Deutschebank 2

Global
29 June 2009
Macro
World Outlook Economics

Editors
Recovery ahead Peter Hooper

(+1) 212 250-7352
Global Markets Research
peter.hooper@db.com
Thomas Mayer
(+44) 20 754-72884
tom.mayer@db.com
For the first time since the beginning of the downturn we have revised
up our forecasts for economic growth. We now expect global growth to
rise to 2.5% in 2010 compared to 2.0% envisaged in our previous World
Outlook from 30 March 2009. The upward revision is due entirely to
better prospects for industrial countries, where growth next year is now Production editors
seen reaching 1.0% compared to 0.3% before. Mark Wall
(+44) 20 754-52087
Most of the upward revision to global growth in 2010 results from a mark.wall@db.com
stronger outlook for investment growth (which has risen to 2.0% from Torsten Slok
0.1%) and export growth (up to 4.1% from -2.2% before). The improved (+1) 212 250-2155
torsten.slok@db.com
prospects for exports and investment reflect greater confidence in the
effectiveness of authorities’ efforts to restore stability in the financial
sector.
In our view the global economic and financial crisis has had two key
drivers: (1) the breakdown of the global growth model of the past Contributors
decade or so, which led to unsustainable international current account Stefan Bielmeier
Michael Lewis
(+44) 20 754-52166
(+49) 69 910-31789
imbalances; and (2) the financial crisis, which ensued when the inability stefan.bielmeier@db.com
michael.lewis@db.com
of debtors to repay their creditors became evident. As a result, we can

Michael Biggs Yaroslav Lissovolik
expect to see lower trend growth and higher economic volatility, the (27) 11 775-7265 (+7) 495 797-5000
michael.biggs@db.com yaroslav.lissovolik@db.com
opposite of what the world economy experienced during the era of the
Great Moderation. George Buckley Mikihiro Matsuoka
(+44) 20 754-51372 (+81) 3 5156-6768
Economic Forecast Summary george.buckley@db.com mikihiro.matsuoka@db.com
GDP growth, % CPI inflation, % Gustavo Canonero Tony Meer

(1) 212 250-7530 (+61) 2 8258-1688
2008 2009F 2010F 2008 2009F 2010F gustavo.canonero@db.com adam.boyton@db.com
G7 0.6 -3.9 1.0 3.2 -0.1 0.8 John Clinkard Joseph LaVorgna
(416) 682-8221 (+1) 212 250-7329
--US 1.1 -2.8 1.2 3.8 -0.5 0.8 john.clinkard@db.com joseph.lavorgna@db.com
--Japan -0.7 -7.0 0.3 1.4 -0.8 -0.5 Gillian Edgeworth Torsten Slok
(+44) 20 754-74900 (+1) 212 250-2155
--Euroland 0.6 -4.3 0.8 3.3 0.3 0.9 gillian.edgeworth@db.com torsten.slok@db.com
EM Asia 6.8 4.2 5.8 6.5 1.3 2.9
Peter Garber Michael Spencer
--China 9.0 7.5 7.2 5.9 0.0 2.0 (+1) 212 250-5466 (+852 ) 2203-8303
peter.garber@db.com michael.spencer@db.com
--India 7.3 5.5 6.0 8.7 3.5 5.1
Darren Gibbs Mark Wall
EMEA 4.3 -3.3 2.9 12.6 9.3 8.5 (+64) 9 351-1376 (+44) 20 754-52087
darren.gibbs@db.com mark.wall@db.com
--Russia 5.6 -4.4 1.8 13.3 11.2 10.3
Caroline Grady Thomas Mayer
Latam 4.4 -2.3 3.0 8.8 6.3 6.6 (+44) 20 754-59913 (+44) 20 754-72884
caroline.grady@db.com tom.mayer@db.com
--Brazil 5.4 -1.0 4.0 4.6 4.2 4.2
Industrial Arend Kapteyn Peter Hooper
countries 0.7 -3.8 1.0 3.3 0.0 0.8 (+44) 20 754-71930 (+1) 212 250-7352
arend.kapteyn@db.com peter.hooper@db.com
EM countries 5.8 1.4 4.5 7.8 3.6 4.5
Global 2.9 -1.5 2.5 5.2 1.5 2.4 Adam Sieminski Carl Riccadonna
(+1) 202 662-1624 (+1) 212 250 0186
Source: DB Global Markets Research
adam.sieminski@db.com carl.riccadonna@db.cm
Deutsche Bank AG/London

Economics
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LOCATED IN APPENDIX 1. MICA(P) 106/05/2009
29 June 2009 World Outlook
Table of Contents
Global Overview
Recovery ahead....................................................................................................................................................................3
Geopolitics
The Dollar and Its Rivals .......................................................................................................................................................7
Commodities
Investment Flows & Fundamentals ...................................................................................................................................11
US
Robust recovery remains elusive .......................................................................................................................................13
Japan
Initially V shaped production recovery ...............................................................................................................................17
Euroland
Constrained expectations...................................................................................................................................................19
Germany: Export dependence has become a drag............................................................................................................21
Other EMU economies ......................................................................................................................................................22
UK
A relatively early exit from recession – Debt and employment to rise well after end of recession ...................................23
Other European countries
Sweden, Denmark, Norway, Switzerland...........................................................................................................................25
CE3
Sustainable recovery still some time away ........................................................................................................................27
Peripheral dollar bloc
Recession themes persist..................................................................................................................................................29
Asia (ex Japan)
Stimulus supports China and India, but for how long? – Asia-8 simply following the G-2 lead .........................................31
Latin America
Safe but recovering unevenly.............................................................................................................................................33
EMEA
Tentative signs of recovery ................................................................................................................................................35
Forecast tables
Key economic indicators ....................................................................................................................................................37
Interest rates ......................................................................................................................................................................38
Exchange rates...................................................................................................................................................................39
Contacts ...........................................................................................................................................................................40
Page 2 Deutsche Bank AG/London

Global Overview: Recovery ahead
• For the first time since the beginning of the (from -1.9% to +0.3%), but revisions in the US (+0.6
downturn we have revised up our forecasts for percentage points) and the euro area (+0.5 percentage
economic growth. We now expect global growth points) are also significant. Growth in emerging market
to rise to 2.5% in 2010 compared to 2.0% economies has remained unchanged at 4.5% (with
envisaged in our previous World Outlook from 30 upward revisions for China and Brazil offsetting downward
March 2009. revisions for Russia and a few smaller countries).
• The upward revision is due entirely to better Forecasts for inflation have increased as well, to a global
prospects for industrial countries, where growth (weighted) average of 2.4% from 1.9% previously.
next year is now seen to reach 1.0% compared to Upward revisions have affected both industrial and
0.3% before.
emerging market countries and reflected in particular
• Most of the upward revision to global growth in
expectations of somewhat higher oil prices.
2010 results from a stronger outlook for
investment growth (which has risen to 2.0% from
0.1%) and export growth (up to 4.1% from -2.2% 1. Economic Forecast Summary
before). The improved prospects for exports and GDP growth, % CPI inflation, %
investment reflect greater confidence in the 2008 2009F 2010F 2008 2009F 2010F
effectiveness of authorities’ efforts to restore G7 0.6 -3.9 1.0 3.2 -0.1 0.8
stability in the financial sector. --US 1.1 -2.8 1.2 3.8 -0.5 0.8
• In our view the economic and financial crisis has
--Japan -0.7 -7.0 0.3 1.4 -0.8 -0.5
had two key drivers: (1) the breakdown of the
--Euroland 0.6 -4.3 0.8 3.3 0.3 0.9
global growth model of the past decade or so,
where a number of (mostly “anglo-saxon”)
countries imported goods and services largely for EM Asia 6.8 4.2 5.8 6.5 1.3 2.9
domestic consumption and others (such as Japan, --China 9.0 7.5 7.2 5.9 0.0 2.0
Germany, and China) produced to satisfy this --India 7.3 5.5 6.0 8.7 3.5 5.1
demand; and (2) the financial crisis, which ensued EMEA 4.3 -3.3 2.9 12.6 9.3 8.5
when the inability of debtors (beginning with US --Russia 5.6 -4.4 1.8 13.3 11.2 10.3
sub-prime mortgage borrowers) to repay their Latam 4.4 -2.3 3.0 8.8 6.3 6.6
creditors became evident. The demise of the --Brazil 5.4 -1.0 4.0 4.6 4.2 4.2
global growth model seems likely to depress
global trend growth for a number of years to Industrial
come; the financial crisis is introducing greater countries 0.7 -3.8 1.0 3.3 0.0 0.8
volatility around this lower growth trend. The EM
outcome is likely to be a reversal of the generally countries 5.8 1.4 4.5 7.8 3.6 4.5
favorable trends that emerged during the era of Global 2.9 -1.5 2.5 5.2 1.5 2.4
the Great Moderation. In the place of high growth
with low economic volatility we can expect to see
lower trend growth and higher economic Most of the upward revision to global growth in 2010
volatility. results from improved expectations for investment growth
(up to 2.0% from 0.1% previously) and export growth (up
In this overview article we first present and discuss the to 4.1% from -2.2%). Private consumption growth has
regional and global forecasts obtained by aggregating the been left unchanged and government consumption
submissions to this exercise from our regional and growth was reduced marginally (Table 2). The improved
country economists. In the second section we address a prospects for exports and investment reflect greater
few global economic issues from a top-down perspective. confidence in the effectiveness of the authorities’ efforts
to restore stability in the financial sector. Actions taken
Bottom-up view: a better 2010 and commitments made to shore up financial institutions
For the first time since the onset of the downturn we have have removed the risk of a major systemic failure, and the
revised up our forecasts for economic growth. We now aggressiveness of macro policy measures have slowed
expect global growth to rise to 2.5% in 2010 compared to the descent of and begun to stabilize activity. The upward
2.0% envisaged in our World Outlook from 30 March adjustment of investment growth is driven by revisions in
2010 (Table 1). The upward revision is due entirely to industrial countries; forecasts of investment in emerging
better prospects for industrial countries, where growth market countries have changed little on balance (Tables 3
next year is now seen to reach 1.0% compared to 0.3% and 4). Exports have been revised up in both regions,
before. The most dramatic revision has occurred in Japan reflecting the improved expectations for global trade.
Deutsche Bank AG/London Page 3

2. Key global aggregates and (2) the financial crisis, which resulted when it became
(% yoy, evident that a growing number of debtors (beginning with
unless 2009 2010 US sub-prime mortgage borrowers) would likely go into
stated) 2004 2005 2006 2007 2008 F F default. The failure of the global growth model is likely to
GDP 4.9 4.5 5.0 4.9 2.9 -1.5 2.5 depress global trend growth for a number of years to
Private come; while the lingering effects of the financial crisis
consumption 4.6 4.2 4.6 4.6 2.9 0.1 2.1
could introduce greater volatility around this lower growth
Investment 8.9 7.6 7.4 5.7 1.4 -9.7 2.0 trend. The outcome spells an unwinding of the favorable
Gov’t
consumption 3.4 3.2 3.6 3.8 5.1 3.9 4.2
trends that developed during the era of the Great
Moderation. Instead of high growth with low economic
Exports 13.7 9.9 11.2 9.0 4.8 -13.7 4.1
volatility we’ll probably see relatively low trend growth
CPI 3.6 3.4 3.3 3.7 5.2 1.5 2.4
with high economic volatility. In addition, while economic
Fiscal
balance, slack will keep inflation quite subdued in the near term,
% of GDP -2.8 -2.2 -0.5 -0.7 -2.3 -7.3 -6.0 the mounting fiscal debt that is being incurred to deal with
Source: DB Global Markets Research the crisis poses a significant upside risk to inflation in the
longer term.
3. Key aggregates in industrial countries
(% yoy, Collapse of the global growth engine
unless 2009 2010 Over the past decade, until the crisis intensified last fall,
stated) 2004 2005 2006 2007 2008 F F real net exports of the US, UK, Canada and Australia
GDP 2.9 2.4 2.8 2.4 0.7 -3.8 1.0 moved steadily and strongly from balanced or surplus
Private positions into deficit as the expansion of these countries’
consumption 2.7 2.4 2.5 2.2 0.5 -1.2 0.4
imports outstripped that of their exports by a substantial
Investment 6.1 5.2 3.7 0.4 -3.6 -16.4 -0.8 margin. Import growth was driven by strong domestic
Gov’t
consumption 1.8 1.2 1.7 2.1 2.4 2.0 3.0
demand, which was in turn supported by increasing
household and business leverage. New borrowing by the
Exports 8.6 6.1 8.5 6.3 3.0 -15.6 3.0
US non-financial private sector increased from 2% of GDP
CPI 2.0 2.3 2.4 2.2 3.3 0.0 0.8
in the early 1990s to 16% of GDP in 2006. This pushed
Fiscal
balance, non-financial private sector debt levels up from 160% of
% of GDP -3.4 -2.8 -1.6 -1.1 -2.8 -9.1 -7.1 GDP to 220% over the same period, and US net debt to
Source: DB Global Markets Research the rest of the world soared (Chart 1).
4. Key aggregates in emerging market countries Chart 1. US borrowing spree coming to an end
(% yoy, USD bn
3000
unless 2009 2010
stated) 2004 2005 2006 2007 2008 F F US net foreign liabilities
2500
GDP 7.6 7.2 7.9 8.2 5.8 1.4 4.5 2000
Private
consumption 7.1 6.5 7.4 7.8 6.1 1.8 4.3 1500
Investment 12.7 10.8 12.4 12.7 8.0 -0.8 5.6 1000
Gov’t
consumption 5.6 6.0 6.1 6.1 8.6 6.4 5.7 500
Exports 20.5 15.0 14.6 12.6 7.2 -11.4 5.4 0
CPI 5.6 4.7 4.4 5.7 7.8 3.6 4.5 -500
Fiscal
balance, 1980 1984 1988 1992 1996 2000 2004 2008
% of GDP -2.1 -1.3 1.0 -0.2 -1.6 -4.9 -4.5
Source: IMF, IFS, DB Global Markets Research
Top down view: reversal of the Great

Given a sharp downward adjustment in asset values
Moderation
(falling prices of stocks and homes), the current elevated
In our view the economic and financial crisis has two key
debt ratios and a tightening of credit conditions globally
drivers: (1) the breakdown of the global growth model of
will inhibit new borrowing, certainly on anything like the
the past decade or so, where a number of (mostly “anglo-
scale observed over the decade leading up to the crisis.
saxon”) countries imported goods and services largely for
By our estimates favorable credit conditions had added
domestic consumption and others (such as Japan,
0.5% on to average annual US GDP growth during that
Germany, and China) produced to satisfy this demand;
period. In the absence of this positive “credit impulse,”

and with credit growth now restrained, the underlying Chart 2. Lower global trend growth and different
trend in real domestic demand growth will be significantly growth drivers in the future
lower in these countries going forward. The new world
we are likely to see will have smaller international current 6 % yoy
Forecast
account imbalances as investors will be more risk averse 5
and less inclined to distribute capital around the world to 4
fund imbalances. This means that countries will have to 3
better align their savings with their investment. 2
1
The consumer countries of the past will have to save 0
Global GDP
more in the future as the asset market downturns have -1
IC ontr.(pp)
destroyed household wealth. Other countries that could -2 EM contr. (pp)
eventually boost consumption to offset this increased -3 trend GDP
saving are unlikely to fill the new void in global 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
consumption for some time. Improvement of social
Source: IMF, DB Global Markets Research
security systems would go a long way to reduce
excessive household savings in EM countries (as it
reduces the need to have cash under the mattress for The financial crisis and economic volatility
medical emergencies and old age), but the development The deep freeze in the financial sector has pushed the
of such social security systems will take many years. economy into a state of dynamic instability. As credit
Higher private saving in the industrial countries will for a dried up, activity stalled, like an engine running out of oil.
time be offset by greater government dissaving. But as The powerful policy response—and notably the partial
fiscal support comes to an end, a trend toward slower revival of the credit markets—has imparted a positive
consumption growth in the previous engine of growth impulse to activity that is now running its course and
countries that is not offset by higher consumption growth could lead to higher growth in most industrial countries as
elsewhere will mean slower growth of aggregate demand 2010 wears on. However, when this impulse has run out
globally. Barring an unforeseen surge in new technologies and headwinds in the form of higher capital market rates
and investment opportunities, prospects for a supply-side and commodity prices (induced by the initial rebound)
driven pickup in trend growth seems unlikely as well. come up, growth could well falter again. This could
Indeed, the lingering effects of both an increase in happen as soon as late 2010, for example, at which time
protectionism spawned by the severe global downturn the US fiscal impulse would also be turning negative. The
and substantial increases in both taxation and regulatory slow-down could trigger a new impulse, and so on (see
oversight of business are likely to be further depressants Chart 3 below).
to the supply side of economic activity.
Chart 3. How to think about “recovery”: a
It seems therefore likely, that global trend growth will fall diminishing sine wave
below the levels reached in recent decades. In the 1980s,
global trend growth rose to about 3% on the back of Q 2 2010
GDP
supply-side reforms, including tax reduction, de-regulation, grow th
and privatisation. It then rose further in the 1990s and the
first half of the current decade to almost 4%, spurred by
globalisation and rapid technical progress (ICT revolution).
With these factors not improving further and with supply-
side policies (taxes, regulation, and protection) moving in
a less supportive direction, global trend growth could fall Q 2 2011
below the average attained even in the 1980s in the near- Q 1 2009
term future. In line with the OECD’s recent estimates, we

would tentatively put US trend growth at around 2%, Source: DB Global Markets Research
Japan at 1%, Europe at 1.5%, and EM at 4%, which
would move the global total to as low as 2-1/2%. Exit challenges will increase volatility.
The volatility in growth will be reinforced by the sheer
magnitude of the recent policy measures. In the US, the
expected federal budget deficit of 12% of GDP in 2009 is
at least double any deficit seen since WWII. Policy
interest rates have reached their lowest level in recent
history, and assets held on the balance sheet of the

Federal Reserve have more than doubled since last 1975 (when the Bundesbank adopted monetary targeting)
September. Stimulus of this magnitude is unprecedented, and 1989 (when the Berlin Wall fell) did not diminish its
and the process of removing it without upsetting reputation. The Fed, however, will need to be more wary.
economic activity will be challenging to say the least. The It has enjoyed substantial success and enhancement of its
uncertainties surrounding the exit strategies for these credibility since the 1980s. But it well remembers the high
unprecedented monetary and fiscal measures in the US cost to the economy during the early 1980s associated
(as well as those in other countries), heighten the chances with the establishment of that credibility. The Fed had to
that policy makers will move either too soon or too late or drive the economy onto a deep recession to deal with the
fluctuate between positions that are too contractionary double-digit inflation that had resulted from a decade of
and too expansionary. giving in to political pressure in the wake of the fiscal
excesses of the 1960s and the supply shocks of the
Post exit policy risk: inflation 1970s
Once the economy is eventually back on track, albeit a
slower one, lower trend growth will pose a problem for
the public and the private sector as well as for monetary Peter Hooper, (1) 212 250-7352
policy. For the public sector, low trend growth means Thomas Mayer, (44) 20 754-72884
sluggish tax revenue growth at a time when expenditure
is boosted by rising debt service payments and mounting
medical expenses and pension support for retiring baby
boomers. Rising levels of public debt will also put upward
pressure on real government yields, which will exacerbate
the debt problem both by raising debt service costs and
by slowing growth and further reducing tax revenues.
Political pressures on central banks will intensify to hold
interest rates lower, especially those like the Fed with
dual mandates. Placed between a rock and a hard place,
they will be forced to chose between allowing rates to
rise and both exacerbating the debt problem and missing
their employment objectives or holding rates lower and in
effect monetizing the debt and missing their inflation
objectives. For a time they may well hold firm to their
inflation objectives, arguing that in the long run that will be
best for employment as well, but the political pressure to
do otherwise will build if the debt problem is not
addressed in other ways. And some degree of inflation to
deal with the debt may become inevitable. It is even
possible that inflation could become a problem before full
exit has been achieved. Expectations of monetization of
the debt in the longer term could telescope the problem
forward to current inflation as the economy is recovering
even before all slack has been eliminated.
How high could inflation go in the longer-term? Probably

not very high. Central banks will make every effort to limit
the increase, even if they have had to give in for a time to
political pressure and employment objectives. History of
the US and UK in the 19th and early 20th century
suggests that even large public debt burdens resulting
from major wars were alleviated (in real terms) by
elevated single digit inflation rates over periods of several
years. Living with such inflation for a time need not
seriously impair the credibility of a central banks if that
credibility has been well established. In the 1970s and
1980s the Bundesbank had an inflation target of 2% and
was widely seen as one of the toughest and most
successful central banks of the world. That west German
inflation averaged 3.3%--1 ¼% above target—between

Geopolitics: The Dollar and Its Rivals
Suggestions that the global system might be better off Geopolitical Advantages of Providing the Dominant
replacing the dollar as the principal reserve and trading Reserve Currency
currency are not new. We can remember 1995 when the There are several advantages. First, if the bulk of
yen hit 80 and the yen and DM were regarded as international transactions pass through a particular
candidates to dethrone the dollar. Japan was not anxious currency, it can be used as a financial weapon. Payments
to accept the appreciation that this role implied, but the in dollars can and have been blocked and seized by the US
euro was born in 1999 as the first plausible competitor to as they pass through the dollar payment system. Banks
the dollar. By 2004, there were constant stories that providing services to proscribed clients under attack can
central banks were dumping the dollar and diversifying to be ruined, as Bank Delta Asia found out. Foreign exchange
its principal competitor, the euro, although these stories and other assets can be seized by the dominant currency
were premature. government in case of conflict, as happened to Iran. This
has been done many times by the US government
Five years later, we have moved on from the scenario of without having much impact on the subsequent demand
the dollar’s being replaced via diversification into the euro. for the dollar as a reserve currency. A country under such
Those countries most anxious for a successor to the dollar attack can keep its payments and assets in other
have leapfrogged the euro as the potential rival. Instead, currencies, and then bear the costs and inconvenience of
they have launched proposals to develop the SDR as a having to undertake extra currency transactions via agents
currency or even to explore a commodity currency. and not having the proper currency in which to cover
currency risk, but these are nuisance costs.
If they come to fruition, recent efforts to move away from
the US dollar as the dominant reserve currency have both Second, the supplier of the dominant reserve currency
geopolitical and economic implications. Once the dollar is can extract resources from other countries via sudden
just one of several competing reserve currencies, it will inflation. This forces other countries to replenish their real
become possible readily to discard it if it is again holdings of the reserve currency to cover their real needs.
financially mismanaged or used to extract excessive If expected, however, the resulting yield differential
geopolitical advantage. It is worth considering how likely should cover this cost. This is a problem especially for a
some of these proposed alternatives are and the impact country that fixes its exchange rate against the dominant
that each of them may have. currency, and it was regarded as especially acute at the
collapse of the Bretton Woods regime in 1971.
First, what are the geopolitical advantages of having the
key reserve currency? Second, what are some of the Third, the dominant reserve country, via intermediation,
motivations for moving away from the dollar? Third, what can acquire control of longer term assets in other
are some of the proposals to provide important countries financed by the short term reserve claims of the
alternatives? Fourth, are such alternatives viable threats to countries themselves through the national balance sheet.
the role of the dollar? These latter two possibilities are what President de Gaulle
complained about during the 1960s.
There is really no science of what drives a transition from
one dominant reserve currency to another. We have only Fourth, if its currency is widely acceptable, perhaps the
one empirical observation—the transition from sterling to dominant reserve country can get more resources during
the dollar from approximately 1920 through 1950—so any wartime, although this has more to do with
number of factors can individually explain such a shift. creditworthiness, geographical position and probability of
Characteristics of the real economy may be necessary victory than with providing a reserve.
conditions. These include the relative size of GDP, the
size, openness and liquidity of financial markets and the Fifth, the dominant reserve country is less subject to
ability of foreigners to access such liquidity, the stability of currency crisis emanating from abroad, since it prices a
the currency’s real value, and the trustworthiness of the large fraction of its international liabilities in its own
legal system. All these factors seem necessary for a currency. The reverse of this coin is that the dominant
currency to be used as one of the several subsidiary reserve country can trigger a financial crisis in a country
reserve currencies, but they do not single out the one that that denominates its domestic or cross-border debt in the
will be dominant. Based on the single transition that we reserve currency by cutting off access to credit and even
have observed, whoever has the dominant global navy is the payment system, as happened to Panama in 1988.
also perfectly correlated with who has the dominant
reserve currency.

Motivations of Some Countries that Want to Change The SDR

China and Russia are the most important countries that The search for an alternative to the dollar has spotlighted
have suggested finding a replacement for the role of the the SDR, either as a usable reserve currency or, more
dollar. Others such as Iran that have suffered from the practically, as a way to channel guaranteed lending to
conscious geopolitical sting of the dollar have also sought other emerging market countries through IMF-issued,
alternatives. The stated motivations of officials in China SDR-denominated bonds. In this way, surplus countries
and Russia have revolved partly around a perceived can still pump out savings to very high risk borrowers—
inability of the US or any other country alone to supply who may be the only ones remaining—but with
smoothly the growing demand for reserves. multilateral guarantees. They can then maintain current
account surpluses and the export driven growth policy. At
They also revolve around the recent financial instabilities the same time, political leverage can be acquired over the
associated with the dollar system. Among these are the upcoming quota and voting reapportionment at the IMF.
crash of the US financial system, the subsequent safe
haven runs into the dollar out of emerging market This use of the SDR lies partly within the post-1973 Fund
economies, and the potential for inflation or lack of financial role of intermediating between the financially
creditworthiness of the dollar stemming from US fiscal strong countries and the financially weak developing
policy. Unstated motivations include a desire to find a way countries during an adjustment program. But it is also
to keep their export surpluses flowing into industrial heavily influenced by a desire to shift the SDR back to its
economies in the face of a secular shift in consumer late 1960s macroeconomic roots of supplying a currency
demand. Another motivation for many is to subtract a key to satisfy official demands for reserves. The Fund would
underpinning to US geopolitical power during what may be a vehicle to channel and finance large scale macro
be only a temporary window of opportunity. balance of payments surpluses as in the old days, not just
a way to help finance small, macroeconomically
What Are the Alternatives to the Dollar? weightless economies fallen on hard times. The return of
this motivation has coincided with a sudden surge in the
The Euro resources allocated to the Fund in the form of SDR
Even before its birth, planners of the euro system allocations, bilateral loans and the sale of SDR bonds.
considered it a potential rival to the dollar as an
international currency, particularly for official reserves. As it now stands, the SDR itself is simply a unit of account
Although it has been highly successful as an international based on a basket of fixed amounts of dollars, yen,
currency, it has shifted only marginally the share of the sterling, and euros and used for Fund accounting
dollar in official reserves. From a low point of 54% in purposes and to define member financial claims and
1987, the share of the dollar rose to 59% in 1997 and to borrowing obligations. A country’s SDR allocation is an
64% in 2007. The euro’s share was 20% in 2003 and was unconditional, low cost line of credit from the other
26% in 2007. Of course, these shares fluctuate with the members, not actual reserves. A country may draw on its
exchange rate, but in many central banks’ exchange line in exigent situations, generally in a balance of
management, there has been an increased share of the payments crisis, when its reserves are being drained, but
euro in new purchases. Nevertheless, the surge in official it is not limited to this purpose. The country’s SDRs are
reserve holdings in the last six years has still meant an then allocated by the Fund to other members in exchange
enormous dollar acquisition. for an equivalent value amount of some or all of the
component reserve currencies, which the country can
Given its status as dominant reserve currency in waiting, it then spend. Other things equal, an increased credit line
is noteworthy that those countries most dissatisfied with would substitute for precautionary official reserves and
the dollar have not as a group shifted their holdings reduce any prior desire to accumulate more through
substantially to the euro, with Russia an exception. In current account surpluses. But other things are not equal.
particular, they are not boosting the euro as the primary The magnitude of the current crisis has proved that the
alternative. This may be because no one currency is large larger the reserve holdings the better. A larger SDR
enough to accommodate the enormous global demand allocation may only offset somewhat but not quench a
for reserves without disruption. It may also be that, general desire to accumulate more reserves coming out
however maligned the inflationist tendencies of the Fed, of the crisis.
the euro is the reserve currency whose internal cohesion
has been frequently questioned during this crisis and The Fund’s programs usually provide a conditional credit
whose possible disintegration arises regularly in public that can be funded via member quotas, through loans to
discussion. Therefore, moving from the dollar to the euro the New Agreements to Borrow or General Agreements
may be the leap from the frying pan to the fire. to Borrow facilities, or now through IMF bonds and
bilateral commitments. The recent $100 billion bilateral
loan from Japan and the $108 billion about to be

authorized by the US will also be denominated as SDR a country that fixes an undervalued exchange rate against
obligations, when drawn. However, the funds will be the dollar attempts to diversify its reserves. 1 Our
delivered by the lending countries only when drawn as conclusion was that the central bank can indeed diversify
specific programs require funding and disbursement of its reserves away from the dollar in the sense of
the underlying currencies—the IMF keeps no liquidity on increasing the share of other currencies in its holdings.
hand for this purpose. Thus, the currencies supplied by But it does so at the price of appreciating its own currency
the lenders are themselves being demanded by the against the dollar. This happens because the now excess
creditors of the borrowing countries. Any serious impacts supply of dollars tends to depreciate the dollar against all
on exchange rates between reserve currencies that currencies including its own. If it does not want to
constitute the SDR basket depend on the size of the abandon the policy of fixing its dollar exchange rate, it will
program and the currencies that a country’s creditors are have to intervene to buy up some of the dollars it just
demanding vs. those that the Fund is delivering. delivered to the market. Diversification can be had at the
price of holding even more reserves.
The story is exactly the same for lending to the Fund via
bonds, as China, Brazil, and Russia want to do. The bonds This also results when a country diversifies indirectly by,
will be issued by the Fund only as the funds are needed for example, buying an SDR bond for dollars. The dollars
for program lending. Again, they may come in as dollars are disbursed and spent by the recipient country. At old
from the lending countries. They will go out in the same exchange rates, the markets have an excess of dollars, so
way to the borrowers, with both ends denominated at the the dollar tends to depreciate against all currencies. So
Fund in SDR equivalent values. The lenders get to the country must buy back some of the dollars and
diversify the currency denomination of their reserves—at expand reserves still more to keep its peg intact. The
the cost of acquiring an illiquid bond. Or they may be effect should be less pronounced than a direct
making a vague buy-in of larger quotas and voting power diversification because, as stated above, the SDR bond
at the Fund in some future negotiation. Again, the impact will be purchased only in the midst of a crisis for a
on exchange rates among the basket currencies depends member country in which the private sector is demanding
on which currencies are desired by the creditors who are to acquire some of the crisis country’s reserves
running out of the borrowing countries.
A Commodity Basket Currency
Private SDR Finally, there have been suggestions of fixing the value of
Finally, there is a possibility that all this activity in the a currency unit against a commodity basket and pricing
official SDR is simply a precursor to developing a full- goods against this currency. This is entirely possible, but
fledged SDR that the private sector may use. This would there is a reason that commodity currencies were
involve the establishment of bank deposits and private abandoned forty years ago. Such a currency, being a sub-
paper denominated in SDR, a clearing and settlement basket of the general price index with its own volatile
system, and a formula for overnight inter-bank interest cyclical properties, would have a pro-cyclical real value. In
rates. In the private ecu, the precursor to the euro, we boom times, when the relative price of commodities rise
have a recent example for how such a system would dramatically because of their increased scarcity and price
work. However, the ecu was always envisioned as inelasticity, the money price of all other goods has to
ultimately being exchanged into the euro or whatever the fall—i.e. there is a general deflation. In depressed times,
single currency was to be called, so there was a when the demand and relative price of commodities
mechanism for basing its value on a real demand for collapse, there will likely be a general inflation. Maybe, the
money. Unless someone were to guarantee the world will split into this sort of hard currency bloc and
conversion of private SDRs to the basket, this would not industrial country floaters, but it is hard to envision. This
be true of the “SDR system”. Also, it should be would be good news for producers of commodities that
remembered that “private ecu”, short term ecu are in the basket. If there is a hard peg, the need to
denominated paper actually issued by various national warehouse stocks of the basket for delivery would create
governments, were counted among official reserves. Such an extra real demand for the commodities, and the
paper constituted twenty percent of the official reserves commodities in the basket would have their nominal
of the UK and Italy. When the ERM crisis came in 1992, volatility eliminated. The bad news is that such a standard
attempts to sell ecu paper to support their currencies inevitably would be run, as anyone who has analyzed the
caused a collapse of liquidity in the ecu market, which dynamics of a commodity standard knows. Alternatively, it
made them useless. The lesson is that abstract, artificial may not be a hard peg but simply a guideline like the
currencies provide only illusory reserves. more general inflation targeting schemes now vaguely or
Some Diversification Issues

In the last round of serious discussion about reserve 1
“Asian Reserve Diversification: Does It Threaten the Pegs?”
diversification in early 2004, we explained what happens if Deutsche Bank, Global Markets Research, Feruary 2004.

explicitly embraced by many countries. Then there is no renminbi, or reals for exports and payment in these
need to warehouse commodities, but the system is just currencies. For this to happen, of course, currencies and
as likely to be met with skepticism in a major crisis as the financial facilities would have to be made readily available
inflation targeting guidelines have been in this one. to traders within the group.
Ekaterinberg Conference One could interpret this as a process of elimination of

The mid-June meeting of the BRICs at Ekaterinberg controls, especially for the renminbi, in which case the
includes some discussion of their attitude to the future renminbi itself can gradually be prepared to serve as an
role of the dollar. Of course, China and Russia have international currency. However, with fewer controls,
recently been the most vocal in proposing possible China may lose the ability to keep the currency
innovations in the international monetary system. An undervalued, which can undermine its export driven
increased use of their own currencies in trade with each development policy and its surpluses.
other appears to be the direction in which these countries
are moving for now. This would mean pricing in rubles, Peter Garber, (1) 212 250-5466

Commodities: Investment Flows & Fundamentals
• We believe underlying fundamentals of supply oil price. As a result, and assuming stability in the equity
and demand in the oil market remain weak. to oil price correlation going forward, a 100 point drop in
However, we believe commodities in general and the S&P 500 towards 850 would tend to pull oil prices
oil in particular have benefited from a USD14/bbl lower towards USD55/bbl, while the S&P500
combination of macro forces including rising at over 950 would supports oil price at USD65/bbl.
equity markets, a weakening in the US dollar and
a resurgent flow of funds into commodities. Figure 1: Crude oil prices & the S&P500
• Since August 2008, oil prices have shown a strong
link to movements in the S&P 500 index. Every 50 Index S&P500 (lhs) USD/ barrel
point move in the S&P 500 seems to have been 1500 160
WTI crude oil price (rhs)
worth about a USD7/bbl move in the WTI price. 1400 140
• US dollar depreciation tends to coincide with 1300
120
soaring commodity prices. For example, oil’s 1200
move from USD35/bbl in February to around 1100 100
USD65/bbl today coincided with EURUSD rising 1000 80
from 1.26 to 1.41. 900
60
• The more upbeat assessment of world economic 800
outlook has been accompanied by a surge in 700 40
inflows into commodity ETFs/ETNs. Today assets 600 20
under management in Powershares commodity Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
products registered in the US are greater than the
peak in 2008 when some commodity prices such Source: Deutsche Bank
as crude oil were trading at more than double
current levels.
Oil prices & the role of the US dollar
• While equity markets have been responding to We believe the weakening US dollar has also played a role
increasingly positive sentiment on the economic
in boosting crude oil price. Figure 2 shows the relationship
outlook, we remain somewhat skeptical of the
between the US dollar and crude oil prices. According to
quick recovery hypothesis.
the IMF, over the past 20 years, commodity prices have
• According to the IMF, over the past 20 years,
generally been negatively correlated with the US dollar,
commodity prices have generally been negatively
and this is particularly true for oil and gold.
correlated with the US dollar. Although our three-
month outlook allows for further weakening, our
one-year view suggests a stronger US dollar. Figure 2: Oil & the US Dollar
• We believe US growth needs to turn positive by
EUR/ USD USD/ barrel
September 2009 to justify the rally in global 1.6 160
equity markets and to sustain inflows into
140
commodity ETFs. If US growth disappoints and Stronger
1.5
the S&P500 has to push back the date of a US 120
US dollar
recovery we believe the rapid surge in commodity 100
price returns will reverse. 1.4
80
• Although oil prices appear likely to average
USD75/bbl in H2 2009, we see a USD55/bbl 60
1.3 EUR/ USD (lhs)
average in 2010 and then a jump to USD80/bbl in 40
WTI oil price (rhs)
2011.
1.2 20
• Natural gas prices have been more accurately
reflecting weak near-term fundamentals, but Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09
should also rise sharply n 2011 Source: Bloomberg, Deutsche Bank
We find that since August 2008, oil prices have become

strongly positively correlated with the performance of the The IMF identified a number of channels through which a
US stock market. Based on the historical correlation, we fall in the nominal effective value of the USD can raise
estimate that for every 50 point move in the S&P 500 commodity prices
index it is worth about a USD7/bbl move in the WTI crude

• Purchasing power and costs because industrial infrastructure spending, which has boosted commodity
metals, bulk materials and grains are most often demand. Second the tightening in credit conditions over
priced in USD terms. the past two years has also led to a significant reduction
• Asset plays because a falling USD reduces returns in capital expenditure for mining and oil exploration
on dollar-denominated financial assets in foreign companies. We estimate that in the absence of new
currencies, making commodities attractive as an investment and given depletion rates for existing oil wells
investment class the global oil production base will fall from 86mmb/d to
• Monetary policy because a sinking dollar results in 75mmb/d by 2015. We believe this has only enhanced the
monetary easing outside the US, and this, in turn, upside price risks for crude oil heading into the next
results in demand stimulus. decade. Finally the expansion of the Fed’s balance sheet
and the surge in government borrowing has raised
Although Deutsche Bank believes that the near-term concerns about higher inflation ahead. We believe this has
prospects for the US dollar are for more weakening and enhanced the appeal of commodities as a distinct asset
EURUSD rising to 1.50, our one-year view calls for this class given their inflation protection properties.
weakness to be partly reversed.
Conclusion
Oil prices & the role of investors We believe the run-up in commodity price returns may
However what may prove to be the most important factor require more convincing evidence of positive growth
driving crude oil prices could be investor flows. We returning in the US. Indeed we believe events today are
believe that the collapse in commodity prices during the reminiscent of early 2008. At that time, we likened
second half of last year has provided investors with a new commodities to the Greek Sirens as commodities were
opportunity to gain exposure to commodities. As shown singing an alluring melody to global investors given the
in Figure 3, we find that Assets under Management poor performance of traditional asset classes. We fear
(AUM) of Powershares ETF/ETN commodity products that if demand falters in China or does not recover
registered for sale in the United States have risen to a strongly in the US, the rapid inflows into commodity ETFs
new all time high over the past month. Indeed total AUM could quickly reverse.
on the Powershares ETF/ETN platform is greater now than
it was at the peak of 2008 when the crude oil price was Figure 4: DB oil and gas price deck (internal only)
trading above USD140/bbl. Although this represents only
a small share of total AUM in commodity ETFs it may WTI Brent US Gas
provide a proxy for overall fund flows into the complex (USD/bbl) (USD/bbl) (USD/mmBtu)
Q1 2009 43.3 45.7 4.47
Figure 3: Commodities ETF & ETN investments Q2 2009 61.0 60.0 3.80
Q3 2009 75.0 75.0 4.00
9 Assets under management for commodity
Q4 2009 75.0 75.0 4.75
8 ETFs/ETNs (USD bn)
2009E 63.6 63.9 4.25
7
2010E 55.0 55.0 6.00
6
2011E 80.0 80.0 8.00
5
4 Source: Bloomberg, Deutsche Bank (this price deck become public on June
26, 2009
3
2
1 Michael Lewis, (44) 20 7545-2166
0 Adam Sieminski, (1) 202 250 2928
Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09
* We track AUM of Powershares products registered for sales in the

United States
Source: Bloomberg (Data as of End May 2009)
We believe the financial crisis has introduced some

compelling reasons for the increasing appeal of
commodities over the medium term. First, aggressive
fiscal action has included a significant increase in

US: Robust recovery remains elusive

The strong recovery in equity and credit markets, which has 1. Job losses in the current cycle have been substantial
led to an improvement in various measures of consumer
% chg. Cumulative change in nonfarm payrolls from the % chg.
and business sentiment—evident from consumer 4 start of recession 4
confidence, purchasing manager, homebuilder and small 3 average of post-WWII recessions 3
business surveys—has taken sharp downside risks out of 1974-75 recession
2 1981-82 recession 2
the outlook. The bankruptcies within the motor vehicle 1 Current recession 1
industry also proceeded without much disruption. Since 0 0
March, two important catalysts for the improvement in -1 -1
sentiment have been more aggressive quantitative easing -2 -2
by the Fed and the successful resolution of financial stress -3 -3
tests. These tests restored market confidence, which had -4 -4
-5 * number of months since recession began -5
begun to discount large swaths of financial sector
nationalization. While troubled assets still remain on bank 0 4 8 12 16 20 24 28 32 36
balance sheets, the tests allowed banks to raise significant
Sources: DB Global Markets Research
amounts of capital—there has even been some early
repayment of government funds. In light of the dramatic 2. Temporary employment trend points to further
shift in market psychology, further dramatic tightening in layoffs
credit conditions is highly unlikely, hence second half % yoy Employees on nonfarm payrolls % yoy
growth prospects have improved over the last few months. Temporary help services, 6m lead (lhs)
20 Total nonfarm payrolls (rhs) 4
We had been looking for the economy to shrink throughout
the year, albeit at a significantly slower pace. Instead, we 10 2
now expect the economy to bottom out next quarter and for
0 0
real GDP to register a positive increase by Q4. However,
the economy will remain fundamentally soft for the -10 -2
foreseeable future. The labor market has not yet bottomed,
household buying power is negligible and consumers are -20 -4
highly leveraged with little access to credit. Consequently,
-30 -6
we do not expect the ensuing economic recovery to be
robust. In fact, we are projecting the mildest recovery in the 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
post-WWII era. In this environment, economic slack will
remain ample. While we are not projecting deflation, we see
inflation risks as minimal given the amount of spare capacity
in the economy.
Macro-economic activity & inflation forecasts
E c o n o m ic a c tiv ity 2 00 9 2 01 0 2 00 8 2 00 9 F 20 1 0 F
( % q o q , sa ar) Q 1F Q 2F Q 3F Q 4F Q 1F Q 2F Q 3F Q 4F % yo y % yo y % yo y
GDP -5 .5 -2 .0 0 .0 1.0 1 .1 1 .8 2 .3 2.8 1 .1 -2 .8 1.2
P r iva t e c on s u m pt ion 1 .4 -1 .8 0 .0 0.7 1 .0 1 .3 1 .8 2.0 0 .2 -1 .2 0.9
In ve s t m en t -48 .9 -5 .8 -3 .8 1.2 0 .1 7 .4 8 .3 1 0.2 -6 .7 -2 1 .3 2.4
G ov’t c on s u m pt ion -3 .1 4 .1 5 .7 5.9 4 .8 2 .2 2 .2 2.8 2 .9 2 .2 4.1
E xport s -30 .6 -8 .0 -6 .0 -1.0 3 .0 5 .0 6 .0 7.0 6 .2 -1 4 .4 1.3
Im por t s -36 .4 -5 .0 0 .0 5.0 6 .0 6 .0 7 .0 8.0 -3 .5 -1 5 .2 4.6
C on t r ibu t ion (pp): S t oc ks -2 .1 1 .6 0 .7 0.7 0 .7 0 .2 0 .4 0.4 0 .1 -0 .1 0.6
N e t t r a de 2 .3 -0 .2 -0 .7 -0.8 -0 .5 -0 .3 -0 .3 -0.4 -0 .5 0 .6 -0.5
In du s t r ia l pr oduc t ion -0 .5 -7 .6 -0.4
U n e m ploy m e n t r a t e, % 8 .1 9 .1 9 .6 1 0.0 10 .2 1 0 .4 1 0 .1 1 0.0 5 .8 9 .2 1 0.2
P ric es & w a g es ( % yo y )
CP I -0 .2 -0 .8 -1 .6 0.8 1 .4 1 .0 0 .3 0.4 3 .8 -0 .5 0.8
C or e C P I 1 .7 1 .6 1 .2 1.3 1 .1 1 .0 0 .9 0.8 2 .3 1 .4 1.0
P r odu c e r pr ic e s -2 .2 -4 .2 -5 .7 -0.7 0 .3 -0 .7 -2 .0 -1.7 6 .4 -3 .2 -1.0
C om pe n s a t ion pe r em pl. 4 .1 4 .6 3 .9 3.4 2 .7 2 .2 1 .7 1.2 3 .7 4 .0 2.0
P r odu c t ivit y 1 .9 1 .5 1 .5 2.0 1 .6 0 .6 -0 .4 -1.2 2 .8 1 .7 0.2
Sources: National authorities, DB Global Markets Research


The labor market has not bottomed. Over the last year, 3. The unemployment rate is still trending higher
payrolls are down nearly 4% which translates into slightly Thousand %
more than 5 million workers. Historically, recessions end Continued unemployment insurance claims (lhs)
approximately one month before the annual change in Unemployment rate (rhs)
7500 10
payrolls bottoms. Therefore, when the rate of decline in
9
nonfarm payrolls slows, it is almost certainly an indication
6000 8
the recession is over. One of the best leading indicators of
the labor market is temporary (temp) workers; this series 7
measures the number of people working through a 4500
6
temporary employment agency who do not have a
5
permanent job position. Temps have been an excellent 3000
leading indicator of future labor demand, because in the 4
past when companies were on the cusp of a big hiring 1500 3
spree, the rise in hiring would normally be preceded by a
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
pickup in temp hiring. At the moment, the trend in temps
is pointing definitively downward. Based on its lead time,
the trend in temps strongly suggests that a bottom in the Sources: DB Global Markets Research
labor market is at least six months away. This suggests to
us the recession is not over—the trend in temps has to 4. The lack of buying power is dampening spending
reverse. When the current recession ends, the initial Chg. yoy, USD bln Chg. yoy, USD bln
economic recovery is projected to be the weakest on Household buying power (lhs)
record. Nominal consumption (rhs)
3000 600
High interest rates were not the problem. Every
recession prior to the current episode was preceded by 2000 400
tight monetary policy. That has not been the case in the
current downturn, when real interest rates were never high 1000 200
to begin with. In the current cycle, the real fed funds rate
never got above 3%, whereas ahead of past downturns, 0 0
the real fed funds rate, on average, rose to 5%.
-1000 -200
Additionally, the real fed funds rate started moving down
six months before the recession began, whereas in past
-2000 -400
cycles it did not begin moving downward until just two
months before the recession. Since interest rates were 1983 1988 1993 1998 2003 2008
never particularly high before the onset of the current
recession—if anything the price of credit and credit
conditions were excessively accommodative—the traction Sources: DB Global Markets Research
from lower interest rates is not likely to be as great in the
current cycle as if rates were higher at the onset. 5. Weak consumer spending means weak GDP
Household buying power is crimped by a couple of factors, % Ratio of PCE to GDP %
74 74
and leverage remains extraordinarily high. Households can
fuel consumption either through their existing cash flow or 72 72
through borrowing, which can consist of tapping existing
lines of credit, such as credit cards, or by borrowing 70 70
against the value of their home through home equity lines 68 68
of credit or cash-out refinancing. Over the last few years,
buying power has been dominated by changes in 66 66
homeowner equity, which are determined by changes in
64 64
home prices. However, homeowners’ equity began
declining in 2006 after home prices started to weaken and 62 62
then went into free-fall in 2007 when home price declines
accelerated to the downside. With the housing inventory 60 60
glut not fully liquidated, further price weakness is likely in 1960 1966 1972 1978 1984 1990 1996 2002 2008
store—at least into 2010.


Deleveraging is the operative word. We believe the 6. The savings rate is likely to continue to rise
need for households to deleverage is apparent from the
% Personal savings rate (lhs) Ratio
ratio of household liquid assets to total household Household net wealth to income ratio ( inverted axis,rhs)
liabilities. Liquid assets are defined as the sum of bank 14 3.5
deposits, credit market instruments, mutual fund shares 12
and corporate equities. These instruments are considered 4.0
to be liquid since they can easily and quickly be converted 10
4.5
to cash. As shown in the chart, the cushion between 8
assets and liabilities is shrinking, suggesting households 6 5.0
are more financially stressed than ever before. All else 4
being equal, this is negative for the path of consumer 5.5
spending, which now accounts for a record high 72% of 2
6.0
expenditures-based output. While we do not know where 0
the tipping point is for households, the current trend in the -2 6.5
liquid assets to liabilities ratio cannot persist indefinitely or
1952 1959 1966 1973 1980 1987 1994 2001 2008
else all US households would effectively become
insolvent.
The ratio of liquid assets to liabilities was relatively Sources: DB Global Markets Research
constant from 1980 to 1996, averaging 2.2 times liquid
7. Household balance sheets remain under pressure
assets to liabilities. At the 2000 equity market peak, liquid
assets were nearly three times the size of liabilities. When Ratio Liquid assets to liabilities Ratio
3.0 3.0
the stock market collapsed, the ratio plunged, stabilizing at
1.7 in 2003. It edged higher before peaking in Q1 2007 and
has been in freefall since, with liquid assets down $4.6 2.6 2.6
trillion and liabilities up $0.6 trillion over this period. By Q4
2008, liquid assets were only 1.4 times liabilities. We do
not yet have official data for Q1, but we estimate the ratio 2.2 2.2
fell further because equities account for slightly more than
40% of liquid assets. With stock prices down nearly 12%
last quarter relative to the end of Q4 2009, we estimate 1.8 Liquid Assets = deposits,credit market 1.8
that liquid assets—holding all of the remaining instruments, mutual fund shares and
components constant at their Q4 2008 values—declined to corporate equities
just 1.3 times total liabilities. An important question is what 1.4 1.4
it would take to restore equilibrium in the household 1980 1984 1988 1992 1996 2000 2004 2008
sector.
Expect deleveraging to be slow and ongoing. We Sources: DB Global Markets Research
estimate equilibrium in the ratio is around 2.2 times liquid

assets to liabilities, the average in the ratio over the entire
8. There is little evidence of an inventory snapback
period, spanning 1980 to 2008. Basically, an elevated ratio
from 1997 to 2001 is offset by a depressed ratio from Hours USD bln
Average weekly hours: manufacturing (lhs)
2002 to 2008. Assuming that household liabilities are
Real change in private inventories (rhs)
constant over the next four quarters, household liquid 42.0 120
assets would have to increase by $11 trillion over the next
41.5 80
year to produce a 2.2 ratio. If half of this increase comes
from equities, we would need to see roughly a 63% 41.0 40
increase in stock prices from their 2008 yearend value,
which would translate into approximately 1470 on the S&P 40.5 0
500 index. 40.0 -40
If, however, we assume that household liabilities decline
6% this year, which is pretty aggressive since it is 10 39.5 -80
times the decline seen in 2008 (the only annual decline on 39.0 -120
record), household liquid assets would have to increase $9
trillion over the next year. If half of this increase comes 1988 1992 1996 2000 2004 2008
from equities, we would need to see roughly a 51%
increase in stock prices from their 2008 yearend value,
which would translate into approximately 1365 on the S&P Sources: DB Global Markets Research
500 index.


This seems pretty optimistic to us presently. Therefore, 9. Rising slack will keep downward pressure on prices
barring a massive equity market rally from current levels, % yoy %
we believe the most likely way for the ratio to return to CPI (lhs)
equilibrium is through the following means: One, a process Unemployment rate/ Capacity utilization (rhs)
16 0.150
of gradual asset accumulation, some of which may come 14
through higher asset values, but much of which will come 12 0.125
through asset accumulation via higher household savings. 10
Two, negligible growth in liabilities may be forced upon US 0.100
8
households via restrictive lending standards. Either 6
0.075
scenario is inhibitive toward economic activity. 4
2 0.050
Against the backdrop of extremely modest economic 0
growth, the unemployment rate is likely to stay elevated -2 0.025
and the capacity utilization rate is likely to remain low. This 1969 1974 1979 1984 1989 1994 1999 2004 2009
should mitigate pricing power in both the labor and
product markets. Typically, prices recover during inventory Sources: DB Global Markets Research
building periods as capacity constraints arise. Moreover, 10. The slowdown in credit growth needs to reverse
with growth in private credit creation having collapsed—it
has grown only about $700 billion over the last year, the Diff. yoy, USD bln Credit market debt Diff. yoy, USD bln
All sectors minus government
smallest increase since 1994—the ingredients for a cyclical 4500 4500
lift in inflation (capacity constraints and abundant credit
3750 3750
growth) are not present. The Fed’s balance sheet
expansion has, at best, offset the collapse in private sector 3000 3000
credit, but it has not expanded to a degree which could
spur inflation. Our forecast of slow, uneven, sub-par 2250 2250
growth means that it will take some time before economic 1500 1500
slack is meaningfully absorbed. As a result, we are likely to
see further disinflation pressures in the economy until the 750 750
pace of growth returns closer to its longer-term trend. 0 0
1953 1960 1967 1974 1981 1988 1995 2002 2009
External balances & financial forecasts

2008 2009F 2010F Financial forecasts Current 3M 6M 12M
Official 0.25 0.25 0.25 0.25
Fiscal balance, % of GDP -3.2 -13.4 -7.6 3M rate 0.60 0.60 0.60 0.60
Trade balance, USD bn -696 -374 -441 10Y yield 3.55 4.00 4.00 3.50
Trade balance, % of GDP -4.9 -2.6 -3.0 USD per EUR 1.41 1.30 1.20 1.18
Current account, USD bn -706 -381 -450 JPY per USD 96 100 105 103
Current account, % of GDP -4.7 -3.5 -3.0 USD per GBP 1.65 1.44 1.33 1.42
Source: DB Global Markets Research, as of June 26
Joseph A. LaVorgna, (1) 212 250-7329

Carl J. Riccadonna, (1) 212 250-0186

Japan: Initially V-shaped production recovery

Broader signs of stabilizing economic activity 1. Leading index of the business cycle turned upward
• Our leading index of the business cycle has finally
CY2005=100 Jan 1995=100
recovered for two straight months to April. This sign of 115 115
stabilizing economic activity is gaining traction to areas 110 110
including consumer/business surveys, inventories, 105 105
exports and monetary aggregates. 100 100
Initially V-shaped production recovery 95 95
• Japan’s production fell 34% from Q1 2008 to Q1 2009, 90 90
out of which we estimate -12pp due to global 85 85
recession, -10pp to substitution from imports to 80 80
75 Leading index: DBCLI-ECONOMY (rhs) 75
domestic production at importing countries, -3pp to
70 Industrial production (lhs) 70
JPY appreciation and another -10pp to an excessive
response of manufacturers to cut production. This 65 65
Japan-specific last 10pp fall would disappear quickly in 90 92 94 96 98 00 02 04 06 08
Q2 and Q3 to result in an initially V-shaped production
recovery. Sources: METI, DB Global Markets Research
• However, a new equilibrium demand for production 2. Production and investment could diverge
would be permanently lowered by the first two factors 120 CY2005=100
Forecast
above (total of -22pp) and its growth should be slower
110
than before. We do not expect this initially V-shaped
100
production recovery to last beyond Q3.
Disparity between production and capital investment 90
• Since low capacity utilization does not seem to quickly 80
disappear, a sense of excessive capacity would prevail, 70
which leads to delayed capital investment recovery well 60 Industrial production
after production recovery. 50
Real private capital investment
• Capital investment recovery at capacity utilization index 40
below 90 (CY05=100) is unlikely. 30
• Production is likely to show another (albeit small) round
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
of decline in Q4 2009 and Q1 2010 given too
aggressive production recovery by then. Sources: Ministry of Economy, Trade and Industries, Cabinet Office, DB Global
Markets Research

Economic activity 2009 2010 2008 2009F 2010F
(% qoq, saar) Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F % yoy % yoy % yoy
GDP -14.2 -2.5 0.5 3.1 -0.4 -1.5 0.3 2.2 -0.7 -7.0 0.3
Private consumption -4.2 2.0 -3.1 -0.6 -0.6 -1.8 0.8 0.8 0.6 -1.9 -0.7
Investment -29.3 -15.5 -7.3 -6.2 -6.5 -1.6 0.4 4.5 -4.8 -17.4 -4.8
Gov’t consumption 0.1 1.6 1.6 1.6 1.6 1.6 1.6 1.6 0.8 1.5 1.6
Exports -70.0 33.3 16.3 6.9 6.3 6.4 7.5 7.5 1.9 -29.0 9.3
Imports -47.8 -6.3 4.3 -2.6 -3.2 -2.5 9.8 6.6 0.9 -14.0 -0.1
Contribution (pp):
Private inventory -0.6 -5.9 1.2 2.3 -0.4 -1.5 0.2 1.3 -0.2 -0.5 -0.1
Net trade -8.3 4.0 1.5 1.1 1.1 1.1 0.0 0.3 0.2 -3.1 1.1
Industrial production -63.2 28.2 17.0 -9.6 -4.9 6.1 9.3 9.3 -3.4 -26.0 3.1
Unemployment rate, % 4.5 5.3 5.7 6.0 6.1 6.1 6.0 6.0 4.0 5.3 6.0
Prices & wages (% yoy)
CPI -0.1 -0.7 -1.5 -0.8 -0.2 -0.4 -0.6 -0.9 1.4 -0.8 -0.5
Core CPI -0.1 -0.6 -1.6 -0.6 -0.2 -0.4 -0.6 -0.9 1.4 -0.7 -0.5
Producer prices -1.5 -5.1 -6.6 -2.1 0.1 0.4 -0.9 -1.3 4.6 -3.9 -0.4
Compensation per empl. -2.3 -2.7 -3.6 -3.8 -3.3 -1.9 -0.8 0.1 0.4 -3.1 -1.5
Productivity -3.4 -4.5 -4.3 -0.6 1.6 1.7 1.3 0.8 0.6 -3.2 1.3

Japan: Initially V-shaped production recovery

Export-led recovery tends to slow in the 2nd year 3. Industrial production in past economic recoveries
• Comparisons of initial phases of the past production
:
recovery shows that recoveries remain V-shaped in the
2nd year when led by robust domestic demand (1970s- 125 Trough month of production = 100
80s), but the speed of expansion slows when led by Mar-75 Jul-77
120 Oct-82 Aug-86
external demand (1990s-2000s). 1970s - 80s
Jan-94 Aug-98
• We expect the economy to follow another export-led
115 Nov-01
recovery, no matter how fragile.
Government stimulus packages 110 1990s and
• We estimate that JPY6trn (1.2% of GDP) would be later
additions to GDP from the government packages. 105
• A JPY2trn cash handout, rebates on the purchase of
environment-friendly consumer electronics, and tax 100 months; t = 0 at trough
cuts on auto purchases are likely to be more than fully month of production
offset by inventory drawdown in Q2. 95
• Effects of fiscal stimulus wear off after nine months. -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24
• GDP growth, unlike production, is likely to remain Sources: METI, DB Global Markets Research
largely flat QoQ through Q2 2010.
Limited monetary policy responses
4. Falling potential growth lowers investment-GDP ratio
• The Bank of Japan introduced i) higher monthly outright
purchases of JGBs (JPY1.8trn), ii) subscription of % of nominal potential GDP %
subordinated loans of commercial banks (max JPY1trn), 24 Nominal private capital investment (lhs) 6
iii) purchases of corporate bonds (max JPY1trn), CP and 22 Potential growth (rhs)
5
ABCP (max JPY3trn), and equities (max JPY1trn). But
20
their total assets have expanded only by 3% of GDP 4
since Sep-08, the smallest among major central banks. 18
• We expect no additional easing measures. 3
16
Risks & political time table
2
• JPY depreciation and strong overseas recovery would 14
result in better recovery in Japan. 12 1
• Lower House election in Q3 2009 could change the
ruling parties. 10 0
70 75 80 85 90 95 00 05
Sources: Cabinet Office, DB Global Markets Research

2007 2008 2009F 2010F 5. Unemployment rate and GDP gap
M2 + CD growth, % 1.6 2.1 2.6 2.5 7.0 % % -12
Fiscal balance, % of GDP -2.0 -4.4 -6.6 -7.6 Unemployment rate (lhs)
6.5 -10
Public debt, % of GDP 163.3 170.5 187.8 0.0 Forecast
6.0 GDP gap (rhs)
Trade balance, USD bn 106.7 38.9 32.7 104.5 -8
Trade balance, % of GDP 2.4 0.8 0.7 2.2 5.5
-6
Current account, USD bn 211.0 156.8 123.1 205.7 5.0
Current account, % of GDP 4.8 3.2 2.6 4.4 -4
4.5
Financial forecasts Current 3M 6M 12M -2
4.0
Official 0.10 0.10 0.00 0.00
3.5 0
3M rate 0.55 0.70 0.70 0.70
10Y yield 1.40 1.60 1.50 1.40 3.0 2
JPY per USD 96 100 105 103 01 02 03 04 05 06 07 08 09 10 11 12
JPY per EUR 134 130 126 121
Sources: National authorities, DB Global Markets Research, as of June 26 Note: GDP gap = (Actual GDP – potential GDP)/potential GDP (%)
Sources: BoJ, Ministry of Internal Affairs and Communication, DB Global
Markets Research
Mikihiro Matsuoka, (81) 3 5156-6768

Euroland: Constrained expectations

Outlook: Although we have revised up the near-term 1. A modest but temporary recovery is approaching
outlook for growth, we question the medium-term
sustainability of the euro area recovery. To resurrect growth, Euro Area: contribution to % qoq growth
2
more needs to be done to help deal with its banks’ troubled
assets. The ECB has put in place a very accommodative 1 Forecast
financing regime for banks, but bank solvency falls on
national governments. They in turn worry about already 0
stretched public balance sheets. In the absence of a more
effective solution for banks, recovery expectations will -1
remain constrained. Weak recovery prospects means a Consumption Government
near-term downside risk to inflation and little reason for an -2 Investment Stocks
early reversal out of the ECB’s accommodative stance. Net trade GDP
Growth: Since the last WO we cut our 2009 GDP forecast -3
to -4.3% (from -3.4%) and upgraded our 2010 call to +0.8%
2004 2005 2006 2007 2008 2009 2010
(from +0.3%). The 2009 downgrade was due to a weaker
than expected Q1. Surveys and real data say the contraction
Sources: Eurostat, DB Global Markets Research
is easing substantially in Q2 and we now expect GDP to be
positive in Q3. An easier rate of destocking combined with a 2. Declining employment and weak income will weigh
period of imports underperforming exports – a reversal of % yoy % yoy
the trend of recent quarters – will boost GDP growth. 10 3
However, we expect domestic demand to remain Forecast
8 2
embattled. Private investment spending is contracting in line
with plummeting capacity utilization; government stimulus 6 1
plans will see public investment compensate but not offset
4 0
the drag from private investment. Private consumption was
very weak in Q4’08 and Q1’09. The success of car 2 -1
scrappage schemes should help stabilize consumption 0 -2
temporarily near-term, but rapidly falling employment and Compensation of employees (lhs)
slowing compensation gains means a consumer recovery is -2 -3
Compensation per employee (lhs)
distant. Thus, after temporary, modest GDP growth in the -4 Employment (rhs) -4
near-term, we expect GDP to subside through 2010. Higher 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
commodity prices, rising yields, weak household income
and anticipated fiscal consolidation—keeping high savings
rates underpinned— are expected to weigh on the recovery Sources: Eurostat, DB Global Markets Research

E c o n o m ic ac tivity 2009 2010 2008 2009F 2010F
(% q o q , saar) Q 1F Q 2F Q 3F Q 4F Q 1F Q 2F Q 3F Q 4F % yo y % yo y % yo y
GDP -9.7 -2.7 0.8 1.3 1.2 1.5 0.5 -0.1 0.6 -4.3 0.8
P riva te c ons um ption -1.9 0.4 -0.8 -0.4 -0.8 0.0 0.0 0.4 0.3 -0.9 -0.3
Inves tm ent -15.7 -16.2 -7.8 -3.9 -2.0 0.0 0.0 0.0 -0.3 -12.2 -3.4
G ov’t c ons um ption 0.1 1.2 2.0 2.0 1.8 2.0 2.0 2.0 1.9 1.4 1.9
E xports -28.8 -9.6 0.0 4.1 6.1 8.2 2.0 0.0 0.9 -14.9 3.4
Im ports -25.7 -11.5 -3.9 0.0 2.8 6.6 2.0 2.0 1.0 -12.9 1.0
Contribution (pp): S toc ks -3.8 -0.4 0.9 0.3 0.3 0.3 0.0 0.0 0.1 -0.5 0.3
N et tra de -1.6 0.8 1.6 1.6 1.3 0.7 0.0 -0.8 0.0 -1.1 1.0
Indus tria l produc tion -27.6 -5.8 -0.2 0.7 0.4 1.0 -0.7 -1.7 -1.8 -15.0 -0.2
U nem ploy m ent ra te, % 8.7 9.4 9.9 10.3 10.6 10.9 11.1 11.2 7.6 9.6 11.0
P ric es & w ag es (% yo y)
H ICP 1.0 0.2 -0.2 0.5 0.9 1.0 0.9 1.0 3.3 0.3 0.9
Core infla tion 1.6 1.6 1.2 0.9 0.7 0.6 0.7 0.6 1.8 1.3 0.7
P roduc er pric es -1.7 -5.2 -6.2 -2.9 0.7 2.2 1.4 1.4 6.1 -4.0 1.4
Com pens a tion per em pl. 2.5 1.3 0.4 -0.6 -0.6 -0.4 -0.1 0.2 3.4 0.9 -0.2
P roduc tivity -3.6 -3.2 -2.2 -0.1 2.2 2.6 2.0 1.4 -0.2 -2.3 2.0
Sources: Eurostat, DB Global Markets Research

Euroland: Constrained Expectations

Inflation: Headline HICP inflation slowed to a record low of 3. Net new credit continues to decline
0.0% yoy in May. A period of negative inflation will begin in
Monthly flow of bank credit, EUR bn (sa)
June care of energy price base effects before base effects
200
and newly rising commodity prices push headline inflation Total private sector credit
back into positive territory later this year. We expect 150 Loans adj. for securitisation
headline to hover around 1% throughout 2010 as non-core
inflation balances out core disinflation. The increase in spare 100
capacity is a downside risk to inflation. The risk of prolonged
weakness in private consumer demand is a risk, as is the 50
inertia in wage inflation as it resets lower over time.
Fiscal: Public debt levels are escalating due to a 0
combination of the economic crisis and the increasing direct
-50
costs of the financial crisis. The weak medium-term
economic outlook will make debt consolidation impossible 2006 2007 2008 2009
for the moment. Hence, room for discretionary stimulus is
all but exhausted. With public balance sheets under so Sources: ECB, DB Global Markets Research
much strain, governments are coy about doing more to

support frail banking sectors despite the fact it might be a 4. Public deficit and debt levels are escalating quickly
price worth paying (c.f. the UK’s recovery). This risks % of GDP General govt balance (lhs) % of GDP
encumbering bank balance sheets, and growth prospects, 1 90
Gross govt debt (rhs) Forecast
for longer. The Stability and Growth Pact needs to be 0
flexible enough to allow adequate support for financial 85
-1
sectors in the short term while remaining credible enough
-2 80
to achieve consolidation in the medium-term.
Monetary: At 1% the refi rate has probably reached the -3
75
floor. The ECB believes the full benefit of its policy stance -4
(1% refi rates, a full-allotment tender regime, including a -5 70
new 12-month tender, and EUR60bn of covered bond -6
purchases) will feed through with a lag. There is a risk the 65
-7
ECB cuts rates once more (possibly September). Given our
-8 60
doubts about the sustainability of the emerging near-term
growth impulse, we do not see the ECB under pressure to 1999 2001 2003 2005 2007 2009
exit its accommodative policy stance within the next 18
Sources: European Commission, DB Global Markets Research
months.

2007 2008 2009F 2010F 5. ECB under no duress to exit accommodative policy
M3 growth, % yoy eop 11.6 7.5 3.6 4.0
3-month EURIBOR, %
Fiscal balance, % of GDP -0.6 -1.9 -5.7 -6.7 6 Forecast
Public debt, % of GDP 66.3 69.6 79.7 85.8
5
Trade balance, EUR bn 12.1 -42.9 -69.3 -38.1
4
Trade balance, % of GDP 0.1 -0.5 -0.8 -0.4
Current account, EUR bn 11.1 -93.5 -97.4 -55.3 3
Current account, % of GDP 0.1 -1.0 -1.1 -0.6 2
Financial forecasts Current 3M 6M 12M 1

Official 1.00 1.00 1.00 1.00 0
3M rate 1.14 1.30 1.20 1.20 -1 Actual Taylor Rate
10Y yield 3.42 3.25 3.00 3.00
-2 Implied
USD per EUR 1.41 1.30 1.20 1.18
JPY per EUR 134 130 126 121 1999 2001 2003 2005 2007 2009
GBP per EUR 0.85 0.90 0.90 0.83
Sources: DB Global Markets Research, as of June 26 Sources: Bloomberg, DB Global Markets Research
Mark Wall, (44) 20 7545-2087

Germany: Export dependence has become a drag

• German GDP fell by 3.8% qoq in Q1 and the data reveals 1. Real economy indicator stabilized at a very low level
that the German economy has been in recession for 4
130 2005 = 100
quarters in a row now. Both net exports and domestic
demand subtracted from GDP growth in Q1. Domestic
120 German production (industry)
demand was mainly dampened by capital spending, while
private consumption made a slightly positive contribution German order intake
110
to GDP growth. World trade has shrunk considerably
during the global economic crisis, and this development 100
left its traces on German GDP growth.
• In recent months sentiment indicators such as the Ifo 90
index or ZEW index have risen strongly. We believe that
80
this increase was mostly driven by the very favourable
development of leading indicators in Germany’s important 70
exports markets and by expectations that global fiscal
2002 2003 2004 2005 2006 2007 2008 2009 2010
stimuli will spur foreign demand for German products.
However, so far growth stimulus programmes abroad do :
not seem to have supported world trade. The impulses Sources: Bundesamt, DB Global Markets Research
from foreign demand for the German economy remain
weak. Accordingly, export growth and production 2. German GDP remains weak
stabilised at a low level, but did not recover in recent 6 % % 3
months. The recovery in world trade looks set to be Forecast
relatively soft in the next few months, thus giving only 4 2
moderate stimulus to the German export sector. We 2 1
forecast a small pick-up in export growth in H2 2009.
However, in 2009 as a whole exports are likely to shrink 0 0
by 16% yoy. In turn, weak export growth should dampen -2 -1
capital spending, which is why we expect machinery and
-4 -2
equipment spending to drop in 2009. This unfavourable qoq (rhs) yoy (lhs)
development in GDP growth should lead to a strong rise -6 -3
in unemployment. However, in H1 2009 unemployment is
-8 -4
likely to rise only moderately, as in this period short-time
work will continue to rise strongly, offsetting the pressure 2000 2002 2004 2006 2008 2010
on the labour market. Nevertheless, the strong slowdown
should finally lead to a rise in unemployment in H2 2009 Sources: Bundesamt, DB Global Markets Research
and in 2010. The rise in unemployment and lackluster

Deutsche Bank Forecasts: Germany
wage growth is likely to curb private consumption in the
(% yoy, unless stated) 2007 2008 2009F 2010F
next few quarters. However, in H1 private consumption
GDP 2.6 1.0 -6.0 0.4
looks set to be supported by the scrapping scheme for
- Private consumption -0.3 -0.1 0.0 0.2
old cars. So private consumption is unlikely to decline
- Investment 4.6 3.6 -11.7 -0.2
much in 2009, even though the savings ratio is likely to
- Government consumption 2.2 1.8 0.6 0.6
rise as well. We believe that the recession in Germany
- Exports 7.7 2.2 -16.0 5.0
will peter out by the end of 2009 due to a stabilisation and
- Imports 5.2 3.9 -9.1 4.6
minor pick-up in foreign demand. For 2010 we expect a
- Net trade contribution, pp 1.2 -0.4 -3.1 0.4
small rise in GDP growth. However, the growth dynamic
Industrial production 5.9 0.0 -16.0 1.4
should remain low and be driven by exports. The fiscal
Unemployment rate, % 9.0 7.8 8.4 10.4
deficit is likely to rise sharply, mainly due to the automatic
HICP 2.3 2.8 0.2 0.6
stabilisers, but also as a result of the growth stimulus
Compensation per employee 1.2 1.9 0.9 0.9
package. Inflation is unlikely to be a hot topic in the next 2
Fiscal balance, % of GDP -0.2 -0.1 -4.8 -6.5
years. In the short term, however, an unexpectedly strong
CA balance, % of GDP 7.9 6.2 3.4 4.6
rise in oil prices could be a risk for inflation. Still, the huge
negative output gap should keep a lid on inflation.
Stefan Bielmeier, (49) 69 910-31789

Other EMU economies

• Growth: All euro area member states contracted in Q1. 1. Peripherals looking at prolonged recessions
Germany contracted the most (3.8% qoq), France and :
Greece the least (1.2%). Despite the ‘credit’ shock, it
8 Real GDP, % yoy 2007 2008
was by-and-large the export-sensitive economies
6 2009 2010
(Germany, Italy, Netherlands, Finland) that suffered the 4
most in the two quarters following the Lehman 2
bankruptcy. Looking ahead, the more credit-exposed 0
-2
economies (especially the peripherals like Ireland, Spain
-4
and Greece) are likely to suffer longer recessions, -6
whereas the less credit-sensitive but competitive, -8
export-sensitive economies like Germany and Finland -10
Portugal
Finland
Ireland
Greece
France
Spain
stand the greatest chance of rebounding quickly if the
Belgium
Netherlands
Austria
Italy
global economy starts to pick-up. In short, divergence is
likely to be a theme in the euro area. Our composite
vulnerability index—which combines credit, fiscal, trade
and Eastern Europe risk factors—puts Greece, Belgium,
Ireland and Austria at the most vulnerable end of the Deutsche Bank Forecasts: Other EMU economies
(% y o y , u n le ss s ta te d ) 2 0 07 20 0 8 2 0 0 9F 2 01 0 F
economic risk spectrum and Germany, Finland, Portugal
F ra n ce GDP 2.3 0 .3 -2 .6 1 .2
and the Netherlands at the least vulnerable end. H IC P 1.6 3 .2 0 .0 0 .6
• Inflation: There is also a core vs. periphery story within C A b a l., % G D P -2 .8 -3 .5 -4 .0 -4 .0
inflation. One-third of member states are already F is c a l ba l., % G D P -2 .7 -3 .4 -6 .1 -7 .2
recording outright deflation, but the initial countries to Ita ly GDP 1 .5 -1.0 -5 .0 1 .1
deflate and the ones with the strongest deflation are in H IC P 2 .0 3.5 0 .8 1 .2
C A b a l., % G D P -1 .8 -2.7 -2 .5 -2 .5
the periphery (Ireland, Spain and Portugal). This reflects
F is c a l ba l., % G D P -1 .5 -2.8 -5 .6 -5 .6
greater sensitivity to energy prices, but also weaker
S p a in GDP 3 .7 1.2 -3 .6 -1 .2
demand. A particular threat to the peripherals is the
H IC P 2 .8 4.2 -0 .4 0 .7
mixture of debt and deflation. This raises the real value C A b a l., % G D P -1 0 .1 -1 0.0 -7 .0 -6 .0
of debt and compounds the deleveraging burden. F is c a l ba l., % G D P 2 .2 -3.8 -7 .9 -9 .5
Compounding the pressure further, Germany is N e th e rla n d s GDP 3 .5 2.1 -4 .0 1 .6
restraining labour costs more than its EMU peers, thus H IC P 1 .6 2.2 1 .4 1 .0
increasing the competitive adjustment burden—the C A b a l., % G D P 9 .8 7.0 6 .0 5 .0
F is c a l ba l., % G D P 0 .3 1.0 -3 .5 -4 .3
need for prices and costs to decline—that the
peripherals must endure. B e lg iu m GDP 2 .6 1.0 -3 .2 1 .3
H IC P 1 .8 4.5 0 .2 1 .2
• Fiscal: The economic and financial crises are taking
C A b a l., % G D P 2 .4 -1.5 -2 .0 -1 .5
their toll on fiscal positions, both deficits and debt F is c a l ba l., % G D P -0 .2 -1.2 -5 .0 -6 .0
levels. The European Commission has already initiated
A u stria GDP 3 .0 1.7 -3 .4 0 .6
Excessive Deficit Procedures against Ireland, Spain,
H IC P 2 .2 3.2 0 .5 1 .2
Greece and France on the basis of 3%+ deficits to GDP C A b a l., % G D P 3 .3 3.0 2 .5 2 .0
ratios for 2008. On the basis of forecasts for 2009, the F is c a l ba l., % G D P -0 .5 -0.4 -4 .0 -5 .0
majority of countries will face corrective procedures as F in la n d GDP 4 .1 0.7 -4 .7 1 .8
the average deficit heads to 5.7% of GDP. H IC P 1 .6 3.9 1 .7 1 .1
• Assuming a slow return to trend GDP growth over the C A b a l., % G D P 4 .0 2.0 1 .5 1 .0
next 4-5 years, even without additional direct financial F is c a l ba l., % G D P 5 .2 4.2 -0 .5 -1 .7
rescue costs government debt levels will rise G re e c e GDP 4 .0 2.9 -1 .2 -1 .0

dramatically. In 2009, 4 countries (Greece, Italy, H IC P 3 .0 4.2 1 .4 2 .1
Belgium and almost France) have a debt-to-GDP ratio of C A b a l., % G D P -1 4 .0 -1 3.0 -11 .0 -8 .0
F is c a l ba l., % G D P -3 .6 -5.0 -7 .2 -8 .7
80% or more, a level where AAA-ratings are
P o rtu g a l GDP 1 .9 0.0 -4 .0 -0 .4
questioned. In 2015, 8 countries (those 4 plus Portugal, H IC P 2 .4 2.7 -0 .7 0 .5
Germany, Austria and Ireland) could have 80%+ debt. C A b a l., % G D P -9 .7 -1 2.0 -9 .0 -7 .0
This is not automatic downgrade territory, but the F is c a l ba l., % G D P -2 .6 -2.6 -6 .3 -7 .3
ratings of the less wealthy, less diversified, and less Ire la n d GDP 6 .0 -2.3 -8 .5 -2 .0
flexible economies could come under pressure. H IC P 2 .9 3.1 -1 .3 -0 .3
C A b a l., % G D P -5 .4 -5.0 -2 .0 -1 .0
F is c a l ba l., % G D P 0 .2 -7.1 -13 .4 -1 4 .2
Mark Wall, (44) 20 7545 2087

UK: A relatively early exit from recession

• The UK economy has endured four quarters of falling 1. This recession has been worse than average
output, with GDP having contracted by just over 4%
Avg quarterly rates of growth in recessions
so far from its peak in the first quarter of last year. This 1
(dots = latest recession)
compares with declines of roughly 5% in the early
1980s and 2.5% in the early 1990s recession. 0
• The rate of contraction looks to have slowed sharply
from its near 7.5% annualised pace in the first quarter -1
of this year. Indeed, the business surveys have all (to
-2
various degrees) shown signs of improvement – in
particular the PMI surveys now indicate that output is -3
growing again (as of May).
Expenditure Output
• The combination of increased liquidity provision, bank -4
recapitalisations, monetary support (lower interest
Govt
Invest
Servs
Exp
Imp
Constr
GDP
Agric
Cons
Industry
rates and quantitative easing), fiscal stimulus
(discretionary and automatic) and lower
sterling/commodity prices (notwithstanding recent Sources: DB Global Markets Research and ONS
rises) is clearly aiding the economic recovery. The UK
appears to be emerging the quickest from the global 2. The end is in sight, but will the recovery be durable?
recession, probably because the authorities were Probability Probability of remaining in recession
swifter to act in providing help to the banking sector. 1.0 beyond a certain number of quarters
• Thus the question is not whether we will emerge from 0.9
recession (that looks likely, as recent IMF research 0.8 Full sample
suggests – see lower right chart), but rather what the 0.7
post-recession environment will look like. Our opinion 0.6 Financial crises (high
is that growth recovers to near-trend by the end of this 0.5 fiscal response)
year, but then falls back in 2010 as markets price in a 0.4 Financial crises
more aggressive tightening of policy and households 0.3
continue to reassess their appropriate debt levels. 0.2
• As a result, we have recently changed our view on
0.1 Quarters
economic growth, which we now see turning positive
0.0
again from the third quarter of this year (rather than
early next year, as in the previous forecast). This marks 0 1 2 3 4 5 6 7 8 9 10
a significant shift in the directionality of forecast
revisions, which had until now been on a downward
Sources: DB Global Markets Research and IMF
trajectory. Still, over the next two years we see growth
remaining below its potential rate.

Economic activity 2009 2010 2008 2009F 2010F
(% qoq, saar) Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F % yoy % yoy % yoy
GDP -7.3 -2.1 0.8 1.9 1.6 1.4 1.4 1.4 0.7 -3.6 1.2
Private consumption -4.9 -2.4 0.4 1.2 1.6 1.6 1.2 1.2 1.4 -2.5 1.1
Investment -14.2 -9.1 -4.0 -1.0 -1.4 0.9 1.0 1.6 -3.1 -8.4 -1.3
Gov't consumption 1.2 2.8 2.8 2.8 2.8 2.4 2.4 2.4 3.4 3.0 2.7
Exports -22.1 -9.6 -3.9 0.8 1.2 1.2 1.6 1.6 0.1 -11.2 -0.2
Imports -21.5 -3.7 1.4 3.3 2.8 2.4 2.4 2.5 -0.6 -10.8 2.1
Domestic demand -5.5 -2.5 0.2 1.3 1.4 1.7 1.5 1.6 1.1 -2.5 1.1
Contribution (pp): Stocks -2.4 2.0 2.0 1.3 0.7 0.0 0.1 0.1 -0.4 -1.3 0.8
Net trade 0.4 -1.5 -1.4 -0.7 -0.5 -0.4 -0.3 -0.3 0.2 0.2 -0.6
Industrial production -19.4 0.0 0.8 2.0 1.2 0.4 0.4 0.0 -2.7 -9.4 0.9
Unemployment rate, % 7.1 7.4 7.9 8.5 9.0 9.5 9.7 10.0 5.7 7.7 9.6
Prices & wages (% yoy)
CPI 4.4 3.6 2.9 2.6 n.a. n.a. n.a. n.a. 3.6 1.9 1.8
Producer prices 2.8 0.1 -0.6 1.7 2.6 2.2 2.1 2.0 7.3 1.0 2.2
Compensation per empl. -0.3 2.6 2.0 2.3 3.7 2.4 2.6 2.9 3.6 1.7 2.9
Productivity -3.2 -3.1 -1.2 1.2 3.1 3.0 2.0 1.4 0.0 -1.6 2.3
Deutsche Bank AG/Lond Page 23

UK: Debt and unemployment to rise well after end of recession

• The labour market should continue to suffer over the 3. Unemployment lags the economic cycle
coming quarters, however. Unemployment lags growth :
by six months, and if we are correct in our view that
Chg. yoy, thous. % yoy
growth will not return back to trend then further job
-600 6
shedding looks likely – albeit at a diminishing pace. Forecast 5
-400
• Still, unemployment has not risen as much yet as in the 4
-200 3
early 1980s and 1990s. One reason for this might be
0 2
increased labour market flexibility, with a larger number 1
of employees accepting lower earnings and working 200
0
fewer hours in return for keeping their jobs. We 400 -1
-2
forecast the unemployment rate (on the household 600
-3
survey measure) to rise to 10% over the coming year. 800 Claimant count (inverted, lhs) -4
• The public finances continue to weaken – the budget 1000 GDP (rhs) -5
deficit is forecast by the Treasury to rise to around 12% 1981 1985 1989 1993 1997 2001 2005 2009
of GDP this year and next, before moving very slowly
Sources: DB Global Markets Research and ONS
towards balance by 2018. Little information about how
the government believes this recovery might happen 4. The budget deficit takes a long time to decline
have been provided, and we are unlikely to see any
detailed plans in advance of the general election – to be % of GDP Budget deficit (with government forecasts)
held before June 2010. In the aftermath we can expect 14
Forecast
the government to outline clearer plans for a long-run 12
consolidation of the public finances, which will probably 10
mean lower spending and public sector job losses. 8
• We forecast CPI inflation to fall to below 1% in the 6
near-term, before rising back towards 2% by the start 4
of next year as higher VAT is reintroduced. From that 2
point, inflation may move sideways as downward 0
pressures from a negative output gap are outweighed -2
by the positive impact from sterling’s decline since the -4
start of 2007 (notwithstanding its recent recovery) and 1955-56 1965-66 1975-76 1985-86 1995-96 2005-06
the significant amount of policy stimulus currently being
provided by the central bank and the government. Sources: DB Global Markets Research, ONS and HM Treasury
• We expect the BoE to leave interest rates where they 5. Inflation is not falling as quickly as we thought
are and continue with its programme of quantitative
% yoy
easing (GBP125bn, which will be completed at the end 5 CPI inflation outturns
of July). We see the first hike in rates in about a year’s and BoE forecasts since 2004
time, although the risks are that the Bank moves more 4 (latest forecast is solid grey line)
quickly than this to withdraw some of the stimulus.
3
2007 2008 2009F 2010F Target
2
M4 growth, % 12.7 12.6 14.0 6.0
Fiscal balance, % of GDP, FY -2.4 -6.0 -12.5 -12.0
1 Forecast
Trade balance, GBP bn -89.8 -92.9 -84.5 -84.1
Trade balance, % of GDP -6.4 -6.4 -6.0 -5.8
0
Current account, GBP bn -40.3 -24.5 -27.0 -22.6
2004 2005 2006 2007 2008 2009 2010 2011 2012
Current account, % of GDP -2.9 -1.7 -2.8 -2.2
Financial forecasts Current 3M 6M 12M

Official 0.50 0.50 0.50 0.50
3M rate 1.20 1.20 1.20 1.30
10Y yield 3.72 3.90 4.00 4.30
USD per GBP 1.65 1.44 1.33 1.42
GBP per EUR 0.85 0.90 0.90 0.83
Sources: DB Global Markets Research, as of June 26 Sources: DB Global Markets Research, ONS and Bank of England
George Buckley, (44) 20 7545-1372

Sweden: Turning the corner, but recovery threatened by Baltic loans

• The financial and economic crisis has hit Sweden Deutsche Bank Forecasts:
hard, with GDP down close to 6.5% since its peak at (% yoy, unless stated) 2007 2008 2009F 2010F
the start of 2008. Exports and manufacturing have GDP 2.7 -0.4 -5.0 1.5
fallen sharply, while consumption too has been a drag UND1X (core inflation) 2.2 3.5 -0.5 1.0
on spending. Government spending has been the only Fiscal balance, % of GDP 3.4 4.3 -3.0 -5.0
positive (helped by discretionary policy easing), having CA balance, % of GDP 8.6 7.8 6.5 7.0
grown by just over 2% in real terms over the past Current 3M 6M 12M
year. The unemployment rate has hit 9%, a wide
Official rates 0.50 0.50 0.50 0.50
margin of spare capacity has opened up and, as a
3M deposit rate 0.91 0.85 1.00 1.25
result, core inflation is trending downwards.
10Y yield 3.46 3.25 3.00 3.00
• There are positive signs from the surveys, however,
with the PMI having turned upwards notably over the SEK per EUR 11.00 10.35 9.75 9.50
past three months, and both consumer and business
confidence having turned the corner. Still, we see
Sweden performing the worst of the Nordic
economies this year, with next year’s recovery being
threatened by the exposure of two large Swedish
banks to non-performing loans in the Baltic region.
Denmark: Consumer downturn to give way to lacklustre recovery
• With the pressure off the currency the central bank Deutsche Bank Forecasts:
has trimmed official interest rates by more than the (% yoy, unless stated) 2007 2008 2009F 2010F
ECB over the past few months to bring the differential GDP 1.6 -1.1 -3.5 0.9
back to close to 50bps – where it is expected to HICP 1.7 3.4 1.0 1.5
remain going forward. Fiscal balance, % of GDP 4.9 2.9 -1.0 -4.0
• GDP has fallen by almost 4% from its peak, although CA balance, % of GDP 0.7 2.0 0.8 0.2
at time of writing the Q1 GDP figures (expected to be Current 3M 6M 12M
weak) had not yet been published. Consumption
remains weak, with retail sales having contracted (on Official rate 1.55 1.50 1.50 1.50
an annual basis) now for the past year. Encouragingly, 3M deposit rate 2.22 1.80 1.70 1.70
however, production is growing again and surveys are 10Y yield 3.86 3.70 3.45 3.45
indicating growth in new orders once more. DKK per EUR 7.45 7.46 7.46 7.46
• We forecast a 3.5% contraction in GDP this year (the
risks may be on the downside given the uncertainties
over the Q1 outturn) followed by a lacklustre recovery
in 2010. Inflation should fall to 1% and below over the
next four quarters as result of spare capacity.
Sweden: Recovery on its way, but how durable? Denmark: Consumers have suffered
Index % yoy % yoy Danish retail sales
15
65 6
60 4 10
55 2
50 5
0
45
-2 0
40
-4
35
PMI (latest reading is average of Apr & May) (lhs) -5
30 -6
GDP (rhs)
25 -8 -10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1998 2000 2002 2004 2006 2008
Sources: National Institutes, DB Global Markets Research

Norway: Shallower recession and stubborn inflation to prevent further rate cuts
• The Norwegian economy has performed better than Deutsche Bank Forecasts:
its neighbours recently, with the downturn in the (% yoy, unless stated) 2007 2008 2009F 2010F
economy having been limited by continued GDP 3.2 2.1 -1.2 1.0
contributions to growth from the offshore sector. But CPIATE (core inflation) 0.7 3.8 1.5 1.5
even mainland GDP has fallen less sharply than in Fiscal balance, % of GDP 13.9 15.9 13.0 9.0
Sweden or Denmark, by a total of 1.7% from its peak. CA balance, % of GDP 16.0 19.5 9.0 6.0
Moreover, inflation remains around the 3% mark, and
Current 3M 6M 12M
unemployment is not rising particularly quickly.
• That said, the survey evidence remains on the weak Official rates 1.25 1.25 1.25 1.25
side, with the latest Business Tendency Survey falling 3M deposit rate 1.95 1.80 1.85 2.10
even further below the levels it reached back in the 10Y yield 4.20 4.05 3.90 4.00
early 1990s (when the economy experienced a more NOK per EUR 9.05 8.54 8.00 8.00
modest recession).
• The central bank expects to keep policy rates close to
the 1% mark over the next year, following its decision
to cut rates to 1.25% at its most recent meeting. We
forecast rates to remain at their current level as signs
of economic recovery continue to emerge.
Switzerland: A prolonged road to recovery with core deflation risks
• At its latest meeting the SNB left interest rates on Deutsche Bank Forecasts:
hold (a target rate of 0.25%) and continued with its (% yoy, unless stated) 2007 2008 2009F 2010F
unconventional policy of a) buying CHF private sector GDP 3.3 1.6 -2.3 0.0
bonds and b) intervening to prevent CHF appreciation. Consumer prices 0.7 2.4 -0.7 0.7
• The economy has not contracted by as much as has Fiscal balance, % of GDP 0.8 1.2 -1.5 -3.0
been the case elsewhere (down 1.6% versus a 4.9% CA balance, % of GDP 10.0 9.3 7.0 5.0
fall in the euro area, for example), despite the strength
Current 3M 6M 12M
of the currency, the economy’s reliance on the
financial sector and the significant exposure to trade Official rates 0.25 0.25 0.25 0.25
(exports are worth 50% of total Swiss GDP). 3M Libor 0.33 0.40 0.40 0.50
• However, the surveys have remained particularly 10Y yield 2.34 2.15 2.00 2.00
weak, with the headline PMI still below 40 at the time CHF per EUR 1.53 1.54 1.56 1.56
of writing. Moreover, core inflation has fallen below
1% and is on a downward trajectory, while headline
inflation is likely to print negative in 2009 as a result of
lower commodity prices and the robust currency.
Expect monetary policy to remain highly expansionary
and unconventional for some time to come.
Norway: Best European performer outside EMU Switzerland: CPI falls in 2009, but not ‘deflation’
GDP growth, % yoy CPI inflation, % yoy
8 3
Forecast Forecast
6
2
4
2
1
0
-2 Sweden Norway 0
-4 Denmark Switzerland
-6 -1
1994 1997 2000 2003 2006 2009 1994 1998 2002 2006 2010
Sources: National Institutes, DB Global Markets Research
George Buckley, (44) 20 7545-1372

CE3 countries: Sustainable recovery still some time away

Czech Republic: Is the worst behind us? CE3 PMIs have recovered but still point to contraction
• Czech has enjoyed its fair share of green shoots over
:
recent months. Since January the manufacturing PMI
has recovered 9 points while the EC’s survey of Index Index
60 60
economic sentiment has also turned. Nonetheless the
economy continues to contract and operates well 55 55
below potential. Capacity utilization has fallen 16.1
points from its peak in Q2-08 to 74.3, its lowest level 50 50
since Q2-93.
• With the output gap to potentially widen to in excess 45 45
of 5% of GDP by end-2010, inflation in yoy terms
below target (1.3% versus a target of 3% and 2% for 40 40
2009 and 2010 respectively) and core inflation negative Poland Hungary Czech
35 35
(-1.3% yoy), the CNB is unlikely to have to tighten
monetary policy over the coming quarters. On fiscal
30 30
policy automatic stabilizers are at work with the deficit
to breach the Maastricht 3% threshold for the first 2002 2003 2004 2005 2006 2007 2008 2009
time in 4 years in 2009. Sources: DB Global Markets Research, Reuters
• Czech’s banking sector is the only of the new EU
countries that holds excess deposits over loans. To Deutsche Bank Forecasts: Czech Republic
date this has not provided it with much protection. (% yoy, unless stated) 2007 2008 2009F 2010F
Indeed more so than elsewhere in the region foreign GDP 6.0 3.7 -3.4 1.7
banks have withdrawn funds (EUR2.3bn over the past - Private consumption 5.2 2.9 -2.8 1.1
3 quarters). Looking forward, however, a more - Investment 6.7 3.1 -12.0 1.8
favourable liquidity position, the potential for further - Government consumption 0.4 0.9 2.5 1.0
repatriation of capital by locals back onshore (over the - Exports 14.9 6.9 -15.0 4.2
past 3 quarters EUR6.2bn), a lower private sector - Imports 14.2 4.6 -16.4 3.8
credit stock and a much more limited amount of FX - Net trade contribution, pp 0.7 2.3 1.0 0.5
debt should see lending resume earlier than in its Industrial production 9.1 0.8 -4.5 2.4
peers. Unemployment rate, % 6.6 5.4 7.3 8.3
• Given a modest C/A deficit and lower levels of external Consumer prices 2.8 6.4 1.4 1.0
indebtedness than its peers, CZK should outperform Compensation per empl. 9.3 8.5 5.0 4.5
the rest of the CE3 currencies though we continue to Fiscal balance, % of GDP -1.0 -1.2 -4.8 -4.4
favour gradual weakness.
CA balance, % of GDP -3.2 -3.5 -0.2 -0.4
Hungary: Fundamental vulnerabilities remain
• The combination of fiscal tightening, a collapse in Current 3M 6M 12M
credit extension and a sharp slump in external demand 3M deposit rate 1.86 1.50 1.20 1.20
means that Q1 is very unlikely to mark the bottom for 10Y yield 5.23 5.25 5.25 5.50
real economic activity. Should our forecast for GDP CZK per EUR 26.0 27.2 27.8 27.4
prove on the mark, Hungary will face its sharpest
Our credit impulse indicator: credit is a drag on growth
contraction since at least 1992.
• Government adherence to the IMF programme to date % of GDP % GDP
6 6
has been impressive and newly appointed PM Bajnai
appears keen to adhere to fiscal consolidation. This 4 4
has facilitated smooth reviews of the IMF/EC
programme to date, helping to boost FX reserves from 2 2
EUR16.1bn last September to EUR24.3bn in May. By
end-June the government will have drawn EUR14bn of 0 0
its EUR20bn programme and used EUR8bn. -2 -2
-4 -4
Poland Hungary Czech
-6 -6
2005 2006 2007 2008 2009
Sources: National central banks, DB Global Markets Research

CE3 countries: Sustainable recovery still some time away

• A combination of factors continues to prevent the NBH Deutsche Bank Forecasts: Hungary
from easing rates further. Having hiked by 300bp last (% yoy, unless stated) 2007 2008 2009F 2010F
October, the NBH cut rates by 100bp over Nov-Dec. GDP 1.1 0.5 -6.0 0.8
By February, however, HUF weakness prompted - Private consumption -1.8 -0.4 -5.2 0.5
renewed discussions of rate hikes, damaging central - Investment 1.5 0.8 -12.0 0.1
bank credibility. That the government has been unable - Government consumption -2.2 -2.1 -1.8 -0.5
to sell a meaningful amount of debt to the market - Exports 15.9 4.6 -15.0 3.5
since last September also suggests investor sentiment - Imports 13.1 4.0 -17.7 3.3
remains weak. This, combined with higher inflation - Net trade contribution, pp 1.1 0.9 2.1 0.4
due to local food prices, higher global energy prices Industrial production 8.2 -0.8 -10.0 2.5
and a VAT hike scheduled for July, could prove Unemployment rate, % 7.3 7.8 10.0 12.0
sufficient to keep the NBH on hold over the coming Consumer prices 8.0 6.1 5.1 5.8
months. Compensation per empl. 8.0 7.8 2.0 3.5
• From a longer perspective, Hungary faces a number of Fiscal balance, % of GDP -4.9 -3.4 -3.8 -3.2
challenges ahead. Public sector debt will near 85% of CA balance, % of GDP -6.4 -8.4 -1.6 -1.4
GDP by year-end while gross external debt stood at
Current 3M 6M 12M
112% of GDP at the end of last year and is rising.
3M deposit rate 11.30 9.60 8.20 7.80
Meanwhile the IMF estimates potential GDP growth of
10Y yield 10.21 9.75 9.25 9.00
just over 2%. As a result any meaningful reduction is
HUF per EUR 276 295 315 298
these debt levels will prove at best a multi-year
process. In the meantime financing of both the public Nominal effective exchange rate performance
and private sector will remain vulnerable to another 1 Jan-08 = 100 1 Jan-08 = 100
downturn in the global economy and risk appetite. 115 115
Poland: Muddling through
• A lower level of trade openness and a wider fiscal 105 105
deficit has helped to soften the downturn for Poland
relative to its peers. Though we are concerned that it 95 95
will be revised downwards, GDP in neither Q4 last PLN
year nor Q1 this year, showed contraction. 85 HUF 85
• That economic activity is weak is reinforced by the CZK
contraction in the C/A deficit. Compared with a deficit
75 75
of EUR6.3bn over the first 4 months of 2008, Poland
Jan 08 May 08 Sep 08 Jan 09 May 09
registered a C/A surplus of EUR0.1bn over Jan-Apr
2009. In part this reflects higher EU inflows but also a Deutsche Bank Forecasts: Poland
narrowing of the trade and incomes balance. FDI flows (% yoy, unless stated) 2007 2008 2009F 2010F
YTD are only 1/3 of those for the same period in 2008. GDP 6.7 4.8 -1.4 1.0
New bank and corporate inflows have also dropped, - Private consumption 5.0 5.4 -0.9 0.9
though at this point outflows appear limited. - Investment 17.6 7.9 -10.4 2.0
• Inflation has proved sticky and above target for most - Government consumption 3.7 0.0 1.5 0.5
of this year. We are not concerned about underlying - Exports 9.1 5.8 -12.0 2.8
inflation pressures however. YTD CPI has increased - Imports 13.6 6.2 -13.6 2.7
3.3% but food, housing and transport accounted for - Net trade contribution, pp -2.0 -0.4 1.4 -0.1
2.9pp of the rise (though less than 60% of the CPI Industrial production 9.7 2.9 -9.5 2.3
basket). The jobs market is weakening and wages Unemployment rate, % 12.7 9.8 11.1 13.4
have shown signs of adjusting downwards. While a Consumer prices 2.5 4.2 3.4 2.5
bout of food and energy inflation means that the rate Compensation per empl. 9.1 10.6 4.5 5.0
cutting cycle is nearing an end, we doubt that the NBP Fiscal balance, % of GDP -1.9 -3.9 -6.9 -5.4
will find room to hike rates over the next 4 quarters. CA balance, % of GDP -4.7 -5.4 -1.5 -2.2
• Instead the local authorities could be better advised to
Current 3M 6M 12M
draw off the USD20.6bn flexible credit lending facility
3M deposit rate 4.20 4.00 3.70 3.60
arranged with the IMF to support lending to local
corporates and/or help finance the fiscal deficit. This 10Y yield 6.35 6.75 6.60 6.80
would help not only support PLN but also ease the PLN per EUR 4.50 4.70 4.75 4.54
crowding out of the private sector. Sources: National authorities, DB Global Markets Research
Gillian Edgeworth, (44) 20 7547-4900

Peripheral dollar bloc: Recession themes persist

Economic outlook Deutsche Bank Forecasts: Peripheral $-bloc
• CAN: Canada is showing some signs of improvement. Current 3M 6M 12M
Existing home sales are up, as is consumer spending Official overnight cash rate
and investor confidence. A Q3-2009 turnaround Canada 0.25 0.25 0.25 0.75
remains likely, driven by monetary and fiscal stimulus. Australia 3.00 3.00 2.75 2.50
New Zealand 2.50 2.50 2.50 3.00
• AUS: The exceptionally stimulatory monetary and fiscal
10Y yield
stance in Australia is beginning to show signs of Canada 3.43 4.00 3.50 3.50
traction. Housing market activity especially has picked Australia 5.62 5.75 5.00 5.00
up and public final demand will strengthen in H2-2009. New Zealand 6.02 6.25 5.50 5.50
• NZ: The economy likely contracted for a 6th quarter in Exchange rate (vs USD)
Q2. But indicators suggest a return to growth by the Canada 1.15 1.20 1.25 1.23
Australia 0.81 0.74 0.68 0.68
end of the year with the easing of monetary and fiscal
New Zealand 0.65 0.60 0.56 0.56
policy boosting confidence and housing market
activity.
Source: DB Global Markets Research, as of June
Monetary policy
• CAN: A very large output gap indicated by high Australia’s GDP forecast to outperform
unemployment and very low inflation will likely cause 8 % yoy GDP in the Dollar Bloc
the BoC to leave rates at record lows into the first
quarter of 2010. The probability of QE is low. 6 Forecast
• AUS: Recent commentary from the RBA has reiterated
a clear easing bias. Despite signs of traction in 4
domestic activity, we expect the cash rate to move
2
lower towards the end of this year.
• NZ: The RBNZ left the OCR at 2.5% but retains an 0
easing bias. Provided that the dataflow continues to
-2 New Zealand Australia
improve, we think it is most likely that the OCR will
remain at current levels until mid 2010. Canada
-4
Peripheral $-bloc currencies
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Notwithstanding the rallies in AUD and NZD since our last
Outlook, the global data remains at levels that continue to
suggest medium-term headwinds for both currencies.
Accordingly, we expect to see both currencies come under Sources: DB Global Markets Research, ABS, Statistics New Zealand, Statistics
renewed pressure at some point in coming months. The Canada
recent rise in oil prices looks overplayed and we anticipate
any correction to be reflected in a weaker CAD.
2009 2010 2008 2009F 20010F
Q 1F Q 2F Q 3F Q 4F Q 1F Q 2F Q 3F Q 4F % yo y % yo y % yo y
CA N A D A
A c t iv it y ( % q o q , s a a r )
GDP -5 .4 -0 .6 2 .0 2 .6 2 .8 3 .0 4 .6 3 .6 0 .4 -1 .7 2 .8
U n e m p lo y m e n t r a t e , % 7 .8 8 .4 9 .0 9 .0 9 .0 8 .8 8 .5 8 .2 6 .1 8 .5 8 .6
P r ic e s ( % y o y )
CPI 1 .2 -0 .1 -0 .3 1 .7 2 .6 2 .5 2 .3 2 .3 2 .4 0 .6 2 .4
A U S T R A L IA
GDP 1 .5 -0 .3 -0 .4 2 .1 0 .9 1 .2 2 .1 3 .8 2 .4 0 .2 1 .3
D o m e s t ic d e m a n d -4 .1 -1 .9 -1 .9 3 .6 4 .9 1 .1 0 .0 4 .3 4 .4 -0 .9 2 .0
N e t t r a d e c o n t r ib u t io n ( p p ) 8 .7 1 .4 -0 .2 -0 .2 -0 .9 -1 .3 -0 .2 -1 .1 -1 .5 3 .4 -0 .6
CPI 2 .5 1 .2 0 .7 1 .3 1 .8 1 .9 1 .8 1 .7 4 .4 1 .4 1 .8
C ore C P I 2 .8 1 .3 0 .7 0 .5 0 .8 1 .1 0 .9 0 .7 4 .0 1 .3 0 .8
N E W Z E A LA N D
GDP -3 .5 -1 .6 1 .4 2 .7 3 .5 3 .6 3 .5 3 .5 0 .3 -1 .8 2 .8
D o m e s t ic d e m a n d -3 .3 -7 .1 -2 .3 1 .7 2 .6 2 .9 3 .1 3 .3 -0 .7 -2 .6 1 .4
CPI 3 .0 2 .0 1 .2 2 .0 2 .1 1 .6 1 .7 2 .2 4 .0 2 .0 1 .9

Peripheral dollar bloc: Recession themes persist

Canada Canada: Terms of trade have weakened sharply
• After contracting more in Q1-2009 than it has since Q1-
:
1990, the Canadian economy will likely continue to
130 Index Canada - Terms of trade
shrink into the second half of this year. As has been the
case for the past several quarters, this further
125
contraction in overall GDP will be caused by the
persisting effects of weak U.S. demand for Canadian 120
exports and it is likely to occur despite a gradual
strengthening of domestic demand. 115
• Early in the second half of the year, growth in Canada 110

should turn positive in response to an increase in U.S.
exports, the effect of unprecedented monetary and 105
fiscal stimulus, rising commodity prices and a
100
strengthening of consumer and investor confidence
2004 2005 2006 2007 2008 2009 2010
and a further easing of lending conditions.
• Against this background of weak growth and very low, Sources: DB Global Markets Research, Statistics Canada
probably negative inflation, the Bank of Canada will
probably leave its overnight rate at 0.25% into 2010. Australia: Household spending has responded to cash
Australia bonus payments to households
• Since our last Outlook the exceptionally stimulatory 19.5 USD bn Value of retail turnover
monetary and fiscal policy stance has underpinned a Retail as reported
19.3 Additional monthly retail expenditure
recovery in housing activity and supported a rise in
Retail + Counter factual
household consumption. 19.1
Recent retail as reported
• Over the second half of this year, we expect public 18.9
investment to increase, offsetting continued weakness 18.7 Rudd-Drop 1 announced
in private business investment and also a likely mid-October
18.5
retracement from the cash bonus-induced surge in
household consumption. 18.3 Retail if previous
• Against this backdrop, the themes we have been 18.1 trend had persisted
detailing for some time remain relevant: a rolling 17.9
recession, from the household to the corporate sector
Jan-08 May-08 Sep-08 Jan-09 May-09
with sharply contracting national income due to the
global recession-induced slump in the terms of trade.
Sources: DB Global Markets Research, ABS
• The outlook for inflation in this environment is subdued
and should provide the RBA with sufficient scope to New Zealand: House sales are picking up, construction
maintain its easing bias for the foreseeable future. will follow
New Zealand level level
2500 12000
• Information available since our last Outlook has made
2300
us more confident that the economy will emerge from
2100 10000
recession over the second half of this year, especially if
global economic and financial conditions stabilize. 1900
8000
• Business spending will likely continue to contract in the 1700
near-term. But a combination of substantial monetary 1500
6000
and fiscal policy easing and rising migrant inflows 1300
should lift household spending over coming months. 1100 Building consents, ex apartments (lhs) 4000
House sales have lifted significantly of late, buoyed by 900 House sales (rhs)
low mortgage rates, and house prices appear to be
700 2000
stabilizing. We expect residential construction to
increase before long whilst retail spending also seems 1992 1996 2000 2004 2008
likely to begin growing modestly over coming months.

• The key downside risks to the economy remain around Sources: DB Global Markets Research, Statistics New Zealand
the global outlook and the risk that markets pre-empt
the recovery. NZD strength would be a concern.
Darren Gibbs, (649) 351 1376; Tony Meer, (612) 8258 1688; John Clinkard, (416) 682 8221

Asia (ex Japan): Stimulus supports China and India, but for how long?
A precipitous decline in activity, but recovery in sight 1. Asia-8 and G-2 GDP growth
• Growth in Asian GDP slowed from 7% in Q3 2008 to
:
3% in Q1 2009, the largest decline in growth over two
% yoy Asia-8 (lhs) G-2 (rhs) % yoy
quarters in 20 years. We think Q1 likely was the trough
10 6
of this recession for the region as a whole, although
some economies may see further downside to yoy 8
4
growth in Q2 before recovery begins. But our 2010 6
forecasts are still generally well below pre-recession 4 2
potential growth rate estimates.
2
0 0
Vigorous policy response supports China and India…
• China, relatively unscathed by the Asian crisis (its -2
-2
exports/GDP ratio has almost doubled from 20% to -4
36% since 1998), has seen GDP growth slow from 9%
-6 -4
to 6.1% over the past two quarters. In India (where
exports are only 23% of GDP), GDP growth slowed 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
from 7.8% to 5.8%, a much better outcome than we
had expected. In both countries, fiscal and monetary Sources: DB Global Markets Research. Notes: G-2 is US and EU; Asia-8 is HK,
Indonesia, Malaysia, the Philippines, Singapore, S. Korea, Taiwan and Thailand.
stimulus has been employed aggressively to support
activity in the face of this external shock.
2. Asian exports and the ISM index
• In China, the government responded to the decline in
exports late last year by unveiling an RMB4tn (over two % yoy, 3mma 3mma
40 Exports (lhs) ISM (-3) (rhs) 65
years) infrastructure investment program in November.
In Q1 2009, government expenditures rose 35% yoy, 30 60
the fastest growth in more than 12 years. Bank lending
20 55
accelerated sharply, rising 27% yoy in Q1 – the fastest
growth in credit in 15 years. In India, during the six 10 50
months to March 2009, government expenditures rose
0 45
45% yoy, the fastest in at least 10 years. The
contribution of government consumption to GDP -10 40
growth during those two quarters averaged 3.6ppts – -20 35
more than half the reported growth rate of GDP. The
RBI has cut the repo rate by 425bps and the CRR by -30 30
400bps since October, although this has not prevented 1993 1995 1997 1999 2001 2003 2005 2007 2009
credit growth slowing from 25% yoy in Q4 to 15%
recently.
….but will it be sustained?

• In China, though, reminiscent of the “stop-go” policies Deutsche Bank Forecasts: Asia (ex. Japan)
of the past, the stimulus was abruptly removed in Q2. (% yoy, unless stated) 2007 2008 2009F 2010F
While yoy credit growth continued to rise, net new Real GDP growth 9.6 6.8 4.2 5.8
lending was only RMB1.3tn in April and May combined, - Private consumption 7.9 6.4 3.9 5.1
- Investment 11.9 7.7 4.5 6.0
just half the average increase in each of the previous
three months, on average. Government expenditure - Government consumption 7.0 11.5 8.3 6.9
growth slowed to 19.5%. With fiscal revenues falling - Exports 15.0 9.3 -12.1 6.5
7% ytd versus a budgeted 8% annual increase, - Imports 12.2 13.8 -14.3 4.7
concerns about fiscal sustainability have apparently Industrial production 12.6 7.5 2.6 7.0
convinced policymakers to scale back fiscal stimulus. CPI 4.4 6.5 1.3 2.9
Similarly, concerns about a potential deterioration in CA balance, % of GDP 7.2 5.6 4.4 3.9
asset quality amid break-neck loan growth have Real GDP growth
apparently triggered at least a temporary tightening of Asia ex China and India 5.9 2.9 -2.3 3.2
credit conditions.
Sources: National authorities and DB Global Markets Research

Asia (ex Japan): Asia-8 simply following the G-2 lead

• In India, with the combined central and state Deutsche Bank Forecasts
government deficits likely to top 10% of GDP, we (% yoy, unless stated) 2007 2008 2009F 2010F
expect the government will gradually ease back its China GDP 11.9 9.0 7.5 7.2
spending to prevent a further widening of the deficit. CPI 4.8 5.9 0.0 2.0
Monetary policy settings are accommodative, and we CA bal., % GDP 9.5 7.2 5.6 5.2
think strengthening private demand can more than Fiscal bal., % GDP 0.7 -0.4 -4.0 -4.6
offset the withdrawal of fiscal stimulus.
Hong Kong GDP 6.4 2.4 -4.5 2.5
• While in India we see GDP growth slowing in Q2 but
CPI 2.0 4.3 0.5 -1.5
recovering thereafter as private demand improves, in
CA bal., % GDP 12.3 14.2 15.5 17.7
China we see the opposite. Powerful stimulus in Q1
Fiscal bal., % GDP 7.5 0.1 -5.6 -4.9
will likely lead to an even stronger qoq GDP growth rate
India GDP 9.4 7.3 5.5 6.0
in Q2. But by year-end, the withdrawal of stimulus will,
CPI 5.4 8.7 3.5 5.1
we think lead growth sharply lower. By mid-2010 we
CA bal., % GDP -1.0 -3.2 -1.5 -1.4
expect growth to be again in the 6% - 6.5% range. As
Fiscal bal., % GDP -6.1 -10.8 -10.4 -9.8
in India, we do not expect there to be further fiscal
stimulus beyond what has already been planned and Indonesia GDP 6.3 6.1 4.0 4.0
there is not much room for further monetary easing. CPI 6.0 9.8 5.0 5.7
CA bal., % GDP 2.4 0.1 0.4 0.1
Asia-8 following the G-2 closely Fiscal bal., % GDP -1.2 -0.1 -1.7 -1.5
• Asia ex-China and India (“Asia-8”) has, as a group, Malaysia GDP 6.3 4.6 -5.0 3.0
essentially tracked the US and EU economies (“G-2”) CPI 2.0 5.4 0.9 2.3
down as our first chart shows. Based on our forecasts CA bal., % GDP 15.6 17.5 14.8 18.7
for the US and Europe, we should expect Asia-8 GDP Fiscal bal., % GDP -3.2 -4.8 -8.0 -7.4
growth to fall a little in Q2, rise back to the Q1 level in Philippines GDP 7.2 3.7 2.0 3.5
Q3 and then rise sharply in Q4. As has been the case CPI 2.8 9.3 4.0 4.0
over the past decade, GDP growth in the Asia-8 CA bal., % GDP 4.3 2.8 0.9 0.0
economies will likely rise more quickly over the next Fiscal bal., % GDP 0.3 -1.2 -0.7 -2.5
year than growth in the G-2. But this is in no sense an Singapore GDP 7.8 1.1 -7.5 4.0
“Asia-led” or “domestic-demand-led” recovery: it is CPI 2.1 6.5 -0.7 -1.1
simply the consequence of tremendous operational CA bal., % GDP 23.4 14.9 14.8 16.6
leverage with respect to the G-2 business cycle. Fiscal bal., % GDP 11.8 9.4 3.4 3.0
• As our second chart shows, while aggregate exports in
Korea GDP 5.1 2.2 -2.6 2.8
Asia have tentatively bottomed out – the USD value of
CPI 2.7 4.7 2.6 2.8
exports has stopped falling but is not rising either and
CA bal., % GDP 0.6 -0.7 2.6 1.0
the yoy growth rate has almost imperceptibly improved
Fiscal bal., % GDP 3.8 1.2 -5.3 -3.7
in May – the ISM suggests a significant improvement in
Taiwan GDP 5.7 0.1 -4.9 3.0
the data lies ahead. While the ISM was actually
CPI 1.8 3.5 -1.0 1.5
negatively correlated with Asian exports during 2005-
CA bal., % GDP 8.3 6.7 8.6 7.9
07, it was for many years a reliable leading indicator
Fiscal bal., % GDP -0.3 -2.0 -5.8 -4.9
and we think it reasonable that growth in Asian exports
and industrial output will improve from here as the G-2 Thailand GDP 4.9 2.6 -5.8 3.3
economies stabilize and then begin to grow. CPI 2.2 5.5 0.3 3.2
• South Korea has been a notable outlier in this group, CA bal., % GDP 6.4 -0.1 5.9 6.1
seemingly because of last year’s KRW depreciation Fiscal bal., % GDP -1.1 -0.4 -5.8 -6.8
which has supported a complete recovery of export
volumes and attracted a surge in tourism receipts.
• We caution, however, that even in South Korea actual
and disguised unemployment in Asia are rising and we
would not be surprised to see consumption growth –
which began slowing in early 2008, long before exports
did – remain weak until well after the turn in exports.
Sources: CEIC and DB Global Markets Research

Michael Spencer, (852) 2203-8305

Latin America: Safe but recovering unevenly

First quarter performance confirms recession 1. GDP growth, YoY
•After holding up relatively well last year, economic activity
10 % yoy 2007 2008 2009F 2010F
in Latin America finally reflected the full impact of the global
crisis in the last quarter of 2008 and the first quarter of this 8
year. On average Q109 GDP was down more than 2% yoy,
6
led by 8.2% fall in Mexico and an estimated 3% decline in
Argentina (based on private data which noticeably differs 4
from public statistics). While domestic demand has been 2
slowing gradually, production has collapsed since October
0
2008. However, production indicators have stopped falling
in most of the countries while expectations are improving -2
relatively rapidly in some places. Thus, on current basis, we -4
now expect the region to experience negative average
-6
growth of 2.3% this year but recovering in 2010 to a pace
close to 3%. In particular, we forecast that Argentina, Brazil, ARG BRA CHI COL ECU MEX PEN VEN
Chile, Ecuador, and Mexico will all experience GDP
Sources: Global Markets Research
contraction this year, but will all rebound in 2010. Indeed,
despite expectation of a rather fragile global economy, we
still believe that 2010 performance will be better for Latin 2. CPI inflation, YoY
America than for many of the most developed countries.
But H2-09 will show recovery, although unevenly 32 % yoy 2007 2008 2009F 2010F
•Growth performance is expected to suffer the most in
28
commodity exposed countries that at the same time face
difficult financing outlooks like Ecuador, Argentina, and 24
Venezuela. These are the countries were we expect growth 20
to recover only gradually and towards below trend levels,
Mexico remains an outlier among well run economies in the 16
region, with low levels of public and private debt and 12
manageable external imbalances, but where the close link
8
to the US plus the effects of the flu epidemic reported
earlier this year is causing a sharp contraction in economic 4
activity. We expect the Mexican authorities to try pushing 0
for pending structural reforms in the months ahead in order
ARG BRA CHI COL ECU MEX PEN VEN
to gain new economic momentum. However the degree of
damage already observed in the local economy together Sources: Global Markets Research
with the still strong dependency on the US, is going to
represent a heavy burden on performance even during 2010
and after a deep fall expected in 2009 (-6% for the whole Deutsche Bank Forecasts: Latin America
(% yoy, unless stated) 2007 2008 2009F 2010F
year). The outlook seems much more constructive for Brazil,
Real GDP growth 5.4 4.4 -2.3 3.0
Peru, and Colombia and Chile to a lesser extent. In Brazil,
- Private consumption 6.7 5.2 -1.4 2.7
we are already witnessing a reversal in capital outflows
- Investment 13.3 12.3 -8.3 5.4
while economic sentiment seems to be improving rapidly. Trade balance, USD bn 93.4 86.8 24.3 21.9
For this reason, plus the fact that Brazil remains a relatively
- Exports, USD bn 696.9 801.2 616.9 673.1
close and large economy with low degree of leverage and a
- Imports, USD bn 603.5 714.4 592.6 651.2
sound banking system, we would expect its economy to Inflation 6.3 8.8 6.3 6.6
recover faster and in a more pronounced way than any Industrial production 6.8 4.4 -4.7 3.8
other in the region. Peru appears also as a strong economy Unemployment, % 7.3 7.0 8.4 7.7
that is only moving its sturdy pace of growth to around Fiscal balance, % of GDP -0.2 -0.8 -0.8 -0.6
5.5% next year, while Colombia and Chile will rebound CA balance, % of GDP 0.8 -0.4 -1.3 -1.2
slower because of greater openness and dependency on
commodity resources. A robust fiscal position in Chile will
help mollify the impact of the crisis but it is unlikely to
prevent a subpar economic performance even during 2010.

Latin America: Safe but recovering unevenly

Basic economic fundamentals remain strong 3. Current account, % GDP
•In general, the region remains relatively solid. After years of
current account surpluses and floating FX regimes, Latin
15 % GDP 2007 2008 2009F 2010F
America has reduced currency mismatches in their balance
sheet, with the public sector becoming a net creditor of the 12
rest of the world in countries such as Brazil, Chile, Mexico,
9
Peru, Venezuela and Colombia. Even in the countries where
FDI has been strong, like Chile, Colombia, Peru, and Mexico, 6
direct foreign participation has represented half of total
3
growth financing in recent years. Therefore, FDI reduction
will hit harder LatAm than overall credit rationing, although 0
the indirect effect of increasing credit costs will certainly not
-3
be negligible and indiscriminate short term external rationing
remain a serious risk. In the meantime, leverage levels have -6
remained relatively low given prudent monetary policies and ARG BRA CHI COL ECU MEX PEN VEN
incipient capital market structures.
•Although commodities dependence remains a source of Sources: National authorities, DB Global Markets Research
vulnerability (around 60% of regional exports come from
commodities), current international positions appear Deutsche Bank Forecasts
adequate to withstand a further decline in commodity prices (% yoy, unless stated) 2007 2008 2009F 2010F
or a prolonged continuation of current credit rationing in
international markets. The ability to access IMF or Fed Argentina GDP 8.7 6.7 -2.5 1.5
funding creates an additional layer of support, but also of CPI 11.1 22.6 17.0 16.6
further credit differentiation in the region, favoring the CA bal., % GDP 3.3 2.7 1.8 2.5
strongest economies, like Brazil; Chile; Mexico; Peru; and to
a lesser extent Colombia. Thus, based on robust external Brazil GDP 5.4 5.4 -1.0 4.0
positions plus the additional funding available from CPI 4.5 4.6 4.2 4.2
multilateral sources, we do not see these economies facing CA bal., % GDP 0.3 -1.8 -0.8 -1.9
serious rationing of foreign credit. The less market friendly
economies in the region may find it different. Chile GDP 5.1 4.6 -0.5 2.9
CPI 7.8 7.1 0.1 2.4
•Fiscal situations have also improved markedly helping to
CA bal., % GDP 4.5 -3.1 -0.4 2.7
withstand the expected sharp reduction in public revenues
this year. Furthermore, relatively healthy local financial
Colombia GDP 6.8 3.5 0.0 2.5
institutions (for the reasons explained above) have avoided
CPI 5.7 7.7 4.3 4.4
massive fiscal shocks arising from banks or companies bail
CA bal., % GDP -4.0 -2.5 -4.6 -3.6
out. Indeed, despite negative spillover effects on debt
dynamics from weak economic growth and wide sovereign
Ecuador GDP 2.6 5.3 -3.5 0.5
spreads, average public debt ratios in Latin America are
CPI 3.3 8.8 1.8 3.5
projected to remain stable or decline over the next decade.
CA bal., % GDP 4.2 1.3 -3.9 0.2
Countercyclical policies to help this time around
•Improved economic fundamentals and strong anti- Mexico GDP 3.2 1.8 -6.0 2.0
inflationary institutions have allowed regional Central Bank to CPI 3.8 6.5 4.2 3.4
behave counter-cyclically. This is the very first time monetary CA bal., % GDP -0.9 -1.8 -2.2 -2.3
policy easing could be contemporaneous with weakening
exchange rates in the region, also reflecting the improved Peru GDP 8.4 9.3 3.8 5.5
balance sheet position of the different countries. Based on CPI 3.9 6.7 3.0 3.0
our calculations, monetary easing has still some more room CA bal., % GDP 1.8 -3.5 -3.5 -2.8
to go in countries like Brazil, Chile, Colombia, Mexico, and
Peru despite aggressive rates cut already. This Venezuela GDP 8.4 4.5 -0.3 3.0
notwithstanding, local currencies are expected to stabilize or CPI 22.5 30.9 24.0 30.0
appreciate in the remainder of the year, or after significant CA bal., % GDP 7.4 13.9 0.3 1.8
currency depreciation since the onset of the global crisis.
Gustavo Cañonero, (1) 212 250-7530

EMEA: Tentative signs of recovery

Russia: IP decline persists Russia: Inflation is slowing down
• Russia’s official statistical agency recently revised its
:
estimate for the contraction in Q1 2009 GDP from
9.5% to 9.8%. The size of the revision is not too 20 % yoy
significant but it is indicative of the severity of the
18 CPI
decline at the beginning of this year. The downturn in
the real sector persisted in Q2 2009, with April figures 16
on fixed investment growth (-16.2% yoy) and industrial
production (-16.9% yoy) disappointing on the 14
downside. Household spending slowed down further (-
12
5.3% yoy growth in April), though overall it stayed 12.3%
more resilient than other segments of the economy, 10
particularly given the significant increase in
unemployment. The latter increased from 10% in 8
March to 10.2% in April (ILO definition), though the 6
increase in the number of unemployed by 0.2m in April
is the lowest since mid-2008. Furthermore, in May the 2002 2003 2004 2005 2006 2007 2008 2009 2010
government reported notable decreases in registered Sources: Rosstat, DB Global Markets Research
unemployment.
• While real sector performance continues to disappoint, Turkey: Openness and IP in selected EM
Russia’s inflation started to decline appreciably since
March. In May it reached 0.6%, which puts the 12-
4 IP (yoy Aug-Mar 08/ 09 over 07/ 08)
month inflation rate at 12.3%, which in turn compares
Argentina
with the 14% registered at the end of March. The main 0
factors accounting for the deceleration in inflation are
the stronger rouble as well as the compression in -4
demand. We continue to expect a further deceleration -8 Malaysia
in inflation in Q3 2009, with a significant possibility of
-12 South Korea
deflation taking place during that period. Our forecast
for 2009 CPI inflation is 11.2%. The notable reduction -16
Turkey Czech Rep R2
in inflation is providing more scope for the monetary R2=0.35
-20
authorities to lower interest rates. On June 5th the
CBR undertook yet another interest rate reduction of -24 Taiwan
50 basis points with respect to the refinancing rate
0 50 100 150
(the third such step so far this year), which brought the
openness excluding commodities (% GDP)
refinancing rate to 11.5%. Finally, on the exchange
rate front, in May the rouble continued to strengthen Sources: DB Global Markets Research
significantly, mostly on the back of higher oil prices
and increased capital inflows. In the past month
Deutsche Bank Forecasts: EMEA
concerns over excessive rouble strength have (% yoy, unless stated) 2007 2008 2009F 2010F
intensified, with Alexey Kudrin Russia’s Finance Real GDP growth 6.8 4.3 -3.3 2.9
Minister declaring that the Rb/$30 level was seen as - Private consumption 10.0 7.4 -1.6 3.9
close to critical, with further rouble appreciation - Investment 17.2 7.1 -8.1 5.2
beyond this level seen as undesirable. Trade balance, USD bn 33.4 70.6 -26.7 -33.1
Turkey: Taking a harder than expected hit - Exports, USD bn 767 981 746 806
• While the external financing gap seems to be declining - Imports, USD bn 734 910 772 839
on the back of rapid adjustment in the current account CPI 10.5 12.6 9.3 8.5
deficit, the fiscal gap is growing and has become the Industrial production 6.0 1.7 -5.8 2.0
prominent concern for economic recovery. The Unemployment, % 8.7 9.0 11.1 10.5
government has responded to the collapse in growth Fiscal balance, % of GDP 1.3 0.2 -5.8 -4.0
with fiscal stimulus (temporary tax cuts, increasing CA balance, % of GDP -0.2 0.2 -2.2 -3.0
transfer payments and employment in the public
Real GDP growth
sector) and the CBT has cut policy rates by a
EMEA incl. CE-4 countries 6.6 4.2 -3.2 2.5
cumulative 800bps bringing the ex-ante real interest
rate down to an unprecedented level below 2.5%.

EMEA: Tentative signs of recovery

• While confidence indices and PMI numbers indicate a Deutsche Bank Forecasts
mild pick up in economic activity, these numbers show (% yoy, unless stated) 2007 2008 2009F 2010F
more of a gradual normalization than a shift to
sustainable recovery, which requires improvement in Egypt* GDP 7.1 7.2 2.9 5.4
bank lending among other factors. The Treasury’s CPI 6.9 18.3 9.6 8.4
domestic debt rollover ratio has been running at well CA bal., % GDP 1.7 0.5 -0.5 -1.7
over 100% leading to a deeper liquidity crunch to
which the CBT has responded by stepping up its Israel GDP 5.4 4.0 -1.1 2.0
funding of the banks effectively monetizing debt. And CPI 3.4 3.8 2.1 1.9
yet, credit spreads remain high, banks are unwilling to CA bal., % GDP 2.7 1.1 3.2 2.3
lend, corporates are de-leveraging as they scale down
their production and SME loans are contracting rapidly. Kazakhstan GDP 8.5 3.2 -2.2 3.3
A partially government sponsored credit guarantee CPI 18.6 9.7 6.4 4.0
scheme is expected to ease access for the latter. CA bal., % GDP -7.9 6.1 -7.4 -4.1
• Turkey is underperforming the EM universe in growth
performance, as contraction in industrial production Romania GDP 6.0 7.1 -3.9 3.5
(ytd avg at 21% yoy) seems to be as severe as in CPI 6.6 6.3 4.6 3.4
those economies with greater exposure to the CA bal., % GDP -13.8 -12.1 -5.8 -4.8
collapse in global trade and banking sector troubles.
This may be attributed to the sharp drop in confidence Russia GDP 8.1 5.6 -4.4 1.8
in Q4’08 and Q1’09, which may have been affected by CPI 11.9 13.3 11.2 10.3
local elections but also to the lack of a coordinated CA bal., % GDP 5.9 5.9 -0.9 -2.1
policy response and IMF financing. Growth in Q1’09
will be in double-digit negative territory and downside South GDP 5.0 3.0 0.2 3.0
risks to our -4.4% full year growth forecast have Africa CPI 9.0 9.8 5.5 5.0
increased significantly. CA bal., % GDP -7.0 -8.0 -7.5 -7.0
South Africa: Global weakness hurts SA production
• Manufacturing and mining output in SA have collapsed Turkey GDP 4.5 0.6 -4.4 4.1
in the face of global weakness, and this has started to CPI 8.4 10.1 6.2 6.5
feed through into private sector demand. GDP fell CA bal., % GDP -5.8 -5.7 -2.2 -3.5
more than anticipated (-6.4% qoq annualised) in Q1.
The Q1 number was biased downwards by Ukraine GDP 7.9 2.1 -5.8 2.2
measurement issues in the mining sector, and we CPI 16.6 22.3 15.8 13.3
expect a sharp rebound in this sector in Q2. CA bal., % GDP -4.2 -5.1 -0.2 -1.8
• Inflation has fallen more slowly than expected due to
stubbornly high core inflation. We continue to expect
inflation to fall within the target band in Q3 2009 due
to the stronger ZAR and favorable base effects from
oil, but an increase back towards 7.0% is likely
thereafter as the base effects turn negative. Inflation
expectations remain stubbornly high, and the weaker
labour market does not appear to have fed through
into more subdued wage growth.
• Further upside risks to inflation stem from the
currency. In our view the currency is stronger than fair
value at present, and we expect the still-wide current
account deficit to put pressure on the currency
through the year. We expect a $/ZAR rate of 9.50 by
year end.
• While there are significant risks that the SARB cuts
rates further, we would view such a move as ill- * Fiscal years ending 30 June for GDP and CA
advised. To the extent that rate cuts support domestic **1998 GDP series
demand growth, they will feed through into imports Sources: National authorities, DB Global Markets Research
and put further pressure on the BoP.
EMEA Research, (44) 20 7547-1930

Key Economic Indicators

Growth of real GDP (% yoy) Inflation, CPI (% yoy) Current Account (% of GDP)
2007 2008 2009F 2010F 2007 2008 2009F 2010F 2007 2008 2009F 2010F
US 2.0 1.1 -2.8 1.2 2.9 3.8 -0.5 0.8 -5.3 -4.7 -3.5 -3.0
Japan 2.3 -0.7 -7.0 0.3 0.0 1.4 -0.8 -0.5 4.8 3.2 2.6 4.4
Euroland 2.7 0.6 -4.3 0.8 2.1 3.3 0.3 0.9 0.1 -1.0 -1.1 -0.6
Germany 2.6 1.0 -6.0 0.4 2.3 2.8 0.2 0.6 7.9 6.2 3.4 4.6
France 2.3 0.3 -2.6 1.2 1.6 3.2 0.0 0.6 -2.8 -3.5 -4.0 -4.0
Italy 1.5 -1.0 -5.0 1.1 2.0 3.5 0.8 1.2 -1.8 -2.7 -2.5 -2.5
Spain 3.7 1.2 -3.6 -1.2 2.8 4.2 -0.4 0.7 -10.1 -10.0 -7.0 -6.0
Netherlands 3.5 2.1 -4.0 1.6 1.6 2.2 1.4 1.0 9.8 7.0 6.0 5.0
Belgium 2.6 1.0 -3.2 1.3 1.8 4.5 0.2 1.2 2.4 -1.5 -2.0 -1.5
Austria 3.0 1.7 -3.4 0.6 2.2 3.2 0.5 1.2 3.3 3.0 2.5 2.0
Finland 4.1 0.7 -4.7 1.8 1.6 3.9 1.7 1.1 4.0 2.0 1.5 1.0
Greece 4.0 2.9 -1.2 -1.0 3.0 4.2 1.4 2.1 -14.0 -13.0 -11.0 -8.0
Portugal 1.9 0.0 -4.0 -0.4 2.4 2.7 -0.7 0.5 -9.7 -12.0 -9.0 -7.0
Ireland 6.0 -2.3 -8.5 -2.0 2.9 3.1 -1.3 -0.3 -5.4 -5.0 -2.0 -1.0
Other Industrial Countries
United Kingdom 3.0 0.7 -3.6 1.2 2.3 3.6 1.9 1.8 -2.9 -1.7 -2.8 -2.2
Denmark 1.6 -1.1 -3.5 0.9 1.7 3.4 1.0 1.5 0.7 2.0 0.8 0.2
Norway 3.2 2.1 -1.2 1.0 0.7 3.8 1.5 1.5 16.0 19.5 9.0 6.0
Sweden 2.7 -0.4 -5.0 1.5 2.2 3.5 -0.5 1.0 8.6 7.8 6.5 7.0
Switzerland 3.3 1.6 -2.3 0.0 0.7 2.4 -0.7 0.7 10.0 9.3 7.0 5.0
Czech Republic 6.0 3.7 -3.4 1.7 2.8 6.4 1.4 1.0 -3.2 -3.5 -0.2 -0.4
Hungary 1.1 0.5 -6.0 0.8 8.0 6.1 5.1 5.8 -6.4 -8.4 -1.6 -1.4
Poland 6.7 4.8 -1.4 1.0 2.5 4.2 3.4 2.5 -4.7 -5.4 -1.5 -2.2
Canada 2.5 0.4 -1.7 2.8 2.1 2.4 0.6 2.4 1.0 0.5 -2.6 -2.2
Australia 4.0 2.4 0.2 1.3 2.3 4.4 1.4 1.8 -6.2 -4.3 -3.6 -4.2
New Zealand 3.2 0.3 -1.8 2.8 2.4 4.0 2.0 1.9 -8.2 -8.8 -6.2 -5.4
Emerging Europe/ Africa
Egypt 7.1 7.2 2.9 5.4 6.9 18.3 9.6 8.4 1.7 0.5 -0.5 -1.7
Israel 5.4 4.0 -1.1 2.0 3.4 3.8 2.1 1.9 2.7 1.1 3.2 2.3
Kasakhstan 8.5 3.2 -2.2 3.3 18.6 9.7 6.4 4.0 -7.9 6.1 -7.4 -4.1
Romania 6.0 7.1 -3.9 3.5 6.6 6.3 4.6 3.4 -13.8 -12.1 -5.8 -4.8
Russia 8.1 5.6 -4.4 1.8 11.9 13.3 11.2 10.3 5.9 5.9 -0.9 -2.1
Turkey 4.5 0.6 -4.4 4.1 8.4 10.1 6.2 6.5 -5.8 -5.7 -2.2 -3.5
Ukraine 7.9 2.1 -5.8 2.2 16.6 22.3 15.8 13.3 -4.2 -5.1 -0.2 -1.8
South Africa 5.0 3.0 0.2 3.0 9.0 9.8 5.5 5.0 -7.0 -8.0 -7.5 -7.0
Asia (ex-Japan)
China 11.9 9.0 7.5 7.2 4.8 5.9 0.0 2.0 9.5 7.2 5.6 5.2
Hong Kong 6.4 2.4 -4.5 2.5 2.0 4.3 0.5 -1.5 12.3 14.2 15.5 17.7
India 9.4 7.3 5.5 6.0 5.4 8.7 3.5 5.1 -1.0 -3.2 -1.5 -1.4
Indonesia 6.3 6.1 4.0 4.0 6.0 9.8 5.0 5.7 2.4 0.1 0.4 0.1
Korea 5.1 2.2 -2.6 2.8 2.7 4.7 2.6 2.8 0.6 -0.7 41.0 1.6
Malaysia 6.3 4.6 -5.0 3.0 2.0 5.4 0.9 2.3 15.6 17.5 14.8 18.7
Philippines 7.2 3.7 2.0 3.5 2.8 9.3 4.0 4.0 4.3 2.8 0.9 0.0
Singapore 7.8 1.1 -7.5 4.0 2.1 6.5 -0.7 -1.1 23.4 14.9 14.8 16.6
Taiwan 5.7 0.1 -4.9 3.0 1.8 3.5 -1.0 1.5 8.3 6.7 8.6 7.9
Thailand 4.9 2.6 -5.8 3.3 2.2 5.5 0.3 3.2 6.4 -0.1 5.9 6.1
Latin America
Argentina 8.7 6.7 -2.5 1.5 11.1 22.6 17.0 16.6 3.3 2.7 1.8 2.5
Brazil 5.4 5.4 -1.0 4.0 4.5 4.6 4.2 4.2 0.3 -1.8 -0.8 -1.9
Chile 5.1 4.6 -0.5 2.9 7.8 7.1 0.1 2.4 4.5 -3.1 -0.4 2.7
Colombia 6.8 3.5 0.0 2.5 5.7 7.7 4.3 4.4 -4.0 -2.5 -4.6 -3.6
Mexico 3.2 1.8 -6.0 2.0 3.8 6.5 4.2 3.4 -0.9 -1.8 -2.2 -2.3
Venezuela 8.4 4.5 -0.3 3.0 22.5 30.9 24.0 30.0 7.4 13.9 0.3 1.8
EM countries 8.2 5.8 1.4 4.5 5.7 7.8 3.6 4.5

World 4.9 2.9 -1.5 2.5 3.6 5.2 1.5 2.4
QUARTERLY GDP
(% qoq annualised)
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009F Q3 2009F Q4 2009F Q1 2010F Q2 2010F Q3 2010F Q4 2010F
US 0.9 2.8 -0.5 -6.3 -5.5 -2.0 0.0 1.0 1.1 1.8 2.3 2.8
Japan 1.5 -2.2 -2.9 -13.5 -14.2 -2.5 0.5 3.1 -0.4 -1.5 0.3 2.2
Euroland 2.8 -1.0 -1.4 -6.8 -9.7 -2.7 0.8 1.3 1.2 1.5 0.5 -0.1
United Kingdom 1.2 -0.1 -2.8 -6.1 -7.3 -2.1 0.8 1.9 1.6 1.4 1.4 1.4
Dollar Bloc
Canada -0.7 0.3 0.4 -3.7 -5.4 -0.6 2.0 2.6 2.8 3.0 4.6 3.6
Australia 3.1 1.4 0.9 -2.2 1.5 -0.3 -0.4 2.1 0.9 1.2 2.1 3.8
New Zealand -1.2 -0.9 -1.8 -3.6 -3.5 -1.6 1.4 2.7 3.5 3.6 3.5 3.5
Sources: Deutsche Bank Global Markets Research, National Statistical Authorities

Interest Rates
(End of Period)
3M rate 10Y rate Official rate
Current 3M 6M 12M Current 3M 6M 12M Current 3M 6M 12M

US 0.60 0.60 0.60 0.60 3.55 4.00 4.00 3.50 0.25 0.25 0.25 0.25
Japan 0.55 0.70 0.70 0.70 1.40 1.60 1.50 1.40 0.10 0.10 0.00 0.00
Euroland 1.14 1.30 1.20 1.20 3.42 3.25 3.00 3.00 1.00 1.00 1.00 1.00

United Kingdom 1.20 1.20 1.20 1.30 3.72 3.90 4.00 4.30 0.50 0.50 0.50 0.50
Denmark 2.22 1.80 1.70 1.70 3.86 3.70 3.45 3.45 1.55 1.50 1.50 1.50
Norway 1.95 1.80 1.85 2.10 4.20 4.05 3.90 4.00 1.25 1.25 1.25 1.25
Sweden 0.91 0.85 1.00 1.25 3.46 3.25 3.00 3.00 0.50 0.50 0.50 0.50
Switzerland 0.33 0.40 0.40 0.50 2.34 2.15 2.00 2.00 0.25 0.25 0.25 0.25
Czech Republic 1.86 1.50 1.20 1.20 5.23 5.25 5.25 5.50 1.50 1.25 1.00 1.00
Hungary 11.30 9.60 8.20 7.80 10.21 9.75 9.25 9.00 9.50 9.50 9.50 9.50
Poland 4.20 4.00 3.70 3.60 6.35 6.75 6.60 6.80 3.50 3.50 3.25 3.25
Canada 0.33 n.a. n.a. n.a. 3.43 4.25 5.00 5.50 0.25 0.25 0.25 0.75
Australia 3.00 3.16 2.75 2.75 5.62 5.75 5.00 5.00 3.00 3.00 2.75 2.50
New Zealand 3.13 2.80 2.80 3.50 6.02 6.25 5.50 5.50 2.50 2.50 2.50 3.00
EMERGING MARKETS SHORT-TERM RATES

Current 3M 6M 12M
Emerging Europe
Romania 10.09 n.a. n.a. n.a.
Russia 11.94 n.a. n.a. n.a.
Turkey^ 11.60 17.30 16.00 15.50
Ukraine 9.20 n.a. n.a. n.a.
South Africa 7.50 9.10 9.10 9.10
Asia (ex-Japan)
China* 2.25 2.25 2.25 1.98
Hong Kong 0.31 0.80 0.95 1.10
India 4.69 3.20 3.60 4.15
Indonesia 7.50 n.a. n.a. n.a.
Korea 2.41 2.60 2.60 2.80
Malaysia 2.16 2.10 2.20 2.50
Philippines 4.52 4.40 4.45 4.70
Singapore 0.56 0.90 1.10 1.20
Taiwan 0.15 0.60 0.60 0.74
Thailand 1.40 1.20 1.00 1.25
Latin America
Argentina 14.63 n.a. n.a. n.a.
Brazil ^^ 9.25 8.80 9.00 9.00
Chile 0.78 n.a. n.a. n.a.
Colombia 5.47 5.10 5.10 5.10
Mexico n.a. n.a. n.a. n.a.
*Short term rate is 1Y deposit rate;

^ 6M rate; ^^Short term rate is Selic (overnight) rate target
Sources: Deutsche Bank Global Markets Research, Bloomberg, Datastream; as of June 26

Exchange Rates (End of Period)

(End of Period)
FX Rate (vs. US Dollar) FX Rate (vs. Euro) FX Rate (vs. Y en)
Current 3M 6M 12M Current 3M 6M 12M Current 3M 6M 12M

US 1.41 1.30 1.20 1.18 96 100 105 103
Japan 96 100 105 103 134 130 126 121
Euroland 1.41 1.30 1.20 1.18 134 130 126 121

United Kingdom 1.65 1.44 1.33 1.42 0.85 0.90 0.90 0.83 158 144 140 146
Denmark 5.29 5.74 6.22 6.32 7.45 7.46 7.46 7.46 18.1 17.4 16.9 16.2
Norway 6.43 6.57 6.67 6.78 9.05 8.54 8.00 8.00 14.9 15.2 15.8 15.1
Sweden 7.81 7.96 8.13 8.05 11.00 10.35 9.75 9.50 12.3 12.6 12.9 12.7
Switzerland 1.09 1.54 1.56 1.56 1.53 1.54 1.56 1.56 88.1 64.9 67.3 65.7
Czech Republic 18.5 20.9 23.2 23.2 26.0 27.2 27.8 27.4 5.2 4.8 4.5 4.4
Hungary 196 227 263 253 276 295 315 298 0.5 0.4 0.4 0.4
Poland 3.20 3.62 3.96 3.85 4.50 4.70 4.75 4.54 30.0 27.7 26.5 26.6
Canada 1.15 1.20 1.25 1.23 1.62 1.56 1.50 1.45 83.5 83.3 84.0 83.3
Australia 0.81 0.74 0.68 0.68 1.75 1.76 1.76 1.74 77.2 74.0 71.4 69.7
New Zealand 0.65 0.60 0.56 0.56 2.18 2.17 2.14 2.11 61.8 60.0 58.8 57.4
Emerging Europe
Israel 3.96 4.39 4.50 4.35 5.58 5.70 5.40 5.13
Romania 2.99 3.21 3.46 3.46 4.21 4.17 4.15 4.09
Russia 31.1 33.2 33.6 34.2 43.82 43.2 40.3 40.4
Turkey 1.54 1.70 1.60 1.75 2.17 2.21 1.92 2.07
Ukraine 7.65 8.60 8.70 9.20 10.77 11.18 10.44 10.86
South Africa 7.98 9.00 9.50 9.50 11.23 11.70 11.40 11.21
Asia (ex-Japan)
China 6.83 6.84 6.84 6.77 9.62 8.89 8.21 7.99 14.0 14.6 15.4 15.1
Hong Kong 7.75 7.77 7.80 7.80 10.91 10.10 9.36 9.20 12.4 12.9 13.5 13.1
India 48.27 47.00 46.10 45.00 67.96 61.10 55.32 53.10 2.0 2.1 2.3 2.3
Indonesia 10,220 10,100 10,000 9,800 14,389 13,130 12,000 11,564 0.01 0.01 0.01 0.01
Korea 1,284 1,260 1,200 1,150 1,808 1,638 1,440 1,357 0.07 0.08 0.09 0.09
Malaysia 3.53 3.60 3.58 3.50 4.97 4.68 4.30 4.13 27.1 27.8 29.3 29.3
Philippines 48.25 48.00 47.50 46.25 67.93 62.40 57.00 54.58 2.0 2.1 2.2 2.2
Singapore 1.45 1.49 1.51 1.50 2.05 1.94 1.81 1.77 65.8 67.1 69.5 68.3
Taiwan 32.91 33.00 32.50 32.00 46.33 42.90 39.00 37.76 2.9 3.0 3.2 3.2
Thailand 34.04 34.50 34.00 33.30 47.92 44.85 40.80 39.29 2.8 2.9 3.1 3.1
Latin America
Argentina 3.79 3.95 4.13 4.40 5.33 5.14 4.96 5.19
Brazil 1.94 1.90 1.90 1.95 2.73 2.47 2.28 2.30
Chile 531 560 570 580 748 728 684 684
Colombia 2,167 2,200 2,300 2,400 3,051 2,860 2,760 2,832
Mexico 13.19 13.70 13.80 14.00 18.56 17.81 16.56 16.52
Sources: Deutsche Bank Global Markets Research, Bloomberg, Datastream; as of June 26

Contacts
Name Title Telephone Email
David Folkerts-Landau Global Head of Research +44 20 754 55502 david.folkerts-landau@db.com
Peter Garber Global Strategist +1 212 250 5466 peter.garber@db.com
Michael Lewis Global Head of Commodities Research +44 20 754-52166 michael.lewis@db.com
Adam Sieminski Chief Energy Economist +1 202 662-1624 adam.sieminski@db.com
United States
Peter Hooper Co-head of Global Economics +1 212 250 7352 peter.hooper@db.com
Joe LaVorgna Chief US Economist +1 212 250 7329 joseph.lavorgna@db.com
Torsten Slok Senior Economist +1 212 250 2155 torsten.slok@db.com
Carl Riccadonna Senior US Economist +1 212 250 0186 carl.riccadonna@db.com
Dollar-Bloc
Tony Meer Chief Economist, Australia +61 2 8258 1688 tony.meer@db.com
Philip O'Donaghoe Senior Economist, Australia +61 2 8258 1606 philip.odonaghoe@db.com
Darren Gibbs Chief Economist, New Zealand +64 9 351 1376 darren.gibbs@db.com
John Clinkard Chief Economist, Canada +41 6 682 8470 john.clinkard@db.com
Japan
Mikihiro Matsuoka Chief Economist, Japan +81 3 5156 6768 mikihiro.matsuoka@db.com
Seiji Adachi Senior Economist, Japan +81 3 5156-6320 seiji.adachi@db.com
Europe
Thomas Mayer Co-head of Global Economics +44 20 754 72884 tom.mayer@db.com
George Buckley Chief UK Economist +44 20 754 51372 george.buckley@db.com
Mark Wall Chief Euro Area Economist +44 20 754 52087 mark.wall@db.com
Stefan Bielmeier Head of Economic Research Bureau Frankfurt +49 69 910 31789 stefan.bielmeier@db.com
Markus Heider Senior European Economist +44 20 754 52167 markus.heider@db.com
Gillian Edgeworth Economist, CE4 +44 20 754 74900 gillian.edgeworth@db.com
Emerging Markets Europe
Marcel Cassard Global Head, EM Research +44 20 754 55507 marcel.cassard@db.com
Arend Kapteyn Chief Economist, EMEA +44 20 7547 1930 arend.kapteyn@db.com
Yaroslav Lissovolik Senior Economist, EMEA +7 495 967 1319 yaroslav.lissovolik@db.com
Michael Biggs Senior Economist, EMEA & Global +27 11775 7265 michael.biggs@db.com
Caroline Grady Economist, EMEA +44 20 754 59913 caroline.grady@db.com
EM Latin America
Gustavo Cañonero Head of Economic Research, LA & EMEA +1 212 250-7530 gustavo.canonero@db.com
Jose Carlos de Faria Senior Economist, LA +55 11 5189 5185 jose.faria@db.com
Fernando Losada Senior Economist, LA +1 212 250-3162 fernando.losada@db.com
Felipe Hernandez Economist, LA +57 315 846-3061 felipe.hernandez@db.com
Andres Orlandi Economist, LA +1 212 250 2975 andres.orlandi@db.com
EM Asia
Michael Spencer Chief Economist and Head of GMR, Asia +852 2203 8305 michael.spencer@db.com
Jun Ma Chief Economist, Greater China +852 2203 8308 jun.ma@db.com
Sanjeev Sanyal Chief Economist, South Asia +65 6423 5925 sanjeev.sanyal@db.com
Taimur Baig Senior Economist, Asia +65 6423 8681 taimur.baig@db.com
Juliana Lee Senior Economist, Asia +852 2203 8312 juliana.lee@db.com

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/ger/disclosure/DisclosureDirectory.eqsr.
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. Thomas Mayer
Deutsche Bank debt rating key
CreditBuy (“C-B”): The total return of the Reference

Credit Instrument (bond or CDS) is expected to
outperform the credit spread of bonds / CDS of other
issuers operating in similar sectors or rating categories
over the next six months.
CreditHold (“C-H”): The credit spread of the
Reference Credit Instrument (bond or CDS) is expected
to perform in line with the credit spread of bonds / CDS
of other issuers operating in similar sectors or rating
categories over the next six months.
CreditSell (“C-S”): The credit spread of the Reference
Credit Instrument (bond or CDS) is expected to
underperform the credit spread of bonds / CDS of other
issuers operating in similar sectors or rating categories
over the next six months.
CreditNoRec (“C-NR”): We have not assigned a
recommendation to this issuer. Any references to
valuation are based on an issuer’s credit rating.
Reference Credit Instrument (“RCI”): The Reference

Credit Instrument for each issuer is selected by the
analyst as the most appropriate valuation benchmark
(whether bonds or Credit Default Swaps) and is detailed
in this report. Recommendations on other credit
instruments of an issuer may differ from the
recommendation on the Reference Credit Instrument
based on an assessment of value relative to the
Reference Credit Instrument which might take into
account other factors such as differing covenant
language, coupon steps, liquidity and maturity. The
Reference Credit Instrument is subject to change, at the
discretion of the analyst.

Regulatory Disclosures
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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at
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David Folkerts-Landau
Managing Director
Global Head of Research
Stuart Parkinson Guy Ashton Marcel Cassard

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Company Research Fixed Income Strategies and Economics
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Global

World Outlook Economics

Recovery ahead Peter Hooper

of debtors to repay their creditors became evident. As a result, we can

GDP growth, % CPI inflation, % Gustavo Canonero Tony Meer

Deutsche Bank AG/London

Page 2 Deutsche Bank AG/London

Global Overview: Recovery ahead

Deutsche Bank AG/London Page 3

Top down view: reversal of the Great

Page 4 Deutsche Bank AG/London

term future. In line with the OECD’s recent estimates, we

Deutsche Bank AG/London Page 5

How high could inflation go in the longer-term? Probably

Page 6 Deutsche Bank AG/London

Geopolitics: The Dollar and Its Rivals

Deutsche Bank AG/London Page 7

Motivations of Some Countries that Want to Change The SDR

Page 8 Deutsche Bank AG/London

Some Diversification Issues

Deutsche Bank AG/London Page 9

Ekaterinberg Conference One could interpret this as a process of elimination of

Page 10 Deutsche Bank AG/London

Commodities: Investment Flows & Fundamentals

should also rise sharply n 2011 Source: Bloomberg, Deutsche Bank

We find that since August 2008, oil prices have become

Deutsche Bank AG/London Page 11

* We track AUM of Powershares products registered for sales in the

Source: Bloomberg (Data as of End May 2009)

We believe the financial crisis has introduced some

Page 12 Deutsche Bank AG/London

US: Robust recovery remains elusive

Deutsche Bank AG/London Page 13

US: Robust recovery remains elusive

Page 14 Deutsche Bank AG/London

US: Robust recovery remains elusive

estimate equilibrium in the ratio is around 2.2 times liquid

Deutsche Bank AG/London Page 15

US: Robust recovery remains elusive

Sources: DB Global Markets Research

External balances & financial forecasts

Source: DB Global Markets Research, as of June 26

Joseph A. LaVorgna, (1) 212 250-7329

Page 16 Deutsche Bank AG/London

Japan: Initially V-shaped production recovery

Macro-economic activity & inflation forecasts

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London Page 17

Japan: Initially V-shaped production recovery

Sources: Cabinet Office, DB Global Markets Research

Page 18 Deutsche Bank AG/London

Euroland: Constrained expectations

Macro-economic activity & inflation forecasts

Deutsche Bank AG/London Page 19

Euroland: Constrained Expectations

much strain, governments are coy about doing more to

External balances & financial forecasts

Financial forecasts Current 3M 6M 12M 1

Mark Wall, (44) 20 7545-2087

Page 20 Deutsche Bank AG/London

Germany: Export dependence has become a drag

and in 2010. The rise in unemployment and lackluster

Page 21 Deutsche Bank AG/London