Our view in a nutshell

Japan

• The recovery of real economy will be gradual, although pent-up demand could push up apparent real growth rates above potential.
• We expect core CPI inflation to continue to decelerate and to plunge below -1.0% y-o-y through Q1 2021 led by lower oil prices.
• We do not expect the Suga cabinet to make any significant change in economic policy and in BOJ’s monetary policy.
• The risk is renewed yen appreciation, caused by deepening US-China tensions and further risk averse moves in markets.

Asia

• After a Q3 rebound, GDP growth should improve further in Q4 and Q1 2021, but rising infections imply slower sequential momentum.
• We expect Northeast Asia to outperform Southeast Asia and India, due to COVID-19 containment and a resilient tech cycle.
• Emerging Asia (India, Indonesia, the Philippines) remains vulnerable amid rising cases and due to limited policy support.
• Beyond pent-up demand, fragilities remain due to the knock-on effects on the labor market, SMEs and on bank asset quality.
• We expect further rate cuts in Thailand, Malaysia, the Philippines and India, while rates are likely to remain on hold elsewhere.
• China: We maintain our real GDP growth forecast of 5.7% y-o-y in Q4 and expect Beijing to maintain a wait-and-see policy mode.
• Korea: We expect Korea’s growth momentum to improve in Q4 on exports and investment despite sluggish domestic consumption.
• India: Economic normalization amid above-target inflation suggests rates on hold and a gradual withdrawal of excess liquidity.
• Indonesia: With rising fiscal deficits and concerns on central bank independence, more debt monetization is a risk.
• Australia: We see a somewhat bumpy road to recovery, amid conflicting forces, with continuing subdued inflation.

United States

• After the US elections, we expect some additional fiscal support, but not enough to fully offset the drag from expiring measures.
• The worsening COVID-19 pandemic will weigh on short-term activity, but a better vaccine outlook is positive for the medium term.
• We expect the Fed to maintain a flexible stance on asset purchases to ensure long-term rates do not constrain the recovery.
• The Fed will likely stay at the ELB at least through 2023 with inflation remaining the key determinant to liftoff.
• The unemployment rate will decline more gradually from here as the pace of recovery slows.
• COVID-19’s impact on service prices and the impact of labor market slack, particularly on rent, will weigh on core inflation.
• Notable risks include the ongoing surge in new COVID-19 cases along with both upside and downside risk around fiscal policy.

Europe

• With new lockdowns across Europe we now see euro area GDP stagnating in Q4 and falling by 0.5% q-o-q in Q1 2021.
• The combination of a protracted demand shock and energy prices below pre-pandemic levels suggest a disinflationary effect.
• We expect €400bn more PEPP, looser TLTRO terms and – more contentiously – a 10bp rate cut from the ECB in December.
• In April UK GDP had fallen 25%. September was still 8.5% below peak , and a full recovery takes until beyond 2022.
• While pent-up demand and policy stimulus should be supportive, we expect a renewed fall in GDP in the UK over the winter.
• Following the BoE’s decision in November to expand QE by £150bn, we do not expect negative rates – but risks have risen.
• The risk of a Brexit cliff edge at the end of 2020 remains, which could mean lower growth, higher inflation and looser policy

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