Our view in a nutshell

Japan

• Despite relatively stable domestic demand, a downside risk to growth remains as drags from real exports could re-emerge.
• We expect core CPI inflation to remain around 0.5% y-o-y for a while as it continues to decelerate for a while
  
• We expect the current YCC policy to remain untouched in the longer run, despite continuing hints from the BOJ for further rate cuts
  
• The risk is renewed yen appreciation caused by our concerns over a global recession and US protectionism.

Asia

• The export-led downturn has spilt into capex, and consumption is now at risk. We don’t expect a recovery until Q1 at the earliest
• We expect more central bank rate cuts: China, Korea, India, Indonesia, Malaysia, Thailand, the Philippines and Australia.
• The region’s new stars in terms of rising long-run potential growth are mainly in parts of Southeast Asia.
• China: We expect the slowdown to worsen and policy easing to continue; the outbreak of Wuhan coronavirus is a new risk
  
• Korea: We expect the BOK to deliver a 25bp rate cut in Q3 2019 (most likely July) and another in Q4 (most likely November).
• India: We expect the cumulative effects of monetary policy easing to support a cyclical recovery starting Q3 2019.
• Indonesia: President Jokowi’s re-election bodes well for further reforms, investment spending and potential growth.
• Australia: We see better, but still-sub trend growth, continuing low inflation and two more 25bp rate cuts (Q4, Q1).
  
  

United States

• Coronavirus risks slowing GDP growth sharply in Q1 2020, but this should be followed by a V-shaped pickup in Q2.
• Growth has slowed to potential but we expect a modest acceleration starting in H2 2020 as uncertainty wanes.
• Recession risk has dissipated as consumer fundamentals help sustain the expansion.
• Core inflation should pick up as the impact from transitory factors continues to wane and labor markets remain tight.
  
• After cutting rates three times in 2019, we expect the Fed to remain on hold over the forecast horizon.
• Balance sheet expansion has started but the FOMC will need to make adjustments in coming quarters.
• Risks include aggressive trade policy, elevated levels of corporate debt and a sudden tightening of financial conditions.

Europe

• We expect growth to stay weak but to slowly recover in 2020; however, we have revised our outlook down due to COVID-19.
• We see euro area core inflation rising gradually over time, but remaining well below the ECB’s inflation aim.
• We expect the ECB to remain on hold and should growth surprise to the downside fiscal support may be needed.
• The tail risks of a Brexit cliff edge at the end of 2020 remain, but we expect a free trade deal to be agreed which avoids that.
• UK growth has been volatile thanks to Brexit uncertainty but we see a recovery in the run-rate of growth in 2020.
• The BoE has revised down its growth and inflation views, and now sees inflation rising to around target in three years.
• We think the window for rate cuts has now closed and see very gradual normalisation back on the table from mid-2021.

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