of
2-3% annually may be achieved over 2017 and 2018, based on the working assumption that oil
prices will rise a small amount over the coming couple of years. But this will not be enough to
offset the headwinds facing the domestic economy.
Potentially, the cash hand-outs for current and retired civil servants in January and a possible snap
election in H1 2017 could temporarily lift consumption. But the effects of ringgit weakness, labour
market softness and a large debt overhang are likely to dominate. For two years now, the
unemployment rate has crept gradually higher, and as at September 2016 stood at a multi-year
high of 3.6%. Meanwhile, although borrowing momentum has slowed, Malaysian households will
still have to work through paying off debt equivalent to nearly 90% of GDP. Weak end-consumer
demand and a currency-led squeeze in margins for those importing inputs is also likely to constrain
private-sector investment, for which sentiment has been broadly deteriorating since 2010.
Moderating demand-pull pressures have led us to trim our inflation forecasts for 2016 and 2017 by
0.1pp to 2.0% and 0.2pp to 2.5%, respectively; this is within Bank Negara Malaysia's (BNM's) 2-3%
comfort range. Core inflation should taper towards 1.5% in 2017 and 2018, from a likely 2.9%
in 2016.
Bank lending growth still in the doldrums Inflation below BNM's comfort range
% 3mma/3mma % Yr % Yr Malaysia CPI inflation % Yr

Malaysia bank lending 10 10
5 15
8 8
4 12
6 6
3 9 4 4
2 6 2 2
0 0
1 3
-2 -2
0 0 -4 -4
2005 2007 2009 2011 2013 2015 2017 2008 2010 2012 2014 2016
% 3mma/3mma (LHS) BNM comfort range Core CPI
Overall bank lending %Yr (RHS) Headline CPI
58
Q1 2017

Policy issues
In an ideal world, the central bank, BNM, would follow up on the 25bp rate cut it delivered in July
2016 – its first since 2009 – by further trimming its Overnight Policy Rate (OPR; currently at 3.00%).
After all, inflation is low, and the economy could well do with more policy support.
But rate cuts would be challenging to deliver given the ringgit's weakness. Further bouts of global risk
aversion are also possible, given the economic and political uncertainties in Europe, the US and
China, just to name a few. Consequently, we no longer expect BNM to trim the OPR.
Nevertheless this re-opens the possibility of further cuts in the Statutory Reserve Ratio (SRR),
particularly if interbank rates start to rise again, for example on the back of falling deposits. In January
2016, BNM reduced the SRR by 50bps to 3.50%, in order to ensure sufficient liquidity in the financial
system after interbank rates rose some 10bps in late 2015. The 3-month KLIBOR has been generally
stable since the July OPR cut, although recent market events did lead to a 1bp increase to 3.41% in
late November. The central bank's easing bias is also evident in its reverse repo operations, which it
restarted in October after a two-month hiatus. Although the size of the liquidity injection was not
large, it helped net reverse repo issuance to turn positive for the first time since December 2015.
The government, too, will be constrained in its response to the slowdown. Amid the need for fiscal
consolidation, the government will be targeting a narrower budget deficit of 3.0% of GDP for 2017,
versus a likely 3.2% this year (though the latest rise in oil prices, if sustained, could help at the
margin). Furthermore, policies appear more focused on short-term measures to boost consumer
sentiment – such as cash hand-outs – rather than longer-term measures to deal with the softening
employment outlook, such as incentivising employers to retain staff.
Risks
The economy's external vulnerabilities remain high, and much hinges on confidence over the ringgit.
The current account surplus is set to remain at 2% of GDP or lower in the coming years, in stark
contrast to the double digits seen as recently as five years ago. The budget deficit also remains
susceptible to swings in oil prices, although the 6% Goods and Services Tax introduced in April 2015
has helped to mitigate some of the downside risks on this front.
Key forecasts
GDP 4.0 3.8 3.6 4.3 3.7 3.9 4.1 3.4 3.9
GDP (% quarter) - - - 1.5 0.5 1.3 0.8 0.8 0.9
Government consumption 5.0 2.6 3.9 3.1 5.9 2.6 -0.4 4.3 3.6
Investment 1.8 2.7 4.1 2.0 -1.1 1.3 1.9 3.5 4.1
Stockbuilding (% GDP) -0.2 -0.1 0.2 -0.6 -0.6 0.0 0.6 -0.6 -0.3
Domestic demand 4.5 3.4 4.3 4.2 3.0 1.5 3.5 3.9 4.6
Exports -0.6 3.3 2.0 -1.3 -1.6 3.6 5.0 2.5 2.0
Imports -0.7 2.5 2.8 -2.3 -3.3 0.0 4.2 3.1 2.8
Unemployment (%) 3.6 4.0 4.2 - - - - - -
Wage growth 5.9 5.2 5.2 6.8 4.3 2.7 5.2 6.0 6.8
Consumer prices 2.0 2.5 2.6 1.3 1.4 2.2 2.6 2.6 2.6
MYR/USD* 4.49 4.50 4.50 4.13 4.49 4.50 4.50 4.50 4.50
3-month money (%)* 3.1 3.1 3.1 3.4 3.1 3.1 3.1 3.1 3.1
10-year bond (%)* 4.2 3.8 3.8 3.6 4.2 4.5 4.3 4.0 3.8
Note: *Period end
59
Q1 2017

Asia Pacific
Singapore
Joseph Incalcaterra Starting 2017 on a weak footing

Economist
Banking Corporation Limited, (HK) After what seemed like a stable start to the year, growth has slowed markedly in Singapore. In a
joseph.f.incalcaterra@hsbc.com.hk
+852 2822 4687
sense, this should not be a surprise. After all, the economy is highly sensitive to trade volumes
and regional growth – particularly in China – which remain lacklustre. However, growth turned
Maitreyi Das
Economics Associate
out even weaker than we were expecting in the third quarter (-2.0% q-o-q saar in the final
Bangalore reading) and even with a technical rebound in Q4, growth is tracking 1.2% in 2016. We think
growth will slow to 1.1% next year (we raise our forecast from 0.9% following the large upward
revision to the Q3 GDP print). This forecast is at the very low end of the government’s 1-3%
forecast for next year, which we believe is relatively optimistic and does not leave sufficient
downside room should risks to the growth outlook materialise.
Singapore’s growth drivers continue to slow on various fronts. Growth in the manufacturing
sector held up well in 2016 compared to services, but is mostly driven by pharmaceutical output,
which is highly volatile (and has weak linkages to employment and other economic indicators).
Electronics also saw some improvement towards the end of the year due to various product
launches, but growth is quite tepid and we think business investment across G3 economies will
remain lacklustre. True, investment in the US is likely to pick up, but will mostly be confined to
the energy sector, and, if anything, possible tax changes may disincentivise imported inputs,
which would impact Singapore. Moreover, data for business investment commitments (a
forward-looking indicator) in Singapore slowed considerably over 2016, which will weigh on
growth in 2017.
The services sector had a rough ride in 2016. The sector effectively went into recession with
three consecutive sequential q-o-q contractions in the first nine months of the year. Wholesale
and retail trade and finance/insurance moderated markedly from 2015, and growth remains soft
in most other services industries. Tourist arrivals rebounded earlier in the year but have slowed
towards the end, partly due to the impact of the Zika virus. Most indicators suggest services
activity will remain sluggish into 2017 – with the business expectations index pointing to a slight
contraction. Given the potential for continued financial market volatility next year, we retain a
cautious stance for growth in finance & insurance.
Resident unemployment moved higher in Inflation likely to move higher in 2017 due
2016 and this is the key indicator for policy to base effects, but momentum subdued
Change in employment, % % Yr % Yr
6 6
50 2.2 Forecast
40 2.1 4 4
30 2.0
20 1.9 2 2
10 1.8
0 1.7 0 0
-10 1.6
-20 1.5 -2 -2
2020 2013 2014 2015 2016 09 10 11 12 13 14 15 16 17
Services Construction Headline CPI Core CPI
Manufacturing Unemployment (RHS) Headline f'cast Core f'cast
60
Q1 2017

Policy issues
2016 was another interesting year for monetary policy in Singapore. In April the MAS adopted a flat
slope – thereby undoing the modest appreciation stance for the currency since 2011 – without the
onset of a technical recession, which is usually the precondition for such a stance. The central bank
seems to have adopted the view that Singapore would go through a prolonged period of tepid growth
due to weak G3 investment – a view in line with that of HSBC. In the October policy review, the
central bank kept policy on hold despite the economy contracting sharply in Q3.
For monetary policy next year, we continue to believe that labour market data will be pivotal.
The resident unemployment rate jumped half a percentage point in 2016 on the back of weaker
economic conditions, and should we see a similar jump in H1 2017 there may be calls for more
aggressive monetary easing. However, the bar remains high and the MAS is likely to keep
conditions on hold for now. We expect fiscal policy to become more expansionary next year,
with a 1.8% overall budget deficit for the FY2017 budget (year ending March 2018). We expect
the stimulus to be split between short-term and long-term measures, with the latter being
influenced by the findings of the Committee on the Future Economy, which is expected to
release its year-long findings in early 2017.
Risks
One of the main risks to Singapore is contagion from weak growth in the immediate region,
particularly in Malaysia and China. Moreover, Singapore’s oil-related manufacturing and services
industries are sensitive to a further deterioration in oil prices – or lack of strong recovery. A
suppressed global trade environment will continue to put pressure on Singapore’s trade services and
port-related activities.
The Fed is also a risk, given the strong correlation of interest rates in the US with short-term rates in
Singapore. We expect the Fed to raise the fed funds rate twice in 2017 and once in 2018. Should
liquidity tighten in the Singapore banking system, short-term rates may rise which could put pressure
on household balance sheets.
Key forecasts
GDP 1.2 1.1 1.5 1.1 0.1 0.5 0.8 1.6 1.5
GDP (% quarter) - - - -0.5 0.6 0.4 0.3 0.3 0.5
Consumer spending 0.9 0.0 1.0 0.6 -2.0 -1.3 0.1 0.3 0.9
Government consumption 5.4 3.2 4.2 -0.5 1.5 2.2 -2.7 11.3 2.6
Investment -1.6 -1.5 -0.2 -2.7 -1.7 0.1 -4.0 0.4 -2.5
Stockbuilding (% GDP) -1.3 -1.5 2.0 -1.9 -3.0 -2.0 -1.0 -2.0 -1.0
Domestic demand -2.5 -0.5 6.4 -9.1 -4.3 -8.7 2.8 1.8 3.0
Exports 2.2 1.6 -0.2 3.1 1.6 4.1 0.3 0.8 1.3
Imports 0.0 0.8 1.6 -2.0 -0.7 0.0 0.2 1.4 1.4
Industrial production 0.7 -0.6 0.4 1.2 1.9 -1.4 -1.8 0.1 0.8
Unemployment (%) 2.3 2.5 2.6 - - - - - -
Wage growth 3.7 3.1 2.6 - - - - - -
Consumer prices -0.6 0.8 1.6 -0.4 -0.2 0.4 0.9 0.8 1.2
Budget balance (% GDP) -0.9 -0.2 0.0 -0.7 -1.1 -1.3 -0.8 -0.4 0.0
SGD/USD* 1.45 1.45 1.45 1.36 1.45 1.47 1.49 1.47 1.45
3-month money (%)* 0.9 0.4 0.4 0.8 0.9 1.0 0.9 0.7 0.4
10-year bond (%)* 2.4 1.3 1.3 1.8 2.4 2.5 2.2 1.8 1.3
Note: *Period end
61
Q1 2017

Asia Pacific
Hong Kong
Julia Wang
Some stabilisation, challenges remain
Economist
Banking Corporation Limited Hong Kong’s growth surprised the market on the upside in Q3 2016, rising 1.9% y-o-y, up from 1.7%
juliarwang@hsbc.com.hk y-o-y in Q2, largely helped by the strength in the property market. Indeed this part of the economy
+852 3604 3663
has staged a notable recovery from early 2016, when prices corrected by 11% from an all-time high
Aakanksha Bhat
reached in September 2015. Property prices aside, transaction volumes have improved. Given the
Economics Associate high correlation between property price gains and private consumption, domestic demand has also
Bangalore
shown signs of stabilisation. Private consumption grew by 1.2% y-o-y up from 0.5% y-o-y in Q2.
Against the backdrop of a relatively robust labour market and stable income growth, domestic
demand is likely to remain resilient. Meanwhile, although sales of consumer durables and luxury
items remain weak, overall retail sales have been falling at a slower pace in recent months as tourist
arrivals showed more signs of stabilisation. On the external front, global demand has also shown
more stability. In real terms, exports of goods grew for the second straight quarter in Q3 2016, while
exports of services also registered a smaller decline.
These positive developments mean that 2016 GDP growth will likely come in at a relatively robust
1.4%. But challenges remain for 2017. First, the property market is likely to remain a key area of
focus in the near term. Accounting for 15% of economic output (excluding construction), the recovery
in the housing market is likely to be impacted by the increase in the double stamp duty (DSD) on
residential property to a flat rate of 15%, from a sliding scale of 1.5-8.5% previously. Furthermore, our
US economists have now pencilled in a more aggressive path of Fed tightening, amidst expectations
of more fiscal stimulus and higher growth in the US. Should this materialise, Hong Kong could face
higher mortgage costs (due to its currency peg with the USD), which would likely bring more
challenges for the housing sector in 2017.
The external sector also remains a risk. The sluggish pace of global growth aside, the direction of US
trade policy in the coming year also remains a key area of concern. Although our base case view is
that an all-out trade war will be averted, a further increase in trade barriers globally could mean
further downside risks for Hong Kong’s small and open economy. For these reasons we leave our
2017 GDP growth forecast unchanged at 1.8%.
Growth momentum has improved in H2 2016 Policy around the housing market remains
prudent
pp Hong Kong, contributions to GDP growth %YoY % Hong Kong, average LTV on new mortgages %
12 12 70 70
9 9
65 65
6 6
3 3 60 60
0 0
-3 -3 55 55
-6 -6
50 50
2011 2012 2013 2014 2015 2016 2017
C G
I Stockbuilding 45 45
NX GDP (RHS) 2001 2003 2005 2007 2009 2011 2013 2015 2017
62
Q1 2017

Policy issues
The Hong Kong dollar’s peg to the US dollar means that Hong Kong’s interest rates will go up
as the Federal Reserve continues to normalise policy. HSBC’s US economists now expect two
25bps increases in the federal funds rate in 2017 (from only one previously), following a 25bps
hike at the Fed’s December meeting. They have also pencilled in one more 25bps rate hike in
2018. The Hong Kong Monetary Authority (HKMA) will follow suit.
Policymakers do not have monetary policy independence but we see room to act in terms of
fiscal policy. We forecast that Hong Kong will likely continue to run a sizeable budget surplus in
2016-18, implying it has a sizeable stock of fiscal reserves to guard against lower growth.
Risks
The housing market will be a key area of focus in the near term. The property market in Hong
Kong could be doubly impacted by local tightening measures and the likelihood of a more
aggressive rate hike cycle in the US. A slowdown in the property market could also have a
knock-on impact on private consumption and growth.
The sluggish pace of global recovery remains another key downside risk, as do any significant
changes to US trade policy when Donald Trump becomes president. Should our base case view
of the avoidance of an outright trade-war play out, our economists predict stronger growth in the
US and continued stability in China. This should have a positive impact on Hong Kong’s
economy. However, in the scenario of rising protectionism abroad, Hong Kong’s economy
stands to be impacted negatively.
Key forecasts
GDP 1.4 1.8 2.4 1.9 1.3 1.4 1.8 1.7 2.2
GDP (% quarter) - - - 0.6 0.0 0.4 0.8 0.4 0.5
Government consumption 3.3 -1.1 -1.0 3.3 2.4 2.0 1.6 2.0 2.5
Investment -1.8 -2.1 -2.7 6.0 1.4 1.0 -5.0 -4.8 0.5
Domestic demand 1.5 1.7 0.4 4.6 0.6 3.3 0.0 1.4 2.0
Exports -0.3 1.2 0.6 1.1 0.8 3.8 2.9 -0.5 -0.8
Imports -0.2 1.2 -0.4 2.3 0.4 4.8 2.1 -0.7 -0.9
Industrial production -0.3 -0.1 -0.1 0.0 -0.5 -0.1 0.2 -0.2 -0.1
Unemployment (%) 3.4 3.5 3.5 - - - - - -
Wage growth 3.8 3.9 4.0 - - - - - -
Consumer prices 2.6 2.7 2.8 3.5 2.3 2.3 2.4 2.7 2.7
Current account (USDbn) 10.9 12.3 19.8 5.8 1.2 5.7 6.1 -0.5 1.0
Current account (% GDP) 3.4 3.8 5.9 7.0 1.4 7.3 7.9 -0.6 1.1
Budget balance (% GDP)* 0.6 0.3 0.8 - - - - - -
Gross external debt (% GDP)** - - - - - - - - -
Gross government debt (% GDP)** 0.1 0.1 0.1 - - - - - -
HKD/USD** 7.80 7.80 7.80 7.76 7.76 7.80 7.80 7.80 7.80
3-month money (%)** 0.7 1.1 1.1 0.6 0.7 0.9 0.9 1.1 1.1
10-year bond (%)** 2.1 2.0 2.0 1.0 2.1 2.2 2.2 2.1 2.0
Note: *Fiscal year ending March. Eg. 2013 refers to fiscal year April 2013 – March 2014. **Period end.
63
Q1 2017

Asia Pacific
Philippines
Joseph Incalcaterra The growth story to be continued in 2017

Economist
Banking Corporation Limited, (HK) The Philippines continues to stand out as one of Asia’s strongest performers. Despite an uncertain
joseph.f.incalcaterra@hsbc.com.hk
+852 2822 4687
external environment and weak regional growth, the economy expanded by 7.1% y-o-y in Q3
2016, the fastest pace in almost three years, bringing growth for the first nine months of the year to
Maitreyi Das
Economics Associate
7.0% and placing the government’s 6-7% growth target for 2016 well within reach.
Bangalore
Private consumption and investment remain the main drivers of growth. Private consumption grew
7.3% y-o-y in Q3, fuelled by strong remittances inflow and growing domestic employment in
outsourcing, tourism, and construction. Remittances are tracking 5% growth this year – higher than
our original forecast of 4%, while peso depreciation has boosted the local currency value, further
supporting consumption. Meanwhile, fixed capital investment grew 23% y-o-y, contributing 5.7
percentage points to overall real GDP growth in the first three quarters of 2016, a record high for
the Philippines.
Investment will likely remain robust as the government targets a 3% deficit in the 2017 budget, with
infrastructure investment upwards of 5% of GDP. The government plans to continue increasing
infrastructure spending to 7% by the end of its term – significantly boosting the overall contribution of
investment to the structure of growth in the Philippines. Fiscal consolidation in recent years has
allowed the government to pursue fiscal expansion, and low debt levels suggest it is sustainable for
now. Moreover, the government is looking to accelerate PPP projects to co-opt more financing from
the private sector.
There are various headwinds on the horizon for the regional economy next year, and while the
Philippines is not completely spared, the economy remains relatively insulated. There are fears that
investment from the US, which is the largest contributor of FDI in the Philippines, might fall under
new US economic policies. However, China has made investment commitments (hard and soft) of
USD24bn recently, which could partly offset any potential decline in FDI from the US.
In any case, the Philippines will continue to see significant changes to the balance of payments
dynamic. We forecast the current account continuing to moderate through 2018, but a pick-up in
capital inflows following potential FDI reform could partly offset the weaker current account.
Growth remained robust as private demand Headline inflation will likely rise in 2017
and public investment surged and 2018 but remain within target
% y-o-y, ppts % y-o-y % y-o-y % y-o-y

15 15 10 10
10 10 8 8
6 6
5 5
4 4
0 0
2 2
-5 -5
0 0
-10 -10 08 09 10 11 12 13 14 15 16 17 18
2010 2011 2012 2013 2014 2015 2016 Core CPI
Net Exports Fixed investment Food CPI
Government consumption Private consumption Headline CPI
%yoy Lower/upper bound target
64
Q1 2017

Policy issues
Monetary policy remains fairly accommodative after the implementation of the Interest Rate Corridor
(IRC) by the Bangko Sentral Ng Pilipinas (BSP) in June this year. The BSP cut the policy rate by
100bps then, and also introduced the Term Deposit Facility to mop up liquidity at a higher interest
rate than the overnight deposit facility (2.50%). Initially, low auction volumes hindered rates, but in
recent months volumes have increased, to PHP180bn from PHP30bn in June. We believe the
28-day term deposit rate is likely to rise towards the policy rate of 3.00%. Consequently, it is
important to note that there has been some incremental tightening in the financial system despite
rates staying on hold. However, we think a 100bp cut to the RRR for banks is likely over the next six
months, which would ease liquidity constraints on banks but is unlikely to spur new lending.
Meanwhile, on the fiscal front, additional government spending on infrastructure would further boost
domestic demand. The National Economic and Development Authority (NEDA) will likely release the
Philippine Development Plan (PDP) 2017-2022 in early 2017. The overall objective of the PDP is to
lay down a solid foundation for inclusive growth, a high-trust society, and a globally competitive
knowledge economy.
Risks
The economic outlook for the Philippines is robust, underpinned by resilient domestic demand.
A number of reforms including tax and other constitutional reforms will likely be undertaken in 2017.
Although President Duterte remains popular among the people, with an 80-85% rating approval, this
may depend on how the reforms are ultimately implemented.
On the other hand, the outlook for manufacturing exports does not look too bright outside electronics,
which might lead to a continuation of trade deficits in the Philippines. Elsewhere, the Philippines
remains highly vulnerable to weather trends, although risk stemming from the onset of La Niña after
El Niño are relatively contained, thanks to government efforts, which are likely to ramp up rice
imports in 2017.
Key forecasts
GDP 6.8 6.5 6.5 7.1 6.2 5.9 6.0 7.3 6.8
GDP (% quarter) - - - 1.2 1.6 1.0 2.2 2.3 1.1
Investment 22.4 12.4 13.0 23.5 15.2 13.6 11.3 12.3 12.5
Stockbuilding (% GDP) 0.4 1.1 1.7 -0.1 0.8 0.6 0.5 0.2 1.0
Domestic demand 10.6 8.9 8.9 9.8 9.1 9.2 8.7 9.1 8.6
Exports 8.6 7.2 7.3 8.8 8.0 7.5 7.0 7.0 7.2
Imports 17.4 11.5 11.5 14.2 14.2 13.0 12.0 10.0 11.0
Unemployment (%) 6.3 5.8 5.9 5.4 6.0 5.9 5.9 5.9 5.9
Wage growth 2.8 5.1 4.7 6.0 4.7 4.7 4.7 4.7 4.7
Consumer prices 1.7 3.6 3.6 2.0 2.3 3.2 3.6 3.8 3.7
PHP/USD* 49.6 49.5 49.5 48.3 49.6 50.5 51.0 50.5 49.5
3-month money (%)* 1.2 1.2 1.2 1.3 1.1 1.2 1.2 1.2 1.2
10-year bond (%)* 4.6 5.3 5.3 3.6 4.6 4.7 5.2 5.5 5.3
Note: *Period end
65
Q1 2017

Asia Pacific
New Zealand
Paul Bloxham Strong growth, inflation stabilising

Economist
paulbloxham@hsbc.com.au New Zealand’s economy continues to perform well. Growth is being supported by a strong rise
+612 9255 2635 in the population, surging construction activity and a booming tourism sector. In the past few
Daniel Smith months, conditions have also improved in the dairy sector after two years of weakness.
Economist
HSBC Bank Australia Limited A key change since last quarter is that we now see less downside risk to the economy from the
+612 9006 5729
daniel.john.smith@hsbc.com.au dairy sector. Dairy prices have picked up sharply and are expected to support rural incomes and
farm-sector investment, much of which will have been put on hold during the past few years
when the majority of dairy farms were operating at a loss. The stronger outlook for dairy should
also support broader confidence in other dairy-related industries and for households.
Strong growth leaves the economy well-placed to deal with any short-term disruption arising
from recent earthquake activity. A large earthquake, measuring 7.8 on the Richter scale, struck
on 14 November 2016 and was followed by over 6,000 (smaller) aftershocks. The majority of
the cost of repair work is likely to be borne by the government, with early estimates of the direct
fiscal cost around NZD2bn-3bn.
Although the seismic activity may cause some short-term disruption to activity and weaken
confidence, the major implication of the earthquakes is likely to be further demand placed on the
country’s construction sector. With overall building activity up 16% y-o-y, capacity constraints
were already starting to emerge before the latest earthquakes. The construction sector is
expected to generate greater wage and price pressures over coming quarters.
Construction-related pressures and higher petrol prices should see headline CPI inflation pick
up over the next few quarters, from the most recent reading of 0.4% y-o-y to around 1.5% by
early 2017. The central bank’s preferred measures of underlying inflation have already steadied
at around 1.0-1.5% y-o-y and some have shown a modest acceleration in recent quarters.
Despite our expectation that CPI inflation will remain below the RBNZ’s ‘near 2%’ inflation target
for some time, we expect the central bank to remain on hold through 2017. Given expected
strong growth and a modest pick-up in inflation, we have recently shifted our view on RBNZ
policy and expect the cash rate to be lifted by 50bp in 2018. Our growth forecasts are
unchanged, with GDP expected to rise by 3.0% in 2017 and 2.9% in 2018.
Dairy prices have lifted from low levels Inflation remains low, but should lift soon
2,000 2,000 % Yr % Yr
6 6
1,500 1,500
4 4
1,000 1,000
2 2
500 500
0 0
0 0 2001 2003 2005 2007 2009 2011 2013 2015 2017
1999 2002 2005 2008 2011 2014 2017 Headline CPI RBNZ factor model
GlobalDairyTrade price index CPI ex food & energy
Source: GlobalDairyTrade Source: Statistics New Zealand, RBNZ
66
Q1 2017

Policy issues
New Zealand’s Prime Minister, John Key, resigned on 5 December 2016, after serving in this
role since 2008. The Finance Minister, Bill English, was confirmed as New Zealand’s next Prime
Minister on 12 December. We see this change as unlikely to have a large impact on the
economy, although we note that the Key government has made progress on reform under his
leadership, so there is some risk that the reform agenda slows. New Zealand is due to have a
general election before 18 November 2017.
The New Zealand government’s finances are strong, with the 2015-16 fiscal accounts recording
a final budget surplus of NZD1.8bn, which was larger than expected. The budget surplus is
expected to increase as population and economic growth remain strong. The recent
earthquakes will present an unexpected cost, but should not require significant changes in the
government’s fiscal strategy. We see the government as likely to deliver modest tax cuts in the
run-up to the late-2017 election.
Financial stability remains a concern for the RBNZ, given continued rapid growth in house
prices and household debt. Macro-prudential measures were tightened further in October 2016,
so that most property investors are now required to have at least a 40% deposit before
borrowing. There has been a noticeable impact from these tighter measures, with house price
inflation moderating and growth in new investor mortgages slowing. However, the impact of
previous macro-prudential measures (this was the third tightening since late 2013) has typically
been temporary. The RBNZ has highlighted loan-to-income caps as a potential additional policy
option if household leverage continues to increase at an uncomfortable rate.
Risks
We see the risks to our growth forecasts as balanced. The major downside risks stem from the
recent earthquakes. Any disruptions are likely to prove temporary, but a prolonged reduction in
confidence could dent broader economic activity. There is also potential for the tourism sector to
be adversely affected if overseas visitors are deterred. On the upside, the rise in the dairy price
could support stronger income growth and spending than we currently expect.
Key forecasts
GDP 3.2 3.0 2.9 3.5 3.2 3.2 3.1 2.8 2.8
GDP (% quarter) - - - 1.1 0.7 0.7 0.6 0.8 0.7
Investment 5.9 4.4 3.8 4.6 7.4 5.6 4.3 3.9 3.8
Stockbuilding (% GDP) -0.4 -0.1 0.0 0.3 -0.9 -1.1 0.5 0.0 0.0
Domestic demand 4.0 3.5 3.1 5.0 4.2 3.7 4.2 3.1 3.1
Exports 2.8 2.3 3.3 1.8 2.9 3.7 0.7 2.2 2.7
Imports 3.3 4.3 4.0 5.4 5.7 5.8 4.1 3.6 3.6
Unemployment (%) 5.0 4.7 4.3 4.9 4.8 4.8 4.7 4.6 4.5
Wage growth 1.7 1.9 2.3 1.6 1.7 1.7 1.9 2.0 2.0
Consumer prices 0.6 1.7 1.9 0.4 1.2 1.6 1.6 1.8 1.9
Budget balance (% GDP) 0.7 0.7 1.2 - - - - - -
NZD/USD* 0.69 0.68 0.68 0.73 0.69 0.67 0.65 0.68 0.68
3-month money (%)* 1.9 1.9 1.9 2.3 1.9 1.9 1.9 1.9 1.9
10-year bond (%)* 3.5 1.9 1.8 2.3 3.5 3.4 2.5 2.0 1.9
Note: *Period end
Source: HSBC Economics
67
Q1 2017

Eurozone
Eurozone
Simon Wells The return of two-speed growth

Chief European Economist
HSBC Bank plc
simon.wells@hsbcib.com Eurozone growth was 0.3% q-o-q in Q2 2016 and Q3 but cyclical indicators are suggesting a modest
+44 20 7991 6718 (+0.1pp) acceleration in Q4. The eurozone composite PMI ended the year close to 2016 highs.
The slightly rosier outlook largely reflects improvements in Germany and Spain. For Germany, higher
employment and benefit payments have supported domestic consumption. Further tax cuts and
increased government spending should boost growth in H1 2017. For Spain, a continuing tourist
boom and improving export performance have powered growth. With little sign of momentum fading,
a healthy pace of Spanish growth should remain through 2017.
It is a different story for France and Italy, and there are once again signs of a two-speed growth
pattern among the eurozone’s ‘big four’. Employment growth in France remains sluggish and
business confidence depressed. The Italian economy may face similar problems, particularly in light
of increased political uncertainty following the resignation of Prime Minister Matteo Renzi
in December.
On balance, we expect eurozone growth of 1.2% and 1.3% in 2017 and 2018 respectively (see
European Economics Quarterly Q1 2017). But this still marks a slowdown from 2015 (1.9%) and
2016 (1.6%). The growth support provided by lower oil prices and lower government bond yields
(which, thanks to QE, increased fiscal headroom) has gone.
With growth set to maintain a slow but steady pace, underlying price pressures are likely to stay
muted. Although headline inflation is set to rise due to the drag from lower energy prices ending, core
inflation remains stubbornly low. With high political uncertainty and varying margins of economic
slack, wage demands are unlikely to pick up significantly in France, Italy and Spain. Even in
Germany, where the labour market is tight, there are few signs of mounting wage pressures. Also,
assuming productivity growth remains weak, firms will try to resist any wage demands to prevent unit
labour costs rising. These factors, alongside German objections to having inflation above 2% in
Germany, means the ECB is likely to struggle to return inflation close to 2% for the eurozone as a
whole. Reflecting this, in December the ECB extended QE until the end of 2017 and made the
commitment credible by saying it might buy bonds yielding below its deposit rate (currently -0.40bps)
and bonds with a residual maturity of one to two years. It can increase the size and duration of the
programme further during 2017, if the inflation outlook warrants it.
Headline inflation is rising as the drag … but underlying inflation remains weak
from energy prices is over … with stagnating unit labour costs
% pts Contribution to EMU inflation % Yr % Yr Unit labour costs based on hours worked % Yr
4 4
12 12
3 Forecasts 3 9 9
2 2 6 6
1 1 3 3
0 0
0 0
-3 -3
-1 -1
06 07 08 09 10 11 12 13 14 15 16 17 -6 -6
Food, drink and tobacco contribution (LHS) 00 02 04 06 08 10 12 14 16
Energy contribution (LHS) Eurozone Germany France
Headline HICP (RHS) Italy Spain
Source: ECB Source: Thomson Reuters Datastream
68
Q1 2017

Policy issues
In December, the ECB forecast that inflation would not to return to target, rising to just 1.7% in
2019 (although this was based on an oil price profile that did not include the late
November/early December rally). Despite this, we think the hurdle to a further QE extension in
2017 will be high. This is mainly due to political pressures. With the QE extension to the end of
2017, the ECB has side-stepped a series of potentially difficult discussions and has provided a
safety net for the sovereign bond market effectively covering all the difficult elections next year.
Given the politics and backdrop of rising headline inflation, loosening policy further could meet
opposition from hawkish policymakers, particularly in Germany. We therefore expect monetary
policy to be on hold throughout 2017.
The ECB may instead continue its calls for structural reforms and support from fiscal policy.
These demands have finally been echoed by the European Commission (EC), which in
November called for a eurozone-wide fiscal expansion of 0.5% of GDP. Unsurprisingly, the EC
wants the stimulus to come from the countries that have the fiscal space, ie driven by Germany.
But with no powers to force governments to spend, and in a German election year, a major
loosening of policy is highly unlikely in our view.
Risks
To the upside, global indicators ended 2016 relatively strongly. Were the EUR to fail to rebound or
depreciate further, this could provide a boost to exports particularly if a stronger US recovery led to
an upswing in global trade. However, the range of political uncertainties means the risks remain
skewed to the downside. Although markets in 2016 were willing to shrug off a number of political
shocks, the Brexit process could yet weigh on sentiment and activity, once the UK actually triggers
Article 50. In addition, there will be general elections in the Netherlands, Germany, France and
most likely Italy. The new minority Spanish government could be fragile, given how far short of a
majority it is. With populist parties still gaining support and opinion polls consistently proving
unreliable, there are plenty of events that could unsettle markets.
Key forecasts
GDP 1.6 1.2 1.3 1.7 1.5 1.3 1.3 1.2 1.2
GDP (% quarter) - - - 0.3 0.4 0.3 0.3 0.3 0.3
Investment 2.8 1.9 1.9 3.0 2.3 2.3 1.6 1.9 1.8
Domestic demand 1.9 1.5 1.5 2.0 1.8 1.5 1.4 1.4 1.4
Exports 2.4 2.7 3.4 2.2 2.3 2.8 2.2 3.0 2.8
Imports 3.1 3.3 4.0 2.9 2.3 3.3 2.8 3.6 3.6
Unemployment (%) 10.1 9.8 9.7 10.0 9.8 9.8 9.8 9.8 9.7
Wage growth 1.2 1.4 1.5 1.5 1.3 1.3 1.4 1.4 1.4
Consumer prices 0.2 1.6 1.3 0.3 0.7 1.6 1.6 1.6 1.5
USD/EUR* 1.05 1.10 1.10 1.12 1.05 1.01 1.05 1.07 1.10
EMU – refi 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
EMU - depo -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40
3-month money (%)* -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
10-year bond (%)* 0.9 0.4 0.4 0.4 0.9 0.9 0.7 0.6 0.4
Note: *Period end
Source: HSBC
69
Q1 2017

Eurozone
Germany
Stefan Schilbe Just a soft spot

Economist
HSBC Trinkaus & Burkhardt AG
stefan.schilbe@hsbc.com In Q3 2016, the German economy continued to decelerate to 0.2% q-o-q (Q2 +0.4% q-o-q;
+49 211 910 3137 Q1 +0.7% q-o-q) with net trade being a major drag. Meanwhile, private consumption was once again
Rainer Sartoris, CFA an important driver of the expansion on the back of still solid employment growth, a moderate real
Economist
HSBC Trinkaus & Burkhardt AG
wage increase and a substantial rise in pension payments, which came into force on 1 July.
rainer.sartoris@hsbc.de
+49 211 910 2470 The trend of labour market tightening is not likely to end soon. Several leading indicators point
to a pick-up in employment growth, after a weaker pace of growth in the second half of 2016. In
particular, the ifo employment index is showing its highest reading since April 2011, pointing to
a substantial acceleration of employment growth in the upcoming months. Nevertheless, it is
striking that the rock-solid labour market has not led to substantial wage growth so far.
In Q3, collectively agreed earnings (without extra earnings) rose by only 1.9%, and are likely to
increase by a meagre 2% on average in 2016. This would be the weakest reading since 2011.
As a consequence, the price pressure induced by wage growth remains subdued.
Against the background of an expected increasing inflation rate in response to higher energy
prices, our expectations of a continuation in labour market tightening and an increase in the
minimum wage at the start of 2017 by 4% to EUR8.84 per hour, overall wage growth is set to
pick up in the year ahead, bolstering private consumption through 2017.
Furthermore, a cut in income taxes, which particularly benefits low and mid-income earners with
a lower propensity to save, should offset some of the impact of higher inflation on real incomes.
Government consumption should continue to grow in the quarters ahead, but we expect
momentum to slow, as growth in expenditure to tackle the refugee crisis is already becoming
less rapid. Meanwhile, corporate sentiment has brightened, notably on the back of improved
global prospects. A further improvement in response to stronger US GDP growth could lead to
even higher capacity utilisation by German companies. In Q4 2016 utilisation had already
reached a five-year high. Business investment, which saw an outright fall in the last two quarters
and will likely decline further in Q4, could finally start to recover in 2017.
Overall, economic activity is set to pick up markedly at the turn of the year relative to the meagre
0.2% q-o-q growth in Q3 2016, leading to an above-potential expansion of GDP by 1.6% in 2017.
Employment growth likely to accelerate Price pressure is building up

Index Employment expectations % Yr % Yr Price expectations Index
115 2.4 4 40
3 30
110 1.8
2 20
105 1.2
1 10
100 0.6
0 0
95 0 -1 -10
90 -0.6 -2 -20
06 07 08 09 10 11 12 13 14 15 16 17 06 07 08 09 10 11 12 13 14 15 16
ifo employment index (6 months ahead, LHS)
HICP (LHS) ifo sales price expectations (RHS)
Employment (RHS)
Source: Macrobond, HSBC Source: Macrobond, HSBC
70
Q1 2017

Policy issues
A recent Allensbach survey documented a deep-rooted “angst” in the German population

related to terrorism and an influx of refugees. Thus, expenditure on domestic security will likely
be increased. Furthermore, the Grand Coalition government has already agreed to cut income
taxes with effect from 1 January 2017 (by EUR6.3bn) to tackle inequality and alleviate the fears
of poverty in old age. These fears stem from doubts about the stability of the pension system
and the ultra-low interest rate environment. In general, Germans have a very conservative
portfolio allocation (roughly 40% in cash and savings accounts, 2.5% in direct holdings of fixed
income products and another 38.5% in life insurance and pension funds which themselves hold
a large amount of fixed income assets). Consequently, the lack of compound interest in
combination with these specific investment preferences force Germans to save even more. It is
very likely, in our view, that an important part of the electoral campaign could concentrate on
further lowering the burden for low and mid-income earners after the federal election, which is
most likely to take place on 17 or 24 September 2017. That said, expectations for a
comprehensive fiscal stimulus package look optimistic, especially if the CDU/CSU again wins
the election. Recently, finance minister Schäuble publicly criticised the EU Commission for its
intention to stimulate the economy via higher expenditure as “economically not convincing”.
Risks
One of the key risks by far for the German economy stems from higher global protectionism, largely
induced by political developments in the US and the Brexit vote. If the new US government
implements substantial tariffs on Chinese products, leading to retaliation, world trade could be hit
hard. This would undermine demand for machinery and equipment goods produced in Germany
(6.5% of German exports are shipped to China). Weaker exports would weigh on business fixed
investment spending and could lead to an end of the labour market tightening.
Key forecasts
GDP 1.7 1.6 1.7 1.7 1.7 1.5 1.5 1.7 1.6
GDP (% quarter) - - - 0.2 0.4 0.5 0.4 0.4 0.3
Investment 2.0 1.5 2.0 1.7 0.9 -0.2 1.9 2.4 2.1
Stockbuilding (% GDP) -0.8 -0.8 -3.3 -0.9 -0.9 -0.8 -0.8 -0.8 -0.8
Domestic demand 2.1 1.6 1.6 2.1 1.5 1.3 1.8 1.8 1.7
Exports 2.2 3.3 4.8 1.5 3.1 2.8 2.4 4.0 4.1
Imports 3.1 3.7 5.1 2.4 3.0 2.5 3.4 4.5 4.5
Unemployment (%) 6.1 6.1 6.2 6.1 6.0 6.0 6.1 6.2 6.2
Wage growth 2.1 2.5 2.6 1.9 2.3 2.3 2.5 2.5 2.5
Consumer prices 0.4 1.8 1.7 0.4 0.9 1.8 1.9 1.8 1.6
Current account (% GDP) 8.4 8.2 7.9 - - - - - -
USD/EUR* 1.05 1.10 1.10 1.12 1.05 1.01 1.05 1.07 1.10
3-month money (%)* -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
10-year bond (%)* 0.2 -0.2 -0.2 -0.1 0.2 0.2 0.1 -0.1 -0.2
Note: *Period end
Source: Thomson Reuters Datastream, HSBC estimates
71
Q1 2017

Eurozone
France
Olivier Vigna Lack of fuel: 2017 no better than 2016?

Economist
HSBC France
olivier.vigna@hsbc.fr The sluggish pace of growth in France has continued. We expect GDP to have grown by only
+33 1 4070 3266 1.1% in 2016, but below the assumption of 1.5% included in the budget act. It is now five years
Chantana Sam since the economy grew by more than 1.5%. The latest data show that in both Q2 and Q3 2016
Economist
HSBC France
household consumption and business investment remained flat. Even though GDP growth
chantana.sam@hsbc.fr should rebound in Q4 2016, we estimate that the recovery will remain tepid in 2017 and 2018,
+33 1 4070 7795
as highlighted by our still weak growth forecasts (1.0% and 1.1% respectively). With a new
government to be inaugurated in May 2017, an unusual degree of uncertainty is prevailing.
Therefore we do not see any reasons to change our cautious stance, as no reforms are
currently in the pipeline and the full Brexit impact may start to bite.
Several reasons explain our disappointing outlook. First, business confidence remains low, as
reflected in survey data, with the INSEE composite index in December 2016 higher than a year
earlier, but still below the peaks seen in 2011. With the recovery in Europe still subdued, no
significant improvement is anticipated from the corporate sector: not only is the industrial
production index still well below its pre-financial crisis peak (-14% in October 2016), but
business investment is 5% lower over the same period. In addition, the latest INSEE survey on
business investment intentions suggested that the investment in the manufacturing industry
should stagnate in 2017 in value terms, which would be the weakest performance since 2013.
Second, the private consumption outlook is clouded by the expected increase in inflation and
the high household saving rate (14.9% end September 2016). In the labour market, progress
has been limited. Over the last two years, the unemployment rate has only fallen by 0.8pp and
in October still stood at 9.7%, higher than its structural level (around 9% according to the IMF).
Third, the economic outlook is also restrained by the lack of competitiveness that prevents
France from benefiting from an external impulse: with a nine-month trade deficit 14% higher in
2016 than in 2015, net exports have already subtracted 0.9pp from annual GDP growth.
Industrial firms are cautious in terms of Uncertainty has weighed on durable goods
investment for 2017 consumption in the recent period
INSEE investment survey: forecast of % Yr France: consumer spending % Yr
Taux de investment growth by industrial firms
% Yr % Yr 3 15
15 15
2 10
12 12
9 9 1 5
6 6 0 0
3 3 -1 -5
0 0
-2 -10
-3 -3
-6 -6 -3 -15
10 11 12 13 14 15 16f 17f 10 11 12 13 14 15 16
Real consumer spending on goods (LHS)
Realized Latest forecast (October 2016) Durable goods (RHS)
Cars (RHS)
Source: INSEE Source: INSEE
72
Q1 2017

Policy issues
Since the divisive, albeit watered down, labour market reform law was promulgated in August,
no economic reform has been implemented, as presidential and then legislative elections are
looming. Although the 2017 budget act is due to cut taxes for companies, while continuing to
bring the fiscal deficit down, we expect this picture to change significantly after the upcoming
elections. The polls are predicting a change of government to one advocating even more near-
term tax cuts and more fiscal discipline in the long run.
More specifically, despite public debt at 97.6% of GDP end September 2016, François Fillon, the
Republican candidate and the latest polls’ favourite to succeed François Hollande, is advocating
further tax cuts, mainly benefiting companies. In spite of proposals for large public expenditure cuts
and VAT hikes, François Fillon’s electoral platform assumes that the fiscal deficit may peak at a
level significantly above 3% of GDP in 2017, before starting to drop thereafter. Over the longer
term, a constitutional ban on fiscal deficit would be considered, but in the meantime, public debt is
likely to exceed 100% of GDP, according to François Fillon’s programme.
Risks
Upside risks may appear if the improvement in employment is larger than expected or if private
consumption holds up well despite higher inflation. However, downside risks may materialise if
consumers and firms become unusually cautious and wait for the proposed reforms to bring
positive results. Lack of progress in the labour market and imbalances in the public finance may
also affect confidence, not to mention the risks attached to Brexit and a US protectionist trade
policy. With yield curves having steepened from August, the trajectory of the public debt ratio
will be pivotal to ensuring that the deviation from the European “3% of GDP” rule is still
temporary. Also, there is a tail risk that the populist National Front’s leader Marine Le Pen could
be elected president. The probability of this outcome is not negligible since recent polls have
failed to detect sudden changes in voter preferences and predict actual outcomes.
Key forecasts
GDP 1.1 1.0 1.1 1.0 1.2 0.7 1.0 1.1 1.0
GDP (% quarter) - - - 0.2 0.5 0.1 0.2 0.4 0.3
Investment 2.7 1.0 1.5 2.7 2.0 0.9 1.0 1.1 1.0
Domestic demand 2.0 1.5 1.5 2.0 1.6 1.0 1.9 1.5 1.5
Exports 0.7 0.7 1.4 0.9 0.6 1.0 0.9 0.5 0.5
Imports 3.5 2.3 2.5 4.2 1.9 2.0 3.6 1.7 2.0
Industrial production 0.3 0.7 2.0 -0.1 0.0 1.2 -0.3 1.1 0.9
Unemployment (%) 10.1 10.1 9.9 10.1 10.1 10.1 10.1 10.1 10.0
Wage growth 1.1 0.8 1.0 1.1 1.0 1.0 0.8 0.8 0.8
Consumer prices 0.3 1.4 1.3 0.4 0.7 1.5 1.4 1.4 1.3
USD/EUR* 1.05 1.10 1.10 1.12 1.05 1.01 1.05 1.07 1.10
3-month money (%)* -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
10-year bond (%)* 0.7 0.1 0.1 0.2 0.7 0.7 0.4 0.3 0.1
Note: *Period end
73
Q1 2017

Eurozone
Italy
Fabio Balboni Post-referendum uncertainty

European Economist
HSBC Bank plc
fabio.balboni@hsbc.com Italian GDP surprised on the upside in Q3 2016, growing by 0.3% q-o-q and outperforming both
+44 20 7992 0374 France (0.2%) and Germany (0.2%) for the first time since Q2 2005. Part of the reason for the
positive surprise was the strong performance of industrial production, which could have added
0.2pp to growth in the quarter. Industrial production accounts for about 20% of the Italian
economy, and in Q3 it increased by 1.1% q-o-q, thanks to strong July and August prints.
This translated into strong investment growth (+0.8% q-o-q) particularly machinery and
equipment and transport investment. Domestic consumption, though, remained very soft. It
grew by just 0.1% q-o-q in Q3, the slowest pace since Q3 2014. This suggests that the fading
impact of lower oil prices on inflation and the recent fall in consumer confidence might have
taken a toll on consumer spending. Employment growth also slowed in Q3 2016, possibly a
result of the phasing out of fiscal incentives for firms to hire permanent workers, which might
also have contributed to the slowdown in consumption. The positive news is that labour
productivity improved (on a y-o-y basis, for the first time since the end of 2011). Inflation, still
only marginally positive (+0.1% in November), is lagging behind the rest of the eurozone due to
ongoing wage moderation arising from labour market reforms, and the labour market slack.
In Q4, we should see a reversal of the negative drag from net exports in Q3 (when exports only
grew by 0.1%, although this was after a strong performance in Q2 of 2.3%). Global PMIs have
picked up recently, which contributed to the Italian PMIs also shooting up (the composite index
climbed to 53.4 in November, its highest level since February). However, other indicators, from
consumer to business confidence, suggest that underlying growth momentum remains weak. So
aside from trade, Q4 could see some reversal of the strong Q3 growth (stock-building added 0.1pp
to growth in Q3), and we see a decline to 0.1% q-o-q. This would take 2016 growth to 0.9%.
A crucial uncertainty is of course the impact of the referendum on the constitutional reform to
limit the role of the upper house, which the Italian population strongly rejected on 4 December,
leading to the resignation of Prime Minister Matteo Renzi (Italian Referendum: Too many no's,
Renzi goes, 5 December 2016). In the short term, however, we do not see any reason to alter
our already below consensus growth forecast for 2017 (0.6%). Consumer confidence had
already fallen before the referendum, and we don’t think it will fall much further, particularly as
the referendum did not open up a major political crisis in Italy (at least for now).
Confidence indicators have eased recently Labour productivity is finally back to zero
Index Italy: confidence indicators Index % Yr Italy: GDP and employment % Yr
120 120 3 3
110 110 2 2
1 1
100 100
0 0
90 90 -1 -1
80 80 -2 -2
-3 -3
70 70 -4 -4
60 60 -5 -5
06 07 08 09 10 11 12 13 14 15 16 -6 -6
Cons. Conf. Bus. Conf. Services 06 07 08 09 10 11 12 13 14 15 16
Productivity GDP Employment
Source: ISTAT, HSBC Source: Bank of Italy, HSBC
74
Q1 2017

Policy issues
For Italy, staying on the reform path is a necessity, both from a growth (and debt sustainability)
perspective, and to continue to obtain the much-needed flexibility from Europe on the fiscal
targets (which so far Italy has exploited down to every last cent). We have long been arguing
that the constitutional reform might have been beneficial to enabling future governments to
implement further reforms, simplifying the legislative process, and favouring more stable
governments. However, even with the upper house still in place, it does not mean that it will be
impossible for Italy to stay on the reform path – after all, Mr Renzi made significant reforms,
particularly in the labour market, under the current system (even if the Jobs Act might be at risk,
see When it rains, it pours: Another referendum on the horizon for Italy, 13 December 2016).
Much depends on what electoral law parliament will approve for the upper house (and possibly
the lower house, if the Constitutional Court deems the existing law, the Italicum, unconstitutional
in its hearing on 24 January 2017). This will be a key priority for the new caretaker government
(Life after the referendum: New Caretaker government, now what's next? 13 December 2016).
Risks
The initial market reaction to the referendum result was measured. But the domestic political
situation remains fluid, and a shift in market sentiment could affect negatively Italy's growth.
A further rise in government borrowing costs might force a return to austerity to prevent the
fiscal deficit from breaching the EU’s 3% of GDP threshold.
In particular the situation of the banks – affected by low profitability and high non-performing
loans (NPLs) – remains challenging. Given no comprehensive solution for the NPLs, the
government had to rush through a public backstop facility of up to EUR20bn (1.2% of GDP) in
December 2016. This will be used to recapitalise Monte dei Paschi di Siena, but whether it can
be used to shore up other banks will depend on the application of EU state-aid rules.
Low inflation might be positive from a competitiveness point of view, but it might also create a
disinflationary mind-set difficult to eradicate in the future. We see inflation remaining well below
the eurozone average next year, and in 2018. This could be challenging for the ECB, which
could soon face a situation in which countries are at different stages of the economic cycle. With
the pace of QE reduced from EUR80bn to EUR60bn per month, possible widening spread and
low nominal growth could put Italy's debt sustainability at risk and undermine investor confidence.
Key forecasts
GDP 0.9 0.6 0.8 1.0 0.9 0.6 0.7 0.6 0.6
GDP (% quarter) - - - 0.3 0.1 0.2 0.2 0.2 0.2
Investment 2.0 1.1 1.3 2.3 1.6 1.2 1.4 0.9 1.0
Domestic demand 1.3 0.6 1.0 1.2 0.8 0.6 0.7 0.6 0.7
Exports 1.4 3.5 3.2 2.5 2.1 4.3 3.0 3.6 3.2
Imports 1.8 3.7 3.9 2.2 1.9 3.9 3.5 3.8 3.6
Unemployment (%) 11.6 11.4 11.1 11.6 11.5 11.5 11.4 11.3 11.3
Wage growth 0.6 0.7 0.7 0.6 0.6 0.6 0.7 0.7 0.7
Consumer prices -0.1 1.2 1.0 0.0 0.1 1.1 1.3 1.1 1.2
USD/EUR* 1.05 1.10 1.10 1.12 1.05 1.01 1.05 1.07 1.10
3-month money (%)* -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
10-year bond (%)* 1.8 1.5 1.5 1.2 1.8 1.9 1.7 1.6 1.5
Note: *Period end
75
Q1 2017

Eurozone
Spain
Fabio Balboni Growth could surprise to the upside (again)

European Economist
HSBC Bank plc
fabio.balboni@hsbc.com The Spanish economy grew by 0.7% q-o-q in Q3 2016, only a touch lower than in the previous
+44 20 7992 0374 three quarters (0.8%). Domestic consumption remains the key driver of growth, with private
consumption growing by 0.7% on the quarter (although the lowest rate since the end of 2014) and
government consumption by 1%. Investment also grew, albeit by a mere 0.1% q-o-q, which was
the lowest since the end of 2013. Net trade added to growth.
A key driver of growth is the continuation of a tourism boom, related to political instability in
Northern Africa and terrorism fears in France and other European holiday destinations. A strong
export performance has also helped, with Spain continuing to increase its global market share.
The PMIs have picked up recently, particularly for manufacturing, and employment posted solid
gains in October (although November was weaker, and we have to wait for December data to get
a clearer picture).
As yet, there are no signs of a slowing in the economy despite the fading boost from lower energy
prices (Madrid trip notes: Growth still surprising to the upside, 14 November 2016). But owing to
tax increases, we expect inflation to average 1.8% in 2017, up from -0.4% in 2016. This could
reduce GDP growth by about 1pp. Healthy job creation, however, could offset part of any impact
higher inflation has on real incomes. That said, GDP growth should slow in 2017, as the marginal
impact of additional tourism slows (particularly if a weaker GBP deters some British holidaymakers
as a fifth of tourists are from the UK). We now forecast 2017 growth of 2.5%, from 3.3% in 2016.
Despite the continuation of solid growth momentum, we still see some elements of uncertainty:
 So far wages have been broadly flat, but contractual wages have picked up recently thanks
to a tightening of the labour market and rising inflation. Parliament has approved an 8% rise
in the minimum wage for 2017. Stronger wage growth in the future could support domestic
consumption, but also undermine Spain's competitiveness and reduce job creation.
 Credit growth has weakened recently. Although this might reflect some crowding-out from the
ECB’s corporate sector purchase programme and political uncertainty (Spain has spent
almost one year without a government) it could also signal the start of a more negative trend.
 The fiscal stance has been highly supportive to growth, adding about 1pp to GDP growth this
year, in our estimates. But the government has just agreed further consolidation measures for
2017 to meet the EU deficit target, and although we do not think the impact on the economy
would be substantial, it could still act as a drag on growth.
The PMIs have picked up again… …but credit growth has slowed recently
Index Spain: PMIs Index % Yr Spain: New loans to NFCs % Yr
62 62
45 45
58 58
30 30
54 54
50 50 15 15
46 46 0 0
42 42 -15 -15
38 38 -30 -30
34 34
-45 -45
10 11 12 13 14 15 16
12 13 14 15 16
Manufacturing Services Composite: employment
Total <1mn >1mn
Source: Markit, Spain Statistical Institute Source: Bank of Spain, HSBC
76
Q1 2017

Policy issues
The fiscal deficit should be close to the EU target for this year (4.6% of GDP) thanks to the bringing
forward of corporate tax payments. But for 2017 Brussels has set a challenging target of 3.1% of
GDP. The government has recently announced measures worth EUR7.5bn in 2016 (0.7% of GDP).
EUR4.3bn should come from a reform of the corporate tax system, some EUR2.5bn from a
clamp-down on tax evasion, and the rest from higher taxes on tobacco and alcohol. It also
announced a reform of environmental taxes (Spain has one of the lowest taxes on energy in Europe)
for 2017 and proposed a reform of the social security system, whose reserves are running down fast.
In our view, these measures should be enough to satisfy Europe's requests for now, although they
are unlikely to be enough to bring down the deficit to 3.1% of GDP. The fiscal stance should
change from being strongly expansionary this year to mildly contractionary next year. But we
expect the drag on growth to be limited. The changes in corporate tax affect mostly large firms with
high cash hoardings and might even yield some positive benefits in the medium term in terms of
creating a business-friendly environment, increasing transparency and simplifying the tax system.
In the medium term, reforming the labour market remains the priority, with still high temporary job
creation (over 90% of all contracts signed each month are temporary) and long-term
unemployment (almost 2m people have been unemployed for over two years). Improving the
education and training system, and more flexible contracts would help in this respect.
Risks
Spain narrowly avoided a third election in less than a year, but Mariano Rajoy's newly-elected
minority government has the lowest MP tally in the history of the country (137 in the 350-seat
parliament; 39 short of a majority). This suggests it might struggle to implement major reforms
and we could even see a U-turn on some reforms (eg on the labour markets) pushed through
with the votes of opposition parties. But with recent polls showing the main opposition party,
PSOE, losing ground (CIS, 8 November), opposition parties might have little incentive to force
early elections. Catalonia also remains a major risk, with the Catalan government remaining
committed to holding a constitutional referendum in September 2017.
Key forecasts
GDP 3.3 2.5 2.0 3.2 3.2 3.0 2.6 2.4 2.0
GDP (% quarter) - - - 0.7 0.8 0.6 0.5 0.5 0.5
Investment 3.7 3.5 3.4 3.1 3.2 3.3 3.2 3.9 3.6
Domestic demand 2.8 2.3 2.0 2.6 2.5 2.5 2.4 2.3 2.1
Exports 4.2 3.5 3.9 2.8 3.8 4.2 2.0 4.3 3.6
Imports 3.1 3.3 4.2 0.9 1.6 2.7 1.7 4.6 4.4
Unemployment (%) 19.8 18.6 17.8 18.9 19.4 19.2 18.6 18.2 18.2
Wage growth 0.0 0.5 0.5 0.0 0.1 0.4 0.4 0.5 0.5
Consumer prices -0.4 1.8 1.2 -0.3 0.6 2.0 1.9 1.7 1.4
Current account (USDbn) 20.1 7.9 3.5 15.6 4.7 -4.8 3.1 6.1 3.6
Current account (% GDP) 1.6 0.6 0.3 2.6 1.5 -1.5 1.0 1.9 1.1
USD/EUR 1.05 1.10 1.10 1.12 1.05 1.01 1.05 1.07 1.10
3-month money (%)* -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3
10-year bond (%)* 1.4 1.1 1.1 0.9 1.4 1.6 1.4 1.3 1.1
Note: *Period end
Source: Thomson Reuters Datastream. HSBC estimates
77
Q1 2017


UK
Liz Martins Faster now, slower later

UK Economist
HSBC Bank plc
liz.martins@hsbc.com The UK has defied expectations of a slowdown since the Brexit vote so far, with neither
+44 20 7991 2170 consumers nor businesses having meaningfully adjusted their behaviour in the wake of the
vote. In fact, UK GDP grew by 0.6% q-o-q in the quarter immediately following the referendum
with business investment rising by 0.4%. Meanwhile, retail sales and consumer credit both grew
at their fastest rate in over a decade in October 2016.
With momentum still looking relatively strong in Q4 2016, and taking into account the revisions
with the Q3 quarterly national accounts, we now see growth of 2.0% for 2016. For 2017, we
pushed up our forecast from 0.7% to 1.2%. And against the backdrop of our new, higher
forecasts, we also revised unemployment down and wage growth up (see The UK in 2017:
Faster now, slower later, 7 December 2016).
This upgrade was more about the momentum from 2016 than us becoming notably more optimistic
about 2017. We still see a meaningful Brexit impact on the economy. Rather than starting in H2
2016, it comes a bit later, in 2017. But the difference is largely in timing, not magnitude.
As before, we see a fall in business investment. Uncertainty levels are likely to rise when Article
50 is triggered, we presume in Q1 2017 or very soon after, and details begin to emerge of the
reality of what price the UK’s businesses may have to pay for Brexit – whether in terms of
access to the single market, tariffs, non-tariff barriers, or restricted access to migrant labour.
Clearly, the impact comes in later than we initially expected.
We also have not changed our view that sterling has further to fall (see HSBC’s report Currency
outlook: 2016 in review, 8 December 2016), and that inflation will pick up sharply over the next
year. Wage growth is unlikely to keep pace, meaning lower real incomes bearing down on
consumption growth (see chart). Weaker investment and consumption will be offset to some
degree by a currency-driven boost to net trade and a looser fiscal policy.
In addition, we find it somewhat concerning that the UK has not, so far, taken the rebalancing
opportunity offered by the weaker currency. With higher prices not yet having been passed onto
consumers, the UK seems to have doubled down on its old habits of borrowing and spending,
rather than scaling back, keeping the savings rate low and the current account deficit wide.
We still see UK growth slowing, but the Falling real wages will weigh on
slowdown starts later consumption
% Yr GDP % Yr %Yr %Yr

4 4
2.5 2.5
3 3
2.0 2.0 2 2
1.5 1.5 1 1
1.0 1.0 0 0
-1 -1
0.5 0.5 -2 -2
0.0 0.0 -3 -3
-4 -4
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
2017Q2
2017Q3
2017Q4
2018Q2
2018Q4
2018Q1
2018Q3
-5 -5
-6 -6
BoE HSBC New 2005 2007 2009 2011 2013 2015 2017
HSBC Old OBR Real wage Consumers' expenditure
Source: HSBC, BoE, OBR Source: ONS, HSBC
78
Q1 2017

Policy issues
We think it will fall to Chancellor Philip Hammond, rather than Bank of England Governor Mark
Carney, to provide any stimulus that is needed. After all, Mr Hammond did give himself substantial
leeway in the Autumn Statement. Compared with George Osborne’s mandate, his new rules
allowed 2.5% of GDP worth of easing, of which only 1.3% was used in the Autumn Statement
programme. We expect the Bank of England to remain on hold throughout the forecast period (to
end-2018), with rates at 0.25% and asset purchases at GBP435bn.
The other major policy issue is of course Brexit – how and when it will happen, and what it will
mean for British businesses and consumers. The government has said it is looking to control
immigration and withdraw from the jurisdiction of the European Court of Justice, and the
indications from European leaders, including Donald Tusk and Angela Merkel, also arguably point
to a ‘hard Brexit’. But everything could still change from here. We don’t think parliament will stand
in the way of Brexit per se, but it could make a lot of noise over the details, and there is some risk
of an early election in the UK, if it becomes unmanageable.
Risks
We see risks in both directions, both for growth and for policy. Our strategists think gilt yields will
fall back in 2017, supporting the cheap credit environment that has been driving the housing
market and private consumption in the UK. But if this cheap credit were to dry up, thanks to
persistently higher market rates, then the consumer slowdown could be worse than we currently
envisage. In such a case, the Bank of England might see a case for additional monetary easing.
The other major risk to our forecast is that inflation will come in lower than our above-consensus
projection. The implications of this will depend on the drivers: if inflation is lower because firms are
unable to pass on higher costs to consumers, then it is not particularly good news. Businesses will
simply have to take the hit at the margins, eventually eroding investment and hiring. If inflation is
lower because sterling is higher, however, it is better news, which would increase real wage
growth and support consumption.
Key forecasts
GDP 2.0 1.2 1.3 2.2 2.0 1.9 1.3 0.8 0.7
GDP (% quarter) - - - 0.6 0.4 0.2 0.1 0.1 0.3
Investment 2.2 -2.4 1.1 5.8 6.1 1.0 1.2 -6.5 -4.8
Stockbuilding (% GDP) -0.4 -0.1 0.0 -0.2 -0.1 0.0 -0.1 -0.2 -0.1
Domestic demand 1.9 0.8 1.0 2.5 2.8 1.8 1.5 -0.2 0.1
Exports 1.1 1.2 2.4 1.7 -2.5 0.2 -0.5 2.9 2.2
Imports 2.5 0.1 1.3 4.2 1.8 0.4 0.2 -0.6 0.2
Manufacturing output 0.3 0.8 0.5 0.5 0.9 1.4 0.0 0.0 0.0
Unemployment (%) 4.9 5.2 5.6 4.8 4.9 5.0 5.0 5.3 5.5
Wage growth 2.4 2.0 2.8 2.4 2.5 2.6 1.7 1.7 2.0
Consumer prices 0.6 2.8 2.6 0.7 1.2 1.9 2.6 3.2 3.6
Current account (USDbn) -113.4 -109.3 -103.7 - - - - - -
Current account (% GDP) -4.9 -4.9 -4.6 - - - - - -
PSND (% GDP)** 88.2 91.0 85.6 - - - - - -
PSNB (% GDP)** 3.8 3.7 2.2 - - - - - -
USD/GBP* 1.24 1.10 1.10 1.30 1.24 1.18 1.15 1.12 1.10
GBP/EUR* 0.85 1.00 1.00 0.87 0.85 0.86 0.91 0.96 1.00
3-month money (%)* 0.2 0.2 0.2 0.4 0.2 0.2 0.2 0.2 0.2
10-year bond yield (%)* 1.3 1.4 1.4 0.7 1.3 1.8 1.6 1.5 1.4
Note: *Period end, **Fiscal years
Source: ONS, HSBC estimates
79
Q1 2017


Switzerland
Chantana Sam Lingering impact of the currency shock

Economist
HSBC France
chantana.sam@hsbc.fr The recovery of the Swiss economy is proceeding at a disappointingly slow pace. GDP growth
+33 1 4070 7795 was unexpectedly flat in Q3 (against market expectations of +0.3% q-o-q), suggesting that the
economy has not yet fully overcome the challenges raised by the SNB’s decision in January 2015
to abandon the currency peg and let the franc appreciate markedly.
Admittedly, some developments in Q3, such as continued growth in the manufacturing sector,
signal that currency effects are waning gradually. Besides, exports declined 0.4% q-o-q, but this
was mainly driven by sectors that tend to be less currency-sensitive, such as services (-0.8%) or
precision tools, watches and jewellery (-0.2%). However, the past effects of the strong franc are
still visible in the labour market, with the unemployment rate still lingering around 3.3% (up from its
August 2011 low of 2.7%). Against this backdrop, it is not surprising that consumption has
remained tepid (+0.1% q-o-q in Q3). Meanwhile, the recovery in investment is still subdued,
reflecting the past squeeze in firms’ margins.
We expect the upward trend in GDP growth to have resumed in Q4. Indeed, recent surveys (PMI
and KOF) point to further progress in the manufacturing sector. In addition, the ongoing resilience
of the recovery in the eurozone should be supportive for Swiss exports. That said, given the
downside surprise in Q3, we lower our 2016 growth forecast to 1.4% from 1.6%. As for 2017,
we still do not expect a meaningful acceleration in GDP growth given the numerous sources of
uncertainty on the external front (Brexit and political risks in the eurozone).
Favourable base effects on energy and import prices should help inflation to continue to recover in
2017. However, beyond these effects, domestic demand remains too weak to lead to a significant
pick-up in underlying price pressures. Therefore, we expect inflation to average only 0.3% y-o-y in
2017 and 0.7% in 2018, but this is still up from -0.4% in 2016. Against this backdrop, the SNB
should continue with its accommodative monetary policy stance and remain committed to reining
in the strength of the franc to achieve its price stability mandate.
GDP growth disappointed in the third Inflation is grinding higher but domestic
quarter due to weak domestic demand price pressures remain muted
% Yr Switzerland GDP % Yr % Yr Switzerland: Inflation % Yr

4 4 2 4
1 2
3 3
0 0
2 2 -1 -2
-2 -4
1 1
-3 -6
2010 2011 2012 2013 2014 2015 2016
0 0
2010 2011 2012 2013 2014 2015 2016 Headline rate (LHS)
GDP Final domestic demand Domestic goods & services (RHS)
Imported goods & services (RHS)
Source: SECO Source: Federal Statistical Office
80
Q1 2017

Policy issues
SNB members have recently continued to stress their willingness to intervene on foreign exchange
markets if needed in a context where the franc is still seen as ‘overvalued’. As an illustration, total
sight deposits at the SNB rose noticeably after the election of Donald Trump, suggesting
intervention activities to curb any upside pressures on the currency, as was the case after the Brexit
vote. As for negative rates, they are still seen as an important element of the SNB policy framework
in spite of the side effects (negative impact on the profitability of Swiss banks, and risks in terms of
asset bubbles). All in all, we still expect that for the foreseeable future, the SNB will keep its policy
rates on hold (3-month Libor target at -1.25%/-0.25% and sight deposit rate at -0.75%).
Beyond monetary policy, the implementation of the result of the 2014 referendum on immigration
restrictions remains a large source of uncertainty, with the February 2017 deadline defined by the
referendum getting very close. Both houses in the parliament are working on a compromise that
would require employers to favour existing residents when filling open jobs but that would avoid the
imposition of outright quotas in order not to breach bilateral agreements with the EU. Once the
Swiss government has finalised its approach, the EU may react. The reaction could be scrutinised
for hints of what the UK might expect for the negotiations over the Brexit process.
Risks
The SNB is still facing a difficult balance between the achievement of its inflation mandate and risks
to financial stability. Negative rates remain a drag on the profitability of the banking sector, as
highlighted by the recent decision of one large Swiss bank to introduce charges for retail customer
deposits above CHF1m.
More generally, mortgage credit has continued to grow at healthy pace recently, suggesting that
banks continue to try to compensate for the increased cost of holding retail deposits by increasing
lending volumes. Therefore, the SNB should continue to closely monitor the developments on
credit. However, if needed, the central bank should opt to adjust the countercyclical capital buffer
applied at banks rather than raising its policy rates.
Key forecasts
GDP 1.4 1.5 1.6 1.3 1.3 1.5 1.3 1.6 1.6
GDP (% quarter) - - - 0.0 0.4 0.5 0.4 0.4 0.4
Investment 2.5 1.0 1.4 2.4 2.5 0.5 1.3 1.1 1.0
Domestic demand -0.1 1.4 1.4 0.2 -1.1 1.4 1.5 1.5 1.4
Exports 5.1 2.4 2.7 5.1 4.2 1.7 1.9 2.9 2.9
Imports 3.1 2.5 2.5 3.4 0.2 1.7 2.5 3.0 2.9
Unemployment (%) 3.3 3.3 3.2 3.3 3.3 3.3 3.3 3.2 3.2
Wage growth 0.5 0.7 0.8 0.5 0.5 0.5 0.6 0.8 0.8
Consumer prices -0.4 0.3 0.7 -0.2 -0.2 0.1 0.1 0.1 0.6
CHF/USD* 1.02 0.98 0.98 0.97 1.02 1.07 1.03 1.01 0.98
CHF/EUR* 1.07 1.08 1.08 1.09 1.07 1.08 1.08 1.08 1.08
3-month money (%)* -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8 -0.8
10-year bond (%)* 0.0 0.2 0.3 -0.6 0.0 0.0 0.0 0.1 0.2
Note: *Period end
81
Q1 2017


Sweden
James Pomeroy Exciting times

Economist
HSBC Bank plc Sweden’s pace of economic growth may be slowing, but the economy is still in good shape. Yes,
james.pomeroy@hsbc.com
+44 20 7991 6714 some of the financial stability concerns are still there, but growth remains reasonably broad-based
with strong consumption being supported by investment, exports and government spending.
We expect annual growth to continue to slow, mainly due to base effects rather than anything more
concerning, with growth still above both longer-term trends and estimates of potential growth.
The economy continues to benefit from a booming technology sector, which is generating
investment, jobs and providing new avenues of growth through service exports. Now that service
exports account for around 20% of the economy, we have to be slightly more wary about
interpreting official GDP data, with this sector prone to measurement and timeliness issues,
meaning that Swedish GDP numbers continue to be heavily revised.
On the inflation front, the weaker SEK and higher oil price should push inflation higher in the short-
term but companies continue to stress the difficulty in passing this onto customers. Therefore, we
would expect the pass-through to be lower than it was previously and for inflation to start to come
back towards 1% by the end of 2017.
Given this backdrop, the ongoing discussions about the future of the Riksbank’s mandate are
important. We are slowly hearing more from the central bank on this topic and Deputy Governor Per
Jansson’s speech on 6 December called “Time to scrap the inflation target?” suggests that a bold
move is at least up for debate. The proposals for changes will be presented in June 2017, but a final
change to the mandate may not happen until May 2019 when the parliamentary commission
reviewing the Riksbank law will present its conclusions.
We make no significant changes to our growth or inflation forecasts, but we do now look for the
Riksbank to start raising rates in 2018. We’ve long argued that the Swedish economy doesn’t
warrant a negative policy rate and an environment with two more Federal Reserve rate rises in
2017 and more solid growth and inflation data, we now look for the Riksbank to return rates to zero
by the end of our forecast horizon.
The housing market may be back… …as is inflation?

% Sweden House Prices (6m change) % % Yr Sweden % Yr
20 20 5 5
15 15 4 4
10 10 3 3
5 5 2 2
0 0 1 1
-5 -5 0 0
-10 -10 -1 -1
-15 -15 -2 -2
2008 2010 2012 2014 2016 2008 2010 2012 2014 2016
Sweden Stockholm, Flats Gothenburg, Flats CPIF Headline CPIF ex-Energy
Source: HSBC, Thomson Reuters Datastream Source: Thomson Reuters Datastream. Note: CPIF is ex-interest payments
82
Q1 2017

Policy issues
Sweden has a general election in September 2018, and the political landscape has been
reasonably stable over the past year or so. The far right Swedish Democrats have stabilised at
around 20% of the vote according to various polls, but if this was to increase at any point then some
degree of political uncertainty may arise when the election comes more into focus.
In terms of monetary policy, a lot will come down to the future of the Riksbank’s mandate. Our base
case is that we move towards a looser inflation target, probably a 1-3% range, which would give the
central bank the opportunity to raise rates reasonably soon. The central bank may also adopt a
clearer role when it comes to financial stability, which would change the reaction function to include
things such as credit growth, house prices and debt, rather than being fixated by the headline
inflation rate.
The pace of any rate increases will be constrained by loose policy elsewhere in Europe, but
bringing rates out of negative territory seems sensible to us.
Risks
As has been the case in Sweden for some time, most risks relate to financial stability. We still see
many risks in the economy, with high levels of household debt, elevated house prices and strong
credit growth, but for these risks to be realised we would need an external shock or a sharp
slowdown in growth. Currently, neither of these look likely but we must be aware of the possible
impact that a shock could have on the Swedish economy.
Otherwise, greater political risk in Europe may feed across to Sweden, especially with the upcoming
election in 2018. This may come via the political channel with a further increase in the popularity of
the Swedish Democrats, or via any uncertainty-driven slowdown in the eurozone, Sweden’s biggest
export partner.
Uncertainty over Brexit has already affected corporate sentiment in Sweden, and although we
remain a long way from discussions even starting over Sweden’s position in the single market, it
remains an extreme tail risk to keep an eye on.
Key forecasts
GDP 3.2 2.1 2.0 2.8 2.2 2.2 2.1 2.1 1.8
GDP (% quarter) - - - 0.5 0.7 0.4 0.4 0.5 0.4
Investment 6.6 2.9 2.0 6.5 4.9 4.0 2.6 3.1 2.0
Domestic demand 3.7 2.1 2.1 3.2 3.0 2.4 1.9 2.3 1.9
Exports 2.7 2.6 2.6 2.2 0.9 2.3 3.3 2.6 2.4
Imports 3.9 2.9 2.8 3.2 2.8 2.8 3.0 3.0 2.8
Industrial production 1.6 0.1 1.2 0.9 -1.5 -2.1 0.2 1.2 1.2
Unemployment (%)* 6.7 6.3 6.6 0.0 6.7 6.6 6.5 6.4 6.3
Wage growth 2.2 1.5 1.5 2.4 2.2 1.5 1.5 1.5 1.5
Consumer prices 1.0 1.4 1.0 1.0 1.4 1.5 1.4 1.4 1.2
SEK/USD* 9.09 8.91 8.91 8.58 9.09 9.50 9.33 9.16 8.91
SEK/ EUR* 9.58 9.80 9.80 9.63 9.58 9.60 9.80 9.80 9.80
3-month money (%)* -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5
10-year bond (%)* 0.6 1.0 1.2 0.2 0.6 0.7 0.8 0.9 1.0
Note: *Period end
Source: HSBC estimates, Thomson Reuters Datastream
83
Q1 2017


Norway
James Pomeroy What’s next for Norway?

Economist
HSBC Bank plc
james.pomeroy@hsbc.com Norway’s growth and inflation story has settled down in the past couple of months: growth has
+44 20 7991 6714 clearly bottomed, with another 0.2% q-o-q mainland growth rate in Q3, and core inflation has
continued to steadily head down towards Norges Bank’s 2.5% target. The stronger NOK, in
response to Norway’s relative economic resilience and the more stable oil price, have helped to
weigh on these inflation numbers but also pose challenges to future growth within non-oil
industries hoping to gain some international competitiveness. Growth remains weak in the oil
producing regions (notably Stavanger) while Oslo house prices are now up nearly 20% y-o-y.
We make no meaningful changes to our forecasts over our forecast horizon, but there is a
bigger discussion to be had about how the Norwegian economy will function over the medium
term. The level of government spending in the 2017 budget implies a lower fiscal impulse of
0.4% (compared to 1.0% in 2016) but we see this as a positive. Norway’s economy remains too
reliant on the public and oil sectors and needs to see a pick-up in productivity.
Norway needs greater incentives for non-oil businesses to set up and thrive in the country. With
a highly educated workforce, Norway could heed the lessons of its Scandinavian neighbours in
terms of generating new avenues for growth, and this would be welcomed.
To do this, a protracted period of slow growth may have to be tolerated while reform is undertaken,
and Norway benefits from a reasonably stable political environment which may make such change
slightly easier. Currently 35% of the workforce is employed by the public sector, and roughly 30% of
investment is in the oil sector. This overreliance on two sectors has to change.
There has been a lot of noise from the government over the past year or so but government
spending has concentrated on propping up near-term growth rather than looking to the future.
This has stopped the economy having an even weaker set of growth data over the past year or
so, but has not helped raise potential growth. So, for now we still expect growth to stay at
around 1% y-o-y and inflation to steadily head lower due to base effects and the stronger NOK.
Growth may have bottomed out… …but there’s a big regional divergence
% Norway % Yr % Yr House prices % Yr
3 6 20 20
15 15
2 4
10 10
1 2
5 5
0 0 0 0
-5 -5
-1 -2
-10 -10
-2 -4
2006 2008 2010 2012 2014 2016 -15 -15
Regional Network Survey (LHS) 2010 2012 2014 2016
Mainland GDP Growth (RHS) Oslo Norway Stavanger
Source: HSBC, Thomson Reuters Datastream Source: HSBC, Thomson Reuters Datastream
84
Q1 2017

Policy issues
Norway’s political situation is much calmer than most of Europe. Although there is an election on
11 September 2017, the likely outcome is an unchanged leadership according to opinion polls,
which have hardly moved since the 2013 election. Consequently, political uncertainty may not
prove to be a challenge.
In terms of the Norges Bank, we expect rates to remain on hold for the foreseeable future. With
rates at 0.50%, it would take a significant downturn to warrant any further easing, especially
while the Norges Bank is keen to stress the importance of robust monetary policy that accounts
for the number of financial stability risks in the economy.
However, given that we expect growth to remain weak, it is hard to see the justification for
tighter policy, despite slightly higher rates elsewhere in the world.
Risks
Norway still has elevated house prices, still has high levels of household debt and still has an
economy overly reliant on its government sector. If growth were to remain weak, the risks of cracks
appearing in the financial system may grow.
The oil price remains volatile and any falls in the oil price could derail the muted recovery. Although
oil accounts for a reasonably small share of employment and the fiscal potential of the government,
the implications for investment and house prices in the Stavanger region are much greater.
There is, of course, a possibility of political surprise with the upcoming election. Although there has
not been a surge in support for populist parties in Norway, there is a risk that public sentiment over
migration, reform and Norway’s position in Europe could lead to policy proposals that are not
supportive of growth in either the short or medium term.
Key forecasts
GDP* 0.7 1.1 1.2 0.7 1.1 1.1 1.0 1.1 1.2
GDP (% quarter)* - - - 0.2 0.2 0.2 0.3 0.3 0.3
Investment* 5.8 2.7 1.2 6.9 5.6 5.4 3.9 0.7 0.9
Domestic demand 2.8 0.8 1.3 2.2 2.0 2.1 2.1 2.0 1.9
Exports* -5.0 0.9 0.8 -5.6 -6.3 0.1 2.1 0.8 0.8
Imports* 0.4 0.7 1.4 3.6 -0.1 -0.1 3.2 2.4 2.4
Industrial production -4.7 1.1 2.8 -4.5 -2.6 -1.4 0.4 2.8 2.8
Unemployment (%) 4.7 4.0 3.6 4.9 4.2 4.1 4.0 3.9 3.8
Wage growth 2.5 2.1 2.1 3.6 2.3 2.1 2.1 2.1 2.1
Consumer prices 3.3 1.8 1.7 4.0 2.4 1.9 1.8 1.8 1.8
Gross external debt (% GDP) - - - - - - - - -
NOK/EUR** 9.09 8.70 8.70 8.98 9.09 8.70 8.70 8.70 8.70
3-month money (%)** 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
10-year bond (%)** 1.8 2.1 2.1 1.2 1.8 1.9 1.9 2.0 2.1
Note: *Mainland, **Period end
85
Q1 2017

CEEMEA
Poland
Agata Urbanska-Giner Growth lower for longer

Economist
HSBC Bank plc
agata.urbanska@hsbcib.com Growth in Poland slowed sharply from 3.9% y-o-y in 2015 to 2.8% in the first three quarters of 2016.
+44 20 7992 2774 We believe it is likely to fall further in Q4, below 2.0% y-o-y, where it should bottom. A gradual
recovery is likely in 2017, but full-year growth is unlikely to return above 3% y-o-y, while a sub-2.5%
reading is a possibility, if investment activity continues to disappoint. We recently revised our GDP
growth forecast to 2.6% y-o-y in 2016 (from 3.0% y-o-y previously), and to 2.6% y-o-y in 2017 (from
3.3% previously), please see Growth lower for longer, 8 December 2016.
We have lowered our GDP growth forecasts every quarter since the beginning of the year, and
on a cumulative basis growth over 2016-2017 now looks to be 2.5pp lower than we had
expected at the start of 2016. This is a much deeper downward revision than we have made for
regional peers such as the Czech Republic and Hungary.
Contracting public investment and a reduced drawdown of EU funds are the main culprits
behind the 2016 slowdown. Encouragingly, there are some signs that this might turn. Data on
the value of new projects to be financed by the EU funds point to some improvement coming
through this year. At the end of November, the value of EU-financed projects signed over the
previous 12 months almost tripled, and rose to about 18% of the total 2014/20 funding pool,
compared to a 1% actual absorption rate in mid-2016. Although we expect a turnaround in
investment, further absorption delays remain a downside risk to our GDP growth forecast.
Private consumption has lagged the high wage bill growth that was additionally boosted by the
transfers under the child benefit scheme this year. We expect it to rise near term but think a
slowdown is likely from mid-2017, driven by a waning impact of those fiscal transfers, slowing
employment growth and rising inflation.
2016 slowdown much deeper than Investment contraction deepest in sectors

expected reliant on EU funds
% Yr Forecast revisions: % Yr % Yr Investment outlays % Yr

Poland 2016 GDP growth 25 25
4.0 4.0
20 20
15 15
3.5 3.5 10 10
5 5
0 0
-5 -5
3.0 3.0 -10 -10
-15 -15
2012 2013 2014 2015 2016
2.5 2.5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Manufacturing Electricity, Gas
Water Supply Transport
Consensus Economics NBP HSBC Total
Source: Thomson Reuters Datastream, HSBC forecasts Source: Thomson Reuters Datastream, HSBC
86
Q1 2017

Policy issues
Weaker-than-expected public investment is set to deliver a better budgetary outcome in 2016. But
fiscal risks remain elevated in 2017-18 and we continue to forecast budget deficits above the 3%
of GDP threshold, the breach of which triggers the EU’s excessive deficit procedure. PiS’s most
costly structural changes introduced this year are the child benefit Family500 at over 1% of GDP
and lower retirement age at some 0.5% of GDP per year.
We maintain our long-held view that the CB policy rate will be unchanged in 2017 and 2018.
The growth slowdown has tempered the MPC’s bias for end-2017 rate hikes and strengthened
the current ‘wait-and-see’ stance. Rising inflation, even if primarily driven by commodities,
together with concerns over the domestic financial system, are holding the MPC back from
contemplating policy easing.
Risks
We see investment spending as both key upside and downside risks to our GDP growth forecast in
2017. In 2016, investment slumped mainly in the sectors reliant on EU funds, such as electricity
production, water supply, and transportation. Lower drawdown of EU funds lies behind contracting
public investment across CE3, but Poland’s slump is deeper than that of its regional peers.
The challenge of utilising EU funds from the new 2014/2020 financial programme has been
compounded in Poland by political uncertainties that arose during the PiS government’s first year in
office, including lack of co-operation between the PiS-led central government and opposition-led
local governments or PiS-led overhauls of management in state-owned companies. Of greater
concern to the medium-term outlook, however, is the slowdown in private investment. The central
bank’s survey revealed uncertainty around the government’s numerous legislative changes (plans
to merge income tax, healthcare fee and pension contributions into one, measures tightening the
tax system, new public procurement law, retail tax law and a lower retirement age) dampening
investment activity. Depending on how these risks play out, investment activity could surprise to the
upside or to the downside in 2017.
Key forecasts
GDP 2.6 2.6 3.2 2.5 1.8 2.1 2.2 3.0 3.0
GDP (% quarter) - - - 0.2 0.6 0.7 0.7 0.9 0.9
Investment -5.6 0.5 5.0 -7.7 -6.0 -4.8 -2.0 -0.5 4.6
Domestic demand 2.6 2.5 3.4 2.9 1.8 2.5 2.7 2.0 2.8
Exports 7.7 5.9 5.5 6.8 6.0 6.7 4.0 7.0 6.0
Imports 8.1 5.9 6.1 7.8 6.2 8.0 5.1 5.0 5.6
Industrial production 2.3 3.6 5.3 2.3 -1.3 1.3 1.1 4.0 6.3
Unemployment (%) 6.1 5.7 5.7 5.9 5.7 5.9 5.7 5.6 5.7
Wage growth 4.2 5.0 5.3 4.4 3.9 4.7 4.7 5.0 5.6
Consumer prices -0.6 1.5 1.6 -0.8 0.1 1.6 1.8 1.5 1.2
PLN/EUR* 4.40 4.60 4.60 4.30 4.40 4.40 4.50 4.60 4.60
3-month money (%)* 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7
10-year bond (%)* 3.6 3.4 3.4 2.9 3.6 3.6 3.6 3.6 3.4
Note: *Period end
87
Q1 2017

CEEMEA
Russia
Artem Biryukov Pragmatism not populism

Economist
OOO HSBC Bank (RR) (Limited
Liability Company) Russia will hold a presidential election in March 2018, but we do not believe policy will turn populist
artem.biryukov@hsbc.com ahead of the vote. With Vladimir Putin’s popularity close to historical highs, the president has no
+7 495 721 1515
pressing need to garner additional support through a change in policy orientation. Indeed, when the
government pushed through a number of expansionary measures in the lead-up to the presidential
election in March 2012, these did little to boost the president’s popularity.
Instead, we expect the government to maintain a pragmatic approach and remain committed to two
long-standing policy goals in 2017: fiscal consolidation and disinflation. We believe that if the
government remains committed to its announced spending limits, it can reduce the budget deficit to
2% of GDP in 2017 and to almost 1% of GDP in 2018, ahead of its medium-term fiscal plan.
We also believe that the central bank can reach its inflation target of 4% by the end of 2017. We
previously saw end-2017 inflation at 4.5%, but have revised down our forecast on the back of a
more subdued domestic demand outlook, and falling pass-through from currency depreciation
to final consumer prices.
Continued disinflation and fiscal consolidation will allow the central bank to resume its slower, but
deeper easing cycle in Q1 2017. But more aggressive Fed tightening and a high share of non-
residents in domestic government debt market will likely slow the pace of monetary policy easing. We
think that the bank could reduce its key rate to 8.00% by end-2017 and to 7.00% by end-2018.
Private consumption was a major drag on growth in H1 2016, with the weakness extending into
the second half of the year. Even though real wages have been growing, household savings
have risen, and consumption has continued to fall. We now believe that the Russian economy
will remain in recession in 2016, contracting by 0.5% y-o-y, making it the second consecutive
year of decline. For 2017 we forecast a return to growth, but in the European Economics
Quarterly Q1 2017 we cut our forecast to 1.0% as private consumption gains will be lower than
we previously thought.
President Putin’s popularity hasn’t been Share of imported goods in trade turnover
affected by falling households’ income almost halved since 2014
Index % Yr % of total trade turnover % of total trade turnover
90 20 50 15.0
40 12.5
80 10
30 10.0
70 0 20 7.5
10 5.0
60 -10 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16
2002 2004 2006 2008 2010 2012 2014 2016 Share of imported electronic goods (LHS)
Mr. Putin's voter approval index (LHS) Share of imported cars (LHS)
Share of imported food products (RHS)
Real disposable income (6M rolling, RHS)
Source: Rosstat, Levada Centre Source: Rosstat
88
Q1 2017

Policy issues
Russia’s strategic budget planning targets a 1% of GDP federal budget balance by 2019.
Structural fiscal adjustment measures of almost 3% of GDP will be required to reach the goal
from 3.5% in 2016, on our estimates. We think consolidation will be front-loaded with the goal
eventually reached in 2018, after the 2% of GDP deficit in 2017. Our moderate optimism is
based on the assumption of a roughly flat oil price for 2017-18.
The role of domestic borrowing in budget deficit financing is set to increase over time but public
debt-to-GDP is unlikely to rise by much. The authorities are going to double net domestic public
bond issuance to RUB1.1tn in 2017-19 from RUB0.5tn in 2016. The increase in borrowing is
consistent with public debt stabilising within 13-15% of GDP over the medium term, on our
estimates. The government will have to deplete its Reserve Fund by end-2017. Given the low
debt stock and broad fiscal consolidation push, we do not view the depletion of the Reserve
Fund with particular alarm. Unlike the authorities, we don’t see a need to tap the National
Wealth Fund in 2017-18, as we forecast a smaller budget shortfall.
Risks
Of the uncertainties raised by Donald Trump’s election victory, the broadest is that his anti-free-
trade campaign-trail proposals put global trade – and by extension, global growth – in jeopardy.
Our major concern is that if China slows because of a trade dispute (not HSBC’s baseline
scenario), it could have a negative spillover effect on oil demand, oil prices and, consequently,
on Russia’s economic outlook. A more immediate risk is Mr Trump’s pro-drilling stance.
Meanwhile, Donald Trump’s forthcoming US presidency could mark a significant turning point.
His less hawkish rhetoric on Russia has given rise to hopes that bilateral relations might
improve after years of geopolitical stand-off. For now, though, our projections assume sanctions
remain in place throughout our forecast period.
Key forecasts
GDP -0.5 1.0 1.5 -0.4 -0.2 0.4 0.9 1.1 1.4
GDP (% quarter) - - - 0.2 0.1 0.3 0.4 0.4 0.4
Consumer spending -3.0 1.5 2.4 -1.8 -0.5 0.7 1.2 1.9 2.2
Government consumption -1.2 -0.6 0.0 -1.0 -1.0 -1.0 -0.5 -0.5 -0.5
Investment -3.9 2.1 3.0 -1.5 0.0 1.0 2.0 2.5 3.0
Stockbuilding (% GDP) 1.5 0.5 0.5 -0.5 0.0 0.5 0.5 0.5 0.5
Domestic demand -2.8 1.2 2.1 -1.6 -0.5 0.4 1.0 1.6 1.8
Exports -0.9 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Imports -4.2 3.0 4.0 0.0 1.0 3.0 3.0 3.0 3.0
Unemployment (%) 5.6 5.5 5.4 5.3 5.5 5.8 5.6 5.2 5.4
Wage growth 7.7 6.6 6.5 8.4 7.5 7.0 6.5 6.5 6.5
Consumer prices 7.1 4.7 4.0 6.8 6.0 5.3 4.8 4.5 4.3
RUB/USD* 61.2 65.0 65.0 62.9 61.2 57.0 57.0 62.0 65.0
3-month money (%)* 10.4 8.3 7.2 10.6 10.4 9.8 9.3 8.8 8.3
10-year bond (%)* 8.5 7.5 7.5 8.2 8.5 8.6 8.6 8.6 7.5
Note: *Period end
89
Q1 2017

CEEMEA
Turkey
Melis Metiner Vulnerable

Economist
HSBC Bank plc
melismetiner@hsbcib.com Turkey’s fundamental weaknesses remain unaddressed. The implementation of structural
+44 20 3359 2636 reforms has been slow, fixed investment has remained weak, and there has been no
meaningful deleveraging of private sector debt. The total external financing requirement
remains large, and the country is vulnerable to a shift in risk appetite, tightening global liquidity
conditions and persistent USD strength.
The economy contracted by 1.8% y-o-y in the third quarter of 2016. Household spending,
exports, and fixed investment all fell in annual terms, while public spending jumped by 24%. The
statistical office also published revisions to historical national accounts data and we believe that
further revisions are likely in the upcoming months. As a result, we revise down our 2016
forecast from 2.9% to 2.2%, but keep our 2017 forecast unchanged at 2.3%. Fixed investment
and export performance are likely to remain weak throughout our forecast period and growth is
set to be primarily consumption-driven.
The lira has been under pressure since October. Our FX strategy team expects the weakness to
continue. Turkey faces a deteriorating macro mix and continued political uncertainty. In the
absence of higher policy rates, which we do not expect in the near term, we see no reason to be
bullish the TRY. Therefore, we see USD-TRY moving to 3.85 by the end of 2017.
This will feed into higher consumer inflation. We expect annual CPI to average 9.1% in 2017, up
sharply from our previous forecast of 7.2%. Most measures of underlying price pressures are
already quite high. Core inflation (excluding unprocessed food and energy) stood at 8.1% in
November. 12-month forward inflation expectations were 7.9% and rent inflation has been stuck
at around 9.0% for most of 2016.
Slowing growth, rising inflation, a widening current account shortfall, continued domestic
political uncertainty, and geopolitical risks relating to neighbouring Iraq and Syria all argue for a
higher risk premium and higher rates in Turkey. Recent rhetoric from the CBRT, however,
suggests that the bank is not considering a large rate hike. We expect the one week repo rate to
remain at 8.0% in the near term, which would keep real rates low.
CBRT on hold despite lira weakness… …and rising inflation
2003=100 CPI-based REER 2003=100 % Yr CPI % Yr

130 130 11 11
10 10
120 120
9 9
110 110
8 8
100 100 7 7
HSBC
90 90 6 forecast 6
03 04 05 06 07 08 09 10 11 12 13 14 15 16 5 5
REER Long term average 2013 2014 2015 2016 2017 2018
Source: CBRT Source: Turkstat, HSBC forecasts
90
Q1 2017

Policy issues
Given a deteriorating inflation outlook and rising risk premium, we have long argued monetary
policy in Turkey should be significantly tighter. However, our view is that the central bank is
currently not close to delivering an aggressive rate hike. This is for two reasons. First, the CBRT
has not delivered any verbal guidance to suggest that it is uncomfortable with the recent pace of
lira depreciation. Second, a number of recently introduced measures aimed either at relieving
the pressure on the lira, or at pushing down banking sector deposit and loan rates, suggest that
interest rate hikes continue to be the policy option of last resort.
Risks
The AKP’s proposal for constitutional change – including a shift from a parliamentary to a
presidential system of governance – is likely to be the key source of political uncertainty in 2017.
At the moment, the AKP lacks the parliamentary majority needed for such a change, but recent
comments suggest that the right-wing Nationalist Movement Party (MHP) could provide support
for the AKP’s proposal. If the AKP, which currently has 316 voting seats, can secure the 330 votes
necessary to send this question to a public referendum, the public vote could occur in Q2 2017.
In a scenario where the AKP did introduce a presidential system, financial markets could be
concerned if the new system of governance compromised the country's system of checks and
balances or its independent institutions. If the proposal were to fail in the referendum, this would
create significant near-term uncertainty about how the policymaking environment might change
in Turkey. Finally, if the AKP cannot secure parliamentary support for its proposal, it could consider
calling for a new election in an attempt to secure a larger parliamentary majority.
Key forecasts
GDP 2.2 2.3 2.5 -1.8 1.8 1.6 2.3 2.8 2.3
Consumer spending 0.7 2.3 3.3 -3.2 2.0 1.5 2.5 2.5 2.5
Investment 2.2 -1.8 0.0 -0.6 -1.6 -2.5 -2.5 -1.5 -1.0
Exports 0.2 1.8 4.0 -7.0 5.0 0.1 0.5 3.0 3.5
Imports 5.0 7.0 7.5 4.3 2.0 6.6 7.0 7.2 7.2
Unemployment (%) 10.5 11.0 11.0 11.0 11.0 11.0 11.1 11.2 11.2
Wage growth 17.1 16.3 14.0 14.9 14.9 19.5 15.5 15.3 15.0
Consumer prices 7.7 9.1 7.8 8.0 7.2 7.7 9.2 9.3 10.1
TRY/USD* 3.53 3.85 3.85 3.00 3.53 3.70 3.80 3.80 3.85
One-week repo rate* 8.0 8.0 8.0 7.5 8.0 8.0 8.0 8.0 8.0
10-year bond (%)* 11.2 12.0 12.0 9.5 11.2 11.0 12.0 12.0 12.0
Note: *Period end
91
Q1 2017

CEEMEA
Saudi Arabia
Simon Williams Relief, not recovery

Economist
HSBC Bank plc
simon.williams@hsbc.com The improved outlook for international oil prices has had only a modest impact on our
+44 20 7718 9563 projections for Saudi Arabia. The higher price will boost the earnings from the hydrocarbon
sector that is the mainstay of Saudi Arabia’s external account revenues and budget receipts.
The shift in OPEC’s supply-side strategy also seems to have established a floor below which
the Saudi-led cartel will not let prices fall – a source of considerable reassurance given the lows
recorded over the past 18 months. Co-operation with non-OPEC members also suggests there
is upside to the USD55/b price that underpins our forecasts for the coming two years.
Nevertheless, we had always expected prices to gain over 2017-18, with the impact of the
higher prices now incorporated into our projections softened by the production cuts Saudi
Arabia will be required to deliver to sustain them. More substantially, oil prices at USD55/b will
leave the kingdom facing reduced, but still very large fiscal and current account shortfalls in
both 2017 and 2018.
As a result, we continue to expect the government to deliver two more years of budget cuts, as
it seeks to rebalance public finances. The impact of this fiscal tightening on growth will be
compounded by rising rates as the dollar-peg forces SAMA to hike its policy rates in line with
the Fed, and the state’s large borrowing requirement keeps liquidity tight. The dollar-peg will
also see the SAR gain in value, further stiffening the headwinds to growth. Real exports will also
fall as a consequence of the OPEC agreement, and all told we continue to expect growth to
remain well below trend at an average of around 1% over 2017-18, albeit on a rising trend.
Despite this still difficult environment, we remain confident that the imbalances the kingdom faces
will be funded. In particular, we strongly expect that the trade and current account shortfall will be
comfortably financed, and that Saudi Arabia’s long-standing currency peg will remain in place.
Debt will rise as the government borrows from at home and overseas to fund the deficits it faces,
and reserves will continue to decline. We also expect to see government entities and financial
institutions increase their borrowing from overseas to offset the pressure on funding at home. On a
net basis, however, the kingdom should remain a strong net international creditor with its public
debt stock, though rising, remaining modest in comparison with that of its EM peers.
OPEC cuts will not boost Saudi oil receipts The budget deficit will narrow, but remain
to previous trend levels large (% GDP)
USD bn USD bn % GDP % GDP

400 400 25 25
20 20
300 300 15 15
10 10
5 5
200 200
0 0
-5 -5
100 100 -10 -10
-15 -15
0 0 -20 -20
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
Oil export earnings Current account Budget
Source: SAMA, HSBC forecasts Source: SAMA, HSBC forecasts
92
Q1 2017

Policy issues
We believe that the kingdom is committed to its programme of economic adjustment and structural
change, and expect the broad programme of reform laid out in Vision 2030 to dominate a busy
reform agenda. Fiscal adjustment is already underway, with moves in late 2016 to cut public sector
salaries marking the most dramatic steps yet to reverse the rapid spending gains of the oil boom
years. We expect to see further cuts in subsidies and salaries over the coming two years, and for
capex to remain muted. We have no expectation that there will be change in the fundamentals of
Saudi monetary policy, which will remain anchored to the dollar peg. We do expect SAMA to take
steps to curb upward pressure on rates, however, by hiking only its reverse repo rate when the Fed
moves, and by easing liquidity constraints within the banking system.
We also look for the government to rely more heavily on the private sector for the development and
funding of services and infrastructure previously provided by the state, and for policymakers to push
ahead with their ambitious privatisation programme, including the eventual sale of Saudi Aramco. In
addition, we expect to see Saudi accelerate the expansion of its debt and equity capital markets,
including steps to boost the role of foreign investors. Fresh deregulation will also be aimed at drawing
additional foreign direct investment into the non-oil economy to boost the development of the service
and manufacturing sector in line with the 2030 plan.
Although material, we expect the reform process to take years to deliver a significant improvement in
economic performance. Before it does, we expect the adjustment measures to weigh on real wages
and to see unemployment rise as the labour market continues to grow rapidly – trends that will be the
acid test of the commitment of the reformists around Mohammed bin Salman (deputy crown prince
and chairman of the Economic Council) to the programme of change.
Risks
Our forecasts assume oil will continue to trade in the USD50-60/b range over the coming two years.
Although the kingdom has the balance sheet to deal with significantly weaker prices, earnings below
this level would prompt us to reduce our forecasts for real growth as the budget and current account
deficits deepened. A materially higher oil price would have the opposite effect, but would weigh on
our hopes for reform, which is critical to the kingdom’s prospects for long-term prosperity.
Key forecasts
% Year 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
GDP 7.4 10.0 5.4 2.7 3.6 3.4 0.6 0.8 1.4
Government consumption 3.2 16.6 8.1 11.1 12.0 -8.5 -2.0 -1.0 1.0
Investment 14.6 15.6 5.0 5.6 7.5 -1.5 -5.0 -0.2 3.5
Domestic demand 38.7 8.1 7.5 4.5 7.9 1.3 -1.2 0.6 2.3
Exports 4.7 10.2 3.4 0.2 -1.8 -1.5 2.0 -2.0 0.7
Imports 5.6 5.5 7.7 3.7 6.6 -8.6 -2.5 -4.0 3.0
Industrial production 169.2 12.0 4.9 0.2 6.0 3.0 1.9 -0.5 0.3
Consumer prices 5.3 5.0 4.5 3.5 2.7 2.2 3.6 3.4 3.4
Current account (USDbn) 66.8 158.5 164.7 135.3 73.4 -54.0 -53.4 -31.0 -30.4
Current account (% GDP) 12.7 23.6 22.4 18.2 9.7 -8.3 -8.0 -4.5 -4.0
Budget balance (% GDP) 4.4 11.6 13.6 6.5 -3.4 -15.0 -12.9 -8.3 -7.2
Gross external debt (% GDP) 19.4 14.6 12.5 11.6 11.6 14.0 17.0 19.1 20.1
Gross government debt (% GDP) 8.5 5.4 3.0 2.2 1.6 5.8 17.3 21.6 24.8
SAR/USD* 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75 3.75
3-month money (%)* 0.8 0.8 1.0 1.0 0.9 1.5 2.1 2.7 2.9
Note: *Period end
Source: Saudi Arabia Monetary Agency, Central Department for Statistics and Information, HSBC estimates and forecasts
93
Q1 2017

CEEMEA
Nigeria
David Faulkner Troubling times

Economist
HSBC Securities (South Africa)
(Pty) Ltd Nigeria's economy is in the midst of a prolonged recession. GDP contracted for a third
david.faulkner@hsbc.com successive quarter, as output fell by 2.2% y-o-y during Q3 2016. The primary driver continued to
+27 11 676 4569
be a collapse of value-add in the oil sector, which declined by 22.0% y-o-y as attacks on oil
infrastructure disrupted oil production in the Niger Delta, while the non-oil economy stagnated.
Agricultural production remains a positive, but manufacturing, construction, real estate and the
trade sector all experienced notable output declines during the third quarter.
A familiar set of issues are weighing on the economic outlook, including the scarcity of foreign
exchange, energy and fuel shortages, rising inflation, and depressed consumer demand. There
are few signs that the current exchange rate system will be reformed or that there will be relief
from the FX shortages that are hampering local economic activity. Without this taking place, it is
hard to be optimistic about Nigeria's growth prospects; however, the uptick in oil production
seen during Q4 2016 could provide a favourable base effect during the second half of 2017.
PMI readings lend credibility to this view, with the whole-economy PMI rising from its Q3 2016
low but continuing to point towards contraction in the final quarter of the year. We have left our
growth forecast for 2016 unchanged at -1.6% but now see a slower recovery in 2017 with GDP
growth of just 1.5% (2.0% previously) as policy mistakes preclude a faster rebound.
Inflation meanwhile continues to move higher, rising to an 11-year high of 18.3% y-o-y in
October 2016. The Central Bank of Nigeria (CBN) continues to identify structural drivers
including the scarcity of fuel and other refined petroleum products, electricity tariff increases,
high transport costs, and pass-through from a weaker exchange rate to import prices. There
remains a substantial premium between the official exchange rate and the rate in the parallel
market, which is currently about NGN480 against the US dollar. If this premium persists,
inflation is likely to remain elevated during 2017. We expect CPI inflation to peak at the end of
2016 before experiencing gradual disinflation thereafter.
Having fallen by 45% in 2015, the USD value of exports dropped another 29% y-o-y in the first
ten months of 2016. However, the collapse in growth and shortage of FX has also resulted in a
sharp fall imports, which is helping limit the size of the trade deficit and external imbalance.
Collapsing oil output has been the primary The CBN has not responded to rapidly
driver of Nigeria's recession rising inflation
000s bpd, 3mma 000s bpd, 3mma % %

2200 2200 20 20
15 15
2000 2000
10 10
1800 1800
5 5
1600 1600
0 0
1400 1400 2008 2010 2012 2014 2016
2010 2012 2014 2016 Central bank policy rate CPI inflation
Source: Bloomberg, HSBC Source: Central Bank of Nigeria, Nigerian National Bureau of Statistics
94
Q1 2017

Policy issues
The CBN left the monetary policy rate unchanged at its final MPC meeting in 2016, emphasising
the structural factors underpinning Nigeria's stagflationary challenge and taking a view that
monetary policy could do little to influence these drivers. Despite headline inflation more than
doubling to the top of the CBN's 6-9% target range, it was a unanimous decision to leave rates
on hold. The MPC statement suggested that the CBN continues to take comfort from slowing
monthly inflation for headline, core and food prices. Based on this we no longer expect the CBN
to hike rates. Indeed, there have been calls for policy easing given Nigeria's slumping economy,
but the MPC argues that the central bank lacks the policy instruments to directly support growth,
while also reiterating the importance of price stability. In addition, there are growing concerns
over debt issues and the potential strain this could place on the banking system. Signs of stress
have become more evident with non-performing loans rising sharply to 13.4%, substantially
above the CBN's 5% regulatory threshold and up from 5.3% at the end of 2015.
The currency regime remains the biggest policy issue facing the central bank, and the economy
more broadly. The FX market remains a problem with very thin liquidity, low trading volumes and little
meaningful flexibility. The ongoing premium in the parallel market, suggests the NGN will need to
depreciate further. We continue to forecast NGN depreciation to 350 against the US dollar by the end
of 2017, however, there is likely to be significant overshooting as part of any adjustment process.
Fiscal data meanwhile show that the federal government accumulated a large budget deficit
during the first half of 2016, equal to almost 4% of GDP, as plunging oil production reduced oil
revenues and the recession weighed on non-oil tax collections. The 2017 budget targets more
government spending, which could place additional pressure on deficits and debt levels. Fiscal
reforms that boost the non-oil tax take and diversify the tax base remain a policy imperative.
Risks
Low oil prices and attacks on oil pipelines remain the major macro risks, negatively affecting the
growth trajectory, exacerbating FX scarcity, and intensifying pressures on the macro imbalances.
Without greater exchange rate flexibility, it is difficult to see a meaningful rebound in activity or
GDP growth. At some stage, the economy is likely to endure a painful adjustment process,
facilitated by a substantially weaker NGN. Predicting the timing of such an adjustment is difficult.
Given the inflation backdrop, the risks are tilted towards aggressive monetary policy tightening.
Key forecasts
% Year 2010 2011 2012 2013 2014 2015 2016 2017f 2018f
GDP 8.0 5.3 4.2 5.5 6.2 2.8 -1.6 1.5 2.9
Consumer spending -26.7 -3.1 0.0 21.1 2.0 -1.6 -1.9 1.7 3.0
Government consumption 17.8 4.6 -2.0 -10.3 5.6 -12.3 6.3 4.3 3.6
Investment -3.6 -8.2 2.6 7.9 13.4 0.6 -1.5 3.7 5.0
Stockbuilding (% GDP) - 0.7 0.7 0.8 0.8 0.8 0.8 0.8 0.8
Domestic demand -13.8 -3.2 0.4 15.5 4.2 -2.1 -1.2 2.3 3.4
Exports 6.7 25.8 -3.6 -21.7 15.6 7.5 -6.9 4.6 1.5
Imports 16.3 -7.8 -32.9 12.2 6.7 -26.8 -13.6 10.3 4.6
Industrial production 0.3 8.3 1.5 0.0 5.5 0.3 -2.5 2.3 2.0
Unemployment (%) 5.1 6.0 10.6 10.0 7.8 9.0 15.3 16.2 15.8
Consumer prices 13.8 10.9 12.1 8.0 8.1 9.0 15.6 15.3 10.5
Current account (USDbn) 14.5 12.7 19.1 19.9 6.2 -15.4 -2.0 -2.5 -5.6
Current account (% GDP) 4.0 3.1 4.2 3.9 1.2 -3.2 -0.5 -0.8 -1.7
Gross external debt (% GDP) 4.2 4.3 4.1 4.2 4.9 6.0 7.4 10.2 10.5
Gross government debt (% GDP) 9.7 10.3 10.6 10.6 10.9 13.4 16.2 19.0 22.8
NGN/USD* 152.0 162.3 156.2 160.0 183.5 199.3 315.0 350.0 350.0
3-month money (%)* 11.8 11.8 13.8 11.8 15.2 10.5 14.5 14.5 14.5
Note: *Period end
95
Q1 2017

CEEMEA
South Africa
David Faulkner Another tough year ahead

Economist
HSBC Securities (South Africa)
(Pty) Ltd The South Africa economy stalled in Q3 2016, expanding at an annualised pace of just 0.2% q-o-q.
david.faulkner@za.hsbc.com Production data showed broad-based weakness with the manufacturing, utilities, trade, and
+27 11 676 4569
agriculture sectors all contracting, while mining was the only sector to enjoy robust growth
during the quarter. Expenditure data meanwhile showed some resilience in consumer spending
and a boost from inventories, but this was offset by the ongoing contraction in fixed capital
formation and a negative contribution from net exports as export volumes dropped sharply.
The weak GDP print continues to highlight the country's challenging growth outlook. We remain
bearish on the prospects for household consumption within a context of rising joblessness,
elevated inflation, a weak consumer credit cycle, higher interest rates and taxes, and low
confidence levels. Meanwhile investment, particularly among private sector firms, remains a key
drag on growth, illustrating the damaging effect of ongoing political and policy uncertainty, and
very low levels of business confidence. We do not envisage a meaningful change in this
dynamic and therefore see little scope for a strong investment rebound next year. The prospect
of a weakening ZAR suggests net exports may be more supportive of GDP growth on the
margin, and we have nudged our forecasts 0.1pp higher to 0.7% in 2017 and 1.1% in 2018.
Stronger net exports should help contain the external imbalance, with weak demand and rising
import prices continuing to compress imports and rand depreciation supporting the ZAR prices
of South Africa's key commodity exports. The current account deficit widened from 2.9% of GDP
in Q2 2016 to 4.1% in Q3 as the trade balance swung from surplus to deficit and the services
shortfall jumped. We now forecast a more gradual weakening of the current account deficit from
3.9% of GDP in 2016 to 4.2% in 2018 (4.5% previously). Nevertheless, the reliance on short-
term capital flows to finance the deficit suggests this will remain a source of macro vulnerability,
particularly in the event of a decline in risk appetite.
A weaker rand exchange is likely to complicate the outlook for inflation with rising import prices
offsetting many of the benefits from the expected food price disinflation in 2017. We think
headline inflation will accelerate in the near term and peak at 6.8% in Q1 2017, only returning to
the SARB's 3-6% target range on a sustainable basis from the final quarter of the year.
The economy stalled in Q3 2016 The political climate is seen as the biggest
constraint for manufacturing firms (%)
% Qtr pp % %
6 6 100 100
4 4 80 80
2 2 60 60
0 0 40 40
-2 -2
20 20
-4 -4
2012 2013 2014 2015 2016 0 0
Other Private services 2000 2004 2008 2012 2016
Manufacturing Mining Skilled labour Interest rates
GDP growth (LHS) Political climate Raw materials
Source: Statistics South Africa, HSBC Source: Bureau for Economic Research
96
Q1 2017

Policy issues
The SARB left its headline inflation and growth forecasts unchanged at its final MPC meeting of
2016 but provided a more cautious assessment of the balance of risks to the inflation outlook.
This was in response to an increasingly uncertain global economic and political outlook
following the outcome of the US election, a more challenging and volatile environment for
emerging markets, and capital outflows that had put pressure on the exchange rate and bond
yields. We expect one 25bp hike, in Q1 2017, as inflation accelerates and the SARB remains
concerned over upside inflation risks, however, future disinflation could still see the debate shift
towards the scope for rate cuts later in the year.
Slumping tax collections prompted the government to announce further policy tightening in the
Medium Term Budget Policy Statement (MTBPS), but this was not enough to prevent the
government's deficit and debt projections from deteriorating. The deficit is expected to narrow at
a slower pace from 3.4% of GDP in FY17 (year ending March) to 3.1% in FY18, and to 2.5% in
FY20. Meanwhile, debt levels are set to stabilise higher and later than before, with gross
government debt reaching 53% of GDP. The government now expects to implement ZAR43bn
in additional tax measures over the next two years and lower its nominal non-interest spending
ceiling by ZAR26bn relative to its previous estimates. We are concerned that the government's
reliance on rising tax revenue to narrow the deficit makes better fiscal outcomes dependent on
a pick-up in GDP growth. Using our more downbeat assessment of growth prospects and tax
buoyancy, we see little fiscal consolidation over our forecast horizon.
Risks
Political uncertainty and ratings downgrades remain among the key risks to the macro outlook.
The ANC will hold its elective conference at the end of 2017, with signs that rifts within the party
are widening. This suggests South Africa's political backdrop could remain volatile and noisy,
and a key headwind for growth. Meanwhile, all three rating agencies now have South Africa on
negative outlook, with S&P and Fitch at the lowest investment grade rating. The challenging
economic outlook, fiscal risks and slow progress with policy initiatives to rebuild confidence and
reinvigorate growth are likely to be among the triggers for future negative ratings actions.
Key forecasts
GDP 0.4 0.7 1.1 0.7 0.7 1.2 0.5 0.8 0.7
GDP (% quarter) - - - 0.1 0.2 0.1 0.1 0.2 0.2
Investment -3.8 0.3 1.8 -6.1 -3.4 -1.9 0.4 0.9 1.6
Stockbuilding (% GDP) -0.4 0.0 0.1 1.6 -0.4 -0.9 0.6 1.0 -0.6
Domestic demand -0.2 0.5 1.0 1.3 0.3 0.6 0.4 0.1 0.8
Exports 0.6 1.8 2.4 -3.9 3.0 1.2 1.3 3.2 1.5
Imports -3.3 0.9 2.2 -3.8 -3.1 -0.7 1.1 0.9 2.2
Unemployment (%) 26.6 26.8 26.7 27.1 26.0 27.4 27.0 26.5 26.2
Wage growth 7.1 7.4 7.2 7.4 7.8 8.0 7.5 7.2 6.9
Consumer prices 6.3 6.2 5.6 6.0 6.5 6.8 6.3 6.0 5.6
ZAR/USD* 13.73 14.00 14.00 13.73 13.73 14.50 15.00 14.50 14.00
3-month money (%)* 7.3 7.6 7.6 7.3 7.3 7.6 7.6 7.6 7.6
10-year bond (%)* 8.9 8.5 8.5 8.7 8.9 9.2 9.2 9.2 8.5
Note: *Period end.
Source: Thomson Reuters Datastream, Bloomberg, HSBC estimates
97
Q1 2017

Latin America
Brazil
Ramiro Blazquez Weaker expectations

Senior Economist
HSBC Bank Argentina S.A.
ramiro.blazquez@hsbc.com.ar The latest activity data were disappointing. In Q3 2016, real GDP contracted 0.8% q-o-q
+54 11 4348 2616 seasonally adjusted, thus doubling the pace of contraction of Q2. High borrowing costs are
John Welch hindering the recovery of domestic demand while private consumption is being held back by
Chief Economist, Latin America unprecedented unemployment levels. In addition, consumer and business sentiment indicators
HSBC Securities (USA) Inc.
john.h.welch@us.hsbc.com deteriorated in November as a result of a downturn in expectations for the first time in several
+1 212 525 4109 months. On the other hand, the activity slump together with lower food prices is driving a sharp
slowdown in inflation. In November, IPCA inflation came in well below expectations at 0.18%
m-o-m – the lowest print for the month of November in 18 years – and we now believe that
inflation could end 2016 at the 6.5% top of the inflation band (4.5% +/- 2%). 2017 CPI expectations
as surveyed by the central bank have drifted closer to the mid-target and currently lie at 4.9%,
while for 2018 local analysts and market players forecast that the 4.5% target will be met. In the
last monetary policy meeting of 2016, the authorities cut rates by 25bps for the second time in a
row and argued that the cautious move had been mostly related to uncertainty on the pace of
monetary policy normalisation in the US. However, policymakers indicated that they would
consider stepping up the pace of monetary easing if warranted by the global backdrop.
Under a benign scenario such as the one embedded in our forecasts – featuring gradual
tightening in the US – we think that policymakers could cut rates by 50bps in either the January
of February COPOM, for a total 100bps cut to 12.75% by the end of Q1. This being said, we
think political uncertainty regarding the progress of the fiscal reforms – we expect H1 to be
dominated by the discussions relating to the Social Security reform, which could instil prudence
in the central bank’s decisions – means that we cannot rule out the possibility that cuts would
alternate between 50bp and 25bp until there is a material improvement in the fiscal outlook. We
now expect rates to be cut to 10.5% by end-2017 (in line with consensus) as we think activity
will take longer to bounce back, which would command lower rates. Thus, we cut our 2016
growth estimate to -3.5% from -3.2% and think that 2017 growth could be more sluggish, partly
as a result of a more negative carry-over effect: we cut our 2017 real GDP expectation to 0.7%
from 1.2%, and are slightly below consensus (0.8%).
Long-term unemployment Medium-term inflation expectations
% Long Term Unemployment % Medium Term inflation expectations

% Yr % Yr
14 14 8 8
12.3
12 11.8 12 7 7
10 10 6 6
8.3
8 8
5 5
6 6
4 4
4 4
2014 2015 2016
12-month ahead End-2016
2 2 End-2017 end-2019
1980 1985 1990 1995 2000 2005 2010 2015 End-2018
Source: IGBE Source: BCB
98
Q1 2017

Policy issues
The likely extension of the tax amnesty will have a small positive impact on fiscal revenues and
increase the possibility that fiscal targets are met next year. This being said, policy issues will be
dominated by the approval of the thorny Social Security reform and the very delicate fiscal
situation in the regions. In addition, the progress on the fiscal front will ultimately condition the
pace at which the BCB eases monetary policy, along with developments in the global backdrop.
For now, we think the central bank will remain cautious.
Risks
The risks of political turmoil unfolding have increased lately: with the resignation of a
congressional liaison and the struggle between the legislature and the judiciary to remove the
President of the Senate, Renan Calheiros, who has been indicted on embezzlement charges.
We believe that monetary policy easing will have to be stepped up soon so as to allow for some
economic recovery that can improve sentiment, so that reforms do not founder on the
deterioration of political conditions. To fight speculation that Finance Minister Meirelles could be
dismissed, the president publicly backed his minister but said that the government would be
working on microeconomic measures to jumpstart growth. In our view, these statements will
have no practical impact and are meant mostly for the headlines. However, we believe that with
inflation trending downwards, the need for monetary policy to create the proper conditions for
the continuity of reforms could now be larger.
Key forecasts
GDP -3.5 0.7 2.5 -2.9 -2.0 -1.4 0.5 1.9 2.2
GDP (% quarter) - - - -0.8 -0.3 0.1 1.5 0.5 0.0
Consumer spending -4.1 1.0 3.2 -3.4 -2.2 -1.1 0.5 1.5 2.0
Government consumption -0.7 0.3 0.4 -0.8 -0.5 0.0 0.3 0.5 0.5
Investment -10.7 0.7 4.0 -8.4 -7.6 -3.0 0.2 2.0 3.5
Domestic demand -5.7 0.6 2.7 -3.8 -3.5 -1.6 0.2 1.2 1.9
Exports -1.6 4.0 6.0 -1.9 4.0 4.0 4.0 4.0 4.0
Imports -18.4 4.3 7.1 -12.1 -4.0 0.4 3.0 5.2 6.2
Industrial production -7.0 1.6 3.6 -5.5 -4.5 -2.1 0.5 2.5 3.7
Unemployment (%) 11.5 11.5 10.2 11.7 12.0 11.8 11.8 11.5 10.9
Wage growth 4.5 4.0 5.0 4.5 4.5 4.0 4.0 4.0 4.0
Consumer prices (avg) 8.8 4.8 4.9 8.7 7.1 4.8 4.6 4.6 4.7
BRL/USD* 3.25 3.35 3.35 3.24 3.25 3.35 3.50 3.42 3.35
3-month money (%)* 13.8 11.0 11.0 14.3 13.8 13.3 12.3 11.5 11.0
10-year bond (%)* 11.5 10.0 10.8 11.6 11.5 11.5 11.0 10.5 10.0
Note: *Period end
99
Q1 2017

Latin America
Mexico
Alexis Milo, PhD New challenges await in 2017

Chief Economist
HSBC México, S.A.
alexis.milo@hsbc.com.mx Economic activity turned up during the third quarter of the year, somehow reversing the subdued
+52 55 5721 2172 performance seen in the previous quarter in seasonally adjusted terms. Nevertheless, the divergence
between the strong expansion of services and the poor evolution of industrial activity remains a
concern for the economy going forward, in our view. Even though the prospects for the last part of
2016 improved slightly on the back of positive Q3 figures, we do not anticipate a material recovery in
industrial production, while services growth may be seeing its last months of buoyancy before it starts
to moderate.
In addition, the potential implications of Donald Trump’s victory will have to be handled in the coming
years as they are likely to have an impact on economic activity in Mexico. Nonetheless, we see that
the negative change in the outlook for 2017 and 2018 should be limited, as structural conditions will
not change in a meaningful way any time soon. Thus, we recently lowered our 2017 and 2018 GDP
forecasts to 1.7% and 2.5% from 2.3% and 3.0%, respectively. Most of the effect on growth is likely
to come from reduced private investment and FDI, weaker growth of exports and a faster moderation
in private consumption. It is important to mention that although there is some concern on the
ramifications if Donald Trump’s proposals to renegotiate or even withdraw from NAFTA were to
become a reality, there is still not enough information to make any strong assumptions. In any case,
we believe that any meaningful renegotiation on trade agreements should take over two years.
Inflation dynamics may change slightly following the outcome of the US election due to the impact
from the weakening of the Mexican peso which may translate into a higher pass-through effect. From
our perspective, some companies have been reluctant to pass the higher FX onto final prices out of
concern for market share and decided to absorb the impact in their margins. However, that is likely to
change for three reasons. First, the pass-through is likely to continue to build up, while the one-off
price drops that helped the CPI will no longer be present, such as in telecom and electricity prices.
Second, the additional depreciation of the MXN is likely to exert more pressure on costs, which
companies may find difficult to absorb. Finally, FX levels around 20 or above can be perceived as
permanent, so companies are going to be less shy about passing the impact onto final prices. As a
result, we raise our inflation forecasts for both the end of 2017 and 2018 to 3.8% from 3.4%.
Economic activity growth Headline and core inflation trajectory
% Yr (3mma) % Yr (3mma) % y-o-y % y-o-y

6 6 4.5 4.5
4 4 4.0 4.0
3.5 3.5
2 2
3.0 3.0
0 0 2.5 2.5
-2 -2 2.0 2.0
2012 2013 2014 2015 2016 2017 2014 2015 2016 2017 2018 2019
Services Industrial production Core inflation Headline inflation
Source: INEGI Source: INEGI, HSBC
100
Q1 2017

Policy issues
The Mexican central bank’s hikes in the monetary policy rate in the last months were driven by two
main factors. First, the dynamics of the Mexican peso stemming from the US election prompted
Banxico to hike in order to contain inflation expectations. Second, the recent Fed decision to raise the
federal funds rate called for another hike by Banxico. We expect the Mexican central bank will
continue to hike rates in tandem with the Fed. Looking into 2017, we foresee two rate hikes of 50bp,
each in line with the Fed's expected timing according to our US economists. Nevertheless, this view
assumes that the exchange rate does not appreciate significantly from current levels because if that
scenario materialises then we would anticipate a slower pace from Banxico.
One of the main challenges for the government next year will be to comply with the consolidation of
public finances. In this regard, we perceive that the government contemplates a conservative macro-
economic outlook, which combined with increased revenues and additional budget cuts may result in
the fulfilment of the 2017 Economic Program. If this happens, and particularly, if the government is
able to deliver the planned primary surplus of 0.4%, then it would be taken as a strong signal for
markets in terms of regaining credibility on fiscal matters. Given the notable depreciation of the
Mexican peso during 2016, Banxico’s residual net operating revenues to be presented in H1 2017
should provide an additional source of revenues, as 70% will be destined for paying down public
sector debt according to law.
Risks
Upside risks for growth have diminished in the last months due to the continuing weakness of
industrial activity. However, if services sector activity continues to be encouraging then this may
continue to provide additional support to overall growth.
In contrast, downside risks for the economy have intensified given the increasing volatility seen in the
last few months. In our view, investment may be one of the most affected sources of growth, followed
by a faster-than-expected moderation of private consumption derived from rising inflation.
Additionally, industrial production weakness continues to represent a threat for growth in the coming
months as manufacturing activity is still soft and construction and mining are also struggling to grow.
Key forecasts
GDP 1.9 1.7 2.5 2.0 1.0 1.7 1.4 1.7 1.8
GDP (% quarter) - - - 1.0 -0.3 0.7 0.3 0.5 0.4
Government consumption 0.0 -0.4 1.5 0.0 -0.3 -0.5 -0.4 -0.3 -0.3
Investment 0.5 0.5 1.5 0.5 0.4 0.5 0.5 0.5 0.5
Stockbuilding (% GDP) -3.0 -3.3 -2.8 - - - - - -
Domestic demand 2.2 1.7 2.3 2.1 2.0 1.7 1.6 1.7 1.8
Exports -3.1 0.7 3.0 -2.3 0.2 2.9 1.5 -0.5 -0.9
Imports -3.1 0.4 2.5 -3.8 -1.9 1.6 1.4 -2.1 0.5
Unemployment (%) 3.9 4.0 4.1 4.0 3.9 4.0 4.0 4.0 3.9
Wage growth 3.9 4.3 4.2 3.9 3.8 4.3 4.3 4.2 4.3
Consumer prices 2.8 3.7 3.8 2.8 3.2 3.4 3.7 3.9 3.8
MXN/USD* 20.64 21.00 21.00 19.34 20.64 21.25 22.00 21.50 21.00
3-month money (%)* 5.8 6.8 6.8 4.8 5.8 5.8 6.3 6.3 6.8
10-year bond (%)* 7.6 8.1 7.8 6.0 7.6 8.0 8.2 8.1 8.1
Note: *Period end
101
Q1 2017

Latin America
Argentina
Javier Finkman Politics gets complicated due to delayed growth

Economist
javier.finkman@hsbc.com.ar Some signs of a turnaround in economic activity began to show up towards the end of 2016.
+54 11 4344 8144 Still, the recession has been longer and deeper than expected. We forecast GDP growth to turn
Jorge Morgenstern positive in 2017, but only amount to a recovery from the 2016 decline. We maintain our – still
Economist
HSBC Bank Argentina S.A. below consensus – forecast for a 2.5% expansion in GDP in 2017. We expect goods producing
javier.finkman@hsbc.com.ar sectors to expand in 2017. In agriculture, non-soybean crops would drive the improvement.
+54 11 4130 9229
Construction should be supported by public works that began ramping up in the 2H16. Both
sectors should also trickle down positively in manufacturing which will not suffer further drag
from Brazilian demand. We are less upbeat about services, where we still see a negative
contribution from the financial sector and only slight improvements in other sectors.
Downside risks are now more prominent, though. First, the recession that began in Q3 2015,
before the current administration took office, has extended beyond expectations. Second, the
external environment is becoming less supportive, with higher interest rates and reduced
appetite for EM coming at a time when external funding is vital for the economy. Moreover, non-
commodity exports remain weak due to the lack of economic recovery in Brazil.
The delayed return to growth is already complicating politics, as we expected. Our thesis has
been that as we approach the end of the administration’s “honeymoon” period, without resuming
growth, President Macri’s approval ratings could suffer and the Peronist opposition could enjoy
a resurgence. Recent discussions regarding changes to the income tax highlighted the
increasing difficulties that the administration may face to find support for its reform agenda with
no majorities in Congress and lack of economic growth reflecting negatively in public support.
Recent cabinet changes reinforce, in our view, the team management approach chosen by
President Macri, the so-called "Economy Cabinet", where several Ministers (of Energy,
Agriculture, Production and Finance) are coordinated by the Chief of Cabinet and his advisors.
In our view, splitting Finance and Treasury into two Ministries cements the idea that there is no
primus inter pares on the economy cabinet and leadership on economic issues falls on the
Chief of Cabinet structure.
Activity still in negative territory ARS strengthening

% Yr Monthly GDP (EMAE) SA 17 Dec Real Exchange Rate 17 Dec
2004=100 2015=100 2015=100
15 152 110 110
12 150
100 100
9 148
6 146 90 90
3 144
0 142 80 80
-3 140 70 70
-6 138 Dec-15 Apr-16 Aug-16 Dec-16
Sep-10 Mar-12 Sep-13 Mar-15 Sep-16 Multilateral USA China
% y-o-y Level (RHS) Brazil Eurozone
Source: INDEC Source: HSBC estimates based on BCRA
102
Q1 2017

Policy issues
The current policy stance, which is softer on the fiscal side and relative tight on the monetary
side, should remain in place throughout 2017, in our view. We believe that lowering inflation to
the 17% ceiling of the target set for end-2017 would require a tighter monetary policy, one that
the central bank is unlikely to deliver. Lately, the central bank eased 200 basis points without
clear news on the inflation front. While it can be argued that real interest rates were already too
high, policy statements were unclear on the rationale for the cut – BCRA appears to target real
rates around 5% measured as one-year inflation expectations net of LEBAC short-term rates.
Meanwhile, the consolidation of the fiscal deficit would be left until after the 2017 elections: we
see both infrastructure-driven capital spending and public sector transfers rising, while on the
revenues side the discussion is mostly about tax cuts.
Risks
The most immediate risk to our base scenario would be a lack of economic recovery in 2017.
We believe there is a strong link between GDP growth and popular support for the
administration, which in turn conditions the behaviour of both the government and the
opposition and voting intentions for the mid-term elections. Lack of GDP growth as elections
approach would prompt an even laxer policy stance, but also bring into question the
sustainability of the administration’s reform process if it turns out to lack political strength.
The external environment is another source of downside risks to economic activity: higher
interest rates and reduced appetite for Argentine debt could increase the cost of an already
challenging financing programme by the sovereign, and reduce the ability of companies and
provinces to use external funding.
External risks cannot be overstated, either. The recession in Brazil, Argentina’s main trade partner for industrial manufacturing,
Key forecasts
could hit exports harder than we estimate and financial contagion cannot be ruled out in a stress scenario. Beyond that, the outlook
% YearChinese economy and the evolution2016
of the of the US2017f
dollar are2018f
importantQ3 16 toQ4
factors 16f due
monitor Q1to17f Q2 17f onQ3agricultural
their influence 17f Q4 17f
GDP -2.2interest 2.5
commodity prices. Finally, the evolution of US 2.8
rates and investors’ -3.8
appetite for-1.5
EM risk is 3.7
relevant due1.6to Argentina’s
2.5 need2.1
GDP (% quarter)
for external funding. - - - -0.2 0.4 0.6 0.8 0.7 -0.1
Consumer spending -1.3 2.8 2.8 -3.1 -1.4 2.7 3.0 2.7 2.9
Investment -3.6 4.4 3.7 -8.3 0.0 3.5 3.0 5.0 6.0
Stockbuilding (% GDP) 0.3 -0.2 -0.5 0.6 0.3 0.6 0.3 0.2 -0.2
Domestic demand -1.3 2.9 2.5 -3.3 -1.8 4.4 2.1 2.8 2.3
Exports -0.6 6.7 3.6 -0.7 3.9 9.8 9.7 3.8 3.6
Imports -5.9 6.0 2.7 15.8 12.9 13.6 16.8 16.4 13.4
Industrial production* -4.6 2.4 2.8 -7.3 -2.3 3.9 1.4 2.5 1.9
Unemployment (%)* 8.9 8.6 8.8 8.5 8.8 8.6 8.6 8.6 8.5
Wage growth 30.2 29.4 23.0 32.0 30.4 31.2 32.6 31.2 29.5
Consumer prices** 41.0 27.2 18.4 44.5 41.8 36.3 27.4 23.8 23.2
ARS/USD*** 15.88 18.00 20.00 15.26 15.88 16.25 16.75 17.25 18.00
Central Bank reference rate (%)**** 24.8 17.8 13.0 26.7 24.8 23.0 21.0 19.3 17.8
Long rate (%, 10 year) 16.0 16.3 16.4 15.5 16.0 16.0 16.1 16.2 16.3
Note: * Official data missing for part of 2015 and 2016. ** Private estimates (released as “Congress CPI” by lawmakers) a new official index was launched in June 2016.
*** period-end. **** 1-month Central Bank paper until Q4 2016, mid-point of the 7-day repo rate corridor thereafter.
103
Q1 2017

Latin America
Colombia
Ramiro Blazquez Better prospects due to fiscal overhaul

Economist
ramiro.blazquez@hsbc.com On 6 December, the Congressional Economic Committees approved a new tax reform draft that
+54 11 4348 2616 had been subject to negotiations with the Finance Ministry following the submission of the
government-sponsored draft on 19 October. Importantly, the version produced by law-makers
remains, to a large extent, faithful to the Finance Ministry's original draft. The proposal will
include an increase of 3ppt to 19% in the general VAT rate, which could become a major
breakthrough in terms of Colombia's recent fiscal track record: the last time the VAT rate was
modified was 20 years ago despite the country's comparatively low level of tax collection.
The government's initiative defeated the alternative sponsored by Centro Democrático (former
President Uribe's party) law-makers to keep VAT unchanged in order to stimulate economic
activity. In addition, law-makers have earmarked 1ppt of the VAT rate (half) to fund health and
education expenses. The current tax reform draft would imply lower tax revenues compared to
the original project: in 2017, the shortfall would amount to COP1bn, COP2.4bn in 2018 and
COP3.4bn in 2019, equivalent to 0.8%, 1.0% and 1.9% of GDP respectively. With the current
version of the tax bill, incremental proceeds would amount to 0.7%, 0.8% and 1.5% of GDP.
Congress could still be modify the bill in the remaining debates but the likelihood of an outcome
that buttresses Colombia's fiscal outlook has risen significantly. We believe, in tandem with the
fiscal overhaul, the prospect of a debt ratings downgrade may have fallen (S&P and Fitch had
warned that a ratings cut could follow if Colombia fails to approve a meaningful tax reform by
end-2016). On the other hand, the additional revenues levied by the reform may not be enough
to completely override uncertainties about achieving the fiscal rule's deficit targets, particularly if
the peace agreement with the FARC guerrilla remains on track.
Congress has extended sessions in the remainder of December to expedite the approval of the tax
reform and also to discuss the amnesty law for ex-FARC guerrilla members. On 2 October,
Colombians rejected, by a narrow margin, the terms of the peace agreement signed with the FARC.
The government made some minor changes to the treaty and submitted it for approval in Congress.
Following the legislative endorsement, the FARC refused to demobilize until the Supreme Court
ratifies the deal, while also demanding an amnesty law so that they can avoid prosecution.
CPI expectations CPI breakdown
% Yr % Yr % Yr % Yr
7 7 10 10
6 6 8 8
6 6
5 5 4 4
4 4 2 2
3 3 0 0
-2 -2
2 2 Nov-10 May-12 Nov-13 May-15 Nov-16
Nov-14 May-15 Nov-15 May-16 Nov-16 Headline Tradables
12-m ahead CPI 24-m ahead CPI Regulated CPI ex Food
CPI-end 2017 CPI-end 2016 Non Tradables
Source: HSBC, BanRep Source: BanRep
104
Q1 2017

Policy issues
Inasmuch as the tax reform is approved with little or no changes compared to the latest draft,
we believe that Colombia could avert a downgrade next year. As a result, this could enable the
Central Bank to engage in monetary easing that could compensate, to some extent, for the
reduction of disposable income from the additional tax pressure. Also, the tax reform will allow
for a gradual decline in the tax pressure on corporates, which should help to improve
investment. We therefore see growth in 2017 at 2% but accelerating north of 3% in 2018 as
both private consumption and investment gain momentum.
The tax reform under the terms known at this point would reduce short-term fiscal uncertainty, in
our view. Nevertheless, if the authorities manage to keep the peace process on track, this could
eventually impact the public finances, as the payment of reparations and the rebuilding of
infrastructure in a post-war Colombia would put pressure on public outlays. Still, the government
would have gained enough time to engineer a solution that will not compromise fiscal
institutions, in our view.
Risks
The fiscal situation continues to be Colombia’s weak spot, even if in the short term the likelihood
of a downgrade is ostensibly lower on the back of the latest tax reform news. The peace will
demand higher expenses – this is at odds with Colombia’s fiscal targets and so more taxes will
have to be levied in the future and/or other expenses will have to be pruned in order to
accommodate outlays related to the post-war reparation.
Key forecasts
GDP 1.8 2.0 3.2 1.2 1.7 1.3 2.0 2.2 2.5
GDP (% quarter) - - - 0.3 1.1 -0.2 0.8 0.5 1.4
Investment -2.4 5.1 6.4 -3.4 -1.0 3.0 5.0 6.0 6.5
Stockbuilding (% GDP) 0.3 0.5 0.8 0.1 0.5 1.1 0.1 1.2 -0.4
Domestic demand 0.6 2.7 3.7 -1.1 1.2 2.2 2.3 4.1 2.5
Exports -10.0 13.8 7.9 0.0 11.9 24.8 11.5 12.1 9.2
Imports -12.7 4.2 7.0 -7.0 -2.6 3.0 3.7 4.8 5.1
Unemployment (%) 9.0 9.2 9.0 9.0 9.0 9.7 9.3 9.0 9.2
Wage growth 7.0 5.0 4.0 7.0 7.0 4.0 4.0 4.0 4.0
Consumer prices 7.5 4.4 3.7 8.1 6.1 4.6 4.3 4.4 4.4
COP/USD* 3001 3075 3075 2884 3001 3050 3100 3075 3075
3-month money (%)* 7.50 5.75 5.25 7.75 7.50 6.75 6.00 5.75 5.75
10-year bond (%)* 7.1 6.5 7.1 7.0 7.1 6.8 6.8 6.6 6.5
Note: *Period end
105
Q1 2017

Latin America
Chile
Jorge Morgenstern No game changer

Economist
HSBC Bank Argentina, S.A
jorge.morgenstern@hsbc.com.ar The 2017 presidential election is likely to be a driver for Chilean markets. A year before the
+54 11 4130 9229 election, polls signal the willingness of the population for another change in the political
alignment of the administration, this time towards the centre-right, under former President
Piñera. That said, the election is clearly open as polls (Cerc-Mori, published on 28 December)
suggest close second round scenarios in which he could be defeated by Alejandro Guiller,
Senator from the ruling Nueva Mayoria coalition.
The Bachelet administration has been defined by its discussion of several reforms (taxes,
education, labour) driven more by the aim of equality than productivity gains. In some cases
(the constitution and education), reforms would only be implemented under the next
administration. The discussion over the reforms during the current administration, along with the
downturn in commodity prices, has been a significant factor driving down sentiment, in our view,
and has had a negative impact on investment.
A promise of a break in the reform-frenzy of recent years is likely to be welcomed by

businesses. Yet, this would be short of a game changer. We forecast Chile to continue posting
a sub-3% GDP growth rate in 2018.
The recent increase in copper prices, if sustained, would be a positive development. However,
the recent downturn of the economy is explained to a significant extent by costs and productivity
issues in the mining sector limiting output and profitability, and this constraint on the sector’s
profits will persist.
FX now levelling after pushing Former President Piñera ahead in polls for
inflation down 2017 election
% Yr Inflation and exchange rate % Yr Voting intentions for 2017 presidential election (%)
8 20 0 10 20 30 40 50
6 15
N/A
4 10
Others
2 5
Ricardo Lagos
Center- Center-
left
0 0
Alejandro Guiller
-2 -5
MJ Ossandón
right
-4 -10
Sebastián Piñera
2012 2013 2014 2015 2016 2017
Goods ex F&E Services ex F&E 0 10 20 30 40 50
USD-CLP (RHS) MORI Plaza Cadem % Adimark
Source: INE, Central Bank of Chile Source: Mori (October 2016), Adimark (November 2016), Plaza Cadem (December 2016)
106
Q1 2017

Policy issues
Fiscal policy should remain contractionary, as the goal of reducing the structural deficit is still a
priority for authorities. Mining-related fiscal revenues have all but disappeared due to the lack of
profitability in the sector. Other revenues are on the rise due to tax hikes brought by the recent
reform. Still, cutting the fiscal deficit requires significant spending restraint and that carries
political costs. As an example, the government recently faced a strike by public servants as it
defended the need to keep the increase in public sector wages at a moderate level.
Policy support should come instead from the monetary side. We expect the central bank to set
an easing bias and cut its monetary policy rate by 50bp in the Q1 2017. Some board members
have been supporting the addition of stimulus for some time. The decline in inflation was mainly
driven by the strengthening of the exchange rate. This has levelled on a y-o-y basis implying a
smaller downward push on inflation. Yet, the slowdown of economic activity is exerting
downward pressure on inflation, as suggested by services core measures.
Risks
Political noise is likely to be high in 2017 and could raise uncertainty. We would expect campaign
promises to include issues that could be read negatively by the market. Proposals to dissolve the
private pension fund system in favour of a pay-as-you-go approach are one example.
On the external front, while recent news regarding copper prices has been positive, there are
doubts about whether these prices are sustainable. Higher interest rates would also be a
headwind if sustained.
Key forecasts
GDP 1.5 2.0 2.5 1.6 0.7 1.6 2.5 1.3 2.5
GDP (% quarter) - - - 0.0 -0.1 2.0 0.6 -1.2 1.1
Investment -0.1 -0.9 0.8 -1.2 -3.0 -2.0 -1.0 -0.6 -0.2
Domestic demand 1.8 1.8 1.3 0.8 3.7 1.0 2.6 2.6 1.1
Exports -5.4 9.6 2.6 0.5 -1.4 -0.3 2.2 2.6 3.2
Imports -1.5 4.6 3.2 -1.4 0.3 -1.9 1.6 1.6 -0.8
Industrial production* -0.4 2.4 3.2 -0.3 -0.7 1.1 2.6 2.9 3.1
Unemployment (%) 6.5 6.8 6.9 6.8 6.3 6.7 7.2 7.1 6.5
Wage growth 5.0 4.0 4.0 5.0 5.0 4.8 4.5 4.3 4.0
Consumer prices 3.8 2.7 2.9 3.5 2.9 2.7 2.7 2.7 2.8
Current account (USDbn) -4.2 -1.1 -1.3 -2.8 -1.4 1.2 0.3 -1.7 -1.0
Current account (% GDP) -1.7 -0.4 -0.5 -1.1 -0.6 0.5 0.1 -0.7 -0.4
CLP/USD* 670 680 680 657 670 680 690 685 680
3-month money (%)** 3.5 3.0 3.0 3.5 3.5 3.0 3.0 3.0 3.0
10-year bond (%)**** 4.4 4.0 4.4 4.2 4.4 4.5 4.3 4.1 4.0
Note: *Manufacturing production, **Period end, ***3-month swap, period end, ****10-year, period-end
107
Q1 2017

Notes
108
Q1 2017

Notes
109
Q1 2017

Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Janet Henry, James Pomeroy, Kevin Logan, Ryan Wang, David
Watt, Qu Hongbin, Julia Wang, Frederic Neumann, Pranjul Bhandari, Paul Bloxham, Daniel Smith, James Lee, Su Sian Lim,
Nalin Chutchotitham, Joseph Incalcaterra, Simon Wells, Stefan Schilbe, Rainer Sartoris, CFA, Olivier Vigna, Chantana Sam,
Fabio Balboni, Elizabeth Martins, Agata Urbanska-Giner, Artem Biryukov, Melis Metiner, Simon Williams, David Faulkner, John
Welch, Ramiro Blazquez, Alexis Milo, Javier Finkman, Jorge Morgenstern and David Bloom
Important disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to
buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
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Additional disclosures
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[539725]
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Global Economics Research Team

Global North America CEEMEA
Global Chief Economist US Chief Economist, CEEMEA
Janet Henry +44 20 7991 6711 Simon Williams +44 20 7718 9563
janet.henry@hsbcib.com Chief US Economist simon.williams@hsbc.com
Kevin Logan +1 212 525 3195
James Pomeroy +44 20 7991 6714 kevin.r.logan@us.hsbc.com Economist, Russia and CIS
james.pomeroy@hsbc.com Artem Biryukov +7 495 721 1515
Ryan Wang +1 212 525 3181 artem.biryukov@hsbc.com
Senior Trade Economist ryan.wang@us.hsbc.com
Douglas Lippoldt +44 20 7992 0375 Economist, CEE
douglas.lippoldt@hsbcib.com Canada Agata Urbanska-Giner +44 20 7992 2774
agata.urbanska@hsbcib.com
David G Watt +1 416 868 8130
Europe david.g.watt@hsbc.ca Chief Economist, Turkey
Chief European Economist Melis Metiner +44 20 3359 2636
Simon Wells +44 20 7991 6718 Asia Pacific melismetiner@hsbcib.com
simon.wells@hsbcib.com
Managing Director, Co-head Asian Economics Economist, South Africa
European Economist Research and Chief Economist Greater China David Faulkner +27 11 676 4569
Fabio Balboni +44 20 7992 0374 Qu Hongbin +852 2822 2025 david.faulkner@za.hsbc.com
fabio.balboni@hsbc.com hongbinqu@hsbc.com.hk
Economist, Middle East and North Africa
Managing Director, Co-head Asian Economics Razan Nasser +971 4 423 6925
United Kingdom Research razan.nasser@hsbc.com
Economist Frederic Neumann +852 2822 4556
Elizabeth Martins +44 20 7991 2170 fredericneumann@hsbc.com.hk
Latin America
liz.martins@hsbc.com
Chief Economist, Australia and New Zealand Chief Economist, Latin America
Paul Bloxham +612 9255 2635 John Welch +1 212 525 4109
Germany paulbloxham@hsbc.com.au john.h.welch@us.hsbc.com
Stefan Schilbe +49 211910 3137
stefan.schilbe@hsbc.de Chief Economist, India Argentina
Pranjul Bhandari +91 22 2268 1841 Chief Economist, Argentina
Rainer Sartoris +49 211910 2470 pranjul.bhandari@hsbc.co.in Javier Finkman +54 11 4344 8144
rainer.sartoris@hsbc.de javier.finkman@hsbc.com.ar
Su Sian Lim +65 6658 8783
Lothar Hessler +49 211 9102906 susianlim@hsbc.com.sg Senior Economist
lothar.hessler@hsbc.de Ramiro D Blazquez +54 11 4348 2616
Sophia Ma +86 10 5999 8232 ramiro.blazquez@hsbc.com.ar
xiaopingma@hsbc.com.cn
France
Senior Economist
Olivier Vigna +33 1 4070 3266 Joseph Incalcaterra +852 2822 4687 Jorge Morgenstern +54 11 4130 9229
olivier.vigna@hsbc.fr joseph.f.incalcaterra@hsbc.com.hk jorge.morgenstern@hsbc.com.ar
Chantana Sam +33 1 4070 7795 Julia Wang +852 3604 3663
chantana.sam@hsbc.fr juliarwang@hsbc.com.hk Mexico
Chief Economist, Mexico
Nalin Chutchotitham +662 614 4887 Alexis Milo +52 55 5721 2172
nalin.chutchotitham@hsbc.co.th alexis.milo@hsbc.com.mx
Daniel John Smith +612 9006 5729

daniel.john.smith@hsbc.com.au
Li Jing +86 10 5999 8240

jing.econ.li@hsbc.com.cn
Prithviraj Srinivas +91 22 2268 1076

prithvirajsrinivas@hsbc.co.in
Issuer of report:
HSBC Bank plc
8 Canada Square
London, E14 5HQ, United Kingdom
Telephone: +44 20 7991 8888
Fax: +44 20 7992 4880
Website: www.research.hsbc.com
Main contributors
Janet Henry
Global Chief Economist
HSBC Bank plc
+44 20 7991 6711 | janet.henry@hsbcib.com
Janet Henry was appointed as HSBC’s Global Chief Economist in August 2015. She was previously HSBC’s Chief European Economist and
is a member of Handelsblatt’s Shadow ECB Council. Janet joined HSBC in 1996 in Hong Kong where she worked as an Asian economist
in the run-up to, and aftermath of, the Asian crisis. From 1999 to 2007 she was a Global Economist during which time her original work
on globalisation – including the global determinants of local inflation – was widely recognised. Janet’s career began at the Economist
Intelligence Unit where she worked as an Asian economist in London and Hong Kong.
James Pomeroy
Economist
HSBC Bank plc
+44 20 7991 6714 | james.pomeroy@hsbc.com
James is a global economist at HSBC. He joined the Economics team in 2013 having previously worked within the Asset Allocation
research team. His global work focuses on longer-term trends and themes, with a particular interest in demographics data. Alongside this,
he provides economics coverage of Scandinavia. James holds a BSc in Economics from the University of Bath.

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ECONOMICS

By: Janet Henry and James Pomeroy https://www.research.hsbc.com

A cyclical recovery and faith in a

…but political and policy risks are

Emerging economies face new

Play video with

The Trump factor

Near-term risks for EM….

…but they still offer the best long-term growth prospects

A changing mix for global growth

Great expectations 6 Eurozone 68

 Signs of a cyclical recovery are building and may soon be supported

Hoping for the best

5. Demographics are still deteriorating… 6. …and productivity growth remains

7. Excessive surpluses in DM remain a 8. Cyclically, eurozone activity seems to

Unemployment rate (RHS) Dec-14 Dec-15

The dangers of anticipation

11. Abenomics did not deliver a sustained turnaround in Japan’s growth

Financial conditions starting to tighten

Debt service costs will rise only slowly in the US

12. US financial conditions are not yet tightening in y-o-y terms

13. Estimates of the impact of USD strength on the US economy

EM monetary conditions have tightened

18. EM currencies have already fallen sharply since the US election

Since 08 November 2016

Predictably, the currencies of the countries mentioned frequently in Mr Trump’s protectionist

Household Non-financial corporate 5 years ago (total)

Any global lift from US growth?

In the absence of a stronger acceleration in Chinese demand, commodity-producing emerging

EM still offer the best long-term prospects

100 100 100 100

Faster working age Saudi Arabia

Global economic forecasts

10 year bond yields

Exchange rates vs USD

Exchange rate vs EUR & GBP

Export volume growth (GDP basis)

Kevin Logan Fiscal activism likely to boost GDP growth

% GDP Federal deficit % GDP % GDP Defence Spending % GDP

Source: BEA, US Treasury Source: BEA, US Treasury

Source: HSBC with data from INEGI

David Watt Export uncertainty amid US trade policy shake-up

200 200 100 100

Source: Statistics Canada, HSBC Source: Statistics Canada, HSBC

Qu Hongbin Nominal growth recovery to continue

Nominal growth is picking up Infrastructure investment still a key growth

% % YoY%, 3mma YoY %, 3mma

Source: CEIC, HSBC Source: CEIC, HSBC

Source: CEIC, HSBC Source: CEIC, HSBC

Pranjul Bhandari An India-style reform playbook

% Yr Public versus private investment % Yr % Yr Trends in CPI inflation % Yr

Source: CEIC, HSBC Source: CEIC, HSBC

Paul Bloxham Commodity price rise to boost incomes

Real GDP fell in Q3 2016 Commodity prices to drive nominal GDP

Source: ABS Source: ABS; RBA

Construction and government spending Improvement in exports mostly price,

Source: CEIC, HSBC Source: CEIC, HSBC

Su Sian Lim Cruising at low altitude

PMIs suggest mild domestic recovery But government infrastructure

Source: Markit, HSBC Source: MOF, HSBC

Julia Wang Rebound delays policy easing

Growth momentum has improved External demand remains a key risk

Moderate growth and inflation to continue Tourism to recover from setback in Q4 16

% 3mma/3mma % Yr % Yr Malaysia CPI inflation % Yr