1. 11 March 2010 Economic Overview – Stay calm and carry on

2. 2 Global recovery continues in Q1, but services remain the weak link Sources: Markit, ISM, JPMorgan. Global GDP and the PMI Manufacturing v. services The Global PMI rose to 53.6 in February, sending a clear signal of ongoing recovery in Q1 despite weather- related disruptions to business in many nations. Annual global GDP growth is running above 2%, its fastest since late-2007. Manufacturing is driving the upturn, with robust service sector growth remaining elusive.

3. 3 US, UK and China see strong growth in Q1. Eurozone services and Japan remain key areas of concern. Manufacturing Services* * US services include all non-manufacturing. Sources: Markit, ISM. The US saw ongoing strong expansion (manufacturing slowed while services* accelerated), and Chinas growth remained robust. In Europe, the UK saw faster growth of manufacturing and services, pointing to a strengthening recovery in Q1. However, areas of weakness persist, notably in Eurozone services and in Japan, which saw a slowing rate of manufacturing growth and an ongoing recession in its services economy.

4. 4 Eurozone divergences widened, and performance can be linked to productivity and pricing. Manufacturing PMIs Productivity and pricing in 2009 Eurozone divergences widened. Soaring manufacturing growth in Germany, France and the Netherlands contrasted with weakness in peripheral countries. Most notably, the downturn worsened in Greece (the only country in the Global PMI to see exports fall). Greeces woes can be linked to firms behaviour: PMI data show that Greek producers raised productivity less than other Eurozone countries last year, and also cut prices less. Sources: Markit. 50 = no change

5. 5 Global labour markets raise further hopes of recoveries becoming more sustainable Employment (actual v. PMI) US employment Sources: Markit, ISM, Ecowin. The Global PMI Employment Index signalled a near-stabilisation of the labour market in February, raising hopes that employment will rise in March for the first time since April 2008. Manufacturers took on more staff for the second month running and job cuts eased in services. Official data were also upbeat, with US non-farm payrolls showing a fall of just 36k and Japans payrolls registering a shock 540k increase – the largest rise in 30 years.

6. 6 Supply chain price pressures intensified, but weak consumer demand subdues consumer price inflation Prices and supplier lead-timesConsumer price inflation * Suppliers delivery times index is inverted. Sources: Markit, ISM, JPMorgan, Ecowin. Supplier delivery delays were the most widespread for five-and-a-half years in February, according to the Global PMI, as suppliers struggled to meet surging demand for inputs by manufacturers. Input prices continued to rise sharply as a result. However, weak consumer demand helped to moderate consumer price inflation in most instances. But the rate of inflation nevertheless rose sharply to a 14-month high of 3.5% in the UK.

7. 7 Currencies and exports Exchange ratesPMI Export Orders Higher UK inflation can also be linked to the c.25% trade-weighted depreciation of sterling since the start of the financial crisis. However, this has led to a record rate of increase in the PMI surveys measure of new export orders. The weaker euro is also helping to boost Eurozone exports.

8. 8 Credit and bond markets PIGS bond yields W. European credit markets. Sources: Markit, Ecowin. A key development during the month was the calming of Greek credit and bond markets as signs appeared that the worst of the countrys debt crisis is over. The premium for insuring again Western European government bond default returned to below that of Western European corporate bonds, and yields on peripheral Eurozone country bonds fell - although Greeces remained elevated.

9. 9 Risk appetite returned as bond and credit markets calmed, driving equity gains US and UKGermany and Japan Equity markets have generally risen in recent weeks as risk appetite has returned. The FTSE 100 was particularly notable in hitting an 18-month high, the only developed country stock index to recover to pre- Lehman levels. FTSE UK companies are favoured as they earn the bulk of their revenues overseas, which are expected to rise as a result of the improved global economic environment and weak sterling.

10. 10 PMI* and central bank interest rate decisions No changes in main policy rates are expected in the US, Eurozone or UK for some time, but its interesting to see how central bank interest rates compare against PMI data. UK PMIs are flashing the brightest warning light for policy tightening. The Eurozone PMI is consistent with wait and see at the ECB. The US Manufacturing PMI could be ringing alarm bells at the Fed, but weak non-manufacturing data subdue the signal. USUKEurozone * measuring manufacturing and services output. Sources: Markit, ISM, US Federal Reserve, European Central Bank, Bank of England.