the global macro analyst, ms, 2-11-15

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For important disclosures, refer to the Disclosures Section, located at the end of this report. MORGAN STANLEY RESEARCH Global February 11, 2015 The Global Macro Analyst  Ghosts of the 1930s: Exporting Deflation Just Got Harder  Almost exactly two years ago, we first argued tha t the ghosts of the 1930s break-up of the Gold Standard could still be with us (see  Back to the 1930s?... ). A first lesson from that time was that domestic  disinflationary forces pushed central banks to export def lation, not very different from today. But even though the global trade in deflation is booming now, exporting deflation  just got harder. Why? Currencies are relative prices and not everyone can export deflation at the same time. But static aggregates aside, relative dynamics can still play a key role. A second lesson from the 1930s is that those who do so earlier benefit at the expense of those who wait too long. Of particular concern on all of these counts is China (see Will China Be the Next to Export Deflation?  November 19, 2014). While our China team also argues that the risk of RMB depreciation has increased, the longer policy-makers wait, the more they will have to do. There is some good news, though. A third lesson from the 1930s is that today’s synchronised global easing could help to fight lowflation, a very different scenario from the lack of coordination that existed back then. In today’s note, we examine whether the ghosts of the 1930s are likely to haunt us, or be a bit more like the uneasy allies in J.R.R Tolkien’s epic finale who helped Aragon turn the tide at the battle for the city of Minas Tirith. Spotlight: China: Lowflation Calls for Further Policy Easing Risks from overall lowflation will likely remain in place and warrant further monetary easing. We continue to expect the PBOC to cut the benchmark interest rate twice this year (a 25bp cut in each of 1Q15 and 2Q15). p 5 The Morgan Stanley Global Economics View  p 6 Deflation Persisted During the Great Depression, Lowflation Persists After the Great Recession -10% 0% 10% 1925/1999 1929/2003 1933/2007 1937/2011 1930s and 2000s Inflation (%Y , simple average of US, GER and UK) 2000s 1930s  Source: National sources, Haver Analytics, Morgan Stanley Research  Global Economics Forecasts Real GDP (%) CPI inflation (%) 2014E 2015E 2016E 2014E 2015E 2016E Global Economy 3.2 3.5 3.9 3.5 3.0 3.6 G10 1.7 2.1 2.1 1.4 0.0 1.8 Emerging Markets 4.5 4.3 5.0 5.2 5.3 4.9 Source: Morgan Stanley Research forecasts Global Macro Watch US: Wages in Context ............................................... p 8 Japan: Civil Servant Salaries – Another Test............ p 8 Sweden: Riksbank Staying Ahead of the Curve ....... p 9 Australia: RBA Recommences Easing Cycle. .......... p 9 CEE: Taking Stock of the ECB and Deflation .......... p 10 China: RRR Cut on the Back of Capital Outflow .....p 10 Korea: The Good, the Bad: What Does it Mean? ... p 11 ASEAN: Indonesia Disinflation, Thailand Deflation .p 11 Global Economics Team Coordinators of this publication Manoj Pradhan [email protected] +44 (0)20 7425 3805 Patryk Drozdzik [email protected] +44 (0)20 7425 7483 Sung Woen Kang [email protected] +852 2848 5652

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