World Economic Outlook December 08

Global Markets Research

Macro

Global

5 December 2008

World Outlook Searching for a new source of global demand growth In mid-October we cut our forecasts to well below consensus. With financial conditions continuing to deteriorate and exact even more pain on households and firms than expected, we see good reason to mark our views down still further. We now expect global growth to be barely above zero in 2009 (about 1% lower than in our previous projection), with downturns in all major regions setting records not seen in the past 50 years.

„

„

This deep recession marks the end of a long-term expansion that was characterised by a few key industrial countries assuming the role of the global net consumer, and all other countries the role of the net producer.

„

Consumer demand in major industrial countries should be depressed for some time to come by tremendous losses in household wealth and a severe credit crunch. Massive fiscal stimulus, especially in the US should fill a good deal of this gap in aggregate demand: enough to avert serious risk of deflation, but not enough to ensure a self-sustaining expansion of global growth for some time to come in our view. In our view, a new engine of private demand growth will be needed, and we see a likely candidate in the still largely untapped consumption potential of the rapidly expanding middle classes in the large emerging market countries.

„

2007

2008F

2009F

2010F

2007

2008F

2009F

2.2

0.9

-2.0

1.3

2.2

3.3

0.2

1.1

--US

2.0

1.2

-2.0

1.6

2.9

4.0

-0.4

1.5

--Japan

2.1

0.3

-1.7

0.7

0.0

1.5

0.0

-0.5

--Euroland

2.6

0.9

-2.5

1.0

2.1

3.3

1.2

1.4

EM Asia

9.4

7.1

4.6

5.7

4.4

7.2

3.0

2.6

--China EMEA

11.9

9.1

7.0

6.6

4.8

6.0

0.6

1.0

6.8

5.2

1.1

3.5

10.5

13.0

7.7

6.0

Latam

5.5

4.3

1.8

3.0

7.0

9.2

7.4

5.9

2.4

0.9

-2.0

1.2

2.2

3.4

0.5

1.2

8.1

6.1

3.3

4.7

5.7

8.2

4.1

3.6

4.7

3.1

0.2

2.6

3.6

5.3

1.9

2.2

Global

Source: DB Global Markets Research

Economics

CPI inflation, %

G7

Industrial countries EM countries

Editors Peter Hooper (+1) 212 250-7352 [email protected]

Thomas Mayer (+44) 20 754-72884 [email protected]

Production editors Mark Wall (+44) 20 754-52087 [email protected] Torsten Slok (+1) 212 250-2155 [email protected]

Contributors Stefan Bielmeier (+49) 69 910-31789 [email protected] Michael Biggs (27) 11 775-7265 [email protected] George Buckley (+44) 20 754-51372 [email protected]

World Economy in Deep Recession GDP growth, %

Economics

2010F

Michael Lewis (+44) 20 754-52166 [email protected]

Yaroslav Lissovolik (+7) 495 797-5000 [email protected] Mikihiro Matsuoka (+81) 3 5156-6768 [email protected]

Tony Meer (+61) 2 8258-1688 Gustavo Canonero [email protected] (1) 212 250-7530 [email protected] Bernd Meyer (44) 20 7547 1533 Binky Chadha [email protected] (1) 212 250 4776 [email protected] David Naude (+33 ) 144956387 John Clinkard [email protected] (416) 682-8221 [email protected] Joseph LaVorgna (+1) 212 250-7329 Gillian Edgeworth [email protected] (+44) 20 754-74900 [email protected] Carl Riccadonna (+1) 212 250-0186 Peter Garber [email protected] (+1) 212 250-5466 [email protected] Torsten Slok (+1) 212 250-2155 Darren Gibbs [email protected] (+64) 9 351-1376 [email protected]

Caroline Grady (+44) 20 754-59913 [email protected]

Arend Kapteyn (+44) 20 754-71930 [email protected]

Michael Spencer (+852 ) 2203-8303 [email protected] Mark Wall (+44) 20 754-52087 [email protected]

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

5 December 2008

World Outlook

Table of Contents

Global Overview Searching for a new driver of global demand growth ......................................................................................................3 Geopolitics Recession = Oil Deflation = Geopolitical Power Deflation................................................................................................7 US Equity Strategy..........................................................................................................................................................9 Pan-European Equity Outlook In search of the bottom ..................................................................................................................................................11 Commodities OPEC action & global growth .........................................................................................................................................13 US Marking activity down further .........................................................................................................................................15 Japan Recession to continue through H1 2010.........................................................................................................................19 Euroland A deep recession.............................................................................................................................................................21 Germany: faces the deepest recession on record ..........................................................................................................23 France: Recession worsens ............................................................................................................................................24 Other Euro Area...............................................................................................................................................................25 UK Recession worse than the 1990s, interest rates lowest on record.................................................................................26 Other European countries Sweden, Denmark, Norway, Switzerland........................................................................................................................28 CE4 Czech Republic, Hungary, Poland and Slovak Republic ..................................................................................................30 Peripheral dollar bloc Headwinds from the major economies point to recession .............................................................................................33 Asia (ex Japan) Recession comes to Asia – deflation too ........................................................................................................................34 Latin America A sharp slowdown is now inevitable in 2009..................................................................................................................36 EMEA Collapse in credit growth and external demand to lead to sharp growth decline ...........................................................38 Forecast tables Key economic indicators .................................................................................................................................................40 Interest rates ...................................................................................................................................................................41 Exchange rates ................................................................................................................................................................42 Contacts ........................................................................................................................................................................43

Page 2

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Global Overview: Searching for a new driver of global demand growth • In mid-October we cut our forecasts to well below consensus. With financial conditions continuing to deteriorate and exact even more pain on households and firms than expected, we see good reason to mark our forecasts down still further. We now expect global growth to be barely above zero in 2009 (about 1% lower than in our previous projection), with downturns in all major regions setting records not seen in the past 50 years. • This deep recession marks the end of a long-term expansion that was characterised by a few key industrial countries assuming the role of the global net consumer, and all other countries the role of the net producer. • Consumer demand in major industrial countries should be depressed for some time to come by tremendous losses in household wealth and a severe credit crunch. Massive fiscal stimulus, especially in the US should fill a good deal of this gap in aggregate demand: enough to avert serious risk of deflation, but not enough to ensure a self-sustaining expansion of global growth. • In our view, a new engine of private demand growth will be needed, and we see a likely candidate in the still largely untapped consumption potential of the rapidly expanding middle classes in the large emerging market countries. • Even so, this restructuring of the global economy should take some time, and the initial expansion to come after the sharp downturn now under way looks likely to be unusually sluggish overall, with fits and starts of growth driven primarily by policy stimulus over the next couple years. • The growth of public debt in the fight against recession should push public sector debt burdens significantly higher in many industrial countries. With the fiscal costs associated with retiring baby boomers drawing nearer, this increases the risk that “monetisation” of the excessive government debt will eventually fuel inflation. The gloom thickens As we began our Q4 review of the world outlook, it became clear that the intensification of the global credit crunch and asset price deflation meant that our relatively pessimistic view of global economic prospects would need to be adjusted down further. Our forecast of a serious global recession as of mid-October has now been revised to a deep and unprecedented (at least since the Great Depression) downturn (cover table). Growth in most major regions of the world for 2009 has been marked down by about 1% point. Notable exceptions are EMEA, where the markdown was substantially more than 1 percentage point and Japan and Latin America, where it Deutsche Bank Securities Inc.

was somewhat less. We project global growth at just above zero in 2009, nearly two percentage points below the “mild recession” level of 2%. The global GDP revisions were driven in part by a weaker outlook for the US (decoupling is clearly dead in our view) and in part by weaker domestic fundamentals in each region. We now see record rates of decline in consumer spending lasting even longer than previously, business spending on plant and equipment falling more sharply, and inventory runoff continuing at a rapid pace through the first half of 2009. The deeper downturn does not beget a stronger recovery—our outlook for a sluggish pickup in 2010 has not changed appreciably. Nor have our projections of aggressive fiscal policy action changed; it now seem more likely to be realized, at least in the US. However, we see inflation falling further and central bank policy rates remaining lower for longer. Indeed, we have marked down global inflation by a full percentage point in 2009 as well, thanks in part to the lower trajectory of oil prices that the growth forecast yields. We now see oil prices as remaining in the neighborhood of $50 per barrel through 2009 and rising in 2010 (see section on commodities below). We project headline inflation to turn slightly and temporarily negative in the US next year, but to rise again as commodity prices stabilize at a low level. We do not see deflation as a serious risk thanks to aggressive monetary and fiscal policy actions being taken. A watershed event Some recessions are mere hick-ups in a basically intact longer-term expansion. Others are watershed events. In our view, the present recession now falls even more dramatically into the second category. It marks the end of a long-term expansion that was characterized by a few key industrial countries assuming the role of the global net consumer, and all other countries the role of the net producer. This international “division of labour” was made possible by trade and financial globalisation, and the availability of cheap credit. Trade integration allowed the shipping of goods and increasingly services through the internet around the world, while financial integration allowed the funding of ever larger trade imbalances. With inflation running fairly low, central banks kept monetary policy relatively accommodative while financial engineering was ever reducing apparent credit risk. In this world, the national accounting equality of savings and investments became irrelevant at the national level. No imbalance seemed to be too big not to be funded by the international capital markets. However, as countless merchants supplying customers on credit have found out since the advent of commerce, business turns sour when the customers can’t repay their debts. The US sub-prime crisis of 2007 was the signal that this endpoint was finally Page 3

5 December 2008

World Outlook

being reached in the credit-driven consumption boom that had begun twenty five years earlier.

Chart 3. The US Depression Index

Index

120

120

Chart 1. An era of US domestic demand driven growth $ bln

Output/man hour

$ bln

100

100

US: real domestic demand 12500

12500

US: real GDP

12000

12000

11500

11500

11000

11000

10500

10500

10000

10000

9500

9500

9000

9000

8500

8500

CPI

80

80

GNP (Real）

40

8000 1997

1999

2001

2003

2005

60 40

S&P index

20

8000

Industrial production

60

Capital Outlay (Nominal)

0

20 0

1929

1930

1931

1932

1933

1934

1935

Source: Historical Statistics of the US, DB Global Markets Research

2007

Source: BEA, DB Global Markets Research

Chart 2. Decline of US household savings rate coming to an end %

% US savings rate

14

14

12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2 1980

-2 1984

1988

1992

1996

2000

2004

2008

Source: BEA, DB Global Markets Research

Averting deflation We have learned from the experience of the 1930s that mass destruction of debt through bankruptcy will cause deflation and depression when resolution is left to the private sector alone. As banks and companies fall like dominos, unemployment surges and—in the absence of a social security net—incomes and demand plunge. Say’s law is at work, albeit with a negative sign: falling supply induces falling demand. As producers compete in cutting prices and consumers wait for prices to fall further, deflation kicks in. To prevent such a vicious cycle, the public sector has to take over bad debt from the private sector, support the incomes of the unemployed, and add direct stimulus to aggregate demand. We have also learned from the Japanese experience that to be successful, the public sector has to act quickly and forcefully.

Page 4

Policy action The good news is that US economic policy seems to broadly meet these requirements. Banks have been recapitalised and the Fed is funding potentially impaired assets. Monetary policy has been eased very aggressively and a big fiscal policy impulse can be expected for 2009 after a more moderate programme earlier this year. The bad news is that European economic policy has not risen to the occasion. Bank recapitalisation programmes have been launched, but the take-up has been slower than in the US (in part because tough conditions have been attached to these programmes and in part because national implementation has led to conflicts with European competitiveness policy). Monetary policy was inactive or moved in the wrong direction for more than a year until the threat of a global financial meltdown forced European central banks into a policy U-turn in October (Table 1). More powerful fiscal policy action is undermined by a dithering German government. Hence, we continue to expect that the recession will be more severe in Europe than in the US (Table 2). Still, thanks to some spill-over effects from the US, some home-made policy support, a lesser sensitivity to oil price declines and a greater degree of wage stickiness, deflation is a relatively low probability in Europe as well. Indeed, for these reasons, we see inflation in Europe remaining noticeably positive next year despite a dip in to negative territory in the US. 1. European rates catching up Central bank rate, % Cur-

10Y yields, % Cur-

rent

3M

6M 12M

rent

3M

6M 12M

US

1.00

0.50

0.50 0.50

2.72 2.00 2.00 2.50

Japan

0.30

0.10

0.10 0.10

1.39 1.50 1.50 1.30

Euroland

2.50

2.00

0.75 0.75

3.05 2.50 2.25 2.00

Source: DB Global Markets Research, as December 5

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

2. Deep recession and shallow recovery GDP growth, %

CPI inflation, %

2007

2008F

2009F

2010F

2007

2008F

2009F

2010F

G7

2.2

0.9

-2.0

1.3

2.2

3.3

0.2

1.1

--US

2.0

1.2

-2.0

1.6

2.9

4.0

-0.4

1.5

--Japan

2.1

0.3

-1.7

0.7

0.0

1.5

0.0

-0.5

--Euroland

2.6

0.9

-2.5

1.0

2.1

3.3

1.2

1.4

EM Asia

9.4

7.1

4.6

5.7

4.4

7.2

3.0

2.6

--China

11.9

9.1

7.0

6.6

4.8

6.0

0.6

1.0

--India EMEA

9.3

7.2

4.8

6.8

4.6

9.6

5.3

4.3

6.8

5.2

1.1

3.5

10.5

13.0

7.7

6.0

--Russia Latam

8.1

6.9

1.0

4.0

11.9

13.8

8.2

7.4

5.5

4.3

1.8

3.0

7.0

9.2

7.4

5.9

--Brazil

5.4

5.2

2.7

3.5

4.5

6.3

5.5

4.5

EM countries

2.4 8.1

0.9 6.1

-2.0 3.3

1.2 4.7

2.2 5.7

3.4 8.2

0.5 4.1

1.2 3.6

Global

4.7

3.1

0.2

2.6

3.6

5.3

1.9

2.2

Industrial countries

Source: DB Global Markets Research

Growth stabilizers In addition to policy actions, private demand downturns have some self-limiting features that help to bring recessions to an end. Cyclical swings in demand are dominated by shifts in purchases of durable goods (most importantly autos), houses, and business plant and equipment. In the US, these components of demand account for roughly one-third of total GDP. In a deep recession, they fall sharply and as they reach a bottom, growth stabilizes. The good news for the US economy this time around is that home building has fallen sharply over the past 2-1/2 years and has already reached a record low—it does not have room to fall much further, and is now running at levels that are well below the demographic growth in demand, meaning it will not be too long before this sector begins to make a positive contribution to growth. Likewise, while indicators of business spending are now plunging, that spending was relatively low to begin with going into this downturn, and it too is unlikely to be an important drag on growth past mid-2009. The major uncertainty is how far spending on consumer durables and even nondurables will fall. Prior to the current downturn, real consumer spending had never declined more than two quarters in a row, at least since the inception of the US National Income and Product Accounts in 1947. This time around, we see consumer spending declining 4 quarters in a row, through mid-2009. More importantly, that spending will face significant headwinds after it has bottomed as households strive to cut debt levels and rebuild very low saving rates.

Deutsche Bank Securities Inc.

A new source of global demand growth Although help from fiscal policy and natural spending stabilizers is essential to averting deflation and limiting the extent of the recession, a new self-sustaining expansion cannot be based on fiscal expansion alone. Nor can we depend on the US consumer to lead the charge this time around. Efforts to translate the high national savings in Japan and Germany into stronger consumption in these countries have not succeeded in the past, although there may be some hope if rapidly ageing populations begin to consume more of their financial assets in retirement. Even so, the industrial economies may well be too stretched financially and in some cases too reluctant to take needed policy actions to contribute their traditional share to global economic expansion ahead. Fortunately, a new and potentially powerful source of global demand may be waiting in the wings: the so far still largely untapped consumption potential of the growing middle classes in the big emerging market countries. The needs and tastes of Chinese, Indian and Brazilian middle class families may have to take over from the US consumer and its associates in spearheading the stimulation of global production in the future. And those who until recently have benefited from cheap goods produced in these countries will in the future turn into their suppliers.

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5 December 2008

World Outlook

Chart 4. Untapped consumption potential in emerging market countries %

Chart 5. Fiscal policy aiming to revive growth % of GDP

%

2.0 1.5

70.3 70

70 56.3

60

60.9

57.3

60

55.5 48.5

50 40

50 40

35.4

30

Forecast

80

Personal consumption expenditure as % of GDP 80

30 20

10

10

0

0 US

Euro Area European Union

China

India

Brazil

2.0

US Euroland

1.5

1.0

1.0

0.5

0.5

0.0

0.0 -0.5

-0.5 -1.0

-1.0

Easing

-1.5

-1.5 -2.0

-2.0

Fiscal impulse (= change in cyclically adjusted budget balance)

-2.5

20

% of GDP

Tightening

-3.0

-2.5 -3.0 -3.5

-3.5 1999

2001

2003

2005

2007

2009

Source: OECD, DB Global Markets Research

Russia

Source: DB Global Markets Research

A reduced global saving glut means that growth in individual countries will in the future probably be more constrained by their ability to fund investments through their own savings rather than from abroad. With less capital having to be shipped around the world to fund national saving-investment imbalances the global financial sector can be smaller than it was in the past. Hence, while “trade globalisation” (and the benefits from international trade integration) is likely to stay, “financial globalisation” will probably retreat as more investment will be financed by savings at home. Bridging the gap The restructuring of the global economy will of course take time, and until it is completed global growth may well seesaw, with recessions trading places with short-term rebounds on the back of fiscal policy stimuli. Modest recovery in the second half of next year, as presently envisaged by many forecasters, ourselves included, could well be followed a renewed weakening several quarters later. And the Bush fiscal stimulus programme of 2008 may be followed by more than one Obama stimulus programme in 2009 and later years. Our forecast sees a period of some volatility in growth that overall is fairly sluggish by historical standards, with relatively slow progress made in bringing down high rates of unemployment until the new driver of the next global expansion is finally in place.

Fiscal burden and ultimately inflation risk Taking over bad debt from the private sector now and incurring new debt in the fight against recession is likely to leave the public sector with a very high debt burden in most industrial countries. In fact, expected future tax revenues may not be enough to cover debt service and all other government expenses, especially when public pension liabilities are taken into account. Fortunately, governments suffering from an excessive debt burden extremely rarely default. As economic history through the centuries has shown, they usually manage to obtain missing funds from their central banks. It is unlikely to be different this time. An oversupply of liquidity caused by central bank funding of government debt should lower exchange rates against the currencies of the faster growing emerging market economies and encourage wage and price increases. Thus, the “monetisation” of the excessive government debt should eventually fuel inflation. Higher inflation should erode the claims of nominal debt holders to real values that are eventually consistent with the debt service capacity of the governments. But the eventual rise in inflation is likely to be still several years off. Conclusion As we enter the third year of the financial crisis the outlook has worsened further. We are likely to avoid deflation, but a deep and potentially long recession (through at least the middle of 2009) seems inevitable. Thereafter, the over-indebted consumers in the industrial world will probably have to settle for lower growth and higher inflation than they experienced in the last two decades. Following a possibly extended period of sluggish global recovery, a key driver of the next self-sustaining global expansion is likely to be increased consumer spending by the growing middle classes in the major emerging market countries. Peter Hooper, (1) 212 250-7352 Thomas Mayer, (44) 20 754-72884 Torsten Slok, (1) 212 250-2155

Page 6

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Geopolitics: Recession = Oil Deflation = Geopolitical Power Deflation The financial crisis and the resulting economic crisis have shifted attention almost entirely from geopolitical issues toward restoring economic growth. As a result, the urgency of resolving in the near term outstanding issues such as the Iran nuclear dispute has been reduced. While the economic slowdown has not yet brought into question the size of US military expenditure, the need to finance the huge stimulus package just placed on the table by the incoming Obama Administration will ultimately lead there. In the 2008 fiscal year, military expenditures were about $600 billion or 4 percent of GDP. In any case, the winding down of the deployment to Iraq will naturally reduce US expenditures. The promised surge of forces to Afghanistan will likely amount to no more than two additional brigades due to logistical constraints. As a further geopolitical side effect, the sharp economic crisis has collapsed the price of oil by two-thirds from peak, with some prospect for a further decline. This has cut the financial knees from under several countries that have adopted in recent years a more forward geopolitical program: Iran, Venezuela, and Russia. Nevertheless, the reserves built up during the oil boom will allow these programs to continue in the near term if from inertia alone. Iran In the presumed chronology of events surrounding efforts to derail Iran’s nuclear development program, the next couple of months have always been emphasized as a dangerous moment. In this chronology, the period between the US presidential election on November 3 and the inauguration of a dovish Democratic Party victor on January 20 would either force a military effort by the outgoing Bush administration or a strike by the Israeli air force against the nuclear facilities. The former was precluded at the end of 2007 by the release of the remarkably benign National Intelligence Estimate on Iran’s nuclear program. The document claimed that Iran had abandoned its nuclear weapons program in 2003. A conflict between the US and Iran right now would add the further catastrophe of a closure of oil flows from the Persian Gulf to the existing economic crisis and potentially drive the world economy to the breaking point. So that makes US action doubly unlikely. The Bush administration’s parting shots have taken the form of missile attacks from drones aimed at al Qaida leadership along the Pakistan-Afghanistan border.

level can be reached by early next year. However, it is most likely that Iran will simply continue with its low enrichment program to establish a stockpile large enough for a much greater number of weapons before taking the next step. That leaves Israel. There have been numerous threats of an Israeli strike from official sources in Israel. But Israel lacks sufficient force to have much impact without US acquiescence. For reasons stated above, the US appears to be warning Israel off. Iran is very vulnerable to the decline in oil price, with eighty percent of it foreign exchange revenues derived from oil. Both its internal social and external geopolitical subsidy programs will have to be cut back soon enough, But the investment in enrichment has already been made, so it will move to completion on its own momentum. The most likely outcome now is an eventual global acquiescence in a nuclear armed Iran. Russia Russia has been smarting from the expansion of NATO into its sphere, the basing of US anti-missile installations in Poland and the Czech Republic, and US responses to the conflict in Georgia. Furthermore, the rapid growth of the Russian economy in recent years and its importance in the energy market have rekindled a desire to establish a geopolitical weight commensurate with being a great power. As a result it has embarked on a program to rationalize and rearm its military, and effort to gain recognition of its pre-eminence in the near abroad states of the former Soviet Union, and an effort to jostle the US in its backyard by renewing its support for Cuba and Venezuela. These initiatives are costly, except for the Caribbean activities, which are on a commercial basis so far. The collapses of the oil price and the global financial crisis have hit the Russian financial system hard. The decline in revenues from oil will inevitably force a retrenchment of these strategic plans. However, Russia has been relatively frugal during the oil boom, accumulating above $500 billion in foreign exchange reserves. Although interventions to stem the capital flight after the Georgia war and the effects of the financial crisis have brought reserves to $475 billion, this can still support the implementation of military modernization in the short term.

However, the latest IAEA report of November 19 stated that Iran has installed 3800 working centrifuges to enrich uranium and will install an additional 3000 next year. Iran now has 630 kg of low enriched uranium and needs 800 kg to have enough to further enrich into a weapon. This Deutsche Bank Securities Inc.

Page 7

5 December 2008

World Outlook

Venezuela This time around Russia is leaving the costs of subsidizing an anti-US coalition in the Caribbean to Venezuela, making minimal shows of military force in the form of a couple of strategic bombers and a demonstration by a small naval squadron. It is selling arms to Venezuela on a scale that is relatively large for the region, but on a commercial basis. Venezuela and Iran are similar in their large budgetary commitments for armament programs, for subsidizing allies, and for subsidizing social programs, all based on oil revenues. With half of government revenues and 90 percent of exports coming from oil, Venezuela is just as vulnerable to the sudden collapse in oil prices. With reserves of $38 billion, there is about a year before it will have to scale back its various programs, including the geopolitical one, unless the time is advanced by a larger capital flight. A little bit on all those aircraft carriers In its rearmament program, the government has suggested that Russia may build up to six aircraft carriers. This followed close on a suggestion from China that it would build one aircraft carrier. (The UK and France are committed to building a total of three large aircraft carriers

Page 8

between them.) These plans seem strange given the ever increasing vulnerability of these huge military assets. Aircraft carriers are for the projection of offensive power over long distances where basing of aircraft may be problematic. This makes no sense for coastal defense. To build a serious aircraft carrier costs well above $5 billion. But then you need to build half a dozen escort vessels and the aircraft to produce a battle unit that will require upwards 10,000 sailors. Since it is for distant power projection, to keep a single aircraft carrier group on constant deployment requires at least two and more likely three groups. This is an enormously costly strategic decision. Since its development has been in the industrial sector, China has the resources to build an aircraft carrier, and a single one would provide an experimental unit to serve as a learning platform. But even with vaster resources than Russia now has, the Soviet Union could not perfect an aircraft carrier. With the rapidly waning financial clout, Russia is unlikely to implement this program very soon. Peter Garber, (1) 212 250-5466

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

US Equity Strategy Equity markets are pricing the worst post-war recession. The current sell-off in the S&P 500 (-51.9%), measured peak-to-trough, exceeds all post-war sell offs. It is now bigger than the post-tech-bubble sell off and the worst recession-related sell off in 1973-75. Like the posttech-bubble selloff in 2000-02, much of the 1973-75 selloff also represented a derating. That recession saw a peak-to-trough decline in trailing four quarter earnings of 15%, while equities fell by 48%, indicating a significant derating, in our view reflecting the oil supply shock that rendered portions of the existing capital stock obsolete. Equities are thus pricing in a deep and long recession, worse than any in the post war period (Figure 1). Figure 1: The worst post-war equity sell-off

Figure 2: Equities bottom half-way through recessions 220

Index

Index

220

200

200

180

180

160

160

140

140

120

120

100

100

-300 -250 -200 -150 -100 -50 0 50 100 150 200 250 300 Recession Current episode (considering Nov 20, 2008 trough) Average of S&P 500 around recessions

Source: NBER, S&P, Haver, Deutsche Bank

0 -10 -20 -30 -40 -50 -60 -70

% decline for S&P 500 from peak to trough around recessions

-80 -90

Source: S&P, NBER, Haver, Deutsche Bank

Historically, equities have bottomed a little more than half way through recessions, recovering significantly before it ends. There are several empirical regularities in the behavior of equity markets around past recessions. (i) On average, they lost 32% from peak to trough. (ii) They bottomed a little more than half way through recessions, recovering significantly before they ended, returning 27% in 6m and 43% in 12m from the bottom. (iii) They bottomed well before any of the macro indicators turned. (iv) Ex post, equity bottoms coincided on average with GDP growth bottoms, but this data only becomes available with a lag and is often revised. Waiting for a turn in the macro indicators before going long equities thus risks losing out 15-30% returns in equities (Figure 2).

In light of further downgrades to DB’s US and global growth outlooks in this World Outlook, we are lowering our S&P 500 EPS estimates for 2008 to $61 ($86 ex-writedowns) and for 2009 to $65 ($73 exwritedowns). Our top-down earnings estimates in the face of the global recession, a higher dollar over the medium term and lower oil and commodity prices imply underlying earnings declines of -14.9% in 2008 and -11.2% in 2009. NIPA profits are measured ex-balancesheet adjustments (“underlying earnings”). Domestic profits are viewed as the product of margins and sales, with the former driven by the cycle (operating leverage) and costs, while the latter are proxied by GDP. Domestic margins peaked in Q3 2006 and have fallen significantly. With growth turning down, in spite of the offset from declining costs, margins are expected to fall through mid-2009 to about the trough levels of past recessions (5.3%). We forecast domestic profit growth to trough in Q1 2009 at -22.1% and then recover but remain negative through Q3 09. Foreign profit growth looks set to suffer a significant double whammy from lower foreign growth and a higher dollar. Foreign profit growth lookss set to fall from positive mid-teen rates in Q2 2008 to negative 29.7% in Q1 09. We forecast total profit growth to trough in Q1 2009 at -24.7% but remain negative through Q3 2009. Financial sector writedowns have taken a heavy toll on S&P 500 operating EPS. We estimate that $317 bn in (pretax) writedowns during 2008 will have reduced S&P 500 operating EPS by $25, i.e., 29%. The magnitude of these writedowns requires some assumption on them going forward, their tax treatment and accounting practices in projecting S&P 500 EPS. We assume that capital markets

Deutsche Bank Securities Inc.

Page 9

5 December 2008

World Outlook

losses continue in Q4 at their recent pace but dissipate as GDP growth bottoms while loan loss provisioning peaks with a lag. Our assumptions on writedowns implies that despite declines in underlying earnings, S&P 500 EPS will grow in 2009 (Figure 3). Figure 3: Relative roles of domestic and foreign profit growth to reverse 40

%

%

40

30

30

20

20

10

10

0

0

-10 -20 -30 Dec-95

-10 -20

Domestic profit growth yoy Foreign profit growth yoy Total Profits growth yoy Dec-98

Dec-01

Dec-04

-30 Dec-07

Dec-10

Source: BEA, Haver, Deutsche Bank

multiple of 13.3 to forward earnings at end-2009, before reverting in 2010 to the long-run multiple of 15.4. The lower multiple is calibrated to be equivalent to an increase of 300 bps in HG credit spreads above their average levels (currently 535 bps above average). It embodies the view that uncertainty and credit conditions improve in H2 09 (Figures 4-5). Figure 5: Prices and earnings around recessions 130

Index

Index

130

125

125

120

120

115

115

110

110

105

105

100

100 -12M -9M -6M -3M 0M 3M 6M 9M 12M Recession Average of S&P 500 around Recessions (Trough = 100) Average of S&P 500 EPS around Recessions

Source: S&P, NBER, Haver, Deutsche Bank

Figure 4: Trailing multiples during recessions 35

Recession periods 0+- 1 s.d. band

S&P 500 trailing PE ratio Average S&P 500 P/E

30 25 20 15 10 5

Low with S&P at 752.4

Our top-down earnings estimates and multiples imply an S&P 500 target of 1140 for 2009 and 1425 for 2010. In the near term we see the S&P 500 remaining in a wide range between 800 and 1000. Our US growth forecasts imply a somewhat extended bottom in growth during Q4 2008- Q1 2009. We thus do not see a sustainable bottom in equities until sometime in Q1 2009. We remain overweight US versus world growth, both at the market and sector level, and thus underweight the global cyclicals (Energy and Materials). We are also underweight the US exporters (Capital Goods in the Industrials and Tech). We are overweight US importers (the Consumer sectors) and the Diversified Financials (Figure 6).

Oct-34 Oct-44 Oct-54 Oct-64 Oct-74 Oct-84 Oct-94 Oct-04 Source: S&P, NBER, Haver, Deutsche Bank

In the near term and during 2009, we expect that the prevailing uncertainty about the depth and duration of the recession will exact a discount on the forward multiple that equity investors apply to estimated earnings. Our long-run fair value PE for the S&P 500 is 16.4 (the ex-bubble average of 15.3 adjusted for the lower interest rate environment). But trailing multiples first fall (on average -28%) and then recover during recessions as prices fall in anticipation of the decline in earnings, and then rise well before the recovery, arguing in favor of using forward multiples. Long-run average earnings growth of 6.4% implies a fair value one-year-forward earnings multiple of 15.4. We apply a significantly lower

Page 10

Figure 6: EPS, multiples and S&P 500 targets

Ye a r 2008E 2009E 2010E 2011E

S & P 50 0 E P S e s ti m a te 61.2 64.5 85.9 93.0

Fo rw a rd P/E 13.3 15.4

S &P ta rg e t 800-1000 1140 1425

(S&P targets for 2009 and 2010 represent forward P/E applied to the next year EPS) Source: Deutsche Bank

Binky Chadha, (1) 212 250-4776 Parag Thatte, (1) 212 250-6605

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Pan-European Equity Strategy: In search of the bottom European equities APPEAR cheap on nearly all valuation measures. The current trailing P/E of 8.2x compares with the 40-year average of 14x and is at the lowest level since the 70s, when double-digit inflation was weighing on equity valuations. The P/B of 1.1x compares with a 29-year average of 1.67x, despite the ROE realized over the last 12 months still running at a healthy 15%. The dividend yield of around 5.3% is above the 75-year average and above the 10-year government bond yield for the first time since 1954 (Figure 1). Figure 1: European dividend yield above government bond yield! 2

%

Figure 2: Equity market decline so far a multiple contraction story 110 100 90 80 70 60 50

1-Jun-07

0

1-Feb-08

1-Jun-08

1-Oct-08

Figure 3: But earnings uncertainty* is at record level…

-2 -3

20

-4

18

-5

% US

Europe

16 Div - Bond Yield (avg. of Germany, UK and France)

14 12

-8 1933

1-Oct-07

Source: Thomson Financial IBES, Deutsche Bank Equity Strategy

-1

-7

Stoxx 600 Forward P/E Stoxx 600 forward earnings

40

1

-6

All indexed at 100 at 1 June 2007

1947

1961

1975

1989

2003

Source: Global Financial Data Inc, Datastream, Deutsche Bank calculations

The reason is that neither realized profits nor future profits expected by the consensus have meaningfully declined so far. Nearly 40pp of the 50% decline of European equities since their peak in June 2008 are driven by contracting multiples rather than earnings. This is true both on trailing earnings, i.e. the profits realized over the last 12 months, as well as on forward earnings, i.e. the profits which the consensus of bottom-up analysts expects to be realized over the next 12 months (Figure 2). Three reasons have contributed to the P/E contraction: (1) Investors demand a higher equity risk premium as uncertainty has risen. Realised and implied equity market volatility are at or close to record levels, credit spreads are at 75-year highs and earnings uncertainty, measured as the average standard deviation of analysts’ bottom-up estimates in the IBES consensus system, has reached a 6year high in Europe and a 20-year high in the US (Figure 3). (2) Investors anticipate lower earnings and lower earnings growth as economic growth falters. (3) Investors had been concerned about inflation until mid-08 and are concerned about deflation since then. Both, in a deflationary as well as in an inflationary environment P/E multiples tend to decline as real growth tends to be lower and the required equity risk premium higher.

Deutsche Bank Securities Inc.

10 8 6 4 2 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 *Average of standard deviation of bottom-up analysts’ earnings forecasts for each company as percent of the consensus earnings forecast Sources: Thomson Financial IBES, Deutsche Bank calculations

In the baseline scenario, we expect European earnings to decline by 20% both in 2008E and 2009E. Despite the recent acceleration of consensus earnings downgrades, consensus earnings growth numbers still remain far too high at -10% for 2008E and +6% for 2009E. In our view, the problem of estimates is not at the top line, which should get a sizable boost from the dollar appreciation. The problem is the margin assumption. We are projecting EBITDA margins to contract by 1.2pp and 2.5pp in 2008E and 2009E, respectively, substantially more than currently factored in by analysts. Below the EBITDA line, we expect the rising cost of interest bearing debt, goodwill impairment, pension funding gaps and rising working capital to weigh on profits and/or cash flows.

Page 11

5 December 2008

World Outlook

In our view the market has already priced in more than this forthcoming profit/cash flow deterioration. We calculate that at the current Stoxx 600 index level of roughly 200 the market is pricing in a roughly 50% peak to trough decline in earnings and a 6pp peak to trough drop in ROE, both more than in the cycles in the last 40 years and more than we forecast in the baseline scenario. So while the market looks clearly more expensive on our bottom-up numbers, it still offers 15-30% upside until end-09 (Figure 4). Also supported by our other models, our Stoxx 600 end-09 target is 250 in the baseline case (see final table for index targets).

Figure 5: Market moves are related to pace of earnings revisions 0.4 0.2

Ratio

Index Earnings revision ratio (3 month avg.) (lhs) Stoxx 600 (rhs)

300 250

-0.2

200 150

-0.4 -0.6

Bottom-up consensus earnings Growth

14.8 10.6 8.0 11.8 19.3 22.8 25.7 3% -29% -24% 47% 64% 18% 13%

27.5 24.7 5% -10%

26.1 28.6 6% 10%

Stoxx index at YE Trailing P/E at YE

360 24.3

365 13.4

200 7.7

299 28.3

202 25.1

229 19.5

251 13.0

310 13.6

365 14.2

200 8.1

200 7.0

Top-down Deutsche Bank earnings Growth

21.7 17.4 20.8 -20% -20% 20%

Required revision of bottom-up consensus earnings

-12% -33% -27%

Stoxx index at YE Trailing P/E at YE YE level on 38Y average trailing P/E of YE level on 38Y average trough P/E of YE level on 38Y average trough earnings P/E of

14.0 13.6 15.2

Latest observation not

100

averaged

50 0

-0.8

2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

200 9.2

200 11.5

200 9.6

304 295 330

243 236 264

292 283 317

Source: Thomson Financial IBES, Deutsche Bank estimates

We believe for equity markets it will be crucial whether global growth stabilises in 2009 or not. However deep the recession will be in 2009, equity markets should perform positively, if global growth looks like heading towards some acceleration in 2010. We believe this is even the case if growth remains sluggish thereafter, as expected in the baseline scenario. The risk scenario is that global growth does not trough in 2009, e.g. if neither aggressive monetary easing nor aggressive fiscal stimulus trigger a rebound. In this case we see another 20% downside risk in 2009 (Stoxx 600 target of 160). Sustainable upswing not likely before end of Q4 08 reporting. For the market to start a lasting rebound we see the following pre-requisites: (1) Slowing pace of earnings estimates downgrades (Figure 5); (2) Improvement in lending conditions; (3) Improvement in consumer confidence; And, (4) improvement of our proprietary Macro Support Ratio. We do not expect a lasting rebound before the end of the Q4 reporting. Near term risks include re-financing needs, higher debt financing costs, goodwill write downs and pension funding gaps.

400 350

0.0

Figure 4: … and profits will likely come down substantially

450

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 The earnings revision ratio looks at the number of companies with consensus forward earnings upgrades and downgrades over the last month. It is calculated as (# upgrades - # downgrades) / # of companies in the universe. Source: Thomson Financial IBES, Deutsche Bank calculations

Growth, large caps and defensives are still the way forward – for now. With regard to investment themes, we continue to favour large caps over small caps. We also believe that Growth will continue to outperform Value. Growth does not look expensive and we find that Growth has always outperformed Value in years in which global GDP growth declined by more than 1pp. Cyclicals vs Defensives is a closer call. Defensives now look more expensive and are over-owned. Yet, as the backdrop clearly remains in favour of Defensives we have maintained a defensive bias with Overweight positions in Health Care, Telecoms and Oil & Gas. In the last two months though we have started to gradually scale back these O/w positions and, at the same time, added weight to Basic Materials and Consumer Cyclicals where we are now slightly O/w and, respectively, less U/w. Figure 6: End-2009 index targets for European equity markets Target index level for end 2009

Upside from current level

Base scenario (60% probability) Stoxx 600 Stoxx 50 Euro Stoxx Euro Stoxx 50 FTSE 100 Dax CAC 40 SMI IBEX 35 MIB 30

250 2650 270 3000 5300 5900 4000 7000 10700 25000

29.5% 29.8% 27.4% 29.4% 29.4% 31.8% 28.7% 27.0% 23.4% 32.4%

Best scenario (15% probability) Stoxx 600

300

55.4%

Risk scenario (25% probability) Stoxx 600

160

-17.1%

Source: Deutsche Bank estimates, prices for upside as at 1 Dec 2008 cob

Bernd Meyer, CFA, (44) 20 7547 1533

Page 12

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Commodities: OPEC action & global growth

•

•

•

•

We expect the industrial metals will continue to struggle in an environment where global equity markets remain under pressure.

Since 1993, OPEC has taken action twelve times to cut production to defend the crude oil price. In Figure 1 we track the performance of the crude oil price in the two weeks before a quota reduction and in the subsequent 2-3 month period. We find that since 1993 OPEC has a 75% success rate of defending the oil price when it takes action and cuts quotas. However, on two occasions, 1998 and 2001, successive rounds of quota reductions were unsuccessful in supporting the oil price. On a cumulative basis production cuts amounted to 4.5mmb/d in 1998-99 and 5.0mmb/d in 2001-02. In our view, this reflected the inability of OPEC to cut production as fast as global oil demand growth was slowing. In 1998, oil demand was under pressure from the unfolding Asia crisis while in 2001 oil demand was hit by a mild US recession. In both years, world GDP growth slowed to 2.5% or below. Figure 2 tracks the performance of the crude oil price in the one, three and six months following a cut in OPEC production quotas since 1993. We find that on average quota reductions are effective in pushing oil prices higher. However, their effectiveness evaporated in 1998 and 2001 with oil prices falling over a one month, three month and six month horizon despite OPEC action. Deutsche Bank Securities Inc.

Figure 1: Tracking the performance of the crude oil price following OPEC production cuts Mar-93 Apr-99 Sep-01 Apr-04

150 140 130

Apr-98 Feb-01 Jan-02 Nov-06

Jul-98 Apr-01 Nov-03 Feb-07

120 reduction

•

We find that OPEC has a good track record of defending oil prices via production cuts. However, their success rate dissolves when global growth is under attack. We would view events today as reminiscent of 1998 and 2001 when world growth and crude oil prices collapsed. At those times, the cartel announced cumulative production cuts of approximately 5mmb/d, which occurred over a 12 month period. We believe OPEC will cut quotas throughout most of next year. However, we believe production cuts will not immediately rescue the oil price and consequently we target WTI crude oil prices hitting USD40/bbl next year. In fact we find that it is only two to three months after the last quota reduction does the oil price begin to stabilise. This would imply a stabilisation in oil prices around the first quarter of Q1 2010. History would suggest that crude oil prices can rally between 35-80% when world growth starts to recover and for this rally to occur within a six month period. This would imply crude oil prices back up at USD75-85 by the second half of 2010.

WTI oil price=100 in the day before quota

•

110 100 90

1998

80 70

2001

60

-14 -7 0 7 14 21 28 35 42 49 56 63 70 Number of trading days before and after OPEC quota reduction

Source: OPEC, DB Global Markets Research

Figure 2: OPEC quota cuts & the WTI crude oil price Production

% change in WTI crude oil price:

cut (m m b/d)

1M later

3M later

6M later

Mar-93

-0.99

-0.8

-2.8

-11.2

Apr-98

-1.76

-1.4

-9.2

3.4

Jul-98

-1.36

-6.7

-12.2

-26.2

Apr-99

-1.41

36.6

37.2

80.2

Feb-01

-1.50

-4.4

-0.7

-8.1

Apr-01

-1.00

8.3

-0.2

-10.9

Sep-01

-1.00

3.2

-19.6

-26.1

Jan-02

-1.50

-1.8

32.6

35.4

Nov-03

-0.90

4.5

13.5

28.4

Apr-04

-1.00

4.5

3.6

38.8

Nov-06

-1.70

7.5

-1.0

11.9

Feb-07

-0.50

-3.3

-2.1

1.4

Average

-1.22

3.9

3.3

9.8

1998

-4.52

-4.1

-10.7

-11.4

2001

-5.00

-2.4

-6.8

-15.0

Source: OPEC, DB Global Markets Research

These results would imply that the current OPEC quota reduction cycle will continue until the fourth quarter of next year. Moreover, that oil prices will stabilise approximately three months after the last reduction in quotas has been announced. In other words, crude oil prices should not hit rock bottom until the very end of next year/early 2010. We believe at that point a sustained move higher in crude oil prices will start to become more compelling. Indeed in the 1998 and 2001 quota reduction cycles as soon as the last production cut had occurred in April 1999 and January 2002 within six months crude oil prices had rallied by 80% and 35% respectively, in line with the recovery in the world economy at that time.

Page 13

5 December 2008

World Outlook

How low can oil prices go? In March 2008, following a doubling in oil prices in the previous 12 month period, we examined at what point oil prices could be considered extreme. We presented a variety of indicators such as oil prices relative to income, the US dollar and as a share of global GDP and found that the oil price would need to surpass USD150/barrel for it to represent levels of valuation which had never been reached in recorded history. Last month we reversed this analysis to assess how low oil prices can fall. We selected a variety of indicators, which are presented in Figure 3. It reveals that budgetary positions of certain oil producers starts to become increasingly strained when the oil price falls below USD55/bbl (Saudi Arabia) or USD95/bbl (Iran and Venezuela). In terms of marginal cost of production we set this close to USD80/bbl as the point for trimming new capital expenditures.

140

% change in price in the 12 months after the

120

first tightening move by the US Federal Reserve 1987

100 80

1994

1999

Average price rise

58%

60

2004 in the last four

42%

tightening cycles

40

30%

20

5%

14%

-20

Oil price level

Budget balance

USD55-95

Marginal cost of production

USD80

Based on futures forecasting error

USD80

As a share of S&P500

USD60-90

As a percent of US disposable income

USD60-85

As a percent of global GDP

USD40-75

Relative to G7 per capita income

USD45

Versus US dollar

USD30-60

In real terms (PPI)

USD35

Average

USD61

Source: DB Global Markets Research

While we believe these two indicators are the most important in setting the long term fair value of crude oil, the last few months have demonstrated the ability of oil prices to overshoot to the upside as well as to the downside. On the indicators we examined, we believe the extreme low point in crude oil is between USD30-35/bbl. Indeed we find that oil prices would need to fall to USD35/bbl in order to bring prices in real terms back to their long run historical averages. Industrial metals & the S&P500 The fortunes of the industrial metals complex have historically been closely tied to the performance of the S&P500. We expect the industrial metals will continue to struggle in an environment where global equity markets remain under pressure, demand side risks are skewed to the downside and inventories continue to rise. We would view aluminium and copper as the most exposed in this environment. We would view stability to global equity markets as a necessary condition to avert further downside in industrial metal prices. Since the S&P500

Page 14

Figure 4: The performance of industrial metals in the year after the Fed starts a new tightening cycle

0

Figure 3: How low can oil prices go? Indicator

only tends to stabilise 3-6 months before the end of a US recession, we believe prospects for the sector will remain hostile into 2009. Indeed the typical trigger for higher industrial metal prices has historically been a new monetary tightening cycle from the Fed, Figure 4.

-4%

-40 Nickel

Copper

Aluminium

Lead

Tin

Zinc

Source: Bloomberg, DB Global Markets Research

Figure 5: DB Oil & Natural Gas Price Forecasts WTI (USD/bbl)

Brent (USD/bbl)

US Gas (USD/mmBtu)

Q4 2008E

62.00

60.00

6.90

2008E

100.39

98.99

9.00

Q1 2009E Q2 2009E Q3 2009E Q4 2009E

55.00 50.00 45.00 40.00

55.00 50.00 45.00 40.00

8.00 7.50 7.50 8.00

2009E

47.50

47.50

7.75

Q1 2010E Q2 2010E Q3 2010E Q4 2010E

50.00 55.00 55.00 60.00

50.00 55.00 55.00 60.00

8.00 8.00 8.50 8.50

2010E

55.00

55.00

8.25

2011E

80.00

80.00

9.00

Source: DB Global Markets Research

Michael Lewis, (44) 20 7545-2166 Adam Sieminski, (1) 202 250 2928

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

US: Marking activity down further In our view, the abandonment of the Treasury’s original intention to purchase troubled assets has weighed on market sentiment and investor risk-taking, potentially leading to another wave of credit write-downs and loan losses. This has adversely affected investor confidence, which should in turn prolong the credit crunch and hence the economic downturn. This is apparent in financial conditions, which have become even more restrictive toward future economic activity. Consequently, we now expect the economic downturn to be even deeper and more protracted than we initially assumed. As a result, we are further lowering our forecasts of growth and inflation. We expect the Fed to cut rates another 50 bps to 0.5% and then hold rates at that level indefinitely. We do not project the economy to return to trend growth until mid-2010, which means the unemployment rate will continue to trend higher as the capacity utilization rate trends lower. As labor and product market slack open up further, both headline and core inflation are likely to move down substantially. With official interest rates steady at 0.5%, the Fed is likely to pursue more overt measures of quantitative easing, evident by the planned upcoming purchases of debt issued by government-sponsored agencies as well as highly-rated mortgages. This should help lower borrowing costs and possibly lead to a mini-refinancing wave, but until the nonagency mortgage market improves, policy initiatives to date are likely to have only a muted positive effect on the broader financial markets. In light of these adverse economic developments, we now expect substantial fiscal stimulus in the first half of 2009. Additionally, the sharp decline in energy prices over the past several months should provide a substantial benefit to cash-strapped consumers.

1. Financial conditions have tightened dramatically further over the last two months Real GDP 10

Domestic financial conditions index* 10

% yoy

% yoy

8

8

6

6

4

4

2

2

0

0 November

-2

-2

estimate

-4

-4

81 84 87 90 93 96 99 02 05 08 * Includes M2, bank loans & leases, consumer credit, yield curve, credit spreads and cyclical stocks.

Sources: BEA, DB Global Markets Research

2. “Troubled asset” prices made new lows following abandonment of the original TARP plan 2000

bps

bps

2000

5Y CMBS cash AAA spread to Libor 1500

1500

1000

1000

500

500

0

0

Nov-07 Jan-08 Mar-08 May-08 Jul-08

Sep-08 Nov-08

Sources: Bloomberg, DB Global Markets Research

Macro-economic activity & inflation forecasts Economic activity (% qoq, saar) GDP Private consum ption Investm ent Gov’t consum ption Exports Im ports Contribution (pp): Stocks Net trade

Q1 0.9 0.9 -5.8 1.9 5.1 -0.8 -0.1 0.8

2008 Q2 2.8 1.2 -11.5 3.9 12.3 -7.3 -1.4 2.8

Q3 -0.5 -3.7 0.4 5.3 3.4 -3.2 0.7

Q 4F -4.5 -2.4 -20.2 2.0 -10.0 -10.0 -0.5

Q 1F -3.7 -2.0 -18.7 -0.1 -15.0 -15.0 0.0

1.0

0.3

0.5

2009 Q 2F Q 3F -2.8 1.0 -1.7 0.0 -14.0 4.2 -0.1 1.9 -10.0 -5.0 -10.0 -5.0 0.5 1.8 0.3

0.1

Q 4F 1.5 1.0 4.1 2.4 -5.0 -3.0 0.7

2008F % yoy 1.2 0.4 -6.5 2.9 7.3 -2.9 0.2

-0.2

Industrial production Unem ploym ent rate, %

4.9

5.3

6.0

6.8

7.4

8.1

8.4

8.6

2009F % yoy -2.0 -1.6 -11.5 1.6 -7.5 -9.3 0.3

2010F % yoy 1.6 1.0 4.3 2.8 -2.3 -0.8 0.5

-0.9

0.5

-0.2

-0.3

-6.1

0.5

5.8

8.1

8.2

Prices & wages (% yoy) CPI

4.2

4.3

5.3

2.1

0.5

-0.5

-1.8

0.4

4.0

-0.4

1.5

Core CPI

2.4

2.3

2.5

2.0

1.7

1.5

1.0

1.1

2.3

1.3

1.2

Producer prices

7.1

7.6

9.4

2.3

-1.8

-4.5

-6.4

-1.8

6.6

-3.7

0.3

Com pensation per em pl.

3.3

4.0

4.0

3.4

3.2

2.9

2.6

2.4

3.7

2.8

2.7

Productivity

3.3

3.2

2.3

1.2

0.1

-1.1

-1.5

-0.4

2.5

-0.7

1.2

Sources: National authorities, DB Global Markets Research

Deutsche Bank Securities Inc.

Page 15

5 December 2008

World Outlook

US: Marking activity down further The credit crunch intensifies. According to the National Bureau of Economic Research, the cyclical peak in economic activity occurred in December 2007. At that time the economy entered a recession, which continues at present. The economic outlook is likely to continue to deteriorate—although we believe the sharpest output decline will occur in the current quarter. There are few, if any, parallel periods in the post-WWII era which compare to the current environment. Arguably, the closest example is the introduction of credit controls by President Carter in 1980. In March 1980, President Carter announced the adoption of credit controls under the Credit Control Act of 1969. These controls, which were administered through the Fed, were to be in effect for an indefinite period of time until the President chose to remove them. The intention of the controls was to put a brake on excessive money and credit creation, which was helping inflation move toward 15%. Consumer credit, which had grown 14% in 1979, slowed to 5% growth in Q1 1980 and produced an outright decline of 7% in Q2. With the economy in recession, the controls were fully lifted by July 1980.

3. Banks are unwilling to provide credit to consumers %

Fed's Sr Loan Officer Survey: banks willingness to lend to consumers

80

% 80

40

40

0

0

-40

-40

-80

-80 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 Sources: FRB, DB Global Markets Research

4. The consumer spending share of GDP is bound to slow in the future 74

%

%

Ratio of PCE to GDP

74

As we have noted on numerous occasions, today’s economic environment bears little resemblance to the 1980 landscape—inflation and interest rates were substantially higher at that time. Moreover, the 1980 credit crunch was short and voluntary, lasting just one quarter. The current credit crisis began in Q3 of last year and has intensified in force as of late, despite repeated Fed, Treasury and, more recently, international attempts to thaw frozen credit markets and restore global financial order.

72

72

70

70

68

68

66

66

64

64

62

62

Households are leveraged. Especially troubling to us is the fact the current credit crunch is occurring in an environment of an extremely cash-strapped consumer. Household savings are near their all-time record lows, while total debt service is near its all-time high. The recent hiccup in the savings rate and modest decline in the debt service burden are both a function of temporarily higher income resulting mostly from the tax rebates—which were primarily saved. With the labor market poised to weaken further, thereby putting downward pressure on income creation, consumer spending is likely to decline substantially. Without easy access to credit, households will be forced to limit consumption to the flow of earnings, predominantly from wages and salaries.

60

In addition to the credit crunch, households have to contend with a massive negative adjustment to net wealth. This should further dampen consumer spending and hence GDP growth. Indeed, our forecast assumes the economy experiences the longest and deepest pullback in consumer spending in the post-WWII period. We project an unprecedented four quarter decline in consumer spending— in prior instances, consumption has never declined for more than two consecutive quarters.

Page 16

60 60

64

68

72

76

80

84

88

92

96

00

04

08

Sources: BEA, DB Global Markets Research

5. Low savings and high debt service put US households in a precarious financial situation %

Homeowner financial obligation ratio (lhs) % Personal saving rate (rhs)

19

14 12

18

10

17

8 6

16

4

15

2 0

14

-2

13

-4 80

84

89

93

98

02

07

Sources: BEA, FRB, DB Global Markets Research

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

US: Marking activity down further How does the current recession compare? In terms of the peak to trough decline in consumption, we forecast a 2.5% drop, slightly worse than the two quarter drop which occurred during the 1980 episode. One of the reasons we believe consumers will not pull back to an even greater degree is due to declining energy costs, which should help US households. According to our analysis, a $1 decline in retail gasoline prices creates approximately $100 billion in added household cash flow. Gasoline prices are down $2 from their peak. Eventually, this should help steady consumer spending. Another reason we expect consumer spending to stabilize is fiscal stimulus. At the moment, we expect the incoming Obama Administration to enact a fiscal stimulus plan which will include middle class tax cuts, financial aid to states and federal infrastructure spending. The total size of the stimulus package is likely to be around $500 billion. While the President-elect has not put out a formal stimulus plan, as he only recently put his economics team in place, we can be assured from his political mandate that a viable program will be put forth soon. In terms of our forecast, we project a peak-to-trough decline in real GDP of -2.9%. This compares to an average postWWII peak-to-trough decline in real output of -2.1%. Our forecast puts the current projected decline in output on a par with the 1981-1982 recession. In addition to what we previously discussed, there are several factors that support an eventual—albeit anemic in historical context—recovery late next year. First, the projected peak-to-trough decline in GDP does not fully capture how weak the economy is. With the recession beginning in December 2007, our forecast is consistent with an 18 month recession. This is two months longer than either the 1974-1975 or 1981-1982 recessions. More importantly, if we factor in the amount of time in which economic output has been below trend, illustrated by a continually rising unemployment rate from its cyclical low, we would be looking at a four-year period of sub-par growth. Second, we expect that all of the various policy initiatives, such as aggressive Fed easing, the TARP capital injections, the FDIC ring-fencing of troubled assets—witness the Citibank bailout—and the most recent announcement that the Fed will buy mortgage assets and help fund consumer asset-backed securitization, will eventually work. At minimum, when fully implemented, these various programs combined with sizeable fiscal stimulus and lower energy costs should help stabilize the economy. Three, the economy is generating some pent up demand that we believe will eventually be unleashed once credit starts to flow. For example, housing and motor vehicle sales are at record lows, but these interest-sensitive sectors should benefit from lower rates once finance companies become less capital-constrained.

6. If sustained, the decline in household net wealth could offset most of the benefit from lower energy costs % yoy

6

Real GDP (lhs) Real household net wealth (rhs)

5

% yoy

20 15 10

4

5 3 0 2

-5

1

-10

Q4 estimate

0

-15 97

98

99

00

01

02

03

04

05

06

07

08

Sources: BEA, BLS, FRB, DB Global Markets Research

7. The credit crunch can be seen across all major product areas FRB Senior Loan Officer Survey Tightening standards for commercial real estate Residential mortgages: net share, banks tightening Banks tightening standards: consumer credit cards % Banks tightening standards: other consumer loans 100

% 100 75

75

50

50

25

25

0

0 -25

-25 90

92

94

96

98

00

02

04

06

08

Sources: FRB, DB Global Markets Research

8. An economic trough will not be in sight until the index of leading economic indicators stabilizes 15

Real GDP % yoy Index of leading economic indicators (2Q lead) 15

10

10

5

5

0

0

-5

-5

-10

-10

% yoy

76

79

82

85

88

91

94

97

00

03

06

09

Sources: BEA, Conference Board, DB Global Markets Research

Deutsche Bank Securities Inc.

Page 17

5 December 2008

World Outlook

US: Marking activity down further What are the risks? If the Fed is successful in jumpstarting the securitization markets, this would help free up consumer credit growth and therefore consumer spending. At present, many consumers are shut out of the credit markets, because of a lack of credit availability. Of course, there are risks to our projections. Conceivably, the various Fed, Treasury and FDIC programs may not sufficiently restore investor confidence and fully deal with the problem of distressed assets remaining on financial firms’ balance sheets. However, we believe the biggest risks to our forecast in the near term stem not from the financial markets per se, but rather from developments among the Big Three automobile manufacturers. With the economy already in recession, we do not believe it can handle a large bankruptcy; and if one occurred, we would likely be looking at a double-digit unemployment rate and a much deeper decline in economic activity than we presently project. According to industry estimates (Centre for Automotive Research), 2.5 to 3 million workers could lose their jobs if the Big Three filed for bankruptcy. This is not an unreasonable estimate because, similar to the Lehman bankruptcy, there would be inevitably negative shocks associated with any potential automobile industry bankruptcy, not least of which could be a further collapse in consumer confidence and thus even greater declines in consumer spending. In terms of output, we estimate the Big Three account for upwards of 70% of total US motor vehicle production. At $350 billion in inflation-adjusted terms, a 35% decline in motor vehicle output translates into about $125 billion in lost output, which is worth about 4% of GDP growth. As such, an automaker bankruptcy could easily push growth next quarter down by nearly -8%—a frightening prospect, to be sure.

9. Credit market stress must also meaningfully abate before the economic outlook can improve %

400

3m LIBOR minus 3m USD swap OIS

%

400

350

350

300

300

250

250

200

200

150

150

100

100

50

50

0

0

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

Sources: Bloomberg, DB Global Markets Research

10. Headline inflation will decline in response to rising labor and product market slack % yoy 15.0

CPI (lhs) Unemployment rate/ capacity utilization (rhs)

12.5

% 15.0 12.5

10.0

10.0

7.5 7.5

5.0

5.0

2.5 0.0

2.5 69 72 75 78 81 84 87 90 93 96 99 02 05 08

Sources: BLS, FRB, DB Global Markets Research

External balances & financial forecasts

Fiscal balance, % of GDP Trade balance, USD bn Trade balance, % of GDP Current account, USD bn Current account, % of GDP

2008F

2009F

2010F

-3.2 -453 -3.2 -677 -4.7

-8.2 -379 -2.7 -519 -3.5

-3.4 -401 -2.7 -465 -3.0

Financial forecasts Official 3M rate 10Y yield USD per EUR JPY per USD USD per GBP

Current 1.00 2.19 2.58 0.78 92 1.47

3M 0.50 1.50 2.00 1.28 95 1.41

6M 0.50 1.50 2.00 1.28 96 1.38

12M 0.50 1.50 2.50 1.21 92 1.30

Source: DB Global Markets Research, as of December 5

Joseph A. LaVorgna, (1) 212 250-7329 Carl J. Riccadonna, (1) 212 250-0186

Page 18

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Japan: Recession to continue through H1 2010 •

•

•

•

Japan’s recession is likely to continue through H1 2010, given the severity of the ongoing global recession, JPY appreciation, and the substantial fall in the leading index of the business cycle. We expect the depth and duration of this recession to be almost as severe as the one which started in February 1991. We expect real GDP to shrink for six consecutive quarters through Q3 2009, led mainly by weakness in exports and private capital investment where we expect both of them to shrink QoQ throughout 2009. A 2% slower global GDP growth and 10% JPY appreciation would lower real exports by 10% points, a substantial drag to economic activity. Private consumption is likely restrained by ongoing labor market softening. Recovery in real purchasing power from falling oil prices and JPY appreciation should not be considered supporting factors for consumption. Remember that in the past business cycles, deterioration (improvement) in the terms of trade accompanied economic expansion (recession). Prices, as lagging indicators of the business cycle, have already peaked in Q3 2008 and are likely to fall in Q4 2008 onward. A modest degree of deflation should prevail again in Japan through 2009-10.

1. Leading index has already fallen substantially 110

CY2005=100

Jan 1995=100 Leading index: DBCLI-ECONOMY (rhs) Cabinet Office coincident index (lhs)

105

110 105

100

100

95 95

90

90

85 80

85 90

92

94

96

98

00

02

04

06

08

Sources: Cabinet Office, DB Global Markets Research

2. Export volumes on the decline to all destinations 130

CY2005=100, sa, 3mma

120 110 100 90 80 US Europe Asia All regions

70 60 50 40 93

95

97

99

01

03

05

07

09

Sources: Ministry of Finance, DB Global Markets Research

Macro-economic activity & inflation forecasts Economic activity (% qoq, saar) GDP Private consumption Investm ent Gov’t consum ption E xports Im ports Contribution (pp):

Q1 2.5 2.4 2.0 -1.8 14.5 5.0

2008 Q2 -3.7 -2.2 -6.5 -0.4 -10.2 -11.5

Q3 -0.4 1.1 -3.5 0.3 2.8 7.9

Q 4F -2.3 -0.6 -3.6 1.6 -12.5 -9.5

Q 1F -2.9 -0.2 -4.5 1.6 -8.0 -4.5

2009 Q 2F Q 3F 0.0 -2.4 3.6 -3.6 -4.5 -3.3 1.6 1.6 -4.5 -3.6 0.3 -1.2

Q 4F 0.3 0.8 -2.2 1.6 -2.7 -0.4

2008F % yoy 0.3 0.7 -2.9 0.3 4.7 0.0

2009F % yoy -1.7 0.1 -4.0 1.3 -6.2 -2.9

2010F % yoy 0.7 0.6 -0.6 1.6 0.2 1.9

Private inventory

-0.8

-0.2

0.2

-0.5

-1.4

-0.7

0.4

0.4

-0.2

-0.5

0.3

Net trade

1.7

-0.4

-0.4

-1.1

-0.8

-0.7

-0.4

-0.4

0.7

-0.7

-0.2

-2.9

-3.3

-5.1

-11.5

-7.8

-5.9

-4.7

-3.9

-1.1

-6.9

-1.5

3.9

4.0

4.1

4.1

4.3

4.5

4.8

4.9

4.0

4.6

5.2

Industrial production Unem ploym ent rate, % Prices & wages (% yoy) CPI

0.9

1.3

2.2

1.6

1.1

0.4

-0.8

-0.8

1.5

0.0

-0.5

Core CPI

1.0

1.5

2.3

1.7

1.0

0.4

-0.8

-0.8

1.6

-0.1

-0.5

Producer prices

3.5

4.9

7.1

1.2

-3.3

-7.0

-10.2

-5.8

4.2

-6.6

-1.3

Com pensation per em pl.

1.3

0.7

0.3

-0.6

-1.8

-2.0

-2.2

-1.5

0.4

-1.9

-0.5

Productivity

0.5

1.8

1.3

1.8

1.0

1.1

0.0

0.3

1.3

0.6

1.5

Sources: National authorities, DB Global Markets Research

Deutsche Bank Securities Inc.

Page 19

5 December 2008

World Outlook

Japan: Recession to continue through H1 2010 •

•

•

•

We doubt the validity of the arguments that Japan is immune because it is not at the epi-center of this financial crisis; its financial system is undamaged; inventory levels are under control; and capital investment is entirely financed by cash flow. This argument, does not take into account dynamical aspects of the business cycle: 1) Japan’s economic activity has clearly been affected by international trade and currency. 2) Prolonged and severe recession would eventually result in newly generated bad loans, which could trigger another credit crunch. 3) A sense of excess in inventories is determined not only by supply but also by demand; a substantial weakness in demand would push up inventories, which in turn leads to cuts in production. 4) A severe and prolonged recession eventually curtails profit so that companies would have to borrow from banks. Most of the fiscal stimulus packages require the approval of the second supplementary budget by the Diet, but this may not be obtained easily in the Jan-09 session. This package includes JPY2trn coupon payment to all households. We expect the BoJ to cut rate by 20bp in Q1 2009, but do not expect a return to either zero interest rate policy or quantitative monetary easing, because of their doubt over the effectiveness of such extreme policies. The next economic recovery is unlikely to be V-shaped, led by exports. Stabilizing domestic demand, instead, would slowly lead to recovery, albeit at a pace of potential growth at best in our view.

3. Prices likely to fall : CY2005=100

116

Domestic CGPI National CPI excl. fresh food National CPI excl. energy and food

114 112 110 108 106 104 102 100 98

Forecast

96 94 00

01

02

03

04

05

06

07

08

09

10

11

12

Sources: Ministry of Internal Affairs and Communication,, DB Global Markets Research

4. Inverted terms of trade as coincident indicator 120

CY2005=100

CY2005=100

Terms of trade; finished goods prices/raw material prices (rhs) Industrial production (lhs)

110

40 60 80

100

100

90

120 140

80

160 70

180

60

200 80

84

88

92

96

00

04

08

Sources: Bank of Japan, Ministry of Economy, Trade and Industry,

External balances & financial forecasts M2 + CD growth, % Fiscal balance, % of GDP Public debt, % of GDP Trade balance, USD bn Trade balance, % of GDP Current account, USD bn Current account, % of GDP Financial forecasts Official 3M rate 10Y yield JPY per USD JPY per EUR

DB Global Markets Research

2007 1.6 -0.8 162.8 105.8 2.4 211.3 4.8

2008F 2.2 -2.8 167.6 44.4 0.9 174.0 3.5

2009F 2.2 -4.2 174.0 74.5 1.4 239.2 4.5

2010F 2.1 -5.1 0.0 90.8 1.6 303.2 5.4

Current 0.30 0.89 1.38 92 118

3M 0.10 0.85 1.50 95 122

6M 0.10 0.85 1.50 96 122

12M 0.10 0.85 1.30 92 112

5. Credit spreads have widened even in Japan 4.5

%

AAA corporate

3.5

JBG 5-year

3.0 2.5 2.0 1.5 1.0 0.5 0.0 3/04

Sources: National authorities, DB Global Markets Research, as of Dec 5

BBB corporate

4.0

9/04

4/05

11/05

6/06

1/07

8/07

3/08

10/08

Sources: Bloomberg, DB Global Markets Research

Mikihiro Matsuoka, (81) 3 5156-6768

Page 20

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Euroland: A deep recession Growth: The outlook has deteriorated further since our WO Update in mid-October. We now expect the euro area to contract by 2.5% in 2009, with a peak-to-trough decline in output of 3¼%, the largest on record (since 1960). Technical recession in Q2-Q3’08 has been confirmed. The main drags were the spike in commodity prices and the declining housing/construction cycle. As Q3 unfolded, discretionary spending (cars, trucks, machinery, etc) started to roll-over, suggesting the euro area was on the verge of slipping into self-reinforcing recessionary dynamics. The escalation of the credit crisis in late September was a blow, creating an inflection point into Q4. Surveys imply that output in the final quarter will fall at the fastest rate since 1974. Despite a rapid decline in supply, stocks, which increased sharply in Q3, have risen further. Anecdotal evidence points to lengthy production holidays from late Q4 well into Q1. We have cut our Q4 GDP forecast from -0.5% to -0.8% qoq and our Q1 forecast from -0.6% to -1.2%. The credit crunch is restricting the supply for credit. Rising uncertainty is reducing the appetite for investment (business investment is starting to contract, adding to declining housing and construction) and consumption. Falling demand is pushing unemployment higher quickly, reinforcing household sector retrenchment; declining house prices will weigh on consumption too. At the same time, foreign demand is contracting. For the next couple of quarters, we believe this spiral will be largely unbreakable. However, around the middle of 2009, activity will have fallen below minimum levels and some catch-up activity should then occur. This process is normally supported by an easier policy environment. Looking into 2009, policy decisions outside the euro area maybe as important as those at home. We expect GDP to grow 1% in 2010.

1. GDP to decline 2.5% in 2009, worst since WWII 5

Contributions to annual GDP growth

4

Forecast

3 2 1 0 -1 Consumption Investment Net trade

-2 -3

Government Stocks GDP

-4 00

01

02

03

04

05

06

07

08F

09F

10F

Sources: Eurostat, DB Global Markets Research

2. Peak-to-trough output destruction of 3.3% 2.5

Euro area GDP growth, % qoq

2.0

Forecast

1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 Sources: OECD, Eurostat, DB Global Markets Research

Macro-economic activity & inflation forecasts Economic activity (% qoq, saar) GDP Private cons um ption Investm ent Gov’t consum ption Exports Im ports Contribution (pp): Stocks Net trade

Q1 2.7 -0.1 6.1 1.2 7.3 7.9 1.2

2008 Q2 -0.8 -0.6 -4.6 2.2 -1.5 -1.6 0.2

Q3 -0.9 0.0 -2.4 2.8 2.4 7.0 1.0

Q 4F -3.2 -1.2 -7.8 2.0 -2.0 -1.6 -1.0

Q 1F -4.7 -1.2 -11.5 2.8 -0.8 0.0 -1.7

2009 Q 2F Q 3F -3.3 0.2 -0.8 0.0 -11.5 -2.0 2.8 2.8 -2.8 -0.8 -0.8 0.0 0.0 0.4

Q 4F 0.7 0.4 0.0 2.8 -0.8 0.8 0.6

2008F % yoy 0.9 0.3 1.1 1.7 3.2 3.4 0.2

2009F % yoy -2.5 -0.7 -7.4 2.6 -1.0 0.3 -0.4

2010F % yoy 1.0 0.5 0.0 2.6 0.5 0.7 0.3 -0.1

-0.1

0.0

-1.9

-0.2

-0.4

-0.9

-0.4

-0.7

0.0

-0.6

Indus trial production

1.4

-1.9

-2.8

-6.6

-9.0

-6.6

-0.8

-0.2

0.0

-5.4

1.0

Unem ploym ent rate, %

7.2

7.4

7.5

7.7

8.0

8.5

8.9

9.2

7.4

8.6

9.7

Prices & w ages (% yoy) HICP

3.4

3.6

3.8

2.4

1.7

1.1

0.7

1.4

3.3

1.2

1.4

Core inflation

1.8

1.7

1.8

1.9

1.9

1.9

1.7

1.6

1.8

1.8

1.1

Producer prices

5.4

7.1

8.5

4.8

2.2

-0.1

-1.8

0.3

6.5

0.2

0.2

Com pens ation per em pl.

3.3

3.8

4.2

3.6

3.2

2.4

1.9

1.5

3.7

2.3

1.5

Productivity

0.5

0.2

-0.2

-1.0

-2.3

-2.1

-1.3

0.0

-0.1

-1.4

1.4

Sources: Eurostat, DB Global Markets Research

Deutsche Bank Securities Inc.

Page 21

5 December 2008

World Outlook

Euroland: A deep recession Inflation & Monetary Policy: Many euro states have programmes to recapitalize their banking sectors and to guarantee lending. These have not stopped deleveraging, either in the banking system or the real economy. The ECB has begun to cut rates but the contraction of credit means that the total benefits to the real economy are not obvious. Having cut 175bp in two months--unprecedented for the ECB, but disappointing some who would prefer a more decisive response--we expect the ECB to keeping cutting at a rapid rate in the first half of 2009. Inflation is falling quickly and should be below 1% in Q3’09. Unlike in the UK and US, negative inflation will probably be avoided, but the small buffer against deflation should encourage the ECB to take out insurance. We now see the terminal rate at 0.75% by end Q2 (prev: 1.5% by end Q3). Fiscal Policy: With the monetary transmission mechanism uncertain, the onus has shifted to fiscal policy. The Commission has proposed a 1.5% of GDP package, which we believe is the least that is needed. With some members reluctant, quick delivery of this plan is unlikely. However, as growth falls further next year, we expect individual countries to be forced to do more and the flexibilities of the reformed Stability Pact will be used. We expect the euro area deficit to rise to 4.7% of GDP in 2009 and higher still in 2010. External Policy: The role of policy elsewhere in turning the euro area growth cycle around should not be underestimated. Unconventional US monetary policy (direct, unsecured lending to the economy; purchasing of MBS) will likely prove to be powerful measures there, as will the proposed fiscal package by President-elect Obama. Risks: The downside risks include a weak fiscal policy response, hard-landings in Eastern Europe and debtdeflation. On the upside, should the measures to unblock funding markets succeed, a positive credit impulse could be supportive for growth.

External balances & financial forecasts M3 growth, % yoy eop Fiscal balance, % of GDP Public debt, % of GDP Trade balance, EUR bn Trade balance, % of GDP Current account, EUR bn Current account, % of GDP Financial forecasts Official 3M rate 10Y yield USD per EUR JPY per EUR GBP per EUR

150

Monthly flow of credit less 5-year trailing average, EURbn (nsa)

100 50 0 Total private sector credit

-50

o/w loans -100 2006

2007

2008

Sources: ECB, DB Global Markets Research

4. Headline inflation is reversing quickly 4.5

% yoy

Forecast

4.0

HICP

Core

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 98

99

00

01

02

03

04

05

06

07

08

09

Sources: DB Global Markets Research, Eurostat

5. ECB refi rate to fall to 0.75% by summer 2009

2007 11.4 -0.6 66.3 15.8 0.2 37.8 0.4

2008F 9.5 -1.5 67.2 -2.5 0.0 -30.0 -0.3

2009F 5.6 -4.3 74.4 10.9 0.1 -40.0 -0.4

2010F 5.0 -5.3 78.1 2.6 0.0 -20.0 -0.2

Current 2.50 3.68 3.03 0.78 118

3M 2.00 2.88 2.50 1.28 122

6M 0.75 1.41 2.25 1.28 122

12M 0.75 1.40 2.00 1.21 112

0.87

0.91

0.93

0.93

Sources: DB Global Markets Research, as of Dec 5

3. Credit is contracting

6

ECB refi rate, % Real

5

Forecast

Nominal

4 3 2 1 0 -1 -2 1999

2001

2003

2005

2007

2009

Sources: ECB, Eurostat, DB Global Markets Research

Mark Wall, (44) 20 7545-2087

Page 22

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Germany: faces the deepest recession on record • German GDP dropped by 0.5% qoq in Q3 and the data reveals that the German economy has been in recession since Q2 2008. While in Q2 the drop in GDP was driven by final domestic demand, in Q3 GDP was dampened by net exports. Capital spending was weak in both Q2 and Q3, as stimulus from export demand is softening significantly. Private consumption remained subdued and could not offset the drag from weaker foreign demand. • Looking forward, we expect the most serious recession on record in Germany. The deep economic crisis will be caused mainly by the pronounced weakness we expect in foreign demand. In 2009 US GDP growth looks likely to shrink by 2% yoy and we expect world GDP growth to come in at less than 1% yoy. We expect this collapse in foreign demand is expected to result in a slide in exports, by 6.3%. In turn, weak export growth should dampen capital spending and we expect a drop in machinery and equipment spending by more than 10% yoy in 2009. • Unemployment is likely to rise only slightly in the first few months of the next year because the government changed the laws and it is now possible to introduce short-time work for temporary workers. This should reduce the pressure on temporary workers. Nevertheless, the strong slowdown in growth should lead to a rise in unemployment. Accordingly, private consumption will probably decline as well, as employment is expected to fall and wage growth will be dampened by the weakness in domestic and global growth. We believe that the recession in Germany will peter out by the end of 2009. For 2010 we again expect positive GDP growth. However, the growth dynamic should remain low and be driven mainly by exports. • So far, the German government is not prepared to support the German economy by implementing a powerful stimulus package. However, we expect such a package in the course of Q1 2009, as the deterioration on the labour market should increase the pressure significantly. Until then, Germany will probably benefit to some extent from the growth packages implemented by its main trading partners. The fiscal deficit is likely to rise considerably, mainly due to the automatic stabilizers, but also as a result of the expected growth stimulus package. Inflation is unlikely to be a hot topic in the next 2 years. Until summer 2009 a very favorable basis effect from the slide in oil prices should lead to marked slowdown in inflation. Afterwards, the negative output gap should keep a lid on inflation. In fact, potential deflation risks might be an important topic in Germany, as inflation could become negative in yoy terms in summer 2009.

1. Worst recession ahead 6

% yoy

GDP

Forecast

5 4 3 2 1 0 -1 -2 -3 71

75

79

83

87

91

95

99

03

07

:

Sources: Statistical office, DB Global Markets Research

2. World GDP growth points to strong fall in exports 6

% yoy

World GDP (lhs) German exports (rhs)

% yoy Forecast

5

15 10

4

5

3 0

2

-5

1 0

-10 92

94

96

98

00

02

04

06

08

10

Sources: DB Global Markets Research

Deutsche Bank Forecasts: Germany (% yoy, unless stated) GDP - Private consumption - Investment - Government consumption - Exports - Imports - Net trade contribution, pp Industrial production Unemployment rate, % HICP Compensation per employee Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 2.6 1.3 -2.5 1.1 -0.3 -0.4 -0.5 0.4 4.6 4.0 -5.2 0.0 2.2 2.5 1.4 0.6 7.7 3.8 -6.3 5.8 5.2 4.3 -4.2 4.7 1.2 0.0 -1.0 0.7 5.9 2.0 -3.0 2.0 9.0 7.8 8.5 10.4 2.3 2.8 0.9 0.8 1.2 1.7 1.0 0.9 0.1 -0.1 -3.3 -4.9 5.2 7.5 6.2 4.5

Sources: National authorities, DB Global Markets Research

Stefan Bielmeier, (49) 69 910-31789

Page 23

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

France: Recession worsens •

•

•

•

•

•

Contrary to the euro area trend, France eked out positive GDP growth in Q3. However, by no means does this indicate that France will remain immune to the global downturn. In fact, we expect a strong contraction in Q4 to even intensify in the first part of next year. The main driving force of the slowdown is the household sector. Indeed, while out of the treble shock that hit the economy – the credit meltdown, the construction downturn, and the spike in inflation – the latter is fading fast, it is being replaced by a sharp deterioration of the labour market, with monthly increases recently unseen since the 1993 recession. This is an almost sure recipe to put consumers on a defensive stance for the foreseeable future. But businesses will adjust to that gloomy domestic environment and cutbacks in spending (investment and stocks) are likely (for instance there is a reported stock of one million unsold autos, and a 25% production cut has been announced in the sector). To be sure, the government made it clear that it won’t stay pat in the face of the faltering in growth. It already announced a step-up in government subsidized job schemes; the purchase by social housing agencies of 30,000 unsold homes, while a plan to support the auto sector is on its way. It had already decided to support the banking sector, among other things with a recapitalization plan worth 10 billion euros. It also set up a strategic investment fund which will be endowed over the medium term with 20 billions, to both take minority stakes in large corporates (to avoid unfriendly take-over) and to support small growth companies which suffer from a drying up of credit availability. In line with EU recommendation the growth supporting plan could amount to as much as 1.2% of GDP. Yet, given the strong negative dynamics that are unfolding, this plan we believe will not be sufficient to revive meaningfully the economy over the forecast horizon – we expect only a tiny rebound in 2010. Indeed, mending the woes affecting the credit market will take time, while the external environment is unlikely to become a support any time soon. While talks about the threat of deflation will grow, we think the risk remains limited – we see a trough in core inflation at around ¾%-1%. Top on the casualty list of the current cycle will obviously be the government deficit which we expect will reach 4.5% of GDP (at least) next year, and little improvement in 2010.

1. The deterioration in the labour market in perspective : 24

% ch., saar

Unemployment yoy

16

M/3M

8 0 -8 -16 -24 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: INSEE/Dares

2. With immediate effects 14

% ch. ov. 2Q. ago, saar

7

0

Households residfential

-7

investment -14 1979

1983

1987

1991

1995

1999

2003

2007

Source: INSEE

Deutsche Bank Forecasts: France (% yoy, unless stated) GDP - Private consumption - Investment - Government consumption - Exports - Imports - Net trade contribution, pp Industrial production Unemployment rate, % HICP Compensation per employee Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 2.1 0.8 -2.3 0.9 2.4 0.8 -0.8 1.3 5.0 0.4 -3.0 1.1 1.3 1.6 2.0 2.0 3.2 2.7 -0.9 1.9 5.9 2.7 1.4 2.1 -0.9 -0.1 -0.8 -0.2 1.4 -1.0 -2.9 1.6 8.0 7.4 8.6 8.7 1.6 3.3 1.0 1.4 3.0 2.8 1.9 2.5 -2.5 -3.3 -4.5 -4.3 -1.2 -1.7 -2.0 -1.8

Sources: National authorities, DB Global Markets Research

David Naudé, (33-1) 44 95 63 87

Page 24

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Other EMU economies

•

•

•

1. Weaker GDP growth across the euro area : 4

Real GDP growth, %

2008

2009

2010

3 2 1 0 -1 -2 -3 Ireland

Portugal

Greece

Finland

Austria

Belgium

Spain

-4 Netherlands

•

We see the shocks to the euro area coming under two general themes: ‘credit’ and ‘external’. The first encompasses housing, household indebtedness, corporate indebtedness, banking system leverage, bank funding risk, etc. With regards ‘external’, in our view exports were the base layer of the last economic cycle. Export growth is threatened directly by the credit crunch, for example, via weak export demand from the UK and US, the euro area’s biggest trading partners, or via other affected euro area economies. It is affected indirectly via declining export demand from China, Russia, and OPEC as the credit crunch hits global demand and with it oil prices. ‘External’ also encompasses risks from current account deficits. The two shocks could be mutually reinforcing. Worrying for the euro area is that if a country is not hit by one of the shocks, they will likely be hit by the other. The euro area has become increasingly integrated over time, as was the intention. With that has come greater synchronicity of cycles. This means there is no chance for a member state to muffle the impact of the shocks through trade with another member state on an uncorrelated cycle which might be independent of the shocks. Chances are a large majority of euro area member states will record recessions over the next year. High on the list of vulnerable countries are Spain and Ireland, for both credit and external reasons. Both punched well above their weight in the credit cycle, with Spain, representing about 12% of EMU GDP, responsible for about 30% of euro area growth in household loans between 2002 and 2007 and 40% of corporate loans. Ireland, representing just 1% of EMU GDP, was responsible for between 5 and 10% of loan growth. Housing risks stretch beyond just Spain and Ireland. Most indicators from the French housing and construction sector have rolled over. House price to income ratios had increased as much in France between 2000 and 2007 as they had in Spain. There are signs of deterioration in Dutch housing too. Current account deficits are increasingly coming into focus as questions are being asked about the availability of external funding (Greece, Spain, Portugal and Ireland are the most threatened). Exposure to Eastern Europe is another potential fault line, both in terms of trade exposure (Germany, Italy) and lending exposure (Austria, Belgium). Government deficit and debts levels are also under strain. The biggest increases in deficits in 2009 should be in Spain, Belgium, Austria and Greece. For the largest increases in debt, add Ireland to that list.

Italy

•

Source: DB Global Markets Research

Deutsche Bank Forecasts: Other EMU economies (% yo y, un less stated)

2007 2008F 2009F 2010F

Italy

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

1.4 2.0 -1.7 -1.6

-0.4 3.5 -2.0 -2.8

-2.3 1.5 -1.5 -4.9

1.0 1.6 -1.5 -5.3

S pain

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

3.7 2.8 -10.1 2.2

1.3 4.2 -10.4 -0.7

-2.6 1.3 -8.5 -4.7

-1.0 1.5 -7.5 -5.9

N etherlan ds

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

3.5 1.6 9.8 0.3

2.0 2.2 7.0 0.8

-1.7 1.6 7.0 -2.0

0.8 1.7 6.0 -3.0

B elgium

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

2.6 1.8 2.4 -0.3

1.3 4.5 0.5 -0.6

-2.3 1.2 0.0 -4.7

0.7 1.5 -0.5 -5.8

A ustria

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

3.0 2.2 3.3 -0.4

1.6 3.2 3.0 -1.2

-2.8 1.2 1.5 -4.1

0.6 1.4 0.0 -5.2

Fin lan d

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

4.4 1.6 5.3 5.3

2.0 3.9 5.5 4.3

-1.0 1.4 4.5 1.4

0.9 1.6 4.0 0.2

G reece

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

4.0 3.0 -14.0 -3.5

3.2 4.3 -14.2 -3.6

-0.8 2.7 -10.0 -5.5

0.0 3.1 -8.0 -6.0

Po rtugal

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

1.9 2.4 -10.0 -2.6

0.5 2.8 -11.0 -2.8

-2.0 1.5 -9.0 -5.4

0.3 1.7 -8.0 -6.4

Ireland

GDP H ICP CA bal., % G D P Fiscal bal., % G D P

6.0 2.9 -5.5 0.2

-2.0 3.1 -4.5 -5.8

-3.5 1.5 -3.5 -5.8

-0.8 1.5 -2.0 -5.6

Sources: National authorities, DB Global Markets Research

Mark Wall, (44) 20 7545 2087

Page 25

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

UK: Recession worse than the 1990s, interest rates lowest on record •

•

•

•

•

Not only did the economy contract by more than we had been expecting in Q3, but with the downtrend in the surveys accelerating quickly our forecasts for growth have rapidly become too optimistic. In addition, with the euro area expected to contract more sharply than we initially thought, we have as a result revised down our view on UK GDP. We now see a decline of 2.5% next year, a smaller recovery in growth in 2010 (up just 0.6%) and a total peak-to-trough decline of 3.3%. This represents a larger fall than that of the early 1990s recession, but a smaller contraction than during the early 1980s. The output gap moves negative and remains there for the duration of our forecast horizon, although does begin to improve from the start of 2010. While our UK GDP forecast is similar to that of the euro area, it assumes a positive contribution from net exports next year due to the depreciation in sterling. The implication of this is that domestic demand is somewhat weaker (a peak-to-trough fall of 4%), with a sharper decline in both consumption and investment than we initially envisaged, and a larger inventory winddown. The result is that the unemployment rate heads up more quickly and to a higher level in our new forecasts – we have revised our peak to 9% by around the middle of 2010 (it is currently 5.8%). This represents a total loss of around one million jobs in the three years to the end of 2010, similar to the scale of job losses resulting from the early 1990s recession (but about half the rise of the early 1980s). Average earnings growth weakens over the forecast period, not only because of a weaker employment picture but also due to falling inflation – in particular RPI inflation turns negative early in 2009 (March) and remains sub-zero for a full twelve months.

1. GDP to fall over 3% from peak to trough in the UK 2.0

6

GDP growth Forecast

1.5

5 4

1.0

3 2

0.5

1

0.0

0 -1

-0.5

% qoq (lhs)

% yoy (rhs)

-2

-1.0

-3

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Sources: ONS, DB Global Markets Research

2. Unemployment to rise to 9% by end-2010 14

Unemployment rate, % Forecast

12 10 8 6 4 2 1971

1976

1981

1986

1991

1996

2001

2006

Sources: ONS, DB Global Markets Research

Macro-economic activity & inflation forecasts Economic activity (% qoq, saar) GDP Private consumption Investment Gov't consumption Exports Imports Domestic demand

Q1 1.1 3.6 -7.7 3.9 3.0 -1.3 1.8

Contribution (pp): Stocks

-1.9

0.8

-0.3

-2.0

-2.3

-1.3

0.8

-0.1

-0.3

-0.6

-1.1

-1.1

Industrial production

-2.0

-2.7

-4.3

-5.1

-6.2

-3.9

Unemployment rate, %

5.2

5.4

5.8

5.9

6.4

7.0

Prices & wages (% yoy) CPI

2.4

3.4

4.8

3.9

2.7

1.3

0.2

0.4

3.6

1.1

1.5

Producer prices

5.9

8.8

9.2

5.6

3.2

-0.2

-1.2

0.6

7.3

0.6

1.0

Compensation per empl.

4.0

3.5

3.3

3.2

2.6

2.8

2.3

2.0

3.5

2.4

2.5

Productivity

0.7

0.2

-0.4

-1.2

-1.8

-1.8

-1.0

0.1

-0.2

-1.1

2.0

Net trade

2008 Q2 0.0 -0.2 -10.7 2.0 -0.2 -2.1 -1.4

Q3 -2.0 -0.5 -9.2 4.0 -1.2 0.3 -1.3

Q4F -3.3 -1.6 -9.6 1.6 -2.0 -6.3 -2.4

Q1F -3.8 -2.0 -11.5 1.6 -3.9 -8.0 -2.9

2009 Q2F -2.6 -1.2 -9.6 2.0 -3.9 -5.6 -2.0

Q4F -0.2 -0.4 -6.0 2.0 0.0 -0.4 -0.8

2008F % yoy 0.8 2.0 -4.2 2.4 1.1 0.7 1.1

2009F % yoy -2.5 -1.2 -9.7 2.1 -2.6 -4.7 -2.0

0.0

0.5

-0.4

-1.1

0.7

-0.7

0.0

0.1

0.7

-0.2

-2.4

-1.2

-1.5

-4.4

-0.4

7.4

7.8

5.6

7.1

8.6

Q3F -1.2 -0.8 -7.8 2.0 -2.4 -2.7 -1.4

2010F % yoy 0.6 0.7 -4.3 2.0 0.8 1.4 0.2

Sources: National authorities, DB Global Markets Research

Page 26

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

UK: Short period of falling prices, but not strictly “deflation” •

•

•

•

•

Lower house prices and standard variable mortgage rates are partially responsible for this as both are included in the RPI measure of inflation (and they are falling quickly). In terms of the BoE’s targeted CPI measure, inflation falls to just below zero at the end of summer 2009, as lower energy and food prices, a widening negative output gap and lower VAT weigh on the index. However, we should stress that we see only a short burst of falling prices rather than a generalized period of deflation (based on the CPI). We do not expect a re-run of Japanese-style deflation in the UK. The government has acted quickly to provide liquidity and capital to the banking sector, and both fiscal and monetary policy have been eased. In the Pre Budget Report the UK government provided a discretionary fiscal boost amounting to 1% of GDP (annualised) over the next sixteen months, the deficit was expected to rise to some 8% of GDP next year. The result is that the Treasury now believes it will take until 2015-16 before the budget is again balanced – even this is based on forecasts for GDP that are way more optimistic than ours (a 1% contraction in 2009, for example, versus DB view of -2.5%). Gilt issuance is set to hit 10% of GDP this year (close to GBP150bn) and should be only modestly less in 2009-10/2010-11. The BoE has taken interest rates down to their lowest on record – 2% – following cuts of 50, 150 and 100bps in October, November and December respectively. We see the MPC easing further to 0.5% by endQ1/beginning-Q2 (remaining there for some time). Even if Bank Rate is not cut to zero, questions will be asked about the need for quantitative easing. Finally, a word on the residential real estate market. We have revised our view modestly downwards and now see a total fall in nominal house prices from peak to trough of 30% (meaning we have seen half of the adjustment in prices thus far). This roughly equates to a 35% real decline from end-2007 to end-2010.

External balances & financial forecasts 2007 12.8 -2.5 -89.3 -6.4 -52.6 -3.8

M4 growth, % Fiscal balance, % of GDP, FY Trade balance, GBP bn Trade balance, % of GDP Current account, GBP bn Current account, % of GDP Financial forecasts Official 3M rate 10Y yield USD per GBP GBP per EUR

Current 2.00 3.72 3.46 1.47 0.87

2008F 2009F 2010F 12.9 12.3 5.0 -5.3 -8.0 -6.8 -92.9 -84.3 -85.0 -6.4 -5.9 -5.8 -23.5 -16.3 -38.0 -1.6 -1.1 -2.6 3M 0.50 1.80 2.70 1.41 0.91

6M 0.50 1.60 2.60 1.38 0.93

Sources: DB Global Markets Research, as of December 5

12M 0.50 1.30 2.60 1.30 0.93

3. RPI inflation to turn negative for a year from March 09 : 6

Inflation rates, % yoy

5 4 3 2

CPI target

1 0 -1 -2 CPI

-3

RPI

-4

Forecast

-5 1997

1999

2001

2003

2005

2007

2009

Sources: ONS, DB Global Markets Research

4. Budget deficit to rise sharply over coming years Forecast

Budget deficit as

8

% of GDP, fiscal years

7 6 5 4 3 2 1 0 -1 -2

62-63

70-71

78-79

86-87

94-95

02-03

10-11

Sources: ONS, HM Treasury, DB Global Markets Research

5. BoE to take rates to an all time low of just 0.5% 18 16

Bank of England official interest rates, including forecasts to end-2009, %

14 12 10 8 6 4 2 0 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Sources: Bank of England, DB Global Markets Research

George Buckley, (44) 20 7545-1372

Deutsche Bank Securities Inc.

Page 27

5 December 2008

World Outlook

Sweden: Recession to intensify •

The Swedish economy is officially in recession – although only just. Growth contracted by 0.1% qoq in both Q2 and Q3, after a flat reading for Q1. This slowdown has been concentrated in consumption and investment (while both continue to expand retail sales growth has been hit notably over recent months), with the labour market slowly beginning to react (weaker hours and employment growth). We expect the contraction to gather pace, particularly given the economy is heavily exposed to European exports, which we now see contracting more sharply. Our forecast is for a fall in GDP of 1% in 2009, with inflation falling as a result of lower commodity prices and the emergence of a negative output gap. As a result, official interest rates are cut to just 0.5% in our view (the Riksbank has shown its willingness to ease aggressively by cutting 175bps in December), and the government budget surplus turns to deficit by 2010.

•

Deutsche Bank Forecasts: (% yoy, unless stated) GDP UND1X (core inflation) Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 2.7 0.5 -1.0 1.0 2.2 3.7 2.2 1.5 3.6 2.0 0.0 -1.0 8.4 4.5 4.0 3.5 Current

3M

6M

12M

Official rates

2.00

1.00

0.50

0.50

3M deposit rate

3.88

1.50

1.25

1.25

10Y yield

2.59

2.10

1.85

1.60

10.57

9.85

9.83

9.78

SEK per EUR

Denmark: Prolonging the sharp recession •

Growth has been negative during three out of the past four quarters, the most recent decline the result of falling consumption and exports. A deterioration in the survey evidence (PMIs, industrial confidence) over recent months suggests that the contraction is to accelerate during 2009. Higher interest rates and a currency pegged against the euro are clearly not helping the economy, and partially as a result we see growth declining sharply in 2009 – to -2.3% for the year as a whole, and a total 4.5% peak-to-trough fall in GDP between Q3 2007 and the middle of 2010. As in most other economies inflation slows rapidly (it is already more than 0.5pp below its August peak) settling around 1.5% in 2010. Given the weakness in economic growth we see the fiscal position deteriorating sharply, while we assume the spread of official rates over the ECB eventually narrows.

•

Deutsche Bank Forecasts: (% yoy, unless stated) GDP HICP Fiscal balance, % of GDP CA balance, % of GDP

Current

3M

6M

12M

Official rate

4.25

3.50

2.00

1.75

3M deposit rate

5.98

4.25

2.75

2.50

10Y yield

4.92

2.95

2.70

2.45

DKK per EUR

7.45

7.46

7.46

7.46

Sweden: The Riksbank shows willingness to cut 5

2007 2008F 2009F 2010F 1.6 -0.8 -2.3 -0.5 1.7 3.5 2.2 1.6 4.5 2.5 0.0 -0.5 1.2 1.0 0.5 1.0

Sweden official interest rates, %

Denmark: Sharp contraction in GDP expected 5

GDP, % yoy

4

4

3 2

3

1 0 -1

2

-2 -3

1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Forecast

-4 1996

1998

2000

2002

2004

2006

2008

2010

Sources: Riksbank, Danmarks Statistik, DB Global Markets Research as of December 5

Page 28

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Norway: Lower growth to eventually drag on inflation •

Growth contracted sharply in the third quarter of this year – by some 0.7% and further large falls can be expected over the coming quarters. Our forecast is for a fall of 1.7% in GDP during 2009, and a total peak to trough contraction of about 2.5% during a recession lasting until the end of 2009. Falling capacity utilisation as a result of slowing activity growth (note recent outturns of the surveys such as the PMIs, industrial and consumer confidence) and lower commodity prices should finally help push down on inflation, which has failed to decline thus far (October CPI inflation rose to 5.5% its highest since the end of 1988). The failure of unemployment to pick up sharply as yet and the continued pace of price growth may limit the scope of official rate cuts by the Norges Bank relative to its European counterparts, but we still see rates being cut from 4.75% to 2.50% by end-2009.

•

•

Deutsche Bank Forecasts: (% yoy, unless stated) GDP CPIATE (core inflation) Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 3.2 1.5 -1.7 0.6 0.7 4.0 2.9 1.3 13.9 13.5 12.5 11.0 15.9 18.0 16.0 15.0 Current

3M

6M

12M

Official rates

4.75

2.75

1.50

1.50

3M deposit rate

5.52

3.50

2.25

2.25

10Y yield

3.64

3.15

2.90

2.65

NOK per EUR

9.13

8.15

8.11

8.04

Switzerland: Hit by financial services and trade •

Switzerland’s trade partners — especially its main trading partner, Germany — slid into a recession in Q3. Germany suffered a decline in GDP of 0.5% qoq and the outlook is even weaker. This should be a drag on Swiss export growth. Furthermore the troubled financial sector contributes 12.5% to Swiss GDP. Therefore weak exports as well as challenges in the financial service sector are expected to dampen the growth dynamic of private consumption in the upcoming quarters. Overall we expect a pronounced deceleration in GDP growth which in our view continues for some quarters. The SNB has cut interest rates three times since October; the last one was an unexpected cut by 100bp to 1% on Nov 20th. The SNB is expected to continue to ease policy. So, we expect the SNB to cut rates by 50 bp in March 2009. In the rest of the year SNB should keep central bank rates at ½%.

Norway: Inflation to fall quickly from 2008 peak 4.5

CPI inflation, % yoy

Deutsche Bank Forecasts: (% yoy, unless stated) GDP Consumer prices Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 3.3 1.9 -1.4 1.1 0.7 2.6 0.8 0.6 1.2 0.8 -1.2 -1.3 17.5 15.0 14.5 0.0 Current

3M

6M

12M

Official rates

1.00

0.50

0.50

0.50

3M Libor

1.18

1.00

0.60

0.60

10Y yield

2.09

1.50

1.30

1.10

CHF per EUR

1.53

1.56

1.56

1.56

Switzerland: Signs of significant retrenchment 5

Forecast

4.0

Forecast

4

3.5

3

3.0

2

2.5

1

2.0

0

1.5

-1

1.0 0.5

-2

0.0

-3

2000

2002

2004

2006

2008

2010

GDP, sa, % change yoy 91

93

95

97

99

01

KOF 03

05

07

09

Sources: National authorities, DB Global Markets Research, as of December 5

George Buckley, (44) 20 7545-1372 Stefan Bielmeier, (49) 69 910-31789 Deutsche Bank Securities Inc.

Page 29

5 December 2008

World Outlook

Czech Republic: Suffering the brunt of the global downturn •

As we enter 2009 Czech’s greatest vulnerability is its reliance on external demand and its exposure to the car industry. With exports and imports totaling 138% of GDP last year, Czech is one of the most open economies globally, while transport and machinery exports account for over 54% of total exports. We are less concerned about the impact of deleveraging in Czech given lower public and external debt levels relative to its peers. Given its reliance on external demand 2009 could be the first year in 11 that the Czech economy faces contraction. The pace of rebound in 2010 will be reliant on global performance. Against this growth background and given recent declines in global food and energy prices inflation is likely to collapse below target early next year. In this environment we expect the CNB to continue to cut rates aggressively, bringing them to 1% by Q2-09.

•

•

Deutsche Bank Forecasts: (% yo y, u n less stated) G DP - P riva te c ons um ption - Inves tm ent - G overnm ent c ons um ption - E xports - Im ports - Net tra de c ontribution, pp Indus tria l produc tion U nem ploy m ent ra te, % Cons um er prices Com pens a tion per em pl. Fis ca l ba la nce, % of GDP CA ba la nc e, % of G DP

2007 2008F 2009F 2010F 6.5 3.1 -1.0 1.6 5.7 2.8 1.0 1.3 6.1 1.5 -6.0 0.5 0.9 -0.5 0.5 1.0 14.5 9.2 -8.5 4.2 13.7 8.0 -8.7 3.6 0.7 1.2 0.1 0.6 9.1 3.2 -5.6 2.8 6.6 5.4 6.2 6.7 2.8 6.4 1.2 1.7 7.3 8.1 6.0 5.5 -1.0 -1.2 -2.5 -3.4 -2.5 -3.0 -0.5 -0.4

Cu rren t 3.26

3M 2.90

6M 1.50

12M 1.20

10Y y ield

4.26

3.60

3.25

2.50

CZK per E UR

25.7

24.9

24.9

24.5

3M depos it ra te

Hungary: Drawing off EU/IMF monies •

Hungary has worked towards narrowing twin deficit ratios but the sharp slowdown in capital flows meant that servicing high stocks of public and external debt proved problematic. In October the IMF/EU/World Bank provided EUR20bn of financing. This package will likely prove more than sufficient until end-09, helping contain the risks of rapid HUF losses. The economy is unlikely to escape recession however as it struggles with a slump in external demand, tighter credit conditions and a fiscal contraction. In this environment inflation pressures are set to ease significantly. Food and oil prices have already helped to lower inflation while higher unemployment and lower wage growth should ease core inflation which has proved sticky over recent quarters. Assuming a gradual depreciation of the forint, we expect the NBH to reverse in full its October 300bp rate hike and potentially more. Any sharp HUF losses would prompt a more cautious monetary policy.

•

•

•

Czech Republic: External demand falls rapidly 60

Index

50 45 PMI (lhs) 40

Change in policy rate (rhs)

35 02

03

04

05

06

07

(% yo y, u n less stated) G DP - P riva te c ons um ption - Inves tm ent - G overnm ent c ons um ption - E xports - Im ports - N et tra de c ontribution, pp Indus tria l produc tion U nem ploy m ent ra te, % Cons um er pric es Com pens a tion per em pl. Fis c a l ba la nc e, % of G D P CA ba la nc e, % of G DP 3M depos it ra te 10Y y ield H U F per E U R

2007 2008F 2009F 2010F 1.3 0.9 -3.7 1.0 -2.2 0.7 -4.0 1.1 1.0 -3.2 -6.5 -1.0 -3.2 -1.8 -0.5 -0.5 14.2 7.3 -7.5 4.5 12.2 6.2 -8.4 4.1 0.7 1.1 0.6 0.4 8.2 1.0 -4.2 2.9 7.3 7.9 9.2 9.5 8.0 6.1 1.9 2.7 8.0 8.2 2.0 3.5 -6.0 -3.2 -2.8 -1.8 -6.5 -6.3 -0.9 -1.4

Cu rren t 11.07

3M 9.70

6M 8.20

12M 7.80

8.56

8.00

7.25

6.00

261

242

247

259

Hungary: Elevated external debt ratios proved too high bps

55

Deutsche Bank Forecasts:

0.4

120

% GDP

% GDP

Intercompany Financial External debt

Government Other

120

0.2

100

0.0

80

80

-0.2

60

60

-0.4

40

40

-0.6

20

20

-0.8

0

08

100

0 2004

2005

2006

2007

Sources: KSH, Reuters, European Commission, DB Global Markets Research, as of December 5

Page 30

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Poland: Boom comes to a sharp halt •

•

•

•

The combination of a decline in external demand, more restricted access to credit and a weakening of the labour market is likely to see growth ease to its lowest level since the early 1990s next year. This growth outlook, combined with lower global food and energy prices, is set to push inflation to the lower end of the MPC’s target band for most of next year, if not briefly outside of the lower end. In line with this outlook monetary conditions have already weakened notably but we expect further weakness ahead. The MPC will hope to achieve a balance between a weaker exchange rate and lower rates, though the Bank’s appetite for PLN weakness is not unlimited even in this inflation environment given 25% of private credit is in FX. Should the authorities adhere to their target of ERM II entry in mid-2009, followed by EMU entry in 2012, it will undoubtedly act as a powerful anchor for fiscal and monetary policy and help support asset prices but a deteriorating fiscal outlook combined with higher currency volatility increases the risk of delay.

Deutsche Bank Forecasts: (% yoy, unless stated) GDP - Private consumption - Investm ent - Government consumption - Exports - Im ports - Net trade contribution, pp Industrial production Unem ployment rate, % Consum er prices Com pensation per em pl. Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 6.6 4.5 0.4 2.0 5.0 4.9 1.0 2.2 17.6 7.0 -3.0 2.5 5.8 1.2 0.5 0.5 8.4 5.5 -5.0 2.8 12.2 5.8 -5.5 2.7 -1.8 -0.4 0.3 -0.1 12.7 9.8 9.6 10.8 12.7 9.8 9.6 10.8 2.5 4.2 1.8 2.5 9.1 10.5 8.5 7.5 -2.0 -2.3 -2.9 -2.6 -4.7 -4.9 -2.1 -2.9

Current 5.96

3M deposit rate

3M 4.75

6M 3.40

12M 3.20

10Y yield

5.85

5.10

4.65

4.00

PLN per E UR

3.87

3.30

3.20

3.10

Iceland: The credit crunch’s biggest loser •

•

•

Relative to the size of its economy Iceland has suffered a banking crisis of unparalleled proportion globally. Prior to the crisis banking sector assets stood at almost 900% of GDP while within 1 week 3 banks, accounting for 85% of the system, collapsed. Central bank data shows that the nominal effective exchange rate lost 97% since end-07. Iceland has secured USD2.1bn in financing, with potentially a further USD3bn forthcoming from bilateral creditors. The economy will, however, undergo a very severe recession, while the banking sector’s collapse has seen public sector debt rise from 28.9% of GDP last year to over 100% of GDP. Currency performance will prove central to the pace of recovery and external debt sustainability. For now current account transactions have been liberalised but controls are likely to remain on capital account transactions for at least a matter of months.

Poland: Monetary conditions have further to weaken 10

Restrictive

Real monetary conditions indices using weights from 2:1 to 10:1

8

Poland

6

Deutsche Bank Forecasts: (% yoy, unless stated) GDP Consumer prices (% pavg) Fiscal balance, % of GDP CA balance, % of GDP

2007 2008F 2009F 2010F 4.9 -2.0 -14.0 2.0 5.1 12.6 16.0 2.0 5.5 -0.2 -15.0 -10.5 -14.6 -10.0 10.0 8.0 Current

3M

6M

12M

18.00

18.00

18.00

15.00

148

148

126

113

Policy rate ISK per USD

Iceland: ISK to key to any recovery Index

110

Index

100

110 100

4

90

90

2

80

80

0

70

-2 -4 -6 -8 -10

70 NEER (2000=100)

60

60

2000-08 average

50 Accommodative

2001

2003

50

40 2005

2007

40 00

01

02

03

04

05

06

07

08

Sources: European Commission, national statistics offices, Bloomberg, DB Global Markets Research, as of December 5

Gillian Edgeworth, (44) 20 7547-4900

Deutsche Bank Securities Inc.

Page 31

5 December 2008

World Outlook

Peripheral dollar bloc: Headwinds from the major economies point to recession Economic outlook • CAN: Heading into 2009, the rapidly deteriorating health of the U.S. economy, which imports 30% of Canada’s total output, points to a recession in Canada starting late in 2008 or early in 2009. • AUS: Global headwinds point to pending recession in Australia. But substantial ‘policy degrees of freedom’ and a comparatively strong financial system will work against prospects for a deep and prolonged slowdown. • NZ: A domestically generated recession is now being reinforced by a recession in key trading partner economies. Aggressive monetary & fiscal easing is expected to gradually revive the economy from late’09. Monetary policy • CAN: Given the significant slowdown of inflation in Canada, the onset of a U.S. recession and the prospect of weakening domestic demand, the BoC will likely lower rates by 100bps by April of 2009. • AUS: The RBA has lowered the cash rate by 300bps since early September, an unprecedented pace. With cash now at 4.25%, and with a benign inflation outlook, the RBA retains significant scope to stimulate demand in the period ahead. • NZ: Since July the RBNZ has eased the OCR by 175bps to 6.5%. We expect a minimum further 100bps of easing this month, likely more, with an OCR of around 3.5% forecast to be seen by mid 2009. Peripheral $-bloc currencies • AUD, NZD, and CAD have been under pressure due to global financial tensions and the worsening global outlook. These headwinds will keep the currencies under pressure in the near-term. A fading of deleveraging and the heavy front-loading of policy easing may improve currency prospects modestly in 2009.

Deutsche Bank Forecasts: Peripheral $-bloc Current

3M

6M

12M

2.25 4.25 5.00

3.00 3.75 4.50

3.00 3.25 3.75

3.25 3.25 3.50

3.06 4.30 4.85

4.25 4.25 5.25

5.00 4.00 5.00

5.50 4.00 5.50

1.28 1.55 0.53

1.07 0.61 0.55

1.08 0.64 0.55

1.11 0.67 0.56

Official overnight cash rate Canada Australia New Zealand 10Y yield Canada Australia New Zealand Exchange rate (vs USD) Canada Australia New Zealand

Source: DB Global Markets Research, as of December 5

Pre-existing surpluses in the $-bloc provide room for fiscal stimulus 6

Fiscal Balance

% of GDP

4 2 0 -2 -4 -6

Australia

-8

Canada

New Zealand

-10 81

84

87

90

93

96

99

02

05

08

Sources: DB Global Markets Research, National Treasuries

Macro-economic activity & inflation forecasts 2008 Q2

Q3

Q 4F

Q 1F

-0 .8 5 .9

0 .3 6 .1

0 .9 6 .1

-1 .1 6 .2

-1.1 6.7

-0 .2 7 .1

1 .8

2 .4

3 .4

2 .1

2.2

2 .4 4 .6 -2 .2 4 .1

1 .4 4 .1 -0 .7 4 .3

0 .3 1 .5 -1 .6 4 .2

-0 .6 1 .0 3 .6 4 .4

4 .2 3 .5

4 .5 4 .2

5 .0 4 .4

-1 .2 -1 .4 3 .7

-0 .6 1 .7 3 .9

3 .4

4 .0

Q1 CA N A D A A c t ivit y (% qoq, s a a r ) GDP U n e m ploy m e n t r a t e , % P r ic e s (% y oy ) CP I A U ST RA L IA A c t ivit y (% qoq, s a a r ) GDP D om e s t ic de m a n d N e t t r a de c on t r ibu t ion (pp) U n e m ploy m e n t r a t e , % P r ic e s (% y oy ) CP I C or e C P I N E W Z E A LA N D A c t ivit y (% qoq, s a a r ) GDP D om e s t ic de m a n d U n e m ploy m e n t r a t e , % P r ic e s (% y oy ) CP I

2 00 9 Q 2F Q 3F

Q 4F

2 00 8 F % yo y

2 0 0 9F % yo y

2 00 1 0 F % yo y

2 .8 7 .1

2.8 6.9

0.6 6.1

0 .1 7 .0

2.2 6.8

1 .2

1 .0

2.9

2.3

1 .7

2.2

1.4 -1.1 1.0 4.9

0 .2 -2 .2 4 .0 5 .7

0 .4 -1 .8 1 .7 6 .2

2.3 3.1 0.1 6.9

2.3 4.2 -1.5 4.2

0 .6 -0 .1 1 .7 5 .9

1.6 1.6 0.1 6.6

3 .5 3 .6

2.5 3.3

1 .7 2 .6

1 .4 2 .4

2.4 2.7

4.3 3.9

2 .0 2 .8

2.6 2.4

-2 .7 -7 .4 4 .2

0 .3 0 .4 4 .7

-3.0 -6.4 5.5

-2 .0 -4 .2 6 .2

-0 .5 -2 .4 6 .6

3.1 2.2 7.1

0.5 1.2 4.1

-1 .3 -2 .4 6 .3

2.3 1.5 7.0

5 .1

3 .3

2.2

1 .4

0 .6

1.8

3.9

1 .5

2.4

Sources: National authorities, DB Global Markets Research

Page 32

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Peripheral dollar bloc: Headwinds from the major economies point to recession Canada ƒ While there is evidence that the Canadian economy has lost momentum, many of the major indicators of domestic demand late in the third quarter and early in the fourth quarter are still positive. These include housing starts, non-residential building permits, wholesale and retail sales and full time employment. ƒ Looking forward, given that the U.S. economy, the market for 80% of Canada exports, is generally acknowledged to be in recession it is only a question of time before growth in Canada stalls and unemployment starts to ratchet higher. ƒ Although the BoC has already cut its target for the overnight rate by 225bp over the past twelve months, a recent sharp 1%m/m drop in headline inflation together with a further deterioration in U.S. economic activity will likely cause the BoC to cut its overnight rate by at least another 100 bps over the next four months. Australia ƒ Global headwinds are likely to push unemployment sufficiently higher to see much of 2009 designated as a ‘recession’. But substantial policy degrees of freedom, a comparatively robust domestic financial system and a physically undersupplied housing market will help stem both the depth and duration of the inevitable slowdown. ƒ The downward pressure on household spending has intensified over the course of 2008. While investment spending continues to be strong and even under pessimistic assumptions will remain so in the current financial year, the prospective downturn in the terms of trade means the ‘forward curve’ on investment into 2010 and beyond has turned negative. ƒ Against this backdrop, the policy cycle in Australia has turned sharply, with the RBA cash rate 300bps lower since the start of September and a front loaded fiscal stimulus of around 1% of GDP already announced. New Zealand ƒ Indicators confirm that the economy likely experienced a third consecutive quarter of contraction in Q3. Looking ahead, the most significant change to our forecasts flows from a weaker outlook for trading partner growth and the accompanying slump in commodity prices. ƒ New Zealand’s recession seems likely to extend well into 2009. Surveys point to a substantial cut-back in capex and jobs. The latter threatens to further weaken an already very soft housing market, with accelerated house price declines from historically overvalued levels likely to weigh significantly on consumer spending. ƒ With a sharp fall in commodity prices and a weak labour market expected to take the heat out of inflation, the RBNZ has room to cushion the real economy. Substantial fiscal and monetary stimulus (including a weaker exchange rate) is forecast to underpin a recovery in late 2009 provided the global economy stabilizes too.

Canada: US and Canadian cycles are closely linked : GDP

% yoy

10

Canada

8

US

6 4 2 0 -2 -4 -6 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Sources: DB Global Markets Research, Datastream

Australia: Output to weaken from very strong growth 7

% yoy

Australian growth to weaken sharply into 2009

6

Forecast

5 4 3 2 1 0 -1

GDP

2008 (2.2%)

-2

2009 (1.0%)

2010 (1.7%)

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Sources: ABS, DB Global Markets Research

New Zealand: A shakeout in the labour market beckons 35

Firm's employment intentions, adv 6 months (lhs) HLFS employment (rhs) % yoy

25

5 4 3

15

2

5

1 0

-5

-1

-15 -25

6

DB employment Net respondents

forecast

-2 -3 -4

1992 1994 1996 1998 2000 2002 2004 2006 2008 Sources: DB Global Markets Research, NBNZ, SNZ

Darren Gibbs, (649) 351 1376; Tony Meer, (612) 8258 1688; John Clinkard, (416) 682 8221 Deutsche Bank Securities Inc.

Page 33

5 December 2008

World Outlook

Asia (ex Japan): Recession comes to Asia… Hong Kong, Singapore recession; Taiwan, Korea will be • Asia never “decoupled”, hence, a recession in the G2 is very negative for Asia. Since 2000, a 1% decline in G2 growth has been associated with a 1.4% decline in Asia-8 growth. While we expect stronger balance sheets (private and government) to insulate Asia a little from the G2 crisis, growth in Asia has actually been more sensitive to G2 growth this year than this “elasticity” suggests. G2 growth has fallen by 1.6% while Asia-8 growth has fallen by 2.8%. While we are much more bearish than consensus, we may yet be too optimistic. • As a group, we expect the Asia-8 economies to slow from 4.2% growth this year to 1.1% next year. We now see a stronger recovery in 2010 than before, bringing growth back up to 3.6%. But within this group, we expect Hong Kong, Singapore and Taiwan to report negative GDP growth next year. • The link between Asian growth and G2 growth derives from the high export/GDP ratio (64% in aggregate) which means that when export growth slows down, investment – and often consumption – growth slow down too. But while China has an export/GDP ratio of 35%, the coastal provinces, accounting for about 60% of GDP, have an export/GDP ratio of 65%. It is likely that slower export growth in these provinces will have a similar dampening effect on investment and consumption as it does in the other Asian economies. Indeed, weak retail sales data in Shanghai, for example, suggest this may be true. Compounding this is a softening of capital investment after years of rapid investment. We therefore expect a sharp slowdown in Chinese growth as well. • India is a less open economy than the rest of Asia, but faces headwinds from tighter monetary and credit policies until recently. Growth is slowing, but not precipitously. Recent large interest rate and reserve requirement cuts – a response to capital outflows – should help to ensure a soft landing. Falling property prices add to downside risks • Property markets are weak throughout Asia, but in most economies this is a reflection of the rising uncertainty and slowing growth that has characterized the last few quarters. In China and India, though, property markets were already softening as a result of tighter monetary and/or specific property market policies. Falling property prices add a negative wealth effect to these countries where this has never been a factor before. Moreover, falling collateral values increase asset quality risks for the region’s banking systems on top of the deterioration due to rising unemployment and weaker corporate profitability.

1. GDP growth in Asia-8 and the G2 :

% yoy

5

% yoy G-2 (lhs)

10

Asia-8 (rhs)

4

8

3

6

2

4

1

2

0

0 00

01

02

03

04

05

06

07

08

Sources: DB Global Markets Research Note: G2 is US and EU; Asia-8 excludes China, India, Pakistan and Vietnam

2. Commodity prices and Asian inflation 75

% yoy

% yoy

Commodities (lhs)

Asian inflation (rhs)

55

9 8 7 6

35

5 4

15

3 2

-5

1 0

-25 2003

2004

2005

2006

2007

2008

Source: CEIC, IMF and DB Global Markets Research

Deutsche Bank Forecasts: Asia (ex. Japan) (% yoy, unless stated) Real GDP growth - Private consumption - Investment - Government consumption - Exports - Imports Industrial production CPI CA balance, % of GDP Real GDP growth Asia ex China and India

2007 9.4 7.8 12.1 6.6 15.6 12.8 12.3 4.4 6.0

2008F 7.1 6.6 9.1 8.8 9.3 11.5 8.7 7.2 4.3

2009F 4.6 5.0 4.3 7.2 -1.8 -2.3 5.1 3.0 4.7

2010F 5.7 5.9 5.8 6.8 6.4 5.8 6.3 2.6 4.6

6.0

4.2

1.1

3.8

Sources: National authorities, DB Global Markets Research

Page 34

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Asia (ex Japan): …deflation too Deflation in North Asia and Singapore in 2009 • Sharply slower global growth has already brought commodity prices down by 36% since July according to the IMF’s commodity price index. Since 2003, this index explains two-thirds of the variation in Asian inflation and even these recent declines suggest inflation will fall back to the early 2007 lows in the coming months. Indeed, we forecast deflation in headline CPI in Singapore, South Korea, Taiwan and Thailand by mid-2009 and briefly in China in Q1. With growth remaining below trend in 2010 deflation may persist until 2011. Due to the lagged influence of rents on Hong Kong’s CPI, deflation is expected to come to that economy only in 2010 and persist until 2011. Rising real interest rates to help turn currencies around • Lower inflation will allow – and deflation, demand – central banks to cut interest rates. Already, policy rates have been brought down faster than we had anticipated. Seven central banks have lowered interest rates by an average margin of 136bps since September. Yet in these economies, inflation has already fallen by 166bps. We think interest rates could yet fall by almost as much again as they have so far, but we forecast that inflation in Asia ex. Pakistan and Vietnam will fall by 370bps. Real interest rates are already rising as inflation falls faster than nominal interest rates and we expect that by mid-2009 most economies will again have positive real interest rates. • Falling commodity prices will boost the region’s current account surplus; positive real interest rates will discourage resident capital outflows; and we expect foreign investors will by mid-year have ceased withdrawing from the region. Hence, after a few more months’ depreciation, we think by mid-year Asian currencies will again be appreciating versus the USD. Risks • Asian currencies have been very weak in 2008, the KRW and IDR particularly so. Neither country has a comfortable reserves stock relative to foreign debt nor local investments by foreign investors but both have rejected tapping the IMF’s SLF. Both currencies are likely to continue to depreciate rapidly without more aggressive intervention, which both central banks seem unable or unwilling to engage in. • While Pakistan has signed an IMF program to support its stabilization, Vietnam has not. With a large current account deficit to finance in an increasingly hostile international capital market external vulnerability remains high and yet the central bank is cutting rates. A renewed bout of pressure on the currency and local rates in the coming months is likely.

Deutsche Bank Forecasts (% yoy, unless stated)

2007 2008F 2009F 2010F

GDP CPI CA bal., % GDP Fiscal bal., % GDP

11.9 4.8 9.5 0.7

9.1 6.0 7.1 0.3

7.0 0.6 7.1 -2.0

6.6 1.0 6.9 -3.0

Hong Kong GDP CPI CA bal., % GDP Fiscal bal., % GDP

6.4 2.0 13.5 7.5

2.5 4.5 12.5 -2.2

-4.0 4.6 12.8 -7.4

2.5 0.4 11.8 -7.7

India

GDP CPI CA bal., % GDP Fiscal bal., % GDP

9.3 4.6 -0.8 -6.2

7.2 9.6 -1.6 -7.6

4.8 5.3 -1.8 -7.8

6.8 4.3 -1.3 -7.2

Indonesia

GDP CPI CA bal., % GDP Fiscal bal., % GDP

6.3 6.4 2.4 -1.2

6.0 9.8 -0.3 -1.3

4.5 8.4 0.0 -1.2

5.0 6.0 0.1 -1.5

Korea

GDP CPI CA bal., % GDP Fiscal bal., % GDP

5.1 2.7 0.6 3.8

4.0 4.8 -0.8 -1.1

0.2 1.6 2.7 -3.3

2.9 1.8 2.3 -2.5

Malaysia

GDP CPI CA bal., % GDP Fiscal bal., % GDP

6.3 2.0 15.5 -3.2

5.3 5.7 16.0 -4.5

3.0 4.3 13.0 -4.5

4.5 4.5 12.3 -4.1

Pakistan

GDP CPI CA bal., % GDP Fiscal bal., % GDP

6.8 7.8 -4.8 -4.3

5.8 11.9 -8.4 -7.4

2.3 22.6 -7.8 -5.0

4.2 13.5 -6.6 -3.5

Philippines GDP CPI CA bal., % GDP Fiscal bal., % GDP

7.2 2.8 4.3 -0.1

4.6 9.2 3.0 -1.2

3.4 4.7 4.6 -1.4

4.2 4.7 3.6 -1.4

Singapore

GDP CPI CA bal., % GDP Fiscal bal., % GDP

7.7 2.1 24.3 12.2

0.7 6.7 14.4 9.2

-4.5 1.6 12.5 3.1

2.5 0.5 12.6 2.9

Taiwan

GDP CPI CA bal., % GDP Fiscal bal., % GDP

5.7 1.8 8.3 -0.3

1.8 3.8 5.7 -2.0

-1.6 -0.9 4.9 -4.3

3.0 1.2 5.0 -2.5

Thailand

GDP CPI CA bal., % GDP Fiscal bal., % GDP

4.8 2.2 6.4 -1.1

4.5 5.8 0.7 -0.4

1.5 0.5 3.4 -2.9

4.2 1.0 2.4 -4.0

Vietnam

GDP

8.5

6.5

4.0

6.5

CPI

7.9

23.7

8.6

11.2

China

CA bal., % GDP

-7.0 -15.4 -21.5 -18.6

Fiscal bal., % GDP

-5.9

-5.0

-8.5

-5.5

Sources: National authorities, DB Global Markets Research

Michael Spencer, (852) 2203-8305

Deutsche Bank Securities Inc.

Page 35

5 December 2008

World Outlook

Latin America: A sharp slowdown is now inevitable in 2009 From inflation to growth concerns • Economic activity in Latin America is holding up better than in industrial countries. Likewise, financial leverage in the region is low and local financing has become the main source of growth in recent years. However, negative spillover effects from the sharp global slowdown, together with weaker commodity demand and meaningful credit rationing are likely to induce a significant drop in growth in most of the regional countries. As a consequence, we have revised Latam growth for 2009 to 1.8% from 2.2% in the previous quarterly exercise. In addition, we now consider that the recovery process would be gradual, with economic activity in 2010 forecast to advance only by 3.0% compared to an average of 4.8% in the previous four years. • Growth performance is expected to suffer the most in commodity exposed countries that at the same time face difficult financing outlooks like Ecuador, Argentina, and Venezuela, or Colombia, Brazil and Peru to a lesser extent. Mexico is already suffering from its closeness to the US economy and economic growth is going to continue decelerating next year even from a low basis. In Brazil, the reversal of strong capital inflows is likely to exacerbate the short term impact of the external crisis but economic growth should go back to trend pace (3.5%) by 2010 despite a potentially feeble global recovery. Economic policy concerns in Argentina, Ecuador, and Venezuela will further delay any possible renewal in external financing, making these economies like to face a sharper and more protracted economic slowdown. • Inflation is unlikely to remain an issue for concern even despite weaker local currencies across the board. The relatively low pass-through from exchange rate depreciation is the reflection of strengthened anti-inflationary institutions in recent years. We expect double digit inflation in Venezuela (25%) and Argentina (17%) in 2009 is expected to be the exception rather than the norm, distorting the regional inflation average that otherwise would be declining to levels below 5.5%. A stress test to solid external accounts • Latam countries have been reducing their dependence on foreign loans and external debt financing to a point that economic growth in the last four years has been mostly financed by local sources. Even in the countries where FDI has been strong, like Chile, Colombia, Peru, and Mexico, direct foreign participation has represented half of total growth financing in recent years. Peru is the only exception, where FDI represented an average of 3.2% of GDP between 2005 and 2008, similar to the amount of new credit growth provided by local banks. Therefore, FDI reduction will hit harder than Latam overall credit rationing, although the indirect effect of increasing credit costs will certainly not be negligible and indiscriminate short term external rationing remaine a serious risk.

Page 36

1. GDP growth 11

% yoy 2007

2008F

2009F

2010F

9 7 5 3 1 -1 ARG

BRA

CHI

COL

ECU

MEX

PEN

VEN

Sources: National authorities, DB Global Markets Research

2. CPI inflation 30

% yoy

2007

2008F

2009F

2010F

25 20 15 10 5 0 -5 ARG

BRA

CHI

COL

ECU

MEX

PEN

VEN

Sources: National authorities, DB Global Markets Research

Deutsche Bank Forecasts: Latin America (% yoy, unless stated) Real GDP growth - Private consumption - Investment Trade balance, USD bn - Exports, USD bn - Imports, USD bn Inflation Industrial production Unemployment, % Fiscal balance, % of GDP CA balance, % of GDP

2007 5.5 7.2 13.4 91.8 696.7 604.8 7.0 6.1 7.5 -0.2 0.8

2008F 4.3 6.0 11.6 95.2 813.5 718.2 9.2 5.6 7.0 -0.8 0.0

2009F 1.8 2.5 0.0 56.9 726.6 669.7 7.4 2.4 7.4 -0.8 -0.9

2010F 3.0 3.6 5.1 43.2 764.4 721.2 5.9 3.6 7.3 -0.6 -1.3

Sources: National authorities, DB Global Markets Research

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Latin America: A sharp slowdown is now inevitable in 2009 • Since commodities represent almost 60% of regional exports, a sharper fall in commodity prices than the one already witnessed is the region’s other most important risk. Oil is the key commodity, representing 30% of average regional exports, and 90% of Venezuela’s, 67% of Ecuador’s, and 25% of Colombia’s exports. Metals represent 64% of Chile‘s and 62% of Peru’s exports and 12% of average regional exports. Finally, agricultural products account for 11% of average regional exports, but 35% of Argentina’s and 22% of Brazil’s. Based on current prices, we forecast aggregate current account balances for the major LatAm countries next year to swing to a deficit of USD37.3bn from a surplus of USD10.7bn estimated for 2008. Thus, even if a benign scenario is considered for external debt rollover, international reserve losses in the region next year could be around USD25.0bn, or a USD100bn turnaround from the estimated gain in 2008. • This notwithstanding, international reserve positions appear ample to withstand such a massive external shock. In the extreme scenario of just 50% external debt rollover, most major economies could maintain reserves to cover six months of imports or more. Ecuador, Colombia, and Mexico would be the only exception with reserves/imports ratio in the 30%-40% range but with state owned commodity receipts securing a good deal of additional hard reserves. • The ability to access IMF or Fed funding creates an additional layer of credit differentiation in the region, favoring the strongest economies, like Brazil; Chile; Mexico; Peru; and to a lesser extent Colombia. Based on solid external positions plus additional funding available from multilateral sources, we do not expect these to face any serious rationing of foreign credit. A totally different case could face less market friendly economies in the region. Currencies could turn around after volatility recedes • Based on the scenarios described, projected real exchange rate depreciation in the regional countries should hardly exceed 10% from average 2008 levels, suggesting that current parities already discount the worst possible external scenario and credit rationing. In addition, the increase in debt services implied by a recent widening in spreads is consistent with only 1%-5% real exchange rate depreciation under total credit rationing assumed permanent (quite extreme and unrealistic assumption but illustrative). Only Ecuador and Argentina could demand a higher correction in competitiveness under this scenario. • Increase in capital flight is the major short-term risk for local currencies. Although debt stocks and short-term liabilities have been reduced substantially and are a fraction of the levels seen in EMEA, further capital flight cannot be ruled out. Another fall in commodity prices is the other risk, as lower commodity receipts could exacerbate sovereign concerns in some cases where fiscal resources depend heavily on them like Venezuela, Ecuador, or Argentina.

3. Current account 14

% GDP 2007

12

2008F

2009F

2010F

10 8 6 4 2 0 -2 -4 -6 ARG

BRA

CHI

COL

ECU

MEX

PEN

VEN

Sources: National authorities, DB Global Markets Research

Deutsche Bank Forecasts (% yoy, unless stated)

2007

2008F

2009F

2010F

Argentina

GDP CPI CA bal., % GDP

8.6 17.9 2.8

6.2 22.6 2.1

-0.9 17.3 0.2

1.6 15.3 -0.4

Brazil

GDP CPI CA bal., % GDP

5.4 4.5 0.1

5.2 6.3 -2.0

2.7 5.5 -1.5

3.5 4.5 -2.3

Chile

GDP CPI CA bal., % GDP

5.1 7.8 4.3

3.9 8.4 -3.0

2.3 4.1 -4.0

2.8 3.1 -5.1

Colombia

GDP CPI CA bal., % GDP

7.5 5.7 -3.4

4.0 7.3 -3.0

2.2 4.5 -1.5

3.0 4.0 -2.0

Mexico

GDP CPI CA bal., % GDP

3.2 3.8 -0.6

1.9 6.0 -0.5

0.5 4.0 -1.0

2.3 3.5 -0.9

Venezuela

GDP CPI CA bal., % GDP

8.4 22.5 7.4

5.2 35.0 13.0

1.4 25.0 4.0

3.0 17.0 4.0

Sources: National authorities, DB Global Markets Research

Gustavo Cañonero, (1) 212 250-7530 Deutsche Bank Securities Inc.

Page 37

5 December 2008

World Outlook

EMEA: Collapse in credit growth and external demand to lead to sharp growth decline Russia: Growth collapsing • Falling commodity prices and expectations of a weaker ruble resulted in a significant acceleration of capital outflows and increased pressure on the rouble to depreciate. The CBR continued to intervene heavily in the currency market spending more than USD50bn in September-October. In November interventions remained significant and exceeded USD20bn. In order to somewhat alleviate the pressure on the ruble and to combat inflation the CBR has raised twice the key interest rates. As a result, the refinancing rate has reached 13% while the REPO rate (the most important rate in our view) was raised to 9%. Still, we may see further rate increases as the CBR targets to bring the key rate in positive territory in real terms. In November the CBR devalued the rouble by 3% vs the dual currency basket and we expect to see further rouble weakness in the coming months. All in all, the rouble may lose about 10% vs the dual currency basket by the end of 2009. • In October Russia’s real sector continued to undergo a notable slowdown: industrial production showed only 0.6% YoY growth while fixed investment expanded by 6.9%. We expect to see further slowdown or even a decline in industrial production by the end of the year as a growing number of Russian corporates announced production cuts. We also revise our GDP growth forecast for 2009 to 1.0% due to lower oil prices and the mounting constraints faced by Russia’s corporate sector in carrying out its capital investment plans. South Africa: Global pressures on local growth • GDP growth stagnated in Q3, as declining demand for SA exports and shutdowns in the mining sector caused primary and secondary production to contract. While strong government spending and a fall in fuel prices should support domestic demand, weaker external demand and tighter global financing conditions could weigh down on growth. We expect GDP growth of 3.3% in 2008 and 2.0% in 2009. • Inflation is expected to fall sharply due to lower food and oil prices and the rebasing and reweighting exercise due to take place in January. We expect inflation to return to the target band in Q2 2009. However, the base effects are likely to be unfavourable through the second half of 2009, and we expect inflation to return to the upper end of the target band by end-2009. • The sharp improvement in the inflation outlook and the deterioration in the growth outlook have meant that rate cuts are likely to be far earlier than we expected, probably starting in February 2009 at the latest. Nevertheless, we continue to believe that the rate cutting cycle priced in is far too aggressive. In our view, if the SARB cuts rates by more than 450bps

Russia: CBR would like to see positive real rates : 16

Refinancing rate became negative in real terms

12 8 4 0 Jan 06

Jul 06

Jan 07

Jul 07

Jan 08

Jul 08

Refinancing rate Deposit rate (1 day) Deposit rate (1 week) Minimum REPO rate (1 day) CPI, annualised Sources: DB Global Markets Research

Turkey: IP growth now in negative territory 12

% yoy, 3mma

Industrial production

10 8 6 4 2 0 -2 -4 Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Sources: DB Global Markets Research

Deutsche Bank Forecasts: EMEA (% yoy, unless stated) Real GDP growth - Private consumption - Investment Trade balance, USD bn - Exports, USD bn - Imports, USD bn CPI Industrial production Unemployment, % Fiscal balance, % of GDP CA balance, % of GDP Real GDP growth EMEA incl. CE-4 countries

2007 6.8 10.2 17.2 33.3 766.6 733.3 10.5 6.0 9.0 1.3 -0.2

2008F 5.2 7.7 7.9 69.9 975.2 905.4 13.0 3.7 8.8 1.4 0.4

2009F 1.1 2.3 2.6 -97.1 796.0 893.1 7.7 1.3 9.3 -2.9 -4.1

2010F 3.5 4.2 6.8 -110.7 805.5 916.2 6.0 2.8 8.8 -2.1 -4.1

6.6

4.9

0.8

3.2

Sources: National authorities, DB Global Markets Research

Page 38

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

EMEA: Collapse in credit growth and external demand to lead to sharp growth decline over the next 12 months (as the market is pricing in), then either the currency could weaken, or a rebound in domestic demand growth could cause the deficit to widen further. We expect 200bps of rate cuts by the end of 2009. Turkey : Rising concerns over external funding and growth • Turkey’s GDP growth declined significantly from 6.7% in 1Q08 to 1.9% in 2Q08. This is the lowest figure seen since 1Q02 and came mainly on the back of the slowdown in domestic demand. More importantly, indicators of consumption and business expectations point to further weakness ahead, as industrial production is contracting. The government is in talks with the IMF for a Stand-By program and the likelihood of reaching an agreement has increased recently. Yet, there are still some differences between the two sides on fiscal adjustment. Funding from the IMF will help to alleviate concerns regarding the external funding gap and growth prospects. A potential IMF program should provide confidence, help to mitigate de-leveraging in domestic credit and endogenize external funding from other sources, which will help to facilitate a more orderly macro adjustment in this environment of large scale global de-leveraging. The current account deficit is likely to decline significantly alongside lower growth and disinflation should gain momentum as the recent decline in oil prices and the slowdown in domestic demand are supportive developments. • While growth is slowing down, implementing countercyclical policies are difficult given rising inflation, the large current account deficit and increasing private sector external debt. Financing of the current account deficit and managing related risks could become a greater challenge going into the next year. The net of interest current account balance is deep in negative territory and FDI coverage of the current account deficit has been declining. These developments have led to sharp rise in corporate foreign exchange debt, which leaves the sector highly vulnerable to weakening of the lira. Strengthening the EU anchor and a new IMF program could clearly go a long way in restoring confidence in the near term. Importantly, we believe that this would also pave the way for a new comprehensive macro initiative that would re-address structural weaknesses.

Deutsche Bank Forecasts (% yoy, unless stated)

2007 2008F 2009F 2010F

Egypt*

GDP CPI CA bal., % GDP

7.1 6.9 1.8

7.2 20.2 0.5

3.3 8.1 -2.1

4.6 8.4 -1.9

Israel

GDP CPI CA bal., % GDP

5.4 3.4 2.8

4.6 4.9 0.9

1.0 1.8 -0.5

3.8 2.2 0.2

Kazakhstan

GDP CPI CA bal., % GDP

8.5 18.6 -7.1

3.9 10.4 3.0

4.0 5.6 -5.5

6.1 4.0 -3.2

Romania

GDP CPI CA bal., % GDP

6.0 6.6 -13.9

8.0 7.2 -12.9

1.6 4.6 -13.5

3.1 3.7 -12.0

Russia

GDP CPI CA bal., % GDP

8.1 11.9 5.9

6.9 13.8 6.7

1.0 8.2 -3.2

4.0 7.4 -3.5

South Africa

GDP CPI CA bal., % GDP

5.0 9.0 -7.0

3.3 10.1 -8.0

2.1 5.2 -7.5

3.0 5.0 -7.0

Turkey

GDP CPI CA bal., % GDP

4.5 8.4 -5.8

1.4 10.3 -5.8

1.2 7.0 -3.1

3.2 6.1 -4.1

Ukraine

GDP CPI CA bal., % GDP

7.6 16.6 -4.2

3.4 20.7 -3.3

-4.1 15.8 -4.6

n.a. n.a. n.a.

* Fiscal years ending 30 June for GDP and CA Sources: National authorities, DB Global Markets Research

EMEA Research, (44) 20 7547-1930

Deutsche Bank Securities Inc.

Page 39

5 December 2008

World Outlook

Key Economic Indicators Key Economic Forecasts

US

Growth of real GDP (% yoy) 2007 2008F 2009F 2010F 2.0 1.2 -2.0 1.6

2007 2.9

Inflation, CPI (% yoy) 2008F 2009F 4.0 -0.4

2010F 1.5

Current Account (% of GDP) 2007 2008F 2009F 2010F -5.3 -4.7 -3.5 -3.0

Japan

2.1

0.3

-1.7

0.7

0.0

1.5

0.0

-0.5

4.8

3.5

4.5

5.4

Euroland Germany France Italy Spain Netherlands Belgium Austria Finland Greece Portugal Ireland

2.6 2.6 2.1 1.4 3.7 3.5 2.6 3.0 4.4 4.0 1.9 6.0

0.9 1.3 0.8 -0.4 1.3 2.0 1.3 1.6 2.0 3.2 0.5 -2.0

-2.5 -2.5 -2.3 -2.3 -2.6 -1.7 -2.3 -2.8 -1.0 -0.8 -2.0 -3.5

1.0 1.1 0.9 1.0 -1.0 0.8 0.7 0.6 0.9 0.0 0.3 -0.8

2.1 2.3 1.6 2.0 2.8 1.6 1.8 2.2 1.6 3.0 2.4 2.9

3.3 2.8 3.3 3.5 4.2 2.2 4.5 3.2 3.9 4.3 2.8 3.1

1.2 0.9 1.0 1.5 1.3 1.6 1.2 1.2 1.4 2.7 1.5 1.5

1.4 0.8 1.4 1.6 1.5 1.7 1.5 1.4 1.6 3.1 1.7 1.5

0.4 7.5 -1.2 -1.7 -10.1 9.8 2.4 3.3 5.3 -14.0 -10.0 -5.5

-0.3 6.2 -1.7 -2.0 -10.4 7.0 0.5 3.0 5.5 -14.2 -11.0 -4.5

-0.4 4.5 -2.0 -1.5 -8.5 7.0 0.0 1.5 4.5 -10.0 -9.0 -3.5

-0.2 5.2 -1.8 -1.5 -7.5 6.0 -0.5 0.0 4.0 -8.0 -8.0 -2.0

Other Industrial Countries United Kingdom Denmark Norway Sweden Switzerland Czech Republic Hungary Poland Canada Australia New Zealand

3.0 1.6 3.2 2.7 3.3 6.5 1.3 6.6 2.7 4.0 3.2

0.8 -0.8 1.5 0.5 1.9 3.1 0.9 4.5 0.6 2.3 0.5

-2.5 -2.3 -1.7 -1.0 -1.4 -1.0 -3.7 0.4 0.1 0.6 -1.3

0.6 -0.5 0.6 1.0 1.1 1.6 1.0 2.0 2.2 1.6 2.3

2.3 1.7 0.7 2.2 0.7 2.8 8.0 2.5 2.1 2.3 2.4

3.6 3.5 4.0 3.7 2.6 6.4 6.1 4.2 2.3 4.3 3.9

1.1 2.2 2.9 2.2 0.8 1.2 1.9 1.8 1.7 2.0 1.5

1.5 1.6 1.3 1.5 0.6 1.7 2.7 2.5 2.2 2.6 2.4

-3.8 1.2 15.9 8.4 17.5 -2.5 -6.5 -4.7 0.9 -6.3 -8.2

-1.6 1.0 18.0 4.5 15.0 -3.0 -6.3 -4.9 1.0 -4.1 -9.8

-1.1 0.5 16.0 4.0 14.5 -0.5 -0.9 -2.1 -0.8 -3.3 -8.3

-2.6 1.0 15.0 3.5 0.0 -0.4 -1.4 -2.9 -0.3 -3.7 -7.5

Emerging Europe/Africa Egypt Israel Kasakhstan Romania Russia Turkey Ukraine South Africa

7.1 5.4 8.5 6.0 8.1 4.5 7.6 5.0

7.2 4.6 3.9 8.0 6.9 1.4 3.4 3.3

3.3 1.0 4.0 1.6 1.0 1.2 -4.1 2.1

4.6 3.8 6.1 3.1 4.0 3.2 n.a. 3.0

6.9 3.4 18.6 6.6 11.9 8.4 16.6 9.0

20.2 4.9 10.4 7.2 13.8 10.3 20.7 10.1

8.1 1.8 5.6 4.6 8.2 7.0 15.8 5.2

8.4 2.2 4.0 3.7 7.4 6.1 n.a. 5.0

1.8 2.8 -7.1 -13.9 5.9 -5.8 -4.2 -7.0

0.5 0.9 3.0 -12.9 6.7 -5.8 -3.3 -8.0

-2.1 -0.5 -5.5 -13.5 -3.2 -3.1 -4.6 -7.5

-1.9 0.2 -3.2 -12.0 -3.5 -4.1 n.a. -7.0

11.9 6.4 9.3 6.3 5.1 6.3 6.8 7.2 7.7 5.7 4.8 8.5

9.1 2.5 7.2 6.0 4.0 5.3 5.8 4.6 0.7 1.8 4.5 6.5

7.0 -4.0 4.8 4.5 0.2 3.0 2.3 3.4 -4.5 -1.6 1.5 4.0

6.6 2.5 6.8 5.0 2.9 4.5 4.2 4.2 2.5 3.0 4.2 6.5

4.8 2.0 4.6 6.4 2.7 2.0 7.8 2.8 2.1 1.8 2.2 7.9

6.0 4.5 9.6 9.8 4.8 5.7 11.9 9.2 6.7 3.8 5.8 23.7

0.6 4.6 5.3 8.4 1.6 4.3 22.6 4.7 1.6 -0.9 0.5 8.6

1.0 0.4 4.3 6.0 1.8 4.5 13.5 4.7 0.5 1.2 1.0 11.2

9.5 13.5 -0.8 2.4 0.6 15.5 -4.8 4.3 24.3 8.3 6.4 -7.0

7.1 12.5 -1.6 -0.3 -0.8 16.0 -8.4 3.0 14.4 5.7 0.7 -15.4

7.1 12.8 -1.8 0.0 2.7 13.0 -7.8 4.6 12.5 4.9 3.4 -21.5

6.9 11.8 -1.3 0.1 2.3 12.3 -6.6 3.6 12.6 5.0 2.4 -18.6

8.6 5.4 5.1 7.5 3.2 8.4 8.1 4.7

6.2 5.2 3.9 4.0 1.9 5.2 6.1 3.1

-0.9 2.7 2.3 2.2 0.5 1.4 3.3 0.2

1.6 3.5 2.8 3.0 2.3 3.0 4.7 2.6

17.9 4.5 7.8 5.7 3.8 22.5 5.7 3.6

22.6 6.3 8.4 7.3 6.0 35.0 8.2 5.3

17.3 5.5 4.1 4.5 4.0 25.0 4.1 1.9

15.3 4.5 3.1 4.0 3.5 17.0 3.6 2.2

2.8 0.1 4.3 -3.4 -0.6 7.4

2.1 -2.0 -3.0 -3.0 -0.5 13.0

0.2 -1.5 -4.0 -1.5 -1.0 4.0

-0.4 -2.3 -5.1 -2.0 -0.9 4.0

Asia (ex-Japan) China Hong Kong India Indonesia Korea Malaysia Pakistan Philippines Singapore Taiwan Thailand Vietnam Latin America Argentina Brazil Chile Colombia Mexico Venezuela EM countries World

Sources: Deutsche Bank Global Markets Research, National Statistical Authorities

Page 40

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Interest Rates Interest Rates (End of Period) 3M rate

10Y rate

Official rate

Current 2.19

3M 1.50

6M 1.50

12M 1.50

Current 2.58

3M 2.00

6M 2.00

12M 2.50

Current 1.00

3M 0.50

6M 0.50

12M 0.50

Japan

0.89

0.85

0.85

0.85

1.38

1.50

1.50

1.30

0.30

0.10

0.10

0.10

Euroland

3.68

2.88

1.41

1.40

3.03

2.50

2.25

2.00

2.50

2.00

0.75

0.75

Other Industrial Countries United Kingdom 3.72 Denmark 5.98 Norway 5.52 Sweden 3.88 Switzerland 1.18 Czech Republic 3.26 Hungary 11.07 Poland 5.96

1.80 4.25 3.50 1.50 1.00 2.90 9.70 4.75

1.60 2.75 2.25 1.25 0.60 1.50 8.20 3.40

1.30 2.50 2.25 1.25 0.60 1.20 7.80 3.20

3.46 4.92 3.64 2.59 2.09 4.26 8.56 5.85

2.70 2.95 3.15 2.10 1.50 3.60 8.00 5.10

2.60 2.70 2.90 1.85 1.30 3.25 7.25 4.65

2.60 2.45 2.65 1.60 1.10 2.50 6.00 4.00

2.00 4.25 4.75 2.00 1.00 2.75 11.00 5.75

0.50 3.00 2.75 1.00 0.50 2.00 9.50 4.25

0.50 2.00 1.50 0.50 0.50 1.00 7.00 3.00

0.50 2.00 1.50 0.50 0.50 1.00 6.00 3.00

n.a. 3.88 4.40

n.a. 3.50 4.10

n.a. 3.50 3.80

3.06 4.30 4.85

4.25 4.25 5.25

5.00 4.00 5.00

5.50 4.00 5.50

2.25 4.25 5.00

3.00 3.75 4.50

3.00 3.25 3.75

3.25 3.25 3.50

US

Canada Australia New Zealand

2.25 4.88 5.70

Deutsche Bank Securities Inc.

Page 41

5 December 2008

World Outlook

Exchange Rates (End of Period) FX Rate (vs. US Dollar)

FX Rate (vs. Euro)

FX Rate (vs. Yen)

Current

3M

6M

12M

Current 1.28

3M 1.28

6M 1.28

12M 1.21

92

95

96

92

118

122

122

112

0.78

1.28

1.28

1.21

Other Industrial Countries United Kingdom 1.47 Denmark 5.83 Norway 7.15 Sweden 8.30 Switzerland 1.20 Czech Republic 20.1 Hungary 204 Poland 3.03

1.41 5.83 6.37 7.70 1.08 19.5 189 2.58

1.38 5.83 6.34 7.68 1.09 19.5 193 2.50

1.30 6.17 6.64 8.08 1.13 20.2 214 2.56

0.87 7.45 9.13 10.57 1.53 25.7 261 3.87

0.91 7.46 8.15 9.85 1.56 24.9 242 3.30

0.93 7.46 8.11 9.83 1.56 24.9 247 3.20

1.28 1.55 0.53

1.07 0.61 0.55

1.08 0.64 0.55

1.11 0.67 0.56

1.00 0.51 1.47

1.37 2.10 2.33

3.96 3.00 28.1 1.57 7.45 10.22

4.21 3.12 28.7 1.62 8.00 6.80

4.24 3.18 29.3 1.55 8.00 7.58

4.30 3.51 31.4 1.63 8.00 7.58

3.10 3.84 22.0 1.22 5.83 8.00

6.88 7.75 49.65 11,800 1,474 3.64 78.65 49.12 1.52 33.50 35.66 16,975

6.82 7.80 49.60 13,300 1,650 3.62 80.30 48.80 1.58 34.50 36.40 17,500

6.82 7.80 49.00 12,500 1,400 3.59 81.00 48.20 1.56 35.00 36.70 18,000

6.80 7.80 48.10 11,240 1,300 3.52 80.00 47.80 1.49 36.00 36.10 18,500

3.44 2.46 670 2,323 13.60

3.25 2.15 660 2,300 12.00

3.28 2.10 660 2,330 12.20

3.31 2.00 680 2,350 12.40

US Japan Euroland

Canada Australia New Zealand Emerging Europe Israel Romania Russia Turkey Ukraine South Africa Asia (ex-Japan) China Hong Kong India Indonesia Korea Malaysia Pakistan Philippines Singapore Taiwan Thailand Vietnam Latin America Argentina Brazil Chile Colombia Mexico

Current 92

3M 95

6M 96

12M 92

118

122

122

112

0.93 7.46 8.04 9.78 1.56 24.5 259 3.10

135 15.8 12.9 11.1 77.0 4.6 0.5 30.4

134 16.4 15.0 12.4 88.2 4.9 0.5 37.0

132 16.4 15.1 12.5 87.8 4.9 0.5 38.3

120 15.0 13.9 11.4 81.7 4.6 0.4 36.0

1.38 2.00 2.33

1.34 1.81 2.16

72.3 143.0 49.2

89.1 58.1 52.4

88.6 61.2 52.6

83.2 61.8 51.7

5.39 3.99 36.7 2.07 10.24 8.70

5.43 4.08 37.5 1.98 10.24 9.71

5.20 4.25 38.0 1.97 9.68 9.18

5.38 6.07 38.86 9,235 1,153 2.85 61.55 38.44 1.19 26.21 27.90 13,285

8.73 9.98 63.49 17,024 2,112 4.63 102.78 62.46 2.02 44.16 46.59 22,400

8.73 9.98 62.72 16,000 1,792 4.60 103.68 61.70 2.00 44.80 46.98 23,040

8.23 9.44 58.20 13,600 1,573 4.26 96.80 57.84 1.80 43.56 43.68 22,385

13.4 11.9 1.9 0.01 0.06 25.4 1.2 1.9 60.7 2.8 2.6 0.01

14.0 12.2 1.9 0.01 0.06 26.3 1.2 2.0 60.3 2.8 2.6 0.01

14.0 12.3 2.0 0.01 0.07 26.7 1.2 2.0 61.3 2.7 2.6 0.01

13.6 11.8 1.9 0.01 0.07 26.2 1.2 1.9 61.9 2.6 2.6 0.00

2.69 1.92 524 1,818 10.64

4.16 2.75 845 2,944 15.36

4.20 2.69 845 2,982 15.62

4.01 2.42 823 2,844 15.00

Sources: Deutsche Bank Global Markets Research, Bloomberg, Datastream; as of December 5

Page 42

Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Contacts Name

Title

Telephone

Email

David Folkerts-Landau Peter Garber Michael Lewis Adam Sieminski United States

Global Head of Research Global Strategist Global Head of Commodities Research Chief Energy Economist

+44 20 754 55502 +1 212 250 5466 +44 20 754-52166 +1 202 662-1624

[email protected] [email protected] [email protected] [email protected]

Peter Hooper Joe LaVorgna Torsten Slok Carl Riccadonna Dollar-Bloc Tony Meer Philip O'Donaghoe Darren Gibbs John Clinkard Japan

Co-head of Global Economics Chief US Economist Senior Economist Senior US Economist

+1 212 250 7352 +1 212 250 7329 +1 212 250 2155 +1 212 250 0186

[email protected] [email protected] [email protected] [email protected]

Chief Economist, Australia Senior Economist, Australia Chief Economist, New Zealand Chief Economist, Canada

+61 2 8258 1688 +61 2 8258 1606 +64 9 351 1376 +41 6 682 8470

[email protected] [email protected] [email protected] [email protected]

Mikihiro Matsuoka Seiji Adachi Europe

Chief Economist, Japan Senior Economist, Japan

+81 3 5156 6768 +81 3 5156-6320

[email protected] [email protected]

Thomas Mayer George Buckley Mark Wall Stefan Bielmeier David Naudé Gillian Edgeworth Emerging Markets Europe Marcel Cassard Arend Kapteyn Yaroslav Lissovolik Michael Biggs Cem Akyurek Caroline Grady EM Latin America

Co-head of Global Economics Chief UK Economist Chief Euro Area Economist Head of Economic Research Bureau Frankfurt Senior European Economist Economist, CE4

+44 20 754 72884 +44 20 754 51372 +44 20 754 52087 +49 69 910 31789 +33 1 44 95 6387 +44 20 754 74900

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Gustavo Cañonero Jose Carlos de Faria Fernando Losada Felipe Hernandez Andres Orlandi EM Asia

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Michael Spencer Jun Ma Taimur Baig Juliana Lee Equity Strategy Binky Chadha Bernd Meyer

Chief Economist and Head of GMR, Asia Chief Economist, Greater China Senior Economist, Asia Senior Economist, Asia

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Head, US Equity Strategy Head, European Equity Strategy

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Deutsche Bank Securities Inc.

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5 December 2008

World Outlook

Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Peter Hooper

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Deutsche Bank Securities Inc.

5 December 2008

World Outlook

Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

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Deutsche Bank Securities Inc.

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David Folkerts-Landau Managing Director Global Head of Research Global Company Research

Global Fixed Income Strategies & Economics

Stuart Parkinson

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Pascal Costantini Regional Head

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