Turning Still More Cautious: 2012-13 Outlook

Takehiro Sato & Takeshi Yamaguchi,Morgan Stanley

Despite reconstruction demand, we believe that Japan's economy is heading for below-consensus low growth in 2012, given the weakening global outlook. Still lower growth will follow in 2013 as the effects of fiscal contraction in Japan and abroad emerge. We keep our 2011 GDP forecast of -0.4% (F3/2012: +0.2%), but come down 0.2pp to +1.1% for 2012 (F3/2013 +1.0%), and assign a 2013 forecast of +0.5%.

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FX: DollarSet toWeaken in 2012

Sverre Holbek,Senior Analyst, Danske Bank

The past year has been particularly eventful for the financial markets. While a budding recovery appeared to be gaining traction at the start of the year, it was soon fears of a nuclear disaster in Japan, rising oil prices on the back of political unrest in the Middle East, intense negotiations in connection with raising the US debt ceiling and the escalation of the European debt crisis that were influencing developments.

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Fed On Hold Until 2014?

John E. Silvia,Chief Economist, Wells Fargo

Any joy about this week's better-than-expected economic news appears to have been offset by continuing worries about the European debt crisis. The 10-year Treasury yield held below 2 percent, despite better news on home sales, new home construction, consumer sentiment and jobless claims. Even the late arrival of a Santa Claus rally on Wall Street has done little to shift expectations about how long the Fed intends to keep interest rates at historically low levels. By all accounts, that appears to be a very long time. Indeed, Friday's Wall Street Journal has an article suggesting the Fed will drop its language about keeping rates at low levels through the middle of 2013 and replace it with a forecast that suggests rates will remain at current levels into 2014. Such a move would be consistent with market expectations, which do not see the output gap closing up until 2017 at the earliest. All of this is subject to change, of course, especially if the economy were to break to the upside in a clear, convincing and self-reinforcing way.

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Unbalanced Markets for an Unbalanced World

TD Economics,TD Bank Financial Group

Global growth and inflation forecasts for 2012 are not sufficiently strong for risk assets to climb uninhibited in the face of financial and fiscal sensitivities. Global growth of 2.5%, with most of it coming from emerging markets as the mature economies slow to just 1.0%, is not enough to absorb the stock of spare capacity in the mature economies, so the inflation forecast is falling.

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Compiled byDavid Song, Currency Analyst