Another year of muddling through? Han de Jong Chief Economist November 2012

2 Will the euro crisis be controlled? Will the US avoid the fiscal cliff and continue its recovery? Will Chinese growth bounce back? Key questions for 2013

3 Today’s western problems require Fiscal consolidation Strengthening the banks Structural reform to improve growth dynamics Debt relief Support from monetary policy Finding the right balance is crucial!

4 Frankfurt air freight vs world trade – bottoming out % yoy Source: Website Fraport, Thomson Reuters Datastream

5 Areas of divergence US and emerging economies OK Europe and Japan lagging In Europe:core – periphery hard data – confidence In the US:labour market – corporate investment

6 Industrial production Index, Jan07=100 Source: Bloomberg

7 Eurozone hard data and confidence parting ways? Source: Bloomberg

8 ECB bank lending survey points to investment slump Source: Thomson Reuters Datastreamloan demand from ECB bank lending survey

9 What is needed to make the euro viable? Medium to longer term (politicians) Sustainable public finances Convincing budget rules Structural reform boosting growth dynamics Banking union Shorter term (ECB/ESM) Access to funding for governments Financial system that works Support economic growth

10 Positives for Europe Work on framework for sustainable euro in progress ECB has limited downside tail-end risk Improvement on deficits in the periphery Fiscal consolidation not getting worse Inventory cycle becoming supportive Waiting for an external lift

11 US: Housing market has turned S&P / Case Shiller house market index, % yoy Source: Bloomberg

12 US: Housing starts – much more to come Source: Bloomberg thousands

13 US: Mortgage rate and refi Source: Bloomberg

14 US: Unemployment %

15 US: Employment growth has picked up (household survey) % yoy Source: Thomson Reuters Datastream

16 But here too, a strange divergence % 3Mo3M, core capital goods orders and nonfarm payrolls Source: Thomson Reuters Datastream

17 Positives on the cliff despite political stalemate After the elections, political dynamics change Tea Party is weaker Fiscal consolidation is not new

18 US budget balance as % GDP Source: Bloomberg

19 Why did China slow? Policy driven Global cycle FX appreciation / rising wages

20 China: Uncertainties Change in leadership Pressure for social and political reform Transition to different growth model

21 China: Industrial production and retail sales turning % yoy Source: Bloomberg

22 Implications for financial markets Monetary policy to remain very loose Search for return Reasonably valued risky assets will do well

23 10 yr bond yields – how low can it go? % Source: Bloomberg

24 Euro stoxx and S&P500 – is the underperformance justified? Index, Jan 2008 = 100 Source: Bloomberg

25 PE S&P500 Source: Bloomberg

26 Conclusions The world’s economy remains on a knife’s edge But the glass is half full Europe keeps eurocrisis under control US avoids fiscal cliff China makes successful transition Risky assets to perform well in 2013

27 Thank you for your attention ABN AMRO Group Economics on het internet abnamro.nl/economischbureau – Dutch publications abnamro.nl/groupeconomics – English publications NEW: App for the iPad – see abnamro.nl/marketinsights (also for English docs) Follow Han de Jong on (Dutch only) This material is provided to you for information purposes only. Before investing in any product of ABN AMRO Bank NV, you should inform yourself about various consequences that you may encounter under the laws of your country. ABN AMRO Bank NV. has taken all reasonable care to ensure that the information contained in this document is correct but does not accept liability for any misprints. ABN AMRO Bank NV reserves the right to make amendments to this material. This material which is subject to change without notice is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any securities or related financial instruments. While ABN AMRO makes reasonable efforts to obtain information from sources, which it believes to be reliable, ABN AMRO makes no representation or warranty of any kind, either express or implied as to the accuracy, reliability, up-to-dateness or completeness of the information contained herein. Nothing herein constitutes an investment, legal, tax or other advice nor is it to be relied on in any investment or decision. Certain services and products are subject to legal restrictions and therefore may not be available for residents of certain countries. You should obtain relevant and specific professional advice before making any investment decision. The past performance is not necessarily a guide to the future result of an investment. The value of investments may go up or down due to various factors including but not limited to changes in rates of foreign exchange and investors may not get back the amount invested. ABN AMRO disclaims any responsibility and liability whatsoever in this respect.