MACRO COMMENTARY

2012, n1 December 20

Macro economic scenario 2012A complicated Year

Conclusion

2012 is going to be a complicated year where it will be difficult to have, as in 2011, core bets in place for the year. The big question mark is about the future of the Euro. The answer to this question brings us to two different scenarios:

European leaders are unable to fix the issue and the Euro as single currency collapses. In other words, Germany decides to go back to the Mark. The value of the Euro will collapse, the dollar will appreciate together with the Yen and Gold. GBP could be under pressures due to special links between European Union and UK. CAD, AUD, SF, likely Scandinavian currencies will appreciate too. Uncertainties and less confidence will bring Western economies in recession, impacting also emergent economies. Protectionism will spur an increase of some commodities prices which will lead to riots and geopolitical risks in some part of the world. The German bund will remain the safer investment in the world. Most of Europeans countries would need to increase interest rate to finance their deficits, most of them will fall in depression. Corporate bonds will rise becoming safer than most of government bonds. European leaders find a way to more fiscal consolidation; the euro survives around the countries able to implement reforms. Some countries go out the euro area to a euro bis or their own currency. In this case, fiscal consolidation will bring Western economies to an anemic growth, interest rate will remain low for some time, inflation will stabilise around 2-3%. Confidence will come back and emergent countries will continue printing pretty high performances, beating the forecasts. Likely the Euro will rally against the dollar, the Yen and the GBP. AUD, CAD, Real, MYR will appreciate against the dollar which will be the great loser of the year. The US economy will take advantage of a weak currency. Equity market will move until a range, volatility will collapse. Stock picking will be the key to make performances. The Fixed income market will remain pretty high due to the persistence of low rate. Italian, French and Spanish bond will rise against German bund. Commodity prices will be steady.

No one can at this stage make the future. The poor quality of political leaders has driven the world to a critical situation. With two major elections in 2012: USA and France, it seems complicated for the same leaders to take the right decisions. Since July 2007 and the beginning of the financial crisis, decision makers have taken the wrong way. Can they be better in 2012? I do not have the answer. Stalos Capital2012 Jean Paul PoggiInvestment Director

The US: on the road to perdition

United States

The European debt crisis has attracted all eyes on Europe forgetting the poor economic situation in US. Unfortunately, the situation on the other side of the Atlantic is not bright. The economy expanded less than previously estimated to 2% in the third quarter as the risk of another recession prompted companies to cut inventories for the first time in almost two years. Excluding stockpiles, so-called final sales climbed 3.6%, the most since last years fourth quarter. Gains in retail sales, manufacturing and housing this quarter, combined with lean inventories, raise the odds of the worlds largest economy will pick up. At the same time, unemployment and stagnant wages mean consumer spending has been fuelled by reductions in savings that cast doubts on whether increases will be sustained into 2012, just as the risks from government cutbacks and the European debt crisis intensify. Corporate profits rose at a slower pace last quarter, and the gain in wages and salaries for the period from April through June was cut by more than half, to $38.9 billion from $78.7 billion. Consumer spending, about 70% of the economy, grew at a 2.3% annual rate, little changed. The savings rate last quarter dropped to 3.8%, the lowest since the last three months of 2007. Inventories were cut at an $8.5 billion annual rate, subtracting 1.6% points from growth, compared with a 1.1% previous estimate. It was the first time stockpiles were trimmed since the last three months of 2009. Fewer inventories put producers on track to ramp up output heading into the holiday season. Restocking will boost growth by 0.8% in the fourth quarter, according to economists at JPMorgan Morgan. The jobless rate, which was 9.4% in December 2010, declined to 8.6%. Payrolls have climbed by 132,000 a month on average in 2011, not enough to create sustainable employment. A decline in the share of the working-age population, known as the par-

ticipation rate, caused a decline of unemployment, meaning that the economy needs to create fewer jobs to decrease unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labour force, another driver is that the baby-boom generation is starting to move into retirement. Even if the current pace is enough to cause a persistent decline in unemployment over the long term, some analysts project the jobless rate will end 2012 at 8%. The baby boomers, the population bulge after World War II between 1946 and 1964, added 9.4 million people in the 16-24 age group during the 1960s and 7.3 million in the 1970s. Boomers started turning 65 this year, and every day for the next 18 years, about 10,000 more will hit the age that historically has been associated with retirement, according to the Pew Research Center in Washington. As a result, there are more inflationary risks with the very accommodative monetary policy we have now. The housing market remains very depressed. A supply of distressed properties in the foreclosure pipe-line that is weighing on prices of existing houses will keep luring buyers away from new construction. A jobless rate that has been hovering around 9% or higher for more than two years signals demand will take time to pick-up, a sign homebuilding will contribute little to economic growth in 2012. The housing market remains out of balance, with much more supply than demand. The S&P/Case-Shiller index of home values in 20 cities slid 3.6% in September, capping 12 straight months of declines. Nationally, prices decreased 3.9% in the third quarter from the same time in 2010. The median second house price dropped 4.7% from a year earlier. The end of a temporary halt on foreclosures may push more properties onto the market, triggering further slides in value that may prevent the industry from recovering for years. At the best, the housing market will stabilise in 2012. There are still a lot of depressed properties in the pipeline that will hit the market, and demand likely needs to strengthen above a 5 million annual rate 2 - Macro Economic scenario 2012

to absorb the overhang of unsold homes and alleviate the downward pressure on prices. Distressed sales, comprised of foreclosures and short sales in which the lender agrees to a transaction for less than the balance of the mortgage, accounted for 28% of the total in October sales. A growing glut of seized properties threatens to weigh on prices even more. In the third quarter, U.S. lenders started foreclosures on more homes, the first increase in a year, as bank moratoriums that clogged the pipeline dissipated. The U.S. lost its last stable outlook from the three biggest credit-ranking companies after Fitch Ratings lowered the nation to negative following a congressional committees failure to agree on deficit cuts. Declining situation makes the probability of a downgrade greater than 50% over two years. U.S. government debt rallied the most since the end of 2008 after Standard & Poors stripped the U.S. of its AAA ranking on August 2011, while global equities lost $9.7 trillion in market value during that period. U.S. federal debt held by the public will exceed 90% of GDP by the end of the decade, while interest on the debt will require more than 20% of tax revenue. Gross debt, including local and state governments, will climb to 110% of GDP during that span. According to some calculation including some debt agencies, we are already over this level. Fitchs action is a reminder of the need for Congress to reduce the countrys longterm deficit in a balanced manner and to avoid efforts that would undo the $1.2 trillion in automatic cuts negotiated last summer. The dollars role as a reserve currency is among the reasons Fitch affirmed the U.S.s AAA rating. That does provide a tremendous amount of financial flexibility for the U.S. However, the value of the dollar is not anymore in the hands of the FED, but in the hands of the Chinese government. The $1.3 trillion budget deficit in the fiscal year ended Sept. 30 was about 8.7% of GDP, the third-largest percentage in the past 65 years, exceeded only by the deficits in 2009

and 2010, according to Treasury statistics. U.S. marketable debt outstanding has doubled to about $9.7 trillion since the end of 2007 as tax receipts plunged and the government boosted spending amid the worst recession since the Great Depression. Accommodative FED policy: more dollars have been printed the last ten years than in all history of United States, interest rate at 0.25% combined with an atone growth and a quite high inflation give to USA very poor arguments to be again the world growth driver. The Presidential election in November 2012 could bring on the table new stimuli from the FED or from the current administration. President Barack started his presidential campaign one month ago with an unrealistic plan for jobs. Such measures could lead the stock markets up on shortterm basis. The dollar could also play a role of defensive value in case of accentuation of the European debt crisis. Besides, big cap in America are doing extremely well, investing in emergent markets and no repatriating profits in the US. In this case they do not pay taxes. Taxpayers are paying the bill, corporates have never been so well. The electoral campaign could bring also some serious issues for the global trade. A very fashionable topic is the Chinese foreign -exchange policy and trade practices. As President Obama seeks to reassert U.S. interests in Asia, he is using increasingly strong language on Chinas trade, currency and intellectual property policies. The U.S. contends Chinas currency is kept artificially low, putting American businesses at a disadvantage and driving up Chinese trade surpluses. You do not take in such way about a country which could decide the fate of your own currency even if it suits American electors. The Chinese Foreign Ministry released a statement saying the U.S. trade deficit and unemployment are not caused by the Yuan exchange rate and a large appreciation in the currency wont solve U.S. problems. It is not wrong too. Besides, the Yuan has gained about 8% against the dollar in nominal 3 Macro Economic scenario 2012

terms since the country ended a two-year peg to the U.S. currency in June 2010, and 30% since July 2005. In real terms, or inflation-adjusted, the gain has been more than 10%, because consumer prices have risen faster in China than in the U.S. Two-way trade between the U.S. and China was $457 billion last year and the U.S. deficit was $273 billion. Still Obama and U.S. businesses regard China as a growing market for American goods; of the 2.3 million vehicles General Motors delivered in the second quarter, 588,000 were sold in China, where the Detroit-based company is No. 1 in market share. A March survey by the American Chamber of Commerce in China found 78% of member companies in the country said their China operations in 2010 were very profitable or profitable. The last thing the world needs at the moment it is a commercial war between USA and China. As mentioned in my previous outlook, protectionism remains one of the biggest threat for any sustainable growth in the world.

4 Macro Economic scenario 2012

Euro area

The Euro area: The end of the Euro or the emergence of a new Europe

Euro-area governments have to repay more than 1.1 trillion euros of long and short term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone. European banks have about $665 billion of debt coming due in the first six months, according to Citigroup Inc. Clearly, the European debt crisis is likely to continue and to amplify in 2012. After two years, European leaders did not convince the world that they are handling the issue properly . Italy, the third European economy has to sell 440 billion euros bonds in the first part of the year. If the borrowing cost remains above 6%, the situation will not be sustainable. Mario Monti also needs to persuade the European Central Bank to continue to backstop the countrys debt. The ECB began buying Italian debt on August 2011 after the nation unveiled 45.5 billion euros in austerity measures, though the effort hasnt been sufficient to stem borrowing costs. The market reading about Italy has been a bit unfair. Italys deficit, at 4.6% of GDP last year, is about the same as Germanys, lower than that of France and less than half the U.K.s, at 10.3%. The country already has a primary surplus, which could send the debt on a declining trajectory starting next year. The Debt of 120% does not take into consideration likely 20%-25% of black economy not integrated in the real GDP. Still, anemic economic growth and the terrible Berlusconi image led investors to increase their bets against Italy during 2011. The big problem of Italy is not the debt, it is an unstable political system. I do not believe that the Mario Monti government will survive long, soon or later Italy could be in politic crisis. The French triple A is more than in trouble. Frances credit outlook was lowered by Fitch Ratings at the end of December. Fitchs action followed reviews announced by Standard & Poors and Moodys. S&P on Dec. 5

placed the ratings of 15 euro nations on review for possible downgrade. As collateral, the European Financial Stability Facility is likely to lose its top credit rating with the French downgrade. The main weapons against the European crisis will be seriously damaged. Macroeconomic figures have been quite dark for French. Unemployment rate have climbed to 9.8%, inflation remains above the target to 2.7% and the country would be already in recession according to the Frenchs Insee, the statistical institute. It said that France is entering a recession with its output shrinking 0.2% in the fourth quarter 2011 and another 0.1% in the first quarter of 2012. French deficit will be around 6% of GDP and the government debt would be around 87% of economic output, the most of any top rated euro country. With presidential election coming in May 2012, I do not expect any fundamental measures to change the trend of the deficits or the growth. Indeed the choice for French remains quite limited between the showman Sarkosy (24% in the last pool), Flamby surname of Socialist candidate in relation with his smooth character (27%), fashionable and racist extreme right candidate Marine Le Pen (18%) and the boring center right Franois Bayrou (11%). French have room to change the direction of their economy, but the lack of leadership and courage could lead the country to a deep recession. Without any action at the European level, the cost of financing debt could reach 5-6% in the coming six months. The steady Germany will suffer too. However, the first European economy starts a contraction from a strong point. Growth will slow to 0.6% in 2012 from 3% in 2011 before recovering to 1.8% in 2013 according to the Frankfurt-based Bundesbank. This scenario is based on the hypothesis that the debt crisis doesn't worsen and that the uncertainty among investors and consumers gradually lessens. In case of accentuation of the debt crisis, Germany could contract in 2012. 5 Macro Economic scenario 2012

Bundesbank President Jens Weidmann has said he opposes the European Central Bank stepping up its bond purchases to battle the debt crisis, and its up to governments to find a lasting solution. Domestic conditions in Germany remain in place for a broad, protracted upswing. While the short-term outlook has clouded over in recent months and the economy will experience a difficult period this winter, the decline in unemployment is bolstering consumer spending. Domestic demand could drive growth next year while net trade makes a negative contribution. German export growth will slump to 3% in 2012 from 10% in 2011 and 18% in 2010. German exporters will clearly feel the weaker demand stemming from the rest of Europe. Inflation should slow to 1.8% in 2012 from 2.5% in 2011. The budget deficit will drop around 1% of GDP in 2011 from 4.3% in 2010 and the ratio will be little changed in 2012 and 2013. German debt will probably sink to 81% of GDP at the end of 2011 from 83.2% a year earlier. Bund is going to stay the safer investment in the world. In Spain, the economy grew in 2011 around 0.7%, less than the governments target, and likely the regions will not meet their deficit goal this year. But the big issue for Spain is the banking system. Spanish banks are under pressure to cut property-backed debt, hold about 30 billion euros of real estate thats unsellable. Spanish lenders hold 308 billion euros of real estate loans, about half of which are troubled, according to the Bank of Spain. Land in the middle of nowhere and unfinished residential units will take as long as 40 years to sell. Only bigger banks such as Santander, BBVA, La Caixa and Bankia are strong enough to survive their real-estate losses. Spanish home prices have fallen 28% on average from their peak in April 2007. Land prices dropped by more than 60% in the provinces

of Lugo, A Coruna and Murcia, and 74% in Burgos since the peak in 2006. Santander has 9.2 billion euros of foreclosed assets, followed by Banco Popular with 6.05 billion euros, BBVA with 5.87 billion euros, Bankia with 5.85 billion euros, Banco Saba-dell SA with 3.6 billion euros and Banco Es-panol de Credito SA with 3.36 billion euros. Dozens of Spanish banks have failed or been absorbed since the economic crisis ended a debtfuelled property boom in 2008. The cost to the public of cleaning up the industrys books has so far been 17.7 billion euros in the form of share purchases from the government bailout funds known as the FROB. Banks have made provisions for a potential 105 billion euros of write-downs since the market crashed. Lenders may need to make another 60 billion euros in provisions to clean up their balance sheets. Spain is struggling to digest the glut of excess homes in a stalling economy where joblessness is among the highest in Europe. Unemployment has almost tripled to 22.6% from a low of 7.9% in May 2009, according to Eurostat. Financial institutions have foreclosed on 200,000 homes and that will balloon to as many as 600,000 in coming years as unemployment continues to rise. The periphery of European Union is not better. Portugals economy shrank for a fourth quarter in the three months through September as the government cut spending and raised taxes to narrow its budget deficit. GDP dropped 0.6% more than estimates. From a year earlier, GDP dropped 1.7%. Household spending declined 3.3% from a year earlier, government spending fell 0.4% and investment dropped 14%. Portugals economic expansion has averaged less than 1% a year for the past decade. The economy will shrink 3% in 2012 according to European Commission forecast. It would be one of only two euro-area countries to contract, 6 Macro Economic scenario 2012

the other being Greece with 2.8% negative growth. Despite a new government the situation in Greece is not better and no light is at the end of the tunnel. Greek Prime Minister Lucas Papademos, another technocrat, took power in Athens, receiving a mandate to push through budget measures to secure EU financing to avert default. Greece will never be able to pay back money to investors despite a second bailout. Greek GDP contracted 5.2% in Q3 and around 5.9% in 2011. Unemployment reached 19.5%. While leaving the euro would allow Greece to regain control of exchange and interest rates, a September 2011 report by economists at UBS AG said its new currency would drop 60%, and local borrowing costs would jump at least 7%, imperilling the balance sheets of banks and companies. The cost would be as much as 11,500 euros a person in the first year outside the euro and 4,000 euros in following years. As I mentioned since the start of this crisis, a negotiated temporary Greek exit would be the best solution for Greek and Europe. No government in Greece will be able to impose an austerity plan to Greek people until 2020 as Europeans are thinking today. The wind of revolution is blowing in Greece with potential huge collateral effects on other countries. Even Ireland, the best student of the crisis debt school cannot follow the program imposed two years ago by IMF and EU. The economy shrank 1.9% in the third quarter, an unexpectedly large drop that raised doubts about the country's capacity to meet its deficit-fighting targets through painful cuts. GDP growth forecast for 2012 have been reviewed down to 1.6% from 2.5% previously and to 2.8% on average over the next three years from 3% before, forecasts still quite optimistic from my point of view. As a consequence, the total fiscal adjustment over the period 2012-2015 has been increased to 12.4 billion euros. In clear, more cuts are needed. Beside, structural issues remain unfixed, the property market

is one of them. In the year to September residential property prices at a national level fell by 14.3%. Residential prices fell by 1.5% in the month. House prices in Dublin are now 49% lower than at their peak in early 2007, while apartments in the capital are 59% down. The fall in the price of residential properties in the rest of Ireland is somewhat lower at 40%. Overall, the national index is currently 44% lower than its highest level in 2007. According to the latest Reuters survey of Irish economists, house prices are likely to continue falling for some time yet. The poll predicts that house prices will decline by a further 12% on average in 2011, and 6% in 2012. In the meantime, the number of Irish mortgages in arrears for more than 90 days grew 11% in the third quarter, highlighting the growing strains on the countrys banks and adding pressure to the government to help struggling borrowers. More than one in 10 Irish home loans are not being fully repaid and the situation is deteriorating as unemployment remains stubbornly high and house prices continue to fall. The impact on the Bank balance sheets could become huge and difficult to monitor. Europes economic expansion failed to accelerate in the third quarter (+0.2%) as Germany and France struggle to shore up a region bracing for a recession sparked by an escalating debt crisis. From a year-earlier, euro-area GDP increased 1.4% in the third quarter. It is a poor performance. An economic contraction in the current fourth quarter seems hard to avoid and the risk of a new recession is becoming more than likely. Recent surveys indicate the pace of growth wont pick up in the current quarter. The European Commission in Brussels cut its euro-area growth forecast to 1.5% this year and 0.5% in 2012. I personally believe that the growth will be close to zero at the end of 2012, assuming that European leaders find a way to solve the debt crisis.

7 Macro Economic scenario 2012

Europe is at the dawn of a new area. A lack of vision, leadership and courage have conducted the European Union to a corner where drastic choices have to be made. Instead of facing only the consequences of the crisis, European leaders have to find a solution to the causes. The euro currency was an unfinished job giving the monetary policy to the ECB but leaving the budgetary policy in the hands of each state. Economy policy has always two legs: the monetary and the budgetary policy. It is difficult to run on one leg, particularly when the ground becomes difficult. I said many times that the only long term solution for the euro area is a Eurobond market monitored by an independent European agency. It is also the only way for the Euro to survive. If in 2012, German and French cannot find an agreement about that, the euro as we know will not exist at the end of the next year. The situation is also socially and economically unsustainable for many countries like Greece or Portugal and others. An exit of the euro area to a new euro bis or to their original currency has to be organised before seeing social unrest driving these countries to some dark sides we do not want to see again in Europe. This has be organised inside a new monetary system managed in coordination with the ECB. As Europes debt crisis raises the risk of a recession, companies in the region show no signs of slowing with growth in earnings poised to top their U.S. rivals. Net income for companies in the Stoxx Europe 600 Index will rise by 10.5% in 2012 after increasing 11% this year according to more than 12,000 analysts estimates compiled by Bloomberg. The gauge is headed for four straight years of income growth exceeding 10%, the longest streak since 1998.

8 Macro Economic scenario 2012

Other countries

Developed economies: contrasted realities Australia and Canada, a commodity story: in Australia, the economy grew faster than estimated in the third quarter to 1% after 1.4% the prior quarter, on consumer spending and mining-driven investment. Economic momentum finished the third quarter solidly and recent cuts in official interest rates should help safeguard sectors of the economy most exposed to short-term cyclical swings. Compared with a year earlier, the economy expanded 2.5%. Household spending rose 1.2%, adding 0.7% point to GDP and non-dwelling construction jumped 24.4%, adding 1.5 points. China is Australias biggest trading partner and its demand for iron ore, coal and energy drove up the nations terms of trade. Mining increased 3.7%, adding 0.3 point. Resource projects valued at A$456 billion have cushioned a slump in manufacturing and services hit by a record currency and subdued consumer spending. The resource-rich states of Western Australia and Queensland led growth. Western Australias economy expanded 8.4% last quarter from three months prior, and 16.4% from a year earlier. Private-sector business investment surged 12.9% from the prior quarter and 22.7% from a year earlier. The strong investment outcomes are further evidence of the massive pipeline of planned investment in Australia. The nations household savings ratio rose to 10.1%. Australia will slow a bit in 2012, but its economy will remain steady. Besides, they can manage the slowdown by decreasing interest rate currently at 4.25%, the highest of the developed economies. Canada grew at a 3.5% annualized pace from July to September, compared with a 3% gain forecast. Exports of goods and services rose at a 14.4% annualized pace in the third quarter, the fastest since the middle of 2004. Canada is in a unique position in that they are less exposed to Europe and China and more heavily reliant on the U.S. With interest rate at 1% and inflation at 3.2%, the country is in a weaker situation than Australia, but still steady enough to fight a new

contraction. Japan, still in deflation: Japan: economy expanded 6% for the first time in four quarters as exports recovered from a record earthquake, an expansion that is already slowing because of weakening overseas demand. At 543 trillion yen ($7 trillion), economic output was back to levels seen before March 11 earthquake. A sustained rebound will depend on how much reconstruction demand can offset a slowdown in global growth as Europes debt crisis damps global confidence and an appreciating yen erodes profits. But likely, GDP will slow very sharply in the current quarter. Expansions in Asian nations from China to South Korea to the Philippines are already showing signs of cooling. International Monetary Fund Managing Director Christine Lagarde said on Nov. 12 that Japan needed to swiftly implement reconstruction spending. Personal consumption rose 1% from the previous three months, led by an increase in durable goods purchases and exceeding forecasts, and overseas shipments advanced 6.2%. Industrial production fell in September for the first time since the March disaster. Japans currency advanced to its highest level since World War II against the dollar. The Ministry of Finance has been intervening more than they ever have. This policy helps exporters and it produces liquidity, but it produces major disruptions in Asia in terms of competitive devaluation. Japanese companies with factories in Thailand have also had to contend with record flooding in the Southeast Asian country. Unable to measure the extent of the damage, Toyota and Honda Motor Co. have scrapped their annual profit forecasts. The Bank of Japan holds interest rate to 0.10% and cut its economic assessment as Governor Masaaki Shirakawa called the European debt crisis the biggest danger for the nations exportled recovery. BOJ left its asset-buying fund unchanged at 20 trillion yen ($260 billion). The BOJ may bolster stimulus again if the yen resumes its gains after climbing to postwar highs against the dollar last month. 9 Macro Economic scenario 2012

The economy will face an adverse effect from the slowdown in overseas economies and the appreciation of the yen as well as from the floodings in Thailand. The rising yen is hurting the profitability of Japanese companies highly depending of exports. It was quite rare to see a so pessimistic report from BOJ. I believe BOJ may increase asset purchases and consider buying longer-term bonds if a deepening crisis in Europe prompts the yen to rise further as a haven currency. The UK: on the road to stagflation: Britain faces a 0.5% contraction in the fourth quarter and 0.4% growth in the first quarter, according to the Office for Budget Responsibility. The National Institute for Economic and Social Research theres a 50% chance that Britain slips back into recession. The unemployment rate for 2011 will be 7.9% for an inflation of 4.8%. The budget deficit would be around 10% of GDP and the total debt at 84% of GDP. Yes, you did not miss something, I am talking about the UK economy. Chancellor of the Exchequer George Osborne plans to reduce Britains budget deficit is under pressure. Osborne needs to borrow an extra 86 billion pounds over the four fiscal years to April 2015 as growth forecasts are lowered to just less than 1% in 2011 and cut by more than half for 2012. I believe, it is still very optimistic. The problem is that such policy so far has driven the country not to a recession but to a stagflation. The deteriorating outlook means Osborne may have to extend spending cuts, so that austerity continues during the first two years after the next general election due to take place in 2015. Jobless claims will rise to 1.75 million next year while inflation will fall to its 2% target by 2013, according to optimist analyse consensus. I am not sure inflation will fade so much and I believe high com-

modity prices will maintain inflation around 3%. The weak outlook led the OCDE to say that the Bank of England will probably add to stimulus early next year as the economy slides back into recession. The Paris-based organization forecasts the central bank will increase its asset-purchase target by 125 billion pounds in early 2012, boosting the program to 400 billion pounds, something which is totally crazy from my point of view. The current issues are not solved yet, that Bank of England is already preparing the next crisis. Osborne announced fiscally neutral ways of boosting economic activity, including a 20 billion-pound credit easing program in which the government underwrites small company lending. He also proposed tapping pension-fund savings to inject 30 billion pounds into infrastructure projects and extend a child-care program for 260,000 poor children valued 650 million pounds over three years. In clear, all these measures are too small to really change a darkest outlook than ever. The isolated position in Europe, which is the first British commercial partner weakens the position of Prime Minister Cameron. With interest rate at 0.50%, an easy quantitative program boosted at 275 billion pounds, a domestic demand depressed and exports down, UK is naked to face the cold of the coming recession . Besides, Bank of England has to deal with serious issues. It introduced a new sterling liquidity facility to address potential financial-market strains as Europes sovereign debt crisis intensifies. The moves indicate officials are taking pre-emptive measures in case Europes debt crisis escalates further and freezes markets. The BOE forecast about the future of the euro area is pretty clear. It does not believe the euro will survive. 10 Macro Economic scenario 2012

The Bank of Englands extended Collateral Term Repo Facility will provide funding against the widest range of collateral and will help ensure that banks have sufficient access to sterling liquidity to mitigate risks arising from unexpected shocks. The new facilitys operations will offer sterling for 30 days against collateral currently allowed for use in the banks Discount Window Facility and is open to all banks and building societies that are signed up to the DWF. U.K. banks have 140 billion pounds of term funding due to mature in 2012, concentrated in the first half of the year, according to the central bank. Short-term money-market funding conditions have been fragile over the past few months, with banks finding it harder to roll over all of their maturing funding. If current market tensions continue into 2012, replacing that funding is going to be real struggle, which will put further pressure on funding costs and deleveraging. The European debt crisis remains the big threat. But the fiscal consolidation policy implemented by the Government of David Cameron did not work. It failed to provide solutions to a crisis which is firstly global and not only national. Emergent markets still growing Russia, the biggest commodity exporter in the world: GDP expanded 4.8% in Q3 from a year earlier, the fastest pace since the second quarter of 2010, after increasing 3.4% in the previous three months, below the median expectation of 5%. The worlds largest energy exporter is counting on domestic consumption to balance shrinking demand abroad as Europe fights to staunch a debt crisis. Prime Minister Vladimir Putin, who will run for president next year, is seeking annual growth of between 6% and 7% and turn the economy into one of the worlds five largest. Fixed-capital investment surged 8.5% from a year earlier in September,

while unemployment fell to a more than three-year low. Retail sales jumped 9.2% in the biggest increase since October 2008 after a 7.8% gain in August. Growth in consumption and retail lending is continuing with 30% annual increase in credit growth. Agriculture also made a substantial contribution to growth last quarter. Russian farmers harvested 95 million metric tons of grain, according to the Agriculture Ministry. Thats about 50% more than in the same period of 2010 and bolsters the industry following the countrys worst drought in at least a half century last year. The sovereigndebt crisis in Europe, Russias most important export market, is hurting demand for manufactured goods. Industrial production grew 3.9% in September from a year earlier, the slowest pace since it began expanding in October 2009. Manufacturing stalled in the July-September period, posting the worst performance since the fourth quarter of 2009 and leaving producers to face lasting stagnation after foreign sales weakened. The economy will match its pre-crisis level by the end of 2011, taking twice as long to recover compared with the 1998 crisis that followed the governments default, according to Renaissance Capital. Russias economy grew at an average annual rate of 7% during Putins presidency from 2000 to 2008 before plunging 7.8% in 2009. The government forecasts a 4.1% expansion in 2011. Is South Africa still a winner? Growth in South Africas economy, the biggest in Africa, stayed near a two-year low in the third quarter as Europes worsening debt crisis undermined demand for exports and mining output slumped. GDP rose an annualized 1.8% in the three months through September. The economys recovery has weakened as the Europe, which buys about a third of South Africas manufactured exports, threatens to fall into recession. 11 Macro Economic scenario 2012

Finance Minister Pravin Gordhan on Oct. 25 cut his growth forecast for this year to 3.1% from 3.4%, less than half the 7% expansion that the government says is needed to meet its jobs pledge. Business confidence slumped to its lowest level in a year in the third quarter as demand for manufacturing exports weakened. Investors have dumped South African assets as growth weakened and risk-appetite waned. The rand has plunged 21% against the dollar this year, the worst-performer of 16 major currencies tracked by Bloomberg. Slower growth may threaten the governments target of creating 5 million jobs by 2020, which is needed in order to reduce the unemployment rate to 14% from 25% currently. The economy is forecasted by the government to expand 3.4% in 2012 and 4.1% in 2013.The Reserve Bank, led by Governor Gill Marcus, has kept its benchmark interest rate unchanged at a 30-year low of 5.5% this year to support growth, even as price pressures increased. Inflation accelerated to the top of the banks 3% to 6% target range in October. No country can actually escape the fall out of the global uncertainties that are currently prevailing. Indeed, the European environment holds many uncertainties and possible unthinkable consequences. South Africa remains an interesting country to play on the long term with many uncertainties on short-term. Turkey, the new Eldorado? Turkeys 8.2% economic growth in the third quarter was the worlds fastest behind China. Exports are growing faster than imports and helping the worlds 17th-largest economy reduce its trade gap. Turkey may beat the 4% economic-growth target set out by the government for next year as its current-account deficit ceases to be a risk, according to Industry Minister Nihat Ergun. The government will identify areas that are contributing to Turkeys 12-month cumulative trade deficit of

$78.6 billion, or about 10% of GDP, and create investment incentives to plug the gap. The International Monetary Fund forecasts that GDP expansion in Turkey will slow sharply to 2% due to weaker capital inflows. The Turkish economy was growing too fast for its own good in the first three quarters and were going to have to see a major adjustment. Policy responses were insufficient to prevent the development of a large current-account deficit and high inflation. Monetary policy shifted to an unconventional mix of reserve requirements, the interestrate corridor, and the policy rate, which has not demonstrated it can deliver price or financial stability. Now, the threat is that Europes sovereign-debt crisis will cut demand for Turkish exports and reduce the inflows needed to finance the current account, leading to a plunge in growth rates. Almost half of Turkeys exports go to the European Union. Brazil, a future leader: the worlds secondlargest emerging market after China, contracted for the first time in 2 1/2 years in the third quarter after policy makers raised borrowing costs and the European and U.S. debt crises hurt confidence. As a result, economic growth for the whole of 2011 will slow to 3% from 7.5% the previous year. Since August, President Dilma Rousseffs administration has cut the benchmark interest rate three times, slashed taxes on consumer goods from pasta to refrigerators and eased curbs on credit. Earlier this year the government cut taxes on payroll, exports and small companies and agreed to a 14% increase in the minimum wage effective January, measures that are equivalent to a combined fiscal stimulus of 39 billion Reals ($21.7 billion). The government also plans to raise public investment to about 1.2% of GDP in 2012. The measures taken this year and further central bank reductions in interest rates are enough to make sure the 12 Macro Economic scenario 2012

Economy will resume growth and pick up speed until annualized GDP expansion reaches 5% in the final quarter of 2012. GDP shrank 0.17% in the three months ended in September on an annualized basis. Growth in the whole of 2012 will likely be 4% and inflation will be less than 5%. Traders are wagering policy makers will cut the benchmark interest rate by an additional 125 basis points by the end of April from 11% in January. Economists expect GDP to expand no more than 3.5% in 2012, according to the latest central bank survey taken a day after the stimulus package was announced. They forecast consumer prices will rise 5.5%. The country could also use international reserves to provide credit for Brazilian exporters as was done during the 2008 credit crunch. International reserves held by the central bank rose to $353 billion on Dec. 9 from $239 billion in 2009. The government plans continue to rely more on interest-rate cuts than fiscal stimulus to spur economic growth, and fiscal policy will be relatively neutral in 2012. Rousseffs 2012 budget proposal targets a surplus before interest payments of 139.8 billion Reals for the federal, state and local governments, or 3.1% of GDP. South Korea: economy expanded in the third quarter to 0.8% as exports of cars and metal products increased. The economy expanded 3.5% from a year earlier, beating the banks October estimate of 3.4%. Goods exports increased 1.6%, private consumption gained 0.4% and government spending rose 1.4%. Overseas shipments continue to drive the economy, expanding a more-thanexpected 13.8% in November. Meanwhile, industrial production unexpectedly fell 0.7% in October from September, the fifth decline this year. South Koreas economy will grow by 3.8% in 2012 according to the OCDE. India, a fragile giant: the economy grew in Q3 at the slowest pace in more than two

years to 6.9%. That was the weakest expansion since the second quarter of 2009. Prime Minister Manmohan Singhs efforts to stimulate growth are being hamstrung by corruption scandals that have stalled legislation for a year, and political outcry against foreign investment in retail. The Reserve Bank of India has also been constrained in supporting the economy as it struggles with inflation thats al-most twice the rate in China and higher than in Brazil and Russia. The currency has slumped 14.4% against the dollar this year. Manufacturing in India grew 2.7% in the three months through September from a year earlier, slower than the 7.2% gain in the previous quarter. Investment by companies and the government declined 0.6%. Indias benchmark wholesale -price inflation was 9.73%. The central bank has boosted the repurchase rate by 375 basis points in 13 moves since the start of 2010, the fastest round of increases since the monetary authority was established in 1935. Developing East Asia still in fire: Despite difficult time for developed economy, Asia is still booming. Asian nations have fiscal scope to cushion its economy from an escalation in Europes debt crisis. Developing East Asia which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and India, will see its expansion moderate to 7.8% in 2012 from 8.2% in 2011. Asia, which led the world out of the 2008-2009 recession, is poised to withstand the blows from any slump in demand for its exports or pull-back in credit by European banks. China, a soft landing? Europes deepening financial crisis and a faltering recovery in the U.S. will weight on profits. More than 60% of Chinese companies that sold bonds in the past six months invest in the real estate market, where sales are weakening under government curbs.

13 Macro Economic scenario 2012

The slowdown of the economy will become more prominent in the next two quarters. The government can support growth by ramping up state housing construction, while moderating inflation may leave room for a loosening monetary policy. Chinas economy can avoid a so-called hard landing with an expansion of more than 8% next year, the economy grew 10.4% in 2010 and likely 9.1% in 2011. The government intensified property measures this year with limits on mortgages and restrictions on home purchases in about 40 cities. October housing transactions declined 25% from September and prices fell in 33 of 70 cities. Seventyfour of 121 companies that filed bond prospectuses since May with Chinabond, the nations clearing-house, count one of their main businesses as real estate, have property subsidiaries or invest in the market. Most Chinese builders face payment delays from developers as the pace of construction slows amid tighter credit and a slowdown in home sales. About 80% of construction companies said developers were behind on payments. Most economists expect Chinas government to loosen some fiscal or monetary policies without cutting interest rates as inflation remains elevated. Domestic demand remains buoyant. Industrial companies sales climbed 29.1% to 68.18 trillion Yuan for the first 10 months of the year. China can also use its $3.2 trillion in foreign exchange reserves to rescue the economy. The country learned from the 1997 Asian Financial Crisis that it needs to keep large reserves to maintain liquidity in order to honour obligations. Inflation reached a 14-month low to 4.2% and industrial production rose less than forecast to 12.4%, bolstering the case for more stimulus measures to shore up growth in the worlds second-largest economy. Socially, the situation could become quite dangerous for the government. Even if Inflation may average about 4% in 2012, the inflation

calculation has been changed at the beginning of the year 2011 underestimating food prices. So the reality of inflation is likely to be above 5%-6%. With inflation down and officials seeing an increase in domestic costs and a slowdown in overseas demand putting severe pressure on its exports next year, policy makers may have little appetite to allow faster gains in the Yuan. Chinas export situation is quite serious and growth in shipments in November was slower than the previous month. Exports rose 10.9% last month from a year earlier, according to the median estimate of 32 economists in a Bloomberg. That would follow a 15.9% increase in October which was the slowest pace since gains resumed in December 2009 after the global financial crisis, excluding holiday distortions. China is going to slow likely to 8% growth and inflation would remain in real close to 5 -6%. Commodity will remain at high level despite the slowdown Food commodity, a crisis at the corner: China reaped its seventh record corn crop in eight years in the harvest ending in 2011. That still wont be enough to meet demand, driving a fivefold gain in imports as prices head for the highest-ever annual average. Production reached 189.2 million metric tons in the harvest that began in September, 6.7% more than a year earlier, according to a survey of growers in the seven main producing regions carried out by Genevabased SGS SA for Bloomberg. Imports in the marketing year that began last month may jump to 5 million tons from 1 million tons. While the supply predicted in the SGS survey would exceed the U.S. Department of Agricultures estimate by more than 7 million tons, rising imports show farmers are failing to grow enough grain for livestock feed. 14 Macro Economic scenario 2012

The fivefold expansion in Chinas economy in the past decade reported by the World Bank spurred a change in diets. The dairy herd almost tripled since 2000, and per capita pork consumption in the nation of 1.34 billion people rose 26 %. The demand is just too strong. The USDA said that China bought 900,000 tons of corn, the most since a 1.45 million-ton purchase in 1994. Chinese demand rose 50% since 2000 as output gained 38%. China became a net importer for the first time in 14 years in 2010. China is entering a golden age for consumption. Consumption of the meat in China, which produces about 50% of the worlds supply, will rise 3.5% to a record 51.56 million tons in 2012 from a year earlier. Corn production in China will likely fall 11 million tons short of demand by 2015. Importing corn to make up the deficit would rank the country as the worlds second-biggest buyer after Japan. The country may need to import as much as 7 million tons of corn and 4 million tons of lower-quality wheat next year to feed its hog, poultry and dairy herds, according to AgResource Co, a research company in Chicago. The world is facing an agriculture crisis in the coming two years. The Crisis could also be exacerbated by climate changes. Yingluck Shinawatra became Thailand first female prime minister by pledging to lift rural incomes through higher rice prices. The rest of Asia had to pay in 2011 for her campaign promise. Yingluck has said the government will buy grain from farmers at 15,000 baht ($502) a ton at harvest in November, above current market rates of 9,900 baht. Thailand is the worlds biggest rice exporter and Asia accounts for 87% of global consumption. Rice, the staple food for about half of the global population, has surged about 55% in the past years. The last flood in Thailand could also be a source of price rising. Agriculture Minister Theera Wongsamut said that the dams didnt re-

lease large volumes earlier because of concern rice farms may be flooded during the harvest. While Thailands fertile floodplains have helped the country remain the worlds biggest rice exporter for the past three decades, they also form a natural basin that slows the drainage of water through the Chao Phraya River toward Bangkok and the sea. The nations largest dams are storing 64.9 billion cubic meters of water, or about 93% of their capacity, compared with 52.3 billion cubic meters at the same time last year, the Royal Irrigation Department said on its website. Other food commodities are also on the uptrend. Sugar prices may rise above 25 cents a pound from the third quarter of 2012 after bottoming out in the second quarter, according to Macquarie Group. Prices will remain under pressure in the first half of 2012 as exports from the European Union, Central America, India and Thailand increase. India is the worlds second-largest sugar producer and Thailand the secondbiggest exporter. Prices will receive support at 20 cents a pound, below which Brazilian mills will favour ethanol or become unprofitable. Mills in Brazil can use their raw material to produce either sugar or ethanol. Sugar output in India totalled 30.8 million tons in 2006-07, after recovering from a 14.2 million tons crop in 2004-05, according to data on the website of the U.S. Department of Agriculture. Production slumped again to 15.95 million tons in 2008-09 before rising to an estimated 28.3 million tons in the current season. Top global producer Brazil may not be able to increase sugar output in the 2012-13 seasons, which starts in April there, due to the low rate of cane replanting and potential dry weather. Coffee futures are expected to rally in the first half 2012 from current sluggish levels on limited supply of arabica beans. 15 Macro Economic scenario 2012

Arabica coffee is grown mainly in Latin America and favoured by Starbucks to make specialty drinks. Brazilian growers are reluctant to sell, as origin stocks are slim, and being well financed, can afford to do so. With both the Colombian crop and Brazils 2012 crop being downgraded, the market is getting tighter. Brazil is the worlds largest coffee producer. Cocoa supplies will outpace demand for a second year in the season started in October, with a very good start to the current main crop in West Africa. Food commodity prices have been at the origin of some revolutions. People in the street of Cairo or Tunis asked first for bread instead of freedom. The current riots in China are caused mainly by an increase of inflation which makes the life of poor people more difficult. India where two-third of the population is leaving in the property has lost control of 25% of his territory to Maoist rebels in the last ten years. All this events have one common point: food prices. Energy and metal: prices stabilisation: As main analysts forecast, I do not believe that energy and non-precious metal prices will collapse in 2012. The world growth is slowing but not contracting. Advanced economies are in crisis, but not emergent economies. Brazil, Russia, India, China and all East Asia will continue to grow with huge needs. Demand from emergent economies will match the decrease of consumption in western economies. The International Energy Agency raised its forecast for global oil demand to 1.3% annually over the next five years on economic growth in China, cautioning that gains in prices threaten the recovery. Consumption will increase to 95.3 million barrels a day in 2016 from 88 million barrels a day in 2010, with China accounting for about 41% of the gain. Crude prices are weighing on the developed nations.

The resilience of emerging economies, which navigated relatively unscathed through the rough waters of the recession of 2008 to 2009, will likely alter the balance of global economic power. Prices around $100 are weighing down an already-fragile macroeconomic and financial situation in the OECD. I am expecting a barrel between $80-$95 in 2012.

16 Macro Economic scenario 2012