Global Forecast For Machine Tools - OXFORD ECONOMICS (November 2018)

Autumn
2018
Global Machine
Tool Outlook
Autumn 2018
Copyright © 2018 Oxford Economics

Autumn
2018
Contents
b
Machine Tool Outlook
Overview 1
Risks 7
Brazil 8
China 10
France 12
Germany 14
India 16
Italy 18
Japan 20
S. Korea 22
Mexico 24
Spain 26
Switzerland 28
Taiwan 30
Thailand 32
Turkey 34
UK 36
US 38
Smaller Markets 40
Industrial Background
Aerospace 44
Basic Metals 46
Electrical Engineering 48
General Purpose Machinery 50
Metal Products 52
Motor Vehicles 54
Other means of transport 56
Precision and Optical Instruments 58
Special Purpose Machinery 60
Economic Background
Overview 62
Brazil 65
China 68
Eurozone 71
France 74
Germany 77
India 80
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Contents
Economic Background (continued)

Italy 83
Japan 86
Mexico 89
S. Korea 92
Spain 95
Switzerland 98
Taiwan 101
Thailand 104
Turkey 107
UK 110
US 113
Austria 116
Canada 117
Czech Republic 118
Hungary 119
Indonesia 120
Malaysia 121
Poland 122
Russia 123
Slovakia 124
Vietnam 125
Appendix Tables
The Global Machine Tool Outlook is a project exclusively for machine tool builders
associations.
Current partners in the project are the AMT, CECIMO (on behalf of its member
associations), AMTIL, IMTMA, TMBA and CMTBA.
Oxford Economic Forecasting

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Autumn
2018

Autumn
2018
Overview
Industrial growth to cool amid trade tensions
In 2017, the global industrial economy was in its strongest
position for at least three years, supported by buoyant
global trade. But growth has now peaked, and rising trade
tensions come at a time when global industrial activity is
already slowing.
Despite the global industry slowdown, economic

fundamentals remain solid, and will support some growth
even amid the intensifying trade frictions. Manufacturing
capacity constraints are providing strong support to
business investment, boosting production of capital goods.
Whilst global trade growth is cooling, it remains well above
the lacklustre rates of 2014-16.
However, trade protectionism, both actual and feared, is a

major downside risk. Indeed, there is potential for a much
more serious trade conflict. This would have profound
implications for global industry. For instance, a loss of
confidence undermines investment, higher prices affect
purchasing power, and exports fall below baseline
projections on the back of higher tariffs and slowing global
demand.
On balance, we expect a modest deceleration in industrial

growth over the second half of 2018, for an overall growth
rate of 3.6% this year but, in 2019, we forecast 3.2%
growth, as global trade slows, and persistent trade policy
headwinds weigh on industrial activity.
China rebalances as trade conflict escalates

Chinese industrial production increased by 6.6% year-on-
year in Q2 2018, following Q1’s 6.8% rise. While Chinese
industry will be challenged by the US trade conflict, only a
modest slowdown is anticipated in the second half of 2018,
with consumer-facing sectors and real estate activity
remaining strong. China’s investment momentum is
expected to remain subdued over the next few years,
however, as the government cuts overcapacity in sectors
such as coal mining and steel.
Elsewhere, Japanese industrial production will be

supported by a combination of high utilisation rates
creating the need for new investment, industrial upgrading,
and construction for the 2020 Tokyo Olympics. However,
this will be offset by a moderation in external demand from
key trading partners such as China, with the ongoing
threat of protectionism weighing on Japanese activity.
Apparent consumption = total consumption of machine tools in the named market. For consumption levels in $, please see appendix
Total investment = spending on all assets by the nine primary machine tool purchasing industries
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Eurozone industry has shifted down a gear

Industrial activity has stalled as growth in eurozone factory
orders has weakened. Demand for exports has been
dampened by slowing global activity, ongoing trade
tensions, and the lagged impact of a stronger euro.
Elevated order backlogs, amid production bottlenecks and

already-high levels of capacity utilisation, should support
industrial activity over the next couple of years. However,
the eurozone remains vulnerable to external headwinds.
Leading indicators suggest global trade growth may
moderate further, meaning eurozone factory orders may
continue to struggle. Uncertainty could also weigh on
equipment investment given that EU-US trade tensions
have already begun to resurface after a temporary truce,
following President Trump’s rejection of the EU’s proposal
to scrap tariffs on automotive imports.
US industrial activity is healthy, but peaking

In the US, underlying industrial momentum looks healthy
while business investment is also strong, supported by the
US administration’s fiscal stimulus as well as activity in the
energy sector. However, we believe Q2 2018 will represent
a peak for industrial growth, as the boost to investment from
the US’s loose fiscal policy fades, global industrial demand
moderates, and ongoing trade protectionism looms over
industrial activity.
On the trade front, despite the breakthrough in US-Mexico

trade talks, negotiations have stalled with Canada, and
trade relations with the EU and China look fragile, especially
since the US recently stated that they will impose further
tariffs on Chinese imports. This is a sober reminder that the
US administration is not backing down from its protectionist
stance.
Machine tool market growth to halve in 2019

Stronger than expected data during the first half of 2018
have led us to revise our global MT-weighted output
projections slightly up to 5% this year but the impact of
slowing global trade and rising protection means that we
forecast growth of 3.1% in 2019. A similar profile is
predicted for MT-weighted investment. Consequently, we
have raised our outlook for MT consumption in 2018 to
8.5% in 2018 but lowered our forecast in 2019 to 3.6%
growth. A closer look at the regional breakdown shows that
the European market is forecast to expand at the fastest
pace in 2018 and 2019, with growth of 15.6% and 4.7%,
respectively, followed by the Americas and then Asia.
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Overview of medium-term trends

The main driver for world growth since the early 2000s was
the emergence of China – both as a producing and
consuming nation – and its increasing integration into world
trade. Chinese real GDP growth in the ten years to 2012
averaged 10.5%pa with real fixed investment spending
across all sectors of the economy increasing by just under
14%pa over the same period, accounting for a much larger
share of world investment than its GDP share. Since then,
Chinese GDP has decelerated considerably, with growth
averaging 6.8% in 2016-2017.
Looking ahead, both Chinese GDP and fixed investment are

set to grow more slowly as the Chinese economy
rebalances away from excessive investment as the main
engine for growth. As a result, GDP is expected to grow at
an average annual rate of 5.8% in the 2018-2022 period and
fixed investment at a rate of 4.1%pa. Weaker investment
trends suggest more moderate Chinese MT consumption
growth rates for the medium term compared to those
typically seen prior to 2011. At the same time, such
rebalancing favours comparatively rapid consumer
spending—6.5%pa over the 2018-2022 period—and a
switch in consumer demand towards more discretionary
spending on manufactured goods and services as per capita
incomes rise. Moreover, despite weaker GDP and
investment growth, the process of catch-up is far from
complete and will ensure China remains an important
engine for the world MT market for some years yet.
This process of catch-up is evident in many emerging

countries and is a key driver of world growth in the medium
term. The nine key machine tool buying sectors will benefit
from this process. For example, both motor vehicles and
high-tech consumer products are expected to be
increasingly in demand in emerging countries as per capita
incomes rise in the coming five years. Although penetration
of these discretionary products into households has
increased over the past decade, there is clearly scope for
further gains as the middle classes in these countries
expand.
This in turn is expected to drive growth in machine tool

purchases in the medium term. The machine tool sector
tends to be more cyclical even than overall fixed investment
spending, itself one of the most cyclical parts of GDP, but
these medium-term trends are expected to underpin robust
growth in apparent machine tool consumption. China,
already the largest consumer and producer of machine
tools, is expected to maintain its lead as its domestic
demand expands and its attraction as a production base for
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export to the rest of the world continues. This comes despite

the ongoing erosion of China’s competitiveness on the back
of rising wages.
In contrast, for Europe, GDP growth over the 2018-2022

period is expected to be a far more modest 1.8%pa, with
fixed investment growth averaging 2.6% over the same
period. Over this time, governments are expected to
continue addressing deficits and public sector debts
accumulated during the recession.
More fundamentally, populations are generally ageing and

this trend is resulting in – at best – very slow growth in
labour supply at a time when immigration has become a
political issue. Indeed, in some countries, labour forces are
set to contract markedly in the coming years. Although
unemployed workers can be re-employed in order to ease
the restriction on growth from limited labour supply growth,
such limits constrain potential output growth across the
region. Greater capital intensity in production can sidestep
the labour force constraints and favours increased
purchases of machine tools, but another often more
attractive solution is to shift further production into emerging
countries where labour shortages are not prevalent and
costs are lower.
For the key machine tool buying sectors, fresh demand for
their products (e.g. motor vehicles) is less dynamic in
Europe as penetration levels are already very high. Markets
here are large, so replacement demand does provide a
continual stimulus to production and hence investment
spending. Greater dynamism is expected to come from
emerging countries. However, E-mobility will gradually alter
traditional automotive supply chains over the longer term
and this could have a considerably adverse impact upon
demand for machine tools, given that pure electric vehicles
require fewer machined parts than conventional motor
vehicles and hybrids. In the near term, however, the EV
market faces a number of constraints, including the cost of
battery technology and limitations in the charging
infrastructure, which should soften the near-term disruptive
impact.
The Americas region lies between these two extremes. The

region as a whole has more favourable demographic trends
than Europe but revisions to long term growth projections
mean that we now expect average GDP growth of around
2% over the forecast period while structural impediments in
Brazil cap long term growth there. Overall, in the longer
term, we expect MT demand in the Americas to grow at a
pace more similar to Europe than Asia, due to trends in
investment.
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Overview table
% change
2017 2018 2019 2020 2021 2022
GDP
World 3.0 3.1 2.8 2.7 2.8 2.8
Americas 2.2 2.6 2.2 1.8 1.9 1.9
Asia 4.9 4.7 4.5 4.1 4.2 4.1
Europe 2.2 1.9 1.7 1.7 1.6 1.5
IP
World 3.7 3.6 3.2 2.7 2.8 2.7
Americas 1.8 3.3 2.7 2.1 1.9 1.9
Asia 5.2 4.4 4.0 3.5 3.8 3.5
Europe 3.1 2.1 1.6 1.7 1.5 1.4
Investment
World 5.4 3.9 2.8 2.8 2.5 2.3
Americas 2.4 2.8 2.1 1.7 1.9 2.2
Asia 6.1 3.9 2.8 3.0 2.7 2.5
Europe 5.7 5.2 3.8 2.9 2.1 1.8
Apparent consumption
World 7.2 8.5 3.6 3.3 3.0 2.7
Americas 4.8 10.7 3.0 2.1 1.8 2.3
Asia 7.7 5.8 3.3 3.4 3.3 2.7
Europe 7.1 15.6 4.7 3.6 2.9 2.7
Exchange rates
$/€ 1.13 1.19 1.22 1.25 1.25 1.25
$/Yen 112.14 109.48 108.41 108.53 108.72 108.90
GDP growth rates are calculated by summing the relevant countries, which are in constant price and dollar
exchange rate terms with 2010 as the base year
Regions for industrial production weight relevant countries together using 2010 weights.
Investment and apparent consumption growth rates are weighted averages of national growth in local
currency terms.
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Machine tool consumption

Local currency unit unless otherwise specificied - % change
Level in
2017,
2017 2018 2019 2020 2021 2022 US$bn
China 9.4 7.0 3.3 3.3 2.9 2.4 30.0
India 19.4 9.6 5.4 7.8 8.3 8.5 2.0
Indonesia -21.5 7.8 6.8 5.7 4.9 4.8 0.4
Japan 1.3 5.4 3.3 0.7 1.6 1.6 6.0
S. Korea 3.0 -3.4 1.5 4.9 4.1 2.4 3.8
Malaysia 19.3 2.7 2.5 4.3 4.1 4.0 0.5
Taiwan 8.7 7.5 3.6 4.0 4.8 5.0 1.8
Thailand -5.5 2.4 4.7 6.1 5.3 3.4 0.9
Vietnam 21.5 3.1 8.2 7.6 6.2 6.0 1.1
Asia 7.7 5.8 3.3 3.4 3.3 2.7 45.5
Brazil -2.6 12.2 0.6 4.8 4.7 4.6 0.6

Canada 7.9 8.0 1.2 1.2 1.3 1.4 1.1
Mexico 1.2 0.5 0.0 3.5 2.3 3.4 2.4
US 8.0 13.2 5.1 0.9 0.7 1.4 8.1
Americas 4.8 10.7 3.0 2.1 1.8 2.3 12.2
Austria 7.3 12.5 3.4 3.7 2.3 2.3 0.8

Czech Republic 14.1 10.3 5.8 4.8 3.1 4.1 0.5
France 4.8 7.4 4.8 4.9 4.4 4.8 1.2
Germany 1.7 15.4 5.2 3.7 2.5 1.9 6.7
Hungary -10.9 3.2 5.5 6.7 5.8 4.4 0.3
Italy 16.1 25.8 6.7 2.6 2.5 1.8 4.2
Poland 8.3 12.5 5.5 5.6 5.0 4.9 0.8
Russia 3.3 9.1 3.4 4.3 3.9 3.7 1.7
Slovakia -5.1 6.1 9.2 7.3 5.0 5.3 0.2
Spain 24.5 4.8 4.6 3.0 2.9 3.4 0.8
Switzerland 3.0 16.1 6.3 2.9 1.4 1.5 1.0
Turkey 14.2 17.4 2.7 2.3 4.2 5.2 1.2
UK 2.8 13.7 -8.3 3.4 1.8 1.2 0.7
Europe 7.1 15.6 4.7 3.6 2.9 2.7 20.1
World ex-China 5.5 9.7 3.7 3.3 3.1 2.8 47.8

World 7.2 8.5 3.6 3.3 3.0 2.7 77.8
World growth rates are calculated using a weighted sum of the local currency growth rates. Each country's
share of world consumption in 2010, measures in dollars, is used as its weight for the world growth
calculation. Regional growth rates are calculated in a similar way. Regional growth rates are a weighted sum
of the local currency growth rates of the countries within the region.
World ex-China is calculated a similar way to world.
Note: World is defined as the aggregate of the 26 countries forecast
Apparent consumption = total consumption of machine tools in the named market, For consumption levels in $, please see appendix
Total investment = weighted sum of investment in the nine key sectors in local currency terms
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Risks
An escalating trade war could hit global
growth…
The trade war has escalated in recent months. Our baseline
forecast incorporates additional protectionist measures beyond
what has already been implemented, but there remains the risk
of a more serious escalation. In this scenario, the Trump
administration imposes tariffs on all imports from China as well
as on imports from South Korea and Taiwan, and these
countries retaliate. Financial markets respond and global
growth falters. The countries at the heart of the trade war are
hit the most, as confidence deteriorates, higher prices erode
incomes and exports shrink, ultimately hitting MT demand.
…and global weakness could become

entrenched
Global economic activity remains firm, but growth has been
less robust in some regions, including in the eurozone, Japan
and several emerging markets. In this scenario, global growth
slows amid trade policy uncertainty and tightening monetary
conditions. This is exacerbated by oil market developments, as
sharp falls in production in Iran and Venezuela push up prices.
Demand declines as confidence and equities fall, higher
inflation hits disposable incomes, slowing activity deters
investment and lower global growth hits trade, and, as a result,
MT consumption.
Policy tightening could create market turmoil
Several emerging market currencies have weakened during
2018. The biggest risk to EM currencies stems from a rising
dollar and tightening global liquidity. In such a scenario,
inflationary pressures increase in the late-cycle US economy,
prompting the Federal Reserve to raise interest rates more
quickly than anticipated. Bond and equity markets respond,
with spillovers to the wider economy through higher corporate
debt servicing costs and wealth effects. Emerging markets,
which are susceptible to rising interest rates and sudden
outflows of foreign investment, are most severely impacted.
Indeed, this would dampen the investment outlook and,
consequently, MT demand.
Trade war fears could dissipate
Although trade fears have mostly worsened, there have also
been a number of more positive developments, including a
trade agreement with Mexico and a temporary truce between
the US and EU. In this scenario, the US reverses existing
protectionist measures and steps back from further threats.
Uncertainty fades and investor sentiment improves,
contributing to strong economic growth and MT demand.
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Brazil
MT demand set to rebound in 2018
GDP is forecast to grow by 1.1% in 2018, after an
estimated rise of 1% in 2017. Brazil has been affected by
rising US interest rates, a stronger US$ and higher oil
prices which have caused domestic inflation to rise, putting
pressure on interest rates. In 2019, GDP growth will pick
up modestly to 2.3% supported by a gradual recovery in
investment and employment.
Output in MT consuming sectors grew 3.8% in 2017, after

a steep drop in 2016, and, beyond this, we expect growth
to surge 5.9% in 2018. The pickup in growth can be
attributed to the improving macroeconomic environment
after recovering from a severe recession. A closer look at
the sectors shows that motor vehicles output is predicted
to be the strongest growing sector in 2018 at 13.6%, which
will support metal products production. However, other
transport equipment continues to be a drag falling by 9% in
2017 and 1.3% in 2018. In 2019, we expect a brief growth
lull in MT-weighted production, with output up by just 1.9%.
Meanwhile, investment in MT consuming sectors is set to

ramp up 6.5% in 2018, representing the first pick-up since
2013, before slowing to 3.6% in 2019. Furthermore, the
latest imports data support our view of a reasonably strong
2018. Overall, MT consumption is predicted to expand by
12.2% in 2018 before rising by just 0.6% in 2019.
Risks are skewed to the downside. On the economic front,

despite a steady recovery, we caution that growth will be
constrained by the large burden of public and private debt
while political uncertainty will persist until elections in
October 2018. On the external front, tighter monetary
policy in the US could lead to market turmoil across a
number of EMs, including Brazil, which force the central
bank to tighten monetary policy to stem capital outflows,
potentially hitting MT demand.
Forecast for Brazil

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Real) -38.7 -2.6 12.2 0.6 4.8 4.7 4.6
Apparent consumption (US$) -41.3 6.3 -3.6 0.6 4.8 4.7 4.6
GDP -3.4 1.0 1.1 2.3 3.0 2.7 2.5
Industrial production -6.6 2.8 2.7 4.0 2.9 2.6 2.6
Investment -14.3 -0.5 6.5 3.6 4.9 4.9 4.9
MT growth rates in local currency are in current prices. GDP and industrial production growth rates are constant price local currency terms
MT growth rates in US$ are calculated using actual exchange rates to 2018 and then fixed at 2018 exchange rates beyond that date
2018 exchange rate per US$ = 3.71
Apparent consumption = total consumption of machine tools in the named market

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China
MT demand set to slow amid high risks
Economic growth held up in recent months, underpinned by
better exports and resilient housing activity. But overall
investment momentum slowed amid soft credit growth. We
expect growth to cool during 2018 on the trade conflict with
the US and slow credit growth. GDP growth should average
6.5% this year, before slowing to 6.1% in 2019.
So far this year, weighted output among the key MT

consuming sectors has held up better than we had expected,
with growth estimated to rise by 8.2% in 2018 before slowing
to 4.3% in 2019. A closer look at the MT purchasing sectors
shows that there was some divergence with aerospace rising
at a double-digit pace, in part due to positive base effects,
while the opposite is seen for precision instruments. At the
same time, the expiration of the new car tax incentive at the
end of last year has clearly led to a softening in automotive
output growth, which has had a knock-on effect upon other
sectors such as metal products. Furthermore, efforts to boost
replacement demand for EVs will dampen MT demand over
the long-term and poses as a downside risk to our forecast.
Similarly to output, investment by the main MT consuming

sectors is forecast to slow from 4.9% in 2018 to 3% in 2019.
Although we expect a slowdown in growth among the key MT
purchasers, growth has generally held up better than we had
expected in our previous report. On balance, we forecast MT
demand growth of 7% in 2018 and 3.3% in 2019.
Risks to the forecast are to the downside. Domestically,

corporate debt remains at unsustainable levels and there is a
risk that the government scales back growth targets and
tightens policy more significantly to rein in credit growth,
which could ultimately dampen MT demand. On the external
front, the trade conflict between the US and China could
escalate further with major implications for economic growth
and, hence, MT consumption.
Forecast for China

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Yuan) 7.2 9.4 7.0 3.3 3.3 2.9 2.4
Apparent consumption (US$) 1.4 7.5 10.2 3.3 3.3 2.9 2.4
GDP 6.7 6.9 6.5 6.1 5.7 5.4 5.2
Industrial production 6.3 6.1 5.7 4.7 4.4 4.2 3.9
Investment 6.0 6.7 4.9 3.0 2.8 2.4 2.3
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France
MT demand forecast to increase 7.4% in 2018
The economy slowed markedly in the first half of the year
while business sentiment and industrial output have fallen
sharply, reflecting concerns about the imposition of US
tariffs and the potential for a wider trade war with the US.
More positively, tax cuts should boost consumer spending
later this year. Overall, we now expect growth to average
1.6% this year before picking up slightly to 1.7% in 2019.
Meanwhile, production growth among the key MT

consuming industries is forecast to slow to 1.9% in 2018
and 1.8% in 2019, as global trade momentum wanes and
concerns about rising protectionism remain elevated.
However, there are some bright spots among the main MT
purchasing segments. Precision and optical instruments
have the strongest growth outlook, although this is aided
by positive base effects from the previous year. At the
same time, motor vehicles production is forecast to pick-up
over the course of the next year as a number of new
automotive models are introduced, which will help to
support growth in sectors further down the supply chain,
such as metal products.
Despite ongoing uncertainty, the outlook for investment by

the key MT consuming sectors is relatively healthy given
higher capacity utilisation in the manufacturing sector and
the supportive environment for capital spending. On
balance, we expect growth of 3.1% in 2018 and 3.5% in
2019. Overall, MT consumption is forecast to increase by
7.4% in 2018 and 4.8% in 2019.
Risks to MT consumption are tilted to the downside. On a

positive note, a more ambitious reform agenda and further
reduction of the corporate tax rate represent an upside risk
to our forecast. However, greater trade protection amid the
deteriorating transatlantic relationship would weaken
global trade further, delay investment spending and,
hence, check MT consumption.
Forecast for France

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Euro) 5.4 4.8 7.4 4.8 4.9 4.4 4.8
GDP 1.1 2.3 1.6 1.7 1.7 1.6 1.6
Investment 3.8 6.6 3.1 3.5 2.7 2.1 1.9
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Germany
High MT demand growth amid high risks
GDP growth will slow during the second half of this year as
elevated trade tensions are likely to cap economic growth
ahead. Overall, we forecast GDP growth of 1.8% in 2018
and 1.6% in 2019.
Weighted production across the main MT purchasing

sectors is forecast to rise by 2.8% in 2018 and 2019. Indeed,
this is a considerable downgrade since our previous report,
as the global trade boom of the past two years ends while
business confidence weakens in the face of rising trade
uncertainty. Furthermore, there appear to be no signs that
trade uncertainty will ease in the near term, which is a
considerable risk for German automotive exporters given the
potential prospect of US automotive tariffs. In addition,
‘Brexit’ remains a concern for the motor vehicles sector
given the UK is a large consumer of their vehicles and,
although this has been accounted for, the risks surrounding
this forecast are still considerable. However, on a positive
note, capacity constraints in the manufacturing sector
combined with efforts to upgrade industrial infrastructure
should provide a floor to weighted output growth ahead.
Meanwhile, weighted investment is forecast to increase by

4.4% in 2018 and 2019. The healthy outlook for investment
combined with solid orders growth is expected to boost MT
consumption ahead. After an exceptional rise of 15.4% in
2018, we expect growth to moderate to 5.2% in 2019.
Risks to the forecasts are to the downside. The main risk is

that the US initiates a trade war with Asia and pulls out of
NAFTA while proceeding with tariffs against German
automobile producers, a key MT consumer. On the other
hand, we could see trade war fears dissipate if the US
reverses its protectionist measures and steps back from
threats, leading to a rise in business confidence and, as a
result, strong MT consumption.
Forecast for Germany

% change
2016 2017 2018 2019 2020 2021 2022
GDP 2.2 2.5 1.8 1.6 1.5 1.2 1.1
Investment 2.0 3.3 4.4 4.4 2.7 1.7 1.4
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India
MT demand to rise 10% but risks to downside
Elevated oil prices and global trade tensions are expected
to lower GDP growth during the second half of the year.
This, in turn, should allow the RBI to ‘pause’ its tightening
for the rest of this year and assess the economic impact of
the policy rate hikes implemented so far. As a result, we
predict GDP will rise by 7.6% in 2018 and 7.2% in 2019.
Meanwhile, the pace of expansion among the key MT

consuming industries has been robust in H1 2018 with
seven out of the nine segments forecast to see output
growth rise at a double-digit pace this year. Higher
infrastructure spending combined with positive
urbanisation trends will support growth in construction,
and, as a result, demand for basic metals and metal
products ahead, which are key MT purchasers. However,
domestic producers of basic metals will face stiffer
competition from steel imports as they get diverted from
the US following the section 232 tariffs. On balance, we
expect weighted output of the main MT consuming sectors
to rise by 12.9% in 2018 and 6.5% in 2019.
At the same time, capital spending by the MT consuming

sectors is forecast to increase by 13.8% in 2018 before
slowing to 4.3% in 2019. Investment will be aided by
measures to improve transport infrastructure as well as the
‘Made in India’ initiative, which will help to gradually move
local MT production up the value chain. Overall, we expect
MT demand to expand by 9.6% in 2018 and 5.4% in 2019.
Risks are skewed to the downside. On the one hand, there

is renewed optimism about India’s economic prospects
and reform plans following the implementation of GST.
However, rising trade uncertainty and renewed concerns
about large scale banking fraud could undermine the
recovery in investment, dampening MT demand.
Forecast for India

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Rupee) 17.9 19.4 9.6 5.4 7.8 8.3 8.5
GDP 7.9 6.2 7.6 7.2 7.0 6.8 6.5
Investment 15.0 8.1 13.8 4.3 7.4 7.6 7.8

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Italy
Government incentives support MT demand
Economic momentum has been slowing while the latest
survey data reinforce this trend. Overall, we forecast GDP
growth of 1.2% in 2018 and 1.1% in 2019. Meanwhile,
markets await the first budget from the new government.
Meanwhile, weighted production growth among the key

MT purchasing sectors is likely to slow in 2018, to 2.5%,
before decelerating further to 0.9% in 2019. However,
some sectors are expected to perform better than others.
Solid investment spending growth has benefitted the
engineering segments, which generally have the strongest
growth prospects. Furthermore, the pace of expansion in
the aerospace sector has accelerated during this year and
we estimate double-digit output growth for 2018. On the
other hand, motor vehicles output is expected to see a
pullback in production over coming years as output shifts
to Eastern European countries and this is likely to weaken
demand for related MT consuming metal products.
Similarly to output, we expect investment growth by the

main MT purchasing sectors to decelerate, with predicted
growth of 4.6% in 2018 and 1.7% in 2019. Also, although
orders remain on an upward trend, important fiscal
incentives, such as the super and hyper depreciation
allowances are scheduled to finish at the end of 2018. On
balance, we expect MT demand to jump by 25.8% in 2018
and 6.7% in 2019.
Although a government was formed, following three

months of deadlock, political uncertainty remains high
given conflicting messages about the fiscal agenda.
Moreover, there is a risk that global trade grinds to a halt
as President Trump pushes through highly protectionist
measures. Both risks could shake business confidence,
lower capital spending and dampen MT demand.
Forecast for Italy

% change
2016 2017 2018 2019 2020 2021 2022
GDP 1.0 1.6 1.2 1.1 1.0 0.8 0.8
Investment 4.7 5.5 4.6 1.7 2.1 1.7 1.4
Page 18
Autumn
2018
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2018
Japan
Strong orders lift MT demand but risks high
A solid outlook for domestic demand will support growth in
2018 and 2019, despite the risk of protectionism.
Consumption will be helped by a robust labour market and
a pick-up in wage growth, while investment will be
supported by high utilisation rates and industrial
upgrading. Export growth will slow, but the deceleration
should be modest given strong demand for Japanese
capital goods. Overall, we expect GDP to grow by 1% in
2018 and 1.1% in 2019.
The solid macroeconomic outlook will support relatively

healthy weighted output growth of 2% this year before
moderating to a 1.6% expansion in 2019. A closer look at
the breakdown shows that the engineering sectors are
among those with the strongest output growth prospects
as spare capacity dwindles, pushing firms to upgrade their
industrial infrastructure. Furthermore, the upcoming 2020
Tokyo Olympics is supporting positive momentum to the
construction sector, which will provide support to key MT
consumers further down the supply chain. Beyond this, the
movement away from an investment-led economy in China
combined with the impact of the upcoming consumption
tax hike in 2019 is likely to impact weighted production.
Meanwhile, investment by the MT purchasing sectors is

forecast to edge up by 0.4% in 2018, following robust
growth in 2017, before rising 1.9% in 2019. Moreover,
orders growth for both cutting and forming tools were
strong in H1 2018. As a result, we expect strong MT
demand growth of 5.4% in 2018 and 3.3% in 2019.
Risks to the forecast are skewed to the downside. The

most important risk is a further escalation in protectionism,
in particular, the threat of US tariffs on the large
automotives industry, which could curtail investment
spending and, hence, MT consumption.
Forecast for Japan

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Yen) -4.8 1.3 5.4 3.3 0.7 1.6 1.6
Apparent consumption (US$) 5.9 -1.8 7.9 3.3 0.7 1.6 1.6
GDP 1.0 1.7 1.0 1.1 0.1 0.9 0.9
Industrial production -0.2 4.5 1.7 1.6 -0.8 1.1 0.7
Investment 0.1 5.4 0.4 1.9 0.0 1.1 1.1
Page 20
Autumn
2018
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Autumn
2018
Korea
Weak global trade to dent MT demand
Over the next year, we expect aggressive fiscal plans to
support growth and employment, which will in turn shore
up weakness in domestic demand. However, export
momentum is forecast to ease as global trade slows and
the US-China trade conflict deepens. Indeed, its trade
surplus with the US leaves the economy exposed to
targeted protectionism. As a result, GDP growth is forecast
to increase by 2.6% in 2018 before edging down slightly to
2.5% in 2019.
Weaker global trade and rising protectionism has dented

the outlook of the key MT consuming sectors. As a result,
we expect MT weighted output to decline by 3.3% in 2018
before rising 1.9% in 2019. However, we expect there to
be considerable divergence across the MT consumers. On
the one hand, electrical engineering, precision & optical
instruments and aerospace have continued to expand at a
solid pace, although the latter is typically not cyclical. On
the other hand, metal products and other transport
equipment production remain on a downward trend while
basic metals output growth is forecast to weaken due to
the impact of the quota which was agreed with the US to
be exempted from the Section 232 tariffs.
At the same time, investment spending by the key MT

consuming sectors is expected to fall by 5.3% in 2018
before edging up 0.6% in 2019. However, on a positive
note, orders in Q1 2018 were up by 3.9% year-on-year. On
balance, consumption is predicted to decrease by 3.4% in
2018 before recovering by 1.5% in 2019.
With Korea an integral part of the Asian supply chain, it is

vulnerable to a sharp slowdown in Chinese growth and at
risk from escalating US-China trade tension, which could
impact capital spending and, hence, MT consumption.
Forecast for Korea

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Won) -13.3 3.0 -3.4 1.5 4.9 4.1 2.4
Apparent consumption (US$) -15.5 5.7 -0.3 1.5 4.9 4.1 2.4
GDP 2.9 3.1 2.6 2.5 2.7 2.5 2.5
Investment 1.9 6.1 -5.3 0.6 4.2 3.4 1.6
2018 exchange rate per US$ = 1,095.36

Page 22
Autumn
2018

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Autumn
2018
Mexico
MT demand growth set to cool in 2019
Mexico’s GDP grew by 2.3% in 2017 but is set to slow by
2% in 2018. NAFTA progress is in the spotlight after the
US and Mexico talks yielded an ‘agreement in principle’.
Trilateral talks could follow as soon as the US and Canada
sort out their bilateral issues. More recently, July’s
industrial data was far from encouraging and suggests that
weakness could extend further into H2 2018 and exchange
rate pressures are now mounting due to higher US interest
rates and a stronger US$.
Weighted output in key MT consuming sectors expanded

by 5.2% in 2017 but, looking ahead, we expect the pace of
growth to slow to 2.7% this year. A closer look at the key
sectors puts this into perspective. Motor vehicles surged
by 9.3% in 2017 but is expected to slow considerably to
2.6% this year. Similarly, Electrical engineering grew by
5.8% last year but is forecast to grow by 2.8% in 2018.
Beyond this, we expect waning global trade and on-going
trade tensions, globally, to dampen growth into next year,
with weighted MT-output forecast to rise by 1.9% in 2019.
Investment in the MT consuming sectors contracted by

0.1% in 2017, however, we expect to see a pickup of 2.5%
this year before growth slows to 1.4% in 2019. Overall, MT
consumption is forecast to edge up by 0.5% in 2018, after
a relatively slow 1.2% last year, before slowing to zero
growth in 2019.
Despite an ‘agreement-in-principle’ with the US, there is

still some way to go in NAFTA negotiations and
uncertainty remains elevated. On the domestic side, we
expect a reasonably responsible management of the
Mexican economy under an AMLO administration, but we
will closely monitor his still unclear position regarding
energy reform implementation.
Forecast for Mexico

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Peso) 27.3 1.2 0.5 0.0 3.5 2.3 3.4
Apparent consumption (US$) 8.1 0.0 -0.3 0.0 3.5 2.3 3.4
GDP 2.6 2.3 2.0 2.2 2.5 2.5 2.5
Industrial production 0.2 -0.5 0.9 2.3 2.6 2.5 2.5
Investment -4.8 -0.1 2.5 1.4 2.7 2.2 2.1

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2018

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Autumn
2018
Spain
Signs of a slowdown are growing
GDP growth in Spain is expected to grow 2.7% this year,
after an increase of 3% in the previous year. Although the
Spanish economy continues to grow above the eurozone
average, signs of a slowdown are becoming more evident.
Leading indicators suggest the economy has entered the
second half of the year on a softer footing. The composite
PMI declined in July, dragged down by a sharp drop in
services activity. Beyond this, we expect GDP growth to
slow to 2.3% in 2019.
Weighted output among key MT consuming sectors

increased by 5.8% in 2017 but is set to slow to 3.4% in
2018. This is evident from looking at the key sectors,
although there is considerable divergence between sectors.
Metal products increased by 6.9% in 2017 but is forecast to
slow by 3.1% in 2018. In contrast, motor vehicles declined
by 0.8% in 2017 but is expected to recover by 2.2% in
2018. Following this year, we expect weighted production to
expand by a further 3.4% in 2019.
Similarly, investment in MT consuming sectors is forecast to

slow this year, down from 5.9% in 2017 to 5.3% this year.
Moreover, we expect a slowdown in 2018 based on more
subdued orders growth. Overall, MT demand is forecast to
rise by 4.8% this year, after robust growth of 25% in 2017.
The risks to the forecast are skewed to the downside. On

the domestic front, a highly fragmented parliament with
widely diverging political views makes it difficult for the
government to pass legislation. Such persistent political
uncertainty could potentially lead to investment by key
sectors being deferred or cancelled altogether, hitting MT
demand. On the external side, ongoing trade policy
uncertainty between the US and EU could also impact
business sentiment by more than we currently expect,
dampening our forecast of MT consumption.
Forecast for Spain

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Euro) -0.2 24.5 4.8 4.6 3.0 2.9 3.4
Apparent consumption (US$) -0.4 27.1 10.7 4.6 3.0 2.9 3.4
GDP 3.3 3.0 2.7 2.3 2.1 1.7 1.4
Investment 2.1 5.9 5.3 4.1 3.6 2.6 3.0

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2018

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Autumn
2018
Switzerland
MT demand boosted by orders but risks high
In view of the excellent sentiment among Swiss companies
and the positive developments in the labour market, we think
the economy achieved robust growth in mid-2018. However,
fading global trade momentum, tariffs and high oil prices are
expected to weigh on Swiss exports and investment activity
in 2019. We expect a moderate slowdown to 1.5% in 2019,
after robust GDP growth of 2.3% in 2018.
The relatively strong macroeconomic background combined

with solid data outturns for the first half of this year means
that we expect weighted production of the key MT sectors to
increase by 4.2% in 2018. A closer look at the breakdown
shows that healthy capital spending growth has helped to
boost output growth in the engineering segments. Moreover,
aerospace is set to expand at the fastest pace, following a
solid increase in 2017. This will support other sectors further
down the supply chain, such as metal products. Beyond this
year, we expect a moderate deceleration in MT-weighted
output growth to 3.2% in 2019, similar to GDP growth.
At the same time, capital spending by MT consumers is to

set to increase at a double-digit pace in 2018 before growing
by a relatively strong 5.8% in 2019. Furthermore, imports and
orders are well above year-ago levels, boding well for near-
term MT demand prospects. On balance, we expect MT
consumption increase by 16.1% in 2018 and 6.3% in 2019.
Forecasts risks are skewed to the downside. On the

domestic front, the future of tax reform remains uncertain and
could dampen investment and, hence, MT consumption.
Externally, downside risks have increased with the financial
crisis in Turkey and rising protectionism, which could both
result in a further appreciation of the Swiss franc. This would
have negative consequences for the economy, investment
prospects and, as a result, MT demand.
Forecast for Switzerland

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Swiss Franc) -14.5 3.0 16.1 6.3 2.9 1.4 1.5
GDP 1.4 1.1 2.3 1.5 1.6 1.5 1.7
Investment 4.4 4.4 12.4 8.2 2.9 1.4 1.6
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2018
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Autumn
2018
Taiwan
Healthy orders support to MT demand
The preliminary Q2 national accounts data show
Taiwan’s economy grew by a stronger than expected
3.3% year-on-year. However, the performance of the
main demand components was less reassuring while
recent high frequency data on sentiment and
merchandise trade have weakened. Furthermore, the
worsening outlook for trade, driven by the US-China
trade dispute, points to a slowdown in economic growth
ahead. Consequently, we forecast GDP growth of 2.4%
in 2018 and 2.1% in 2019.
Solid levels of business confidence have helped to keep

output growth among some of the key investment-
intensive MT consuming sectors healthy during the first
half of this year, but weaker global trade dynamics and
rising protectionism are expected to dent MT-weighted
output growth ahead. A closer look at the breakdown
shows that motor vehicles is the only sector forecast to
see a small decline in 2018, edging down 0.2%, although
this will be followed by a swift recovery in 2019. On
balance, we forecast weighted production growth of 2.8%
in 2018 and 2.1% in 2019.
Meanwhile, investment by the main MT consuming

sectors to expand by 3.8% in 2018 before slowing to
3.3% in 2019. At the same time, MT orders and imports
have grown at a double-digit pace during the first half of
the year. Overall, we forecast MT demand growth of
7.5% in 2018 before decelerating to 3.6% in 2019.
Risks in Taiwan are skewed to the downside. Given the

openness of the Taiwanese economy, a shock to
Chinese growth because of escalating trade tensions
between the US and China would adversely impact the
Taiwanese economy, hitting business confidence,
investment spending and, as a result, MT consumption.
Forecast for Taiwan

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Taiwan $) -3.2 8.7 7.5 3.6 4.0 4.8 5.0
GDP 1.4 2.9 2.4 2.1 2.5 2.2 2.2
Investment 1.8 -0.2 3.8 3.3 3.3 3.6 3.9

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2018

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2018
Thailand
MT demand recovery to begin this year
Thai GDP expanded 4.6% on the year in Q2, only a slight
slowdown from the 4.9% registered in Q1. The outturn was
higher than expected, in part because the drag from trade
war fears does not appear to have materialised yet. As a
result, we expect GDP to increase by 4.4% in 2018 before
slowing to 3.4% growth in 2019, partly because of cooling
Chinese import demand and protectionist fears weighing
on confidence.
We expect weighted output growth of key MT consuming

sectors to accelerate to 4.5% in 2018, following a 0.3%
decline last year. Much of this rebound can be attributed to
the strong recovery in the general and special purpose
machinery sectors this year. Additionally, the aerospace
and automotive sectors are expected to see robust growth
this year, in turn boosting sectors further down the supply
chain such as basic metals. However, similarly to
economy-wide growth, we expect the pace of expansion
among the key MT purchasers to slow to 2.5% in 2019.
Meanwhile, investment spending by the main MT

purchasing sectors is also forecast to rebound, with growth
expected at 3.3% this year, after a contraction of 1.7% in
2017, before rising by a further 3.7% in 2019. On balance,
we expect to see MT consumption rebound by 2.4% this
year before rising by 4.7% next year, following five
consecutive years of decline.
The political outlook remains uncertain. Legislation has

been passed that ensures the next general election has to
take place before May 2019, but uncertainty regarding
potential regime changes could slow investment and
industrial activity, resulting in a decline in MT demand.
However, long-term infrastructure plans are encouraging
both public and private investment and, in turn, could lead
to stronger MT consumption than we currently anticipate.
Forecast for Thailand

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Baht) -16.4 -5.5 2.4 4.7 6.1 5.3 3.4
Apparent consumption (US$) -18.9 -1.7 7.6 4.7 6.1 5.3 3.4
GDP 3.3 3.9 4.4 3.4 3.1 2.9 2.9
Investment 0.5 -1.7 3.3 3.7 6.4 4.7 3.0

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2018

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Autumn
2018
Turkey
MT demand to see sharp slowdown in 2019
The Turkish lira crisis, prompted by US sanctions, is
leading to downgrades in the macroeconomic outlook as
sell-offs have resulted in the lira losing 20-25% of its value.
We expect authorities to respond by accepting slower
growth in a bid to redress current imbalances in the
economy. As a result, we see GDP expanding by 3.9% in
2018 and by just 1.2% in 2019.
At the same time, weighted output growth among the key

MT consuming sectors is set to slow, with growth falling
from double digit growth in 2017 to 2.9% in 2018 and then
decelerating further to 2% in 2019. The aerospace sector
has seen the largest adjustment in output projections.
However, on a tentatively positive note, export facing
sectors may see some benefit from the lira crisis as the
sharp depreciation makes Turkish products more
internationally competitive.
Meanwhile, weighted investment growth in the key MT

consuming sectors have seen similar downgrades with
investment now expected to grow by just 2.3% in 2018 and
0.9% in 2019. However, stronger import data for the first
half of this year combined with the short-term effect of the
weaker currency, which increases the value of MT imports
in local currency terms, points to robust MT demand this
year. On balance, we expect MT demand to rise by 17.4%
in 2018 before slowing sharply to 2.7% growth in 2019.
Forecast risks remain skewed to the downside. The

currency plunge is likely going to be most prevalent in
rising inflationary pressure, but upside pressure may come
in the depreciated currency encouraging exports from the
MT consuming sectors. Externally, enhanced
protectionism in the US and slower Chinese growth could
also lead to weaker investment spending trends and,
hence, MT demand.
Forecast for Turkey

% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (Lira) 13.2 14.2 17.4 2.7 2.3 4.2 5.2
Apparent consumption (US$) 2.0 -5.4 -15.4 2.7 2.3 4.2 5.2
GDP 3.2 7.4 3.9 1.2 3.9 3.8 3.4
Investment 3.7 11.6 2.3 0.9 2.4 3.3 3.7

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2018

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Autumn
2018
United Kingdom
‘Brexit’ uncertainty to hit MT demand in 2019
With Q2 GDP growth coming in at 0.4%, in line with
expectations, we forecast GDP will expand by 1.3% and
1.4% in 2018 and 2019, respectively. We expect soft
underlying inflationary pressures to ensure a maximum of
one 25bp rate hike next year. But the outcome of ‘Brexit’
negotiations remains a major source of uncertainty for both
the short- and long-term forecasts.
Meanwhile, capital spending by the important engineering

and motor vehicles sector edged down by 0.5% on the
quarter in Q1 2018, although positive base effects means
that investment remains well above year-ago levels. On
the other hand, the latest MT consumption data have been
stronger than we had previously anticipated while strength
in orders points to near term support for the MT outlook.
On balance, we forecast investment spending by the key
MT purchasing sectors will increase by 7.2% in 2018,
however, ongoing ‘Brexit’ related uncertainty points to a
sizable deceleration, with growth of 3% predicted for 2019.
At the same time, weighted production by the key MT

consuming sectors is expected to increase by 1.1% in
2018 before slowing to just 0.4% growth in 2019. A closer
look at the breakdown shows that motor vehicles and
metal products have the worst output growth prospects.
Overall, we expect MT consumption to rise by 13.7% in
2018, before dropping by 8.3% in 2019. However, the
forecast for 2019 is highly uncertain given that the terms of
trade and migration remain unclear following ‘Brexit’.
Indeed, the risks to an investment and export driven sector

like MT would be considerable and, as such, a deal which
leaves the UK outside the single market would be the most
economically damaging result.
Forecast for UK
% change
2016 2017 2018 2019 2020 2021 2022
Apparent consumption (£) -0.6 2.8 13.7 -8.3 3.4 1.8 1.2
Apparent consumption (US$) -11.8 -2.2 18.9 -8.3 3.4 1.8 1.2
GDP 1.8 1.7 1.3 1.4 2.0 2.2 2.1
Investment 0.0 3.4 7.2 3.0 4.0 1.7 1.1
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Autumn
2018
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Autumn
2018
United States
Solid MT demand amid increasing trade risks
Strong consumer outlays, solid business investment,
sturdy export growth remain supportive of growth.
However, risks are appearing on the horizon, including
threatening protectionism, slowing emerging markets
growth and a more hawkish Fed. As a result, we forecast
GDP growth of 2.9% in 2018 and 2.3% in 2019.
Indeed, further steps towards a protectionist trade stance

could hurt the US economy and further dent growth
prospects across the main MT consuming sectors.
However, there are a few positive factors supporting our
current outlook. The Tax Cuts and Jobs Act has generally
been seen as a positive development by manufacturers
given the large tax cut combined with expensing provisions
for particular types of equipment that would be beneficial
for the machine tool sector. Meanwhile, aerospace, a key
MT consumer, is expected to see a swift recovery in output
supported by significant order backlogs and a ramping up
of deliveries, although there have been supply chain
issues recently. Also, motor vehicles production will benefit
from activity resuming at some plants following product
changeovers. On balance, we expect weighted output of
the MT purchasing sectors to increase by 4.4% in 2018
before slowing to 2.9% growth in 2019.
At the same time, investment spending by the main MT

purchasing sectors is forecast to expand by 2.4% this year
and 2.1% next year. Furthermore, rising capacity utilisation
has contributed to the strong growth in MT orders during
2018. Overall, MT consumption is forecast to expand by
13.2% in 2018 before decelerating to 5.1% growth in 2019.
Risks to the forecasts are increasingly to the downside.

Since our previous report, trade tensions between the US
and China have escalated considerably and, although
there has been some progress in NAFTA negotiations,
trade relationships with the EU are uneasy. This could
dampen capital spending and, hence, MT consumption by
more than we currently anticipate.
Forecast for US
% change
2016 2017 2018 2019 2020 2021 2022
GDP 1.6 2.2 2.9 2.3 1.6 1.8 1.9
Industrial production -2.0 1.6 3.8 2.7 2.0 1.8 1.8
Investment 4.0 3.1 2.4 2.1 1.3 1.7 2.0
Page 38
Autumn
2018
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Autumn
2018
Smaller markets
Canada
GDP increase by a relatively strong 0.7% on the quarter in
Q2 2018. Indeed, the Bank of Canada had anticipated a Apparent consumption (LHS)
strong growth performance in Q2, so the latest data should Investment in machine tool
purchasing industries (RHS)
not materially affect its plans for continued policy
tightening. We believe firm economic activity and some
inflationary pressures will keep the Bank on a tightening
bias, and we look for the next interest rate hike to come in
October. Overall, we forecast GDP growth of 2% in 2018
and 1.7% in 2019.
Weighted investment of the key MT consuming sectors is

expected to increase by 5.2% in 2018 before slowing to
0.8% growth in 2019. Furthermore, President Trump’s
trade agenda will remain a persistent risk. On balance, we
forecast MT consumption growth of 8% in 2018 before
decelerating sharply to 1.2% in 2019.
Austria
The Austrian economy grew by 0.5% in Q2, slowing from Apparent consumption (LHS)
the impressive growth run of previous quarters as the Investment in machine tool
global trade surge has begun to fade. However, growing
labour supply constraints means that even as employment
growth may be peaking, accelerating wages should help
sustain strong domestic growth. As a result, we forecast
GDP growth of 2.9% in 2018 and 2% in 2019.
Meanwhile, strong MT import and orders data will support

near term MT consumption. Furthermore, weighted
investment by the key MT consuming sectors is forecast to
increase by 4.1% and 3.3% in 2018 and 2019,
respectively. Consequently, we expect MT demand to rise
by 12.5% this year and 3.4% next year.
Czech Republic
Apparent consumption (LHS)
Inflation surprised on the upside in August, rising to 2.5% Investment in machine tool
year-on-year, which supports our view that the CNB will purchasing industries (RHS)
continue to tighten monetary policy. Meanwhile, a stronger

than expected rise in economic activity in Q2 2018 means
that we forecast annual GDP growth of 3% in 2018 and
2.7% in 2019.
Moving ahead, we expect weighted investment by the key

MT consuming sectors to increase by 8.6% in 2018 before
slowing to 3.7% growth in 2019. Furthermore, healthy
imports and order growth will further support near term
prospects. As a result, MT demand is forecast to grow by
10.3% in 2018 and 5.8% in 2019.
Page 40
Autumn
2018
Hungary
Hungarian GDP grew by 0.9% on the quarter in Q2. Apparent consumption (LHS)
Looking ahead, we see consumption being the main driver Investment in machine tool
of growth, as wage growth stays robust given the very tight
labour market. On the external front, even though trade
tensions between the EU and the US have eased, they
remain elevated. Overall, we expect GDP growth to 4.2%
in 2018 before slowing to 2.7% in 2019.
Weighted investment of the key MT purchasing sectors

saw continued strong growth in 2018 although growth is
expected to slow to a more normal rate of 7% in 2019.
However, weak import data suggest that MT consumption
trends are weak. Overall, we expect MT demand to
expand 3.2% in 2018 before rising by 5.5% in 2019.
Indonesia
Over the next few quarters, we expect consumer spending Apparent consumption (LHS)
growth to ease slightly as a weaker currency and higher Investment in machine tool
interest rates gradually weigh on private demand. Also,
while we look for some strengthening in investment, rupiah
volatility and the government’s plans to slow capital goods
imports will likely limit the pick-up. Furthermore, we expect
slower Chinese import demand and rising US-China trade
tensions to slow export growth. Consequently, we forecast
GDP growth of 5.1% in 2018 and 2019.
At the same time, weighted investment by the main MT

consuming sectors is forecast to have expand by 6.8% in
2018 before moderating to 6.4% growth in 2019. As a
result, MT consumption is expected to rebound in 2018, up
by 7.8%, after a 21.5% fall in 2017, before a further 6.8%
increase is seen in 2019.
Malaysia
The outlook for exports is expected to become more
Investment in machine tool
challenging through to 2019 amid cooling Chinese import purchasing industries (RHS)
demand and increased trade protectionism. Investment is

also likely to moderate given the government’s review of
major infrastructure projects, while US-China trade
frictions are likely to weigh on sentiment. We expect the
easing in exports and investment to be partly offset by
ongoing strength in consumer spending. We now expect
GDP to grow by 4.9% this year, and 4.6% in 2019.
Meanwhile, investment by the important MT consuming

sectors is forecast to slow to 3.4% in 2018 and remain at
that pace in 2019. Overall, MT consumption is expected to
achieve modest growth of 2.7% in 2018 and 2.5% in 2019,
after a 19.3% increase in 2017.
Page 41
Autumn
2018
Poland
Despite mounting concerns over slowing global and
European demand and trade tensions with the US, the Apparent consumption (LHS)
Polish economy is enjoying stellar growth rates, aided by Investment in machine tool
healthy domestic demand. As such, we expect GDP to
post growth in 2018 of 4.7% before decelerating slightly to
3.5% in 2019. However, the impact of increasing
protectionism is an ongoing risk.
Meanwhile, weighted investment by the main MT

consuming sectors is forecast to expand by 10.8% and
6.1% in 2018 and 2019, respectively. Moreover, healthy
MT import growth points to solid MT demand this year.
Consequently, MT consumption is expected to expand
12.5% in 2018 and 5.5% in 2019.
Russia
Russian GDP growth accelerated to 1.8% year-on-year in
Q2, surpassing our expectations. However, growth will
likely stall in the coming quarters, amid the pressure from
sanctions, notwithstanding the slight pick-up seen in the
August PMIs. Consumer demand will remain the leading purchasing industries (RHS)
driver of activity, although we nonetheless expect it to

soften in 2019 on the back of the planned VAT increase to
20%, from 18%, and the gradual rise in inflation.
Consequently, we forecast GDP growth of 1.8% in 2018
and 1.4% in 2019.
At the same time, MT imports suggest that near term

demand growth is solid while weighted investment by the
main MT purchasing sectors is forecast to increase by
3.6% in 2018, after 6.9% in 2017, and 2.1% in 2019. As a
result, MT consumption is expected to expand 9.1% in
2018 and 3.4% in 2019.
Slovakia
Slovakia’s GDP grew 1% in Q2, the same pace as in the
first quarter. However, we still expect growth to slow over Apparent consumption (LHS)
the next few quarters, in line with the eurozone. As for Investment in machine tool
2018, we now see GDP growth of 3.7% before slowing to
2.6% in 2019, as the economy will suffer from an
intensification of concerns about the trade outlook.
Meanwhile, MT weighted investment is set to expand by

4.9% in 2018 before decelerating to 4.2% in 2019. As a
result, we expect MT consumption to return to growth of
6.1% in 2018, following two years of falling demand,
before rising by 9.2% in 2019.
Page 42
Autumn
2018
Vietnam
GDP grew by a solid 7.1% in the first half of 2018,
however, although external demand is set to remain
healthy we look for its momentum to ease as Chinese
import demand cools. Meanwhile, domestic demand is purchasing industries (RHS)
forecast to strengthen in 2018 driven by solid FDI inflows,

buoyant consumer spending and expansionary monetary
policy conditions. We look for GDP to grow 6.7% in 2018,
before easing to around 6.3% in 2019 amid a less
stimulating monetary policy and a less supportive
background for global trade.
At the same time, investment by the major MT purchasing

sectors is forecast to increase by a robust 18.1% in 2018
before slowing to a more normal rise of 8.2% in 2019.
However, recent MT import data points to less near-term
strength in MT demand. On balance, we expect MT
demand to expand by 3.1% in 2018 and 8.2% in 2019.
Apparent consumption
(% change unless specified)
2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
Canada -11.5 7.9 8.0 1.2 1.2 1.3 1.4 1.1
Austria 13.6 7.3 12.5 3.4 3.7 2.3 2.3 0.8
Czech Republic -28.9 14.1 10.3 5.8 4.8 3.1 4.1 0.5
Hungary 8.0 -10.9 3.2 5.5 6.7 5.8 4.4 0.3
Poland -3.3 8.3 12.5 5.5 5.6 5.0 4.9 0.8
Russia -8.2 3.3 9.1 3.4 4.3 3.9 3.7 1.7
Slovakia -8.3 -5.1 6.1 9.2 7.3 5.0 5.3 0.2
Indonesia -7.1 -21.5 7.8 6.8 5.7 4.9 4.8 0.4
Malaysia -11.5 19.3 2.7 2.5 4.3 4.1 4.0 0.5
Vietnam -37.4 21.5 3.1 8.2 7.6 6.2 6.0 1.1
MT growth rates in local currency are in current prices
Page 43
Autumn
2018
Autumn
2018
Aerospace
Supplier bottlenecks belie firm underlying
demand
The aerospace industry is highly geographically
concentrated—the US, Canada, Europe and Japan account
for 90% of global production, with China and Brazil adding
another 5%. At the same time, demand is mainly driven by
trends in Asia, where growing numbers of middle-class
households are increasingly able to afford air travel.
Aerospace production has been sluggish in 2018, with a full-

year expansion of just 1.6% expected. But this growth lull is
mainly due to supplier bottlenecks that are hampering aircraft
deliveries. For example, Boeing has been forced to park
large numbers of unfinished 737 Max jets outside its factory
near Seattle, Washington as it awaits engines and fuselage
parts. As a result, US value-added output (which accounts
for half of global production) is expected to decline 2% this
year—though Boeing indicates that deliveries should start
ramping up before the end of the year.
Underlying demand warrants stronger growth, and we expect

global production to rebound to just over 3% in 2019 as US
bottlenecks ease. However, rising jet fuel prices will increase
fares and temper passenger demand. In addition, air cargo
activity has eased from record growth, which will adversely
affect the freighter market. We thus see production growth
expanding at around 3% for the next several years, slightly
less bullish than our view six months ago.
Investment shows a markedly different pattern, reflecting

strategic moves in Asia to develop an internationally
competitive aerospace sector. Chinese aerospace
investment is expected to jump 28.9% this year, which is
stimulating investment in smaller Asian suppliers such as
Malaysia and Thailand.
The aerospace investment outlook is also fairly strong in

Europe, with growth of nearly 9% this year. A sharp drop in
investment in 2015 has left gaps in capacity, and we expect
these to be gradually filled in the next several years. This will
allow aerospace investment growth to exceed that of
production in Europe over the next few years.
Globally, the near-term risks are skewed to the downside,

mainly related to escalations in the China-US trade war
further constraining global trade. Looking further ahead, the
ability of planes to fly efficiently over longer distances could
further weigh on production prospects since a smaller fleet is
needed.
Page 44
Autumn
2018
Aerospace investment
2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China 7.1 1.8 28.9 5.0 4.9 5.0 5.0 3.4
Indonesia 0.5 4.7 1.6 7.7 5.9 5.2 5.0 0.0
India 9.0 16.7 18.7 5.3 7.3 7.3 7.3 0.2
Japan 8.0 7.0 0.8 5.3 1.4 1.9 1.7 1.9
Malaysia -8.3 -1.0 24.0 3.7 3.2 3.4 3.7 0.1
S. Korea -0.5 7.5 3.3 2.2 6.2 6.0 4.5 1.5
Taiwan 1.2 11.5 5.9 5.0 3.7 3.8 4.0 0.1
Thailand -4.8 8.0 12.0 6.6 6.0 5.9 5.5 0.0
Vietnam 8.0 14.1 7.1 11.9 8.1 18.2 9.1 0.0
Asia 5.4 4.8 15.2 4.6 4.3 4.5 4.2 7.2
Brazil -19.7 -4.0 -13.6 0.4 4.9 4.9 5.0 0.2

Canada -20.4 -1.5 10.5 2.7 1.0 1.0 1.2 0.9
Mexico -16.4 -4.2 3.3 3.4 4.4 3.8 3.9 0.3
US 6.4 2.6 -1.1 1.5 2.1 2.9 3.0 15.3
Americas 3.6 2.2 -0.5 1.6 2.1 2.9 2.9 16.7
Austria 11.6 10.6 -25.0 4.1 2.4 2.2 1.9 0.2

Czech Republic 11.8 -5.8 20.2 3.2 3.8 3.7 2.8 0.0
France 2.4 9.5 8.1 4.7 4.2 3.7 3.5 5.3
Germany 6.3 5.6 13.9 5.2 4.5 3.3 3.1 3.0
Hungary 41.7 52.3 36.9 6.1 2.5 2.9 3.0 0.0
Italy 4.7 5.9 18.4 3.7 2.3 2.0 2.0 1.9
Poland -0.7 7.7 12.0 6.7 6.3 6.2 6.3 0.1
Russia -18.6 23.6 -9.2 4.6 5.3 4.8 4.3 1.7
Slovakia -3.9 1.4 13.7 3.8 3.9 3.3 3.0 0.0
Spain 8.7 4.2 4.5 4.5 3.9 4.0 3.7 0.1
Switzerland 6.7 5.5 17.6 12.8 6.2 5.4 5.2 0.4
Turkey -1.2 -0.7 -22.0 2.6 2.7 4.2 4.5 0.1
UK -15.9 4.6 10.2 6.5 7.0 4.3 3.2 1.8
Europe -1.6 8.8 8.7 5.1 4.5 3.6 3.3 14.8
World 2.0 5.1 5.9 3.6 3.5 3.5 3.4 38.6
All growth rates are calculated based on dollar values using actual exchange rates to 2018 and then fixed at 2018 exchange rates beyond that date
Page 45
Autumn
2018
Basic Metals
China to drive global metals growth
Despite mounting trade tensions and cooling global
activity, we expect world basic metals production growth of
4.2% this year. Although forecast downgrades have been
made to a number of countries – particularly in the
Eurozone – they are dominated by the upgrades that have
been made to the Chinese forecast.
Chinese basic metals production has fired on all cylinders

thus far this year. Production has been lifted by elevated
domestic steel prices and profit margins, with high margins
allowing steel mills to switch to high-grade, more
productive variants of iron ore. While production will likely
be reined in later in the year as capacity cuts intensify and
demand cools, the strength of production in H1 means we
forecast overall production growth of 5.6% this year. In
India, our bullish forecast for 8.9% growth in 2018 is
underpinned by strong demand from the construction
sector as rapid urbanisation continues and the government
ramps up infrastructure spending.
The basic metals outlook in the US remains bright this

year, as the strength of the domestic economy –
underpinned by strong consumer spending, business
investment and robust export growth – supports healthy
metals demand. The Section 232 tariffs, by reducing the
competitiveness of imports, are also providing support to
domestic metals production. We see production rising by
4.1% this year.
In contrast, the sharp slowing of manufacturing activity in

the UK and the Eurozone has dented basic metals
production in the region. Export demand, in particular, has
been hampered by slowing global activity, trade tensions,
and the lagged impact of a stronger euro. We now expect
subdued growth of 1% in the Eurozone in 2018.
World investment is expected to grow 4% in 2018 thanks

to ongoing reductions in excess capacity taking place in
China and a solid outlook for metals intensive fixed
investment activity.
Basic metals production and investment is vulnerable to

the current trade war escalating to a more serious level
than is assumed in our baseline forecasts. A sharper
slowdown in China, or deeper than expected cuts taking
place over winter are also important downside risks.
Slower growth in China would not only hamper domestic
production but also hit output in other countries through
reduced import demand for metal-intensive products.
Page 46
Autumn
2018
Basic metals investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China -6.0 -3.7 5.8 1.1 0.5 0.3 0.4 100.4
Indonesia -0.3 5.7 1.5 8.8 7.3 4.7 4.2 7.1
India 8.1 -6.6 2.1 5.2 8.0 8.5 8.3 21.9
Japan 11.9 0.9 5.4 2.5 -1.0 0.5 0.5 14.2
Malaysia -8.7 1.5 8.8 3.0 3.3 3.5 3.4 0.4
S. Korea 1.2 9.6 0.2 0.7 3.2 3.2 1.6 20.6
Taiwan 4.5 -0.1 4.0 3.4 3.6 3.5 3.8 1.0
Thailand 4.5 6.9 8.0 4.3 4.8 3.5 2.9 1.0
Vietnam 17.2 43.8 21.1 10.0 8.2 5.7 5.1 0.7
Asia -1.8 -1.6 4.5 2.1 2.1 2.1 1.9 167.2
Brazil -13.3 10.6 -8.3 3.2 4.3 5.2 6.0 4.1

Canada -31.6 -6.4 6.2 2.3 1.8 1.8 2.1 2.3
Mexico 0.1 -2.7 0.0 0.7 1.4 1.0 1.0 1.5
US 2.8 3.3 2.8 2.9 1.5 1.9 1.7 9.0
Americas -8.2 2.9 0.3 2.7 2.1 2.5 2.7 16.9
Austria -2.4 6.9 11.6 1.6 0.9 1.0 0.7 1.2

Czech Republic -8.0 8.1 15.0 3.4 2.7 2.6 2.0 0.2
France -2.0 5.7 5.0 2.6 1.2 0.4 0.2 1.3
Germany -0.7 3.9 7.6 2.9 1.0 -0.1 -0.1 4.0
Hungary 72.1 56.3 15.8 4.8 4.8 2.7 2.2 0.3
Italy 1.2 5.0 7.1 2.2 0.1 0.1 0.2 2.2
Poland 19.9 24.4 12.0 5.8 3.4 2.6 3.1 0.8
Russia -26.1 26.4 -8.5 1.8 3.3 3.8 3.6 3.0
Slovakia -5.6 11.6 9.9 1.5 1.7 1.7 2.2 0.3
Spain 1.3 8.3 9.8 2.0 0.9 1.1 1.1 1.0
Switzerland -1.8 3.1 16.5 7.7 2.0 -0.1 0.1 0.3
Turkey -11.3 -11.9 -25.7 2.4 0.6 1.2 2.1 1.5
UK -19.5 -5.5 17.7 4.0 3.5 1.5 1.1 0.4
Europe -6.4 7.9 2.7 2.7 1.6 1.2 1.2 16.6
World -2.7 -0.5 4.0 2.2 2.0 2.0 1.9 200.7
Page 47
Autumn
2018
Electrical Engineering
Cyclical investment upswing easing
Electrical engineering is one of the most important machine
tool-consuming sectors, accounting for nearly one-quarter of
the total investment of the nine key MT-buying sectors. This
sector includes the producers of electrical motors, wiring and
fixtures as well as electronic components and
telecommunications equipment.
The fortunes of electrical engineering are closely tied to the

investment cycle – particularly the categories of electric
motors and computers/office equipment – and the world has
enjoyed nearly two years of strong growth, allowing global
sector investment to expand by well over 6% annually in the
past year.
But there are signs that the peak of the cycle has passed,
particularly in the developed world. We expect sector
investment growth to decelerate next year in both Europe
and the US. The deceleration is more pronounced in the US,
reflecting the fact that tax provisions to encourage additional
capital spending have pulled some investment activity
forward.
In Europe, sector investment growth is likely to peak this

year, as worries about potential US tariffs directed at the EU
have caused many firms to put capex plans on hold. The UK
market will be relatively subdued this year, reflecting
additional uncertainty about the final ‘Brexit’ negotiations, but
will see a modest bounce once the terms are known.
An upside surprise this year has been China, where sector

investment growth is estimated to have accelerated. But
much of this growth was frontloaded and due to stimulative
fiscal and monetary policy that have now tightened up.
Strong real estate activity and residential construction had
been supporting the wiring and electric fixtures segments
until recently, but a move toward renovation as opposed to
new build will cap this source of sector growth. At the same
time, continuing development of the electric power grid will
support growth into next year and beyond.
The longer-term global sector outlook is generally more

favourable that for other machine tool using sectors. A move
towards the “internet of things”, whereby a growing number of
devices and machines are connected to the internet, will
require firms to invest in components and sensors, along with
upgrades to existing electrical equipment. While this process
will be gradual, it will be sufficient to drive global sector
investment growth of above 3% into the medium term.
Page 48
Autumn
2018
Electrical engineering investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China -2.2 6.6 11.5 3.4 3.6 3.2 3.2 173.8
Indonesia -0.5 -1.7 -1.6 9.5 7.4 5.9 5.8 0.1
India 7.8 3.7 13.7 8.6 9.5 9.4 9.4 3.7
Japan 7.0 5.1 3.5 3.2 0.9 2.3 2.5 24.0
Malaysia -1.9 3.9 10.8 4.0 4.1 4.2 4.5 3.3
S. Korea 7.8 12.9 10.4 3.4 4.5 4.4 3.1 39.7
Taiwan 7.1 9.5 6.2 3.4 5.0 5.0 4.6 31.0
Thailand -3.8 11.4 8.0 7.7 8.6 7.2 5.6 13.7
Vietnam 130.1 -14.5 16.6 10.7 8.4 6.9 6.7 2.6
Asia 1.4 7.5 10.0 3.7 4.0 3.8 3.6 292.0
Brazil -15.5 12.9 -7.1 7.9 7.4 5.7 5.6 1.4

Canada -5.1 10.5 8.2 1.4 -0.8 -0.3 0.2 0.6
Mexico -22.3 1.8 2.4 2.6 3.5 3.1 3.0 13.9
US 7.6 4.3 6.5 3.9 1.8 2.3 2.9 72.2
Americas 0.8 4.0 5.6 3.8 2.1 2.4 2.9 88.1
Austria 8.1 11.6 14.5 1.9 2.4 2.1 2.0 2.4

Czech Republic -2.5 17.9 22.5 4.2 5.5 5.4 4.6 0.7
France 3.8 8.2 7.8 2.2 2.5 2.3 2.3 6.4
Germany 1.1 6.7 10.6 4.4 3.4 1.8 1.5 11.0
Hungary 20.1 24.8 16.7 3.2 1.3 2.1 2.6 0.7
Italy 1.7 0.0 7.2 3.9 2.3 1.7 1.9 3.9
Poland -1.8 11.9 15.1 3.7 6.3 6.3 6.4 0.8
Russia -77.2 25.0 4.5 5.1 6.4 7.3 6.3 0.2
Slovakia -6.7 0.4 2.9 2.5 4.5 4.5 4.4 0.4
Spain 1.4 8.4 13.4 1.8 4.3 3.9 3.7 0.6
Switzerland 1.3 6.2 8.5 2.1 1.3 0.2 1.3 0.4
Turkey -6.1 -5.9 -26.7 -0.1 2.9 4.5 5.1 1.9
UK -14.0 4.6 5.9 6.4 5.7 3.2 2.9 1.3
Europe -1.0 6.3 7.8 3.4 3.2 2.4 2.3 30.6
World 1.1 6.6 8.9 3.7 3.6 3.4 3.4 410.6
Page 49
Autumn
2018
General Purpose Machinery

This is a diverse sector incorporating the manufacture of
products such as non-vehicle engines and turbines,
pumps and compressors, furnaces, material handling
and ventilation equipment. Investment by the sector
accounted globally for about 12% of investment spending
by the nine key machine tool using industries in 2017.
The pickup in the developed-world investment cycle is

disproportionately benefitting this sector. Global sector
output jumped nearly 7% last year and is on path to
expand a further 5.4% this year, broadly in line with our
expectations. We expect investment spending to grow
slightly less rapidly than output this year and next, since
the global capex cycle has likely passed its peak.
This cyclical pattern is most pronounced in Europe,

where sector investment growth is set to grow by 9.2%
this year before slowing to 3.5% in 2019. Even though
the broader industrial backdrop has shifted down a gear,
capacity constraints in the general-purpose machinery
sector are extending lead times, resulting in rising order
backlogs that will support European investment well into
2019. In the UK, ‘Brexit’ has been a major impediment to
sector investment growth, but we expect a pickup once
the UK leaves the EU in March 2019, although the
outlook for the UK is highly uncertain.
Activity in the Americas has been disappointing this year,

and we have lowered our full-year sector investment
forecast to dip by 0.1% in 2018. US investment demand
has not responded nearly as strongly to the 2017
business tax cuts as we expected, and some large
consumers of general-purpose machinery (such as
automotive and metal products) have seen profit margins
erode due to rising materials costs. We do expect a
modest investment rebound next year, but the Americas
will nonetheless be the growth laggard.
Chinese sector investment held up surprisingly well in

the first half of this year, as government support for
construction and infrastructure activities boosted demand
for material handling and ventilation equipment. But
these policies are winding down, giving way to tighter
credit conditions and more subdued investment demand.
The beneficiaries of this Chinese transition away from
heavy machinery manufacturing will be the ASEAN
countries, which are set to become the growth leaders
for investment in the general-purpose machinery sector.
Page 50
Autumn
2018
General purpose machinery investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China 1.1 5.4 7.7 2.4 2.5 2.4 2.4 130.5
Indonesia 3.1 3.8 4.6 5.2 5.2 4.9 4.4 0.0
India 14.9 16.5 9.2 2.7 7.6 7.9 8.4 4.8
Japan 11.7 10.5 5.3 2.2 1.0 1.3 1.4 11.8
Malaysia -9.0 1.7 -11.5 -18.4 3.3 3.1 3.1 0.2
S. Korea -1.4 11.4 1.8 0.7 5.7 4.7 1.3 5.6
Taiwan 5.2 16.1 10.4 2.1 3.4 3.9 4.6 1.2
Thailand 13.3 -6.9 3.4 3.9 5.3 3.3 2.2 1.7
Vietnam 5.2 8.4 11.0 9.2 7.6 5.9 5.0 0.1
Asia 2.2 6.2 7.3 2.4 2.7 2.6 2.5 156.0
Brazil -26.0 10.0 -11.7 2.8 4.5 4.3 4.5 0.7

Canada -14.3 7.6 -13.8 -6.9 0.3 0.5 0.7 0.4
Mexico -15.7 5.7 0.6 1.7 2.2 1.9 1.8 4.1
US 6.4 -0.5 0.6 2.2 1.6 2.2 2.2 15.6
Americas -0.4 1.2 -0.1 2.0 1.8 2.2 2.1 20.9
Austria 6.1 3.9 5.4 1.3 2.2 1.9 1.7 0.9

Czech Republic -1.3 13.7 16.3 2.1 3.7 3.5 2.5 0.6
France 3.0 5.1 6.9 3.1 3.3 2.0 1.8 2.3
Germany -1.1 2.8 8.5 3.7 2.5 1.3 1.1 8.8
Hungary 7.3 20.6 4.9 4.5 1.4 1.8 1.8 0.4
Italy 5.3 8.6 12.5 2.1 0.8 0.4 0.4 4.4
Poland -12.6 9.6 17.8 4.1 4.4 4.5 4.5 0.4
Russia -24.0 27.7 -4.2 2.5 1.4 1.0 0.8 0.8
Slovakia -5.1 6.9 9.8 3.6 4.0 3.0 2.5 0.1
Spain 6.6 17.0 12.3 2.8 2.5 2.6 2.5 0.3
Switzerland -0.5 2.4 17.2 10.1 4.5 3.0 2.9 1.3
Turkey -2.1 7.0 3.6 -1.4 0.9 2.1 2.6 0.6
UK -14.7 4.6 4.9 3.5 5.1 3.7 1.9 1.4
Europe -1.2 5.9 9.2 3.5 2.5 1.6 1.4 21.8
World 1.6 5.6 6.7 2.4 2.6 2.4 2.3 198.7
Page 51
Autumn
2018
Metal Products
Global upcycle coming to an end
World fabricated metal products output is expected to
expand by 3.3% this year, a slight downgrade from 6
months ago. Metal products are heavily used in
industrial/electrical equipment, motor vehicles and
construction, and activity in most of these sectors is pulling
back across most regions of the world after a very strong
2017.
The investment outlook for metal product manufacturers is

relatively similar. Asia is the laggard, mainly due to China’s
efforts to stimulate the consumer and services side of the
economy, as well as transform manufacturing away toward
more high-value manufacturing such as automotive and
aerospace. This transformation is, however, to the benefit
of other Asian countries with more attractive production
costs such as Vietnam.
Europe has been an important source of sector investment

growth over the past 18 months thanks to a strong
industrial upcycle. But broad weakness in the first half of
this year signal that the cycle is topping out and will bring
metal products investment growth to more moderate levels
toward the middle of next year.
The industrial upcycle has more momentum in the US,

thanks both to the impact of the corporate tax cuts and
investment incentives enacted in late 2017 and the
resurgent US oil extraction sector. Nonetheless, metal
products producers have been indirectly affected by US
tariffs on steel and aluminium imports, which has raised
their input costs and reduced profit margins. This will cap
sector investment growth at under 4.5% this year, with a
further deceleration in 2019.
The balance of risk for the sector is skewed to the

downside, driven by the impact of a potential US-China
trade war. Beyond the steel and aluminium tariffs just
mentioned, President Trump has proposed further tariffs
on Chinese imports, with China promising retaliation if he
implements them. If this scenario were to play out, metal
products demand would be significantly reduced not only
in China and the US, but other countries that are linked to
their industrial supply chains.
Page 52
Autumn
2018
Metal products investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China 1.9 1.7 4.5 2.4 2.4 1.5 1.5 88.3
Indonesia -0.3 6.3 -0.5 5.6 4.5 3.9 3.3 4.1
India 11.5 6.6 1.3 3.0 6.8 6.9 6.7 3.2
Japan 9.5 -0.5 1.5 1.1 0.0 0.7 0.8 9.3
Malaysia -6.9 -2.9 -3.7 2.7 4.9 5.7 3.5 0.4
S. Korea -0.4 4.4 -6.2 0.0 3.4 3.3 1.7 7.4
Taiwan -1.5 1.4 3.0 2.4 3.2 3.5 3.5 1.4
Thailand -5.8 0.3 8.9 2.6 6.2 4.3 3.1 0.6
Vietnam 3.0 14.7 16.9 7.0 7.6 5.9 5.0 0.8
Asia 2.4 2.0 3.3 2.4 2.5 1.9 1.7 115.5
Brazil -19.1 5.0 -9.7 3.7 5.0 4.9 4.4 1.3

Canada -12.1 1.4 10.2 2.5 2.0 2.0 1.6 0.9
Mexico -20.2 -4.4 2.4 1.0 2.1 1.5 1.3 1.9
US 3.5 2.7 3.4 2.1 0.9 1.1 1.1 16.5
Americas -1.8 2.1 2.8 2.1 1.3 1.4 1.3 20.6
Austria 12.5 12.1 13.1 1.5 2.0 1.8 1.6 1.3

Czech Republic 0.2 16.1 19.1 4.1 2.7 3.0 2.5 1.2
France 4.5 8.9 8.9 3.1 2.7 2.2 2.1 5.0
Germany 2.6 6.0 9.9 4.6 3.3 2.0 1.3 7.0
Hungary 41.5 40.1 22.2 6.6 5.3 4.8 4.1 0.6
Italy 3.8 7.4 9.4 1.5 0.6 0.6 0.9 7.0
Poland -19.3 5.6 20.2 6.6 3.5 2.8 4.4 1.5
Russia -17.1 19.7 -6.5 1.2 2.6 2.4 2.1 0.5
Slovakia -5.6 11.6 10.6 2.8 3.4 4.1 4.3 0.2
Spain 0.6 10.4 10.2 4.3 3.3 3.3 3.4 2.1
Switzerland 2.6 5.5 12.1 6.2 1.4 -0.4 0.0 1.4
Turkey -5.3 -6.9 -27.5 1.2 3.1 3.8 4.0 1.2
UK -8.4 -5.5 15.9 2.2 3.2 1.3 0.9 2.6
Europe 0.5 6.7 9.7 3.4 2.5 1.8 1.8 31.6
World 1.5 2.9 4.5 2.5 2.4 1.8 1.7 167.7
Page 53
Autumn
2018
Motor Vehicles
Production remains resilient amid a strong
medium-term investment outlook
Global automotive markets have maintained surprising
strength in the early part of 2018, leading us to upgrade
our estimate of full-year production growth to 4.6%, not far
behind last year's 5.3% expansion. Production in China
has pushed ahead strongly despite the expiration of a tax
credit on small-engine vehicles, and a strong rebound in
Russian production has helped maintain robust growth in
Europe. US production turned around from a modest
decline in 2017, but will lag other regions this year.
Looking ahead, we expect a further deceleration in global

automotive production growth, to 3.5% next year and just
over 2% in 2020. The immediate cause of the slowdown is
the 50% increase in crude oil prices, which has boosted
inflation across much of the developed world and
increased the cost of owning and operating a car.
Furthermore, several years of strong growth in demand
during the extended period of low oil prices has begun to
saturate some markets, notably in Europe and the US.
The sector investment profile looks more promising than

production. We expect investment growth to outpace
production growth throughout the forecast horizon. One
reason for this is the migration of production within
regions. For instance, many automotive manufacturers are
making big investments in greenfield projects in Mexico
and (to a lesser extent) Brazil, which is contributing to a
strong outlook at the expense of Canada.
A second reason, especially for Europe, is that years of

past underinvestment is supporting a strong investment
upcycle across all major producers that will persist well
into 2019. Growth will be particularly strong in Eastern
European countries such as Poland, Slovakia and
Hungary, which have become attractive automotive
manufacturing hubs compared to higher-cost factories in
Western Europe.
A final and arguably the most important reason, is the

rapid increase in the number of middle-class households
able to afford a car. This is the main factor driving the
Asian investment outlook and will support robust growth
into the medium term.
Due to all of these factors, we expect global investment by

automakers to expand 7.1% in 2018, with 3.9% growth in
store next year.
Page 54
Autumn
2018
Motor vehicle investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China 6.8 7.2 9.2 4.6 3.4 3.0 2.4 108.8
Indonesia -0.3 0.1 -0.2 9.1 6.4 3.9 4.1 0.1
India 4.3 20.4 18.5 7.9 6.9 7.2 8.2 6.2
Japan 13.8 3.7 5.0 2.8 -2.7 1.6 1.2 23.2
Malaysia -13.2 1.0 9.9 4.0 3.4 5.2 4.0 0.3
S. Korea -2.7 7.7 -1.7 2.9 3.6 -0.3 0.3 15.0
Taiwan -1.9 0.7 0.9 8.0 1.3 2.0 2.3 1.1
Thailand -7.8 8.6 10.2 2.0 6.6 5.0 -0.3 5.1
Vietnam 11.1 6.7 23.7 7.8 9.9 3.2 4.6 0.5
Asia 6.1 7.1 8.0 4.3 2.8 2.8 2.2 160.1
Brazil -10.9 23.6 -0.9 4.0 4.3 5.0 5.9 8.2

Canada -12.2 -0.8 3.0 -1.8 -4.2 -3.2 -2.5 2.3
Mexico -20.4 4.2 1.6 2.9 4.0 3.5 3.5 7.5
US 6.2 3.0 2.6 0.7 1.9 1.7 4.8 44.4
Americas -0.8 5.3 2.1 1.3 2.3 2.2 4.5 62.4
Austria 9.5 15.8 26.4 17.4 3.2 -3.5 -3.0 1.7

Czech Republic 6.5 18.1 17.0 3.0 4.3 0.7 5.9 3.1
France 1.9 9.4 9.3 6.5 0.9 1.5 0.2 7.9
Germany 3.2 4.1 9.9 4.0 -0.3 0.5 1.9 43.6
Hungary 1.3 14.7 13.3 18.6 12.4 2.7 3.5 2.2
Italy 5.3 8.1 7.8 -0.7 8.5 7.1 3.7 7.2
Poland 12.9 17.2 12.2 10.5 22.5 11.8 4.1 3.5
Russia -18.2 33.8 5.0 8.4 4.4 6.0 4.7 1.5
Slovakia -3.9 1.4 16.3 13.6 6.6 0.8 1.9 0.6
Spain 5.5 2.4 9.2 3.1 6.1 -0.6 1.8 0.8
Switzerland 2.1 3.7 15.7 10.1 4.4 3.2 3.1 0.2
Turkey -4.4 -2.5 -23.4 -0.6 -1.9 -0.5 1.4 2.0
UK -15.8 4.6 5.9 3.8 4.5 -0.6 -0.5 7.8
Europe 0.9 6.7 9.2 4.9 2.9 1.8 1.9 82.0
World 3.2 6.6 7.1 3.9 2.7 2.4 2.6 304.6
Page 55
Autumn
2018
Other transport equipment

Global trade slowdown to weigh on sector
The strong global trade rebound over the past several years
has been a strong support of the “other transport equipment”
industry (which consists primarily of shipbuilding and railroad
locomotives and carriages), which saw output expand by
3.4% last year and is on track for a similar outturn this year.
However, high-frequency indicators of rail and seaborne
shipping have pulled back considerably in recent months.
This pullback could spell trouble for manufacturers of

container ships, for which there has been a glut for much of
the post-financial crisis period. Even though shipbuilding
activity has increased in major manufacturers such as South
Korea and Japan, investment has been very weak, since
there is still considerable excess capacity even after two
years of stronger seaborne trade volumes. Another factor
constraining the sector investment outlook is an unusually
low rate of decommissioning ageing tankers, which adds to
spare capacity.
The market for rail rolling stock (for which passenger traffic is
a more important determinant of global demand than for
shipping) has more promising prospects. India remains a
growth leader as previously-announced investments
(approximately $137bn over 2016-21) are currently being
made – purchase of 700 locomotives, and more than 17,000
railcars is expected in the 2018-19 fiscal year alone. In
China, emphasis is shifting from high-speed lines (which has
driven growth in recent years) to urban rail transit in order to
cope with air pollution. European markets are mature, but
passenger rail traffic continues to climb and there is an
ongoing need to replace obsolete rolling stock as well as
continue the transition away from diesel-electric locomotives.
In North America (where freight is the dominant use of

railway networks), oil pipeline bottlenecks have become
increasingly problematic in the Permian basin, and the rise in
crude oil prices has made rail transport more attractive,
stimulating demand for tank cars.
Taken together, we expect investment in the other transport

equipment sector to expand by 3% this year before
accelerating to 3.6% in 2019. The acceleration is
concentrated in Asia and partly reflects our belief that the
pullback in investment activity this year overshot the level
suggested by economic fundamentals.
Page 56
Autumn
2018
Other transport equipment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China -6.3 1.6 1.4 4.8 2.8 3.0 3.1 28.7
Indonesia 0.5 4.7 1.6 7.7 5.9 5.2 5.0 0.1
India 11.3 18.2 18.7 5.2 7.4 7.3 7.4 3.2
Japan 23.1 6.5 -1.4 2.2 2.0 1.5 1.6 2.3
Malaysia -16.1 1.5 -20.2 4.7 2.0 2.2 2.6 0.0
S. Korea -14.4 -24.9 -18.2 -5.4 3.8 4.7 3.1 2.5
Taiwan 1.2 11.5 5.9 5.0 3.7 3.8 4.0 0.8
Thailand 1.9 9.2 10.2 5.0 5.0 5.0 5.0 0.0
Vietnam 8.0 14.1 7.1 8.9 6.8 6.2 5.9 0.4
Asia -4.6 0.9 1.5 4.1 3.3 3.5 3.5 37.7
Brazil -23.5 -4.0 -13.7 0.4 4.8 5.0 5.2 0.8

Canada -18.7 5.3 17.2 2.3 1.0 0.8 0.9 0.3
Mexico -25.7 -3.4 4.6 1.8 3.2 2.5 2.6 0.3
US 6.8 2.8 4.5 1.6 2.0 2.4 2.4 13.5
Americas 2.8 2.3 3.8 1.6 2.2 2.5 2.5 14.9
Austria 9.4 16.3 -22.4 4.1 2.4 2.3 1.9 0.1

Czech Republic -1.8 -2.5 19.2 3.8 4.2 3.8 2.9 0.1
France 0.2 9.5 10.5 2.3 2.8 2.1 1.8 1.7
Germany -0.7 -3.3 11.3 2.4 2.3 1.1 0.9 1.0
Hungary 38.9 60.2 43.6 6.1 0.9 0.9 0.8 0.0
Italy 14.6 11.2 14.4 4.1 2.3 1.7 1.8 1.7
Poland -2.6 13.2 15.8 5.8 5.3 5.2 5.0 0.3
Russia -21.7 36.1 74.1 -20.2 5.2 4.2 4.1 0.2
Slovakia -3.9 1.4 13.7 3.8 3.9 3.4 3.3 0.0
Spain -1.8 4.4 28.4 5.1 4.3 4.3 3.8 0.1
Switzerland 4.9 -3.5 24.1 17.4 8.8 7.0 6.5 0.1
Turkey -1.2 -20.2 -22.0 2.6 2.7 2.6 2.9 0.0
UK -12.4 4.6 11.1 5.7 5.3 3.2 2.9 0.6
Europe -2.6 10.1 7.6 4.0 3.6 2.8 2.6 7.6
World -2.9 2.4 3.0 3.6 3.2 3.2 3.2 61.8
Page 57
Autumn
2018
Precision and Optical

Instruments
2018 slowing on Chinese weakness
Activity in the precision and optical instruments sector was
robust in 2017, but growth has slowed in early-2018.
Global production growth is expected to slow to 2.7% in
2018, from 5.9% last year. Much of weakness has come
from China, where output declined sharply in the first two
quarters of the year. Investment spending has softened
somewhat in early-2018, but more likely the decline is a
normalisation after strong growth in 2017. Indeed, longer-
term Chinese demand for precision instruments is likely to
grow as it develops new markets such as electric vehicles
which will require high-tech instruments in their production.
After a 15.5% decline in 2018, Chinese production is
expected to return to growth of 3.1% in 2019 and to 5½%
per year in the early-2020s.
Production in developed economies, which account for

nearly 80% of global output, has been more robust. Solid
US production, which accounts for 28% of the global total,
has been driven by robust capital spending due to
corporate tax cuts enacted late last year. Strong
investment in Japan, the world’s second largest producer,
has driven buoyant production in early-2018. European
output, by contrast, is expected to decelerate somewhat.
Sector investment is expected to broadly track output

trends over the forecast period. From 2014-16, investment
lagged sector output, leaving the sector with plenty of
scope for catch-up growth in investment as firms seek to
expand capacity and replace ageing capital. Indeed, sector
investment outpaced output in 2017, and should now
move more in line with output over the next two years.
Trade tensions pose a downside risk

The balance of risk surrounding our central forecast has
grown over the last six months. The US and China have
each imposed tariffs on bilateral imports, including on
many precision and optical instruments, and more tariffs
could be on the way. Beijing has encouraged Chinese
companies to look towards Europe, Japan, South Korea
and Taiwan for alternatives to US imports, although given
the US’s dominance in the sector, this may be difficult.
Although there could be some trade diversion, the global
nature of supply chains means the net impact on these
countries is likely to be negative.
Page 58
Autumn
2018
Precision and optical equipment investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China -6.0 14.4 -13.7 1.8 4.3 4.1 4.1 15.3
Indonesia 1.2 -2.0 -1.5 9.1 7.0 5.4 5.5 0.0
India 5.3 21.3 24.7 9.8 9.0 9.3 9.4 0.8
Japan 13.9 0.9 4.8 3.4 0.7 1.9 2.5 4.6
Malaysia -3.0 -0.2 14.4 3.7 2.9 3.0 3.4 0.1
S. Korea -0.2 28.8 15.6 3.2 4.0 3.2 1.7 1.1
Taiwan -1.2 6.1 5.3 5.1 2.9 4.0 4.3 0.4
Thailand -6.6 9.8 16.3 8.0 6.4 5.6 4.5 0.1
Vietnam 166.1 -17.1 18.3 10.9 8.5 7.1 7.0 0.2
Asia -0.6 11.6 -6.2 2.9 3.7 3.8 3.9 22.7
Brazil -16.3 18.1 -14.4 4.0 7.0 5.5 5.2 0.1

Canada -7.0 16.0 4.6 1.9 -1.2 -0.5 0.0 0.0
Mexico -14.0 -5.4 1.3 2.9 2.8 2.5 2.4 1.1
US 1.1 3.9 3.4 4.2 2.8 4.0 4.5 28.5
Americas 0.3 3.5 3.3 4.2 2.8 3.9 4.5 29.7
Austria 11.0 17.3 17.8 3.5 2.2 2.0 1.9 0.5

Czech Republic -1.2 20.2 22.9 3.9 5.1 5.3 4.2 0.1
France 1.4 18.9 11.7 2.8 1.3 0.7 0.6 6.3
Germany -0.8 5.5 6.8 3.2 2.4 0.7 0.3 6.7
Hungary 29.6 37.9 15.4 3.4 1.1 2.7 3.4 0.1
Italy 0.5 9.8 14.0 4.5 3.7 2.6 2.4 1.4
Poland -13.3 10.4 9.9 6.7 6.6 8.0 8.1 0.1
Russia -13.3 21.5 -5.2 -0.4 -0.4 0.4 0.0 0.3
Slovakia -11.8 -5.0 -3.4 5.3 7.3 6.1 6.0 0.0
Spain 1.5 1.4 18.0 4.6 3.7 3.9 4.1 0.2
Switzerland -5.1 0.6 18.5 10.7 2.7 1.5 1.6 6.1
Turkey 2.9 -5.9 -23.8 2.4 2.7 5.7 6.1 0.3
UK -18.6 4.6 10.0 3.2 4.3 3.0 2.9 0.7
Europe -2.1 8.0 11.7 5.3 2.3 1.3 1.2 22.8
World -0.7 7.2 3.0 4.2 2.9 3.0 3.2 75.2
Page 59
Autumn
2018
Special Purpose Machinery

Special purpose machinery covers equipment used in a
wide range of industries, including mining, construction,
packaging, electronics, textiles, food and agriculture as
well as residential applications. This sector’s share of
global investment by the nine key machine tool using
industries has been growing gradually, reaching almost
12% in 2017. Sector investment is expected to increase by
8.2% this year, the same as last year.
Sector investment in Europe continues to outpace the

world as a whole by a small margin, though the maturing
of the investment upcycle means that overall growth is
expected to be 9.8% this year. The deceleration comes
amidst capacity constraints which might otherwise
stimulate additional investment, but uncertainty about
whether the EU will be the target of US tariffs is a major
near-term obstacle. The expansion remains broad-based
apart from Turkey (due to inflation and currency
fluctuations) and the UK (due to Brexit uncertainty).
Looking ahead to 2019, European sector investment will
continue to outpace the global total, reflecting the need to
retool after the many years of underinvestment following
the global financial crisis.
In contrast, the Americas region is expected to be much

weaker this year, with sector investment to dip slightly.
This trend is mainly due to the dynamics in the oil
extraction sector, which saw buoyant growth in 2017 but
has cooled recently as oil prices have stabilized. A second
factor is that the US business tax cuts appear to be having
a smaller impact on investment than in the past amid
worries that additional tariffs and retaliation may damage
domestic industrial prospects. As the trade policy
environment becomes clearer, we expect Americas
special-purpose machinery investment growth to pick up
modestly to 2.2% next year.
China is facing similar challenges to the developed world

with respect to labour markets and the need for additional
automation, particularly in labour-intensive sectors, such
as textiles and electronics where offshoring to Vietnam
and other Asian countries is a real threat. Nonetheless, the
transition away from low-value assembly and light
manufacturing will keep overall sector investment growth
to around 2% by 2019 – in sharp contrast to the outlook for
next-generation Asian manufacturing centres, such as
Vietnam and Indonesia.
Page 60
Autumn
2018
Special purpose machinery investment

2016 2017 2018 2019 2020 2021 2022 Level in
2017, US$bn
China 0.5 7.1 9.4 2.5 2.4 2.3 2.3 133.2
Indonesia -2.4 1.9 1.5 6.4 5.7 4.5 4.0 0.0
India 3.8 15.3 9.7 2.3 8.3 8.7 9.0 2.0
Japan 14.0 5.4 8.0 2.1 0.6 1.2 1.3 13.1
Malaysia -2.8 4.4 26.4 8.8 3.9 3.6 3.6 0.3
S. Korea 3.6 35.0 3.5 0.3 5.8 4.8 1.4 9.0
Taiwan 3.9 14.4 9.6 3.2 3.8 4.2 4.8 1.6
Thailand 3.4 7.3 6.4 7.3 8.8 6.7 5.0 6.0
Vietnam 4.9 8.3 8.3 9.1 7.3 5.8 4.9 0.0
Asia 1.8 8.3 8.9 2.6 2.8 2.6 2.4 165.3
Brazil -11.9 7.8 -7.5 4.8 5.2 4.7 4.8 1.4

Canada -18.9 15.1 -3.8 -0.4 1.3 1.2 1.4 0.3
Mexico -17.5 -1.5 -0.8 -1.3 2.4 2.2 2.1 1.1
US 0.2 7.1 -0.1 2.3 1.5 2.3 2.4 13.1
Americas -2.9 6.6 -0.8 2.2 1.8 2.5 2.5 15.8
Austria 5.0 11.1 12.7 1.2 2.0 1.8 1.5 1.1

Czech Republic -1.3 13.7 16.3 2.1 3.7 3.5 2.5 0.6
France 3.0 5.1 6.9 3.1 3.3 2.0 1.8 2.3
Germany -1.1 2.8 8.5 3.7 2.5 1.3 1.1 8.8
Hungary 7.3 20.6 4.9 4.5 1.4 1.8 1.8 0.4
Italy 5.3 8.6 12.5 2.1 0.8 0.4 0.4 4.4
Poland -5.5 15.1 18.5 3.3 4.3 4.2 4.2 0.6
Russia -19.1 18.1 -9.8 2.3 1.7 1.1 0.9 0.5
Slovakia -3.9 6.3 9.0 1.8 3.0 2.6 2.2 0.2
Spain -1.9 7.5 10.0 6.2 1.8 2.3 2.2 0.3
Switzerland -0.6 8.2 12.4 5.6 3.5 2.0 2.2 0.3
Turkey -15.2 -14.7 -26.7 1.5 4.6 5.0 4.7 0.6
UK -0.6 8.2 12.4 5.6 3.5 2.0 2.2 0.3
Europe -2.1 8.4 9.8 3.5 2.6 1.8 1.5 16.1
World 1.1 8.2 8.2 2.6 2.7 2.5 2.3 197.2
Page 61
Autumn
2018
Economic Background
Autumn
2018
Economic Background
World Economic Prospects

Overview: Growth still on track to ease modestly
• Protectionism, tightening global liquidity and emerging
market concerns remain key threats to the global
economic expansion. But while these factors may
trigger slower growth in 2019 and beyond, there is little World: GDP & PMI
compelling evidence of a significant loss of growth Index
Global composite PMI (Adv two months, LHS) % y/y
momentum. We expect global GDP growth to ease 65 6
Global GDP (RHS)
gently from 3.1% this year to 2.8% in 2019. 5
60
4
• Potential growth threats have certainly surfaced this 55
year, but our current estimates for global GDP growth 3
in H1 2018 show no clear loss of momentum relative 50 2
to 2017. While the global composite PMI fell for a 45 1
second month running in August to 53.4 – just 0.1pp
0
above its February low – it still points to global GDP 40
-1
growth of around 3%.
35
-2
• Looking to 2019, we see some loss of momentum in 30 -3
the advanced economies after a couple of years of 2001 2004 2007 2010 2013 2016
exceptional growth. Higher inflation and tightening Source : Oxford Economics/Haver Analytics/Markit
labour markets are likely to lead to weaker real income
growth and thus household spending growth too. And
despite investment holding up well in H1, we expect
protectionism-related uncertainty to weaken growth in
the second half of the year and 2019. Nonetheless, the
support from US fiscal policy will stretch into 2019 and
financial conditions remain accommodative so growth
in the region should remain pretty solid.
• With Chinese GDP growth also likely to slow gradually,

global trade growth, which has recently been soft, may
continue to ease. This will make conditions more
challenging for manufacturers, particularly those in
emerging markets (EMs).
• Of greater concern for EMs is perhaps the persistent

strong dollar and declining global liquidity, in the light
of the build-up of debt in some economies over recent
years. Nonetheless, we do not see Turkey’s and
Argentina’s problems as being symptomatic of a wider
malaise in EMs – fundamentals are generally stronger
than a decade ago in most EMs. For now, a wider EM
crisis seems unlikely, particularly if, in line with our
baseline view, the dollar begins to weaken again and
global growth remains solid.
Page 62
Autumn
2018
Economic Background
Synchronised slowdown (10%) Trade war (10%)

The US ends NAFTA participation and, on
Heightened trade policy uncertainty weighs
on Eurozone and US domestic demand top of EU/other tariffs in the baseline,
raises tariffs on China, S.Korea and Taiwan
Broader global slowdown follows as Iranian
sanctions and broader supply disruption The US is hit by retaliatory tariff hikes
drive oil to $100pb and tighter monetary Confidence drops globally, while the US
conditions expose pockets of vulnerability
Geopolitical tensions
dollar strengthens and equities fall sharply

Oil exporters fare better as some mitigate amid deteriorating market sentiment
the Iran output drop and investment surges
Growth falters in the US and globally
Trade war fears dissipate (20%) Market turmoil (10%)

Inflationary pressure increases in the late-
President Trump claims trade war victory, cycle US economy
following China concessions and progress
in US-EU and NAFTA negotiations The Federal Reserve tightens policy more
rapidly than expected and bond and equity
Trade growth strengthens as expected tariff
hikes fail to materialise markets sell off
The impact is exacerbated by emerging
Global confidence rises, boosting market
sentiment and driving equities higher signs of distress in the US corporate sector
Emerging markets bear the brunt of the
Recent dollar strength unwinds, providing
an additional boost to global growth shock as the dollar strengthens and the
sell-off broadens
Policy brakes
Alternative GDP growth forecasts
2016 2017 2018 2019 2020 2021 2022
Oxford Baseline Forecast (50%)

US 1.6 2.2 2.9 2.3 1.6 1.8 1.9
Eurozone 1.8 2.5 2.0 1.7 1.6 1.4 1.3
China 6.7 6.9 6.5 6.1 5.7 5.4 5.2
World 2.4 3.0 3.1 2.8 2.7 2.8 2.8
Trade war hits global growth (10%)

US 1.6 2.2 2.8 1.6 1.0 1.5 1.8
Eurozone 1.8 2.5 2.0 1.3 1.6 1.5 1.4
China 6.7 6.9 6.5 5.4 5.0 5.2 5.1
World 2.4 3.0 3.1 2.4 2.3 2.7 2.8
Synchronised global slowdown (10%)

US 1.6 2.2 2.8 1.5 0.4 1.2 1.9
Eurozone 1.8 2.5 2.0 1.1 0.7 1.0 1.4
China 6.7 6.9 6.5 5.4 4.2 4.9 5.5
World 2.4 3.0 3.1 2.4 1.9 2.4 2.9
Market turmoil amid late-cycle policy tightening (10%)

US 1.6 2.2 2.8 1.2 0.5 1.7 1.9
Eurozone 1.8 2.5 2.0 1.3 1.0 1.5 1.5
China 6.7 6.9 6.5 5.4 5.0 5.3 5.5
World 2.4 3.0 3.1 2.3 2.0 2.7 3.0
Trade war fears dissipate (20%)

US 1.6 2.2 2.8 2.4 1.7 1.7 1.8
Eurozone 1.8 2.5 2.0 2.1 1.8 1.4 1.3
China 6.7 6.9 6.5 6.7 5.9 5.4 5.2
World 2.4 3.0 3.1 3.2 2.9 2.7 2.7
World GDP growth at 2010 prices and market exchange rates
Page 63
Autumn
2018
Economic Background
Summary of International Forecasts

2017 2018 2019 2020 2021 2022
Real GDP
North America
United States 2.2 2.9 2.3 1.6 1.8 1.9
Canada 3.0 2.0 1.7 1.5 1.6 1.6
Europe
Eurozone 2.5 2.0 1.7 1.6 1.4 1.3
Germany 2.5 1.8 1.6 1.5 1.2 1.1
France 2.3 1.6 1.7 1.7 1.6 1.6
Italy 1.6 1.2 1.1 1.0 0.8 0.8
UK 1.7 1.3 1.4 2.0 2.2 2.1
EU27 2.5 2.1 1.8 1.8 1.7 1.6
Asia
Japan 1.7 1.0 1.1 0.1 0.9 0.9
Emerging Asia 6.0 6.0 5.6 5.4 5.2 5.0
China 6.9 6.5 6.1 5.7 5.4 5.2
India 6.2 7.6 7.2 7.0 6.8 6.5
World 3.0 3.1 2.8 2.7 2.8 2.8
World 2000 PPPs 3.7 3.7 3.5 3.5 3.5 3.4
World trade 6.3 5.1 3.8 3.9 3.8 3.7
Inflation (CPI)
North America
United States 2.1 2.4 2.0 1.9 2.0 2.0
Canada 1.6 2.1 2.0 2.1 2.0 2.0
Europe
Eurozone 1.5 1.8 1.7 1.7 1.8 1.9
Germany 1.7 1.9 1.8 1.9 2.0 2.1
France 1.0 1.9 1.6 1.5 1.6 1.6
Italy 1.2 1.4 1.8 1.6 1.7 1.8
UK 2.7 2.5 2.0 1.6 1.6 1.7
EU27 1.7 1.9 1.8 1.7 1.8 1.9
Asia
Japan 0.5 1.0 1.1 1.8 1.1 1.1
Emerging Asia 2.5 2.7 2.9 3.0 3.0 2.9
China 1.5 2.2 2.6 2.7 2.8 2.8
India 3.3 4.8 5.1 5.4 5.4 5.2
World 3.0 3.3 3.5 3.3 3.2 3.1
Exchange Rates
US$ Effective 91.1 88.3 87.1 85.5 85.0 84.6
$/€ 1.13 1.19 1.22 1.25 1.25 1.25
¥/$ 112.1 109.5 108.4 108.5 108.7 108.9
Commodity Prices
Brent Oil ($/bl) 54.2 74.1 76.5 73.0 73.5 75.3
Page 64
Autumn
2018 Economic Background
Brazil
Brazil
Highlights

Highlights
The 2018 presidential campaign is officially on and the
race is even more fragmented than usual. Of the 10
 Meanwhile, we have further downgraded our 2018-19
GDP forecasts this month. The 0.2% rise in GDP on
registered candidates, we think at least four stand a the quarter in Q2 may have surprised us on the upside,
real chance of winning and a second round of voting is but a cumulative 0.5% downward revision to earlier
almost certain. Right-wing firebrand Jair Bolsonaro, quarters meant our -0.4% q/q estimate was almost
who is leading the polls since jailed former president accurate in level terms. That said, given subdued
Lula was officially banned from running on 31 August, underlying domestic momentum and a challenging
will most likely make it to the run-off. However, we think external environment, we have cut our GDP estimates
that his high rejection rate, the inability to form alliances for this year and next to a below-consensus 1.1% and
and his extremist rhetoric mean that he will lose the 2.3%.
second round on 28 October. Lula’s running mate, left-
 Inflation was a little lower than expected in August, with
wing Fernando Haddad (PT), centre-right Geraldo
prices falling by 0.1% m/m, implying an annual rise of
Alckmin (PSDB) and centre-left Marina Silva (REDE)
4.2%. We forecast inflation to end 2018 and 2019 at
are equally likely winners. Volatility will remain high in
4.4%.
the next 10 weeks.
 The Brazilian real (BRL), which has lost over 20%
versus the US$ year-to-date, could drop by another
20% (even if only temporarily) should Haddad gain
enough traction to take him to the run-off against
Bolsonaro. Our baseline forecast continues to be that a
more centrist candidate wins the vote and the BRL
rallies to 3.90/$1 by year-end, meaning the central
bank won’t need to raise the Selic rate until Q1 next
year.
Forecast for Brazil

(Annual percentage changes unless specified)
2017 2018 2019 2020 2021 2022
Domestic Demand 1.1 1.7 2.9 3.8 3.2 2.8
Private Consumption 0.9 1.5 2.1 3.3 2.9 2.8
Fixed Investment -1.9 3.7 4.4 4.6 4.4 4.4
Stockbuilding (% of GDP) -1.5 -1.4 -0.7 0.2 0.7 0.9
Government Consumption -0.6 -0.1 0.0 0.0 0.0 0.0
Exports of Goods and Services 5.7 2.6 5.1 3.7 3.9 3.9
Imports of Goods and Services 5.5 5.9 8.2 8.1 6.2 5.2
GDP 1.0 1.1 2.3 3.0 2.7 2.5
Industrial Production 2.8 2.7 4.0 2.9 2.6 2.6
Consumer Prices 3.4 3.8 4.4 4.2 3.9 3.7
Government Budget (% of GDP) -7.8 -8.0 -7.2 -6.3 -5.4 -4.9
Trade Balance ($bn) 64.0 56.9 53.6 45.5 44.7 44.8
Current Account ($bn) -9.76 -14.54 -20.77 -31.66 -33.97 -37.72
Current Balance (% of GDP) -0.47 -0.79 -1.04 -1.50 -1.52 -1.61
Short-Term Interest Rates (%) 10.07 6.48 7.34 7.90 7.90 7.90
Exchange Rate (Per US$) 3.19 3.71 3.70 3.73 3.78 3.83
All growth rates are calculated based on values in local currency
Page 65
Autumn
2018 Brazil
Poor growth amid uncertain times
For several months we have argued that the effects of the truck Brazil: Contributions to GDP growth in Q2 2018
drivers’ strike would be temporary, while those from the external
headwinds would take time to materialise. Data for Q2 Stockbuilding 0.9
confirmed that the economy performed poorly in April-June,
Imports 0.3
with the 0.2% q/q rise in GDP overwhelmingly the result of
accumulating stocks and a fall in imports. By contrast, private GDP 0.2
consumption moved sideways, while investment and exports Govt. Cons. 0.1
contracted sharply. The poor composition of growth in Q2 and
Priv. Cons. 0.0
the weak underlying momentum implied by the downward
revision to earlier quarters left us with no option but to cut our Investment -0.3
GDP growth forecasts for 2018 and 2019 once again. The
Exports -0.8
persistent rise in volatility in the exchange rate, higher risk
premia and collapsing demand from Argentina are further -1.0 -0.5 0.0 0.5 1.0
Source: Oxford Economics, Haver % points
reasons to be cautious about growth in the coming quarters. As
such, our below-consensus GDP growth forecasts of 1.1% for
2018 and 2.3% for 2019 are based on the following factors:
• Low interest rates may not last that much longer: the Brazil: Contributions to GDP
% year
effects of strike-related food shortages and spikes to fuel 12 Domestic
prices on inflation have already faded, but the depreciation demand
10 F'cast
GDP
of the BRL and its volatility could cause inflation 8
expectations to rise further. Our modelling suggests that a 6
20% fall in the real would probably have to be countered by 4
aggressive rate hikes, which justifies why the interest rate 2
forward curve is pricing in 100bp of tightening before year- 0
end. Higher short-term market interest rates have led to a -2
rise in longer-term rates, prompting banks to stop cutting Net exports
-4
their lending rates to borrowers. If sustained, this process -6
could jeopardise the still-fragile cyclical recovery at a time -8
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
when spare capacity is still abundant. We continue to expect Source: Oxford Economics
that the first rate hike will occur in Q1 2019 and think that
150bp of tightening to 8% next year will be enough to keep
inflation between 4-4.5% until end-2019.
Brazil: IPCA inflation and Selic policy rate
• Recovery in investment will be gradual at best: even %
though we always ruled out a V-shaped recovery in 16.5
investment before the October elections, the four quarters of 14.5 Policy rate (Selic)
F'cast
growth before Q2 2018 provided some false hope. The

12.5
disruption caused by the truckers’ strikes will take a toll on
investment at a time when uncertainty and borrowing costs 10.5
have increased, meaning that the recovery after the 8.5
contraction in Q2 will be gradual. Inflation (IPCA)
6.5
• Volatility ahead of the elections: since the start of the 4.5

Inflation target
year, the BRL has weakened by over 20% versus the US$
2.5
and the EMBI risk premium has risen by 100bp, increasing 2006 2008 2010 2012 2014 2016 2018 2020
the cost of borrowing (and hedging) for firms. We think this Source: Oxford Economics
volatility reflects the fact that whoever wins the election will
have to eliminate the roots of Brazil’s large primary fiscal
deficit. So far, all parties except for PT have committed to
doing so by reforming the pension system. By contrast, the
Page 66
Autumn
2018 Brazil
PT program proposes more state intervention (a serious tail
risk for the economy).
Brazil: FX rate during election years
BRL/USD Index, July 5th = 100
Medium term growth will fall well short of 3% 130
Election Day
Our forecast that Brazil will probably not grow faster than 3% Pre-campaign
+
120
Campaign period
again on a sustained basis reflects the fact that it remains a
relatively closed economy with low domestic savings, an 110
uncompetitive and a relatively unskilled labour force, and a
100
large stock of public and private debt to service. The medium-
term outlook reflects: 90
2014 2002
• Pension reform will be done in stages: the 20-year budget 80 2006 2010
freeze made reforming the pension system essential. With 2018 Depreciation
total expenditure capped and pension-related spending 70

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
growing as the population ages, the room to cut Source: Oxford Economics/Haver
discretionary expenditure is extremely reduced from 2019
onwards. However, we don’t believe that a “once and for all”
pension reform will be approved next year. Instead, we think
Brazil will follow the example of other countries and vote Brazil: Total government expenditure (2017)
through individual measures gradually over several years Pensions Interest Payroll Other ring-fenced Discretionary
(such as linking pension benefits to CPI rises rather than to

minimum wages or progressively increasing minimum 20%
retirement ages).
7%
18%
• Balance sheet-induced recession: because the 2015-16

slump was caused by firms, households and the government
all over-borrowing, we can rule out a ‘V-shaped’ recovery.
Even though the bulk of public and private debt is mainly of
21% 34%
a short-term nature, servicing costs are high, meaning that
deleveraging will hamper consumption, until the recovery in
the labour market firms up, and investment, until companies
Source: Secretaria do Tesouro Nacional, Banco Central do Brasil
return to profitability.
• No investment grade status until the 2020s: the move

towards populist policies in 2009-14 cost Brazil its
Brazil: Twin deficits
investment-grade status. Given the gradual approach to % of GDP
fiscal tightening and the slow recovery ahead, we only see 4
F'cast
Brazil regaining its investment-grade status by 2023, by 2 Current account
which time the country’s debt-to-GDP ratio will finally be
0
trending down, after having peaked at 83%. S&P’s and
-2
Fitch’s decision, in Q1 2018, to downgrade Brazil to BB-,
from BB, does not change this view as we think Brazil fairly -4
Fiscal balance
rated at BB using our sovereign risk model. -6
-8
-10
-12
2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Oxford Economics
Page 67
Autumn
China
China
Highlights

Highlights
Overall growth momentum held up in August,
underpinned by somewhat stronger investment and
 A weaker CNY has helped Chinese exporters in recent
months, but policymakers have taken measures to
consumption. But credit growth has yet to respond to support it, including the re-introduction of the “counter-
the monetary policy easing started in Q2, underscoring cyclical factor” in the setting of the fixing rate for the
the downward pressures in the rest of the year. Indeed, CNY, confirming that they want to dampen the pressure
we still expect growth to be challenged in the coming for CNY depreciation. Looking ahead, we continue to
months by the slow credit growth and the trade conflict expect the greenback to give up ground globally
with the US. That said, recent developments suggest through end-2019. Against this background we expect
that the slowdown is likely to be modest. We maintain the CNY to appreciate somewhat from 6.86 now to 6.70
our GDP growth forecasts of 6.5% in 2018 and 6.1% in by end-2018, and to strengthen further to 6.30 by end-
2019. 2019.
 China’s overall export growth eased in August. But the  Amid rising trade headwinds, China’s policymakers
continued strength of exports to ASEAN and the US have started to ease the macro stance and have
provide some relief as to current global demand trends. indicated a readiness to ease further if growth slows
Nonetheless, we expect the trade conflict with the US sharply. But as we have stressed before, and based on
to escalate further before subsequent de-escalation, recent developments, we do not envisage a major shift
and that the dispute will soon become a drag on towards significant stimulus in the coming months.
exports.
Forecast for China

2017 2018 2019 2020 2021 2022
Domestic Demand 6.3 6.1 5.6 5.3 5.1 5.0
Fixed Investment 4.6 4.3 4.2 4.1 3.9 3.8
Government Consumption 11.1 8.2 6.7 5.8 5.3 5.2
GDP 6.9 6.5 6.1 5.7 5.4 5.2
Manufacturing (value-added) -2.1 -1.6 -1.1 -1.2 -1.4 -1.4
Consumer Prices 1.5 2.2 2.6 2.7 2.8 2.8
Current Balance (% of GDP) 1.3 0.1 0.2 0.4 0.5 0.4
Current Account ($bn) 164.9 22.4 30.1 78.8 91.2 93.3
Total Trade Balance ($bn) 210.7 89.6 73.8 113.0 119.3 117.3
Page 68
Autumn
2018 China
Growth held up in August…
Following the resilient Q2 data, growth in industry remained China: Key cyclical indicators
broadly steady in July and August. Overall fixed asset % year
18
investment growth picked up in August, in part reflecting still- Value added industry (real)
16 Retail sales (real)
resilient real estate activity. But corporate investment lost
14 Fixed asset investment (nominal)
momentum and infrastructure investment growth remained
subdued despite recent efforts to support it. Household 12
consumption improved slightly last month, with real retail sales 10
growth edging up to 6.6% y/y. However, overall credit growth is 8
yet to respond to the monetary policy easing started in Q2. 6
…but headwinds linger 2
0
Looking ahead, we think China’s export prospects remain 2014 2015 2016 2017 2018
positive for now, as global demand momentum is holding up Source : Oxford Economics/CEIC
reasonably well. Nonetheless, the intensifying US-China trade
conflict remains a key risk to China’s export outlook. While
discussions between the two sides seem to be resuming,
prospects for significant progress towards de-escalation are China: Housing starts and sales
% year, 3m mov avg
weak. We expect the trade conflict to escalate further before 100
subsequent de-escalation, when the negative impact in the US Floor space sold
80 Floor space started
becomes more visible. Domestically, we still expect demand
momentum to cool over the rest of 2018, on slow credit growth 60
so far this year, slower real estate activity and the negative
40
impact of the trade conflict. But we expect the slowdown to be
modest, given still resilient overall global demand and some 20
further easing of the macro stance. Overall, we maintain our 0

forecast that China’s GDP growth will slow from 6.7% in Q2 to
-20
6.2% in Q4, averaging 6.5% for 2018, and slowing further to
6.1% in 2019. The main factors affecting our short-term forecast -40
2009 2011 2013 2015 2017
are:
Source : Oxford Economics/Haver Analytics
• Fiscal policy to be more supportive: the government

plans to accelerate infrastructure spending to boost the
cooling economy. At the same time, spending on health and
China: Monetary policy stance
education, social security and the environment continues to %
rise solidly, in line with the central government’s aspiration 6.0
for higher-quality growth.
5.0
1 year lending rate
• Still low inflation gives scope for monetary policy 4.0
flexibility: while China’s policymakers have shifted the 3m Chibor rate
policy stance a little bit in response to signs of global 3.0
headwinds, we do not envisage a major easing of the policy
2.0 7 day repo rate
stance in the coming months unless the external
environment worsens more substantially. We forecast that 1.0 Interest rate on excess reserves
CPI inflation will remain comfortably below the PBoC’s 3%
target and thus we do not expect higher benchmark interest 0.0
2015 2016 2017 2018
rates in 2018. Source : Oxford Economics/Haver Analytics
Page 69
Autumn
2018 China
• Solid consumption growth: relatively strong real wage
growth and a resilient labour market are lifting the living
China: Household consumption and income
standards of households, feeding through into robust % year, real, 4q mov avg
spending. We expect household consumption to increase by 16
6.9% this year. 14
12
• Robust services sector: with consumption becoming an
10
increasingly important driver of growth as households get
richer, demand for services will remain strong. Indeed, the 8
services sector has outpaced industry since 2012 and 6

accounted for 52% of GDP last year. 4 Disposable income
2 Consumption expenditure
A gradual slowdown amid rebalancing
0
We expect GDP growth to decelerate through to 2020 on 2005 2007 2009 2011 2013 2015 2017
Source: Oxford Economics/Haver Analytics
slowing investment and industrial activity. But we forecast
continued solid consumption and service sector growth. Overall,
we expect GDP growth in 2018-20 to average 6.1%.
The Chinese government targets average GDP growth of at China: Current account composition
% GDP
least 6.5% in 2017-20 to achieve the objective set in 2010 to Primary income
12.0 Forecast
double GDP and per capita income by 2020. With 2017 growth Secondary income
10.0 Services balance
having surprised on the upside, China now only requires
Goods balance
average growth of 6.3% per year in 2018-20 to meet that target. 8.0
Current Account
Nevertheless, challenges remain, including a property 6.0
slowdown and still significant excess capacity in heavy industry.
4.0
In addition, the authorities’ continuing focus on growth may lead
2.0
to trade-offs that compromise the reform programme. Indeed,
the approach to key areas of reform, including SOE reform, 0.0
remains timid. But continued implementation of supply side -2.0

reforms is vital to enable robust organic growth over the -4.0
medium term. 2000 2003 2006 2009 2012 2015 2018 2021 2024
• Urbanisation and reforms: the government targets an
urbanisation rate of 60% by 2020 (from 55% in 2015), with
around 100mn urban residency permits granted to rural
China: Real consumption and investment
migrants. However, better access to public services will be
% year
needed if migrants are to spend and behave like full urban 18
Forecast
citizens. This requires further reform of the 16
intergovernmental fiscal system. 14
12
Fixed
• Cutting overcapacity: the government has made progress investment
10
with cutting excess capacity in coal mining and steel. But Household
8 consumption
more capacity reduction is needed, including extending the GDP
6
reform efforts to other industries such as cement, glass,
4
electrolytic aluminum and shipping.
2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Page 70
Autumn
Eurozone
Eurozone
Highlights
Final Q2 GDP data confirmed that growth was stable the eurozone economy to maintain the current 0.4%
Highlights

at 0.4%. Surveys suggest the eurozone economy is pace in Q3 and Q4.
expanding at a similar pace in Q3 but continue to point
 Inflation edged down to 2.0% in August, but remains
to external risks despite the easing of trade tensions
close to the highest in six years, primarily a result of
with the US in recent weeks. Overall, our GDP growth
high energy prices. Core inflation remains significantly
forecasts remain unchanged at 2.0% for this year and
lower (currently at 1%), but we still expect it to start
1.7% for 2019.
rising as wage growth climbs across the region. We
 The detailed GDP breakdown by components see headline inflation remaining close to 2% over the
confirmed our expectations that household spending coming months, resulting in an average of 1.8% for
was very weak in Q2 and that net trade posted a 2018, before easing slightly to 1.7% in 2019.
negative contribution to growth for a second
 The ECB will meet this week, but no policy
consecutive quarter despite a mild rebound in exports.
announcements are expected. QE purchases are still
Fixed investment, on the other hand, rebounded
on track to end this year, and we do not expect the
strongly from a weak Q1.
first interest rate hike until H2 2019, with a very
 Leading indicators continue to suggest stable growth gradual pace of tightening thereafter.
in the second half of the year. The composite PMI was
virtually unchanged in August and its average in Q3
looks likely to be very similar to that of Q2. We expect
Forecast for Eurozone

2017 2018 2019 2020 2021 2022
Domestic Demand 1.8 1.8 1.9 1.7 1.5 1.4
Net exports (% of GDP) 4.2 4.4 4.2 4.1 4.1 4.0
GDP 2.5 2.0 1.7 1.6 1.4 1.3
Consumer Prices 1.5 1.8 1.7 1.7 1.8 1.9
Current Account (% of GDP) 3.5 3.2 2.9 2.8 2.7 2.6
Short-Term Interest rate (%) -0.3 -0.3 -0.1 0.3 0.6 0.8
Long-Term Interest Rates (%) 1.1 1.2 1.7 2.2 2.6 2.9
Exchange rate (US$ per Euro) 1.1 1.2 1.2 1.3 1.3 1.3
Exchange rate (YEN per Euro) 126.7 130.6 132.3 135.7 135.9 136.1
Page 71
Autumn
2018 Eurozone
Investment drove Q2 growth
The latest release for national accounts in Q2 confirmed that Eurozone GDP growth contributions
GDP growth was stable at 0.4%. As we had suspected, the q/q in %
breakdown by components showed weaker growth in consumer 1.5
spending (which rose at its slowest pace since 2014) and a 1.0
negative contribution from net trade despite a mild rebound in 0.5
exports. Fixed investment provided the largest contribution to 0.0
economic growth. -0.5
-1.0
Net exports
The latest survey data continue to suggest stable economic -1.5 Fixed Investment
activity in the second half of the year. The composite PMI in Q3 -2.0 Government consumption
is likely to be similar to the average in Q2. The EU’s Economic -2.5
Household spending
GDP
Sentiment Indicator paints a slightly more negative trend, but -3.0
this is an indicator that has been consistently over-estimating 2005 2007 2009 2011 2013 2015 2017
growth in the past quarters, so we think there is some room for
it to fall further without automatically translating into slower GDP
growth. There is little hard data available yet for Q3, but so far it
has been on the soft side. Retail sales contracted in July, while Eurozone PMIs & GDP
we expect industrial production – to be released this week – to Index % change q/q
70 2.0
have declined as well based on the available national figures.
65 1.5
60 1.0
Despite some easing in trade tensions with the US in recent
55 0.5
weeks, data for factory orders and manufacturing PMIs
50 0.0
continue to suggest a challenging environment in the second
45 -0.5
half of the year. We continue to expect GDP growth to stabilise
40 -1.0
at around 0.4% a quarter in H2, which results in a 2018 GDP
35 GDP (RHS) -1.5
forecast of 2.0%. This would still be the second-best year for
30 Manufacturing PMI (LHS) -2.0
growth in a decade after 2.5% in 2017.
25 Services PMI (LHS) -2.5
20 -3.0
Stable growth in H2 2018 2004 2006 2008 2010 2012 2014 2016 2018
Source: Oxford Economics/Haver Analytics/IHS Markit
Our forecasts for 2018-19 reflect the following factors:
• Weaker household spending: consumer spending was

resilient in 2016 and 2017 due to strong employment growth.
Eurozone: Consumption and real income
The pace of job creation remains solid and has driven the % y/y
unemployment rate down to a nine-year low of 8.3%, but we 4 Household spending Forecast
think it can fall further as structural unemployment is 3 Real disposable income
declining as well. Although there are no strong signs of

2
robust wage growth yet, there are indications that the trend
may be changing in some countries. However, modest wage 1
gains will not be enough to offset the rise in inflation (which 0

will reach a six-year high of 1.8% this year) and we expect
-1
households to be increasingly squeezed by slower real
income growth. We forecast private consumption growth of -2
1.4% this year, down from 1.7% in 2017 and the weakest in -3
four years. 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
• Solid outlook for investment: following a 2.9% rise in

2017, we expect another year of solid growth in fixed
Page 72
Autumn
2018 Eurozone
investment. Spending on machinery and equipment (up
5.4% in 2017), should be supported by buoyant business
Eurozone: Equipment investment by type
sentiment, tight capacity and the continued improvement of
ppts contribution, y/y
bank lending flows to non-financial firms. Construction and
15
real estate activity is also picking up strongly across many
10
countries, lifting total investment. We expect capital
formation to expand 3.1% this year and 2.9% in 2019. 5
• Downside risks for exports materialising: following an -5

excellent year in 2017, eurozone exports have suffered from -10 Transport equipment
a worsening global environment, with risks posed by rising
-15
Machinery & equipment ex.
protectionism and a potential trade war with the US already Transport
-20
materialising and hitting sentiment and orders. Despite a Machinery & equipment
mild recovery in Q2, European exporters remain under -25
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
pressure. Given the slowdown already taking place in global Source: Oxford Economics
trade volumes, combined with the lagged impact of the
stronger euro, we expect eurozone export growth to ease to
3.3% in 2018 (from 5.5% last year).
Eurozone: Contributions to GDP growth
% year Forecast
Growth this year will be driven mainly by the domestic sector, 3
but net trade will also make a positive contribution for a second
year in a row. For 2019, we still see GDP growth slowing to 2
1.7%, despite stronger domestic demand.

1
ECB to end QE in December as expected 0
The ECB announced in June that it will end its QE purchases in -1

Net exports
Stockbuilding
December, following a quick taper in the last three months of Government spending
the year when purchases will be cut from the current €30bn a -2 Investment
Consumption
month to €15bn a month. The central bank did leave the door GDP
-3
open for a further extension, but we think this is very unlikely. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
The central bank also provided some dovish forward guidance,
indicating that interest rates will remain unchanged at least
“through the summer of 2019”. In practical terms, this means a
rate hike could take place in either Q3 or Q4. Our view of a very Eurozone: ECB refinancing rate
gradual exit remains unchanged. Despite solid economic % Forecast
5
growth, the relatively weak inflation outlook means the ECB will
continue to be cautious about withdrawing monetary support, so
4
we anticipate a very slow pace of interest rate hikes over the
coming years.
3
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Page 73
Autumn
France
France
Highlights
The French economy slowed markedly in H1 this year, growth. But some of the effects of this squeeze should
Highlights

with GDP rising just 0.2% q/q in both Q1 and Q2 be reversed in H2 this year as reduced unemployment
compared with 0.7% in H2 last year. This reflects both insurance contributions and lower housing taxes are
a drop-off in exceptional items such as aircraft sales introduced.
and the impact of higher taxes and inflation on
 Looking ahead, concerns about the more assertive
consumer purchasing power. Business sentiment and
trade stance taken by the US continue to weigh on
industrial output have fallen sharply, reflecting concerns
sentiment, leading to a significant fall in new export
about the imposition of US tariffs and the potential for a
orders. Sentiment remains vulnerable to the potential
wider trade war with the US. More positively, tax cuts
extension of US tariffs to the auto sector. Against this,
and lower inflation should boost consumption in H2 this
further reforms and a modest fiscal stimulus in the
year. Overall, we now expect growth to average 1.6%
shape of reduced employers’ contributions should help
this year before picking up slightly to 1.7% in 2019.
to support the economy in 2019.
 Consumers’ purchasing power has been hit hard this
year by increased indirect taxes and higher generalised
social contributions (CSG). On top of this, the US
withdrawal from the Iran nuclear agreement has led to
higher oil prices, pushing HICP inflation up to 2.6% in
July. As a result, real disposable incomes fell 0.6% in
Q1, leading to a marked slowdown in consumption
Forecast for France

2017 2018 2019 2020 2021 2022
Domestic Demand 2.2 1.2 1.8 1.7 1.5 1.4
Stockbuilding (% of GDP) 1.0 0.8 0.9 0.9 0.9 0.9
GDP 2.3 1.6 1.7 1.7 1.6 1.6
Consumer Prices 1.0 1.9 1.6 1.5 1.6 1.6
Short-Term Interest Rates (%) -0.3 -0.3 -0.1 0.3 0.6 0.8
Exchange Rate (US$ per Euro) 1.13 1.19 1.22 1.25 1.25 1.25
Page 74
Autumn
2018 France
Growth expected to pick up in H2
The French economy enjoyed a solid end to 2017, growing French GDP and Composite PMI
% q/q
0.7% in Q4 and the economy expanding by 2.3% overall, its 2.0 70
strongest since the financial crisis. Since then, the pace of GDP Composite PMI
1.5 65
growth has slowed markedly, with GDP rising just 0.2% in both
1.0 60
Q1 and Q2 this year. In part this reflected temporary factors
such as the exceptionally cold weather in the spring, and 0.5 55
aircraft deliveries inflated the output of transport equipment in 0.0 50

H2 last year. More recently, sentiment has also been hit hard by -0.5 45
concerns about new US tariffs on steel, and the potential for a
-1.0 40
further escalation in tensions continues to pose a significant
-1.5 35
drag on export orders. While manufacturing activity shows signs
of stabilising, higher inflation is reducing consumer spending -2.0 30
2000 2003 2006 2009 2012 2015 2018
power, which is reflected in weaker service sector activity.
Source : Oxford Economics/Haver Analytics/IHS
Analytics Markit
Some of the factors that weighed on activity in H1 should be

reversed in H2, meaning GDP growth should bounce back to
some extent. Personal sector tax cuts and reduced France: Household income and consumption
unemployment insurance contributions will boost consumers % y/y
Forecast
real incomes in Q4 while the payback from weak activity in H1 5
Consumption Real disposable income
looks set to boost industrial production in Q3. Overall, we 4
forecast GDP growth of 1.6% this year, before a slight rise to 3
1.7% in 2019.
2
1
The key drivers of our short-term forecast are:
0
 Consumption squeezed by higher inflation: consumers -1

are likely to face a number of pressures later this year -2
reflecting the impact of tax changes and the recent rise in oil
-3
prices. In H1, higher generalised social security contributions 1999 2003 2007 2011 2015 2019
(CSG) and higher taxes on tobacco and energy are likely to Source : Oxford Economics/Haver Analytics
squeeze purchasing power before being offset by cuts in

direct taxation later in the year. Inflation meanwhile is set to
rise to 1.9% in 2018 (from 1% in 2017) reflecting higher
French HICP Inflation
indirect taxes and higher oil prices. % y/y
Forecast
4
Offsetting these developments, however, is a solid HICP
expansion in employment that saw around 350,000 new jobs
3 Core
generated last year. As a result, unemployment is dropping
sharply and has fallen to 8.7% in Q2. But the improvement in
2
the labour market is not yet leading to significant upward
pressure on wages, with hourly labour costs up just 1.8% in 1
Q1 – after a 1.5% increase in Q4.
0
 Given these factors, growth in consumers’ real disposable
income dropped by 0.6% in Q1, meaning that consumer -1
2000 2003 2006 2009 2012 2015 2018 2021
spending power is unlikely to show any increase at all this
Page 75
Autumn
2018 France
year in annual terms. Longer term, tax cuts in the autumn
and lower inflation next year should facilitate a modest
France: Employment is rising at a fast pace
recovery in consumer purchasing power in 2019. Overall, we
% y/y contrib to total Public Sector Services
look for consumption growth to average 0.7% this year, 2.5
Construction Industry
rising to 1.2% in 2019. 2.0 Total
1.5
 Trade war concerns leading to slower export orders: last
1.0
year’s synchronised global upswing, and especially the
0.5
recovery in global manufacturing, gave a significant boost to
0.0
French exports, which grew by 4.7% in 2017. More recently,
-0.5
exports declined in Q1 which may reflect an unwind after the
-1.0
large number of aircraft deliveries boosted exports at the
-1.5
end of last year. While global growth has remained dynamic,
-2.0
concerns about a global trade war have reduced new orders,
-2.5
which is likely to be reflected in slower export growth both 2005 2007 2009 2011 2013 2015 2017
Source: Oxford Economics\ Haver Analytics
this year and next.
 Overall, we expect exports to grow by 3.7% this year, before
slowing further to 3.0% in 2019. Import growth is likely to be
more subdued, reflecting the impact of taxes on the personal France: Exports and world trade
% y/y
sector. Imports are expected to grow by 2.6% this year,
20 Forecast
rising to 3.3% in 2019, meaning net trade will make a
15
negative contribution to growth in both years.
10
 Higher capacity utilisation supporting investment: given
5
the strength of final demand, capacity utilisation has been
rising gradually, supporting a strong revival in investment 0
spending, which was up 4.7% in 2017. This was the fastest -5

pace of investment growth since the financial crisis. Real exports % y/y
-10
World Trade % y/y
Investment spending moderated in Q1, before rebounding in
-15
Q1. Looking ahead, a reduction in the corporation tax
-20
combined with the public investment programme should help 1996 1999 2002 2005 2008 2011 2014 2017 2020
maintain a steady recovery in corporate profit margins. We Source: Oxford Economics/Haver Analytics
expect headline investment to retain a solid pace of

expansion but slowing to 3.0% in 2018 before rising to 3.4%
in 2019.
France: Fixed investment
 Slowly declining fiscal deficit: thanks to the stronger % y/y
economy, the fiscal deficit fell to 2.6% of GDP in 2017, 10 Forecast
allowing France to exit its excessive deficit procedure.

Further fiscal consolidation is likely to be modest. Overall, 5
the structural budget deficit is likely to be broadly constant

0
this year before the switch from an employment tax credit to
reduced social contribution that is likely to provide a modest
-5
boost to business in 2019. More substantive reductions in
spending have largely been deferred until later in President
-10
Macron’s five-year term.
-15
1996 1999 2002 2005 2008 2011 2014 2017 2020
Page 76
Autumn
Germany
Germany
Highlights
Industry and retail sales had a weak start to Q3, We expect these themes to continue in Q3, but with
Highlights
 
reinforcing our view that GDP growth will slow to 0.3% growth slowing. July industrial production fell again, by
in Q3 from 0.5% in Q2. But some encouraging survey 1.1% m/m after -0.7% in June, while factory orders
data show that the underlying trend remains solid, not continued their volatile downtrend amid the slowdown
least due to the strong labour market boosting domestic in global trade. A decline in July retail sales and exports
demand. We expect growth to stabilise at 0.4% in Q4 adds to the subdued near-term growth outlook.
despite external risks. And overall we expect 2018 and Moreover, trade tensions show no real sign of easing,
2019 GDP growth forecasts at 1.8% and 1.6% posing a risk for German exporters, and US car tariffs
respectively. may well return to the fore. This is a negative backdrop
for investment.
 GDP growth rose to 0.5% in Q2 from 0.4% in Q1 due to
robust and broad-based gains in investment and  However, the sharp rise in the ifo index in August
consumption. The former benefited from tight continued the run of encouraging survey data. The
capacities while the latter was supported by solid gains strong service ifo and PMI point to robust domestic
in employment and wages. In contrast, external demand as the labour market continues to tighten. This
demand was a drag for a second consecutive quarter lifted wage growth to 3.2% y/y in Q2. Combined with
as strong imports outpaced weak exports, which are easing headline inflation and tax cuts planned for 2019,
now slowing after last year’s surge in global trade. this should support real incomes. Inflation remained
stable at 2.0% in August, but energy and food prices
seem to have peaked, while core inflation is not picking
up. As a result, we have lowered our inflation forecast
to 1.9% this year and 1.8% in 2019.
Forecast for Germany

2017 2018 2019 2020 2021 2022
Domestic Demand 2.3 2.1 2.4 2.0 1.6 1.4
Stockbuilding (% of GDP) -0.6 -0.2 0.0 0.0 0.1 0.1
GDP 2.5 1.8 1.6 1.5 1.2 1.1
Consumer Prices 1.7 1.9 1.8 1.9 2.0 2.1
Government Budget (% of GDP) 1.0 1.9 1.6 0.7 0.4 0.2
Exchange Rate (£ per Euro) 1.14 1.13 1.13 1.14 1.18 1.20
Page 77
Autumn
2018 Germany
Domestic resilience offset external drag in Q2
The German economy grew by a solid 0.5% on the quarter in German GDP growth composition
Q2 following slightly upwardly revised expansion of 0.4% in Q1. % q/q, %-pts
Net Exports Inventories
2
The GDP breakdown broadly confirms our prior expectations. Construction Equipment investment
Domestic demand grew strongly as consumer spending was 1.5
Government Consumption Private Consumption
bolstered by solid employment gains and the impact of recent GDP
strong pay deals. Public investment made up for some earlier 1

weakness and investment grew only slightly as tight capacity
0.5
offset rising uncertainty. In contrast, net trade was a drag on Q2
GDP as imports outpaced exports, given the slowdown in global 0
trade growth, which led manufacturing activity to come to a
standstill in H1. -0.5
-1
July marked a weak start to Q3 2014 2015 2016 2017 2018
The first round of hard data for Q3 supports our view that
German industry faces several headwinds in H2. Factory orders
dropped yet again, with a 0.9% m/m decline in July adding to
the previous 3.9% drop as demand from non-eurozone Germany: Industrial production
% m/m & pp contribution
countries is tumbling. This suggests that global trade may be
3
moderating further. Industrial production fell sharply again as
2.5
the car sector struggles with new emission standards, which is
2
likely to continue into Q4. The decline in retail sales implies that
1.5
inflation remains a drag on incomes, but very strong car
1
registrations due to sales incentives mean that Q3 consumption
0.5
should be well supported. 0
-0.5
There are also no clear signs that the underlying domestic Other
-1
expansion is weakening materially. Underpinned by a strong -1.5
Automotive
Headline
labour market, upcoming fiscal easing and steady expansion in -2
the construction sector, the domestic demand outlook appears 2016 2017 2018
well supported, although higher oil prices will be a temporary
dampener for consumers in H2. Externally, initial encouraging
signals from ongoing EU-US trade talks boosted manufacturers
business expectations, but it is far too early to send the “all German: Employment composition & ifo
clear”. Overall, we continue to see quarterly GDP growth % 3M/3M and %-pts contribution (LHS), Index (adv. 2M, RHS)
slowing to 0.3% in Q3 and then stabilize around 0.4% in Q4. 0.7 108
Hence, our 2018 and 2019 GDP forecasts remain at 1.8% and
0.5 104
1.6% respectively. Below we summarise our views in more
detail: 0.3 100
• Global and European outlook remains solid: in many 0.1 96
ways, Germany’s economic fortunes remain tied to the

-0.1 92
global growth cycle despite its more domestically-driven Labour force
Registered unemployed
expansion in recent years. The country has a very large and -0.3 Employment 88
competitive industrial sector, with a focus on specialised ifo employment barometer (RHS)
-0.5 84
investment goods and a regionally very diversified client 2007 2009 2011 2013 2015 2017
base. Thus, it was well-placed to benefit from last year’s Source: Oxford Economics/Haver Analytics
global trade surge but is now exposed to the impact of
Page 78
Autumn
2018 Germany
slowing global trade and rising protectionism. We still see
global growth at 3.1% in 2018 and 2.8% in 2019, but
weakening leading export indicators, trade tensions and still-
looming risks of US car tariffs keep the balance of risks for
exports to the downside. We expect export volumes to grow
by 2.8% in 2018 after 5.3% in 2017.
• Equipment investment may be hit by uncertainty: the

rise in external demand in 2017 boosted an industrial sector
operating at already-stretched capacity. At 88%, capacity
utilisation is just 1.5% points below the pre-crisis high. But
we see equipment investment growth slowing to around 3%
in 2018 as uncertainty and weaker external demand weigh
on firms’ confidence. In the construction sector, labour
supply constraints are biting as backlogs continue to rise. So
despite buoyant demand, we retain a cautious construction
growth forecast.
• Labour market supply constraints may start to bite: the Germany: Negotiated wages vs. core inflation
labour market performance has been one of the stand-out % y/y, 3-month average
6.0 2.5
features of this cycle. However, leading indicators suggest a Negotiated wages (LHS)
Core inflation (RHS, 12-month lagged)
softening of employment gains as business sentiment has 5.0
2
fallen from its highs. In addition, firms may struggle to fill the 4.0
record number of vacancies as labour supply begins to dry 3.0
1.5
up. This should also boost wages. Indeed, negotiated wages

2.0 1
were up by 4% in May and could rise 3% in 2018 overall.
1.0
Employment gains are seen slowing from the 10-year high of 0.5
1.4% in 2017-18. 0.0
0
-1.0
• Normalising inflation: inflation held at 2.0% in August, still -2.0 -0.5
bolstered by oil and food prices. Energy inflation is likely to 1994 1998 2002 2006 2010 2014 2018
keep consumer price inflation elevated in the coming months
before slowing into 2019. Core inflation remains muted for
now, but should still accelerate over time given rising wages
and pipeline pressure from firms’ non-wage costs. We have
Germany: CPI composition
lowered our 2018 and 2019 CPI inflation forecasts to 1.9%
CPI, % y/y, ppts contribution
and 1.8% respectively.
3.5
3
Food Energy Core CPI* Total
Overall, we remain fairly optimistic about the short- and 2.5
medium-term outlook, with GDP growth of 1.8% this year and 2
1.6% next year exceeding the economy’s potential. And despite 1.5
demographic headwinds, GDP growth could still average close 1

0.5
to 1.5% in 2020-21.
0
This environment points to some risk of overheating. A tight -0.5
labour market could result in much faster wage growth than -1
expected, which would add to underlying inflationary pressures -1.5

2012 2014 2016 2018
lifting inflation above the ECB’s 2% target. *excl. energy & food
Page 79
Autumn
India
India
Highlights
We maintain our 2018 and 2019 growth forecasts at strong rally in the Indian rupee, even when the USD
Highlights

7.6% and 7.2% respectively and continue to look for a rally falters. The outlook is further complicated by the
modest slowdown beyond the second quarter of this escalation in US-China trade tensions, which could
year. We forecast elevated oil prices and global trade potentially derail global growth momentum. Meanwhile,
tensions to lower real GDP growth in H2 and ease the India’s decision to impose tariffs on USD240mn worth
upside pressure on core inflation. This, in turn, should of US imports, in response to the US duties on its steel
allow the RBI to ‘pause’ its tightening for the rest of this and aluminum exports, could also spark further
year and assess the economic impact of the 50bp of retaliation from the US administration.
policy rate hikes implemented so far.
 CPI inflation surprised on the downside in July,
 Monthly indicators suggest that economic momentum primarily due to lower food prices, but also aided by
remained resilient in Q2 – with robust car sales, softening core inflation. With growth expected to slow
expanding manufacturing output and anecdotal down in the coming quarters, we expect core inflation
evidence of recovering private investment. Overall, the to be lower in H2 than in H1 2018 and partly offset the
picture is quite constructive and we forecast that real upside inflationary pressures from other sources.
GDP growth remained elevated at 7.6% in Q2. Accordingly, we expect the RBI to hike interest rates
more gradually going forward, keeping monetary
 However, the outlook for the remainder of the year is
conditions supportive of growth, and only forecast
not as optimistic. We expect the current account deficit
further tightening next year.
to widen sharply in H2, which is likely to preclude a
Forecast for India *

2017 2018 2019 2020 2021 2022
Domestic Demand 7.3 8.0 6.8 6.7 6.7 6.4
GDP 6.2 7.6 7.2 7.0 6.8 6.5
Consumer Prices 3.3 4.8 5.1 5.4 5.4 5.2
Trade Balance ($bn) -148.14 -188.24 -210.77 -226.53 -239.12 -254.47
Short-Term Interest Rate (%) 6.47 7.27 7.64 7.43 7.09 6.85
Exchange Rate (per US$) 65.12 68.18 69.92 66.93 67.80 69.23
* Refers to Calendar year
Page 80
Autumn
2018 India
A V-shaped recovery, but slowdown ahead
High-frequency indicators suggest that real GDP grew at a India: Contributions to GDP
strong pace of 7.6% y/y in Q2 2018, little changed from the first % year
Domestic
14 demand
quarter print. But elevated oil prices and escalating global trade GDP F'cast
12
tensions dampen the outlook going forward and we forecast
10
growth to slow down to 7.2% by the last quarter of the year. The
8
key drivers of the forecast are: 6
• Consumption growth steadying: consumption indicators 4
painted a mixed picture in July. The Nikkei services PMI 2
extended gains for the second consecutive month, rising to 0
54.2 (versus a 51.2 average in Q2), supported by strong -2

Net exports
-4
demand conditions. On the other hand, auto sales started
-6
Q3 on a muted note, rising 8% y/y in July compared to 18% 1996 1999 2002 2005 2008 2011 2014 2017 2020
in Q2. This was largely due to a drop in passenger vehicle Source: Oxford Economics
sales (-2.7%). Two-wheeler sales (a proxy measure of

India’s rural demand) slowed to 8.2% from 16% in Q2 and
25% in Q1, while car sales contracted 0.4% after increasing
18% in the previous quarter. The slowdown was partly due India : Auto sales
%year, 3mma
to unfavourable base effects. Auto sales picked up in July 60
2017, ahead of the rollout of the goods and services tax. 50
However, the underlying momentum, as shown by the three-
40
month moving average, also appears to have peaked. With
Two Wheelers
30
the recent policy rate hikes slowly transmitting into higher
lending rates, we expect consumer spending growth to 20
plateau going forward. 10
0
• Higher infrastructure spending: as expected, the FY19
-10 Passenger
budget continued to emphasize infrastructure spending –
Vehicle
budgeted to rise to ~INR 6trn in FY19 from ~INR 5trn in -20
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
FY18. In general, we expect an expanding tax base to Source : Oxford Economics/CEIC
generate more revenues to facilitate government investment
over the medium term. According to the FY18 economic
survey, 4 million additional tax payers have registered since
demonetisation, while the GST has resulted in a 50% India : Central fiscal deficit
INR tn %
increase in new taxpayer registrations. This supports our 7 Fiscal deficit as 7
long-held view that demonetisation and GST should lead to % of GDP (RHS)
6 6
a structural improvement in India’s fiscal health. However,
short-term risks of populist spending ‘crowding out’ capital 5 5
spending remain on the horizon, with the general election 4 4

approaching in 2019. As such, we find the central
3 3
government’s budget maths optimistic and expect the fiscal
deficit’s share in GDP to remain unchanged from the last 2 Gross fiscal deficit (LHS) 2
financial year at 3.5% (versus the government’s projection of 1 1
3.3%).
0 0
FY95 FY98 FY01 FY04 FY07 FY10 FY13 FY16 FY19
• Investment recovery challenged by rising costs:
Source : Oxford Economics/CEIC
industrial production ended the second quarter on a positive
note, rebounding to 7% y/y in June from 3.9% in May. For
Page 81
Autumn
2018 India
the quarter, as a whole, growth averaged 5.2% compared to
6.5% in Q1, indicating steady momentum in manufacturing
output. This is corroborated by the Nikkei manufacturing India: Consumer spending and investment
% year
PMI, which remained in expansionary territory in July (52.3 21
versus 53.1 in June). We continue to expect manufacturing’s 18 Investment F'cast
contribution to growth to improve this year (relative to 2017).
15
But the renewed uptick in input and output price inflation
12
could dent the sector’s momentum going forward and
9
impinge on business investment plans. Accordingly, we
expect investment growth to slip back to single digits in the 6
coming quarters from 14.4% in Q1. We maintain that a 3 Consumer

spending
return to the robust double-digit investment growth 0
experienced in the mid-2000s is unlikely until there is -3
meaningful progress on key reform areas. 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
• Smaller drag from net exports in 2018: export volumes

were affected by domestic issues (demonetisation and GST)
last year, so we expect their growth to improve in 2018,
leading to a lower drag from net exports on headline GDP India: Nominal goods trade
% year, 3mma
growth. However, in nominal USD terms, the surge in the oil 80 Exports
Imports
import bill in the last three quarters has led to a sharp Core imports (ex-oil and gold)
60
widening in the trade deficit (a five-year high in July).
Moreover, this has coincided with a period of weak portfolio 40
flows. In our baseline, we expect the current account deficit
20
to remain within 3% of GDP (a level deemed sustainable for
the country by the IMF). But a sustained rise in oil prices 0
towards US$100pb would threaten this threshold.
-20
Easing inflation to allow RBI pause in H2 -40

2008 2010 2012 2014 2016 2018
Headline CPI inflation fell to 4.2% y/y in July from 4.9% in June,
as food inflation touched an 11-month low of 1.4%. ‘Core-core’
inflation (CPI excluding food, fuel and motor fuels) also
moderated, but remained close to 6%. Meanwhile, fuel inflation
jumped to 8% from 7.2% previously.
India: Monetary conditions
Overall, the July print indicates an easing in inflationary trends. %
14
However, the pass-through from the increase in minimum CPI inflation
F'cast
support prices of some agricultural products, elevated oil prices 12
and weak INR to headline inflation still needs to be monitored 10

closely. In our baseline, we forecast the dip in inflation to be
8
temporary and look for the headline to rise back towards 5% in
the coming months, leading to further monetary policy 6
tightening next year. 4 Repo rate
0
2006 2008 2010 2012 2014 2016 2018 2020
Page 82
Autumn
Italy
Italy
Highlights
GDP expanded by 0.2% in Q2, a touch lower than in The annual inflation rate rose to 1.7% in August, with
Highlights
 
Q1. Investment contributed to growth but net trade was the core rate edging up to 0.9%. Further upward
a drag on activity for a second consecutive quarter. We pressure from oil prices is likely to push inflation above
expect exports to pick up in Q3 and for net trade to 2% later this year but the headline rate is then
make a positive contribution, with quarterly GDP growth expected to moderate, and average 1.8% in 2019.
averaging close to 0.3% in Q3 and Q4. However, this
 It remains to be seen how much of the coalition deal
sort of pace will only be sufficient to generate annual
the new government will be able to implement. The
GDP growth of 1.1% in 2019, after 1.2% this year.
government continues to send conflicting messages
Markets await the first budget from the Lega and Five
about its fiscal agenda – this has prompted some
Star government, anxious to see how much the budget
renewed volatility in Italian sovereign bonds. Risks of
deficit may widen. Our view remains that a
fiscal slippage remain high ahead of the autumn
conservative approach will prevail, with a targeted
showdown between the leaders of the two governing
deficit of around 2% of GDP in 2019, but uncertainty
parties and the finance minister over the budget. We
remains high.
think the finance minister’s more conservative
 Monthly surveys are not as positive as they were at approach is likely to prevail, but in the meantime, policy
their peak last year, and some of them have weakened uncertainty remains high, with the risk of snap elections
again after stabilizing in June and July. We expect still low but increasing.
quarterly GDP growth to be around 0.2-0.3% in the
coming quarters and now forecast annual growth of
1.1% for 2019, down from our previous estimate of
1.3%.
Forecast for Italy

2017 2018 2019 2020 2021 2022
Domestic Demand 1.4 1.4 1.0 0.9 0.6 0.7
GDP 1.6 1.2 1.1 1.0 0.8 0.8
Consumer Prices 1.2 1.4 1.8 1.6 1.7 1.8
Page 83
Autumn
2018 Italy
Economic momentum has been slowing…
The second estimate of Italian GDP in Q2 confirmed that the Italy: Contributions to real GDP growth
economy has shifted into a lower gear so far this year, a similar %-point contribution
1.5
dynamic to that seen in the wider eurozone. GDP grew by just
0.2% in Q2, slightly lower than in Q1 and 0.2 percentage points 1.0
slower than the average quarterly growth rate in 2017. Net 0.5
exports were a drag on growth for the second consecutive
0.0
quarter, while domestic demand, in particular investment,
provided a positive contribution to growth. -0.5
Stockbuilding
Net Exports
-1.0
…and latest surverys reinforce this trend Government Consumption
Private Consumption
-1.5 Investment
Monthly surveys are not as positive as they were at their peak GDP
last year, and some of them have weakened again after -2.0
2011 2012 2013 2014 2015 2016 2017 2018
stabilizing in June and July. In particular, the composite PMI in Source : Oxford Economics/Haver Analytics
August was the lowest in more than two years and the
manufacturing PMI fell by more than expected. Moreover, the
ISTAT confidence indicator dropped to its lowest level since
December 2016 for both the services and manufacturing Italian Composite PMI & GDP
Index % change q/q
components. These indicators suggest that growth is likely to 65 1.5
GDP (RHS)
be very modest at best over the coming months.
Composite PMI (LHS)
60 1
In July industrial production fell by 1.8%, after a 0.3% gain in
June and a 0.7% rise in May. After this very negative start to 55 0.5
the quarter we are unlikely to see much of a contribution from
50 0
industrial production in Q3. We still expect quarterly GDP
growth of 0.2-0.3% during the second half of the year, but after
45 -0.5
the July production data our 0.3% GDP forecast for Q3 now
looks quite vulnerable to downside risks. Moreover, given the 40 -1
recent trends in the data and the external and political
35 -1.5
backgrounds, we have revised down our 2019 growth forecast, 2000 2003 2006 2009 2012 2015 2018
which we now see at 1.1%. Source : Oxford Economics/Haver Analytics/Markit
Uncertainty slowly fading around the budget

The 2019 budget negotiations in Italy continue to attract the
scrutiny of financial markets in Europe. Following a series of
conflicting messages in which members of the government
hinted at exceeding the EU’s budget limit of 3% of GDP, it now
seems that the Italian cabinet is finally steering towards a more
conservative stance and aims to keep the budget deficit close
to 2% of GDP next year. This is broadly in line with our
prediction made in June, shortly after the coalition government
was formed. These recent developments have triggered a
positive reaction in bond markets, with the yield spreads
between the Italian 10-year government bond and its eurozone
counterparts falling to their lowest levels in a month. A
confirmation of this shift towards a more cautious fiscal stance
would be quite positive for Italian BTPs, which could continue to
rally strongly in the short run.
Page 84
Autumn
2018 Italy
An ongoing but fragmented recovery

The economy still has some way to go before returning to pre-
crisis levels, but the recovery looks set to continue:
• Credit flow starts to improve amid falling NPLs: the last
few rounds of data show that the Italian banking system has
turned a corner. Net bad debt (at around €40 bn) is at its
lowest level in four years and there are also signs that credit
to the economy has started to improve.
• Labour market remains supportive: employment in Italy is
now above the level seen in 2008 and the unemployment
rate was 10.4% in July (the lowest since 2012). But the level
of employment has fallen back in June and July, after strong
gains in early 2018. We expect the pace of job creation to
slow gradually in the coming quarters, as the economy loses
momentum.
• Return of inflation: the annual inflation rate rose to 1.7% in

August, with the core rate edging up to 0.9%. Further
upward pressure from oil prices is likely to push inflation
above 2% later this year but the headline rate is then
expected to moderate, and average 1.8% in 2019.
• Little contribution from net exports: the contribution to

growth from net external trade was negative for the second
consecutive quarter in Q2. We expect some positive boost
from net trade in Q3, but overall global conditions are slowly
losing momentum.
• Gradual recovery in investment: investment dynamics

have been positive recently and we see capex growing by
3.8% in 2018, in line with last year. But investment is still
more than 20% below its pre-crisis level.
• Debt very high but should be sustainable: recent Italy and Eurozone: GDP
governments have tried to balance fiscal consolidation and % year
demand stimulus but have failed to show a clear will to 6
F'cast
improve the dynamics of Italy’s public debt. Our baseline 4 Eurozone
remains that, in the absence of any major structural reforms
2
or a notable economic slowdown, public debt is unlikely to
change significantly, remaining at a high level and leaving 0
Italy vulnerable. But there is a risk of debt deviating from a -2

sustainable path, particularly if the new government goes for
-4 Italy
a massive fiscal easing.
-6
-8
2000 2003 2006 2009 2012 2015 2018
Page 85
Autumn
Japan
Japan
Highlights
A solid outlook for domestic demand will support The most notable downside risk to the outlook is
Highlights
 
growth in 2018 and 2019, despite the risk of protectionism, which may weigh on trade via the Asian
protectionism. Consumption will be helped by a robust supply chain and undermine sentiment, possibly
labour market and a pick-up in wage growth, while amplified by a slowdown in global growth. In particular,
investment will be supported by high utilisation rates the threat of US tariffs on Japanese cars may dampen
and industrial upgrading. Export growth will slow, but confidence and investment spending. At home, the
the deceleration should be modest given strong planned consumption tax increase in October 2019 will
demand for Japanese capital goods. Overall, we expect weigh on growth, but Prime Minister Abe has made it
GDP to grow by 1.0% in 2018 and 1.1% in 2019. clear that he is ready to provide additional stimulus to
offset the negative impact.
 Reasonable domestic momentum will continue to
support growth in H2 2018. We expect record-low  With inflation well below the Bank of Japan’s (BoJ) 2%
unemployment and a pick-up in wage earnings to target, monetary policy is committed to remain
bolster consumption and incentivise investment in expansionary for longer. To make the easing stance
labour-saving technology. Meanwhile, the investment more sustainable, the BoJ tweaked policy in late July,
outlook is also bolstered by high utilisation rates and allowing for greater movement of 10-year JGB yields
industrial upgrading, driving increased demand for and more flexibility on its ETF purchases. Meanwhile,
capital goods. In addition, the 2020 Tokyo Olympics is we continue to look for an end to this year’s dollar rally
providing positive momentum. in the coming months and see the Japanese yen
averaging 108-109 per dollar in 2019.
Forecast for Japan

2017 2018 2019 2020 2021 2022
Domestic Demand 1.2 0.8 1.2 0.1 1.0 1.0
Private Consumption 1.0 0.7 1.3 -0.4 1.0 0.8
GDP 1.7 1.0 1.1 0.1 0.9 0.9
Industrial Production 4.5 1.7 1.6 -0.8 1.1 0.7
Consumer Prices 0.5 1.0 1.1 1.8 1.1 1.1
Exchange Rate (Yen per US$) 112.1 109.5 108.4 108.5 108.7 108.9
Exchange Rate (Yen per Euro) 126.7 130.6 132.3 135.7 135.9 136.1
Page 86
Autumn
2018 Japan
Domestic demand to support growth in 2018
After GDP grew by a solid 1.7% in 2017, we expect growth this Japan: Inflation and wages
year to ease to 1.0% on average, given slowing external % year
4
momentum and a temporary softening of domestic demand in
3 Consumer
Q1 due to adverse weather. Our outlook for domestic demand
prices
2
remains reasonable as low unemployment and an acceleration
in wage growth will support consumption. Meanwhile, high 1
utilisation rates and industrial upgrading will benefit investment 0
and strong demand for Japanese capital goods will cushion an -1

expected slowdown in export growth. The most notable -2
downside risk to the economic outlook is protectionism, which -3
may weigh on trade via the Asian supply chain and undermine -4 Wages
F'cast
sentiment, possibly amplified by a slowdown in global growth. -5
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Our short-term outlook is influenced by the following factors:
• Healthy labour market ensures reasonable outlook for

consumption: after a temporary decline in spending in Q1 Japan: Contributions to GDP growth
due to adverse weather, private consumption resumed its % year
expansion in Q2. A solid labour market will support 6
consumption going forward as unemployment remains low
4 GDP Domestic
and workers are seeing a pick-up in wage earnings. The
demand
planned consumption tax increase in October 2019 will 2
weigh on spending, but Prime Minister Abe has made it clear
that he is ready to provide additional stimulus to offset the 0
negative impact. Net exports
-2
• Solid investment trend, notwithstanding headwinds: we -4

expect business investment to grow 3.1% in 2018 and 1.6% F'cast
next year, supported by solid demand for capital goods at -6
2005 2007 2009 2011 2013 2015 2017 2019
home and abroad. Although the PMI and the Tankan index
Source: Oxford Economics / Haver Analytics
have moderated since the start of the year, levels remain
high by historical standards. Firms continue to operate close
to capacity and look to develop more higher-value-added
Japan: Tankan survey
products, which should spur R&D expenditure and Diffusion index (favourable - unfavourable, % points)
investment in industrial upgrading. In addition, the 2020 40
30
Tokyo Olympics provide positive momentum. While there
20
remains a risk that protectionism (particularly the threat of 10
US tariffs on Japanese cars) may dampen confidence and 0
investment spending, the latest Tankan results suggest that -10
this has not yet materialised. Indeed, investment plans -20

-30
among large enterprises remain resilient at 13.6% y/y growth All
-40
for fiscal year 2018, above their historical average. However, -50 Large manufacturers
we expect investment to slow in 2019 as the investment -60
cycle begins to turn and external momentum eases. -70
2005 2007 2009 2011 2013 2015 2017
• Export growth to slow but stay positive: exports started
Q3 on a weaker note, with volumes slowing to 1.4% y/y in
July, from 2.5% in June, as weaker US demand partly offset
still healthy export growth to China and ASEAN. Meanwhile,
Page 87
Autumn
2018 Japan
import volumes grew 2.2% y/y. Although we expect export
momentum to ease, given slowing global trade and the
threat of protectionism, the slowdown should be relatively
Japan: Exports and world trade
% year
mild as demand for Japanese capital goods is still strong.
40
30 F'cast
• Growth before fiscal consolidation: Prime Minster Abe
20 World trade
remains committed to the principle of “no fiscal consolidation
without economic revitalization”, which suggests that sharp 10
fiscal tightening is unlikely. While Abe is set to win the LDP 0

leadership contest in September, a larger than expected loss -10
of votes would probably start a shift in emphasis towards
-20
structural reform and fiscal consolidation within the party.
-30
Export volumes
-40
• Subdued inflation means monetary easing for longer: 2005 2007 2009 2011 2013 2015 2017 2019
inflation was 0.9% in July 2018, well below the BoJ’s 2% Source: Oxford Economics
target. With oil prices likely to plateau near current levels

and a limited pass-through of rising energy costs to
consumer prices, we see inflation averaging only 1.0% this
year. The BoJ in late July lowered its own inflation forecasts Japan: Inflation measures
% year
and committed to maintaining easing for longer, announcing
4
policy tweaks to make its easing measures more F'cast
Inflation Inflation ex energy
sustainable. These tweaks included greater movement of 3
2% target
10-year JGB yields and more flexibility on BoJ purchases of 2
ETFs.
1
• Yen to strengthen when dollar rally fades: the yen 0
depreciated mildly on the back of a widening interest rate -1

differential in Q2 as 10-year US Treasury yields picked up.
-2
But, with growth in the US peaking, we look for the dollar
rally (in place since April) to fade in the coming months. In -3
2005 2007 2009 2011 2013 2015 2017 2019
addition, we expect greater political attention to the US- Source: Haver Analytics / Oxford Economics
Japan trade balance and pressure towards a stronger yen.
We therefore see the yen at 108-109 next year.
2019 outlook World: Global 10-year government bond yields

%
Speculation has risen that the BoJ will ‘fine-tune’ its current 5.5
monetary policy stance, particularly following comments by BoJ 5.0 Japan F'cast
Governor Kuroda that the BoJ will discuss an exit policy around 4.5 US
Germany
4.0
FY 2019 (this is when the BoJ believe the 2% inflation target
3.5
will be met). In our view, markets have overreacted. Moreover, 3.0
as we think the BoJ will not achieve its 2% inflation target, we 2.5
still expect the BoJ to maintain its current policy of -0.1% on 2.0
1.5
banks’ excess reserves, and the 10-year JGB yield target at
1.0
“around 0%” for the next couple of years. 0.5
0.0
-0.5
2005 2007 2009 2011 2013 2015 2017 2019 2021
Page 88
Autumn
Mexico
Mexico
Highlights
NAFTA progress is in the spotlight after the US and Another key event that will maintain the fast news flow
Highlights
 
Mexico talks yielded an ‘agreement in principle’. on Mexico’s economy will be the start of the 2019
Trilateral talks could follow as soon as the US and budget process. Finance Ministry officials must deliver
Canada sort out their bilateral issues. Meanwhile, public revenue and spending outlines to a now Morena-
Mexico’s GDP growth in H1 2018 was revised down dominated Mexican Congress this month. Financial
and early H2 indicators have been underwhelming, with markets will closely monitor by how much AMLO’s
mounting external headwinds now bringing exchange ambitious agenda could worsen Mexico’s 2019 primary
rate pressures despite fading domestic uncertainty. surplus from an initially pencilled 0.9% of GDP.
Taking these factors into account, we have no choice
 Meanwhile, the Mexican economy grew 1.9% y/y in H1
but to temper our short-term optimism about Mexico’s
2018, a downward revision from the initially reported
outlook.
2.1%. And with July data signalling that industrial
 The preliminary US-Mexico trade deal would keep weakness could extend further into H2 2018 and
Mexican exports’ access to US manufacturing goods exchange rate pressures now mounting from external
markets, but there would be new provisions for the key headwinds (replacing fading domestic uncertainty). We
auto sector. President Trump has notified the US expected 2018 and 2019 GDP growth forecasts to post
Congress of his intent to sign a trilateral trade 2.0% and 2.2% respectively.
agreement, a key step forward that bodes well for our
expectation that NAFTA 2.0 will have trilateral
legislative approval at some point in H1 2019.
Forecast for Mexico

2017 2018 2019 2020 2021 2022
Domestic Demand 3.4 2.5 1.9 2.4 2.5 2.5
GDP 2.3 2.0 2.2 2.5 2.5 2.5
Industrial Production -0.5 0.9 2.3 2.6 2.5 2.5
Consumer Prices 6.0 4.7 3.9 3.4 3.3 3.2
Trade Balance ($bn) -10.99 -21.74 -40.54 -40.83 -42.92 -45.65
Page 89
Autumn
2018 Mexico
More cautious GDP growth forecast for 2018
An outright GDP contraction in Q2 has been confirmed, led by
falls in agricultural and industrial activity. At the same time, the
strength in Q1 was revised down slightly. Mexico’s economy
grew 1.9% y/y in H1 2018, below the initially reported pace of
2.1%. Private consumption outperformed the rest of the
economy, growing 2.5% y/y, while a staggering 7.5% y/y
decline in oil sector activity held back Mexico’s overall
performance.
More recently, July’s industrial data was far from encouraging

and suggests that weakness could extend further into H2 2018.
Oil and auto output contracted by 7.4% and 3.7% y/y in July,
respectively. The former can be attributed to the secular decline
in Mexican oil production, while flooding in an assembly line in
Mexico’s automotive heartland was the reason behind the
latter’s weakness in July. The car plant affected contributes to a
sizeable 5% of Mexican vehicle output and exports, meaning its Mexico: Industry
expected five-month halt will exert downward pressure on Million vehicles, 12m sum; mb/d (LHS)
Index, 3m average, 2013=100 (RHS)
manufacturing activity during H2 2018. We now expect GDP Auto output (LHS)
4.0 106
growth of 2.0% this year, down from 2.4% previously.
105
3.5
Furthermore, the disinflation process has gone into temporary 104
reverse, with inflation rising to 4.9% y/y in August, from 4.5% in 3.0 103
May. Non-core inflation accelerated further to 8.8% y/y as fuel Industry (RHS)
and food price spikes failed to ease as we had expected. But 2.5 102
with subdued core inflation and anchored inflation expectations, 101

we remain convinced that inflation is not spiralling up. 2.0
Oil output (LHS) 100
Nevertheless, we have once again raised our 2018 and 2019
year-end inflation forecasts, to 4.7% and 3.7%, respectively, 1.5 99
2012 2013 2014 2015 2016 2017 2018
from 4.4% and 3.6% previously. Source: Oxford Economics/Haver Analytics
Banxico on hold in Q4 2018

Despite higher inflation, we maintain our view that Mexico’s
central bank (Banxico) will keep the policy rate on hold at
7.75% during Q4 2018 and start a rate-cutting cycle next year.
Banxico recently stated that, given elevated non-core inflation,
core inflation “better reflects the monetary stance” and thus the
Governing Board will “monitor it closely”. We expect temporary
fuel and food price pressures to fade and inflation expectations
to remain well-anchored. Importantly, we expect Nafta talks,
which are the central bank’s main concern, to stay on track,
prompting Banxico to cut rates by 100bp next year to 6.75%.
Our previous call pointed to 150bp of rate cuts in 2019, but we
have watered this down given the disinflation reverse and the
current turmoil in EMs.
Page 90
Autumn
2018
Mexico
Modest fiscal expansion under AMLO

President-elect Andrés Manuel López Obrador (AMLO) will take
office in December against a background of a solid fiscal
position. Mexico’s primary surplus was 0.5% of GDP during H1
2018 and more austerity has been targeted for H2 2018, to
reach 0.8% of GDP for full-year 2018. Public debt levels will be
around 45% of GDP in 2018. The question is by how much
AMLO’s ambitious social agenda will worsen the fiscal metrics
during his six-year tenure.
Key factors affecting our short-term forecast are:

 Stronger-than-expected consumption: private
consumption staged a brisk recovery in Q1, up 3.5% y/y. We
thus upgraded our 2018 forecast to 2.7% from 2.3%, albeit
this is still lower than last year’s 3.3% expansion.
Remittances, consumer credit and consumer confidence
have been evolving in a more favorable way than we had
expected at the start of the year.
 Investment to benefit from decreasing uncertainty:

electoral uncertainty is finally behind us while prospects for
NAFTA are improving again. The 3.2% y/y pick-up in
investment in Q1 was exaggerated by a temporary surge of
capital goods imports for specific auto plants and
infrastructure projects. We expect investment to recover by
1.9% in 2018, after a 1.5% decline in 2017.
 Tight monetary stance but now stable: Banxico’s three-
year long tightening cycle continued in June with an
additional 25bp hike to 7.75%. Higher interest rates have
helped keep the exchange rate and inflation under control,
but they are restraining Mexico’s economic activity. Looking
ahead, we expect the current adverse environment to
gradually improve during Q4 2018 and Banxico to stay on
hold for the rest of the year. Once a NAFTA deal is in place,
which we assume will be in H1 2019, the central bank will
start to cut interest rates.
 Changing dynamics of US economy: US real GDP grew
an annualized 4.2% in Q2, its strongest performance since
Q3 2014. But we see growth falling back below 3% in H2 as
private sector outlays moderate and net trade becomes
more of a drag on GDP. A decelerating US economy will
inevitably have an impact on Mexican exports, particularly as
trade linkages are set to be confirmed in NAFTA 2.0. We
expect a slowdown in Mexican export volume growth to
3.5% in 2019 from 4.5% in 2018.
Page 91
Autumn
2018
Economic Background
South Korea
South Korea
Highlights

Highlights
Due to a broad-based slowdown, quarterly GDP
growth decelerated to 0.6% in Q2 from 1% in Q1.
 The government is looking to increase fiscal spending
by 9.7% in 2019, the largest expansion since 2009, to
Looking ahead, more aggressive fiscal plans to support its income-led and innovative-growth plans,
support growth and employment will shore up which could boost domestic demand. A strong
domestic weakness later this year and into 2019. increase in tax revenue so far this year has boosted
However, despite strong global demand for the revenue outlook and given room to raise budget
semiconductors, general machinery and spending beyond 2019.
petrochemical products, export momentum is
 The renegotiated KORUS deal could be signed this
expected to ease as Chinese demand slows and the
month. The auto sector is the key because it has been
US-China trade conflict deepens, with the impact
the biggest source of trade surpluses with the US in
being felt the most next year. The downward revision
the past, and the revised deal will allow greater
to GDP growth in Q2 has prompted us to nudge our
access for US automakers. It is hoped that Korean
2018 GDP growth forecast down to 2.6%. Beyond
exports will be exempt from any auto tariffs based on
this, we expect GDP to grow 2.5% in 2019.
US national security grounds.
 Monthly trade data suggest that goods exports
remained resilient in August, expanding by 8.7% y/y
in USD terms after growing 6.2% in July. But the soft
August PMI data indicate that new export orders
declined in August, pointing to softening demand
from key export destinations. Services growth also
softened in July, and the labour market continued to
weaken in August. However, growth in retail sales
picked up in July, helped by the recovery in inbound
tourism from China.
Forecast for Korea

2017 2018 2019 2020 2021 2022
Domestic Demand 5.3 2.5 2.6 3.0 2.7 2.4
Fixed Investment 8.6 -0.1 1.9 3.9 2.8 2.3
GDP 3.1 2.6 2.5 2.7 2.5 2.5
Consumer Prices 1.9 1.5 2.1 2.1 2.0 2.0
Government Budget (% of GDP) 1.4 0.9 0.4 0.5 0.5 0.5
Trade Balance ($bn) 119.9 108.5 118.2 132.8 137.5 142.6
Exchange Rate (Per US$) 1131 1095 1093 1082 1082 1082
Page 92
Autumn
2018
South Korea
Growth momentum to moderate further in H2

GDP growth in Q2 was revised to 0.6%, a tad lower than the
initial estimate and slower than the 1% rise in Q1. The
Korea: Contributions to GDP growth
slowdown was broad-based; export growth decelerated, both % year
equipment and construction investment tumbled, while growth 12
F'cast
in private and government consumption also slowed more than 10 Domestic
expected. Moreover, incoming data suggest that domestic demand
8
demand made a sluggish start to Q3. Services growth slowed to GDP
6
1.9% y/y in July, while employment growth has remained on a
declining trend amid poor job creation, restructuring in the 4
automobile and shipbuilding industries and job reduction in the 2

retail sector. Equipment investment has also continued to 0
decline sequentially. However, exports are still holding up as
-2
demand from China remains strong, and exports to ASEAN Net exports
-4
countries rebounded in August. Yet the expected slowdown in 2000 2003 2006 2009 2012 2015 2018 2021
China and escalating US-China trade tensions do not bode well Source: Oxford Economics
for Korea’s export outlook. In fact, the manufacturing PMI
remained in contractionary territory at 49.9 in August as new
export orders from key markets softened. Korea: Consumption and investment
% year
Overall, we expect GDP growth of 2.6% and 2.5% in 2018 and 20
F'cast
2019 respectively. Factors affecting our forecast for GDP 15
growth are:
Investment
10
 Consumption to soften amid sluggish labour market:

5
private consumption is expected to be underpinned by the
relatively fast pace of real labour earnings growth amid 0
subdued CPI inflation and a shift in the wage profile thanks

-5
Consumption
to the 16.4% minimum wage hike this year (and the further
10.9% increase planned for 2019). However, the large rise in -10
2000 2003 2006 2009 2012 2015 2018 2021
the minimum wage has also increased the dismissal rate as Source: Oxford Economics / Haver Analytics
firms react to higher labour costs (the level of employment
fell sequentially in Q2 and again in July and August).
Consumer sentiment has also turned sour, with the August Korea: Investment
% year
reading dipping below the neutral mark. Meanwhile, high
60 Plant and
household debt remains a concern, and debt servicing costs machinery
F'cast
50
will rise in line with interest rates, although household credit Domestic bank investment
40 lending
growth has nearly halved since mid-2016.
30
 Investment to stay subdued in the near term: the decline 20
in construction investment growth may continue as the 10
rebound in construction starts in Q2 appeared to be short- 0
lived. Equipment investment has also remained on a -10
declining trend, corroborated by the relatively weak -20 Construction
manufacturing PMI readings in recent months. -30
2000 2003 2006 2009 2012 2015 2018 2021
 However, anecdotal evidence suggests that firms may plan Source: Oxford Economics / Haver Analytics
to boost automation and enhance productivity, as the

statutory maximum working hours for workers has been cut
to 52 hours a week from 68 hours (from July for firms
employing over 300 workers). Moreover, the innovative-
Page 93
Autumn
2018
South Korea
growth plan initiated by the government encourages large

corporates to boost investment in eight key innovative
sectors, including artificial intelligence and autonomous
driving, and to nurture SMEs. Korea: Exports
% year (3 month average)
 Moderating export momentum: global demand for 40
semiconductors and petrochemical products will continue to
30
underpin Korean exports. However, a slowdown in China’s
economy will dent Korea’s exports of goods and services. 20
The escalating US-China trade tensions will also cause 10

collateral damage to Korea’s export sector, given that over a
0
quarter of goods exports go to China and another 10% to the Volumes
US, and that Korea is an integral part of Asia’s supply chain. -10
It is likely that Korea will be exempt from possible US auto US$ terms
-20
import tariffs, but this will only be confirmed when the
-30
renegotiated KORUS FTA deal is signed, possibly in the 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
later part of September. Source: Haver Analytics
 Expansionary fiscal policy plans: addressing income

inequality and boosting employment are top of President
Moon’s agenda, but so far the impact of government efforts Korea: Government budget balance and debt
% of GDP % of GDP
has yet to be seen as the labour market remains sluggish. A 5 Government 50
strong increase in tax revenue so far this year has boosted 4
debt (RHS) 45
the revenue outlook and hence provided more fiscal room to 3 40
raise budget spending beyond 2019. In fact, the government 35
2
has announced plans to increase budget spending by 9.7% 30
1
in 2019 to support job creation, and income-led and 25
0
innovative growth. The government also announced that the 20
-1
expansion will last through 2022. 15
-2 Government 10
 Accommodative monetary policy: as inflation is still well -3
balance (LHS) F'cast
5
below the 2% target and is expected to pick up only
-4 0
gradually in H2, we look for only one interest rate hike in 2000 2003 2006 2009 2012 2015 2018 2021
2018, probably in Q4. Indeed, headline inflation remained Source: Oxford Economics / Haver Analytics
subdued at 1.4% y/y in August, and the core inflation rate

was just 1.0%. However, the US-Korea interest rate Korea: Monetary conditions
%
differential will widen further as two more US Fed rate hikes 10
are expected later this year, which could precipitate capital F'cast
outflows. Yet, in June, BoK governor Lee Ju-yeol vowed to 8

Policy
Long-term
focus more on inflation and growth. Hence, we do not expect interest rate
interest rate
an imminent rate hike despite the recent weakening in the 6
Korean won, unless it depreciates sharply and threatens
financial stability. 4
2
Inflation
0
2000 2003 2006 2009 2012 2015 2018 2021
Source: Oxford Economics / Haver Analytics
Page 94
Autumn
2018
Economic Background
Spain
Spain
Highlights
 Although the Spanish economy continues to grow at  Inflation remained stable at 2.2% in August, close to its
a robust pace and well above the eurozone average, highest in 15 months. We expect inflation to moderate
Highlights
signs of a slowdown are becoming more apparent. very gradually over the coming months, but we think
Latest indicators show the domestic economy is that a combination of high energy prices and rising
transitioning towards lower growth, so the external core prices will keep the headline rate close to 2%,
sector will need to recover from a weak H1 in order to resulting in an average of 1.8% for the year.
maintain current overall growth. But for now, we have
 The government is reaching out to other parties ahead
kept our GDP growth forecasts at 2.7% for this year
of the start of discussions on the 2019 budget. Prime
and 2.3% for 2019.
Minister Pedro Sánchez has announced taxes on fuel
 After expanding 0.6% in Q2 – the lowest in four years and financial transactions, but it is unclear whether
– survey data suggest the Spanish economy is these will be implemented as the Socialists struggle to
expanding at a similar pace or even slower in Q3. gather enough support given their minority position in
The composite PMI is going to be weaker in Q3 than Congress.
in Q2 and other survey indicators such as the EC
Economic Sentiment Indicator paint a similar picture.
 There is little hard data for Q3 yet, but both industrial
production and retail sales fell in July, while
employment growth – a key driver of the current
economic cycle – was disappointing in July and
August. Our GDP indicator, which takes into account
both soft and hard data, points to growth remaining
at 0.6% in Q3, although the risks are now skewed to
the downside.
Forecast for Spain

2017 2018 2019 2020 2021 2022
Domestic Demand 2.9 2.7 2.2 1.8 1.5 1.4
GDP 3.0 2.7 2.3 2.1 1.7 1.4
Consumer Prices 2.0 1.8 1.6 1.7 1.9 1.8
Page 95
Autumn
2018
Spain
Economic growth looks to be easing

Although the Spanish economy continues to grow above the
eurozone average, signs of a slowdown are becoming more
Spain: High frequency GDP Model Forecast
evident, something we had expected for some time. After GDP
% quarter
expanded 0.6% in Q2, the lowest growth rate in four years, 1.5
leading indicators suggest that the economy is growing at a
1.0
similar pace or even a tad slower in Q3. Although the composite
0.5
PMI rose slightly in August, its average for Q3 is going to be
Q3 ESTIMATE: 0.6%
lower than in Q2. Similarly, the EU Economic Sentiment 0.0
Indicator also presents a similarly declining trend.
-0.5
GDP
Hard data releases also portray an economy that has entered -1.0
GDP Indicator
H2 on a softer footing, with monthly declines in industrial -1.5
production and retail sales in July and employment growth
-2.0
easing in August, albeit from very robust levels. Our GDP 2001 2003 2005 2007 2009 2011 2013 2015 2017
indicator, which incorporates the available monthly data, Source: Oxford Economics/Haver Analytics
suggests stable growth of 0.6% in Q3, although risks are

shifting to the downside.
Spain: Household spending and employment
y/y in %
A gradual slowdown remains out baseline Forecast
4
Household spending
We maintain our 2.7% projection for this year and 2.3% for 3
Employment
2019. The following factors underpin our forecast: 2
 Pressure on household spending: strong employment 1
growth and low inflation have boosted real disposable 0
incomes, providing ample support to consumer spending. -1

But as the pace of job creation continues to slow and -2
inflation continues to hover around 2%, this will put -3
downward pressure on real incomes, which will be only -4
partially offset by a moderate rise in wages. Households will -5
have limited room to offset this as the savings rate is close 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
to its lowest in a decade. We expect consumer spending to
expand 2.3% this year, the weakest since 2014, and to slow
Spain: Exports
further to 1.9% in 2019. 12m avg y/y in %
15 Eurozone
 Exports hit hard by trade worries: the increasing threat of
protectionism and a possible trade war have hit Spanish Rest of the world
exports hard in H1 this year. Although we expect exports to 10
recover somewhat in H2, risks have clearly shifted to the

downside. Services exports are still being supported by the 5
tourism sector, although growth in the number of arrivals is
cooling fast after the surge of recent years. We expect
0
export growth to moderate to 2.5% this year from 5% in
2017.
-5
 Solid investment growth: we see another year of solid 2013 2014 2015 2016 2017 2018
investment growth (at 4.2%, albeit down from 5% in 2017), Source: Oxford Economics/Haver Analytics
as companies continue to enjoy a robust recovery and
remain optimistic about their prospects. The outlook for
residential investment is also much improved as the sector is
Page 96
Autumn
2018
Spain
finally seeing a recovery after a long period of decline.

However, the uncertainty due to persistent political tensions
remains a downside risk as some investment projects could
be delayed. Spain: Housing approvals
12m sum
 Less policy support: although there has been a recent 120000
relaxation in fiscal policy, Spain will have to maintain a tight
100000
fiscal stance to meet its targets. At the same time, monetary
policy will remain accommodative, but its effects will be more 80000
limited than in the past as interest rates and bond yields are
close to a bottom. The ECB is embarking on a gradual 60000
normalisation of its monetary policy and will end QE

40000
purchases by the end of this year.
20000
Constraints on medium-term growth 0

2010 2011 2012 2013 2014 2015 2016 2017 2018
Further ahead, GDP growth is forecast to slow to around 2% a
year in 2020-21 as structural factors weigh on activity.
 Private sector deleveraging: both consumers and

businesses have undergone major deleveraging but debt Spain: Unemployment rate
remains high by historical standards. Banks continue to %
F'cast
carry a high (albeit falling) burden of NPLs. As such, credit 30
will grow more slowly than in previous expansions. We

expect investment growth of around 2.5% a year in 2019-21, 25
less than half the pace in the pre-crisis decade.

20
 High unemployment: unemployment has been falling
sharply since 2013. But without more reforms, still-high 15
structural unemployment could weigh on consumption and
welfare costs over the medium term. Although consumer 10
spending will grow by a little over 2% a year in 2018-19, in
real terms the 2019 level will still be only slightly better than 5
1995 2000 2005 2010 2015
in 2007. Source: Oxford Economics
 Fiscal consolidation: Spain continues to run one of the

largest budget deficits in the eurozone (3.1% of GDP in Spain: Government balance and debt
% of GDP % of GDP
2017), so fiscal consolidation remains a policy priority and 4 110
we see modest growth in public spending in the coming
2 Government 100
years. If tax revenues fail to grow as expected, or if interest budget balance (LHS)
90
0
rates and debt repayments rise more quickly than forecast,
80
then further adjustments will be necessary to maintain the -2
70
pace of deficit reduction. -4
60
-6
50
-8
40
Government
-10 debt (RHS) F'cast 30
-12 20
1995 1998 2001 2004 2007 2010 2013 2016 2019
Page 97
Autumn
2018
Economic Background
Switzerland
Switzerland
Highlights
The Swiss economy has expanded faster in recent The Swiss economy also had a strong second
Highlights
 
years than previously estimated according to revised quarter of 2018. GDP rose at an above-average rate
data from the Federal Statistical Office. The economy for the fifth quarter in a row, +0.7% on the quarter.
also achieved a robust pace of growth in the first two Exports of goods rose strongly and the surge in
quarters of 2018. As a result, we expect GDP growth of activity and spending related to the ticketing,
2.3% in 2018. However, we still think that fading global licensing and broadcasting for the FIFA World Cup
trade momentum and the significant risks facing the boosted Swiss GDP growth again.
global economy will weigh on Swiss exports and
 However, this major sporting event effect will reduce
investment activity in the coming quarters. Hence, we
GDP growth by the same amount in 2019 (around 0.3
expect a moderate slowdown to 1.5% growth in 2019.
percentage points of GDP). In addition, the global
 According to the revised national accounts data, Swiss economic backdrop has deteriorated, and the
GDP has expanded faster than previously estimated ongoing global trade conflicts will likely slow down
since 2015. In particular, growth in 2017 is now Swiss exports of goods and investment activity in the
estimated to be half a percentage point higher than coming quarters.
previously. These latest estimates suggest that the
Swiss economy performed quite reasonably during the
period of Swiss franc strength between early 2015 and
mid-2017.
Forecast for Switzerland

2017 2018 2019 2020 2021 2022
Domestic Demand 0.6 2.7 1.5 2.2 2.0 1.8
Stockbuilding (% of GDP) -3.5 -2.9 -3.0 -2.5 -2.1 -1.9
GDP 1.1 2.3 1.5 1.6 1.5 1.7
Consumer Prices 0.5 0.9 0.9 0.9 1.0 1.1
Government Budget (% of GDP) 1.1 0.9 0.4 0.3 0.0 -0.1
Short-Term Interest Rates (%) -0.7 -0.7 -0.6 -0.3 0.2 0.5
Long-Term Interest Rates (%) -0.1 0.1 0.4 0.8 1.2 1.5
Exchange Rate (Per Euro) 1.1 1.2 1.2 1.2 1.2 1.1
Page 98
Autumn
2018
Switzerland
GDP growth of 3% in 2018

The Swiss economy has expanded faster in recent years than
previously estimated. GDP growth is now put at 1.1% in 2017.
Moreover, GDP growth maintained a strong pace in Q1 and Q2 Switzerland: PMI survey & KOF leading indicator
2007-16 = 100 50 = neutral
2018. Due to this, we now expect the Swiss economy to 120 70
achieve the very high growth rate of 2.3% in 2018, even though 65
the pace of growth will likely slow a bit in the coming quarters. 110
60
55
The main drivers of our short-term forecast are: 100
50
 Solid external demand: in 2018, Swiss exporters are 90 45
benefiting from ongoing solid international demand even 40
PMI (RHS)
though protectionism and higher oil prices pose headwinds 80
35
to world trade growth. World trade weighted by Swiss export 30
70
shares is forecast to grow by 4.2% in 2018. As a result, KOF leading indicator (LHS) 25
export volumes should grow at a reasonably healthy and 60 20
1995 1998 2001 2004 2007 2010 2013 2016
similar pace this year.
Source: Haver Analytics
 Positive business sentiment, though concerns about

protectionism and tax reform: over the last year the PMI
survey has shown strongly positive sentiment among Swiss Switzerland: Consumption and investment
companies. In August, the industrial PMI was at a very high % year
9
level of 64.8. However, there is uncertainty stemming from Investment
the rejection of Corporate Tax Reform III. Until the 6
submission of a new reform that can win majority support, it 3

remains unclear what tax regime companies in Switzerland
0
will face in the future. The economic damage will be greater
the longer the uncertainty persists. -3
Consumption
 Strong labour market supports consumer spending -6
outlook: unemployment has decreased steadily since
-9
September 2016 and the seasonally adjusted unemployment F'cast
rate was at a multi-year low of 2.6% in August 2018. While a -12

1995 1998 2001 2004 2007 2010 2013 2016 2019
new, automated system for collecting information across Source: Oxford Economics
Swiss job centres has likely contributed to the strong fall in

unemployment in recent months, the new method is Switzerland: Unemployment
estimated to only cause a margin of error of around 0.1 %
percentage points, so the downward trend in unemployment 6
is not in doubt. However, consumer confidence fell back to F'cast

5
its long-term average in July, as consumers have become
less optimistic about the economic outlook. 4
CHF – less of a drag on exports than 2015-17 3
 Swiss franc expected to trade around 1.18 EUR/CHF in 2

2019 – provided there are no major shocks: the
uncertainty triggered by the financial crisis in Turkey has 1
caused the Swiss franc to appreciate against the euro. In our

0
baseline forecast, we expect the Swiss franc to return to 1995 1998 2001 2004 2007 2010 2013 2016 2019
levels around 1.18 EUR/CHF in Q1 2019 and trade around Source: Oxford Economics
this level during the rest of the year. This implies a slight
trade-weighted depreciation in real terms, on average, in
both 2018 and 2019. However, if the Turkish crisis escalates
further and leads to contagion in other countries, the Swiss
franc could appreciate further.
Page 99
Autumn
2018
Switzerland
 GDP growth in 2018 has also received a boost from the

Winter Olympics and the Soccer World Cup. Both FIFA and
the IOC are located in Switzerland and the surge in activity
and spending related to the ticketing, licensing and Switzerland: Exchange rates
broadcasting for these events is estimated to raise Swiss Franc/US$ Franc/€
1.8 1.8
GDP growth by around 0.3% percentage points in the years Franc/€
1.7 (RHS) 1.7
they take place. In 2019, this effect will, however, reduce 1.6
1.6
GDP growth by the same amount. 1.5
1.5
1.4
Average GDP growth around 2% seen in 2018-20 1.3 1.4
We forecast solid GDP growth over the next few years as the 1.2 1.3
burden of the strong CHF in 2015-16 fades. In the medium 1.1 Franc/US$
1.2
(LHS)
1.0
term, the economy will benefit from: 1.1
0.9
 Strong industrial base: Switzerland exports high-quality 0.8 1.0
consumer and investment goods, which will be increasingly 0.7 0.9

1996 1999 2002 2005 2008 2011 2014 2017
in demand from the expanding middle classes in emerging Source : Haver Analytics
economies in the medium-to-long term.
 Efficient monetary policy: the SNB has the advantage of

being able to adjust its policy to meet the changing needs of Switzerland: GDP
% year
the domestic economy without reference to possibly 6
conflicting requirements (whereas the ECB has to set one F'cast
policy for many different economies). 4
 No need for fiscal austerity: there is no need for significant

2
austerity given years of cautious fiscal policy in the mid-
2000s.
0
 Population growth: we expect population growth to be
above that of most western European countries in the -2
coming years. We expect the working-age population to
grow by 0.5-0.6% per year in 2018 to 2020. -4
1995 1998 2001 2004 2007 2010 2013 2016 2019
Switzerland: Export volumes and world trade

% year
20
Export F'cast
15 volumes
10
-5
-10
-15
World trade index
-20
1995 1998 2001 2004 2007 2010 2013 2016 2019
Page 100
Autumn
2018
Economic Background
Taiwan
Taiwan
Highlights

Highlights
The preliminary Q2 national accounts data show  Domestic demand, in particular consumption, is still
Taiwan’s economy grew by a stronger than expected supported by low inflation and solid wage growth but a
3.3% y/y. However, the performance of the main deterioration in external demand would likely endanger
demand components was less reassuring. Moreover, future improvements in nominal wages, curtailing
the worsening outlook for trade, driven by the US- growth in private consumption. Uncertainty in the trade
China trade dispute, has prompted us to downgrade outlook also threatens to stall the recovery in fixed
our 2019 growth forecast to 2.1%. In addition, recent investment, with projects being delayed or cancelled
high frequency data on sentiment and merchandise until the outlook becomes clearer. Survey data on
trade have weakened. consumers and producers suggest that sentiment has
deteriorated, probably influenced by the escalating US-
 GDP growth in Q2 picked up to 3.3%, from 3% in Q1,
China trade dispute.
but both consumer spending and export volumes lost
momentum. Moreover, the escalation in the trade  While a resolution to the trade dispute would remove
dispute between the US and China has damaged the many of the downside risks to Taiwan’s growth
prospects for Taiwanese trade growth and will chill outlook, our research indicates this is unlikely due to
growth in domestic demand going forward. Recent the conflicting objectives of the two parties.
monthly merchandise trade data highlighted the
weakening outlook, with export growth in US$ terms
slowing to 4.7% y/y in July compared to 10.9% in H1
2018, with some of the slowdown likely influenced by
the first round of tariffs in the US-China trade dispute.
Forecast for Taiwan

2017 2018 2019 2020 2021 2022
Domestic Demand 0.9 3.0 3.0 2.4 2.9 2.8
Government Consumption -1.1 4.4 2.7 2.2 1.1 1.0
GDP 2.9 2.4 2.1 2.5 2.2 2.2
Consumer Prices 0.6 1.7 1.3 1.3 1.3 1.3
Trade Balance ($bn) 80.9 81.3 84.8 86.0 75.9 60.8
Page 101
Autumn
2018
Taiwan
Solid growth in Q2, but slowdown imminent

In July merchandise exports grew by 4.7% y/y, a marked
slowdown from the pace of trade growth seen over the past
Taiwan: Exports by destination
year. Export growth was weaker across all markets, but sales to
US$bn (seasonally adjusted)
China and Hong Kong remained the strongest, up 8.1% y/y. We 14
expect that the protectionist background will slow trade growth
12
through H2 2018.
China & HK
10
Taiwanese industry data have also cooled from the strong
trends seen earlier in the year, dampened by the escalating 8
Rest of
tensions surrounding global trade. Seasonally adjusted emerging Asia
6
production in June rose by just 1.7% on the year, significantly
4
weaker than the 5.4% y/y average in January-May. And while US
industry sentiment has remained quite positive, the Nikkei PMI 2

Europe
for July was down to its lowest level in over a year, at 53.1. We 0
expect the increased uncertainty about global trade and the 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Taiwan Ministry of Finance / Oxford Economics
consequences of increased protectionism for regional supply
chains will curtail growth in fixed investment.
The souring environment in global trade, and the damage this Taiwan: Prices and earnings
will do to Taiwan’s export-oriented industry, will also limit growth % year
15
in private consumption. Monthly data on consumer sentiment,
Consumer
though still positive, has deteriorated from its peak at the start 10 prices Average
earnings
of the year. And though retail sales have continued to grow
5
robustly, at 4.9% y/y in June, private consumption could slow if
the outlook for trade deteriorates so much that it hits the labour 0
market, and curbs the rising trend in wages. -5
Mixed picture for GDP growth… -10
In our baseline scenario, which includes limited reciprocal tariffs -15

F'cast
between the US and China, underlying trends in domestic
-20
demand and industry should remain positive. However, risks to 1995 1998 2001 2004 2007 2010 2013 2016 2019
external demand will constrain GDP growth to 2.4% in 2018 Source: Oxford Economics
and 2.1% in 2019.

Taiwan: Consumption and investment
 Protectionist threat to external demand: exports have % year
risen strongly since mid-2016, reflecting momentum in global 30
Investment F'cast
trade, the resilience of Chinese demand and the European
20
recovery. Yet the outlook for trade policy has worsened
between the US and China, chilling growth in external 10
demand. Our research has found that an escalation in the
0
trade dispute to a trade war might damage Chinese growth
by 0.7ppt in 2019. A shock to Chinese growth would dampen -10
Consumption
Taiwanese activity via links with the mainland in trade,

investment and tourism. -20
 Modest pick-up in consumer spending: retail sales rallied -30

1995 1998 2001 2004 2007 2010 2013 2016 2019
in the middle of 2017 and since then have consistently Source: Oxford Economics
posted year-on-year growth of more than 3% (in nominal
terms). A modest turnaround in tourism from China over the
past year has contributed to this growth. We expect
consumer spending to grow 2.7% this year and 2.5% in
2019, but fallout from protectionist action could imperil this
trend as employment, wages and productivity would be
Page 102
Autumn
2018
Taiwan
damaged by a trade war.

 Surveys point to solid levels of business confidence:
gross capital formation fell sharply in late 2017, both due to
destocking and subdued fixed investment. Stronger growth Taiwan: GDP, exports and world trade growth
% year
in fixed investment in Q1 2018 signalled a possible 30 Foreign Demand
turnaround, but escalating trade tensions and a bleaker (weighted by Taiwan's
F'cast
25 export partners)
backdrop for external demand remains a downside risk to
20
the outlook.
15
…but domestic demand playing a greater role 10

5
Exports received temporary boosts at the end of 2016 and in
0
early 2017 from the annual electronics cycle and a period of
-5 GDP
particularly strong Chinese import demand. However, we
-10 Total exports
expect the current rally in external demand to be longer lasting
-15
than in our earlier assessments, and this should in turn bolster 1995 1998 2001 2004 2007 2010 2013 2016 2019
the outlook for domestic demand. Overall, we expect the Source: Oxford Economics
economy to benefit from:
 Healthy level of consumer confidence: consumer

sentiment remains well above mid-2017 levels Taiwan: Consumer confidence
Index
notwithstanding the trade tensions. Spending is likely to 100
remain solid if external and financial backgrounds do not
worsen significantly. 90
 Turnaround in investment: fixed investment has been 80

subdued in recent years, but the high-tech sector will need
70
to scale up its investments to stay competitive. We forecast
that overall investment will rise steadily, provided risks to 60
foreign demand do not materialise.
50
 Current account protection: we forecast the external
surplus to stay above US$70bn pa offering protection if 40
2001 2003 2005 2007 2009 2011 2013 2015 2017
capital flows are hit by external shocks.
Source: Haver Analytics
 Relatively solid labour market should underpin
purchasing power: the labour market remains tight in a Taiwan: Current account
historical context. Moreover, productivity rose strongly in % of GDP
18
2010-14 and since mid-2016. These factors should raise F'cast
Current
15
wages if business sentiment remains broadly positive. account
12
Stable political relations with China will also be crucial for
9
Taiwan’s trade prospects, business confidence and tourism. Visibles
6
3
.
0
-3
Invisibles
-6
1995 1998 2001 2004 2007 2010 2013 2016 2019
Page 103
Autumn
2018
Economic Background
Thailand
Thailand
Highlights
 Highlights
The Thai economy appears to be weathering the initial  In the face of the recent EM-wide sell-off and US-China
phase of the trade war storm reasonably well, with data trade war concerns, the THB has outdone most of the
for early Q3 staying robust. However, we are maintaining region and appreciated further in September (partly
our growth forecasts of 4.4% in 2018 and 3.4% in 2019, making up for its slippage in Q2). Merchandise export
as we still expect the pace of expansion to decelerate, growth moderated further in August, and we expect this
largely due to cooling Chinese import demand weighing trend to continue as Thailand is susceptible to
on exports. The baht (THB) has withstood recent EM worsening global trade conditions dampening its sales
contagion and protectionism concerns, bolstered by the to China, the US and the Asian supply chain.
solid fundamentals of a very large current account
 In an environment of seemingly structurally low
surplus, high foreign reserves and low inflation.
inflation, the focus of the Bank of Thailand appears to
 Despite the strong Q2 outturn, we still have some be shifting towards financial stability risks. At its latest
concerns about the domestic outlook, as the recovery meeting two members of the seven-strong MPC voted
has yet to reach all corners of the economy, while there for a rate hike (up from one previously), while a less
are downside risks from oil prices above US$70pb and dovish statement hinted that the start of normalisation
protectionist fears dampening private investment. In will likely occur within the next few meetings. However,
addition, as restrictions on political activity are gradually an uncertain external picture and a relatively strong and
lifted, the political temperature could rise, hitting volatile THB mean we do not expect the first rate hike
confidence. However, the consolidation of the military’s until Q1 2019
powers should ensure policy continuity after next year’s
elections.
Forecast for Thailand

2017 2018 2019 2020 2021 2022
Domestic Demand 4.6 5.8 3.9 3.4 2.9 2.7
Stockbuilding (% of GDP) -0.2 1.5 1.5 1.4 1.4 1.4
GDP 3.9 4.4 3.4 3.1 2.9 2.9
Consumer Prices 0.7 1.4 1.6 1.6 2.0 2.1
Trade Balance ($bn) 34.2 25.7 20.1 22.4 21.9 20.5
Short-Term Interest Rate (%) 1.6 1.6 1.9 2.6 3.2 3.7
Exchange Rate (per US$) 34 32 32 32 31 31
Page 104
Autumn
2018
Thailand
Domestic recovery gradually broadening out…

After a strong H1 2018, there are further signs of a broadening
domestic demand recovery in the early months of H2.
Consistently higher agricultural production should boost Thailand: Contributions to GDP
farmers’ incomes and SME profits, stimulating consumption. In % year
12
addition, the tourism sector will likely rebound from a Q3 blip to F'cast
provide impetus to the economy. 9 GDP
…but outweighed by rising external pressures 6
However, we expect that the pace of growth peaked in Q1 2018 3
and that it will decelerate steadily over the coming quarters, in 0

part as exports moderate in line with cooling Chinese import
-3
demand. In addition, higher oil prices will be a drag on growth. Domestic
demand
Meanwhile, the global economic background has deteriorated -6 Net exports
this year, with the increase in protectionist risks, tightening -9

global financial conditions and weakening momentum in the 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
eurozone economy.
 Tourism sector faces some short-run uncertainty: tourist
arrivals were up a healthy 9.1% y/y on average in Q2 but Thailand: Tourism arrivals
% year (3 month moving average)
have suffered a temporary setback so far in Q3 after the 60
sinking of two tourist boats in early July, which left more than Total
50
40 Chinese tourists dead. Overall, we expect tourism to
40
expand strongly this year, close to the 40 million target. In
2017 it accounted for 19% of exports (and 13% of GDP), 30
significantly higher than in 2014. 20
 Government infrastructure plans drive investment: 10
before the next election, the ruling junta is keen to put in 0

place long-term infrastructure plans to boost the economy. -10
Contribution from
Chinese & HK
Indicators suggest that such plans are finally gaining tourists
-20
traction, with overall investment accelerating further in Q2 to 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
its fastest pace since H1 2016, led by a jump in public Source: Haver Analytics
investment. Meanwhile, private investment continues to

edge higher, responding to the strong trend in tourism and Thailand: Government budget balance and debt
% of GDP % of GDP
the pick-up in merchandise exports since mid-2016. An 2 40
Government balance
estimated US$43bn will be spent on improving tourism 1 (LHS)
infrastructure, creating ‘new’ smart cities and facilitating 36
0
trade links through the Eastern Economic Corridor (EEC)
-1
project (which could connect with China’s “One Belt, One 32
Road” initiative). But there are concerns about the financing -2
of such plans, as a looser foreign ownership cap on new -3 28
projects could potentially channel some of the benefits out of

-4
Thailand. A further worry is that the country will need to 24
-5
demonstrate that it has a sufficiently strong talent pool if it is F'cast
Government debt (RHS)
to attract the private investment required in this “Thailand -6 20
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
4.0” project. Overall, we expect investment to increase by Source: Oxford Economics
4.6% this year, up from 0.9% in 2017.
 Oil prices to have modest pass-through to CPI inflation:

we expect inflation to increase in response to higher oil
Page 105
Autumn
2018
Thailand
prices, strengthening domestic activity and a weaker baht;

averaging 1.4% in 2018 and 1.6% in 2019. The energy
minister has confirmed that he will use the large energy fund
to contain prices, limiting retail diesel to 30THB/litre Thailand: Monetary conditions
%
(currently 29.6). This will help to check the impact of rising 8
global energy prices on headline inflation.
6 Policy
 Supportive monetary policy into next year: the BoT is interest rate
gradually moving towards a more hawkish stance. At its 4

latest meeting two members of the seven-strong MPC voted
for a rate hike (up from one previously) and the statement 2
was less dovish. With inflation likely to remain low for

0
structural reasons, the BoT is now focusing more on rising
financial stability concerns. However, a worsening external -2
Inflation
background, low inflation relative to target and a large F'cast
-4
external surplus supporting the baht throughout an EM-wide 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
sell-off, mean there is plenty of scope for continued Source: Oxford Economics
accommodative policy. Meanwhile, the bank has been

cautiously positive about the economy this year, raising its
growth forecast to 4.4% in June, but often highlighting Thailand: Nominal trade-weighted exchange rate
downside risks that require monitoring. 2010=100
115
 Trade to slow but in decent shape in 2018: the impressive
110
performance of goods and services exports last year appreciation
resulted in a current account surplus of almost 11% of GDP. 105
The external picture will remain positive this year, although 100
moderating Chinese import demand will mean that Thai
95
export volumes grow at a slower pace (5.0%) than in 2017
(5.5%). The relative strength of the baht is a concern for 90
exporters’ competitiveness, but a weaker THB/US$ since 85
April has dampened this issue.
80
 Election delays mean political and economic ‘drift’: the 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Bank of International Settlements / Oxford Economics
next general election is scheduled for February 2019 and the
government has recently lifted some of the restrictions on
political activity, but it remains to be seen whether the Thailand: Export volumes and world trade
% year
election will actually occur as it has been routinely promised 25
World trade (weighted
by Thai export shares)
since 2015. Post-election, it seems likely that the military will 20
continue to dominate proceedings, either formally or ‘behind 15
the scenes’ under the new constitution. Further delays to a 10
return to democracy could intensify the sense of political 5
‘drift’ and prevent economic momentum building as investors 0
hold off on investments. -5

-10
-15
-20
Export volumes F'cast
-25
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Page 106
Autumn
2018
Economic Background
Turkey
Turkey
Highlights
 Highlights
As the Turkish lira (TRY) crisis was unfolding, we  Indeed, the stakes are high. We calculate that Turkey’s
argued that the authorities had two unpleasant options external financing requirement is around US$200 billion
to prevent a currency crisis from morphing into a debt over the next year. And should portfolio flows, which
and liquidity crisis: either to impose capital controls to have been the main source of financing of the current
stem hard currency outflows, or to accept slower account, dry up, the country’s foreign reserves are
growth in order to redress the large imbalances that insufficient to cover the external funding needs.
have led to the economy’s current precarious position.
 The impact of the plunge in the TRY will be felt in
We think the second option is the more likely scenario
inflation, which we now expect to rise to a peak of 24%
and have revised our baseline accordingly. We now
by Q2 2019. But, despite the political aversion to higher
expect growth to slow to 1.2% in 2019, with a fall in
interest rates, we assume that the CBRT will have no
consumption partly offset by strong export growth.
choice but to raise rates accordingly, and we see the
 The imposition of US sanctions against Turkey was the policy rate reaching 25% in Q1 next year. Tighter
trigger for the TRY sell-off, and the TRY has lost 20- financial conditions will drive the slowdown in growth,
25% of its value since then. While confidence in Turkish but a weaker currency will help exports outperform.
macroeconomic policy had already been running low,
especially after the central bank (CBRT) failed to raise
interest rates at its July meeting despite inflation
moving above 15%, the TRY’s collapse set off a vicious
circle fed by concerns that the private sector’s servicing
of its large hard-currency external debts could become
very difficult.
Forecast for Turkey

2017 2018 2019 2020 2021 2022
Domestic Demand 7.1 2.6 -2.0 4.0 4.2 4.2
Private Consumption 6.1 4.4 -2.9 5.5 3.2 3.1
Fixed Investment 7.3 4.2 -3.1 4.6 3.6 3.3
Imports of Goods and Services 10.3 0.5 -3.2 5.0 4.8 5.1
GDP 7.4 3.9 1.2 3.9 3.8 3.4
Consumer Prices 11.1 15.4 19.7 13.7 12.2 11.0
Trade Balance ($bn) -59.0 -66.9 -39.1 -32.6 -39.8 -44.7
Page 107
Autumn
2018
Turkey
Lira crisis to lead to sharper growth slowdown

The sudden stop to capital flows that has haunted Turkey’s
economic outlook for months is finally upon us. The mind-
Turkey: Contributions to GDP
boggling 18% fall in the TRY on 10 August has exposed Turkey
% year
to a full-blown currency crisis whose trigger has been as much 15
political as economic. The TRY has now fallen more than during F'cast
GDP
the 2008 financial crisis. And contrary to previous episodes of 10
TRY weakness, which were driven mostly by concerns over

5
inflation and central bank credibility, this sell-off is rooted in a
wider set of risks. The FX debt repayment costs of Turkey’s 0
corporate sector have soared, putting at risk the quality of bank
-5 Net exports
assets and the country’s ability to meet around US$200bn of
external financing requirements over the next year. And with a -10
backdrop of rising interest rates and a stronger dollar, the Domestic demand
imposition of US sanctions was the final ingredient for a perfect -15
1995 1998 2001 2004 2007 2010 2013 2016 2019
storm for the economy and Turkish assets. Source: Oxford Economics
The measures announced by the Turkish authorities this week

have provided some help to the TRY, but at 6.1/$ at the time of
writing it is 20-25% weaker than a few weeks ago. A restriction Turkey: USD/TRY exchange rate
% change over six months
on bank swaps helped curtail short-selling of the currency, and 30
the approval of a loan restructuring agreement, along with
20
tweaks to regulations suspending mark-to-market requirements
for banks, have helped stabilise banking sector stress. In 10
addition, the finance minister, in a call with investors, pledged to 0

rein in fiscal spending and not to impose capital controls.
-10
Meanwhile, the CBRT has refrained from holding its regular
auctions, offering TRY liquidity to banks instead at the overnight -20
lending rate (which is 150bp higher than the one-week repo)
-30
and Qatar has pledged substantial funds for investment.
-40
Although these measures have provided some support, we 2007 2009 2011 2013 2015 2017
think they will prove insufficient to prevent further TRY Source : Oxford Economics/Haver Analytics
weakness, especially since they don’t address the underlying

causes of the crisis. Turkey: Official reserve assets
$ billion
Our revised forecast sees GDP growth falling to 1.2% in 2019 Foreign currency reserves
140 o/w: Banks' required reserves in FX
on the back of tighter financial conditions, higher inflation, and a
Gold
120
much weaker TRY. The new baseline is based on the following:
100
 Growth to slow faster than previously expected: even useable
before the latest tightening in financial conditions, the 80 reserves
($32 bn)
leading indicators of growth have already been falling. 60
Industrial production slowed further in June, to 3.2% y/y from
40
6.1% in May, and, with the manufacturing PMI remaining in
negative territory for the fourth consecutive month, the 20
prospects for a recovery are limited, except perhaps in the
0
export sector, which will get a boost from the weaker 2012 2013 2014 2015 2016 2017 2018
currency. Moreover, the lira’s weakness this year has dented Source : Oxford Economics/Haver Analytics
consumer and business confidence, and the recent plunge

will worsen sentiment further. We think the tighter financial
Page 108
Autumn
2018
Turkey
conditions (largely brought about by market developments)

and higher inflation will cause consumption to shrink 2.9% in
2019 (previously +1.8%).
Turkey: Headline vs core inflation
% change, y/y
 Inflation to surge further following TRY fall: inflation 16
continued to rise in July, reaching 15.8% up from 15.4% the 14 Headline Core
month before, with core inflation rising by 0.5ppts to 15.1%,
12
suggesting that the underlying inflationary pressures remain
10
strong. And the recent fall in the TRY make it even more
unlikely that we will see inflation peaking this year. Indeed, 8
our modelling suggests that, the exchange rate pass-through 6

to inflation, which takes around six months to fully play out, 4 Official target
will see inflation reach 23.7% y/y in Q2 2019. Our forecast
2
assumes that the TRY will continue to weaken over the next
0
few months, albeit much less violently than over the last two 2004 2006 2008 2010 2012 2014 2016 2018
weeks.
 Despite resistance, rate hikes are on the way: we find it

very difficult to envisage that the CBRT could refrain from Turkey: Central bank policy rate and inflation
%
raising rates with inflation rising to 23-24%. We therefore 27 Forecast
expect that, despite the political pressure not to, it will have Inflation (new)
24
no choice but to raise rates this year. That said, we assume Inflation (old)
21 One-week repo rate (new)
that the bank will remain behind the curve with regard to One-week repo rate (old)
18
inflation-fighting (in line with its historical behaviour). As
15
such, we only pencil in 725bp of rate hikes in the coming
12
quarters, much less than the rise in our inflation forecast.
Given the aversion to higher rates in Turkey, however, it is 9
plausible that this forecast will prove too optimistic, and that 6
the central bank will either undershoot expectations, or will 3

revert to using a multiple-rates framework, a step back from 0
2010 2012 2014 2016 2018 2020
the simplification of policy that was initiated earlier this year. Source : Oxford Economics/Haver Analytics
 Lira weakness to help narrow external imbalances: the Turkey: Current account balance
US $ bn
silver lining from the TRY’s weakening is that it will facilitate 20
a sharper adjustment in the current account balance. Current account F'cast
Indeed, with the lira 25-30% weaker in our new forecast, we 0
see the deficit falling from over 7% of GDP in 2018 to a more

-20
manageable 3% in 2019, as exports (notably tourism) Trade
balance
receive a boost from the weaker currency while the sharp -40
slowdown in domestic demand compresses import growth.
-60
-80
-100
1995 1998 2001 2004 2007 2010 2013 2016 2019
Page 109
Autumn
2018
Economic Background
United Kingdom
United Kingdom
Highlights
 A run of firmer data has led us to upgrade our GDP  September’s MPC meeting saw a unanimous vote to
forecast for Q3 2018 to 0.5% but, although this is not keep policy unchanged. The Committee reiterated its
enough to move our forecast for 2018 overall, it has view that a tight labour market will drive up wages and
nudged up our 2019 projection to 1.4%. And the bigger inflation, but we remain sceptical that the data will
picture is one of sluggish growth which, along with soft evolve in a way that supports this argument and
underlying inflationary pressures, should mean a continue to expect a maximum of one rate hike in 2019.
maximum of one 25bp rate hike next year.
 With a little over six months until the UK leaves the EU,
 GDP grew by 0.3% m/m in July, taking the three- Brexit remains a major source of uncertainty. Although
monthly rate to an 11-month high of 0.6%. But this was we remain of the view that it is unlikely that the two
flattered by the comparison with the period of snow- sides will fail to agree a deal, it is not impossible. Our
related disruption in Q1, so we expect a slightly softer modelling suggests that a disorderly Brexit in March
outturn for Q3 as a whole of 0.5%. Indeed, there is little 2019 would see significant additional trade frictions and
in the high-frequency data to suggest that the firmer a substantial depreciation of sterling, resulting in the
output data for Q3 is anything more than noise, with a level of GDP being a little over 2% below our baseline
range of indicators – most notably the composite PMI – forecast by the end of 2020. This is predicated on the
suggesting that Q3 has seen a similar pace of growth to idea that both monetary and fiscal policy are loosened
Q2. to help cushion the shock.
Forecast for UK
2017 2018 2019 2020 2021 2022
Domestic Demand 1.3 1.3 1.2 1.8 2.1 2.1
Exports of Goods and Services 5.4 -0.3 2.7 3.1 3.0 2.9
Imports of Goods and Services 3.2 -0.3 1.9 2.5 2.9 2.9
GDP 1.7 1.3 1.4 2.0 2.2 2.1
CPI 2.7 2.5 2.0 1.6 1.6 1.7
Exchange Rate (US$ per £) 1.29 1.35 1.38 1.43 1.48 1.50
Exchange Rate (Euro per £) 1.14 1.13 1.13 1.14 1.18 1.20
Page 110
Autumn
2018
United Kingdom
GDP growth set to pick up to 0.5% in Q3…

GDP rose by 0.3% in July, taking the three-monthly rate to an
11-month high of 0.6%. This probably exaggerates the
underlying strength of the economy, given that the 3-month rate UK: Monthly Gross Value Added
Jul 2017 = 100
was flattered by the comparison with the period of snow-related 104 Industrial production
Forecast
Construction
disruption in March. However, the strong start to Q3 according
Services
to the official output series means that we now expect quarterly 103
GDP growth of around 0.5%, which would be the strongest 102

outturn since Q4 2016.
101
…but the stronger Q3 looks likely to be noise
100
But we expect the stronger run of official output data to prove to
be little more than noise. Business survey data – most notably 99
the composite PMI – suggests that activity has continued to run Horizontal lines denote quarterly averages
at a similar pace to Q2, while retail sales growth is likely to have 98
Jul-17 Oct-17 Jan-18 Apr-18 Jul-18
slowed somewhat, after Q2 had been boosted by a post-snow Sources : Haver Analytics, Oxford Economics
rebound. So, while the upgrade to Q3 has mechanically pushed
up our forecast for GDP growth in 2019 to 1.4%, the bigger
picture is little changed, with the UK economy set to continue to UK: Earnings & inflation
grow at a sluggish pace by historical standards. The key drivers % year
7
of our forecast are: Average weekly Forecast
earnings
6
 Household spending power gradually recovering: CPI
5
inflation was 2.7% in 2017, its highest in five years, causing
a sharp squeeze on household spending power. But the rate 4
slowed in H1 2018, as the impact of the 2016 sterling 3

depreciation faded. Higher oil prices, rises in domestic 2
energy bills and renewed weakness in sterling are likely to CPI
1 inflation
mean that inflation remains sticky in H2, but the weakness of
0
core pressures means that inflation is likely to resume its
descent in 2019. We expect CPI inflation of 2.5% this year, -1
2004 2006 2008 2010 2012 2014 2016 2018 2020
slowing to 2.0% in 2019.
However, the strength of the recovery in household

spending power will be constrained by the government’s UK: Contributions to consumption growth
% year
welfare reforms, higher interest rates and softer employment Savings contribution
6 Income contribution
growth. And with the savings ratio already very low, we
5 Consumer spending growth
expect households to become more reluctant to borrow,
4
such that spending growth moves into line with real incomes.
3
We expect consumer spending growth to slow from 1.9%
2
last year to 1.1% in 2018 and then an eight-year low of just
0.9% in 2019. 1
 Boost to net exports fades as sterling strengthens and -1

Forecast
global growth softens: stronger global growth and a weak -2
pound drove a marked pick-up in export growth in 2017, -3

2010 2012 2014 2016 2018 2020
meaning that net trade lifted GDP growth by 0.6% points in
Source : Oxford Economics
that year. But this support is now likely to weaken
significantly. We expect global growth to cool as the impact
of more protectionist trade policy is seen. And though Brexit
uncertainty and dollar strength will weigh on sterling in the
short term, our modelling suggests that the pound remains
Page 111
Autumn
2018
United Kingdom
heavily undervalued and we expect it to recover through

2019, assuming that Brexit proceeds in an orderly fashion.
 Brexit uncertainty weighs on business investment: in
2016-17, business investment grew just 0.7% a year, having UK: World trade* and the sterling EER
% year Index Jan 2005 = 100, inverted
risen by almost 5% a year in 2010-15. Corporate profitability 7 75
Weaker
remains firm but investment intentions are subdued, with W orld pound 77
6 £EER
Brexit-related uncertainty weighing. This will persist until the (RHS)
Trade 79
UK’s future trading relationship with the EU becomes 5 81
clearer. We expect growth in business investment to stay 4
83
relatively subdued, with capital spending seen rising by 1.1% 85
3
in 2018 and 2.0% in 2019. Overall investment is set to grow Forecast
87
by 1.1% this year, before rising to 2.9% in 2019. 2 89

91
 Tight fiscal stance: the squeeze on welfare spending noted 1 Stronger
93
pound
above, along with other cuts to current spending and tax 0
* weighted by UK exports shares
95
rises, means that fiscal policy will exert a drag on growth 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Sources: Haver Analytics, Oxford Economics
over the next few years. Forecasts from the Office for
Budget Responsibility imply that fiscal tightening will drag on
GDP growth in each year between 2018/19 and 2022/23,
with the peak impact of 0.4% of GDP in 2018/19. The Prime UK: Contributions to GDP growth
%pts Consumer spending Investment
Minister has announced a sizeable increase in funding for 4.0 Govt. consumption Other (inc inventories)
Net trade GDP
the NHS, but this looks set to be largely financed by tax rises 3.5
to be announced in the Budget this autumn. 3.0
2.5
2.0
Maximum of one 25bp rate hike likely in 2019
1.5
The MPC voted unanimously to keep monetary policy 1.0
unchanged at its September meeting. Though it suggested that 0.5
its August Inflation Report forecasts remained on track, it stated 0.0
that the degree of downside risk had increased due to rising -0.5
concerns about global growth and growing Brexit uncertainty. -1.0

1997- 2007- 2017 2018 2019 2020 2021
The minutes remained true to the MPC’s narrative that a tighter 2007 2017
labour market will drive up wages and inflation, thus Source : Oxford Economics
necessitating higher interest rates. But thus far the data have
offered scant backing to this narrative and we think it unlikely UK: Interest rates
this situation will change in the near-term. Against this %
6
backdrop, further rate hikes will be increasingly difficult to
justify, so we expect just one 25bp increase in Bank Rate in 5
2019.
4
10-year
gilt yield
3
1 Bank Rate
0
2004 2006 2008 2010 2012 2014 2016 2018 2020
Source : Oxford Economics
Page 112
Autumn
2018
Economic Background
United States
United States
Highlights
Highlights
 The economy appears to be firing on all cylinders this  On the policy front, trade developments have been
summer with real GDP growth approaching 3% y/y and encouraging for NAFTA, but disappointing with regard
the labor market continuing to deliver robust job growth. to Europe and China. On the latter, the administration
Strong consumer outlays, solid business investment, appears to be likely to impose tariffs on another $200
sturdy export growth and firming government outlays billion of imports from China, and the president has
remain supportive of growth. However, risks are threatened imposing tariffs on all imports from China.
appearing on the horizon, including rising inflation, Meanwhile, Congress will be focusing on passing a
threatening protectionism, slowing emerging markets budget by the end of the month to avoid a government
growth and a more hawkish Fed. shutdown. On the political front, recent publications
have exposed the chaos within the White House and
 As we approach the midterm elections, it appears solid
will continue to draw the ire of Trump.
economic momentum prior to this administration was
boosted by the passage of the Tax Cuts and Jobs Act  With PCE inflation trending near the Fed’s 2% target,
and the Bipartisan Budget Act as well as gradual we foresee two more interest rate hikes in 2018, for a
business deregulation. However, as these tailwinds total of four this year. In 2019, we expect another two
gradually dissipate, and new headwinds appear in the rate hikes as Fed Chair Powell puts his new doctrine
form of rising inflation, rising interest rates and rising of “risk management” to the test.
trade tensions, we expect real GDP growth will
moderate towards the 2.0-2.5% range in the coming
quarters.
 The economy added 201,000 jobs in August while wage
growth rose to 2.9% y/y – its strongest since 2009 – and
the unemployment rate remained at a low 3.9%.
Forecast for US
2017 2018 2019 2020 2021 2022
Domestic Demand 2.5 2.8 2.4 1.7 1.8 1.9
GDP 2.2 2.9 2.3 1.6 1.8 1.9
Consumer Prices 2.1 2.4 2.0 1.9 2.0 2.0
Exchange Rate (Yen per US$) 112.14 109.48 108.41 108.53 108.72 108.90
Page 113
Autumn
2018
United States
Economic momentum likely peaked in Q2

Real GDP grew 4.2% in Q2, its strongest performance since Q3
2014. Final sales rose 5.2%, while inventories subtracted 1.0
percentage point (pp) from GDP growth. The solid quarterly
advance was driven by rebounding consumer spending, up
3.8%, a strong 8.5% advance in business investment and a
1.2pp contribution from net trade on a one-time surge in
soybean exports. Year-on-year real GDP growth rose to 2.9% –
the fastest pace since mid-2015.
The latest economic data, however, point to gradually easing

momentum. As the boost from tax cuts fades, global growth
moderates, inflation rises, and the Fed tightens policy, we see
the economy shifting into a more moderate growth mode
around 2.5-3.0%. Despite the cooling momentum, we still
expect a healthy labor market, adding over 2 million jobs in
2018 (for an eighth straight year), along with building
inflationary pressures. We look for another two interest rate
hikes (four in total) in 2018, but we anticipate the Fed will adopt
a more cautious stance in 2019 as the federal funds rate
approaches the neutral rate, and protectionist measures weigh
on growth. We forecast two rate hikes in 2019, bringing the
federal funds range to 2.75–3.00% by the end of next year.
Despite some positive trade policy developments, we caution

that much work remains to be done. The US and Mexico
announced a preliminary trade deal, showing encouraging
progress toward a fully negotiated NAFTA, but securing
Canada’s sign off will not be an easy task. Meanwhile, US-
China relations remain precarious, with the US imposing extra
tariffs on a further $200 billion of imports. Similarly, US-EU
trade relations remain cool at best.
Solid fundamentals, but trade risks

 A healthy, maturing labor market: steady job growth and
firmer wage rises will support disposable income growth,
which should drive consumer outlays in H2 2018. The
unemployment rate will continue to fall toward 3.6% in the
coming months.
 Solid consumer spending, steady savings: the healthy

labor market, reduced tax burdens and accommodative
interest rates have kept confidence elevated, supporting
household outlays. Upward revisions to personal income
show the personal savings rate has held stable between 6-
8% over the last five years.
 Steady business investment: fiscal stimulus and strong

energy sector activity are supporting business investment
growth around 7.0% this year, though that should ease to
just under 3.5% in 2019.
Page 114
Autumn
2018
United States
 Moderate housing activity: income growth is supportive of

real estate activity, but tight inventories and elevated home
prices continue to be important headwinds. We see
residential investment being about neutral for growth in
2018, after providing a modest tailwind in recent years.
 Trade flows steady but risks rising: global activity is still
supporting US exports while strong domestic activity
supports imports. We see net trade as neutral for growth in
2018, though protectionism remains a concern.
 Firming inflation: headline and core personal consumption
expenditure (PCE) inflation are expected to hover around
the Fed’s 2% target into 2019.
 Policy risks: trade protectionism will curtail growth,
especially if met by retaliation from China and other key
partners, including Canada, Mexico and the EU.
 Fiscal overdrive: late-cycle fiscal stimulus could spur higher
inflation, tighter monetary policy and a wider deficit, weighing
on growth in 2019 and beyond.
Two more rate hikes expected in H2

Minutes from the most recent FOMC policy meeting showed
activity and inflation progressed in line with participants’
expectations, causing many to suggest it would “likely soon” be
appropriate to tighten monetary policy. With activity rising at a
“strong” rate and several members having “increased
confidence” that inflation will remain near the symmetric 2%
target, “further gradual increases” are the likely path for the fed
funds rate. We see two more rate hikes this year (in September
and December), followed by two more in 2019.
Long-term factors
The US economy should grow nearly 2.0% pa in 2022-30 as
the economy grows broadly in line with its potential.
 Flexible labor force: the US will maintain the flexibility of its
labor force, giving it an advantage over its peers.
 Recovering productivity: we continue to foresee a modest

rebound in US productivity growth.
Page 115
Autumn
2018
Economic Background
Austria
Austria
Highlights
The Austrian economy had a mixed start in Q3 after growing Exports rose by 0.8% m/m in July after increasing by
Highlights
 
by 0.5% in Q2. July retail sales fell for a third consecutive just 0.4% q/q in Q2. This rise is encouraging as it
month as rising inflation dragged on real incomes. But suggests that export growth may stabilise in H2.
exports posted a solid gain in July and surveys showed Stagnating imports in July also suggest that net trade
further signs of stabilising in August. Overall, we expect the may not be a drag on Q3 GDP. However, export growth
economy to grow at a steady rate in Q3 and Q4, as robust is unlikely to be as much of a pillar of growth as it was
domestic demand offsets weakening global trade. We have last year, given that world trade growth is moderating
nudged up our GDP growth forecast for 2018 to 2.9%, while and rising trade tensions imply clear downside risks to
for 2019 we have raised it to 2.0% from 1.5% as updated the outlook.
population forecasts imply higher potential output given less
 Overall, with our near-term growth outlook largely
of a demographic drag on labour supply.
unchanged, we see consumer prices rising by 2.0% this
 Retail sales fell by 0.6% m/m in July, following similar year, much the same as in 2017, before slowing energy
declines in May and June, suggesting that private price rises bring it down to 1.6% in 2019.
consumption growth will ease in Q3 after a strong rise in Q2.
Inflation, which rose to an eight-month high of 2.2% in
August, may be partly to blame. But the ongoing labour
market strength suggests a very robust outlook for
household incomes. Employment and negotiated wages
rose at steady rates of 2.3% and 2.6% respectively in
August, building on their persistent large gains in recent
quarters. This will provide support to consumption and
domestic demand growth.
Forecast for Austria

2017 2018 2019 2020 2021 2022
Domestic Demand 2.9 2.5 2.2 2.0 1.8 1.7
GDP 3.1 2.9 2.0 1.9 1.8 1.7
Consumer Prices 2.1 2.0 1.6 1.5 1.7 1.9
Government Budget (% of GDP) -0.8 -0.3 -0.2 -0.2 -0.1 0.0
Page 116
Autumn
2018
Economic Background
Canada
Canada
Highlights
Real GDP grew by 2.9% annualized in Q2, confirming All eyes are on the progress of trade talks between
Highlights
 
the rebound in growth we had been anticipating after Foreign Affairs Minister Freeland and US Trade
the fairly sluggish 1.4% advance in Q1. The star representative Lighthizer. Both sides are ostensibly
component of the report was exports, which grew a negotiating in good faith with the hope of reaching an
very robust 12.3% in volume terms – the strongest amicable solution, but risks of a policy shock remain
quarterly gain in four years. The rest of the details elevated. We think Canada can leverage its unique
pointed to reasonable activity, though investment was position in the trade talks to extract some key
somewhat sluggish. With half the calendar year now concessions from the US.
officially in the books, we continue to look for average
 Overall, the economic data are maintaining an upbeat
annual real GDP growth of around 2% in 2018. This
tone despite the contentious trade backdrop. The
assumes that the US and Canada agree to terms on a
August employment report was a bit disappointing, as
new trade deal that doesn’t substantively alter their
the 12-month moving average of job gains slowed to
existing trading relationship.
14,300 while wage inflation softened to 2.6% y/y, but
 On the monetary policy front, the Bank of Canada we still think the data signal little excess slack in the
(BoC) kept the overnight interest rate steady at 1.50% labor market.
at its September meeting, as we had expected. The
policy statement indicated that the Governing Council
maintain a favorable view of the economy while they
are keeping an eye on trade-related developments
and uncertainties. Assuming there is no shock on the
trade front, the stage looks set for the Bank of
Canada to lift interest rates next month.
Forecast for Canada

2017 2018 2019 2020 2021 2022
Domestic Demand 3.0 2.5 1.5 1.5 1.6 1.6
GDP 3.0 2.0 1.7 1.5 1.6 1.6
Consumer Prices 1.6 2.1 2.0 2.1 2.0 2.0
Government Budget (% of GDP) 0.2 0.1 -0.3 -0.4 -0.6 -0.9
Exchange Rate (Yen per Can $) 86.40 84.74 84.42 85.42 86.12 86.81
Page 117
Autumn
2018
Economic Background
Czech Republic
Czech Republic
Highlights
The Czech statistical office has raised its estimate of Industrial production fell by 1.8% in July, reversing
Highlights
 
Q2 quarterly GDP growth to 0.7% from 0.5% in the June’s 1.8% gain. The decline was unexpected and
flash estimate. This is close to our initial expectation, coincided with a large drop in German output, a key
so we have raised our 2018 GDP growth forecast export market for Czech manufactured goods. We
slightly to 3.0%, before a slight moderation to 2.7% in expect German activity to remain muted in the next
2019. Inflation surprised on the upside in August, few months, which is likely to weigh on Czech output.
rising to 2.5% y/y, which supports our view that the The manufacturing PMI, while still consistent with solid
CNB will deliver another 25bp rate hike this month, output growth, softened further in August as the
consistent with the hawkish tone in the August growth of new orders dropped to a 12-month low, in
statement. line with our expectation of moderating industrial
activity in Q3.
 The second estimate of the national accounts also
included the main components of GDP. Growth in Q2  Inflation rose to 2.5% in August, up from 2.3% in July.
was broad-based, with household consumption rising Core inflation rose 0.1pp to 2.1%, while energy
by a solid 0.7% q/q, and investment by 1.7%. Export inflation softened by 0.3pp to 12.4%. Job vacancies
growth slowed to 0.6% but, with imports declining by reached another record high in August and are up
0.3%, net trade made a positive contribution to 57% from a year earlier, but monthly growth softened
growth. Over the coming quarters, we expect growth from Q2. The policy rate was raised to 1.25% in
to rely increasingly upon domestic demand. August, and we still expect another rate hike from the
CNB this month.
Forecast for Czech Republic

2017 2018 2019 2020 2021 2022
Domestic Demand 3.3 4.5 2.6 2.2 1.8 1.7
GDP 4.5 3.0 2.7 2.3 1.9 1.8
Consumer Prices 2.4 2.2 2.2 2.1 2.0 2.0
Government Budget (% of GDP) 1.6 0.2 0.3 0.2 -0.2 0.1
Trade Balance ($bn) 10.3 11.1 9.8 11.1 12.3 13.3
Page 118
Autumn
2018
Economic Background
Hungary
Hungary
Highlights
Hungarian GDP grew by 0.9% q/q in Q2, slightly below Headline inflation rose to multi-year high of 3.4% in
Highlights
 
Q1’s 1.2%. As the Q2 result was in line with our July, owing to higher fuel prices, while core inflation
expectations, our 2018 growth forecast is unchanged at remained below 2.5%. for the sixth consecutive
4.2%. We see consumption being the main driver of month. The currency crisis in Turkey put renewed
growth, as wage growth stays robust given the very tight pressure on HUF after a short period of relief in July,
labour market. Even though trade tensions between the pushing it back into the HUF323-325 range against
EU and the US have eased, we still expect Hungary’s the euro. Looking ahead, we expect currency
growth to slow to 2.7% in 2019 and then about 2% in volatility to persist (as the central bank has signalled
2020-21, in line with potential. it will remain dovish despite the ongoing global
tightening); but as the current account balance is
 According to the Central Statistical Office, most
expected to remain in surplus and inflation
industries contributed to growth in Q2, with market-
expectations are anchored, we expect the HUF to
based services remaining the main driver of growth.
trade in a 320-325 range to the euro in H2.
Despite a significant drop in July, GKI’s consumer
confidence index stayed close to its multi-year high and
continues to point to robust consumption growth for
2018. June trade data also surprised on the upside, as
exports grew by 8.9% (and imports by 8.4%), perhaps
reflecting a front-loading in global trade amid ongoing
US-China tensions. Construction also rebounded and
grew by 28.2% in June, following a dip in March-April,
as the house price boom and EU funds inflow is seen
continuing in 2018.
Forecast for Hungary

2017 2018 2019 2020 2021 2022
Domestic Demand 6.8 6.4 1.4 0.7 1.6 1.7
GDP 4.2 4.2 2.7 2.1 2.0 2.0
Consumer Prices 2.3 3.1 3.3 2.6 2.4 2.6
Trade Balance ($bn) 2.56 1.95 3.77 2.51 2.63 2.32
Page 119
Autumn
2018
Economic Background
Indonesia
Highlights
 Despite faster y/y GDP growth in Q2 than we and the imports – the support this will provide to the current
consensus had expected, we remain cautious and account in 2018 is likely to be limited (we expect a
continue to forecast 2018 growth at 5.1%. That said, deficit of 2.3% of GDP this year).
the upside risks to our forecast have probably risen.
 The further weakening of the IDR this month –
However, over the next few quarters, we expect
sparked by the Turkish lira crisis – led Bank Indonesia
consumer spending growth to ease slightly as a
(BI) to hike its policy rate another 25bp to 5.5%. The
weaker rupiah (IDR) and higher interest rates
reported robust momentum in the economy in Q2
gradually weigh on private demand. And while we
likely strengthened the central bank’s commitment to
look for some strengthening in investment after Q2’s
prioritising currency stability in the short term (which
disappointing reading, rupiah volatility and the
had prompted it to raise rates 100bp in Q2). Given the
government’s plans to slow capital goods imports will
challenging environment for emerging markets
likely limit the pick-up. At the same time, we expect
currencies in general and Indonesia’s widening
slower Chinese import demand and rising US-China
current account deficit, we expect one more rate hike
trade tensions to slow export growth.
in H2 – and acknowledge the risks are tilted towards
 The recent strength in import growth resulted in the further near-term rate rises.
current account deficit widening to 2.6% of GDP in
H1, compared to 1.7% in 2017. The government is
concerned about the downward pressure this is
placing on the rupiah and has responded by
announcing measures that aim to slow imports. But
with most measures yet to be implemented and
appearing to focus on a subset of capital and
consumer goods – which account for 25% of total
Forecast for Indonesia

2017 2018 2019 2020 2021 2022
Domestic Demand 4.8 5.9 5.5 5.5 5.3 5.3
GDP 5.1 5.1 5.1 5.3 5.3 5.3
Consumer Prices 3.8 3.3 4.0 4.2 3.8 3.5
Trade Balance ($bn) 18.8 8.9 14.4 19.0 24.7 28.2
Page 120
Autumn
2018
Economic Background
Poland Malaysia
Highlights
 GDP growth decelerated in Q2 to 4.5% y/y from 5.4%  We expect household spending will remain the key
in Q1 as import volume growth outpaced exports. driver of GDP growth in H2. However, most other
Moreover, the outlook for exports is expected to domestic demand components are forecast to cool,
become more challenging through to 2019 amid which should see imports ease back in the coming
cooling Chinese import demand and increased trade quarters. We also expect some bounce-back in
protectionism. Investment is also likely to moderate exports and inventories in Q3 as mining and
given the government’s review of major infrastructure agriculture production normalise following supply
projects, while US-China trade frictions are likely to disruptions in June.
weigh on sentiment. We expect the easing in exports
 Despite lower inflation and a slower Q2 GDP growth
and investment to be partly offset by ongoing
outcome we expect Bank Negara Malaysia (BNM) to
strength in consumer spending. We now expect GDP
keep the policy interest rate at 3.25%. Moreover, as
to grow by 4.9% this year, and 4.6% in 2019.
the impact of abolishing the GST on prices fades next
 Headline GDP growth was surprisingly soft in Q2 as year, and demand-pull inflationary pressures build, we
imports grew at a much faster pace than anticipated, expect BNM to raise rates by 25bp in mid-2019
rising 2.1% y/y (up from -2% in Q1) and outpacing
exports of 2%. Underpinning the rise in imports was a
pick-up in domestic demand, which rose 4.7% y/y, up
from 1.4% in Q1. In particular, household spending
surged to a multi-year high of 8% y/y, reflecting a
boost to consumer sentiment after the announcement
of the zero GST rate and the introduction of fuel
subsidies.
Forecast for Malaysia

2017 2018 2019 2020 2021 2022
Domestic Demand 6.6 4.2 5.3 4.1 4.0 4.0
Fixed Investment 6.2 -0.6 2.1 4.9 5.3 4.1
Stockbuilding (% of GDP) 0.1 -0.8 0.1 0.1 -0.1 0.0
GDP 5.9 4.9 4.6 4.1 4.0 3.9
Consumer Prices 3.8 1.2 2.9 2.9 2.5 2.5
Trade Balance ($bn) 27.2 30.3 30.5 31.7 35.4 39.1
Page 121
Autumn
2018
Economic Background
Poland
Highlights
Highlights
 Despite mounting concerns over slowing global and contributions, of 0.7pp and 0.1pp respectively. But
European demand and trade tensions with the US, after picking up in the two previous quarters, fixed
the Polish economy is enjoying stellar growth rates. investment disappointed, adding only 0.1pp to growth,
The Q2 1% q/q expansion was driven equally by and was more than offset by a 0.8pp drag from
domestic consumption and external demand, but inventories. As the PLN has recovered 2.2% since
investment disappointed. As such, we continue to then, exports may decelerate in Q3, resulting in a
see growth in 2018 at 4.7%, with risks skewed to the somewhat lower growth rate.
upside if trade tensions and weaker external demand  The Turkey-driven EM sell-off has left the PLN
fail to dampen growth in H2 in line with our forecast relatively unscathed, down just 0.5% against the euro,
(we expect growth to slow to 0.8% q/q in H2). For with Poland’s limited external imbalances preventing
2019, we GDP growth of 3.5%. a deeper selloff. And despite persisting labour market
 The flash estimate of Q2 GDP was in line with our tightness and moderate depreciation of the PLN,
forecast, at a solid 0.9% q/q, and has since been inflation remains low at 2% in August, with core
revised up to 1% q/q or 5.1% y/y. Although we inflation at only 0.6%. Inflation will slow in the rest of
expected external demand to have a positive impact the year on base effects, averaging about 1.9% in
on growth in Q2 (helped by the 3.5% depreciation 2018, playing into the dovish stance of the NBP.
against the euro), the published estimate was a
positive surprise – net exports contributed 0.8pp to
the 1% GDP growth as exports outpaced imports.
Private and public consumption also made positive
Forecast for Poland

2017 2018 2019 2020 2021 2022
Domestic Demand 4.8 5.0 3.8 3.9 3.4 3.3
GDP 4.6 4.7 3.5 3.1 3.2 3.0
Consumer Prices 2.0 1.9 2.1 2.0 2.1 2.2
Trade Balance ($bn) 0.8 -1.4 -2.0 -6.6 -8.9 -12.5
Current Account ($bn) 0.80 -0.66 -1.64 -4.54 -4.44 -5.57
Current Balance (% of GDP) 0.19 -0.12 -0.24 -0.63 -0.58 -0.69
Exchange Rate (Zloty per Euro) 4.26 4.25 4.21 4.15 4.12 4.09
Page 122
Autumn
2018
Economic Background
Russia
Russia
Highlights
Russian GDP growth accelerated to 1.8% y/y in Q2, Government bond yields have continued to creep higher
Highlights
 
surpassing our expectations. However, the q/q pace of amid a weaker rouble, escalating sanctions rhetoric and
expansion will likely stall in the coming quarters, amid general ‘risk-off’ sentiment, with foreigners offloading
the pressure from sanctions, notwithstanding the slight local bonds. This is not an environment to ease
pick-up seen in the August PMIs. Consumer demand monetary policy and we now think the CBR will stand
will remain the leading driver of activity, although we pat until H2 2019, seeing through the expected
nonetheless expect it to soften in 2019 on the back of temporary breach of the 4% inflation target. A rate
the planned VAT increase to 20%, from 18%, and the increase still seems unlikely.
gradual rise in inflation. Overall, we are forecast GDP
growth of 1.8% for 2018, before projecting a slowdown
to 1.4% in 2019.
 The potential for a tighter US sanctions package against

Russia, which threatens to include a ban on the sale of
debt securities, has exacerbated capital outflows,
maintaining the downward pressure on Russian assets,
including the rouble. In the short term, a weaker
currency will continue to act as a shock absorber, lifting
the RUB value of the crucial oil and gas exports. In the
longer term, however, existing and additional sanctions
targeting energy projects and banks will reinforce the
bleak outlook for foreign investment and the economy.
Forecast for Russia

2017 2018 2019 2020 2021 2022
Domestic Demand 4.0 1.4 1.4 1.5 1.3 1.3
GDP 1.5 1.8 1.4 1.2 1.2 1.2
Consumer Prices 3.7 3.0 4.4 4.0 4.0 4.0
Government Budget (% of GDP) -1.3 0.5 0.2 0.4 0.0 0.0
Trade Balance ($bn) 115.4 190.4 207.6 192.1 190.0 194.3
Page 123
Autumn
2018
Economic Background
Slovakia
Slovakia
Highlights
Slovakia’s economy continues to grow robustly,  After a negative start to the year, export volumes
Highlights
notwithstanding the wider eurozone deceleration this increased by 2.7% in Q2, while net trade contributed
year. Q2 GDP was revised up to 1.1% q/q, after a more than 1 percentage points to quarterly GDP
1.0% gain in Q1, with fixed investment and net trade growth. There has been some volatility in the data
the key drivers of growth. We expect the economy to available on Q3 so far, with industrial production falling
slow marginally over the next few quarters, with Q3 in July, including a sharp decline in auto output, while in
seen at 0.8% q/q. As for 2018 as a whole, we now August there was a jump in car registrations, as
see GDP growth of 3.7%, before slowing to 2.6% in companies registered cars that they otherwise would
2019, as the economy will suffer from the weaker not have been able to sell to consumers because of
outlook for global trade. But, given the resilience that new emission standards.
the Slovak economy has been showing, there is a risk
 CPI inflation accelerated to 2.8% in August, mainly
that growth could continue to beat expectations.
driven by an increase in transport costs. We expect
 Private consumption, which was strong throughout inflation to average 2.6% this year, before moderating
2017 and in Q1 2018, was more subdued in Q2, to around 2% in 2019. On a structural basis, the labour
growing by 0.5% over the quarter, constrained by market is approaching full employment, with a high
higher inflation. level of job vacancies. The unemployment rate was
stable in Q2 at the record low of 6.9%, while real wages
are forecast to increase by a solid 4% this year.
Forecast for Slovakia

2017 2018 2019 2020 2021 2022
Domestic Demand 3.0 3.5 2.1 2.7 2.3 2.5
GDP 3.4 3.7 2.6 2.4 2.3 2.2
Consumer Prices 1.3 2.6 2.0 2.2 2.2 2.2
Trade Balance ($bn) 0.7 2.1 3.1 3.0 3.0 2.6
Short-Term Interest Rate (%) -0.3 -0.3 -0.1 0.3 0.6 0.8
Page 124
Autumn
2018
Economic Background
Vietnam
Highlights
 After recording a solid 7.1% in H1 2018, we expect  Inflation has risen from 2.6% at end-2017 to 4.5% in
GDP growth to moderate as base effects become less July, above the government’s target of 4%, reflecting
favourable. In addition, while external demand is set accelerating food and transportation prices. Given the
to remain healthy we look for its momentum to ease solid domestic demand outlook and higher food prices
as Chinese import demand cools. Meanwhile, we expect inflation to remain above 4% well into 2019.
domestic demand is forecast to strengthen in 2018 Nonetheless, after lowering the credit growth target to
driven by solid FDI inflows, buoyant consumer 17% this year we expect policy rates to remain
spending and expansionary monetary policy unchanged. We forecast a 25bp hike in early 2019,
conditions. We look for GDP to grow 6.7% in 2018, although upside risks to inflation could see interest
before easing to around 6.3% in 2019 amid a less rates raised sooner.
stimulating monetary policy and a less supportive
 The economy faces several risks including rising US-
background for global trade.
China trade frictions. And despite ongoing progress in
 GDP growth slowed to 6.9% y/y in Q2 from 7.4% in improving its macro stabilisers, as recognised by the
Q1, with expansion in the manufacturing sector recent upgrade to its sovereign credit rating by
easing back, albeit at 12.6% its growth remained Moody’s, there is still concern that rapid credit growth
strong. Meanwhile, growth in construction and service could lead to an increase in nonperforming loans in the
sector activity picked up amid strong FDI inflows and banking sector and higher inflation.
tourism receipts.
Forecast for Vietnam

2017 2018 2019 2020 2021 2022
Domestic Demand 8.2 10.9 7.4 4.9 5.3 6.5
GDP 6.8 6.7 6.3 6.2 6.0 5.8
Consumer Prices 3.5 3.9 4.2 3.9 4.0 4.0
Trade Balance ($bn) 11.5 11.5 10.2 9.0 7.4 7.6
Page 125

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Autumn

Copyright © 2018 Oxford Economics

Economic Background (continued)

Oxford Economic Forecasting

Machine Tool Outlook

Despite the global industry slowdown, economic

However, trade protectionism, both actual and feared, is a

On balance, we expect a modest deceleration in industrial

China rebalances as trade conflict escalates

Elsewhere, Japanese industrial production will be

Eurozone industry has shifted down a gear

Elevated order backlogs, amid production bottlenecks and

US industrial activity is healthy, but peaking

On the trade front, despite the breakthrough in US-Mexico

Machine tool market growth to halve in 2019

Overview of medium-term trends

Looking ahead, both Chinese GDP and fixed investment are

This process of catch-up is evident in many emerging

This in turn is expected to drive growth in machine tool

export to the rest of the world continues. This comes despite

In contrast, for Europe, GDP growth over the 2018-2022

More fundamentally, populations are generally ageing and

The Americas region lies between these two extremes. The

Machine tool consumption

Brazil -2.6 12.2 0.6 4.8 4.7 4.6 0.6

Austria 7.3 12.5 3.4 3.7 2.3 2.3 0.8

World ex-China 5.5 9.7 3.7 3.3 3.1 2.8 47.8

…and global weakness could become

Output in MT consuming sectors grew 3.8% in 2017, after

Meanwhile, investment in MT consuming sectors is set to

Risks are skewed to the downside. On the economic front,

Forecast for Brazil

Apparent consumption = total consumption of machine tools in the named market

Apparent consumption = total consumption of machine tools in the named market

So far this year, weighted output among the key MT

Similarly to output, investment by the main MT consuming

Risks to the forecast are to the downside. Domestically,

Forecast for China

Meanwhile, production growth among the key MT

Despite ongoing uncertainty, the outlook for investment by

Risks to MT consumption are tilted to the downside. On a

Forecast for France

Apparent consumption = total consumption of machine tools in the named market

Weighted production across the main MT purchasing

Meanwhile, weighted investment is forecast to increase by

Risks to the forecasts are to the downside. The main risk is

Forecast for Germany

Meanwhile, the pace of expansion among the key MT

At the same time, capital spending by the MT consuming

Risks are skewed to the downside. On the one hand, there

Forecast for India

Apparent consumption = total consumption of machine tools in the named market

Apparent consumption = total consumption of machine tools in the named market

Meanwhile, weighted production growth among the key

Similarly to output, we expect investment growth by the

Although a government was formed, following three

Forecast for Italy

The solid macroeconomic outlook will support relatively

Meanwhile, investment by the MT purchasing sectors is

Risks to the forecast are skewed to the downside. The

Forecast for Japan

Weaker global trade and rising protectionism has dented

At the same time, investment spending by the key MT