The document provides an analysis of the global economic recovery. It notes that while the private sector is recovering, government finances remain fragile. The recovery is uneven across countries and regions. China, India, and other emerging markets are rebounding more quickly than rich nations. However, high government debt and weak consumers continue to pose risks. Overall, the recovery remains uncertain and the outlook is extremely difficult to predict.

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4. Acropolis Now
Where next for the global economy?
Robin Bew
Editorial Director, Economist Intelligence Unit
New York, June 2010

5. The crisis in pictures

6. But recovery now underway
Brighter days for many economies
US: +290,000 jobs (April ’10) beats -528,000 jobs (April ’09)
But not everyone is recovering; Europe’s debt crisis deepens
Multi-speed economic recovery
China, India, Brazil & emerging markets will do better than rich nations
The US will outperform Europe and Japan
Beware the bounce back
Yes, some momentum, but
Public debt is alarming
Consumers still stretched
Don’t confuse growth rates
with levels (which remain low)

7. So, we’re out of the woods?
Ha-ha-ha

8. Why the bounce-back?
Too fast, too hard
Firms cut back very aggressively in climate
of uncertainty
Overdid it
Correcting inventory overhang
International Rescue
Interest rates slashed
Printing money
Government spending splurge
Tax cuts
Bank bailouts

9. Can’t overstate the role of government
Budgets deeply in the red 4 Budget deficit; % of GDP
Worst in rich countries 2
Government giveaway 0
Public works -2
Incentives -4
Tax cuts -6
Bailouts China Euro area
-8
-10 UK US
-12
-14 2000
2002
2004
2006
2008
2010
Source: Economist Intelligence Unit, Country Data

10. And the banking crisis is still running
• US commercial property market
1,800
looks sickly—US$1.4trn such loans
1,600 maturing in 2011-14; UK similar
World
1,400 • W European banks exposed to
Americas
wobbling bits of euro zone
1,200
1,000
• A dearth of borrowers—like Japan in
Europe 1990s
800
Asia • Steep yield curve and government
600
guarantees boosting sector
400
• Monetary policy already tightening—
200
but how far can they go?
0
Write-offs Capital raised • The return of Glass-Steagall?
Cost of the credit crunch so far for finance cos;
US$ bn. As of May 11th 2010.
Source: Bloomberg.

11. A mixed picture
Private sector is recovering
Overdid the cuts
Weak firms have gone, stronger ones are
looking ahead
Policy is helping
Government spending, bailouts tax cuts, low
interest rates etc
All good stuff, but will soon be taken away
Outlook is therefore extremely uncertain
Can we survive on our own?

12. The skeleton in the cupboard

13. Government frailty
Crisis was about banks and private sector
Big lenders, big borrowers, big bankruptcies
Governments have (rightly)
stepped in
Huge bailouts, public spending,
tax cuts
But governments can go
bust too
Who rides to their rescue?

14. Euro zone: Creaking sounds
The euro is
7 launched
6
Greece joins The Great
5 the euro Moderation
4
3
2
1
0
-1
5/31/1993
5/31/1994
5/31/1995
5/31/1996
5/31/1997
5/31/1998
5/31/1999
5/31/2000
5/31/2001
5/31/2002
5/31/2003
5/31/2004
5/31/2005
5/31/2006
5/31/2007
5/31/2008
5/31/2009
Italy Portugal Greece Spain Ireland
Spreads of 10-year govt bonds over German bunds.
Percentage points.
Source: Bloomberg.

15. Euro zone: Acropolis Now?
150 Germany Spain Greece Ireland Liquidity
145 Cut out of capital markets
140 Fixed by the $1trn bailout?
135 Solvency
130
Greece is almost certainly insolvent
Less clear about the others
125
Interest costs, Growth, Fiscal
120 tightening
115 The outcome
110 Low growth, fiscal hair-shirt
105 Structural reform
100
Fiscal help from euro zone
Default (restructuring)
2000
2003
2006
2009
Euro exit
Real private consumption, 2000 Q1=100.
Source: Economist Intelligence Unit, CountryData.

16. Not just Europe
Greece is a special case
Fiddling the books for years
But don’t be fooled
Banking crisis and low growth is killing public
finances in the rich world
UK, US, Japan, other euro zone economies
Too pessimistic to expect crisis everywhere
But the tightening needed to prevent a crisis will
be extremely painful and long lasting

17. The shape of the recovery

18. Global: Recoverology
Bounce-back theory: “V”
The sharper the contraction, the stronger the recovery
Financial-impairment theory: “U”, “L”
Recoveries following financial crises are much slower
than normal recoveries
Borrowed-time theory: “W”
Stimulus boosts economy at the cost of weakness later
Armageddon theory: “Q”
Too grim to talk about

19. US: Better-than-expected growth, but…
… pace will slow later in 2010
10 Real GDP growth, % change
…as pent-up demand fades;
average about 3.2% for the year 8
5.6%
6
Investment spending up 4
Equipment and software rose
19% in 4Q, 13% in 1Q; most in 2
nearly four years
0
-2
Consumers slowly reviving
Spending up 3.5% in Q1 -4 Recessions
-6
But inventories tell the tale -8
Re-stocking contributed 66% of
2000q1
2001q2
2002q3
2003q4
2005q1
2006q2
2007q3
2008q4
2010q1
growth in 4Q, 50% in 1Q
% change year on year
Source: Bureau of Economic Analysis

20. US: The long and winding road…..
125
1981
120
1973
115 2001
1991
110
2007
105
100
95 2010
Q3
90
11
13
15
17
19
21
23
1
3
5
7
9
Peak of GDP = 100. Quarters from peak of GDP.
Years denote year of peak. 2007 peak in Q3.
Sources: BEA; Economist Intelligence Unit.

21. Europe: where’s the growth?
Euro zone all but stalled
Greek problems casting shadow over whole region
Greece is a special case, but fiscal problems looming for many
countries
Where’s growth in the periphery going to
come from?
Brutal fiscal consolidation
No country specific devaluation
Structural reforms needed
High cost countries will also need
internal devaluation
Fiscal subsidies, monetisation?
Default, euro zone exit?

22. BUT Important not to get too gloomy
A cyclical recovery is underway in the
rich world
Fiscal consolidation is required
Will slow growth
But for many this can be partially offset by
currency weakness and monetary easing
Emerging markets can survive this
Domestic demand in China is significant
Can partially support other countries

23. Asia: Hello, Tiger …
Policy stimulus in Asia remains strong 18
Driving recovery—but policy needs to 16
tighten more quickly
Thailand
Most Asians can afford the fiscal 14
Vietnam
expansion
12
Regional dynamics
10
China
Chinese demand is driving demand for
other Asians’ exports
Australia
Korea
8
India powered by private investment
Malaysia
Turkey
Japan
US
spending—8-9% possible 6
OECD
Germany
Indonesia buoyed by demographic
4
dividend and investment
France
Watch Thailand (politics) and Vietnam 2
(poor policy—credit too loose, inflation)
0
Fiscal stimulus, 2008-10. % of annual GDP
Sources: OECD; Economist Intelligence Unit.

24. Is Asia heading for a new bubble?
Asia is importing monetary stimulus
from US
Consequence of active exchange-rate
management
Economic conditions are much
stronger in Asia
Monetary policy is too loose for Asian
circumstances
Food commodity prices are again a
concern
El Niño, bad monsoon in India
Watch out for inflation/asset bubbles in
Asia

25. China, India: Strong rebound…
… and growth far outpacing richer countries
A V-shaped recovery 16
Real GDP, % change
Investment, consumption rising 14
China’s exports, India’s industry are CHINA INDIA
booming 12
But… 10
Massive government stimulus 8
China’s: Largest ever?
Inventory rebuilding 6
Risks ahead 4
Overheating, asset bubbles in China
2
Inflation, fiscal strains in India Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008 2009
% change, real GDP, year on year;
Source: National Bureau of Statistics, China;
Central Statistical Organisation, India

26. Is China’s economy overheating?
15
Producer prices
10
5
0
-5
-10
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
% change, year on year
National Bureau of Statistics, China

27. China: Massive credit expansion
Chinese government stimulus
New loans
package 2000
Public works
Subsidies 1500
Make the banks lend
1000
Bank credit rose sharply in 2009
500
• By 31% from previous year
• By RMB9.6trn (US$1.4trn) 0
Credit is always a major risk -500
2/1/2000
2/1/2001
2/1/2002
2/1/2003
2/1/2004
2/1/2005
2/1/2006
2/1/2007
2/1/2008
2/1/2009
2/1/2010
indicator
What’s the risk of a credit bust?
New loans per month; RMB, bn
Sources: China Economic Information Net; Bloomberg

28. Government can cope
Government already stamping on the brakes
bank lending slowing sharply
Will all the lending of 2009 turn sour?
China sub-prime?
Maybe, but the government is ready
Central bank is the world’s most liquid financial institution
Ultimately banks can rely on government
• Government has the funds
Government has bailed out many times before
Banks are key policy instrument
Government will not allow crunch
Bail-out in China will not be like bail-out in US/Europe
Will not require pay-back
Bigger danger is that the brakes have gone on too hard
Chinese public finances. % of GDP.
Source: Economist Intelligence Unit, CountryData.

29. East Europe: Fragile, but adjusting
Brent crude
CIS oil,
Russia an oil story, 7% possible this year—but 3,000 US$/barrel 160
structural weaknesses linger
Ukraine’s economy stabilises and political risk 140
recedes 2,500
Kazakh banking sector problems near resolution;
growth boosted by commodities 120
CE Europe 2,000
100
Hungary adjusting fiscally; new govt unlikely to
change debt reduction strategy
1,500 Russian 80
Poland driven by return of investment growth and
inventory adjustment stockmarket
(RTS,
60
Balkans 1,000 1995=100)
Ouzo spillover risk—FDI and bank channels
Bulgaria fiscally strong, peg to survive 40
Romania faces budget challenges 500
20
Balts
Endured brutal adjustment 0 0
Limbering up for euro membership later this decade
1996
1997
1998
1999
2001
2002
2003
2005
2006
2007
2009
Further contraction in 2010
Source: Haver Analytics.

30. Latin America: Shows resilience
Latin America Region will grow by to 4-5% in
60 Food
Industrial
2010
50
Brazil poised to outperform
40
Less than in boom years
30
Better fiscal positions
20 Flexible exchange rates
10 Better trade performance
0 Countries with Asian exposure
-10 are further ahead
-20 Mexico set to benefit from US
-30 rebound
Commodity prices support
2001
2003
2005
2007
2009
2011
2013
growth; China again!
Real GDP growth, % change, for Latin America. EIU
commodity price indices: % change, year on year. Source:
Economist Intelligence Unit.

31. Brazil: Powered by strong tailwinds
8
GDP Growth to reach 6% or more in 2010
Consumer spending
Bouncing back from recession
7
Helped by ‘stabilisation dividend’
6
Big boost from commodity prices and
5 Chinese growth
4 Expanding labour force, more credit
3 Risk of ‘overheating’
2 Longer term?
1 More stabilisation dividends
0 Lower cost of credit
-1 Rising consumer spending
-2 But risks: rigid labour market
Too reliant on commodities
2000
2002
2004
2006
2008
2010
2012
2014
Real growth, % change, year on year.
Source: Economist Intelligence Unit.

32. -6
-4
-2
0
2
4
6
8
10
99 Q1
99 Q4
00 Q3
01 Q2
OECD
02 Q1
World (PPP)
02 Q4
03 Q3
Emerging countries
04 Q2
05 Q1
World GDP growth, %
05 Q4
06 Q3
07 Q2
Unsynchronised recovery
08 Q1
08 Q4
09 Q3
10 Q2
11 Q1
11 Q4

33. What does all this mean for the recovery?

34. Where’s the growth?
2009 2010 2011
8
6
4
2
0
-2
-4
-6
-8
st
IS
N
na
S
a
K
a
a
n
e
pe
ic
di
ic
U
n
A
U
pa
Ea
C
hi
ro
zo
er
SE
In
fr
Ja
C
A
Eu
m
le
ro
A
d
A
Eu
E
id
tin
M
La
Real GDP growth; % change, year on year. ASEAN = Association of South
East Asian Nations. CIS = Russia, Ukraine etc. As of April 2010.
Source: Economist Intelligence Unit, CountryData.

35. Conclusion
Cyclical recovery is underway
Economic conditions are improving, and the data
support that
Fiscal woes are widespread and real
Some countries are on their knees
But for others, currency weakness and monetary
easing will offset some of the pain
Emerging markets are robust
Gradually reducing dependency on the rich world
Long existing trends are continuing
Gradual rise of the emerging world
Shifting centre of gravity

36. What does all this mean for you?

37. You made it!
Lots of companies didn’t
But you’ve probably:
Cut costs to the bone
Not had much opportunity for strategic
thinking
Time to think strategically is now
But the external environment has changed
out of all recognition

38. What’s changed?
Cheap credit
Spending outpacing income
Investment and consumer spending
Limited credit
Weak banks
Weak private sector
Excessive leverage being unwound
Spending will rise more slowly than income
For a long time

39. What’s changed
Jobs for all
Economic growth drove up employment to
record levels
Long-term joblessness
A jobless recovery
A division between haves and have-nots
Insider/outsider labour market
Social strife?

40. What’s changed
Emerging world attractive but risky
BRIC economies fast growing
But policy uncertainty
Small and illiquid
Hard to operate it
Emerging markets central
Policy lauded
Robust growth
More creditworthy
More influential internationally

41. What’s changed?
Government financial stability
Public finances broadly under control
tax and spend moving in step
Government financial weakness
Public spending cuts
Much higher taxes
High public borrowing
Crowding out your borrowing
Higher long-term interest rates

42. What does that mean?
Then Now
•Fast growth •Slow growth
•Rich world •Emerging world
•Easy credit •No credit
•Rising asset price •Flat asset prices
•Momentum driven •Value driven

43. Globalisation—a new phase
4 “Absorption and agility”
• weather shocks vs exploiting
opportunities
3.75 “Embracing manyness”—a world with
no centre
Treat emerging markets as you would
your home market
3.5
Flexibility is key
Watch for the new competitive
3.25 landscape—incumbents beware!
Challenger companies/consumers
are dissolving old barriers
3
Technology continues to be a driver
1995
1998
2001
2004
2007
2010
2013
of globalisation
Globalisation Index.
Source: Economist Intelligence Unit.

44. Innovations in innovation
Expect an innovation surge
2012 55%
Look for EM innovation in
Products
Processes
Logistics
Corporate structures
“Reverse innovation”
2009 38%
Flexibility in R+D—developing
successful products in one
0 20 40 60 80 100
country that can succeed in
others is vital
0-9 10 14 15-24 25-49 50-75 75+
What proportion of your company’s revenue is/will be
derived from overseas operations?
Source: EIU Globalisation Index survey, 2009.

45. Implications for business
Geographic refocusing
Emerging markets will become the primary
source of revenue and profit
Doing more with less
Permanently leaner as low cost competition
increases
Freeing up resources to become more agile
Balancing the short and long-term
Surviving today vs investment in a
dramatically changing business

46. Contact US
To learn more, please contact us:
Josh Hill
Sr. Manager, Field Marketing
joshuahill@eiu.com
212-698-9726