Larry Kantor GIC March 0310

Global Economic and Market Outlook Larry Kantor Head of Research March 3, 2010

Please read carefully the important disclosures at the end of this publication.

Recovery in 2010 still on course  The world is normalizing, which implies a strong rebound from extremely depressed levels Industrial production already turning

Exports are expanding % y/ y, real exports

IP index: Jan 08 = 100

Korea

105 100

Brazil

40

90

US

20

85

Europe

95

80

Japan

75 70

Korea Brazil US Germany China Japan

60

0 -20 -40

65 60 Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

-60 Jan-08

Jul-08

Jan-09

Note: Europe includes Germany, France, Italy, Spain and UK. Source: Haver, Barclays Capital

Jul-09

Jan-10

2

Recovery patterns in manufacturing and exports % of manufacturing and export loss recovered since start of '08 8 38

Euro area

Manufacturing production Exports (local currency)

15

UK

142 26

US

82 51 55

Japan

112

EM Asia

140 0

30

60

90

120

150

Note: Recovery = (current-trough since Jan 08)/(Jan 08 – trough since Jan 08).

Source: Haver Analytics, Barclays Capital

3

Fiscal pedal off the metal, but only slightly  Cash-for-clunkers and housing incentives are short-lived and “borrow” from the future, but are only a small part of overall fiscal packages

 40% of global discretionary stimulus is still in the pipeline for 2010; even higher in China.

Estimated stimulus spending by year

Fiscal stimulus by country Discretionary fiscal stimulus % of GDP (in relation to 2007 baseline)

Esimated share of stimulus spending by year OECD Countries

70

China

US 60%

60 48% 50%

50

50% 40%

40

37%

2008

Brazil 0.0

China 0.4

France 0.0

Ger. 0.0

India (FY) 0.6

2009

0.6

3.1

0.7

1.6

0.6

2010

0.8

2.7

0.8

2.0

0.6

Japan

Korea

S Arabia

UK

US

2008

0.3

1.1

2.4

0.2

1.1

2009

2.4

3.9

3.3

1.3

2

2010

1.8

1.2

3.5

-0.1

1.8

30 20

15%

10 0% 0% 0 2008

2009

2010

Source: OCED Economic Outlook, June 2009, Barclays Capital

4

China: Trains to nowhere? Not quite.  33,000 km of new railways currently under construction, totaling investment of CNY2.5trn  Wuhan – Guangzou high-speed railway opened on Dec 09: 10.5 hour trip made into 3hs  By 2012, high-speed railways will reach 13,000 km, covering 70% of cities with pop. of above 0.5 mn

Source: chineserailways.com

5

Controlling the hangover from the 2009 boost

Index of monetary conditions and GDP growth 106

Index

Nov 08

Strong January prompted early warning % y/ y

% y/ y 4

2.0

6

1.6

30

1.2

26

0.8

22

0.4

18

104 102

8

100 98

CNY trn

34

10

96

12 Loosening

94

14

92 90 Oct-04 Aug-05 Jun-06

16 Apr-07 Feb-08 Dec-08 Oct-09

Monetary Condition Index

Real GDP (RHS, inverted)

Source: Barclays Capital, CEIC

0.0 Jan 07

Jul 07

Jan 08

Jul 08

Newly increased loans (LHS)

Jan 09

Jul 09

14 Jan 10

M2 growth (RHS)

6

Productivity: Europe lags US Productivity comparisons: GDP per hour worked (% y/y) 6 5 4 3 2 1 0

US (business sector)

-1

Germany-France-Italy

-2

Japan (4 qtr ma)

-3 79

85

91

97

03

09

Source: Barclays Capital, Haver, Thomson DataStream

7

Inventory cycle is larger than in past recessions Change in real private inventories as a % of real GDP 1.5

1.0

f/ c

0.5

0.0

-0.5

-1.0

-1.5 60

65

70

75

80

85

90

95

00

05

10

Note: Shading indicates recession. Source: BEA, Haver Analytics, Barclays Capital

8

Production is bouncing now, supporting household labor income growth 3m/ 3m % chg, saar

index, 3mma, sa

15

65

10

60

5

55

3m/ 3m % chg, saar 10 Payroll proxy (agg wkly hrs * avg hrly earnings) 8 6 4

0

50 2

-5

45 0

-10

40 -2

-15

35

-20

30

-6

25

-8

20

-10

-4

Mfg. agg. hours worked (lhs) -25

ISM manufacturing production (rhs)

-30 05

06

07

08

09

10

05

06

07

08

09

10

Note: Shading indicates recession. Source: BLS, ISM, Haver Analytics, Barclays Capital.

9

Consumption is improving along with labor income % y/ y, quarterly data 20

% 3m/ 3m, saar 8

10

6 4

0

2 -10 0 -20 -2 -30

-4

-40

-6 00

01

02

03

04

05

06

07

08

09

00

01

Light vehicle sales

02

03

04

05

06

07

08

09

10

Real non-auto consumption

Note: Shading indicates recession. Source: BEA, Haver Analytics, Barclays Capital

10

Negative wealth effects are starting to lessen % consumer spending (saar)

f/ c

3.0%

7.0%

f/ c

6.0%

2.5%

5.0%

2.0%

4.0%

1.5%

3.0%

1.0%

2.0%

0.5%

1.0%

0.0%

0.0%

-0.5%

-1.0%

-1.0%

-2.0%

-1.5%

95

97

99

01

03

Total wealth effects as % PCE

-3.0%

Real estate wealth effect Financial wealth effect

-2.0%

Real PCE (%y/ y)

-4.0% 05

07

09

95

97

99

01

03

05

07

09

Source: FRB, Barclays Capital, Haver Analytics

11

Leading indicators of payroll changes are improving 3mth avg chg, thous

3mth avg chg, thous

80

5.0

41.6

400

40

200

41.2

4.5

40.8 0

0

-40

4.0 40.4

-200 3.5

-80

-400

-120

-600

-160

-800

40.0 3.0

00

01

02

03

04

05

06

07

08

Temporary hires (lhs) Total nonfarm payrolls (rhs)

09

10

39.6

2.5

39.2 00

01

02

03

04

05

06

07

08

09

10

Average weekly hours: manufacturing overtime (lhs) Average weekly hours: manufacturing (rhs)

Source: BLS, Haver Analytics

12

Level of business investment spending is very low 15

Business investment as a % of US GDP

14

13

12

11

10

9 65

70

75

80

85

90

95

00

05

Source: BEA, Haver Analytics

13

Unemployment is well above the Fed’s desired range, while inflation is below y/ y % chg

% 11

Forecast

Forecast

5

10

4 9 8

3

7

2 6 5

1

4

0

3 2

-1 00

01

02

03

04

Fed's objective

05

06

07

08

09

Unemployment rate

10

11

00

01

02

03

04

05

Fed's objective

06

07

PCE

08

09

10

11

Core PCE

Source: BLS, BEA, FRB, Haver Analytics

14

Fiscal package is massive 400

Federal budget balance

4

200

2

0 0 -200 -2

-400 -600

-4

Stimulus packages

-800 -1,000 -1,200

billion

% of GDP

2001 tax cut

$174

1.7%

2003 tax cut

$231

2.1%

2008 rebate

$150

1.0%

2009

$787

5.5%

Level (bn $, lhs) Percent of GDP (rhs)

-1,400 -1,600 68

73

78

-6 -8 -10 -12

83

88

93

98

03

08

Source: BEA, CBO, Barclays Capital

15

Most of the stimulus has yet to kick in $ bn

$ bn

Tax benefits

ARRA spending

500

300

450

250

400 350

200

Entitlements

300

150

Contracts, grants, loans

250 200

100

150 100

50

50

0

0

Appropriated

Paid out

Appropriated

Paid out

Source: Recovery.gov, BEA, CBO, Council of Economic Advisers, Haver Analytics, Barclays Capital

16

Fixed income accounting plus composition The retrenchment of the Fed and the return to risk suggest it is inevitable that rates are going up

FI supply demand imbalance

Demand for risk free assets $bn

Ex Ante Demand Overseas Banks Households Pension allocation Total ex-ante demand Total net term FI supply Imbalance

Total +600 +300 +600 +100 1600 2640 -1040

1200

Cumulative flows into government money market funds since start of 2006

1000 800 600 400 200 0 -200 2006

2007

2008

2009

2010

Source: ICI, OECD Outlook, Barclays Capital

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A global fiscal shock  Massive amounts of QE reduced the burden of the fiscal shock US net fixed income issuance

G4 net debt/GDP set to increase dramatically Expected change in net debt/ GDP 2007-2011 (in pp) Euro Area

US net fixed income issuance, $bn 3000

19.6

2,640

2,593

2500 32.3

Japan

2000

1,551 1,314

1500 UK

35.2

1,124 843

1000 500

38.4

US

0 2006 0

10

20

30

40

2007

2008

2009E 2009-Ex 2010E Fed

Source: OECD Outlook, Barclays Capital.

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