1. Global Economic Outlook Business and Policy Dilemmas Draft Zbyszko Tabernacki, CFA Executive Managing Director Economics and Country Risk IHS Global Insight November 18, 2010

2. Copyright © 2010 IHS Inc. All Rights Reserved. The Global Recovery: Status Update The global expansion is continuing, but at a more gradual pace Recoveries from financial crises are typically slow Debt levels will influence the speed of country recoveries Inflation will not be a serious problem in most countries Interest rates will remain low through 2011 in advanced countries but will rise in emerging markets Quantitative easing will have little impact on economic growth The probability of a global double-dip recession is about 20% and declining

3. Copyright © 2010 IHS Inc. All Rights Reserved. After Slowing in Mid-2010, World Real GDP Growth Is Expected to Gradually Pick Up (Quarter-on-quarter percent change, annual rate) Source: IHS Global Insight

4. Copyright © 2010 IHS Inc. All Rights Reserved. Global Economic Indicators: Mixed Signals Net Output Surprises Global Yield Curve Global Real Policy Rate Global Consumer Price Inflation Global Real Narrow Money (M1) Supply Global Real Broad Money (M2) Supply Lending Standards TED Spread: LIBOR vs. T-bill Global Equity Prices Global Foreign Exchange Reserves Global Manufacturing Confidence Global New Orders Industrial Metals Prices Global Industrial Production Real Baltic Dry Bulk Shipping Rate Index Global Real Merchandise Imports Real Crude Oil Prices Consumer Confidence Diffusion Global Real Retail Sales Corporate Profit Proxy: CPI–WPI Difference Global Employment Growth In October 2010, 18 of 21 indicators signaled expansion (green), but only 10 had improved since August (up arrow) Source: IHS Global Insight

5. Copyright © 2010 IHS Inc. All Rights Reserved. 5 Crawling Economies High debt levels Weak growth — post-crisis recoveries are almost always slow No inflation Rock-bottom interest rates Downward pressure on currencies Risks: double-dips and/or lost decades Risk: currency “wars” and protectionism Macro challenges: monetary and fiscal policy “exit strategies” without aborting the recovery Micro challenges: boosting productivity and competitiveness (especially in Southern Europe), reining in healthcare and pensions costs, cleaning up housing wreckage, help for the chronically unemployed

6. Copyright © 2010 IHS Inc. All Rights Reserved. 6 Global Unemployment (Percent of unemployed out of work for at least six months) Source: OECD Of which: 12 months or more 7.5 Unemployment Rate, % 11.6 10.1 20.5 5.1 10.5 7.7 9.6 5.1 7.4 3.3 3.4 8.1

7. Copyright © 2010 IHS Inc. All Rights Reserved. 7 Booming Economies Low debt levels Strong growth Rising (but still low) inflation Rising interest rates Upward pressure on currencies Risks: overheating and asset bubbles Risk: currency “wars” Macro challenges: less intervention in currency markets, more support for consumer spending Micro challenges: structural and institutional changes to increase share of consumer spending in economy (i.e. less export dependence)

8. Copyright © 2010 IHS Inc. All Rights Reserved. 8 Global Auto Markets Reflect Two-Speed World Light Vehicle Sales Note: Triad comprises U.S., Japan, and Western Europe

9. Copyright © 2010 IHS Inc. All Rights Reserved. Purchasing Managers’ Indexes Signal Expansion in Most Areas (Manufacturing index, over 50 indicates expansion) Sources: Institute for Supply Management, Royal Bank of Scotland/NTC Research, China Federation of Logistics and Purchasing, Nomura/JMMA

10. Copyright © 2010 IHS Inc. All Rights Reserved. (IHS Global Insight Indexes, 2002:1=1.0) Industrial Materials Prices Are Rising Again, Partly in Response to Dollar Depreciation Source: IHS Global Insight

11. Copyright © 2010 IHS Inc. All Rights Reserved. Currency Wars Could Lead to Trade Wars Fundamental problem: the world economy needs to reflate and rebalance at the same time Textbook solution: currencies of surplus countries appreciate and the currencies of deficit countries depreciate Motivations for market intervention deflationary fears (Japan and Switzerland) concerns about capital inflows (Brazil) insecurities about the strength of domestic demand (China) worries about China’s competitiveness (Brazil, South Korea) Zero-sum game: shades of 1930s competitive devaluations

12. Copyright © 2010 IHS Inc. All Rights Reserved. The U.S. Dollar Will Depreciate Against Currencies of Emerging Markets (Real Trade-Weighted Dollar Index, 2005=1.0)

13. Copyright © 2010 IHS Inc. All Rights Reserved. 13 The U.S. Recovery: Uneven and Subpar Recession “over”, but GDP hasn’t regained previous peak yet Growth boost from fiscal stimulus and inventories is fading Headwinds are blowing from consumer and business caution Policy uncertainties don’t help, but the key problem is the hangover from the financial boom and bust QE II is on the way; it’s not a cure-all It’s too early to tighten fiscal policy when the private sector is gripped by an “epidemic of thrift”

14. Copyright © 2010 IHS Inc. All Rights Reserved. A Deeper U.S. Recession and Slower Recovery than in Past Cycles (Real GDP, percent difference from recession trough) Source: IHS Global Insight

15. Copyright © 2010 IHS Inc. All Rights Reserved. 15 Household Credit Conditions: Beginning To Loosen *% change y/y; **Percent of banks tightening less percent loosening Consumer Credit Growth* Home Mortgage Credit Growth* Banks Tightening Cons. Credit** Banks Tightening Mortgage Credit** Prime Loans Credit Cards Other Loans

16. Copyright © 2010 IHS Inc. All Rights Reserved. 16 Employment Is Turning, But Not Rapidly *Thousands, monthly change, SA; **Percent; ***Hours, SA Private Payroll Employment* Unemployment Rate** Length of Workweek*** Temporary Employment*

17. Copyright © 2010 IHS Inc. All Rights Reserved. 17 (Annualized rate of growth) Consumer Spending Stabilizing, But Not a Strong Driver of Recovery

18. Copyright © 2010 IHS Inc. All Rights Reserved. 18 Business Equipment Demand Recovering (Non-defense capital goods ex-aircraft, 3-mo moving average, US$ billions)

19. Copyright © 2010 IHS Inc. All Rights Reserved. 19 (Percent change unless otherwise noted) U.S. Economic Growth by Sector 2009201020112012 Real GDP-2.62.72.32.9 Final Sales-2.11.22.52.9 Consumption-1.21.72.42.0 Light Vehicle Sales (Millions)10.411.412.814.8 Residential Investment-22.9-4.24.133.4 Housing Starts (Millions)0.550.600.781.21 Business Fixed Investment-17.15.65.97.3 Federal Government5.74.70.0-3.5 State and Local Government-0.9-1.30.20.0 Exports-9.511.58.38.1 Imports-13.813.25.65.3

20. Copyright © 2010 IHS Inc. All Rights Reserved. 20 (Percent unless otherwise noted) Other Key Indicators 2009201020112012 Industrial Production (% growth)-9.35.32.93.5 Employment (% growth)-4.3-0.50.92.2 Unemployment Rate9.39.79.69.1 CPI Inflation-0.31.71.51.9 Oil Prices (WTI, US$/bbl)62798389 Core PCE Price Inflation1.51.41.31.4 Federal Funds Rate0.160.170.141.27 10-year Government Bond Yield3.263.142.583.43 Dollar (Major Currencies, 2005=1)0.930.900.860.88

21. Copyright © 2010 IHS Inc. All Rights Reserved. 21 What Can QE II Accomplish? Don’t expect too much from QE II Quantitative easing is powerful in a crisis......but financial markets are not in meltdown now... QE II of $500bln-$1 trl can push down long-term interest rates (25- 50bps?), at least partly priced in already......and help growth a tenth or two in 2011......not a game-changer

22. Copyright © 2010 IHS Inc. All Rights Reserved. 22 * Ivey, n.s.a; ** ISM Index Retail Sales (Excluding motor vehicles and parts, billions) Real GDP (Percent change) Canada Recovery Hits a Speed Bump Total New Motor Vehicle Sales (Millions of units, SAAR) Leading Manufacturing Indicators (Diffusion index, over 50 indicates expansion)

23. Copyright © 2010 IHS Inc. All Rights Reserved. 23 *Annual average, **Billions of U.S. dollars Real GDP Growth (%)Consumer Price Inflation (%) Exchange Rate per US$* Current Account Balance** Mexico Outlook Summary

24. Copyright © 2010 IHS Inc. All Rights Reserved. 24 Eurozone Growth Likely to Be Uneven and Sluggish Despite strong Q2, Eurozone growth will remain sluggish overall Two-speed Europe (as well) — marked divergences in performance of member countries, with North doing relatively well (especially Germany) and South struggling But fiscal policy was already becoming less accommodative even before Eurozone sovereign debt crisis increased pressure for policy to be tightened earlier and faster High unemployment, weak wage gains, and tight credit will restrain consumer Business investment limited by substantial excess capacity and concerns about strength and sustainability of recovery Exports will be hurt by slowing global growth and the recent strength in the euro

25. Copyright © 2010 IHS Inc. All Rights Reserved. 25 Asia’s Recovery Is At a Flexing Point Impetus from inventories has already peaked Net exports will slow considerably in coming quarters China has become a source of near-term risk Slight shift in policy stance betrays worry about outlook (Percent change from a year earlier, SAAR)

26. Copyright © 2010 IHS Inc. All Rights Reserved. A Mild Slowdown in China’s Industrial Output as the Economy Rebalances (Percent change from year earlier) Source: IHS Global Insight

27. Copyright © 2010 IHS Inc. All Rights Reserved. 27 China: Focus on Risks Slowdown has stabilized ― Property sector tightening policy effective in deflating bubble, so far ― Following the initial sharp slide, construction and overall output have leveled off ― Growth downtrend should continue, as tightening policy will remain in effect and export growth is expected to slow Soft-landing is still the most probable scenario ― External demand will stagger, not collapse ― Policy will be “cautiously accommodative”, including RMB appreciation ― Consumer demand should remain stable But risks of hard-landing have increased ― Recovery in the U.S. and EU still unstable ― 2009 credit binge could turn into a full-fledged banking crisis, especially local government debt ― The usually steady consumer demand will likely then collapse ― If all flashpoints ignited, we are looking at the worst case scenario

28. Copyright © 2010 IHS Inc. All Rights Reserved. 28 Bottom Line and Business Implications The next decade will be less “fun” than the 1990s or the pre-crisis 2000s The risk of a lost decade is higher than a double-dip — but still relatively low The risk of deflation is greater than inflation — but also relatively low Many companies will pursue market share (or hunker down) strategies in the developed world and growth strategies in the emerging world Since the emerging world is not without risk, diversification will be key — in other words, don’t put all your eggs in the Chinese basket Fiscal consolidation is inevitable and taxes will rise — businesses have a huge stake in how this happens Businesses also have a huge stake in the outcome of the currency “wars” and especially in keeping the protectionist instincts of politicians in check

29. Thank you! zbyszko.tabernacki@ihs.com