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Global

ECONOMICS
The Big Chill
As the euro crisis builds and the US economy stalls... ...the developed world is succumbing to economic permafrost The emerging world looks better, but is not completely immune

Macro Global Economics Q4 2011

By Stephen King, Karen Ward and Madhur Jha

Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Macro Global Economics Q4 2011

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The Big Chill


As the euro crisis builds and the US economy stalls... ...the developed world is succumbing to economic permafrost The emerging world looks better, but is not completely immune

Permafrost in numbers
Following a tumultuous third quarter, we can now take a more considered look at the wreckage of the global economic recovery. We had already published updates for some of the worlds biggest economies in our 6 September 2011 report The New Global Cooling. Weve now extended the analysis to include all of the economies covered on a regular basis by the Global Economics team. Coupled with a further downward revision to our forecast for the Eurozone we now expect global growth of 2.5% in 2011 (compared to 3.0% in the last Global Economics Quarterly, 29 June 2011) and 2.6% in 2012 (previously 3.4%). While the numbers remain positive (unlike the collapse post-Lehman in 2009), they are not sufficiently robust to suggest that we have anything

HSBC growth and inflation forecasts GDP World Developed Emerging US UK Eurozone Japan Brazil Russia India China Inflation World Developed Emerging US UK Eurozone Japan Brazil Russia India China
Source: HSBC

__________ An uphill struggle___________ 2011 2012 3.0 1.8 6.3 2.5 1.2 2.0 -0.6 4.1 5.5 7.5 8.9 3.4 2.3 6.2 2.9 1.6 1.4 2.4 4.4 4.0 8.1 8.6

______________ Latest _______________ 2011 2012 2.5 1.3 6.0 1.6 1.1 1.6 -0.6 3.5 4.2 7.4 8.9 2.6 1.4 5.9 1.7 1.3 0.6 1.9 4.0 3.0 8.0 8.6

__________ An uphill struggle___________ 2011 2012 3.4 2.5 6.4 2.9 4.3 2.7 -0.1 6.5 9.6 8.0 4.8 2.5 1.5 5.8 1.5 2.2 1.9 -0.3 5.3 8.5 7.7 2.9

______________ Latest _______________ 2011 2012 3.4 2.6 6.3 3.2 4.4 2.7 -0.5 6.6 8.6 8.0 4.8 2.7 1.7 5.8 2.1 2.4 1.8 -0.3 5.8 7.6 7.7 2.9

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approaching a decent recovery in economic activity. Healthy global recoveries typically deliver growth of around 3.5% per year, so were now a long way short. And, as we have persistently argued in recent months, the level of economic activity remains remarkably low. The problems are particularly acute in the developed world, where we now expect growth this year of just 1.3% with a further 1.4% in 2012. These numbers are shockingly weak, held back by a combination of higher commodity prices earlier in the year, the painful process of deleveraging and, with the passage of time, growing political uncertainty. The emerging nations are not doing so badly. We remain positive on the outlook for China and India, even if China has lost some of the momentum it exhibited in 2010. Inflationary pressures appear to be easing following the scares earlier in the year. However, some of the smaller emerging nations particularly some of the Asian exporters are doubtless vulnerable to the deteriorating external environment. Overall, we expect growth of 6.0% in 2011 with a further 5.9% in 2012.

Monetary policy constrained by political deadlock


Following the shocking financial market developments in the third quarter US sovereign debt downgrade by S&P, a collapse in equity prices, a ratcheting-up of euro strains, a drop in US 10-year Treasury yields below 2% there has been a dramatic shift in attitude from the worlds central bankers. The Federal Reserve has launched Operation Twist, designed to force US long-term interest rates to still-lower levels, the Bank of England is contemplating further quantitative easing, despite inflation being well above target, and the European Central Bank has started to buy Italian and Spanish government debt, a remarkable development given the ECBs hallowed independence. But has monetary policy in all its conventional and unconventional forms begun to lose its magic? There are some obvious problems. The recent loss of economic momentum in the US, for example, shows that last years QE2 was not the panacea. More concerning is that central banks are increasingly being pulled into the political deadlock that is as much an issue in the US as it is in the Eurozone. Fear of Congressional criticism may have persuaded the Fed to adopt Operation Twist rather than QE3, for example. With constraints on monetary policy, weak growth will only make the household and fiscal deleveraging process all the more drawn out and painful.

The euro crisis intensifies with no end in sight


Despite all the talk about the EFSF and the ESM, the euro crisis remains unresolved. It is, of course, just one of many manifestations of the growing strain between creditors and debtors in an environment of extremely weak economic growth, but the euro crisis offers its own unique dangers. The US, for example, may have a terrible fiscal position, but its central bank has the capacity to print money to avoid the need for painful austerity, whereas the likes of Italy, Spain and others do not enjoy the same monetary flexibility. The choice is now simple: either the nations within the Eurozone have to come up with some kind of burden-sharing arrangement which takes into account the responsibilities of both creditors and debtors or, instead, the system fragments. As we argued in How to solve the euros problems, (Stephen King and Janet Henry, 30 September 2011), the EFSF and other short-term fixes are no substitute for a muchneeded lasting political arrangement. Fragmentation, meanwhile, could threaten another Great

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Depression, reflecting the sudden need for cross-border holdings of capital to unwind in response to the re-introduction of currency risk.

Investor implications
Economic weakness and financial uncertainty are hardly helpful for the value of risky assets. As Fredrik Nerbrand argues in his latest Allocator (The Loopy cycle 30 September 2011), we favour US Treasuries, cash and gold. With increasing correlation and volatility in the markets, we have reduced our portfolio weight in equities and commodities. Justified by valuations, we have maintained some exposure in high yield credit, expecting this asset class to outperform equities in the coming months.

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Contents
Key forecasts Monetary & fiscal policy assumptions The new economic permafrost
The Wizards of Oz Surprise, surprise The toil from oil Why so soon? The ambient noise of deleveraging Final support may be fading Swings and roundabouts The limits of monetary policy Weak growth and political battles Solving the euros problems

6 7 8
8 8 9 9 11 12 14 14 15 17

Country and Territory sections


US Canada Mexico Brazil Argentina Chile Eurozone Germany France Italy Spain UK Norway Sweden Switzerland Hungary Poland Romania Russia Turkey Egypt Saudi Arabia UAE South Africa Japan Australia New Zealand China India Hong Kong Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 36 38 39 40 42 43 44 46 48 50 52 54 56 57 58 59 60 61 62 64 66 67 68 69 70 72 73 74 76 78 79 80 81 82 83 84 85 86

Global economic forecasts


GDP Consumer prices Short rates Long rates Exchange rates vs USD Exchange rate vs EUR & GBP Consumer spending Investment spending Exports Industrial production Wage growth Budget balance Current account

19
20 22 24 25 26 27 28 29 30 31 32 33 34

Disclosure appendix Disclaimer

90 91
5

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Key forecasts
Key forecasts __________________ GDP_________________ 2009 2010 2011f 2012f World (nominal GDP weights) World (PPP weights) Developed Emerging North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam -2.6 -0.7 -4.1 2.0 -3.4 -3.5 -2.8 -3.0 -6.1 -0.6 0.9 -1.7 -4.2 -4.1 -5.1 -2.6 -5.2 -3.7 -4.3 -4.9 -1.6 -5.1 -1.9 -3.4 -4.1 -6.7 1.6 -7.8 -4.8 -14.8 -7.1 4.7 0.8 0.1 -2.9 -1.7 0.4 -6.3 1.4 -2.0 5.9 9.2 2.5 -2.7 7.0 4.6 -1.6 1.1 -0.8 0.3 -1.9 -2.3 5.3 3.9 5.1 2.6 7.6 3.0 3.0 3.2 6.6 5.4 7.5 9.2 5.2 1.7 1.7 3.6 1.4 1.2 -0.1 1.9 1.4 2.1 5.4 2.7 4.3 2.2 1.2 3.8 4.0 8.9 4.2 -1.3 5.1 4.7 4.1 1.7 2.8 6.6 4.0 2.7 1.7 9.1 10.4 7.8 7.0 9.0 6.1 7.2 7.6 14.5 6.2 10.9 7.8 6.8 2.5 3.6 1.3 6.0 1.7 1.6 2.1 4.3 3.7 3.5 8.0 6.4 1.6 1.6 2.8 1.6 0.5 0.6 1.5 1.1 2.5 3.8 1.9 4.0 1.9 1.8 3.7 4.2 5.1 4.0 1.5 1.8 4.3 5.9 3.9 3.0 3.9 -0.6 1.8 2.0 7.3 8.9 5.5 5.0 7.4 6.4 4.8 4.3 5.0 3.4 4.0 3.9 5.8 2.6 3.6 1.4 5.9 1.7 1.7 1.9 4.1 3.9 4.0 5.0 4.5 0.8 0.6 1.0 1.2 -0.2 0.3 1.3 1.3 3.1 0.9 1.4 3.1 1.7 1.5 3.0 3.0 3.0 5.1 2.5 2.7 3.2 4.3 4.2 2.5 5.2 1.9 3.9 3.8 7.4 8.6 6.0 4.5 8.0 6.7 5.0 4.8 5.1 4.1 1.7 5.0 7.0 _______________ Inflation ________________ 2009 2010 2011f 2012f 1.0 2.0 0.0 4.9 -0.3 -0.3 0.3 6.1 5.3 4.9 14.5 0.3 0.6 0.3 0.2 0.1 0.8 -0.2 1.5 2.2 2.2 -0.5 -0.5 7.6 1.0 4.2 3.5 11.7 6.3 16.0 5.6 15.5 3.3 5.1 -0.4 7.2 0.9 -1.3 1.8 2.1 2.9 -0.7 5.6 0.6 12.4 4.8 0.6 3.3 0.6 2.8 -0.9 -0.8 7.0 2.4 3.3 1.4 5.6 1.7 1.6 1.8 7.0 4.2 5.0 23.2 1.4 1.8 1.6 1.2 1.7 1.6 2.0 2.5 3.3 2.4 1.2 0.7 6.0 1.5 4.9 2.6 6.9 8.6 9.4 6.9 11.7 2.7 5.3 1.8 4.3 2.2 -0.7 2.8 2.3 4.8 3.3 5.8 2.3 10.4 5.1 1.7 3.8 2.8 3.0 1.0 3.3 9.2 3.4 4.2 2.6 6.3 3.2 3.2 2.9 7.9 3.5 6.6 23.8 3.2 2.8 2.7 2.4 2.2 2.8 2.7 3.3 4.4 1.5 3.0 0.4 6.3 1.9 3.7 4.1 8.6 5.9 8.6 6.3 11.0 3.6 4.8 2.0 5.1 2.9 -0.5 3.6 4.4 5.6 4.8 6.1 5.0 8.0 5.6 3.2 4.4 4.7 4.4 1.5 4.0 18.4 2.7 3.3 1.7 5.8 2.1 2.1 2.0 8.0 3.6 5.8 23.4 2.9 1.9 1.8 1.7 2.0 2.4 1.2 2.0 2.4 2.2 2.4 0.6 6.2 2.4 3.5 3.1 7.6 7.4 8.0 4.0 8.9 2.4 6.1 2.8 5.9 2.4 -0.3 3.1 3.0 4.6 2.9 5.7 5.3 7.7 6.2 3.0 4.5 3.0 3.6 2.0 3.6 11.2

Notes: Calendar year; except for * which is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain nominal GDP (USD) weights Source: Thomson Reuters Datastream and CEIC, HSBC estimates

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Monetary & fiscal policy assumptions


Monetary policy Q1 2011
US Targeted Fed funds Japan Overnight call rate Eurozone Repo rate UK Bank rate Canada Overnight rate 0.00 to 0.25 0.05 1.00 0.50 1.00

Q2 2011
0.00 to 0.25 0.05 1.25 0.50 1.00

Q3 2011f
0.00 to 0.25 0.05 1.50 0.50 1.00

Q4 2011f
0.00 to 0.25 0.05 1.25 0.50 1.00

Q1 2012f
0.00 to 0.25 0.05 1.00 0.50 1.00

Q2 2012f
0.00 to 0.25 0.05 1.00 0.50 1.00

Q3 2012f
0.00 to 0.25 0.05 1.00 0.50 1.00

Q4 2012f
0.00 to 0.25 0.05 1.00 0.50 1.00

Source: Thomson Reuters Datastream, HSBC estimates

Fiscal policy Country


US

2011
The budget deficit for FY2011 will closely match that of FY2010, at least in nominal terms. We expect the FY2011 deficit to come in close to USD1.28trn, barely changed from the USD1.29trn of red ink posted in FY2010. As a percentage of GDP, the deficit should drop to about 8.6% from 9.0%. Tax revenues as a share of GDP are beginning to rise again, while the increase in federal outlays as a share of GDP has begun to taper off. The government has proposed a third supplemental budget of over JPY10trn, which is expected to be passed by late October. This would support construction activity well into 2012. How exactly this will be funded is not clear yet, although part of the funding for reconstruction could be made available through cuts elsewhere, which implies that the boost to growth is not as large as this headline number suggests. The narrowing output gap and tighter fiscal policy should help to narrow the Eurozone public deficit to 4.5% of GDP in 2011 from 6% in 2010. Even without a rise in long-term interest rates, however, this improvement will not be enough to stabilise the debt-to-GDP ratio before 2013. Solid growth should bring the budget deficit down to 1.7% of GDP in 2011. One driving force behind the improvement is the strength of the labour market: Revenues from income tax are rising, while transfer payments are shrinking. We expect the debt to GDP ratio to fall slightly from around 84% to 82.5%. In 2011, we expect the public deficit to narrow to 5.8% of GDP on the back of a recovery in GDP growth and thanks to the end of one-off measures such as the grand loan which narrowed the French public deficit by EUR35bn in 2010. The lack of any meaningful austerity measures however imply that fiscal adjustment will not weigh on GDP growth. Public debt COULD continue to rise to 85.6% in 2011 after reaching 82.1% of GDP in 2010 on our calculations. The Berlusconi government recently passed a EUR54bn package of measures to eliminate the budget deficit in 2013. From 2011 onwards, the primary budget balance (excluding interest payments) should be back in surplus and the public deficit should narrow towards 4% in 2011 from 4.6% in 2010. The March Budget left the broad fiscal plan effectively unchanged, with a decline in the structural deficit of roughly 2ppt of GDP being targeted in FY2011/12. Almost half of this tightening will come via higher taxes. We expect a deficit of 1.9% of GDP in FY201/12, following a deficit of 2.2% of GDP (36bn CAD) last fiscal year. As a result fiscal policy is being held roughly neutral in Canada this year.

2012
Temporary tax reductions and federal spending increases set to expire in 2012 could create significant fiscal drag on the economy, equivalent to about 1% of potential GDP. Washington officials may extend (or even increase) some of the tax breaks and spending programmes to prevent a sudden build up of fiscal constraints on the economy. At this point, we expect only a modest decline in the deficit, down to about USD1.13trn from USD1.28trn in FY2011. Tax hikes may be in the pipeline. There are proposals to raise the consumption tax starting in April 2012 by 1ppt to 6%, with an aim to raise it all the way to 10% by 2015. A 1ppt hike could yield around JPY2.5trn in additional annual revenue. However, at this stage, it is uncertain whether this will be implemented. Weak GDP growth is expected to hinder the consolidation efforts of peripheral countries, while the Presidential election in France may also limit the extent to which public spending is reduced. The increase of the effective lending capacity of the EFSF (and later the ESM) could apply upward pressure to bond yields. Still reasonable growth will push the deficit down to 1.4% of GDP in 2012. Despite the improvement in the fiscal situation, the leeway for any fiscal loosening is limited due to the debt brake. Hence, we expect no significant fiscal loosening that could benefit companies or consumers. The recent pressure on European debt markets encouraged the prime minister at end-August to shore up the credibility of the deficit reduction programme from 7.1% of GDP in 2010 to 5.7% in 2011 and 4.5% in 2012 by unveiling tax hikes ahead of time. But the 2012 budget law didnt include any additional austerity measures. Therefore, if GDP growth is lower than the official estimate, the public deficit could come in at 5.6% of GDP in 2012 rather than at 4.5%, which could push the public debt-to-GDP ratio to 88.8%. Ongoing austerity measures should lead to a higher primary surplus but higher interest payments and very weak nominal growth will mean the budget deficit will still amount to about 3.7% of GDP. The pace of fiscal consolidation is not expected to ease significantly in FY2012/13, given that the structural deficit is seen falling by a further 1.7ppt of GDP. Spending cuts, however, are seen providing a clear majority of the tightening. The Canadian government is planning to bring its budget into balance by FY2014/15. However, we anticipate that any steps towards fiscal consolidation over the coming year will be modest. We expect the deficit as a share of GDP to move down to about 1.7% for FY2012/13.

Japan

Eurozone

Germany

France

Italy

UK

Canada

Source: HSBC

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The new economic permafrost


Unconventional monetary policies offered hope... ...but have achieved little... ...undermined by the growing political uncertainty stifling economic growth

The Wizards of Oz
After the Great Recession, there has sadly been no Great Recovery. To be fair, no one thought the scars left by the financial crisis would disappear any time soon. Nevertheless, policymakers claimed to know a thing or two about dealing with the aftermath of a financial meltdown. The West, apparently, could not only avoid a Great Depression Mark II but also the multi-year deflation experienced by Japan. A mixture of interest rate cuts, fiscal stimulus and the printing press would surely do the trick. Ben Bernanke, the worlds most powerful central banker, told us so in his now-famous 2002 speech entitled Deflation: Making sure It doesnt happen here1. Yet tricks arent always magical. And sometimes we discover that, behind their impressive exteriors, our policymaking institutions are as intimidating as the Wizard of Oz: their reputations may be big but their powers are sometimes rather more modest.

We have consistently taken the view that the Western world was suffering from Japan-lite problems: weak money supply growth, high levels of debt, lots of deleveraging, structurally weak growth and a rapidly deteriorating fiscal position. Given recent economic developments, perhaps lite should be replaced with heavy.

Surprise, surprise
Inflation concerns are now behind us and policymakers are now focusing more or less entirely on growth or the lack of it the increase in financial instability and the mounting risk of recession. Its not difficult to see why.

The speech can be found at http://www.federalreserve.gov/boarddocs/speeches/2002/2002 1121/default.htm

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How can we explain this sudden loss of economic momentum? For a while, it seemed possible to argue that the weakness was mostly the result of temporary global supply disruptions associated with the Japanese earthquake and tsunami. As times gone by, however, this explanation has lost its last remnants of plausibility. Even as Japan has staged a recovery, economic indicators elsewhere have continued to plunge. The latest Philly Fed readings, for example, have in recent months touched the lows seen during the depths of the recession at the beginning of 2009 (Chart 1). Kevin Logan, our Chief US Economist, has devised a range of indicators to track how close the US is getting to recession (see Recession Watch No 2, September 30).
1. The Philly Fed survey is back in recession territory

doubling within the space of 12 months. That, of course, hasnt happened.


2. The recent rise in oil prices came at a bad moment

%Yr 300 200 100 0 -100 71 74 77 80 83 86 89 92 95 98 01 04 07 10 Real oil price


Source: Thomson Reuters Datastream

% Yr 300 200 100 0 -100

Why so soon?
Nevertheless, higher oil prices have played a role. One clue comes from the lack of growth of real household income (Chart 3). The rise in US inflation in the first half of the year had the same effect as a giant tax increase. Real income growth slumped and, as it did so, consumer spending growth came to a grinding halt. Unlike the 1970s, the increase in inflation wasnt followed by an increase in wages and hence real incomes were hit particularly hard. Compared with previous recovery episodes, the result has been a remarkably insipid performance from American consumers (Chart 5). Its a reflection of underlying weaknesses in the labour market, most obviously the persistence of unemployment and the associated worrying rise in the number of long-term unemployed.

Index 60 40 20 0 -20 -40 -60

US

Index 60 40 20 0 -20 -40 -60

68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 Philadelphia Fed Surv ey


Source: Thomson Reuters Datastream

The toil from oil


Higher oil prices have certainly played an important role (Chart 2). We warned in February that this oil price spike couldnt happen at a worse time and suggested that the bigger concern is ultimately recession, not inflation2. Yet we thought that a recession was likely to be triggered only if oil prices continued to rise, perhaps to USD140pb or beyond in effect, a

See The global economic impact of higher oil prices, Stephen King, Karen Ward and Madhur Jha, HSBC Research, 25 February 2011

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3. US real incomes have been hit hard

5. US consumer spending is remarkably weak

% Yr 10 5 0 -5 -10

US

% Yr 10 5 0 -5 -10

Index , T=100 120 115 110 105 100 95 90 T

Consumption

Index , T=100 120 115 110 105 100 95 90

60 65 70 75 80 85 90 95 00 05 10 Real disposable income


Source: Thomson Reuters Datastream

T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 57Q3 60Q2 69Q4 73Q4 01Q1 81Q3 01Q1 07Q4

Source: US Bureau of Economic Analysis, T equals peak of cycle prior to recession

Singling out the weakness of consumer spending, however, is a blinkered approach. Other US domestic metrics have also been very disappointing. Housing investment has been hopeless, non-residential investment has picked up only modestly and government consumption is now a drag on growth, a reflection of ongoing deleveraging at the state and local level. Much the same can be said of the UK. The difficulties facing Western economies are much greater than a simple loss of consumer momentum.
4. Even without a double dip, this is the weakest post-war US recovery

6. US government spending is already under pressure

Index , T=100 120 115 110 105 100 95 90 T

Gov ernment Spending

Index , T=100 120 115 110 105 100 95 90

T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 57Q3 80Q1 60Q2 81Q3 69Q4 01Q1 73Q4 07Q4

Source: US Bureau of Economic Analysis, T equals peak of cycle prior to recession

Index , T=100 120 115 110 105 100 95 90 T

GDP

Index , T=100 120 115 110 105 100 95 90

7. US housing investment is frozen at low levels

Index , T=100 180 160 140 120 100 80 60 40 T

Residential inv estment

Index , T=100 180 160 140 120 100 80 60 40

T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 57Q3 80Q1 60Q2 81Q3 69Q4 01Q1 73Q4 07Q4

Source: US Bureau of Economic Analysis, T equals peak of cycle prior to recession

T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 57Q3 80Q1 60Q2 81Q3 69Q4 01Q1 73Q4 07Q4

Source: US Bureau of Economic Analysis, T equals peak of cycle prior to recession

10

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8. Other areas of investment have picked up but from a very low base

Index , T=100 140 120 100 80 60 T

Non-residential inv estment

Index , T=100 140 120 100 80 60

planet earth. Another way of demonstrating the problem comes from a comparison of Fed funds with the household saving ratio. In times past, declines in Fed funds were typically matched eventually by rising consumer spending helped along by a drop in the saving ratio. As Chart 11 shows, the relationship has now broken down. Ongoing household deleveraging has stifled the benefits stemming from monetary policy. The same was true of Japan at the beginning of the 1990s.
10. Theyve only just begun to repay debt

T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 01Q1 07Q4

Source: US Bureau of Economic Analysis, T equals peak of cycle prior to recession

9. Exports have been the only area of normality

US household debt as a share of GDP 100% 80% 60% 40% 20% 0% 51 58 65 72 79 86 93 00 07 100% 80% 60% 40% 20% 0%

Index , T=100 160 140 120 100 80 60 T

Ex ports

Index , T=100 160 140 120 100 80 60

T+2 T+4 T+6 T+8 T+10 T+12 T+14 T+16 57Q3 80Q1 60Q2 81Q3 69Q4 07Q4 73Q4 07Q4

Source: Thomson Reuters Datastream

Source: US Bureau of Economic Analysis, T equals peak of cycle prior to recession

The ambient noise of deleveraging


Economies typically enjoy some flexibility in dealing with oil price shocks. If credit markets work well, households can borrow to offset a squeeze in real incomes. If theyre working less well, governments can borrow on behalf of households and support real incomes via a tax cut. These sources of flexibility may no longer exist. The ambient noise of deleveraging is now deafening. Even if the supply of credit has improved, continuous weakness in US housing has led households to pay down debt. Yet, as Chart 10 suggests, following the massive increase in borrowing before the financial crisis, there is still a long way to go before households return to

11. The Fed cut rates but household saving went up

14 12 10 8 6 4 2 0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 Sav ing rate (LHS)


Source: Thomson Reuters Datastream

20 15 10 5 0

Fed funds (RHS)

Deleveraging is no longer confined to households. The Eurozone crisis has already made that clear. Nations are under pressure either from markets or from political forces to get a grip on their fiscal arithmetic.

11

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As a result, since the last Global Economics Quarterly we have taken an axe to our forecasts. We now expect growth in 2012 of just 1.7% in the US, 1.3% in the UK and a dismal 0.6% for the Eurozone.

Yet while the renewed acceleration in growth was welcome, the associated pick-up in inflation bringing with it rising income inequality and the threat of social instability was not. Policy across the emerging world has been systematically tightened over the past 18 months, a mixture of conventional rate increases and unconventional quantitative tightening. So whereas countries in the developed world are now desperately seeking growth, nations in the emerging world were, until recently, much more worried about inflation.
12. The emerging contribution to US trade has been on the rise

Final support may be fading


The US economic performance could have been a lot worse had exports done as badly as domestic demand. Relative to history, however, US export growth has been perfectly reasonable (chart 9), reflecting most obviously the rising importance of the emerging world. Indeed, the strength of emerging market activity has provided vital support: emerging economies are now bigger than they used to be, theyve been expanding very quickly (in some cases, too quickly) and, in recent times, have become bigger contributors to US export growth than the nations of the developed world (Charts 12 and 13). And the story is not just restricted to the US. German exports in recent years have expanded rapidly thanks mainly to the stellar growth of demand for German products in Asia and Latin America (Chart 14). There are plenty of structural explanations underlying the strength of the emerging markets expansion. Weve discussed many of them elsewhere (see, for example, Karen Wards The World in 2050 (4 January 2011) or Stephen Kings The Southern Silk Road (6 June 2011)). But one key reason why emerging nations have offered support recently is the extent to which their policies have been very growth friendly. Weve already mentioned the upgrades to forecasts in China as the misery of 2008 gave way to the renewed optimism of 2009, but plenty of other emerging economies had a similar experience.

% 30 25 20 15 10 5 0 -5 -10 -15 -20

Contributions to US ex port grow th

% 30 25 20 15 10 5 0 -5 -10 -15 -20 09

82 85 88 91 94 97 Emerging
Source: IMF Direction of Trade Statistics

00

03

06

Adv anced

13. The US has hugely benefited from strong emerging demand

Index , 2007 = 100 250 200 150 100 50 0 07 Latam 08

US ex ports

Index , 2007 = 100 250 200 150 100 50 0

09

10

11 Asia

Western Europe

Source: IMF Direction of Trade Statistics

12

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14. Germanys experience has been similar

Index , 2007 = 100 250 200 150 100 50 0 07 08

Germany ex ports

Index , 2007 = 100 250 200 150 100 50 0

Brazil now feels it was a little heavy handed and has started to reverse some of the tightening, cutting rates by 50bp in August.
15. Some of the smaller EM economies are more exposed to the troubles in the developed world Trade vulnerability % exports to DM ( 2010) Latin America Mexico Brazil Argentina Chile EMEA Hungary Poland Russia Turkey Ukraine Egypt South Africa Asia China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Thailand Vietnam Financial vulnerability* Current account +FDI %GDP

09

10 Latam Asia

11

USA Western Europe


Source: IMF Direction of Trade Statistics

90.2 41.1 28.4 50.8 73.1 78.8 53.9 50.1 22.4 42.3 54.7 70.0 34.7 44.9 60.8 60.6 75.7 45.2 41.5 54.6 68.5

0.9 -0.6 1.1 4.5 4.5 1.1 -9.0 -0.4 -0.2 -2.7 4.4 6.4 -0.9 2.0 11.2 2.1 24.1 1.0 3.6 5.9

Therefore, despite some fairly hefty downward revisions to our growth forecasts in the developed world, there have been few changes to our forecasts for the emerging world. Indeed, our forecasts for Chinese growth this year and next remain rock solid at 8.9% and 8.6%, respectively. Similarly, we are still forecasting more than 7% growth in India over the coming two years. India has always been a more domestically driven economy, but the same is increasingly true for China. Indeed over the past year net exports havent made any contribution to the stunning 9% growth its achieved. Its true that some of the strength of domestic demand is spillover effects from the almighty fiscal stimulus introduced in 2008. There are more than a hundred thousand infrastructure projects that are work in progress, which is helping fixed-asset investment run at close to 25% annual growth. But strong wage growth is also fuelling doubledigit consumption growth. As the Asian super powers steam ahead with infrastructure driven growth this continues to support the commodity exporters. Weve edged down our forecast for Brazil slightly but this is more a reflection of the domestic monetary tightening that has occurred over the course of the year through the interest and exchange rate, and macroprudential measures. With the Eurozone crisis escalating it appears the central bank of

* This proxy for financial vulnerability shows how susceptible an economys funding gap is to portfolio flows Source: IMF Direction of Trade Statistics, HSBC

Some of the smaller emerging market economies are not quite so fortunate. Table 15 shows a selection of the EM countries we cover and their dependence on developed world demand for exports. Clearly some of the smaller Asian economies are more exposed to the world trade cycle and fluctuations in demand in the West. We have taken down our forecasts a little more significantly for Hong Kong, Taiwan and Singapore. It is somewhat harder to gauge the vulnerability of each country to potential financial contagion. Equity prices have also fallen sharply on emerging bourses, which will have some impact on consumer sentiment, but the wealth effect from stocks is small in emerging markets. It is the

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potential for liquidity flight and banking sector troubles that is of more concern. In certain parts of EM, 2008 saw parent financial institutions returning funds from foreign subsidiaries to bolster domestic balance sheets, starving the local markets of credit. For others the collapse in trading finance as counterparty risk soared was the main issue. This kind of liquidity squeeze seems less of an issue this time around, due to the generous provision of central bank liquidity in the developed world and the ample level of reserves at the hands of local central banks. While our base case scenario continues to be one of healthy GDP growth for EM, we highlight two risks. First, a sudden contraction in commodity prices would be a huge restraint on growth in the Middle East, LatAm and Russia where public and private cash flows are dependent on commodity revenues. Second, the flight to safety has led to declines in some EM currencies relative to the dollar and euro, which is a problem for those countries with large amounts of financial liabilities denominated in foreign currencies. Central parts of Central and Eastern Europe look particularly vulnerable (see Emerging CEEMEA Economics: the impact of Eurozone contagion, Murat Ulgen, 12 August 2011). Overall, the emerging world looks less vulnerable to the fallout from problems in the developed world today than it did in 2008. Of course, this does depend on how bad things get there. We stress that the key difference for us, as we put together our forecasts for the EM countries, is that, in stark contrast to the developed world, policymakers still have fiscal and monetary tools left in their armoury should their economies need a boost. As it stands, we dont think theyll need to use them. Indeed, particularly in Asia, we think policymakers should keep their eye on inflation which for now is proving rather sticky. But if the developed world fails to overcome its current

troubles, EM policymakers still have some of their powder dry. That said, Beijing may be hesitant to unleash the magnitude of stimulus it produced back in 2008 and 2009. Again via the impact on global commodity prices, this produced a little more inflation than was comfortable. Like the Federal Reserve, Chinese policymakers may be feeling some limits on their policy choice. Some additional stimulus may be offered in the light of a renewed meltdown elsewhere but the policydriven boom of the past couple of years will not be repeated any time soon once bitten, twice shy. As a result, if things do get ugly in the developed world, its difficult to see how emerging nations can ride to the global rescue once more.

Swings and roundabouts


The resulting tilt in global economic growth has certainly helped boost Western exports, but the cost has been much higher commodity prices. Growth in the emerging world is much more commodity intensive than elsewhere, so any tilt in global growth towards China, India and others inevitably pushes up the price of energy, food, metals and other raw materials. And its those price rises that have led to higher Western inflation and, hence, lower real wages. Looser monetary conditions stimulated the wrong parts of the world economy and, via higher inflation, squeezed real incomes in the West, undermining the pace of recovery.

The limits of monetary policy


Mr Bernankes 2002 speech made no real mention of the dangers of international monetary leakage. Much of the speech was internally focused, as if the rest of the world didnt really exist. And where there was reference to the international situation, it was primarily a story about monetary helicopters and the US dollar:

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Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, its worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from US history is Franklin Roosevelts 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the US deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelts devaluation.

Western world is genuinely worse off relative to earlier expectations (Table 16).
16. Where we were, where we are and where we thought wed be Consensus forecast for 2011 made in 2008 Actual Q1 % change in 2011 actual since Q1 2008 ppts difference between actual and forecasts

US Canada Japan UK Germany France Italy

107.8 107.8 105.1 106.1 105.3 106.0 104.1

99.7 102.3 94.4 95.9 99.8 99.1 94.9

-0.3 2.3 -5.6 -4.1 -0.2 -0.9 -5.1

-8.1 -5.5 -10.7 -10.2 -5.5 -6.9 -9.1

* Index, 2008 =100 Source: Thomson Reuters Datastream, Consensus Forecasts

Weak growth and political battles


In truth, we have reached the point where central bankers begin to run out of power. Their potency is fading because any likely resolution to the developed worlds economic difficulties will involve burden-sharing across different groups in society. And that must be a matter not of monetary technique but, instead, of political choice. To see why, consider how economies have behaved since the onset of the crisis. GDP is, at best, no higher than it was at the beginning of 2008 and, in many countries, still quite a lot lower. The cumulative performance has been far worse than was anticipated pre-crisis. Indeed, relative to levels projected for 2011 by the forecasting consensus pre-crisis, GDP is massively down. For all the stimulus on offer, the

This, however, creates a problem. Until 2008, asset values and levels of debt were determined by optimistic expectations about future growth which, in hindsight, have proved wide of the mark. Even if a second recession is avoided, the evidence now strongly suggests that previous estimates of trend economic growth were too high. In Chart 17, weve sketched out the implications for a typical debt-ridden Western economy: its consistent with the idea that, recession or not, weve shifted to a permanently lower path for GDP both a lower level and a lower growth rate. That, in turn, means that the collective financial claims on future income are probably too high, as they have been based on a previous, more optimistic view of future levels of economic activity. It also means that those who took on debts in times past, fully expecting income gains to allow them to repay their creditors, are now in trouble. The level of economic activity both current and future appears not to be high enough to allow all financial claims to be settled.

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17. Different paths for the economy: the gap between expectations and reality

18. Does the need for votes lead to political inaction?

GDP

US Canada Japan UK Germany France Italy

Time 3% grow th low er lev el, 3% grow th low er lev el, low er structural grow th
Source: HSBC

Spain India Brazil Russia

6 November 2012 presidential elections General elections held in May 2011, next in 2016 Parliamentary elections are scheduled for 30 August 2013 Under coalition agreement general elections to be held on 7 May 2015 4/18 September 2011 Mecklenburg-Vorpommern state elections; under regular circumstances federal elections will be held between 1 September and 27 October 2013 22 April 2012 (6 May 2012 - second round) presidential elections April 2013 parliamentary elections, May 2013 presidential elections 20 November 2011 general elections Presidential elections planned for July 2012, May 2014 for parliamentary elections General elections held in October 2010, next scheduled for October 2014 March 2012 presidential elections

Any plausible resolution to the current financial crisis must involve burden-sharing on a scale not seen since the 1930s. Unemployment, defaults, inflation, currency crises, stock market collapses, austerity: all these are consistent with the new, lower, level of economic activity and are not unique to any one country or part of the world. Our political leaders, however, are in denial. Like Charles Dickens Mr Micawber, they hope something will turn up. Yet, the longer they leave the hard decisions reflecting in part the tyranny of the electoral timetable the worse things will become (Table 18). With indecision comes uncertainty.

Source: HSBC, Bloomberg

We used to think political deadlock was a problem unique to Japan. As Ben Bernanke put it in 2002: Japans economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies...Fortunately, the US economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan. ...I believe that...the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japans overall economic problems...both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japans long-run economic health. But in the short run, comprehensive economic reform will

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likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve. Ben Bernanke was right about Japan but, unfortunately, his analysis also now extends to the US and parts of Europe. With Democrats and Republicans unable to agree on how to tackle the US fiscal deficit and with nation states in the Eurozone unable to offer solace on the future of the euro, investors naturally head for the exit, unsure how they may be individually liable for sorting out the crisis.

Without the necessary political legitimacy, the euro could eventually break up. To do so would threaten another Great Depression. Disentangling the cross-border assets and liabilities which have risen so rapidly since the euros inception in 1999 would be a Herculean task that might fatally damage the fabric of the European financial system. Uncertainty over the value of assets and liabilities would soar, reflecting both the reintroduction of national currencies and sudden legal ambiguity. Doubts over the viability of both government finances and financial institutions would increase. Hyperinflation in parts of the periphery could become a reality while, in the core, massive currency revaluations alongside impaired balance sheets could threaten economic meltdown. Solving the Eurozones problems will be no easy task but, ultimately, countries need to accept collective responsibility for what can be regarded as collective systemic failures. While the ECBs purchases of peripheral debt and the creation of the EFSF are extremely helpful first steps, they cannot possibly be regarded as anything more than a small part of any lasting solution. As indicated at the IMF/World Bank meetings in Washington in September 2011, the EFSF will almost certainly have to increase in size. Action needs to be taken not just on sovereign debt but also on bank recapitalisation. And, if Greece is eventually to have a comprehensive restructuring, firewalls need to be created to limit the fallout elsewhere within the Eurozone. But theres more. The measures announced so far and the measures likely to materialise in coming months lack any proper political legitimacy. The cross-border battle between the interests of creditors and debtors partly a reflection of ongoing Western economic permafrost suggests that further political upheavals are very likely.

Solving the euros problems


19. Fiscal austerity wont deliver debt sustainability if it merely leads to recession

Index 65 55 45 35 25 05 06 Greece
Source: Markit, HSBC

Headline Manufacturing PMI

Index 65 55 45 35 25

07

08 Ireland

09

10 Italy

11 Spain

Problems within the euro area are, of course, particularly challenging. Imposing austerity on the peripheral nations cannot, on its own, solve the euros problems. Indeed, so far it seems that greater fiscal tightening is merely coinciding with deeper recession (Chart 19). We now need collective responsibility, involving burden sharing between creditors and debtors and, in time, a move towards a minor version of fiscal union.

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One way to avoid this is for Eurozone member states to sign up to a fiscal club, a modest act of fiscal union. That isnt going to happen overnight. As with the creation of the euro, however, it may be possible for politicians to agree on a timetable for the creation of such a club. By doing so, investors would know that politicians were prepared to fix the Eurozones problems and voters would be able to choose whether to sign up for the club or otherwise opt out (at considerable cost). Its not without its risks, but a timetable of this kind would at least offer the euro some much needed democratic legitimacy.

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Global economic forecasts

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GDP
Annual % Year World (Nominal GDP weights) World (PPP Weights) Developed Emerging North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway*** Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE* South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India** Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 2.5 3.9 1.8 5.7 2.4 2.5 1.9 2.1 1.3 1.1 8.8 4.0 1.1 0.8 -0.4 0.9 0.1 3.1 2.1 2.8 1.0 2.5 -0.2 5.7 3.6 3.9 3.8 7.3 5.8 9.5 1.4 3.2 2.3 7.7 11.9 3.0 4.0 1.4 3.3 4.2 7.2 10.0 5.0 3.0 7.3 4.8 5.4 4.9 4.6 2.8 3.7 7.0 7.3 2004 3.7 5.0 2.9 7.0 3.5 3.6 3.1 5.3 4.1 5.7 9.0 6.0 2.2 2.0 0.7 2.3 1.4 3.3 3.0 3.0 4.1 3.7 2.5 6.4 4.5 4.5 5.4 7.2 9.4 12.1 8.2 4.1 5.2 5.3 7.4 4.6 5.0 2.7 3.8 4.5 7.9 10.1 6.2 8.5 6.7 5.0 7.3 6.4 9.2 4.6 6.2 6.4 7.8 2005 3.3 4.7 2.4 6.7 3.1 3.1 3.0 3.9 3.2 3.2 9.2 5.6 2.0 1.8 0.8 1.9 0.8 3.6 2.5 2.1 4.3 3.2 2.6 5.9 6.3 3.1 3.6 6.4 8.4 3.0 4.3 4.5 5.1 5.6 10.5 5.3 4.7 1.9 3.1 3.3 8.0 10.2 6.1 7.1 8.5 5.7 5.3 5.0 7.4 4.0 4.7 4.7 8.4 2006 3.8 5.4 2.8 7.7 2.7 2.7 2.8 5.0 5.2 4.0 8.5 4.6 3.2 3.2 3.9 2.7 2.1 4.0 3.3 2.8 4.5 4.6 3.6 6.5 6.8 3.7 6.2 8.2 6.9 7.4 7.8 6.8 5.3 3.2 9.4 5.6 5.3 2.0 2.6 1.0 9.1 11.6 7.0 7.0 9.8 5.5 5.8 5.3 8.7 5.2 5.4 5.1 8.2 2007 3.7 5.6 2.4 8.3 2.0 1.9 2.2 5.0 3.3 6.1 8.7 4.6 2.9 2.8 3.4 2.2 1.4 3.6 3.0 2.7 5.4 3.4 3.6 5.9 6.1 0.8 6.8 8.5 4.7 7.6 6.2 7.1 5.2 2.0 7.6 5.6 6.3 2.4 4.6 2.8 10.4 14.2 7.1 6.4 9.5 6.3 6.5 7.1 8.8 5.1 6.0 5.0 8.5 2008 1.3 2.9 0.0 5.6 0.0 0.0 0.7 3.4 1.2 5.2 6.8 3.7 0.2 0.2 0.8 -0.2 -1.3 0.9 0.2 -0.1 1.6 -0.8 2.1 4.0 2.5 0.9 5.2 5.2 0.7 2.3 7.7 7.2 4.0 4.2 7.0 3.6 3.1 -1.2 2.6 -0.1 7.0 9.6 4.6 2.3 7.5 6.0 4.8 3.5 1.5 2.3 0.7 2.5 6.3 2009 -2.6 -0.7 -4.1 2.0 -3.4 -3.5 -2.8 -3.0 -6.1 -0.6 0.9 -1.7 -4.2 -4.1 -5.1 -2.6 -5.2 -3.7 -4.3 -4.9 -1.6 -5.1 -1.9 -3.4 -4.1 -6.7 1.6 -7.8 -4.8 -14.8 -7.1 4.7 0.8 0.1 -2.9 -1.7 0.4 -6.3 1.4 -2.0 5.9 9.2 2.5 -2.7 7.0 4.6 -1.6 1.1 -0.8 0.3 -1.9 -2.3 5.3 2010 3.9 5.1 2.6 7.6 3.0 3.0 3.2 6.6 5.4 7.5 9.2 5.2 1.7 1.7 3.6 1.4 1.2 -0.1 1.9 1.4 2.1 5.4 2.7 4.3 2.2 1.2 3.8 4.0 8.9 4.2 -1.3 5.1 4.7 4.1 1.7 2.8 6.6 4.0 2.7 1.7 9.1 10.4 7.8 7.0 9.0 6.1 7.2 7.6 14.5 6.2 10.9 7.8 6.8 2011f 2.5 3.6 1.3 6.0 1.7 1.6 2.1 4.3 3.7 3.5 8.0 6.4 1.6 1.6 2.8 1.6 0.5 0.6 1.5 1.1 2.5 3.8 1.9 4.0 1.9 1.8 3.7 4.2 5.1 4.0 1.5 1.8 4.3 5.9 3.9 3.0 3.9 -0.6 1.8 2.0 7.3 8.9 5.5 5.0 7.4 6.4 4.8 4.3 5.0 3.4 4.0 3.9 5.8 2012f 2.6 3.6 1.4 5.9 1.7 1.7 1.9 4.1 3.9 4.0 5.0 4.5 0.8 0.6 1.0 1.2 -0.2 0.3 1.3 1.3 3.1 0.9 1.4 3.1 1.7 1.5 3.0 3.0 3.0 5.1 2.5 2.7 3.2 4.3 4.2 2.5 5.2 1.9 3.9 3.8 7.4 8.6 6.0 4.5 8.0 6.7 5.0 4.8 5.1 4.1 1.7 5.0 7.0

Notes: * = based upon Egyptian fiscal year (July-June); ** = calendar year; *** = mainland. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC

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Quarterly % Quarter & % Year North America US* Q3 10 Q4 10 Q1 11 Q2 11 Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Canada*
Latin America Mexico

% Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Quarter % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Quarter % Year % Quarter % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year % Year

2.5 3.5 2.5 3.8 0.7 5.1 0.4 6.7 0.7 8.6 2.3 6.9 0.4 2.0 0.8 4.0 0.4 1.6 0.3 1.4 0.0 0.2 0.6 2.5 2.8 6.8 2.8 2.7 1.7 4.2 3.1 5.2 3.6 -2.2 5.2 2.7 1.3 5.0 0.3 2.7 1.6 9.6 6.9 8.9 5.8 5.3 7.3 10.5 4.4 10.7 6.6 7.4

2.3 3.1 3.1 3.3 1.1 4.4 0.7 5.0 2.5 9.2 1.1 5.8 0.3 2.0 0.5 3.8 0.3 1.4 0.1 1.5 0.2 0.6 -0.5 1.5 2.2 7.2 2.9 2.6 1.9 4.5 4.5 9.2 3.3 -0.6 6.4 3.8 -0.9 2.2 0.8 2.7 1.1 9.8 6.4 8.3 6.9 4.8 6.1 12.0 4.7 7.1 3.8 7.2

0.4 2.2 3.6 2.9 0.6 4.6 1.2 4.2 2.8 9.9 1.6 10.0 0.8 2.5 1.3 4.6 0.9 2.2 0.1 1.0 0.4 0.9 0.5 1.6 1.9 6.1 2.6 2.8 2.5 4.4 4.1 11.0 5.3 1.7 6.9 3.5 -1.3 -1.0 -0.9 1.0 1.4 9.7 7.5 7.8 6.5 4.9 4.6 9.3 4.2 6.2 3.2 5.4

1.3 1.6 -0.4 2.2 1.1 3.3 0.8 3.1 1.4 7.6 1.4 6.8 0.2 1.7 0.1 2.8 0.0 1.7 0.3 0.8 0.2 0.7 0.3 0.9 2.7 4.9 2.3 2.2 1.5 4.3 3.4 6.0 4.0 1.4 3.4 3.0 -0.1 -1.1 1.2 1.4 1.7 9.5 5.1 7.7 6.5 4.0 3.4 0.9 3.4 5.0 2.6 5.7

2.2 1.6 2.0 2.0 1.0 3.6 0.8 3.4 1.1 8.0 0.7 4.3 0.1 1.4 0.4 2.3 0.3 1.6 -0.2 0.3 -0.3 0.4 0.5 0.6 2.4 2.8 1.6 1.4 1.6 3.0 5.0 3.1 4.0 1.5 3.3 2.4 0.9 -0.1 1.1 2.2 2.4 8.7 4.4 6.0 6.4 5.6 4.0 5.4 2.4 3.3 4.9 6.1

0.7 1.2 0.7 1.5 0.8 3.4 0.6 3.2 1.2 6.6 1.1 4.9 -0.1 1.1 -0.2 1.6 -0.1 1.1 -0.2 0.0 -0.1 0.2 0.2 1.3 2.5 1.4 1.1 1.2 1.4 3.0 4.1 0.4 4.0 1.2 3.5 3.0 -0.8 0.0 1.1 2.5 2.6 8.6 3.2 8.2 6.2 4.7 5.3 4.6 3.5 2.0 4.9 5.8

1.7 1.5 2.1 1.1 1.0 4.0 1.1 3.4 1.4 5.1 1.3 4.4 0.1 0.4 0.2 0.4 0.3 0.5 -0.2 -0.2 0.1 -0.1 0.2 1.1 2.9 0.6 0.8 1.4 1.4 2.6 3.5 0.1 5.0 1.9 2.8 2.8 -0.9 2.1 0.9 4.3 2.8 8.4 2.3 7.9 6.3 4.0 5.5 0.6 2.8 -1.3 3.5 6.5

2.1 1.7 2.4 1.8 0.6 4.0 1.1 3.8 1.2 4.9 1.6 3.5 0.2 0.4 0.4 0.8 0.6 1.2 0.1 -0.4 0.2 -0.1 0.2 1.1 2.8 0.2 0.9 1.5 1.6 3.0 3.0 1.9 5.0 2.1 3.4 2.2 -0.8 2.3 0.9 4.0 3.8 8.5 2.5 7.7 6.7 3.8 5.9 4.6 3.4 -0.2 5.3 6.5

2.0 1.6 2.9 2.0 1.2 3.6 1.2 4.2 1.2 5.0 1.4 5.0 0.3 0.6 0.5 0.9 0.5 1.3 0.1 -0.2 0.2 0.4 0.7 1.4 3.2 1.0 1.7 1.8 1.3 3.2 3.0 4.2 5.0 2.8 3.2 2.3 1.4 2.3 0.9 3.8 4.2 8.6 5.3 8.1 6.9 5.4 6.0 7.2 5.5 3.0 5.5 7.4

2.4 2.1 2.9 2.6 1.2 3.9 1.0 4.5 1.0 4.8 1.4 5.2 0.4 1.1 0.6 1.8 0.6 2.0 0.2 0.2 0.3 0.8 0.3 1.5 3.6 1.9 2.2 2.2 1.5 3.1 2.5 5.8 5.0 3.0 3.2 2.5 0.8 1.1 1.0 3.7 4.5 8.7 7.5 8.2 6.8 6.6 6.0 8.0 4.7 5.0 5.5 7.5

Brazil Argentina Chile


Western Europe Eurozone

Germany France Italy Spain


Other Western Europe UK

Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Israel South Africa Asia-Pacific Japan Australia New Zealand China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam

Note: * = quarter-on-quarter data has been annualised Source: HSBC

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Consumer prices
Annual % Year World Developed Emerging North America US Canada Latin America Mexico Brazil Argentina* Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine* Romania Egypt** Israel* Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 2.4 1.8 4.9 2.3 2.3 2.8 8.9 4.5 14.7 13.4 2.8 2.0 2.1 1.0 2.2 2.8 3.1 1.5 1.4 2.5 1.9 0.6 7.6 0.0 4.7 0.8 13.7 25.3 5.2 4.5 4.0 0.7 0.6 3.1 5.4 1.0 -0.2 2.8 1.8 2.2 1.2 3.1 -2.6 3.8 6.8 1.1 3.5 0.5 3.5 -0.3 1.8 3.2 2004 2.5 1.9 4.6 2.6 2.7 1.9 5.2 4.7 6.6 4.4 1.1 1.9 2.2 1.8 2.3 2.3 3.1 1.1 1.3 0.5 0.4 0.8 6.1 2.8 6.8 3.5 10.9 8.6 9.0 11.9 14.3 -0.4 0.5 7.0 1.4 1.8 -0.0 2.3 2.3 3.7 3.9 3.6 -0.4 3.9 6.1 1.4 6.0 1.7 3.6 1.6 2.8 7.7 2005 2.7 2.3 4.5 3.3 3.4 2.2 5.6 4.0 6.9 9.6 3.1 2.1 2.2 1.9 1.9 2.2 3.4 1.7 2.0 1.5 0.5 1.2 6.5 1.9 3.6 2.1 12.7 8.2 10.3 9.0 8.9 1.3 0.4 9.0 3.4 1.5 -0.3 2.7 3.0 3.2 1.8 4.3 0.9 4.2 10.5 3.0 7.7 0.5 2.8 2.3 4.5 8.3 2006 2.8 2.3 4.5 3.1 3.2 2.0 4.6 3.6 4.2 10.9 3.4 2.2 2.2 1.8 1.9 2.2 3.6 2.0 2.3 2.3 1.4 1.1 6.2 2.6 3.9 1.0 9.7 9.6 9.1 6.6 4.2 2.1 2.3 10.5 4.6 2.0 0.2 3.5 3.4 3.7 1.5 5.4 2.0 6.8 13.1 3.6 6.3 1.0 2.2 0.6 4.6 7.4 2007 2.8 2.1 5.3 2.8 2.9 2.1 4.8 4.0 3.6 12.7 4.4 2.1 2.1 2.3 1.6 2.0 2.8 2.0 2.3 0.7 2.2 0.7 7.1 2.8 8.0 2.5 9.0 8.8 12.8 4.8 11.0 0.5 4.1 11.1 7.1 2.2 0.1 2.3 2.4 4.5 4.8 4.2 2.0 6.2 6.7 2.0 2.8 2.1 2.5 1.8 2.2 8.3 2008 4.3 3.3 8.0 3.7 3.8 2.4 7.7 5.1 5.7 24.8 8.7 3.3 3.3 2.7 3.2 3.5 4.1 3.5 3.6 3.8 3.4 2.4 10.5 6.4 6.1 4.2 14.1 10.4 25.2 7.9 11.6 4.6 9.9 6.5 11.0 4.1 1.4 4.4 4.0 6.8 5.9 7.4 4.3 9.1 9.8 5.4 9.3 6.6 4.7 3.5 5.5 23.1 2009 1.0 0.0 4.9 -0.3 -0.3 0.3 6.1 5.3 4.9 14.5 0.3 0.6 0.3 0.2 0.1 0.8 -0.2 1.5 2.2 2.2 -0.5 -0.5 7.6 1.0 4.2 3.5 11.7 6.3 16.0 5.6 15.5 3.3 5.1 -0.4 7.2 0.9 -1.3 1.8 2.1 2.9 -0.7 5.6 0.6 12.4 4.8 0.6 3.3 0.6 2.8 -0.9 -0.8 7.0 2010 2.4 1.4 5.6 1.7 1.6 1.8 7.0 4.2 5.0 23.2 1.4 1.8 1.6 1.2 1.7 1.6 2.0 2.5 3.3 2.4 1.2 0.7 6.0 1.5 4.9 2.6 6.9 8.6 9.4 6.9 11.7 2.7 5.3 1.8 4.3 2.2 -0.7 2.8 2.3 4.8 3.3 5.8 2.3 10.4 5.1 1.7 3.8 2.8 3.0 1.0 3.3 9.2 2011f 3.4 2.6 6.3 3.2 3.2 2.9 7.9 3.5 6.6 23.8 3.2 2.8 2.7 2.4 2.2 2.8 2.7 3.3 4.4 1.5 3.0 0.4 6.3 1.9 3.7 4.1 8.6 5.9 8.6 6.3 11.0 3.6 4.8 2.0 5.1 2.9 -0.5 3.6 4.4 5.6 4.8 6.1 5.0 8.0 5.6 3.2 4.4 4.7 4.4 1.5 4.0 18.4 2012f 2.7 1.7 5.8 2.1 2.1 2.0 8.0 3.6 5.8 23.4 2.9 1.9 1.8 1.7 2.0 2.4 1.2 2.0 2.4 2.2 2.4 0.6 6.2 2.4 3.5 3.1 7.6 7.4 8.0 4.0 8.9 2.4 6.1 2.8 5.9 2.4 -0.3 3.1 3.0 4.6 2.9 5.7 5.3 7.7 6.2 3.0 4.5 3.0 3.6 2.0 3.6 11.2

Note: * = end-year values; ** = based upon Egyptian fiscal year (July-June). We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC

22

Macro Global Economics Q4 2011

abc

Quarterly % Quarter North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt Israel South Africa Asia-Pacific Japan Australia New Zealand China India Hong Kong Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam
Source: HSBC

Q3 10

Q4 10

Q1 11

Q2 11f

Q3 11f

Q4 11f

Q1 12f

Q2 12f

Q3 12f

Q4 12f

1.2 1.8 3.7 4.6 23.4 0.0


1.7 1.2 1.8 1.7 2.0

1.3 2.3 4.2 5.6 25.0 1.4


2.0 1.6 1.9 2.0 2.5

2.1 2.6 3.5 6.1 23.4 2.2


2.5 2.1 2.0 2.3 3.2

3.4 3.4 3.3 6.6 23.2 2.7


2.8 2.5 2.2 2.9 3.3

3.8 2.9 3.4 7.1 24.1 2.9


2.7 2.6 2.3 2.6 2.5

3.6 2.7 3.4 6.6 24.2 3.2


2.8 2.2 2.4 3.5 1.6

2.8 1.2 3.5 6.2 24.2 3.3


2.2 2.0 2.2 3.1 1.2

2.1 1.5 4.1 5.6 24.1 3.1


1.8 1.6 1.9 2.5 0.6

1.8 2.0 4.2 5.7 23.9 3.0


1.8 1.7 1.9 2.2 1.4

1.7 2.1 3.9 5.6 22.2 2.9


1.6 1.6 1.9 1.8 1.8

4.7 1.9 1.1 0.3 1.9 3.8 2.2 7.0 8.4 8.5 7.5 10.6 1.8 3.5 -1.0 2.9 1.5 3.3 10.3 1.6 6.2 1.9 3.8 3.4 2.9 0.4 3.3 8.4

3.4 2.2 1.9 0.3 2.1 4.4 2.9 8.8 7.4 9.5 7.9 10.7 2.7 3.5 -0.3 2.7 4.0 4.2 9.2 2.7 6.3 2.0 3.0 4.0 3.6 1.1 2.9 10.8

4.1 1.4 2.6 0.6 1.7 4.2 3.8 9.5 4.3 7.7 7.5 10.9 4.3 3.8 -0.5 3.0 4.5 5.0 9.0 3.8 6.8 2.8 4.1 5.2 4.5 1.3 3.0 12.8

4.4 1.4 3.3 0.4 1.8 4.0 4.6 9.4 5.9 8.9 8.2 11.6 4.2 4.6 -0.4 3.5 5.3 5.9 8.9 5.2 5.9 3.3 4.5 4.7 4.2 1.6 4.1 19.4

4.6 1.6 3.4 0.3 1.9 3.4 4.1 7.7 6.6 9.3 4.6 9.6 3.1 5.5 -0.2 3.6 4.8 6.0 8.5 6.1 4.8 3.4 4.8 4.8 4.6 1.4 4.3 22.5

4.5 1.7 2.6 0.2 2.1 3.4 3.7 7.6 6.9 8.5 5.0 8.6 3.0 6.3 -0.7 3.6 3.0 3.8 8.0 4.8 4.9 3.4 4.4 4.3 4.5 1.7 4.4 19.1

3.1 2.0 2.4 0.0 2.7 3.2 2.7 7.3 8.3 8.5 4.3 9.4 2.7 6.5 -0.6 3.3 3.1 3.3 6.7 4.6 5.5 3.3 4.5 2.9 3.7 1.7 4.1 16.2

2.5 2.2 2.3 0.4 2.4 3.2 2.7 7.7 7.4 8.3 3.9 9.5 2.2 6.2 -0.6 2.7 3.0 2.5 7.5 4.2 6.3 3.1 4.2 3.0 3.6 1.9 3.6 11.1

2.2 2.3 2.4 1.1 2.3 3.7 3.1 8.1 7.1 8.0 3.8 9.7 2.2 5.8 -0.1 3.0 3.0 2.3 7.9 6.1 6.5 3.0 4.5 2.9 3.5 2.3 3.4 8.7

1.9 2.4 2.4 1.0 2.0 3.9 3.8 7.5 6.6 7.8 4.0 10.5 2.4 5.3 -0.0 3.5 2.9 3.1 7.8 6.4 6.5 2.8 4.8 3.2 3.4 2.0 3.2 8.9

23

Macro Global Economics Q4 2011

abc

Short rates
3 month money End period North America 2007 Q4 2008 Q4 2009 Q4 2010 Q4 ______ 2011 _______ ________________ 2012 _________________ Q3f Q4f Q1f Q2f Q3f Q4f

US (USD) Canada (CAD)


Latin America

4.7 4.5 7.3 11.2 6.2 4.6

1.4 1.9 8.2 13.0 7.9 2.9 2.8 4.0 2.5 0.6 10.0 5.8 20.6 15.5 20.0 11.4 0.6 4.1 6.0 1.7 9.2 1.0 12.0 3.4 6.1 1.4 4.7 1.0 3.6

0.3 0.5 4.6 8.7 0.5 0.7 0.6 2.2 0.5 0.3 6.0 4.2 6.6 7.5 16.1 7.1 0.3 4.0 2.8 1.7 3.7 0.1 6.6 2.3 3.9 0.7 2.8 0.5 1.4

0.3 1.2 4.4 11.1 3.3 0.9 0.8 2.6 1.8 0.2 5.7 4.0 3.8 6.7 7.5 5.6 0.2 4.9 3.3 5.0 7.2 0.3 6.4 3.0 0.8 0.4 2.8 0.7 2.2

0.4 1.2 4.3 12.1 5.3 1.5 1.0 3.0 2.5 0.0 5.9 4.6 4.8 6.0 7.0 5.6 0.2 4.8 2.8 6.8 8.3 0.3 6.8 3.1 4.5 0.4 4.1 1.1 3.8

0.4 1.3 4.3 11.0 5.1 1.5 0.9 2.7 2.3 0.3 5.8 4.6 5.5 6.0 9.0 5.5 0.3 5.3 3.4 4.9 7.7 0.3 6.8 3.1 4.5 0.7 4.1 1.1 4.1

0.4 1.3 4.3 10.0 4.6 1.3 0.8 3.0 2.5 0.3 5.8 4.6 5.5 6.3 7.0 5.2 0.3 5.5 3.9 4.6 7.7 0.3 6.8 3.4 5.2 0.7 4.3 1.1 4.1

0.4 1.3 4.4 10.0 4.6 1.3 0.8 3.2 2.7 0.5 5.8 4.6 5.7 6.5 7.0 5.4 0.3 5.6 4.2 4.4 7.7 0.3 7.3 3.6 5.5 0.9 4.6 1.2 4.1

0.4 1.3 4.8 10.0 4.6 1.3 0.8 3.6 2.9 0.7 5.7 4.8 6.3 6.8 9.0 5.5 0.3 5.7 4.5 4.7 7.7 0.3 7.6 3.6 5.7 0.9 4.6 1.4 4.1

0.4 1.5 5.0 10.0 4.6 1.3 0.9 4.0 3.1 0.8 5.6 4.8 6.5 7.0 9.0 5.8 0.3 5.8 4.6 4.3 7.7 0.3 7.6 3.6 5.7 1.0 4.6 1.5 4.1

Mexico (MXN) Brazil (BRL) Chile (CLP)


Western Europe Eurozone Other Western Europe

UK (GBP) Norway (NOK) Sweden (SEK) Switzerland (CHF)


EMEA

5.9 5.9 4.7 2.6 7.6 5.1 6.3 16.0 6.6 11.3 0.6 7.3 8.9 3.3 8.3 3.5 7.8 3.6 3.7 2.5 5.7 2.2 3.7

Hungary (HUF) Poland (PLN) Russia (RUB)* Turkey (TRY) Ukraine (UAH) South Africa (ZAR)
Asia-Pacific

Japan (JPY) Australia (AUD) New Zealand (NZD)


Asia ex Japan

China (CNY)
Asia ex Japan & China

India (INR) Hong Kong (HKD) Indonesia (IDR) Malaysia (MYR) Philippines (PHP) Singapore (SGD) South Korea (KRW) Taiwan (TWD) Thailand (THB)
Note: * = 1-month money Source: HSBC

24

Macro Global Economics Q4 2011

abc

Long rates
10-year bond yields End period Americas 2007 Q4 2008 Q4 2009 Q4 2010 Q4 ______ 2011________ _________________ 2012 __________________ Q3f Q4f Q1f Q2f Q3f Q4f

US Canada Chile
Western Europe Eurozone

3.5 3.4 6.3 3.8 3.4 3.7 4.3 4.0 3.7 4.2 3.5 2.3 7.6 5.7 6.3 8.4 1.4 5.5 6.0 7.8 2.9 9.2 6.4 2.3

3.3 3.3 7.4 3.5 3.2 3.5 4.0 3.7 3.7 4.1 3.3 2.0 10.0 5.4 11.3 7.3 1.3 5.4 5.6 5.3 2.4 11.8 7.3 1.4

3.8 3.6 5.9 3.6 3.4 3.6 4.0 3.9 4.1 4.4 3.3 1.9 7.7 6.3 8.7 9.0 1.3 5.7 6.0 7.7 2.6 10.1 7.9 2.7

3.3 3.2 6.1 3.8 3.0 3.4 4.5 5.5 3.7 3.7 3.3 1.8 7.9 6.0 7.7 8.4 1.2 5.6 5.8 8.0 2.9 8.3 5.9 1.8

1.9 2.1 6.3 3.3 1.9 2.6 5.5 5.1 2.4 2.4 1.7 1.0 7.5 6.2 8.0 8.4 1.0 4.2 4.4 8.5 1.5 6.9 5.6 1.5

1.5 2.0 5.1 3.1 1.5 2.4 5.6 5.1 2.0 2.1 1.5 0.8 7.6 6.0 8.6 8.2 1.0 4.0 4.4 8.3 1.4 7.0 5.4 1.4

1.7 2.1 7.0 3.1 1.6 2.3 5.4 4.9 2.1 2.2 1.6 0.9 7.5 6.2 8.1 8.0 0.9 3.9 4.3 8.1 1.5 7.4 8.0 1.4

1.7 2.3 7.0 3.1 1.7 2.4 5.4 4.9 2.2 2.3 1.8 0.9 7.5 6.3 7.8 8.1 1.0 4.1 4.4 7.8 1.6 8.0 8.0 1.5

1.8 2.3 7.0 3.2 1.7 2.4 5.5 5.0 2.2 2.4 1.9 1.0 7.4 6.3 7.9 8.3 1.1 4.2 4.5 8.0 1.6 7.8 8.0 1.5

1.8 2.3 7.0 3.2 1.7 2.4 5.5 5.0 2.2 2.4 2.0 1.0 7.3 6.3 7.9 8.5 1.2 4.4 4.5 7.8 1.9 7.6 8.0 1.7

Germany France Italy Spain


Other Western Europe

UK Norway Sweden Switzerland


EMEA

Hungary Poland Russia South Africa


Asia-Pacific

Japan Australia New Zealand


Asia ex Japan

India Hong Kong Indonesia Philippines Singapore


Source: HSBC

25

Macro Global Economics Q4 2011

abc

Exchange rates vs USD


Exchange rates vs USD End period Americas 2007 Q4 2008 Q4 2009 ____ 2010 _____ ____________ 2011 ____________ Q4 Q3 Q4 Q1 Q2 Q3f Q4f ____________2012 ____________ Q1f Q2f Q3f Q4f

Canada (CAD) Mexico (MXN) Brazil (BRL) Argentina (ARS) Chile (CLP)
Western Europe

0.99 10.92 1.77 3.15 498 1.46 1.99 6.46 5.43 1.13 18.19 172.9 2.46 24.5 1.17 5.05 3.95 5.52 6.83 112 0.88 0.77 7.31 7.80 39.4 9393 3.31 41.28 1.44 936 32.4 33.72 16217

1.23 13.81 2.31 3.45 637 1.39 1.44 7.91 7.00 1.06 19.31 191.3 2.96 29.4 1.54 8.05 3.78 5.52 9.25 91 0.70 0.58 6.82 7.75 48.6 11027 3.46 47.47 1.43 1263 32.9 34.90 16900

1.05 13.08 1.74 3.80 507 1.43 1.61 7.14 5.78 1.03 18.40 188.3 2.86 30.2 1.50 8.00 3.75 5.48 7.36 93 0.90 0.73 6.83 7.75 46.4 9425 3.42 46.50 1.41 1166 32.1 33.33 18200

1.03 12.62 1.69 3.96 484 1.37 1.58 6.73 5.86 0.98 18.00 202.6 2.91 30.4 1.45 7.93 3.75 5.71 6.97 84 0.97 0.74 6.69 7.76 44.6 8925 3.09 43.90 1.31 1140 31.2 30.37 19475

0.99 12.36 1.67 3.97 468 1.34 1.57 6.72 5.81 0.93 18.70 207.5 2.95 30.5 1.54 7.97 3.57 5.70 6.62 81 1.03 0.78 6.59 7.77 44.7 9010 3.08 43.65 1.28 1121 30.4 30.10 19498

0.97 11.89 1.63 4.06 478 1.42 1.60 6.31 5.53 0.91 17.31 187.2 2.84 28.4 1.55 7.96 3.56 5.90 6.76 83 1.03 0.76 6.55 7.78 44.5 8708 3.03 43.46 1.26 1097 29.4 30.25 20895

0.97 11.71 1.56 4.11 467 1.45 1.61 6.31 5.37 0.84 16.78 183.1 2.75 28.1 1.62 7.97 3.50 6.00 6.78 81 1.07 0.83 6.46 7.78 44.7 8577 3.02 43.34 1.23 1067 28.7 30.70 20515

1.04 13.88 1.85 4.21 521 1.34 1.56 6.87 5.87 0.91 18.42 218.7 3.29 31.9 1.86 8.00 3.70 6.00 8.04 77 0.97 0.76 6.38 7.78 49.0 8790 3.19 43.73 1.31 1181 30.5 31.12 20830

0.97 12.00 1.65 4.28 455 1.38 1.59 6.52 5.43 0.87 17.97 206.5 3.15 31.5 1.75 8.05 3.80 6.00 7.60 74 0.95 0.76 6.35 7.80 49.0 8800 3.10 43.50 1.27 1150 30.0 30.70 21500

1.00 12.25 1.65 4.40 455 1.40 1.61 6.36 5.32 0.86 17.29 200.0 3.00 28.8 1.70 8.50 3.75 6.10 7.30 73 0.94 0.76 6.30 7.80 48.2 8700 3.05 43.00 1.25 1130 29.5 30.20 21500

1.00 12.50 1.65 4.53 460 1.42 1.63 6.20 5.21 0.85 16.90 193.7 2.96 31.1 1.65 8.70 3.70 6.25 7.10 73 0.94 0.75 6.25 7.80 47.4 8550 3.00 42.50 1.23 1110 29.0 29.70 21500

1.00 12.50 1.65 4.66 465 1.44 1.66 6.04 5.14 0.83 16.67 187.5 2.85 32.2 1.60 9.00 3.60 6.40 7.00 72 0.93 0.74 6.20 7.80 46.6 8400 2.95 42.00 1.21 1090 28.5 29.20 21500

1.00 12.50 1.65 4.80 470 1.44 1.66 6.04 5.14 0.83 16.67 184.0 2.78 32.6 1.60 9.50 3.50 6.50 7.00 72 0.93 0.74 6.15 7.80 45.5 8300 2.88 41.00 1.19 1070 28.0 28.80 21500

Eurozone (EUR)
Other Western Europe

UK (GBP) Sweden (SEK) Norway (NOK) Switzerland (CHF)


EMEA

Czech Republic (CZK) Hungary (HUF) Poland (PLN) Russia (RUB) Turkey (TRY) Ukraine (UAH) Israel (ILS) Egypt (EGP) South Africa (ZAR)
Asia/Pacific

Japan (JPY) Australia (AUD) New Zealand (NZD) China (CNY) Hong Kong (HKD) India (INR) Indonesia (IDR) Malaysia (MYR) Philippines (PHP) Singapore (SGD) South Korea (KRW) Taiwan (TWD) Thailand (THB) Vietnam (VND)
Source: HSBC

26

Macro Global Economics Q4 2011

abc

Exchange rate vs EUR & GBP


Exchange rate vs EUR & GBP End period vs EUR Americas 2007 Q4 2008 Q4 2009 ____2010 ____ ___________ 2011____________ Q4 Q3 Q4 Q1 Q2 Q3f Q4f ___________2012 ____________ Q1f Q2f Q3f Q4f

US (USD) Canada (CAD)


Europe

1.46 1.44 0.73 9.45 1.66 7.94 26.6 253 3.60 35.88 163.3 1.67 1.90 9.99

1.39 1.72 0.97 10.99 1.48 9.73 26.8 266 4.12 40.84 126.0 1.99 2.38 12.85

1.43 1.50 0.89 10.24 1.48 8.29 26.4 270 4.11 43.39 133.6 1.60 1.97 10.56

1.37 1.40 0.87 9.19 1.33 7.99 24.6 277 3.98 41.51 114.0 1.41 1.86 9.52

1.34 1.33 0.86 9.02 1.25 7.80 25.1 278 3.96 40.89 108.8 1.31 1.72 8.88

1.42 1.38 0.89 8.95 1.30 7.85 24.6 266 4.03 40.34 117.6 1.37 1.86 9.59

1.45 1.40 0.90 9.15 1.22 7.78 24.3 266 3.98 40.70 117.1 1.35 1.76 9.83

1.34 1.40 0.86 9.21 1.22 7.88 24.7 293 4.42 42.77 103.4 1.38 1.76 10.79

1.38 1.34 0.87 9.00 1.20 7.50 24.8 285 4.35 43.47 102.1 1.45 1.82 10.49

1.40 1.40 0.87 8.90 1.20 7.45 24.2 280 4.20 40.32 102.2 1.49 1.84 10.22

1.42 1.42 0.87 8.80 1.20 7.40 24.0 275 4.20 44.16 103.7 1.51 1.89 10.08

1.44 1.44 0.87 8.70 1.20 7.40 24.0 270 4.10 46.37 103.7 1.55 1.95 10.08

1.44 1.44 0.87 8.70 1.20 7.40 24.0 265 4.00 46.94 103.7 1.55 1.95 10.08

UK (GBP) Sweden (SEK) Switzerland (CHF) Norway (NOK) Czech Republic (CZK) Hungary (HUF) Poland (PLN) Russia (RUB)
Asia/Pacific

Japan (JPY) Australia (AUD) New Zealand (NZD)


Africa

South Africa (ZAR)


vs GBP Americas

US (USD) Canada (CAD)


Europe

1.99 1.96 0.73 12.86 10.81 2.25 222 2.27 2.59 13.60

1.44 1.77 0.97 11.37 10.07 1.53 130 2.06 2.46 13.29

1.61 1.69 0.89 11.53 9.33 1.67 150 1.80 2.22 11.89

1.58 1.62 0.87 10.61 9.23 1.54 132 1.63 2.14 10.99

1.57 1.56 0.86 10.53 9.10 1.46 127 1.53 2.00 10.36

1.60 1.56 0.89 10.11 8.87 1.47 133 1.55 2.10 10.84

1.61 1.55 0.90 10.13 8.61 1.35 130 1.50 1.94 10.88

1.56 1.62 0.86 10.70 9.15 1.41 120 1.60 2.04 12.52

1.59 1.54 0.87 10.35 8.63 1.38 117 1.67 2.09 12.07

1.61 1.61 0.87 10.24 8.57 1.38 118 1.71 2.12 11.76

1.63 1.63 0.87 10.12 8.51 1.38 119 1.74 2.18 11.60

1.66 1.66 0.87 10.01 8.51 1.38 119 1.78 2.24 11.60

1.66 1.66 0.87 10.01 8.51 1.38 119 1.78 2.24 11.60

Eurozone (EUR) Sweden (SEK) Norway (NOK) Switzerland (CHF)


Asia/Pacific

Japan (JPY) Australia (AUD) New Zealand (NZD)


Africa

South Africa (ZAR)


Source: HSBC

27

Macro Global Economics Q4 2011

abc

Consumer spending
Consumer spending % Year World Developed Emerging North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 2.4 2.0 4.2 2.8 2.8 3.0 1.8 2.2 -0.8 8.2 4.2 1.5 1.2 0.3 1.9 1.0 2.9 2.5 3.0 2.5 2.3 0.9 5.2 6.0 8.2 2.6 7.7 6.6 12.6 2.2 2.3 1.3 1.3 10.5 2.8 2.4 0.4 3.8 5.7 4.8 6.5 3.9 -1.3 8.2 3.9 6.6 5.3 1.6 -0.4 2.9 6.4 8.0 2004 3.2 2.6 5.9 3.4 3.5 3.3 5.5 5.6 3.8 9.5 7.2 1.7 1.3 0.1 1.7 0.8 4.2 2.8 3.1 5.0 2.6 1.6 8.6 2.9 3.2 4.8 12.5 11.0 13.0 15.8 2.1 5.0 5.3 29.1 6.2 3.1 1.6 5.7 5.4 4.6 7.2 3.3 7.0 1.7 5.0 10.5 5.9 6.1 0.3 5.2 6.1 7.1 2005 3.3 2.6 6.8 3.4 3.4 3.7 5.2 4.8 4.5 8.9 7.4 1.9 1.8 0.2 2.5 1.1 4.2 2.1 2.2 3.9 2.8 1.7 8.1 2.5 3.5 2.1 12.2 7.9 20.1 10.3 4.8 3.5 8.8 22.5 6.1 3.7 1.3 3.2 4.6 6.8 8.5 5.8 3.0 8.5 4.0 9.1 4.8 3.6 4.6 2.9 4.9 7.3 2006 3.3 2.4 7.1 3.0 2.9 4.2 5.8 5.7 5.2 7.8 7.1 2.1 2.1 1.6 2.4 1.2 3.8 2.0 1.8 4.8 2.8 1.6 8.7 5.0 2.0 5.0 12.2 4.6 15.9 12.9 6.4 4.3 10.2 24.0 8.3 3.9 1.5 3.4 2.2 6.8 8.7 5.8 5.9 8.3 3.2 6.8 5.5 3.5 4.7 1.5 3.2 8.3 2007 3.2 2.2 7.5 2.5 2.4 4.6 5.4 4.0 6.1 9.0 7.0 1.8 1.6 -0.2 2.3 1.1 3.6 2.4 2.2 5.2 3.8 2.3 8.9 4.8 -1.7 4.9 14.3 5.5 17.2 12.1 4.2 6.3 17.7 12.0 5.5 4.5 1.6 5.5 4.1 7.7 9.0 6.9 8.5 9.3 5.0 10.5 5.8 6.4 5.1 2.1 1.8 10.8 2008 1.2 0.0 5.7 -0.1 -0.3 3.0 3.7 1.8 5.7 6.5 4.5 0.4 0.3 0.5 0.2 -0.8 -0.6 0.5 0.4 1.5 -0.1 1.4 6.5 3.6 0.7 5.8 10.6 -0.3 13.1 9.8 5.7 3.6 3.5 21.4 2.2 2.5 -0.7 1.9 -0.3 6.2 8.9 4.6 2.4 7.7 5.3 8.7 6.4 3.2 1.3 -0.9 2.9 9.3 2009 -0.9 -1.6 1.5 -1.8 -1.9 0.4 -2.0 -7.1 4.2 0.5 0.9 -1.4 -1.2 0.0 0.1 -1.8 -4.2 -2.0 -3.2 0.2 -0.3 1.4 -1.4 -0.3 -6.8 2.1 -4.8 -2.3 -14.9 -10.7 5.7 1.7 6.7 2.0 -2.0 1.3 -1.9 1.0 -0.8 4.8 8.0 2.8 0.6 7.3 4.9 0.7 2.3 0.2 -0.0 1.1 -1.1 3.1 2010 2.6 1.6 6.2 2.1 2.0 3.3 6.5 5.0 7.0 9.0 10.4 0.9 0.8 0.6 1.3 1.0 1.2 1.2 0.7 3.6 3.6 1.7 3.8 0.4 -2.2 3.2 3.0 6.6 7.0 -1.7 5.1 5.0 3.2 3.8 4.4 4.5 1.8 2.8 2.3 7.3 9.5 5.9 5.8 8.6 4.6 6.5 3.4 4.2 4.1 3.7 4.8 10.0 2011f 2.3 1.2 6.1 2.1 2.1 1.9 5.8 5.0 4.7 10.5 10.2 0.4 0.6 1.0 0.7 0.7 0.4 -0.0 -0.8 2.7 2.4 1.0 4.6 -0.3 0.7 3.5 6.5 4.6 9.0 1.7 5.3 3.8 5.0 4.5 2.7 3.4 -0.4 3.1 1.4 7.0 9.4 5.4 7.7 7.9 4.7 6.3 5.2 5.3 2.5 3.1 3.5 4.9 2012f 2.3 1.2 5.8 1.5 1.5 2.0 4.9 5.1 4.0 6.3 6.0 1.0 0.9 1.0 1.3 0.1 0.3 1.4 1.3 3.5 2.1 1.0 3.9 1.0 1.0 2.6 5.5 3.4 7.0 3.0 1.9 3.2 4.0 7.0 2.2 4.0 0.5 2.5 1.7 7.2 9.3 5.7 5.0 8.1 5.3 6.2 5.1 4.8 3.7 1.9 3.7 5.2

Note: * = based upon Egyptian financial year (July-June). We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC

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Investment spending
Investment spending % Year World Developed Emerging North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway*** Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia** UAE** South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 4.3 1.9 12.3 3.5 3.2 6.2 1.1 0.4 -4.6 38.2 5.7 1.1 1.3 -1.2 2.2 -0.9 5.2 0.5 1.2 -2.8 1.8 -1.2 7.4 0.4 2.1 -0.1 13.9 10.0 12.2 0.4 -6.2 -10.7 16.6 17.1 10.2 8.3 -0.5 9.5 10.9 16.7 27.7 5.4 0.9 9.7 0.6 2.7 3.6 -4.9 4.4 -0.1 12.1 11.9 2004 7.4 4.4 16.9 7.4 7.3 7.8 10.6 8.0 9.1 34.4 10.0 2.5 1.8 -1.2 3.0 1.5 5.2 4.9 5.1 9.4 4.9 4.5 11.7 3.9 10.1 5.9 12.6 28.4 20.4 11.3 6.3 4.0 2.5 11.1 12.9 11.2 1.4 7.1 12.8 19.7 27.6 9.9 2.5 20.7 14.7 3.1 1.3 10.1 2.1 14.0 13.2 10.4 2005 7.9 4.8 16.3 6.7 6.5 9.3 8.6 7.5 3.6 22.7 23.9 3.4 3.3 1.0 4.4 1.4 6.5 3.7 2.3 11.6 8.3 3.8 11.0 1.8 6.1 5.4 10.6 17.4 3.9 14.0 10.3 4.0 18.5 15.7 11.0 12.4 3.1 8.7 5.5 19.4 27.2 8.0 4.1 16.2 10.9 5.0 -6.6 0.4 1.9 2.7 10.5 9.8 2006 7.4 3.6 16.7 2.7 2.3 7.1 10.2 9.9 9.8 18.2 2.3 5.9 5.7 8.9 4.2 3.2 8.3 6.7 6.7 12.0 9.4 4.7 14.7 6.0 -2.0 14.2 18.0 13.3 20.9 18.7 13.3 11.3 17.0 28.9 12.1 11.2 0.5 4.5 -1.2 18.4 24.5 7.9 7.1 13.8 2.6 7.5 3.9 14.6 3.4 0.1 3.9 9.9 2007 7.2 1.7 19.4 -1.3 -1.8 3.5 10.2 6.9 13.9 13.6 11.2 5.4 4.7 5.0 6.2 1.4 4.3 7.8 7.9 15.6 9.0 5.1 21.2 10.8 1.5 18.6 21.0 3.1 24.4 29.5 31.8 15.3 18.8 105.2 14.0 13.0 -1.2 10.1 6.0 20.6 25.8 10.3 3.4 16.2 9.3 9.4 10.9 19.6 4.2 0.6 1.5 24.2 2008 3.4 -3.2 15.8 -5.6 -6.4 2.0 9.6 5.9 13.6 9.1 19.4 -1.5 -1.1 1.0 0.1 -3.8 -3.9 -2.8 -4.7 -0.8 0.4 0.5 8.3 -1.5 2.7 11.0 10.6 -6.2 -1.2 18.4 15.5 4.4 12.6 20.8 14.1 11.8 -3.6 7.9 -3.0 18.7 26.1 2.0 1.0 1.5 11.9 1.1 2.8 13.5 -1.9 -12.4 1.2 3.8 2009 -3.3 -14.1 13.5 -18.3 -18.8 -13.1 -11.1 -11.3 -10.3 -10.2 -15.9 -11.9 -11.7 -11.4 -8.8 -12.0 -15.8 -12.5 -15.3 -10.9 -15.1 -4.9 -11.7 -9.2 -7.8 -1.5 -14.4 -19.0 -50.5 -21.4 -9.1 -5.8 -4.6 -15.0 -2.2 13.1 -11.7 -3.2 -12.8 22.7 30.5 1.2 -3.9 7.3 3.3 -5.6 -1.7 -2.9 -1.0 -11.0 -9.2 8.7 2010 9.2 1.4 18.4 3.4 2.6 10.0 12.3 2.3 21.9 21.2 18.8 0.1 -0.9 5.2 -1.4 2.3 -7.0 3.4 3.6 -3.1 5.6 7.5 6.4 4.7 -5.3 -2.2 6.1 29.9 4.9 -14.1 4.2 12.6 3.6 3.8 -3.7 16.4 -0.2 5.8 3.4 21.0 24.5 8.6 8.1 8.6 8.5 9.8 19.1 5.1 7.0 23.4 9.4 10.9 2011f 9.7 3.5 16.0 6.0 5.8 7.6 8.3 7.8 6.3 12.1 14.4 2.7 2.5 7.2 3.2 0.7 -5.3 3.2 1.5 8.5 8.8 4.1 6.4 3.8 0.5 5.0 6.0 11.9 7.0 4.0 -8.5 14.2 8.0 5.5 5.0 14.6 -0.5 5.5 4.9 18.1 21.5 4.2 6.3 7.1 9.4 4.5 4.8 2.9 0.1 0.4 5.9 3.9 2012f 9.7 4.1 14.7 5.0 5.2 3.5 6.2 5.8 6.3 5.0 9.7 2.2 1.6 2.4 3.2 -0.2 -0.2 4.1 4.7 7.3 3.8 2.0 4.5 3.2 1.3 3.2 5.0 2.7 9.0 7.0 -8.6 4.3 9.0 7.8 3.0 15.0 6.0 8.4 11.7 16.8 19.0 6.2 2.8 8.5 10.7 6.1 8.5 4.6 3.0 2.5 5.4 6.6

Note: * = based upon Egyptian financial year (July-June); ** = nominal growth; *** = mainland. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC

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Exports
Export volume growth (GDP basis) % Year World Developed Emerging North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway*** Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE** South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 5.9 1.8 16.4 0.6 1.6 -2.3 9.2 2.3 21.1 14.8 19.2 1.3 1.2 2.5 -1.3 -1.5 3.7 1.7 1.8 2.5 4.4 -0.5 19.2 7.2 6.2 14.2 26.7 27.6 27.2 2.3 15.2 10.7 28.7 31.1 0.1 13.9 9.2 -1.6 2.3 16.8 32.0 11.2 12.8 9.6 5.9 5.7 4.8 14.2 14.5 10.2 7.0 20.6 2004 12.1 7.7 21.8 8.4 9.5 5.0 22.0 14.1 32.0 16.9 50.1 6.6 7.0 9.7 4.2 3.6 4.2 5.6 5.0 4.5 10.0 7.9 24.6 20.7 15.3 12.8 34.8 11.2 40.8 14.2 27.4 18.2 34.8 35.5 2.8 18.1 13.9 4.0 6.1 20.5 32.0 15.5 15.4 19.0 13.5 2.3 15.0 19.1 19.7 15.4 9.6 31.4 2005 10.1 5.7 18.7 5.6 6.7 1.9 17.9 14.0 22.6 16.0 26.9 5.7 5.3 8.0 3.1 2.0 2.5 6.8 7.9 6.7 7.0 7.8 22.5 11.6 11.3 9.3 33.1 7.9 7.5 7.7 32.3 4.3 43.6 28.9 8.6 14.1 7.0 2.9 -0.5 17.1 29.0 11.2 10.6 25.8 16.6 8.3 4.8 12.4 7.8 7.8 4.2 22.5 2006 11.7 8.5 17.2 7.1 9.0 0.6 19.4 16.7 16.5 16.1 42.2 9.0 8.8 13.5 5.5 6.6 6.7 9.5 11.1 8.5 9.4 10.3 18.5 15.8 18.6 14.8 24.7 6.6 22.8 10.5 33.4 6.0 16.9 24.1 7.5 14.3 9.7 2.2 1.7 16.2 25.0 11.2 9.4 20.0 9.4 6.6 13.4 10.9 11.4 11.4 9.1 22.7 2007 9.3 6.0 14.7 7.6 9.3 1.2 13.0 8.8 16.6 20.1 15.8 5.2 6.2 8.3 2.3 4.0 6.6 2.1 -2.6 8.8 6.3 9.6 15.1 15.0 16.4 9.1 16.6 7.3 37.0 8.0 19.3 9.3 10.5 22.7 6.6 13.1 8.4 2.4 3.9 14.8 23.8 9.1 8.3 5.9 8.5 4.1 5.5 9.3 12.6 9.6 7.8 21.9 2008 6.1 1.7 12.6 3.9 6.0 -4.7 12.5 7.2 23.2 25.5 -2.5 0.9 0.7 2.1 -0.6 -4.4 -1.0 1.5 1.0 4.1 0.3 3.1 23.7 6.0 6.1 5.8 33.1 2.7 38.9 8.6 33.3 5.2 34.4 33.9 1.8 6.0 1.6 4.7 -1.8 7.2 11.2 4.2 2.6 14.4 9.5 1.7 -5.3 4.0 6.6 0.9 5.1 29.1 2009 -14.6 -12.5 -17.4 -10.2 -9.4 -13.8 -21.3 -21.2 -22.7 -20.5 -18.5 -12.1 -13.1 -13.6 -12.2 -18.4 -11.6 -8.8 -10.1 -5.4 -11.8 -8.6 -26.1 -10.8 -9.3 -6.7 -35.5 -5.0 -46.8 -5.0 -14.3 -12.5 -38.7 -19.8 -19.5 -13.6 -23.9 2.6 1.9 -11.7 -17.9 -7.0 -10.1 -5.5 -9.7 -10.5 -7.8 -8.1 -1.2 -8.7 -12.5 -8.9 2010 15.6 11.0 22.1 10.5 11.3 6.4 30.0 29.9 32.0 23.1 31.5 9.7 10.9 13.4 9.3 8.9 10.3 5.8 5.2 3.0 9.9 8.4 18.3 17.7 14.2 10.2 31.6 3.4 36.3 13.2 -5.1 13.4 23.1 10.7 4.7 22.0 23.9 5.7 2.8 22.4 29.4 17.5 16.8 17.9 14.9 9.9 21.0 19.2 14.5 25.7 14.7 26.4 2011f 10.8 9.8 12.2 11.0 7.1 3.2 11.0 18.9 25.2 18.3 25.9 11.0 6.0 7.8 4.0 3.5 7.7 11.0 5.2 0.5 6.7 4.6 15.9 9.7 8.0 8.0 26.6 8.7 35.8 8.0 16.3 5.5 33.5 22.5 7.0 8.7 0.4 -0.5 4.1 10.8 16.0 6.8 10.2 14.9 11.2 5.3 0.1 3.2 7.7 4.3 9.1 27.0 2012f 10.2 11.3 8.8 12.0 6.1 3.1 12.0 16.3 6.8 9.3 5.9 12.0 1.7 3.1 0.8 0.4 0.6 12.0 1.7 2.3 1.7 1.4 7.3 8.5 3.0 6.0 1.5 8.0 20.0 5.5 9.9 4.0 -4.4 4.1 5.5 8.1 3.9 12.5 5.4 8.8 10.0 7.8 11.2 7.0 8.1 7.5 5.9 8.3 7.3 1.3 6.6 24.6

Note: * = based upon Egyptian financial year (July-June); ** = nominal growth, *** = mainland. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC

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Industrial production
Industrial production % Year World Developed Emerging North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France* Italy Spain Other Western Europe UK* Norway* Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt Israel Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam
Note: * = Manufacturing output Source: HSBC

2003 4.7 1.0 9.6 1.2 1.3 0.2 3.0 0.8 0.1 16.2 5.2 0.1 0.3 0.2 -1.2 -0.6 1.3 -0.5 -0.6 -4.1 1.8 0.4 7.9 1.6 6.4 8.7 8.8 8.8 15.8 -0.2 3.1 -0.3 20.2 12.7 -1.9 9.4 3.0 1.3 1.6 11.4 16.7 6.4 -9.2 7.0 5.3 3.7 4.2 -30.3 5.5 9.1 12.8 19.8

2004 6.6 2.5 11.6 2.3 2.3 1.5 7.2 3.7 8.3 10.7 8.8 2.1 2.2 2.5 1.3 -0.2 1.8 1.6 1.0 0.7 4.1 4.0 9.9 10.4 8.3 12.7 6.6 9.8 12.5 2.7 15.8 6.9 23.9 6.7 4.0 11.0 4.8 -0.1 2.3 13.0 16.3 9.9 2.9 11.7 6.4 0.3 5.0 13.9 10.4 9.3 11.1 16.0

2005 5.5 2.0 9.5 3.1 3.2 1.7 3.9 2.8 3.1 8.0 5.4 1.1 1.6 2.9 0.2 -0.6 1.0 -0.2 -1.3 2.6 2.4 2.7 6.6 3.9 7.0 4.0 3.2 5.4 3.1 -3.0 7.6 3.6 38.0 5.6 3.0 9.3 1.4 1.7 0.3 11.5 15.9 6.9 2.5 7.9 4.6 6.3 5.3 9.5 6.3 3.8 8.8 17.2

2006 6.4 2.9 10.6 2.0 2.2 -0.0 4.7 5.7 2.8 8.4 3.2 3.6 4.2 5.7 1.3 3.7 3.9 1.6 0.1 5.7 3.7 7.8 7.5 8.3 10.2 12.1 4.0 7.8 6.2 9.2 9.7 8.5 15.4 10.3 4.8 10.7 4.5 1.2 -5.0 12.6 16.2 8.8 2.2 11.9 4.6 6.7 4.2 11.9 8.4 4.7 6.4 17.0

2007 6.1 2.9 9.9 2.4 2.7 -0.5 4.9 2.0 6.0 7.5 4.1 3.4 3.9 5.9 1.2 1.9 1.9 1.8 0.1 5.8 4.1 9.5 6.9 10.6 8.1 9.4 3.7 6.9 7.6 10.4 16.4 4.3 9.6 8.0 4.6 9.9 2.8 4.3 5.4 11.7 16.0 7.4 -1.5 8.7 4.7 2.8 3.3 5.9 6.9 7.8 8.1 17.1

2008 1.4 -2.8 6.3 -3.8 -3.7 -4.5 1.6 -0.1 3.1 1.1 0.2 -1.7 -1.6 -0.0 -2.7 -3.7 -7.5 -2.1 -2.8 2.9 -3.7 1.3 4.0 -1.8 0.1 3.0 -0.9 -0.9 -5.2 2.8 21.9 6.9 34.3 6.4 0.9 5.6 -3.3 2.8 -7.6 7.8 12.9 2.7 -6.7 3.2 3.7 1.3 4.8 -4.2 3.4 -1.8 3.9 14.6

2009 -6.1 -13.3 2.5 -11.0 -11.1 -9.4 -7.0 -7.6 -7.4 -4.9 -6.7 -13.8 -14.8 -15.5 -13.6 -18.7 -15.6 -10.9 -10.7 -6.3 -17.3 -7.9 -10.2 -12.7 -17.4 -3.6 -10.1 -9.6 -21.9 -5.2 17.8 -6.2 -30.7 -4.0 -12.6 2.2 -21.9 -2.5 -1.4 7.9 12.9 2.8 -8.3 10.5 2.2 -9.0 -4.8 -4.2 -0.1 -8.1 -7.2 7.6

2010 9.7 7.3 12.6 5.2 5.3 4.6 8.4 6.0 10.4 10.3 0.5 6.7 7.5 10.1 4.9 6.4 0.8 4.3 3.6 2.8 8.9 6.3 11.2 9.9 9.7 11.1 10.3 13.1 11.2 5.5 18.1 8.6 20.4 2.4 5.0 14.0 16.5 5.3 -0.5 13.9 15.7 12.0 3.5 7.8 4.5 11.7 11.2 29.7 16.2 26.9 14.4 14.0

2011f 5.5 3.3 8.1 3.6 3.7 2.2 4.0 3.3 2.3 9.0 6.6 3.3 3.5 8.6 3.7 0.4 -2.2 2.8 2.4 1.4 7.6 1.9 7.2 6.5 4.5 7.5 4.6 8.5 6.9 6.0 4.0 3.0 29.4 3.8 3.6 7.7 2.8 -0.4 4.3 9.1 13.2 5.0 -0.6 4.2 5.8 4.7 6.8 5.3 5.8 6.4 1.6 -

2012f 4.0 0.8 7.8 2.0 2.0 1.6 5.1 4.2 5.6 5.4 5.0 0.8 0.7 3.2 1.6 -0.0 -1.5 1.2 1.1 1.4 0.8 1.5 3.8 4.3 3.0 5.5 2.5 6.0 7.0 7.5 10.0 3.4 -3.1 3.7 3.1 6.9 -4.0 4.5 3.2 9.4 12.5 6.3 8.1 6.4 5.0 5.0 8.5 4.0 8.5 2.5 5.6 -

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Wage growth
Wage growth % Year World North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Israel South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan, China & India Hong Kong Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand 2003 6.2 3.6 3.7 2.7 7.3 5.8 12.1 3.4 3.0 2.9 2.0 2.4 2.2 5.0 2.9 3.2 4.4 18.2 5.8 12.1 4.7 26.0 22.9 22.8 5.8 -3.0 8.1 8.6 -0.8 3.6 2.3 11.2 13.6 4.1 -1.4 10.0 4.0 0.4 1.2 9.4 2.6 2.2 2004 5.8 3.7 3.8 2.7 6.3 4.7 4.6 11.0 2.7 2.8 2.3 0.9 2.5 2.8 3.9 3.7 4.2 4.1 15.5 6.3 6.2 2.8 21.9 11.7 27.6 22.6 3.7 7.5 7.9 -0.7 3.6 2.3 10.2 12.3 3.8 -0.3 16.6 3.4 3.6 3.6 6.5 2.9 2.3 2005 6.4 3.3 3.2 3.9 10.7 3.8 7.6 26.0 6.3 2.8 2.3 1.1 2.8 3.1 3.1 4.0 4.6 3.9 18.2 5.0 8.7 4.4 26.9 12.5 36.7 17.0 3.4 6.5 8.8 0.6 4.0 2.8 10.8 12.3 5.1 1.6 8.5 3.9 8.5 2.6 6.4 2.8 6.9 2006 6.5 3.1 3.1 2.5 9.2 5.1 7.2 19.4 3.5 3.0 2.5 1.1 2.8 3.0 2.9 4.3 4.9 4.1 17.4 6.6 8.2 5.0 24.3 13.2 29.2 18.8 1.5 9.1 12.3 0.2 4.1 3.2 11.8 14.0 4.4 2.2 6.2 10.1 7.9 4.3 5.6 1.4 6.2 2007 7.2 3.4 3.3 4.3 9.7 5.4 7.3 20.0 4.5 3.4 2.9 1.3 2.7 2.2 4.4 4.2 4.7 6.3 20.1 7.2 8.0 9.1 27.8 14.7 31.9 22.0 5.6 8.9 13.4 -1.0 4.0 3.2 13.1 16.2 3.7 2.8 4.9 7.3 4.5 3.5 5.9 1.8 3.0 2008 7.1 2.9 2.9 2.9 11.1 6.0 9.9 23.4 5.3 3.7 3.6 2.8 2.9 3.5 5.2 3.3 3.5 5.6 20.1 8.3 7.6 10.5 27.2 10.8 33.7 24.6 3.0 11.6 13.1 -0.3 4.2 3.6 12.7 15.8 3.4 0.9 7.6 0.5 5.3 4.1 3.1 -0.3 10.2 2009 3.2 1.7 1.7 1.6 8.3 4.6 8.4 17.3 4.0 2.2 2.6 2.1 2.2 3.1 4.3 0.6 -0.1 4.3 2.9 7.5 4.0 0.6 4.2 8.6 -1.9 9.1 8.8 1.0 10.8 5.1 -3.9 3.6 2.5 5.7 9.0 -1.9 0.8 5.3 -5.0 2.2 5.0 2.6 -9.2 -2.5 2010 5.6 2.0 1.9 3.5 11.2 3.4 9.2 29.3 4.7 1.7 1.4 1.6 1.8 2.1 1.2 2.1 1.9 3.6 2.4 13.1 2.3 1.4 3.6 11.8 15.7 16.4 2.5 3.6 14.6 12.4 0.6 3.3 1.6 11.9 13.0 6.4 3.3 10.9 2.0 3.4 0.3 6.8 8.6 6.5 2011f 5.5 2.3 2.2 2.9 11.1 3.9 9.9 27.2 6.0 2.2 2.1 1.8 2.2 1.8 0.8 2.4 2.3 4.0 2.1 12.2 2.4 4.0 4.4 12.6 14.5 17.6 4.0 5.9 9.0 11.3 -0.5 3.8 2.1 11.0 13.0 4.2 4.8 10.0 4.0 5.5 6.0 2.9 3.8 5.9 2012f 5.2 2.1 2.1 2.6 9.3 4.0 9.3 21.5 4.8 2.3 2.2 2.0 2.4 1.7 1.0 2.5 2.4 3.2 2.9 11.4 3.0 4.5 5.0 11.9 13.0 15.0 4.8 6.8 8.0 10.9 -0.2 3.8 2.8 10.6 12.0 5.0 4.9 9.0 4.0 6.5 5.0 6.0 4.2 3.6

Note: Global and regional aggregates are calculated using the World Bank's 2004 PPP weights Source: HSBC

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Budget balance
Budget balance % GDP North America US Canada* Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK* Norway Sweden EMEA Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 -3.1 -3.4 0.7 -2.6 -0.6 -5.2 0.5 -0.5 -2.8 -3.1 -4.0 -4.1 -3.5 -0.2 -1.9 -2.9 7.3 -1.2 -2.2 -7.2 -6.2 1.7 -8.8 0.2 -1.5 -10.4 -5.5 4.5 3.6 -2.5 -3.4 -7.1 0.9 4.0 -2.6 -2.2 -3.1 -3.2 -4.7 -1.7 -4.4 -4.4 -1.5 -1.8 -1.2 0.3 -4.9 2004 -3.2 -3.5 0.7 -0.9 -0.2 -2.9 2.6 2.1 -2.7 -3.0 -3.8 -3.6 -3.5 -0.4 -1.7 -3.3 11.1 0.6 -0.3 -6.4 -5.4 4.3 -5.4 -3.3 -1.2 -9.5 -3.9 11.4 10.0 -2.0 -2.9 -7.1 0.9 4.1 -2.0 -1.3 -2.7 1.7 -3.9 -1.0 -4.1 -3.7 -1.1 -2.3 -2.2 0.0 -4.9 2005 -2.3 -2.6 0.8 -1.1 -0.1 -3.6 1.8 4.6 -2.2 -2.6 -3.3 -3.0 -4.2 1.0 -0.9 -2.9 15.1 2.2 2.5 -7.9 -4.1 7.5 -1.3 -1.8 -1.2 -9.6 -1.9 18.4 20.8 -0.5 -2.5 -6.2 1.5 4.5 -1.9 -1.2 -2.5 1.0 -4.0 -0.5 -3.6 -2.6 -0.3 -2.6 -0.6 0.3 -4.9 2006 -1.7 -1.9 0.9 -0.9 0.1 -3.6 1.8 7.5 -1.0 -1.3 -1.6 -2.3 -3.3 2.0 -0.1 -2.3 18.5 2.3 3.2 -9.3 -3.6 7.4 -0.5 -0.8 -2.2 -8.2 -0.9 21.0 26.6 0.3 -2.1 -5.3 1.6 5.1 -1.5 -1.0 -2.0 4.0 -3.3 -0.9 -3.3 -1.0 0.5 -2.8 0.1 1.2 -5.0 2007 -1.0 -1.2 0.7 -0.6 0.0 -2.8 1.1 8.7 -0.5 -0.6 0.3 -2.7 -1.5 1.9 -0.1 -2.4 17.7 3.6 2.1 -5.0 -1.9 5.4 -1.6 -1.0 -2.6 -7.3 0.0 12.2 21.6 0.7 -1.2 -5.0 1.6 4.0 -0.4 0.6 -1.4 7.7 -2.5 -1.3 -3.2 -0.2 3.0 0.5 -0.1 -2.3 -5.7 2008 -3.0 -3.2 -0.1 -0.4 -0.1 -2.0 1.4 5.0 -2.4 -2.0 0.1 -3.3 -2.7 -4.1 -3.7 -6.7 19.1 2.2 2.8 -3.7 -3.7 4.1 -1.8 -1.4 -5.7 -6.8 -2.1 32.5 21.1 -0.4 -2.7 -7.0 1.7 0.4 -1.9 -0.4 -3.4 0.1 -6.0 -0.1 -4.8 -0.9 1.5 -2.0 -0.8 -1.1 -4.6 2009 -9.6 -10.2 -3.0 -2.6 -2.3 -3.3 -0.6 -4.6 -2.3 -6.2 -3.1 -7.5 -5.4 -11.1 9.8 -11.2 10.5 -0.7 -5.6 -4.5 -7.3 -6.0 -5.5 -2.1 -8.5 -6.9 -5.2 -6.1 -12.4 -5.0 -4.7 -10.8 -2.2 -3.5 -3.4 -2.2 -4.6 1.6 -6.4 -1.6 -7.0 -3.7 12.7 -4.8 -3.4 -4.4 -7.0 2010 -8.5 -9.0 -2.1 -2.1 -2.8 -2.5 0.2 -0.3 -2.6 -6.3 -4.3 -7.1 -4.6 -9.3 8.9 -10.0 10.5 -0.0 -3.4 -4.2 -7.9 -4.0 -3.6 -1.1 -6.4 -8.4 -3.7 6.5 2.7 -4.8 -4.1 -9.4 -4.3 -4.3 -2.9 -2.5 -3.2 4.3 -4.7 -0.7 -5.6 -3.5 -1.7 -2.1 -2.7 -1.3 -5.5 2011f -8.0 -8.6 -1.9 -2.1 -2.5 -2.4 -1.4 1.1 -1.6 -4.5 -1.7 -5.8 -4.2 -6.4 7.4 -7.9 12.5 0.7 -1.2 1.0 -5.6 0.3 -1.5 -3.1 -4.5 -9.7 -3.0 9.6 10.0 -4.8 -4.1 -9.9 -3.6 -3.0 -2.8 -2.0 -3.5 1.4 -5.2 -1.9 -4.4 -2.4 0.4 -2.7 -2.2 -2.0 -3.9 2012f -6.8 -7.3 -1.7 -2.0 -2.1 -2.4 -1.5 0.5 -1.5 -4.0 -1.4 -5.6 -3.7 -5.8 6.1 -6.1 13.5 1.1 -2.3 -3.5 -4.5 -1.5 -2.5 -3.0 -3.2 -10.2 -3.7 5.3 8.4 -4.2 -3.3 -8.3 -1.5 -2.0 -2.3 -1.7 -2.9 3.7 -4.4 -1.7 -4.6 -2.2 0.6 -2.9 -0.6 -2.5 -3.8

Note: * = Fiscal year forecasts. Global and regional aggregates are calculated using the World Banks' 2004 PPP weights Source: HSBC

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Current account
Current account % GDP North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India** Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 -4.2 -4.7 1.2 0.9 -1.0 0.7 6.3 -1.1 0.6 0.3 1.9 0.8 -1.3 -3.5 1.7 -1.6 12.3 6.9 13.3 2.5 -6.2 -8.7 -2.1 8.3 -2.8 5.8 -5.8 2.4 1.2 5.5 8.6 -1.3 2.9 3.2 -5.3 -4.0 3.3 2.8 3.7 9.2 1.5 3.4 12.8 0.8 22.7 1.2 9.8 5.6 -4.9 2004 -4.7 -5.3 2.3 1.1 -0.7 1.8 2.3 2.2 0.9 0.8 4.7 0.5 -0.9 -5.3 1.4 -2.1 12.7 6.5 13.4 3.8 -5.2 -8.3 -3.9 10.0 -3.7 10.5 -8.4 4.3 2.2 15.4 10.0 -3.0 2.7 3.7 -6.1 -5.7 2.8 3.6 2.1 8.9 0.1 0.6 12.1 1.0 17.0 2.2 5.8 1.7 -3.5 2005 -5.3 -5.9 1.9 1.1 -0.6 1.6 3.1 1.2 0.4 0.1 5.1 -0.5 -1.7 -7.4 1.3 -2.6 16.3 6.8 14.1 5.2 -1.3 -7.2 -1.2 11.1 -4.6 2.9 -8.7 3.3 3.2 28.8 17.6 -3.5 3.9 3.6 -5.8 -7.9 4.3 7.1 1.5 12.4 -1.2 0.1 15.0 1.9 21.1 4.1 4.8 -4.3 -1.1 2006 -5.4 -6.0 1.4 1.3 -0.5 1.3 3.8 4.9 0.1 -0.1 6.3 -0.6 -2.6 -9.0 1.1 -3.4 17.2 8.4 14.9 4.0 -2.4 -7.2 -2.7 9.5 -6.1 1.0 -10.4 1.6 5.1 27.7 20.6 -5.3 5.2 3.9 -5.4 -8.2 5.9 9.3 2.5 11.4 -1.0 3.0 16.7 4.3 24.8 2.1 7.0 1.1 -0.3 2007 -4.6 -5.1 0.8 0.5 -0.9 0.1 2.8 4.5 0.3 0.1 7.4 -1.0 -2.4 -10.0 0.9 -2.6 14.1 9.2 8.9 1.5 -3.2 -6.5 -4.7 5.9 -5.9 -3.6 -13.5 1.7 2.9 24.2 9.5 -7.0 6.0 4.8 -6.3 -8.2 6.8 10.6 2.8 10.8 -0.7 2.4 15.9 4.6 27.3 1.5 8.9 6.6 -9.8 2008 -4.3 -4.7 0.3 -1.0 -1.5 -1.7 2.2 -1.9 -0.9 -1.6 6.3 -1.8 -2.9 -9.6 1.2 -1.6 17.7 8.8 2.3 1.5 -0.6 -7.1 -4.8 6.1 -5.7 -7.2 -11.6 0.5 0.7 27.7 8.8 -7.1 4.5 3.2 -4.6 -8.8 5.2 9.4 0.9 10.3 -2.5 0.0 17.7 2.1 14.6 2.3 6.9 0.8 -11.9 2009 -2.7 -2.7 -3.0 -0.3 -0.7 -1.5 3.6 1.6 0.1 -0.3 5.6 -1.5 -2.0 -5.2 1.4 -1.7 11.8 7.1 11.4 0.7 -1.0 0.4 -2.2 4.0 -2.3 -1.5 -4.2 -2.4 3.6 6.0 3.4 -4.1 3.6 2.8 -4.3 -3.1 4.1 5.7 2.4 7.5 -1.9 2.0 16.5 5.6 19.0 0.4 11.4 8.3 -8.0 2010 -3.2 -3.2 -3.1 -1.0 -0.5 -2.3 1.0 1.9 -0.2 -0.4 5.7 -1.8 -3.5 -4.6 0.8 -3.2 12.4 6.6 15.6 1.2 -2.1 2.4 -3.4 4.8 -6.5 -2.1 -4.2 -2.1 3.1 15.6 5.8 -2.8 2.8 3.6 -2.7 -4.1 2.9 4.2 1.4 5.6 -3.0 0.8 11.5 4.2 22.2 3.3 9.3 4.7 -8.3 2011f -3.0 -3.1 -2.4 -1.3 -0.8 -2.4 0.0 0.2 -0.2 -0.7 5.0 -2.4 -4.0 -4.1 1.3 -2.1 12.5 6.7 13.0 1.1 -2.5 0.6 -4.4 4.6 -9.6 -2.5 -4.4 -0.9 0.0 23.6 9.9 -3.9 2.5 2.7 -2.5 -2.5 2.7 3.7 1.6 6.2 -2.3 0.5 11.9 4.3 19.2 2.1 9.8 4.3 -7.6 2012f -2.7 -2.8 -1.5 -1.6 -0.9 -2.7 -0.7 -0.5 0.4 0.1 4.8 -2.1 -1.0 -3.7 1.4 -1.6 12.0 5.1 12.6 0.0 -1.9 0.3 -4.6 3.1 -6.3 -8.3 -5.8 -1.8 0.5 16.0 7.6 -4.0 2.0 2.0 -2.9 -1.6 2.2 2.6 1.7 9.8 -2.6 0.6 11.8 3.9 22.4 1.5 11.4 3.2 -6.7

Note: * = based upon Egyptian financial year (July-June); ** = based upon Indian fiscal year (April-March). Global and regional aggregates are calculated using the World Banks' 2004 PPP weights Source: HSBC

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Current account USDbn North America US Canada Latin America Mexico Brazil Argentina Chile Western Europe Eurozone Germany France Italy Spain Other Western Europe UK Norway Sweden Switzerland EMEA Czech Republic Hungary Poland Russia Turkey Ukraine Romania Egypt* Israel Saudi Arabia UAE South Africa Asia-Pacific Japan Australia New Zealand Asia ex Japan China Asia ex Japan & China Hong Kong India** Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam 2003 -506.4 -521.0 14.7 4.3 -7.2 4.2 8.1 -0.8 88.1 24.2 47.7 14.5 -19.9 -32.0 63.9 -30.2 27.8 22.1 44.3 38.5 -5.8 -6.8 -4.6 35.8 0.0 2.9 -3.5 1.9 1.4 11.8 7.5 -2.2 262.2 136.3 -28.3 -3.1 157.3 45.9 111.4 14.7 8.8 8.1 13.3 0.7 21.8 7.5 30.5 8.0 -1.9 2004 -600.2 -630.0 29.8 12.0 -5.2 11.7 3.4 2.1 137.2 76.7 129.7 10.7 -15.9 -55.7 60.4 -45.2 33.3 23.0 49.2 69.9 -5.7 -8.8 -10.0 59.9 -14.4 6.8 -6.4 3.4 2.7 38.6 10.5 -6.7 284.4 172.1 -39.5 -5.6 157.4 68.7 88.7 14.7 0.8 1.6 15.1 0.9 19.2 15.6 19.7 2.8 -1.6 2005 -722.1 -748.0 25.9 16.0 -5.1 14.0 5.6 1.4 78.1 13.2 138.2 -10.4 -28.6 -81.8 64.8 -58.9 48.4 23.9 51.4 156.3 -1.6 -8.3 -3.7 84.3 -22.1 2.5 -8.6 2.9 4.3 90.8 24.4 -8.5 379.0 165.8 -41.6 -8.8 263.7 160.8 102.9 22.1 -10.3 0.3 20.7 2.0 26.4 32.3 17.6 -7.6 -0.6 2006 -777.9 -798.4 20.5 24.3 -4.5 13.6 8.0 7.2 44.6 -16.0 183.9 -12.9 -49.0 -112.0 60.6 -83.1 58.3 27.2 58.3 159.3 -3.4 -8.6 -9.4 94.3 -32.2 1.1 -12.8 1.8 7.4 98.9 36.0 -13.7 510.7 170.4 -41.6 -8.7 390.6 253.3 137.3 21.7 -9.3 10.9 25.4 5.3 36.2 18.6 26.3 2.3 -0.2 2007 -711.9 -724.7 12.8 7.5 -8.9 1.6 7.4 7.5 63.0 10.3 252.1 -26.2 -50.9 -146.5 52.7 -73.2 56.1 30.6 39.2 75.3 -5.6 -9.6 -20.3 77.2 -38.3 -5.2 -23.1 2.3 4.9 93.3 19.6 -20.0 681.1 210.9 -58.6 -10.8 539.6 371.8 167.8 22.4 -8.1 10.5 29.2 7.1 48.6 14.1 35.2 15.7 -7.0 2008 -701.9 -707.2 5.3 -40.9 -16.3 -28.3 7.0 -3.3 -145.0 -212.0 230.5 -50.5 -89.5 -155.8 67.1 -47.3 76.8 25.6 12.0 122.7 -1.3 -11.1 -25.5 102.3 -41.9 -12.9 -23.7 0.9 1.5 132.3 22.3 -20.1 626.6 157.1 -47.3 -12.1 528.9 426.1 102.8 22.1 -31.0 0.1 39.6 3.6 27.7 21.8 27.5 2.2 -10.8 2009 -421.8 -376.6 -45.2 -17.3 -6.4 -24.3 10.9 2.6 49.0 -36.2 188.1 -39.6 -69.2 -76.6 85.2 -37.5 44.4 21.3 57.0 37.2 -2.0 0.5 -9.7 49.0 -13.9 -1.7 -7.0 -4.4 7.1 22.8 7.8 -11.3 515.5 141.7 -43.7 -3.6 421.2 284.1 137.1 15.6 -25.9 10.6 31.9 9.4 35.0 3.2 42.9 21.9 -7.4 2010 -521.8 -470.9 -50.9 -45.7 -5.6 -47.5 3.6 3.8 31.6 -53.4 186.4 -44.8 -70.7 -64.0 85.0 -75.8 51.4 24.4 85.1 72.6 -4.0 3.1 -15.9 71.1 -48.6 -2.9 -6.7 -4.3 6.7 69.8 14.3 -10.0 540.0 195.9 -31.1 -5.7 380.9 250.0 130.9 12.6 -51.7 5.6 27.4 8.5 49.6 32.8 39.9 14.8 -8.5 2011f -503.4 -463.0 -40.4 -69.2 -9.6 -60.2 0.1 0.4 19.5 -97.8 178.3 -66.5 -89.9 -61.5 117.3 -50.7 60.2 25.7 82.1 106.0 -7.1 0.8 -22.5 83.1 -75.0 -3.9 -8.1 -2.0 2.3 126.2 27.2 -15.0 530.6 164.2 -34.5 -3.9 404.7 260.0 144.7 14.8 -45.6 4.4 33.6 9.6 50.2 24.6 46.6 15.9 -9.4 2012f -459.9 -432.9 -27.0 -93.2 -11.3 -77.0 -3.7 -1.3 134.5 9.2 179.2 -61.6 -22.7 -56.7 125.3 -40.7 66.8 21.3 78.0 33.8 -6.5 0.4 -26.5 60.1 -51.0 -14.8 -11.0 -4.5 1.2 83.2 21.8 -18.5 442.3 135.7 -67.0 -2.8 376.5 210.0 166.5 24.3 -56.7 5.8 38.1 9.8 65.0 19.8 57.1 12.9 -9.6

Note: * = based upon Egyptian financial year (July-June); ** = based upon Indian fiscal year (April-March). Global and regional aggregates are calculated using the World Banks' 2004 PPP weights Source: HSBC

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US
Worse than previously thought
Sizable revisions to GDP data revealed that the recent recession was much deeper, and the recovery since the recession ended has been much slower, than originally estimated. The new data show that GDP declined 5.1% during the end of the recession a full percentage point more than the original estimates. The rebound through the first quarter of 2011 lifted GDP only 4.6% (rather than 5.1%), leaving the total level of output below the level for Q4 2007, the quarter in which the recession began. The new data also show economic growth over the last few quarters was weaker than originally reported. Instead of averaging 2.5%, the economy expanded at a below-trend 1.8% in Q4 2010 and Q1 2011. The sub-par pace of growth continued in Q2 this year, with a rise of only 1.3%. The loss of economic momentum is likely to persist in the second half of 2011. A lower level of GDP means a lower tax base on which state and local governments can generate tax revenue. With growth slowing, the squeeze on local government budgets is now all the more severe. Fiscal austerity is creating more of a drag on GDP than expected this year, and will continue to constrain the rate of growth in 2012. Government cutbacks will slow the growth of aggregate income and damp overall consumer sentiment. The recent prolonged debate in Washington over how to resolve the federal governments long-term deficit problem only served to further depress consumer confidence. With deficit reduction still a priority, fiscal drag will continue in 2012, holding back the economys growth. In response to these developments, the Federal Reserve is pursuing additional unconventional policies to ease monetary conditions. Its latest move, dubbed operation twist by the press, involves selling short-term Treasury debt from its portfolio and buying longer-term debt. This may lower longterm interest rates and could boost private spending.
Kevin Logan Chief US Economist HSBC Securities (USA) Inc. +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang Economist HSBC Securities (USA) Inc. +1 212 525 3181 ryan.wang@us.hsbc.com

% q-o-q annualised
2010 Consumer spending Government consumption Private fixed investment Housing Stockbuilding (ppt contribution) Domestic demand Exports Imports GDP (year) GDP (% quarter annualised) Industrial production (% year) Unemployment (%) Consumer prices (% year) Employment costs (% year) Current account (USDbn) Current account (% GDP) Budget balance (% GDP)* 3-month money (%) 10-year bond yield (%)
Source: BEA, BLS, HSBC estimates

2011f 2.1 -2.0 5.8 -2.7 -0.2 1.6 7.1 5.3 1.6 3.7 9.1 3.2 2.2 -463.0 -3.1 -8.6 0.4 1.5

2012f 1.5 -0.5 5.2 0.8 -0.1 1.6 6.1 3.9 1.7 2.0 9.0 2.1 2.1 -432.9 -2.8 -7.3 0.4 1.8

Q3 11f 1.6 -0.8 5.8 -2.0 0.3 2.0 6.3 3.9 1.6 2.2 3.2 9.1 3.8 2.3 -111.4 -2.9 0.4 1.9

Q4 11f 1.3 -0.5 4.7 -4.0 -1.0 0.5 6.1 3.3 1.2 0.7 2.3 9.2 3.6 2.3 -114.0 -3.0 0.4 1.5

Q1 12f 1.4 -0.1 4.0 1.0 0.1 1.6 6.4 4.5 1.5 1.7 1.6 9.1 2.8 2.2 -106.0 -2.7 0.4 1.7

Q2 12f 1.6 -0.7 5.8 5.0 0.2 1.9 5.8 4.1 1.7 2.1 2.1 9.0 2.1 2.0 -104.0 -2.7 0.4 1.7

Q3 12f 1.9 -0.2 5.1 2.0 -0.1 1.9 6.8 4.5 1.6 2.0 1.7 9.0 1.8 2.0 -108.9 -2.8 0.4 1.8

Q4 12f 2.1 -0.5 5.2 2.0 0.1 2.2 6.8 4.5 2.1 2.4 2.4 8.8 1.7 2.0 -114.1 -2.9 0.4 1.8

2.0 0.7 2.6 -4.3 1.6 3.5 11.3 12.5 3.0 5.3 9.6 1.6 1.9 -470.9 -3.2 -9.0 0.3 3.3

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Consumer confidence surveys


Index 100 90 80 70 60 50 06 07 08 09 10 11 Index 120 100 80 60 40 20

Sudden plunge in confidence


Increased financial market volatility over the summer, along

with concern over the difficulties policymakers are having in reducing the nations budget deficit, led to a sharp drop in consumer confidence. Measures of consumer confidence are approaching the lows last seen during the recession of 2008-09. Further declines in confidence could be accompanied by a slowing in consumer spending, pushing the economy closer to recession as a result.

Univ . of Michigan (LHS) Conference Board (RHS)


Source: Institute for Supply Management

New home sales


000s 1400 1200 1000 800 600 400 200 03 04 05 06 07 08 09 10 New home sales, annual rate, ths
Source: Core Logic

Home sales continue to stagnate


000s 1400 1200 1000 800 600 400 200 11 12m av g
Over the past year, sales of new homes have declined

about 12% compared to the previous 12 months. Compared to the peak year of 2006, sales are down 77%. The inventory of homes for sales is still at a high level, with roughly 1.2m more homes on the market than what would be considered a normal level. House prices continue to face pressure from the large overhang of homes for sale. The median sales price is down about 8% over the past year. From the peak level reached in 2006, average home prices are down 32%. The loss of wealth in household real estate is weighing on consumer confidence and continues to hold back the growth of consumer spending.

Federal budget deficit as a % of GDP


% GDP 10 8 6 4 2 0 -2 -4 90 92 94 96 98 00 02 04 06 08 10 12
Source: Bureau of Economic Analysis

Fiscal contraction lies ahead


% GDP 10 8 6 4 2 0 -2 -4
On 2 August Congress passed the Budget Control Act of

2011. The legislation specifies USD900bn in federal spending reductions over the 2012-21 period. In addition, a Select Committee of Congress is charged with making recommendations for another USD1.2trn in deficit reduction from 2012 to 2021. These reductions may include tax increases as well as spending cuts. The impact of the Budget Control Act on the deficit in 2012 will be modest. The spending cuts will only amount to about 0.2% of GDP. However, in 2013, the planned deficit reductions are close to 1.0% of GDP, potentially creating a sizable fiscal drag on economic growth.

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Canada
Net exports at risk
We now see GDP growth at 2.1% for 2011 (down from our previous forecast of 2.9%) and at 1.9% for 2012 (from 2.5%). Canadas economy returned to its pre-recession GDP level roughly a year ago, the only G7 country to accomplish this feat. A number of factors aided this performance, including a resilient housing sector, robust growth in energy exports, and a sharp turnaround in overall manufacturing activity after steep declines in 2008-09. In recent months, industrial activity has stalled in both the US and Europe, resulting in a generalised slowdown in global trade. This has had important ramifications for Canada, since these two regions still account for over 80% of Canadian exports. Both energy and manufacturing are directly affected by the recent slowing in the trade cycle. As recently as the July Monetary Policy Report, the Bank of Canadas expectation was that demand over the next year would rely increasingly on business fixed investment and net exports, rather than government and household expenditure. Now, though, we expect net exports to be a source of weakness for growth. Concerns about external demand mean businesses may also be more cautious about investment plans. We expect labour market slack to remain significant. Over the next year, we see the unemployment rate staying close to its current level of 7.3%. Businesses will continue to use part-time employment to adjust to demand, and the proportion of part-time workers that would prefer a full-time job may remain high. BoC is likely to remain focused on downside risks. Headline inflation has fallen back into the banks 1% to 3% control band, and core inflation is trending sideways in the lower half of this range. We previously expected the BoC to raise rates to 1.50% by year-end, but now expect the overnight policy rate to stay at 1.00% for all of this year and next.
Kevin Logan Chief US Economist HSBC Securities (USA) Inc. +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang Economist HSBC Securities (USA) Inc. +1 212 525 3181 ryan.wang@us.hsbc.com

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter annualised) Industrial production CPI Average earnings Unemployment (%) Current account (USDbn) Current account (%GDP) Budget balance (%GDP)* CAD/USD 3-month money (%) 10-year bond yield (%)
Note: * = Fiscal year Source: Statistics Canada, HSBC estimates

3.3 2.4 10.0 0.7 5.2 6.4 13.1 3.2 4.6 1.8 3.5 8.0 -50.9 -3.1 -2.1 0.99 1.2 3.2

1.9 1.2 7.6 0.7 3.0 3.2 6.6 2.1 2.2 2.9 2.9 7.5 -40.4 -2.4 -1.9 0.97 1.3 2.0

2.0 0.6 3.5 0.4 1.7 3.1 3.0 1.9 1.6 2.0 2.6 7.1 -27.0 -1.5 -1.7 1.00 1.5 2.3

1.9 1.2 6.5 0.5 2.1 3.1 4.6 2.0 2.0 1.0 2.9 2.4 7.3 1.04 1.2 2.1

1.3 0.6 4.8 0.4 2.3 1.7 5.5 1.5 0.7 1.0 2.7 2.4 7.3 0.97 1.3 2.0

1.8 0.8 3.5 0.4 1.7 0.8 3.9 1.1 2.1 0.1 1.2 2.3 7.2 1.00 1.3 2.1

1.9 0.5 2.6 0.4 0.8 4.0 2.2 1.8 2.4 1.8 1.5 2.8 7.2 1.00 1.3 2.3

2.0 0.5 3.5 0.4 1.9 3.7 3.0 2.0 2.9 2.2 2.0 2.7 7.1 1.00 1.3 2.3

2.2 0.5 4.5 0.4 2.4 3.9 3.0 2.6 2.9 2.2 2.1 2.7 7.0 1.00 1.5 2.3

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Mexico
Weathering the storm
Mexico seems to be well positioned to deal with the US slowdown. First, Mexico has a solid macroeconomic framework (see Mexico Economics: Mexican Bliss, 12 May 2011). Second, recent indicators show that it has grown more strongly than the US economy. Third, the automatic stabilisers exchange rate and interest rates are moving in the right direction. Finally, the domestic market recovery means that Mexicos performance is less dependent on external forces. Economic activity has been stronger in Mexico than in the US. For instance, seasonally adjusted Mexican real GDP is now higher than in 2008, whereas US real GDP has not yet returned to the pre-crisis level. The case is similar for industrial production, services, investment and formal employment. Mexico continues to be strongly linked to the US. Indeed, Mexico enjoys a higher market share in US imports than in 2008, with 12% of the total now, versus close to 10%. However, Mexican exports have become diversified, as the percentage of exports destined for countries other than the US has increased to 22% of total exports from 10% in the last decade. Whilst the slowdown in US demand will have an impact on Mexican exports, the automatic stabilisers have responded adequately. The exchange rate has depreciated about 10% over the course of the year which supports the competitiveness of exports. Similarly, relatively low interest rates will continue to stimulate investment and consumption. Domestic demand seems to be reviving, and indicators such as a rising wages and increased credit growth support a better outlook (see Equity Strategy & Economics: Domestic-oriented companies even more important as times get tougher, 15 September 2011). We estimate that inflation will remain benign, and that the monetary policy rate will remain on hold at 4.5%.
Sergio Martin Economist HSBC Mxico, S.A +52 55 5721 2164 sergio.martinm@hsbc.com.mx

% Year 2007 2008 2009 2010 2011f 2012f

Private consumption Public consumption Gross capital formation GDP Industrial production Unemployment (%) Consumer prices Exports Imports Current account (USDbn) Current account (% GDP) Budget balance (% GDP) MXN/USD 3-month money* (%)
Note: * = average Source: CEIC, HSBC estimates

4.0 3.1 6.9 3.3 2.0 3.4 4.0 8.8 10.1 -8.9 -0.9 0.0 10.9 7.2

1.8 1.1 5.9 1.2 -0.1 4.3 5.1 7.2 9.5 -16.3 -1.5 -0.1 13.8 7.7

-7.1 3.5 -11.3 -6.1 -7.6 4.8 5.3 -21.2 -24.0 -6.4 -0.7 -2.3 13.1 5.4

5.0 2.8 2.3 5.4 6.0 4.9 4.2 29.9 28.6 -5.6 -0.5 -2.8 12.4 4.6

5.0 2.6 7.8 3.7 3.3 4.5 3.5 18.9 19.8 -9.6 -0.8 -2.5 12.0 4.5

5.1 9.2 5.8 3.9 4.2 4.2 3.6 16.3 15.5 -11.3 -0.9 -2.1 12.5 5.2

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Brazil
Taking risks with monetary policy
12-month consumer inflation (IPCA) reached 7.2% in August and we forecast it to fall gradually to about 6.5%, the central banks inflation target, by the end of the year. However, it may well not achieve this. Market inflation expectations for 2012 have continued to widen in recent weeks, and we recently raised our own forecast for 2012 IPCA inflation from 5.4% to 5.7%. Despite this difficult inflation backdrop, the central bank cut its policy rate by 50bp, citing downside risks to growth and inflation from deterioration in the external scenario. Although we agree that the global economic outlook has worsened, the central bank is, in our view, responding to an adverse scenario that is yet to materialise, and the impact of which on Brazil remains uncertain. In so doing, it appears to us to be increasing risks for the inflation outlook. The decision to cut interest rates suggests that the authorities have a degree of intolerance to slower growth. In this respect, we recently lowered our growth forecasts from 4.1% to 3.5% for 2011, and from 4.4% to 4.0% for 2012. This move followed the release of Q2 2011 GDP figures, and takes into consideration our forecast for monetary policy (we expect the Selic policy rate to be cut to 11% by the end of this year and to 10% by the end of Q1 2012). One aspect of the growth outlook we find striking is the divergence between the decline in economic activity in the manufacturing sector and persistent strength in consumer demand. The first, in our view, reflects the general loss of competitiveness of Brazils industrial sector on the back of real appreciation and rising costs (especially wages). By contrast, consumer demand remains solid on the back of tight job market conditions (and the resulting pressure on wages), and the expansion of credit (which we expect to rise by about 15% in 2011, despite the macro-prudential measures enacted by the central bank earlier this year). This combination implies pressure on both imports (the need to satisfy demand for tradable goods) and service inflation.
Andr Loes Chief Economist Latin America HSBC Bank Brasil S.A. +55(11)3371-8184 andre.a.loes@hsbc.com.br Constantin Jancs Economist HSBC Bank Brasil S.A. +55(11)3371-8183 constantin.c.jancso@hsbc.com.br Marcos Ross Fernandes Economist HSBC Bank Brasil S.A. +55(11)3847-9787 marcos.r.fernandes@hsbc.com.br

% Year 2007 2008 2009 2010 2011f 2012f

Private consumption Gross capital formation GDP Industrial production Unemployment (%) Consumer prices Exports Imports Current account (USDbn) Current account (% GDP) Budget balance (% GDP) BRL/USD 3-month money
Source: IBGE, HSBC estimates

6.1 13.9 6.1 6.0 7.4 3.6 16.6 32.0 1.6 0.1 -2.8 1.77 11.2

5.7 13.6 5.2 3.1 6.8 5.7 23.2 43.6 -28.3 -1.7 -2.0 2.31 13.0

4.2 -10.3 -0.6 -7.4 6.8 4.9 -22.7 -26.3 -24.3 -1.5 -3.3 1.74 8.7

7.0 21.9 7.5 10.4 5.3 5.0 32.0 42.3 -47.5 -2.3 -2.5 1.67 11.1

4.7 6.3 3.5 2.3 4.3 6.6 25.2 26.7 -60.2 -2.4 -2.4 1.65 11.0

4.0 6.3 4.0 5.6 4.2 5.8 6.8 13.2 -77.0 -2.7 -2.4 1.65 10.0

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Growth in the manufacturing and services sector diverge


Index 60 55 50 45 40 35 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 PMI Manufacturing
Source: Sources: Markit and HSBC

reflecting the factors that are eroding the competitiveness of the industrial sector
Index 60 55 50 45 40 35
PMI readings show that the manufacturing sector is

PMI Serv ices

experiencing a significant contraction, while the services sector is still expanding (even if growth rates appear to be stabilising at a more modest pace). In our view, the industrial slowdown reflects the impacts of BRL strength and rising wage costs both of which adversely affect industrial competitiveness. Although the recent weakening of the BRL may ease this pressure, we believe the government may enact more measures to protect the domestic manufacturing sector similar to the recent IPI tax increase on imported vehicles going to the limit of what is permissible under WTO rules.

Rising average nominal wages (in USD)


USD USD

help explain the erosion of industrial competitiveness but support consumer demand
Converted to US dollars, the average wage in Brazil has

1200 1000 800 600 400 200 0 02 03 04 05 06 07 08 09 10 11


Source: Sources: IBGE and HSBC

1200 1000 800 600 400 200 0

risen by about 350% since its low in 2002. BRL appreciation over the period explains about one-third of this rise. The remainder reflects higher average wages in domestic currency. In part, this increase in the average wage reflects sociodemographic changes (essentially, the growth of the middle class); but it also reveals a substantial increase in domestic labour costs, with negative implications for competitiveness.

12-month IPCA inflation may have peaked in August


9% 8% 7% 6% 5% 4% 3% Jan-08 Oct-08 IPCA
Source: IBGE

but service prices look set to remain under pressure


12-month inflation reached 7.2% in August and we forecast

9% 8% 7% 6% 5% 4% 3% Jul-09 Apr-10 Core Jan-11 Serv ices

it to decline to 6.5% by year-end.


Import growth has helped cover the divergence between

domestic production of tradable goods and rising demand, thereby limiting tradable goods inflation. In this sense, any future protectionist measures could have an undesired effect on inflation. Strong domestic demand and rising wages, meanwhile, help explain the persistent rise in services inflation, which is running well above headline inflation.

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Argentina
What to expect post election
President Kirchner looks almost certain to be reelected so it is time to think about post-election policies. We have pointed out that a strengthening Argentine peso is unsustainable in the medium term. Moreover, ongoing dollarisation increases the need for change. Barring a sharp deterioration in global conditions (ie a sharp weakening in the Brazilian real and soy prices), we expect little change in these factors until the 23 October elections. The governments room for manoeuvre will increase after the election especially if it is re-elected by a wide margin over its rivals. Our base scenario implies some changes to current policies in order to regain macro consistency, though we do not anticipate any radical changes in one direction or the other. We expect the authorities to respond to the erosion of the current account surplus by allowing a faster depreciation of the peso though still at a rate below inflation higher interest rates and stricter capital controls. The total energy and transportation subsidies bill costs more than 3% of GDP. We believe the government will attempt to reduce subsidies by increasing tariffs to the highmiddle and high-income sectors. As a result of marginally less expansionary fiscal policies, higher tariffs and high dollarisation, we expect GDP growth to slow to 5% in 2012 from 8% in 2011. The challenge will be for both the government and economic agents to lower expectations after many years of GDP growth well above potential. Coordinating the wage bargaining process to reduce rates of increase is a necessary condition for a consistent macro framework, in our view. Central bank reserves will continue to be a source of funding, though they should now be complemented by debt issuance if market conditions are reasonable in order to close a USD6bn funding gap. We do not rule out the possibility of increased taxation on the mining sector or some bond issuance to absorb banks excess dollar reserves in order to improve financing above and/or below the line.
Javier Finkman Economist HSBC Bank Argentina S.A +54 11 4344 8144 javier.finkman@hsbc.com.ar Jorge Morgenstern Economist HSBC Bank Argentina S.A +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar

% Year 2007 2008 2009 2010 2011f 2012f

Consumption Gross fixed capital formation GDP Unemployment (%) Industrial production Consumer prices* Exports Imports Current account (USDbn) Current account (% GDP) Budget balance (% GDP) ARS/USD 1-month money (%)

9.0 13.6 8.7 7.8 7.5 12.7 20.1 30.6 7.4 2.8 1.1 3.15 13.6

6.5 9.1 6.8 7.4 1.1 24.8 25.5 28.7 7.0 2.2 1.4 3.45 19.8

0.5 -10.2 0.9 8.4 -4.9 14.5 -20.5 -32.5 10.9 3.6 -0.6 3.80 10.0

9.0 21.2 9.2 7.0 10.3 23.2 23.1 45.6 3.6 1.0 0.2 3.97 11.3

10.5 12.1 8.0 6.7 9.0 23.8 18.3 28.3 0.1 0.0 -1.4 4.28 13.0

6.3 5.0 5.0 7.2 5.4 23.4 9.3 14.7 -3.7 -0.7 -1.5 4.80 14.0

Note: * = average of provincial estimates, ** = end-year 30-day deposit Source: INDEC, Provincial statistics offices, BCRA, Ministry of Finance and HSBC estimates

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Chile
Ready to act
The balance of risks for the Chilean economy has changed sharply over the year: from high inflation and overheating fears in the first part of the year, to more balanced risks mid-year, to the current situation where the risk has risen that both inflation and GDP growth fall below their target and potential levels, respectively, in 2011. Indeed, the main scenario reflected in our forecasts features GDP growth marginally below its potential, which we deem to be in the 4.5% to 5.0% range, and inflation ending 2012 at the centre of the central bank target range. We expect domestic demand to moderate, especially for consumer goods, reflecting past monetary tightening efforts and deterioration in consumer sentiment. In addition, we dont expect the Chilean peso to strengthen next year, ending the decline in prices of tradable goods, which has offset the increase in retail sales in the past year. We therefore forecast a decline in import volumes, but envisage the contribution of net exports to GDP growth remaining negative in 2012. We expect the central bank to fine-tune its monetary policy, lowering the policy rate by 75bp starting this November, to prevent falling inflation expectations from resulting in an overly tightened stance. However, Chile is one of the Latin American economies most exposed to a global downturn, in our view; in particular it is sensitive to copper price movements and developments in capital markets. We therefore believe economic activity could be severely affected if the outlook in advanced economies deteriorated beyond our forecasts. A worse-than-expected external scenario would result in a front-loaded and more pronounced lowering of the policy rate. The central bank has been pre-emptive in the past and we believe that, at this juncture, it is also ready to take action.
Jorge Morgenstern Economist HSBC Bank Argentina, S.A +54 11 4130-9229 jorge.morgenstern@hsbc.com.ar

% Year 2007 2008 2009 2010 2011f 2012f

Private consumption Fixed investment GDP Industrial production Unemployment (%) Consumer prices Exports Imports Current account (USDbn) Current account (% GDP) Budget balance (% GDP) CLP/USD 3-month money (%)*
Note: *= end-year 3-month central bank paper Source: BCCh, INE, Dipres, HSBC estimates

7.0 11.2 4.6 4.1 7.2 4.4 15.8 22.6 7.5 4.5 8.7 498.0 6.15

4.5 19.4 3.7 0.2 8.5 8.7 -2.5 31.1 -3.3 -1.9 5.0 637.0 7.86

0.9 -15.9 -1.7 -6.7 10.0 0.3 -18.5 -30.9 2.6 1.6 -4.6 507.5 0.48

10.4 18.8 5.2 0.5 7.1 1.4 31.5 38.3 3.8 1.9 -0.3 468.0 3.26

10.2 14.4 6.4 6.6 6.9 3.2 25.9 33.4 0.4 0.2 1.1 455.0 5.09

6.0 9.7 4.5 5.0 6.8 2.9 5.9 9.4 -1.3 -0.5 0.5 470.0 4.59

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Eurozone
Sliding into stagnation at best
The big hit to confidence from the intensified sovereign strains poses a major risk to Eurozone growth, as do the associated concerns about bank funding and potential constraints on the availability of credit. These factors are on top of the sharper-than-expected downturn in the world trade cycle. The industrial indicators are already consistent with contracting manufacturing output, and the available export data show a sharp slowdown, not just within Europe and the developed world, but Asia as well. In parts of the Eurozone there will be some domestic offset to the export-led downturn from the easing of the squeeze on real income as inflation abates, especially in those countries where the fiscal tightening is very modest. However, this is unlikely to prevent the Eurozone from registering an outright contraction in GDP in Q4 2011. We now expect growth of only 0.6% in 2012. This is partly the result of the lower starting point at the end of 2011, but also due to the continuing effect of the sovereign crisis, in which we see no near-term improvement, the banking sector strains and the additional austerity measures announced over the summer. The ECB has already started to respond to the risks to financial stability. We expect it to continue with very generous longer-term liquidity operations for banks and the SMP scheme (until the EFSF is up and running. We also expect it to reverse the 5bps of rate rises delivered in April and July by January 2012.
Janet Henry Economist HSBC Bank plc +44 20 7991 6711 janet.henry@hsbcib.com

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Fixed investment Final domestic demand Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter) Industrial production Unemployment (%) Wages Inflation M3 Current account (% GDP) Budget balance (% GDP) Debt (% GDP) ECB refi rate* 3-month money (%) 10-year bond yield (%)** USD/EUR*

0.8 0.6 -0.9 0.4 -0.0 1.0 10.9 9.3 1.7 7.5 10.1 1.4 1.6 0.6 -0.4 -6.3 84.5 1.00 0.9 3.8 1.34

0.6 0.3 2.5 0.9 0.0 1.0 6.0 4.4 1.6 3.5 10.1 2.1 2.7 1.9 -0.7 -4.5 87.0 1.25 1.5 3.2 1.38

0.9 0.0 1.6 0.8 -0.2 0.6 1.7 1.9 0.6 0.7 10.2 2.2 1.8 1.8 0.1 -4.0 89.5 1.00 1.3 3.2 1.44

0.6 0.1 2.1 0.8 -0.1 0.7 5.0 3.2 1.4 0.1 -5.0 10.1 2.1 2.7 1.7 1.50 1.5 3.3 1.34

0.4 0.1 2.6 0.7 0.0 0.6 3.1 2.1 1.1 -0.1 6.4 10.2 2.1 2.8 1.8 1.25 1.5 3.1 1.38

0.4 -0.2 1.0 0.4 -0.1 0.0 1.3 1.0 0.4 0.1 -1.9 10.3 2.1 2.2 1.8 1.00 1.3 3.1 1.40

0.9 0.1 1.3 0.8 -0.1 0.5 0.8 1.1 0.4 0.2 0.7 10.2 2.2 1.8 1.7 1.00 1.3 3.1 1.42

1.0 0.1 1.7 1.0 0.1 0.7 1.6 2.2 0.6 0.3 -4.0 10.2 2.2 1.8 1.7 1.00 1.3 3.2 1.44

1.2 0.1 2.3 1.2 -0.1 1.2 3.2 3.3 1.1 0.4 8.1 10.1 2.2 1.6 2.0 1.00 1.3 3.2 1.44

Note. * = Period-end; ** = Weighted average of big 4, period-end Source: Thomson Reuters Datastream, HSBC estimates

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Inflation concerns easing but not disappearing


%pts 5 4 3 2 1 0 -1 -2 03 04 05 06 07 08 Contribution to EMU inflation Forecast % Yr 5 4 3 2 1 0 -1 -2 12

Inflation
In September, the flash estimate of Eurozone inflation

09

10

11

Food contribution (LHS) Energy contribution (LHS) HICP inflation (RHS)


Note: *Netherlands, Austria, Finland, **Spain, Ireland, Portugal, Greece Source: Eurostat and HSBC estimates

jumped to a 3-year high of 3% y-o-y, driven by energy prices and methodological changes relating to seasonal clothing prices. Unsurprisingly, it is the countries that have been growing most rapidly over the past year that continue to run the highest inflation rates. Not only is German inflation running at 2.8%, but inflation in Austria, Belgium and Finland remains quite sticky. Underlying core remains relatively subdued, so inflation should fall by the end of the year and be back below 2% by March 2012.

ECB not ready for a U-turn yet


Index 65 35 5 -25 % 9 6 3 0 90 92 94 96 98 00 02 04 06 08 10 12 EMU Consumer price ex pectations sa (LHS) BBK/ECB discount rate (RHS) EUR 3 mth rate (RHS)

Policy rates and bond purchases


The ECB effectively shifted from a tightening to a neutral

bias at the September meeting and its comments about intensified downside risks left the door open for a reversal of the rate rises delivered earlier this year. We also expect the refi rate to be lowered back to 1% by January 2012 at the latest. Supporting the banking sector will remain the priority. We expect unlimited liquidity of longer maturities will continue to be provided to banks and expect the covered bond purchase programme to be restarted.

Source: ECB and HSBC

Monetary data are not signalling a threat to inflation


EURbn 25 20 15 10 5 0 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 ECB Purchases (LHS) Portugal (RHS) Greece (RHS) Ireland (RHS) % 2y r Bond Yield 80 64 48 32 16 0

Government bond purchases


Having halted the Securities Markets Programme (SMP)

in March, the ECB only took the decision to start buying Italian and Spanish bonds amid the spreading sovereign concerns in August. The ECB only plans to keep up these debt purchases until the EFSF is able to undertake the purchases, as agreed by Eurozone governments at the 21 July summit. The necessary legislation is expected to be passed by all Eurozone member states by early October.

Note: Dotted lines show start of tightening cycle. We have excluded July 2008 as that was a one-off. Source: ECB, National Central Banks and HSBC

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Germany
Germany begins to feel the global cooling
The constant bombardment by negative news regarding the Eurozone debt crisis has not gone unnoticed by German companies and households. Leading indicators (ifo business climate, PMIs) have deteriorated rapidly in the last three months, pointing to weak growth in the second half of 2011 and going into 2012. Given its high degree of dependence on exports, Germany will be unable to decouple from austerity-led weakness in other parts of the Eurozone and a cooling in developed countries, as the plunging export expectations component of the PMI highlighted recently. Additionally, net trade will be adversely affected by the phasing-out of nuclear power in the aftermath of the Japanese earthquake, leading to higher imports of electricity. Although the exposure of German households to the stock market is limited, recent drops in equity
% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

markets will undoubtedly lead to more cautious consumption, keeping the savings ratio higher than previously anticipated. All in all, the private households balance sheet is very solid, especially when compared to other Western countries. According to Bundesbank data, liabilities did not even rise nominally in the last decade. Unless companies start to shed labour on the back of recession fears, healthy household balance sheets together with still favourable labour market developments and falling inflation should lead to a positive growth contribution from private consumption. In early September we lowered our German growth forecast to 2.8% in 2011, followed by just 1.0% in 2012 on the back of a much weaker global environment. This is only slightly below Germanys long-term growth potential of 1.3%.

Stefan Schilbe Economist HSBC Trinkaus & Burkhardt AG +49 21 1910 3137 stefan.schilbe@hsbctrinkaus.de Rainer Sartoris Economist HSBC Trinkaus & Burkhardt AG +49 21 1910 2470 rainer.sartoris@hsbctrinkaus.de

Consumer spending Government consumption Investment Machinery & equipment Construction Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter) Industrial production Unemployment (%) Average earnings Producer prices Consumer prices Current account (EURbn) Current account (% GDP) Budget balance (% GDP) 3-month money (%)* 10-year bond yield (%)*

0.6 1.7 5.2 10.0 1.9 0.4 2.1 13.4 11.5 3.6 10.1 7.7 1.6 1.6 1.2 141.1 5.7 -4.3 0.9 3.0

1.0 0.8 7.2 9.8 6.1 0.8 2.5 7.8 7.6 2.8 8.6 7.0 1.8 5.9 2.4 129.5 5.0 -1.7 1.5 1.5

1.0 0.7 2.4 3.0 1.8 0.5 0.9 3.1 3.3 1.0 3.2 6.5 2.0 2.0 1.7 128.0 4.8 -1.4 1.3 1.7

0.7 0.7 5.2 7.7 4.4 1.0 2.5 6.5 7.3 2.3 0.4 8.2 6.9 2.0 5.9 2.6 28.0 4.3 1.5 1.9

0.3 0.7 5.7 4.9 7.6 0.7 1.9 5.1 6.0 1.6 -0.2 6.1 6.7 2.0 5.4 2.2 39.0 6.0 1.5 1.5

0.2 0.6 1.7 3.3 1.0 0.5 0.8 3.5 4.5 0.4 0.2 4.1 6.5 2.0 3.4 2.0 30.0 4.6 1.3 1.6

1.2 0.6 2.0 2.0 2.4 0.5 0.7 2.0 2.1 0.8 0.4 3.7 6.5 2.0 2.1 1.6 30.0 4.6 1.3 1.7

1.2 0.7 2.5 2.5 1.9 0.5 0.8 2.6 2.6 0.9 0.5 2.1 6.5 2.0 1.4 1.7 34.0 5.1 1.3 1.7

1.4 0.8 3.2 4.1 1.9 0.5 1.4 4.5 4.1 1.8 0.6 2.9 6.5 2.0 1.3 1.6 34.0 5.1 1.3 1.7

Note: * = Period-end Source: Thomson Reuters Datastream, HSBC estimates

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Macro Global Economics Q4 2011

abc

Ifo business climate indicates slowdown


Business exp. For the next 6mnth (bal.) 30 Upsw ing 20 10 Nov -09 0 -10 -20 -30 Dec-08 -40 Recession -50 -50 -40 -30 -20 -10 0 Jun-10 Boom 30 20 10 0 -10 -20 -30 -40 -50

Leading indicators The recent decline of the ifo business climate clearly indicates a loss of momentum for the German economy in the coming quarters compared to the first half of 2011. The expectations component fell to its lowest level since October 2009, pushing the ifo into the downswing quarter. Regarding future employment intentions, companies still plan to hire on a net basis, albeit at a slower pace. The robust labour market situation should prevent households from becoming overly pessimistic. While the expectations of the retail industry have deteriorated, the current level is still higher than for most quarters in the last two decades.

Sep-11 Aug-08 Dow nsw ing 10 20 30 40

Current business situation (bal.)

Source: Ifio, Macrobond, HSBC

Export expectations have weakened


%Yr 30 20 10 0 -10 -20 -30 -40 94 96 98 00 02 04 06 08 10 % 30 20 10 0 -10 -20 -30 -40

Exports Companies are getting more cautious regarding their export expectations on the back of a deteriorating global economic environment. Whereas Germany could cope with a contraction in countries like Portugal, Greece or Ireland in the past, the recessions we expect in Spain and Italy could pose a bigger problem. A massive decline in exports like that seen in 2009 nevertheless appears highly unlikely. While we cut our growth forecasts for the developed world substantially, the downward adjustment for emerging economy growth forecasts has been negligible.

German ex ports (LHS) ifo ex port ex pectations (RHS)


Source: Ifo, Macrobond, HSBC

Households financially in good shape


EUR tril. 5 4 3 2 1 0 91 93 95 97 99 01 03 05 07 09 11 EUR tril. 5 4 3 2 1 0

Balance sheet of households The financial situation of German households has never been better than it is today, with net financial wealth marking a new record high in Q1 2011. Gross liabilities have not even risen nominally in the last decade. In relation to GDP, private debt fell from 74% in 2000 to 62% in 2010, whereas household debt in the US rose over the same period from 68% to 91%. While the German equity market plunge undoubtedly has a negative psychological impact on German households, the overall effect on the propensity to spend should be limited due to the low share of equities and mutual funds (roughly 20% of financial assets) in their portfolios.

Gross assets
Source: Macrobond, HSBC

Gros s liabilities

Net w ealth

47

Macro Global Economics Q4 2011

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France
Public spending support for GDP growth
French growth stalled in Q2 2011. As had been expected, household consumption dropped because of a slump in car sales of 11.2% q-o-q due to the end of the scrappage scheme. Car sales contributed 0.7 percentage points to the contraction in total household consumption. However, firms did not correct their substantial restocking in Q1, and business investment rose another 0.3% q-o-q in Q2 2011. The pause in GDP growth in Q2 may, therefore, be attributed to temporary factors that will fade in Q3 2011. We expect a rebound in household spending, especially as job creation has been prolific and real disposable income increased another 1.7% yo-y in Q2 2011. Moreover, inflation will moderate in Q4 2011 and the governments deficit reduction programme is modest. Real public spending is set to continue rising by 0.9% per year until 2013
% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

according to the French government forecast, and 1.4% according to our own. Therefore, real disposable income will continue to be pushed higher by social benefits. This relationship between public spending and real disposable income should not hold in the long term. However, in the short term, fiscal policy will remain positive for growth so long as the markets do not insist more forcibly on additional spending cuts. Nevertheless we cut our GDP growth forecast due to the global industrial recession and the sovereign debt crises, which should limit exports and business investment. Overall, French GDP growth will be well below potential but faster than that for the Eurozone as a whole. That reflects the French economys less cyclical nature, which itself stems from a large public sector that currently faces little threat from what may well remain modest budgetary restraint.

Mathilde Lemoine Economist HSBC France +33 1 40 70 32 66 mathilde.lemoine@hsbc.fr

Consumer spending Government consumption Investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter) Manufacturing output Unemployment (%) Average earnings Consumer prices Trade account (EURbn) Current account (% GDP) Budget balance (% GDP) 3-month money (%)* 10-year bond yield (%)*

1.3 1.2 -1.4 -0.1 1.3 9.3 8.3 1.4 4.9 9.8 1.8 1.7 -51.7 -1.8 -7.1 0.9 3.4

0.7 1.0 3.2 1.0 2.3 4.0 6.3 1.6 3.7 9.7 2.2 2.2 -75.8 -2.4 -5.8 1.5 2.4

1.3 1.9 3.2 1.3 2.1 0.8 3.7 1.2 1.6 9.7 2.4 2.0 -78.7 -2.1 -5.6 1.3 2.4

0.4 1.0 3.1 1.1 2.0 2.3 3.6 1.6 0.3 3.4 9.8 2.3 2.3 -19.0 -2.1 1.5 2.6

0.2 1.2 2.8 1.1 2.1 1.5 5.0 1.1 -0.1 1.4 9.8 2.5 2.4 -19.3 -2.1 1.5 2.4

0.4 1.7 2.5 1.2 1.4 -0.7 2.6 0.5 0.3 -0.7 9.8 2.2 2.2 -19.5 -2.2 1.3 2.3

1.5 2.3 3.1 1.2 2.4 -0.0 4.4 1.2 0.6 0.4 9.7 2.3 1.9 -19.6 -2.1 1.3 2.4

1.5 1.9 3.2 1.3 2.1 1.0 3.8 1.3 0.5 1.8 9.7 2.5 1.9 -19.7 -2.1 1.3 2.4

1.8 1.7 4.0 1.3 2.3 3.0 4.1 2.0 0.6 5.1 9.6 2.6 1.9 -19.9 -2.1 1.3 2.4

Note: * = Period-end Source: Thomson Reuters Datastream, HSBC estimates

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Our central hypothesis...


%Yr 3.0 2.5 2.0 1.5 1.0 0.5 0.0 10 1.8 2.6 2.1 1.8 1.5 %Yr 3.0 2.5 2.0 1.5 1.0 0.5 0.0 11 12

... of modest budgetary consolidation According to the French government, real public spending will grow by 0.9% in 2012 after 0.7% in 2011. Therefore, even if it meets this objective, fiscal policy will not weigh on GDP growth. Moreover, the drop in the 10year OAT yield has limited the interest burden and therefore lowered the amount of spending cuts needed to obtain a given rate of increase in total public expenditure. Even so, another reduction in the deficit to 4.5% of GDP in 2012, as planned by the government, will require an additional effort on spending. But budgetary consolidation will remain modest for as long as French government bonds benefit from a flight to quality. Government support for French banks could change this situation, however.

0.0

Eurozone nominal publ ic spending grow th* French nominal public spending grow th**
Notes: * = Eurozone Governments forecasts aggregated according to Stability and Growth Pact; ** = French Government forecast according to Stability and Growth Pact Source: European Commission, HSBC

Low-debt households...
%pts 2.0 1.5 1.0 0.5 0.0 France Germany Eurozone UK US Volatility* for households consumption %pts 2.0 1.5 1.0 0.5 0.0

... with largely non-cyclical consumption In Q3 2011, household consumption will no longer be penalised by the end of car scrappage scheme. And in Q4 2011, our expectation of a moderation of inflation will push real disposable income and consumer spending higher. Moreover, thanks to automatic stabilisers, household gross disposable income is largely non-cyclical. Note also that French households indebtedness ratio is low (79% of gross disposable income in Q1 2011) and household wealth was 2% higher than its pre-crisis level in 2010. This means that French households have no pressure to deleverage and monetary policy will continue to push the household loan figure up.

Note: * volatility = standard deviation over average growth Sources: Eurostat, HSBC calculations

The German slowdown will severely limit exports...


% GDP 50 45 40 35 30 25 20 France Eurozone Germany Openness rates* in the Eurozone % GDP 50 45 40 35 30 25 20

and the sovereign debt crisis could delay investment plans Because of its lower degree of openness just 30.4% in 2010 France is less dependent on the global trade cycle than other European countries such as Germany. Even so, the slowdown in the Eurozone, which accounts for 48% of French exports, will lower French export growth. Moreover, the plunge in French stock market capitalisation will discourage business investment. But French firms have relatively little short-term debt and more cash, suggesting that they would suffer less from any tightening in credit conditions than they did in 2008.

Note: * Openness rate = (Exports + Imports) / (2*GDP) Sources: Eurostat, HSBC

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Macro Global Economics Q4 2011

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Italy
In the eye of the storm
The sovereign concerns, which began in May/June when the rating agencies put Italy under review for a possible downgrade, intensified over the summer, forcing government bond spreads ever higher. Although the ECB stepped in to start buying the bonds in early August, the governments wavering over the final details of the new austerity package continues to raise questions about how serious the administration is about stabilising the debt burden. The budget deficit is relatively small by developed world standards, and the country is already back in primary surplus, but with interest costs already amounting to more than 4.5% of GDP in 2010, it is imperative that these elevated rates do not persist for long. The latest austerity measures are heavily slanted towards taxation, including a temporary 1 percentage point rise in VAT, which took effect in mid-September. Most of the other measures will be split between 2012 and 2013, but will start to hit when the economy is weak given that it is already starting to suffer the impact of a marked downturn in the world trade cycle. Indeed, it looks as though Italy has already entered an industrial recession. Consumer spending has, by Italian standards, been relatively resilient, rising by more than 1% in the year to the second quarter, but the labour market had been supported by the wage supplementation scheme, and we do not expect the unemployment rate to continue falling in the coming months. Combined with the squeeze on real incomes from higher taxation, we expect this to result in very weak spending. The investment recovery never really began and, given the big hit to confidence, is not going to start anytime soon. Such a weak growth backdrop will make the governments aim of balancing the budget by 2013 extremely challenging.
Janet Henry Economist HSBC Bank plc +44 20 7991 6711 janet.henry@hsbcib.com

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter) Industrial production Unemployment (%) Hourly wage rate Consumer prices Current account (EURbn) Current account (% GDP) Budget balance (% GDP)* 3-month money (%)** 10-year bond yield (%)**

1.0 -0.6 2.3 -0.1 1.8 8.9 10.3 1.2 6.4 8.4 2.1 1.6 -53.5 -3.5 -4.6 0.9 4.5

0.7 -0.2 0.7 0.0 0.1 3.5 1.3 0.5 0.4 8.1 1.8 2.8 -63.1 -4.0 -4.2 1.5 5.6

0.1 -1.2 -0.2 0.3 -0.7 0.4 -1.1 -0.2 -0.0 8.3 1.7 2.4 -16.0 -1.0 -3.7 1.3 5.5

0.6 -0.3 -0.2 -0.1 -0.4 1.6 -1.3 0.3 -0.2 -1.4 8.0 1.7 2.6 -12.0 -3.0 1.5 5.5

0.3 -0.2 0.3 -0.2 -1.5 0.4 -4.8 0.0 -0.2 -0.9 8.1 1.7 3.5 -14.0 -3.5 1.5 5.6

0.1 -1.0 -0.5 -0.2 -1.6 -0.6 -4.5 -0.2 -0.2 -0.7 8.2 1.7 3.1 20.0 5.0 1.3 5.4

-0.0 -1.3 -0.7 -0.2 -0.8 -0.9 -2.1 -0.4 0.1 -1.6 8.3 1.7 2.5 -12.0 -3.0 1.3 5.4

0.1 -1.2 -0.4 -0.2 -0.3 0.7 0.1 -0.2 0.1 0.6 8.3 1.7 2.2 -12.0 -3.0 1.3 5.5

0.3 -1.2 0.7 -0.2 0.1 2.6 2.1 0.2 0.2 1.6 8.3 1.7 1.8 -12.0 -3.0 1.3 5.5

Note: * = National measure ** = Period-end Source: Thomson Reuters Datastream, HSBC estimates

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Macro Global Economics Q4 2011

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Back in industrial recession


%Yr 20 10 0 -10 -20 -30 -40 00 01 02 03 04 05 06 07 08 09 10 11 IP (LHS)
Source: Markit Economics, Eurostat and HSBC

Growth and PMI


Index 60 55 50 45 40 35 30

Second-quarter GDP was a fairly respectable 0.3% q-o-q but still only up 0.8% y-o-y. Most of the growth was driven by consumption which rose 0.2% q-o-q, while net exports also made a big contribution due to a sharp fall in imports. The economy is expected to slip into a shallow recession in the second half of the year, driven largely by an exportled industrial contraction. The manufacturing PMI was below 50 in August and September, while the new orders component is just at 45.1.

Manufacturing PMI (RHS)

The contagion intensifies

Spreads and the ECB Since the intensified discussion about some kind of Greek debt restructuring back in May, Italian spreads have been under persistent upward pressure, with 10year yields briefly breaching 6% in early August. The ECB stepped into the market to start buying Italian and Spanish debt which helped to narrow spreads, but the Berlusconi administrations wavering over its latest austerity plans, contributed to a renewed widening in early September. The ECB has said that it only took the decision to start buying Italian and Spanish bonds after the Eurozone governments agreed on 21 July to revamp the EFSF to allow it to start buying debt in the secondary market, and that it will cease buying once the EFSF is in a position to do so (ie after the 17 member states have passed the necessary legislation).

% 10-y r Gov ernment bond spreads ov er German Bunds % 12 10 8 6 4 2 0 08 Italy 09 Spain 10 11 Portugal Ireland 12 10 8 6 4 2 0

Source: Eurostat, European Commission and HSBC

Primary surplus needs to be a lot bigger


% GDP 4 2 0 -2 -4 -6 2007 2008 2009 2010 2011f 2012f 2013f 2014f Primary balance
Source: IMF and European Commission

Budget deficit and austerity


% GDP 4 2 0 -2 -4 -6

Italy : Budget deficit

Italy is one of very few Eurozone countries which has already moved into a primary budget surplus in 2011, but the huge debt stock means the interest burden is very heavy so it needs to run an increasingly large surplus in the coming years if it is to stabilise the debt-to-GDP ratio. The government has committed to balancing the budget by 2013. The latest efforts include a EUR54bn package of austerity measures for 2012-2013. The cabinet has also approved a bill to amend the constitution to enforce the rule of a balanced budget with the aim of having it in force by 2014.

Interest ex penditure

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Macro Global Economics Q4 2011

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Spain
Wishing for a mild recession
The Spanish growth story was broadly unchanged over the last quarter, with net exports providing the main contribution to growth. Domestic demand remained an overall drag, despite a pickup in consumer spending. But the global trade cycle has turned down sharply and is unlikely to provide the same levels of support to growth. Domestic demand, on the other hand, will remain a drag. Sovereign debt concerns that have rattled markets recently imply that Spain cannot afford to ease off on austerity measures. As a result, government spending is likely to continue to detract from growth over 2011 and 2012. Gross fixed capital formation, which has been contracting for the last 14 quarters, is only likely to fall further as public sector investments are scaled back more aggressively. And consumer spending, despite the drawdown of savings by households, will remain sluggish as unemployment rises in line with a slowing economy. A look at the manufacturing data suggests that Spain is already in an industrial recession, and leading indicators such as the PMIs suggest that this is likely to spread to the broader economy as well. As a result, we look for a mild recession in Spain in H2 2011. Our growth forecast has also been lowered for 2012 as the global slowdown compounds the weakness in domestic demand. The Spanish Statistics Office plans to re-index the GDP data from Q3 2011 onwards, and while this could have some impact on the numbers, the overall trend will remain unchanged. The general election on 20 November could add to the volatility in the markets, but both the main parties seem to be committed to austerity, which, together with ECB support, remains key to Spain distinguishing itself from the rest of the periphery.
Madhur Jha Economist HSBC Bank plc +44 20 7991 6755 madhur.jha@hsbcib.com

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Domestic demand Exports Imports GDP GDP (% quarter) Industrial production Unemployment (%) Average earnings Consumer prices Trade account (EURbn) Current account (EURbn) Current account (% GDP) Budget balance (% GDP) 3-month money (%)* 10-year bond yield (%)*

1.2 -0.7 -7.0 -1.0 10.3 5.4 -0.1 0.8 20.1 1.2 2.0 -52.3 -48.4 -4.6 -9.3 0.9 5.5

0.4 -0.2 -5.3 -1.2 7.7 1.6 0.6 -2.2 21.1 0.8 2.7 -46.0 -44.6 -4.1 -6.4 1.5 5.1

0.3 -1.9 -0.2 -0.1 0.6 -1.1 0.3 -1.5 21.4 1.0 1.2 -11.6 -40.5 -3.7 -5.8 1.3 5.0

0.7 -1.3 -4.8 -1.1 7.3 2.0 0.4 -0.3 -3.6 21.3 0.4 2.5 -10.2 -9.3 1.5 5.1

0.3 -0.9 -3.5 -0.9 3.2 -0.0 0.2 -0.1 -5.6 21.6 0.4 1.6 -11.7 -9.0 1.5 5.1

0.4 -3.8 -1.8 -0.8 -2.3 -4.8 -0.1 0.1 -5.7 21.8 0.8 1.2 -10.4 -11.2 1.3 4.9

-0.1 -1.5 -0.6 -0.1 0.2 -1.0 -0.1 0.2 -4.2 21.6 1.1 0.6 -12.0 -10.6 1.3 4.9

0.2 -0.9 0.4 0.1 1.6 0.3 0.4 0.2 0.1 21.3 1.1 1.4 -11.6 -9.9 1.3 5.0

0.6 -1.2 1.1 0.3 3.0 1.4 0.8 0.3 4.2 21.0 1.0 1.8 -12.2 -8.8 1.3 5.0

Note: * = Period-end Source: Thomson Reuters Datastream, HSBC estimates

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Spanish export performance will weaken...


Ex ports of goods 2008=100 110 100 90 80 70 08 Germany 09 France 10 Italy 11 Spain 110 100 90 80 70

lowering the contribution from net exports


The need to de-leverage, both of households and the

public sector, has seen growth rely disproportionately on external demand over the past few quarters. Spanish export performance has been very encouraging, with Spain joining Germany as the only Big 4 countries to see export levels back above 2008 peaks. However, the global trade cycle has turned sharply and Spain has begun to feel the heat from external demand drying up from its main trading partners within Europe. While slowing domestic demand will also mean lower import growth, weaker exports will result in net exports making a smaller contribution to growth over the coming quarters.

Source: Thomson Reuters Datastream, HSBC

Spain is already facing manufacturing recession


Index 60 50 40 30 20 Jan-08 Jan-09 Manuf output PMI Jan-10 Jan-11 Industrial production % Yr 10 0 -10 -20 -30

which could spread to the rest of the economy


The economy is already in industrial recession, which

we expect will extend into the next couple of quarters.


This is very evident from the sharp drop in

manufacturing PMIs as well as the negative prints on industrial production that we have seen recently. At the same time, service sector PMIs have fallen into contraction territory as well, while business and consumer confidence is weakening on the back of the global slowdown and the Eurozone debt crisis. The sharp turn down in the global trade cycle while domestic demand remains sluggish then suggests that the Spanish economy could see a mild recession in the second half of this year, with only a very sluggish recovery over the coming quarters.

Source: INE, HSBC

Regional government finances remain the main risk...

to the achievement of fiscal consolidation targets The achievability of fiscal consolidation targets is likely to come under strain as the Spanish economy slows. Regional public finances remain the big risk for Spain, with deficit data for H1 2011 showing that regional governments had almost touched the 1.3% deficit to GDP target for the year as a whole by the end of the second quarter. The general election on 20 November makes any major austerity decisions difficult for the government. However, both the main parties seem to be committed to fiscal austerity, by co-operating in favour of constitutional amendments enshrining budgetary controls. Recent polls suggest that the opposition Popular Party is likely to win the general election. With the Popular Party already having won the regional elections, improved cooperation on the fiscal situation at both the regional and central government level will be welcome.

%GDP 0 -2 -4 -6

Gov ernment deficit

%GDP 0 -2 -4 -6

Autonomous regions 2011 target

Central gov ernment 2011 H1 actual

Source: Spanish Treasury, HSBC

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Macro Global Economics Q4 2011

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UK
Printing presses primed again
The UK outlook has been clouded in uncertainty for a number of quarters, with unseasonable weather, additional bank holidays, tax changes and Olympic ticket sales providing ample one off factors to blame for the economys recent poor performance. However, it is becoming increasingly apparent that the underlying trend is also extremely weak, with household spending restricted by a sizeable squeeze on real incomes, while the recent weakening in global trade already appears to be damaging exports. The additional royal wedding bank holiday affected growth in Q2, and the underlying trend was certainly stronger than the 0.2% headline rate would suggest. Some of this strength will be rolled over to Q3, artificially boosting growth during the quarter. However, the underlying trend will almost certainly be weaker, particularly with recent survey data indicative of further soft manufacturing output and export figures. Therefore, we still see 2011 as a whole to be extremely weak (1.1%), and momentum entering into 2012 will be softer than previously expected. As a result, we have recently lowered our 2012 growth forecast from 1.6% to 1.3%. Against this backdrop of weak growth, and given the recent projections within the Bank of Englands latest Inflation Report, it appears likely that interest rates will remain on hold at 0.5% for an even more prolonged period. As a result, we do not expect a rate increase until the first quarter of 2013. Moreover, encouraged by recent BoE staff research on the effectiveness of quantitative easing, the MPC appears set to embark on another round. We now forecast that by the end of the year the MPC will have expanded its asset purchase programme by GBP50bn, taking the total quantitative easing completed to GBP250bn. A further GBP50bn is likely in Q1 2012.
Janet Henry Economist HSBC Bank plc +44 20 7991 6711 janet.henry@hsbcib.com

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Stockbuilding (%GDP) Domestic demand Exports Imports GDP growth GDP % Quarter Manufacturing output Unemployment rate end-year Average earnings RPI CPI, average Current account (%GDP) PSNB (%GDP) USD/GBP** GBP/EUR** Base rate (%)** 10-year bond yield

0.7 1.0 3.6 1.5 2.7 5.2 8.8 1.4 3.6 7.9 1.9 4.6 3.3 -3.2 10.0 1.57 0.86 0.50 3.7

-0.8 0.9 1.5 0.1 -0.0 5.2 1.0 1.1 2.4 7.9 2.3 5.2 4.4 -2.1 7.9 1.59 0.87 0.50 2.0

1.3 -1.0 4.7 0.0 1.3 1.7 1.8 1.3 1.1 8.2 2.4 3.3 2.4 -1.6 6.1 1.66 0.87 0.50 2.2

-0.8 1.0 0.6 -0.2 -0.4 4.0 0.3 0.6 0.5 1.8 8.0 2.3 5.2 4.6 1.56 0.86 0.50 2.4

-0.4 0.8 2.5 -0.3 0.0 1.7 -2.5 1.3 0.2 1.0 8.1 1.9 5.2 4.5 1.59 0.87 0.50 2.0

0.6 -0.0 5.2 0.2 1.3 -0.5 0.5 1.1 0.2 0.5 8.2 1.8 3.7 3.1 1.61 0.87 0.50 2.1

1.2 -0.8 4.7 -0.1 1.2 0.7 1.1 1.1 0.2 1.2 8.3 2.5 3.3 2.5 1.63 0.87 0.50 2.2

1.6 -1.4 4.6 -0.1 1.3 2.4 2.2 1.4 0.7 1.3 8.2 2.7 3.2 2.2 1.66 0.87 0.50 2.2

1.7 -1.9 4.5 0.0 1.3 4.2 3.4 1.5 0.3 1.6 8.2 2.6 2.9 1.9 1.66 0.87 0.50 2.2

Notes: *Public borrowing numbers are shown in fiscal years (2010 is FY10/11, 2011 is FY 2011/12), **end - period. Source: Thomson Reuters Datastream, HSBC estimates

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The royal wedding took around 0.4pp off Q2 growth


% pt 1.2 0.8 0.4 0.0 -0.4 -0.8 -1.2
Jan-11 Mar-11 May -11 Jul-11

and will flatter the Q3 figure


Growth of 0.2% during the second quarter of 2011 may look like an extremely bad result, but there were significant one-off factors contributed to this modest rate of expansion. The royal wedding bank holiday appears to have taken around 0.4pp off quarterly growth, while Olympic ticket sales would have added 0.1pp if they had been included. Therefore underlying growth during Q2 was likely much stronger than the 0.2% headline. In contrast, however, the Q3 figure will be artificially high. Indeed, given the recent slowdown in manufacturing and export growth, it appears that the underlying trend will be one closer to stagnation. Indeed, our forecast of 0.5% growth in Q3 would mean an underlying figure of between 0 and 0.1%.

Index 101.5
100.5 99.5 98.5 Sep-11

Roy al w edding contribution (lhs) Likely path w ithout additional bank holiday (rhs) Combined IoS and IoP (rhs)
Source: Thomson Reuters Datastream, ONS, HSBC

Hiring has dried up, resulting in a reduction of claimant count outflows


'000s 380 330 280 230 180 07 08 Inflow s
Source: Thomson Reuters Datastream, ONS, HSBC

and increase in unemployment


'000s 380 330 280 230 180
Up until recently, the UK labour market had been a cause for optimism, with employment rising and the unemployment rate actually edging down slightly. However, this trend appears to have changed in the past few months. Private sector hiring is drying up, as shown by a decline in vacancies and reduction in outflows from the claimant count. And although inflows into unemployment have yet to increase, suggesting limited firing, the decline in hiring has already resulted in a rise in the unemployment rate. With household incomes already facing a significant squeeze from high levels of inflation, and consumer confidence already at levels rarely seen outside periods of recession, this deterioration in labour market conditions will act as a further headwind for the already poor consumer spending outlook.

Claimant count Inflows/Outflows

09

10

11 Outflow s

Inflation has remained stubbornly high...


% Yr
6.0 4.0 2.0 0.0 t t+1 t+2 t+3 t+4 t+5
Feb-09

but this will not prevent another round of QE


The MPCs decision to keep rates unchanged at 0.5% in September was 9-0 and the vote on asset purchases was 1-8 but "most" of the other members thought it was likely that further asset purchases would be warranted at some point. Near term, inflation is likely to rise even further above target and revisions to GDP in October's bluebook may change estimates of the degree of spare capacity. But with the risks to the global and UK economy skewed very much to the downside, the committee is likely to take out maximum insurance against allowing the UK economy to slip back into recession. In October we expect an initial extension of the asset purchase programme of GBP50bn by end 2011 with a further GBP50bn in 1Q 2012 also likely.

Inflation projections (constant IR basis)

% Yr
6.0 4.0 2.0 0.0 t+6 t+7 t+8

Aug-1 1
Source: BoE; HSBC

Aug-09

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Macro Global Economics Q4 2011

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Norway
Complications arising from safe haven status
Higher domestic demand is expected to boost the Norwegian economy for the rest of the year, offsetting a slowdown in export growth as the global economy slows down. A stronger krone is not helping. Growth in Q2 remained robust at 1% q-o-q and consumer spending recovered from the modest growth of 0.3% y-o-y in the first quarter to 3.4% in Q2. Looking forward, consumption is expected to grow more strongly towards the end of the year, propelled by a rise in households disposable real income. Low unemployment, at 2.5% in September, is clearly playing a major role in supporting wage growth. The average wage increase in 2011 is expected to be 4%, compared with 3.6% in 2010. Together with the continued acceleration in household loan growth, this should support the ongoing rise in house prices, adding to household wealth. The spillover of the sovereign debt crisis and a marked slowdown in EMU, the UK and the US will nevertheless have an impact on Norwegian growth. In addition, following the Swiss National Banks currency intervention, NOK is one of the few perceived safe haven currencies left. Fear of further currency appreciation contributed to the Norges Bank decision to keep rates on hold in August and will continue to have an impact on the central banks reaction function. We expect interest rates to be kept on hold at 2.25% for the rest of the year. Fortunately, as yet there are few signs that higher wages are feeding into more generalised inflation. Inflation remains low (1.3% in July) and is expected to hover around this note for the rest of the year.
Janet Henry Economist HSBC Bank plc +44 20 7991 6711 janet.henry@hsbcib.com

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Mainland investment Stockbuilding (% GDP) Mainland domestic demand Mainland exports* Mainland imports* Mainland GDP Mainland GDP (% quarter) Manufacturing production Unemployment (%)** Average earnings Consumer prices Current account (% GDP) Budget balance (% GDP) NOK/EUR 3-month money (%) ** 10-year bond yield (%) **

3.6 2.2 -3.1 1.1 1.9 3.0 9.7 2.1 2.8 2.9 3.6 2.4 12.4 10.5 7.80 2.6 3.7

2.7 1.8 8.5 1.4 3.5 0.5 6.7 2.5 1.4 2.8 4.0 1.5 12.5 12.5 7.50 3.0 2.1

3.5 2.6 7.3 0.1 4.0 2.3 3.7 3.1 1.4 2.7 3.2 2.2 12.0 13.5 7.40 4.0 2.4

2.8 1.5 10.8 -0.4 3.9 0.0 7.0 2.4 0.6 0.2 2.8 4.0 1.6 13.0 7.85 3.0 2.4

2.2 2.7 6.5 -0.4 3.1 0.0 7.5 2.5 0.4 1.9 2.8 3.4 1.7 12.5 7.78 2.7 2.1

2.8 3.3 9.4 0.1 4.1 3.3 3.0 2.9 0.9 1.7 2.7 0.2 2.0 11.0 7.88 3.0 2.2

3.1 2.8 9.1 0.1 4.1 2.0 3.5 2.8 0.9 2.6 2.7 3.3 2.2 11.5 7.50 3.2 2.3

3.8 2.2 6.4 0.1 3.8 2.0 4.0 3.2 1.0 1.4 2.7 4.3 2.3 12.5 7.45 3.6 2.4

4.5 2.0 4.4 0.1 3.8 2.0 4.2 3.6 0.8 0.1 2.7 5.0 2.4 13.0 7.40 4.0 2.4

Note: * = Travel and non-oil related goods and services; ** = Period-end Source: Statistics Norway and HSBC forecasts.

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Sweden
SEK appreciation and global slowdown damp growth
Swedish GDP surged 0.9% q-o-q in Q2 2011. This better-than-expected growth arose because the strong business outlook until June encouraged businesses to limit the destocking. Moreover, investment rose 3.2% q-o-q in Q2 while net exports added 0.1 percentage point to GDP growth. Household consumption accelerated to 1.2% q-o-q in Q2 11 from 0% q-o-q in Q1 11 in spite of the Riksbanks rate hikes which increased households debt service costs We expect GDP growth to be hampered by the deteriorating world outlook and by SEK appreciation. The US, UK and Eurozone jointly account for 55% of Swedish exports. Given Swedens high dependence on foreign demand and the expected slowdown in these countries, we have cut our forecast for exports and industrial production. Moreover, business investment could slow on lower business expectations. but should continue to support GDP growth. Capacity utilisation recovered from the crisis, rising to 88.8% in Q2 2011 against a long-term average of 86.9%. Moreover, the tightening in credit standards should be modest because banks financing terms are more favourable in Sweden than in the Eurozone, thanks to stronger balance sheets. Household consumption should benefit from the pause in Riskbanks rate hikes. Furthermore, SEK appreciation should limit imported inflation and earnings should rise with new collective wage negotiations in H2 2011 and H1 2012. Given the downturn and the slight SEK appreciation, rates should remain steady until Q2 2012.
Mathilde Lemoine Economist HSBC France +33 1 40 70 32 66 mathilde.lemoine@hsbc.fr Pierre-Emmanuel Ferraton Economist HSBC France +33 1 40 70 79 92
pierre-emmanuel.ferraton@hsbc.fr

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Stockbuilding (%GDP) Domestic demand Exports Imports GDP growth GDP (% quarter, sa) Industrial production Unemployment rate* Average earnings CPI, average Current account (%GDP) Budget balance (% GDP) State debt (% GDP) SEK/USD SEK/ EUR 3-month money (%) * 10-year bond yield *

3.6 1.8 5.6 0.6 5.5 9.9 12.0 5.4 8.9 7.9 2.4 1.2 6.6 -0.0 39.8 6.72 9.02 1.8 3.3

2.4 1.6 8.8 0.8 3.6 6.7 6.7 3.8 7.6 7.4 2.1 3.0 6.7 0.7 36.7 6.52 9.00 2.3 1.5

2.1 1.4 3.8 0.0 1.4 1.7 2.7 0.9 0.8 7.5 2.9 2.4 5.1 1.1 34.5 6.04 8.70 3.1 2.0

2.8 1.7 8.1 0.5 3.0 4.4 5.2 2.8 -0.1 5.5 7.4 2.1 3.4 6.7 6.87 9.21 2.5 2.5

1.8 1.1 6.9 0.4 1.8 2.3 3.3 1.4 -0.2 3.9 7.4 2.3 2.6 5.2 6.52 9.00 2.3 2.3

2.4 1.5 5.3 0.1 1.4 0.4 1.9 0.6 -0.0 -0.4 7.4 2.5 2.4 5.0 6.36 8.90 2.5 2.5

1.7 1.5 3.0 0.1 1.0 0.5 2.1 0.2 0.5 0.1 7.4 2.9 2.3 4.7 6.20 8.80 2.7 2.7

1.9 1.4 3.0 0.0 1.4 2.0 2.9 1.0 0.7 1.0 7.5 3.0 2.4 5.4 6.04 8.70 2.9 2.9

2.2 1.2 4.1 -0.2 1.7 4.1 4.0 1.9 0.7 2.5 7.5 3.0 2.4 5.5 6.04 8.70 3.1 3.1

Note: * = Period-end. Source: Thomson Reuters Datastream, HSBC estimates

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Switzerland
Choked by the CHF
Following a further 10% appreciation of the Swiss franc between June and early August, the SNB finally adopted a floor for the EUR/CHF at 1.20 in September, arresting the tightening of monetary conditions in Switzerland. The SNB had already lowered its 3-month LIBOR target to as close to zero as possible, and increased the target for banks sight deposits from CHF30bn to CHF200bn to weaken its currency in August. The summers currency appreciation came on top of a slowdown in growth in H1 and will weigh on exports in the coming months, since, even at 1.20, the EUR/CHF exchange rate is 6.6% higher than in Q1 2011. In Q2, GDP rose by 0.4% q-o-q, its slowest pace since Q2 2009. Investment in both equipment and construction fell, and exports contracted as a result of a 6.2% q-o-q drop in services exports. Private consumption growth moderated but remained supported by the fall in the unemployment rate, which has been 3.0% since May. Export growth should be seriously dampened by the sharp slowdown we now expect in the Eurozone, which accounts for 50% of Switzerlands exports. As exports represent 54% of GDP, this will seriously hamper GDP growth in H2 2011 and 2012. But extremely low interest rates and an above-average capacity utilisation rate in industry should foster investment, while the labour market remains supportive for consumption. As a result of the large disinflationary effects of the sharp CHF appreciation in the summer, we have also lowered our inflation forecasts. Confronted with weakened activity, low inflation and the need to counter appreciation pressures on the CHF as long as the global risk assessment does not improve, we now expect the SNB to keep policy rates on hold until Q4 2012.
Franois Letondu Economist HSBC France +33 1 40 70 39 33 francois.letondu@hsbc.fr

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Stockbuilding (% GDP) Final domestic demand Exports Imports GDP GDP (% quarter) Industrial production Unemployment (%) Consumer prices Current account (EURbn) Current account (% GDP) CHF/USD* CHF/EUR* 3-month money (%)* 10-year bond yield (%)*

1.7 0.8 7.5 -2.4 2.9 8.4 7.3 2.7 6.3 3.9 0.7 62.1 15.6 0.93 1.25 0.2 1.8

1.0 1.3 4.1 -3.5 1.8 4.6 2.5 1.9 1.9 3.1 0.4 54.4 13.0 0.87 1.20 0.3 0.8

1.0 1.4 2.0 -3.2 1.3 1.4 2.1 1.4 1.5 3.1 0.6 53.8 12.6 0.83 1.20 0.8 1.0

1.0 1.7 3.7 -3.4 1.7 5.5 1.6 1.6 -0.0 1.4 3.0 0.3 14.1 13.5 0.91 1.22 0.0 1.0

0.7 1.7 0.4 -3.2 0.8 1.8 1.7 1.1 0.1 -0.2 3.1 0.2 13.4 12.8 0.87 1.20 0.3 0.8

0.8 3.3 -0.2 -3.2 0.9 -1.0 0.4 0.8 0.3 -0.1 3.2 0.0 13.8 12.7 0.86 1.20 0.3 0.9

0.9 0.7 2.5 -3.2 1.3 1.1 2.7 0.9 0.5 1.8 3.2 0.4 12.8 12.6 0.85 1.20 0.5 0.9

1.1 0.9 2.5 -3.2 1.4 2.3 2.5 1.7 0.7 2.0 3.1 1.1 13.4 12.5 0.83 1.20 0.7 1.0

1.3 0.6 3.2 -3.2 1.7 3.3 2.7 2.2 0.6 2.3 3.0 1.0 13.8 12.7 0.83 1.20 0.8 1.0

Note: * = period-end Source: Thomson Reuters Datastream, HSBC estimates

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Hungary
Extraordinary measures
Recent deterioration in the global growth outlook poses downside risks to Hungarys already weak recovery. The economy grew by 1.5% y-o-y in Q2, driven exclusively by net exports. Investment spending was a drag on headline growth, while the contribution of household and government spending was neutral. Household loans were flat in Q2, while lending to corporations declined by 4% y-o-y. Job creation has been weak. In early July, the government announced a new public employment programme which could help, depending on its scale. Headline CPI rose to 3.6% y-o-y in August, primarily due to higher food and energy prices. With the policy rate currently at 6%, and relatively high real rates, the central bank could afford to cut rates to spur domestic spending. However, the most recent communication by the central bank suggests that the rate setters are reluctant to turn dovish too soon. The main constraint lies in financial stability risks, given Hungarys large external debt and households significant FX exposure through their Swiss-franc and euro mortgages. Since monetary stimulus looks unlikely, the government resorted to unorthodox macroprudential measures to redistribute the risks facing the economy. Since 2009, the forint has depreciated sharply against the Swiss franc. In September, Parliament approved a bill to allow mortgage holders to pay down their debt at fixed exchange rates below the current spot rates. The measure could put significant strain on the banking sector, while its impact on household spending is likely to depend on banks willingness to extend HUF loans for conversion. Given the risks posed by these extraordinary measures, deteriorating business confidence and the Hungarian economys small and open nature, we expect economic activity to be subdued, and to almost stall, in 2012. The markets are pricing in potential monetary stimulus; however, the uncomfortable make-up of Hungarys FX balance sheet and rising risk premium could preclude such support.
Dr. Murat Ulgen Economist HSBC Turkey +90 212 376 4619 muratulgen@hsbc.com.tr

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Exports Imports GDP Industrial production Unemployment* Consumer prices*** Current account (% GDP) Budget balance (% GDP)** HUF/USD* HUF/EUR* 3-month money (%) 10-year yield (%)
Note: * = Period-end; ** = Fiscal year; *** = Year average Source: CEIC, HSBC estimates.

-1.7 -4.0 1.5 16.4 13.4 0.8 8.1 7.7 8.0 -6.5 -5.0 172.9 252.8 7.5 6.9

0.7 0.6 2.7 6.1 6.1 0.9 0.1 8.0 6.1 -7.1 -3.7 191.3 265.9 9.7 8.3

-6.8 2.0 -7.8 -9.3 -14.3 -6.7 -17.4 10.5 4.2 0.4 -4.5 188.3 270.2 6.0 7.7

-2.2 -0.2 -5.3 14.2 12.0 1.2 9.7 10.8 4.9 2.4 -4.2 207.5 278.3 5.6 7.9

0.7 1.2 0.5 8.0 7.0 1.8 4.5 10.5 3.7 0.6 1.0 206.5 285.0 5.8 7.6

1.0 0.6 1.3 3.0 5.0 1.5 3.0 10.3 3.5 0.3 -3.5 184.0 265.0 5.6 7.3

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Poland
Slowing but steady
Opinion polls suggest that Civic Platform (PO) will win the most votes at Polands 9 October election, but fall short of the majority needed to form a singleparty government. The current coalition is made up of the centre-right PO and centre-left PSL. We see another PO-PSL coalition or continued dominance of PO with a junior coalition partner as the most likely outcome. Polish growth has been remarkably steady of late, averaging nearly 4.5% in the past four quarters, including 4.3% y-o-y in Q2 2011. Household spending, fixed investment and restocking all contributed positively, while the impact of net exports was neutral. We believe slower German growth could drag on exports, but note that Poland is a relatively closed economy driven primarily by domestic demand, providing some resilience. Higher-frequency demand indicators suggest that, despite recent softening, household spending is still robust. In July annual credit growth rose to its highest level since late 2009, of 12%. Enterprise employment has grown at a pace of about 3% for the year, the unemployment rate has come down and wage growth has risen to about 5% y-o-y. The main downside risks to Polands growth are its exposure to the European financial system and its FX debt. While the levels are not as high as in Hungary and Romania, and the debt generally has a longer maturity, Polish households are also indebted in FX. As the country faces the renewed Eurozone crisis with sizeable twin deficits, the zloty has recently weakened sharply. Given subdued consumer confidence, uncertainty in core European markets and slowing trade we expect Polish growth to slip to around 3.0% next year still solid by regional standards, but notably lower than before. The NBP will likely find it difficult to reduce interest rates given the constraints posed by the FX balance sheet as well as above-target inflation, which is still cruising above the 2.5% (1.0%) target band. Fiscal policy is also in consolidation mode given a budget deficit of nearly 8.0% of GDP in 2010.
Dr. Murat Ulgen Economist HSBC Turkey +90 212 376 4619 muratulgen@hsbc.com.tr

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Exports Imports GDP Industrial production Unemployment (%)* Consumer prices*** Current account (% GDP) Budget balance (% GDP) PLN/USD** PLN/EUR** 3-month money (%) 10-year bond yield (%)
Note: * = Year-end; ** = Period-end; *** = Year average Source: CEIC, National sources, HSBC estimates.

4.9 3.7 18.6 9.1 13.7 6.8 9.4 11.2 2.5 -4.7 -1.9 2.46 3.60 5.6 5.9

5.8 7.4 11.0 5.8 6.2 5.2 3.0 9.5 4.2 -4.8 -3.7 2.96 4.12 6.1 5.7

2.1 2.1 -1.5 -6.7 -12.3 1.6 -3.6 12.1 3.5 -2.2 -7.3 2.86 4.11 3.9 6.2

3.2 3.9 -2.2 10.2 11.6 3.8 11.1 12.3 2.6 -3.4 -7.9 2.95 3.96 4.0 5.9

3.5 2.2 5.0 8.0 11.0 3.7 7.5 11.4 4.1 -4.4 -5.6 3.15 4.35 4.6 6.0

2.6 2.0 3.2 6.0 7.5 3.0 5.5 10.5 3.1 -4.6 -4.5 2.78 4.00 4.7 6.3

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Romania
Improving deficit, lacklustre growth
For most of 2011 the National Bank of Romania has been caught between a domestic recovery that has failed to gain pace and consumer price inflation significantly above its 3% (1%) target. Moreover what little growth there was has been driven primarily by restocking. Net exports were a drag on growth in Q2 2011 due to the deterioration in foreign demand. Monthly trade data show that export growth slowed to 18.7% yo-y in the second quarter, from a very impressive 39.6% in the first. We lower our GDP growth forecasts for 2011 and 2012 to 1.5% and 2.5%, respectively, on account of weaker European outlook and poor household spending in H2 2011. Headline inflation retreated to 4.3% in August, from a high of 8.4% in May as the impact of the 5ppt value-added-tax hike fell out of the series in July. Even though there is little sign of demandside pressures, core inflation is still high. Citing commodity price and pass-through risks, the NBR maintains its prudent policy stance. As in Hungary, the FX exposure of the household sector (with 65% of total loans denominated in FX) is also a factor to consider. A lower policy rate could prompt further currency depreciation but the NBR could reduce reserve requirements (presently 20% for FX and 15% for RON). The improvement in the external deficit, rising FDI and a better fiscal situation might allow Romania to eke out small positive growth this year and next, after the longest recession in CEE4. Whilst the precautionary IMF Stand-By Arrangement offers a buffer, the country is exposed to the Greek and, to a lesser extent, Italian financial systems, and still has a large stock of FX debt and a high share of FX household mortgages. Consequently, the risks to growth remain to the downside.
Dr. Murat Ulgen Economist HSBC Turkey +90 212 376 4619 muratulgen@hsbc.com.tr

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Fixed investment Exports Imports GDP Industrial production Unemployment (%)* Consumer prices*** Current account (% GDP) Budget balance (% GDP)** RON/USD* RON/EUR* 3-month money (%)

12.1 29.5 8.0 27.4 6.2 10.4 4.1 4.8 -13.5 -2.6 22.91 33.50 8.0

9.8 18.4 8.6 8.9 7.7 2.8 4.4 7.9 -11.6 -5.7 2.90 4.03 14.7

-10.7 -21.4 -5.0 -20.5 -7.1 -5.2 7.8 5.6 -4.2 -8.5 3.00 4.30 10.0

-1.7 -14.1 13.2 11.6 -1.3 5.5 6.9 6.9 -4.2 -6.4 3.19 4.28 7.2

1.7 4.0 8.0 8.8 1.5 6.0 6.0 6.3 -4.4 -4.5 3.12 4.30 7.5

3.0 7.0 5.5 8.0 2.5 7.5 5.5 4.0 -5.8 -3.2 2.78 4.00 7.6

Note: *= Period-end; ** = General government balance (ESA 96); *** = Year-average Source: CEIC, National sources, HSBC estimates.

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Russia
Looking to China to sustain exports
Growth in the first half of 2011 was slower than expected because of weak manufacturing growth resulting from the slowdown in global trade. We expect growth to pick up in the second half of 2011, largely on the back of better service sector performance (fuelled by rising wages and increasing consumer lending) and stronger agricultural output. For the first time in many years, a substantial pick up in oil prices has failed to provide much of a boost to domestic demand. Consumers and investors must have learnt the lessons of 2008 and stopped extrapolating spot oil prices to the future when making their spending and investment decisions. A continuous flow of negative global economic and market news must be keeping them cautious. Yet, oil prices that have been above USD100/bbl for Russian Urals since February should be providing some comfort, and should eventually boost growth in consumption and fixed investment. As a result of the weak first half (up 3.7% y-o-y) and a smaller positive pass-through effect from increased oil prices on domestic demand this time, we have reduced our forecast for economic growth this year from 5.5% to 4.2%. Expectations of slowing global growth along with the recent decline in business confidence in Russia have led us to cut our forecast for 2012 to 3.0% from 4.0%. The slowdown in activity has taken the momentum out of inflation, as signalled by the HSBC PMI surveys in August. In addition, food price inflation has slowed sharply. We have revised down our inflation outlook for Russia. We now expect year-average inflation of 8.5% (was 9.6%) in 2011 and 7.6% in 2012 (was 8.6%). Despite the better inflation outlook, there is unlikely to be room for policy easing in the very short term due to the remaining upside inflation risks and robust credit growth.
Alexander Morozov Economist HSBC Bank (RR), Moscow +7 495 783 8855 alexander.morozov@hsbc.com

% Year 2007 2008 2009 2010 2011f 2012f

GDP Industrial production Consumer prices Current account (USDbn) Current account (% GDP) Foreign exchange reserves (USDbn) Overall fiscal balance (% GDP) RUB/USD 1-month money (%)
Source: CEIC,HSBC estimates

8.5 3.7 9.0 77.2 5.9 477.9 5.4 24.5 6.3

5.2 -0.9 14.1 102.3 6.1 427.1 4.1 29.4 20.6

-7.8 -10.1 11.7 49.0 4.0 439.5 -6.0 30.2 6.6

4.0 10.3 6.9 71.1 4.8 479.4 -4.0 30.5 3.8

4.2 4.6 8.6 83.1 4.6 534.8 0.3 31.5 5.5

3.0 2.5 7.6 60.1 3.1 565.4 -1.5 32.6 6.5

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Economy fails to sustain robust growth


Index 65 55 45 35 25 05 06 07 08 09 10 11 Index 65 55 45 35 25

Strong export demand is needed


The Russian growth model works well when global

Serv ices PM I Business Activ ity Composite PMI Output Manufacturing PMI Output
Source: HSBC, Markit

growth is strong. This is also an environment in which domestic demand is supported by bank lending. The global economy is now slowing down. Export orders at best stagnate in a slowdown. This suppresses growth in manufacturing. Business and personal services also fail to grow strongly in that environment, which means the economy cannot reap the full benefits of higher oil prices. So, the focus is on emerging markets to see if they can sustain growth and therefore Russian exports.

Strong food disinflation is the key


% Year 25 20 15 10 5 0 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Headline CPI N on-food F ood
Source: Rosstat, HSBC

Uncertain inflation outlook for 2012


% Year 25 20 15 10 5 0

There are two contrasting inflation trends at present. Food

Headline CPI (forecas t) Serv ices

price inflation that jumped last year has been decelerating since 1Q 2011. Yet, non-food prices are growing faster than last year. While the headline inflation is likely to keep moderating in the coming months, there are upside risks for inflation in 2012. First, a weaker rouble, falling propensity to save, augmented by strong consumer lending growth, and more robust service sector growth could sustain faster non-food inflation. Second, food inflation may rebound in 2012. Downside risks for inflation stem from declining business confidence because of problems in the global economy.

Policy rate band has narrowed


% 10 8 6 4 2 0 May -09 N ov -09 May -10 Nov -10 May -11 % 10 8 6 4 2 0

Has the CBR tightened or eased?


Since June the CBR has hiked its deposit rates, cut its

CBR O/ N deposit rate MOSPR IME O/N CBR O/ N REPO rate floor

repo rates and left flat its refinancing rate in September. Should that be interpreted as a tightening or easing policy bias? The CBR explained the narrowing of the policy rate spread by the need to reduce interest rate volatility. Yet, tighter liquidity will effectively result in the market interest rate rising towards the new repo rate, which would still be an equivalent to tightening. After the policy rate spread narrowed to 150bp, the potential for further narrowing has disappeared, and the CBR should take a pause with policy rate changes at its next few meetings. Looking forward, the CBR is likely to shift to the policy easing mode if inflation falls due to a slowdown in credit growth.

Source: CBR

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Turkey
Unorthodox issues
Second-quarter GDP paints a picture of still robust growth in Turkey. The economy expanded by 8.8% y-o-y in Q2, bringing growth for the first half of the year to 10.2%. Despite the impressive headline figure, the growth drivers remain asymmetric: domestic demand is strong while foreign demand continues to be a drag. More recently, high frequency indicators point to some loss of pace, but the deterioration is more evident in the production side of the economy. The central banks reading of the global environment is rightly bleak, hence its monetary policy stance is decidedly dovish. After calling an interim meeting in early August, the MPC surprised markets by cutting the policy rate by 50bps to 5.75%. We have lowered our growth forecasts for 2011 and 2012 to 5.1% and 3.0%, respectively, on account of slower growth elsewhere in the world, but we believe that the bulk of the correction seen in Turkey is likely to come through the currency, external financing and confidence channels. Turkeys current account deficit has reached an unprecedented 9.8% of GDP as of July. Such an excessive external financing need is difficult to sustain in this environment, especially considering Turkeys reliance on Europe. Granted, a much more competitive lira (down by c20% y-t-d against a USD-EUR basket) will help, but Turkey is a relatively closed economy. Consequently, we believe domestic demand has to be reduced in order to bring down external financing needs. As a result the large current account deficit and short FX positions of the non-financial corporates are likely to rule out much more than 25bps of further rate cuts. Monetary stimulus, if any, could be mainly carried out through the unwinding of substantial (maturity-weighted c850bps) increase in lira reserve requirements. Fiscal policy appears to have some room to support activity, but is also constrained by the massive external imbalance.
Dr. Murat Ulgen Economist HSBC Turkey +90 212 376 4619 muratulgen@hsbc.com.tr

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Domestic demand Exports Imports GDP Industrial production Consumer Prices* Producer Prices* Current account (% GDP) Budget deficit (% GDP) TRY/USD** 3-month money (%)***
Note: * = Year average; ** = Period-end, *** = Average Source:CEIC, National sources, HSBC estimates

5.5 6.5 3.1 5.0 7.3 10.7 4.7 6.9 8.8 6.4 -5.9 -1.6 1.17 16.0

-0.3 1.7 -6.2 -1.5 2.7 -4.1 0.7 -0.9 10.4 12.7 -5.7 -1.8 1.54 15.5

-2.3 7.8 -19.0 -5.1 -5.0 -14.3 -4.8 -9.6 6.3 1.4 -2.3 -5.5 1.50 7.5

6.6 2.0 29.9 10.6 3.4 20.7 8.9 13.1 8.6 8.5 -6.5 -3.6 1.54 6.7

4.6 3.2 11.9 6.1 8.7 16.0 5.1 8.5 5.9 9.6 -9.6 -1.5 1.75 6.0

3.4 2.9 2.7 3.2 8.0 8.5 3.0 6.0 7.4 6.4 -6.3 -2.5 1.60 7.0

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Manufacturing sector
Index 130 120 110 100 90 08 09 10 11 PMI (RHS) Index 60 55 50 45 40 35 30

is showing early signs of a slowdown


Both the PMI survey and the real sector confidence

Industrial production (LHS)


Source: Turkstat, Markit, HSBC

index published locally point to a deterioration in business conditions. One likely factor is lower export orders as Eurozones recovery loses steam. The MENA region also remains in transition. These two regions are Turkeys largest trade partners. But Turkey is a relatively closed economy and headline growth is driven by domestic demand. Household spending indicators have softened recently as well, arguing that there has been some retrenchment in consumption. Continued lira weakness could also reduce investment demand given the large short FX position of the non-financial corporate sector.

The sharp currency decline


Index 1.3 1.2 1.1 1.0 0.9 Jan-10 May -10 Sep-10 Jan-11 May -11 Sep-11 TRY
Source: Bloomberg, using CBRT methodology

is also a factor in our lower growth forecasts


Index 1.3 1.2 1.1 1 0.9
The lira is down by c20% since the beginning of the year

against a USD-EUR basket. TRY has also significantly underperformed most EM currencies. The central bank itself believes that the currency could be 5-10% undervalued at present levels. Why such a sharp move? Turkeys excessive external financing needs, the 125bp rate cut since late 2010 and CBRTs unorthodox policy mix generated risks for lira, which was priced in during bouts of global risk aversion. A weaker TRY is likely to help in balancing the current account gap, but it could also cause a sharp reduction in domestic demand.

EM

Slower growth and higher core inflation


%Yr 10 8 6 4 2 0 -2 09 I-index 10 11 H-index Trend inflation %Yr 10 8 6 4 2 0 -2

is an uncomfortable combination
Inflation is another area which is affected by a weaker

currency. The central bank estimates that core inflation will round out the year at c7%, with 350bps of FX passthrough. We expect consumer price inflation to reach 7.5% by year-end due to additional FX pass-through, earlier demand pressures, volatile food prices and unanchored expectations. If the lira does not recover, inflation is likely to remain sticky since global commodity prices remain fairly high. However the policy priority is recession risk rather than inflation. Hence, we reckon the CBRT will seek to buffer the economy from downside global growth risks, market conditions permitting.

Source: Turkstat, HSBC

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Egypt
Hard miles
It was always likely that it would take some time for a new order to establish itself in Egypt following the February revolution that brought an end to Hosni Mubaraks 30-year rule. As a consequence, the widespread frustration at the pace of political change and anxiety at Egypts subdued economic performance seems misplaced. Indeed, seven months on from the revolution, much has been achieved. Dates for elections have been set, new political parties formed, and the trial of senior members of the old regime has begun. Overall, the military overseeing the transition period has proved responsive to some popular demands, including the appointment of a new cabinet in July. After contracting sharply in Q1 2011, the economy was flat y-o-y in Q2, and data show some stabilisation (if not yet normalisation) in key sectors including tourism. Our expectation remains that a new parliament will both have been elected by the end of Q1 2012, and that economic growth will slowly strengthen, supported in part by flows of international aid. Nevertheless, Egypt faces substantial challenges in the months ahead. Although parliamentary elections are due to take place in Q4, it could be a further 12 months before a new constitution is in place and a permanent president elected a protracted period of transition that increases the risk of policy drift and conflict between the military and pro-revolutionary groups, particularly if security conditions continue to worsen. It is also still unclear who is likely to hold power once the elections have taken place, or what power structures they will operate within uncertainties that will weigh on investment. The downturn in growth has already brought with it a pick-up in unemployment that is likely to prove difficult to reverse in the near term. Inflation has also remained high, adding to frustrations with living costs. Public finances and the currency remain under considerable pressure, and unless aid pledges materialise soon, funding difficulties will become increasingly acute.
Simon Williams Economist HSBC Bank Middle East Limited, Dubai +971 4423 6925 simon.williams@hsbc.com Liz Martins Economist HSBC Bank Middle East Limited, Dubai +971 4423 6928 liz.martins@hsbc.com

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Exports Imports GDP Consumer prices Current account balance (USDbn) Current account (% GDP) Budget balance (% GDP) EGP/USD 3-month money (%)
Note: All figures for fiscal year ending 30 June Source: CBE, HSBC estimates

4.2 3.2 31.8 19.3 28.5 7.1 11.0 2.3 1.7 -7.3 5.52 5.7

5.7 2.1 15.5 33.3 26.3 7.2 11.6 0.9 0.5 -6.8 5.52 7.0

5.7 5.6 -9.1 -14.3 -17.9 4.7 15.5 -4.4 -2.4 -6.9 5.48 9.3

5.1 4.5 4.2 -5.1 -3.2 5.1 11.7 -4.3 -2.1 -8.4 5.70 8.9

5.3 1.1 -8.5 16.3 7.7 1.8 11.0 -2.0 -0.9 -9.7 6.00 9.4

1.9 14.1 -8.6 9.9 0.4 2.7 8.9 -4.5 -1.8 -10.2 6.50 10.0

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Saudi Arabia
Sheltered, mostly
Saudi Arabia looks well positioned to weather the current global weakness. Buoyed by the longestever run of triple-digit oil prices, and with output boosted to offset reduced production in Libya, we estimate Saudi oil revenues are running as much as 40% above last years levels. This has allowed the Kingdom to continue to add to its reserves, which crossed the half-trillion dollar level for the first time ever in August 2011. A substantial sum in absolute terms, the reserves equate to more than 100% of GDP, or almost five years import spending, underscoring how resilient public finances and the Kingdoms external accounts are likely to prove, even in the event of a protracted deterioration in global markets. Economic growth also appears to have held up well over the first part of the year, driven by the current growth in public spending, wage increases and other short-term measures introduced at the start of the year. After a two-year run of negative real credit growth, commercial bank lending has begun to expand. We expect this trend to continue over our forecast period, bringing about the return of a multiplier for government spending growth that has been lacking in recent years. Saudi Arabia will not be completely sheltered from external events, however. Foreign capital flows fell away in the early part of the year and are likely to remain soft, given lingering political uncertainties and increased risk aversion. PMI data also point to weakness in the third quarter of the year, suggesting that the initial impact of the stimulus may have begun to wane. Although the Kingdom can comfortably absorb a fall in oil earnings, reduced oil prices have in the past weighed quickly on public and private sentiment and are likely to again constrain growth. As a major international creditor and with its currency tied to the US dollar Saudi Arabia will monitor current global market turmoil closely and with considerable concern. Its primary focus, however, is likely to remain on boosting orders. As a consequence, it appears highly unlikely to us that the Kingdom would introduce any preemptive changes to its currency regime given the additional turmoil such adjustments would cause.
Simon Williams Economist HSBC Bank Middle East Limited, Dubai +971 4423 6925 simon.williams@hsbc.com Liz Martins Economist HSBC Bank Middle East Limited, Dubai +971 4423 6928 liz.martins@hsbc.com

% Year
2007 Consumer spending* Government consumption* Fixed investment* Exports* Imports* GDP Consumer prices Current account balance (USDbn) Current account balance (% GDP) Budget balance (% GDP) SAR/USD 3-month money (%)**
Note: * = End year Source: CEIC, HSBC estimates

2008 3.5 6.0 12.6 34.4 23.5 4.2 9.9 132.3 27.7 32.5 3.75 1.7

2009 6.7 1.0 -4.6 -38.7 -14.1 0.1 5.1 22.8 6.0 -6.1 3.75 0.2

2010 3.2 1.0 3.6 23.1 1.0 4.1 5.3 69.8 15.6 6.5 3.75 0.3

2011f 5.0 3.0 8.0 33.5 12.0 5.9 4.8 126.2 23.6 9.6 3.75 0.4

2012f 4.0 3.0 9.0 -4.4 18.0 4.3 6.1 83.2 16.0 5.3 3.75 0.8

17.7 2.4 18.8 10.5 29.3 2.0 4.1 93.3 24.2 12.2 3.75 2.6

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UAE
Better this time
Although the Middle East as a whole felt the impact of the 2008 recession, it was the UAE and Dubai in particular that suffered the largest and most high profile losses. The current downturn in global conditions is likely to have a much less marked effect. In part this reflects the long run of high oil prices that has allowed the UAE to add to its already substantial stock of reserves, and to rebalance fiscal positions that at an emirate and federal level had shown some signs of distress. Perhaps more significantly, the UAE carries few of the excesses that were the cause of its vulnerability back in 2008. Asset prices, particularly for real estate, are still down as much as 50% from their previous highs, for example, suggesting any further weakness will be muted. Lending growth is also stagnant, a marked contrast with the situation in 2008 when credit had been expanding at over 30% a year for the previous five years. This suggests that corporates are unlikely to be exposed to the sudden credit
% Year 2007 2008 2009 2010 2011f 2012f

squeeze that caused such difficulties before. Overall, our forecasts are almost unchanged from those we published last quarter, with growth still expected to run at around 4% a year. We also continue to expect the UAE to generate substantial budget and current account surpluses this year and next. Nevertheless, there are grounds for concern. The UAE is the most open of the MENA economies, and has been lifted in recent years by strong Asian trade flows. Any reversal in trade growth would weigh on growth, particularly if it also fed into demand for services. Despite its high savings rates, the UAE has also traditionally sought long-term funding from overseas for its major industrial and infrastructure projects. Those flows have already weakened, and should capital market stresses mean they remain soft in the months ahead, fixed investment will slow. Capital market dislocation could also complicate the heavy refinancing schedule Dubai GREs face over the coming 18 months.

Simon Williams Economist HSBC Bank Middle East Limited, Dubai +971 4423 6925 simon.williams@hsbc.com Liz Martins Economist HSBC Bank Middle East Limited, Dubai +971 4423 6928 liz.martins@hsbc.com

Consumer spending* Government consumption* Fixed investment* Stocks* Exports* Imports* GDP Consumer prices Current account balance (USDbn) Current account balance (% GDP) Budget balance (% GDP) AED/USD 3-month money (%)**
Note: * = Nominal growth. ** = End year Source: CEIC, HSBC estimates

12.0 31.0 105.2 10.8 22.7 50.0 7.6 11.1 19.6 9.5 21.6 3.67 4.6

21.4 14.0 20.8 105.5 33.9 33.4 7.0 6.5 22.3 8.8 21.1 3.67 4.2

2.0 7.0 -15.0 9.0 -19.8 -15.1 -2.9 -0.4 7.8 3.4 -12.4 3.67 1.9

3.8 4.3 3.8 1.8 10.7 6.0 1.7 1.8 14.3 5.8 2.7 3.67 2.2

4.5 4.8 5.5 2.0 22.5 16.0 3.9 2.0 27.2 9.9 10.0 3.67 1.5

7.0 6.3 7.8 2.8 4.1 7.0 4.2 2.8 21.8 7.6 8.4 3.67 1.5

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South Africa
Slowdown without recovery
The South African economy is rapidly losing momentum without having fully recovered after the 2008-09 crisis. Growth in the second quarter fell sharply to 1.3% saar from 4.5% in Q1 2011, while recent activity indicators were also fairly poor. The manufacturing sector PMI indicated contraction in July and August, while consumption demand, one of the main drivers of activity, was also slowing, with real growth in monetary aggregates nearly zero and car sales rolling over. In the meantime, the headline inflation rate is grinding higher, mostly driven by cost and supplyside pressures. The core inflation rate has nearly reached the top of the 3.0%-6.0% target band as high real wage increases and massive electricity price hikes are feeding into core inflation. Going forward, recent weakness of the South African rand (c15% weaker since July) is also likely to keep inflation sticky at high levels, despite poor aggregate demand conditions. In a nutshell, the economic performance remains poor, given the structural constraints of the economy that we have examined in various notes. This is also likely to affect the political environment as we enter 2012 when South Africas ruling party will elect its candidate for 2014 presidential election at the ANC conference. Consequently, the Medium Term Budget Policy Statement (MTBPS) to be issued in October will be an important indication of the level of enthusiasm for further fiscal consolidation. Meanwhile, despite weak economic performance and expectations that the South African Reserve Bank could cut rates further to support the economy, the South African rand (ZAR) remains fairly resilient as the rise in gold-to-oil price ratio has boosted the countrys terms-of-trade. However, recent worries about global growth, falling commodity prices and the outflows from the crowded local rates market are all taking their toll on the ZAR.
Dr. Murat Ulgen Economist HSBC Bank +90 212 376 4619 muratulgen@hsbc.com.tr

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Exports Imports GDP Industrial production Consumer prices Current account (% GDP) Budget balance (% GDP) ZAR/USD 3-month money (%)* 10-year bond yield (%)*
Note: * = Index 1995=100 (end year) Source: CEIC, HSBC estimates

5.5 4.1 14.0 6.6 9.0 5.6 4.6 7.1 -7.0 0.7 6.83 11.3 8.4

2.2 4.7 14.1 1.8 1.5 3.6 0.9 11.0 -7.1 -0.4 9.25 11.4 7.3

-2.0 4.8 -2.2 -19.5 -17.4 -1.7 -12.6 7.2 -4.1 -5.0 7.36 7.1 9.0

4.4 4.6 -3.7 4.7 9.6 2.8 5.0 4.3 -2.8 -4.8 6.62 5.5 8.4

2.7 4.0 5.0 7.0 11.5 3.0 3.6 5.1 -3.9 -4.8 7.60 5.5 8.2

2.2 3.5 3.0 5.5 7.5 2.5 3.1 5.9 -4.0 -4.2 7.00 5.8 8.5

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Japan
Losing momentum, again
Japans economy has delivered an impressive Vshaped recovery from the devastating tsunami that hit the country in March. Most activity indicators are now back near their February levels. Growth should continue over the coming quarters, not least because of a powerful fiscal stimulus that should support reconstruction in the affected areas. A third supplemental budget to this effect, the largest to date, is expected to be passed by parliament in October. There are, however, signs that the pace of recovery has begun to slow from the rapid rise in output of the last few months. This was always to be expected: the speed of the recovery was, after all, driven by unusual factors, such as inventory restocking that ultimately runs its course. However, there are two other factors that are limiting the potential for further gains in production. The first is the unexpected strength of the exchange rate at a time of rapidly weakening overseas demand. Export growth, as a result, is likely to start to falter in Q4. The second factor is lingering policy uncertainty. The appointment of a new prime minister promises to change this, but Japan is facing grave decisions on energy and fiscal policy, which will not be easily resolved in the coming months. In fact, the third supplemental budget may need to be financed ultimately through tax hikes or cuts in other government spending, both of which would weigh on growth. Companies will be reluctant to invest until there is clarity on these issues. The Bank of Japan will thus be forced to maintain its policy accommodation, if not to add more stimulus. This would most likely entail more asset purchases.
Frederic Neumann Economist The Hongkong and Shanghai Banking Corporation Limited, (HK) +852 2822 4556 fredericneumann@hsbc.com.hk

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Private non-residential Private residential Public Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter) Industrial production Unemployment rate Wholesale prices CPI M2+CDs Current account (JPYtrn) Current account (% GDP) Budget balance (% GDP) JPY/USD 3-month money (%) Benchmark bond (%)
Source: CEIC, HSBC estimates

1.8 2.2 -0.2 -0.2 2.1 23.9 9.8 4.0 16.5 4.9 -0.7 2.8 17.2 3.6 -9.4 81.1 0.2 1.2

-0.4 1.8 -0.5 -0.2 -0.2 0.4 4.6 -0.6 2.8 4.9 -0.5 3.0 13.0 2.7 -9.9 74.0 0.3 1.0

0.5 1.8 6.0 -0.2 2.3 3.9 4.8 1.9 -4.0 5.0 -0.3 3.5 9.8 2.0 -8.3 72.0 0.3 1.2

-0.1 1.0 0.0 -0.5 0.7 -3.3 0.3 -0.1 0.9 14.0 4.7 -0.2 3.5 3.5 77.1 0.2 1.0

0.1 1.5 0.3 1.5 -1.1 -9.4 -3.2 -0.0 -0.8 5.9 4.9 -0.7 3.5 2.6 74.0 0.3 1.0

0.3 2.0 7.0 -2.9 5.3 -10.7 -9.0 2.1 -0.9 -2.5 5.0 -0.6 3.5 2.5 73.0 0.3 0.9

0.7 2.0 8.0 1.1 1.1 -8.2 -5.6 2.3 -0.8 -7.0 5.0 -0.6 3.5 0.7 73.0 0.3 1.0

0.5 2.0 6.0 -0.5 1.9 -3.3 0.3 2.3 1.4 -7.2 5.0 -0.1 3.5 2.8 72.0 0.3 1.1

0.4 1.0 3.0 1.4 1.0 2.2 6.1 1.1 0.8 0.6 5.0 -0.0 3.5 2.1 72.0 0.3 1.2

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Net exports a huge drag on Q2 GDP growth


Contribution to GDP 100% 50% 0%
-50%

domestic demand to drive economy in second half


% Yr
15 10 5 0 -5 -10 -15
In annual terms, Japans economy contracted for two

quarters in a row over the first half.


This, however, masks a V-shaped recovery over the

second half, especially in consumption and investment.


Growth is likely to turn positive in sequential terms in the

-100% Mar-08 Mar-09 Mar-10 G C P C Gov t. Con Pv t Cons Net Ex ports GDP (RHS)
Source: Cabinet Office

Mar-11 I Inv .

third quarter, led by consumption, investment and net exports. Construction spending should support economic activity in the fourth quarter and the first quarter of next year. However, export momentum will slow markedly, reflecting both weakening overseas demand and a strong yen.

Capacity is gradually being rebuilt


IP index (2005=100) 120 110 100 90 80 70 60 Sep-01 Sep-03 Sep-05 Sep-07 IP index (2005=100) 120

but slowing exports will weigh on growth


Production is nearly back to its February level, although

producers are forecasting a contraction in September.


This deceleration probably reflects electricity shortages. However, easing global demand is also weighing on

September

110 100 90 80

March

70 60

industrial production again, despite the continued need for inventory rebuilding in some sectors. Without a further recovery in production, there is a risk of more severe job losses in the economy, especially given that producers have held on to staff through the post-tsunami slump, a policy that may become unsustainable if production does not rise further.

Sep-09 Sep-11

Source: Reuters, HSBC

Consumption should strengthen


% Yr 4 2 0 -2 -4 -6 Mar-01 Mar-04 HH consumption
Source: Cabinet Office

but weak labour market outlook to limit recovery


% Yr 4 2 0 -2 -4 -6
Impending reconstruction activity will provide a powerful

Mar-07

Mar-10 Real Wages

boost to Japans economy, with money being spent both by the government and the private sector to restore infrastructure, housing and factories. An additional boost will come from households as residents of the affected areas increase spending to replace lost items, something that has already raised sales in the north east of the country. Over the longer term, however, real employee income growth may slow further, with firms showing caution in their hiring.

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Australia
Not entirely immune
As we expected, growth in domestic demand in H1 was strong in Australia, despite the Queensland floods restraining exports. Household consumption and mining investment were the key drivers, and household income also grew strongly. But things have weakened slightly since then, as Australia is not entirely immune to the global slowdown. Consumer and business confidence have fallen, and the labour market has softened in Q3. Weaker confidence is largely explained by global financial concerns, although it also reflects the divergence apparent across industries due to the strong exchange rate. Australian households have sizable equity holdings and the barrage of bad news from the West has weighed on local confidence. But before we get too carried away, keep in mind that Australias position is still generally positive. While the weaker global outlook will keep the RBA on hold for longer than previously expected, Australias sovereign position is sound, its major trading partners are in Asia, and are continuing to grow, and the prices of its key exports bulk commodities are still at very high levels. Barring an event that pushes China off track and commodity prices sharply down, growth is still expected to be supported by the current mining boom and continued modest growth in other sectors. Nonetheless, in response to the weaker global outlook we have lowered our GDP forecasts to 1.8% in 2011 (from 2.2%) and 3.9% in 2012 (from 4.5%). Underlying inflation is still expected to rise above the RBAs target band, to 3.2% this year, and to remain elevated next year. We expect the RBA to be on hold for the rest of this year. Our central case remains that the next move for rates will be up, to keep inflation in check, but this is highly contingent on how global financial risks resolve.
Paul Bloxham Economist HSBC Bank Australia Limited +612 9255 2635 paulbloxham@hsbc.com.au

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Final domestic demand Stockbuilding (% GDP) Domestic demand Exports Imports GDP GDP (% quarter) Industrial production CPI Unemployment Average earnings Current account (% GDP) Budget balance (% GDP) USD/AUD 3-month money (%) 10-year bond (%)

2.8 3.6 5.8 3.8 0.3 4.2 5.7 13.7 2.7 5.3 2.8 5.2 3.3 -2.7 -4.3 1.03 4.9 5.6

3.1 3.3 5.5 3.8 0.8 4.3 -0.5 10.8 1.8 -0.4 3.6 5.3 3.8 -2.5 -3.6 0.95 5.3 4.0

2.5 2.7 8.4 4.2 0.6 4.0 12.5 11.8 3.9 4.5 3.1 5.0 3.8 -2.9 -1.5 0.93 5.8 4.4

2.9 2.9 6.0 3.7 1.0 4.8 2.6 11.7 2.2 1.1 1.6 3.6 5.3 3.8 -2.5 0.97 4.8 4.2

2.8 2.9 8.0 4.0 0.7 4.1 3.7 11.5 2.5 1.1 1.1 3.6 5.3 3.8 -2.6 0.95 5.3 4.0

2.8 2.8 6.7 4.0 0.7 4.1 13.8 12.1 4.3 0.9 3.9 3.3 5.3 3.9 -2.9 0.94 5.5 3.9

2.4 2.6 8.8 4.1 0.6 3.6 13.7 10.7 4.0 0.9 3.0 2.7 5.2 3.9 -3.3 0.94 5.6 4.1

2.4 2.7 9.1 4.2 0.6 4.0 11.8 11.8 3.8 0.9 5.1 3.0 5.1 3.8 -3.7 0.93 5.7 4.2

2.4 2.8 8.8 4.2 0.6 4.3 10.9 12.6 3.7 1.0 6.1 3.5 5.0 3.7 -4.2 0.93 5.8 4.4

Note: * = Period end. Quarterly data is annualised Source: Thomson Reuters Datastream, HSBC estimates

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New Zealand
Recovery continues
After a long period of malaise the economic recovery now looks to be on track. The upswing that began at the tail end of last year continued in H1, despite disruptions caused by the Canterbury earthquake in February. Growth has been supported by trade, with strong growth in exports and high dairy and meat prices boosting incomes. We expect trade to continue to be supported by demand from Asia, though there is clearly a risk that the global slowdown weakens export demand. High farm incomes are also expected to drive a rise in rural investment. In H2 growth will also be supported by the Rugby World Cup, which is currently in progress, and the rebuilding of quake affected Canterbury. While rebuilding has been slower to commence than expected, it is largely prefunded and will begin to boost the economy later this year and into 2012. Given the growing momentum we are revising up our forecasts for 2011 growth to 2.0% (from 1.7%), but at the same time, we have shaved next years forecasts (3.8%, down from 4.3%) reflecting slower expected global growth. We still expect uncomfortably high inflation to prompt the RBNZ to lift rates soon and to move rates towards neutral through 2012. Indeed, the RBNZ is currently one of the few central banks in the world actively planning to lift rates noticeably (of course it has a lot of scope to do so, with rates still at earthquake-related emergency lows of 2.5%). While the recent global financial ructions kept them on hold in September, the RBNZs latest statement implies that they still expect to lift rates multiple times over the next year, which is also our expectation.
Paul Bloxham Economist HSBC Bank Australia Limited +612 9255 2635 paulbloxham@hsbc.com.au

% Year 2010 2011f 2012f Q3 11f Q4 11f Q1 12f Q2 12f Q3 12f Q4 12f

Consumer spending Government consumption Investment Final domestic demand Domestic demand Exports Imports GDP GDP (% quarter) Industrial production Consumer prices Unemployment Average earnings Current account (% GDP) Budget balance (% GDP) NZD/USD 3-month money (%) 10-year bond (%)

2.3 2.6 3.4 2.6 4.3 2.8 9.9 1.7 -0.5 2.3 6.5 1.6 -4.1 -4.3 0.8 3.3 5.8

1.4 3.5 4.9 2.6 1.9 4.1 6.6 2.0 4.3 4.4 6.4 2.1 -2.5 -3.0 0.8 3.4 4.4

1.7 2.8 11.7 4.3 4.3 5.4 6.8 3.8 3.2 3.0 6.0 2.8 -1.6 -2.0 0.7 4.6 4.5

1.3 4.1 6.0 2.9 1.7 5.8 7.2 2.4 0.6 5.8 4.8 6.4 2.4 -3.2 0.8 2.8 4.4

1.3 3.3 3.2 2.1 0.2 4.8 2.1 2.6 0.7 4.3 3.0 6.3 2.5 -4.0 0.8 3.4 4.4

1.3 2.8 8.2 3.2 3.2 5.3 6.4 2.8 1.1 2.7 3.1 6.2 2.6 -2.5 0.8 3.9 4.3

1.5 2.8 11.4 4.1 4.1 5.3 6.4 3.8 1.4 2.9 3.0 6.1 2.7 -1.3 0.8 4.2 4.4

1.8 2.8 13.2 4.7 4.7 5.2 6.8 4.2 1.0 3.1 3.0 5.9 2.8 -1.4 0.7 4.5 4.5

2.1 2.8 13.9 5.1 5.1 5.7 7.6 4.5 0.9 3.2 2.9 5.7 3.0 -1.3 0.7 4.6 4.5

Note: * = Period-end Source: Thomson Reuters Datastream, HSBC estimates

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China
On track for a soft landing
Policy tightening over the course of the year appears to be working in slowing the pace of domestic demand and inflation, but the level is still high. Fixed-asset investment growth is still strong, retail sales are growing above 10% y-o-y, and headline CPI inflation was 6.2% in August. We expect the growth rate to continue to slow in the coming quarters due to the global slowdown and as a lagged effect of credit tightening. However, China is on track for a soft landing. First of all, with inflation passing its peak, the tightening cycle is close to an end. So there is no need to worry about the risk of over tightening. In fact, the current pace of credit growth (14% to 16%) is more than sufficient to support 8-9% GDP growth. Second, despite credit tightening, domestic demand remains resilient. Credit tightening is only causing a slowdown in investment growth, not a meltdown, thanks to massive infrastructure projects, the acceleration of public housing construction and robust consumption, which
% Year 2007 2008 2009 2010 2011f 2012f

support consumer-related investment. Moreover, consumption remains resilient thanks to faster growth in wages over the last two years and households strong balance sheets. In addition, Chinese growth has become much less dependent on external demand in the postcrisis era: net exports contribution to the 9.6% GDP growth in H1 2011 was almost zero. This is in contrast to 2007/8 when net exports accounted for 3-4 percentage points of the 11.9% GDP growth rate. As a result, we reiterate our forecast for growth of around 8-9% this year and next year. There is no need for Beijing to rush into a massive stimulus package this time. The PBoC is likely to maintain its current monetary policy in the coming months, not least because headline CPI inflation will remain sticky in the near-term.

Qu Hongbin Economist The Hongkong and Shanghai Banking Corporation Limited (HK) +852 2822 2025 hongbinqu@hsbc.com.hk

Consumer spending Government consumption Fixed asset investment Exports Imports GDP Industrial production CPI Current account (% GDP) Budget balance (% GDP) CNY/USD 1-year time depost (%) 1-year lending (%)
Note: * = excluding small businesses; ** = average Source: CEIC, HSBC estimates

9.0 12.0 25.8 23.8 17.8 14.2 16.0 4.8 10.6 0.6 7.31 6.78 7.47

8.9 9.8 26.1 11.2 8.5 9.6 12.9 5.9 9.4 -0.4 6.85 2.25 5.31

8.0 20.7 30.5 -17.9 -16.3 9.2 12.9 -0.7 5.7 -2.2 6.83 2.25 5.31

9.5 16.0 24.5 29.4 33.6 10.4 15.7 3.3 4.2 -2.5 6.59 2.75 5.81

9.4 15.0 21.5 16.0 15.0 8.9 13.2 4.8 3.7 -2.0 6.35 3.50 6.56

9.3 13.0 19.0 10.0 11.0 8.6 12.5 2.9 2.6 -1.7 6.15 3.50 6.56

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Tightening measures are filtering through


%Yr, 3mma 40 35 30 25 20 15 10 5 99 00 01 02 03 04 05 06 07 08 09 10 11 M1
Source: CEIC, HSBC

so there is little need for more restraint


Policy tightening measures have cooled credit and

%Yr, 3mma 40 35 30 25 20 15 10 5 M2 Loans

money supply growth to a level in line with the historical average (14-16%). Chinas tightening cycle is likely to be close to an end after the PBoCs latest increase in the indirect reserve ratio. Despite the downside risk to external demand, policy easing is unlikely, not least because of still elevated inflationary pressures and resilient growth.

Inflation has peaked


%Yr 25 20 15 10 5 0 -5 -10 98 99 00 01 02 03 04 05 06 07 08 09 10 11 CPI
Source: CEIC, HSBC

but the subsequent slowdown is likely to be gradual


%Yr 25 20 15 10 5 0 -5 -10 Non-food CPI Food CPI
The headline CPI inflation rate eased to 6.2% y-o-y in

August from the cyclical high of 6.5% y-o-y in July, in part due to base effects and decelerating food inflation. By contrast, non-food inflation edged up slightly to 3.0% y-o-y in August from 2.9% y-o-y in July. We believe CPI has peaked, but the subsequent slowdown is likely to be very gradual not least because of still high food prices. Inflation is set to slow to around 4% by year end but the year average CPI inflation is set to overshoot the official annual target of 4% this year.

IP growth continues to moderate


%Yr,3mma 25 20 15 10 5 0 05 06 07 08 09 10 11 IP (LHS) HSBC China manufacturing PMI (RHS) 50 45 40 Index 60 55

but is still consistent with around 9% GDP growth


Industrial production (IP) growth cooled to a three-month

low at 13.5% y-o-y in August.


Growth for heavy industries, which accounted for 70% of

IP, fell from 14.5% y-o-y in July to 13.5% in August, causing a 0.7ppt reduction in IP growth. On the other hand, growth for light industries quickened to 13.4% y-oy in August from 12.8% in July. This is just a moderation in growth in response to the tightening measures. The current level of IP growth is consistent with around 9% GDP growth.

Source: CEIC, HSBC

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India
Inflation still the key concern
Indias economy slowed a little more in the second quarter of 2011, with GDP growing at 7.7% y-o-y (versus 7.8% y-o-y in Q1). Private consumption eased (6.3% y-o-y versus 8.0% in Q1 2011), but this partly reflected a base effect. Government consumption also slowed. Investment, on the other hand, rebounded (7.9% y-o-y versus 0.4% in Q1), but this also partly reflected a base effect. While exports grew at a healthy rate, net exports slowed as there was a sharp rise in imports. Another big swing in the statistical discrepancy made up the difference. High-frequency indicators show that the growth rate is declining, particularly in the manufacturing sector. Industrial production growth eased in annual terms in July, but this was largely because of the volatile nature of the capital goods segment. HSBCs PMI indices for manufacturing and services also show signs of sequential deceleration, but the economy remains in expansionary territory. Moreover, private credit growth is robust. Even so, the economy is facing the lagged effects of monetary tightening, the uncertainty associated with high inflation, and the natural speed limit imposed by tight capacity. While the domestic orientation of the economy limits the spill over from adverse global economic conditions, it is not immune, and global weakness has spilled over through the trade and confidence channels. For this reason, we have lowered our 2011/12 forecast to 7.4% from 7.6% and our 2012/13 forecast to 8.1% from 8.2%. Despite slower growth, inflationary pressures are not abating. Excess demand is still pushing up core inflation and is not set to disappear anytime soon. Adjustments to regulated diesel and kerosene prices have also added to inflation pressures, and we have not yet seen a discernable decline in international commodity prices. Consequently the inflation rate will stay elevated for a while. The 2011/12 central government budget target of 4.6% of GDP may not be achieved due to slower growth and a larger-than-budgeted subsidy bill as a result of high international fuel prices. Consequently, fiscal policy will at best be neutral leaving monetary policy with the main responsibility for tackling inflation. We expect the policy rate to rise another 25bps over the rest of 2011/12, taking the repo rate to 8.50%.
Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited (Singapore) +6562390840 leifeskesen@hsbc.com.sg Prithviraj Srinivas Economics Associate, Bangalore

% Year 2007 2008 2009 2010 2011f 2012f

GDP* GDP (Financial year)** Consumer prices** Current account (% GDP)** Budget balance (% GDP)** Broad money supply** INR/USD 3-month money*** (%) 10-year bond yield*** (%)

9.5 9.3 6.2 -0.7 -2.5 21.9 39.4 7.17 7.81

7.5 6.8 9.1 -2.5 -6.0 20.4 48.6 7.65 5.30

7.0 8.0 12.4 -1.9 -6.4 19.2 46.4 3.70 7.74

9.0 8.5 10.4 -3.0 -4.7 16.1 44.7 5.45 7.95

7.4 7.4 8.0 -2.3 -5.2 15.0 49.0 7.61 8.30

8.0 8.1 7.7 -2.6 -4.4 16.1 45.5 7.70 7.80

Note: * = Calendar year, ** = Based upon Indian fiscal year (April-March), *** = average Source: CEIC, HSBC estimates

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GDP growth eased in the first quarter of 2011/12...


% Yr contribution 10 8 6 4 2 0 -2 08 Agriculture Serv ices
Source: CEIC, HSBC

and the moderation is expected to continue


Following the boost to growth from the good monsoons

% Yr contribution 10 8 6 4 2 0 -2 09 10 11 Industry GDP grow th %Yr

in 2010/11, the agriculture sector is expected to grow at a more normal pace in 2011/12. Industrial production is expected to see slower growth in response to tighter monetary policy, tight capacity, the uncertainty associated with high inflation, and a slowdown in exports. Service-sector growth will also ease in response to tighter monetary conditions, but is expected to show more resilience given smaller rate and export sensitivity. Overall, we expect to see a soft and not a hard landing of the economy.

Inflation is not coming down


% 20 15 10 5 0 -5 07 08 09 10 WPI % y -o-y WPI: food % y -o-y WPI: core % y -o-y WPI: core % m/m sa (RHS) 11 % 7.5 6.0 4.5 3.0 1.5 0.0 -1.5

and we have seen a shift in inflation dynamics


India has seen a shift in inflation dynamics from the

supply to the demand side.


Food prices have been coming down with supply factors

improving, but food inflation has stabilised at a historically high level as both structural and cyclical factors are keeping up prices. Demand pressure remains a key driver of inflation. Together with tight capacity, this has driven up core inflation. Rising international commodity prices are adding to inflationary pressures, with regulated diesel and kerosene prices recently adjusted in light of high international prices.

Source: CEIC, HSBC

Monetary policy has been tightened


% 9.0 8.5 8.0 7.5 7.0 6.5 Current policy rate
Source: CEIC, HSBC

but the current stance is only slightly contractionary


% 9.0 8.5 8.0 7.5 7.0 6.5
RBI has been one of the most active central banks in

hiking rates and reserve requirements.


However, it has also faced a more significant inflation

HSBC forecast

Tay lor rule

problem than most other central banks. The monetary policy stance is only slightly contractionary and the policy rate is negative in real terms. A few more policy rate hikes are, therefore, needed to tame inflation. RBI is expected to hike the repo rate to 8.5% this fiscal year. However, a significant further worsening of global economic conditions could push back further rate increases.

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Hong Kong
Sticky stuff
With Hong Kongs headline inflation hitting a post-1995 high on a y-o-y basis, the question on everyones mind right now is, are we about to see runaway inflation? Moreover, as one of Asias most export-reliant economies, is Hong Kong inevitably heading into recession? The answer to both questions, in our opinion, is in a word, no. Despite the strength of inflation, there is little evidence that rising prices have undermined household purchasing power as Hong Kongs real retail sales numbers attest. On a sequential annualised basis, real retail sales (one of the closest proxies for Hong Kongs real private consumption) is still expanding at roughly the same 25% (3m/3m, saar) rate as in Q2 2011. Despite the Wests increasingly grim growth outlook, buyers in Hong Kong continue to spend thanks to buoyant local consumption demand and tourist spending. That said, weakening Western demand is starting to weigh on business
% Year 2007 2008 2009 2010 2011f 2012f

conditions and hiring activities. With consumers in the US and EU looking increasingly strained, Hong Kongs export growth is set to be weaker in the second half of the year. Continued income growth, strong inflows of visitors from the mainland and government policies should all help to counterbalance this. But if inflation does not slow then Hong Kongs second key driver of growth, domestic consumption, could start to slip before the year is up. Ironically, such an outcome could be just what is needed to bring inflation back down to earth, and for the economy to strike a more healthy macroeconomic balance. We continue to see inflation and financial market turbulence as the two top risks to the resilience of domestic demand.

Donna Kwok Economist, Greater China The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6621 donnahjkwok@hsbc.com.hk

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Retail sales Consumer prices Goods & services balance (% GDP) Budget balance (% GDP) HKD/USD 3-month money* (%) Prime rate* (%)
Note: * = average Source: HSBC, CEIC

8.5 3.0 3.4 0.8 7.9 8.3 9.1 6.4 -1.5 3.4 12.8 2.0 10.8 7.7 7.80 4.33 7.563

2.4 1.8 1.0 0.5 1.7 2.6 2.3 2.3 -6.7 4.1 10.6 4.3 10.3 0.1 7.75 2.36 5.313

0.6 2.3 -3.9 1.4 0.7 -10.1 -9.0 -2.7 -8.3 5.1 0.6 0.6 7.5 1.6 7.75 0.45 5.000

5.8 2.7 8.1 2.3 7.0 16.8 17.3 7.0 3.5 4.0 18.3 2.3 5.6 4.3 7.77 0.25 5.000

7.7 2.0 6.3 0.3 4.7 10.2 10.2 5.0 -0.6 3.4 16.8 5.0 6.2 1.4 7.80 0.29 5.000

5.0 1.0 2.8 0.1 3.9 11.2 11.1 4.5 8.1 3.0 11.1 5.3 9.8 3.7 7.80 0.30 5.000

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Indonesia
Domestic engine powers growth
Indonesias second quarter GDP rose 6.5% y-o-y, unchanged from the first quarter. In seasonally adjusted terms, the economy grew 1.6% q-o-q, above the 1% q-o-q expansion in Q1 and slightly faster than the historical average. Examination of the expenditure components shows that private consumption held up (4.6% y-o-y versus 4.5% in Q1), government consumption accelerated (4.6% y-o-y versus 3.0% in Q1) and net exports rose (22.9% y-o-y versus 1.3% in Q1) led by strong exports. Meanwhile investment also picked up smartly (9.2% y-o-y vs. 7.3% in Q1). Looking ahead, we expect growth in Indonesia to hold up well, sustained by its strong domestic economy; we believe both private consumption and investment will remain stellar over the forecast horizon. Still very loose monetary policy settings also clearly play a role here. Moreover, as the economy is more domestically oriented, the expected softening in exports will not do much damage to headline growth, in our view. With growth looking strong, inflation pressures are still lurking. In August, headline inflation came in at 4.8% y-o-y and core inflation picked up, reaching a two-year high of 5.2% y-o-y. However, gold prices appear to have been the culprit, and their impact may well prove largely temporary. Nevertheless, as growth is set to remain strong this year and next, core inflation pressures are likely to remain firmly in place. Still, Bank Indonesia (BI) is in no hurry to tighten policy rates despite its very accommodative stance. In fact, it slipped in a stealth easing at the last policy meeting, when it kept the policy rate unchanged at 6.75%, as expected, but then lowered the floor of its rates corridor to 150bp below the policy rate from 100bp before. Given its reluctance to tighten even before this summers drama on the global stage, we believe the BI is likely to dig its heels in even more now. As such, we do not see it tightening policy until next year.
Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6658 8782 leifeskesen@hsbc.com.sg

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Consumer prices Current account (% GDP) Budget balance (% GDP) IDR/USD 3-month money* (%)
Note: * = average Source: CEIC, HSBC estimates

5.0 3.9 9.3 -0.0 4.1 8.5 9.1 6.3 4.7 9.1 6.7 2.4 -1.3 9393 8.1

5.3 10.4 11.9 0.1 7.6 9.5 10.0 6.0 3.7 8.4 9.8 0.0 -0.1 11027 9.3

4.9 15.7 3.3 -0.1 5.2 -9.7 -15.0 4.6 2.2 7.9 4.8 2.0 -1.6 9425 7.6

4.6 0.3 8.5 0.3 5.7 14.9 17.3 6.1 4.5 7.1 5.1 0.8 -0.7 9010 6.5

4.7 5.4 9.4 0.6 6.4 11.2 12.4 6.4 5.8 6.6 5.6 0.5 -1.9 8800 6.5

5.3 6.5 10.7 0.6 6.8 8.1 8.8 6.7 5.0 6.4 6.2 0.6 -1.7 8300 7.2

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Malaysia
Headwinds
Growth in Malaysia slowed to 4.0% y-o-y in the second quarter of 2011 (versus 4.9% in the first quarter) amid the supply chain disruptions in the region that adversely affected the countrys exports. Domestic demand stood up better, with continued support from private consumption and investment. There was, however, a significant decline in government expenditure, but that is likely to be reversed as we may see increased spending ahead of the general election. We have reduced our growth forecasts for the whole of 2011 to 4.8% y-o-y (from 5.7%). We expect domestic demand to hold up in the next two quarters as more investment projects are rolled out under the Economic Transformation Programme. However, the recent slowdown in global growth will continue to dampen export growth. On a positive note, this cooling of global demand should help to reduce inflationary pressures, including to the extent it contains international commodity price inflation. Consequently,
% Year 2007 2008 2009 2010 2011f 2012f

inflation in Malaysia is likely to moderate in the coming months, but could pick up again if the government, as is expected, cuts subsidies on energy and food items again. Overall, we still believe that the inflation rate will be above 3% for this year. In light of weaker global economic conditions, Bank Negara Malaysia has started to sound more dovish of late. Consequently, we believe that it will once again keep the policy rate unchanged at 3.0% at its November meeting, which will be the last meeting of the year. Despite the high fiscal deficit, which led S&P to downgrade Malaysias sovereign rating, the budget for 2012 is unlikely to lower the deficit significantly. On the contrary, it could be expansionary with a general election to be held no later than 2013. In turn, this is likely to add to inflationary pressures and subsequently the need for Bank Negara to lift policy rates in 2012.

Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6658 8782 leifeskesen@hsbc.com.sg Namrata Mittal Economics Associate, Bangalore

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Consumer prices* Current account (% GDP) Budget balance (% GDP) MYR/USD 3-month interbank rate* (%)
Note: * = average Source: CEIC, HSBC estimates

10.5 6.6 9.4 -0.2 9.4 4.1 5.9 6.5 2.8 3.2 2.0 15.9 -3.2 3.31 3.63

8.7 9.9 1.1 -1.0 5.8 1.7 2.1 4.8 1.3 3.3 5.4 17.7 -4.8 3.46 3.62

0.7 3.9 -5.6 -2.8 -2.4 -10.5 -12.2 -1.6 -9.0 3.7 0.6 16.5 -7.0 3.42 2.29

6.5 0.5 9.8 2.1 12.4 9.9 15.1 7.2 11.7 3.3 1.7 11.5 -5.6 3.08 2.69

6.3 3.3 4.5 2.8 6.2 5.3 6.6 4.8 4.7 3.2 3.2 11.9 -4.4 3.10 3.08

6.2 1.1 6.1 2.7 5.3 7.5 8.0 5.0 5.0 3.1 3.0 11.8 -4.6 2.88 3.38

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Philippines
Feeling the global turbulence
GDP growth in Q2 slowed to 3.4% y-o-y (versus 4.6% in Q1) and 0.5% q-o-q sa (versus 1.5% in Q1). The main culprits were exports and investment, which contracted 0.3% and 5.7% y-o-y, respectively. Sluggish global demand weakened both electronic and service exports, and the associated deterioration in sentiment pulled down investment although fiscal consolidation also contributed to that decline, especially in construction. Encouragingly, private consumption held up and government consumption rebounded after the slump in Q1. Looking ahead, global economic problems will continue to weigh on growth through the trade and confidence channels. However, we expect private consumption to remain a key source of growth, supported by remittance inflows, which have proven resilient so far. Of course, those flows could ease if global conditions weakened further, but they have in the past been a relatively stable source of income even during times of global distress. Following slow execution during the first half of the year, public spending is likely to pick up in H2 and provide a much-needed boost to the economy. However, in light of the weak global economic backdrop, we have cut our 2011 forecast to 4.3% y-o-y (from 5.2% in the previous global quarterly). Inflation is still high. While headline inflation eased a bit in August, it was close to the top end of the 35% target range and core inflation remains sticky. However, we expect slower growth and cooling commodity prices to bring inflation below the central banks target range for the rest of the year, partly helped by a gradual decline in food inflation. This should keep average headline inflation for 2011 at 4.7% (using the 2006 base year series). Following two policy rate hikes and three RRR hikes earlier in the year, the uncertain global economic picture is likely to keep the BSP in wait and see mode for a while, with rates on hold until Q2 2012. Excess liquidity due to hot money inflows is still a concern for the central bank, however. Another 100 basis point RRR hike is, therefore, still on the table.
Trinh Nguyen Economist
The Hongkong and Shanghai Banking Corporation Limited, (HK)

+ 852 2822 2956 Trinhdnguyen@hsbc.com.hk@hs bc.com.hk

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Consumer prices* Current account (% GDP) Budget balance (% GDP) PHP/USD 3-month money* (%)
Note: * = average Source: CEIC,HSBC estimates

5.8 6.6 10.9 -1.9 6.2 5.5 -4.1 7.1 3.3 7.4 2.8 4.6 -0.2 41.3 3.4

6.4 0.0 2.8 -0.5 6.6 -5.3 3.9 3.5 4.8 7.7 9.3 2.1 -0.9 47.5 5.6

2.3 10.9 -1.7 -1.8 1.1 -7.8 -8.1 1.1 -4.8 7.3 3.3 5.6 -3.7 46.5 4.2

3.4 4.0 19.1 0.0 8.2 21.0 22.5 7.6 11.2 7.4 3.8 4.2 -3.5 43.6 3.6

5.2 1.1 4.8 1.5 4.7 0.1 4.3 4.3 6.8 7.1 4.4 4.3 -2.4 43.5 2.8

5.1 4.1 8.5 1.4 5.7 5.9 7.4 4.8 8.5 7.3 4.5 3.9 -2.2 41.0 4.7

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Singapore
Facing global weakening
GDP growth slowed significantly in the second quarter of 2011 to 0.9% y-o-y (after 9.3% in Q1 2011). Private consumption held up, supported by favourable labour market conditions, and government consumption and investments bounced back. However, export growth slowed significantly, partly due to the supply-chain disruptions associated with the natural disaster in Japan. On the supply side, manufacturing drove the sequential drop, led by biomedical and electronics which were most affected by global economic conditions. Services growth also slowed during the quarter. Growth is expected to ease in the coming quarters. While retail sales are holding up, the weakening global economic conditions are spilling over to Singapores economy, hurting exports, industrial production, and trade-related services. While private consumption growth is expected to hold up reasonably well, supported by good job and wage prospects, Singapores high-beta economy will see exports and inventories take a hit. This has led us to lower our growth forecasts significantly to 5% in 2011 (from 6.2%) and 5.1% in 2012 (from 6.3%). Inflation has been on the rise. This was initially due to rising accommodation costs and politically engineered increases in car prices. However, inflation has now become more broad-based as capacity is tight and demand-led price pressure has built up. Inflation is likely to remain elevated for a while, even though growth is easing, given that the economy is operating above its long-term potential. Given the lingering inflation pressures, the MAS is likely to maintain the tightening bias in October. However, with growth set to ease over the policy horizon, the MAS may feel compelled to lessen the slope of the NEER band. Fiscal policy could turn out to be tighter than planned given conservative assumptions underlying the 2011/12 budget; however, the assumptions look less conservative than they did before, given the slower growth now expected.
Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited (Singapore) +65 6239 0840 leifeskesen@hsbc.com.hk Prithviraj Srinivas Economics Associate Bangalore

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Consumer prices* Current account (% GDP) Budget balance (% GDP)** SGD/USD 3-month money* (%) 10-year bond yield* (%)
Note: *= average; **= Fiscal-year Source: CEIC, HSBC estimates

6.4 3.1 19.6 -2.7 7.2 9.3 7.8 8.8 5.9 1.8 2.1 27.3 3.0 1.44 2.76 2.80

3.2 7.2 13.5 2.3 14.8 4.0 9.4 1.5 -4.2 2.7 6.6 14.6 1.5 1.43 1.33 2.05

0.2 3.5 -2.9 -2.7 -6.8 -8.1 -11.0 -0.8 -4.2 2.3 0.6 19.0 12.7 1.41 0.70 2.66

4.2 11.0 5.1 -1.4 7.2 19.2 16.6 14.5 29.7 2.2 2.8 22.2 -1.7 1.28 0.56 1.80

5.3 3.1 2.9 -0.6 5.2 3.2 3.0 5.0 5.3 2.1 4.7 19.2 0.4 1.27 0.39 1.40

4.8 3.1 4.6 -0.5 4.6 8.3 8.7 5.1 4.0 2.1 3.0 22.4 0.6 1.19 0.40 1.70

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South Korea
That beta feeling
South Korea has delivered an impressive recovery since being battered by the global financial crisis in 2008. In large part, this is due to the extraordinary competitiveness of Koreas export sector, setting the country up to benefit more than others from rebounding world trade. However, this dependence on external demand is now likely to prove more of a liability than an asset as growth slumps in much of the world. Korean exports, in short, will prove a major drag on overall economic growth in the coming quarters. However, with demand in China expected to hold up better than elsewhere the majority of Korean shipments are now heading there we still do not expect an outright collapse. In addition, a tight labour market domestically, spurring robust retail spending, will help Koreas economy to escape an outright recession. The Bank of Korea, however, will not overplay its hand and is likely to suspend its tightening cycle until the end of the first quarter of 2012. Outright cuts in the policy rate, however, appear unwarranted, with growth expected to remain positive throughout the forecasting period. Moreover, sticky inflationary pressures, especially at the core level, will make policymakers reluctant to soften the growth slowdown by running a more accommodative monetary policy. Continued growth in household debt, meanwhile, continues to reinforce a hawkish bias among monetary officials. All considered, Korea appears in more robust shape than in 2008, when the global credit freeze hit the country especially hard. The banking sector is today less reliant on wholesale funding and, although external debt has not declined as much as hoped, the Bank of Korea now commands an even more impressive war chest of FX reserves to counter volatility in US dollar funding markets.
Frederic Neumann Economist The Hongkong and Shanghai Banking Corporation Limited, (HK) +852 2822 4556 fredericneumann@hsbc.com.hk

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Retail sales Consumer prices** Current account (% GDP) Budget balance (% GDP) KRW/USD* 3-month CD yield (%)** 5-year treasury yield*
Note: *=Year-end, **= average Source: CEIC, HSBC estimates

5.1 5.4 4.2 0.8 4.5 12.6 11.7 5.1 6.9 3.2 4.4 2.5 1.5 0.5 936 5.2 5.6

1.3 4.3 -1.9 1.3 1.4 6.6 4.4 2.3 3.4 3.2 0.0 4.7 2.3 -2.0 1263 5.5 4.3

-0.0 5.6 -1.0 -1.7 0.6 -1.2 -8.0 0.3 -0.1 3.3 12.8 2.8 0.4 -4.8 1166 2.6 4.3

4.1 3.0 7.0 -0.7 6.0 14.5 16.9 6.2 16.2 3.8 8.1 3.0 3.3 -2.1 1121 2.7 3.3

2.5 3.1 0.1 0.2 2.8 7.7 6.5 3.4 5.8 3.5 3.0 4.4 2.1 -2.7 1150 3.6 3.7

3.7 4.5 3.0 0.2 3.7 7.3 6.8 4.1 8.5 3.3 7.0 3.6 1.5 -2.9 1070 4.4 3.9

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Taiwan
Bracing for turbulence
Taiwans disproportionate reliance on the fickle global electronics cycle for growth is a doubleedged sword. When Western demand is strong, growth soars along with the price of global commodities on which Taiwan depends for 99% of its energy needs. When Western demand stumbles, growth dips uncomfortably sharply, but imported inflationary pressures also ease. The recent plummet in Taiwans PMI readings has been a reflection of deteriorating US demand more than a decline in Chinese demand. This is in contrast to Q1 2011, when the weakening of Chinas manufacturing PMI seemed to be the key drag upon Taiwans shipment growth. That said, global trade has yet to revisit the depths seen in 2008-09. To put things in perspective, although the current decline has taken PMI readings lower than in last summers soft patch, PMIs, exports and IP remain well above 2008-09s trough in seasonally adjusted terms. Moreover, we do not expect global supply chains to collapse as they did during the 2008-09 global financial crisis, because central banks are today both ready and willing to prevent a full-scale global credit crunch from spreading, as it did less than three years ago. The key risk to this view is that financial volatility continues unabated, becoming a dead-weight on global consumer sentiment and spending. In addition, regional demand remains strong. Provided Taiwans manufacturers are able to gear themselves more towards mainland than US demand via ECFAs preferential trade tariff channels, Taiwan electronics should at least have some cushion to fall back on as US demand declines. The CBC is still keeping a close eye on elevated global commodity prices, but it will also have noticed that Western consumers are reining in. The CBC remains prudent in our view, but must strike a balance between addressing concerns about both inflation and growth. So we expect the CBC to pause, in line with its peers in the rest of exporting Asia.
Donna Kwok Economist The Hongkong and Shanghai Banking Corporation Limited + 852 2996 6621 donnahjkwok@hsbc.com.hk

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Consumer prices Current account (% GDP) Budget balance (% GDP) TWD/USD 3-month CD (%) Policy rate (%)
Source: CEIC, HSBC estimates

2.1 2.1 0.6 0.1 1.4 9.6 3.0 6.0 7.8 3.9 1.8 8.9 -0.1 32.4 2.0 3.38

-0.9 0.8 -12.4 1.0 -2.4 0.9 -3.7 0.7 -1.8 4.1 3.5 6.9 -0.8 32.9 2.1 2.00

1.1 3.9 -11.0 -1.2 -3.6 -8.7 -12.8 -1.9 -8.1 5.8 -0.9 11.4 -3.4 32.1 0.5 1.25

3.7 1.8 23.4 0.9 9.9 25.7 28.2 10.9 26.9 5.2 1.0 9.3 -2.7 30.4 0.6 1.63

3.1 0.4 0.4 0.4 1.5 4.3 0.8 4.0 6.4 4.6 1.5 9.8 -2.2 30.0 0.9 1.88

1.9 1.8 2.5 -0.3 1.2 1.3 0.4 1.7 2.5 4.8 2.0 11.4 -0.6 28.0 1.3 2.25

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Thailand
Populist pressure
In the second quarter of 2011 GDP growth eased to 2.6% y-o-y, from 3.2% y-o-y in the first quarter with sequential growth turning negative. While both private and public consumption eased modestly, the slowdown was primarily driven by deceleration in investment and exports. This was mostly the result of supply chain disruptions associated with the natural disaster in Japan, which had a particularly large impact on the manufacturing and exports of Japanese cars produced in Thailand. Looking ahead, growth could get some support in the short term from the fading of the Japan-related supply chain disruptions. However, weaker global economic conditions will constrain growth through the trade and confidence channels. We have therefore cut our GDP forecasts to 3.9% for 2011 (from 4.4%) and 5.0% for 2012 (from 5.4%). While the global factors pose downside risks to growth, the risks to inflation are skewed to the upside. Both headline and core inflation have continued to trend up. At the same time, a host of populist measures that the new government plans to roll out (both higher minimum wages and minimum support prices for rice, among others) will add to underlying inflation pressures. In light of this, the Bank of Thailand (BoT) is likely to remain hawkish and continue to nudge its policy rate up to normalise monetary policy settings, which are still accommodative. BoTs proactive stance was evident when it tightened in August even in the context of heightened global economic uncertainty. However, it is, of course, not agnostic about external factors and is likely to condition the speed of further hikes on both global economic developments and the likely impact from the new populist measures.
Leif Eskesen Economist The Hongkong and Shanghai Banking Corporation Limited, (Singapore) +65 6658 8782 leifeskesen@hsbc.com.sg Tushar Arora Economics Associate, Bangalore

% Year 2007 2008 2009 2010 2011f 2012f

Consumer spending Government consumption Fixed investment Stockbuilding (% GDP) Domestic demand Exports Imports GDP Industrial production Unemployment (%) Consumer prices* Current account (% GDP) Budget balance (% GDP) THB/USD 3-month interbank rate (%)*
Note: *=average Source: CEIC, HSBC estimates

1.8 9.8 1.5 0.0 2.4 7.8 4.4 5.0 8.1 0.8 2.2 6.6 -2.3 33.7 4.0

2.9 3.2 1.2 1.6 4.3 5.1 8.9 2.5 3.9 1.4 5.5 0.8 -1.1 34.9 3.6

-1.1 7.5 -9.2 -2.4 -6.9 -12.5 -21.5 -2.3 -7.2 0.9 -0.8 8.3 -4.4 33.3 1.5

4.8 6.4 9.4 0.8 10.3 14.7 21.5 7.8 14.4 0.7 3.3 4.7 -1.3 30.1 1.6

3.5 3.3 5.9 0.1 3.1 9.1 9.4 3.9 1.6 1.0 4.0 4.3 -2.0 30.7 3.3

3.7 5.0 5.4 0.9 5.3 6.6 7.3 5.0 5.6 1.1 3.6 3.2 -2.5 28.8 4.1

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Vietnam
Inflation remains a challenge
The economy accelerated by 6.1% y-o-y in Q3 (versus 5.7% in Q2), recording 2.3% seasonally adjusted growth from the previous quarter. All sectors of the economy expanded, with manufacturing and services growing by 6.8% y-oy and 6.5% y-o-y, respectively. Looking forward, we see adverse global conditions affecting the economy. Net exports are expected to worsen as a result of global economic softness. Investment and consumption, which have traditionally been supported by steady inflows of FDI and remittances, will remain important sources of growth. However, they too are set to decelerate. In light of this, we have cut our 2011 GDP forecast slightly from 6.1% y-o-y to 5.8%. Vietnams biggest challenge, however, is still high inflation, with the rise in September headline CPI hitting 22.4% y-o-y. While food inflation is a key part of the story, core inflation pressures have also picked up. Moreover, the planned increase in minimum wages in October is likely to add to underlying inflation pressure.
% Year 2007 2008 2009 2010 2011f 2012f

On the monetary policy front, however, the SBV now seem to have little appetite for further hikes. Following aggressive tightening (increasing the OMO rate from 9% to 15%) earlier in the year, the SBV lowered the OMO rate to 14% in July despite rising inflation. Banks have also recently been encouraged to lower their lending rates for production enterprises to avoid a credit squeeze. These steps have created uncertainties about the monetary policy strategy. Looking ahead, we expect the SBV to hold the OMO rate steady at 14% well into next year in light of the more challenging growth outlook, domestically and abroad. However, it may resort to further targeted quantitative tightening through hikes in RRRs. On the fiscal front, the government has committed to cutting the deficit and it will be important to fully implement the planned fiscal tightening to complement the monetary policy efforts to ease the demand pressures in the economy.

Trinh Nguyen Economist The Hong Kong and Shanghai Banking Corporation Limited, (HK) + 852 2996 6975 Trinhdnguyen@hsbc.com.hk

Consumer spending Government consumption Fixed investment Exports - Goods Imports - Goods GDP Industrial production Unemployment (%) Consumer prices Current account (% GDP) Budget balance (% GDP) VND/USD Policy rate (Refinance) (%)* 5-year interest rate (%)*
* = As at year end Source: CEIC, HSBC estimates

10.8 8.9 24.2 21.9 39.8 8.5 17.1 4.6 8.3 -9.8 -5.7 16217 6.50 8.73

9.3 7.5 3.8 29.1 28.6 6.3 14.6 4.7 23.1 -11.9 -4.6 16900 9.50 10.00

3.1 7.6 8.7 -8.9 -13.3 5.3 7.6 4.6 7.0 -8.0 -7.0 18200 8.00 11.70

10.0 12.3 10.9 26.4 21.2 6.8 14.0 4.3 9.2 -8.3 -5.5 19498 9.00 11.00

4.9 4.3 3.9 27.0 24.0 5.8 4.5 18.4 -7.6 -3.9 21500 14.00 11.00

5.2 5.0 6.6 24.6 21.7 7.0 4.5 11.2 -6.7 -3.8 21500 14.00 11.00

Note: **We do not forecast IP due to changes to insufficient historical data after the introduction of a new IP series starting from 2008 and the discontinuation of the old one.

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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Stephen King, Madhur Jha and Karen Ward

Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures
1 2 3 This report is dated as at 05 October 2011. All market data included in this report are dated as at close 04 October 2011, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer
* Legal entities as at 04 March 2011 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation HSBC Bank plc Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC Securities (Canada) 8 Canada Square, London Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; E14 5HQ, United Kingdom 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Telephone: +44 20 7991 8888 Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Fax: +44 20 7992 4880 Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Website: www.research.hsbc.com Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch This document is issued and approved in the United Kingdom by HSBC Bank plc for the information of its Clients (as defined in the Rules of FSA) and those of its affiliates only. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. 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Global Economics Research Team


Global
Stephen King Global Head of Economics +44 20 7991 6700 stephen.king@hsbcib.com Karen Ward Senior Global Economist +44 20 7991 3692 karen.ward@hsbcib.com Madhur Jha +44 20 7991 6755 madhur.jha@hsbcib.com

Global Emerging Markets


Pablo Goldberg Head of Global EM Research +1 212 525 8729 pablo.a.goldberg@hsbc.com Bertrand Delgado EM Strategist +1 212 525 0745

bertrand.j.delgado@us.hsbc.com

Emerging Europe, Middle East and Africa


Murat Ulgen Chief Economist +44 20 7991 6782

Europe & United Kingdom


Janet Henry Chief European Economist +44 20 7991 6711 janet.henry@hsbcib.com Astrid Schilo +44 20 7991 6708 Germany Lothar Hessler +49 21 1910 2906 France Mathilde Lemoine +33 1 4070 3266 astrid.schilo@hsbcib.com

muratulgen@hsbc.com

Alexander Morozov +7 495 783 8855 alexander.morozov@hsbc.com Simon Williams +971 4 507 7614 Liz Martins +971 4 423 6928 simon.williams@hsbc.com liz.martins@hsbc.com

lothar.hessler@hsbc.de

Latin America
Andre Loes Chief Economist, Latin America +55 11 3371 8184 andre.a.loes@hsbc.com.br Argentina Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Ramiro D Blazquez Senior Economist +54 11 4348 5759 Jorge Morgenstern Senior Economist +54 11 4130 9229 Brazil Constantin Jancso Senior Economist +55 11 3371 8183 Marcos Fernandes +55 11 6847 9787 Mexico Sergio Martin Chief Economist +52 55 5721 2164 Claudia Navarrete Economist +52 55 5721 3284 Central America Lorena Dominguez Economist +52 55 5721 2172

mathilde.lemoine@hsbc.fr

North America
Kevin Logan Chief US Economist +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang +1 212 525 3181 Stewart Hall +1 416 868 7523 ryan.wang@us.hsbc.com stewart_hall@hsbc.ca

ramiro.blazquez@hsbc.com.ar

Asia Pacific
Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.com.au Donna Kwok +852 2996 6621 Trinh Nguyen +852 2822 6975 Sun Junwei Associate Sophia Ma Associate donnahjkwok@hsbc.com.hk trinhdnguyen@hsbc.com.hk

jorge.morgenstern@hsbc.com.ar

constantin.c.jancso@hsbc.com.br marcos.r.fernandes@hsbc.com.br

sergio.martinm@hsbc.com.mx

claudia.navarrete@hsbc.com.mx

lorena.dominguez@hsbc.com.mx

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Principal contributors
Stephen King Chief Economist HSBC Bank Plc 020 7991 6700 stephen.king@hsbcib.com Stephen is the HSBC Groups Global Head of Economics and Asset Allocation research. He joined the company in 1988, having previously worked as an economic adviser at the UK Treasury. Stephen is a regular economics commentator on television and radio and has written a weekly column for The Independent, one of the UKs leading newspapers, since 2001. Stephens first book, Losing Control: the Emerging Threats to Western Prosperity is now available from Yale University Press. Karen Ward Senior Global Economist HSBC Bank Plc 020 7991 3692 karen.ward@hsbcib.com Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with responsibility for monitoring challenges facing the global economy and their implications for financial markets. Before joining HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the Monetary Policy Committee. She has an MSc Economics from University College London. Madhur Jha Global Economist HSBC Bank Plc 020 7991 6755 madhur.jha@hsbcib.com Madhur is HSBCs Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA markets. She has gained experience in emerging markets economics research from her stints as Fixed income/FX strategist at a leading research consultancy in London and at the largest private sector bank in India, where she also worked in FX derivative sales.