United States: Budget bubble
While the administration’s estimates out to FY2012 seem pessimistic, beyond that point they appear optimistic. We expect the deficit to trough at 4.7% of GDP in FY2013, and then start creeping higher. Conversely, the administration assumes the deficit will fall to less than 4% of GDP in 2013 and remain there until 2020.

Euro area: Vigilantes with a vengeance
The next hurdles to clear before sentiment might take a turn for the better are:
1) the Greek public sector strike on 10 February; 2) the EU summit between heads of state to debate on fiscal policy on 11 February; and 3) the Ecofin vote on the new Greek stability program on 15-16 February.

Japan: Reconciling fiscal soundness and reflation
Given the very high budget deficit and rising government debt, we think it has become clear that a framework needs to be developed to restore fiscal soundness over the medium term.

Australia: No change to RBA call
We had four 25bp hikes (from 3.75% to 4.75%) by the Reserve Bank of Australia (RBA) in our call for this year over 11 meetings, frontloaded into the first half of the year. Despite no rate hike this past week, we still expect four out of 10, though a bit more evenly spread.

Emerging Asia: Near a transition point
We are nearing a transition point for Asia, as the extraordinary drivers of the recovery (Chinese policy stimulus, the rebound in global trade) give way to the ordinary drivers (domestic consumption and investment and the stabilization of G3 demand).

Emerging EMEA: South Africa: monetary policy review
Given endemic inflationary pressures in the South African economy and amid significant increases in administered electricity prices over the next three years, we believe any changes to the SARB’s mandate would be damaging to its independence and credibility.

Latin America: Mexico: Top questions for 2010
We expect the Mexican economy to bounce back in 2010, growing at least 3.0% after contracting 6.8% in 2009. We expect Mexico’s recovery to be an external demand led-recovery in H1 2010. Q3 2009 GDP grew 2.9% QoQ on a seasonally adjusted basis, confirming that the economy is bottoming out.