Global Economics Weekly

October 2, 2013
Issue No: 13/31
Global Economics Weekly

Economics Research
Still-firm data are a bulwark against politicians at the gate

Markets shift to risk-off mode
Markets have taken a decidedly risk-off shift, likely owing in part to the US federal government shutdown and its uncertain implications for the upcoming debt-ceiling debate. Reflecting this risk-off dynamic, equity volatility has climbed, equity prices are well off post-FOMC highs, bonds have rallied, safe-haven currencies have strengthened, and EM currencies have weakened.
Dominic Wilson
(212) 902-5924 dominic.wilson@gs.com Goldman, Sachs & Co.
Kamakshya Trivedi
+44(20)7051-4005 kamakshya.trivedi@gs.com Goldman Sachs International
Noah Weisberger
(212) 357-6261 noah.weisberger@gs.com Goldman, Sachs & Co.
But we see little cause for concern

While risk-off moves can persist, and catalysts that improve sentiment are hard to discern in advance, we see little that causes us great concern. The current data, our forward views and a simple look back at past government shutdowns all suggest that current concerns ought to be short-lived.
Aleksandar Timcenko
(212) 357-7628 aleksandar.timcenko@gs.com Goldman, Sachs & Co.
Jose Ursua
(212) 357-2234 jose.ursua@gs.com Goldman, Sachs & Co.
and view current jitters as an opportunity

Ultimately, the bond market rally and equity pullback likely represent opportunities to re-express key strategic views in both those markets, and are unlikely to be harbingers of a sea change in underlying dynamics. As the political jitters reach their natural denouement and growth starts to accelerate again, the macroeconomic fundamentals that reigned earlier this summer will likely to reassert themselves. Market dynamics have gone from risk on/growth off, to growth on/risk off
20% Return attribution Jan-Apr (Risk rally) Apr-July (Growth & Risk: Firing on all cylanders) 10% Jul-Present (Growth takes over, Risk a headwind) Change in bps 110 95 80 65 50 35 20 5 -10 -5% -25 -40 -10% Risk Growth Europe Oil S&P 500 10-Year Yield (RHS) -55
George Cole
+44(20)7552-3779 george.cole@gs.com Goldman Sachs International
Julian Richers
(212) 855-0684 julian.richers@gs.com Goldman, Sachs & Co.
15%
5%
0%
Source: Goldman Sachs Global Investment Research.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
The Goldman Sachs Group, Inc.
Global Investment Research
October 2, 2013
Still-firm data are a bulwark against politicians at the gate

Over the past month, several key risks seem to have been resolved. US monetary policy has yet to shift course, speculation regarding the Fed Chairman nomination has recentered on current Vice-Chairman Yellen, elections in Germany have passed and a potential US/Syrian conflict looks to be moving towards a global diplomatic resolution. But, in their place, the focus has shifted to the implications of the US federal government shutdown, the looming debt ceiling confrontation, and political events in Italy and Greece. Currently, markets have taken a decidedly risk-off shift, likely owing in part to the US federal government shutdown and the uncertain implications this has for the political calculus surrounding the upcoming debt-ceiling imbroglio. Reflecting this risk-off dynamic, equity volatility has climbed, equity prices are well off post-FOMC highs, bonds have rallied, safe-haven currencies have strengthened, and EM currencies have weakened. This new market dynamicwith negative risk sentiment as increasingly strong headwindhas only been in play for a short period of time, coming on the heels of several longer-lived market regimes that had held sway for much of 2013. In this Global Economics weekly, we view the recent market moves in the context of (a) the current and expected near-term macroeconomic fundamentals and (b) the historical record of similar government shutdowns. Against this backdrop, we look at how market dynamics have shifted over the course of the year and how we would expect them to evolve on a macro fundamental basis. While risk-off moves can persist, and catalysts that improve sentiment are hard to discern in advance, we see little that causes us great concern in the medium-term. The current data, our forward views and a simple look back at past government shutdowns all suggest that current concerns will likely be short-lived. Although still nascent, the current risk-off mood is more dour than the current macroeconomic landscapeand how we expect that landscape to evolvewould otherwise suggest. Our global forecasts continue to indicate that we are in the early stages of a long patch of accelerating growth and the first bits of the September data look firmalthough the signals are a bit more mixed, with some evidence that the strong summer acceleration has slowed. Ultimately, the bond market rally and equity pullback likely represent opportunities to reexpress key strategic views in both those markets, and are unlikely to be harbingers of a sea change in underlying dynamics. As the political jitters reaches its natural denouement and growth starts to accelerate again, the macroeconomic fundamentals that reigned earlier this summer ought to reassert themselves. However, tactically, with the core September data already out and political uncertainty yet to crescendo, we are more actively managing our equity risk here, particularly given that pro-cyclical shifts have run for some time. As such, we have raised the stop on our long recommendation in the GDP Wavefront Growth basket to 82 (from 80), and we are keeping the original 86 target.
Markets shift to risk-off mode

Markets have gone through several regimes over the course of the year, reflecting a shifting set of risks around (1) monetary policy accommodativeness and its potential pause, (2) improving growth outcomes, which had been dormant, and now (3) rising fiscal risks. For much of the first half of the year, a rising equity market coincided with falling yields. Decomposing the S&P 500s return over this period, it was driven by improving risk sentiment, to the exclusion of other macroeconomic risk factors (see Exhibit 1). Sector leadership was decidedly defensive in nature, and growth views actually retreated
Goldman Sachs Global Investment Research
October 2, 2013
significantly over this period. EM risk and EM growth were also clear headwinds, as those assets underperformed markedly too. A risk-driven US market, rallying without an improvement in growth views, had been common for much of 2012 and 2013, and has held sway for long periods of time in the past (05-08-2013, Global Economics Weekly: 13/17 Equity upside more than cyclical tilt). This dynamic gave way to growth leadership in late spring and early summer. Visible improvement prompted rates to sell off, the growth factor started to perk up and support the market, and risk sentiment continued to be a positive. Then, late in the summer, even as the growth outlook continued to improve, risk sentiment turned more downbeat, bonds rallied and the overall market paused. This risk-off dynamic has accelerated in recent weeks, despite the Feds dovish surprise (which had little lasting effect) and still firm data. With political concerns in greater focus, and following a temporary post-FOMC boost, risk sentiment has become an increasing headwind: USTs have continued to rally, the USD and other safe-haven currencies have appreciated, the S&P 500 has declined, and equity volatility has picked up (see Exhibit 2).
Data still firm, but pace of summer improvements slowing

Against this recent shift in market sentiment to more of a risk-off mode, the early read of the September global data shows that ongoing improvements look firmly entrenched. On the whole, the US data continue to surprise to the upside. Our US Economics teams MAP score, which captures data surprises over a rolling 1-quarter window and which is tilted towards more recent and more important data, is still in positive territory and close to its 2013 highs (see Exhibit 3). Over shorter windowssay 20 or 10 dayssurprises have also been positive. Although the MAP index has not gained ground recently, it is still in positive territory as expectations have not yet fully caught up to the pace of realised data improvements.
Exhibit 1: Market dynamics have gone from risk on/growth off, to growth on/risk off
20% Return attribution Jan-Apr (Risk rally) Apr-July (Growth & Risk: Firing on all cylanders) 10% Jul-Present (Growth takes over, Risk a headwind) Change in bps 110 95 80 65 50 35 20 5 -10 -5% -25 -40 -10% Risk Growth Europe Oil S&P 500 10-Year Yield (RHS) -55
15%
5%
0%
October 2, 2013
Exhibit 2: Markets in risk-off mode
Asset S&P 500 VIX Basket of EM equities Wavefront GDP Growth basket US 10-year treasury yields Trade-weighted US Dollar CHF Basket of EM currencies
9/18 - today -1.8% 2ppt -0.5% 0.3% -3bps 0.7% -2.1% -0.9%
8/19 - 9/18 4.8% -1.5ppt 7.4% 2.8% -19bps -1.4% 0.9% 1.7%
Beyond merely surprising to the upside, the data themselves remain consistent with improving growth prospects. Our US CAI shows that US growth has been accelerating for much of the year and, on a real GDP basis, reached about 3% in August, near the multiyear highs. The first estimate of Septembers growth rate is due to come out along with Septembers payrolls data at the end of the week, but the shutdown may delay the release. Looking forward, our forecasts call for real GDP growth to bottom in 3Q (with the current estimated run rate already surpassing that mark), then accelerate into 2014, peaking at 3.5% (on a qoq basis) in the second quarter and remaining there for the rest of the year. Outside of the US, the industrial cycle continues to improve too. The Global PMI climbed again in August, to 52.5, marking the 4 consecutive month above the 50 threshold and the 5th sequential monthly improvement (see Exhibit 4). Both US and China PMIs improved, while the European aggregate declined a touch. Beneath these headlines, the forwardlooking New Orders to Inventories gap ticked lower across the board after a significant widening last month. The GLI, continues to point to positive global cyclical growth. Month-on-month GLI growth in September was 0.37%, a touch below the August reading (by a basis point) and (apart from August) the highest reading since late 2011 (see Exhibit 5). With growth positive but down (ever so slightly) relative to last month, the GLI Swirlogram shows that the GLI has, just barely, re-entered the Slowdown phase, after spending the last five months in Expansion (see Exhibit 6). If subsequent GLI releases confirm this trend, it would be a somewhat short Expansion phase by historical standards. Given that growth was barely down on the month and with more data in hand, GLI revisions could easily show a reacceleration. It is worth noting, however, that risky assets still tend to do well in the Slowdown phase too, although outperformance is not as clear-cut.
October 2, 2013
Exhibit 3: Data surprises remain positive and US growth outcomes continue to improve
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan-10 GS Real GDP Growth Forecast (Q/Q Annualized, LHS) US CAI (LHS) MAP (RHS) Jan-11 Jan-12 Jan-13 Jan-14 -3 1 0 -1 -2 3 2
Exhibit 4: Global PMI data continue to climb
Index
60 58 56 54 52 50 48 46 44 42
Index
Global US PMI Euro Area China PMI 2010 2011 2012 2013
-4 Jan-15
Exhibit 5: GLI growth continues apace
Exhibit 6: although slowing growth means an end to Expansion

65 60 55
GLI Acceleration
30% 20% 10% 0%
Index
0.06% 0.05% 0.04% 0.03% 0.02% 0.01% 0.00%
Recovery Current Last Month
Oct-12 Nov-12 Apr-13
May-13
Expansion
Jul-13 Aug-13
Jun-13 Dec-12 Jan-13
50 45 -10% -20% -30% 2000 GLI Momentum (LHS) GLI Headline (LHS) US PMI:Manufacturing (SA, 50+=Expansion, RHS) 2002 2004 2006 2008 2010 2012 40 35 30 2014
-0.01% -0.02% -0.03% -0.04% -0.05% -0.2%

Contraction
Sep-13 Mar-13 Feb-13

Slowdown
-0.1%
0.0%
GLI Momentum
0.1%
0.2%
0.3%
0.4%
0.5%
A history of shutdowns suggests This too shall pass

Although hard to quantify, the current risk-off market moves are likely due, in part, to the US federal government shutdown, opacity over the ultimate endgame and the uncertain implications this has for the political calculus surrounding the upcoming debt-ceiling imbroglio. Even so, past experience suggests that markets tend to take these sorts of events in stride. Looking back over the last 35 years, there have been 18 such shutdowns, which have lasted between just 1 day and 21 days (December 1995 to January 1996). Several of these were in quick succession (September, October and November 1977, September and December 1982, September and October 1984, and November and December 1995).
Goldman Sachs Global Investment Research 5
October 2, 2013
Exhibit 7: Uncertainty index climbs ahead of shutdowns and remains elevated
Exhibit 8: Equity volatility rises in anticipation of a shutdown, but moderates quickly
190 170 150 130 110 90 70 50
Index (shutdown date = 100) BBD: 2013 shutdown
9 7
Chg in (realized) equity volatility (shutdown = 0)
BBD: Average of 12 Shutdowns (1976-2013) BBD: 1995 Shutdown
5 3 1 -1 -3
Realized Volatility: 2013 Shutdown Realized Volatility: Average of 12 Shutdowns (1976-2013) Realized Volatility: 1995 Shutdown
-40
-30
-20
-10
10
20
30
40
50
60
70
-5 -40 -30 -20 -10 0 10 20 30 40 Days relative (+/-) to shutdown = 0 50 60 70
Days relative (+/-) to shutdown = 0
Source: Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com
Eliminating these overlapping incidents and indexing market moves to the first shutdown, there are some clear lessons from the remaining 12 episodes. Exhibit 7 shows how the Baker, Bloom and Davis measure (BBD) of policy uncertainty has evolved around the shutdown episodes. This measure tends to rise about 20% in the month ahead of a shutdown and decline only slowly. In the 1995 shutdown, it trended higher without much pause until 40 days after the shutdown started, which itself had lasted about 20 days. Currently, this measure has been on the rise for some time now although, to be fair, it remains much more moderate relative to its own recent past. Similarly, volatility tends to rise by about 5 points ahead of the shutdown, and moderate shortly thereafter, which seems to be similar to the current path (see Exhibit 8).
Exhibit 9: Equities tend to be sanguine in the face of shutdowns

115
Exhibit 10: although there does seem to be evidence of a flight into US bonds
0.5
Index (shutdown date = 100) S&P 500: 2013 shutdown
Chg in yield (bps, shutdown date = 0)
US 10 Year: 2013 Shutdown US 10 Year: Average of 12 Shutdowns (1976-2013) US 10 Year: 1995 Shutdown
110
0.3
S&P 500: Average of 12 Shutdowns (1976-2013) S&P 500: 1995 Shutdown 0.1
105 -0.1 100
-0.3
95 -40 -30 -20 -10 0 10 20 30 40 50 60 70 Days relative (+/-) to shutdown = 0
-0.5 -40 -30 -20 -10 0 10 20 30 40 50 60 70 Days relative (+/-) to shutdown = 0
October 2, 2013
On average, equities tend not to respond too much to shutdowns. In 1995 there were several multiple-percentage-point drawdowns but, over the horizon we consider, the shutdown did not interrupt the budding bull market (see Exhibit 9). Although shutdowns are clearly a US-centric risk, USTs and the USD tend to strengthen throughout. Rates seem to sell off slightly ahead of the shutdown and then rally the rest of the way through, and the USD, on a TWI basis, has tended to strengthen on average (see Exhibit 10). This time around, the USD weakened slightly heading into the shutdown, perhaps influenced by the Feds dovish surprise. But other risk-free, safe-haven currenciesthe CHF in particularhave rallied. In sum, and perhaps not surprisingly, any negative market reaction tends to happen in advance of the actual shutdown and those reactions tend to be short-lived. The biggest and most persistent impact seems to be on measures of uncertainty. There seems to be some evidence of a flight to quality, but forward-looking risky assets tend to return quickly to upward trends. Of course, simple historical analogies gloss over important differences in terms of structural pressures (deficits are larger now than in earlier episodes), cyclical position and broader policy stance. And an analysis of actual shutdowns ignores other fiscal risk episodes. For example, one recent episode that is not captured above is the August 2011 debt-ceiling debate, which generated significant market stress, as bonds rallied and the equity market sold off sharply, moves that were coincident with a similarly large increase in economic uncertainty (see Exhibit 11). While our baseline is that the current shutdown does not represent such a dramatic market risk, pressures could intensify. On this count, there are two countervailing arguments, which we are not sure how to balance. On the one hand, market participants may have become more inured to these events, having weathered them in the recent past, which would argue for mitigated market reaction. This is amplified by a sense that monetary policy will remain as accommodative as possible to balance out fiscal concerns. On the other hand, market pressure may be a part of the ultimate forcing mechanism that illustrates the degree of distress that the shutdown is causing and that helps, in part, to motivate a compromise. Exhibit 11: The August 2011 episode, while not a shutdown, was punishing, as uncertainty spiked and equities sold off sharply
Index 325 Uncertainty Index (LHS) 275 S&P 500 (RHS) 1125 1175 1225 1275 1325 1375 Mar-11 May-11 Aug-11 Oct-11 Dec-11 Index 1075
225
175
125
75 Jan-11
October 2, 2013
Tightening up tactically, but we view jitters as an opportunity

With the US Congress at an impasse, the Federal government shut and a debt ceiling looming later this fall, markets have started to shift into risk-off mode. Three factors suggest that any near-term amplification of market worries will ultimately prove overdone: (a) the current macro dataset, (b) the expected evolution of the macroeconomic fundamentals and (c) how markets have reacted to shutdowns in the past. And so we tend to view the equity sell-off and bond rally as potential opportunities to exploit rather than as a function of a sea change to fear. These market shifts may well provide an opportunity to continue to assert our longer-term view that the implications of an acceleration in US growth will be the primary market driver as we head into 2014. However, tactically, with the core September data already in hand and with political risks yet to crescendo, we are more actively managing our equity risk here. Given that the data have already improved for some time and that sector rotations have run for some time too, we have raised the stop on our long recommendation in the GDP Wavefront Growth basket to 82 (from 80), and we are keeping the original 86 target to try and manage these swirling risks.
Noah Weisberger
October 2, 2013
Global economic forecasts

Real GDP, %ch yoy
2013 G3 USA Euro area Japan Advanced Economies Australia Canada France Germany Italy New Zealand Norway Spain Sweden Switzerland UK Asia China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand CEEMEA Czech Republic Hungary Poland Russia South Africa Turkey Latin America Argentina Brazil Chile Mexico Venezuela Regional Aggregates BRICS G7 EU27 G20 Asia ex Japan Central and Eastern Europe Latin America Emerging Markets Advanced Economies World 1.6 -0.4 1.9 2.2 1.7 0.0 0.6 -1.8 2.6 1.0 -1.4 1.4 1.8 1.4 7.6 3.2 4.2 5.4 4.6 6.8 2.3 2.7 2.8 4.0 -1.0 0.5 1.0 2.0 2.2 4.5 5.6 2.6 4.2 1.1 1.5 5.8 1.2 0.0 2.8 6.0 0.4 2.9 5.2 1.2 2.8 2014 2.9 0.9 1.5 2.0 2.7 0.5 2.0 0.4 2.5 2.4 0.0 2.8 1.4 2.3 7.7 3.4 5.0 5.5 4.8 5.5 3.2 3.5 3.9 4.3 2.0 1.4 2.8 3.3 3.4 2.7 3.5 2.3 4.1 3.3 2.5 6.2 2.3 1.3 3.6 6.4 2.4 3.3 5.6 2.2 3.6 2015 3.2 1.2 1.2 2.4 2.7 1.0 2.1 0.9 1.7 1.9 1.0 3.0 1.4 2.5 7.8 4.5 7.2 6.4 5.2 5.6 4.2 3.8 4.0 5.1 2.4 1.9 3.4 3.7 3.8 3.7 2.7 3.2 4.6 3.4 2.6 6.8 2.5 1.6 4.0 7.0 2.9 3.5 6.1 2.4 4.0 2016 3.0 1.5 1.5 3.7 2.5 1.3 2.2 1.0 2.6 1.9 1.8 2.8 1.5 2.7 7.8 4.2 7.5 6.7 5.5 5.8 4.5 3.8 4.0 5.6 2.5 2.0 3.5 3.1 3.2 3.0 2.7 3.4 4.6 3.6 1.0 6.9 2.4 1.8 4.1 7.1 3.1 3.6 6.2 2.5 4.1 G3 USA Euro area Japan Advanced Economies Australia Canada France Germany Italy New Zealand Norway Spain Sweden Switzerland UK Asia China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand CEEMEA Czech Republic Hungary Poland Russia South Africa Turkey Latin America Argentina Brazil Chile Mexico Venezuela Regional Aggregates BRICS G7 EU27 G20 Asia ex Japan Central and Eastern Europe Latin America Emerging Markets Advanced Economies World
Consumer Prices, %ch yoy

2013 1.6 1.5 0.2 2.0 1.1 1.8 1.6 1.1 2.0 1.6 0.0 -0.3 2.6 2.5 3.6 6.5 8.2 2.3 3.2 3.0 1.5 1.8 2.5 1.6 1.8 1.0 6.5 5.7 7.8 10.7 6.2 1.8 3.7 36.7 4.1 1.3 1.6 2.7 3.4 1.3 7.9 4.9 1.4 2.8 2014 1.8 1.5 2.3 2.5 1.5 2.0 1.3 1.8 1.9 0.9 1.3 0.9 2.4 2.6 3.3 6.7 6.8 2.4 3.8 3.3 2.6 1.7 3.2 1.7 1.4 2.0 5.6 5.1 8.1 12.5 5.8 3.0 3.2 39.6 4.0 1.8 1.6 2.9 3.5 1.9 7.2 4.7 1.8 3.0 2015 1.9 1.6 1.7 2.6 1.2 2.5 1.4 2.1 2.1 0.8 2.3 1.1 2.0 3.0 3.4 5.5 5.5 2.8 3.5 3.5 2.8 2.0 3.5 1.9 2.6 2.0 5.3 5.4 7.5 12.4 5.5 2.8 3.3 26.6 3.9 1.8 1.7 2.9 3.5 2.1 6.2 4.4 1.8 2.9 2016 2.1 1.8 2.1 2.8 1.5 2.9 1.5 2.1 2.4 0.8 2.8 1.6 1.7 3.0 3.1 4.7 5.5 2.8 3.5 3.2 2.9 1.9 3.4 2.1 3.0 2.1 4.6 5.1 7.8 12.0 4.9 3.1 3.0 20.8 3.6 2.0 1.9 2.9 3.4 2.2 5.6 4.1 2.0 2.9
Source: Goldman Sachs Global Investment Research For India we use WPI not CPI. For a list of the members within groups, please refer to ERWIN. For our latest Bond, Currency and GSDEER forecasts, please refer to the Goldman Sachs 360 website: (https://360.gs.com/gs/portal/research/econ/econmarkets/).
October 2, 2013
Global macro and markets charts

PMI-implied global growth
8 6 4 2 0 -2 -4 -6 -8 03 04 Global PMI ModelImplied Growth Global Actual Sequential Growth GS Forecast 05 06 07 08 09 10 11 12 13 14 15 -4 0 -1 -2 -3 GLI Momentum Global Industrial Production*, 3mma 00 01 02 03 04 05 06 07 08 09 10 11 12 13 % qoq annl
GLI momentum vs. global industrial production*

2 %mom 1
See Global Economics Weekly 12/18 for methodology Source: OECD, Goldman Sachs Global Investment Research
* Includes OECD countries plus BRICs, Indonesia and South Africa See Global Economics Paper 199 for methodology Source: OECD, Goldman Sachs Global Investment Research
GLI Swirlogram
0.06% 0.05% 0.04% 0.03%
GLI Acceleration
Recovery Current Last Month
China, Europe and US risk factors

110
Oct-12 Nov-12 Apr-13 May-13
Expansion
Index 105 100 95
Jul-13 Aug-13
0.02% 0.01% 0.00%
Jun-13 Dec-12 Jan-13
-0.01% -0.02% -0.03% -0.04% -0.05% -0.2%

Contraction
Sep-13 Mar-13 Feb-13

Slowdown
90 85 Europe Risk China Risk US Risks Mar-13 May-13 Jul-13 Sep-13
-0.1%
0.0%
GLI Momentum
0.1%
0.2%
0.3%
0.4%
0.5%
80 Jan-13
See Global Economics Paper 214 for methodology Source: OECD, Goldman Sachs Global Investment Research
See Global Economics Weekly 12/15 for methodology Source: Goldman Sachs Global Investment Research
US equity risk premium

6.5 6.1 5.7 5.3 4.9 4.5 4.1 3.7 3.3 2.9 2.5 2.1 1.7 04 05 06 07 08 09 10 11 12 13 14 %
US ERP, calculated daily US ERP, 200 Day Moving Average
US equity credit premium

5 4 3 2 1 0 -1 -2 -3 2 standard deviations band 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 See Global Economics Weekly 03/25 for methodology Source: Goldman Sachs Global Investment Research 1985-1998 average Credit relatively expensive %
See Global Economics Weekly 02/35 for methodology Source: Goldman Sachs Global Investment Research
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October 2, 2013
The world in a nutshell

THE GLOBAL ECONOMY
OUTLOOK UNITED STATES We expect below-trend annual growth of 1.6% in 2013 followed by an acceleration to 2.9% in 2014. Growth should then remain slightly above that rate in 2015 and 2016. On an annualised sequential basis, we expect a slowdown to 1.8% in 2013Q3, before a pick-up to 2.5% in the last quarter of the year. Looking into 2014 and beyond, we expect above-trend growth at around 3%-3.5%. We expect real GDP growth of 1.9% in 2013 and 1.5% in 2014, and a further deceleration in 2015. On a sequential basis, our forecasts show quite wide swings. We expect strong growth over the coming quarters buoyed by public works spending, a recovery in exports and a sharp rise in personal consumption ahead of a consumption tax hike in April 2014. For the Euro area as a whole, we expect a continued contraction, by -0.4% in 2013, and a return to positive growth of 0.9% in 2014. Our baseline is still that the Euro area will muddle through but remain intact. Crosscountry divergence remains a key theme in this baseline scenario, however, with economic weakness especially pronounced in Spain and Italy. Meanwhile, we also expect growth to decelerate temporarily in Germany in 2013. For Asia ex-Japan, we expect growth of 6.0% and 6.4% in 2013 and 2014, respectively. We expect 2013 to be a transition year for the region, with external risks in the US and Europe to be navigated in the first half of the year. Subsequently, after the slowdown in 2012, we see the regional economies with room to grow at around trend in the coming years. We forecast that real GDP growth in Latin America will reach 2.9% in 2013, and 3.3% in 2014. Against a more favourable global backdrop, the divergence between those economies with more challenging (Brazil) and more stable (Mexico) policy outlooks is likely to increase. With growth across the region forecast at 2.5% in 2013 and 3.3% in 2014, we expect CEEMEA to recover visibly. Helped by improvements in external demand conditions, large output gaps provide fertile ground for recovery from the 2012 soft patch although current account deficit countries in particular will continue to face stiff challenges. KEY ISSUES Our forecast for near-term weakness but long-term strength is based on competing impulses from the private and public sectors. We expect the sequester to continue to be a significant drag on growth in Q3, while in the intermediate and long term we expect further strength in the private sector, led by the ongoing housing recovery, rising business investment and financial rebalancing in the household sector. Structurally, Japan is poised to reach above-trend growth rates in step with an improvement in the global economy towards the end of our forecast horizon in 2016. The new leadership at the BoJ has led to a regime shift in Japanese monetary policy with much more aggressive, Fed-style easing capabilities. While this potentially offers a way out of more than a decade of deflation, reaching the 2% inflation target remains a tall order. The long grind we forecast for 2013 is the result of the damaging but necessary combination of continued publicsector austerity and private-sector deleveraging. Still, with financial conditions having eased quite substantially through enacted and prospective ECB policy, a sharper contraction has been avoided. ECB policy will aim to reduce the segmentation of financial markets further with targeted measures such as the Outright Monetary Transaction (OMT) programme. In China, we expect 7.6% and 7.7% growth in 2013 and 2014 respectively. Although growth is slightly below trend, the recent tightening in financial conditions sends the signal that policy makers are willing to tolerate slightly lower growth in order to tackle structural problems and to foster more sustainable medium-term growth. In Brazil, we expect real GDP growth of 2.6% and 2.3% in 2013 and 2014, respectively. Despite two consecutive years of sub-par growth, inflation has been sticky above the inflation target of 4.5%. BRL weakness will likely force the Copom to continue to hike policy rates. The EM differentiation theme is again visible across the region. While we forecast strong and steady growth in Israel and Russia, we see a similar recovery in Turkey as less sustainable. Growth in South Africa and Ukraine will likely be dragged down by idiosyncratic political and economic risks.
JAPAN
EUROPE
NON-JAPAN ASIA
LATIN AMERICA
CENTRAL & EASTERN EUROPE, MIDDLE EAST AND AFRICA
CENTRAL BANK WATCH

CURRENT SITUATION UNITED STATES: FOMC JAPAN: BoJ Monetary Policy Board EURO AREA: ECB Governing Council The Fed funds rate is at 0%-0.25%. The Fed initiated a new round of asset purchases and extended its rate guidance on September 13, 2012. The overnight call rate is at 0%-0.1%. The BoJ significantly extended asset purchases, as well as the related maturity horizon, on April 4, 2013. The refi/deposit rates are at 0.50%/0.00%. The ECB announced the OMT programme for conditional purchases of Euro area sovereign bonds in Sept. 2012 and cut the refi rate by 25bp on May 2, 2013. The BoE policy rate is currently at 0.5%. The BoE announced threshold-based forward guidance for the path of the policy rate on August 7, 2013. NEXT MEETING S Oct. 30 Dec.18 Oct. 4 Oct. 31 Nov. 7 Dec. 5 EXPECTATION We expect the Fed to keep the funds rate near 0% through 2015, and to continue asset purchases until 3Q2014. We expect the BoJ to keep the policy rate near 0% through at least 2016, and to expand its monetary easing efforts through ongoing asset purchases. We expect the ECB to keep policy rates on hold at least through mid-2015. If, however, activity were to weaken further significantly, a rate cut and/or credit easing could become potential options. We expect the BoE to keep the policy rate unchanged until mid-2016, with the possibility of further unconventional easing ahead.
UK: BoE Monetary Policy Committee
Oct. 10 Nov.7
11
October 2, 2013
Equity basket disclosure

The Securities Division of the firm may have been consulted as to the various components of the baskets of securities discussed in this report prior to their launch; however, none of this research, the conclusions expressed herein, nor the timing of this report was shared with the Securities Division. Note the ability to trade the basket will depend upon market conditions, including liquidity and borrow constraints at the time of trade.
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October 2, 2013
Disclosure Appendix
Reg AC
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Global Economics Weekly - Goldman Sachs 02.10.13

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Global Economics Weekly - Goldman Sachs 02.10.13

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October 2, 2013

Issue No: 13/31

Still-firm data are a bulwark against politicians at the gate

But we see little cause for concern

and view current jitters as an opportunity

Source: Goldman Sachs Global Investment Research.

The Goldman Sachs Group, Inc.

Global Investment Research