Our view in a nutshell

Japan

• Despite relatively stable domestic demand, a downside risk to growth is increasing as drags from real exports continue.
• We expect core CPI inflation to remain around 0.5% y-o-y for a while as it turns into deceleration in 2019.
• We expect the current YCC policy to remain untouched in the longer run, despite elevated market expectations for a rate cut.
• 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.
• India and parts of Southeast Asia are the region’s new stars in terms of rising long-run potential growth.
• China: We expect policy easing to sustain given strong growth headwinds and re-escalating US/China trade tensions.
• 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

• Elevated trade tensions and other factors will likely slow growth over 2019-20 before a modest recovery in 2021.
• Recession risk is elevated, but strong consumer fundamentals will help to sustain the expansion.
• Core inflation should pick up as higher tariffs pass-through to consumer prices and labour markets remain tight.
• After cutting rates in July, and September, we expect another 25bp rate cut from the Fed in October.
  
• Fed balance sheet runoff ended in August and we expect expansion starting in Q4 2019.
• Notable risks include aggressive trade policy, unresolved fiscal issues and further deterioration in financial conditions.

Europe

• We have revised down our GDP growth forecast. The recession in euro area manufacturing risks spilling over into services.
• We see euro area core inflation rising gradually over time, but remaining well below the ECB’s inflation aim.
• Following the ECB’s easing we expect a further 10bp rate cut in December 2019 under the presidency of Ms. Lagarde.
• The tail risks of a no Brexit and no deal are substantial, but we continue to base our forecasts on deal and transition period.
• UK growth has been volatile thanks to Brexit uncertainty but we see a recovery in the run-rate of growth in 2020.
• The BoE forecasts overshooting inflation but only because of its market conditioning assumptions (low FX and rates).
• We see the BoE raising rates annually from May 2020. The risks are skewed towards a more dovish outcome.

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