Accessible version

Global Economics
Year Ahead 2025: A Brave New World

A year of divergence and policy uncertainty 24 November 2024

We expect another year of unbalanced growth in 2025, characterized by US Economics

outperformance and policy uncertainty, which will impact the Euro area and China the Global
most. All in, this implies stable 2025-2026 global growth in the 3.2%-3.3% range. After a
better-than-expected 2024, we upgraded our forecasts for the US but downgrade them Table of Contents
for the Euro Area. Meanwhile, we expect China to grow below official targets. Policy
Global Letter: A Brave New World 2
rates globally should also diverge, as the last mile of inflation convergence to targets
US 17
will be bumpy and country specific. We expect the Fed and ECB to cut towards terminal
Euro area 21
rates of 4% and 1.5%, respectively. But with the detail of Trump’s policies still a
China 25
significant unknown, the narrative could change considerably versus our baseline
Japan 29
outlook.
UK 32
The elephant in the room Nordics 35
Trumponomics 2.0 is about trade, immigration, fiscal and deregulation. But it is hard to Canada 37
call how they will play out. The domestic and global impact will depend on their relative Australia & New Zealand 39
size and sequencing, as well as how other countries respond. Our baseline scenario is for India 42
tariffs on China and elsewhere, but less than the 60%/20% proposed in the campaign, Korea 44
tightening immigration flows, debt-financed tax cuts and deregulation of especially
ASEAN 46
financials and energy. We assume bilateral negotiations and country-specific packages.
EEMEA 48
Unauthorized redistribution of this report is prohibited. This report is intended for zouguanzhong@cramc.hk

Trumponomics 2.0: better for US than rest of the world Brazil 55

The policy mix we expect is better for the US than the rest of the world but ironically Mexico 57
will widen the US current account deficit. Given the recent productivity improvements, Argentina, Andeans and Caribbeans 59
we forecast higher US growth, inflation and policy rates than consensus. China and the Global Economic Forecasts 64
Euro Area will be most impacted. Instead of retaliating significantly, we expect China to Research Analysts 72
undertake sizable fiscal easing to cushion the shock. Tariffs on USMCA members look
unlikely. Overall, we forecast higher real rates, a strong dollar and lower oil.
Claudio Irigoyen
EM will have winners and losers Global Economist
BofAS
Emerging economies will be negatively impacted, but with relative winners and losers. claudio.irigoyen@bofa.com
Despite noisy negotiations, Mexico (and Canada) could benefit from nearshoring flows. Antonio Gabriel
Global Economist
Vietnam and India may profit from geopolitically induced shifts in supply chains. We also BofAS
expect lower oil prices in 2025, a negative/positive shock for oil exporters/importers. antonio.gabriel@bofa.com

Meanwhile, the path for Saudi Arabia/OPEC and Iran crude oil production is highly Global Economics Team
BofAS
uncertain and could impact oil price dynamics. The fortunes of commodity exporters will
See Team Page for List of Analysts
depend on the trade-off between the negative tariff and interest rate shocks and the
positive reflationary effect of potentially significant fiscal easing in China.

Risks: trade wars, fiscal profligacy and geopolitics

On the positive side, a US policy agenda that focuses more on pro-growth policies and
downplays protectionist ones could lead to higher global growth. Excessive fiscal easing
in the US is an upside risk to inflation and tighter financial conditions. By contrast,
aggressive tariffs could trigger a trade war and worsen geopolitical dynamics, leading to
a global slowdown. Excessive fiscal profligacy in the US, coupled with protectionist
policies and financial repression, could lead to higher inflation and severe global
instability. Any worsening of geopolitical tensions would add insult to injury.

BofA Securities does and seeks to do business with issuers covered in its research
reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision.
Refer to important disclosures on page 70 to 71. 12763306

Timestamp: 24 November 2024 04:30PM EST

Global Letter: A Brave New World
Claudio Irigoyen Antonio Gabriel
Global Economist Global Economist
BofAS BofAS

This past year will be remembered as the year of elections, with countries representing
more than 60% of GDP going to the polls. With political polarization being the rule rather
than the exception, changes in leadership bring associated significant changes in policies
and, in turn, implementation risks. And when those policy changes originate in core
countries, the implications can reverberate across the global economy.

The policy changes to be implemented by the upcoming Trump administration represent

a major shock, not only for the US economy but the rest of the world. The uncertainty
over the exact shape they will take means they will not only be a critical driver but also a
significant risk factor for growth, inflation and monetary policy across countries.

US most resilient of the major global growth engines

Not all countries are equally prepared to absorb these policy shocks, either cyclically or
structurally. If we focus on the major economies, the US economy stands out as the
most resilient, showing signs of higher productivity growth. China has been reluctant to
pull the trigger on aggressive policy stimulus to restore consumer and business
confidence. Europe is dealing with a combination of structural problems, a confidence
crisis and severe challenges in terms of political leadership. And Japan is struggling just
to put consumption back on track.

In our baseline scenario, we forecast global growth for 2025 and 2026 will remain stable
around 3.2% and 3.3%, respectively (Exhibit 1), but with persistent regional divergence.
We are above consensus in the US, where we have upgraded our growth forecasts, while
we have downgraded our already below-consensus Euro Area forecasts. In China, we
continue to expect growth to remain below the official growth targets.

Central banks likely to become less synchronized

In turn, we expect global inflation to continue converging asymptotically towards
inflation targets, although the last mile is always the hardest (Exhibit 2). We are above
consensus in the US and Japan and below consensus in Euro Area. In a shift from last
year, we expect more divergence in policy rates as central banks could face different
risks to inflation and growth, both on the domestic and external fronts. But these
projections are subject to an unusually large degree of uncertainty.

Exhibit 1: GDP growth forecasts for 2024-2026 (% yoy avg) Exhibit 2: Inflation forecasts for 2024-2026 (% yoy avg)
We expect stable global growth, but growth divergences to persist Inflation should keep trending down, but the last mile is the hardest

5.0 12
4.5
4.0 10
3.5
3.0 8
2.5 6
2.0
1.5 4
1.0
0.5 2
0.0
-0.5 0
Global

Global
EM Asia

EM Asia
US

Japan

China

EMEA

LatAm

US

Japan

China

EMEA

LatAm
Euro area

Euro area

2024F 2025F 2026F 2024F 2025F 2026F

Source: BofA Global Research Source: BofA Global Research
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

2 Global Economics | 24 November 2024

 Exhibit 3: GDP growth (% yoy avg), inflation (% yoy avg), and policy rate forecasts (%, eop)
We expect growth divergences to persist, inflation to continue trending down, and most central banks to keep cutting
GDP growth, % CPI inflation, % Short term interest rates, %
2023 2024F 2025F 2026F 2023 2024F 2025F 2026F Current 2024F 2025F 2026F
Global 3.3 3.1 3.2 3.3 4.3 3.2 2.6 2.7 5.78 4.82 4.03 3.89
Developed Markets 1.6 1.5 1.7 1.6 4.7 2.6 2.1 2.0 3.61 3.47 2.71 2.71
US 2.9 2.7 2.4 2.1 4.1 2.9 2.4 2.3 4.63 4.38 3.88 3.88
Euro area 0.4 0.7 0.9 1.0 5.4 2.3 1.6 1.6 3.25 3.00 1.50 1.50
Japan 1.7 -0.2 1.1 0.6 3.3 2.6 2.1 1.9 0.25 0.25 0.75 1.00
Emerging Markets 4.5 4.2 4.3 4.4 4.0 3.5 3.0 3.2 7.46 5.82 4.99 4.72
Emerging Asia 5.4 5.1 5.0 4.9 2.1 1.8 1.9 2.6 4.05 4.12 3.58 3.59
China 5.3 4.8 4.5 4.5 0.2 0.3 0.8 1.6 3.10 3.10 2.70 2.70
Emerging EMEA 2.3 2.1 2.9 3.6 12.9 13.2 9.2 6.7 19.71 11.86 9.30 8.55
Latin America 2.1 1.8 2.2 2.5 5.7 4.3 3.8 3.7 9.81 9.72 9.10 7.78
Source: BofA Global Research, Bloomberg
BofA GLOBAL RESEARCH

Will we see ultra-low interest rates again any time soon?

One of the most important questions is whether we will go back to the level of interest
rates observed pre-pandemic, or if we are in a new regime of higher rates. The answer is
country specific. A good example is the increase in natural rate differentials between the
US and Euro Area. For the US, the debate is focused on whether the recent increase in
interest rates is driven by a productivity boom or fiscal profligacy. The productivity story
might be relevant here, but fiscal imbalances are certainly playing a major role as well,
suggesting that structurally higher real interest rates could be here to stay. Given the
anchoring role of US rates, this dynamic will probably have a powerful global spillover.

Where are we coming from: the year of the cuts

A year ago, we expected a continuation of the normalization process that started in
2023 as economies recovered from twin global shocks of COVID and Russia-Ukraine.
Namely, we expected some heterogeneous growth dynamics but more homogeneous
disinflation across countries. Those dynamics broadly materialized, allowing central
banks to embark on easing cycles. Hence the title of our 2024 Year Ahead report:
Growing apart, cutting together.

Even though the lack of growth convergence across regions came to pass, global growth
outperformed the most optimistic expectations, remaining north of 3%, although
masking significant heterogeneity across regions. The US economy put in a stellar
performance. The better-than-expected growth dynamics in the US, India and Brazil
more than outweighed the weak performance of the Euro Area, China and Japan.

Global inflation continued normalizing towards long-term averages. Goods inflation

stabilized somewhat faster than services, which remains, with few exceptions,
stubbornly high. Inflation convergence across countries allowed most central banks in
developed countries to start easing monetary policy, albeit later than their EM
counterparts. China and Japan remain the obvious exceptions, with the former still
flirting with deflation and the latter in the early stages of monetary policy normalization.

What to expect when you are expecting

The uncertainty about the outcome of the US elections has been resolved, but even
though asset prices have reacted to what is expected, we haven’t learned much about
Trump policies since then. For the sake of our outlook and associated forecasts, we rely
on some core working assumptions.

First, we assume the main policy changes with economic impact will involve trade,
immigration, fiscal policy, and deregulation. Second, we believe Trump will negotiate
bilaterally country-specific comprehensive packages involving trade, immigration,
energy, defense, etc.

Global Economics | 24 November 2024 3

On trade, the focus will be on China, with significant increases in tariffs but likely less
than headlines suggest, while there will be limited tariff increases for other countries,
with significant exclusions. Some, including the Euro Area, will likely get a seat at the
table to negotiate. Despite the noise, we expect the renegotiation of USMCA in 2026
not to include additional tariffs on Mexico and Canada – they could belong to the select
few who stand to be potential net winners of higher global trade tensions, even though
the priors are not that favorable.

We assume some additional fiscal loosening beyond the extension of the Tax Cuts and
Jobs Act (TCJA), and possibly limited reductions in spending. For immigration, we expect
a middle ground with tightening focusing mostly on flows. At the same time, we think
we are likely to see a broad deregulation push benefitting the supply side of the
economy.

Needless to say, our forecasts are highly dependent and sensitive to the specifics of the
policies to be implemented. As a result, there will likely be updates as we learn more
about concrete proposals which could diverge from our core assumptions.

US can benefit if growth-friendly policies dominate

Starting with the domestic impact, some pro-growth policies like deregulation of
financial services and energy, as well as lower taxes, will positively impact sentiment and
asset prices. However, debt-financed tax cuts will put pressure on real interest rates,
inflation, and inflation expectations.

On the other hand, higher tariffs on imports and tighter immigration restrictions will
dampen the positive growth effects and cause a temporary increase in inflation.
However, since the combination of policies should imply a stronger dollar, the final
impact on inflation could be relatively muted. When we couple the new policy set with
recent productivity improvements, we now expect higher growth, higher inflation to
remain above consensus, a higher r*, and a terminal rate around 4%.

Ironically, the described policy mix will not do much to reduce the US current account
deficit, which responds to a macroeconomic saving-investment imbalance. Most likely,
the current account deficit will widen as long as the rest of the world remains willing to
finance it.

In this scenario, we should observe higher real rates, somewhat higher inflation
expectations, a stronger dollar and strong equity market. Gold would remain in high
demand as geopolitical risks persist.

For the rest of the world, US policies are a negative shock

Globally, the Trump set of policies represents a negative shock because of higher
interest rates and hawkish tariff policy that would strengthen the dollar. Persistently
higher US rates have obvious spillovers to global financial conditions. In turn, tariffs
affect relative prices and increase policy uncertainty, negatively impacting sentiment,
investment, and asset prices.

China and Euro Area look set to be most impacted

The most impacted economies will be China and the Euro Area, with the former
suffering a cyclical slowdown and the latter even more persistent weakness, and both
facing major structural challenges. The net impact will depend on how strong retaliatory
reactions are and how much of the fiscal and monetary space is used to cushion those
shocks.

In our baseline scenario, we have China stepping up fiscal stimulus and we keep growth
forecasts below the official targets. We expect limited retaliation from other countries.
Another important consideration is how much exchange rates will be allowed to move to
adjust to the shocks. We expect Renminbi to move to 7.6 as the authorities will be keen
to avoid more significant depreciation that could trigger further capital outflows.

4 Global Economics | 24 November 2024

Both winners and losers in emerging markets
Emerging economies will be negatively impacted, but with relative winners and losers.
Certain countries, like Mexico and Vietnam, among other EMs like India, may benefit
from geopolitically induced shifts in supply chains. We expect oil prices to move lower
and remain in the mid-60s in 2025, a negative/positive shock for oil exporters/importers.
There is substantial uncertainty over the path for Saudi Arabia/OPEC and Iran crude oil
production, which could impact oil price dynamics. Commodity exporters will depend on
the trade-off between the negative tariff and interest shock and the positive reflationary
effect of potentially significant fiscal easing in China.

Risks are two-sided but tilted to the downside

Many things could go differently than planned. On the positive side, a US policy agenda
that focuses more on pro-growth policies and downplays protectionist ones could lead
to higher growth in the US and less global uncertainty, lifting all boats, though not by
the same amount. A sustainable de-escalation of military conflicts would complement
this scenario.
Excessive fiscal easing coupled with protectionist policies could put pressure on inflation
and force the Fed to restrict monetary policy from current levels, effectively tightening
financial conditions.
However, risks are tilted to the downside, particularly for global growth. For starters, if the
US decides to implement a shock and awe policy on China and the rest of the world with a
60%/10% upfront tariff increase, the shock to global growth could be significant, not least
because there would likely be more scrutiny of rules of origin to prevent rerouting.
Hawkish US protectionist policies could trigger a full-fledged trade war if other
countries retaliate in kind, potentially leading to a global slowdown. A significantly worse
stagflationary scenario would entail a global slowdown in the US and the rest of the
world coupled with the decision to significantly increase the US deficit financed with
some sort of financial repression. Finally, a worsening of geopolitical tensions would add
insult to injury.
Growth convergence remains elusive
We now dig deeper into how growth dynamics might play out in our baseline scenario.
Growth divergence is becoming the norm despite countries are recovering from two
major global shocks. And the emergence of a new policy mix in the US represents an
additional threat to the growth convergence narrative (Exhibit 4, Exhibit 5).

US resiliency meets Trumponomics 2.0

We are more bullish than consensus on the US. The US economy is still showing signs of
resiliency, converging from above to a potential output which is higher than previously
Exhibit 4: GDP growth and BofA forecasts (% qoq, saar) Exhibit 5: Real GDP levels (4Q2019=100)
We expect growth divergences to persist The US has been the global outperformer since the pandemic

8 125
120
6 115
110
4
105
2 100
95
0 90
85
-2
2018 2019 2020 2021 2022 2023 2024
2023 2024 2025 2026
US EA China US Euro area China
Source: BofA Global Research, Haver Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 5

thought. The strong consumption dynamics, driven by robust private sector balance
sheets and healthy labor income growth, are now coupled with significant improvements
in productivity growth. These productivity improvements are a key component of the
outlook, since the labor market, although still healthy, has started to show signs of
softening.

In turn, the Achilles heel of the economy remains the sizable fiscal deficit, which is most
likely to widen over time. Putting everything together, this implies a higher terminal rate
as well as a higher natural rate than what markets had been pricing for a long time.

This is the economy that the upcoming Trump administration will inherit. But in order to
construct our baseline scenario and associated forecasts, we have to make assumptions
about the size and sequencing of the policies that could characterize the Trump
administration.

As stated above, we are moderately optimistic that a full-blown trade war can be
avoided. Still, tariff increases and tightening immigration can have stagflationary
effects, even though a stronger dollar could limit the impact of the former. Against this
backdrop, these inflation risks must be weighted up against the growth-positive aspects
of a broad deregulation push. Furthermore, it is not just that tariffs could be used as a
negotiating tool, but that their application could also depend on the amount of fiscal
stimulus that can be passed, limiting downside risks to domestic growth.

On fiscal policy, we assume some additional fiscal spending beyond the extension of the
TCJA, including full deduction of capital expenses and lower corporate taxes, and limited
reductions in spending. We expect a broad deregulatory push benefiting energy and
financial services, and an immigration policy stance mostly restricting flows. We recently
upgraded our growth forecasts. We now expect US growth at 2.7% in 2024, with a still
resilient 2.4% and 2.1% in 2025 and 2026, respectively (from 1.9% and 2.0% before).

China adds a tariff shock to their own domestic issues

China is facing a significant challenge in public confidence, which can be seen in both
consumer and business metrics, coupled with an aging population and record-high youth
unemployment. The imbalances in the property market need to be addressed and
people’s worries about a further correction in real estate prices keep them accumulating
precautionary savings. Sizable fiscal stimulus is needed to stabilize expectations and
restore confidence. So far, the authorities have been reluctant to pull the trigger on
sizable policy easing, opting instead for piecemeal measures on the monetary and
regulatory front, with limited success.

Domestic demand remains weak and deflationary pressures continue. China still relies
heavily on exports as an important growth engine, which benefited from the technology
product cycle turning, resilient demand especially from the global south, and frontloaded
orders before trade tension intensified in recent months. Meanwhile, consumer and
investor confidence still linger at low levels, against the backdrop of an ailing property
market.

With President-elect Trump scaling up tariffs against Chinese imports, and given the
limited room for aggressive retaliatory measures, fiscal easing becomes the path of
least resistance, given the authorities’ reluctance to rely on a real depreciation of the
currency. Going into 2025, we believe the deteriorating trade environment will keep
Chinese policy makers alert and fully engaged in economic monitoring.

If the US tariff hike comes early in 1H25, we expect China to step up policy easing
measures more meaningfully to brace for the trade shock. These measures would include
(but not be limited to) a larger fiscal deficit, more monetary easing (including interest
rate and RRR cuts and PSL lending, and modest currency depreciation) and efforts to
stabilize the property market.

6 Global Economics | 24 November 2024

 Exhibit 6: NBS consumer sentiment indexes Exhibit 7: Investment growth by sector (% yoy)
Consumer sentiment is failing to pick up… . … and the property market continues to struggle

140 40
130
20
120
110 0
100
90 -20

80
2014 2016 2018 2020 2022 2024
-40
2018 2019 2020 2021 2022 2023 2024
Consumer Confidence Index Consumer Satisfactory Index
Consumer Expectation Index Manufacturing Infrastructure Real estate
Source: BofA Global Research, NBS Source: BofA Global Research, China Customs, CEIC
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

As a result, the economy should gradually rebound from the hard hit in 2Q25 and
stabilize at a lower level, allowing real GDP growth to reach 4.5% yoy and inflation 0.8%
yoy. Our hope is that China would engage in negotiations with the US to mitigate the
impact of tariffs while managing to stabilize its own property market. By 2026, growth
will be further helped by property sector normalization, without the deadweight from
investment and sales contractions. An upfront tariff hike to 60% would represent a
major shock that fiscal policy would be unlikely to be able to smooth out.
We expect growth to drop to 4.5% for 2025 and 2026, well below the official targets.
Our forecasts are largely in line with consensus for this year and next year, but
significantly above consensus (4.2%) for 2026. We expect front-loaded export and policy
easing to prop up growth this year, and stronger easing and stabilization in the property
market to offset the negative shock emanating from US tariffs in 2025 and 2026.

Europe remains between a rock and a hard place

In our baseline scenario, the growth story in Europe remains one of very sluggish
recovery, and we continue to be below consensus with sub 1% growth for the coming
years. The services-driven recovery in the US didn’t help Euro area exports as much and
more importantly the weak demand from Asia, coupled with the increase in energy
prices, is taking a toll on export-oriented economies like Germany.
If that is not enough, Euro Area countries are facing severe challenges in terms of
political leadership. The hawkish trade policy strategy expected to be put in place by the
Trump administration adds a significant source of uncertainty to already depressed
capex spending. Consumer confidence remains subdued though likely bottoming, while
fiscal policy might have limited impact in the short term in aggregate for the bloc.
Our Euro area growth forecasts move to 0.7% for 2024, 0.9% for 2025 and 1.0% for
2026 from 0.7%/1.1%/1.3% previously. We still expect a mild cyclical recovery through
consumption as disinflation helps real wage gains (at least until 2H25) and saving rates
should have mostly peaked by now.
The UK is bracing for a fiscal boost, and we recently upgraded our growth forecast by
40bps to 1.5% in 2025 and by 20bps to 1.4% in 2026. We expect trend-like growth
being supported by improving real incomes and the fading impact of rate hikes.

Japan is hoping for the best

After weaker-than-expected growth dynamics this year, it seems Japan’s consumption
has bottomed and is firmly in recovery mode. Real income growth has improved as real
wages have recovered and consumer confidence is back. In addition, we expect further
fiscal easing to help growth dynamics in the short run. The hawkish stance on US tariffs
represents a headwind to Japan, but in the big scheme of things, Japan is arguably better
positioned to absorb the impact than many countries.

Global Economics | 24 November 2024 7

Unlike the EU, Mexico, Canada, and Vietnam where the trade deficit of the US has
expanded considerably since 2016, Japan’s bilateral trade balance has barely changed.
Meanwhile, Japan is already benefiting from investment flows associated with supply
chain realignment and stands to make further gains in competitiveness relative to China
if the US administration continues to tighten trade access.

Canada could benefit from trade tensions, Australia to pick up

Canada will likely accelerate in 2025 with lower interest rates and a strong US economy.
We see 2025 growth at 2.3%, up from 1.2% this year. Additionally, Canada is one of the
few countries that could emerge as a net winner of higher trade tensions. In Australia,
momentum has turned out weaker than we expected on the back of high interest rates,
but we expect consumption to pick up driven by real income growth, and investment to
increase with lower rates. We see 2025-26 growth at 2.1% and 2.3%, respectively.

Identifying relative winners in EM

For emerging markets, coping with the new world order and the spillovers of Trump
policies creates, for the most part, an array of downside risks. These will materialize
through higher US rates, lower terms of trades and weaker demand as a consequence of
further protectionism. To a different degree, all regions will be impacted.

However, the key will be to find the possibly small pockets of countries which could turn
into potential winners, and focus on relative value stories. In EM Asia, some countries
like Vietnam could end up benefitting from US-China trade tensions, as that has been
the case so far. Indonesia could also be in this group of beneficiaries. But this isn’t
without risks. The opportunities for friendshoring should be here to stay, but watch out
for increasing tensions on potential rerouting and scrutiny of rules of origin, which could
amplify the global trade shock. For Korea, we see signs of moderation in the tech cycle
negatively affecting exports, which were a key engine of growth this year.

India remains a global outperformer and would likely be a winner from a relatively
hawkish China stance, as a potential beneficiary of supply chain relocation out of China.
Even though risks are tilted to the downside, we continue to expect strong growth in
India at 6.9% for 2025, just mildly below 7.1% this year.

In LatAm, Mexico stands to be the main beneficiary of nearshoring, but it has its own
significant structural problems, including an erosion of checks and balances and
deteriorating institutional quality, lacking public infrastructure, and strained fiscal
accounts. We expect lower-than-consensus growth at 0.8% in 2025. Costa Rica could
also be a winner in the nearshoring bucket.

For the rest of LatAm, growth outperformer Brazil will likely remain in that group, but
downside risks from China would tend to prevail on the global front for the region. And
then we have the countries which lack market access and expect to get some dividend
from the US Treasury at the IMF Board, like Argentina and El Salvador.

For EEMEA, CEE could suffer from lower external demand from the broader European
Union, while trade tension could be a drag for Africa, including via commodity prices. If
there are to be beneficiaries in EEMEA, we think they would be idiosyncratic stories
(further disinflation and stabilization in Türkiye) or primarily on the geopolitical front,
most notably Saudi Arabia if a defense treaty is agreed upon, or the Levant region if a
quick conflict resolution were to materialize. We think liquidity-stressed high-yielders
could continue to muddle through near-term thanks to regional support or IMF programs.

Within EM, we expect growth in EM Asia ex-China to remain broadly resilient at 5.5%
and 5.4% in 2025 and 2026, respectively (vs 5.4% in both years in our prior forecasts). In
LatAm, growth aggregates point to relatively subdued growth at 2.2% and 2.5% in 2025-
26 (vs 2.1% and 2.4% before), but this masks heterogenous dynamics within the region.
For EEMEA, we make downward revisions for 2025, and we now expect the region to
grow 2.9% and 3.6% over the next two years (vs 3.2% and 3.6% before).

8 Global Economics | 24 November 2024

The inflation battle has not been won yet
On inflation, following synchronized global disinflation, we have been observing more
heterogeneous dynamics in the 2H24. The disinflation trend has been broad-based
across countries as the double whammy of COVID- and geopolitically induced supply
shocks has faded (Exhibit 8). But progress has been more limited in recent months.

Goods disinflation is no longer helping as much, and services inflation remains sticky
(Exhibit 9). With a few exceptions, if anything inflation has surprised to the downside, in
particular in the Euro Area and China, which continue to fight the deflation trap.

The last mile in the disinflation process is always the toughest, and the new set of US
policies will bring some upside risk to the table. Central banks in developed countries are
in full-on easing mode, though the speed of easing varies driven by revisions in terminal
rates, where the US vs Euro Area is the most striking example in the r* debate.

US Inflation stuck in the high twos

Unlike for growth, the inflation implications of the Trump agenda are less of a mixed
bag: the expected policy mix is likely to be modestly inflationary. Coupled with the strong
US growth we continue to expect, we are convinced that inflation will remain above
consensus. We have a higher than consensus inflation forecast. We think core PCE
inflation will get stuck between 2.5% and 3% throughout 2025-2026, instead of drifting
closer to 2% as we were previously expected.

In our view, tariffs should add about 30-40bp to yoy inflation by mid-2026. Inflation
should decrease after that because of base effects, but the fiscal impulse will likely slow
the decline. Tighter immigration could also be inflationary on the margin, but lower
energy prices are expected to keep headline inflation below core.

A persistent undershoot may be in sight for the Euro Area

The target was undershot a little earlier than we thought, thanks to energy prices
coming down slightly faster. While that may correct near-term, we think it will resume
and persist throughout 2025. We now expect headline at 1.6% in 2025 and 2026 (from
1.5% and 1.7% before), with core inflation of 1.9% and 1.8% in 2025 and 2026
(unchanged), keeping us significantly below consensus estimates.

We still think the chronic insufficiency of aggregate demand and a persistent output gap
that will not close even by 2026, together with a too-tight policy mix, will all contribute

Exhibit 8: Headline inflation vs January 2020 levels (% yoy) Exhibit 9: US inflation measures (CPI, 3m/3m saar, %)
Disinflation has been more synchronized than growth Recent data paved the way for cuts, but services inflation remains sticky

10 20

8 15
6 10
4
5
2
0 0
-
-2 -5
-4
-10
2020 2021 2022 2023 2024
2018 2019 2020 2021 2022 2023 2024
Euro area G10 ex US LatAm Trimmed mean Core goods
EM Asia EEMEA US Core services Core services ex. housing
Source: BofA Global Research, Bloomberg Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 9

to the undershoot. Yes, services inflation is taking longer than expected to moderate, but
momentum is already vastly improved and not far from comfortable levels. And with
wages tracking past inflation closely, we would expect wage growth to significantly
moderate in 2025, contributing to a marked additional slowdown in services inflation.

In the UK, we are still concerned about risks of persistent inflation. We expect services
inflation to remain elevated at around 5%, with the fiscal expansion penciled in the
Budget driving inflationary pressures higher on the margin amid more resilient growth.

China and Japan, contrasting dynamics

There are two global outliers in terms of inflation and monetary policy: China and Japan.
For China, which continues to battle against deflation, we adjust our CPI forecast to
0.8% for 2025 and 1.2% for 2026, reflecting our more optimistic medium-term view on
aggregate demand. This should also push PPI inflation back to positive territory.

In Japan, imported inflation and nominal wage hikes will continue contributing to
inflation dynamics. We maintain our above-consensus Japan inflation forecasts and
expect Japan-style core inflation (CPI ex fresh food) to average 2.5% in 2024 and 2.1%
in 2025, before slowing to 1.9% in 2026. Stripping out volatile energy prices, which will
continue to be distorted by government subsidies, we expect BoJ-style core (CPI ex fresh
food & energy) to average 2.3% in 2024, 2.2% in 2025, and 2.0% in 2026.

Canada inflation is under control, cooling in sight in Australia

In Canada, inflation reached the 2.0% target in August and undershot a month later.
From here, we expect it to stay around target. In Australia, headline will remain distorted
by regulated prices, but the underlying trimmed-mean should return to the target band
of 2-3% by mid-2025.

There is growing divergence in EM

Similarly to what is happening across developed markets, the last mile of disinflation is
proving harder to win in emerging markets. In fact, some, most notably Brazil, have seen
a shift in inflation dynamics, with the composition of inflation and inflation expectations
worsening somewhat, even though we are more optimistic than the market.

This is testament to idiosyncrasies becoming more important going forward. EM

inflation has to a large extent been determined by global supply shocks so far, both on
the way up and on the way down. In contrast, domestic fundamentals and policy choices
including fiscal stances will be key to shaping the outlook.

Within EM, we expect inflation in EM Asia ex-China to be 3.1% and 3.8% in 2025 and
2026, respectively little changed vs prior forecasts. In LatAm, inflation is set to remain
above target, but keep coming down on average, as we forecast inflation at 3.8% and
3.7% in 2025-26, also little changed vs prior forecasts. For EEMEA, we expect higher
inflationary pressures than before, with the region witnessing the highest inflation
globally at 9.2% and 6.7% over the next two years (vs 7.4% and 6.1% before).

Central bank decoupling has begun

Together with the more idiosyncratic nature of disinflation that we expect going
forward, and following the year of the cuts, monetary policy is probably set to start
diverging once again. The US story, with a combination of structural factors that seem
to have driven r* higher, will most likely curtail the monetary easing that the global
economy can expect from the Fed.

In contrast, weaker domestic dynamics in the Euro Area mean that we should probably
expect the ECB to, if anything, have to go all the way to neutral pretty fast, and
potentially below. Most other G10 countries are set to cut rates as well. While Japan is in
a different league, monetary policy normalization is expected to continue. For EM, Brazil
provides the first example of a major central bank going back into hiking mode. But
monetary easing remains the baseline in most countries (Exhibit 10, Exhibit 11).

10 Global Economics | 24 November 2024

 Exhibit 10: Cumulative policy rate hikes (bp) and BofA forecasts Exhibit 11: Output gap vs core inflation gap (%)
Monetary policy could start diverging again The resiliency of growth will be key to determine the space to cut rates

750 2.0
600 Poland
1.5
450 New Zealand Norway UK

Core inflation -target (%)

300 1.0 Mexico
Australia EA
US Brazll
150 0.5
Sweden Canada Japan
0
0.0
-150 Korea India
S Africa
-0.5
-300
2020 2021 2022 2023 2024 2025 Indonesia
-1.0
ECB G10 ex US LatAm -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
EM Asia EEMEA Fed Output Gap (%)
Source: BofA Global Research, Bloomberg Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Just three more Fed cuts

The ongoing resilience of US growth and the signs of higher productivity growth and
higher potential GDP growth already pointed to a higher r*, at least in the US. Beyond
these factors, we think Trump policies cement upside risks to the terminal rate. We still
look for another 25bp cut in December while remaining data dependent. In particular,
core inflation has moved back up in the last couple of months, which could be enough to
make the Fed uneasy about continuing to cut rates at every meeting, in our view.

For 2025, we forecast two more 25bp cuts in March and June, which would bring the
policy rate to a higher 3.75-4.0% terminal rate. We don’t think the Fed can afford to look
through the tariffs as a one-off increase in price levels because inflation has been above
target for an extended period, and the Fed made a mistake by assuming the 2021-22
supply shocks would be “transitory”. However, the bar for hiking again is very high.

Even faster cuts from the ECB, and a higher terminal for BoE
We continue to expect back-to-back cuts from the ECB to 2% depo by June. But we now
also expect a continuation of those back-to-back cuts until we get to 1.5% by September
2025, a quarter before than in our previous call and still faster than consensus. With an
economy that will be growing at or below trend for most of 2025, we think it will be
hard for the ECB to skip a meeting until it gets slightly below where they see the neutral
rate (2%) or to where we think neutral is (1.5%). But in light of the balance of risks, 1.5%
is easily becoming an upper bound, cementing our dovish view.

In the UK, recent dynamics and central bank guidance support our core view on the BoE.
We have turned more hawkish and now expect a higher terminal rate at 3.5%, in light of
upside inflation risks and the stimulus penciled in the Budget.

The Renminbi remains a constraint for PBoC

Keeping with the outlier narrative, the PBoC has been reluctant to decisively ease
monetary policy to prevent more marked CNY depreciation, and is among the few
countries where monetary stimulus seems too scarce. Potential tariff threats may put
the CNY at risk, but we still expect more accommodative monetary policy to accompany
more supportive fiscal policies next year. We expect further RRR cuts to accelerate bond
issuance, a lower OMO rate (with 30bp of cumulative cuts), and potentially PSL to be
reactivated to support the property sector.

The BoJ will keep hiking

In Japan, the potential for sustained USD strength (yen weakness) implies that the BoJ
will have more work to do to ensure inflation expectations stabilize at the 2% price
stability target. We expect the central bank to deliver its next hike, to 0.5% at the

Global Economics | 24 November 2024 11

January ’25 MPM (with risk of an earlier move in December ’24), followed by a hike to
0.75% after the Upper House elections, at the July ’25 MPM. Reflecting the prospects of
prolonged yen weakness and upward pressure on underlying inflation, we now pencil in
an additional rate hike in January ’26. That would bring the terminal rate to 1%, the low
end of the BoJ’s estimate of neutral (+1 to 2.5%).

BoC to stop cutting soon, RBA turning on the engines

In Canada, the BoC still has some space to cut, but we expect it to stop in January at
3.25%, and only cut further if growth underperforms. In Australia, the RBA will probably
start cutting before underlying inflation touches the target band in mid-2025.

EM monetary policy will also gradually become idiosyncratic

In line with inflationary processes that are gradually becoming more country-specific,
monetary policy is set to follow the same path. As inflation moves from supply- to
demand-driven, domestic factors will gain relevance and push for less synchronized
monetary policies across emerging markets.

Once again, Brazil serves as a prime example. In line with worsening fiscal concerns,
stronger-than-expected growth, and less conducive inflation dynamics, the central bank
has gone back to hikes to prevent a de-anchoring of inflation expectations. And while
the extent to which further hikes are granted is debatable, they are set to continue.

The rest of EM, for now, remains in the cutting club. However, there are important
differences. Most (though not all) central banks in LatAm still have significant space to
cut given their hawkish reaction to the inflation shock. But in EEMEA and EM Asia, while
central banks are still expected to keep cutting rates, they have much less space to do so
— a combination of a much smaller hiking cycle in Asia to begin with, and a somewhat
lower beta to the inflation shock in EEMEA.

Fiscal (im)balances remain unaddressed

One of the most important questions for the next 3 to 5 years is whether we are going
back to the level of interest rates observed pre-pandemic or are we in a new regime of
higher interest rates. In the US, there is a debate over how much of the recent increase
in interest rates is driven by a productivity boom or rather fiscal profligacy. The
productivity story is relevant here, but fiscal imbalances are certainly playing a major
role too, suggesting structurally higher real interest rates could be here to stay.

Fiscal policy deteriorated across countries post-pandemic and the increase in interest
rates is threatening debt sustainability absent sizable fiscal consolidation. Fiscal policy is
losing power to fight the next recession (Exhibit 12 and Exhibit 13).

Exhibit 12: Government deficits (% of GDP) Exhibit 13: Debt-to-GDP ratios (%)
Government deficits are much larger than pre-GFC… … and government debt jumped accordingly

8 250
7
6
5 200
4
3 150
2
1 100
0
-1 50
-2
-3 0
Poland

Korea
Euro Area

Türkiye
US

UK

Mexico
Japan

Brazil

China

Poland

Korea
Euro Area

Türkiye
US

UK

Japan

Brazil

China

Mexico

2024F primary deficit Interest 2007 2024F 2007

Source: BofA Global Research, IMF WEO, Haver Source: BofA Global Research, IMF WEO, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

12 Global Economics | 24 November 2024

The spillover of higher US real rates into global rates and fiscal policy is one of the
factors driving a higher r*, at least in the US. Fiscal policy might end up conditioning the
conduct of monetary policy. Fiscal dominance is not around the corner but is not light
years away either (see Around the world in 5 questions).

In a world of extremely low interest rates, governments faced no trade-offs, so they

could get away with increasing debt-financed spending in bad times without the need to
implement fiscal consolidation in good times. This low interest rate regime led many
economists to recommend continually increasing levels of debt as a socially efficient
solution to deal with “insufficient demand in a liquidity trap environment” – also referred
to as secular stagnation. The argument was based on the debt sustainability condition
popularly known as (r - g), which states that if the real rate of interest (r) is lower than
the growth rate (g) of the economy, any increase in debt is sustainable.

Central banks were partners in this strategy through different types of quantitative
easing policies. They effectively become buyers of last resort of various kinds of public
and private debt that markets were not able to absorb without validating significantly
higher interest rates or outright waves of default that would exacerbate the depth of the
different crises. Central banks, in the end, monetized sizable fiscal deficits through
financial repression by warehousing risk and altering equilibrium market risk premia.

But in a new regime of higher real interest rates, expansionary fiscal policy in bad times
is no longer a free lunch. It now requires proper fiscal consolidation in good times. In
other words, (r - g) moved from deeply negative to somewhat positive, and the optimal
policy prescriptions have changed accordingly. Avoiding fiscal consolidation when the
economy is booming and rolling over debt at increasingly higher real rates is a first step
towards fiscal dominance, when monetary policy ends up subordinated to fiscal policy.

The US headline fiscal deficit rose in FY 2023 vs 2022 despite growth outperformance,
reaching 6.2% of GDP (3.6pp in primary deficit plus 2.6pp in debt servicing). In 2024 the
headline deficit ticked higher to 6.4% of GDP (3.1pp primary deficit and 3.3pp debt
servicing). Net interest payments already represent 19.3% of total federal revenues, and
this figure is expected to keep rising based on Congressional Budget Office projections.

If we are in a new regime of higher interest rates, debt dynamics in the US will quickly
embark on a very dangerous path absent a sizable fiscal consolidation. And this is hard
to foresee given the lack of political incentives for both parties to reduce spending
and/or increase taxes in the coming years. With real interest rates on the rise, the case
for fiscal dominance cannot be ruled out. Fiscal dominance adds an additional trade-off
at best, and constraint at worst, on the conduct of monetary policy.

If the fiscal deficit spirals out of control, you have three possible scenarios: higher real
rates, higher inflation, or financial repression (i.e. the Fed buying all the Treasuries that
nobody wants and or banking regulation to induce banks to buy more Treasuries). This is
particularly important because heightened geopolitical uncertainty is inducing many
countries, including China, to reduce their US Treasury holdings in favor of gold and
other non-dollar denominated assets.

Geopolitics are more important than ever

Globalization is not dead, but it is morphing. Companies don’t want to be exposed to
global shocks like the pandemic or a geopolitical accident by having their supply chains
allocated to countries based only on efficiency. Running the risk of depending on critical
inputs produced on the other side of the world has become close to unacceptable.

Companies are paying more attention to risk management when deciding where to
locate. They are producing not just where it is cheaper, but where it is relatively ‘safer’.
This is changing the comparative advantages of countries. Mexico and Canada are a
good example as members of USMCA, together with the US. Countries are thinking
along the same lines and industrial policies are moving in that direction (Exhibit 14 and
Exhibit 15).

Global Economics | 24 November 2024 13

 Exhibit 14: Changes in market share in US imports since 2018 Exhibit 15: Share in China total exports, 12m sum (%)
Vietnam, Mexico, Taiwan, Korea, India, Thailand gained vs China China exports are shifting away from the West

4 55
2 50
0 45
-2 40
-4 35
-6 30
-8 25
-10 20
2000 2004 2007 2010 2014 2017 2020 2024
EA

Vietnam

Taiwan
Mexico

Thailand

Japan

China
Canada
Korea

India
Exports to Belt and Road countries
Exports to US, EU and Japan
Source: BofA Global Research, Haver Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

National security is the new password to open and close countries to trade. Geopolitical
concerns are masked behind trade and industrial policies. Trade and current account
deficits are a macroeconomic problem, and tariffs are not a solution to that (Exhibit 16).
The US current account deficit is due to lower savings relative to investment, and tariffs
that do not affect the saving-investment imbalance will not affect the current account.
Moreover, expansionary fiscal policy will most likely increase the overall trade deficit.

This is the main difference between the bipartisan US approach to China vs Japan in the
‘80s. Back then, Japan was able to manufacture much more cheaply than the US. It was
seen as a commercial but not a geopolitical threat. The solution was to bring Japanese
companies in to produce in the US. Now, this option is not available with China, which is
seen as a geopolitical rival rather than simply a commercial threat. Data and
semiconductors have become today what steel was in the ‘50s—the most critical input
to face a military conflict competitively.

Trump claimed during his campaign that he could end the two wars that are still taking
place in Europe and the Middle East. It is true that such military conflicts did not take
place during his first tenure, but it is certainly going to be challenging to stop them
swiftly. Needless to say, this will have economic consequences for Europe and other
NATO members in terms of defense spending.

Exhibit 16: Global imbalances (current account balance as a share of global GDP)
After shrinking following the GFC, global imbalances have been widening since the pandemic

2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
US Canada Europe Japan DM Asia China EM Asia ex-China EEMEA LatAm
Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH

14 Global Economics | 24 November 2024

Risks: The good, the bad and the ugly
With so much policy uncertainty ahead of us, we should pay careful attention to what
might not play out as expected, both in terms of the size and sequencing of Trump
policies, as well as the reaction function of the rest of the world. To summarize the
relevant risks, we create three alternative scenarios: the good, the bad and the ugly. Our
baseline view sits somewhere between the good and the bad. Admittedly, the ugly
scenario is a low probability tail risk, though.

The Good: Deregulation, limited tariffs, fiscal awareness

In this scenario, there is strong focus on pro-growth policies such as a strong
deregulation agenda coupled with aggressive tax and spending cuts to keep the budget
balanced, while de-emphasizing the tariff and immigration restrictions, which are less
favorable to growth. Fiscal stimulus through tax cuts goes full steam with the rollover of
the TCJA and aggressive corporate tax cuts, coupled with some reduction in
discretionary spending to address market concerns regarding debt dynamics.

In particular, the deregulation of the banking system not only helps easing credit
constraints but helps stabilizing the overall financial system given the recent rapid
increase in private lending, which is by definition completely unregulated. The
deregulation of the energy sector, in turn, puts some downward pressure on energy
prices in general and oil prices in particular, which will have additional geopolitical
dividends and help reduce the trade deficit.

On the trade side, tariffs are used as a negotiation tool to obtain other concessions
through bilateral negotiations. Tariffs on China are symbolic by incorporating significant
exclusions. Immigration restrictions are mild and only affecting a small portion of the
flows. In this scenario, US growth can go north of 3% and inflation still head closer to
target or not, depending on how expansionary fiscal policy ends up being.

This is a scenario where the chosen policy mix is mindful of the much higher inflation
sensitivity of households and firms post pandemic.

On the geopolitical front, in this scenario we assume a relatively swift resolution to the
Middle East and the Russia-Ukraine conflicts that is sustainable over time, significantly
reducing geopolitical uncertainty.

This scenario is also quite benign for global growth, which could be north of 3.7% if
China decides to implement expansionary fiscal policy, in turn lifting growth in Europe
and EM economies. This is a scenario of higher real rates, higher inflation expectations
globally, with a still somewhat strong dollar and lower gold prices relative to our baseline
scenario. In this scenario the Fed might remain on hold or even hike rates.

The dynamics of the dollar is not that obvious though, since it not only depends on the
US policy mix, but also on how strong the fiscal impulse is in China. Let’s not forget that
China needs to do sizable fiscal easing to stabilize property prices and eventually revert
the very weak confidence levels.

One tweak to this scenario that can turn it into a bad one is that fiscal policy puts too
much pressure on an economy operating at potential and induce much higher interest
rates, risking a subsequent hard landing or dampening the positive global growth
dynamics through the tightening effect of global financial conditions.

The Bad: Trade uncertainty triggers a trade war

In this scenario, the deregulation agenda gets stalled and fiscal easing is minimal,
limited to a few tax cuts as markets become concerned with unsustainable debt
dynamics and reprice interest rates higher.

Global Economics | 24 November 2024 15

In addition, the administration moves forward with a hawkish plan on trade, imposes a
shock and awe 60% tariffs on China and 10-20% on the rest of the world, and US
trading partners retaliate strongly and at the same time there is significant tightening
on the immigration front, affecting not just the flow but the stock of the immigrant
labor force through a sharp increase in deportations. In this scenario, we assume
geopolitical conflicts remain open.

In addition, the US imposes closer scrutiny on Chinese products diverted from a third
country or further tighten restrictions on its allies’ technology exports to China, the
disruptions on China’s trade, manufacturing activities and domestic demand would be
deeper.

The aggressive tariff hikes trigger a tit-for-tat type of retaliation that hits global trade
and increases uncertainty to the point that global investment collapses, consumer
confidence drops, stock prices correct significantly lower, and eventually consumption
retraces, leading the US economy into a recession. This scenario is negative for US
growth but even more negative for growth outside the US.

Once again Europe would be significantly impacted, and most likely China would not be
able to smooth that shock with fiscal easing and there would be additional pressure on
the currency. China’s growth should be meaningfully impacted, and the Euro Area would
be once again the weakest link.

In this scenario, the Fed would cut interest rates aggressively despite the transitory
effect on inflation of higher tariffs, as the negative impact on growth would dominate
and it would be therefore less likely that markets interpret that policy response as driven
by political interference.

As a result, we should observe lower real rates across the spectrum, with somewhat
lower long term inflation expectations in a global risk-off scenario.

Once again, the dynamics of the dollar is hard to pin down in this scenario. The dollar
might strengthen first as markets de-risk and then weaken as the Fed accommodates
the shock through monetary easing. This is a negative scenario for global growth, where
all countries suffer, and monetary and fiscal policy would turn more accommodative to
cushion the shock. Therefore, the fate of the dollar would depend on the relative policy
response of the US vis-a-vis the rest of the world.

The Ugly: Trade war meets fiscal profligacy

In this very tail risk scenario, the economy enters a stagflationary spiral. We keep all the
assumptions of the bad scenario, but we add significant fiscal easing that the market
refuse to finance and the rest of the world selling US Treasuries and buying gold in
massive scale due to geopolitical concerns. In this scenario, there is escalation of the
two open military conflicts with no clear solution in sight.

Given the inability of the government to finance the deficit at reasonable rates, the Fed
could be induced to implement yield curve control, which is equivalent to a monetization
of the fiscal deficit. Political interference would impair significant reputational costs on
the Fed.

In this scenario, real rates remain low due to financial repression but inflation
expectations and eventually realized inflation move significantly higher. In this scenario,
the dollar weakens across the board as its reserve currency status is called into question
and gold and cryptocurrencies become the main beneficiaries relative to fiat currencies.

This is also a very negative scenario for global growth, leading to a global recession and
very complex geopolitical dynamics.

16 Global Economics | 24 November 2024

US
Aditya Bhave Stephen Juneau
BofAS BofAS

Shruti Mishra Jeseo Park

BofAS BofAS

The only certainty is change

• The economy went into the elections with structural and cyclical tailwinds. Strong
productivity growth, in particular, posed upside risks to the terminal fed funds rate.

• We expect 4Q/4Q GDP growth of 2.3% in 2025 and 2.0% in 2026, with tariffs and
immigration restrictions roughly offsetting fiscal easing and deregulation. We think
inflation will remain above 2.5%. We raise our terminal rate forecast to 3.75-4.0%.

• However, given the uncertainty around which aspects of the Trump policy agenda
will be prioritized, the risks around our forecasts are massive and two-sided.

Bullish on America
As the year comes to an end, we turn our focus to the years ahead. We make wholesale
revisions to our economic and monetary policy outlook (Exhibit 17). Specifically, 1) we
revise growth up in 2025 but down in 2026, resulting in a net upward revision to the
level of GDP by year-end 2026. 2) We now expect inflation to get stuck in the 2.5-3%
range owing to easy fiscal policy, higher tariffs, and less immigration. 3) Higher potential
growth and inflation mean a shallower cutting cycle. We raise our terminal rate forecast
to 3.75-4.0%. We are above consensus on growth, policy rates and particularly inflation.

Our revisions reflect cyclical (real income growth) and structural (increased labor
productivity) factors. We also incorporate our expectations for policy changes following
the election results. We expect the policy mix to have roughly offsetting effects on
growth but put upward pressure on inflation.

Don’t fight the US consumer

US economic growth has shown little sign of cooling despite higher rates, slower hiring,
and a fading fiscal impulse. Consumer resilience has been a big reason for this.
Consumers have benefited from solid real income growth and robust balance sheets

Exhibit 17: Summary of our forecast changes vs. consensus Exhibit 18: Real personal income less transfer payments (% y/y)
We are now above consensus on growth, inflation and policy rates Personal income growth has supported the consumer
2025 2026 12%
GDP (% 4q/4q)
New 2.3 2.0
Old 1.6 2.3 8%
Bloomberg Consensus 1.9 2.0
U-rate (4q avg.)
New 4.4 4.3 4%
Old 4.5 4.2
Bloomberg Consensus 4.3 4.2
PCE (% 4q/4q)
New 2.5 2.4 0%
Old 2.1 2.1
Bloomberg Consensus 2.1 2.1
Core PCE (% 4q/4q) -4%
New 2.8 2.6
Old 2.2 2.2
Bloomberg Consensus 2.2 2.1 -8%
Fed funds range (end of period) 1990 2000 2010 2020
New 3.75-4.0 3.75-4.0
Old 3.0-3.25 3.0-3.25 Source: BEA, Haver Analytics
Bloomberg Consensus 3.25-3.5 3.0-3.25 BofA GLOBAL RESEARCH
Source: BofA Global Research, Bloomberg. Note: Bloomberg Consensus is as of Nov 21, 2024
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 17

(Exhibit 18 and 19). We expect real income growth to remain positive in the years ahead,
with decent job growth and wage inflation continuing to outpace price inflation.

Realizing a higher potential

The US economy grew at 1.8% in the previous cycle (4Q 2007 to 4Q 2019). At the time,
there was a growing consensus that we were in a “new normal” of sluggish growth. The
FOMC’s median estimate of longer run growth has been 1.8-1.9% since September
2016. We have also pegged potential growth in that range for several years, though we
did argue that labor supply likely temporarily boosted potential above 2% last year.
We now think that the temporary boost could become more permanent and potential
growth could remain in the 2.0-2.5% range. Our optimism is underpinned by increasing
evidence of a sustained pickup in labor productivity growth (Exhibit 20). In our view, the
post-pandemic surge in new business formations and the recent upturn in capex should
support productivity going forward. Then over time (though likely outside our forecast
horizon), AI adoption could lead to another leg higher in productivity.
Exhibit 19: Household balance sheets are robust Exhibit 20: Nonfarm business productivity (2017 = 100)
Total and liquid household assets are very elevated relative to liabilities Productivity has moved above its pre-pandemic trend in recent quarters

1100% Household assets / liabilities 120% 115

Household liquid assets / liabilities (rhs)
1000% 110%
110
100% 4Q '07-4Q '19 trend
900%
105
90%
800%
80% 100
700%
70%
95
600% 60%
500% 50% 90
1995 2000 2005 2010 2015 2020
85
Source: BofA Global Research, Federal Reserve Board, Haver Analytics. Note: We define liquid 2007 2009 2011 2013 2015 2017 2019 2021 2023
assets as the sum of checkable deposits and currency, time and savings deposits and money
market fund shares. Source: Bureau of Labor Statistics (BLS)
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

The elephant in the room

Turning to the elections, the Republican sweep could be a game changer on many fronts.
We focus on four policy areas: trade, fiscal, immigration and deregulation. We make
specific assumptions about policy implementation to form our outlook. But we note that
uncertainty is elevated, and so the error bands around our forecasts are very large.
1. Trade policy: We expect tariffs on US goods imports to rise significantly in 2025-
26. Specifically, we assume that average tariff rates will roughly double for China
and the rest of the world ex Canada and Mexico.
2. Fiscal: In addition to extending the expiring personal provisions from the Tax Cuts
and Jobs Act, we expect Congress to restore full expensing of capex. Legislators
might also lower corporate tax rates marginally or increase the State and Local Tax
(SALT) deduction cap.
3. Immigration: We think significant tightening in the flow of migrants is more likely
than large changes to the migrant population that is already in the US.
4. Regulatory policy: We assume sweeping changes aimed at deregulation. This is
likely to benefit certain industries (e.g., financials and energy).

Growth effects to be more evident in 2H 2025 and beyond

In the near term, imports and inventories are likely to surge in anticipation of tariffs. But
they should net out, so we don’t see much impact on GDP. Deregulation is also likely to
be a tailwind in 1H 2025. However, the impact of the Trump policy agenda should be
more evident starting in 3Q 2025 (Exhibit 21).

18 Global Economics | 24 November 2024

In terms of trade, similar to 2018-19, we think the impact of tariffs will be mitigated by
dollar appreciation, shifting of supply chains toward lower-tariff jurisdictions, stockpiling
before implementation of tariffs and exclusions. All else equal, we look for a 20-50bp
drag to annualized GDP growth from trade policy, starting in 3Q 2025.

We think the impact of the tariffs will be felt more in capex than consumer spending. For
one, capital goods are likely to see larger tariffs and fewer exclusions. For another, tariff
uncertainty should be a bigger drag for capex than consumption. Exports should face
headwinds from a stronger dollar, weaker global demand and, potentially, retaliation by
countries facing higher US tariffs.

That said, we think fiscal expansion could offset most of the drag from trade policy,
arguably by design. All else equal, the expected fiscal package should add a few tenths to
growth in late 2025 and early 2026. We expect the effect to be most evident in
nonresidential investment, which should get a temporary boost from full expensing of
capex. Some payback for front-loaded capital spending is likely later in 2026, particularly
since tariff uncertainty will probably still be lingering. We think immigration restrictions
will likely be a mild and persistent headwind to labor supply and GDP growth.

Inflation: stuck in the high twos

Unlike growth, the inflation implications of the Trump agenda are less of a mixed bag:
the expected policy mix is likely to be inflationary. We now think inflation will get stuck
between 2.5 and 3% throughout our forecast horizon.

We expect tariffs to add about 30-40bp to y/y inflation by mid-2026. Inflation should
decrease after that because of favorable base effects, but a positive fiscal impulse
should slow the decline. Immigration restrictions could also be marginally inflationary.
Lower energy prices should keep headline inflation lower than the core (Exhibit 22).

Initial conditions also matter. When Trump assumed office in 2017, inflation was below
target, and there was no recent precedent for retailers to pass costs through to
consumers. Today, inflation is above target, and we think retailers would be more
comfortable passing costs on. So, although tariffs and fiscal easing had little visible
impact on inflation during Trump’s first term, this time should be (moderately) different.

Fed: just three more cuts

We think the Trump policy agenda cements the upside to the terminal rate that we have
viewed as a risk so far. We still look for another 25bp cut in December, although that has
become a close call after Chair Powell’s hawkish comments.

We then expect the Fed to slow down to a quarterly pace of cuts based on the data flow
alone. In particular, core inflation has moved back up in the last couple of months. We
Exhibit 21: Contributions to GDP growth (pp) Exhibit 22: PCE inflation (% y/y)
We expect the policy agenda over the next two years to distort activity in the We expect core PCE inflation to be range bound between 2.5% and 3%
near-term and be more evident in 3Q 2025
10% Core PCE
6
8%
Core goods PCE
4
6%
2 Core services
4% PCE
0 2%

-2 PCE Bus fixed inv Residential inv 0%

Gov Inventories Net exports -2%
-4
Mar-23 Dec-23 Sep-24 Jun-25 Mar-26 Dec-26 2018 2021 2024
Source: BEA, BofA Global Research Source: BEA, BofA Global Research
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 19

think core PCE inflation will increase to 2.8% y/y in 4Q 2024, two tenths above the Fed’s
median forecast as of September. That isn’t disastrous, but it should be enough to make
the Fed uneasy about continuing to cut rates at every meeting

For next year, we forecast two more 25bp cuts in March and June, which would bring the
policy rate to 3.75-4.0%. That is our terminal rate. Why? By 2H 2025, if our policy
projections are correct, the Fed will need to decide how to respond to the negative
supply shock from significantly higher tariffs. We don’t think the Fed can afford to look
through the tariffs as a one-off increase in price levels because i) inflation has been
above target for an extended period, and ii) the Fed made a mistake by assuming the
2021-22 supply shocks would be “transitory”. The bar for hiking again is very high, but
we think the Fed will go on hold after the June cut, for the rest of our forecast horizon.

Pro-growth fiscal policy

Higher policy rates will likely counteract some of the effects of expansionary fiscal
policy. We expect Congress to enact deeper tax cuts beyond an extension of the
individual tax provisions of the Tax Cuts and Jobs Act. As a result, we see the primary
deficit rising from 3.1% of GDP in FY 2024 to 3.2% in FY 2025 and 3.7% in FY 2026,
which will generate a positive fiscal impulse for the economy.

Expectations for greater fiscal expansion have already contributed to rising interest
rates, which will accelerate the rise in the debt-to-GDP ratio through higher interest
expense. It will also raise more questions around the potential for fiscal dominance. That
said, we do not expect monetary policy to become subordinate to fiscal policy in the
near-term. Instead, we believe the Fed will push back against easy fiscal policy,
offsetting much of the expansionary effects of tax cuts to limit upside risks to inflation.

Risks: unusually large and two-sided

Given the lack of clarity at this stage over the policy agenda, the risks to our forecasts
are substantial in either direction. Growth could be stronger than we are forecasting
(perhaps even exceeding 3%) if the incoming administration focuses on the pro-growth
aspects of its platform – fiscal easing and deregulation – and de-emphasizes the aspects
that are unfavorable for growth – tariffs and immigration restrictions. Even if there are
tariffs, the impact could be mitigated if the shock gets mostly absorbed in the exchange
rate and/or margins of exporters to the US.

At the other end of the spectrum, it is possible that i) the administration imposes 60%
tariffs on China and 10-20% on the rest of the world, and the US’s trading partners
retaliate strongly, ii) there is significant tightening on the immigration front, and iii)
fiscal easing is minimal, perhaps because of a bout of bond vigilantism. In this scenario,
the economy could get pushed into a recession, and the Fed would probably end up
cutting rates in late 2025/2026 to around 1%, or perhaps even lower. There is also
uncertainty about the extent to which the administration will seek to cut spending.

In summary, our base case is sanguine, but our conviction is low. As the policy agenda
becomes clearer next year, we will be nimble in adjusting our forecasts. Stay tuned.

20 Global Economics | 24 November 2024

Euro area
Ruben Segura-Cayuela Evelyn Herrmann
BofA Europe (Madrid) BofASE (France)

Chiara Angeloni Alessandro Infelise Zhou

BofA Europe (Milan) BofASE (France)

The year the policy rate goes below 2%

• Our Euro area base case: growth close to 1% in 2025/26, inflation undershoot and
an ECB terminal depo rate at 1.50% in Sep-25.
• The tails around the base case are fat. A fast and comprehensive pan-EU or even
German fiscal rethink could help.
• The lower tail is fatter though: trade uncertainty, tariffs, domestic demand fragility.
A depo rate of 1% is easily thinkable.
When the base case is just a number
Things have not changed that much relative to what we expected in our base case a year
ago. A bit more growth in 2024 and less in the future, slightly faster disinflation near
term, and a somewhat faster cutting cycle to the same terminal rate. The biggest
difference relative to our last Year Ahead is in everything beyond the base case. Indeed,
while our forecasts have moved only marginally, risks are plentiful and larger than
before. That makes the base case particularly less relevant today than in a “normal year”,
with everything that could go wrong, or right (and we can think of more of the former
than the latter), being the most relevant factors into 2025. Tails around the main
scenario are fat, particularly the one to the downside. On paper, it takes very little for
growth in the Euro area to improve from here, but that was true for much of 2024, too.
Further delays, i.e., a lack of acceleration in the economy during 1H25 could easily
trigger the kind of non-linear dynamics we have been worried about for a while and lead
to stronger recessionary forces.

Exhibit 23: Euro area forecasts

No large changes to our forecasts so far this year – overall picture remains of weak, slowly improving
economy
2024E 2025E 2026E
YA (Nov No Consensus Consen YA (Nov No Consensus Consen Bof Consen
23) w (Nov 23) sus 23) w (Nov 23) sus A sus
GDP
growth, % 0.5 0.7 0.6 0.7 1.2 0.9 1.5 1.2 1.0 1.4
HICP, % 2.6 2.3 2.7 2.4 1.4 1.6 2.1 2 1.6 2.0
Core HICP,
% 2.6 2.7 2.8 2.7 1.8 1.9 2.2 2.1 1.8 2.0
Source: BofA Global Research, Bloomberg
BofA GLOBAL RESEARCH

Not a bad year, in terms of forecasts

A year ago, we were expecting a modest acceleration of growth in 2024 and 2025, at
0.5% and 1.2%, respectively, on the back of declining inflation, improving real incomes,
less uncertainty, the beginning of a cutting cycle, mild fiscal tightening and a soft
reacceleration of the global economy. We were calling 2024 the year of disinflation,
expecting inflation to converge to target by late 2024, with yearly averages of 2.6% in
2024 and 1.4% in 2025. That was meant to come with 75bp of cuts from the ECB in
2024, one per quarter starting in June, before the cutting cycle would accelerate in 2025.
Hence, we thought the ECB would take the depo rate to 2% by July 2025, followed by a
pause. We believed that cuts were likely to resume in 2026, beyond what back then was
our forecast horizon (end of 2025), once it became evident that neutral is below 2% and
likely not too different from what it was before the pandemic (somewhere between 1%
and 2%).

Global Economics | 24 November 2024 21

What we have seen so far has not been too different from what we expected (Exhibit
23). Growth has moved slightly higher in 2024 and lower in 2025E and 2026E. The
resilience of the US economy has certainly helped during 2024 despite a recovery in
Euro area private domestic demand that surprised our below-consensus expectations to
the downside. That delayed domestic recovery, together with what we now expect to be
a more challenging and uncertain external backdrop (including a modest increase in US
tariffs, with some retaliation on the EU side), drives our downward revision to 2025.

Similarly, we now expect lower inflation on the back of weaker energy prices, with core
inflation broadly unchanged relative to last year’s Year Ahead forecasts. We got to
undershoot target a bit earlier than we thought, thanks to energy prices coming down a
bit faster. While that may correct near-term, the undershoot should resume and persist
throughout 2025. The inflation undershoot theme remains in 2026, with headline at
1.6% and core at 1.8%.

Finally, the ECB started cutting rates in June, in line with our expectations. But faster
disinflation together with growing worries about weakness in private domestic demand
probably means they will end up cutting a total of 100bp in 2024, rather than the 75bp
we expected a year ago. From here, the path remains broadly the same, with back-to-
back cuts before reaching a deposit rate of 1.5% by September 2025.

Growth: weak, but improving, if all goes well

Our Euro area growth forecasts move to 0.7% for 2024, 0.9% for 2025 and 1.0% for
2026 from 0.7%/1.1%/1.3% before (Exhibit 24). We still expect a mild cyclical recovery
through consumption as disinflation helps real wage gains (at least until 2H25) and
saving rates probably peaked. Capex, meanwhile, will be more anaemic due to
heightened trade uncertainty and subdued demand in the medium term.

Compared to our old scenario, the downgrades are mainly driven by, first, heightened
trade uncertainty and the assumption of a mild increase in US tariffs on EU exports (i.e.
a doubling of tariffs on average, particularly affecting Germany) and second, tighter than
previously assumed fiscal policy (idiosyncratic to France, where we assume a 2025
budget close to the initial government plan). In other words, the cyclical recovery story
weakens mainly via domestic demand in core countries. Having said that, we doubt
countries in the periphery can continue to “thrive” persistently if the core countries
weakened further.

Part of the weakness created by tariffs and increased trade uncertainty is compensated
by the assumption that early German elections will lead to an earlier (partial) fiscal
offset of downside, not because of a debt brake rule reform, but because of a triggering
of the escape clause. Also, our China team expects more capex-oriented fiscal policy
support as a response to higher US tariffs, which typically help European exporters.

We continue to assume moderate fiscal tightening on aggregate from here, 30-50bp per
year, in the next couple of years. And, crucially, we don’t assume a joint fiscal response
to the additional geopolitical challenges ahead of us. That can only happen with more
economic pain, so while it remains a hope scenario, it can’t be part of the base case.

Inflation: the materialisation of the persistent undershoot

Our forecasts for headline inflation move to 1.6% in 2025 and 2026, from 1.5% and
1.7% before, with core inflation of 1.9% and 1.8% in 2025 and 2026 (unchanged from
our previous forecasts). Energy prices pushed inflation below 2% a bit earlier than we
initially thought. They could now further delay disinflation by a few months, before it
resumes throughout 2025 (Exhibit 25). The inflation undershoot theme remains in 2026,
with headline at 1.6% and core at 1.8%.

22 Global Economics | 24 November 2024

We still think the chronic insufficiency of aggregate demand and a persistent output gap
that will not close even by 2026, together with a too-tight policy mix, will all contribute
to the undershoot. Yes, services inflation is taking longer than expected to moderate, but
momentum is already significantly improved and not far from comfortable levels. And
with wages tracking past inflation closely, we would expect wage growth to significantly
moderate throughout 2025. This should contribute to a significant additional slowdown
in services inflation (possibly even implying close to no real wage gains into 2026).

Exhibit 24: A permanent gap Exhibit 25: A persistent undershoot

The region did not really close the gap with the pre-Covid trend Inflation will be below target throughout the forecast horizon

110 11
Pre-covid trend Forecasts/actual BofA forecasts
10
HICP
9
105 CORE
8
7
100 6
5
95 4
3
2
90 1
0
85 -1
19 20 21 22 23 24 25 26 2019 2020 2021 2022 2023 2024 2025
Source: BofA Global Research Source: BofA Global Research
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

ECB: all the way down and more?

We continue to expect back-to-back cuts from the ECB to 2% depo by June. But we now
also expect a continuation of those back-to-back cuts for the depo to reach 1.5% by
September 2025, a quarter earlier than in our previous call. With an economy that will be
growing at or below trend for most of 2025, we think it will be hard for the ECB to skip
a meeting until it gets slightly below where it sees the neutral rate (2%), or to where we
think neutral is (1.5%). Of course, at this point, 1.5% is easily becoming an upper bound.

We continue to think it will probably take further data deterioration for the ECB to
increase the pace of cuts further. And we believe recent data probably isn't enough to
make the ECB shift yet another gear higher (i.e. to 50bp cuts). But we would argue that
the ECB will get to 1.5% by September 2025 at the latest.

50 shades of risk
Sizeable increases in US tariffs are certainly a key risk going forward. The threat of US
tariffs on European imports is not new. In 2018, there were threats of a rise to US
tariffs on European cars to 25% (from 2.5%), paired with a generalised increase in all
tariffs by 10%. We argued back then that this could put c 0.7% of European GDP at risk
directly via price effects on US demand. The impact of uncertainty on internal demand
could amplify that. In fact, uncertainty about tariffs can damage growth without tariffs
ever happening. Uncertainty has spiked abruptly in the past few days and particularly
with the US election behind us (Exhibit 26). The move is a bit larger for the Euro area
than at the global level. However, it is not as large as during the previous "trade war" or
during Brexit implementation. Still, a persistent spike in trade policy uncertainty could
lead to even less growth and a lot faster cutting cycle from the ECB. In such a scenario,
50bp cuts (more than one) into the picture and make a terminal rate of 1.5% (our base
case) an optimistic view.

Global Economics | 24 November 2024 23

 Exhibit 26: BofA EMOT trade-related uncertainty trackers (higher = more uncertainty)
Our news-based trackers of trade uncertainty have spiked

4
Trade-related uncertainty - Euro area
3 Trade-related uncertainty - Global level

-1

-2
Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 Nov-23 Nov-24
Source: BofA Global Research, GDELT Project (www.gdeltproject.com). The tracker identified as an EMOT above is intended to be an
indicative metric only and may not be used for reference purposes or as a measure of performance for any financial instrument or contract,
or otherwise relied upon by third parties for any other purpose, without the prior written consent of BofA Global Research. This tracker was
not created to act as a benchmark.
BofA GLOBAL RESEARCH

The impact on inflation of a 10% rise in bilateral tariffs (to stick to that reference) would
initially be in the range of 0-10bp. But that does not consider another important point.
Bilateral tariff escalation is not the same as a multilateral trade war. We would see
significant trade diversion away from the US, including some short-term dumping that
would end up being quite disinflationary. The impact on global growth and confidence
would then filter through. In other words, tariffs could be the shock that takes policy
rates to or below 1%.

Geopolitics and energy prices are also key to watch from here. The region is facing
pressure to step up its individual defence effort, perhaps even in the very short term.
Challenges go beyond defence, as reflected in the Draghi report. There is limited fiscal
space in national budgets. There is also little appetite for further common borrowing.
Faced with a new reality, that could serve as an incentive to do more and better.

But for the market narrative, the timing of that matters and it may take a significant
increase in uncertainty driven by heightened geopolitical risks and a worsened economic
outlook beyond what we expect. If we are wrong, and there is more political capital for a
joint EU response to the challenges the region faces before a deterioration of the
outlook, that could be a significant upside surprise.

The same applies in the particular case of Germany. We work on the assumption that the
escape clause of the debt brake is triggered in 2025, though probably only after new
elections. This is about putting a floor under an emergency and not the broader fiscal
rethink some people have in mind. That requires constitutional reform of the debt brake,
which we don’t have in our base case. Any surprise here (i.e. proper rule reform) would
be a significant upside surprise to the short- and medium-term outlook.

24 Global Economics | 24 November 2024

China
Helen Qiao Benson Wu
Merrill Lynch (Hong Kong) Merrill Lynch (Hong Kong)

Xiaoqing Pi Anna Zhou

Merrill Lynch (Hong Kong) Merrill Lynch (Hong Kong)

Demand still weak but hope is up since late-September

• Compared with our mid-year outlook back in June, our assessment on the Chinese
economy remains largely unchanged on weak domestic demand and persistent
deflationary pressure.

• China still relies heavily on exports as a growth engine, which has benefited from
the technology product up-cycle, resilient external demand especially from the
global south, and frontloaded orders ahead of potential tariff escalations this year.
• Meanwhile, consumer and investor confidence still linger at record-low levels,
against the backdrop of an ailing property market.

However, an important development since June is emerging expectations on policy

stimulus stepping up more meaningfully to boost domestic demand, after policy makers
revealed a slew of easing measures since late-September. While there has been no
Bazooka Package and easing measures are moderate in magnitude so far, the perception
is that top decision makers are aware of the economic deceleration and eager to
prioritize growth stabilization. At the Politburo meeting on Sep 26, top leadership
stressed the importance of raising fiscal expenditure and preventing the property market
from further decline. In our view, it unmistakably signaled an urgent turn in policy
orientation towards further easing.

Exhibit 27: Summary of key macro data and forecasts

We maintain our forecasts for 2024-26 GDP growth
2020 2021 2022 2023 2024F 2025F 2026F
GDP by expenditure
Real GDP Growth % yoy 2.2 8.4 3.0 5.2 4.8 4.5 4.5
Final Consumption Expenditure % yoy -0.3 9.0 2.1 8.1 5.2 5.0 5.2
Gross Capital Formation % yoy 4.2 3.9 3.2 3.5 4.4 4.1 4.5
Contribution to GDP Growth
Net Exports pp 0.6 1.9 0.4 -0.6 0.4 0.0 -0.3
Major activity indicators
Industrial Production % yoy 2.8 9.6 3.6 4.6 5.6 4.8 4.2
Fixed Asset Investment % yoy 2.9 4.9 5.1 3.0 3.3 4.7 5.0
Retail Sales % yoy -3.9 12.5 -0.2 7.2 3.6 4.8 5.0
Exports of Goods % yoy 3.6 29.6 7.4 -4.6 5.2 -0.4 -1.2
Imports of Goods % yoy -0.6 30.0 1.1 -5.5 1.4 0.6 -0.2
Trade Balance US$ bn 524 670 838 822 961 937 900
Current Account % GDP 1.7 2.0 2.5 1.4 1.8 1.8 1.4
Key price and policy indicators
CPI % yoy 2.5 0.9 2.0 0.2 0.3 0.8 1.2
PPI % yoy -1.8 8.1 4.2 -3.0 -2.0 0.0 1.6
1y Loan Prime Rate %, year-end 3.85 3.80 3.65 3.45 3.10 2.70 2.70
7d Reverse Repo Rate %, year-end 2.20 2.20 2.00 1.80 1.50 1.20 1.20
USD/CNY year-end 6.53 6.36 6.90 7.10 7.30 7.40 6.90
Source: BofA Global Research estimates, CEIC, Bloomberg
BofA GLOBAL RESEARCH

Stimulus to meet external shock next year

Going into 2025. Chinese policy makers would like to demonstrate growth resilience in
the last year of their 14th Five Year Program and keep growth target at around 5.0%.
However, achieving such a growth target would depend on: 1) whether policy easing
measures could stimulate public and private demand and lifting overall expectations
effectively; 2) the size of the external shock on the export sector.

Global Economics | 24 November 2024 25

In our view, China may have to face severe challenges in trade if the President Trump
raises import tariffs on Chinese products further from an average of 20% now. With
about 15% of China’s overall exports destined to the US, a stiff tariff will likely prove
disruptive. In that case, we expect China to step up policy easing measures more
meaningfully to brace for the trade shock to stoke domestic demand and boost public
confidence in response. These measures will include, but not be limited to, a larger fiscal
deficit, more monetary easing (including interest rate and RRR cuts as well as PSL
lending, and modest currency depreciation), and efforts to stabilize the property market.

Tariff shock not fully absorbed

However, China will unlikely be able to offset the impact from such external shocks in
full. We expect growth to weaken to 4.5% in 2025 in our baseline scenario with
incremental and gradual tariff hike. Our hope is that China would engage in negotiations
with the US to mitigate some of the tariff impact, while stabilizing its own property
market at the same time. By 2026, growth will be further helped by the property sector
normalization, without further drag from investment and sales contractions.

In the bear case where 60% tariffs are imposed on all Chinese goods in 1Q25 without
room for negotiations and tariffs are added on the rest of the world, China will likely
struggle to keep growth above 4% through the next year.

Growth under pressure in 2025 - 2026

We expect real GDP growth to weaken from 4.8% in 2024 to 4.5% in 2025. In 2026,
while export drag will persist as the external environment deteriorates, the stabilization
of the property market will prove helpful in keeping growth at 4.5% again. We spell out
our expectations on the near-term outlook as the follows:

Frontloaded exports, policy easing to prop up 2024 growth

After growth rebounded from 2Q24 bottom level, 3Q YTD growth reached 4.8% yoy,
close to the government’s target of about 5.0%. Recent data suggests a notable
improvement in industrial activities, property sales, and retail sales, partly helped by
policy stimulus measures since late-September. The upside surprise in export growth in
Oct was likely caused by frontloaded orders to the US before potential trade tension
intensification. We think such momentum would be sufficient to lift sequential growth
and keep the full year yoy growth at 4.8%, with slight risk tilted to the upside.

Stronger easing, property stabilization to offset tariff impact in 2025-26

While we didn’t change our full-year growth forecasts for 2025 compared with our mid-
year outlook, we have revised our quarterly path for 1Q – 3Q25 on the assumption that
1) the US will hike tariffs on Chinese goods from 2Q onwards (consistent with our US
team’s forecasts); and 2) China will adopt more domestic demand stimulus, especially on
investment, but it will take some time to kick in.

During our macro conference in Beijing earlier this month, policy experts suggested the
new growth target will likely be set at around 5.0% next year (instead of lowering to
4.5% as we previously expected), implying policy makers’ determination and willingness
to put in more efforts to support domestic demand.

While we don’t think the US-China trade tension will be resolved any time soon, we see
a higher probability of the property market stabilizing by 2026, which will remove a large
drag on headline growth. We think the supply chain relocation will also yield more
returns to support exports to DM through connector countries.

Deflationary pressure likely to ease in 2025-26

We adjust our CPI inflation forecast to 0.8% for 2025 and 1.2% for 2026, reflecting our
more optimistic view on aggregate demand in the medium term, which will also push PPI
inflation back to positive territory.

26 Global Economics | 24 November 2024

 Exhibit 28: Quarterly GDP growth forecast
We expect frontloaded exports to prop up near-term growth, while tariff shock to kick in from 2Q25 onwards
Real GDP growth 1Q24 2Q24 3Q24 4Q24E 1Q25E 2Q25E 3Q25E 4Q25E 1Q26E 2Q26E 3Q26E 4Q26E
% yoy 5.3 4.7 4.6 4.5 4.7 4.5 4.6 4.2 4.0 4.9 4.7 4.4
% qoq, saar 6.1 2.0 3.6 6.4 6.8 1.2 4.0 5.0 6.0 4.5 3.5 3.5
% yoy ytd 5.3 5.0 4.8 4.8 4.7 4.6 4.6 4.5 4.0 4.5 4.6 4.5
Source: BofA Global Research estimates
BofA GLOBAL RESEARCH

Expect policy easing to intensify in 2025

While China braces for the tariff shock, we believe policy makers will step up on policy
easing intensity especially in 4Q24–1H25 to support domestic demand, including
monetary easing, fiscal expansion, and efforts to stabilize the property market.
Specifically, on fiscal policy, we expect the following fiscal measures to materialize in
2025, which could lead to an additional government debt expansion equivalent to around
1.1% of GDP: 1) fiscal deficit to widen to 3.5% from 3.0% in 2024, with more efforts in
central-to-local fiscal transfers; 2) continued issuance of special treasury bonds of more
than RMB1.5tn (vs. RMB1tn this year), supporting investment as well as consumption
(especially for consumer trade-in policies and support to targeted groups, see also: Fiscal
viewpoint); 3) the in-sequence issuance of RMB1tn special treasury bond for large
commercial banks’ capital injection from the end of 2024; 4) the start of the multi-year
debt swap plan in 2025 (Exhibit 3); 5) the higher LGSB issuance (of RMB4.5tn) for debt
swap (RMB800bn), land and unsold house inventory purchasing, and conventional
infrastructure-related projects.
Exhibit 29: Local government debt swap programs
MoF mentioned it will deploy a multi-trillion debt swap in replacing the local government “hidden debt”

RMB tn
6 Local bond swap Special refin bond
Special refin bond forecast Refinancing via LGSB
Refinancing via LGSB forecast
4

0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024F 2025F 2026F 2027F 2028F
Source: MoF, Wind, BofA Global Research estimates
BofA GLOBAL RESEARCH

In terms of monetary policy, the potential tariff threats may put the CNY at risk (our FX
strategist expects USDCNY to depreciate to 7.6 by in 1H25), and we still expect a more
accommodative monetary policy along with fiscal easing in 2025. We expect further RRR
cuts to facilitate the faster bond issuance in 2025, and a lower OMO rate (with
accumulative of 30bp cuts) to guide financial cost in the economy lower. PSL, a major
PBoC tool, may also be reactivated to support property-related projects.
On property policy, the implementation of supply-side policies remains the key. We
expect a step-up in utilization of PBoC relending, LGSB, and other financing channels to
destock and support constructions. We also see further reductions in mortgage rates and
easing in tax policies to support home transactions and prices. That said, nationwide
home prices and investment will only stabilize in 2026, instead of in 2025, in our view.
Who let the bears out? Assessing impact of a 60% tariff
While we expect the US tariff increase to be imposed in incremental tranches in our
baseline, we cannot rule out a blanket tariff hike as suggested on the campaign trail.
Theoretically, the US president could impose blanket tariffs of 60% on all Chinese
exports for a sustained period of time and 10-20% tariffs on products from rest of the
world as soon as 1Q25 by releasing executive orders (Exhibit 30).

Global Economics | 24 November 2024 27

In this scenario, we expect China’s exports to the US to slump in 2Q25, leading to a
c.45% contraction in 2025-26 (Exhibit 31). The trade shock will likely be significant in
size for the following reasons: i) US importers will likely choose to switch sources away
from China for faster diversion compared to more hesitant waiting in 2018 – 19; ii)
global trade will likely weaken as a result of US tariff hikes on a wide range of trading
partners; iii) the end of the tech up-cycle and a strong US dollar could exert even more
downward pressure on Chinese exports.

In this bear case, we expect China’s GDP growth to slip to 4.1% yoy in 1Q25, and below
4% yoy in 2Q-4Q25, dragging the full-year growth to 3.9%. Chinese policy makers will
seek to mitigate this unprecedented shock with more aggressive fiscal expansion and
monetary easing, including a 60bp cumulative policy rate reduction in 2025. However,
such policy response will unlikely offset the impact of the tariff shock in full.

Exhibit 30: Assumptions on US tariff increases Exhibit 31: China's exports to the US
We expect the US to impose a 40% tariff hike on China and 10-20% on RoW We expect the tariff increase to lead to a notable negative shock to export
in bear case growth
China RoW China's exports to the US
Current tariff 20% roughly 4% Baseline Bear case
Roughly double (~ 8%) on most % QoQ SA % YoY % QoQ SA % 'YoY
Increase to 30% in 2Q25,
RoW in 3QW25-1Q26, while free 1Q 25 0.8 7.5 -1.2 5.4
Base case and by another 10pp to 40%
trade with Canada and Mexico 2Q 25 -3.2 0.1 -11.7 -10.5
in 3Q25-1Q26
will continue 3Q 25 -7.3 -6.1 -11.7 -20.0
Bear case 60% in 1Q25 10-20% in 1Q25 4Q 25 -4.2 -13.3 -10.0 -30.7
Source: BofA Global Research 2025 -3.1 -14.2
Note: When assessing impact on trade and growth, we also make additional assumptions: 1Q 26 -5.0 -18.3 -10.0 -36.9
1. We a 3% qoq frontloading effect in 4Q24 and 1Q25 in baseline scenario, and 3% and 1.5% qoq 2Q 26 -4.8 -19.7 -9.8 -35.5
frontloading effect, respectively, in 4Q24 and 1Q25, in bear case scenario. This would be followed 3Q 26 -4.8 -17.5 -9.8 -34.1
by payback in 2Q25-3Q25. 4Q 26 -4.8 -18.0 -9.8 -34.0
2. Based on various economist estimates, we choose tariff elasticity to be 1, i.e., 1% increase in 2026 -18.4 -35.3
tariff rate leads to 1% decline in exports in each following year, and the effect would compound in
Source: BofA Global Research
the following two years at least.
BofA GLOBAL RESEARCH
BofA GLOBAL RESEARCH

Tariffs are not the only thing that matters

Beyond the tariff scenario mentioned above, we see both upside and downside risks to
our forecasts for next year. On the one hand, upside risks include stronger-than-
expected fiscal measures, especially those directly subsidizing consumption: the
expansion of coverage for consumer goods upgrade programs, potential services
spending vouchers, or monthly stipends for multi-child families. These could provide a
more meaningful lift to domestic demand than currently expected. In addition, a more
resilient external demand, particularly for the global south countries, which are
increasingly important for Chinese exports, could also help sustain Chinese growth
momentum.

On the other hand, external shock does not have to stop at tariffs. If the US impose
closer scrutiny on Chinese products diverted from a third country or further tighten
restrictions on its allies’ technology exports to China, the disruptions on China’s trade,
manufacturing activities and domestic demand would be deeper.

Another source of downside risk could stem from insufficient countercyclical policy
adjustment, with or without the worst-case trade tariffs. Should policy makers err more
on the fiscally conservative side next year or if quantitative monetary tools such as PSL
are under-deployed, that would pose meaningful downside risks to our current forecasts.

28 Global Economics | 24 November 2024

Japan
Izumi Devalier Takayasu Kudo
BofAS Japan BofAS Japan

Domestic resilience vs. external risks

In the Year Ahead report a year ago, we expressed optimism that Japan’s real GDP would
at last stabilize, and eventually pick up gradually after declining throughout 2023. The
main argument for an improvement was a better outlook for consumer fundamentals.
After rising steadily in 2022, real private consumption began to deteriorate in early 2023
(Exhibit 32). While this was partly due to the fading of post-pandemic re-opening
tailwinds, the biggest culprit was a sharp decline in real disposable incomes caused by
the surge in imported inflation.
The good news is that, in line with our expectations, the headwinds facing consumers is
gradually easing. Though still elevated, goods inflation has clearly peaked out and is
slowing steadily (Exhibit 36). On the income side, per worker wage growth has continued
to pick up, reflecting another year of strong wage hikes at the FY24 Shunto spring wage
negotiations (Exhibit 34). Coupled with an easing of supply-side constraints in the auto
sector, which depressed new car sales and durables consumption in 4Q CY23 - 1Q CY24,
real consumer spending is finally showing signs of stabilization.
That said, retroactive downward revisions to the GDP statistics, particularly public
investment, and the aforementioned supply-side problems in the auto sector resulted in
growth profile that was much weaker than we had expected. The unfavorable base
effects pull our forecast for average CY24 real GDP growth to -0.2%YoY, compared to
the 1% we excepted last year (Exhibit 33).

Gradual expansion to continue, despite external headwinds

Looking ahead, we expect Japan’s economy to continue expanding gradually, and
forecast real GDP to average +1.1%YoY in CY25 and +0.6% in CY26 (on a 4Q/4Q basis,
our forecasts are +0.8% and +0.6%, respectively) (Exhibit 33).

Exhibit 32: Real GDP by expenditure component (CY19 avg = 100 Exhibit 33: Japan forecast summary CY2024-2026
SA) We expect Japan's economy to continue expanding gradually
After falling through 2023, real GDP showed signs of bottoming in 1H CY24
CY24 CY25 CY26
120 120 Real GDP %YoY, avg. -0.2 1.1 0.6
Real GDP (Ref) Real GDP 4Q/4Q %YoY 0.6 0.8 0.6
115 Private consumption 115 Private consumption %YoY, avg. -0.1 1.2 0.5
Business investment (incl. inventories) Business investment %YoY, avg. 1.2 1.5 1.4
110 110 Net exports, contrib. ppt, avg -0.2 0.2 0.1
Public demand Unemployment rate, % SA avg. 2.5 2.4 2.3
105 Exports 105 CPI ex fresh food %YoY, avg. 2.5 2.1 1.9
CPI ex FF, energy %YoY, avg. 2.3 2.2 2.0
100 100 Nominal GDP %YoY, avg. 2.7 3.6 2.8
BoJ Policy Rate, % eop. 0.25 0.75 1.00
95 95 Source: BofA Global Research
BofA GLOBAL RESEARCH
90 90

85 85
18 19 20 21 22 23 24
Source: BofA Global Research, Cabinet Office
BofA GLOBAL RESEARCH

Admittedly, the uncertainty around our forecasts is higher than usual this time around, due to the
lack of clarify the timing and magnitude of US policy shifts under the new US administration.
Our US economics team has identified four areas of focus—trade, immigration, fiscal and
deregulation. For the rest of the world, the threat of tariffs is the greatest concern, given the
direct drag on exports and potential hit to global capex due to elevated policy uncertainty. We
thus maintain our cautious outlook on exports and manufacturing activity.

Global Economics | 24 November 2024 29

Domestic demand to be underpinned by structural capex needs, wage hikes
In contrast, we expect domestic demand to remain resilient. One concern is that
elevated trade uncertainties dampen domestic capex. However, we would expect the
impact to be limited. In recent years, the increase in domestic capex by Japanese
corporates have been driven by investment designed to address labor shortages, digital-
related investment, and strengthening supply chains. We do not think these priorities will
be affected as a result of the US election outcome.

Meanwhile, consumption is likely to continue expanding gradually, backed by a modest rise

in real incomes. On wages, we tentatively forecast the FY25 Shunto spring wage
negotiations to deliver an average base pay revision rate of 2.5% - 3.0%, marking the third
consecutive year of robust, 2%+ base pay hikes (See Wages update: Progress toward
sustainable wage hikes in the FY25 Shunto, 7 November 2024). Coupled with strong
growth in part-timers’ wages, in part reflecting minimum wage hikes (see report), we
expect employee compensation to rise steadily. That said, sustained inflation will prevent
real wage growth from moving decisively higher, keeping the spending recovery gradual.

Exhibit 34: Shunto revision rate and macro level base payment Exhibit 35: Monthly cash payment per worker* (3mma %YoY)
growth (FY basis yoy%) Wage growth has been accelerating
The FY24 Shunto delivered the strongest rise in base pay since 1991. We
expect strong 2%+ base pay growth to continue in FY25 6 6
General workers - Total pay
8% General workers - Base pay
Base up portion BofA
FY25
4 Part-timers - Total pay 4
Seniority portion
6% Headline revision rate f'cast
MHLW: base payment 2 2
4%

2% 0 0

0%
-2 -2
-2%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024

-4 -4
Source: BofA Global Research, MHLW, Rengo 16 17 18 19 20 21 22 23 24
*Rengo base revision rate, data until 2014 are BofA estimates based on headline revision rate from
Rengo and base-up portion from Central Labor Relations Commission. Figures for FY24 are as of Source: MHLW *Based on the reference series of continuously-surveyed firms
the third of response. BofA GLOBAL RESEARCH
BofA GLOBAL RESEARCH

Fiscal populism comes to Japan

Another factor that we think will limit the downside to domestic growth is the likelihood
of increased fiscal easing. This was already true before the US election, as the ruling
LDP + Komeito coalition’s loss in the 27 October Lower House elections means they will
be dependent on third parties, such as the Democratic Party for the People (DPFP) to
pass legislation (see Ruling coalition loses Lower House majority – first take & what’s
next?, 28 October 2024).

It is unclear to what extent the DPFP’s core policy proposals—including a substantial

expansion in income tax deductions and effective cuts to gasoline taxes—will be
reflected in the FY25 tax reforms and FY25 initial budget (see Clarity emerging on new
fiscal stimulus, 14 November 2024). That said, the risks around fiscal easing are tilted to
the upside, given the DPFP’s insistence on tax cuts. The fact that Upper House elections
are coming up in July 2025 also raises the incentive for the government to pursue
populist, fiscal easing measures.

30 Global Economics | 24 November 2024

Weaker JPY outlook = higher inflation & BoJ terminal rate
Against this backdrop, we think the rise in underlying inflation will be sustained. After
peaking in mid-2023, ex-energy core inflation has been slowing gradually on a YoY basis,
driven by a moderation in import-sensitive goods, such as food (Exhibit 36). In contrast,
services inflation has stayed relatively firm. Though the upward pressure on prices from
higher import prices has been fading, firms are facing rising cost pressures due to the
steady increase in wages and logistics costs. We also expect little relief to inflation from
FX, reflecting our Japan FX strategy team’s updated expectation that USDJPY will
average around 154 throughout 2025.

We thus maintain our above-consensus Japan inflation forecasts, and expect Japan-style
core inflation (CPI ex fresh food) to average +2.5%YoY in CY24 and ＋2.1% in CY25 before
slowing to +1.9% in CY26 (Exhibit 33). Stripping out volatile energy prices, which will
continue to be distorted by government subsidies, we now expect the BoJ-style core (CPI
ex fresh food & energy) to average +2.3%YoY in CY24, +2.2% in CY25, and +2.0% in CY26.

The potential for sustained USD strength (yen weakness), implies that the BoJ will have
more work to do to ensure inflation expectations stabilize at the 2% price stability
target. We expect the central bank to deliver its next hike, to 0.5% at the January ’25
MPM (with risk of an earlier move in December ’24), followed by a hike to 0.75% after
the Upper House elections, at the July ’25 MPM. Reflecting the prospects of prolonged
yen weakness and upward pressure on underlying inflation, we now pencil in an
additional rate hike in January ’26. That would bring the terminal rate to 1%, the low end
of the BoJ’s estimate of neutral (+1 to 2.5%; Exhibit 37).

Risks
Admittedly, uncertainty around the outlook is high. In the bullish scenario, the negative
hit to growth from increased US tariffs is limited, while imported inflation remains
restrained, thus boosting household sentiment and discretionary spending. In the bear
scenario, Japan’s growth continues to weaken amidst stiffer external headwinds,
resulting in a sell-off in the yen, a resurgence in imported inflation, and squeeze on
household incomes and spending.

Exhibit 36: Factors driving changes in Japan-style core inflation (CPI Exhibit 37: Estimates of the natural rate of interest for Japan
ex fresh food) The BoJ estimates Japan's R* to range from roughly -1 to 0.5%, implying
Actual and BofA forecasts from October 2024 onwards (YoY%) nominal neutral of 1 to 2.5%

4 Holston-Laubach-Williams (2023) model

4% Nakajima et al. (2023) model
3 Imakubo-Ojima-Nakajima (2015) model
Okazaki-Sudo (2018) model
2% Del Negro et al. (2017) model
2
Goy-Iwasaki (2023) model
0% 1

-2% 0
22 23 24 25 26
US-style core CPI*** Non-perishable food -1
Underlying energy price Policy support
-2
Source: BofA Global Research, MIAC
92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
Note: BofA forecasts based on our FX and commodity team's forecasts; Underlying energy price
removes distortions from government subsidies and other idiosyncratic factors affecting the
Source: Bank of Japan
energy CPI *Japan-style core = CPI ex fresh food, **BoJ-style core = CPI ex fresh food & energy,
BofA GLOBAL RESEARCH
***US-style core = CPI ex food & energy
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 31

UK
Sonali Punhani
MLI (UK)

Higher terminal rate expectations

• Fiscal easing means higher 2025/26 growth (1.5%/ 1.4%) and inflation (2.6%/
2.1%), though downside risks from potential tariffs and uncertainty are rising.

• Inflation persistence risks remain. Headline inflation is expected to just about reach
target in mid-2026.

• Our BoE call changes: we continue to expect gradual, quarterly cuts but the BoE to
now stop at a higher terminal rate of 3.50% in early 2026 (vs. 3.25% before).

We argued in our Mid-Year outlook that the BoE is likely to be cautious in its cutting
cycle, due to sticky domestic inflation. Since then, growth has been stronger than
expected in H1 while in H2 2024, the economy looks to be slowing, with the slowdown
more pronounced than we expected. Inflation progress has been a faster than we
expected, though we argue that volatile factors and energy prices were behind some of
the decline and domestic inflation looks elevated. The BoE has been cautious, delivering
two quarterly cuts so far as we expected and sticking with its cautious guidance.

Going forward, our view that the UK has inflation persistence risks, and the BoE would
cut at a cautious quarterly pace, remains unchanged. Moreover, the fiscal easing
announced in the October 30th Budget would mean higher growth and inflation in
coming years, which does not help the case for faster cuts. In fact, we now think the BoE
will stop at a higher terminal rate of 3.5% in early 2026 (vs. our previous view of 3.25%
in mid-2026) on the back of the 1% of GDP per year worth of fiscal easing announced.
So, we expect four more quarterly cuts in 2025 and one cut in early 2026.

But risks around our base case are high, including uncertainty on the passthrough of
fiscal measures on the economy. The other big risk is the potential imposition of tariffs
from the US and global trade uncertainty, which could weigh on UK growth. Tariffs may
seem inflationary in the first instance and keep the BoE cautious, but eventually we think
risks are that lower growth/ higher uncertainty and potentially trade diversion away from
the US could end up being disinflationary and open the door for faster cuts.

Fiscal boost to growth

We expect growth at 0.9% in 2024 (higher than our Mid-Year forecast of 0.7% and
below 1% expected a few weeks ago). The upside surprise to growth came in the first
half of the year. Growth slowed down in H2 2024, and the slowdown was somewhat
more pronounced than we expected (0.1% in Q3, but we highlighted in our recent report
that domestic demand details looks stronger than the headline number indicates, with
volatile components driving the decline). We expect trend like growth in Q4 (0.3%)-
growth is likely being supported by improving real incomes and fading impact of hikes.
There has been a decent recovery in consumer spending in Q3, but the uptick in savings
has likely moderated the boost from real incomes to consumption.

The October 30th Budget entailed higher borrowing, spending and tax rises than we
expected. 1% of GDP per year worth of fiscal easing was announced, with 1% or so of
tax rises and 2.2% of spending increases on public services and investment (Exhibit 38).

On the back of the fiscal easing, we upgraded our growth forecast in UK Watch: Budget
Review by 40bps to 1.5% in 2025 and by 20bps to 1.4% in 2026 (higher than our Mid-
Year forecast of 1.0%/1.2% in 2025/26). The near-term growth boost from frontloaded
higher public spending and investment is likely to outweigh the negative impact of tax
rises (the largest of which is the rise in employer national insurance- NICs). The increase
in GDP forecast reflects an upgrade to government consumption and investment, offset

32 Global Economics | 24 November 2024

to some extent to a small downgrade to private consumption due to tax rises and higher
inflation. However, consumer spending is still expected to grow in coming years due to
real wage growth/ waning impact of rate hikes and there are some upside risks to
consumer spending if the elevated savings rate falls.

Unemployment has been volatile and rose to 4.3%. We must be cautious in interpreting
the labour market data given data quality issues. We think broader indicators are
consistent with the labour market easing slowly from tight levels and slowing but
positive employment growth. Going forward, we expect the labour market to continue to
ease, and recent outturns and upgrade to demand means we now expect unemployment
rate to increase to 4.4% by end 2025 (less than 4.6% before). Risks are balanced in both
directions- the rise in employer NICs/ tariffs risks could dampen hiring while stronger
boost from fiscal easing could lead to a stronger labour market.

Exhibit 38: OBR estimate of impact of package on fiscal measures (£bn) Exhibit 39: Share of inflation basket with inflation above 5%- UK and
1% of GDP worth of fiscal easing per year has been announced EZ
Share of UK basket with inflation above 5% is elevated at 36%
Current spending measures Capital spending measures
90 Receipts measures Indirect effects 90
Change in borrowing Change in current budget Share of UK inflation basket with infl>5%
80
70 Share of UK inflation basket with infl>5%- LT avg
60
50 Share of EZ inflation basket with infl>5%
40 60
30 Share of EZ inflation basket with infl>5%- LT avg
20
10
0
-10 30
-20
-30
-40
-50
2024-25 2025-26 2026-27 2027-28 2028-29 2029-30 0
1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
Source: OBR, BofA
BofA GLOBAL RESEARCH Source: ONS, BofA
BofA GLOBAL RESEARCH

Uncertainty and risks going into 2025 are high

Risks going into 2025 are high. First is the uncertainty on the passthrough of fiscal
measures on the economy. We can’t rule out a potentially negative impact from the rise
in employer national insurance on hiring, business investment or sentiment. There are
also risks of further tax rises, given the move higher in rates post the budget has
reduced the fiscal headroom which raises risks of higher taxes down the line.

The risk of imposition of tariffs from the US present another big source of risk for UK
growth. It is not clear if or when the US imposes tariffs on the UK. We assume a mild
increase in US tariffs to the UK and somewhat heightened trade uncertainty in our
forecasts, which lowers to a small degree our quarterly growth profile from H2 2025 but
keeps the annual numbers unchanged (at 0.9%, 1.5%, 1.4% in 2024/2025/ 2026).

If we were to see more meaningful tariffs on the UK and globally, greater uncertainty
and global slowdown, it would imply cuts to our growth forecasts. If tariffs are imposed,
the direct impact on UK growth could be contained, given majority of UK exports to the
US are services, with goods exports accounting for 32% of UK’s trade to the US. UK
goods exports to the US constitute 7% of UK’s exports and 2.2% of UK’s GDP. The BoE
calculates elasticity of 0.1-0.7 for UK exports to changes in price. Assuming an average
elasticity of 0.4, a 10% rise in tariffs can put 10bps of UK growth at risk from a direct
impact (assuming no currency offset). But we can’t rule out a bigger impact arising from
higher trade uncertainty and softer global growth (potentially 20-40bps overall). In a
speech, Kristin Forbes calculated that the impact of one standard deviation increase in
uncertainty was estimated to be 40-50bps drag to growth after 4 quarters.

Global Economics | 24 November 2024 33

We still see risks of inflation persistence
Inflation progress has been a bit faster than expected. However volatile factors (like
airfares/ accommodation) and energy prices were behind some of the decline, which
somewhat reversed in the latest print. Domestic inflation looks elevated (core services
inflation at 5.1% and 36% of CPI basket has inflation above 5%- Exhibit 39). Private
wage growth slowed to 4.8% in Q3, reflecting slowly easing labour market and falling
inflation expectations. But pay growth is elevated and progress looks to be somewhat
stalling.

Base effects would likely mean a small pickup in pay growth in coming months. We
expect services inflation to remain elevated at ~5% in coming months. Headline inflation
is likely to rise to 2.4% in Q4 2024 and average 2.5% in 2024.

The Budget would imply a boost to inflation in coming years- we expect inflation to rise
to 2.6% in 2025 and then fall to 2.1% in 2026 (with energy base effects causing
headline inflation to reach 2.9% in Q3 2025). Headline inflation is expected to just about
reach target in mid-2026. Core inflation is expected at 3.7%/3.0%/2.2% in 24/25/26.

The factors from the Budget that add to inflation include stronger demand due to fiscal
easing, passthrough of higher employer NICs to prices, 6.7% rise in minimum wage in
April 2025 and impact of various duties/policies (notable one being the introduction of
VAT for private school fees in January 2025).

We expect domestic inflation to slow somewhat gradually in 2025, mainly from Q2

onwards driven by services (services inflation expected at 3.8% in Q4 2025), reflecting
easing labour market and inflation expectations (which have normalized to pre-Covid
levels). The key for the inflation outlook would be pay awards for 2025. Bank Agents
expect pay awards in 2025 to be in the 2-4% range, with upside risks, while the Decision
Maker Panel participants expect 2025 wage growth at 4.1%, still at elevated levels. The
rise in minimum wage in April 2025 is likely to boost wage growth somewhat (which
previously raised wage growth by 30bps in April 2024) while the passthrough of higher
NICs to wages pose some downside risks to wage growth.

Risks to inflation remain on the upside, given the fiscal boost to growth or potential
structural changes (higher NAIRU, greater mismatch, weak labour supply due to
increased long term illness, potentially Brexit) keeping domestic inflation elevated.

The impact of potential tariffs on inflation is less clear. While a tariff retaliation by the
UK/ currency adjustment or trade restrictions can raise UK inflation somewhat in the
first instance, risks are that lower growth/ higher uncertainty and potentially trade
diversion away from the US could end up eventually being disinflationary for the UK.

Higher terminal rate expectations

The BoE has been cautious, delivering two quarterly cuts so far as we expected and
sticking with its cautious and gradual guidance (i.e., “gradual approach to removing
policy restraint remains appropriate”). In November it also made hawkish upgrades to its
forecasts to reflect the effect of Budget measures.

The inflation persistence risks, fiscal easing, the BoE's cautious guidance and hawkish
forecasts- all support our view for a cautious BoE. We have highlighted that the Budget
shifted the risk distribution in the markets from this narrative that the BoE would need
to cut faster like other central banks to that of a BoE going slow. In fact, we now think
the BoE will stop at a higher terminal rate of 3.5% in early 2026 (vs. our previous view
of 3.25% in mid-2026) on the back of the fiscal easing announced. So, we expect four
more quarterly cuts in 2025 (with the next cut in February) and one cut in early 2026.

If tariffs are imposed on the UK, they may seem inflationary in the first instance and
keep the BoE cautious due to worries about the impact of tariffs on inflation
expectations and second round effects. But eventually we think risks are that tariffs end
up being disinflationary because of lower growth and open the door for faster cuts.

34 Global Economics | 24 November 2024

Nordics
Alessandro Infelise Zhou Ruben Segura-Cayuela
BofASE (France) BofA Europe (Madrid)

Asymmetric easing, asymmetric recovery

Sweden: delayed recovery, but easing should help
Sweden’s awaited economic rebound is still lagging, despite some timid signs of
turnaround in household sentiment and consumption. The domestic demand recovery
should become clearer in the coming months and, with the Riksbank on track for a fast
easing cycle in very rate-sensitive economy, we see growth accelerating in 2025. We
forecast GDP growth at 1.5% in 2025 and 1.9% in 2026 (well above the Euro area in
both years). The 2025 government budget should help, too – the plans are on the
expansionary side, with several measures directed to household purchasing power. Trade
frictions at a global level remain a major downside risk to Sweden’s open economy.

On the inflation side, we maintain our long-term view that inflationary pressures are
limited and that, next year, both headline and core inflation will undershoot the 2%
target (Exhibit 42). Corporates are flagging incoming discounts due to weak demand,
dampening the risk of price pressures (Exhibit 41). Wage growth remains relatively low
and one- and two- year-ahead inflation expectations have dipped below 2%. Next year’s
wage negotiations are unlikely to reach inflationary outcomes.

Exhibit 40: Sweden, GDP outturn and Riksbank forecasts Exhibit 41: Sweden, selling prices in the current and next quarter
Economy remains weaker than Riksbank expectations Riksbank business survey shows businesses expect discounts in the near
term due to weak demand and high competition
110 Riksbank Sep forecast
130
Riksbank Jun forecast
105 120
actual
110
100
100
Current quarter
95 90
Next quarter
80
90
70
Mar-21
Dec-19

Oct-20

Jan-22

Apr-23
Sep-23

Dec-24

Oct-25
May-20

Aug-21

Jun-22

Jul-24

May-25
Nov-22

Feb-24

Feb-21 Sep-21 Apr-22 Nov-22 Jun-23 Jan-24 Aug-24

Source: Riksbank. Note. Index figures show a standardized value (mean value = 100 and standard
deviation = 10) of the net figures for companies responding to the question regarding whether
Source: Riksbank, BofA Global Research sales prices will be raised or lowered during the current and next quarters.
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Riksbank: back to 2% by March-25, below 2% by end-2025

The Riksbank’s main concern is now the lagging economic recovery (Exhibit 40). On the
inflation side, upside risks are limited – the central bank has started to acknowledge
more explicitly that the main risk is a clear inflation undershoot (which is our base case).
A fast easing cycle is the Riksbank’s best hope to anchor inflation somewhat closer to
2%, but we still doubt it will be enough to avoid inflation undershooting in 2025/26.

We keep our base case of 25bp cuts in December, January and March, back to 2.0%. The
recovery in domestic demand should then be on a stronger footing, allowing the
Riksbank to stay on hold for a few meetings next year. Over time, with inflation still
likely to undershoot the target in a persistent way, we remain convinced that the
Riksbank will take the policy rate below 2% (our base case is still for a cut to 1.75% in
4Q25 and to 1.5% in 1H26). Sizeable increases in US tariffs are certainly a key risk for
the Riksbank too. We think the dampening effect on both foreign demand (i.e. US and
Euro area) and domestic demand (through uncertainty’s effect on capex) would
eventually prevail on the upside risk to prices incl. via weaker SEK – the negative shock
to growth could bring the Riksbank to cut rates below 2% earlier and deeper than we
currently assume.

Global Economics | 24 November 2024 35

 Exhibit 42: Sweden, main macroeconomic forecasts Exhibit 43: Norway, main macroeconomic forecasts
We still expect a clear inflation undershoot next year, in headline and core Next year we expect inflation to be lower than the central bank’s forecast
GDP CPIF CPIF ex-energy GDP, mainland CPI CPI-ATE
BofA Riksbank BofA Riksbank BofA Riksbank BofA Norges BofA Norges BofA Norges
2024 0.5 0.8 1.8 1.7 2.6 2.6 2024 0.9 0.6 3.2 3.2 3.7 3.7
2025 1.5 1.9 1.5 1.6 1.8 2.0 2025 1.2 1.1 2.5 3.2 2.5 3.0
2026 1.9 2.5 1.8 1.9 1.7 2.0 2026 1.5 1.3 2.0 2.8 2.1 2.8
Source: BofA Global Research, Riksbank Source: BofA Global Research, Norges Bank
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Norway: resilient, with clear improvements in inflation

Norway’s economy remains resilient. 3Q24 mainland GDP surprised to the upside, with
large revisions to the previous quarters, bringing this year’s growth projection to 0.9%.
Norway’s activity data is noisy and household consumption remains quite sluggish, but
there are some encouraging signs on services spending. With better consumer balances
and a labour market that remains broadly solid, we continue to expect mainland growth
to stay on a positive path, despite rates still at restrictive levels. Non-oil business
investment dynamics should improve with the start of easing cycle next year. We see
Norway’s mainland real growth at 1.2%/1.5% in 2025/26. The 2025 government budget
implies slightly positive fiscal stimulus – on the margin this creates some upside risks to
growth, but we don’t see it as a game-changer.

Inflation is going to be stickier in Norway than in Sweden (and elsewhere in Europe), due
to strong wage growth and imbalances in the rental markets. But core inflation has
slowed meaningfully over this year, backing our core view that Norges Bank is
overestimating Norway’s inflationary pressures. Our 2025/26 inflation forecasts remain
well below those of Norges Bank (Exhibit 43).

Norges Bank: economic dataflow says “cut”, but NOK is in the way
Norges Bank decided to maintain a strong hawkish stance this year, keeping rates at
4.5% up to November and signalling the start of the easing cycle only in 1Q25. We still
believe that the domestic dataflow (sluggish household consumption, with inflation
surprising Norges Bank to the downside again and again) would justify the start of a
gradual easing cycle in 4Q this year. But we must acknowledge that Norges Bank’s main
concern is the persistent weakness in the currency, and, in that respect, our expectations
have been disappointed over 2024.

On the back of US trade policy and solid US data, our FX strategists turned bearish on
NOK near term, expecting weakness to persist and possibly extend in the coming
months incl. vs EUR amid a stronger USD. In such a scenario, Norges Bank is likely to
remain on hold until 1Q25, therefore we delay our base case for the first cut from
December 2024 to March 2025. Turnarounds in NOK levels (e.g. due to geopolitics) could
still let Norges Bank cut rates earlier (in December 2024 or January 2025) but, as things
stand, the base case scenario has to be for a later start. The rest of the path and the
terminal rate remain unchanged – we still expect a gradual cutting cycle, with one 25bp
cut per quarter, reaching a terminal rate of 2.75% (one quarter later in our new base
case, i.e. in 3Q26 vs 2Q26 before).

36 Global Economics | 24 November 2024

Canada
Carlos Capistran
BofAS

Recovery in sight
• We expect GDP growth to accelerate to 2.3% in 2025 from 1.2% in 2024 on the
back of lower interest rates, although reduced immigration targets are a headwind.

• Inflation is already around the 2.0% target. We expect the BoC to cut the policy rate
to 3.25% to keep inflation at the target. We see downside risks to our terminal rate.

• Canada would benefit if US growth accelerated, but tariffs would hurt Canadian
activity. Canada will have federal elections in 2025, so federal policies may change.

The economy decelerated and inflation returned to the target in 2024

Last year we expected economic activity to decelerate to 0.9% yoy in 2024. We were
right in calling for a deceleration, although economic activity is tracking slightly better
than what we expected (1.2%). Our call for inflation to return to the 2.0% target in 2024
was correct, as we expect inflation to be 2.1% yoy by year-end. Finally, given that
inflation fell consistently at the beginning of the year, the Bank of Canada (BoC) decided
to begin its easing cycle in June 2024, with the overnight policy rate target currently at
3.75%. While we expected the policy rate at 3.75% by end-2024, it is likely that the rate
will end up lower, as there is one more meeting left in the year (December) and the BoC
will likely choose to give an extra boost to the economy.

The federal election is approaching

Canada will hold a federal election no later than October 20, 2025, in which 343 seats in
the House of Commons will be elected (using a new electoral map based on the 2021
census, compared to the previous 338-seat electoral map). According to CBC News’s poll
tracker, as of November 18, 2024, the Conservative Party has a significant lead of 18pp
over the incumbent Liberal Party. The Conservatives’ lead in the opinion polls would
virtually guarantee them a majority in the House, thus a change in Prime Minister is
likely. A conservative government would likely have a different policy mix than the
current one, and a fiscal consolidation could happen. The new government will oversee
Canada’s relation with US president-elect Donald Trump. In our baseline the US will not
impose tariffs to Canada, but the prospect of tariffs could be used as leverage.

Exhibit 44: GDP growth forecasts Exhibit 45: Macroeconomic outlook

We expect the Canadian economy to accelerate significantly from 4Q24 % year-on-year growth rate, unless otherwise indicated
10 GDP, %qoq saar 2024 2025 2026
Observed Real GDP growth 1.2 2.3 2.2
8 Forecast CPI inflation (eop) 2.1 2.0 2.0
Bank of Canada overnight rate (eop) 3.50 3.25 3.25
6 Average (2000-2023) = 2.1 CAD (eop) 1.40 1.37 1.35
3.9 3.8 3.4 Brent crude oil ($bbl average) 80.0 65.0 63.0
4 2.5 2.6 2.5 2.3 2.2 US real GDP growth 2.7 2.4 2.1
1.8 1.8 2.1 1.2 US Fed Funds rate (upper limit, eop) 4.50 4.00 4.00
2
0.7 Source: BofA Global Research
0.1
0 BofA GLOBAL RESEARCH

-0.3
-2 -0.9
-4
Q1-22
Q2-22
Q3-22
Q4-22
Q1-23
Q2-23
Q3-23
Q4-23
Q1-24
Q2-24
Q3-24
Q4-24
Q1-25
Q2-25
Q3-25
Q4-25

Source: BofA Global Research

BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 37

We expect higher growth in 2025
We expect the Canadian economy to accelerate in 2025 driven by lower interest rates.
We expect Canadian growth to pick up significantly staring in 4Q24, as the 50bp interest
rate cut in October, coupled with the previous 75bp in cuts, should provide a big relief to
interest-sensitive sectors, such as housing (through lower mortgage rates) (Exhibit 44).
We also expect a resilient US economy to help Canadian growth, especially with a
weaker CAD. All in all, we see GDP growth in 2025 at 2.3% (a revision from our previous
forecast at 2.4%), up from 1.2% this year (a revision from our previous forecast at 1.3%)
(Exhibit 45). Risks seem to be balanced, as cuts by the BoC could lead to a faster-than-
expected recovery, but a new curb on immigration could press activity to the downside.

New immigration targets are a headwind to the economy

Immigration to Canada surged in 2022 and 2023. The Government announced in October
plans to curb immigration: annual targets for new permanent residents will go from 485k
in 2024 to 395k, 380k and 365k in 2025, 2026 and 2027. Regarding non-permanent
residents, the Government expects their net flows into Canada to go from +300k in
2024 to a decline of -446k in both 2025 and 2026, and then register a small increase of
+17k in 2027 (Exhibit 46). These restrictions will likely impact GDP growth, due to the
reduction in labor force, although will likely ease downward pressure on GDP per capita.

Inflation is now under control

Headline inflation reached the 2.0% target in October. We expect inflation to be around
the target in the following months as the economy recovers but shelter inflation moves
down with interest rates. We expect headline inflation to be at 2.0% yoy by end-2025,
down from 2.1% yoy by end-2024. Regarding core inflation (average of trimmed and
median), we believe it will likely move to 2.0% from the current 2.6% (October) as
services inflation falls.

The BoC will likely end its easing cycle in 2025

We expect the BoC to keep cutting the policy rate due to slowly accelerating economic
growth and below-the-target inflation. Our base case is rate cuts of 25bp each in the
December and January meetings, thus reaching a terminal rate of 3.25% (an increase from
our previous expectation at 3.0%). The main risk is that the BoC decides to cut 50bp in
December, with a small probability of an additional 25bp cut in January should growth
remain weak. We believe that after January, the BoC will wait to see the impact of rate
cuts in the economy and to cut later in the year only if growth disappoints. The
adjustments made by the BoC will be limited by its interest rate spread with the US Fed,
as our US economics team now expects 4% terminal rate in the US next year (Exhibit 47).

Exhibit 46: Net immigration into Canada Exhibit 47: Monetary policy rates: US vs CA
New immigration targets will reduce the inflow of newcomers into Canada We now expect a higher BoC terminal rate on the back of a higher US rate

1400 Immigration to Canada 7

Canada Overnight Rate
1200 Government of Canada target 6 Federal Funds Rate
1000 Permanent + non-permanent residents, thousands BofA Forecast
5
800 %
4
600
400 3
200 2
0 1
-200
0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025F
2027F

2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

Source: BofA Global Research, Stat Canada, Haver Source: BofA Global Research, Bloomberg
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

38 Global Economics | 24 November 2024

Australia & New Zealand
Anna Zhou Ting Him Ho, CFA
Merrill Lynch (Hong Kong) Merrill Lynch (Hong Kong)

Australia: Tepid growth momentum but sticky prices

Growth momentum in Australia has turned out to be slightly weaker than we expected
during our Back-to-School report a few months ago, in part due to a slower recovery of
the consumer. Meanwhile business sentiment and demand continue to be weighed by
high interest rates and elevated cost of labour. The good news is that stronger
government spending on the back of recent fiscal stimulus has provided some offset.

Looking ahead to next year, we continue to expect consumption to pick up on the back
of recovery in real come growth. Private investment should pick up from late 2025,
supported by declines in the cash rate and the large pipeline of infrastructure projects.

Putting it all together, we downgrade our 2024 annual GDP forecast to 1.1% (from 1.3%
previously). We also look for 2025 and 2026 annual real GDP to come in at 2.1% and
2.3%, respectively (Exhibit 48).

Exhibit 48: Key economic forecast for Australia

We look for 2024, 2025, and 2026 annual growth rate to come in at 1.1%, 2.1%, and 2.3%, respectively
2024 2025 2026
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 2024F 2025F 2026F
Gross domestic product 0.2 0.2 0.4 0.5 0.6 0.6 0.5 0.5 0.6 0.6 0.6 0.6
% ch from year earlier 1.3 1.0 1.0 1.3 1.7 2.1 2.2 2.2 2.2 2.2 2.3 2.4 1.1 2.1 2.3
Household consumption 0.6 -0.2 0.2 0.4 0.5 0.6 0.8 0.6 0.6 0.5 0.5 0.5
% ch from year earlier 1.2 0.5 0.9 1.1 0.9 1.7 2.3 2.5 2.6 2.5 2.2 2.1 0.9 1.9 2.4
Labour market
Employment 0.4 0.7 1.0 0.6 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 2.7 1.9 0.8
Unemployment rate (%) 3.9 4.1 4.2 4.2 4.4 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.1 4.5 4.5
Inflation
'Headline'CPI (d) 1.0 1.0 0.2 0.5 0.9 0.6 1.2 0.9 0.5 0.5 0.7 0.7
% ch from year earlier 3.6 3.8 2.8 2.7 2.6 2.3 3.3 3.6 3.2 3.1 2.6 2.4 3.2 3.0 2.8
'Underlying' CPI (d) 1.0 0.9 0.8 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.5 0.5
% ch from year earlier 4.0 4.0 3.5 3.4 3.1 2.9 2.8 2.7 2.6 2.4 2.3 2.2 3.7 2.9 2.4
Interest rates
RBA cash rate (% pa) (e) 4.35 4.35 4.35 4.35 4.35 4.10 3.85 3.60 3.35 3.10 3.10 3.10 4.35 3.60 3.10
Source: BofA Global Research
BofA GLOBAL RESEARCH

Household consumption: Compared with our view during the back-to-school report,
household spending has come in weaker than expected. Specifically, total household
expenditure actually contracted by 0.2% qoq in 2Q 2024. Moreover, monthly data such as
bank card spending published by the ABS also points to just a tepid growth in consumer
spending in 3Q (Exhibit 49), which might in part due to lower necessity spending as
government subsidies for electricity and rent kicked in. Encouragingly, consumer
sentiment has seen some quite meaningful jump in recent months, although the levels
remain well below pre pandemic norms (Exhibit 50).

For 2025, we expect private consumption to gradually increase on the back of higher
real income growth. More specifically, consumer spending in 3Q 2025 will likely exhibit a
larger jump as current cost-of-living subsidies roll out. That said, this will not alter the
overall growth path as such consumption is simply shifting from government
expenditure back into household expenditure.

Global Economics | 24 November 2024 39

 Exhibit 49: Nominal household spending (SA, %mom) Exhibit 50: Consumer confidence in Australia
Consumer spending remained tepid in 3Q 2024 Consumers remains relatively low compared with pre-pandemic periods

1.6% 130 Australia: Westpac-Melbourne Inst Consumer Sentiment

1.4% Index (SA, 100+=Favorable)
120
1.2% 2018-2019 average
1.0% 110
0.8% 100
0.6%
0.4% 90
0.2% 80
0.0%
-0.2%
70
-0.4% 60
Jan-24 Feb-24 Mar-24 Apr-24 May-24 Jun-24 Jul-24 Aug-24 Sep-24 2018 2019 2020 2021 2022 2023 2024
Source: Australian Bureau of Statistics Source: Haver Analytics
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Labour market: We expect employment growth to stay relatively robust in the near
term as the labour market continues to rebalance. As of September, the ratio between
job openings and the number of unemployment has moderated to 0.52, down from the
peak of 0.93 in 3Q 2022, but still well above the 2019 average of 0.33 (Exhibit 51). At
the current rate of decline, it would take about three quarters before this ratio returns to
more balanced levels, which likely points to a more meaningful slowdown in hiring
demand in mid-next year.

Looking into 2025, the tightening in student visa policies likely means that overseas
migration will slow, resulting in slower growth in the labour force. That said, we think
hiring demand will slow more than the growth in labour force, which would push the
unemployment rate up to 4.5% by end of 2025 from current levels of 4.1%. The labour
market is expected to stay stable in 2026 with employment growth averaging 0.8% and
the unemployment rate steady at 4.5%.

Exhibit 51: Ratio of job openings to unemployment

The ratio between job openings and the number of unemployment is still above the 2019 average
1.0
0.8
0.6
0.4
0.2
0.0
2014 2016 2018 2020 2022 2024
Source: Australian Bureau of Statistics
BofA GLOBAL RESEARCH

Inflation: Headline inflation will likely remain choppy in the year ahead as energy
rebates and cost of living subsidies create distortions. As a result, the RBA will pay more
attention to the underlying trimmed-mean inflation. With labour market normalization in
progress, we expect the trimmed-mean CPI inflation to also continue its easing path: it
will likely return to the RBA’s target band of 2-3% in 2Q 2025 (2.9%) before continuing
its moderation and reaching 2.2% at the end of 2026.

40 Global Economics | 24 November 2024

RBA: Given policy lags, we think the RBA will start cutting before underlying inflation
reaches the upper bound of its 2-3% target range and also to stop its easing cycle when
inflation gets closer to the lower bound of the target range. Given our forecasted path
for underlying inflation in Exhibit 48, we maintain our call that the RBA will start its
easing cycle in 2Q 2025 with a 25bp rate reduction. We also expect it to deliver five rate
cuts in total, one per quarter until 2Q 2026 to bring the cash rate target to 3.1%, after
which we expect the RBA to remain on hold for rest of 2026.

Risks: external uncertainties persist in 2025

In our view, stimulus out of China and potential US tariffs on Chinese and global exports
remain the biggest uncertainty around our forecasts. On China, our base case scenario
remains for additional fiscal and monetary stimulus to be rolled out next year, but the
focus is to stabilize instead of stimulate growth. While policy makers have guided
markets that more will be done for the ailing property market, it is unlikely that prices or
investments would stabilize next year. That said, any positive policy surprises, especially
those directly targeting the property market, could bode well for commodity prices and
Australian exports to China.

Meanwhile in the case of an intense trade escalation between the US and its trading
partners, we see two potential impacts. First, under the bear case of tariffs between US
and China (60% on all Chinese exports), Chinese economy could face with a large
external shock, which would in turn have negative spillover effects to the Australian
economy. Second, under broad-based US tariffs, it is likely that goods disinflation will
intensify in Australia as exporters absorb some of the blow by reducing prices and
discounted goods get rerouted to outside of the US.

New Zealand: More easing is needed to revive growth

Weakness in domestic demand became more pronounced in 2024. Household
consumption was lacklustre as they cut down discretionary spending. Business
investment was subdued on high financing costs and bleak outlook. External sectors
were hit by weakened China’s demand, although the impact was partly offset by the
rebound in commodity prices including diary prices. As a result, labour market eased
further. As a result, we forecast an annual contraction of 0.2% in GDP growth and
unemployment rate to climb up further to 5.3%.

Despite the recent rebound in business and consumer confidence, we do not think the
recovery in sentiment can be sustained without a quick normalization in monetary policy.
Against the backdrop of falling inflation, we expect the RBNZ to ease somewhat
aggressively to revive growth next year. We expect 50bp cut in the policy meeting on
27th Nov, and a total of 175bp cut in 2025, bringing policy rate to a terminal level of
2.5%. Risks are still tilted towards downside, including the renewed trade protectionism
from the US that could shock global confidence and trade, and a weaker than expected
growth in China without strong policy support.

In the property sector, housing prices have bottomed out in anticipation of further rates
cut. This is still supply driven, and we do not think housing prices could return to the
peak level in 2021.

Exhibit 52: Summary of forecasts in New Zealand

We expect aggressive monetary easing to bring growth back on track in 2025
1Q25 2Q25 3Q25 4Q25 1Q26 2Q26 3Q26 4Q26
Real GDP growth (% qoq) 0.5 0.6 0.7 0.7 0.7 0.7 0.7 0.7
Real GDP growth (% yoy) 0.1 1.1 2.0 2.5 2.7 2.8 2.8 2.8
Unemployment rate (%) 5.4 5.4 5.3 5.2 5.1 4.9 4.8 4.7
Headline CPI (% yoy, period avg) 2.1 2.2 2.3 2.4 2.2 2.1 2.0 2.0
Official Cash Rate (period end) 3.75 3.25 2.75 2.50 2.50 2.50 2.50 2.50
Source: BofA Global Research estimates
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 41

India
Rahul Bajoria
BofAS India

Growth concerns bubble up

• Visible signs of momentum loss in GDP seen in high frequency indicators, creating
downside growth risks.

• Significant deceleration in inflation is expected in CY2025, keeping rate cuts in play.

• Fiscal deficit remains in check, while low energy prices help cap the current account
financing needs.

Growth Outlook: visible signs of momentum loss

We continue to expect CY2024 GDP growth of 7.1%, moderating to 6.9% in 2025, but
increasingly see downside risks to our baseline projections, as high frequency data
shows a more significant loss of momentum. The biggest culprit of the slowdown
appears to be policy tightening, both monetary and fiscal. Indeed, credit growth has
moderated significantly, and fiscal spending continues to remain tepid. Private
investment and exports have shown some resiliency, but growth in both sectors is
seeing moderation as well.

With agriculture production and incomes set to improve, we expect private consumption
growth to normalise and converge with headline growth in next 4-6 quarters as inflation
starts to come down at the margin. Ongoing geopolitical tensions and high real rates are
likely to remain the headwinds to growth, we see India broadly maintaining its relative
lead in growth rates amongst major economies. Private sector investment continues to
see a gradual revival, as we expect the construction sector to stay buoyant as the
government ramps up capex spending in the coming year. While the services sector is
likely to benefit from resilient urban demand, we expect the downturn in credit growth,
and stagnation in income growth and wealth effects to have a dampening effect on
urban economic growth.
Exhibit 53: Real GDP forecasts – annual basis (CY terms) Exhibit 54: Headline CPI and RBI inflation target
India’s growth showing signs of moderation Headline CPI shot up in Oct24 outside the tolerance band

% yoy GDP Headline CPI (% yoy) Inflation target (%)

12 8
9.4
7.7 7.1
8 6.5 6.9 6.8 7
4.6 6
4
5
0 4
3
-4
2
-8 -5.9
1
2019 2020 2021 2022 2023 2024F 2025F 2026F Oct-12 Oct-14 Oct-16 Oct-18 Oct-20 Oct-22 Oct-24
Source: BofA Global Research, Haver Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Inflation Outlook: A temporary inconvenience

While inflation has again spiked in recent months given elevated vegetable prices, we
expect Q1 and Q2 2025 to come down to 4.5% followed by lower prints of 3.4% and
3.6% in Q3 and Q4. This significant deceleration can still bring the CY 2025 inflation
precisely to the policy target rate of 4.0% over the medium term. Core CPI inflation
(defined as headline excluding food and fuel) remains close to historical lows, and with
signs of the economy slowing down cyclically, underlying demand-side price pressures
also are likely to be contained. We do anticipate some sequential pickup in core CPI but

42 Global Economics | 24 November 2024

there is very little risk of a significant move higher. We expect core CPI to end CY2024
at 3.4% and pick up slightly to 4.3% in CY2025. Potential decline in energy prices due to
higher oil production can be another tailwind for managing inflation, which along with
slower growth can keep core inflation in check.
Monetary Easing delayed, but not denied
The low and stable core inflation along with cyclical loss in growth momentum has
certainly made the MPC take notice and change its stance in the October 2024 meeting.
Beyond the near-term price disruptions, the low and stable underlying inflation
environment in 2025 should give the RBI the confidence to begin its easing cycle and be
more supportive of growth. We remain comfortable with our view of 100bp of cuts,
bringing the repo rate to 5.50% by end-2025, which we identify as being close to the
neutral policy rate in India. Recent guidance from Governor Das separating change in
stance and rate path signals some near term uncertainty in the inflation path, but
eventually, weaker growth should create conditions for the RBI to ease monetary
conditions, as monetary indicators lose momentum rapidly.
Fiscal policy back in action
After the General elections induced lull, the government is looking to speed up public
capex spending after a weak first half. This lack of spending has meant that fiscal deficit
momentum remains weak in India, and the Finance ministry is comfortably placed to
stay on the fiscal glide path to reach or exceed its 4.5% of GDP fiscal deficit target by
FY2025-26. Beyond FY26, we expect the government to start prioritizing public debt
reduction over the next decade from the current ~84.4% in FY24, instead of historical
emphasis on a fiscal deficit figure. On the capex front, FYTD 2024-25 spend has been
37% of the FY25 BE of INR 11.11tn. The weak pace of spending, which is down 15.4%
yoy, has been pinned on elections in April-May, and then a very heavy monsoon rainfall
cycle in Q3 2024. The slow pace of spending is expected to gather some pace in Q4, but
the growth needed in infra spending in H2 FY25 is significant, which is difficult to
achieve, implying that the government is likely to undershoot its target by large margin.
Exhibit 55: Public capex spending plans Exhibit 56: Current account deficit forecast
Public capex spending was low in H1FY25, but will rise in H2FY25 India’s current account deficit is likely to remain stable

H2 FY H1 FY CA balance (USD bn) LHS

12 CA balance (% GDP) RHS
40 1.3 1.5
4.1 20 1.0
8 0.5
4.9 0
0.0
3.4 -20
2.3 -0.5
4 -1.0
1.7 7.0 -40 -1.0
1.3 1.6 1.9 3.9 4.6 -0.9 -0.8 -1.5
1.0 1.0 1.3 1.5 3.6 -60 -1.1 -1.1 -1.2
1.6 1.5 2.6 -2.0
0.9 0.9 1.1 1.2 1.4
0 -80 -2.5
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25* -2.4
-100 -3.0
2019 2020 2021 2022 2023 2024F 2025F 2026F
* indicates budgeted amount for spending; Source: BofA Global Research, Haver Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

External sector: Equipped to handle external risks

From a macro vulnerability standpoint, India’s low and stable current account deficit
provides material stability, and despite a surge in gold prices, the external finances
remain in check. Current account deficit is expected to end CY2024 at a low -0.8% (USD
32bn) to widen modestly in CY2025 to -1.2% (USD 49bn) of GDP. The decline in energy
costs, along with robust increase in services exports will continue to provide support for
external financing requirements being benign. On the capital and financial account, the
recent selloff in equity markets and foreign outflows poses some risks, but we still see
balance of payments in India likely to remain in positive territory for the full year,
supported by some recovery in FDI, and ongoing growth in debt related inflows.
Valuation gains in foreign reserves will also help at the margin.

Global Economics | 24 November 2024 43

Korea
Benson Wu Ting Him Ho, CFA
Merrill Lynch (Hong Kong) Merrill Lynch (Hong Kong)

Embracing the external uncertainties

• We revise down GDP growth to 2.2%/1.8% for 2024-25. The rising US tariff threats
will remain the key source of uncertainty.

• We expect three cuts in 2025 (with terminal rate at 2.5%). The favorable financial
condition will help stabilize domestic demand.

• Risks are relatively balanced. Upside: 1) AI-led semi demand; 2) China stimulus;
Downside: 1) higher US tariffs and Fed rate.

See the complete Korea Year Ahead report.

External demand resilience moderated while domestic demand stabilizes

Undoubtedly, Korea’s economy has been riding the wave of tech cycle upturn this year.
Year-to-date, its export growth has increased 9.1% yoy, and we expect the net export to
contribute almost all its 2024 GDP growth. Sector-wise, semi exports took the lead (of
47.3% yoy ytd) and accounted for the prominent share of the headline export growth,
followed by non-semi tech goods (including PC, hard disks, mobile phones, and flat panel
displays) which rose 13% yoy ytd. That said, with the current tech cycle upturn already
lasting for more than 14 months, signs of moderation emerged, evidenced by peaking
DRAM ASP as well as yoy semi export volume growth. We also expect the softening
global manufacturing cycle to kick in and affect Korea’s non-tech exports.
On the flip side, domestic demand has started to stabilize at a low level. On the
domestic investment front, facility investment growth has finally started to accelerate
from 3Q, catching up with the earlier improvement in external demand. As for domestic
consumption, despite the relatively weak retail sales growth year-to-date, consumer
confidence index also started to improve, while household loan growth has picked up in
recent months. In sum, we see Korea’s economy growing at 2.2% this year, slightly
weaker than our earlier expectations.

Growth in 2025: Raising US tariff threats remain key external uncertainties

The growth perspective for 2025 will also be less promising, unfortunately. We expect
GDP growth to moderate to 1.8% next year with a slight drag from net exports on the
back of rising geopolitical tensions (Exhibit 57). Consumption and investment growth
could pick up on favorable financial conditions, but should fail to fully offset external
headwinds. The new administration of the US is set to impose punitive tariffs on China
as well as the rest of the world. Our US economists expect the new administration to
impose an average of an additional 10% tariff to China as early as 2Q25, and to further
increase by another 10ppts in early 2026. Its tariff on the rest of the world will also
likely double by then (from ~4% to 8%). Among Asian economies, the negative spillover
could be relatively significant for Korea, considering: 1) the high share of US-bound
exports in Korea’s total exports (of almost 20%); 2) the significant share of intermediate
goods demand from China, which are then further processed for shipment to the US or
for China’s domestic demand; and 3) limited gain from substitution effect on China’s
exports to the US (see also: Viewpoint on US-Korea trade). As a small and open
economy, we see that Korea could allow a certain level of currency depreciation to
partially offset the headwind, but rooms are limited, given that the USDKRW has already
reached close to the 1,400 level. In our base-case scenario, Korean export growth could
moderate to 2.7% yoy from 6.5% this year (in BoP terms), with the current account
surplus narrowing from 5.0% of GDP this year to 3.1%/1.7% in 2025/26. Sequentially,
we expect the external headwinds to materialize from 2H25, with both intensified tariff
concerns and the tech cycle’s fading.

44 Global Economics | 24 November 2024

Inflation: limited concerns over price stabilization
Headline CPI inflation has already come off from the higher level in 1H24 and reached a
low 1% handle. We expect CPI inflation to soften to 2.3% yoy this year. Going forward,
inflation is unlikely to post extra concern for the BoK, and we have seen a gradual
rollback of earlier tax rebates for gasoline. The potentially weaker KRW could result in a
higher imported price of energy products, while we believe the relatively weaker global
demand could cap the upside. We expect core inflation to remain stable and headline
inflation to remain at around the 2% level (Exhibit 58).

Exhibit 57: Real GDP forecast by expenditure Exhibit 58: BoK policy rate and CPI inflation
We expect Korea’s GDP to grow 1.8/2.0% in 2025/26 We expect inflation to stay near 2% target in 2025

% yoy Consumption Investment % BofA

Net exports Change in inventory 7 BoK policy rate forecast
6 Real GDP growth
6 Headline CPI
4 5 Core CPI (ex. Food & energy)
2.2 1.8 2.0
4
2
3
0 2
1
-2 BofA
forecast 0
-4 -1
15 16 17 18 19 20 21 22 23 24F 25F 26F 15 16 17 18 19 20 21 22 23 24 25
Source: Haver, BofA Global Research estimates Source: Haver, BofA Global Research estimates
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Policy: expect BoK to deliver three cuts in 2025

Fiscal policy
According to the 2025 Budget, the fiscal spending is set to rise by 3.2% yoy in the next
year. With a better foresight fiscal revenue in place (helped by strong corporate
performance in 2024), the managed fiscal balance is expected to narrow to -2.9% (vs.
3.6% in 2024’s budget). In our view, the current government is still vigilant on debt
expansion, and maintains a relatively conservative fiscal stance. That said, if faced with
stiff external headwinds, relatively easing fiscal conditions can be expected in supporting
corporates, in our view.

Monetary policy
After a long hold on the benchmark rate, the BoK finally decided to pivot in the Oct MPC
meeting as both inflation and growth cooled. With the Fed’s easing continued, we expect
BoK to deliver a cumulative of 75bp cut in 2025, one per quarter from January. That said,
the terminal rate will likely remain high at 2.5% despite the looming external
uncertainties. In our view, the already elevated Seoul housing price will prevent BoK
from easing aggressively, while the underperformance of KRW will also raise additional
concerns about financial stability. The BoK will likely continue its balancing act through
2025.

Risks are relatively balanced on either side

We find the risks to be largely balanced. On the bright side: 1) if the AI-led semi demand
can be sustained, we could see better tech exports throughout 2025; 2) the potential
China fiscal stimulus, if rolled out, could also lift Korean exports to the region. On the
other hand, 1) if China faces higher US tariffs (toward 60%) and/or if the rest of the
world is met with high tariffs (10-20%), we could see a more notable impact on Korean
exports; and 2) if the high US tariff significantly dampens US demand and limits the
Fed’s policy on higher inflation, Korea could also find it challenging to ease further its
monetary condition to spur growth; 3) the surging Seoul housing price/higher household
debt to restrain the BoK’s monetary easing.

Global Economics | 24 November 2024 45

ASEAN
Rahul Bajoria Kai Wei Ang
BofAS India Merrill Lynch (Singapore)

Growth steady but not robust

• Baseline outlook for growth favorable and inflationary pressures well contained.

• Durability of exports recovery contingent on US trade policies, with trade

divergence to ASEAN mitigating but not necessarily offsetting any income shocks.

• Fiscal and monetary policy direction to diverge across the region.

Our forecasts point to ASEAN-6 GDP growth being broadly steady in coming quarters,
rising from 4.9% in 2024 to 5% in 2025-26 and broadly in line with pre-COVID trends.
Domestic demand remains the key growth driver for the region, supported by generally
healthy labour markets, tailwinds from the final stages of tourism recovery (latest
arrivals are still around 10%-pts below 2019 levels for most) and policy measures
increasingly skewed towards stimulating consumption for lower income groups.

Durability of exports recovery contingent on future US trade policies

If universal tariffs are imposed by the incoming US administration, Singapore and
Vietnam are likely to be most impacted, followed by Malaysia and Thailand, based on the
share of these economies’ trade openness and exposure to final demand. If additional
targeted tariffs are imposed, Vietnam, Thailand and Malaysia seem more vulnerable, not
just because of the size of trade surplus with the US, but also the product mix (more
skewed towards electronics). Trade divergence to ASEAN as part of companies’
diversification efforts would help to mitigate, but not necessarily offset income effects
from global trade slowdown. If country of origin rules kicks in, downside risks could also
be larger for ASEAN from a trade perspective.

Exhibit 59: ASEAN-6 GDP growth forecasts (%yoy) Exhibit 60: ASEAN-6 inflation forecasts (%yoy)
Steady growth projected in 2025-26 for now Inflation seen within target ranges/historical averages in 202

8
2023 2024E 2025E 2026E 2015-19 2024E 2025E 2010-19 Avg
5
6
4

3
4
2
2 1 Shaded grey areas refer to central banks'
target range
0
0 ID MY PH SG (Core TH VN
ASEAN-6 ID MY PH SG TH VN ex-GST)
Source: BofA Global Research, Haver Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

46 Global Economics | 24 November 2024

Inflation less of a concern for most vs. past years
Share of food in the CPI basket is relatively high in this region (>20% for most) and the
emergence of La Nina and general decline in oil prices should help keep food and fuel
inflation contained. Our forecasts point to headline inflation staying within central
banks’ target ranges in Indonesia and the Philippines, within National Assembly’s Target
in Vietnam, and slightly below in Thailand. Meanwhile, we see core inflation in Singapore
(which the central bank looks most closely at) close to its historical averages. Malaysia is
an exception, as inflation is expected to rise in 2025 given strong growth and fiscal
measures (unwinding of blanket petrol subsidies and broadening of consumption tax).
However, we think that the calibrated nature of fiscal policy measures in Malaysia would
help reduce second-round effects and keep core inflation (coverage excludes petrol)
closer (rather than decisively above) the historical average.

Divergence in fiscal trajectories…

Fiscal consolidation efforts should continue in Malaysia and the Philippines, though the
pace may slow if growth concerns deepen. Fiscal deficit should be higher in Thailand due
to the rollout of cash handout programmes (to fulfill earlier pledges), but fiscal space
going forward is limited, with public debt close to the present statutory ceiling.
Singapore would likely pursue an expansionary budget – elections must be held by Nov
2025, and the government can draw on accumulated savings from the earlier part of its
term. Indonesia is likely to stay within its fiscal deficit ceiling (3% of GDP), with earlier
considerations to raise the ceiling likely shelved following the re-appointment of Finance
Minister Sri Mulyani (who has advocated for fiscal prudence).

…as well as monetary policy directions

We presently see 3 central banks easing policies and 3 maintaining status quo. Easing
cycles for BSP and BI would be relatively deeper, given higher real interest rate
differentials, but with BI probably more cautious given its focus on currency stability.
BSP has signaled its willingness to lower headline RRR, but BI is less likely to do so, with
effective RRR considerably lower. BOT has already surprised with a rate cut once in Oct,
and we think that further cuts may be more likely only in 2H25 when growth is more
likely to be slower. We don’t expect easing elsewhere, but risk is skewed towards (a)
easing in the case of MAS (if medium-term core inflation is seen slipping below 1.5%)
and SBV, and (b) tightening in the case of BNM due to inflation concerns as a result of
policy measures.

Current account dynamics generally more favourable

We expect most countries to benefit from cyclical recovery in goods demand as well as
smaller imports for commodities such as energy and oil. Thailand could see a greater
boost not just from faster pick-up in arrivals, but also composition shift towards tourists
that tend to spend more (e.g., China and Middle East). Likewise, Indonesia could benefit
from stronger commodity prices, advancement in down-streaming (e.g., copper) and
greater demand for EV batteries. The only exception is the Philippines, whereby
investment-led growth model could lead to higher capital imports and widening of the
current account deficit.

Impending elections to shape policy agenda

General elections in Singapore must be held by November 2025. We expect more
household-friendly measures aimed at alleviating cost of living concerns, especially with
consumer price expectations still sticky. There would also be greater urgency to promote
more sustainable price movements for motor vehicles and housing. Mid-term elections
in Philippines will take place in May 2025 and will be important for President Marcos to
push through his legislative agenda amidst policy differences with candidates aligned
with former President Duterte. Ongoing pivot towards the alliance with US, Japan and
Taiwan may also gain momentum amidst tensions with China over the South China Sea.

Global Economics | 24 November 2024 47

EEMEA
Mai Doan Tatonga Rusike
MLI (UK) MLI (UK)

Zumrut Imamoglu Jean-Michel Saliba

MLI (UK) MLI (UK)

Vladimir Osakovskiy >>

Merrill Lynch (DIFC)

In the shadow of US elections

• Regional conflicts, sanctions policy and pressure on Organization of the Petroleum
Exporting Countries (OPEC) are likely to be in focus in 2025.

• Central and Eastern Europe (CEE) macro recovery continues with more headwinds;
CEE cutting cycles more data dependent. We see further disinflation and
stabilisation in Türkiye.

• We see risks of fewer cuts from the South African Reserve Bank (SARB) versus our
current projections. Oil exporters could face more fiscal challenges.

Middle East – North Africa (MENA): in the eye of the

storm
The aftermath of United States (US) presidential elections could have important
ramifications across the Middle East – North Africa (MENA) region, specifically regarding
geopolitics, global economic/financial conditions, oil prices, and Organization of the
Petroleum Exporting Countries (OPEC) energy policies.

Oil and geopolitics – multiple equilibria possible

The foreign policy towards the Middle East of the incoming US administration could
determine the outlook for the ongoing regional conflicts. Iran-Israel tensions, if renewed,
could have global implications. Iran tensions could escalate if the planned sunset of the
United Nations (UN) sanctions snapback ability is not resolved diplomatically, especially
in the event of changes to US sanctions towards Iran.

Any Iran oil production shortfall may be accommodated within the OPEC+ agreement,
but this is likely to depend on the geopolitical backdrop and global oil market dynamics.

A potential trilateral Saudi-US-Israel treaty could have important regional and global
implications. However, the passage of any treaty will likely depend in part on the
alignment of Congress with the White House, in our view. The defense aspect of the
potential treaty could provide support for OPEC to offset oil supplies lost from Iran in
the event of changes to US sanctions towards Iran.

Market access key for high yielders

We think liquidity-stressed high-yielders could continue to muddle through near term, if
global financial conditions are tight thanks to regional support or International Monetary
Fund (IMF) programs.

Egypt – a revised IMF program is likely

We think authorities and the International Monetary Fund (IMF) are likely to agree on
revisions to the Extended Fund Facility (EFF) program. While the fourth review
conclusion may be delayed, the challenging regional backdrop suggests to us that a
compromise could be reached. As such, the setback of mixed performance within the
IMF program to date, alongside signs of reform fatigue setting in, is unlikely to be a
fatal blow to the program, in our view.

48 Global Economics | 24 November 2024

A revised program could support a rebound in economic activity as fiscal consolidation
could be watered down, in our view. We expect authorities to look to renegotiate the
budget sector primary surplus target and delay the Value-Added Tax (VAT) exemption
removal package that was due by end-November.

We do not see imminent material Saudi official sector Foreign Direct Investment (FDI).
The evaluation of the impact of the removal of the preferential tax treatment and
exemptions for State-Owned Enterprises (SoEs) would start around February-March
2025, after a year of implementation and collection. Authorities indicate progress is
being achieved towards the public sector (Egyptian Pound) EGP1trn cap, although only
data on the budget sector capital spending is available as of now.

Saudi Arabia – focus on energy policy, fiscal policy and issuance

The key focus next year is likely to be on the authorities’ likely response to sustained low
oil prices and whether they could focus on revenue mobilization or spending cuts, given
the prioritization of infrastructure spending in line with Saudi Vision 2030. We think a
mix of both measures could be contemplated within the central government sector,
although the general government sector spending plans may continue subject to
financing constraints. However, note that a potential trilateral Saudi-US-Israel treaty
could provide support for Saudi Arabia to boost oil production within OPEC to offset oil
supplies lost from Iran in the event of changes to US sanctions towards Iran. This could
support a drop in the fiscal breakeven oil price, all else being equal.

Other MENA countries – a mixed bag

In Lebanon, we think governance optimism may be premature. We continue to see that
technocrats are open for a tolling agreement with bondholders by March 2025. However,
it is unclear to us if the political class could support or prioritize such a measure in the
current circumstances.

In Kuwait, the Cabinet may be starting to focus on reform needs. Key will be the
upcoming Action Plan for the new Cabinet. In Iraq, parliamentary elections in late 2025
suggest fiscal reforms are unlikely. In Tunisia, we see no policy-making changes post-
presidential elections, no IMF engagement and fatigue by some bilateral donors. We
expect the 2025 Eurobonds to be serviced.

In Morocco, an upgrade to Investment Grade (IG) could be in the offing for 2025,
assuming fiscal consolidation continues, and the external outlook remains comfortable.
In Oman, a full IG rating may be in the offing in 2025, assuming continued prudent fiscal
policy. In Bahrain, we expect it to require a reformist 2025-26 budget cycle and
additional financial support from the Gulf Cooperation Council (GCC) countries.

Central and Eastern Europe (CEE): recovery continues with

more headwinds
The economic recovery is set to continue in 2025, but more external headwinds mean
the path is more protracted compared to previous cycles, and risks are on the downside.
Poland and Romania, benefiting more from their larger domestic economies and
relatively more supportive fiscal/European Union (EU) funds, should continue to see GDP
outperformance versus Czechia and Hungary, who are more reliant on exports and run
tighter budgets.

CEE central banks will likely be even more data-dependent in the next phase of the
cutting cycle. Inflation has fallen sharply but there are lingering concerns about stickly
services inflation and high wage growth. The easing path will also need to take the right
balance between a more hawkish Fed versus a more bearish European growth backdrop
and a more dovish European Central Bank (ECB). Our interest rate forecasts are thus
subject to high uncertainty, particularly in Hungary where the Hungarian Forint (HUF) is
vulnerable. We currently expect the policy rate to fall to 4.75% by year-end (YE)2025 in
Poland, 3.0% in Czechia, 5.5% in Hungary, and 5.5% in Romania.

Global Economics | 24 November 2024 49

GDP - uncertainty caps the rebound
We expect the cyclical recovery to continue, but are more worried about downside risks.
GDP growth will likely be in the order of 2.5-3.5%, driven by consumption – underpinned
by high real income growth and high employment, and investments – underpinned by EU
funds. Net exports will likely remain a drag on growth, as European/investment demand
looks weak. Poland and Romania will be the growth leaders in CEE, with GDP expansion
back to trend-like rate of 3%+. Czechia will likely be the laggard given the highest
vulnerability to external demand and lack of policy support (central bank keeps rates
unnecessary high, and fiscal stays tight). Hungary has a strong desire to revive growth to
at least 3%, but policy constraints are high. Rate cuts will need to be cautious to avoid
sharp FX depreciation. Fiscal spending is constrained by credit ratings pressures.

Risks to the outlook are to the downside. Threats of tarifffs and heightened trade
uncertainty are new risk factors following the US elections. But existing ones already
weighing on the recovery are also plenty, e.g. cautious consumption behaviour,
geopolitical tensions, auto sector, climate policy.

Consumer Price Inflation (CPI) - sticky services is an issue

The first part of disinflation was faster than expected, but central banks have not been
able to claim victory on inflation yet. The last stretch to achieving the CPI target is
bumpy, as base effects and the unwinding of support measures are affecting the
inflation path, while services inflation is sticky. Czechia, where CPI has been in target
range this year, is in a more comfortable position than other CEE countries. In Hungary,
Poland, and Romania, wage growth remaining in or close to double digits is a challenge
for central banks.

Türkiye: Disinflation and normalization

A year of disinflation, further stabilisation and normalisation awaits Türkiye. We see
inflation falling from 44% this year to 25% year-end (YE) 2025. Monetary policy will
likely remain tight although the policy rate will likely decrease along with inflation. We
see policy rate at 30% YE25 and expect macroprudential tools to support the disinflation
program. Monthly loan caps could be reduced further in-line with underlying inflation
trend, deposit rate supports will likely continue to ensure de-dollarisation. FX-protected
deposits (KKM) will likely end in the second half of the year, and we expect more
simplification in rules and regulations in the banking sector.

We see growth slowing down from 3% to 2.5% next year. Weak European growth, strong
Turkish Lira (TRY) and high labor costs will likely limit export growth. Domestic demand
will likely remain low due to the disinflation program. However, lower oil price next year
and recent revisions to the balance of payments will likely push CA deficit to 0.5% next
year. We expect budget deficit to go down from 4.9% in 2024 to 3.1% in 2025. Primary
cash deficit will also be lower, c.1% and fiscal impulse will likely be negative, supporting
the disinflation program.

We see 15-20% nominal depreciation in TRY next year, implying a real appreciation up to
3-8%. Strong currency, tight monetary policy and a negative fiscal impulse could bring
down inflation close to our expectations.

We think that Türkiye will remain an idiosyncratic story driven by its own policies rather
than global policy changes. It is still fighting to bring down its inflation which is
significantly above other Emerging Market (EM) countries and has very little room to
diverge from its tight policy mix. If there are unexpected shocks due to geopolitics or
increased tariffs and trade wars, the Central Bank of the Republic of Türkiye (CBRT)
could tighten policy and use its reserves to reduce volatility in the currency.

50 Global Economics | 24 November 2024

Israel: Geopolitics drives the economic outlook
Macroeconomic outlook in Israel will likely be driven by developments around the
conflict in the Middle East. While a resolution to the conflict could quickly bring down
the risk premium and help with disinflation and growth, a prolonged war has the
potential to deteriorate fiscal outlook further.

Following a sharp recovery in 1Q24, real Gross Domestic Product (GDP) growth was
almost flat in 2Q24. We see growth at 0.7% this year and 3% next year. We see budget
deficit at 7% this year and 5% next year. Inflation has been volatile on the back of
demand and supply shocks as well as FX fluctuations due to the conflict. We see 3.5%
inflation at YE2024 and 3% at YE2025.

Monetary stance will likely remain tight as long as inflation is above the upper band. We do
not foresee any cuts until 3Q25. In a global environment with higher Fed rates, Bank of
Israel (BOI) might have to hold its base rate at current levels even longer. However, in the
case of a resolution to the conflict, it can deliver cuts earlier and faster than we expect.

Exhibit 61: Türkiye inflation and rate forecasts Exhibit 62: Israel inflation
We see inflation at 25% next year-end and policy rate at 30% We see inflation hovering above the upper band and no cuts until 3Q25

100 10 CPI
BofA
8 Tradables f'cast
80
6 Non-tradables ex fruit, veg, housing
60 4

40 2
0
20 -2
0 -4
Jan-20 Dec-20 Nov-21 Oct-22 Sep-23 Aug-24 Jul-25 Jun-26 -6
Source: Haver, CBRT, BofA Global Research
18 19 20 21 22 23 24 25
BofA GLOBAL RESEARCH Source: Haver, BOI, BofA Global Research. CPI = Consumer Price Index.
BofA GLOBAL RESEARCH

CIS/Balkans/South Asia: fiscal issues and geopolitics

Ukraine - navigating through geopolitical currents
Continued conflict will remain in the spotlight of market attention as it remains the key
headwind to country’s macro and market cases. With restructuring out of the way, next
main market trigger for Ukraine External Debt (EXD) will likely be any tangible steps
towards the eventual de-escalation. The latter could potentially be catalysed by the
recent political changes, but which are yet to be seen despite intensified discussions on
the readiness to do so on both sides. Conflict resolution may provide a major boost to
Ukraine macro, unlocking the eventual post-war recovery and cutting downside risks.

The other geopolitics - various “shades” of European Union (EU) accession

Serbia and other Western Balkans are set to start to receive financial assistance through
the EUR6bn EU growth plan from 2025, which aims to push further integration of the
region with the EU. Inflows on the back of ambitious public spending plans may further
support growth, particularly in Serbia. In the latter case, we think that this may push
other rating agencies to catch up with Investment Grade (IG) from Standard & Poors
(S&P).

In Caucasus, Georgia is yet to pass through domestic political crisis after latest general
elections and get greater clarity with EU accession agenda. In any case, we expect
Georgian macro framework to remain robust despite all the changes, even though pace
of growth may slow on the likely deceleration of Foreign Direct Investment (FDI) inflows.
Meanwhile, efforts to secure Armenia/Azerbaijan peace agreement will likely continue, as
further delays may revive re-escalation risks.

Global Economics | 24 November 2024 51

Commonwealth of Independent States (CIS) - focus on fiscal
Fiscal outlook remains the key issue in the investor case of both Kazakhstan and
Uzbekistan. In 2025, Kazakhstan plans develop new Tax Code in 2Q25, which could be
instrumental to rebalance the budget and limit Oil Fund use. So far authorities refrain
from reviving the Value-Added Tax (VAT) hike idea, although any major breakthrough in
tax collection without it appears seems to be unlikely. In Uzbekistan, any major
improvement in fiscal balances remains linked to the continuity of reforms, especially in
the energy sector. Energy price dynamics may catalyse any expected changes. Lower oil
prices may accelerate revenue-based fiscal consolidation in Kazakhstan, as higher oil
prices may do the same on the spending side in Uzbekistan. Meanwhile, fiscal pressures
and maturities are likely to push Kazakhstan to issue US$3bn, and another US$1.5-2bn
in Uzbekistan in 2025.

South Asia - back to work

2024 was volatile, but largely positive to both Sri Lanka and Pakistan. Key electoral
cycles are behind, IMF programs are in place, as Sri Lanka could be finalizing debt
restructuring by the end of the year. However, with all of this out of the way, both
countries will now have to deliver on the progress with their respective IMF programs
for further macro and market recovery. This may prove to be complicated, while any
delays may start to weigh on asset valuations.
After two years of recession/weakness, such effort could have positive macro
background due to base effect, which may support fiscal balances, facilitating reforms.
We remain positive on both. With massive funding pressures, Pakistan remains
committed to structural changes in line with IMF program (see: Trip feedback: much
deeper than ever). In Sri Lanka, the new government’s commitment to the IMF agenda is
yet to be fully confirmed. However, we also note that the likely robust macro may allow
the market to start pricing in benefits of macro contingency in Sri Lanka macro-linked
bonds (see: “Charted waters” of fair values).
South Africa: 2025 reform choices and fiscal decisions
We forecast South Africa’s real GDP growth to increase to 1.8%yoy in 2025, from 1%
this year, buoyed by an increase in consumption and domestic investment. We see
headline CPI moderating to 4.2% in 2025 as food and oil prices remain low. The South
African Reserve Bank (SARB) is likely to continue cutting until March 2025, by 100bp
cumulative to 7.25% terminal.

The lights are back on but not everything is bright

In 2024, elections delivered a Government of National Unity (GNU) and substantially
reduced the power cuts that had weighed on economic growth. The central bank is in an
interest rate-cutting cycle that could boost consumption and improve economic
performance. However, the fiscal authorities now have to make choices on spending:
substantially support weak state companies (e.g., Transnet), extend the social relief
distress grant (SRD) and/or contain wage growth. We see tests to GNU stability in
November 2026 with local government elections and in December 2027 with the ANC’s
elective conference.

Turning GNU confidence into investment and growth

The 2024 underperformance (1% real GDP growth) provides a base for higher 2025
growth. The balance of risks has shifted to the upside. We estimate 2025E GDP growth
at 1.8% on the back of rising business confidence in the GNU turning into domestic
investment, low inflation and a rate-cutting cycle that should buoy consumption. Beyond
2025, it is tough to see economic growth moving consistently above 2%, and we
forecast 1.8% in 2026, too. If the economy were to grow above 2%, electricity systems
could be constrained, bringing back power cuts, which could hamper much stronger
growth in the future. Meanwhile, the reform focus is shifting from electricity shortages
to reducing logistics bottlenecks. Transnet owns and operates freight rail, terminals and
ports, and is at the heart of reforms to bring private sector participation.

52 Global Economics | 24 November 2024

SARB in cutting cycle, with the risk of less versus more
We forecast Consumer Price Inflation (CPI) to average 4.6% in 2024, 4.2% in 2025 and
4.4% in 2026. Inflation has largely moderated on the back of nominal appreciation of the
rand, while international oil and food prices remain low to moderate. Risks to weaker
South African rand (ZAR) could come from less easing from the Fed, a stronger US dollar
should the new US leadership pursue an expansionary fiscal policy. For now, we keep our
policy rate forecasts unchanged but remain mindful of risks. The SARB is likely to
continue with 25bp cuts in November 2024, January and March 2025. That would result
in 100bp cumulative cuts to a terminal rate of 7.25%. But we see the risk of less cutting
rather than more. Post US elections, we now forecast USD/ZAR 18.2 in 1Q 25 (versus
17.5 previously) and a year-end strengthening to 17.5.

Fiscal choices in a spending grip

This year fiscal performance is largely on track with the budget despite some tax
revenue shortfalls. The big fiscal spending questions are likely to be answered in the
February 2025 Budget presentation. For example, containing public sector wage growth,
extending the Covid-19 SRD grant and offering new financing to weak state-owned
enterprises, such as Transnet. This potentially higher spending is not currently factored
into the government’s fiscal forecasts. We forecast a slower pace of consolidation in
2024 and 2025 versus govt targets. Fiscal improvements are likely in 2026 when Eskom
support is completed.

Exhibit 63: South Africa Annual Real GDP Growth (%) Exhibit 64: South Africa Inflation and Monetary Policy Outlook (%)
Real GDP growth set to improve to 1.8% in 2025, from 1% in 2024 The easing cycle has begun; terminal rate of 7.25% from a peak of 8.25%

6 9 CPI yoy% Policy Rate(%)

5
CPI forecast Policy rate forecast
4
8
3
2
7
1
0
6
-1
-2
5
-3
-4
-5 4
-6
-7 3
2017 2018 2019 2020 2021 2022 2023 2024e2025F2026F Jul-22 Jan-23 Jul-23 Jan-24 Jul-24 Jan-25 Jul-25

Source: BofA Global Research Source: BofA Global Research

BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 53

Sub-Saharan Africa (SSA): low oil prices and fiscal
consolidation risks ahead
Angola better equipped for a lower oil price than Nigeria…
Our house view is for oil prices be lower in 2025 versus 2024 due to excess supply from
non-OPEC members. This would hit Angola and Nigeria, the main SSA producers of oil,
which accounts for 90% of exports. Low oil revenues would add to existing fiscal
pressures in both countries. The onus remains on each country to pursue domestic
reforms that strengthen the fiscal and economic outlook. Angola’s approach to the IMF
for a funded program could anchor reforms and external financing, if successful.
Meanwhile, Nigeria may continue without IMF support and faces a less certain external
financing outlook. The jury is still out on the ability of tax reforms to meaningfully
reduce the deficit in Nigeria.

…while Kenya should benefit with a narrower current account

Kenya, on the other hand, could benefit from a low oil price environment with a
continued narrowing of the current account deficit to c4% of GDP in 2025. Despite the
IMF’s recent recalibration of fiscal deficit targets, risks remain elevated with revenue
collections behind targets. Nevertheless, inflation is low and stable, while improved
external financing has helped the Kenyan shilling to stabilise. The Central Bank of Kenya
(CBK) is officially in a rate-cutting cycle. Economic growth should remain around 5%
over the medium term. The main risk is the expiry of the IMF program in April 2025. It’s
not clear if Kenya will be able to renew the funded program or seek alternative financing.

Debt restructuring puts Ghana and Zambia on a clean slate

Ghana and Zambia start on a clean slate post debt restructuring. Resumption of external
debt-service payments is likely to moderate current account balances and slow the build-
up of FX reserves. This could put Ghana back into a current account deficit while Zambia
could remain in a surplus due to high copper export prices. In Zambia, economic growth
could pick up close to 5% from 1% in 2024, which was weighed down by the drought
and power cuts. The rainy season has started, which could result in an increasing power
supply while copper production is already trending upwards.

54 Global Economics | 24 November 2024

Brazil
David Beker >> Gustavo Mendes
Merrill Lynch (Brazil) Merrill Lynch (Brazil)

Fiscal is always the focus

• We are updating our Selic rate call. Terminal rate goes from 12% by Jan-25 to 13%
by May-25. 25YE at 12.0% from 10.75%.

• Fiscal remains key. The government is working on a spending cut package up to

R$70bn for 2025 and 2026.

• We expect growth to slow down from 3.0% in 2024 to 2.0% in 2025

Higher growth in 2024, but slowdown expected ahead

In 2024, growth surprised on the upside. In the beginning of the year, the consensus
estimate was at 1.6%, and now it is at 3.1%. We updated our growth forecast for the
year twice, from 2.2% to 2.7% in April, and from 2.7% to 3.0% in September. The first
reassessment came on the back of a greater potential GDP due to structural reforms.
The second was due to a larger impact of fiscal stimulus than anticipated at first, as well
as unemployment surprising on the upside and credit acceleration. We expect activity to
cool down in 2H24, as we saw a strong surprise in 1H24. We also revised our 2025 GDP
growth expectation, from 2.5% to 2.0%, due to three key reasons: 1. Lower fiscal
impulse (more below). 2. Base effects. 3. Interest rates above neutral and increasing.
Due to the high interest rates level forecasted for next year, 2025 GDP growth is unlikely
to be supported by an increase in investment. With low unemployment, government
expenses growing at more than 2.5% in real terms and the possibility of another record
soybean harvest next year, consumption, government expenditure and exports should
drive the expansion of domestic income.
Fiscal: another year(s) running after the target
In April 2024, the Central Government changed the primary results targets for the
coming years (see our report on Budgetary Guidelines Bill). The target for 2025
became a balanced budget, with a +- 0.25% of GDP tolerance band. Since 2023, the
government has been counting on revenue increases to balance its budget. Up to now,
the strategy poised for next year is not different, as the main measures to meet the
fiscal target are on the revenue side. On the expenditure side, the budget includes a
compliance check in pensions and on the welfare system. The government expects to
save R$25.9bn in the year by canceling the benefits of citizens who are no longer
eligible to claim them, a small amount given the size of the expenditure bill. We expect a
0.6% of GDP deficit next year.
The government is currently working on an expenditure cut package to be able to meet
the fiscal target in 2025 and 2026. According to local press, cuts could be up to R$70bn,
with 30bn in 2025 and 40bn in 2026. If this figure is confirmed by the government, the
market would be positively surprised, as expectations for the cut ranged between 35 and
50bn. Besides the amount of the savings, the composition of the package is also
relevant, as cuts that address structural issues would have a more meaningful impact
over the debt trajectory than one-off measures.

Inflation: living on the edge

Inflation should end 2024 at 4.4%, impacted by strong demand pressures, as activity
surprised on the upside and unemployment is close to historical lows. Furthermore,
during the year the country went through a severe drought, which has had an impact
over meat and electricity prices. The composition of inflation worsened in the October-
24 print. We expect 2025 year-end inflation at 3.6%, as demand pressure cools down
and the monetary policy tightening effects start to materialize. Risks to the 2025
forecast are on the upside, due to inflationary inertia.

Global Economics | 24 November 2024 55

Monetary: updating our Selic forecast
In the November meeting, the Brazilian Central Bank (BCB) increased the pace of the
tightening cycle, by hiking rates by 50bps. The minutes of the meeting acknowledged
more challenging domestic and international scenarios for inflation, and explicitly stated
that "A further deterioration of expectations could lead to an increase in the duration of
the hiking cycle".

We are updating our Selic call due to: 1. A deterioration in inflation expectations, 2. A
more hawkish language on the BCB’s communication, 3. Persistence in the labor market
resilience, with unemployment close to historical lows, 4. A worsening in the
composition of inflation, as evidenced by October’s IPCA, 5. A prolonged period of
depreciated currency, possibly translating to industrial goods inflation.

We now expect a 50bps hike in Jan-25, instead of a 25bps hike, a 50bps hike in the Mar-
25 meeting, instead of a hold, and a final 25bps hike in May-25, instead of a hold. This
implies a terminal Selic of 13.0% by May-25, as opposed to a 12.0% terminal rate in Jan-
25. We now expect a sequence of 50bps cuts starting in Nov-25, bringing the Selic to
9.0% in 2026. We are also updating our BRL call to 5.75 for 24YE, from 5.50.

Political agenda: tax reforms & spending cuts

The focus is the spending cut package (as discussed above) to be announced by the
government. The package will have to be approved by Congress, and it seems that both
houses are prone to support the adjustment proposed by the Central Government.

Currently, the two bills regulating the VAT tax reform are under analysis in the Senate. It
is unlikely that both get voted before the year-end recess, as the first regulating bill (PLP
68//2024) contemplates very controversial topics, such as which items will have a
reduced tax rate or be exempt from the VAT. On the other hand, the terms of the
presidents of both houses of the Legislative end in February 2025, and they want to
have the complete approval of VAT reform before they leave office. Therefore, they
should try to speed up the passing of legislation in the end of 2024/beginning of 2025.

The following theme on the Executive agenda is the approval of the Income Tax Reform,
as President Lula made a campaign promise to exempt all the workers who earn less
than R$5,000 from paying income taxes. However, the government will have to find
ways to compensate for the foregone revenue.

Exhibit 65: Selic rate forecasts (% per year) Exhibit 66: Major macro forecasts
We are updating our forecast to a higher terminal rate We see growth at 2.0% in 2025
Brazil 2023 2024F 2025F 2026F
Selic Previous forecast Real GDP (% yoy) 2.9 3.0 2.0 2.2
14.5 CPI (% yoy)* 4.6 4.4 3.6 3.5
Current forecast
Policy Rate (eop)* 11.75 11.75 12.00 9
Fiscal Bal (%/GDP) -8.9 -7.9 -8.4 -8.1
12.5 CurAct Bal (%/GDP) -1.3 -1.7 -2.2 -2.6
Source: BofA Global Research
BofA GLOBAL RESEARCH

10.5

8.5
Dec-21 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26
Source: BCB, BofA Global Research
BofA GLOBAL RESEARCH

56 Global Economics | 24 November 2024

Mexico
Carlos Capistran
BofAS

In state of uncertainty
• 2024 surprised with electoral sweeps in Mexico and the US. Uncertainty will remain
high in 2025 as Sheinbaum and Trump’s administrations implement their agendas.

• Economic activity will likely remain weak in 2025 on the back of uncertainty and a
large fiscal consolidation, but consumption is likely to remain resilient.

• We expect Banxico to continue cutting, but only to 8.75% as we expect inflation to

remain around 4%.

Economic activity decelerated in 2024, as expected

Economic activity has been weak this year at 1.4% ytd, below Mexico’s usual trend
growth (~2.0%). Our expectation a year ago was that Mexico would growth 1.8% this
year, a below consensus call at the time, and those bearish expectations have
materialized. We expected a better first half of the year followed by a weak second half,
and instead we have seen a weak first half followed by a strong 3Q. A year ago we
expected inflation to end 2024 at 4.7%, and inflation is now at 4.8%. We had expected
Banxico to lower its policy rate to 8.75% by end-2024, and so far, Banxico has only cut
to 10.25%.

We expect uncertainty to remain high in the following months and in 2025

Elections in Mexico and the US in 2024 were marked by landslide victories. In Mexico,
Claudia Sheinbaum was elected President on June 2 with nearly 60% of the votes
(expected), and the ruling party got enough votes in Congress to modify the Constitution
(unexpected). Since then, Mexico has been busy approving several constitutional reforms
and the process will continue at least until December.

Mexico already approved a complete overhaul of its Judiciary, which will take years to be
implemented, and is in the process to eliminate several independent regulators (e.g.,
energy, telecom). In the US, Donald Trump was elected President on November 5, with
Republicans controlling the Senate and the House. Mexico could benefit from Trump
policies to continue the relocation of supply chains from Asia to the US and from
stronger US growth if lower taxes and deregulation help US activity. But Mexico could
also be negatively impacted if Trump imposes tariffs, does massive deportations, or
Exhibit 67: US trade balance with Mexico, 12mm sum (US$bn) Exhibit 68: Macroeconomic outlook
US trade deficit with Mexico continues to increase substantially % year-on-year growth rate, unless otherwise indicated

20 2024F 2025F 2026F

Real GDP growth 1.3 0.8 1.8
0
CPI inflation (eop) 4.7 4.2 4.1
-20 Banco de Mexico overnight rate (eop) 10.00 8.75 8.75
-40 MXN (eop) 20.50 21.50 22.50
-60 Brent crude oil ($bbl average) 80.0 65.0 63.0
US real GDP growth 2.7 2.4 2.1
-80 US$bn
US Fed Funds rate (upper limit, eop) 4.50 4.00 4.00
-100 US trade balance with Mexico Source: BofA Global Research estimates
-120 (12mm sum, custom value) BofA GLOBAL RESEARCH

-140
-160 US - China trade
tensions
-180
1990
1992
1994
1996
1998
2000
2003
2005
2007
2009
2011
2013
2016
2018
2020
2022
2024

Source: BofA Global Research, US Census, Haver

BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 57

taxes remittances. Mexico is particularly exposed on trade as the US trade deficit with
Mexico has increased significantly (Exhibit 67). Insecurity and drugs are other hot topics
waiting for action on both sides of the border. The reforms and the US-Mexico relation
will keep uncertainty high, potentially impacting investment in Mexico, in our view.

We expect slow growth in 2025 on the back of a large fiscal consolidation

We expect the economy to decelerate to 0.8% in 2025, from 1.3% in 2024 (Exhibit 68).
We expect a deceleration mostly because of uncertainty that will likely impact private
investment, and because of lower government expenditure. The latter following a large
fiscal consolidation in 2025, as the government is penciling-in a 0.6% primary surplus in
2025 after a 1.4% deficit in 2024, mostly through cutting expenditures. But we expect
consumption to continue to outperform GDP growth, driven by an increase in social
programs, higher real wages, and strong remittances (Exhibit 69). Net exports are likely
to improve, if no tariffs are imposed, helped by US growth and a weaker peso. We see
balanced risks for 2025. Nearshoring and a weaker peso could help private investment.
But potential US policies (e.g., tariffs, taxes to remittances) or the impact of
constitutional reforms in Mexico could decelerate growth more than we expect.

We expect lower inflation in 2025, but still above the 3.0% target
We expect inflation to fall to 4.2% yoy by end-2025 from 4.8% yoy in October 2024,
with core inflation falling to 3.7% yoy from 3.8% yoy. We expect weaker economic
activity to lower services inflation, which remains around 5.0% yoy. But not much
because unemployment remains low and Sheinbaum continues to increase the minimum
wage well above inflation (12% yoy announced for January 2025). However, we expect
goods inflation to increase in the following months driven by a weaker currency. Pass-
through is low in Mexico but it is not zero (a 10% MXN depreciation on average
increases inflation by 40bp in the following year). And inflation expectations are not at
3.0% for any horizon (Exhibit 70). We see upside risks to our forecasts on the impact on
MXN from potential US actions such as tariffs and from Mexico’s constitutional reforms.

We expect Banxico to lower rates, but not much

We expect Banxico to keep cutting its policy rate in the following months. Our baseline
is 25bp at each meeting to an 8.75% terminal rate to be reached in 2H 2025 (this is a
change from our previous 8.25% terminal rate expectation). Banxico has been vocal
about its intentions to keep cutting, so we believe the economic slowdown coupled with
core inflation already below 4.0% will allow Banxico to continue cutting rates.
Nevertheless, we think that Banxico will not be able to cut below 8.75% as we do not
see inflation converging to the 3.0% target in 2025. The risk to our call is to the
downside, as Banxico may decide to cut more given that it continues to estimate a real
neutral rate at 2.7%.
Exhibit 69: Real GDP, consumption, and investment Exhibit 70: Inflation expectations (% yoy)
We expect consumption, but not investment, to keep outperforming GDP No inflation expectation measure is at the 3.0% target

120 Index (Q1-2019=100) 5.0 %, monthly inflation expectations

4.5
110
4.0
100 3.5
90 3.0
2.5
80 2.0
Real GDP, sa
70 Real private consumption, sa 1.5
Dec-20

Oct-21

Mar-22

Oct-24
Jan-23
May-21

Aug-22

Jun-23

May-24
Nov-23

Real investment, sa
60
Q1-19

Q4-19

Q3-20

Q2-21

Q1-22

Q4-22

Q3-23

Q2-24

2024 2025 next 4 years next 5-8 years

Source: BofA Global Research, INEGI Source: BofA Global Research, Banco de Mexico
BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH

58 Global Economics | 24 November 2024

Argentina, Andeans and Caribbeans
Sebastian Rondeau Alexander Müller
BofAS BofAS

Pedro Diaz
BofAS

Rich in idiosyncratic stories

• Argentina will likely see a rebound in GDP growth and a further decline in inflation in
2025, which will likely allow more FX flexibility.

• We see space for lower policy rates than those implied by the market in Colombia
(6.5% by end-2025) and Chile (4.5% by end-2025).

• High priority of fiscal matters among almost all the Central American & Caribbean
countries that we cover.

Argentina: Fiscal consolidation, GDP recovery and mid-

term elections
The government seeks to keep a fiscal balance (zero deficit) in 2025, after the 5% of
GDP adjustment made in 2024. This allowed to reduce inflation to 3% mom so far from
a peak 25% mom in December 2023. We expect Inflation to decline further to 35% in
2025 (from our 121% forecast this year). We expect GDP to rebound 4% next year, after
a 3% recession this year, amid fast loan growth, energy sector dynamism and wage
rebound.

Markets still have questions about the sustainability of the crawling peg regime after the
large real appreciation of the currency and large external debt payments. The current
account should decline to around 0% of GDP next year (from 1% of GDP in 2024) due to
this and the GDP rebound. So far, capital inflows (spurred by the tax amnesty) have
financed the FX regime.

The government resumed negotiations with the IMF towards a new program involving
fresh money. We expect a gradual lifting of capital controls and more FX flexibility next
year. In October 2025, Argentines will elect ½ of the Lower House and 1/3 of the Senate,
and opportunity for the ruling coalition to improve governability and accelerate
structural reforms.

Exhibit 71: Argentina: The lowest inflation in three years emboldens Milei’s FX signals
A new low: 2.7% inflation in October
330 30
Inflation mom (right) Inflation yoy

230 20

130 10
2.7

30 0
May-21
Jul-21
Sep-21
Nov-21
Jan-22
Mar-22
May-22
Jul-22
Sep-22
Nov-22
Jan-23
Mar-23
May-23
Jul-23
Sep-23
Nov-23
Jan-24
Mar-24
May-24
Jul-24
Sep-24

Source: INDEC.
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 59

Chile: Macro converge with fiscal concerns and
presidential elections
Most macro variables are converging to normal levels, including GDP growth, inflation,
interest rates and the current account. The exception is the fiscal deficit, which remains
elevated, at 3.8% of GDP in the last 12 months (the government seeks to reduce it to
1% of GDP next year).

We forecast a 2% GDP growth in 2025 (as in this year) supported by easier monetary
policy and mining investment. Inflation seems under control despite the electricity price
shock. We forecast inflation at 4.8% this year and at 3.5% next year. The central bank
expects inflation to converge to 3% in 1H26. We forecast the central bank will continue
cutting the policy rate to 5.0% this year and to 4.5% next year, amid slower rate cuts
from the Fed.

The ruling coalition will seek to pass pro-growth reforms through congress, including a
reduction in permit times for large investments and a pension reform. In October 2025,
Chileans will elect a new president, 100% of the Lower House and 50% of the Senate.
Evelyn Matthei (centre-right coalition) is ahead of the polls. Michelle Bachelet
announced she will not run for president. Right-wing parties increased the number of
mayors in recent local elections.

Colombia: Main headwinds are fading

The Colombian economy is likely to gain traction in 2025 as the main factors that
dragged growth in 2023-2024 – namely, very high interest rates, inflation (denting
consumer purchasing power), and confidence shock (associated to progressive reforms)
– are easing. Growth was sluggish in 2023 (0.6%) and 2024 (BofA forecast 1.9%), amid a
collapse in the interest-rate sensitive segments (house sales, consumer durables,
investment, credit, among others).

For 2025, we expect GDP growth to pick up to 2.8%, driven by lower interest rates,
better business and consumer sentiment, firmer real wages (as inflation drops), and the
“Pact for Credit” (whereby banks have committed to pump in COP 55tn, ~3.3% of GDP,
in eighteen months starting from September 2024).

We forecast the central bank (BanRep) cutting the policy rate to 6.5% by the end of
2025 (from 9.75% in November 2024), with inflation falling to 3.6% (from 5.4%
currently). President Petro will have the power to appoint two new BanRep board
members in February 2025, which will probably change the equilibrium in the board from
hawkish to dovish (four out of seven votes).

Exhibit 72: Colombia: Fiscal risks – the elephant in the room

Govt. needs large adjustment in Q4 to meet fiscal target (5.6% of GDP)
4
Central Govt balance 12m-sum (% GDP) Primary balance
2
0
-2
-4
-6
-8
-10
Aug-09 Aug-12 Aug-15 Aug-18 Aug-21 Aug-24
Source: BofA Global Research, BANREP, FinMin
BofA GLOBAL RESEARCH

60 Global Economics | 24 November 2024

On the fiscal side, while our baseline is that the government will reaffirm its
commitment to the fiscal rule and implement budget cuts to the meet the targets,
uncertainty may be larger next year amid an overly optimistic budget. The
decentralization law – perceived as a major fiscal risk – is unlikely to enter into force
until 2027, but noise may rise in 2025 if the competencies law shows signs of giving
room for additional fiscal costs.

Peru: Growth close to potential, inflation near target

We expect Peru’s GDP to grow 3.3% in 2025 (from 3.2% in 2024), close (or slightly
higher) to what we consider the potential growth rate. Incoming data on activity is
showing more convincing signals of a sustained expansion. The tailwinds from terms of
trade (mainly copper and gold prices), lower interest rates, and new infrastructure
(deepwater Chancay port, owned by Chinese government) will be supportive for GDP
next year. The favorable terms of trade shock should be conducive to record-high trade
surpluses in 2024 and 2025 (~US$ 22bn, ~7.5% of GDP).

Meanwhile, the Central Bank (BCRP) is likely to continue cutting rates, considering that
inflation is standing at the 2% target. They intend to transition from a contractionary to
a neutral stance. We forecast a reference rate of 4.5% for 2025 (broadly neutral), from
5% currently, and inflation at 2.5%.

On the fiscal front, failure to comply with the deficit caps set by the Fiscal Responsibility
Law for 2023 and 2024 has raised concerns among investors. However, we foresee
consolidation to a 2.5%-of-GDP Non-Financial Public Sector deficit in 2025 (from 3.6%
in 2024), driven by the annual settlement of income taxes from the mining sector.

The risk of Peru being downgraded to high yield is low, in our view. We think gross public
debt below 35% of GDP is reassuring for the rating agencies, the lowest in LatAm after
Guatemala.

Exhibit 73: Peru: Monetary policy rate and inflation

We expect two more 25bp cuts, to be broadly in line with neutral stance
9 CPI %yoy Infation target
8
7 Reference rate Neutral rate
6
Real rate exante
5
4
3
2
1
0
-1
-2
-3
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Source: BofA Global Research, BCRP, INEI
BofA GLOBAL RESEARCH

Ecuador: Elections are critical for the macro-outlook

Ecuador is one of the four countries in the Americas that are slated to have presidential
elections in 2025, along with Canada, Bolivia, and Honduras. The incumbent president,
Daniel Noboa, is running for re-election. His economic policy agenda – focused on fiscal
consolidation (anchored by IMF program), openness to foreign investment (such as in
the mining sector), and hawkish security policies – is quite different from the agenda of
the main opposition party, Revolucion Ciudadana (the Correistas).

The Correistas believe in fiscal expansion (i.e., public investment crowds in private
investment), the government’s control of strategic sectors (i.e., energy, utilities, natural
resources, among others), and antagonism to the role of international institutions in

Global Economics | 24 November 2024 61

Ecuador’s domestic affairs. At the current juncture, the Ecuadorean economy is facing
multiple crises: electricity blackouts, recession, high funding needs, and insecurity.

The policy response could differ substantially depending on the outcome of the 2025
presidential election, including the decision on how the government will tackle Eurobond
amortizations that begin in 2026. In our scenario, for now, we assume continuity in
economic policies. We forecast GDP growth of 2% for 2025, after a 1.5% contraction in
2024; fiscal consolidation making progress, shepherded by IMF; and the government
staying current on its foreign debt obligations.

Uruguay: New government to follow prudent policies

In the first-round presidential election, the centre-left coalition Frente Amplio obtained
43.9% of the votes, followed by the centre-right Partido Nacional (PN) with 26.8% and
Partido Colorado (PC) with 16%. The centre-right Republican coalition (PN, PC and two
minor parties) added up to 47%.

There will be a presidential runoff between Yamandu Orsi (Frente Amplio) and Alvaro
Delgado (Partido Nacional) on November 24. The two main economic proposals are
consistent with keeping the rules of the game, preserving economic stability (seeking
fiscal balance), and being friendly to investment. The social security plebiscite was
rejected (with 38.8% support), reducing fiscal risks dramatically. Still, the Left could
propose potential adjustments to the social security system. The centre-left coalition
secured a majority in the Senate (the centre-right coalition is close to control the Lower
House).

We forecast GDP growth at 2% in 2025 (down from 3% this year). We see inflation at
4.9% this year and 5% in 2025. BCU has kept the policy rate unchanged recently at
8.5%. We expect minor rate cuts to 8% next year.

Venezuela: Status quo and stagnation

The electoral council announced Nicolas Maduro was re-elected president on July 28, but
it has not made detailed voting data public. The opposition claimed its candidate,
Edmundo Gonzalez, won with 67% of the votes (based on copies of voting records).
Gonzalez received asylum in Spain after the Venezuela justice issued a warrant to arrest
him. Opposition leader Corina Machado says she remains in the Venezuela.

A new presidential term should start on January 10, 2025. The government continues to
show signs of policy radicalization. The United States, Brazil, Mexico, and Europe among
others have not recognized Maduro’s victory yet and demand the publication of voting
tallies.

Oil production remains around 900 kbpd (vs 850 in 1H), despite US put sanctions back
on the Venezuelan oil and gas sector. The US had been considering license requests
from oil companies in a case-by-case basis. We assume oil production stabilizes around
900 kbpd this year and next. We forecast inflation at 50% in 2024 (amid FX intervention
and stable exchange rate) and a pick-up to 125% next year amid persistent sanctions.

Central America & Carib.: fiscal matters on the spotlight

One commonality among almost all the Central American & Caribbean countries that we
cover (Panama, Costa Rica, El Salvador, Guatemala, and the Dominican Republic) is the
high priority of fiscal matters in their governments’ agenda.

Costa Rica: Fiscal rule remains an anchor of the economy

In Costa Rica – despite some fiscal slippage in 2024 – we believe the fiscal rule (created
in 2018) will be conducive to primary surpluses that are sufficiently large to reduce the
public debt ratio in 2025. Primary fiscal surpluses, a strong balance of payments, and
GDP growth hovering around 4% bode well for Costa Rica.

62 Global Economics | 24 November 2024

Dominican Republic: Disappoint from fiscal reform withdrawal
Markets were quite optimistic on the expectation of a fiscal/tax reform in 2025.
However, last month the Abinader administration decided to withdraw it from Congress,
out of concern of social backlash. We believe a (revenue-enhancing) tax reform would
substantially increase the probability of DomRep becoming Latam’s next investment-
grade country in the next four years. But the odds of the reform happening now seem
low now. Still, relatively high economic growth (we forecast 4.9% for 2025) make
DomRep one the most attractive macro stories in the region.

Exhibit 74: Central American and Caribbean region is highly dependent on remittances inflows
Remittances inflows represent about 18% of GDP in CAC region

30
26.3 25.5 Remittances %GDP, 2019
25 23.7
Remittances %GDP, 2024
19.2
20
17.0

15

10 8.5

4.9
5 3.4 3.1 2.7
1.7 1.5 0.7 0.5 0.2 0.2 0.2
0
Nic Hon Slv Gtm Jam DRep Ecu Mex Bol Col Per Par CRica Pan Bra Uru Arg
Source: BofA Global Research, Haver
BofA GLOBAL RESEARCH

El Salvador: IMF program to lower high public debt

In El Salvador, the government bond yields have fallen significantly as investors priced-in
a high probability of an IMF program happening in 2025. The IMF program will be
focused on fiscal consolidation (to bring down public debt from 80% of GDP), reforms to
set guardrails for Bitcoin, and the improvement of governance. The US election outcome
is favorable for El Salvador – as reflected in the reaction of bond prices – considering
President Bukele has warm relations with the Republican party. The US geopolitical
influence might help El Salvador to get an IMF program in 2025.

Guatemala: Running larger fiscal deficits to address structural gaps

Guatemala is the outlier in the group. As the only country in LatAm with gross public
debt below 30% of GDP, fiscal space is ample. The Arevalo administration plans to run
larger fiscal deficits in the next years (~3% of GDP vs. 1%-2% previously) to address the
economy’s structural gaps: infrastructure, social safety net, governance. We don’t think
running a 3% fiscal deficit would be a big deal for Guatemala. It may even be credit-
rating positive if the government succeeds at improving the structural issues.

Panama: fiscal consolidation, social security reform, and mine

In Panama, the Mulino administration’s main three challenges for 2025 are narrowing
the large fiscal deficit (around 6% of GDP in 2024), delivering a pension reform (which
has fiscal ramifications), and reaching a compromise with the copper mine that was shut
down by the Supreme Court last year (resulting in a ~US$ 20bn, 23% of GDP, contingent
liability from arbitration). We expect the government to make some progress on all of
these fronts.

Global Economics | 24 November 2024 63

Global Economic Forecasts
Key forecasts
Exhibit 75: Economic forecasts
GDP growth, inflation and policy rate forecasts for the major economies
Economic forecasts
2024Q4 2025Q1 2025Q2 2025Q3 2025Q4 2026Q1 2026Q2 2026Q3 2026Q4 2024F 2025F 2026F
Global and Regional Aggregates, %
United States
Real GDP growth 1 2.0 2.5 2.3 2.2 2.2 2.1 2.0 2.0 2.0 2.7 2.4 2.1
CPI inflation 2.6 2.3 2.3 2.6 2.5 2.4 2.4 2.2 2.4 2.9 2.4 2.3
Policy Rate (EoP) 4.38 4.13 3.88 3.88 3.88 3.88 3.88 3.88 3.88 4.38 3.88 3.88
Euro area
Real GDP growth 1 0.5 0.9 0.9 1.0 1.0 1.1 1.1 1.0 1.1 0.7 0.9 1.0
CPI inflation 2.1 1.9 1.6 1.5 1.4 1.5 1.6 1.6 1.5 2.3 1.6 1.6
Policy Rate (EoP) 3.00 2.50 2.00 1.75 1.50 1.50 1.50 1.50 1.50 3.00 1.50 1.50
China
Real GDP growth 2 4.5 4.7 4.5 4.6 4.2 4.0 4.9 4.7 4.4 4.8 4.5 4.5
CPI inflation 3 0.6 0.9 0.7 0.6 1.1 1.0 1.1 1.3 1.6 0.3 0.8 1.6
Policy Rate (EoP) 3.10 2.95 2.70 2.70 2.70 2.70 2.70 2.70 2.70 3.10 2.70 2.70
Japan
Real GDP growth 1 1.8 1.1 0.7 1.0 0.5 0.6 0.5 0.7 0.6 -0.2 1.1 0.6
CPI inflation 2.3 2.4 2.2 1.9 1.9 2.1 1.9 1.8 1.7 2.6 2.1 1.9
Policy Rate (EoP) 0.25 0.50 0.50 0.75 0.75 1.00 1.00 1.00 1.00 0.25 0.75 1.00
Global Aggregate 4
Real GDP growth 3.1 3.2 3.3
CPI inflation 3.2 2.6 2.7
Policy Rate (EoP) 4.8 4.0 3.9
Emerging Markets Aggregate 4
Real GDP growth 4.2 4.3 4.4
Real GDP growth (ex-China) 3.9 4.2 4.4
CPI inflation 3.5 3.0 3.2
Policy Rate (EoP) 5.8 5.0 4.7
Notes: 1. Quarterly values are % q/q annualized | 2. Quarterly values are % y/y. | 3. Quarterly values are period averages. | 4. Due to reporting limitations, Global and EM aggregate are annual only.
Source: BofA Global Research
BofA GLOBAL RESEARCH

Exhibit 76: Markets forecasts

Forecasts for FX, interest rates, commodities and equities
Markets forecasts
spot 2024Q4 2025Q1 2025Q2 2025Q3 2025Q4 2026Q1 2026Q2 2026Q3 2026Q4
Exchange Rates (EoP)
EUR/USD 1.04 1.12 1.12 1.15 1.15 1.17 1.17 1.18 1.20 1.20
USD/JPY 154.8 151 152 151 149 147 147 147 147 147
USD/CNY 7.25 7.30 7.30 7.20 7.10 6.90 6.90 6.80 6.80 6.80
GBP/USD 1.25 1.35 1.35 1.39 1.39 1.41 1.41 1.44 1.48 1.50
Interest rates (% EoP)
US 10yr 4.42 4.40 4.25 4.25 4.25 4.25 4.25 4.25
Bunds 10yr 2.27 4.40 4.25 4.25 4.25 4.25 4.25 4.25
Japan 10yr 1.09 1.00 1.15 1.20 1.35 1.40 1.50
Commodities 1
Oil - Brent ($/bbl) 74.6 73.0 68.0 66.0 64.0 62.0 NA NA NA NA
Oil - WTI ($/bbl) 70.7 69.0 64.0 62.0 60.0 58.0 NA NA NA NA
Gold ($/oz) 2695.8 2750 2750 3000 2750 2500 2500 2750 2750 2500
Equities (EoP)
S&P 500 5969 5400
Stoxx 600 509 410
Notes: 1. All values are EoP, except for gold forecasts, which are period averages.
Source: BofA Global Research
BofA GLOBAL RESEARCH

64 Global Economics | 24 November 2024

Detailed forecasts
Exhibit 77: Global Economic Forecasts
Global GDP growth expected at 3.1% in 2024, 3.2% in 2025 and 3.3% in 2026
GDP growth, % CPI inflation*, % Short term interest rates**, %
2023 2024F 2025F 2026F 2023 2024F 2025F 2026F Current 2024F 2025F 2026F
Global and regional aggregates
Global 3.3 3.1 3.2 3.3 4.3 3.2 2.6 2.7 5.78 4.82 4.03 3.89
Global ex US 3.4 3.2 3.4 3.5 4.3 3.2 2.7 2.8 6.04 4.92 4.06 3.89
Global ex China 2.7 2.7 2.9 2.9 5.5 4.0 3.2 3.1 6.52 5.33 4.43 4.25
Developed Markets 1.6 1.5 1.7 1.6 4.7 2.6 2.1 2.0 3.61 3.47 2.71 2.71
Emerging Markets 4.5 4.2 4.3 4.4 4.0 3.5 3.0 3.2 7.46 5.82 4.98 4.72
Emerging Markets ex China 4.0 3.9 4.2 4.4 6.4 5.6 4.5 4.3 10.17 7.62 6.49 6.05
Europe, Middle East and Africa (EMEA) 1.0 1.3 1.7 2.0 7.7 5.5 3.9 3.2 9.08 5.82 4.13 3.89
European Union 0.5 1.0 1.3 1.5 6.3 2.6 1.9 1.8 3.47 3.29 1.93 1.88
Emerging EMEA 2.3 2.1 2.9 3.6 12.9 13.2 9.2 6.7 19.71 11.86 9.30 8.55
Emerging Asia 5.4 5.1 5.0 4.9 2.1 1.8 1.9 2.6 4.05 4.12 3.58 3.58
ASEAN 4.1 4.8 4.9 5.0 3.5 2.3 2.4 2.6 4.73 4.67 4.22 4.16
Latin America 2.1 1.8 2.2 2.5 5.7 4.2 3.7 3.6 9.81 9.73 9.11 7.79
G6
US 2.9 2.7 2.4 2.1 4.1 2.9 2.4 2.3 4.63 4.38 3.88 3.88
Euro area 0.4 0.7 0.9 1.0 5.4 2.3 1.6 1.6 3.25 3.00 1.50 1.50
Japan 1.7 -0.2 1.1 0.6 3.3 2.6 2.1 1.9 0.25 0.25 0.75 1.00
UK 0.3 0.9 1.5 1.4 7.3 2.5 2.6 2.1 4.75 4.75 3.75 3.50
Canada 1.2 1.2 2.3 2.2 3.9 2.4 2.2 2.0 3.75 3.50 3.25 3.25
Australia 2.0 1.1 2.1 2.3 5.6 3.2 3.0 2.8 4.35 4.35 3.60 3.35
Euro area
Germany -0.3 -0.1 0.4 0.8 6.0 2.5 1.6 1.5 3.25 3.00 1.50 1.50
France 1.1 1.1 0.6 0.9 5.7 2.3 1.6 1.6 3.25 3.00 1.50 1.50
Italy 0.7 0.5 0.8 1.0 5.9 1.1 1.5 1.5 3.25 3.00 1.50 1.50
Spain 2.7 3.0 1.9 1.5 3.4 2.8 1.5 1.7 3.25 3.00 1.50 1.50
Netherlands 0.1 0.8 1.4 1.4 4.1 3.1 2.6 2.1 3.25 3.00 1.50 1.50
Belgium 1.4 1.0 1.2 1.3 2.3 4.3 2.5 2.3 3.25 3.00 1.50 1.50
Austria -0.8 -0.5 1.1 1.1 7.7 2.9 1.9 1.9 3.25 3.00 1.50 1.50
Greece 2.0 2.3 1.7 1.9 4.2 3.0 1.9 1.9 3.25 3.00 1.50 1.50
Portugal 2.3 1.5 1.4 1.7 5.3 2.4 1.6 1.7 3.25 3.00 1.50 1.50
Ireland -5.5 -0.7 4.0 2.1 5.2 1.4 1.5 1.6 3.25 3.00 1.50 1.50
Finland -1.2 -0.4 0.8 1.3 4.3 1.0 1.4 1.5 3.25 3.00 1.50 1.50
Other developed economies
New Zealand 0.6 -0.2 1.4 2.8 5.7 2.9 2.3 2.1 4.75 4.25 2.50 2.50
Switzerland 0.7 1.4 1.2 1.5 2.1 1.1 0.6 0.8 -0.75 0.75 0.50 0.50
Norway 0.5 0.9 1.2 1.5 5.5 3.2 2.5 2.0 4.50 4.50 3.50 2.75
Sweden -0.2 0.5 1.5 1.9 5.9 1.8 1.5 1.8 2.75 2.50 1.75 1.50
Emerging Asia
China 5.3 4.8 4.5 4.5 0.2 0.3 0.8 1.6 3.10 3.10 2.70 2.70
India 8.2 7.1 6.9 6.8 5.4 4.7 4.0 5.2 6.50 6.50 5.50 5.50
Indonesia 5.0 5.0 5.3 5.5 3.7 2.3 2.3 2.6 6.00 5.75 5.25 5.25
Korea 1.4 2.2 1.8 2.0 3.6 2.3 1.8 2.0 3.25 3.25 2.50 2.50
Taiwan 1.3 4.4 3.3 2.6 2.5 2.1 1.7 1.6 2.00 2.00 2.00 2.00
Thailand 1.9 2.7 2.6 2.4 1.6 0.5 0.7 0.7 2.25 2.25 1.50 1.50
Malaysia 3.6 4.9 4.7 4.7 2.5 1.9 2.5 2.7 3.00 3.00 3.00 3.00
Philippines 5.5 5.9 5.9 5.8 6.0 3.5 3.0 3.4 6.00 6.00 5.00 4.50
Singapore 1.1 3.3 2.6 2.6 4.8 2.5 1.6 1.9
Hong Kong 3.3 2.5 2.0 2.4 2.1 1.7 1.9 1.9 4.31 4.75 4.25 4.25
Vietnam 5.0 6.4 6.8 6.8 3.3 3.8 4.1 4.0 4.50 4.50 4.50 4.50
Source: BofA Global Research
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 65

 Exhibit 78: Global Economic Forecasts (continued)
Global GDP growth expected at 3.1% in 2024, 3.2% in 2025 and 3.3% in 2026
GDP growth, % CPI inflation*, % Short term interest rates**, %
2023 2024F 2025F 2026F 2023 2024F 2025F 2026F Current 2024F 2025F 2026F
Latin America
Brazil 2.9 3.0 2.0 2.2 4.6 4.3 3.9 3.8 11.25 11.75 12.00 9.00
Mexico 3.2 1.3 0.8 1.8 5.5 4.8 4.2 4.3 10.25 10.00 8.75 8.75
Argentina -1.6 -3.0 4.0 3.4 -0.9 220.8 47.7 29.0 35.00 35.00 35.00 25.00
Colombia 0.6 1.9 2.8 3.0 11.7 6.6 3.8 3.3 9.75 9.25 6.50 6.00
Chile 0.2 2.0 2.0 1.9 7.6 3.9 4.0 3.2 5.25 5.00 4.50 4.25
Peru -0.6 3.2 3.3 3.0 6.3 2.3 2.0 2.4 5.00 4.75 4.50 4.50
Ecuador 2.4 -1.5 2.0 2.3 2.2 1.9 1.8 1.8
Uruguay 0.4 3.0 2.0 2.0 5.9 4.7 5.0 5.0
Costa Rica 5.1 4.2 3.8 3.9 0.5 -0.1 1.1 1.7 4.00 4.00 4.00 4.00
Dominican Republic 2.4 5.0 5.1 5.0 4.8 3.2 4.5 4.0 6.25 6.25 6.00 6.00
Panama 7.3 2.9 3.9 3.8 1.5 -0.1 1.1 1.7
El Salvador 3.5 2.0 2.6 2.9 4.0 0.5 1.0 1.6
Guatemala 3.5 3.5 4.0 4.0 6.2 2.1 3.2 2.8 4.75 4.00 3.25 3.25
EEMEA
Türkiye 5.1 3.0 2.5 4.2 53.9 59.9 31.2 18.7 50.00 47.50 30.00 20.00
Nigeria 2.9 2.6 3.2 3.0 24.7 35.0 26.0 18.0 27.25 27.75 26.00 24.00
Egypt 3.8 2.4 4.0 4.0 24.4 33.3 19.0 13.0 27.75 27.25 17.00 15.00
Poland 0.2 2.7 3.4 3.3 11.4 3.7 4.4 3.4 5.75 5.75 4.75 4.25
South Africa 0.7 1.0 1.8 1.8 5.9 4.6 4.2 4.4 7.75 7.75 7.25 7.00
Romania 2.1 0.9 2.8 3.3 10.4 5.5 4.0 3.3 6.50 6.50 5.50 5.50
Czech Republic -0.1 1.0 2.3 2.7 10.7 2.5 2.4 2.0 4.00 3.75 3.00 3.00
Israel 2.0 0.7 3.0 3.9 4.2 3.1 3.5 2.6 4.50 4.50 4.00 3.25
Hungary -0.9 0.8 2.5 3.2 17.1 3.6 3.1 3.0 6.50 6.50 5.50 5.00
Saudi Arabia -0.8 1.2 2.9 3.2 2.3 2.2 2.1 1.9 4.75 5.00 4.50 4.50
Ukraine 5.3 3.5 3.5 7.0 12.9 6.3 7.5 5.0 13.00 13.00 13.00 13.00
Source: BofA Global Research
BofA GLOBAL RESEARCH

Exhibit 79: Real GDP growth, qoq annualized %

Global GDP growth expected at 3.1% in 2024
1Q 2024 2Q 2024 3Q 2024 4Q 2024 1Q 2025 2Q 2025 3Q 2025 4Q 2025 2024 2025 2026
Developed Markets
US 1.6 3.0 2.8 2.0 2.5 2.3 2.2 2.2 2.7 2.4 2.1
Euro area 1.2 0.8 1.5 0.5 0.9 0.9 1.0 1.0 0.7 0.9 1.0
Japan -2.4 2.2 0.9 1.8 1.1 0.7 1.0 0.5 -0.2 1.1 0.6
UK 2.8 1.8 0.6 1.2 1.8 1.8 1.4 1.8 0.9 1.5 1.4
Canada 1.8 2.1 1.2 2.5 2.6 2.5 2.3 2.2 1.2 2.3 2.2
Australia - - - - - - - - 1.1 2.1 2.3
G6 Aggregate 1.1 2.0 1.9 1.4 1.7 1.6 1.6 1.5 1.6 1.7 1.6
Emerging Markets
China 6.1 2.0 3.6 6.4 6.8 1.2 4.0 5.0 4.8 4.5 4.5
India 5.4 2.6 10.5 10.9 3.6 3.1 10.5 11.2 7.1 6.9 6.8
Indonesia 5.8 4.9 3.8 4.5 6.1 6.6 3.6 5.3 5.0 5.3 5.5
Korea, Republic Of (South) 5.3 -0.9 0.5 2.2 2.1 2.4 2.3 2.1 2.2 1.8 2.0
Thailand 5.7 3.1 4.9 4.4 1.7 1.0 1.5 1.5 2.7 2.6 2.4
Singapore 1.5 1.6 11.7 -3.9 2.8 2.8 3.0 3.2 3.3 2.6 2.6
Hong Kong 10.3 1.2 -4.3 3.3 1.9 3.7 1.4 3.1 2.5 2.0 2.4
Brazil 3.2 5.9 0.4 1.5 2.9 2.3 1.7 1.2 3.0 2.0 2.2
Mexico 0.4 0.6 4.1 0.7 -0.2 0.2 0.5 0.6 1.3 0.8 1.8
Colombia 4.9 0.4 0.8 2.4 2.8 3.6 3.6 4.1 1.9 2.8 3.0
Chile 4.8 1.7 2.6 -1.1 4.4 3.2 1.8 1.8 2.0 2.0 1.9
Peru 1.9 7.4 3.7 2.8 2.8 3.2 3.2 2.8 3.2 3.3 3.0
Türkiye 5.6 0.3 3.0 -3.2 -0.5 7.7 6.5 7.7 3.0 2.5 4.2
South Africa -0.2 3.2 2.4 2.4 1.0 1.0 1.0 1.2 1.0 1.8 1.8
Source: BofA Global Research
BofA GLOBAL RESEARCH

66 Global Economics | 24 November 2024

Monetary Policy Forecasts
Exhibit 80: Monetary Policy rate path
End of period (%)
Central Banks Current Dec-24 Jan-25 Feb-25 Mar-25 Apr-25 May-25 Jun-25 Jul-25 Aug-25 Sep-25 Oct-25 Nov-25 Dec-25
Developed Markets
Fed (upper bound) 4.75 4.50 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00 4.00 4.00 4.00 4.00
ECB (deposit rate) 3.25 3.00 2.75 2.75 2.50 2.25 2.25 2.00 1.75 1.75 1.50 1.50 1.50 1.50
BoJ 0.25 0.250 0.500 0.500 0.500 0.500 0.500 0.500 0.750 0.75 0.75 0.75 0.75 0.75
BoE 4.75 4.75 4.75 4.50 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00 3.75 3.75
BoC 3.75 3.50 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25
Riksbank 2.75 2.50 2.25 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.75
SNB 1.00 0.75 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Norges Bank 4.50 4.50 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00 3.75 3.75 3.75 3.50
RBA 4.35 4.35 4.35 4.35 4.35 4.10 4.10 4.10 4.10 3.85 3.85 3.85 3.60 3.60
RBNZ 4.75 4.75 4.75 4.50 4.50 4.25 4.00 4.00 3.75 3.50 3.50 3.25 3.00 3.00
Emerging Asia
China (lending rate) 3.10 3.10 3.10 3.10 2.95 2.95 2.95 2.70 2.70 2.70 2.70 2.70 2.70 2.70
7d reverse repo* 1.50 1.50 1.50 1.50 1.40 1.40 1.40 1.20 1.20 1.20 1.20 1.20 1.20 1.20
India 6.50 6.50 6.50 6.25 6.25 6.00 6.00 6.00 6.00 5.75 5.75 5.50 5.50 5.50
Indonesia 6.00 5.75 5.75 5.75 5.50 5.50 5.50 5.25 5.25 5.25 5.25 5.25 5.25 5.25
South Korea 3.25 3.25 3.00 3.00 3.00 2.75 2.75 2.75 2.75 2.50 2.50 2.50 2.50 2.50
Taiwan 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Thailand 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.00 2.00 1.75 1.75 1.75
Malaysia 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00
Philippines 6.00 5.75 5.75 5.75 5.50 5.50 5.50 5.25 5.25 5.25 5.00 5.00 5.00 5.00
Latin America
Brazil 11.25 11.75 12.25 12.25 12.75 12.75 13.00 13.00 13.00 13.00 13.00 13.00 12.50 12.00
Chile 5.25 5.00 4.75 4.75 4.75 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Colombia 9.75 9.25 8.75 8.75 8.25 7.75 7.75 7.50 7.25 7.25 7.00 6.75 6.75 6.50
Mexico 10.25 10.00 10.00 9.75 9.50 9.50 9.25 9.00 9.00 8.75 8.75 8.75 8.75 8.75
Peru 5.00 4.75 4.75 4.75 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Emerging EMEA
Czech Republic 4.00 3.75 3.75 3.75 3.50 3.50 3.25 3.25 3.25 3.00 3.00 3.00 3.00 3.00
Hungary 6.50 6.50 6.50 6.50 6.25 6.25 6.00 6.00 5.75 5.75 5.50 5.50 5.50 5.50
Israel 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.25 4.25 4.25 4.00 4.00 4.00
Poland 5.75 5.75 5.75 5.75 5.50 5.50 5.50 5.25 5.25 5.25 5.00 5.00 4.75 4.75
Romania 6.50 6.50 6.25 6.25 6.25 6.00 5.75 5.75 5.50 5.50 5.50 5.50 5.50 5.50
South Africa 7.75 7.75 7.50 7.50 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25 7.25
Türkiye 50.00 47.50 47.50 45.00 42.50 40.00 37.50 36.00 35.00 34.00 33.00 32.00 32.00 30.00
Source: BofA Global Research, Bloomberg. Note: *Major five banks. **Reverse repo rate.
Source: BofA Global Research, Bloomberg. Note: *Major five banks. **Reverse repo rate.
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 67

FX, Rates and Commodity Forecasts
Exhibit 81: Quarterly forecasts
End of period
Spot Dec-24 Mar-25 Jun-25 Sep-25 Dec-25 Mar-26 Jun-26 Sep-26 Dec-26
FX forecasts
G6
EUR-USD 1.05 1.05 1.03 1.05 1.07 1.10 1.10 1.12 1.15 1.15
USD-JPY 155 151 148 152 156 160 160 158 156 155
EUR-JPY 162 159 152 160 167 176 176 177 179 178
GBP-USD 1.26 1.27 1.24 1.28 1.32 1.38 1.38 1.42 1.47 1.49
USD-CAD 1.40 1.40 1.40 1.39 1.38 1.37 1.36 1.35 1.35 1.35
AUD-USD 0.65 0.64 0.62 0.63 0.65 0.68 0.69 0.69 0.71 0.71
Asia
USD-CNY 7.24 7.30 7.60 7.60 7.50 7.40 7.30 7.20 7.10 6.90
USD-INR 84.5 85.0 85.0 86.0 85.5 85.0 84.0 84.0 84.0 84.0
USD-IDR 15925 16000 16200 16400 16300 16200 16200 16100 16100 16000
USD-KRW 1399 1400 1450 1430 1410 1390 1370 1350 1330 1310
Latin America
USD-BRL 5.81 5.75 5.75 5.75 5.75 5.75 5.85 5.90 5.95 6.00
USD-MXN 20.41 20.50 20.75 21.00 21.25 21.50 21.75 22.00 22.25 22.50
Emerging Europe
EUR-PLN 4.34 4.35 4.42 4.35 4.30 4.25 4.25 4.20 4.16 4.12
USD-TRY 34.48 36.50 38.50 40.50 42.50 44.00 45.50 46.50 47.00 48.00
USD-ZAR 18.12 17.80 18.20 18.00 17.80 17.50 17.30 17.10 17.00 17.00
Rates forecasts
2yr
US 2-year 4.35 4.30 4.00 4.00 4.00 4.00 4.00 4.00
Germany 2-year 2.11 1.80 1.85 1.60 1.35 1.45 1.45 1.60
Japan 2-year 0.58 0.50 0.70 0.75 0.95 1.00 1.15
UK 2-year 4.38 4.25 4.00 3.75 3.65 3.50 3.50 3.50 3.50 3.50
Canada 2-year 3.38 3.20 3.00 3.00 3.00 3.00 3.00
10yr
US 10-year 4.42 4.40 4.25 4.25 4.25 4.25 4.25 4.25
Germany 10-year 2.32 2.00 2.05 1.85 1.75 1.85 1.90 2.00
Japan 10-year 1.10 1.00 1.15 1.20 1.35 1.40 1.50
UK 10-year 4.44 4.50 4.25 4.33 4.42 4.50 4.75 4.75 4.75 4.75
Canada 10-year 3.46 3.30 3.25 3.25 3.25 3.25 3.25
Commodities forecasts
WTI Crude Oil - $/bbl 70.1 69 64 62 60 58 58 60 60 58
Brent Crude Oil - $/bbl 74.2 73 68 66 64 62 62 64 64 62
Gold $/oz 2670 2,500 2,750 2,750 3,000 2,500 2,750
Note: Spot exchange rate as of day of publishing. The left of the currency pair is the denominator of the exchange rate. Currency forecasts are for end of period.
Source: BofA Global Research, Bloomberg.
BofA GLOBAL RESEARCH

68 Global Economics | 24 November 2024

Abbreviations
Commonly used abbreviations
AMLO: Andres Manuel Lopez Obrador (Mexico’s president) EM: Emerging Markets NBP: National Bank of Poland
ASW: asset swap spread EMTA: Emerging Markets Trader Association NBR: National Bank of Romania
AUM: Assets under management Eop: end of period NBS: National Bank of Serbia
Avg: average EPFR: Emerging Portfolio Fund Research NBU: National Bank of Ukraine
Banxico: Banco de Mexico (Mexico’s central bank) ESG: Environmental, Social & Governance NDF: non-deliverable forward
BCB: Brazilian Central Bank ETF: Exchange Traded Fund OCC: Official Creditor Committee
BCCH: Central Bank of Chile EU: European Union OIS: overnight interest swap
BCRA: Central Bank of Argentina EXD: External debt PBoC: Peoples bank of China
BI: Bank of Indonesia EZ: Eurozone Pemex: Petroleos Mexicanos (Mexico’s Oil State Company)
BNM: Bank Negara Malaysia FH: Foreign Holdings RBA: Reserve bank of Australia
BoK: Bank of Korea FOMC: Federal open market committee RBI: Reserve bank of India
BoT: Bank of Thailand FX: foreign exchange RBNZ: Reserve bank of New Zealand
BSP: Bangko Sentral Ng Pilipinas GCC: Gulf Cooperation Council RRF: EU’s Recovery and Resilience Facility
CBA: Central Bank of Armenia HC: hard currency RRP: EU’s Recovery and Resilience Plan
CBAz: Central Bank of Azerbaijan HG: High Grade SARB: South Africa Reserve Bank
CBC: Central Bank of China (Taiwan) HKMA: Hong Kong Monetary Authorities SBP: State Bank of Pakistan
CBR: Central Bank of Russia HY: High Yield SBV: State Bank of Vietnam
CBSL: Central Bank of Sri Lanka IBC-Br: Brazil’s Monthly GDP Selic: Interest rates in Brazil
CBU: Central Bank of Uzbekistan IG: Investment Grade Sov: Sovereign
CDI: Brazil’s interbank interest rates IMM: International Monetary Market SSA: South and Southern Africa
Cetes: certificates of the treasury (Mexico’s gov’t short-term debt) IPCA: Consumer inflation in Brazil TIIE: Interbank Lending Rate
CIS: Commonwealth of Independent States LC: Local currency USMCA: US-Mexico-Canada Trade Agreement
CNB: Czech National Bank LDM: Local debt markets Vol: implied volatility
Corp: Corporate MAS: Monetary Authority of Singapore xccy: cross-currency
CPI: Consumer Price Index MEAF: Middle East & Africa Yoy: year on year, vs. same period of last year
DM: Developed Markets MFF: EU’s Multi-annual Financial Framework CFETS: China Foreign Exchange Trade System
EC: European Commission Mom: month on month, vs last month CGB: China government bond
ECJ: European Court of Justice NBG: National Bank of Georgia MLF: Medium-term lending facility
EDP: EU’s Excessive Deficit Procedure NBH: National Bank of Hungary NCD: Negotiable certificate of deposits
EEMEA: Eastern Europe, Middle East & Africa NBK: National Bank of Kazakhstan OMO: Open market operation
RRR: Required reserve ratio PFB: Policy financial bonds PSL: Pledged Supplementary Lending
NBS: National Bureau of Statistics BofA EMOT: trade-related uncertainty tracker USMCA: United States-Mexico-Canada Agreement
LGSB: Local government special bonds NICs: National Insurance contributions
Source: BofA Global Research
BofA GLOBAL RESEARCH

Global Economics | 24 November 2024 69

Disclosures
Important Disclosures

BofA Global Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of Bank of America
Corporation, including profits derived from investment banking. The analyst(s) responsible for this report may also receive compensation based upon, among other factors, the overall
profitability of the Bank’s sales and trading businesses relating to the class of securities or financial instruments for which such analyst is responsible.

Other Important Disclosures

Prices are indicative and for information purposes only. Except as otherwise stated in the report, for any recommendation in relation to an equity security, the price referenced is the publicly
traded price of the security as of close of business on the day prior to the date of the report or, if the report is published during intraday trading, the price referenced is indicative of the traded
price as of the date and time of the report and in relation to a debt security (including equity preferred and CDS), prices are indicative as of the date and time of the report and are from various
sources including BofA Securities trading desks.
The date and time of completion of the production of any recommendation in this report shall be the date and time of dissemination of this report as recorded in the report timestamp.

Recipients who are not institutional investors or market professionals should seek the advice of their independent financial advisor before considering information in this report in connection
with any investment decision, or for a necessary explanation of its contents.
Officers of BofAS or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments.
Individuals identified as economists do not function as research analysts under U.S. law and reports prepared by them are not research reports under applicable U.S. rules and regulations.
Macroeconomic analysis is considered investment research for purposes of distribution in the U.K. under the rules of the Financial Conduct Authority.
Refer to BofA Global Research policies relating to conflicts of interest.
"BofA Securities" includes BofA Securities, Inc. ("BofAS") and its affiliates. Investors should contact their BofA Securities representative or Merrill Global Wealth Management
financial advisor if they have questions concerning this report or concerning the appropriateness of any investment idea described herein for such investor. "BofA Securities" is a
global brand for BofA Global Research.
Information relating to Non-US affiliates of BofA Securities and Distribution of Affiliate Research Reports:

BofAS and/or Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") may in the future distribute, information of the following non-US affiliates in the US (short name: legal name,
regulator): Merrill Lynch (South Africa): Merrill Lynch South Africa (Pty) Ltd., regulated by The Financial Service Board; MLI (UK): Merrill Lynch International, regulated by the Financial Conduct
Authority (FCA) and the Prudential Regulation Authority (PRA); BofASE (France): BofA Securities Europe SA is authorized by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and
regulated by the ACPR and the Autorité des Marchés Financiers (AMF). BofA Securities Europe SA (“BofASE") with registered address at 51, rue La Boétie, 75008 Paris is registered under no 842
602 690 RCS Paris. In accordance with the provisions of French Code Monétaire et Financier (Monetary and Financial Code), BofASE is an établissement de crédit et d'investissement (credit and
investment institution) that is authorised and supervised by the European Central Bank and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and regulated by the ACPR and the
Autorité des Marchés Financiers. BofASE's share capital can be found at www.bofaml.com/BofASEdisclaimer; BofA Europe (Milan): Bank of America Europe Designated Activity Company, Milan
Branch, regulated by the Bank of Italy, the European Central Bank (ECB) and the Central Bank of Ireland (CBI); BofA Europe (Frankfurt): Bank of America Europe Designated Activity Company,
Frankfurt Branch regulated by BaFin, the ECB and the CBI; BofA Europe (Madrid): Bank of America Europe Designated Activity Company, Sucursal en España, regulated by the Bank of Spain, the
ECB and the CBI; Merrill Lynch (Australia): Merrill Lynch Equities (Australia) Limited, regulated by the Australian Securities and Investments Commission; Merrill Lynch (Hong Kong): Merrill Lynch
(Asia Pacific) Limited, regulated by the Hong Kong Securities and Futures Commission (HKSFC); Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte Ltd, regulated by the Monetary Authority
of Singapore (MAS); Merrill Lynch (Canada): Merrill Lynch Canada Inc, regulated by the Canadian Investment Regulatory Organization; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa
de Bolsa, regulated by the Comisión Nacional Bancaria y de Valores; BofAS Japan: BofA Securities Japan Co., Ltd., regulated by the Financial Services Agency; Merrill Lynch (Seoul): Merrill Lynch
International, LLC Seoul Branch, regulated by the Financial Supervisory Service; Merrill Lynch (Taiwan): Merrill Lynch Securities (Taiwan) Ltd., regulated by the Securities and Futures Bureau;
BofAS India: BofA Securities India Limited, regulated by the Securities and Exchange Board of India (SEBI); Merrill Lynch (Israel): Merrill Lynch Israel Limited, regulated by Israel Securities
Authority; Merrill Lynch (DIFC): Merrill Lynch International (DIFC Branch), regulated by the Dubai Financial Services Authority (DFSA); Merrill Lynch (Brazil): Merrill Lynch S.A. Corretora de Títulos e
Valores Mobiliários, regulated by Comissão de Valores Mobiliários; Merrill Lynch KSA Company: Merrill Lynch Kingdom of Saudi Arabia Company, regulated by the Capital Market Authority.
This information: has been approved for publication and is distributed in the United Kingdom (UK) to professional clients and eligible counterparties (as each is defined in the rules of the FCA
and the PRA) by MLI (UK), which is authorized by the PRA and regulated by the FCA and the PRA - details about the extent of our regulation by the FCA and PRA are available from us on request;
has been approved for publication and is distributed in the European Economic Area (EEA) by BofASE (France), which is authorized by the ACPR and regulated by the ACPR and the AMF; has
been considered and distributed in Japan by BofAS Japan, a registered securities dealer under the Financial Instruments and Exchange Act in Japan, or its permitted affiliates; is issued and
distributed in Hong Kong by Merrill Lynch (Hong Kong) which is regulated by HKSFC; is issued and distributed in Taiwan by Merrill Lynch (Taiwan); is issued and distributed in India by BofAS
India; and is issued and distributed in Singapore to institutional investors and/or accredited investors (each as defined under the Financial Advisers Regulations) by Merrill Lynch (Singapore)
(Company Registration No 198602883D). Merrill Lynch (Singapore) is regulated by MAS. Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), AFS License 235132 (MLEA) distributes
this information in Australia only to 'Wholesale' clients as defined by s.761G of the Corporations Act 2001. With the exception of Bank of America N.A., Australia Branch, neither MLEA nor any of
its affiliates involved in preparing this information is an Authorised Deposit-Taking Institution under the Banking Act 1959 nor regulated by the Australian Prudential Regulation Authority. No
approval is required for publication or distribution of this information in Brazil and its local distribution is by Merrill Lynch (Brazil) in accordance with applicable regulations. Merrill Lynch (DIFC) is
authorized and regulated by the DFSA. Information prepared and issued by Merrill Lynch (DIFC) is done so in accordance with the requirements of the DFSA conduct of business rules. BofA
Europe (Frankfurt) distributes this information in Germany and is regulated by BaFin, the ECB and the CBI. BofA Securities entities, including BofA Europe and BofASE (France), may
outsource/delegate the marketing and/or provision of certain research services or aspects of research services to other branches or members of the BofA Securities group. You may be contacted
by a different BofA Securities entity acting for and on behalf of your service provider where permitted by applicable law. This does not change your service provider. Please refer to the Electronic
Communications Disclaimers for further information.
This information has been prepared and issued by BofAS and/or one or more of its non-US affiliates. The author(s) of this information may not be licensed to carry on regulated activities in your
jurisdiction and, if not licensed, do not hold themselves out as being able to do so. BofAS and/or MLPF&S is the distributor of this information in the US and accepts full responsibility for
information distributed to BofAS and/or MLPF&S clients in the US by its non-US affiliates. Any US person receiving this information and wishing to effect any transaction in any security
discussed herein should do so through BofAS and/or MLPF&S and not such foreign affiliates. Hong Kong recipients of this information should contact Merrill Lynch (Asia Pacific) Limited in
respect of any matters relating to dealing in securities or provision of specific advice on securities or any other matters arising from, or in connection with, this information. Singapore recipients
of this information should contact Merrill Lynch (Singapore) Pte Ltd in respect of any matters arising from, or in connection with, this information. For clients that are not accredited investors,
expert investors or institutional investors Merrill Lynch (Singapore) Pte Ltd accepts full responsibility for the contents of this information distributed to such clients in Singapore.
General Investment Related Disclosures:
Taiwan Readers: Neither the information nor any opinion expressed herein constitutes an offer or a solicitation of an offer to transact in any securities or other financial instrument. No part of
this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or any other person without the express written consent of BofA Securities.
This document provides general information only, and has been prepared for, and is intended for general distribution to, BofA Securities clients. Neither the information nor any opinion
expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options,
futures, warrants, and contracts for differences). This document is not intended to provide personal investment advice and it does not take into account the specific investment objectives,

70 Global Economics | 24 November 2024

financial situation and the particular needs of, and is not directed to, any specific person(s). This document and its content do not constitute, and should not be considered to constitute,
investment advice for purposes of ERISA, the US tax code, the Investment Advisers Act or otherwise. Investors should seek financial advice regarding the appropriateness of investing in financial
instruments and implementing investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Any
decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering
document issued in connection with such offering, and not on this document.
Securities and other financial instruments referred to herein, or recommended, offered or sold by BofA Securities, are not insured by the Federal Deposit Insurance Corporation and are not
deposits or other obligations of any insured depository institution (including, Bank of America, N.A.). Investments in general and, derivatives, in particular, involve numerous risks, including,
among others, market risk, counterparty default risk and liquidity risk. No security, financial instrument or derivative is suitable for all investors. Digital assets are extremely speculative, volatile
and are largely unregulated. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the security or
financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such
securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance. Levels and
basis for taxation may change.
BofA Securities is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short" securities or other financial instruments and that such
action may be limited by regulations prohibiting or restricting "shortselling" in many jurisdictions. Investors are urged to seek advice regarding the applicability of such regulations prior to
executing any short idea contained in this report.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. Investors in such securities and instruments
effectively assume currency risk.
BofAS or one of its affiliates is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. BofAS or one of its affiliates may, at any time,
hold a trading position (long or short) in the securities and financial instruments discussed in this report.
BofA Securities, through business units other than BofA Global Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach
different conclusions from, the information presented herein. Such ideas or recommendations may reflect different time frames, assumptions, views and analytical methods of the persons who
prepared them, and BofA Securities is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this information.
In the event that the recipient received this information pursuant to a contract between the recipient and BofAS for the provision of research services for a separate fee, and in connection
therewith BofAS may be deemed to be acting as an investment adviser, such status relates, if at all, solely to the person with whom BofAS has contracted directly and does not extend beyond
the delivery of this report (unless otherwise agreed specifically in writing by BofAS). If such recipient uses the services of BofAS in connection with the sale or purchase of a security referred to
herein, BofAS may act as principal for its own account or as agent for another person. BofAS is and continues to act solely as a broker-dealer in connection with the execution of any transactions,
including transactions in any securities referred to herein.
Copyright and General Information:
Copyright 2024 Bank of America Corporation. All rights reserved. iQdatabase® is a registered service mark of Bank of America Corporation. This information is prepared for the use of BofA
Securities clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of BofA Securities. This document
and its content is provided solely for informational purposes and cannot be used for training or developing artificial intelligence (AI) models or as an input in any AI application (collectively, an AI
tool). Any attempt to utilize this document or any of its content in connection with an AI tool without explicit written permission from BofA Global Research is strictly prohibited. BofA Global
Research information is distributed simultaneously to internal and client websites and other portals by BofA Securities and is not publicly-available material. Any unauthorized use or disclosure
is prohibited. Receipt and review of this information constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information
contained herein (including any investment recommendations, estimates or price targets) without first obtaining express permission from an authorized officer of BofA Securities.
Materials prepared by BofA Global Research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information
known to, professionals in other business areas of BofA Securities, including investment banking personnel. BofA Securities has established information barriers between BofA Global Research
and certain business groups. As a result, BofA Securities does not disclose certain client relationships with, or compensation received from, such issuers. To the extent this material discusses
any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of
law relating to the subject matter of this material. BofA Global Research personnel’s knowledge of legal proceedings in which any BofA Securities entity and/or its directors, officers and
employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving issuers mentioned in this material is based on public information. Facts and views presented in this
material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of BofA Securities in
connection with the legal proceedings or matters relevant to such proceedings.
This information has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any
securities. None of BofAS any of its affiliates or their research analysts has any authority whatsoever to make any representation or warranty on behalf of the issuer(s). BofA Global Research
policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing
such rating, recommendation or investment thesis.
Any information relating to sustainability in this material is limited as discussed herein and is not intended to provide a comprehensive view on any sustainability claim with respect to any
issuer or security.
Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to
seek tax advice based on their particular circumstances from an independent tax professional.
The information herein (other than disclosure information relating to BofA Securities and its affiliates) was obtained from various sources and we do not guarantee its accuracy. This information
may contain links to third-party websites. BofA Securities is not responsible for the content of any third-party website or any linked content contained in a third-party website. Content
contained on such third-party websites is not part of this information and is not incorporated by reference. The inclusion of a link does not imply any endorsement by or any affiliation with BofA
Securities. Access to any third-party website is at your own risk, and you should always review the terms and privacy policies at third-party websites before submitting any personal information
to them. BofA Securities is not responsible for such terms and privacy policies and expressly disclaims any liability for them.
All opinions, projections and estimates constitute the judgment of the author as of the date of publication and are subject to change without notice. Prices also are subject to change without
notice. BofA Securities is under no obligation to update this information and BofA Securities ability to publish information on the subject issuer(s) in the future is subject to applicable quiet
periods. You should therefore assume that BofA Securities will not update any fact, circumstance or opinion contained herein.
Certain outstanding reports or investment opinions relating to securities, financial instruments and/or issuers may no longer be current. Always refer to the most recent research report relating
to an issuer prior to making an investment decision.
In some cases, an issuer may be classified as Restricted or may be Under Review or Extended Review. In each case, investors should consider any investment opinion relating to such issuer (or
its security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses and investment opinion(s) pertaining to such issuer (or its securities and/or financial
instruments) nor should the analyses or opinion(s) be considered a solicitation of any kind. Sales persons and financial advisors affiliated with BofAS or any of its affiliates may not solicit
purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies.
Neither BofA Securities nor any officer or employee of BofA Securities accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this
information.

Global Economics | 24 November 2024 71

Research Analysts
Global Economics Ting Him Ho, CFA Alexander Müller
Asia Economist Andean(ex-Ven) Carib Economist
Claudio Irigoyen Merrill Lynch (Hong Kong) BofAS
Global Economist tinghim.ho@bofa.com alexander.muller@bofa.com
BofAS
claudio.irigoyen@bofa.com Kai Wei Ang Natacha Perez
ASEAN Economist Brazil Economist
Antonio Gabriel Merrill Lynch (Singapore) Merrill Lynch (Brazil)
Global Economist kaiwei.ang@bofa.com natacha.perez@bofa.com
BofAS
antonio.gabriel@bofa.com Anna Zhou Sebastian Rondeau
China & Asia Economist Southern Cone & Venz Economist
North America Economics Merrill Lynch (Hong Kong) BofAS
Aditya Bhave anna.zhou@bofa.com sebastian.rondeau@bofa.com
US Economist
BofAS EEMEA Cross Asset Strategy and Ezequiel Aguirre
aditya.bhave@bofa.com LatAm FI/FX Strategist
Economics BofAS
Stephen Juneau David Hauner, CFA >> ezequiel.aguirre2@bofa.com
US Economist Global EM FI/FX Strategist
BofAS MLI (UK) Gustavo Mendes
stephen.juneau@bofa.com david.hauner@bofa.com Brazil Economist
Merrill Lynch (Brazil)
Shruti Mishra Mai Doan gustavo.mendes@bofa.com
US Economist CEE Economist
BofAS MLI (UK)
smishra44@bofa.com mai.doan@bofa.com
BofA Securities participated in the preparation of this
Jeseo Park Vladimir Osakovskiy >> report, in part, based on information provided by
US Economist EM Sovereign FI/EQ strategist Philippine Equity Partners, Inc. (Philippine Equity
BofAS Merrill Lynch (DIFC)
jeseo.park@bofa.com vladimir.osakovskiy@bofa.com Partners). ^^Philippine Equity Partners employees are
not registered/qualified as research analysts under
Developed Europe Economics Zumrut Imamoglu FINRA rules.
Turkey & Israel Economist >> Employed by a non-US affiliate of BofAS and is not
Ruben Segura-Cayuela MLI (UK)
Europe Economist zumrut.imamoglu@bofa.com registered/qualified as a research analyst under the
BofA Europe (Madrid) FINRA rules.
ruben.segura-cayuela@bofa.com Tatonga Rusike Refer to "Other Important Disclosures" for information
Sub-Saharan Africa Economist
Evelyn Herrmann MLI (UK)
on certain BofA Securities entities that take
Europe Economist tatonga.rusike@bofa.com responsibility for the information herein in particular
BofASE (France) jurisdictions.
evelyn.herrmann@bofa.com Jean-Michel Saliba
EEMEA Econ Head/MENA Economist
Chiara Angeloni MLI (UK)
Europe Economist jean-michel.saliba@bofa.com
BofA Europe (Milan)
chiara.angeloni@bofa.com Merveille Paja
EEMEA Sovereign FI Strategist
Alessandro Infelise Zhou MLI (UK)
Europe Economist merveille.paja@bofa.com
BofASE (France)
alessandro.infelise_zhou@bofa.com Mikhail Liluashvili
EEMEA Local Markets Strategist
Japan Economics MLI (UK)
Takayasu Kudo mikhail.liluashvili@bofa.com
Japan and Asia Economist
BofAS Japan Latin America Strategy and
takayasu.kudo@bofa.com
Economics
Izumi Devalier David Beker >>
Japan and Asia Economist Bz Econ/FI & LatAm EQ Strategy
BofAS Japan Merrill Lynch (Brazil)
izumi.devalier@bofa.com david.beker@bofa.com

Emerging Asia Economics Jane Brauer

Sovereign Debt FI Strategist
Helen Qiao BofAS
China & Asia Economist jane.brauer@bofa.com
Merrill Lynch (Hong Kong)
helen.qiao@bofa.com Carlos Capistran
LatAm and Canada Economist
Rahul Bajoria BofAS
India & ASEAN Economist carlos.capistran@bofa.com
BofAS India
rahul.bajoria@bofa.com Pedro Diaz
Caribbean Economist
Jojo Gonzales ^^ BofAS
Research Analyst pdiaz2@bofa.com
Philippine Equity Partners
jojo.gonzales@pep.com.ph Christian Gonzalez Rojas
LatAm Local Markets Strategist
Pipat Luengnaruemitchai BofAS
Emerging Asia Economist christian.gonzalezrojas@bofa.com
Kiatnakin Phatra Securities
pipat.luen@kkpfg.com Lucas Martin, CFA
Sovereign Debt FI Strategist
Benson Wu BofAS
China & Korea Economist lucas.martin@bofa.com
Merrill Lynch (Hong Kong)
benson.wu@bofa.com

72 Global Economics | 24 November 2024