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Goodbye To All That...From Excees To Deficient Liquidity
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Goodbye To All That...From Excees To Deficient Liquidity

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Interesting report - all about how the world economy turned to extreme deficient in liquidity from excess and easy credit !

Interesting report - all about how the world economy turned to extreme deficient in liquidity from excess and easy credit !

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    Goodbye To All That...From Excees To Deficient Liquidity Goodbye To All That...From Excees To Deficient Liquidity Document Transcript

    • Macro Global Economics Q1 2008 Goodbye to all that From excess to deficient liquidity… ...as the credit squeeze threatens the transatlantic economies… ...but can de-coupled emerging markets limit the damage? By Stephen King and Stuart Green 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 Q1 2008 The excess liquidity of recent years has gone down the plughole. In its place is a credit squeeze. The persistence of elevated money market rates over recent months indicates a financial system in crisis. Banks fret about their off-balance sheet and counterparty risks. Business models are threatened by a loss of faith in securitisation. With the financial sector becoming ever more cautious, we are making downgrades to our growth forecasts for the transatlantic economies. As growth softens, and the credit squeeze intensifies, we expect more aggressive rate cuts from the major central banks. Fed funds may fall to just 3% by the final quarter of 2008. Lower US rates will lead to looser monetary conditions in the emerging markets, allowing domestic demand in the emerging world to hold up surprisingly well. However, strong emerging market growth points to elevated commodity prices, making the control of inflation more difficult in the developed world. Central bankers may not be able to cut interest rates as far as they would like to. In response, budget deficits may end up a lot bigger than they are today. Goodbye to all that It was good while it lasted. The excess liquidity of recent years was, though, bound to come to an end at some point. Whereas we’d thought the borrowers – notably American households – would bear the brunt of any adjustment, it’s the lenders who, so far, have suffered the most. This creates an international dimension to the sub-prime crisis. The lenders are, of course, not confined to US banks. Through securitisation and the innovation of ever-more-complex financial products, all sorts of international investors have found themselves burdened with now often-worthless sub-prime debt. Apart from raising some obvious questions about the funding of the US current account deficit – which, in recent years, has been increasingly dependent on the sale of mortgage-backed securities to sometimes unsuspecting foreigners – the scale of the crisis raises doubts about the securitisation model. After all, this was the process through which the danger of banking crises was supposedly reduced through the spread of risk ever-more thinly. 1
    • Macro Global Economics Q1 2008 Instead, we are left with investors who have a sense of revulsion towards many previously-popular products and a bunch of hitherto off-balance sheet assets which are rapidly being brought back onto banks’ balance sheets. The net result is a financial system in crisis. What does this mean for the global economy? We raise four questions. What is the direct impact of the financial crisis on the transatlantic economies, which seem to have the biggest exposures? What happens to inflationary pressures, which have yet to ride off into the sunset? Can emerging markets continue their de-coupled journey? And, if they do, can they offer any respite for those in the eye of the credit storm? The direct impact It’s early days, but already there are some signs of weaker transatlantic economic activity. The momentum of economic growth has slowed and credit surveys show a significant tightening of conditions. These effects are likely to continue. In our view, the links between official interest rates, broader financial conditions and the overall economy are becoming increasingly unstable. With the US housing market already in crisis, with the UK housing market threatening to move in the same direction and with bad assets springing up all over the place, we are making downgrades to our developed world growth outlook. We now expect developed economy GDP growth of just 1.8% in 2008, mostly a reflection of growth downgrades to the US, the UK and the eurozone. Inflationary pressures Although growth is slowing, inflationary pressures are not going away very easily. With eurozone inflation above 3%, it’s no great surprise that hopes of sustained interest rate reductions are not held with as much conviction as might seem appropriate in the light of an ongoing credit squeeze. The persistence of inflation reflects the shifting balance of global growth. With a bigger proportion of the world’s economic expansion accounted for by emerging markets, commodity prices are unusually elevated. Many emerging economies are at a stage of development which is very commodity-intensive. Global growth weighted towards emerging markets thus tends to have a very high income elasticity of demand for commodities. Elevated commodity prices have led to a deteriorating trade off between growth and inflation in the developed world, reflecting a worsening terms of trade. This doesn’t necessarily mean that central banks should not be cutting interest rates – if the financial system is gummed up, the case for action remains strong – but it certainly suggests that central banks may proceed with unusual caution. De-coupling With chill recessionary wind swirling over the transatlantic economies, fears of a repeat of 2001, when emerging markets were hit hard, are on the rise. However, the 2001 economic downswing was a reflection of global technology risk, whereas the latest situation seems to be more a transatlantic housing and credit risk. While there’s a good chance that global imbalances will unwind further – partly because the US will no longer easily be able to fund its deficit through the sales of copious quantities of mortgage- backed securities – part of the unwinding is likely to come not so much from collapsing US imports but, instead, from elevated demand in the emerging world. 2
    • Macro Global Economics Q1 2008 Although many people argue the case for revaluations of emerging market currencies, enthusiasm for such adjustments is likely to dwindle as fears of a major US downswing take hold. Why revalue if your exports are also likely to be hit by a sudden loss of US demand? Instead, emerging economies will continue to tie their currencies to the US dollar and, hence, their monetary policies to the Federal Reserve. With falling Fed funds, emerging market monetary conditions will loosen, leading to strong domestic demand growth and relatively high inflation. This is unlikely to be sustainable forever – a similar situation occurred in the early-1990s yet was followed eventually by the Mexican and Asian crises – but the knee-jerk assumption that a transatlantic slowdown will drag the whole world into a recessionary mire may not be correct. We expect the gap between developed and emerging world growth to widen in 2008. Respite Buoyant emerging market performance may be just enough to prevent the transatlantic economies from going into recession. While domestic demand in the US, the UK and parts of the eurozone will be under the cosh, exports may continue to surprise in the light of the emerging markets boom. Nevertheless, fears of a recessionary downswing are likely to dominate the newspaper headlines in the months ahead. Central banks will continue to inject liquidity in the hope of restoring order to money markets but, even if they succeed, the crisis may already be moving into a second phase, where banks begin to cut back on their lending to the economy at large. At the very least, this will require further interest rate reductions. We expect Fed funds to drop to just 3% by the end of 2008, with Bank of England bank rate down to 4.5% and the ECB repo rate down to 3.75%. Will this be enough to return the transatlantic economies to economic health? Monetary action will certainly be a welcome shot in the arm, but if we’re in the middle of a balance sheet deflation – the reverse of the excess liquidity boom of earlier years – more controversial action may eventually be required. Bad debts may have to be removed from the financial system with the use of taxpayers’ money. Homeowners who can no longer afford rising monthly repayments may need government help if a sudden rise in foreclosures is to be avoided. And, ultimately, if the financial system really is failing to function properly, governments may have to bypass the banking system to put money back into the economy. The most obvious way to do that is to sell government bonds to the central bank and use the proceeds to deliver monetised tax cuts. A long way off, perhaps, but there are ways of pumping up the economy even when the normal transmission mechanism of monetary policy is broken. 3
    • Macro Global Economics Q1 2008 4
    • Macro Global Economics Q1 2008 Key forecasts 6 Country and territory sections US 40 Canada 42 Monetary & fiscal policy Mexico 44 assumptions 7 Brazil 45 Argentina 46 Goodbye to All That 8 Chile 47 From liquidity to drought 8 Eurozone 48 Germany 50 The key issues 10 France 52 Inflation the emerging concern 14 Italy 54 Spain 56 US still the global price-setter? 15 UK 58 Link to US manufacturing has eroded 15 Norway 60 Not just a dollar issue or speculation 16 Sweden 61 Switzerland 62 Decoupling – fact not fiction 17 Hungary 63 Resolving global imbalances 18 Poland 64 Russia 65 Reaching conclusions 20 Turkey 66 Saudi Arabia 67 Global economic forecasts 23 South Africa 68 GDP 24 Japan 69 Australia 71 Consumer prices 26 New Zealand 72 Short rates 28 China 73 Hong Kong SAR 74 Long rates 29 India 75 Exchange rates vs USD 30 Indonesia 76 Exchange rate vs EUR & GBP 31 Malaysia 77 Philippines 78 Consumer spending 32 Singapore 79 Investment spending 33 South Korea 80 Taiwan 81 Exports 34 Thailand 82 Industrial production 35 Vietnam 83 Wage growth 36 Budget balance 37 Disclosure appendix 84 Current account 38 Disclaimer 87 5
    • Macro Global Economics Q1 2008 Key forecasts __________________ GDP ________________ _______________ Inflation ________________ 2006 2007f 2008f 2009f 2006 2007f 2008f 2009f World (nominal GDP weights) 3.8 3.5 3.0 3.5 2.7 2.8 2.9 2.4 World (PPP weights) 5.2 5.0 4.5 4.7 3.2 3.6 3.6 3.1 Developed 2.8 2.4 1.8 2.4 2.3 2.1 2.1 1.7 Emerging 7.3 7.3 7.0 6.8 4.3 5.4 5.5 4.8 North America 2.9 2.2 2.0 3.0 3.1 2.8 2.4 2.0 US 2.9 2.2 1.9 3.0 3.2 2.8 2.4 2.0 Canada 2.8 2.6 2.1 2.2 2.0 2.1 1.6 1.8 Latin America 4.7 4.6 4.4 4.2 4.2 4.7 5.0 4.4 Mexico 4.8 3.1 3.3 4.1 4.1 3.8 4.0 3.3 Brazil 3.7 5.4 5.0 3.7 3.1 4.4 5.0 4.5 Argentina 8.5 7.8 6.2 5.4 9.8 8.5 9.3 9.5 Chile 4.0 5.5 5.2 5.1 2.1 7.7 3.5 3.0 Western Europe 2.9 2.7 1.6 1.9 2.1 2.1 2.4 1.9 Euro-13 2.9 2.6 1.6 1.8 2.2 2.1 2.6 1.9 Germany 3.1 2.6 1.6 2.0 1.8 2.3 2.3 1.5 France 2.2 1.9 1.7 1.8 1.9 1.6 2.2 2.0 Italy 1.9 1.7 1.0 1.3 2.2 2.0 2.7 1.8 Spain 3.9 3.8 2.4 2.8 3.6 2.8 3.7 2.4 Other Western Europe 3.1 3.0 1.7 2.2 2.0 2.0 2.0 1.8 UK 2.8 3.2 1.5 2.1 2.3 2.3 1.8 1.7 Norway 2.1 3.3 2.8 3.1 2.3 0.8 3.0 2.5 Sweden 4.4 2.6 2.3 2.7 1.4 2.2 2.6 2.3 Switzerland 3.2 2.8 1.9 1.8 1.1 0.7 1.7 1.2 EMEA 6.0 5.8 5.8 5.6 5.8 7.9 7.3 5.9 Czech Republic 6.4 5.7 5.2 5.0 2.6 2.7 3.7 2.5 Hungary 3.8 1.6 3.3 4.5 3.9 7.9 5.3 3.0 Poland 6.1 6.6 5.6 5.2 1.0 2.7 3.5 2.1 Russia 6.7 7.6 6.7 6.0 9.0 11.9 11.0 9.0 Turkey 6.1 4.4 5.5 5.4 9.6 8.8 8.0 5.7 Ukraine 7.1 7.1 6.8 7.0 9.1 12.8 6.0 5.5 Egypt* 6.8 7.1 6.4 6.2 4.2 9.6 6.5 6.2 Israel 5.2 5.5 4.4 4.2 -0.1 3.1 2.9 2.4 Saudi Arabia 4.3 3.5 5.7 6.3 2.3 3.9 5.4 4.5 UAE 9.4 6.6 7.4 6.8 10.5 9.5 9.0 8.7 South Africa 5.0 5.4 5.3 5.0 4.6 6.5 6.3 5.5 Asia-Pacific 5.3 5.3 5.1 5.3 2.0 2.2 2.6 2.4 Japan 2.4 1.9 1.6 2.2 0.2 0.0 0.4 0.4 Australia 2.8 3.9 4.5 4.3 3.5 2.3 3.2 2.7 New Zealand 1.9 3.4 2.4 2.7 3.4 2.6 2.5 2.5 Asia ex Japan 8.8 8.9 8.4 8.1 3.6 4.4 4.8 4.2 China 11.1 11.4 11.0 10.5 1.5 4.7 4.1 3.0 Asia ex Japan & China 6.8 6.7 6.0 5.9 5.2 4.2 5.3 5.2 Hong Kong 6.8 5.9 5.0 4.5 2.0 2.0 3.9 4.3 India 9.6 8.9 7.1 7.4 6.3 6.4 6.8 6.9 Indonesia 5.5 6.3 6.5 5.3 13.1 6.5 8.5 8.6 Malaysia 5.9 6.2 6.2 5.8 3.6 2.0 2.8 2.6 Philippines 5.4 6.9 5.9 5.6 6.3 2.7 4.1 4.6 Singapore 7.9 8.1 7.3 6.5 1.0 2.0 3.9 1.6 South Korea 5.0 4.8 4.5 4.7 2.2 2.5 3.3 3.2 Taiwan 4.9 5.0 4.0 4.5 0.6 1.6 2.4 1.9 Thailand 5.1 4.4 5.0 4.6 4.7 2.3 3.1 2.5 Vietnam 8.2 8.3 8.5 8.1 7.5 8.1 9.9 7.1 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: HSBC 6
    • Macro Global Economics Q1 2008 Monetary policy Q1 2007 Q2 2007 Q3 2007f Q4 2007 Q1 2008f Q2 2008f Q3 2008f Q4 2008f US Targeted Fed funds 5.25 5.25 4.75 4.25 4.00 3.75 3.25 3.00 Japan Overnight call rate 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.75 Eurozone Repo rate 3.75 4.00 4.00 4.00 4.00 3.75 3.75 3.75 UK Base rate 5.25 5.50 5.75 5.50 5.25 5.00 4.75 4.50 Canada Overnight rate 4.25 4.25 4.50 4.25 4.00 3.75 3.50 3.50 Source: HSBC Fiscal policy Country 2007 2008 US The federal budget deficit in FY2007 was USD163bn, or about 1.2% of GDP. Receipts We expect the federal budget deficit in FY2008 to be USD240bn (about 1.7% of GDP). totalled USD2,568bn, an increase of 6.7% from FY2006. Outlays rose to USD2,731bn, up Outlays could rise by around 8%, while expected revenue growth of 5% reflects a 2.9% from FY2006. Defence outlays increased by 6.6%, while combined Medicare and slowdown in GDP growth. The Treasury department will soon release a new tax study with Medicaid spending rose 9.7%. These were offset by declines in other spending, including suggestions on lowering corporate taxes, although no specific legislation has been for disaster assistance and student loan programs. recommended yet. Japan Fiscal policy is expected to tighten about the same degree as in 2006, as the other half of The degree of fiscal policy tightening should diminish, since no major tax hikes are the 1999 income tax cuts are rolled back. This, together with another round of increases of expected. However, there will continue to be fiscal drag from annual hikes in social public pension contribution rates, should keep the fiscal drag at around 0.5% of GDP. security premiums and steady cuts in public capital formation. Eurozone Fiscal policy was tightened by around 0.6% of GDP) in 2007, mainly reflecting the impact of Fiscal performance is expected to be roughly neutral with a small bias towards the German and Italian fiscal measures (see below). loosening, largely reflecting France and Spain. Note the latter is still likely to be the only EMU big 4 economy running a fiscal surplus. The Eurozone deficit should stay around 1.0% of GDP. Germany The deficit is projected to fall to 0.2% of GDP (2006: -1.6%). The financial effects of The key element of the tax reform is the reduction of the corporate tax rate to 15 % the taxation measures which started in January 2007 (including the VAT rate hike) from 25 %. Thus, the corporate tax rate burden should decline from around 38.7% to should boost revenues by around 1 % of GDP. However, the better fiscal position is 29.8%. The unemployment contribution rate will decline to 3.3% from 4.2%. How- only partly driven by an improved structural position. ever, the time period of benefits for older unemployed persons will be enlarged. France The deficit is likely to be slightly higher than government projections, which were On our calculations, measures announced and passed will result in tax revenue based on a 2.25% growth forecast, whereas we expect growth of 1.9%. The deficit growing more slowly than the government expects. In addition, the government will could reach 2.6% in 2007, since tax revenues are likely to suffer from the slowdown use the proceeds of selling a 3% stake in EDF for public spending, not debt in consumer spending. However, corporate income tax revenues should remain reduction. The measures announced to limit growth in public spending are marginal, robust. Changes in taxation will lead to slower growth in tax revenues in late 2007, and are unlikely to have much of an impact in 2008. As a result, the deficit could but their full impact will come in 2008. move close to 3% if the economy were to grow by 1.7% in 2008. Italy Italy’s reduction of its fiscal deficit to about 2.4% of GDP this year from 4.4% in 2006 Italy’s debt burden remains high (107% of GDP in 2006) and hence fiscal “austerity” has been impressive, although the 2006 budget was negatively affected by one off has to continue. The 2008 budget includes a sizeable cut in corporate taxes. factors. The 2007 budget was also helped by higher income through tax rises. Combined with slower economic growth, this implies a widening of the budget deficit, although we expect it stay below 3% of GDP. UK In the pre-budget report (PBR) the Chancellor revised up total borrowing to £38bn. The PBR projected an overall borrowing of £36bn in FY08-09. In our less optimistic Taking into account public borrowing to date, it looks again as though the Chancellor GDP projections we expect borrowing of nearer £40bn. The removal of a capital will end up borrowing more than anticipated. allowance for corporates in April 08 is likely to lead to a large increase in investment in the first quarter of 2008 and subsequent fallback. Canada Canada continued to run a budgetary surplus of CAD9.3bn in the first six months of the Canada is expected to maintain a small budgetary surplus in FY2008-2009. Weaker fiscal year, from April through September. This is on track to meet the Government’s than expected revenues would be offset by a scaling back in debt reduction plans. projected underlying surplus of CAD11.6bn for FY2007-08, taking into account the CAD4.8bn of tax reductions proposed in October. The Government plan calls for debt reduction of CAD10bn this year. Source: HSBC 7
    • Macro Global Economics Q1 2008  From excess to deficient liquidity…  …as the credit squeeze threatens the transatlantic economies…  …but can de-coupled emerging markets limit the damage? From liquidity to drought 2…and in the UK Stephen King Economist House prices to UK House prices to HSBC Bank plc (UK) No one ever defined it precisely but, in the first +44 20 7991 6700 av. earnings av. earnings half of 2007, the world was awash with excess 10 10 stephen.king@hsbcib.com liquidity. Funds were freely available for all 9 9 Stuart Green Economist manner of ventures, whether they involved house 8 8 HSBC Bank plc (UK) 7 7 +44 20 7991 6718 purchases, private equity, leveraged buyouts or stuart1.green@hsbcib.com 6 6 emerging market equities. Central banks fretted 5 5 about this excess liquidity, fearing that an absence 4 4 of investor discretion would eventually lead to 84 86 88 90 92 94 96 98 00 02 04 06 08 dire economic consequences. House price-to-earnings ratio 1. Houses have looked expensive in the US… Source: Halifax, ONS, and Thomson Financial Datastream House price to US House price to av.earnings av.earnings 3. Rising house prices formed the collateral for more debt… 7 7 US household debt % disposable % disposable income income 6 6 140 140 5 5 120 120 4 4 100 100 84 87 90 93 96 99 02 05 80 80 House price-to-earnings ratio 60 60 Source: Thomson Financial Datastream, and HSBC 90 92 94 96 98 00 02 04 06 Source: Thomson Financial Datastream, and HSBC 8
    • Macro Global Economics Q1 2008 4…..encouraging a transatlantic borrowing binge designed to bring them back down again. Official % disposable UK household debt % disposable interest rates have been cut, liquidity has been income income injected and eligible collateral has been increased yet 160 160 all, until recently, to little avail. 140 140 6. Inflation has been rising in emerging markets 120 120 % Yr Consumer price inflation % Yr 20 20 100 100 80 80 10 10 90 92 94 96 98 00 02 04 06 0 0 Source: Thomson Financial Datastream, and HSBC -10 -10 5. Global private equity activity doesn’t look quite so healthy 05 06 07 Brazil China Mexico Russia Private equity deals USDbn 2000 600 Source: Thomson Financial Datastream, and HSBC 500 1500 400 7. Money market rates are elevated in the US… 1000 300 200 % US % 500 6.0 6.0 100 0 0 5.5 5.5 Jan-00 Jan-02 Jan-04 Jan-06 by number (LHS) by value (RHS) 5.0 5.0 Source: HSBC 4.5 4.5 4.0 4.0 And now the liquidity has dried up. Ahead of 06 07 08 them, central bankers can now only see a parched 3 month interbank rate Fed Funds target rate economic landscape where, once, money flowed all Source: Thomson Financial Datastream, and HSBC too freely. We have gone from a flood to a dribble, a change of quite extraordinary proportions. And 8…in the UK… so far, despite the central banks’ best efforts, the % UK % drought continues. 7.0 7.0 Admittedly, this is an overstatement. Credit growth remains firm in many parts of the world. Across 6.0 6.0 emerging markets, economies are booming and inflation is very much on the rise. But for the 5.0 5.0 transatlantic economies – the US, Canada, the UK and parts of the eurozone – the credit shock has been 4.0 4.0 sizeable. Most obviously, since July, money market 06 07 08 3 month interbank rate BoE base rate interest rates have remained at remarkably elevated levels despite a range of central bank initiatives Source: Thomson Financial Datastream, and HSBC 9
    • Macro Global Economics Q1 2008 9…and in the eurozone The key issues % Eurozone % Where, though, do we go now? There are four 5.0 5.0 key issues: 4.0 4.0  What does the drying-up of liquidity entail for domestic economic performance in the 3.0 3.0 affected countries and regions?  Even if, in some areas, liquidity has dried up, 2.0 2.0 06 07 08 are we yet safely out of the inflationary woods? 3 month interbank rate ECB repo rate  If some countries are hit through a credit Source: Thomson Financial Datastream, and HSBC crunch, will others be dragged down as well? Or, alternatively, are we living in a truly de- That this has been, so far, a transatlantic problem coupled world? is, perhaps, no great surprise. We argued in “Be  And, if we are in a de-coupled world, will careful what you wish for” (21 November 2007) there be any positive feedback effects from that the US housing crisis had become more a strong growth in the emerging markets back problem for the international lender than for the into the credit-constrained economies? domestic borrower. We noted, in particular, that the rest of the world had been happily buying US The absence of liquidity has to be seen in the asset backed securities and argued that most of the context of the earlier period of excess. We’ve foreign investors probably resided in Europe. argued before (see “Fear and Loathing”, Global This, of course, fits very easily with the bad news Economics, 2007Q4) that, apart from the obvious stemming from both the US and the European impact of low US interest rates earlier in the banking sectors. It’s worth noting, for example, decade, one of the biggest influences on excess that IKB and Sachsen Bank, two small German liquidity was the actions of emerging market institutions, proved to be the canaries in the central bank reserve managers, who invested their mineshaft for the latest crisis. burgeoning reserves in mostly safe assets including vast amounts of government paper. By doing so, yields on these assets were driven down to unusually low levels, thereby encouraging 10. US Corporate bonds – including asset-backed securities – seem to be mostly held in Europe Non-China Offshore Middle East Emerging Financial Japan UK China Euro Area Oil Exporters Asia Centres Portfolio weights* Equities 16.3 46.5 0.5 36.8 51.3 22.2 36.3 Treasuries 61.1 9.0 56.5 12.6 34.0 47.7 10.2 Agencies 13.1 4.5 36.1 9.3 8.8 21.8 10.8 Corporates 9.6 40.0 6.9 41.4 6.0 8.3 42.8 Total exposure to US assets In percent of GDP** 23.9 25.4 23.7 12.3 20.3 18.8 - Notes: * Breakdown of portfolio holdings of US assets ** This cannot be calculated for offshore financial centres because GDP is not available for all offshore financial systems from TICS data. Data in percent; holdings as of June 30 2005. Corporates include asset backed securities. Source: IMF 10
    • Macro Global Economics Q1 2008 institutional investors to look elsewhere for crisis. This argument, though, has unravelled all returns. The appetite for more exotic products – too rapidly. First, too many “bad” assets were asset backed securities (and, within them, bundled together and sold off to unsuspecting mortgage backed securities), collateralised debt investors who will now look twice before buying obligations and their ilk – started to increase. exotic products. Second, too many of the bad Securitisation expanded rapidly and, as it did, the assets were hidden away in banks’ own off- gap between ultimate borrower and ultimate balance sheet vehicles, such as conduits and SIVs. lender widened more and more. Far from being spread thinly, many risky apples didn’t fall far from the tree. 11. Emerging market central banks hold a lot of reserves USDbn Total foreign exchange reserve holdings USDbn 13. Most issuance of asset backed securities has been mortgage backed securities 4500 4500 % GDP % GDP Issuers of ABS - Net acquisition of 4000 4000 financial assets 3500 3500 3000 3000 6.0 6.0 2500 2500 4.0 4.0 2000 2000 1500 1500 2.0 2.0 1000 1000 500 500 0.0 0.0 00 01 02 03 04 05 06 07 -2.0 -2.0 Developing Countries Developed Countries 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Source: HSBC Total Mortgages Other Source: Thomson Financial Datastream, and HSBC 12. They’ve invested the reserves in government paper, keeping yields well below consensus expectations* % US 10-yr bond yield % Since our last Global Economics quarterly, the 7 7 situation has worsened. The money market strains which the majority of central banks 6 6 thought would only be temporary have persisted. 5 5 The strategies adopted by the central banks to deal with these problems have succeeded only very 4 4 recently, and the effects may not last. Meanwhile, there are increasing signs that the money market 3 3 crisis is beginning to spill over into the economy 00 01 02 03 04 05 06 07 08 at large. Credit surveys in the US, the eurozone Note: * Red line shows consensus forecast made at the beginning of each year for the and the UK suggest that, for a given level of end of that year. official interest rates, credit conditions are being Source: Thomson Financial Datastream, and HSBC. tightened. October’s Federal Reserve Senior For a while, many commentators argued that Loan Officers’ Survey, for example, suggested securitisation was entirely a good thing. Risks banks were busily tightening their lending which used to reside in lumpy fashion within the standards to mortgage-seeking households and banking system were now spread very thinly also to real estate companies. across a wide range of investors, apparently reducing the danger of an old-fashioned banking 11
    • Macro Global Economics Q1 2008 14. Some initial signs that credit conditions are becoming 17. Households suddenly can’t get mortgages more awkward for US commercial and industrial companies % Domestic respondents tightening standards for % % Domestic respondents tightening standards for C&I % residential mortgage loans loans 60 60 70 70 July survey 40 40 50 50 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 90 92 94 96 98 00 02 04 06 90 92 94 96 98 00 02 04 06 Prime Nontraditional Loans to large and medium-sized firms Subprime All residential Loans to small firms Source: US Federal Reserve Source: US Federal Reserve None of this should come as any great surprise. 15. Loan rate spreads over cost of funds are widening After all, the bottom has fallen out of the mortgage % Domestic respondents increasing spreads of loan % backed securities market, as revealed in the Fed’s rates over Banks’ costs of funds 80 80 flow of funds accounts. After many years where July survey funding from the sale of mortgage backed securities 40 40 grew almost exponentially, the third quarter of 2007 0 0 showed an extraordinary collapse, as a global -40 -40 buyers’ strike took hold. Fortunately for the US -80 -80 housing market, the Federal Home Loan Banks 90 93 96 99 02 05 plugged the gap in the third quarter but, without Loans to small firms Loans to large and medium-sized firms new funds, this mechanism won’t last indefinitely. Source: US Federal Reserve 18. US Financial sector borrowing/issuance* - GSE’s have stepped in as securitisation has dried up 1500 1500 16. Commercial real estate is facing a tough time 1000 1000 % Domestic respondents tightening standards for % 500 500 commercial real estate loans 80 80 0 0 July survey -500 -500 60 60 Q106 Q206 Q306 Q406 Q107 Q207 Q307 40 40 Open market paper + Corporate bonds 20 20 GSE issues 0 0 Agency- and GSE-backed mortgage pool sec. Bank loans n.e.c -20 -20 Other loans and advances (FHLB & foreign loans) -40 -40 90 92 94 96 98 00 02 04 06 Note: *All figures are US$bn, seasonally adjusted annual rates Source: HSBC, Federal Reserve Source: US Federal Reserve 12
    • Macro Global Economics Q1 2008 The persistence of wide money market spreads, collateral against which banks will extend more together with government bond yields lower than loans. If, instead, the securities fall in value, banks could reasonably be justified on the back of may be more reluctant to create loans, in which case incoming economic data, suggests a major shift in monetary growth is likely to be curtailed. asset preference. If asset backed securities and Expressed this way, it’s not so surprising that their various derivatives are no longer flavour of central banks have struggled to reinvigorate the the month, cash and near-cash alternatives very transatlantic monetary system. While they’re much are. Government bonds, after all, are pumping money into the economy, the banks are backed by the taxpayer and, therefore, are a lot licking their wounds from persistently declining safer than the various tranches of collateralised values (and, in some cases, an inability to offer debt obligations backed by low quality assets, any value) on a range of hitherto reliable financial whatever the rating agencies used to claim. products. Declining collateral values have, in 19. Economic data surprises can’t explain low bond yields turn, inflated counterparty risk, placed a stake Index % through the heart of the securitisation model and 30 5.3 led banks to doubt whether, at any point in recent 25 years, they had enough liquidity on their balance 20 4.8 sheets to deal with possible crises. 15 10 4.3 Thus a gap has opened up between official 5 interest rates and the ultimate performance of 0 3.8 transatlantic economies. Economic models Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 typically assume that banking systems are stable US surprise index (LHS) 10 yr bond yield (RHS) and function smoothly across the economic cycle. The latest episode suggests these models now Source: Thomson Financial Datastream, and HSBC have to be radically re-calibrated. Those who rely on Taylor rules, for example, will have to think Cash and near-cash substitutes are basically being again because the connection between official hoarded. The implications are easily spelt out interest rates, growth, spare capacity and inflation through the use of the famous Fisher identity, is in danger of breaking down. MV 37 ZKHUH 0 LV WKH PRQH VWRFN 9 LWV velocity of circulation, P is the price level and T is If so, many of the factors that have driven buoyant the volume of transactions (hence PT is the same as economic activity in recent years will go into nominal GDP). Money hoarding simply means a reverse. If excess liquidity led to rapid house collapse in velocity (V) which, other things equal, price inflation, house prices are likely to fall. If will tend to depress PT, thereby pointing to lower people borrowed excessively on the back of ever- levels of activity and inflation. The obvious way rising house prices, they may now have to repay out of this is to boost M which is why central banks debt. If stock prices were buoyant in response to are happily pumping money into the system. the perceived extra demand created by private However, the vast bulk of money is not created by equity and leveraged buyouts, then they may now central banks. Most of it is endogenous to the struggle to perform quite so well. If banks were banking system and depends for its existence on happy to extend more and more loans on the back rising collateral values. If, for example, asset of ever-rising collateral, they may have to think backed securities rise in value, they can be used as again. And if securitisation as a whole goes into 13
    • Macro Global Economics Q1 2008 reverse, even for only a modest period of time, helped to contain wage and manufactured goods then the transatlantic economy will be facing prices in developed economies, the rise in some very chill winds indeed. If there was excess commodity prices that has accompanied the rapid liquidity, it’s now time to say goodbye to all that. growth in emerging markets - as part of the globalisation process - suggests that this may Inflation the emerging concern increasingly be seen as a relative rather than Just as the outlook for global liquidity has turned absolute shift in the price level. less certain, however, so too has that for inflation. At present, most inflationary pressures relate to The stellar rise in commodity prices (see chart 20) the profile of energy and food prices, particularly over recent years has undoubtedly forced a more within the emerging world where such elements lively debate around the inflationary outlook, and directly account for a disproportionately large indeed how the globalisation theme has influenced share of the movement in consumer price indices. developed economy inflation. The greater influence Although supply factors are important, we’re of global rather than country-specific factors in the focussing here on the demand for commodities, determination of domestic inflation levels has for and in particular the impact of the rapid expansion the most part been viewed as a beneficial of the BRIC (Brazil, Russia, India and China) development, facilitating a period of low and stable economies. Their outsize demand for resources inflation within the G7 economies over the past may have contributed to a sustained boom in decade. The augmentation of significant capacity commodity prices that has prompted a fresh into the global supply chain, it is argued, has deterioration in the inflation outlook in both allowed for a more sustained period of robust, non- developed and emerging economies. inflationary growth in developed economies than could otherwise have been expected. The linkages between the industrialised and 20. Real commodity prices*: some prices have gone through emerging worlds, therefore, could be about to the roof assume a new dimension. If the round of early 400 400 interest rate cuts in the United States provides a 350 350 further stimulus to emerging markets, and by 300 300 extension commodities, then the associated threat 250 250 200 200 to price stability may eventually prove to be a 150 150 constraining influence upon particularly those 100 100 central banks in developed economies that have an 50 50 acute hatred of inflation. As such, policymakers 0 0 across the globe may face a plethora of unhelpful 90 92 94 96 98 00 02 04 06 Food Agric. RM Metals Oil external influences. A policy mix that fails to satisfactorily address developed economy growth Note: *IMF commodity price series deflated by US CPI concerns or the threat of inflation in the Source: Thomson Financial Datastream, IMF, and HSBC developing world could easily result. Such a trend may, for instance, go a long way to For example, the surge in Euro-zone inflation of explaining the persistent tendency to over- the past few months, hitting 3.1% in November, estimate developed economy bond yields over the has proved worse than even the most pessimistic past decade shown earlier in chart 12. But whilst forecasts. Although the headline rate may peak in the threat of overseas competition may have the next few months as the base effects turn more 14
    • Macro Global Economics Q1 2008 favourable, this development has certainly therefore, the rapid pace of industrialisation in the provided the opportunity for the European Central BRIC economies may instead exert a progressive, Bank (ECB) to reiterate its overriding sustained influence upon commodity markets. commitment to price stability, as if such an This point is of crucial importance to the broader invitation were ever needed. The extent to which inflationary outlook and, as such, the degree to this inflationary spike will constrain policymakers which a new inflation (or terms of trade) in the Euro-zone is rather a moot point at present, constraint may be imposed upon policymakers in given that interest rate cuts are not expected for industrialised economies even as domestic activity several months. Nevertheless, as with earlier slows. Importantly, the US economy may no comments from the Federal Reserve, the inflation longer be the price setter of commodity prices, risk cannot be easily dismissed. with the composition as well as the level of global US still the global price-setter? growth proving increasingly influential. Of key relevance to the current situation is the Link to US manufacturing has relationship between commodity prices and the eroded changing composition of global growth. In a note Comparing the monthly changes in a broad index published at the beginning of 2007, (see “A of commodity prices, such as the Standard & Shifting Centre of Gravity”, January 2007) we Poor’s Goldman Sachs Commodity Index (S&P outlined the rising economic leadership of the GSCI), and US manufacturing output over time emerging economies within a global context - in certainly highlights an apparent breakdown in essence the ‘decoupling story’ – and the previously well established pricing relationships. supportive impact this was exerting on the US The S&P GSCI is seen as a particularly useful economy as rising export demand helped offset measure of commodity price inflation due to its the impact of the housing recession. production weighting basis. Here, the relative The likely consequences for certain commodities importance of each commodity price movement markets, metals in particular, from this process within the overall index is determined by its share were also detailed. Essentially, emerging nations of global commodity production, and by extension possess a higher income elasticity of demand for its economic importance. commodities than developed economies, with 21. US manufacturing activity and S&P GSCI spot index most estimates of China’s income elasticity of 10% 75% demand for oil being close to double that of the typical OECD economy. The price elasticity of 50% 5% demand of emerging economies is also thought to 25% 0% be lower, due to the more limited opportunities to 0% switch to alternative energy inputs, implying less -5% -25% substitution away from oil than a $100 per barrel -10% -50% price would typically suggest. 72 76 80 84 88 92 96 00 04 A greater concentration of global growth within US manufacturing versus trend, LHS Annual change in S&P GSCI spot price, RHS such economies will, by extension, influence commodity demand to a greater extent than the Source: Thomson Financial Datastream, and HSBC headline activity data alone may indicate. Rather than experiencing a one-off shift in demand, 15
    • Macro Global Economics Q1 2008 The design of the index, therefore, should allow it to match those that would be expected to be returned capture the impact of movements in global growth during the course of a commodity price cycle. upon commodity prices as a whole in a reasonably During the entire sample period (January 1972 to accurate manner. In turn, how the S&P GSCI series October 2007), monthly increases in US correlates with the activity of a particular nation or manufacturing output from an above trend position economic bloc may provide guidance on how that have coincided with an annualised rise of 10.9% in region influences developments within commodity commodity prices, and monthly declines a 2.9% markets. In theory, monthly changes in industrial annualised return. When US manufacturing activity activity, and the level of industrial output in relation was seen to be below potential, increases in output to potential, should therefore be important corresponded with a annualised 13.5% gain in determinants of monthly commodity price changes. prices, and declines a loss of some 9%. This Chart 21 illustrates a calculated measure of a US relationship has also held between January 1990 and manufacturing output gap (showing the difference the current day. The degree of coincidence between between actual and trend output expressed as a US manufacturing output and the movements of the percentage of the trend) and the annual rate of S&P GSCI spot index appeared particularly strong change in the S&P GSCI spot index. Periods of between 2000 and end-2003, perhaps unsurprisingly above and below trend growth in US manufacturing given concerns of a US-led global downturn during activity have in the past coincided with peaks and the period. Once more, however, this relationship troughs in commodity price inflation, suggesting a appears to have diminished in more recent years, reasonably close relationship between the two series. with commodity prices rising strongly even when US manufacturing output was seen to be both below 22. S&P GSCI spot index annualised returns in relation to US manufacturing, US$ terms trend and declining on a monthly basis. US Mftg output versus trend: ____ Above trend___ ___ Below trend ___ Not just a dollar issue or Monthly direction Increasing Declining Increasing Declining of output: speculation S&P GSCI performance*: Still, given that this divergence is a relatively new 1972-present 10.9% 2.9% 14.4% -9.0% phenomenon, it is tempting to look for alternative (5.0%) (7.1%) (4.8%) (6.2%) explanations that may account for this ‘aberration’, 1990-present 11.4% -9.1% 21.5% -4.2% (5.1%) (5.9%) (5.2%) (6.1%) rather than accept the de-coupling argument in full. Commodity prices can, after all, be buffeted by a 2000-2004 37.1% -22.7% 54.7% -16.9% (7.0%) (4.4%) (5.3%) (6.7%) variety of factors unrelated to economic growth. 2004-present 18.7% -12.7% 27.1% 64.0% The steady decline in the US dollar since the (5.4%) (8.5%) (5.9%) (6.2%) beginning of the decade, for instance, has often Note: *Figures show annualised monthly performance of S&P GSCI spot index when US manufacturing output is above trend and increasing/decreasing, or below trend and increasing/decreasing. Figures in brackets are the standard deviation of these returns. been forwarded as a ready explanation for the Source: HSBC and Thomson Financial Datastream conflicting trends in US activity and commodity markets. As commodity prices are typically dollar- Table 22 provides further detail, showing the denominated, fluctuations in the greenback can annualised return of the S&P GSCI spot index cause nominal price shifts even if the real or against monthly changes in US manufacturing physical value of these assets remains unchanged. output when activity was estimated to be both above With the dollar having been on a predominantly and below potential. Again, the results roughly downward trend in recent years, some appreciation 16
    • Macro Global Economics Q1 2008 in prices would still have been possible without Decoupling – fact not fiction necessarily questioning the position of the United Indeed, de-coupling has been a fact of economic States as the key determinant of commodity prices. life in recent quarters. As table 24 shows, the pace A further alternative explanation to the de-coupling of US domestic demand growth has been not argument is the rising degree of investor much stronger in the first three quarters of 2007 participation within commodity markets over the than it was in 2001, at the height of the tech-led past few years. The motivation behind this growing recession. Yet emerging market growth has involvement is thought to relate more to the remained remarkably buoyant, unlike the near- perceived benefits that commodities as an asset class collapse that occurred in some countries in 2001. may offer to a balanced portfolio of investments, 23. Emerging markets a lot stronger than they used to be rather than entering commodity markets for the % Yr Emerging market GDP growth % Yr purposes of speculation alone. As such, this 10.0 10.0 development would have been expected to have 8.0 8.0 added predominantly upward pressure to commodity prices as investment positions were established. 6.0 6.0 However, when analysing the S&P GSCI in euro 4.0 4.0 rather than dollar terms and re-running the analysis 2.0 2.0 contained in table 22, a clear break within the 0.0 0.0 relationship between US manufacturing and 2000 2001 2002 2003 2004 2005 2006 commodity markets is still evident since 2004, with prices rising strongly even as US activity was Source: Thomson Financial Datastream, and HSBC declining and seen to be below trend. In addition, the evidence of a speculative bubble or of investor 24. Emerging markets a lot more robust today given US domestic demand weakness participation producing a distorting effect within % Yr 2001 2007* commodity markets is also far from compelling. US Private final demand 1.4 1.8 US Exports -5.4 8.0 Speculative activity, rather than causing higher US GDP growth 0.8 2.1 prices, may in fact be the product of an underlying, Emerging Market GDP growth 3.2 8.1 structural increase in commodity prices, rather than Note: *2007 values calculated using first 3 quarters. Source: Thomson Financial Datastream, and HSBC. the cause. The accompanying boost to liquidity may simply have helped this trend to be more The secular case for de-coupling is powerful. In easily expressed. And even if we accept that our view, emerging markets have embarked on a increased speculative activity may have period of sustained rapid economic growth as they accentuated the rising trend of commodity prices, take full advantage of more liberal capital applying any rigorous test for this effect is hindered markets, new technologies and, importantly, the by the paucity of available data. Overall, the size of shifting political landscape since the fall of the the investment funds that have flowed into Berlin Wall in 1989. Their economic commodity markets in recent years, when performance is reminiscent of the gains made by compared to the value of the physical production, Germany, Japan, France and other European does not appear large enough to have accounted for nations in the 1950s and 1960s, when incomes per the rapid price appreciation alone, again suggesting capita slowly caught up with those in the US. some fundamental ‘decoupling’ influence. 17
    • Macro Global Economics Q1 2008 Indeed, given incomes per capita in many Resolving global imbalances emerging markets are still incredibly low, the Beyond these factors, though, it’s worth thinking scope for continued out-performance on economic about likely changes in global imbalances in the growth appears to be very high. years ahead. One of the peculiarities of the 2001 If, though, we leave the secular case to one side, recession was the absence of any major reduction there’s still the key cyclical issue. Can the in the US current account deficit. It contracted by emerging world cyclically survive a sustained US- only 0.5% of US GDP or less than 0.2% of non-US led economic slowdown? Or, instead, will the global GDP. This was not a big change, suggesting emerging world succumb to a collapse in much that the global recession was truly global and not the same way that we saw in 2001? really US-led (if it had been, the US deficit would presumably have shrunk a lot more). It would be foolish to suggest that a transatlantic slowdown would have no effect on the emerging 25. The US current account deficit didn’t really shrink very much in 2001 world. The issue is one of magnitude. There are, % GDP US current account % GDP though, reasons for hope: 1.0 1.0 0.0 0.0  First, we’ve already seen that emerging -1.0 -1.0 markets have continued growing despite an -2.0 -2.0 already relatively weak domestic demand -3.0 -3.0 picture in the US -4.0 -4.0 -5.0 -5.0  Second, the tech bubble was global in nature -6.0 -6.0 and all equity markets fell simultaneously, -7.0 -7.0 90 92 94 96 98 00 02 04 06 including those in many emerging markets. While there are some obvious property Source: Haver Analytics bubbles in the emerging world, they have yet to succumb to the sub-prime crisis that’s hit 26. This time, it may have to shrink more – and funding from the transatlantic economies ABS is already falling sharply USDbn USDbn  Third, many emerging economies were major 500 500 volume suppliers of technology products at 400 400 the height of the late-1990s bubble and, 300 300 therefore, were inevitably in trouble when 200 200 recession came. It’s not so obvious that they 100 100 0 0 have the same connections with the US or -100 -100 European housing markets 95 96 97 98 99 00 01 02 03 04 05 06 07 Official purchases Corporate bonds  Fourth, although the information is murky at Corporate equity FDI best, it seems more likely that the bad assets associated with the housing bust are held Note: Data expressed as a four quarter moving average at an annual rate Source: Thomson Financial Datastream, and HSBC mostly in America and Europe and not in the emerging world (although it’s difficult to be sure about the ultimate owners of assets held in the US or Europe on a custodial basis) 18
    • Macro Global Economics Q1 2008 Imagine, though, that the shock we’re now seeing 27. A smaller US deficit was met at the beginning of the 1990s by smaller surpluses and bigger deficits elsewhere requires a significant shrinkage of the US current USDbn Current account USDbn account deficit. Indeed, given the ways in which the 150 150 US current account deficit has been funded in recent 100 100 years (see chart 26), this wouldn’t be altogether 50 50 surprising: up until recently, foreigners were happily 0 0 funding US borrowing through sizeable purchases of -50 -50 asset backed (mostly mortgage-backed) securities. -100 -100 Without these purchases, something else will have to -150 -150 change. The possibilities include heightened foreign 89 90 91 92 93 US Germany Mexico Japan purchases of other US assets (but at what price?), a Source: Thomson Financial Datastream, and HSBC lower dollar to raise exports and reduce imports, a lower level of US demand to reduce imports or a The US current account deficit shrank dramatically higher level of non-US demand to raise US exports. in the process, but the rest of the world didn’t seem From these possibilities, it’s easy to see why de- particularly bothered. Germany was going through coupling doesn’t have many fans. Surely, it’s its reunification boom and the associated rise in argued, a US slowdown must hit the rest of the domestic demand led to a shift in Germany’s world’s exports to the US. If so, it’s only a matter current account position from large surplus into of time before a US downswing becomes a global small deficit. Japan, despite the beginnings of the downswing. equity price collapse, was still growing strongly in 1990 (although its current account surplus was This outcome, though, is not guaranteed. To increasing again by 1992). Meanwhile, emerging understand why, it’s worth thinking about the markets were making an appearance on the world impact of capital flows, particularly in stage: Mexico boomed (shifting from a small conjunction with global economic performance in current account surplus to a $25bn current account the early-1990s during the last US credit crunch. deficit in just a handful of years), Thailand soared, Back then, US short-term interest rates fell to just Hong Kong roared and others followed suit. And 3% as the Greenspan Fed engineered a very even when Europe succumbed to reunification blues steeply-sloped yield curve, a policy designed to in 1992 and 1993 and as Japan headed from boom encourage banks to borrow short and lend long. into deflationary malaise, emerging markets were The policy eventually worked, but only after a still able to perform well. number of years of very disappointing domestic demand growth associated initially with recession How did they manage it? In much the same way, and then with the so-called “jobless recovery”. we suspect, as we’re likely to see in the months ahead. The US Federal Reserve has already lowered the key Fed funds rate by 100 bp to 4.25% and, on our new forecasts, we’re likely to see Fed funds fall all the way down to 3% by the final quarter of 2008. This doesn’t necessarily mean that monetary conditions in the US are likely to be very loose – that depends as much on money market rates and credit tightening as on the level of official rates – but it does mean that 19
    • Macro Global Economics Q1 2008 28. Developed disappointments, emerging surprises GDP projections __ Global Economics Quarterly Q307 (June) ___ ________________ Latest__________________ 2007 2008 2007 2008 World 3.4 3.4 3.5 3.0 Developed 2.4 2.4 2.4 1.8 Emerging 6.8 6.9 7.3 7.0 US 2.0 2.6 2.2 1.9 UK 2.7 2.0 3.2 1.5 Eurozone 2.8 2.3 2.6 1.6 China 10.6 11.0 11.4 11.0 Japan 2.4 2.0 1.9 1.6 Asia ex Japan & China 6.2 5.8 6.7 6.0 Latin America 4.0 4.2 4.6 4.4 Source: HSBC monetary conditions are unlikely to be tightened that mantle. Their share of global GDP is, in total, sufficiently in emerging markets, particularly if not so different from the US share and they’re they resist sustained currency appreciation against collectively growing a lot faster than the US, either the US dollar. now or in the halcyon days of the late 1990s. And, if anything, resistance to currency Reaching conclusions appreciation is likely to intensify, even with clear Putting all these factors together, what do we end evidence of rising inflationary pressures across up with? Our main forecast changes relate to the the emerging world. Why, after all, would a transatlantic area. Table 28 shows our latest GDP policymaker choose to revalue knowing that, in projections compared with those we made before the months ahead, there’s a relatively high chance the onset of the banking crisis in July. The of a US recession? This, surely, would be a risk numbers show the degree to which our numbers too far and few emerging market policymakers are have come down in the US, the UK and the likely to have the appetite for a double hit to eurozone. It is also worth noting that these growth coming from both a currency appreciation revisions, so far, are based not so much on weak and a US economic downturn. data but, rather, on the degree to which we expect We suspect, then, that any narrowing of the US the impact of the credit squeeze eventually to current account deficit will be driven in part by a constrain growth. Admittedly, this is a relatively further lift to domestic demand in emerging high-risk approach but it is our best guess of how markets, the result of overly loose monetary the credit squeeze is likely to affect domestic conditions. This, in turn, will boost transatlantic economic activity. Most of the impact feeds exports and play a role in the reduction of global through consumer spending, primarily because of imbalances. Indeed, the mechanism is already in the earlier rapid increase in household debt which, operation. Through 2007, the nasty effects of the in turn, reflected the easy access of households, US housing slump were mostly offset by booming via the mortgage market, to global credit. US exports, many of which headed towards the Meanwhile, growth within the emerging world emerging world. Put another way, it’s no longer holds up rather well. We’ve been impressed with obvious that the US is consumer of last resort. the degree to which emerging economies have Emerging markets, arguably, have now taken on remained resilient in the light of the US housing 20
    • Macro Global Economics Q1 2008 shock to date. And because the evidence of any 29. Rates will fall further emerging market exposure to sub-prime debt is _______2007_______ _______ 2008 ______ Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 limited, we’re not convinced that we’re about to US see a repeat of 2001, when what was initially seen Targeted Fed Funds 5.25 5.25 4.75 4.25 4.00 3.75 3.25 3.00 as a US problem was, in truth, a global problem. UK Base rate 5.25 5.50 5.75 5.50 5.25 5.00 4.75 4.50 So although we have made modest downgrades to Eurozone Repo rate 3.75 4.00 4.00 4.00 4.00 3.75 3.75 3.75 some of our emerging market forecasts, the overall Japan picture is still one of reasonably buoyant growth. Overnight call rate 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.75 The growth gap between the emerging world and Source: HSBC the transatlantic economies therefore widens. Nevertheless, we expect all three central banks to Although good news, this is not the most helpful of lower interest rates through the course of 2008. backgrounds for global inflation. We have noted on By the end of the year, we expect Fed funds to be a number of occasions the deteriorating trade-off down to 3%, Bank of England bank rate to be between growth and inflation in the industrialised down to 4.50% and the eurozone repo rate to be world, primarily because of continuous advances in down to 3.75%. In all three cases, our forecasts commodity prices. The balance of global growth, are more aggressive than those of the market, skewed as it is towards emerging markets, suggests partly reflecting our concerns over the persistence that commodity prices will remain elevated and, as of credit problems which, in turn, undermine the such, that imported inflation will remain an issue for standard Taylor-rule calculations. the industrialised countries. So far, there’s been However, in none of these cases are we yet little evidence of any pass through to higher wages forecasting interest rate levels consistent with a (indeed, as headline inflation has risen, so core move into outright recession. Our reluctance reflects inflation has in some cases come down). This, (i) the strength of emerging markets and their though, simply shifts the problem away from possible impact on transatlantic export demand; (ii) inflation towards activity (it’s a negative terms of the persistence of inflationary pressures, which trade shock). Moreover, higher imported inflation suggests, rightly or wrongly, a modicum of caution creates ambiguities for policymakers. Should they on behalf of the world’s central bankers; and (iii) a cut interest rates in the light of the credit squeeze degree of caution on our own behalf because we’re (and be seen to be accommodating inflationary still waiting for data to confirm the pace of any pressures) or, instead, should they remain vigilant, economic slowdown through the course of 2008. thereby making the credit squeeze worse than it needs to be? 30. There’s less room for action on fiscal policy… % GDP US budget balance % GDP To a degree, central banks have revealed their 3.0 3.0 hands already. The Federal Reserve was quick to 2.0 2.0 lower interest rates, the Bank of England, initially 1.0 1.0 reluctant, was eventually forced to cut interest 0.0 0.0 rates towards the end of last year and the -1.0 -1.0 European Central Bank, so far, has been unwilling -2.0 -2.0 Maastricht criteria -3.0 -3.0 to provide any indication that the next move in -4.0 -4.0 official interest rates might be downward. 99 00 01 02 03 04 05 06 Source: Thomson Financial Datastream, and HSBC 21
    • Macro Global Economics Q1 2008 31….so will countries be forced to break the rules… In any case, in a world of monetary drought, % GDP Germany budget balance % GDP cutting interest rates alone is unlikely to unblock 2.0 2.0 the system. We suspect the debate will develop in 1.0 1.0 the months ahead. The key question, ultimately, is 0.0 0.0 how to create liquidity when, for the time being, -1.0 -1.0 there’s very little available or usable. Do -2.0 -2.0 -3.0 -3.0 policymakers have to create products which will Maastricht criteria meet the new, more conservative, interests of banks -4.0 -4.0 -5.0 -5.0 and other financial institutions? Do they have to 99 00 01 02 03 04 05 06 intervene to protect homeowners from the risk of widespread foreclosures? Will they eventually Source: Thomson Financial Datastream, and HSBC have to remove the badly performing assets from the financial system to re-create trust? If the 32. …running bigger budget deficits… answer to all of these questions is a firm “yes” – % GDP France budget balance % GDP 1.0 1.0 and we suspect it is – the debate will shift away from monetary towards fiscal policy. Already 0.0 0.0 budget deficits in many countries are relatively -1.0 -1.0 wide – much more so than they were during the -2.0 -2.0 2001 recession – but that observation, on its own, -3.0 -3.0 Maastricht criteria may not be much of a constraint. Even larger -4.0 -4.0 budget deficits are likely to be an increasingly -5.0 -5.0 common feature of the policymaking landscape in 99 00 01 02 03 04 05 06 the years ahead. They’ll be needed to bail out Source: Thomson Financial Datastream, and HSBC homeowners who cannot afford their monthly repayments. They’ll be needed to buy up the bad 33. ...in response to monetary and financial failure? assets that infect the monetary system. And they % GDP UK budget balance % GDP may eventually be needed to deliver on Keynes’ 2.0 2.0 idea of burying bank notes in the road and digging 1.0 1.0 them up again: monetised tax cuts would bypass 0.0 0.0 the banking system and place extra liquidity in the -1.0 -1.0 hands and pockets of the public at large. -2.0 -2.0 Maastricht criteria -3.0 -3.0 -4.0 -4.0 99 00 01 02 03 04 05 06 Source: Thomson Financial Datastream, and HSBC 22
    • Macro Global Economics Q1 2008 23
    • Macro Global Economics Q1 2008 Annual % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World (Nominal GDP weights) 4.2 1.5 1.9 2.5 3.7 3.2 3.8 3.5 3.0 3.5 World (PPP weights) 4.9 2.4 3.0 3.9 5.0 4.7 5.2 5.0 4.5 4.7 Developed 3.7 1.2 1.3 1.8 2.9 2.4 2.8 2.4 1.8 2.4 Emerging 6.7 3.1 4.5 5.7 7.1 6.6 7.3 7.3 7.0 6.8 North America 3.7 0.8 1.6 2.5 3.6 3.1 2.9 2.2 2.0 3.0 US 3.7 0.8 1.6 2.5 3.6 3.1 2.9 2.2 1.9 3.0 Canada 5.2 1.8 2.9 1.9 3.1 3.1 2.8 2.6 2.1 2.2 Latin America 4.8 0.1 0.4 2.1 5.3 3.7 4.7 4.6 4.4 4.2 Mexico 6.6 -0.2 0.8 1.4 4.2 2.8 4.8 3.1 3.3 4.1 Brazil 4.3 1.3 2.7 1.1 5.7 2.9 3.7 5.4 5.0 3.7 Argentina -0.8 -4.4 -10.9 8.8 9.0 9.2 8.5 7.8 6.2 5.4 Chile 4.5 3.4 2.2 3.9 6.0 5.8 4.0 5.5 5.2 5.1 Western Europe 3.9 1.9 1.1 1.1 2.1 1.7 2.9 2.7 1.6 1.9 Euro-13 4.0 1.9 0.9 0.8 1.8 1.6 2.9 2.6 1.6 1.8 Germany 3.5 1.4 0.0 -0.2 0.6 0.9 3.1 2.6 1.6 2.0 France 4.0 1.8 1.1 1.1 2.3 1.7 2.2 1.9 1.7 1.8 Italy 3.8 1.7 0.3 0.1 1.0 0.2 1.9 1.7 1.0 1.3 Spain 5.0 3.6 2.7 3.1 3.3 3.6 3.9 3.8 2.4 2.8 Other Western Europe 3.8 1.9 1.7 2.0 3.1 2.2 3.1 3.0 1.7 2.2 UK 3.8 2.4 2.1 2.8 3.3 1.8 2.8 3.2 1.5 2.1 Norway 3.4 1.8 1.2 0.9 3.6 2.3 2.1 3.3 2.8 3.1 Sweden 4.5 1.2 2.4 2.1 3.5 3.3 4.4 2.6 2.3 2.7 Switzerland 3.6 1.2 0.4 -0.2 2.5 2.4 3.2 2.8 1.9 1.8 EMEA 6.8 1.5 3.3 5.7 6.4 5.8 6.0 5.8 5.8 5.6 Czech Republic 3.6 2.5 1.9 3.6 4.6 6.5 6.4 5.7 5.2 5.0 Hungary 5.2 4.3 3.8 3.4 5.2 4.1 3.8 1.6 3.3 4.5 Poland 4.0 1.0 1.4 3.8 5.3 3.4 6.1 6.6 5.6 5.2 Russia 10.0 5.1 4.7 7.3 7.2 6.4 6.7 7.6 6.7 6.0 Turkey 7.4 -7.5 7.9 5.8 8.9 7.4 6.1 4.4 5.5 5.4 Ukraine 5.9 9.2 5.2 9.6 12.1 2.6 7.1 7.1 6.8 7.0 Egypt* 5.4 3.5 3.2 3.2 4.1 4.5 6.8 7.1 6.4 6.2 Israel 8.7 -0.4 -0.6 2.3 5.2 5.3 5.2 5.5 4.4 4.2 Saudi Arabia 4.9 1.0 0.1 7.7 5.3 6.1 4.3 3.5 5.7 6.3 UAE 12.3 3.5 2.6 11.9 7.4 10.5 9.4 6.6 7.4 6.8 South Africa 4.2 2.7 3.7 3.1 4.8 5.1 5.0 5.4 5.3 5.0 Asia/Pacific 4.7 2.3 3.2 4.0 5.1 4.7 5.3 5.3 5.1 5.3 Japan 2.9 0.2 0.3 1.5 2.7 1.9 2.4 1.9 1.6 2.2 Australia 3.4 2.1 4.1 3.0 3.9 2.8 2.8 3.9 4.5 4.3 New Zealand 3.8 2.4 4.8 4.3 3.7 2.6 1.9 3.4 2.4 2.7 Asia-ex-Japan 7.4 5.2 6.8 7.2 8.0 8.0 8.8 8.9 8.4 8.1 China 8.4 8.3 9.1 10.0 10.1 10.4 11.1 11.4 11.0 10.5 Asia ex-Japan & China 6.8 3.1 5.1 5.0 6.4 6.1 6.8 6.7 6.0 5.9 Hong Kong 8.0 0.5 1.8 3.0 8.5 7.1 6.8 5.9 5.0 4.5 India** 5.5 4.5 4.5 7.3 7.3 8.2 9.6 8.9 7.1 7.4 Indonesia 4.1 3.6 4.5 4.8 5.0 5.7 5.5 6.3 6.5 5.3 Malaysia 8.9 0.3 4.4 5.4 7.3 5.0 5.9 6.2 6.2 5.8 Philippines 6.0 1.8 4.4 4.9 6.4 4.9 5.4 6.9 5.9 5.6 Singapore 10.0 -2.3 4.0 2.9 8.7 6.9 7.9 8.1 7.3 6.5 South Korea 8.5 3.8 7.0 3.1 4.7 4.2 5.0 4.8 4.5 4.7 Taiwan 5.8 -2.2 4.2 3.4 6.1 4.7 4.9 5.0 4.0 4.5 Thailand 4.8 2.2 5.3 7.0 6.4 4.6 5.1 4.4 5.0 4.6 Vietnam 6.8 6.9 7.1 7.3 7.8 8.4 8.2 8.3 8.5 8.1 Notes: * = based upon Egyptian fiscal year (July-June); ** = calendar year. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC 24
    • Macro Global Economics Q1 2008 Quarterly % Quarter & % Year Q3 06 Q4 06 Q1 07 Q2 07 Q3 07f Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f North America US* % Quarter 1.1 2.1 0.6 3.8 4.9 1.0 1.1 1.1 1.8 3.3 % Year 2.4 2.6 1.5 1.9 2.8 2.6 2.7 2.0 1.3 1.8 Canada* % Quarter 1.3 1.5 3.5 3.8 2.9 2.0 1.7 1.7 1.9 1.9 % Year 2.4 1.9 1.9 2.5 2.9 3.0 2.6 2.1 1.8 1.8 Latin America Mexico % Quarter 0.6 0.5 0.3 1.4 1.5 0.0 1.1 0.0 1.7 1.0 %Year 4.5 4.3 2.6 2.8 3.8 3.3 2.9 3.8 2.8 3.7 Brazil % Quarter 1.8 1.4 1.1 1.3 1.7 1.4 1.3 1.1 0.9 0.6 % Year 4.4 5.1 4.5 5.6 5.7 5.8 5.2 5.2 4.7 4.9 Argentina % Quarter 2.8 1.6 1.3 2.4 1.6 1.5 1.2 2.4 0.8 1.1 % Year 8.7 8.5 8.1 8.4 7.5 7.0 6.4 6.9 6.0 5.6 Chile % Quarter 0.4 1.8 2.2 1.5 -0.6 1.3 3.3 1.2 -1.7 3.1 % Year 2.6 4.3 5.9 6.2 4.1 5.6 5.4 5.2 5.2 5.0 Western Europe Euro-13 % Quarter 0.6 0.8 0.8 0.3 0.7 0.4 0.4 0.3 0.3 0.4 % Year 2.9 3.3 3.2 2.5 2.7 2.2 1.7 1.7 1.4 1.4 Germany % Quarter 0.7 1.0 0.5 0.3 0.7 0.3 0.3 0.3 0.4 0.5 % Year 3.2 3.9 3.6 2.5 2.5 1.8 1.6 1.7 1.4 1.6 France % Quarter -0.1 0.5 0.6 0.3 0.7 0.4 0.5 0.3 0.4 0.4 % Year 2.1 2.1 1.9 1.4 2.1 2.1 1.9 1.9 1.5 1.5 Italy % Quarter 0.3 1.1 0.3 0.1 0.4 0.2 0.3 0.2 0.2 0.4 % Year 1.6 2.8 2.4 1.8 1.9 0.9 0.9 1.1 0.9 1.1 Spain % Quarter 0.9 1.1 1.0 0.9 0.7 0.5 0.5 0.6 0.7 0.8 % Year 3.9 4.0 4.1 4.0 3.8 3.2 2.6 2.3 2.3 2.5 Other Western Europe UK % Quarter 0.7 0.8 0.8 0.8 0.7 0.6 0.3 -0.1 0.4 0.4 % Year 3.0 3.2 3.1 3.1 3.3 2.9 2.4 1.4 1.1 1.0 Norway % Year 2.0 1.9 2.1 3.2 3.4 4.2 3.9 3.3 2.4 1.6 Sweden % Year 4.4 4.1 3.2 2.9 2.6 1.8 2.1 2.1 2.1 2.9 Switzerland % Year 3.3 2.9 2.7 2.8 2.8 2.8 2.3 2.0 1.8 1.5 EMEA Czech Republic % Year 6.3 6.1 6.4 6.0 5.1 5.2 5.1 5.3 5.5 4.8 Hungary % Year 3.6 3.2 2.7 1.2 0.9 1.6 2.5 3.3 3.6 3.9 Poland % Year 5.8 6.6 7.2 6.4 6.3 6.1 5.8 5.6 5.5 5.3 Russia % Year 6.8 7.8 7.9 7.8 7.6 7.0 5.6 6.3 6.5 6.6 Turkey % Year 4.8 5.2 6.8 4.1 1.5 6.1 6.2 5.6 6.8 3.2 Ukraine % Year 8.0 9.5 8.0 7.9 6.1 6.5 6.5 6.5 7.0 7.0 Egypt** % Year 7.2 7.1 7.3 6.8 6.9 7.2 5.9 6.4 6.9 6.5 Israel % Year 4.5 5.0 5.1 4.9 6.5 5.7 4.6 4.4 4.2 4.2 South Africa %Year 4.7 6.2 5.7 5.0 5.1 5.6 5.5 5.0 5.3 5.0 Asia/Pacific Japan % Quarter -0.1 1.3 0.8 -0.5 0.4 0.4 0.3 0.6 0.7 0.5 % Year 1.9 2.3 2.8 1.6 1.9 1.2 0.8 1.8 1.9 1.8 Australia % Quarter 0.5 1.2 1.3 0.7 1.0 1.2 1.2 1.2 1.3 0.8 % Year 2.6 2.8 3.6 3.7 4.3 4.3 4.1 4.6 4.8 4.5 New Zealand % Year 1.2 2.6 3.2 3.8 3.1 2.9 2.6 2.6 2.4 2.5 Asia-ex-Japan China % Year 10.6 10.4 11.1 11.9 11.5 11.2 11.0 10.8 11.3 10.7 Asia ex-Japan & China Hong Kong % Year 6.4 6.9 5.6 6.6 6.2 5.2 5.6 2.7 5.2 6.5 India % Year 10.2 8.7 9.1 9.3 8.9 8.3 7.6 7.4 6.8 6.6 Indonesia % Year 5.9 6.1 6.0 6.3 6.5 6.4 6.4 6.6 6.6 6.3 Malaysia % Year 6.0 5.7 5.5 5.8 6.7 6.8 6.6 6.3 6.1 5.9 Philippines % Year 5.1 5.5 7.1 7.5 6.6 6.4 6.2 5.9 6.1 5.3 Singapore % Year 7.0 6.6 6.5 8.7 8.9 8.3 7.9 7.1 7.4 7.0 South Korea % Year 4.8 4.0 4.0 5.0 5.2 4.8 4.5 4.6 4.6 4.5 Taiwan % Year 5.3 4.1 4.2 5.2 6.9 3.8 4.5 3.4 3.8 4.2 Thailand % Year 4.5 4.3 4.2 4.3 4.9 4.3 4.8 5.4 4.9 4.8 Vietnam % Year 8.8 8.9 7.7 8.0 8.7 9.0 7.7 8.4 8.7 9.0 Note: * = quarter-on-quarter data has been annualised; ** = based upon Egyptian fiscal year (July – June) Source: HSBC 25
    • Macro Global Economics Q1 2008 Annual % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World 2.5 2.5 2.1 2.2 2.5 2.7 2.7 2.8 2.9 2.4 Developed 2.1 2.0 1.4 1.8 1.9 2.3 2.3 2.1 2.1 1.7 Emerging 4.1 4.6 5.1 4.1 4.9 4.3 4.3 5.4 5.5 4.8 North America 3.3 2.8 1.6 2.3 2.6 3.3 3.1 2.8 2.4 2.0 US 3.4 2.8 1.6 2.3 2.7 3.4 3.2 2.8 2.4 2.0 Canada 2.8 2.5 2.2 2.7 1.9 2.2 2.0 2.1 1.6 1.8 Latin America 6.8 4.9 10.7 5.7 6.0 5.1 4.2 4.7 5.0 4.4 Mexico* 9.0 4.4 5.7 4.0 5.2 3.3 4.1 3.8 4.0 3.3 Brazil* 6.0 7.7 12.5 9.3 7.6 5.7 3.1 4.4 5.0 4.5 Argentina* -0.7 -1.5 41.0 3.7 6.1 12.3 9.8 8.5 9.3 9.5 Chile* 4.5 2.6 2.8 1.1 2.4 3.7 2.1 7.7 3.5 3.0 Western Europe 1.9 2.2 2.1 2.0 1.9 2.1 2.1 2.1 2.4 1.9 Euro-13 2.2 2.4 2.3 2.1 2.2 2.2 2.2 2.1 2.6 1.9 Germany 1.4 1.8 1.4 1.0 1.8 1.9 1.8 2.3 2.3 1.5 France 1.8 1.8 1.9 2.2 2.3 1.9 1.9 1.6 2.2 2.0 Italy 2.6 2.3 2.6 2.8 2.3 2.2 2.2 2.0 2.7 1.8 Spain 3.5 2.8 3.6 3.1 3.1 3.4 3.6 2.8 3.7 2.4 Other Western Europe 1.2 1.6 1.4 1.5 1.1 1.7 2.0 2.0 2.0 1.8 UK 0.8 1.3 1.3 1.4 1.3 2.0 2.3 2.3 1.8 1.7 Norway 3.1 3.0 1.3 2.5 0.5 1.5 2.3 0.8 3.0 2.5 Sweden 1.0 2.4 2.2 1.9 0.4 0.5 1.4 2.2 2.6 2.3 Switzerland 1.6 1.0 0.6 0.6 0.8 1.2 1.1 0.7 1.7 1.2 EMEA 10.0 9.8 9.4 7.0 6.7 6.2 5.8 7.9 7.3 5.9 Czech Republic 3.9 4.7 1.8 0.7 2.5 1.9 2.6 2.7 3.7 2.5 Hungary 9.8 9.2 5.3 4.7 6.8 3.6 3.9 7.9 5.3 3.0 Poland 10.1 5.5 2.0 0.8 3.5 2.1 1.0 2.7 3.5 2.1 Russia* 19.8 17.4 15.1 12.0 11.7 10.9 9.0 11.9 11.0 9.0 Turkey 56.4 54.4 45.0 25.3 8.6 8.2 9.6 8.8 8.0 5.7 Ukraine* 28.2 12.0 0.8 5.2 9.0 10.3 9.1 12.8 6.0 5.5 Egypt** 2.7 2.4 2.4 3.2 14.3 8.9 4.2 9.6 6.5 6.2 Israel* 0.0 1.4 6.5 -1.9 1.2 2.4 -0.1 3.1 2.9 2.4 Saudi Arabia -1.1 -1.1 0.2 0.6 0.3 0.4 2.3 3.9 5.4 4.5 UAE 1.3 2.7 2.9 3.1 7.0 9.0 10.5 9.5 9.0 8.7 South Africa 7.7 7.2 7.7 5.8 4.3 3.9 4.6 6.5 6.3 5.5 Asia/Pacific 0.3 0.9 0.3 1.0 1.8 1.4 2.0 2.2 2.6 2.4 Japan -0.7 -0.8 -0.9 -0.2 0.0 -0.3 0.2 0.0 0.4 0.4 Australia 4.5 4.4 3.0 2.8 2.3 2.7 3.5 2.3 3.2 2.7 New Zealand 2.6 2.6 2.7 1.8 2.3 3.0 3.4 2.6 2.5 2.5 Asia-ex-Japan 1.1 2.4 1.4 2.2 3.7 3.1 3.6 4.4 4.8 4.2 China 0.3 0.7 -0.8 1.2 3.9 1.8 1.5 4.7 4.1 3.0 Asia ex-Japan & China 1.8 3.9 3.2 3.0 3.6 4.2 5.2 4.2 5.3 5.2 Hong Kong -3.7 -1.6 -3.0 -2.6 -0.4 0.9 2.0 2.0 3.9 4.3 India 3.8 4.3 4.0 3.7 3.9 4.0 6.3 6.4 6.8 6.9 Indonesia 3.7 11.5 11.9 6.8 6.1 10.5 13.1 6.5 8.5 8.6 Malaysia -6.9 1.4 1.8 1.1 1.4 3.0 3.6 2.0 2.8 2.6 Philippines 9.3 6.8 2.9 3.5 6.0 7.7 6.3 2.7 4.1 4.6 Singapore 1.3 1.0 -0.4 0.5 1.7 0.5 1.0 2.0 3.9 1.6 South Korea 2.3 4.1 2.8 3.5 3.6 2.8 2.2 2.5 3.3 3.2 Taiwan 1.3 0.0 -0.2 -0.3 1.6 2.3 0.6 1.6 2.4 1.9 Thailand 1.6 1.5 0.6 1.7 2.9 4.3 4.7 2.3 3.1 2.5 Vietnam -1.6 -0.3 4.1 3.1 7.8 8.3 7.5 8.1 9.9 7.1 Note: * = end-year values. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC 26
    • Macro Global Economics Q1 2008 Quarterly % Year Q3 06 Q4 06 Q1 07 Q2 07 Q3 07f Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f North America US 3.3 1.9 2.4 2.7 2.4 3.8 3.4 2.3 2.3 1.9 Canada 1.7 1.4 1.8 2.2 2.1 2.5 2.0 1.0 1.4 1.9 Latin America Mexico 4.1 4.1 4.1 4.0 4.0 3.8 4.0 4.3 4.1 4.0 Brazil 3.7 3.1 3.0 3.7 4.1 4.4 4.5 4.8 5.3 5.0 Argentina 10.6 10.1 9.5 8.8 8.6 8.5 8.7 8.9 9.5 9.3 Chile 3.5 2.3 2.7 2.9 4.8 7.2 7.6 6.8 5.3 4.0 Western Europe Euro-13 2.2 1.8 1.9 1.9 1.9 2.9 3.2 2.7 2.6 1.9 Germany 1.7 1.3 1.9 2.0 2.2 3.1 3.2 2.5 2.0 1.4 France 1.9 1.5 1.3 1.3 1.4 2.5 2.7 2.3 2.2 1.7 Italy 2.3 2.0 2.0 1.9 1.7 2.5 3.0 2.7 3.0 2.3 Spain 3.6 2.7 2.5 2.4 2.4 3.9 4.4 3.9 3.7 2.7 Other Western Europe UK 2.4 2.7 2.9 2.6 1.8 2.1 2.0 1.6 1.8 1.7 Norway 2.2 2.5 1.0 0.3 0.2 1.5 2.5 3.0 3.5 3.0 Sweden 1.6 1.5 1.9 1.8 1.9 3.0 3.1 2.8 2.5 2.0 Switzerland 1.2 0.5 0.1 0.5 0.6 1.6 2.1 1.7 1.7 1.4 EMEA Czech Republic 2.9 1.5 1.6 2.5 2.5 4.0 4.2 3.7 3.5 3.6 Hungary 4.1 6.4 8.5 8.7 7.7 6.8 6.7 5.7 5.0 3.8 Poland 1.4 1.3 2.5 2.6 2.3 3.6 3.4 3.6 3.6 3.2 Russia 9.4 9.1 7.7 7.9 8.9 10.6 12.5 13.2 13.1 11.9 Turkey 10.5 9.7 10.9 8.6 7.1 8.5 8.4 8.5 8.3 6.1 Ukraine 8.0 11.4 10.2 11.4 14.1 15.3 17.3 18.4 16.2 14.5 Egypt 9.5 12.4 12.8 8.5 8.8 7.6 6.8 6.7 6.3 6.1 Israel 1.3 -0.1 -0.9 -0.7 1.6 3.1 3.3 3.3 2.7 2.9 South Africa 5.0 5.0 5.5 6.4 6.7 8.3 7.9 7.5 6.8 6.1 Asia/Pacific Japan 0.6 0.3 -0.1 -0.1 -0.1 0.3 0.5 0.4 0.2 0.3 Australia 3.9 3.3 2.4 2.1 1.9 2.8 3.5 3.1 3.1 3.0 New Zealand 3.5 2.6 2.5 2.0 1.8 2.4 2.6 2.4 2.4 2.4 China 1.3 2.0 2.7 3.6 6.1 6.5 5.0 4.1 3.8 3.5 Hong Kong 2.3 2.2 1.7 1.3 1.7 3.5 2.4 4.5 4.3 4.4 India 6.6 7.0 7.0 6.3 6.7 5.5 6.0 6.5 7.0 7.5 Indonesia 14.9 6.1 6.4 6.0 6.5 6.9 7.3 8.3 9.0 9.5 Malaysia 3.6 3.0 2.6 1.5 1.8 2.0 2.3 3.0 3.0 3.0 Philippines 6.1 4.8 2.9 2.4 2.5 3.1 3.8 4.3 4.5 4.5 Singapore 0.7 0.6 0.5 1.0 2.7 3.6 4.5 5.0 3.5 2.5 South Korea 2.5 2.1 2.0 2.4 2.3 3.3 3.3 3.2 3.3 3.4 Taiwan -0.3 -0.1 1.0 0.3 1.5 3.9 3.7 2.3 2.0 1.5 Thailand 4.3 3.1 2.8 2.0 2.0 2.6 3.1 3.1 3.1 2.9 Vietnam 7.3 6.8 6.7 7.3 8.3 10.0 11.2 10.7 9.5 8.3 Source: HSBC 27
    • Macro Global Economics Q1 2008 3 month money End period 2003 2004 2005 2006 2007 2008 Q4 Q4 Q4 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f North America US (USD) 1.1 2.6 4.5 5.3 5.3 5.3 5.2 4.9 4.6 4.4 3.9 3.3 Canada (CAD) 2.6 2.6 3.4 4.2 4.3 4.5 4.9 4.9 4.6 4.4 4.1 3.8 Latin America Mexico (MXN) 6.2 8.8 8.0 7.2 7.2 7.3 7.4 7.6 7.7 7.9 7.9 7.8 Brazil (BRL) 15.9 18.2 17.4 12.8 12.3 11.5 11.0 11.2 11.3 11.3 11.4 11.4 Argentina (ARS)* 4.1 3.1 4.8 7.1 7.3 7.0 8.6 10.1 10.3 10.5 10.7 10.9 Chile (CLP) 2.5 2.8 4.5 5.3 5.0 5.0 5.9 6.0 6.2 6.1 6.1 5.9 Western Europe Euro-13 2.1 2.2 2.5 3.7 3.9 4.2 4.8 4.8 4.6 4.4 4.3 4.1 Other Western Europe UK (GBP) 4.0 4.8 4.6 5.3 5.6 6.0 6.2 6.2 5.9 5.6 5.2 4.8 Sweden (SEK) 2.9 2.2 2.0 3.3 3.4 3.7 4.3 4.7 4.6 4.8 4.7 4.5 Switzerland (CHF) 0.2 0.7 1.0 2.1 2.3 2.7 2.7 2.8 2.8 2.8 2.8 2.8 Norway (NOK) 2.4 2.0 2.6 3.9 4.5 4.9 5.7 5.9 5.8 6.0 5.9 5.7 EMEA Hungary (HUF) 12.2 9.3 6.3 8.1 7.9 7.7 7.5 7.3 7.1 6.8 6.6 6.3 Poland (PLN) 5.5 6.5 4.6 4.2 4.2 4.7 5.1 5.1 5.2 5.2 5.4 5.6 Russia (RUB) 6.3 5.8 5.7 4.8 7.2 6.5 7.2 7.5 7.5 7.2 Turkey (TRY) 29.1 22.6 13.8 17.6 17.5 17.4 17.0 16.0 15.0 15.2 15.4 14.9 Ukraine (UAH) 12.5 6.6 7.6 5.2 4.3 4.2 7.0 9.0 10.0 10.0 10.0 South Africa (ZAR) 7.7 7.5 7.0 9.2 9.2 9.8 10.4 10.5 10.6 10.1 9.8 10.0 Asia/Pacific Japan (JPY) 0.0 0.0 0.1 0.6 0.6 0.7 1.0 1.0 1.0 1.0 1.3 1.3 Australia (AUD) 5.7 5.6 5.8 6.5 6.6 6.5 7.2 7.3 7.1 7.2 7.2 7.0 New Zealand (NZD) 5.4 6.8 7.7 7.7 7.9 8.3 8.6 8.9 8.8 8.7 8.6 8.4 Asia-ex-Japan China (CNY) 1.7 1.7 1.7 1.8 2.0 2.1 2.9 2.9 3.2 3.2 3.2 3.2 Asia ex-Japan & China Hong Kong (HKD) 0.2 0.3 4.2 3.9 4.2 4.5 5.2 3.8 3.3 3.4 3.5 3.6 India (INR) 4.5 5.3 6.9 9.6 11.7 9.3 8.5 8.0 7.9 7.8 7.8 7.8 Indonesia (IDR) 8.3 7.3 12.8 9.5 8.1 7.8 7.8 8.1 8.1 8.1 8.6 9.6 Malaysia (MYR) 3.1 2.8 3.2 3.7 3.6 3.6 3.6 3.6 3.6 3.6 3.8 4.0 Philippines (PHP) 6.5 7.8 5.2 4.8 3.0 3.0 3.8 4.1 4.1 4.2 4.4 4.6 Singapore (SGD) 0.8 1.5 3.3 3.4 2.9 2.5 2.6 2.6 2.6 2.9 3.0 3.0 South Korea (KRW) 4.3 3.4 4.0 4.8 4.9 5.0 5.3 5.2 5.2 5.5 5.5 5.5 Taiwan (TWD) 1.1 1.2 1.6 1.8 1.8 2.0 2.1 2.3 2.3 2.3 2.3 2.4 Thailand (THB) 1.4 2.4 4.5 5.3 4.5 3.8 3.6 3.7 3.7 3.7 3.9 3.9 Note: * = 1-month money Source: HSBC 28
    • Macro Global Economics Q1 2008 10-year bond yields End period Q4 04 Q4 05 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Americas US 4.2 4.4 4.6 4.7 4.7 5.0 4.6 4.0 3.9 3.7 3.9 4.2 Canada 4.3 4.0 4.0 4.1 4.1 4.6 4.3 4.0 3.8 3.6 3.6 3.6 Chile 5.1 5.3 6.5 5.4 5.6 6.4 6.3 6.3 6.4 6.4 6.4 6.2 Western Europe Euro-13 3.7 3.3 3.8 4.0 4.1 4.6 4.4 4.2 4.1 4.2 4.2 4.1 Germany 3.7 3.3 3.7 3.9 4.1 4.6 4.3 4.2 4.1 4.2 4.2 4.1 France 3.7 3.3 3.7 4.0 4.1 4.6 4.4 4.2 4.1 4.2 4.2 4.1 Italy 3.8 3.5 4.0 4.2 4.3 4.8 4.6 4.4 4.3 4.4 4.4 4.3 Spain 3.6 3.3 3.7 4.0 4.1 4.6 4.4 4.2 4.1 4.2 4.2 4.1 Other Western Europe UK 4.6 4.1 4.5 4.7 5.0 5.5 5.0 4.5 4.7 4.7 4.6 4.5 Sweden 3.9 3.3 3.6 3.8 3.9 4.5 4.3 4.3 4.4 4.5 4.5 4.5 Switzerland 2.3 1.9 2.4 2.5 2.6 3.2 3.0 3.0 2.9 2.6 2.7 2.9 Norway 4.0 3.6 4.1 4.3 4.6 5.1 5.0 4.7 5.3 5.3 5.3 5.3 EMEA Hungary 7.0 7.0 7.6 6.7 6.7 6.6 6.5 6.4 6.4 6.3 6.1 6.0 Poland 5.8 5.1 5.5 5.2 5.2 5.6 5.6 5.7 5.9 6.0 6.0 6.0 Russia 6.8 6.5 6.5 6.5 6.3 6.6 6.8 6.9 7.0 7.1 7.3 South Africa 8.1 7.5 8.6 7.7 7.7 7.9 8.1 8.3 8.6 8.4 8.3 8.1 Asia/Pacific Japan 1.4 1.5 1.7 1.7 1.6 1.9 1.7 1.4 1.5 1.7 1.7 1.7 Australia 5.3 5.2 5.5 5.9 5.9 6.2 6.2 6.3 6.2 6.2 6.1 6.1 New Zealand 6.0 5.7 5.8 5.8 5.9 6.7 6.5 6.4 6.4 6.4 6.3 6.3 Asia-ex-Japan Hong Kong 3.6 4.2 3.9 3.7 4.2 4.8 4.4 3.4 3.4 3.5 3.7 3.9 India 6.6 7.1 7.7 7.6 7.9 8.2 8.5 7.9 7.9 7.9 7.9 7.9 Indonesia* 10.1 13.3 10.8 9.4 9.4 8.7 8.8 8.9 9.5 10.5 11.5 11.3 Philippines 13.9 10.2 8.3 6.4 8.1 8.1 6.6 6.6 6.7 6.7 6.8 6.8 Singapore* 2.1 3.0 3.1 3.0 2.7 2.6 2.5 2.5 2.7 2.7 2.7 2.7 South Korea* 3.4 5.4 4.6 5.0 4.8 5.4 5.5 5.4 5.4 5.7 5.7 5.7 Vietnam* 8.5 8.8 8.4 8.3 6.8 7.4 8.2 8.8 8.4 8.0 7.5 7.5 Note: * = 5-year bond yield Source: HSBC 29
    • Macro Global Economics Q1 2008 Exchange rates vs USD End period 2004 2005 2006 2007 2008 Q4 Q4 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f Americas Canada (CAD) 1.20 1.17 1.12 1.16 1.15 1.06 0.99 1.00 1.00 1.00 1.05 1.05 Mexico (MXN) 11.15 10.63 10.99 10.80 11.04 10.81 10.93 10.85 10.80 11.15 11.15 11.20 Brazil (BRL) 2.65 2.34 2.17 2.14 2.05 1.93 1.84 1.75 1.80 1.85 1.90 1.95 Argentina (ARS) 2.97 3.03 3.10 3.06 3.10 3.09 3.15 3.14 3.18 3.21 3.26 3.27 Chile (CLP) 557 514 536 532 539 528 511 505 510 510 515 520 Western Europe Eurozone (EUR=) 1.36 1.18 1.27 1.32 1.33 1.35 1.42 1.45 1.45 1.40 1.35 1.35 Other Western Europe UK (GBP=) 1.92 1.72 1.87 1.96 1.96 2.01 2.04 2.04 1.99 1.92 1.83 1.83 Sweden (SEK) 6.65 7.96 7.33 6.84 7.02 6.86 6.47 6.14 6.07 6.21 6.22 6.22 Norway (NOK) 6.06 6.77 6.52 6.23 6.10 5.91 5.42 5.24 5.24 5.43 5.56 5.56 Switzerland (CHF) 1.14 1.32 1.25 1.22 1.22 1.23 1.17 1.15 1.16 1.17 1.19 1.19 EMEA Czech Republic (CZK) 22.3 24.6 22.3 20.9 21.1 21.3 19.3 18.8 18.6 19.3 19.6 19.3 Hungary (HUF) 180.7 214.0 215.4 190.6 185.8 181.9 176.7 172.4 169.0 171.4 174.1 170.4 Poland (PLN) 3.00 3.26 3.14 2.90 2.90 2.79 2.65 2.52 2.45 2.48 2.48 2.41 Russia (RUB) 27.7 28.8 26.7 26.4 26.0 25.8 25.0 24.6 24.6 25.1 25.6 25.6 Turkey (TRY)* 1.35 1.35 1.52 1.42 1.39 1.31 1.21 1.19 1.18 1.23 1.24 1.25 Ukraine (UAH) 5.31 5.05 5.05 5.05 5.05 5.05 5.05 5.05 5.05 5.05 5.05 5.20 Israel (ILS) 4.34 4.61 4.35 4.20 4.21 4.18 4.09 3.95 4.00 4.02 4.05 4.10 South Africa (ZAR) 5.63 6.34 7.77 7.05 7.25 7.05 6.90 6.75 6.50 6.90 7.00 6.80 Asia/Pacific Japan (JPY) 102 118 118 119 118 123 115 115 113 113 115 115 Australia (AUD=) 0.78 0.73 0.75 0.79 0.81 0.85 0.88 0.90 0.92 0.87 0.84 0.83 New Zealand (NZD=) 0.72 0.68 0.65 0.71 0.72 0.77 0.76 0.78 0.80 0.76 0.73 0.72 China (CNY) 8.28 8.07 7.91 7.81 7.73 7.61 7.51 7.40 7.30 7.20 7.10 7.00 Hong Kong (HKD) 7.78 7.75 7.79 7.77 7.81 7.82 7.76 7.80 7.80 7.80 7.80 7.80 India (INR) 43.4 45.0 45.8 44.2 43.2 40.5 39.7 39.0 38.5 38.5 38.0 37.5 Indonesia (IDR) 9272 9825 9203 8996 9125 9040 9145 8600 8600 8600 8600 8600 Malaysia (MYR) 3.80 3.78 3.69 3.53 3.46 3.45 3.41 3.38 3.34 3.30 3.26 3.22 Philippines (PHP) 56.3 53.0 50.1 49.1 48.2 46.3 45.3 43.0 43.0 42.0 42.0 41.0 Singapore (SGD) 1.63 1.66 1.59 1.53 1.52 1.53 1.49 1.50 1.46 1.45 1.44 1.43 South Korea (KRW) 1035 1008 946 930 941 923 915 895 895 890 885 880 Taiwan (TWD) 31.7 32.8 33.1 32.6 33.1 32.7 32.7 33.0 32.5 32.5 32.5 32.5 Thailand (THB) 38.9 41.0 37.6 35.5 32.3 31.8 31.8 33.0 33.0 32.5 32.0 31.5 Vietnam (VND) 15754 15896 16055 16050 16020 16130 16217 16217 16217 16217 16176 16135 Note: * = Turkish currency (until then coded TRL) shed 6 zeros of its exchange rate in January 2005 Source: HSBC 30
    • Macro Global Economics Q1 2008 Exchange rate vs EUR & GBP End period 2004 2005 2006 2007 2008 Q4 Q4 Q3 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f vs EUR Americas US (USD) 1.36 1.18 1.27 1.32 1.33 1.35 1.42 1.45 1.45 1.40 1.35 1.35 Canada (CAD) 1.63 1.38 1.41 1.53 1.54 1.44 1.41 1.45 1.45 1.40 1.42 1.42 Europe UK (GBP) 0.71 0.69 0.68 0.67 0.68 0.67 0.70 0.71 0.73 0.73 0.74 0.74 Sweden (SEK) 9.03 9.39 9.28 9.02 9.34 9.26 9.20 8.90 8.80 8.70 8.40 8.40 Switzerland (CHF) 1.55 1.55 1.59 1.61 1.63 1.66 1.66 1.67 1.68 1.64 1.60 1.60 Norway (NOK) 8.23 7.99 8.26 8.21 8.13 7.98 7.71 7.60 7.60 7.60 7.50 7.50 Czech Republic (CZK) 30.4 29.0 28.3 27.5 28.0 28.7 27.5 27.3 27.0 27.0 26.5 26.0 Hungary (HUF) 246 252 273 251 247 246 251 250 245 240 235 230 Poland (PLN) 4.07 3.84 3.97 3.83 3.86 3.76 3.77 3.65 3.55 3.47 3.35 3.25 Russia (RUB) 37.7 34.0 33.9 34.8 34.6 34.8 35.5 35.7 35.7 35.1 34.6 34.6 Asia/Pacific Japan (JPY) 139 139 150 157 157 167 164 167 164 158 155 155 Australia (AUD) 1.73 1.61 1.70 1.67 1.65 1.59 1.61 1.61 1.58 1.60 1.61 1.63 New Zealand (NZD) 1.88 1.73 1.94 1.87 1.86 1.75 1.88 1.86 1.81 1.84 1.85 1.88 Africa South Africa (ZAR) 7.66 7.48 9.84 9.30 9.65 9.52 9.81 9.79 9.43 9.66 9.45 9.18 vs GBP Americas US (USD) 1.92 1.72 1.87 1.96 1.96 2.01 2.04 2.04 1.99 1.92 1.83 1.83 Canada (CAD) 2.30 2.01 2.08 2.28 2.26 2.13 2.02 2.04 1.99 1.92 1.92 1.92 Europe Eurozone (EUR) 0.71 0.69 0.68 0.67 0.68 0.67 0.70 0.71 0.73 0.73 0.74 0.74 Sweden (SEK) 12.76 13.66 13.69 13.39 13.76 13.76 13.18 12.51 12.06 11.92 11.38 11.38 Norway (NOK) 11.63 11.62 12.18 12.19 11.97 11.85 11.05 10.69 10.41 10.41 10.16 10.16 Switzerland (CHF) 2.18 2.26 2.34 2.39 2.39 2.46 2.38 2.35 2.30 2.25 2.17 2.17 Asia/Pacific Japan (JPY) 197 203 221 233 232 248 234 234 225 217 210 210 Australia (AUD) 2.45 2.34 2.50 2.48 2.43 2.36 2.30 2.27 2.16 2.19 2.19 2.21 New Zealand (NZD) 2.66 2.52 2.86 2.78 2.74 2.60 2.70 2.61 2.48 2.52 2.51 2.55 Africa South Africa (ZAR) 10.82 10.89 14.51 13.80 14.23 14.15 14.05 13.76 12.91 13.24 12.80 12.44 Source: HSBC 31
    • Macro Global Economics Q1 2008 Consumer spending % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World 4.0 2.4 2.3 2.4 3.3 3.1 3.3 3.2 2.6 2.8 Developed 3.6 2.3 2.0 2.0 2.8 2.4 2.6 2.4 1.6 1.9 Emerging 5.8 3.2 3.9 4.1 5.9 6.6 6.4 6.6 6.5 6.3 North America 4.6 2.5 2.8 2.8 3.6 3.2 3.1 2.9 1.7 2.2 US 4.7 2.5 2.7 2.8 3.6 3.2 3.1 2.9 1.6 2.2 Canada 4.0 2.3 3.6 3.0 3.4 3.8 4.2 4.1 2.7 2.5 Latin America 5.5 1.0 0.0 1.8 4.6 5.4 5.3 5.2 4.9 4.7 Mexico 8.2 2.5 1.6 2.3 4.1 5.1 5.0 3.8 3.4 4.4 Brazil 4.0 0.7 1.9 -0.8 3.8 4.5 4.6 6.1 6.0 3.9 Argentina -0.7 -5.7 -14.4 8.2 9.5 8.9 7.7 8.0 7.0 7.0 Chile 3.7 2.9 1.9 4.0 6.1 7.6 7.7 7.7 7.2 7.0 Western Europe 3.5 2.1 1.4 1.6 1.9 1.7 2.0 1.9 1.5 1.6 Euro-13 3.2 2.0 0.9 1.2 1.5 1.6 1.9 1.5 1.6 1.7 Germany 2.5 1.9 -0.8 0.2 -0.2 0.1 1.1 -0.2 1.4 1.5 France 3.7 2.5 2.3 2.0 2.4 2.2 2.2 1.9 2.1 2.0 Italy 2.4 0.7 0.2 1.0 0.7 0.6 1.5 1.9 1.2 1.3 Spain 5.0 3.4 2.8 2.9 4.2 4.2 3.8 3.1 2.1 2.3 Other Western Europe 4.1 2.4 2.8 2.5 3.3 2.0 2.3 3.2 1.3 1.4 UK 4.6 3.0 3.5 2.9 3.4 1.5 2.1 3.1 0.8 1.1 Norway 3.8 1.8 2.8 2.6 5.2 4.1 4.2 6.8 3.1 2.0 Sweden 5.1 0.4 2.6 2.0 2.6 2.7 2.5 3.2 3.0 2.4 Switzerland 2.4 2.3 0.1 0.9 1.5 1.8 1.6 2.1 1.8 1.6 EMEA 5.3 1.9 5.1 5.2 8.3 8.1 7.5 7.4 7.8 7.0 Czech Republic 1.3 2.3 2.2 6.0 2.9 2.4 4.4 6.0 4.0 3.8 Hungary 5.0 5.7 9.9 7.8 3.2 3.8 1.2 -2.0 1.9 3.5 Poland 2.8 0.5 4.6 1.5 3.8 1.9 5.7 5.5 5.0 4.5 Russia 7.3 9.5 8.9 7.5 12.1 12.8 11.2 12.1 11.0 9.0 Turkey 6.2 -9.2 2.1 6.6 10.1 8.8 5.2 3.0 7.1 5.0 Ukraine 2.5 9.6 9.5 12.6 12.2 16.6 14.4 9.0 7.0 7.0 Egypt* 6.2 4.0 2.7 2.3 2.1 4.7 6.4 6.9 7.5 8.4 Israel 7.7 2.7 1.1 1.3 5.0 3.4 4.8 6.0 4.8 4.4 Saudi Arabia** 2.3 0.6 0.3 3.7 5.8 9.5 6.5 6.8 7.2 7.5 UAE** 12.3 5.3 21.6 10.5 29.1 16.4 12.2 18.0 17.0 15.0 South Africa 4.1 3.5 3.2 3.5 6.7 6.6 7.3 5.6 5.0 4.8 Asia/Pacific 2.9 3.0 2.8 2.3 3.4 3.5 3.8 4.0 3.8 4.0 Japan 0.7 1.7 1.1 0.4 1.6 1.3 2.0 1.7 1.3 1.6 Australia 3.9 2.9 3.9 3.5 5.9 3.1 2.8 4.0 4.2 3.6 New Zealand 1.8 2.0 4.6 5.9 6.0 4.7 2.4 2.4 2.5 2.5 Asia-ex-Japan 6.3 5.1 5.1 4.6 5.3 6.2 6.3 6.7 6.5 6.7 China 8.5 6.2 6.2 6.5 7.2 8.5 8.7 9.0 8.9 9.1 Asia ex-Japan & China 5.2 4.6 4.5 3.6 4.2 5.0 4.9 5.3 5.1 5.2 Hong Kong 5.1 1.9 -0.9 -1.3 7.0 3.0 5.9 6.6 5.3 3.6 India 2.5 6.1 2.9 8.1 5.4 6.7 6.2 5.8 5.0 5.5 Indonesia 1.6 3.5 3.8 3.9 5.0 4.0 3.2 5.0 5.3 4.0 Malaysia 13.0 2.4 4.4 6.6 10.5 8.7 7.1 11.1 7.2 6.2 Philippines 3.5 3.6 4.1 5.3 5.9 4.8 5.5 5.6 4.9 4.7 Singapore 14.9 4.7 4.9 0.9 5.9 2.7 2.5 5.0 7.1 6.1 South Korea 8.4 4.9 7.9 -1.2 -0.3 3.6 4.2 4.3 4.2 4.5 Taiwan 4.6 0.7 2.3 0.9 3.9 4.3 1.8 2.8 3.0 3.6 Thailand 5.2 4.1 5.4 6.4 6.1 4.8 3.2 1.7 3.7 4.3 Vietnam 3.1 4.5 7.6 8.0 7.1 7.3 7.5 7.5 7.6 7.0 Note: * = based upon Egyptian financial year (July-June). ** = Nominal growth. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC 32
    • Macro Global Economics Q1 2008 Investment spending % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World 5.7 -0.4 -1.1 4.3 7.2 7.8 7.2 6.0 6.1 7.4 Developed 4.7 -1.1 -2.8 2.0 4.5 4.9 3.7 1.2 1.3 3.4 Emerging 9.9 2.1 5.4 12.3 16.0 16.1 16.2 17.0 15.8 14.3 North America 6.4 -2.5 -4.7 3.6 7.3 7.0 2.7 -2.3 -0.3 4.0 US 6.5 -3.0 -5.2 3.4 7.3 6.9 2.4 -2.8 -0.7 4.1 Canada 4.8 3.0 1.3 6.3 8.1 8.1 7.1 3.7 3.2 2.4 Latin America 6.8 -3.9 -5.4 1.0 10.5 8.7 10.2 9.6 8.5 7.2 Mexico 11.4 -5.6 -0.7 0.4 7.5 7.6 10.0 7.8 7.5 8.3 Brazil 5.0 0.4 -5.2 -4.6 9.1 3.6 8.7 11.0 10.0 6.5 Argentina -6.8 -15.7 -36.4 38.2 34.4 22.7 18.7 12.9 8.0 6.0 Chile 8.9 4.3 1.5 5.7 11.7 24.7 5.5 9.0 8.0 5.0 Western Europe 5.0 0.6 -0.8 1.1 2.8 3.1 5.7 5.2 2.5 2.5 Euro-13 5.3 0.6 -1.5 1.2 1.9 2.8 5.2 4.7 2.3 2.6 Germany 3.8 -3.5 -6.3 -0.2 -1.1 1.3 7.0 5.3 2.5 1.9 France 7.5 2.3 -1.6 2.2 3.3 4.1 4.1 3.7 2.5 3.1 Italy 6.7 2.3 4.0 -1.5 1.3 -0.2 2.4 2.9 1.8 1.7 Spain 6.1 4.4 3.4 5.2 5.2 6.5 7.0 5.7 2.3 2.8 Other Western Europe 3.1 0.7 1.8 0.6 6.0 4.2 7.1 6.5 3.0 2.3 UK 2.7 2.6 3.6 1.1 5.9 1.5 6.9 6.9 3.0 2.4 Norway -3.5 -1.1 -1.2 0.1 10.0 13.2 6.5 6.6 5.4 2.9 Sweden 6.3 -0.5 -1.8 1.4 5.7 8.9 7.7 8.5 4.4 2.6 Switzerland 4.3 -3.5 -0.5 -1.2 4.5 3.7 4.2 2.8 0.5 1.1 EMEA 7.7 -4.6 0.1 8.2 11.7 10.2 12.6 13.9 12.7 11.4 Czech Republic 5.1 6.6 5.1 0.4 3.9 2.3 5.5 4.9 6.3 6.9 Hungary 7.7 5.1 10.1 2.1 7.7 5.6 -1.8 1.7 1.5 2.8 Poland -0.1 -17.0 -8.8 4.1 13.4 -5.8 12.6 16.5 12.2 8.8 Russia 18.1 10.3 2.8 12.8 12.6 8.3 13.9 19.5 15.0 11.0 Turkey 16.9 -31.5 -1.1 10.0 32.4 24.0 14.0 6.6 8.9 8.1 Ukraine 12.4 6.2 3.4 12.2 -2.2 -0.3 18.7 12.0 10.0 9.0 Egypt* -3.6 -2.2 5.5 -8.7 6.2 14.2 13.3 23.8 20.5 19.5 Israel 0.9 -5.1 -13.7 -10.7 4.0 2.9 6.4 10.3 6.3 5.5 Saudi Arabia** 4.3 2.3 1.6 24.5 6.8 24.1 10.9 14.0 16.0 16.0 UAE** 6.5 4.8 3.7 17.1 11.1 15.5 29.0 22.0 20.0 20.0 South Africa 4.3 3.5 3.7 9.1 9.6 9.6 12.8 12.0 11.3 11.2 Asia/Pacific 5.2 1.9 2.7 7.8 10.3 12.0 11.1 11.7 12.1 12.0 Japan 1.1 -0.9 -4.9 -0.5 1.5 3.4 1.5 -0.4 1.3 3.7 Australia 1.5 -4.9 17.0 8.9 8.0 7.9 5.0 8.8 8.5 6.5 New Zealand 8.3 -1.2 10.9 10.3 11.6 3.6 -2.5 3.7 1.7 3.9 Asia-ex-Japan 11.8 6.5 10.4 16.5 18.4 19.2 18.2 19.1 17.7 16.0 China 13.8 13.0 16.9 27.7 27.6 27.2 24.5 24.0 22.0 19.0 Asia ex-Japan & China 10.2 1.3 4.6 5.3 7.3 7.7 7.7 9.4 8.1 8.4 Hong Kong 7.9 2.9 -4.6 1.0 2.7 4.1 6.3 5.6 7.6 8.9 India 4.1 4.3 7.7 9.7 11.8 15.3 14.6 15.0 11.0 13.0 Indonesia 16.7 6.5 4.7 0.6 14.7 10.8 2.9 7.9 10.1 6.5 Malaysia 25.7 -2.8 0.3 2.7 3.1 5.0 7.9 9.6 7.9 6.5 Philippines 19.9 -13.0 2.3 3.6 1.3 -6.6 1.4 8.5 4.6 4.1 Singapore 9.8 -3.9 -11.4 -3.2 10.2 0.2 11.5 16.9 9.4 6.8 South Korea 12.2 -0.2 6.6 4.0 2.1 2.4 3.2 5.1 4.6 5.0 Taiwan 9.0 -19.9 -0.6 -0.9 17.5 7.4 0.6 4.2 4.4 4.5 Thailand 5.5 1.1 6.5 12.1 13.2 10.6 3.8 1.0 8.8 4.8 Vietnam 10.2 10.7 12.9 11.9 10.4 9.7 8.6 10.4 11.0 11.5 Note: * = based upon Egyptian financial year (July-June). ** = Nominal growth. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC 33
    • Macro Global Economics Q1 2008 Export volume growth (GDP basis) % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World 13.2 0.4 3.0 5.2 10.6 8.1 9.8 8.0 7.2 7.7 Developed 11.9 0.5 1.2 1.6 7.4 5.5 7.9 5.7 5.4 5.5 Emerging 16.8 0.3 7.7 14.1 17.6 13.6 13.5 12.2 10.3 11.1 North America 8.8 -4.8 -1.4 0.4 8.5 5.8 6.6 6.7 7.1 6.2 US 8.7 -5.4 -2.3 1.3 9.7 6.9 8.4 8.1 8.3 7.0 Canada 8.9 -3.0 1.2 -2.3 4.8 2.2 0.7 1.9 2.7 2.8 Latin America 13.1 1.1 2.7 5.1 11.6 8.6 8.3 7.9 6.3 6.6 Mexico 16.3 -3.5 1.4 2.7 11.7 7.0 11.2 8.8 6.7 7.5 Brazil 12.9 10.0 7.4 10.4 15.3 9.3 4.7 5.5 5.0 4.5 Argentina 2.7 4.3 0.7 4.4 2.0 20.0 6.0 9.0 8.0 8.0 Chile 5.1 7.2 1.6 6.0 11.7 3.5 4.2 7.8 6.0 4.5 Western Europe 13.2 3.5 1.5 1.2 6.3 5.3 8.2 5.0 4.5 5.0 Euro-13 12.6 3.7 1.6 1.1 6.5 4.7 7.9 6.3 4.5 4.7 Germany 14.1 6.8 4.3 2.4 9.2 7.4 12.9 8.4 7.4 7.4 France 13.1 2.6 1.3 -1.2 3.3 3.2 6.3 3.5 2.9 2.5 Italy 9.6 0.3 -4.0 -2.2 2.7 0.0 5.5 2.4 1.5 3.2 Spain 10.2 4.2 2.0 3.7 4.2 2.6 5.1 5.7 4.6 4.4 Other Western Europe 9.7 2.4 0.9 1.2 5.5 7.0 9.1 1.0 4.4 5.7 UK 9.1 2.9 1.0 1.7 4.9 8.2 10.3 -4.4 5.4 7.6 Norway 3.4 4.2 -1.0 -0.7 0.5 0.1 0.5 3.1 3.2 2.5 Sweden 11.4 1.0 1.1 3.8 10.8 7.0 8.6 4.7 2.9 3.2 Switzerland 12.4 0.6 -0.3 -0.2 7.8 7.1 10.0 9.1 3.1 4.5 EMEA 12.1 1.7 3.3 11.3 12.2 6.5 8.4 7.7 7.9 7.9 Czech Republic 16.5 11.2 2.1 7.2 21.1 10.4 14.6 13.5 15.0 14.0 Hungary 22.0 8.1 3.9 6.2 15.7 11.6 17.1 15.5 10.8 10.0 Poland 13.9 -1.0 7.6 20.4 19.2 3.0 16.0 8.5 10.2 10.5 Russia 9.5 3.6 9.6 12.5 11.8 6.4 7.2 5.0 4.2 3.0 Turkey 19.2 7.4 11.1 16.0 12.5 8.5 8.5 10.3 7.7 8.6 Ukraine 21.5 2.9 9.1 10.3 13.8 -11.2 -4.9 5.0 7.0 7.0 Egypt* 3.8 3.3 -7.8 11.8 27.6 20.2 21.3 23.3 14.5 13.6 Israel 22.7 -11.2 -2.3 8.2 18.2 5.1 4.9 8.0 4.4 4.0 Saudi Arabia 6.1 -3.5 -4.4 13.7 3.1 4.7 -2.6 -5.0 3.7 5.0 UAE** 5.4 0.6 -1.3 10.7 5.5 6.9 8.4 4.8 6.4 8.0 South Africa 8.3 2.4 1.0 0.1 2.9 8.0 5.6 9.5 8.5 8.0 Asia/Pacific 17.4 -2.0 9.5 14.3 18.6 14.3 14.3 12.7 10.5 11.6 Japan 12.8 -6.8 7.4 9.2 14.0 6.9 9.6 7.9 6.4 7.3 Australia 10.2 2.2 0.0 -1.2 4.3 2.3 3.3 4.0 8.0 8.0 New Zealand 7.0 3.4 6.4 2.1 5.7 -0.5 1.9 3.1 3.4 4.5 Asia-ex-Japan 20.2 -0.6 11.1 17.4 21.1 17.3 16.3 14.4 11.7 12.8 China 28.5 7.5 18.0 32.0 32.0 29.0 25.0 23.5 18.0 17.0 Asia ex-Japan & China 17.8 -3.0 8.7 12.1 16.4 11.6 11.4 8.7 7.2 9.5 Hong Kong 16.3 -1.7 9.0 12.8 15.4 10.6 9.2 8.2 6.4 6.9 India 21.1 -1.6 14.4 19.0 28.0 31.1 21.0 15.6 13.8 20.0 Indonesia 26.5 0.6 -1.2 5.9 13.5 16.4 9.2 8.6 7.8 9.8 Malaysia 16.1 -7.5 4.5 5.7 2.3 7.9 7.4 2.8 4.8 7.9 Philippines 17.0 -3.4 4.1 4.8 15.0 4.8 11.2 2.8 4.4 5.4 Singapore 15.2 -4.0 7.2 13.7 20.6 11.5 10.4 7.2 7.5 9.3 South Korea 19.1 -2.7 13.3 15.6 19.6 8.5 12.4 9.7 7.3 9.0 Taiwan 18.1 -8.1 10.5 10.9 14.8 10.0 10.4 6.7 4.4 5.4 Thailand 17.5 -4.2 12.0 7.0 9.6 3.9 8.5 5.9 4.2 6.0 Vietnam 25.2 4.0 11.2 20.6 31.4 22.5 22.1 21.2 17.7 18.6 Note: * = based upon Egyptian financial year (July-June). ** = Nominal growth. We now calculate the weighting system using chain nominal GDP (USD) weights Source: HSBC 34
    • Macro Global Economics Q1 2008 Industrial production % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World 6.2 0.1 2.7 4.6 6.3 5.2 6.3 6.0 5.3 5.7 Developed 5.0 -2.4 -0.3 0.9 2.6 1.8 3.6 2.4 1.8 2.7 Emerging 8.1 3.8 6.8 9.2 10.8 9.1 9.5 10.3 9.4 9.1 North America 4.8 -3.5 0.2 1.0 2.4 3.1 3.7 1.9 1.7 2.9 US 4.5 -3.5 0.0 1.1 2.5 3.2 4.0 2.1 1.8 3.0 Canada 7.5 -3.5 2.1 0.2 1.9 1.6 -0.2 0.3 0.7 1.8 Latin America 2.6 1.5 0.8 2.0 7.4 3.5 4.3 4.5 4.6 4.5 Mexico -0.2 4.2 -0.1 -0.2 4.2 1.7 5.0 1.3 2.6 4.3 Brazil 6.6 1.6 2.7 0.1 8.3 3.1 2.8 6.2 5.6 4.5 Argentina -0.7 -4.3 -7.2 12.5 10.7 7.5 7.4 6.6 5.6 5.0 Chile -3.2 0.6 10.9 2.9 10.2 6.0 3.3 4.1 4.5 4.6 Western Europe 4.9 0.0 -0.7 0.2 2.0 0.7 3.3 2.9 2.1 2.4 Euro-13 5.5 0.4 -0.4 0.3 2.2 1.3 4.0 3.2 2.1 2.2 Germany 4.9 -0.4 -1.3 0.1 2.5 2.8 6.0 5.8 3.8 3.4 France 4.5 1.2 -1.2 -0.3 1.9 0.2 0.9 1.7 1.9 2.3 Italy 4.3 -1.0 -1.4 -0.6 -0.3 -0.9 2.7 0.3 0.6 1.4 Spain 4.4 -1.4 0.1 1.4 1.5 0.8 3.9 2.4 1.6 1.8 Other Western Europe 3.0 -1.3 -1.8 -0.3 1.6 -1.0 1.1 1.9 1.9 2.8 UK 1.9 -1.4 -2.0 -0.3 0.8 -2.0 0.1 0.8 1.4 2.8 Norway 3.2 -1.6 0.9 -4.0 2.3 -0.8 -2.4 -0.2 2.3 0.6 Sweden 5.9 -0.6 0.2 1.5 3.9 2.0 3.9 4.4 2.9 2.9 Switzerland 8.4 -0.7 -5.1 0.1 4.4 2.7 7.8 8.6 4.3 4.5 EMEA 8.3 2.4 3.7 7.0 7.9 4.6 6.1 6.3 6.1 5.9 Czech Republic 5.7 5.0 5.0 5.9 9.8 6.7 11.2 8.8 7.0 9.0 Hungary 18.7 5.0 2.6 6.4 8.3 7.0 10.6 8.5 11.1 10.5 Poland 6.7 0.6 0.8 8.7 12.7 4.0 12.0 10.6 11.0 9.6 Russia 12.0 4.9 3.7 7.0 6.6 3.9 3.8 5.9 5.0 4.6 Turkey 6.0 -8.7 9.5 8.8 9.7 5.4 5.8 4.3 5.2 4.7 Ukraine 13.2 14.2 7.0 15.8 12.5 3.1 6.2 10.0 7.6 7.0 Egypt* 6.8 7.1 2.7 6.5 5.8 5.3 6.1 5.7 5.1 Israel 10.0 -5.0 -1.8 -0.3 6.9 3.6 8.5 4.5 4.3 4.2 Saudi Arabia 6.4 -1.3 -3.9 13.4 6.6 6.1 2.8 2.7 4.5 5.7 UAE 15.4 3.0 -1.4 12.7 6.7 5.6 10.3 4.4 6.3 6.0 South Africa 2.5 2.9 4.6 -1.9 3.3 4.2 4.9 5.5 4.4 5.0 Asia/Pacific 8.4 2.0 6.7 9.4 10.7 9.2 9.9 10.4 9.1 9.2 Japan 5.7 -6.8 -1.3 3.3 5.5 1.1 4.8 2.8 1.0 3.3 Australia 5.4 0.2 3.1 0.1 0.3 1.1 -0.5 2.5 1.9 2.0 New Zealand 3.8 -0.2 5.5 2.8 4.5 -2.6 -1.6 -1.0 1.0 1.0 Asia-ex-Japan 9.3 4.7 9.0 11.4 12.4 11.5 11.5 12.5 11.3 10.9 China 11.5 9.7 12.7 16.7 16.3 15.9 16.2 18.0 16.5 15.0 Asia ex-Japan & China 9.2 -1.4 5.4 6.0 8.6 6.0 5.6 4.7 5.6 6.1 Hong Kong -0.5 -4.4 -9.7 -9.2 2.9 2.5 2.2 0.6 2.4 1.9 India 5.0 2.7 5.8 7.0 8.4 8.2 8.2 9.7 6.4 7.6 Indonesia 6.0 3.3 5.3 5.3 6.4 4.6 4.6 4.2 5.5 5.1 Malaysia 18.3 -5.9 4.3 8.4 11.3 5.3 7.1 2.5 4.4 7.9 Philippines 2.4 -5.7 -6.1 0.0 1.0 2.2 -9.9 -2.8 2.8 3.0 Singapore 15.3 -11.6 8.4 3.0 13.8 9.4 12.0 6.1 7.8 8.0 South Korea 16.8 0.7 8.0 5.3 10.2 6.2 10.1 6.2 6.5 7.5 Taiwan 6.9 -7.8 7.9 7.1 9.8 4.6 5.0 5.4 3.4 4.1 Thailand 6.1 1.4 6.9 10.4 8.3 5.2 5.9 5.0 6.3 8.0 Vietnam 13.1 16.2 14.2 19.8 17.6 25.5 16.0 14.6 17.3 13.5 Note: * = based upon Egyptian financial year (July-June). Source: HSBC 35
    • Macro Global Economics Q1 2008 Wage growth % Year 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f World 7.3 6.0 5.8 5.7 5.3 5.8 6.1 6.3 6.0 5.6 North America 4.1 4.0 3.6 3.5 3.7 3.2 3.0 3.4 3.3 3.1 US 4.3 4.2 3.7 3.7 3.8 3.2 3.0 3.4 3.4 3.2 Canada 2.4 1.4 2.1 1.3 2.1 3.2 3.0 3.0 2.1 2.1 Latin America 8.1 5.1 6.3 6.3 5.9 7.4 6.3 6.0 5.5 5.3 Mexico 12.5 9.3 6.1 4.9 4.4 4.5 4.3 4.4 4.2 4.0 Argentina 0.0 -4.0 7.6 10.2 10.2 14.0 10.5 9.0 8.0 8.0 Chile 5.3 5.3 4.6 3.8 2.9 5.0 5.4 6.6 6.2 5.4 Western Europe 3.8 4.2 3.7 3.4 2.7 3.0 3.1 3.0 3.2 3.2 Euro-13 3.4 3.9 3.3 2.9 2.3 2.7 2.6 2.5 2.8 2.7 Germany 1.9 1.9 2.6 2.1 1.3 1.1 1.3 1.8 2.4 2.5 France 1.8 2.5 2.5 2.4 2.5 2.8 2.9 2.6 2.9 2.8 Italy 1.9 2.6 2.1 2.2 2.8 3.1 2.9 2.4 2.5 2.5 Spain 2.3 3.5 3.8 3.9 2.8 2.6 3.4 3.7 3.0 2.4 Other Western Europe 4.3 4.4 3.7 3.5 4.1 3.8 4.0 4.1 3.9 3.2 UK 4.5 4.5 3.5 3.4 4.4 4.0 4.1 4.1 3.9 3.2 Norway 4.1 4.5 5.2 4.7 4.2 3.5 4.1 5.5 4.2 3.4 Sweden 3.0 3.7 3.5 2.9 2.5 2.9 3.0 3.2 3.6 3.0 EMEA 30.6 19.4 16.5 11.8 11.3 12.0 12.8 13.7 11.9 9.9 Czech Republic -0.5 0.3 -0.3 -0.5 1.3 -2.4 1.5 3.0 4.2 3.7 Hungary 13.6 18.2 18.2 12.1 6.2 8.7 8.2 8.8 6.7 5.2 Poland 7.5 5.3 3.7 2.6 4.3 3.2 5.0 8.8 7.5 6.2 Russia 43.1 21.0 16.6 10.4 10.6 12.6 13.5 15.3 12.0 9.0 Turkey 55.8 31.8 37.2 23.0 13.4 12.2 11.5 9.2 8.7 8.0 Ukraine 30.2 34.9 20.7 23.0 27.6 36.5 29.4 25.0 25.0 20.0 Israel 5.1 7.1 -4.2 -3.0 2.5 1.0 1.6 2.9 3.0 3.2 South Africa 9.2 8.8 9.5 8.1 7.5 6.5 9.0 9.5 8.6 8.2 Asia/Pacific 7.8 6.8 7.5 8.5 7.8 8.6 12.7 12.8 12.3 11.6 Japan 0.1 -1.6 -2.9 -0.8 -0.7 0.6 0.2 -0.7 0.1 0.4 Australia 3.0 3.6 3.3 3.6 3.5 4.1 4.0 4.2 4.2 4.2 New Zealand 1.6 1.9 2.2 2.3 2.4 2.9 3.0 3.2 3.2 3.3 Asia-ex-Japan 10.5 9.4 10.5 11.1 10.0 10.6 12.2 12.5 11.8 11.0 China 12.3 11.7 12.6 13.6 12.3 12.3 14.5 15.0 14.0 13.0 Asia ex-Japan & China 5.0 3.3 4.4 3.8 3.2 4.6 4.5 4.4 4.4 4.4 Hong Kong -0.2 -0.7 -2.9 -1.2 -3.3 -0.6 4.2 6.0 8.5 7.3 Philippines 11.5 10.8 10.4 0.4 3.6 8.5 7.9 7.1 7.0 7.0 Singapore 8.3 2.7 1.2 3.6 2.6 4.3 3.5 6.5 5.0 3.5 South Korea 8.0 5.7 11.5 9.4 6.5 6.4 5.6 6.1 5.0 5.0 Taiwan 2.5 0.0 -0.7 1.5 1.8 1.3 1.1 2.0 2.2 2.4 Thailand 0.2 1.0 -0.8 2.2 2.3 6.9 6.2 2.7 3.8 4.0 Note: Global and regional aggregates are calculated using the World Bank’s 2004 PPP weights Source: HSBC 36
    • Macro Global Economics Q1 2008 Budget balance % GDP 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f North America 2.4 0.6 -2.4 -3.2 -2.9 -2.2 -1.3 -1.5 -2.1 -2.2 US 2.4 0.5 -2.7 -3.6 -3.2 -2.4 -1.5 -1.7 -2.4 -2.5 Canada 1.9 1.3 0.8 0.7 0.7 0.8 0.9 0.7 0.7 0.7 Latin America -2.3 -2.3 -2.6 -2.3 -0.7 -0.9 -0.6 -0.3 -0.4 -0.6 Mexico -1.1 -0.7 -1.2 -0.6 -0.2 -0.1 0.1 0.0 -0.1 0.0 Brazil -3.4 -3.3 -4.2 -4.7 -2.4 -3.0 -3.0 -1.8 -2.0 -2.2 Argentina -2.4 -3.2 -1.5 0.5 2.6 1.8 1.8 0.4 1.5 1.2 Chile -0.6 -0.4 -1.0 -0.4 2.2 4.8 7.8 8.7 5.8 4.7 Western Europe 0.7 -0.9 -2.1 -2.8 -2.5 -2.2 -1.2 -0.8 -1.0 -1.0 Euro-13 0.0 -1.8 -2.5 -3.1 -2.9 -2.5 -1.6 -0.9 -1.0 -1.1 Germany 1.3 -2.8 -3.6 -4.0 -3.8 -3.2 -1.7 -0.2 -0.1 0.0 France -1.5 -1.6 -3.2 -4.1 -3.6 -3.0 -2.6 -2.7 -2.9 -2.8 Italy -0.9 -3.1 -3.0 -3.5 -3.5 -4.2 -4.4 -2.4 -2.6 -2.7 Spain -0.9 -0.5 -0.3 0.0 -0.2 1.1 1.8 1.8 1.0 0.4 Other Western Europe 3.0 2.0 -0.9 -2.0 -1.6 -1.2 -0.2 -0.6 -0.8 -0.5 UK 1.7 1.0 -1.8 -3.0 -3.1 -3.3 -2.3 -2.7 -2.9 -2.4 Norway 15.4 13.3 9.2 7.3 11.1 15.2 18.0 16.7 16.0 15.0 Sweden 3.8 1.7 -1.5 -1.1 0.6 2.1 2.3 2.5 2.5 2.3 EMEA -1.0 -2.7 -3.2 -2.1 -0.3 2.6 3.1 1.7 0.9 0.1 Hungary -2.7 -2.7 -8.6 -3.8 -4.3 -2.4 -8.2 -5.6 -3.9 -3.3 Poland -2.1 -4.2 -4.9 -4.4 -4.5 -2.5 -2.4 -1.5 -1.8 -1.5 Russia 2.4 3.0 1.4 1.7 4.4 7.5 7.5 5.3 2.3 1.3 Turkey -10.6 -16.3 -14.4 -11.2 -7.0 -2.0 -0.7 -2.5 -2.3 -2.4 Ukraine 0.4 -0.3 0.5 -0.1 -3.7 -1.5 -0.7 -1.7 -2.1 -2.3 Egypt* -5.6 -5.9 -6.1 -6.1 -7.0 -7.7 -6.2 -5.9 -5.2 Israel -0.7 -4.5 -3.8 -5.5 -3.9 -1.9 -0.9 0.0 -1.5 -2.0 Saudi Arabia 3.2 -3.9 -2.9 4.4 11.2 18.2 22.2 13.0 14.5 9.3 UAE -3.8 -10.5 -10.7 -4.4 -0.4 8.0 12.1 8.5 8.3 4.1 South Africa -1.9 -0.7 -0.7 -2.5 -2.0 -0.5 0.2 0.5 0.6 0.2 Asia/Pacific -4.0 -4.1 -4.1 -3.4 -2.5 -2.4 -2.0 -1.6 -1.7 -1.7 Japan -7.4 -6.8 -8.3 -7.7 -5.5 -5.8 -5.0 -3.0 -2.5 -2.0 Australia 1.1 -0.6 0.8 1.3 1.0 1.4 1.5 1.5 1.5 1.5 New Zealand 1.6 2.2 3.1 3.9 3.7 4.4 3.9 3.0 3.0 3.0 Asia-ex-Japan -3.2 -3.5 -3.2 -2.6 -2.0 -1.8 -1.5 -1.5 -1.7 -1.7 China -2.5 -2.3 -2.6 -2.2 -1.3 -1.2 -1.0 -0.9 -1.1 -1.0 Asia ex-Japan & China -3.7 -4.5 -3.7 -3.0 -2.7 -2.4 -2.0 -2.0 -2.3 -2.5 Hong Kong -0.6 -4.9 -4.8 -3.3 1.7 1.0 4.0 5.3 2.9 2.5 India -6.2 -6.7 -6.4 -4.8 -4.4 -4.5 -3.8 -3.4 -3.7 -4.0 Indonesia -1.2 -2.5 -1.3 -1.7 -1.0 -0.5 -0.9 -1.8 -2.3 -2.5 Malaysia -5.7 -5.5 -5.6 -4.4 -4.1 -3.6 -3.3 -4.2 -3.8 -3.5 Philippines -4.1 -4.0 -5.3 -4.7 -3.8 -2.7 -1.1 -0.9 -0.5 -0.8 Singapore 3.5 2.2 0.8 -1.1 -1.9 -0.8 -0.2 0.6 2.1 2.1 South Korea 1.1 1.2 3.3 1.1 0.7 0.4 0.4 0.2 -0.2 -0.5 Taiwan -4.5 -6.4 -4.2 -2.7 -2.8 -0.6 -1.1 -0.5 -0.7 -0.7 Thailand -2.2 -2.6 -1.4 0.3 0.0 0.3 1.2 -1.5 -2.6 -2.9 Vietnam -5.0 -4.9 -4.8 -4.9 -4.9 -4.9 -5.0 -5.0 -4.8 -4.8 Note: * = based upon Egyptian financial year (July-June). Global and regional aggregates are calculated using the World Banks’ 2004 PPP weights Source: HSBC 37
    • Macro Global Economics Q1 2008 Percentage % GDP 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f North America -3.7 -3.3 -3.9 -4.3 -4.9 -5.4 -5.5 -4.9 -4.5 -4.5 US -4.3 -3.8 -4.4 -4.8 -5.5 -6.1 -6.2 -5.4 -5.0 -5.0 Canada 2.7 2.3 1.7 1.2 2.3 2.0 1.6 1.2 1.3 1.3 Latin America -3.4 -3.2 -1.0 0.3 0.8 0.9 1.1 0.2 -0.4 -0.7 Mexico -3.2 -2.8 -2.2 -1.4 -1.0 -0.6 -0.3 -1.2 -1.8 -2.4 Brazil -3.8 -4.2 -1.5 0.7 1.7 1.6 1.3 0.2 -0.7 -1.1 Argentina -3.3 -1.4 3.7 3.2 1.2 1.8 2.4 1.8 1.3 1.3 Chile -1.2 -1.6 -0.9 -1.3 2.2 1.1 3.6 4.7 5.1 5.5 Western Europe -0.9 -0.1 0.9 0.8 1.0 0.4 0.1 0.0 0.0 0.2 Euro-13 -1.5 -0.3 0.8 0.4 0.8 0.1 -0.2 0.1 0.0 0.1 Germany -1.7 0.0 2.0 1.9 4.3 4.6 4.9 5.9 5.6 5.3 France 1.7 2.0 1.3 0.9 0.5 -1.0 -1.3 -1.1 -1.5 -1.5 Italy -0.5 -0.1 -0.8 -1.3 -0.9 -1.6 -2.6 -2.3 -2.6 -2.4 Spain -4.0 -3.9 -3.3 -3.5 -5.3 -7.4 -8.6 -9.6 -9.3 -8.4 Other Western Europe 0.8 0.8 1.1 1.9 1.6 1.4 1.1 -0.3 -0.2 0.6 UK -2.6 -2.2 -1.6 -1.3 -1.6 -2.5 -3.2 -4.8 -3.5 -2.3 Norway 15.0 16.1 12.5 12.3 12.7 16.3 17.3 14.7 10.0 8.0 Sweden 4.0 4.3 5.0 7.2 6.7 6.8 7.0 6.4 5.9 5.2 Switzerland 12.0 7.7 8.3 12.9 12.9 13.5 15.1 15.7 11.0 11.9 EMEA 4.9 3.6 2.8 3.0 4.0 4.9 3.5 1.8 0.7 -0.7 Czech Republic -4.8 -5.3 -5.5 -6.2 -5.1 -1.6 -3.2 -3.2 -2.8 -3.1 Hungary -8.4 -6.1 -7.0 -8.7 -8.7 -7.2 -5.8 -3.4 -2.5 -2.5 Poland -5.8 -2.8 -2.5 -2.1 -4.1 -1.6 -2.3 -4.0 -3.9 -3.7 Russia 18.0 11.0 8.4 8.3 10.0 11.1 9.6 5.9 3.0 0.9 Turkey -4.9 2.3 -0.8 -2.8 -5.2 -6.2 -8.2 -7.2 -7.4 -7.1 Ukraine 3.8 3.7 7.5 5.8 10.5 3.1 -1.6 -3.6 -5.6 -3.8 Egypt* -0.1 0.0 0.7 2.4 4.3 3.2 1.7 2.1 1.0 0.5 Israel -1.2 -1.5 -1.2 1.2 2.4 3.3 5.7 3.6 2.0 1.3 Saudi Arabia 7.6 5.1 6.3 12.9 20.5 28.3 27.6 25.1 26.0 18.5 UAE 17.4 9.4 4.7 8.5 9.9 18.2 21.5 15.5 14.0 7.3 South Africa 2.4 0.1 0.6 -1.3 -3.2 -3.8 -6.4 -7.1 -7.3 -7.8 Asia/Pacific 2.0 2.0 2.8 3.0 2.8 3.7 5.1 5.4 5.4 5.2 Japan 2.6 2.2 2.8 3.2 3.7 3.7 3.9 4.9 5.6 5.4 Australia -3.8 -2.0 -3.8 -5.4 -6.0 -5.8 -5.5 -5.9 -5.9 -5.9 New Zealand -5.1 -2.8 -3.9 -4.3 -6.6 -9.0 -9.0 -9.0 -8.5 -8.5 Asia-ex-Japan 2.2 2.2 3.1 3.4 3.0 4.1 5.9 6.1 5.9 5.7 China 1.7 1.3 2.4 2.8 3.6 7.2 9.4 9.7 10.2 10.1 Asia ex-Japan & China 2.6 2.9 3.7 3.9 2.5 1.1 2.3 2.3 1.5 1.2 Hong Kong 4.5 4.7 8.3 9.2 8.9 12.5 11.7 11.5 11.2 11.0 India -0.6 0.8 1.5 1.6 0.1 -1.8 -1.1 -1.3 -1.5 -1.9 Indonesia 4.8 4.2 3.9 3.4 0.6 0.1 2.7 3.0 2.7 3.1 Malaysia 9.4 8.3 8.4 12.8 12.1 14.6 16.3 16.5 15.8 15.6 Philippines 8.2 1.9 6.9 0.9 1.1 1.9 5.0 5.1 4.5 4.0 Singapore 12.7 16.8 18.0 31.5 28.9 29.5 27.5 31.9 29.5 29.2 South Korea 2.4 1.7 1.0 2.0 4.3 1.9 0.7 0.6 -0.2 -0.4 Taiwan 2.8 6.3 8.6 9.6 5.6 4.5 6.8 6.3 3.6 3.6 Thailand 7.6 5.4 5.5 5.6 1.7 -4.5 1.1 4.5 1.7 0.5 Vietnam 2.1 2.1 -1.9 -4.9 -3.4 0.4 0.5 -2.5 -2.9 -3.1 Note: * = based upon Egyptian financial year (July-June). Global and regional aggregates are calculated using the World Banks’ 2004 PPP weights Source: HSBC 38
    • Macro Global Economics Q1 2008 Balance USDbn 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f North America -397.0 -368.0 -447.0 -511.0 -618.0 -732.0 -790.0 -733.2 -702.3 -704.4 US -417.0 -385.0 -460.0 -522.0 -640.0 -755.0 -811.0 -750.1 -720.8 -723.0 Canada 20.0 17.0 13.0 11.0 22.0 23.0 21.0 16.9 18.5 18.5 Latin America -52.8 -45.8 -13.6 2.9 10.4 16.3 24.3 5.5 -13.1 -25.4 Mexico -18.7 -17.7 -14.1 -8.6 -6.7 -4.9 -2.4 -11.0 -17.4 -24.2 Brazil -24.2 -23.2 -7.6 4.2 11.6 14.3 13.5 2.5 -10.0 -17.0 Argentina -9.0 -3.8 8.7 8.1 3.4 5.6 8.0 6.3 5.1 5.0 Chile -0.9 -1.1 -0.6 -0.8 2.1 1.3 5.2 7.7 9.2 10.8 Western Europe -65.9 5.0 93.8 105.5 142.6 88.2 61.9 40.4 39.7 68.5 Euro-13 -95.7 -19.0 56.2 38.4 75.3 10.4 -16.2 13.6 3.5 12.0 Germany -33.8 0.4 42.5 47.0 115.5 124.8 145.9 189.3 194.3 176.8 France 23.0 25.0 20.0 16.0 9.0 -20.0 -29.0 -35.2 -40.0 -40.5 Italy -6.0 -0.6 -9.9 -19.9 -15.9 -28.3 -48.4 -47.0 -57.0 -50.8 Spain -23.9 -22.7 -23.5 -31.6 -53.7 -80.9 -108.4 -142.0 -143.7 -128.1 Other Western Europe 29.7 24.0 37.6 67.1 67.3 77.7 78.1 26.8 36.2 56.6 UK -37.6 -30.8 -25.2 -24.6 -35.1 -54.6 -77.5 -134.6 -90.9 -59.7 Norway 26.0 26.5 25.6 27.1 32.0 48.4 60.0 56.7 40.7 32.2 Sweden 10.3 9.3 13.2 22.6 23.4 23.8 28.2 29.7 28.8 24.9 Switzerland 31.0 19.0 24.0 42.0 47.0 49.0 60.0 68.4 49.4 51.8 EMEA 46.2 40.7 31.3 50.2 88.2 162.8 165.5 116.8 80.4 2.0 Czech Republic -2.8 -3.1 -4.6 -5.8 -5.6 -2.0 -4.5 -5.5 -6.0 -7.1 Hungary -4.2 -3.0 -4.9 -6.8 -8.4 -7.3 -6.7 -4.8 -4.0 -4.4 Poland -10.0 -5.4 -5.0 -4.6 -10.4 -4.8 -7.9 -16.9 -19.2 -20.0 Russia 46.8 33.6 29.1 35.8 59.9 84.3 94.5 75.4 45.3 15.0 Turkey -10.0 3.0 -2.0 -8.0 -16.0 -23.0 -33.0 -35.8 -44.0 -45.9 Ukraine 1.2 1.4 3.2 2.9 6.8 2.5 -1.7 -4.9 -9.5 -6.9 Egypt* 0.6 1.9 3.4 2.9 1.8 2.7 1.5 0.9 Israel -1.4 -1.7 -1.3 1.4 2.9 4.3 8.0 5.8 3.5 2.5 Saudi Arabia 14.3 9.4 11.9 28.0 52.0 90.7 96.2 92.0 105.0 76.1 UAE 12.2 6.5 3.5 7.5 10.5 24.4 35.1 28.2 29.3 16.3 South Africa 0.0 0.1 0.7 -2.2 -6.9 -9.2 -16.4 -19.5 -21.5 -24.6 Asia/Pacific 193.5 165.4 222.8 255.9 308.6 364.6 498.1 610.7 718.0 789.7 Japan 121.8 86.0 116.8 131.2 171.0 165.5 174.5 213.5 255.9 242.3 Australia -15.0 -7.0 -16.0 -29.0 -37.0 -41.0 -41.0 -53.8 -55.7 -51.7 New Zealand -2.8 -1.4 -2.5 -3.4 -6.0 -9.2 -8.5 -11.7 -12.5 -11.8 Asia-ex-Japan 89.5 87.7 124.5 157.2 180.7 249.3 373.1 462.6 530.4 610.8 China 20.5 17.4 35.4 45.9 68.7 160.8 249.9 313.8 401.4 480.0 Asia ex-Japan & China 69.0 70.3 89.1 111.3 112.0 88.5 123.2 148.8 129.0 130.8 Hong Kong 7.5 7.9 13.6 14.7 14.7 22.2 22.1 23.6 24.5 26.0 India -2.7 3.4 7.1 8.8 0.8 -13.5 -9.4 -13.5 -17.5 -27.2 Indonesia 8.0 6.9 7.8 8.1 1.6 0.3 9.9 12.8 13.9 18.2 Malaysia 8.0 7.0 8.0 13.0 15.0 20.0 25.0 30.0 32.6 36.6 Philippines 6.3 1.3 5.3 0.7 0.9 1.9 5.9 7.6 8.0 8.4 Singapore 10.7 11.8 12.3 22.1 31.1 34.3 36.5 49.6 53.2 58.8 South Korea 12.3 8.0 5.4 11.9 28.2 15.0 6.1 5.4 -2.7 -4.5 Taiwan 8.9 18.2 25.6 29.2 18.5 16.0 24.7 24.4 14.7 16.1 Thailand 9.3 5.1 4.7 4.8 2.8 -7.9 2.2 10.7 4.8 1.5 Vietnam 0.6 0.7 -0.7 -1.9 -1.6 0.2 0.3 -1.8 -2.4 -3.0 Note: * = based upon Egyptian financial year (July-June). Global and regional aggregates are calculated using the World Banks’ 2004 PPP weights Source: HSBC 39
    • Macro Global Economics Q1 2008 A long drawn-out affair mean substantially less employment growth, Ian Morris Economist resulting in the unemployment rate rising from 4.7% HSBC Securities (USA) Inc. The inter-bank lending difficulties have gone on for now to 5.4% by the end of 2008. +1 212 525 3115 longer than we expected, and as a result, the risk of a Ian.morris@us.hsbc.com credit squeeze on the economy has intensified. The slackening labour market should help keep core Ryan Wang Moreover, with about $70bn of financial sector PCE inflation just below 2% through the year, Economist HSBC Securities (USA) Inc. write-downs so far, and the OECD estimating the despite upside inflation risks from import and +1 212 525 3181 losses could be as much as $200-300bn, more bad commodity prices. ryan.wang@us.hsbc.com news could be on the way. It is probable that 3- In this context, and because of the dual-mandate, the month LIBOR spreads will narrow early in 2008, but Fed is more likely to be responsive to growth this may prove short-lived as losses from underlying developments than inflation, with financial assets mount, and the deleveraging process continues headwinds taking fed funds lower than what might to spook bank confidence. be justified from economic data itself. Therefore, we Reflecting this heightened risk, we are forecasting look for Fed funds to be cut to 3% by the end of that real GDP growth will remain sluggish in 2008 at 2008, which should help the economy avoid an 1.9% year-average after a likely 2.2% rate in 2007, outright recession if the Fed is aggressive. 10-year due to both the credit squeeze and negative wealth note yields, as a result, may be around or somewhat effects from falling house prices. Lower demand will under 4% for most of the year. % q-o-q annualised 2007f 2008f 2009f Q3 07f Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 2.9 1.6 2.2 2.7 2.0 1.1 1.1 1.7 2.3 Government consumption 2.1 3.1 3.0 3.8 2.6 3.0 3.0 3.0 3.0 Investment -2.8 -0.7 4.1 -0.4 -2.3 -1.6 -2.9 2.5 4.3 Housing -16.7 -13.2 3.2 -19.7 -22.0 -14.0 -12.0 0.0 5.0 Stockbuilding (% GDP) 0.1 -0.1 0.3 0.3 0.1 0.0 0.0 -0.2 -0.1 Domestic demand 1.6 1.4 3.0 3.4 0.7 0.7 0.6 1.5 3.1 Exports 8.1 8.3 7.0 18.9 6.3 7.0 7.0 7.0 7.0 Imports 2.2 2.9 5.8 4.2 2.7 3.0 2.4 4.0 5.0 GDP (year) 2.2 1.9 3.0 2.8 2.6 2.7 2.0 1.3 1.8 GDP (% quarter annualised) - - - 4.9 1.0 1.1 1.1 1.8 3.3 Industrial production (% year) 2.1 1.8 3.0 1.7 2.3 2.4 1.8 1.3 1.8 Unemployment (%) 4.6 5.1 5.4 4.7 4.7 4.9 5.0 5.2 5.3 GDP deflator (% year) 2.6 1.8 1.8 2.4 2.5 1.9 1.7 1.9 1.8 Consumer prices (% year) 2.8 2.4 2.0 2.4 3.8 3.4 2.3 2.3 1.9 Employment costs (% year) 3.4 3.4 3.2 3.3 3.3 3.4 3.4 3.4 3.4 Current account (USDbn) -750 -721 -723 -712 -744 -732 -714 -710 -727 Current account (% GDP) -5.4 -5.0 -5.0 -5.1 -5.3 -5.2 -5.0 -4.9 -5.0 Budget balance (USDbn) -163 -240 -275 - - - - - - USD effective (1990 = 100) 88.6 87.4 100.6 85.8 85.3 85.0 86.3 89.2 89.2 3-month money (%) 5.3 4.0 3.5 5.2 4.9 4.6 4.4 3.9 3.3 10-year bond yield (%) 4.6 3.9 4.2 4.6 4.0 3.9 3.7 3.9 4.2 Source: HSBC 40
    • Macro Global Economics Q1 2008 Real house prices Falling prices % Yr % Yr  House prices are declining on a variety of measures. In Q3 07, nominal house prices fell in twenty-one out of fifty states, 15 15 according to the OFHEO house price index 10 10 5 5  The S&P/Case-Shiller index highlights more pronounced 0 0 declines in various metropolitan areas. The biggest drops have -5 -5 included areas like Detroit, Las Vegas, Miami, and San Diego -10 -10 75 78 81 84 87 90 93 96 99 02 05 08  Inventory levels of both new and existing homes for sale remain Recessions high, putting downward pressure on prices Real average single-family EHS price Real S&P Case-Shiller home price index Real OFHEO house price index Note: Home price changes deflated using core CPI. Source: Thomson Financial Datastream Business credit conditions Credit and lending standards net % of respondents bp  Bank lending attitudes have tightened somewhat. The net percentage of banks tightening standards rose to 19.2 in the 80 400 October Senior Loan Officer survey, higher for the second 60 350 quarter in a row 40 300 20 250  Credit spreads have widened, reaching new highs for 2007 in December 0 200 -20 150  Further sustained tightening in credit conditions risks a pull -40 100 back in business lending, although so far the actual data has 87 89 91 93 95 97 99 01 03 05 07 not suggested that a clamp down is occurring SLO survey: tighter standards for C&I loans (LHS) Moody’s Baa corporate yield less 10-yr yield (RHS) Source: Federal Reserve Senior Loan Officer Survey, Haver Analytics Employment growth Job gains are coming from just four sectors 000s Cumulative change in payrolls from Jan 2007 000s  Four sectors accounted for 80% of the jobs growth in the first eleven months of 2007: educational services, health services, 1200 1200 food services, and government 1000 1000 800 800  Education, health care, and government stayed strong through 600 600 the end of the year, while education has recently showed some signs of slowing 400 400 200 200  The rest of the economy has been much more subdued. Job 0 0 losses are ongoing in construction, manufacturing, and finance, Jan-07 Apr-07 Jul-07 Oct-07 while the trend is unclear in areas such as retail trade and Education & health, restaurants, government professional & business services Rest of economy Source: Bureau of Labor Statistics, Haver Analytics 41
    • Macro Global Economics Q1 2008 Slower domestic demand housing market remains in healthy shape. Home Ryan Wang Economist price gains for the nation have slowed from 12.1% HSBC Securities (USA) Inc. Canadian GDP growth appears set to slow to a year-on-year back in August 2006 to 6.1% in +1 212 525 3181 sub-2% pace in Q4 2007 or in early 2008. Since Ryan.wang@us.hsbc.com October, but construction activity has been steady. the middle of 2007, the Bank of Canada has cautioned against downside risks from weaker than Upside inflation risks persist, but the latest data expected US growth and a higher Canadian dollar. shows core inflation is under control. The core CPI These risks appear increasingly likely as we have slowed to 1.6% year-on-year in November, down reduced our US GDP estimate to 1.1% for H1 from 2.5% in June. Headline inflation is higher at 2008, while the Canadian dollar is close to parity 2.5% due to energy prices, but remains within the as of the end of 2007. We see a continued drag 1% to 3% target range. from net exports in 2008 after a small detraction in The Bank of Canada reduced the overnight target 2007. However, the extra kicker in 2008 is that rate to 4.25% from 4.50% on December 4, focusing domestic demand is likely to slow to 3.3% after an on the downside risks coming from turmoil in global estimated 3.7% in 2007. For total GDP, we see financial markets. Further credit and funding strains, 2.1% growth after 2.6% in 2007. weakening US growth, and slower domestic demand Consequently, this will mean a shift in tone for may mean lower rates in 2008. We look for 75bp of economic data to come. Employment growth has further rate cuts (25bp per quarter through Q3 2008) been surprisingly strong thus far, with solid job gains to end the year at 3.50%. coming from the service sector. Meanwhile, the % Year 2007f 2008f 2009f Q3 07f Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 4.1 2.7 2.5 4.0 3.7 3.5 2.6 2.4 2.4 Government consumption 3.0 2.9 2.5 3.6 3.5 3.5 3.3 2.4 2.4 Investment 3.7 3.2 2.4 4.3 4.0 4.2 3.8 2.5 2.2 Stockbuilding (% GDP) 0.7 1.1 1.0 1.2 1.1 1.1 1.1 1.2 1.2 Domestic demand 3.7 3.3 2.3 4.2 4.9 4.6 3.8 2.4 2.4 Exports 1.9 2.7 2.8 2.2 2.2 2.6 2.4 2.7 3.1 Imports 5.1 5.9 2.9 6.1 7.2 8.3 7.3 4.0 4.2 GDP 2.6 2.1 2.2 2.9 3.0 2.6 2.1 1.8 1.8 GDP (% quarter annualised) - - - 2.9 2.0 1.7 1.7 1.9 1.9 Industrial production 0.3 0.7 1.8 0.5 1.2 0.2 0.2 1.0 1.5 CPI 2.1 1.6 1.8 2.1 2.5 2.0 1.0 1.4 1.9 Average earnings 3.0 2.1 2.1 3.2 2.6 2.1 2.1 2.0 2.1 Unemployment (%) 6.0 6.2 6.3 6.0 5.8 6.0 6.1 6.3 6.3 Current account (CADbn) 18.8 20.6 20.6 1.0 5.0 5.1 5.1 5.2 5.2 Trade account (CADbn) 51.3 39.1 47.5 10.8 9.8 9.5 9.4 9.7 10.5 Budget balance (CADbn) 11.0 11.0 11.0 - - - - - - CAD/USD 1.05 1.03 1.10 0.99 1.00 1.00 1.00 1.05 1.05 3-month money (%) 4.7 4.2 4.7 4.9 4.9 4.6 4.4 4.1 3.8 10-year bond yield (%) 4.2 3.7 5.0 4.3 4.0 3.8 3.6 3.6 3.6 Source: HSBC 42
    • Macro Global Economics Q1 2008 New housing prices House price appreciation is slowing % Yr % Yr  New house price growth has been decelerating for the past fourteen months. In major population centres like Toronto and 50 50 Montreal, appreciation has been either edging down gradually 40 40 or holding steady 30 30  The largest deceleration has occurred in Alberta. Calgary home 20 20 prices have slowed from over 60% year-on-year in August 2006 to 6.2% in October, close to the matching the national average. 10 10 In Edmonton, year on-year gains have slowed from 43% to 24% 0 0 98 99 00 01 02 03 04 05 06 07  For most cities, however, the supply of unoccupied homes is Canada new housing prices fairly low. Demand remains solid and homebuilding activity has Toronto been steady Edmonton Source: Thomson Financial Datastream, Statistics Canada Imports and exports Trade prospects % Qtr Ann % Qtr Ann  The Q3 spike in Canadian imports coincided with a sharp rise in US exports. Although Canadian import growth is likely to slow 25 25 from this pace, we think net trade will remain a drag in 2008 20 20 15 15  We expect Canadian import growth of 5.9% in 2008 10 10 5 5  Amidst a slowdown in US GDP and import growth, we see 0 0 Canadian exports rising 2.7% in 2008 -5 -5 -10 -10 -15 -15 98 99 00 01 02 03 04 05 06 07 08 Canada real exports Canada real imports Source: Thomson Financial Datastream Headline and core CPI Inflation trends % Yr Canada % Yr  The core CPI slowed to 1.6% year-on-year in November. With headline inflation running at 2.5%, both measures are within the 5 5 Bank of Canada’s target range of 1-3% 4 4 3 3  The unemployment rate of 5.9% and rising labour force participation suggest employment conditions are fairly tight. In 2 2 the latest Business Outlook Survey, 41% of firms reported labour shortages 1 1 0 0  The Bank of Canada estimates that the economy is continuing 01 02 03 04 05 06 07 to run above its production capacity for now, but slower growth CPI ex 8 volatiles and indirect taxes in 2008 may act to reduce this pressure Bank of Canada target midpoint Headline CPI Source: Bloomberg 43
    • Macro Global Economics Q1 2008 Central Bank forecasts higher Bank’s projected upper-bound. At the same time, Jonathan Heath Chief Economist inflation in 2008 the expected slowdown in the economy in the first HSBC México, S.A half of the year should help contain any additional +52 55 5721 2580 Inflation has averaged 4.03% over the 15-month jonathan.heath@hsbc.com.mx inflationary pressures. Nevertheless, policy will period from September 2006 through November become more restrictive in relative terms, as the 2007, as a result of higher processed food and Federal Reserve cuts its policy rate further and the commodity prices in international markets. In spite interest differential increases. of inflation remaining well above the Central Bank’s objective of 3.0%, monetary policy has been only After a major slowdown in industrial production in marginally restrictive. In October, the monetary the United States in Q1, production bounced back authorities disclosed their 8-quarter forecast for strongly in the next two quarters. This set the upper and lower limits for inflation, incorporating a pattern for a much improved performance for 50 basis point impact in 2008 from the recently export growth in Mexico and higher growth rates approved fiscal reform. As a result, the Bank now in GDP for the period. Preliminary data for Q4 forecasts inflation reaching as high as 4.5% in mid- shows record high export and import levels 2008 and then slowly converging to its 3.0% target (October), suggesting that Q4 may not be as weak by the end of 2009. as originally expected. Imports registered strong growth rates in consumer, intermediate and capital Given that the higher inflation rate has been and will goods, suggesting robust domestic demand, while continue being a product of exogenous supply the IMEF manufacturing and non-manufacturing shocks rather than demand pressures, the Central indicators (equivalent to U.S. ISM) anticipate a Bank is not expected to restrict monetary policy any relatively good finish to the year. further, unless inflation increases outside of the % Year 2004 2005 2006 2007f 2008f 2009f Private consumption 4.1 5.1 5.0 3.8 3.4 4.4 Public consumption -0.4 0.4 6.0 2.5 1.0 -1.0 Gross capital formation 7.5 7.6 10.0 7.8 7.5 8.3 GDP 4.2 2.8 4.8 3.1 3.3 4.1 Industrial production 4.2 1.7 5.0 1.3 2.6 4.3 Unemployment (%) 4.2 3.8 4.3 3.8 3.2 3.1 Consumer prices* 5.2 3.3 4.1 3.8 4.0 3.3 Exports (USDbn) 188.0 214.2 250.1 271.9 290.0 311.8 Imports (USDbn) 196.8 221.8 256.1 283.8 308.8 337.6 Current account (USDbn) -6.7 -4.9 -2.4 -11.0 -17.4 -24.2 Current account (% GDP) -1.0 -0.6 -0.3 -1.2 -1.8 -2.4 Budget balance (% GDP) -0.2 -0.1 0.1 0.0 -0.1 0.0 MXN/USD 11.3 10.8 11.0 10.9 11.1 11.3 3-month money (%) 7.1 9.3 7.3 7.4 7.8 7.6 Note: * = end-year Source: HSBC 44
    • Macro Global Economics Q1 2008 Next action up gap narrowed continuously over the past six Alexandre Bassoli Economist quarters, and the economy now seems to be HSBC Bank Brazil S.A. GDP growth reached 5.3% in the first three quarters operating very close to full capacity. This notion is +55 11 3371 8184 of 2007, indicating a significant acceleration in alexandre.bassoli@hsbc.com.br corroborated by several factors. Industrial capacity comparison to the previous year, when the economy utilization, for example, reached a new record high expanded 3.8%. From a demand perspective, growth of 83.1% in October, while the unemployment rate continues to be pushed by domestic consumption, reached a new low of 8.9% (s.a.) in the same month. which is responding vigorously to the monetary easing (overnight rates fell from 19.75% in Sep-05 Regarding inflation, there has been a clear upward to 11.25% two years later) and to the expansionary trend in the first three quarters of 2007. After stance of fiscal policy. Private consumption reaching a low of 3% in March, full-year inflation expenditure has risen 5.9% year-to-date, and gross should be close to 4.4%, almost in line with the 4.5% fixed capital formation has soared 12.4% in the same target. Food prices explain a significant part of this period. Investments, in fact, have consistently rise, but core inflation (excludes food and outperformed output growth over the last four years, administered prices) climbed from 2.6% in March to and as consequence they now represent 17.1% of 3.9% in November. There were signs of more GDP, up from 15.3% in 2003. disseminated price pressures in the second half of this year, and we believe this essentially reflects the We see the vigorous expansion of investments as a exuberance of domestic demand. Overall, recent very encouraging sign. The indications are that developments reinforce our view that the neutral average growth in coming years will be well above level of interest rates is still abnormally high in the 2.9% seen in the last six years. This does not Brazil. Most likely the next action on rates will be mean, however, that the current pace of expansion is upwards, not downwards. sustainable. According to our estimates, the output % Year 2004 2005 2006 2007f 2008f 2009f Private consumption 3.8 4.5 4.6 6.1 6.0 3.9 Gross capital formation 9.1 3.6 8.7 11.0 10.0 6.5 GDP 5.7 2.9 3.7 5.4 5.0 3.7 Industrial production 8.3 3.1 2.8 6.2 5.6 4.5 Unemployment (%) 11.5 9.8 10.0 9.3 8.8 8.6 Consumer prices* 7.6 5.7 3.1 4.4 5.0 4.5 Exports (USDbn) 96.5 118.3 137.5 160.8 182.0 195.0 Imports (USDbn) -62.8 -73.5 -91.4 -121.0 -152.5 -173.0 Current account (USDbn) 11.6 14.3 13.5 2.5 -10.0 -17.0 Current account (% GDP) 1.7 1.6 1.3 0.2 -0.7 -1.1 Budget balance (% GDP) -2.4 -3.0 -3.0 -1.8 -2.0 -2.2 BRL/USD 2.88 2.39 2.16 1.89 1.88 1.96 3-month money 16.4 19.0 14.8 11.7 11.4 11.8 Note:* Year end. Source: HSBC 45
    • Macro Global Economics Q1 2008 Fiscal moderation ahead For 2008, we anticipate some fiscal prudence. The Javier Finkman government has already showed improvements on Economist The pace of expansion of GDP continues to show HSBC Bank Argentina S.A the revenues side, increasing the tax on +54 11 4344 8144 robust figures, with recent data showing that GDP agricultural, oil and oil derivatives exports that javier.finkman@hsbc.com.ar recorded an estimated real growth rate of 8.7% y/y together amount to 0.8% of nominal GDP. Hernan M Yellati in 3Q07. From the aggregate demand point of view, Economist private consumption recorded an impressive 8.9% Less encouraging signals surround HSBC Bank Argentina S.A +54 11 4348 5759 y/y growth in the quarter and an average growth in methodological changes in the CPI – though we hernan.m.yellati@hsbc.com.ar the first three quarters of 8.8% y/y, compared to expect reported inflation to increase from 8.5% in 7.8% y/y in 2006. In the same vein, public 2007 to 9.3% in 2008 – and getting an agreement consumption posted an 8.4% y/y increase in 3Q07 with the Paris Club. compared to only 5.2% y/y in 2006. Gross fixed Regarding the CPI, the government appears to be investment is growing below 13% y/y against an moving towards a chained index targeting a lower average of 18.2% y/y last year. To some extent, income consumption basket. On the Paris Club, growth is stronger than our expectations: we were recent developments on the international relations targeting 7.8% growth for the whole 2007 and the front make a fast agreement less likely. Therefore, figure could yet be around 8.5%. Also, growth could fiscal moderation is the only change that the CFK be overstated by the official data: if the GDP deflator presidency will deliver in its first year. is partially suffering from the methodological changes that affected the CPI, then growth of those activities that are measured nominally and then deflated – such as financial services or public consumption - are being overstated. % Year 2004 2005 2006 2007f 2008f 2009f Consumption 9.5 8.9 7.7 8.0 7.0 7.0 Gross capital formation 34.4 22.7 18.7 12.9 8.0 6.0 GDP 9.0 9.2 8.5 7.8 6.2 5.4 Unemployment (%) 13.6 11.6 10.2 9.0 8.5 8.5 Industrial production 10.7 7.5 7.4 6.6 5.6 5.0 Consumer prices* 6.1 12.3 9.8 8.5 9.3 9.5 Exports (USDbn) 34.5 40.0 46.6 51.8 57.0 62.8 Imports (USDbn) 22.4 28.7 34.2 40.7 47.2 54.3 Current account (USDbn) 3.4 5.6 8.0 6.3 5.1 5.0 Current account (% GDP) 1.2 1.8 2.4 1.8 1.3 1.3 Budget balance (% GDP) 2.6 1.8 1.8 0.4 1.5 1.2 ARS/USD 2.94 2.94 3.08 3.12 3.23 3.31 1-month money (%)* 3.1 4.8 7.1 10.1 10.9 11.4 Note: * end period. Source: HSBC 46
    • Macro Global Economics Q1 2008 Less growth, more inflation Central Bank’s target of 3% (+/- 1 percentage point). Lorena Domínguez Economist Core inflation rose 0.5% in November, which HSBC México, S.A Recently, growth has moderated in the Chilean represents an annual growth rate of 5.6%. +52 55 5721 2172 economy. The Monthly Economic Activity Indicator lorena.dominguez@hsbc.com.mx (IMACEC), registered an increase of 4.1% in Q3, In this scenario, the Board of the Central Bank of which is lower than the average growth rate of 6.0% Chile decided to start a monetary tightening cycle, observed during the first half of the year. hiking the policy rate three times (July, August and Meanwhile, October economic activity grew 4.4% September) to 5.75%. However, the Central Bank y-o-y, lower than market expectations. Industrial then opted for a temporary pause at the next two activity registered an average growth rate of 3.1% meetings. There were different reasons behind the during the third quarter, a figure much lower than the decision, including the deterioration of the financial 4.6% growth observed during the first half of the markets with regard to the problems associated with year. As a result, 2007 GDP expectations have been the sub-prime crisis and weaker local activity. In adjusted downwards. According to the Central the last meeting of the year however, the monetary Bank’s latest Expectation Survey, specialists in the authorities decided to increase the policy rate to private sector expect 5.0% growth in GDP. 6.0%. The decision was seen to be necessary to reduce the risk that the currently higher inflation On the inflation front, headline inflation increased outturns spillover into inflation expectations. At the 0.8% in November, which means that inflation has same time, the Central Bank re-affirmed its accumulated a 7.3% rise during the first 11 months commitment to hit the 3% inflation target over the of the year. The 12-month rate reached 7.4%, which medium term. represents the highest reading in the last 10 years. This places inflation significantly higher than the % Year 2004 2005 2006 2007f 2008f 2009f Private consumption 6.1 7.6 7.7 7.7 7.2 7.0 Fixed investment 11.7 24.7 5.5 9.0 8.0 5.0 GDP 6.0 5.8 4.0 5.5 5.2 5.1 Industrial production 10.2 6.0 3.3 4.1 4.5 4.6 Unemployment (%) 8.9 6.9 6.6 6.5 7.0 7.5 Consumer prices* 2.4 3.7 2.1 7.7 3.5 3.0 Exports (USDbn) 32.0 40.6 57.0 68.5 70.5 69.5 Imports (USDbn) 23.0 30.4 35.4 42.5 43.4 43.1 Current account (USDbn) 2.1 1.3 5.2 7.7 9.2 10.8 Current account (% GDP) 2.2 1.1 3.6 4.7 5.1 5.5 Budget balance (% GDP) 2.2 4.8 7.8 8.7 5.8 4.7 CLP/USD 604 552 534 521 514 520 3-month money (%)** 2.8 4.5 5.3 6.0 5.9 5.8 Note: * = end-year; ** = end-year 90-day deposit rate Source: HSBC 47
    • Macro Global Economics Q1 2008 Resisting rate cuts notably Germany and Austria. However, for the Janet Henry/Astrid Schilo Economist Eurozone as a whole the downward revisions to our HSBC Bank plc The current backdrop of a developed world credit forecasts for the UK and US (which together account +44 20 7991 6711/6708 squeeze and an ongoing emerging market janet.henry@hsbcib.com/ for about 30% of EMU exports) will be only partly astrid.schilo@hsbcib.com investment boom poses an interesting, if uncertain offset by the latest set of upward revisions to some backdrop for the Eurozone. Eurozone households are of our emerging market forecasts, notably Russia. not likely to undergo the same retrenchment that we envisage in the US and the UK, as they have already EMU growth already looks set to slow to 0.4% in slowed their lending growth over the past 18 months 4Q07 (possibly lower) after 0.7% in 3Q with a or so. But the non-listed corporate sector has been further slowdown envisaged in the first half of 2008 reliant on debt growth in this upswing, and so the With inflation likely to remain above 3% in 1Q08, tightening of lending standards and widening of no near-term rate cut is expected from the ECB spreads already underway is likely to contribute to which we expect to continue pursuing a variety of an investment slowdown. On the external side, alternative measures such as the provision of large assuming emerging world growth holds up (and the amounts of term liquidity in order to try to ease implications of our Fed rate view for emerging money market tensions. In 2Q08, however, we monetary conditions implies it will), some parts of expect the activity data to have weakened the Eurozone remain very well placed to benefit, sufficiently for the ECB to deliver a rate cut. % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 1.5 1.6 1.7 1.6 1.4 1.8 1.6 1.4 1.5 Government consumption 2.0 1.5 1.4 2.0 2.1 1.5 1.7 1.4 1.4 Fixed investment 4.7 2.3 2.6 4.4 3.3 2.0 2.6 2.3 2.4 Final domestic demand 2.3 1.8 1.9 2.3 2.0 1.8 1.8 1.6 1.7 Stockbuilding (% GDP) 0.1 0.0 0.0 0.2 -0.1 0.1 -0.1 0.1 0.0 Domestic demand 2.4 1.6 1.8 2.3 2.2 1.7 1.6 1.5 1.8 Exports 6.3 4.5 4.7 7.4 5.3 5.3 5.2 3.8 4.0 Imports 5.5 4.8 4.7 6.0 5.1 4.8 5.7 4.2 4.6 GDP 2.6 1.6 1.8 2.7 2.2 1.7 1.7 1.4 1.4 GDP (% quarter) - - - 0.7 0.4 0.4 0.3 0.3 0.4 Industrial production 3.2 2.1 2.2 3.8 2.3 2.1 2.4 1.9 2.1 Unemployment (%) 7.5 7.5 7.4 7.4 7.5 7.5 7.5 7.5 7.5 Wages 2.5 2.8 2.7 2.5 2.8 2.8 2.8 2.8 2.8 Inflation 2.1 2.6 1.9 1.9 2.9 3.2 2.7 2.6 1.9 M3 11.3 9.5 7.0 11.5 12.5 11.0 10.0 9.0 8.0 Current account (% GDP) 0.1 0.0 0.1 - - - - - - Budget balance (% GDP) -0.9 -1.0 -1.1 - - - - - - Debt (% GDP) 66.9 66.7 66.5 - - - - - - 3-month money (%) 4.4 4.3 4.3 4.8 4.8 4.6 4.4 4.3 4.1 10-year bond yield (%) 4.3 4.2 4.4 4.4 4.2 4.1 4.2 4.2 4.1 USD/EUR* 1.45 1.35 1.30 1.42 1.45 1.45 1.40 1.35 1.35 Note: * = end-period Source: HSBC 48
    • Macro Global Economics Q1 2008 Signs of a slowdown Growth Index % Yr  Third quarter GDP growth picked up to 0.7% after just 0.3% in Q2 66 5  Private consumption was up by 0.5% q-o-q (from 0.6% in Q2), and 62 4 investment rebounded by 0.9% q-o-q after a flat reading in Q2 58 3 54 2  The purchasing managers surveys have weakened sharply 50 1 since August and are consistent with a slowdown in GDP growth to 0.4% or less in Q4 46 0 42 -1 99 00 01 02 03 04 05 06 07 08 Eurozone composite PMI output (LHS) Eurozone GDP (RHS) Source: Reuters, Thomson Financial Datastream, Eurostat, and HSBC Germany coping with a strong euro Exports % Yr Exports of goods & services % Yr  Eurozone exports have held up well, growing 2.4% q-o-q in Q3… 20 20 15 15  …but there has been a clear divergence in the performance of Germany and the rest of the Eurozone over the past 3-4 years 10 10 5 5  A combination of Germany’s competitiveness gains, a favourable product mix and a relatively high exposure to 0 0 emerging markets has so far enabled German export growth to shrug off the impact of euro appreciation -5 -5 96 97 98 99 00 01 02 03 04 05 06 07 EMU ex Germany Germany Source: Thomson Financial Datastream, Eurostat, and HSBC Inflation surge Inflation % Yr EMU inflation % Yr  Inflation rose to a shocking 3.1% in November with more than half of inflation driven by food and energy prices 3.5 3.5 3.0 3.0  Assuming stable oil prices, inflation will stay above 3% in 1Q08 2.5 2.5 and is unlikely to fall below 2% until very late in 2008 2.0 2.0 1.5 1.5  Although not its central forecast, the ECB remains concerned 1.0 1.0 about second round effects and will remain particularly wary 0.5 0.5 during the German public sector wage negotiations in early 2008 0.0 0.0 97 98 99 00 01 02 03 04 05 06 07 08 Headline Core (ex energy, food, alcohol & tobacco) Source: Thomson Financial Datastream, Eurostat, and HSBC 49
    • Macro Global Economics Q1 2008 Third act of upswing awaited than half of the Q1 drop has already been reversed in Lothar Hessler Economist Q2 and Q3. Private consumption should contribute HSBC Trinkaus & Burkhardt AG The economic upswing should remain intact even around half (growth contribution 0.8 percentage +49 211 910 2906 though the growth momentum is expected to slow lothar.hessler@hsbctrinkaus.de points) of GDP growth in 2008, given the down. The economy grew by 0.7% in 3Q 2007, continuation of the positive trend in the labour adjusted for seasonal and calendar effects. The market next year. The trend of falling unemployment strongest growth contribution was made by stock- should continue. For 2008 and 2009 we are building (0.4 percentage points) followed by private expecting unemployment levels of around 3.50 and consumption (0.3 percentage points). Our target for 3.25 million. We see economic growth of 1.6% as annual GDP growth of 2.6% in 2007 is not at risk, realisable in 2008, and 1.9% in 2009, thanks to due to the fact that a quarterly growth rate in the employment growth and higher wages: there is range of 0.1% to 0.4% for Q4 2007 will suffice for it likely to be an increase in disposable income beyond to be reached. the 3.5% mark in 2008 and 2009. We have no doubts about the classic German With the sentiment indicators having fallen but still upswing scenario. The initial trigger came from at high levels, Germany is likely to cope relatively exports, investments then picked up in the second well with international pressures, be it the turmoil in stage and finally private consumption will show the money and forex markets or the high oil and some pick up. Private consumption was depressed food prices. substantially by the increase in VAT which came into force at the beginning of 2007. However, more % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending -0.2 1.4 1.5 0.2 -0.4 1.9 1.4 1.2 1.2 Government consumption 2.0 0.8 0.8 1.7 2.1 0.5 0.8 1.0 0.8 Investment 5.3 2.5 1.9 3.4 2.8 1.2 3.1 3.1 2.4 Machinery & equipment 7.9 2.6 2.6 7.4 5.7 2.6 2.4 2.7 2.8 Construction 2.9 0.5 1.1 -0.1 -1.4 -2.5 1.4 1.4 1.8 Stockbuilding (% GDP) -0.8 -0.9 -0.8 -0.8 -1.0 -1.0 -1.0 -0.9 -0.8 Domestic demand 0.8 1.4 1.5 -0.1 1.8 0.6 2.0 1.5 1.6 Exports 8.4 7.4 7.4 9.1 5.1 7.2 8.2 6.9 7.3 Imports 6.3 7.8 7.3 5.9 5.9 5.6 9.6 7.6 8.3 GDP 2.6 1.6 2.0 2.5 1.8 1.6 1.7 1.4 1.6 GDP (% quarter) - - - 0.7 0.3 0.3 0.3 0.4 0.5 Industrial production 5.8 3.8 3.4 5.4 4.9 3.9 4.6 3.4 3.5 Unemployment (%) 9.0 8.2 8.0 8.8 8.8 8.5 8.2 8.1 8.1 Average earnings 1.8 2.4 2.5 1.7 2.6 2.4 2.4 2.4 2.4 Producer prices 1.9 1.9 1.3 1.2 2.0 2.3 2.0 2.0 1.5 Consumer prices* 2.3 2.3 1.5 2.2 3.1 3.2 2.5 2.0 1.4 Current account (EURbn) 144.2 140.0 136.0 37.7 33.7 35.0 35.0 35.0 35.0 Current account (% GDP) 5.9 5.6 5.3 6.2 5.5 5.7 5.6 5.5 5.5 Budget balance (% GDP) -0.2 -0.1 0.0 - - - - - - 3-month money (%) 4.4 4.3 4.3 4.8 4.8 4.6 4.4 4.3 4.1 10-year bond yield (%) 4.3 4.2 4.3 4.3 4.2 4.1 4.2 4.2 4.1 Source: HSBC 50
    • Macro Global Economics Q1 2008 Inflation exceeds the 3% mark for the first time in 13 The inflation drivers: Food and energy years % Yr % pts  The inflation rate (on a national basis) exceeded the 3% mark for the first time since 1994 in November 2007 (3.1%). The 4.0 0.9 German HICP (3.3% y-o-y) was at the highest level since its inception. The strong inflation is being influenced above all by 3.0 0.6 the significant increase in energy and food prices. These segments accounted for more than half of the overall increase 2.0 0.3 in prices vs. November 2006. Without the surge in energy product prices, inflation would have been around 2.2% 1.0 0.0  Although the increase in VAT as of January 2007 will have the 0.0 -0.3 effect of taking pressure off prices in 2008 due to the base effect, it 99 00 01 02 03 04 05 06 07 08 is becoming evident that average inflation in 2008 will be the same German HICP (LHS) German CPI (LHS) as in 2007, owing to the recently strong price momentum Spread (RHS) Source: Thomson Financial Datastream, and HSBC Trend in temporary work Flexibility on labour market vs. minimum wages too high  1.3% of persons in employment were temporary workers in ’000s Unskilled workers subject to social insurance ’000s 2006. Temporary work also fulfils the function of an instrument 600 600 for entering the labour market. Studies indicate that more than half of the approx. 700,000 temporary workers were previously 500 500 unemployed (every seventh person unemployed for longer than 400 400 one year) 300 300 200 200  There is a threat at present not only of the deregulation of temporary work being reversed, but also of the abandonment of 100 100 labour market policy reforms, with negative effects on 0 0 employment. However, the agreement over the minimum wage for postal workers should not be the starting point of a general 98 99 00 01 02 03 04 05 06 agreement about minimum wages. Up to now, minimum wages At temporary agencies At other companies are fixed in the range EUR 12.50 to 6.36 Source: IWG GDP growth rate and the number of working days GDP will fall slightly short of potential growth in 2008  Adjusted for seasonal and calendar effects a growth overhang of % pts Days 0.7 percentage points should be generated for 2008 0.6 253 0.4 252   More working days than usual will be available in 2008 which 0.2 251 suggests a positive production effect of around 0.3%, based on 0.0 250 past experience. Our calculations are based on seasonally and -0.2 249 calendar adjusted GDP. We expect a growth rate of 1.6% for 2008. Based on the unadjusted data, our GDP forecast would be -0.4 248 1.9% in 2008 and 2009 -0.6 247 97 98 99 00 01 02 03 04 05 06 07 08 Growth rate differences (LHS) Average working days (RHS) Source: Thomson Financial Datastream, and HSBC 51
    • Macro Global Economics Q1 2008 Auto industry no longer a drag to lead to car purchases being postponed until the Mathilde Lemoine Economist new year. Subsidies of between ¼ DQG ¼ HSBC France Growth bounced back in Q3 2007, gaining 0.7% will be available for vehicles with low CO2 +33 1 40 70 32 66 q-o-q following the 0.3% recorded in Q2 2007, mathilde.lemoine@hsbc.fr emissions. In cases where the purchase leads to helped by a positive contribution from foreign trade the replacement of a vehicle that is more than 15 (0.1% point). Manufacturing output was very strong, years old, a further ¼ Zill be available. gaining 1.3% compared to 0.0% in Q2, thanks most notably to the upturn in automotive production, In 2008, the boost to growth from healthy production which grew by 1.4% compared with the 1.8% drop in aerospace and the automotive sector will limit the in Q2, meaning this sector no longer held back other slowing in growth relative to the Eurozone, but the manufacturing areas and business services. drop in residential investment and in exports will prevent any overall increase in French GDP growth. Consumer spending was bolstered by purchases The increase in rates on mortgage loans in response of domestic consumer durables, rising 0.8% in Q3 to higher ECB rates and market rates will hit from 0.6% in Q2 and 0.5% in Q1. This trend is household solvency. The slowdown in the US and likely to falter as higher fuel and food prices hit UK will hold back export growth, as will the slower purchasing power. In addition, November’s strikes pace of growth in German investment. As a result, are likely to cut 0.1% point off consumer the fiscal deficit is likely to continue to widen as spending growth in Q4 2007, given that not all receipts slow and the government is not planning to spending planned for November will be carried rein in spending. over into December. Lastly, the introduction of a ’green tax’ system for cars in early 2008 is likely % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 1.9 2.1 2.0 2.2 2.2 2.3 2.1 1.8 2.0 Government consumption 1.5 1.4 1.6 1.5 1.5 1.4 1.3 1.4 1.4 Investment 3.7 2.5 3.1 3.5 2.9 2.3 2.4 2.6 2.7 Stockbuilding (% GDP) 0.7 0.8 0.9 0.8 0.8 0.8 0.8 0.9 0.9 Domestic demand 2.2 2.1 2.2 2.3 2.1 2.2 2.1 1.9 2.1 Exports 3.5 2.9 2.5 5.0 5.0 4.3 3.7 2.2 1.6 Imports 4.4 4.1 3.6 5.3 5.1 5.2 4.2 3.4 3.4 GDP 1.9 1.7 1.8 2.1 2.1 1.9 1.9 1.5 1.5 GDP (% quarter) - - - 0.7 0.4 0.5 0.3 0.4 0.4 Manufacturing output 2.0 2.0 2.3 2.7 3.2 2.3 2.6 1.7 1.6 Unemployment (%) 8.1 8.1 8.0 7.9 8.0 8.1 8.1 8.1 8.1 Average earnings 2.6 2.9 2.8 2.5 2.7 2.8 2.7 2.9 3.0 Consumer prices 1.6 2.2 2.0 1.4 2.5 2.7 2.3 2.2 1.7 Trade account (EURbn) -35.7 -41.9 -44.2 -9.3 -9.5 -9.7 -10.5 -10.7 -11.0 Current account (% GDP) -1.1 -1.5 -1.5 - - - - - - Budget balance (% GDP) -2.7 -2.9 -2.8 - - - - - - 3-month money (%) 4.4 4.3 4.3 4.8 4.8 4.6 4.4 4.3 4.1 10-year bond yield (%) 4.3 4.2 4.3 4.4 4.2 4.1 4.2 4.2 4.1 Source: HSBC, Thomson Financial Datastream 52
    • Macro Global Economics Q1 2008 The automotive sector will no longer hold back Automotive production will no longer hinder overall economic activity manufacturing output % Yr Firms investment outlook % Yr  Automotive production bounced by 1.4% in Q3 2007, having dropped by 1.8% in Q2 2007 and 6.9% in 2006 20 20 Forecast 10 10  This positive trend, due to the launch of new French-produced 0 0 models, will bolster growth in business services and exports. Automotive exports account for 12.7% of exports of goods and -10 Estimate -10 between 2000 and Q3 2007 represented 10.9% of total export -20 -20 growth 00 01 02 03 04 05 06 07 08 Manufactured goods producers  The slowdown expected in the business sector is likely to be Consumption goods producers limited by investment in the automotive sector and by improved Car builders confidence amongst business leaders in this sector Capital goods producers Intermediate goods producers Source: INSEE, and HSBC Tightening of monetary conditions is measured Interest rates on loans to the private sector are rising Index Bank lending survey for France Index  Between July and September, fixed mortgage rates rose by 31bp, after rising by 14bp between December 2006 and June 0.6 0.6 2007. This increase in lending rates, partially offset by tax Tightening 0.4 0.4 deductions on interest payments, (which we calculate are 0.2 0.2 equivalent to a 34bp rate cut), will hit consumer solvency through the beginning of next year 0.0 0.0 -0.2 Loosening -0.2  Despite structurally strong demand due to a lack of new houses -0.4 -0.4 being built, residential investment is therefore likely to slow in 2008 03 04 05 06 07  Companies have seen borrowing conditions tighten since the Credit standards applied to the approval of loans or credit lines end of 2006 as can be seen in the BoF’s bank lending survey. to enterprises Furthermore, between December 2006 and June 2007, rates on Credit standards applied to the approval of loans to households loans to companies increased by 42bp, and by a further 17bp for house purchase between July and September 2007 Source: Bank of France, and HSBC Consumer spending trends are likely to be more Consumption of manufactured goods weaken erratic temporarily % Mth % Mth  The 9.1% increase in petroleum products prices between June Manufactured goods consumption by and October and the 0.9% rise in food prices over the same components in 2007 period could limit purchases of residential durable goods, the 10 2 main engine of growth in consumer spending 5 1  Moreover, the announcement of the introduction of a 'green tax' 0 0 system for car purchases at the beginning of 2008 is likely to lead to purchases being delayed. -5 -1 -10 -2  But, the tax and social security exemptions on overtime and the recent announcement of a revision of the maximum 35-hour Jan Feb Mar Apr May Jun Jul Aug Sep Oct week in exchange for an increase in wages are likely to boost Automobile (LHS) Capital goods (LHS) gross disposable income, as are cash payments for days not Clothing (LHS) Other (LHS) worked as part of arrangements to reduce working hours Manufactured goods (RHS) Source: INSEE, Banque de France, and HSBC 53
    • Macro Global Economics Q1 2008 Already slowing readings for business confidence and the Janet Henry Economist manufacturing PMI are consistent with further HSBC Bank plc GDP growth rebounded to 0.4% q-o-q in Q3 after weakness. Partly in response to the slightly +44 20 7991 6711 the very weak Q2 figure of just 0.1%. The janet.henry@hsbcib.com weaker outlook for Germany, as well as the US surprise was in the detail, which showed an and UK, we have lowered our 2008 GDP growth unexpectedly large rise in investment (1.5% forecast from 1.2% to 1%. q-o-q) and a disappointingly weak 0.2% q-o-q rise in consumer spending. Given the slower As in the rest of the Eurozone, HICP inflation has employment growth and lack of an expected picked up from 1.7% in 3Q07 to 2.6% in upturn in wage growth, we expect this trend to November on the back of higher food and energy persist into 2008, especially as the country’s high inflation. It is likely to move above 3% in 1Q08 dependence on variable rate mortgages means that and could remain above 2% even by end-year. many households are facing higher servicing costs After an impressive fiscal performance in 2007, as a lagged response to past ECB rate increases which is likely to have reduced the budget deficit and the recent rise in money market rates. from 4.4% of GDP to about 2.5%, the deficit As in Germany, inventories made a sizeable appears set to widen again in 2008-09 as the positive contribution in Q3, which could be a government will find it difficult to curb spending constraint on Q4 growth. Exports were fairly solid as the economy slows. In addition, the 2008 in Q3 but industrial production fell in both budget includes a cut in corporate tax rates. September and October and the more recent % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 1.9 1.2 1.3 1.7 1.9 1.4 1.2 1.2 1.1 Government consumption 0.2 0.5 0.5 0.1 0.4 0.5 0.5 0.5 0.5 Investment 2.9 1.8 1.7 4.5 2.3 2.1 2.3 1.3 1.7 Stockbuilding (% GDP) 0.5 0.4 0.3 0.9 0.4 0.4 0.4 0.4 0.3 Domestic demand 1.8 1.0 1.1 1.7 1.0 1.4 1.2 0.5 1.0 Exports 2.4 1.5 3.2 3.9 0.8 0.3 2.1 1.8 1.6 Imports 2.3 1.6 2.4 2.8 1.0 2.0 2.5 0.7 1.1 GDP 1.7 1.0 1.3 1.9 0.9 0.9 1.1 0.9 1.1 GDP (% quarter) - - - 0.4 0.2 0.3 0.2 0.2 0.4 Industrial production 0.3 0.6 1.4 0.8 -1.3 -0.3 0.4 0.5 1.6 Unemployment (%) 6.0 6.3 6.3 5.9 6.0 6.1 6.2 6.3 6.4 Hourly wage rate 2.4 2.5 2.5 1.9 2.5 2.5 2.3 2.5 2.5 Consumer prices 2.0 2.7 1.8 1.7 2.5 3.0 2.7 3.0 2.3 Current account (EURbn) -35.6 -40.9 -39.1 -5.1 -9.0 -12.7 -10.0 -8.0 -10.2 Current account (% GDP) -2.3 -2.6 -2.4 - - - - - - Budget balance (% GDP)* -2.4 -2.6 -2.7 - - - - - - 3-month money (%) 4.4 4.3 4.3 4.8 4.8 4.6 4.4 4.3 4.1 10-year bond yield (%) 4.5 4.4 4.4 4.6 4.4 4.3 4.4 4.4 4.3 Note: * = state sector cash balance Source: HSBC 54
    • Macro Global Economics Q1 2008 Survey data have weakened PMIs and growth Index Italy Index  The Italian PMIs have fallen back more sharply than the Eurozone in recent months... 65 65 60 60  ...particularly the service sector PMI which fell from 58.5 in July to 50.8 in November 55 55 50 50  Industrial production fell in September and October and the -1.1% m-o-m drop in industrial orders in October suggests Q4 45 45 production will be weak 40 40 98 99 00 01 02 03 04 05 06 07 08 PMI manufacturing PMI services Source: Reuters, and HSBC Consumer spending softening Retail sales and confidence % Yr, 3mma Index  Consumer spending growth slowed to just 0.2% in Q3, reflecting an easing in employment growth, to just 0.3% 5.0 -20 q-o-q while annual wage growth slowed to 1.9% y-o-y 2.5 -60  Consumer confidence fell back in October-November and recent retail sales growth has been disappointing 0.0 -100  The slowdown in employment and moderation in wage growth is expected to persist into 2008, suggesting consumer spending -2.5 -140 growth will amount to just 1% in 2008 98 00 02 04 06 08 Retail sales (LHS) Consumer confidence - intentions to buy (RHS) Source: INS, ISAE, Thomson Financial Datastream, and HSBC Exports faltering Exports % Yr % Yr  Italy’s real exports of goods and services picked up a little in Q3 to 0.9% q-o-q after a 1.4% drop in Q2... 15 6 10 4  ...but the overall export performance in 2007 has been 5 2 disappointing, especially given the strength of import demand in its major export destination – Germany 0 0 -5 -2  Interestingly though, Italy’s exports to the US have held up rather better than France or Germany’s over the past year -10 -4 98 00 02 04 06 08 Italy exports of goods & services (LHS) Germany GDP (RHS) Source: INS, Thomson Financial Datastream, and HSBC 55
    • Macro Global Economics Q1 2008 Slowdown has kicked-off crisis, and continue to do so now. Astrid Schilo Economist The Spanish economy is vulnerable to elevated A positive aspect of the Spanish economy is that it HSBC Bank plc +44 20 7991 6708 interest rates on two fronts: First, households are runs a fiscal surplus, albeit a shrinking one. Should astrid.schilo@hsbcib.com highly indebted, predominantly on mortgages with the cyclical situation deteriorate dramatically, the variable interest rates. Second, corporate debt levels government could still step in and boost the are also significantly above its European neighbours. economy through fiscal expansion. The incumbent The link between the household and corporate sector government is under a socialist helm, but general is the housing and construction boom experienced in elections take place in March 2008. recent years, which is now unravelling. As in most economies, oil and food price inflation Spain had been defying its weak fundamentals for proved a nasty surprise in Q4. Spanish HICP quite a long time, but the third quarter proved inflation moved back above 4.0%, and is expected different. Household consumption came down to to stay elevated into the third quarter of 2008, 0.4% q-o-q, the weakest growth rate in 4 years. subject to the disclaimer that commodity prices Investment activity was also disappointing. On could reverse their gains. This is not our current our forecasts, both trends are set to continue. assumption. Elevated HICP inflation also has the unpleasant side effect that wage inflation will The credit and money market turmoil in our view remain elevated, as wage indexation on CPI exacerbated a development which would have inflation is still a common feature in Spain. taken place in any case. Spanish banks did not hesitate to pass on higher interest rates before the % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 3.1 2.1 2.3 3.0 2.8 2.3 2.0 2.1 2.1 Government consumption 5.3 4.4 4.1 5.8 4.8 4.6 5.3 3.9 4.1 Investment 5.7 2.3 2.8 5.4 4.0 2.6 1.8 2.2 2.4 Stockbuilding (% GDP) 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Domestic demand 4.2 2.6 2.7 4.1 3.5 2.8 2.5 2.5 2.6 Exports 5.7 4.6 4.4 8.0 6.4 6.8 5.3 2.3 3.9 Imports 6.9 4.4 3.7 8.3 6.8 6.3 5.1 2.7 3.5 GDP 3.8 2.4 2.8 3.8 3.2 2.6 2.3 2.3 2.5 GDP (% quarter) - - - 0.7 0.5 0.5 0.6 0.7 0.8 Industrial production 2.4 1.6 1.8 1.5 1.6 1.3 1.4 1.7 1.8 Unemployment (%) 8.2 9.1 9.5 8.0 8.2 8.6 9.2 9.2 9.2 Average earnings 3.7 3.0 2.4 3.8 2.8 3.0 3.7 3.0 2.5 Consumer prices 2.8 3.7 2.4 2.4 3.9 4.4 3.9 3.7 2.7 Trade account (EURbn) -96.1 -98.4 -94.7 -24.9 -25.0 -25.2 -25.2 -24.2 -23.8 Current account (EURbn) -101.3 -103.5 -98.5 -25.3 -25.8 -26.5 -26.7 -25.5 -24.8 Current account (% GDP) -9.6 -9.3 -8.4 - - - - - - Budget balance (% GDP) 1.8 1.0 0.4 - - - - - - 3-month money (%) 4.4 4.3 4.3 4.8 4.8 4.6 4.4 4.3 4.1 10-year bond yield (%) 4.3 4.2 4.3 4.4 4.2 4.1 4.2 4.2 4.1 Source: HSBC 56
    • Macro Global Economics Q1 2008 Households pessimistic on financial future… …as debt level high, and interest rates on the rise  Spanish households are highly indebted, and with rising Index Spain Index interest rates on flexible mortgage rates, a squeeze of 10 10 disposable income is unavoidable 5 0  Households have already reacted by scaling back private consumption in Q3 0 -10 -5 -20  This is arguably backward looking, but households also believe that their future financial situation is going to deteriorate -10 -30 95 97 99 01 03 05 07  Indeed, according to the European Commission’s consumer Consumer fin. situation next 12 months (LHS) confidence survey, consumers’ expectations on their future Consumer fin. situation over last 12 months (RHS) financial situation hit a 12 year low in November Source: ECB, Bloomberg, Thomson Financial Datastream, and HSBC Corporate loan volume is reacting… …suggesting higher interest rates work here as well % Yr, 3mMA Volumes: new loans to NFCs % Yr, 3mMA  High corporate loan growth is the major factor keeping up Eurozone-wide private sector loan expansion 60 60 40 40  In 2006 and the beginning of 2007, Spain was a major culprit for this 20 20 0 0  However, things have changed. New corporate loan growth was close to zero on a 3 month moving average in October. -20 -20 Outstanding corporate loan growth, which takes longer to react, is down to 25% y-o-y in October, from a peak of 31% y-o-y -40 -40 04 05 06 07 08  The suspicion is that corporates with strong exposure to the EMU Spain France Germany construction and real estate sector are behind this decline Note: For France 12 months cumulative, NFC = non-financial corporations Source: ECB, National Central Banks, and HSBC PMIs have clearly turned… …endorsing economic slowdown  Lower loan volumes are one thing, but there is no automatic Index Spain PMIs Index translation into slow economic growth 62 66  58 62  However, the Q3 GDP data already gave us some evidence of 54 58 this, with private consumption and investment both softening significantly 50 54 46 50   Evidence for the fourth quarter, best captured by the 42 46 manufacturing and service sector PMIs, also speaks in favour of 38 42 a further easing of economic growth. The slowdown in the two indicators has been quite dramatic, but we are not yet at the 00 01 02 03 04 05 06 07 08 levels seen in 2001 Manufacturing (LHS) Serv ices (RHS) Source: Eurostat, Reuters, and HSBC 57
    • Macro Global Economics Q1 2008 Bursting the bubble But we think the UK will avoid a recession: We Karen Ward Economist expect 100bp of interest rate cuts and a sizeable HSBC Bank plc The UK housing bubble has relied upon decline in sterling to 1.80 against the dollar. With +44 20 7991 3692 continually expanding credit from the commercial karen.ward@hsbcib.com the global growth outlook looking only banking sector. With funds now hard to come by, marginally weaker we expect net trade to provide many banks and building societies have to cut a rare boost to UK GDP growth. In other words, back on loan growth. The BoE re-ran their we expect some of the rebalancing of the quarterly credit conditions survey early in a bid to economy that the Governor of the Bank of capture the reaction to the credit turmoil and this England has been hinting at to come through. pointed to a significant tightening of credit standards to corporates and households. As credit Inflation will remain a nagging concern but is retrenched the UK housing bubble appears to be although energy and food are expected to boost deflating. Nominal house prices have already inflation, declines in the price of other items should fallen by 1.7% in just three months. We expect ensure overall headline inflation remains benign. further sizeable declines in house prices in 2008. RPI is expected to fall sharply through 2008. Declines in house prices, coupled with increased But there are major uncertainties. One of the largest is job insecurity, are expected to sharply depress the extent of job cuts in the financial services sector consumer spending. We expect the unemployment and the economy-wide impact of falling house prices. rate to increase due to job cuts in finance, construction and distribution. % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 3.1 0.8 1.1 3.6 2.9 2.0 1.1 0.1 0.0 Government consumption 1.7 2.7 3.0 1.9 2.1 2.2 2.5 3.0 3.1 Investment 6.9 3.0 2.4 6.2 4.2 4.5 3.8 2.4 1.5 Stockbuilding (% GDP) 0.3 -0.1 -0.1 0.3 0.6 0.2 0.0 -0.4 -0.3 Domestic demand 3.8 1.5 1.7 4.0 3.5 2.8 1.9 0.7 0.6 Exports -4.4 5.4 7.6 2.1 3.5 5.2 6.2 5.2 5.2 Imports -2.2 5.0 5.7 4.3 5.7 6.3 7.6 3.3 3.1 GDP 3.2 1.5 2.1 3.3 2.9 2.4* 1.4* 1.1 1.0 GDP (% quarter) - - - 0.7 0.6 0.3* -0.1* 0.4 0.4 Manufacturing output 0.6 1.2 2.6 0.4 0.2 0.3 0.3 0.5 0.7 Unemployment (%) 2.7 3.0 3.2 2.6 2.7 2.8 2.9 2.9 3.0 Average earnings 4.1 3.9 3.2 3.8 3.6 3.3 3.2 3.1 3.0 RPI 4.2 2.2 2.4 3.9 4.1 3.2 2.3 1.8 1.2 CPI 2.3 1.8 1.7 1.8 2.1 2.0 1.6 1.8 1.7 Current account (% GDP) -4.8 -3.5 -2.3 - - - - - - PSNB (% GDP) 2.7 2.9 2.4 - - - - - - USD/GBP** 2.04 1.83 1.76 2.04 2.04 1.99 1.92 1.83 1.83 GBP/EUR** 0.71 0.74 0.74 0.70 0.71 0.73 0.73 0.74 0.74 Base rate (%)** 5.50 4.50 4.50 5.75 5.50 5.25 5.00 4.75 4.50 10-year bond yield (%)** 5.0 4.6 4.7 5.0 4.5 4.7 4.7 4.6 4.5 Notes: *corporate capital allowance changes in April 08 is likely to affect investment spending, ** end-quarter estimates Source: HSBC 58
    • Macro Global Economics Q1 2008 Housing bubble looks to be popping... ... as credit is retrenched and expected capital gains are lowered Net balance, y-y Net balance, y-y  The rapid gains in house prices over the past couple of years are hard to justify with improved fundamentals in the economy. 80 80 Households’ earnings prospects deteriorated as higher RPI could no longer be negotiated into higher wages 40 40  Commercial banks compensated for the weakness in earnings 0 0 by loosening credit conditions further, fuelling the speculative demand around the housing market -40 -40  Both the credit on which the bubble relies, and the overly -80 -80 inflated expectations of future house price gains, are now 92 94 96 98 00 02 04 06 08 deflating. However, this is likely to be a slow-burning unwind Site visitors Net reservations Source: Homebuilders’ federation Consumer spending expected to contract in H1... ...alongside nominal house prices % Yr % Yr  As house prices decline, those homeowners that expected their houses to provide a pension as well as somewhere to live will 45 16 be disappointed, and may wish to revive their saving ratio which in the past year fell to the lowest on record 30 12 15 8  Such a revival in the savings habit will be encouraged by the strong gains in savings interest rates now available as commercial banks look to deposits to raise funds 0 4 -15 0 84 88 92 96 00 04 08 Average house prices* (LHS) Nominal consumer spending (RHS) Source: ONS, Nationwide, Halifax, and HSBC The inflation outlook will be a lingering concern... ... but will turn out to be uneventful % Contributions to RPI %  Food and petrol prices are expected to continue to push up on inflation through 2008 and retail gas suppliers are threatening 5 5 higher prices. However, this is expected to depress demand 4 Forecast and prices elsewhere in the CPI basket, so that overall inflation 4 remains benign. Coupled with interest rate cuts and falling 3 3 house prices through 2008 we expect RPI to fall very sharply to 2 nearer 1% by end-2008 2 1 1 0  But until that inflation outlook is proven correct, the Bank of -1 0 England will feel constrained as regard to how aggressively -2 -1 they can ease policy to support growth. With inflation expectations elevated, they will be concerned that supporting 05 06 07 08 09 the growth outlook is at the expense of their inflation credibility. CPI MIPs Council tax Depreciation We therefore look for a gradual easing cycle through 2008 Note: MIP = mortgage interest payments Source: ONS, and HSBC 59
    • Macro Global Economics Q1 2008 Opposing forces to limit rate The Norwegian experience shows that price and Janet Henry Economist rises cost inflation can rise rapidly towards the end of a HSBC Bank plc cyclical upturn. Hence, in isolation, a pre-emptive +44 20 7991 6711 The Norwegian economy remains strong but there janet.henry@hsbcib.com and more pronounced increase in the key policy are signs that demand growth may moderate in the Manas Paul rate might look appropriate. Bangalore months ahead. The rise in house prices seems to have come to a halt and a strong krone exchange However, the inflation outlook is marked by rate is reducing profitability in some business opposing forces. The krone is strong and prices sectors. The turbulence in international financial for imported consumer goods are still falling in markets, inducing slower growth among trading spite of higher prices for many commodities. partners, is expected to affect exports. Moreover, lending is expected to become more expensive (even without any hike in the policy However, there are clear signs of rising prices for rate), as global tightening of credit conditions domestically produced goods and services. The affects Norwegian lenders through the euro- and enterprises in the Norges Bank’s regional network dollar-based inter-bank market. report that wage growth has been generally higher than anticipated. Moreover, productivity growth With some softening likely in the 2008 growth in the business sector is probably slackening outlook, we expect these opposing forces to limit the amidst rising capacity utilisation. rise of policy rates. We look for the policy rate to peak at 5.5% by 1H08. However, we view the risks thereafter to be marginally biased to the upside. % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 6.8 3.1 2.0 6.7 6.3 4.1 3.0 2.7 2.4 Government consumption 3.4 4.1 4.7 3.5 3.8 4.1 4.2 4.1 4.1 Investment 6.6 5.4 2.9 7.0 8.7 9.8 7.0 4.3 1.0 Stockbuilding (% GDP) 2.2 2.5 3.0 2.6 2.6 2.6 2.2 2.6 2.6 Domestic demand 5.0 4.1 3.4 5.1 5.7 6.9 3.9 3.4 2.5 Exports 3.1 3.2 2.5 3.8 4.0 3.0 5.8 3.1 1.0 Imports 7.9 7.1 3.2 8.9 8.2 11.2 8.7 6.1 3.0 GDP 3.3 2.8 3.1 3.4 4.2 3.9 3.3 2.4 1.6 GDP (% quarter) - - - 1.4 1.2 0.3 0.4 0.6 0.4 Industrial production -0.2 2.3 0.6 1.3 3.5 2.8 4.4 1.1 0.8 Unemployment (%) 2.7 3.1 3.8 2.5 2.7 3.0 3.0 3.3 3.3 Average earnings 5.5 4.2 3.4 5.3 5.0 3.9 4.4 4.6 4.1 Consumer prices 0.8 3.0 2.5 0.2 1.5 2.5 3.0 3.5 3.0 Current account (% GDP) 14.7 10.0 8.0 17.6 11.5 10.0 10.0 10.0 10.0 Budget balance (% GDP) 16.7 16.0 15.0 - - - - - - NOK/EUR* 7.6 7.5 7.5 7.71 7.60 7.60 7.60 7.50 7.50 3-month money (%) 5.2 5.8 5.6 5.7 5.9 5.8 6.0 5.9 5.7 10-year bond yield (%) 4.8 5.3 5.3 5.0 4.7 5.3 5.3 5.3 5.3 Note: * = end-year Source: HSBC 60
    • Macro Global Economics Q1 2008 Policy rate at or near the peak At the same time, however, inflation pressures are Janet Henry Economist expected to persist in the near term due to rising HSBC Bank plc Having passed its cyclical peak, the Swedish unit labour costs, rapidly rising food prices and +44 20 7991 6711 economy is expected to slow down on account of janet.henry@hsbcib.com higher interest costs for home owners. weaker productivity growth, a gradually rising Manas Paul interest rate and a cyclical slowdown in investment So while domestic developments still point to Bangalore growth. Weaker international growth (attributable to higher policy rates, international developments the global financial turbulence) has added to the and the risk of a deterioration in the growth pressures, affecting the 2008 growth outlook through environment point in the opposite direction. exports and the domestic spillovers from rising inter- The central bank currently seems to be biased bank lending rates in the international market. towards the more negative news arising out of the Sweden’s relatively strong household global financial turmoil, thus limiting the prospect consumption may be hit by the growing trend of of further rate hikes from the current 4% level. precautionary saving amidst continuing However, for now we maintain our mid-2008 international financial turbulence. In fact, Swedish policy rate call at 4.25%, which would probably consumer confidence slumped to a two-year low be the peak in the current cycle. in November, as tumbling stocks and rising interest rates dented household optimism. % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 3.2 3.0 2.4 3.4 3.7 3.4 3.3 3.0 2.5 Government consumption 0.6 1.2 1.2 0.2 0.5 0.8 1.1 1.4 1.3 Investment 8.5 4.4 2.6 8.6 7.5 6.1 4.9 3.8 2.9 Stockbuilding (% GDP) 0.7 0.4 0.4 1.2 0.3 0.4 0.4 0.4 0.5 Domestic demand 4.5 2.5 2.2 4.7 3.7 2.7 3.1 1.8 2.5 Exports 4.7 2.9 3.2 4.2 2.8 2.4 2.7 3.2 3.3 Imports 8.9 3.9 2.3 9.7 7.2 5.4 4.7 2.8 2.6 GDP 2.6 2.3 2.7 2.6 1.8 2.1 2.1 2.1 2.9 GDP (% quarter, sa) - - - 0.6 0.0 0.8 0.7 0.6 0.8 Industrial production 4.4 2.9 2.9 4.1 2.5 2.3 2.7 3.2 3.2 Unemployment (%) 6.0 5.0 5.3 5.4 5.2 5.0 4.9 5.0 5.1 Average earnings 3.2 3.6 3.0 3.3 3.4 3.7 3.7 3.6 3.5 Consumer prices 2.2 2.6 2.3 1.9 3.0 3.1 2.8 2.5 2.0 Current account (% GDP) 6.4 5.9 5.2 5.6 6.1 6.3 5.9 6.1 5.5 Budget balance (% GDP) 2.5 2.5 2.3 - - - - - - State debt (% GDP) 43.4 39.7 39.0 - - - - - - SEK/USD 6.62 6.18 6.77 6.47 6.14 6.07 6.21 6.22 6.22 EUR/SEK 9.18 8.58 8.80 9.20 8.90 8.80 8.70 8.40 8.40 3-month money (%) 4.0 4.6 4.4 4.3 4.7 4.6 4.8 4.7 4.5 10-year bond yield (%) 4.2 4.0 4.5 4.3 4.3 4.4 4.5 4.5 4.5 Source: HSBC 61
    • Macro Global Economics Q1 2008 Domestic strength is a buffer Switzerland will be predominantly through second Astrid Schilo Economist round effects, which means via weaker export and HSBC Bank plc As a small open economy, Switzerland is highly investment activity. +44 20 7991 6708 exposed to international developments, but for astrid.schilo@hsbcib.com now the resilience of the domestic economy has Inflation picked up in Q4, predominantly on energy been a surprise. Looking forward, we believe the and food. This effect should slowly fade, and domestic element will continue to be a positive, favourable structural factors like labour immigration although not being able to counterbalance and the liberalisation of domestic markets should completely the external drag. also help to keep inflationary pressures at bay. Private consumption ran close to 3% y-o-y in Q3 The SNB kept interest rates on hold at 2.75% in 2007, which means that four years of economic December, as uncertainties regarding the economic expansion have, like a textbook scenario, translated outlook dominated. SNB rates are currently roughly into an increased willingness to spend on behalf of at a neutral level, and we believe the SNB is on hold households. On the other hand, investment for the foreseeable future. Should the global expenditure continued to cool, especially on the economy slow by more than currently expected, an construction side. So the economic upswing is in a easing cannot be excluded. But it is worth noting that more mature phase, and we believe that the the SNB has been quite successful in keeping money momentum will cool in the coming quarters. market distortion out of its own market. Hence, it is unlikely that the SNB would lower interest rates just The credit crisis and expected US slowdown are to unlock money markets. well known external headwinds. The impact on % Year 2007f 2008f 2009f Q3 07 Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 2.1 1.8 1.6 2.6 2.6 2.3 2.1 1.5 1.5 Government consumption -0.7 0.4 0.3 -0.9 -0.2 0.4 0.4 0.8 0.1 Investment 2.8 0.5 1.1 1.3 0.8 0.7 -1.6 1.8 1.2 Stockbuilding (% GDP) -1.1 -0.8 -1.1 -1.2 -1.2 -1.2 -0.2 -0.6 -1.3 Final domestic demand 1.9 1.4 1.4 1.9 1.8 1.7 1.0 1.5 1.3 Exports 9.1 3.1 4.5 10.1 6.2 4.1 2.8 2.0 3.5 Imports 4.5 3.1 3.7 7.1 -0.1 3.0 3.1 2.9 3.2 GDP 2.8 1.9 1.8 2.8 2.8 2.3 2.0 1.8 1.5 GDP (% quarter) - - - 0.8 0.5 0.2 0.4 0.6 0.3 Industrial production 8.6 4.3 4.5 10.7 6.6 7.4 3.9 2.6 3.6 Unemployment (%) 2.8 2.6 2.9 2.7 2.7 2.7 2.6 2.6 2.6 Consumer prices 0.7 1.7 1.2 0.6 1.6 2.1 1.7 1.7 1.4 Current account (EURbn) 49.3 35.6 39.8 12.0 11.3 9.2 8.5 8.5 9.4 Current account (% GDP) 15.7 11.0 11.9 15.0 14.0 11.6 10.8 10.3 11.3 SFR/USD* 1.15 1.19 1.23 1.17 1.15 1.16 1.17 1.19 1.19 SFR/EUR* 1.67 1.60 1.60 1.66 1.67 1.68 1.64 1.60 1.60 3-month money (%) 2.6 2.8 2.8 2.7 2.8 2.8 2.8 2.8 2.8 10-year bond yield (%) 2.9 2.8 3.1 3.0 3.0 2.9 2.6 2.7 2.9 Note: * = end-year Source: HSBC 62
    • Macro Global Economics Q1 2008 Inflation puts easing on hold in the year. The risks to this rate cut scenario Alexander Morozov Economist stems from the potential second round effect on HSBC Bank (RR), Moscow The acceleration of inflation from 6.4% y-o-y in inflation from wage increases in the private sector +7 495 783 8855 September to 7.1% y–o-y in November represents alexander.morozov@hsbc.com in 2008. a growing concern for the authorities. In essence, inflation has reversed its decelerating trend, with Balancing the negative news on inflation, foreign elevated food and energy prices the culprits. The trade has been surprising on the upside, with export inflation increase came after the ongoing global growth being led by manufacturing. Besides the financial market turbulence had already prompted improving current account, exports keep GDP the NBH to pause it’s cutting cycle in October. growing. Otherwise, it would have stagnated or NBH governor Simor also expressed concerns even fallen amidst a decline in private and public about the outcome of 2008 wage negotiations with spending and sluggish investment. trade unions. As a result, the 9:3 majority of the Overall, we expect 2008 to bring positive news as Bank’s board voted to leave the policy rate far as economic growth is concerned, with private unchanged in November. Moreover, Simor even consumption and investment recovering from the hinted that NBH might decide to raise rates at tax hikes and the cut in budget subsidies that some point if inflationary pressures persist. occurred in 2007. Although there is just a little chance that the rate will be cut prior to February 2008, some moderation in food inflation and the easing of negative base effects should positively affect CPI in early-2008, making new rate cuts possible later % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 3.2 3.8 1.2 -2.0 1.9 3.5 Government consumption 0.0 0.2 -5.5 -0.5 0.0 2.0 Fixed investment 7.7 5.6 -1.8 1.7 1.5 2.8 Exports 15.7 11.6 17.1 15.5 10.8 10.0 Imports 14.1 6.8 11.9 12.5 9.1 10.5 GDP 5.2 4.1 3.8 1.6 3.3 4.5 Industrial production 8.3 7.0 10.6 8.5 11.1 10.5 Unemployment* 6.3 7.3 7.5 6.8 6.4 6.2 Consumer prices 6.8 3.6 3.9 7.9 5.3 3.0 Current account (% GDP) -8.7 -7.2 -5.8 -3.4 -2.5 -2.5 Budget balance (% GDP)** -4.3 -2.4 -8.2 -5.6 -3.9 -3.3 HUF/USD* 180.7 214.0 190.6 172.4 170.4 178.3 HUF/EUR* 245.6 252.5 251.4 250.0 230.0 230.0 3-month money (%)* 9.3 6.3 8.1 7.3 6.3 5.1 10-year yield (%)* 7.0 7.0 6.7 6.4 6.0 5.8 Note: * = year-end; ** Cash deficit rather than European Standard Accounting budget deficit Source: HSBC 63
    • Macro Global Economics Q1 2008 Strong growth and increasing trade deficit. The current account deficit is expected Philip Poole inflationary pressure to hit 4% of GDP in 2007. Economist HSBC Bank plc Economic indicators currently paint a rosy picture Fiscal performance has been better than expected, as +44 20 7991 5641 philip.poole@hsbcib.com and we look for growth of 6.6% in 2007. All signs growing employment and consumption have Jonathan Katz are that growth will remain buoyant in the quarters supported tax revenues, while falling unemployment Israel to come, fuelled by rising consumption and has cut benefit costs. Other than employment tax phenomenal investment growth. Both household and cuts, these factors are likely to remain mostly intact government consumption are booming. Rising next year. However, expenditure will start to rise employment levels and robust wage growth have moderately in 2008 as the result of various election unleashed pent-up consumer demand. The new promises, many of which were passed in the weeks coalition, led by the centrist Civic Platform, has been prior to the elections. positive for fiscal credibility so far, trimming the The central bank has responded to rising demand, budget in order to finance a wage increase for wages, headline CPI and planned budget expenditure teachers. A coalition with the smaller Polish by hiking interest rates by 25bp on four occasions Peasants’ Party (PSL) promises little in the way of a between April and November. With inflation policy shift, but will mean a marked improvement currently running above target (3.6% y-o-y in for foreign relations. Expenditure plans (on pensions November) and domestic demand strong, further and child benefits) as well as employment tax cuts in monetary tightening is expected in 2008. 2008 will combine to support strong growth next year. However, it may also forestall a fall in the budget deficit, increase inflation risks and widen the % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 3.8 1.9 5.7 5.5 5.0 4.5 Government consumption 2.5 1.7 2.1 3.5 4.5 3.5 Fixed investment 13.4 -5.8 12.6 16.5 12.2 8.8 Exports 19.2 3.0 16.0 8.5 10.2 10.5 Imports 16.6 -1.9 17.6 12.5 11.8 10.2 GDP 5.3 3.4 6.1 6.6 5.6 5.2 Industrial production 12.7 4.0 12.0 10.6 11.0 9.6 Unemployment (%)* 19.1 17.6 14.9 11.5 8.7 8.0 Consumer prices 3.5 2.1 1.0 2.7 3.5 2.1 Current account (% GDP) -4.1 -1.6 -2.3 -4.0 -3.9 -3.7 Budget balance (% GDP) -4.5 -2.5 -2.4 -1.5 -1.8 -1.5 PLN/USD 3.00 3.26 2.90 2.52 2.41 2.50 PLN/EUR 4.07 3.84 3.83 3.65 3.25 3.30 3-month money (%)* 6.5 4.6 4.2 5.1 5.6 5.3 10-year bond yield (%)* 5.8 5.1 5.2 5.7 6.0 5.8 Note: *year-end Source: HSBC 64
    • Macro Global Economics Q1 2008 Economic overheating amidst full-year growth projection of 7.6%. In 2008, the Alexander Morozov Economist muted political risks moderation of credit growth should get GDP HSBC Bank (RR), Moscow growth down to c6.5-7.0%. All in all, we expect +7 495 783 8855 The strong 3Q GDP data have served to offset alexander.morozov@hsbc.com still high growth and double-digit inflation next news of a deceleration of investment and year. A return to single-digit inflation is unlikely industrial activity in August/September, and point before 2009, when the recent deceleration of to the sustainability of growth. However, the money supply growth should have had a positive observed pattern of economic growth suggests impact on prices. overheating in the economy. A boom in construction and rapid growth of the service With President Putin’s blessing of Dmitry sector have occurred in parallel with the Medvedev for the Presidential race, and the acceleration of price growth. The good thing is reciprocal offer by Medvedev to Putin to head the that manufacturing demonstrates strong growth. It government after the presidential elections, the speaks for the economy’s resistance so far to the political outlook has become much clearer. Dutch Disease that manifests itself in a stagnation Together with a possible shift of some or depression of the tradable sector of an economy Presidential powers to the Prime-minister’s office, when the rapid appreciation of national currency this assures that significant deviations from the against the currencies of major trade partners current policies are not very likely in 2008. Since (adjusted for the inflation differential) erodes the rating agencies pay close attention to political sector’s competitiveness. risks, the substantial mitigation of these risks should prompt Russia’s credit rating to be Looking forward, good economic data for October upgraded to A-/A3 by at least one agency. That hint at the continuation of strong growth in 4Q as should maintain favourable investor sentiment well. The high base effect of 4Q 2006 and the towards Russia, supporting the strong moderation in growth of financial services that we macroeconomic fundamentals. expect in November-December brings us to expect 4Q GDP growth of 7.0% y-o-y and the % Year 2004 2005 2006 2007f 2008f 2009f GDP 7.2 6.4 6.7 7.6 6.7 6.0 Industrial production 6.6 3.9 3.8 5.9 5.0 4.6 Consumer prices* 11.7 10.9 9.0 11.9 11.0 9.0 Current account (USDbn) 59.9 84.3 94.5 75.4 45.3 15.0 Current account (% GDP) 10.0 11.1 9.6 5.9 3.0 0.9 Foreign exchange reserves (USDbn) 120.7 175.9 295.6 464.0 543.3 577.4 Overall fiscal balance (% GDP) 4.4 7.5 7.5 5.3 2.3 1.3 RUB/USD** 28.6 28.4 27.0 25.3 25.2 25.8 1-month money (%)** 5.6 4.7 4.8 4.9 6.7 6.9 Note: * = year-end; ** = year average Source: HSBC 65
    • Macro Global Economics Q1 2008 Structural resilience real interest rates among comparable economies. While Murat Ulgen Economist the Central Bank initiated an easing cycle in September HSBC Yatirim Menkul Turkish markets have held up reasonably well during and so far unwound 175bp of the previous year’s Degerler A.S., Istanbul the recent financial turmoil. In fact, Turkish Lira +90 212 3661625 425bps monetary tightening, we argue that the room for muratulgen@hsbc.com.tr (TRY), which is usually seen as one of the most rate cuts is getting smaller with disappointments in Esra Erisir vulnerable currencies due to a large current account inflation. Hence, policy rates, at 15.75% now, will Economist deficit and ensuing external financing needs, has been HSBC Yatirim Menkul likely see limited declines throughout 2008, supporting Degerler A.S., Istanbul one of the best performing currencies (when including the currency. +90 212 3661615 the carry) since the summer. Stock prices are actually esraerisir@hsbc.com.tr higher, although non-resident investors – while staying Third, local investors, who were concerned with in TRY – have sold long-term bonds and thereby politics and increased their FX deposit stock from shortened maturity. around $60bn in Jun-06 to nearly $100bn now (but kept on losing money by staying in FX), are now switching We reckon the following reasons stand behind this back to TRY whenever they see the opportunity. This is resilience, particularly in TRY; first after lots of hubbub proving a major stabiliser of the currency. early in the year, political stability has been restored. The government has finally started to grasp the Hence, with stable domestic politics and structural structural reform agenda. A very comprehensive social reforms to follow, locals will continue to shift back to security reform, which is designed to fix the biggest TRY. Foreign investors will also likely increase their black hole in public finances (pension gap c5% of positions as risk appetite improves. Hence, we expect GDP), is in parliament now. TRY and TRY-denominated assets, on balance, to attract interest in 2008. Second, the Turkish Lira offers the highest nominal and % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 10.1 8.8 5.2 3.0 7.1 5.0 Government consumption 0.5 2.4 9.6 6.6 3.1 3.6 Fixed investment 32.4 24.0 14.0 6.6 8.9 8.1 Stockbuilding (% GDP) 8.2 5.3 3.1 3.8 3.3 2.8 Domestic demand 14.1 12.1 8.1 4.3 7.4 5.8 Exports 12.5 8.5 8.5 10.3 7.7 8.6 Imports 24.7 11.5 7.1 11.2 10.1 8.8 GDP 8.9 7.4 6.1 4.4 5.5 5.4 Industrial production 9.7 5.4 5.8 4.3 5.2 4.7 Consumer Prices 8.6 8.2 9.6 8.8 8.0 5.7 Producer prices 15.3 2.7 11.6 6.1 5.2 5.0 Current account (% GDP) -5.2 -6.2 -8.2 -7.2 -7.4 -7.1 Budget deficit (% GDP) -7.0 -2.0 -0.7 -2.5 -2.3 -2.4 TRY/USD** 1.41 1.35 1.47 1.28 1.23 1.27 3-month money (%)* 22.6 13.8 17.6 16.0 14.9 12.1 Note: * = year end; ** = starting in January 2005, when the Turkish currency (until then coded TRL) shed 6 zeros off its exchange rate Source: HSBC 66
    • Macro Global Economics Q1 2008 That’s not a slowdown The key theme from the data – and the real cause for Simon Williams Economist both the fall in the budget and current account HSBC Bank Middle East Saudi Arabia released its preliminary full year surpluses, and the pick up in inflation – is Limited, Dubai accounts for 2007 in mid-December and at first +971 4507 7614 strengthening domestic demand. As the kingdom simon.williams@hsbc.com glance, the figures are disappointing. Real growth adjusts to the new oil price environment, investment fell to an estimated 3.5%, the slowest pace of and consumption spending is beginning to increase since 2002. The budget and current account accelerate, creating an increasingly buoyant surpluses also fell, ending in both cases a four-year environment for the non-oil sector. The shift in run of sharp year on year growth. Inflation, growth drivers has a momentum which will persist meanwhile, is on track to record its highest annual throughout 2008, when headline growth rates will be average in 15 years. boosted further still by oil output gains. Inflation, Not for the first time, though, the numbers miss the however, looks likely to rise. underlying point. For one thing, the estimated public The rise in inflation at a time of high oil prices finance and current account surpluses are still and dollar weakness has prompted renewed remarkably high, at around 13% and 25% of GDP speculation that the kingdom may be preparing to respectively. The surpluses allowed the government adjust its exchange rate, and SAR forwards to continue to pay down public debt (now worth just reached an all time high in early December. We 19% of GDP compared to a peak of over 110% a retain our view, however, that there is no appetite decade before) and build up its holdings of overseas in SAMA for change, and that an adjustment in assets. The underlying economic growth story is also the value or nature of the currency regime remains strong. The headline slowdown was a consequence only a remote possibility. of OPEC-imposed production cuts. This masked a more robust 6% expansion in non-oil output. % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending* 5.8 9.5 6.5 6.8 7.2 7.5 Government consumption* 11.9 18.4 25.3 14.0 10.0 10.0 Fixed investment* 6.8 24.1 10.9 14.0 16.0 16.0 Stocks* 22.6 2.1 0.0 9.5 14.1 4.0 Exports* 33.2 42.5 9.7 1.5 11.1 -2.7 Imports* 20.3 31.2 18.0 15.0 14.0 14.0 GDP 5.3 6.1 4.3 3.5 5.7 6.3 Consumer prices 0.3 0.4 2.3 3.9 5.4 4.5 Current account balance (USDbn) 52.0 90.7 96.2 92.0 105.0 76.1 Current account balance (% GDP) 20.5 28.3 27.6 25.1 26.0 18.5 Budget balance (% GDP) 11.2 18.2 22.2 13.0 14.5 9.3 SAR/USD 3.75 3.75 3.75 3.75 3.75 3.75 3-month money (%)** 2.6 5.0 4.9 4.0 3.8 4.0 Note: * Nominal growth ** End year. Source: HSBC 67
    • Macro Global Economics Q1 2008 Liking FX over rates in ST with a high energy bill, have caused a substantial Murat Ulgen Economist widening of South Africa’s current account gap to HSBC Yatirim Menkul South Africa continues to suffer from unrelenting 8.1% of GDP in Q3 from 6.5% in Q2. Degerler A.S., Istanbul inflationary pressures. The headline CPI-X +90 212 3764619 (consumer prices excluding interest payments on SARB expects inflation to peak around 7.8% in muratulgen@hsbc.com.tr Esra Erisir mortgage bonds), which is the monetary policy Q1 2008, which appears rather optimistic to us Economist target, has breached the 3.0%-6.0% target band given investment demand and supply side HSBC Yatirim Menkul since April and recently hit 7.3%. While the major pressures. We do not expect inflation to revert to Degerler A.S., Istanbul +90 212 3764618 cause of inflation appears to be supply-side the target band anytime soon, which might also esraerisir@hsbc.com.tr shocks (i.e. rising energy and food costs), negatively impact inflation expectations. economic activity still remains vibrant, despite a Similarly, given the nature of current account 17-month long tightening campaign during which deficit financing in the country, which mostly the South African Reserve Bank (SARB) has relies on portfolio inflows and a highly volatile hiked policy rates by 400bps to 11.00%. currency that is vulnerable to a further shift in global risk appetite, we argue that short-term rates Going forward, we might see inflation pressures will likely remain high at least during the first easing somewhat on the demand side due to the quarter of the next year. lagged impact of monetary tightening. There are already signs of limited softening in household consumption demand, although investment demand remains high with ongoing expenditure in the country’s mining sector and infrastructure. Indeed, large investment goods imports, coupled % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 6.7 6.6 7.3 5.6 5.0 4.8 Government consumption 6.3 5.2 5.4 6.0 5.7 5.5 Fixed investment 9.6 9.6 12.8 12.0 11.3 11.2 Exports 2.9 8.0 5.6 9.5 8.5 8.0 Imports 14.5 10.7 18.4 12.5 10.2 8.5 GDP 4.8 5.1 5.0 5.4 5.3 5.0 Industrial production 3.3 4.2 4.9 5.5 4.4 5.0 M3 12.8 24.0 23.1 22.5 22.0 19.6 Consumer prices 4.3 3.9 4.6 6.5 6.3 5.5 Current account (% GDP) -3.2 -3.8 -6.4 -7.1 -7.3 -7.8 Budget balance (% GDP) -2.0 -0.5 0.2 0.5 0.6 0.2 ZAR/USD 6.16 6.40 7.03 6.99 6.80 6.59 3-month money (%)* 7.5 7.0 9.2 10.5 10.0 8.7 10-year bond yield (%)* 8.1 7.5 7.7 8.3 8.1 7.4 Note: * = index 1995 = 100 Source: HSBC 68
    • Macro Global Economics Q1 2008 Another downward revision to the Building Standards Law this year. Seiji Shiraishi Economist We revise our 2007 and 2008 real GDP growth HSBC Securities (Japan) We forecast core CPI inflation rates of 0.0% in Limited forecasts slightly downward in light of past GDP 2007 and +0.4% in 2008. Companies are passing +81 3 5203 3802 data revisions. We now look for real GDP growth seiji.shiraishi@hsbc.com.jp sharply higher raw material prices onto customers, of +1.9% (vs. 2.0% previously) in 2007, +1.6% (vs. but we expect the move away from deflation to be 1.8%) in 2008, and +2.2% (unchanged) in 2009. slow due to large negative contributions from imputed rents (which has a high weighting), rapid The impact from a US economic slowdown will be price declines for IT-related consumer goods, and comparatively limited, and external demand will strong downward pressure on wages. again drive growth during the latter half of 2008 against a backdrop of an improving US economy. The BoJ will maintain a wait-and-see stance amid We forecast a clear slowing in capex in 2007, in US downside risks until the summer of 2008. Our part due to pressure from a capital stock adjustment, call for the BoJ’s next rate hike is September 2008. before a gradual rebound in 2008 on a pickup in external demand. We also look for a growth impact in 2008 in response to the slump in housing and construction investment that resulted from revisions % Year 2007f 2008f 2009f Q3 07f Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 1.7 1.3 1.6 2.3 1.6 1.2 1.3 1.2 1.3 Government consumption 0.6 0.9 0.6 0.4 0.8 0.9 0.8 1.1 0.8 Investment -0.4 1.3 3.7 -1.3 -3.0 -2.1 1.5 2.7 3.2 Private non-residential 1.9 3.2 4.7 0.8 -0.2 1.5 3.7 3.8 3.9 Private residential -8.7 1.0 7.5 -11.3 -20.2 -15.5 -6.1 7.2 18.5 Public -2.8 -6.4 -3.9 -0.1 -4.3 -10.9 -6.0 -4.8 -4.0 Stockbuilding (% GDP) 0.4 0.1 0.1 0.3 0.2 0.1 0.1 0.1 0.1 Domestic demand 0.9 0.9 1.9 0.8 0.3 -0.1 0.9 1.5 1.5 Exports 7.9 6.4 7.3 8.0 9.0 6.3 6.8 6.0 6.4 Imports 1.6 2.9 6.9 1.2 2.2 2.0 2.0 3.2 4.5 GDP 1.9 1.6 2.2 1.9 1.2 0.8 1.8 1.9 1.8 GDP (% quarter) - - - 0.4 0.4 0.3 0.6 0.7 0.5 Industrial production (% year) 2.8 1.0 3.3 2.7 3.0 2.4 0.6 0.5 0.3 Unemployment rate 3.9 4.0 3.7 3.8 4.0 4.0 4.0 4.0 3.9 Wholesale prices 1.7 0.7 1.0 1.5 2.0 0.9 0.9 1.1 0.1 CPI 0.0 0.4 0.4 -0.1 0.3 0.5 0.4 0.2 0.3 M2+CDs 1.6 2.2 2.3 1.9 2.0 2.1 2.1 2.2 2.3 Current account (JPYtrn) 25.1 29.2 29.1 6.2 6.8 6.9 7.2 7.5 7.6 Current account (% GDP) 4.9 5.6 5.4 4.8 5.2 5.3 5.5 5.7 5.7 Budget balance (% GDP) -3.0 -2.5 -2.0 - - - - - - JPY/USD 118 114 120 115 115 113 113 115 115 3-month money (%) 0.6 1.1 1.6 1.0 1.0 1.0 1.0 1.3 1.3 Benchmark bond (%) 1.6 1.7 - 1.7 1.4 1.5 1.7 1.7 1.7 Source: HSBC 69
    • Macro Global Economics Q1 2008 US ISM mfg. new orders and Japan’s mfg. activity Industrial production, capital expenditures and exports % Yr Index  The U.S. Manufacturing ISM new orders index suggests that Japan’s industrial production and export volume growth (y-o-y) 20 70 should decelerate towards spring 15 65 10 ( 60 5 55  But despite the subprime mortgage problems in the U.S., 0 50 exports to Asia should remain robust, helping to underpin industrial production and export volume -5 45 -10 40 -15 35  Capex decelerated in 2007 owing to the capital stock cycle. But 95 97 99 01 03 05 07 it will not go into a severe adjustment phase, and should re- accelerate after mid-2008 given the bottoming out of the U.S. Export volume (LHS) economy Industrial production (LHS) Mfg.ISM New orders (RHS) Note: The OECD lead indicator has been shifted forward 2-quarters. Source: METI, MoF, ISM Growth of employees’ income Wage growth and consumption % Yr % Yr  Despite Japan’s long economic recovery, wages per worker are still falling at a moderate rate, for several structural reasons. 5 5 Highly paid baby boomers are either retiring or continuing to 4 4 work at lower wages. The government is controlling public 3 3 employee wage growth. Low-wage industries are hiring more 2 2 employees than high-wage industries, and companies are 1 1 restraining personnel costs to remain competitive internationally 0 0 -1 -1 -2 -2  On the other hand, total wage and salary income is gradually -3 -3 growing, reflecting a rise in the number of workers -4 -4 95 97 99 01 03 05 07  Personal consumption is likely to grow consistently at an Real compensation of employees annual rate of slightly over 1%. This growth pace has been Real consumption of households continuing since 1999 even under wage deflation phases, which indicates the “ratchet effect” of personal consumption Source: Cabinet Office Taylor rule and o/n call rate Monetary policy  The BoJ will maintain its basic outlook for the economy and % Japanese Overnight Call Rate % prices in January’s review, but at the same time will have to take a wait and see stance amid the global market instability 10 10 and the increasing external risks. We predict the next rate hike 8 8 will take place in September 2008 6 6 Estimation (Taylor rule)  Core CPI y-o-y inflation is likely to accelerate to more than 4 4 0.5% toward next spring, but core core CPI(excluding oil 2 2 products from core CPI) y-o-y inflation rate should be around zero. The BoJ will care more about downside economic risks 0 0 than oil price led inflation risks -2 Actual -2 -4 -4  The BoJ’s outright purchases of long-term JGBs on the open 83 86 89 92 95 98 01 04 07 market are unlikely to decline. The spread between the overnight call rate and the Lombard rate (currently 25bp) will be maintained after the next rate hike, although the spread should expand to 100bp in the long run Source: HSBC 70
    • Macro Global Economics Q1 2008 Resilient expansion With a strong banking system, little mortgage John Edwards Chief economist – Australia and distress and an active central bank Australia has New Zealand Australian output growth rose 4.3% in the year to been little troubled by the global credit turmoil. It HSBC Bank Australia Limited September last, a pace we expect to be matched +61 02 9255 2744 has made it more difficult for Australian banks to john.k.edwards@hsbc.com.au through 2008. Despite booming demand and prices, borrow offshore, however, raising the risk of exports have been unexpectedly weak. With pressure on the exchange rate if the credit turmoil reasonable global growth, the volume of export persists through the first half of 2008. growth will likely pick up through 2008. So too will housing construction, which has been slow since the The Australian cash rate was twice increased 25bp home boom faded four years ago. Business through 2007, taking it to 6.75%. Core inflation is a investment will probably not grow as rapidly as it little above the 2% to 3% central bank target, did through 2007, but it will continue to increase. making at least one further tightening probable Underpinned by rising employment and incomes when global financial markets settle down. The and by a double round of tax cuts from July 1, Australian rate premium will to some extent offset household consumption will keep pace with the rate concerns over the short term financing of the current of growth of overall GDP. If the protracted drought account, keeping the currency reasonably firm. is indeed ending, as appeared to be the case at the end of 2007, additional rural production will boost GDP growth in the second half of 2008. % Year 2007f 2008f 2009f Q3 07f Q4 07f Q1 08f Q2 08f Q3 08f Q4 08f Consumer spending 4.0 4.2 3.6 4.4 4.1 3.5 4.5 4.0 4.0 Government consumption 2.9 3.6 2.0 1.3 3.1 3.0 3.8 3.9 3.5 Investment 8.8 8.5 6.5 10.2 10.4 9.0 7.7 9.0 8.0 Final domestic demand 5.0 4.6 4.0 5.4 5.4 4.5 4.5 4.5 4.3 Stockbuilding (% GDP) 0.1 0.1 0.1 1.0 0.0 0.0 0.0 0.0 0.0 Domestic demand 5.3 4.7 4.0 6.4 5.4 4.5 4.0 4.5 4.3 Exports 4.0 8.0 8.0 4.6 5.3 6.9 8.8 8.5 7.0 Imports 10.0 7.0 6.0 12.2 8.1 7.2 7.8 6.5 6.5 GDP 3.9 4.5 4.3 4.3 4.3 4.1 4.6 4.8 4.5 GDP (% quarter) - - - 1.0 1.2 1.2 1.2 1.3 0.8 Industrial production 2.5 1.9 2.0 1.6 -0.5 0.7 1.2 2.7 2.8 CPI 2.3 3.2 2.7 1.9 2.8 3.5 3.1 3.1 3.0 Unemployment 4.4 4.3 4.3 4.3 4.4 4.3 4.2 4.3 4.2 Average earnings 4.2 4.2 4.2 4.2 4.3 4.0 4.1 4.3 4.0 Current account (AUDbn) -62.5 -64.5 -65.0 -62.0 -62.3 -63.3 -63.7 -64.4 -64.5 Current account (% GDP) -5.9 -5.9 -5.9 - - - - - - Budget balance (% GDP) 1.5 1.5 1.5 - - - - - - USD/AUD 0.86 0.86 0.80 0.88 0.90 0.92 0.87 0.84 0.83 3-month money (%) 6.8 7.0 7.0 7.2 7.3 7.1 7.2 7.2 7.0 10-year bond (%) 6.1 6.2 6.2 6.2 6.3 6.2 6.2 6.1 6.1 Note: * = quarterly data are a four-quarter rolling sum; ** = quarter annualised Source: HSBC 71
    • Macro Global Economics Q1 2008 Moderating demand John Edwards Chief Economist – Australia and New Zealand domestic demand growth slowed in New Zealand The New Zealand dollar was volatile through HSBC Bank Australia Limited the second half of last year, a trend welcomed by 2007, with a reliably inverse relationship to global +61 02 9255 2744 the Reserve Bank of New Zealand. The lively john.k.edwards@hsbc.com.au risk aversion. It remains a popular asset in the yen housing market has begun to weaken, while retail carry trade, however, and the yield differences sales growth has moderated. Business investment between New Zealand dollar assets and those in growth faded. Through 2008 we expect export Japan, the US and Europe are likely to persist. We growth to pick up while domestic demand look for a little currency weakness in 2008, but continues to moderate. GDP growth should not much. however remain above 2%. Like Australia, New Zealand has enjoyed a Troubled by a somewhat higher inflation rate than protracted expansion. Like Australia it is now it wants to see, the RBNZ will likely maintain its challenged by very low unemployment and higher 8.25% cash rate through 2008. It declined to raise inflation than the central bank is prepared to it further after a July 2007 tightening, however, accept. The essential policy issues in both and we think it unlikely that another tightening economies arise from the probability that they will will need to be seriously considered. As in for many years need to operate at the very limit of Australia, the global elevation of lending spreads their capacity. has done some of the central banks work for it. % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 6.0 4.7 2.4 2.4 2.5 2.5 Government consumption 5.2 4.2 4.8 3.2 4.0 2.0 Investment 11.6 3.6 -2.5 3.7 1.7 3.9 Final domestic demand 7.2 4.4 1.5 2.8 2.8 2.5 Stockbuilding (% GDP) 1.2 0.9 0.0 0.1 0.1 0.1 Domestic demand 7.3 4.0 0.7 2.8 2.8 2.5 Exports 5.7 -0.5 1.9 3.1 3.4 4.5 Imports 16.0 5.5 -2.5 6.0 4.0 2.0 GDP 3.7 2.6 1.9 3.4 2.4 2.7 Consumer prices 2.3 3.0 3.4 2.6 2.5 2.5 Current account (% GDP) -6.6 -9.0 -9.0 -9.0 -8.5 -8.5 Budget balance (% GDP) 3.7 4.4 3.9 3.0 3.0 3.0 Unemployment* 3.6 3.8 3.7 3.6 3.5 3.5 NZD/USD 0.67 0.70 0.64 0.76 0.75 0.69 3-month money (%) 6.2 7.2 7.6 8.4 8.6 7.0 10-year bond yield (%) 6.1 5.9 5.8 6.4 6.2 6.0 Note: * Year end. Source: HSBC 72
    • Macro Global Economics Q1 2008 Beijing’s policy dilemma Waiting for clearer data before taking real action Qu Hongbin Economist seems to be the logical option under the current The Hongkong and Shanghai Rising headline consumer price inflation, clear circumstances. But the problem is that by the time Banking Corporation Limited signs of stock and property bubbles and excessive (HK) the global picture becomes clear, Beijing may +852 2822 2025 credit growth all point to the need for more have missed the opportunity to either control hongbinqu@hsbc.com.hk aggressive policy tightening. Indeed, we have inflation or prevent a sharp slowdown. The already heard top leaders doing some tough bottom line is that the policymakers need to take a talking at high-level meetings about fighting bet. Given the political will of creating a picture against economic overheating and inflation. of prosperity around the Olympics in 3Q08, we However, aggressive tightening is easier said than expect Beijing to step up its tightening a little bit done. First, with exports accounting for 45% of its next year. And they will have to rely more on GDP and the US still a top destination for the quantitative tightening measures, such as required Chinese exports, a US recession would cause a reserve ratio hikes, lending curbs and deregulating major disruption to the Chinese economy. So capital outflows. This, plus our house view of aggressive tightening could prove over kill for slowdowns in the Euro-zone, Japan and the US, growth should there be a recession in the US. leads us to revise our 2008 GDP growth Moreover, the Fed’s easing has already led to a projection from 12% to 11%. Meanwhile, we have significant narrowing in the rate differential also lifted our 2008 CPI forecast from 3.6% to between the renminbi money markets and USD 4.1%, thanks to stronger-than-expected growth in markets, making it more difficult for the PBoC to food and energy prices. hike rates without worrying about attracting more capital inflows. % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 7.2 8.5 8.7 9.0 8.9 9.1 Government consumption 8.6 10.3 10.0 11.0 11.5 11.0 Fixed asset investment 27.6 27.2 24.5 24.0 22.0 19.0 Exports 32.0 29.0 25.0 23.5 18.0 17.0 Imports 31.0 17.0 20.0 16.4 15.0 17.0 GDP 10.1 10.4 11.1 11.4 11.0 10.5 Industrial production (ex-small 16.3 15.9 16.2 18.0 16.5 15.0 enterprises) Consumer prices 3.9 1.8 1.5 4.7 4.1 3.0 Current account (% GDP) 3.6 7.2 9.4 9.7 10.2 10.1 Budget balance (% GDP) -1.3 -1.2 -1.0 -0.9 -1.1 -1.0 CNY/USD 8.28 8.18 7.93 7.56 7.15 6.85 1-year time deposit (%) 2.0 2.3 2.4 3.5 4.7 4.7 1-year lending (%) 5.4 5.6 5.9 6.9 7.6 7.8 Note: * = nominal Source: HSBC 73
    • Macro Global Economics Q1 2008 Domestic spending boom billion will be added to local economy per annum, Janus Chan Economist plus another HKD5.2 billion from the new The Hongkong and Shanghai Hong Kong’s economy is expected to remain government headquarters building. Banking Corporation Limited robust in 2008, expanding by 5% over the year (HK) after an estimated 5.9% in 2007. Domestic +852 2996 6975 Externally, goods exports have grown 9.7% y-o-y januschan@hsbc.com.hk demand will still be the key driver, with fixed for the year-to-October, driven mainly by strong asset investment expected to pick-up when major Chinese demand. This robustness is likely to be public infrastructure projects commence. Strong sustained and help offset the anticipated US demand from China in both goods and services is slowdown. On the other hand, healthier growth in expected to drive external trade, despite a the export of services is expected to continue in 2008 downside risk from the anticipated slowdown of due to increasing cross-border financial services as US demand. portfolio investment becomes more liberalised. Support for private consumption is mainly from Inflation has been modest this year at 1.7% year- rising household wealth which is derived from both to-October. As price pressures from wages, import wage increases on the back of a tighter labour goods and rental costs intensify, inflation is likely market (3.9% unemployment rate in October) as to rise to 4% by 2008. In light of the downward well as the buoyant stock market (index up 43% interest rate cycle, Hong Kong will again enter into year-to-date). We look for the unemployment rate an era of negative real interest rates. to stay below 4% throughout 2008. We expect fixed asset investment to be strong in 2008 as public infrastructure projects commence boosting construction. An additional HKD100 % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 7.0 3.0 5.9 6.6 5.3 3.6 Government consumption 0.7 -3.2 0.2 2.1 2.4 2.6 Fixed investment 2.7 4.1 6.3 5.6 7.6 8.9 Stockbuilding (% GDP) 0.6 -0.3 0.0 0.6 0.3 0.2 Domestic demand 5.0 1.5 5.8 6.7 5.2 4.6 Exports 15.4 10.6 9.2 8.2 6.4 6.9 Imports 13.8 8.0 8.9 8.7 6.5 7.1 GDP 8.5 7.1 6.8 5.9 5.0 4.5 Industrial production 2.9 2.5 2.2 0.6 2.4 1.9 Unemployment (%) 6.9 5.7 4.8 4.1 3.7 3.8 Retail sales 10.8 6.8 7.3 12.8 14.0 11.2 Consumer prices -0.4 0.9 2.0 2.0 3.9 4.3 Goods & services balance (% GDP) 8.9 12.5 11.7 11.5 11.2 11.0 Budget balance (% GDP) 1.7 1.0 4.0 5.3 2.9 2.5 HKD/USD 7.79 7.77 7.77 7.80 7.80 7.80 3-month money (%) 0.5 3.1 4.3 4.4 3.4 3.6 Prime rate (%) 5.0 6.2 7.9 7.4 6.3 6.3 Source: HSBC 74
    • Macro Global Economics Q1 2008 RBI in for an extended pause to be minimal, only time will tell how the indirect Robert Prior-Wandesforde Economist effects play out, while the new External The Hongkong and Shanghai July-September GDP growth of 8.9%, though Commercial Borrowing (ECB) limits will impose Banking Corporation Limited, slightly higher than market expectations of an Singapore branch an additional constraint. These represent further +65 6239 0840 8.7% outturn, was down from 9.3% in 2Q07. The risks to the FY09 growth outlook. Robert.prior- slowdown is more prominent in terms of ex- wandesforde@hsbc.com.sg agriculture GDP growth, which slipped to 9.8% in Despite robust growth, inflation has softened since the latest quarter from 10.6% previously. Though the beginning of FY08 thanks to the stronger the economy is softening, it is doing so at a pace currency and collapsing metal price inflation. WPI slower than our previous estimate and we have inflation at c3% has more than halved while the revised up our FY08 growth forecast marginally to various measures of CPI inflation have declined by 8.5% from 8.3% previously. between 150 to 300bps. We expect WPI inflation to stabilise around these levels with a possible We expect ex-agriculture growth to continue downside bias if the pass through of the higher trending lower. A weaker global backdrop and international oil prices is delayed. higher oil prices are two of the reasons but the bigger impacts are likely to come from the lagged The latter would further pressurize the off-budget effects of the stronger rupee and the policy component of the fiscal deficit via the further tightening delivered over the recent past. The repo issuance of oil bonds. Also the 6th Pay rate has been hiked 175bp since the end of 2005 Commission, due to report by April 2008, could and the CRR by 250bp over the last 12 months, have a negative impact on the FY09 deficit. while the interest actually paid by households and With lower inflation and moderating growth, we companies have risen more sharply. As such, we expect the RBI’s policy rate pause to continue for are maintaining are sub-consensus 7% GDP many months yet. However, for reasons of growth forecast for FY09. liquidity management we wouldn’t be surprised to While any direct impact from the global financial see a further 50bp CRR hike in H1 2008. turmoil on India’s domestic economy is expected % Year 2004 2005 2006 2007f 2008f 2009f GDP* 7.3 8.2 9.6 8.9 7.1 7.4 GDP (Financial year)** 7.5 9.0 9.4 8.5 7.0 7.8 Consumer prices 3.9 4.0 6.3 6.4 6.8 6.9 Current account (% GDP) 0.1 -1.8 -1.1 -1.3 -1.5 -1.9 Budget balance (% GDP) -4.4 -4.5 -3.8 -3.4 -3.7 -4.0 Broad money supply 12.3 21.2 19.2 23.0 14.0 19.0 INR/USD 44.7 44.0 45.1 40.6 38.1 37.3 3-month money (%) 4.7 6.1 7.6 9.2 7.8 7.5 Prime rate (%) 10.5 10.5 11.3 13.0 13.0 12.5 Note: * = calendar year; ** = based upon Indian fiscal year (April-March) Source: HSBC 75
    • Macro Global Economics Q1 2008 Targeting growth not inflation much greater attention to the government’s growth Robert Prior-Wandesforde Economist target than they are the Central Bank’s 4-6% 2008 The Hongkong and Shanghai The Indonesian economy is enjoying its strongest inflation objective. Our own forecast envisages Banking Corporation Limited, and most sustained period of growth since the dark Singapore branch average inflation of 8.5% in 2008 and an end-year +65 6239 0840 days of the Asian crisis a decade ago. There also rate of 9.5%. robert.prior- seems little chance of things going badly wrong in wandesforde@hsbc.com.sg the short term. After all, the impact of the 475bps of This assumes that the oil subsidy, which is costing Prakriti Sofat Economist rate cuts since May last year will continue to filter the government at least 3% of GDP, will be reduced The Hongkong and Shanghai through, while the government’s 2008 budget was at some point over the next few months, and Banking Corporation Limited, Singapore branch highly expansionary, boosting development presumably not too close to the 2009 elections. The +65 6230 2879 spending significantly as well as raising public sector subsidy itself is put at USD10-15bn and we estimate prakritisofat@hsbc.com.sg wages. It is also important to remember that that each USD1bn cut adds1-1.5% to the headline Indonesia has amongst the lowest trade exposures to inflation rate. the US of all Asian countries. At the same time, inflationary risks also stem from The most encouraging aspect of the recent growth the lagged effects of Indonesia’s relatively strong numbers has been the improvement in investment, economic growth, high public sector wage rises which we expect to continue in 2008. In view of the (which could filter into the private sector) as well the sluggish progress on structural reform, we suspect weakness of the rupiah, which is down 4% in trade that much of the extra spending is government-led weighted terms since mid-2007. If we are right then but if infrastructure improvements ensue then greater the pressure is going to be on Bank Indonesia to start private investment may also be encouraged. raising rates again in the second half of 2008. It seems to us that the policy authorities are paying % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 5.0 4.0 3.2 5.0 5.3 4.0 Government consumption 4.0 6.6 9.6 5.3 7.0 5.7 Fixed investment 14.7 10.8 2.9 7.9 10.1 6.5 Stockbuilding (% GDP) 1.5 1.1 0.7 0.8 0.8 0.7 Domestic demand 5.4 5.3 3.3 5.9 6.6 4.8 Exports 13.5 16.4 9.2 8.6 7.8 9.8 Imports 26.7 17.1 7.6 8.0 8.1 9.4 GDP 5.0 5.7 5.5 6.3 6.5 5.3 Industrial production 6.4 4.6 4.6 4.2 5.5 5.1 Unemployment (%) 9.7 10.6 10.8 10.1 9.7 9.6 Consumer prices 6.1 10.5 13.1 6.5 8.5 8.6 Current account (% GDP) 0.6 0.1 2.7 3.0 2.7 3.1 Budget balance (% GDP) -1.0 -0.5 -0.9 -1.8 -2.3 -2.5 IDR/USD 9097 9840 9135 8978 8600 8600 3-month money (%) 7.4 9.0 11.9 8.1 8.4 10.0 Source: HSBC 76
    • Macro Global Economics Q1 2008 Impressive decoupling that the bulk of Malaysia’s goods exports are tech Robert Prior-Wandesforde Economist related and hence more closely related to US IT The Hongkong and Shanghai The Malaysian economy has decoupled impressively spending than consumption. The former slowed Banking Corporation Limited, from what has recently been as sharp a downturn in Singapore branch sharply through 2005 and 2006, with signs of +65 6239 0840 exports to the US as witnessed during the mini-2001 improvement emerging in the last couple of quarters. robert.prior- recession. The decoupling has taken two forms. wandesforde@hsbc.com.sg At the same time, the domestic economy is likely to Prakriti Sofat First, while exports to the US had, until recently benefit from ongoing strong infrastructure-related Economist been falling 20% year-on-year, total exports were spending in the three main development regions of The Hongkong and Shanghai roughly flat as exports to the likes of China and Banking Corporation Limited, the country. Singapore branch Europe remained firm. Second, the domestic +65 6230 2879 economy has begun to boom again, showing the first Malaysian inflation has remained below 2% since prakritisofat@hsbc.com.sg back-to-back quarters of double-digit growth since March 2007, but will rise decisively as and when the the second-half of 2000. The latest data for 2007Q3, fuel subsidy is cut. In our view this will come after for example, showed private consumption up 14% the general elections which we are expecting to be and investment 13.5%. brought forward to March. Higher fuel prices will probably then add around 1 ppt to the headline rate, The extent of the decoupling has taken us by surprise which in turn will put the pressure on Bank Negara and we have revised up our 2007 GDP growth to start tightening what it views to be an forecast to 6.2% from 5.8%. We have also decided accommodative stance. We are still looking for the to leave our above-consensus 2008 projection first move around mid-2008, with a further 25bp rise unchanged at 6.2%. This might seem strange in before the end of the year. Such action might help view of the deteriorating outlook for the US cool the economy in 2009. consumer, but one important point to bear in mind is % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 10.5 8.7 7.1 11.1 7.2 6.2 Government consumption 6.0 6.4 5.0 6.3 4.4 4.0 Fixed investment 3.1 5.0 7.9 9.6 7.9 6.5 Stockbuilding (% GDP) 2.3 -0.4 -0.2 -2.4 -2.3 -2.2 Domestic demand 11.0 5.6 7.1 7.2 7.2 6.1 Exports 2.3 7.9 7.4 2.8 4.8 7.9 Imports 20.7 8.9 8.6 3.0 5.4 8.5 GDP 7.3 5.0 5.9 6.2 6.2 5.8 Industrial production 11.3 5.3 7.1 2.5 4.4 7.9 Unemployment (%) 3.6 3.6 3.3 3.2 3.0 3.1 Consumer prices 1.4 3.0 3.6 2.0 2.8 2.6 Current account (% GDP) 12.1 14.6 16.3 16.5 15.8 15.6 Budget balance (% GDP) -4.1 -3.6 -3.3 -4.2 -3.8 -3.5 MYR/USD 3.80 3.78 3.64 3.43 3.28 3.18 3-month interbank rate (%) 2.9 2.9 3.7 3.6 3.7 4.5 Source: HSBC 77
    • Macro Global Economics Q1 2008 Credit where it’s due Corporation by auctioning off generation assets. Frederic Neumann Economist The Philippines is on a roll. GDP rose over seven The Hongkong and Shanghai Still, challenges remain. Investment, for example, Banking Corporation Limited percent on average in the first three quarters of is still underperforming despite a series of interest (HK) this year, with more of the same to come. The +852 2822 4556 rate cuts over the past year. Here, structural fredericnaumann@hsbc.com.hk peso, shedding much of its historic stigma, has bottlenecks may be hindering greater capital been among the best performers in Asia this year, expenditure. In fact, the country’s export rising an impressive 16% against the dollar. True, performance has sagged of late, suggesting that the economy remains supported by surging competitiveness is suffering. Greater infrastructure remittances, fuelling a boom in consumption that expenditure in the next two years should help spur appears difficult to sustain, but, the fiscal deficit, at least a gradual rebound in investment. long the economy’s Achilles heel, continues to Another challenge is inflation. To be sure, CPI contract, lending some valuable stability. readings have so far surprised on the low side, Certainly, much of this year’s fiscal improvement giving the central bank some room to cut rates is due to privatization receipts and we remain further. However, with base effects kicking in and sceptical about the outlook for tax revenue growth. the appreciation of the peso slowing down, price Still, with a budget deficit narrowing considerably pressures should pick up over the coming year. this year and next, the government has bought With the latest data being consistently strong, we itself time to put its house in order. The raise our GDP forecast for this year to 6.9% from administration has also made impressive strides 6.5% earlier, although we still expect a deceleration towards reducing broader public debt, retiring to 5.9% in 2008. much of the liabilities of the National Power % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 5.9 4.8 5.5 5.6 4.9 4.7 Government consumption 1.4 1.6 6.1 8.8 5.3 5.6 Fixed investment 1.3 -6.6 1.4 8.5 4.6 4.1 Stockbuilding (% GDP) 0.9 0.3 0.5 0.3 0.1 0.4 Domestic demand 5.8 2.0 5.0 6.0 4.8 4.9 Exports 15.0 4.8 11.2 2.8 4.4 5.4 Imports 5.8 2.4 1.9 -4.4 4.0 4.9 GDP 6.4 4.9 5.4 6.9 5.9 5.6 Industrial production 1.0 2.2 -9.9 -2.8 2.8 3.0 Unemployment (%)* 11.9 7.9 7.9 7.4 7.1 6.8 Consumer prices 6.0 7.7 6.3 2.7 4.1 4.6 Current account (% GDP) 1.1 1.9 5.0 5.1 4.5 4.0 Budget balance (% GDP) -3.8 -2.7 -1.1 -0.9 -0.5 -0.8 PHP/USD 56.2 55.0 50.9 45.7 42.0 40.8 3-month money (%) 7.3 6.1 5.2 3.4 4.3 4.9 Note: * Since Sep 2005, the ILO definition of unemployment has been adopted by official sources. Source: HSBC 78
    • Macro Global Economics Q1 2008 Inflationary stress as the global tech cycle is finally beginning to Robert Prior-Wandesforde Economist show more encouraging signs. The Hongkong and Shanghai The economy is likely to show weaker GDP growth Banking Corporation Limited, in 2008 than 2007, but not dramatically so. Our Unusually, Singapore’s main economic concern is Singapore branch forecast of 7.3%, unchanged from the previous +65 6239 0840 inflation. Headline CPI inflation, at 3.6% in robert.prior- Quarterly, is above the top end of the government’s November, was a 16-year high, while the wandesfore@hsbc.com.sg own range and would, if correct, represent government is expecting it to reach 5% in the first Prakriti Sofat Economist something of a triumph bearing in mind the half of 2008. This pick from a recent low of just The Hongkong and Shanghai increasingly worrisome outlook in the US. 0.2% in January 2007, reflects an almost perfect Banking Corporation Limited, Singapore branch storm of rising energy and food commodity prices, A number of factors are likely to keep growth +65 6230 2879 higher rents and the impact of July's GST rise. prakritisofat@hsbc.com.sg going. In particular, extremely low real interest Clearly the government can do little about the first rates should help support investment and two of these factors, but the second two are indicative consumption spending, while the latter will also of any economy that is running a little too hot. benefit from booming asset markets and real personal income growth. Employment grew more Against this background, we wouldn’t be surprised than 9% year-on-year in the third quarter, while to see further tightening measures in the February real wages rose by nearly 4%. The marine & off- budget as well as the April MAS meeting. The last shore engineering sector will benefit further from meeting in October saw the Central Bank raising the high oil price, with pharmaceuticals and “slightly” the slope of the currency band and a financial services continuing to enjoy structural further tweaking would seem difficult to avoid if success. Even export growth could hold up inflation really is running around 5% at that time. reasonably well, despite slowing US consumption, % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 5.9 2.7 2.5 5.0 7.1 6.1 Government consumption -1.1 7.6 11.2 1.1 4.8 5.0 Fixed investment 10.2 0.2 11.5 16.9 9.4 6.8 Stockbuilding (% GDP) -4.8 -3.6 -3.4 -3.3 -3.1 -3.1 Domestic demand 11.1 4.1 6.6 8.4 7.9 6.2 Exports 20.6 11.5 10.4 7.2 7.5 9.3 Imports 23.2 11.0 10.4 7.1 7.7 9.6 GDP 8.7 6.9 7.9 8.1 7.3 6.5 Industrial production 13.8 9.4 12.0 6.1 7.8 8.0 Unemployment (%) 3.5 3.2 2.7 2.3 1.7 2.3 Consumer prices 1.7 0.5 1.0 2.0 3.9 1.6 Current account (% GDP) 28.9 29.5 27.5 31.9 29.5 29.2 Budget balance (% GDP) -1.9 -0.8 -0.2 0.6 2.1 2.1 SGD/USD 1.68 1.67 1.58 1.51 1.45 1.42 3-month money (%) 1.0 2.2 3.4 2.8 2.8 3.0 Prime rate (%) 5.3 5.3 5.3 5.3 5.3 5.3 Source: HSBC 79
    • Macro Global Economics Q1 2008 Slower, not faster Closer to home, we remain concerned that the record Frederic Neumann Economist level of household debt will weigh on consumer The Hongkong and Shanghai No doubt, recent data out of Korea is looking spending growth. Here, the tightening of monetary Banking Corporation Limited fairly solid. Growth in the third quarter topped (HK) conditions in recent months has added an extra +852 2822 4556 5%, a respectable rate for any economy even if burden since much of consumer debt is financed at fredericneumann@hsbc.com.hk Koreans themselves remain unimpressed. variable interest rates. Also, real wage growth Confidence remains generally buoyant as the remains sluggish despite the low unemployment rate country heads into a presidential election and as overall job growth is still lacklustre. looks towards a change in political leadership. Exports, too, continued to perform well, clearly The liquidity squeeze that is driving up money unfazed by the appreciation of the Won. market rates is unlikely to convince the Bank of Korea to cut its policy rate. Here, inflation is But, risks remain, and altogether the economy is beginning to concern officials who previously likely to slow over the coming year rather than kept a closer eye on burgeoning asset prices. The accelerate further. First, take exports. Korean headline CPI already touched the upper band of producers remain comparatively exposed to a the central bank’s inflation target of 2.5-3.5%, and possible slowdown in the US, not only because a looks set to stay near it at least for the next several big chunk of their goods head across the Pacific months on the back of higher energy costs. Still, but also because they dabble in industries, such as growth should slow only marginally to 4.5% in electronics, that are cyclically sensitive. 2008 from 4.8% this year. % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending -0.3 3.6 4.2 4.3 4.2 4.5 Government consumption 3.7 5.0 5.8 5.0 5.0 5.2 Fixed investment 2.1 2.4 3.2 5.1 4.6 5.0 Stockbuilding (% GDP) 0.1 0.0 -0.1 -0.4 0.0 0.0 Domestic demand 1.8 2.4 0.0 9.5 4.9 4.8 Exports 19.6 8.5 12.4 9.7 7.3 9.0 Imports 13.9 7.3 11.3 9.8 8.9 10.0 GDP 4.7 4.2 5.0 4.8 4.5 4.7 Industrial production 10.2 6.2 10.1 6.2 6.5 7.5 Unemployment (%) 3.7 3.7 3.4 3.3 3.3 3.5 Retail sales -0.2 4.3 4.9 3.5 4.5 4.5 Consumer prices 3.6 2.8 2.2 2.5 3.3 3.2 Current account (% GDP) 4.3 1.9 0.7 0.6 -0.2 -0.4 Budget balance (% GDP) 0.7 0.4 0.4 0.2 -0.2 -0.5 KRW/USD 1122 1026 950 918 888 875 3-month CD yield (%) 3.8 3.6 4.5 5.1 5.4 5.6 5-year treasury yield (year-end) 4.3 4.5 5.0 5.2 5.6 5.8 Source: HSBC 80
    • Macro Global Economics Q1 2008 It’s political employment growth continue to be sluggish. Frederic Neumann Economist Therefore, the bounce in private consumption is The Hongkong and Shanghai Taiwan had a bumper third quarter, with growth unlikely to carry very far. Banking Corporation Limited jumping to 6.9%, almost 2ppt above the average (HK) for the previous quarters. Surprisingly, growth was +852 2822 4556 Clearly, the upcoming legislative and presidential Fredericneumann@hsbc.com not only driven by exports, even if these still elections add some upside risk. Should one party .hk performed well, but also by a little bounce in come to control both the executive and domestic demand coming both from private parliament, confidence might quickly improve, consumption and investment. For the full year, especially if this entails a shift towards a more therefore, Taiwan should handsomely beat our pragmatic stance in cross-straits relations. But, earlier growth forecast of 4.4%. given the political cleavages on the island, it is difficult to see how policy gridlock could be But, there are worrying signs on the horizon, and, swiftly overcome even under a new government. all considered, we expect the island’s economy to slow again next year. The main risk here is export Apart from politics, inflation bears watching since growth: Taiwan remains the economy most exposed it has jumped recently on the back of rising food in the region to a slowdown in the United States as a costs. But, so far, we remain relaxed about price big chunk of its goods are headed there. Moreover, stability, and look for the central bank to raise the economy’s dependence on electronics exposes it rates only gradually, not least because growth to a possible cyclical downturn. should slow to about 4% next year. Domestically, too, some challenges lie ahead: consumer sentiment is still weak, while wage and % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 3.9 4.3 1.8 2.8 3.0 3.6 Government consumption -0.5 1.1 -0.4 0.9 3.2 4.0 Fixed investment 17.5 7.4 0.6 4.2 4.4 4.5 Stockbuilding (% GDP) 0.2 0.1 0.1 0.0 0.0 0.0 Domestic demand 7.0 4.4 1.2 2.8 3.4 3.8 Exports 14.8 10.0 10.4 6.7 4.4 5.4 Imports 18.6 10.3 5.2 3.3 3.6 4.6 GDP 6.1 4.7 4.9 5.0 4.0 4.5 Industrial production 9.8 4.6 5.0 5.4 3.4 4.1 Unemployment (%) 4.4 4.1 3.9 3.9 4.1 3.9 Consumer prices 1.6 2.3 0.6 1.6 2.4 1.9 Current account (% GDP) 5.6 4.5 6.8 6.3 3.6 3.6 Budget balance (% GDP) -2.8 -0.6 -1.1 -0.5 -0.7 -0.7 TWD/USD 33.1 32.3 32.6 32.9 32.5 32.5 3-month CD (%) 1.1 1.4 1.6 2.0 2.3 2.4 Prime rate (%) 3.4 3.7 4.0 4.2 4.6 4.7 Source: HSBC 81
    • Macro Global Economics Q1 2008 Will confidence return? investment approvals are running at quite a high Frederic Neumann Economist level, holding out the prospect that a temporary The Hongkong and Shanghai Fundamentally, the Thai economy is in reasonable thaw in the political climate could see significant Banking Corporation Limited shape. Growth, after all, is bumping along (HK) capital outlays. Remarkably, foreign direct +852 2822 4556 between 4-5% every quarter, supported mainly by investments in 2007 have remained relatively fredericneumann@hsbc.com.hk exports and, this year, government consumption. strong, close to levels seen last year. No major macroeconomic imbalances are on the horizon. However, sentiment, both among Aggressive cuts in the policy rate over this year investors and consumers, continues to be subdued, should further help spur investment, with banks holding back a much needed kick to expenditure. gradually recovering their appetite for risk. Still, rising inflation raises some concerns, especially The trouble is that political uncertainties are still since the price level in Thailand has historically weighing on sentiment. Despite earlier hopes that been rather sensitive to rising energy costs. the stalemate would be resolved over the course of the year, leading to a bounce in domestic The Bank of Thailand should therefore maintain a demand, uncertainties persist. The upcoming tightening bias, even if not necessarily delivering elections are unlikely to yield a quick fix as the a hike until the last quarter of 2008. By that time, country’s electorate remains deeply divided. fiscal policy should turn more stimulative as Forecasts for next year, therefore, must be politicians again get a say in the upcoming approached with caution. budget. Altogether, growth should accelerate to 5% as long as exports maintain their momentum. Nevertheless, there is scope for a recovery in investment, even if household spending will only gradually accelerate. Already, applications for % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 6.1 4.8 3.2 1.7 3.7 4.3 Government consumption 5.8 10.9 2.3 10.0 8.6 6.5 Fixed investment 13.2 10.6 3.8 1.0 8.8 4.8 Stockbuilding (% GDP) 1.5 2.0 0.3 0.0 0.5 0.4 Domestic demand 8.6 7.4 1.3 1.9 6.3 4.5 Exports 9.6 3.9 8.5 5.9 4.2 6.0 Imports 13.4 8.7 2.6 2.4 4.7 5.4 GDP 6.4 4.6 5.1 4.4 5.0 4.6 Industrial production 8.3 5.2 5.9 5.0 6.3 8.0 Unemployment (%) 2.1 1.9 1.5 1.4 1.4 1.2 Consumer prices 2.9 4.3 4.7 2.3 3.1 2.5 Current account (% GDP) 1.7 -4.5 1.1 4.5 1.7 0.5 Budget balance (% GDP) 0.0 0.3 1.2 -1.5 -2.6 -2.9 THB/USD 40.1 40.6 37.5 32.2 32.3 31.3 3-month interbank rate (%) 1.6 3.3 5.2 3.9 3.7 3.9 Source: HSBC 82
    • Macro Global Economics Q1 2008 Driven by consumption with China and Australia becoming increasingly Robert Prior-Wandesforde Economist important trading partners, we think export growth The Hongkong and Shanghai Vietnam is forecast to grow by 8.3% in 2007 – is set to exceed 17%. This however is slower than Banking Corporation Limited, expanding at a rate above 8% for the third Singapore branch the 20% expansion of the last few years. +65 6239 0840 consecutive year. Economic momentum should robert.prior- pick up in 2008 largely on the back of stronger With inflation already in double digits and growth wandesforde@hsbc.com.sg consumer spending, with the continued strength in showing little signs of abating, we think there is a Prakriti Sofat Economist fixed asset investment and non-oil exports high probability of CPI printing in the teens in the The Hongkong and Shanghai chipping in as well. As such we have revised up early part of 2008. The floating of diesel and Banking Corporation Limited, Singapore branch our growth forecast to 8.5% from 8.0% previously. kerosene prices scheduled for 2008 adds another +65 6230 2879 This, however, is still conservative compared to layer of upside risk. Base effects, however, are prakritisofat@hsbc.com.sg the government’s target of 9% for 2008. going to be favourable which should see inflation average 10% in 2008 as a whole. Given healthy wage gains, strong jobs growth and the lack of policy tightening in Q4 2007, we think On the policy front we are hopeful that the solid spending by households is warranted in National Assembly will grant greater autonomy to 2008. The 20% increase in minimum salaries of the central bank, which should then see some state employees and pensioners, effective 1st of policy tightening, in addition to the liquidity January, will only support the spending spree. draining measures. This should allow growth to slow and inflation to moderate in 2009. On the external side, slowing in US and EU consumption spending is a risk. However, given that the bulk of Vietnam’s exports are basic in nature, the negative spill over should be limited. Further, % Year 2004 2005 2006 2007f 2008f 2009f Consumer spending 7.1 7.3 7.5 7.5 7.6 7.0 Government consumption 7.8 8.6 8.1 7.5 7.2 6.8 Fixed investment 10.4 9.7 8.6 10.4 11.0 11.5 Exports - Goods 31.4 22.5 22.1 21.2 17.7 18.6 Imports - Goods 26.6 15.7 33.4 34.0 20.5 17.2 GDP 7.8 8.4 8.2 8.3 8.5 8.1 Industrial production 17.6 25.5 16.0 14.6 17.3 13.5 Unemployment (%) 5.6 5.3 4.4 4.0 3.5 3.2 Consumer prices 7.8 8.3 7.5 8.1 9.9 7.1 Current account (% GDP) -3.4 0.4 0.5 -2.5 -2.9 -3.1 Budget balance (% GDP) -4.9 -4.9 -5.0 -5.0 -4.8 -4.8 VND/USD 15738 15866 16006 16146 16186 16035 Short-term lending rate (%) 9.8 11.2 11.2 11.2 11.2 11.2 5-year interest rate (%)* 8.5 8.8 8.3 8.8 7.5 7.5 Note: * end-year. Source: HSBC 83
    • Macro Global Economics Q1 2008 84
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    • Macro Global Economics Q1 2008 Analyst certification The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and 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, Stuart Green, Janet Henry, Karen Ward, Ian Morris, Ryan Wang, Jonathan Heath, Alexandre Bassoli, Paulo Mateus, Javier Finkman, Hernan Yellati, Marjorie Hernandez, Lothar Hessler, Mathilde Lemoine, Astrid Schilo, Alexander Morozov, Murat Ulgen, Esra Erisir, Simon Williams, Seiji Shiraishi, Hongbin Qu, Janus Chan, Robert Prior-Wandesforde, Prakriti SOFAT and Frederic Neumann This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor’s decision to make an investment should depend on individual circumstances such as the investor’s existing holdings and other considerations. Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company, 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 This report is dated as at 21 December 2007. 2 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. Chinese Wall 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. 86
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    • Global Economics Research Team Global Emerging Europe, Middle East and Africa Stephen King Juliet Sampson Global Head of Economics +44 20 7991 5651 juliet.sampson@hsbcib.com +44 20 7991 6700 stephen.king@hsbcib.com Alexander Morozov Stuart Green +7 495 783 8855 alexander.morozov@hsbc.com +44 20 7991 6718 stuart1.green@hsbcib.com Murat Ulgen Europe +90 21 2366 1625 muratulgen@hsbc.com.tr Janet Henry Esra Erisir Chief European Economist +90 21 2366 1615 esraerisir@hsbc.com.tr +44 20 7991 6711 janet.henry@hsbcib.com Simon Williams Astrid Schilo +971 4507 7614 simon.williams@hsbc.com +44 20 7991 6708 astrid.schilo@hsbcib.com Latin America Germany Marjorie Hernandez Lothar Hessler +1 212 525 4109 marjorie.hernandez@us.hsbc.com +49 21 1910 2906 lothar.hessler@hsbctrinkaus.de Alexandre Bassoli France +55 11 3847 5744 alexandre.bassoli@hsbc.com.br Mathilde Lemoine +33 1 4070 3266 mathilde.lemoine@hsbc.fr Paulo E Mateus +55 11 3847 5985 paulo.e.mateus@hsbc.com.br United Kingdom Karen Ward Javier Finkman +44 20 7991 3692 karen.ward@hsbcib.com +54 11 4344 8144 javier.finkman@hsbc.com.ar North America Jonathan Heath +52 55 5721 2176 jonathan.heath@hsbc.com.mx Ian Morris +1 212 525 3115 ian.morris@us.hsbc.com Juan Pedro Trevino-Gutierrez +44 20 7991 5980 juan.trevino@hsbc.com.mx Ryan Wang +1 212 525 3181 ryan.wang@us.hsbc.com Global Emerging Markets Philip Poole +44 20 7992 3683 philip.poole@hsbcib.com Wietse Nijenhuis +44 20 7992 3680 wietse.nijenhuis@hsbcib.com Asia Peter Morgan +852 2822 4870 petermorgan@hsbc.com.hk Frederic Neumann +852 2822 4556 fredericneumann@hsbc.com.hk Qu Hongbin +852 2822 2025 hongbinqu@hsbc.com.hk Sophia Ma +86 10 5999 8232 xiaopingma@hsbc.com.hk Christopher Wong +852 2996 6917 christopherwong@hsbc.com.hk Seiji Shiraishi +81 3 5203 3802 seiji.shiraishi@hsbc.co.jp Robert Prior-Wandesforde +65 6239 0840 robert.prior-wandesforde@hsbc.com.sg Yukiko Tani +81 3 5203 3827 yukiko.tani@hsbc.co.jp Prakriti Sofat +65 6230 2879 prakritisofat@hsbc.com.sg
    • Principal contributors Stephen King* Chief Economist +44 20 7991 6700 stephen.king@hsbcib.com Goodbye to all that Stephen King is HSBC Group’s Chief Economist. Stephen joined HSBC in 1988, having previously been an economic adviser at the Treasury in the UK. Stephen is a regular economics commentator on television and radio, and since 2001 he has written a weekly column for The Independent, one of the UK’s leading newspapers. Stuart Green* Global Economist +44 20 7991 6718 stuart1.green@hsbcib.com Stuart Green is HSBC’s Global Economist. Prior to joining HSBC in August 2007, Stuart worked as an economist at a number of the world’s largest financial institutions, covering the UK, European and US economies. Global Economics * Employed by non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations. Q1 2008