Testing The Limits of Stimulus Policies: Fixed Income Markets Research

Fixed Income Markets Research
18 December 2008
Testing the limits of stimulus policies

Hervé Goulletquer Fed’s balance sheet (USDbn)
Head of FIM Research
2,250
(33) 1 41 89 88 34
herve.goulletquer@calyon.com 2,000
1,750
Mitul Kotecha 1,500
Head of Global FX Strategy 1,250
+852 2848 9809 1,000
mitul.kotecha@hk.calyon.com 750
500
David Keeble 250
Global Head of Rates Strategy 0
+44 20 7214 6244
Jan-08 Apr-08 Jul-08 Oct-08
david.keeble@uk.calyon.com
T-Bills Repo Gold Stock
Misc. Primary Dealer Credit Other Fed Assets
Isabelle Job Other credit extensions TAF ABCP & MMFF
Head of Macro-Research
+44 20 7214 7468 Source: Fed, Crédit Agricole
isabelle.job@uk.calyon.com
Not all the conditions for an emergent recovery of the global economy have yet
Macro Insight
been met. However, we believe that because of proactive policies the global
economic situation will gradually improve. The recovery will not be as strong as
normal, because of the deleveraging required and the slowdown in world trade
growth. These two expected changes will modify the engines of growth for many
countries, especially the US and China.
In the US, while the fed funds rate is near 0%, the central bank is using
quantitative easing measures that seek to lower overall mortgage spreads and
perhaps also LT Treasury rates. The aggressive monetary policy is expected to be
paired with a large multi-year fiscal stimulus programme.
Contents
Editorial: The old, the crisis and the new ........................................................2
Monetary Policy: Anti-deflation front ...............................................................4
Exchange rates: USD on the precipice ............................................................6
Interest Rates: When will the scales tip?.........................................................7
Energy: Will OPEC be able to defend USD70/bl oil? ......................................9
Metals: Producers cutting as demand collapses............................................9
US: The recession deepens ............................................................................10
US Focus: US policymakers: ‘whatever it takes’ ..........................................11
Eurozone: A clear recession ...........................................................................15
Eurozone focus: The European recovery plan..............................................16
France: Growth pinned down by external shocks ........................................18
Germany: Taking it on the chin.......................................................................19
Japan: Facing turbulence................................................................................20
Japan Focus: Challenges for Japan’s banking system ...............................21
UK: Back to the early 1990s ............................................................................23
Sweden: Historic rate cut ................................................................................24
Norway: Norges Bank changes course radically..........................................24
Australia: Verging on recession .....................................................................25
Canada: Dragged into recession ....................................................................25
EM currency outlook: weaker, but smoother ................................................26
Russia: A hard winter ......................................................................................27
CE: Can Central Europe avoid recession in 2009?.......................................27
Asia: Gloomy times ahead ..............................................................................28
Latin America: Caught up in the crisis ..........................................................29
South Africa: Sharp growth slowdown in 08 and 09 ....................................30
Middle East: Oil wealth to dry up in 2009 ......................................................30
Exchange rate forecasts..................................................................................31
Interest rate forecasts ................................................................................32/33
Economic forecasts ....................................................................................34/35
Commodities forecasts....................................................................................36
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18 December 2008 Macro Insight
Editorial: The old, the crisis and the new

Not all the conditions for an emergent recovery of the global economy have yet been met. However, we believe that
because of proactive policies the global economic situation will gradually improve. The recovery will not be as strong as
normal, because of the deleveraging required and the slowdown in world trade growth. These two expected changes
will modify the engines of growth for many countries, especially the US and China.
World PMI Index In whatever direction you look economic data flows show that the
situation has not yet stabilised, even if the risk of a financial industry
65
collapse seems to have been averted. Everywhere, either recession is
60 growing (this is the case in most developed countries) or growth is severely
55 slowing down (emerging countries). Markets react by pushing asset prices
50 down, while corporate and household confidence is declining quickly and
45 deeply. To at least attenuate the vicious cycle among confidence, market
40 prices and economic data, more policy initiatives have to be implemented.
35 That is effectively the case. For a few weeks, fiscal stimulus plans have been
30 discussed or decided all around the world, the largest ones being in China
2005 2006 2007 2008 and the US. More easing in monetary policy is also being implemented in a
World composite PMI index lot of countries. Official interest rates have reach historical low points, while
New orders the US, with a fed funds rate already close to zero, is experiencing
quantitative easing (QE). However, because economic figures remain poor
Source: Reuters, Crédit Agricole and are very often worse than expected, these positive signals from
policymakers do not succeed in stabilising financial markets. It is very likely
that the period of disappointing figures will continue for a few months or even
a few quarters. It will be more and more difficult to accelerate the rate of
China: budget and external stimulus initiative announcements in order to stop market prices from moving
balances lower.
12 Policymakers have to change their method of communication. Firstly,
10 country by country, they have to explain their full strategy to extract the
8 economy from the current turmoil (recession or huge slowdown,
6 depending on the region or country). The government and the central bank
4 must jointly send the message that they are ’in front of the curve’. They have
2 to be precise in the details of their action plan and to state clearly how the
0 economy, according to their analyses, will react and when any improvement
-2 will begin to be perceived. They also have to specify what exit strategy they
-4 will follow when the recovery stabilises. The strategy is certainly a risky one
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Government balance (% GDP) but is there an alternative, if some stabilisation in financial markets is an ex-
Current account balance (% GDP)
ante ’necessary condition’ to economic recovery? It seems for the moment
that the US is closer to this than its European counterparts.
Source: Bloomberg, Calyon
Secondly, because the economic crisis is a global affair, co-ordination
among the main countries is needed. If “they are all Keynesians now”, they
must take care that policies, decided at the national level, are consistent with
each other. For example, a country with solid fiscal and external positions but
China, US: external balances
confronted by a serious downward growth inflexion, should not hesitate to
12 launch quite a large stimulus plan. Isn’t this the current situation in Germany?
It may also be argued that a country with a huge trade surplus has absolutely
8
no reason to be tempted by a devaluation of its currency. It must exclusively
4 use any fiscal and monetary leeway. Hopefully, China will not succumb to
0
such a temptation. On the contrary, it may be dangerous in the US to include
measures which would result in a significant acceleration in imports and so
-4 lead to trade balance degradation.
-8
It is not possible to say that all the conditions for an emergent recovery
90 92 94 96 98 00 02 04 06 08
of the global economy have already been met. Too many important details
CH Current Account Balance (% gdp)
of the strategy to be implemented in the US, Europe and the main emerging
US Current Account Balance (% gdp)
countries are missing. However, we make a bet that because of these
proactive policies the global economic situation will gradually improve.
Source: Bloomberg, Calyon
According to our forecasts, recession in the developed countries will lose its
strength from Q209 and will leave room for a recovery in Q4, although it will
remain fragile to start with.
Hervé Goulletquer 2
herve.goulletquer@calyon.com
+33 1 41 89 88 34
2010 should be the year of emergence from a long period of global

recession (about two years in the US). We continue to believe that the
recovery will not be as strong as normal. We have already discussed the
main reasons. According to our analysis, the two main engines of the
US: GDP growth and weight of
tremendous economic performances of previous years were a sharp rise in
consumption debt and a huge acceleration in global trade. These will become less
10 0.64
powerful.
8
0.66
Firstly, the de-leveraging in the banking sector will be painful, and bank
6 balance sheet repair will take time. Moreover, a stricter regulatory
4 0.68 environment may be implemented in order to prevent new financial excesses.
2 0.70
This is why it seems reasonable to assume more constraints on the lending
0 supply, which will weigh down the pace of economic growth. It will especially
-2
0.72 impact the most indebted among economic agents, households in the US or
the UK, for example.
-4 0.74
80 83 86 89 92 95 98 01 04 07 Then, a slowdown in world trade is expected. The idea of the unlimited
GDP growth rate YoY %
extension of democracy and free market economy is fading. In world affairs,
Hhold Consumption/GDP ratio % (rhs)
the rules of the game will change. This is the price to be paid in order to
Source: Bloomberg, Calyon integrate some of the ‘heavyweights’, such as China, India, Russia, etc. The
process will be chaotic and will imply some periods of diplomatic tension. The
Doha Round, under the umbrella of the WTO, has failed. This means less
likelihood of reducing tariffs and other obstacles to trade. The mix of these
two events will hamper the development of global growth.
China: export dynamism and
These two expected changes will modify the engines of growth for
GDP growth many countries. In the US, the rise in non-financial private sector debt
40 16 has been accompanied by a surge in the weight of consumer spending
35 14
as a percentage of GDP: from about 65% at the beginning of the 1980s to a
30 12
little less than 72% in 2007. A downward correction will very likely occur in
25 the next few years. It will be related to households and will reduce their debt,
10
20 so increasing their savings. Will it have a negative impact on US growth?
8
15 Historical experience in the US does not show a clear and strong relationship
6
10 between GDP and the weight of private consumption in the economy.
5 4
Exports and government spending seem to be the demand components most
0 2 able to take the baton from private consumption. However, a more export-
87 89 91 93 95 97 99 01 03 05 07
oriented economy would imply an enlargement of the manufacturing basis. It
China Exports/GDP %
takes time to be implemented and it will be a U-turn, or at least a significant
China GDP Growth YoY chg, % (rhs)
slowdown, away from the outsourcing process of the past few decades. More
Source: Bloomberg, Calyon public infrastructure and wider access to health insurance suggest a larger
tax base. Otherwise, the risk is of recording a government deficit at
unsustainable levels. The US could enter a transitory period. Its economic
model may change significantly, even if we are not able to perceive its impact
on the pace of growth.
In China, the loss (or at least decreased appetite) of one of the main
China: GDP growth and weight consumers of last resort (the US) will also have serious consequences.
of consumption Because no substitute seems able to replace the US consumer, it means that
13 0.45
China will have to re-balance its growth between exports, which will slow, and
domestic demand, which will have to accelerate. The focus overall is on
11
0.50 consumer spending. From the beginning of the current decade until 2007, the
9
acceleration in growth was related to a decline in the weight of household
7
0.55 consumption in GDP. The challenge for the Chinese government is to
5 maintain a high level of GDP growth, while building conditions for an
3 0.60 acceleration in household spending. This means creating conditions for a
1 slide in the personal saving ratio. This requires increasing both retirement
-1 0.65 pensions and health insurance. It will probably have an impact on the
95 96 97 98 99 00 01 02 03 04 05 06 07 composition of government spending and perhaps also on their size. In a
GDP growth rate (YoY %) country committed to social harmony, the depth of such a change is a serious
Hhold consumption/GDP ratio % (rhs-inv)
issue.
Source: Bloomberg, Calyon When the current crisis is over, capital markets will have to rebuild their
benchmarks. Growth opportunities may lie elsewhere compared with a few
years ago. A complex and difficult capital reallocation process will have to be
launched. This will impact labour markets. During this transitory phase,
visibility will be limited, return expectations will be somewhat unstable and
volatility may remain high. Welcome to the new world of opportunity!
Hervé Goulletquer 3
herve.goulletquer@calyon.com
+33 1 41 89 88 34
Monetary Policy: Anti-deflation front

An anti-deflation front has formed, bringing rate cuts in its train that are unprecedented in terms of their scale and
speed. A lot is at stake: deflation is a rare economic phenomenon but is sufficiently destructive for it to be avoided
at all costs.
US: Fed funds and Only months ago, an anti-inflation front was being formed, with a succession
unemployment rate of rate increases designed to slow price trends that were largely fuelled by
spiralling oil prices. At the time, we reckoned that central banks were taking a
% % risk by relegating the financial crisis and its deflationary shockwave to the
7.0 3.5
4.0
background. Only the Fed seemed to want to protect itself against the risk of
6.0
4.5 triggering such a downward spiral.
5.0 5.0
4.0 5.5 Since then, the bursting of the oil bubble, the reactivation of the financial
6.0 crisis following the emblematic fall of Lehman Brothers and, in its wake, the
3.0 6.5
2.0 7.0 emergence of systemic risk have revived deflationary fears at the same time
7.5 as world growth braked suddenly. In response, an anti-deflation front is
1.0
8.0 now forming, bringing in its wake rate cuts unprecedented in their size
0.0 8.5
and speed. In the space of a year, the Fed has conceded 425bp of rate cuts,
94 96 98 00 02 04 06 08 10
grey area: recession; and could even go so far as to set its fed funds rate at zero in early 2009. The
Fed funds green area: forecast other central banks have only very recently followed suit but now seem ready
unemployment rate (inverted rhs)
to do a lot, fast, with targets of 1.5% for the ECB, and 0.5% for the BoE by
Source: Federal Reserve, BLS, Crédit mid-2009, ie, cuts of 275bp and 550bp in less than nine months.
Agricole
A great deal is at stake here: deflation is a rare economic phenomenon
but it is sufficiently destructive for the authorities to try and avoid it at
all costs. While comparisons are of only limited use, the episode of the Great
UK: capacity utilisation rate Depression of the 1930s should serve as an example. At the time, the
and BOE rate collapse in global demand triggered a contraction in activity of over 7% on
average between 1930 and 1933, and the unemployment rate topped out at
8
85 25%, demonstrating the exorbitant cost of a severe deflation episode. More
7 recently, after stock market and property bubbles burst in the late 1990s,
83 Japan was swept up in a deflationary spiral which deprived it of a decade of
6
81
growth and led to massive wealth destruction.
5
79
To head off that threat, it is of course necessary to influence inflation
4
expectations. There is a likelihood that the economy could enter a
77 3 downward spiral in which recession and deflation sustain each other as
economic agents expect future price falls and so defer their purchasing or
75 2
investment decisions. Above all, however, it is necessary to ease the
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
CUR BoE rate (rhs)

liquidity constraints on over-indebted agents in order to circumvent
insolvency circles and cushion the fall of asset prices, which otherwise
Source: BoE, Crédit Agricole might weigh too heavily on bank balance sheets, with the resulting
excessive rationing of credit and a fall in activity levels. These debt
deflation mechanisms are proportional to the excessive leverage
ECB: standing facilities accumulated during the cyclical upswing and are therefore potentially
(daily data) devastating, notably when real rates cannot fall any further to relieve the
burden on borrowers.
EURbn
300 The whole aim of aggressive monetary easing is to influence these two
250 parameters: low interest rates act as an incentive to immediate consumption
200 to the detriment of saving, which the low rates make unattractive, and can
150 therefore create an environment that fosters inflation. By committing to keep
100 the cost of borrowing at the lowest possible level, central banks can also help
50
to nudge the yield curve downwards, which usually has an impact on the cost
and availability of funding, especially when the outlook brightens and
0
encourages the risk-taking that is intrinsic to all lending decisions. All this
-50
should contribute to the market rebound when expectations eventually
99 00 01 02 03 04 05 06 07 08
Marginal lending Deposit crystallise around the idea of a recovery.
Source: Bloomberg, Crédit Agricole Today, however, the monetary policy transmission mechanisms seem
to have totally seized up. The markets are paralysed by the lack of visibility,
distrust is all-pervading, with as a corollary an offsetting rise in risk premiums
Isabelle Job 4
+44 207 214 7468
plus systemic liquidity and financing problems and general dysfunctions in

the financial markets, against a backdrop of deflating asset prices. Faced
with this lack of efficiency, and at a time when ammunition is getting
low, the central banks, with the Fed out in front, are ready to innovate
and deploy the complete arsenal of unconventional weapons to ‘reflate’
the system. Printing money to buy back all asset types ought automatically
to ease deflationary pressures in the financial sphere, but it cannot have a
direct impact on the psychology of economic agents. The confidence factor is
equally primordial and, in this respect, communication is a powerful tool, to
be wielded without restraint…
Isabelle Job 5
+44 207 214 7468
Exchange rates: USD on the precipice

The outlook for the USD has turned increasingly negative; a combination of factors – quantitative easing – in
particular, will result in a weaker trajectory for the currency over much of 2009. Into Q109 we believe that high
risk aversion and continued deleveraging may still prompt some further USD upside but this is likely to be limited.
USD now overvalued against The USD has undergone a sharp reversal in recent weeks. The move
most currencies appears to be flow-driven as well as fundamentally led. Improved risk
appetite is likely to have played a role as well as growing concerns
5.0 % Over(+) and under(-)valuation about the effects of quantitative easing and a widening fiscal deficit. We
w.r.t. USD, today expect this to continue through much of 2009, with the USD set to slide
0.0
further through the year as cyclical strength gives way to structural
-5.0 weakness. The USD has moved from a position of undervaluation to one of
overvaluation over recent months but the fact that the USD is now
-10.0
overvalued, at least according to our measures of fair value, suggests the
-15.0 room for further depreciation has grown.
-20.0 Deleveraging has been an ongoing theme over the past few months and this
has resulted in a substantial repatriation of capital by US investors as they
-25.0 have withdrawn capital from various asset markets including commodities
GBP NZD CHF NOK JPY
and emerging markets. The deleveraging process has accelerated as a result
Source: Bloomberg, Calyon of mounting economic disappointments that have led to significant
downgrades in the US and global economic outlook. We expect
deleveraging to continue at least in the first part of 2009, but the pace
and magnitude are expected to be much smaller than in recent months.
Risk aversion close to record
This implies that the USD will lose much support from this source in 2009.
highs but will ease gradually
We look for the USD to weaken and a number of factors are likely to
Calyon Risk Aversion Barometer converge to push it lower. In particular, we look for risk appetite to improve
270 gradually over the course of the year following the recent peak in the Calyon
Risk Aversion Barometer in November. This points to downside risks for
220 the JPY against the USD. For most other currencies it suggests that
they will appreciate against the USD as indicated by the high correlations
170 between many currencies and risk aversion.
Foreign investors have continued to be strong buyers of US assets,
120
especially US Treasuries over recent months, but we do not expect this to
persist. As risk aversion eases, the safe-haven demand for Treasuries
70
will also decrease. There may also be a growing unwillingness of foreign
01 02 03 04 05 06 07 08
investors to buy US assets, especially Treasuries, in the wake of the growing
Source: Bloomberg, Calyon fiscal deficit in the US and huge bond issuance programme to finance the
massive stimulus packages announced over recent weeks. Similarly, in an
environment where cross-border portfolio capital flows have declined
dramatically, foreign investors may question the appeal of US assets at a
USD index set for a broad-
time when the US is in a severe recession. This in turn could make it more
based decline from Q209 difficult to finance the US current account deficit and push the USD lower.
87.0 DXY Index based on Calyon It is more difficult to assess the real impact of quantitative easing, via the
forecasts
85.0 aggressive expansion of the Fed’s balance sheet, on the USD, but just the
perception that the Fed is printing money without sterilising the
83.0 additional boost to money supply could act to exaggerate USD
81.0 weakness. In reality, much will depend on whether quantitative easing is
undertaken in other countries and whether there is a shift in relative inflation
79.0 expectations. The fact that the velocity of money is declining in the US and
77.0 that lenders are not utilising QE to boost lending suggests that its impact will
be relatively muted in the short term. Further out, as risk appetite improves,
75.0
QE will have a more significant impact and at that point the Fed will need to
Dec-08 May-09 Oct-09 Mar-10 Aug-10
consider how quickly it should remove the QE without running the risk of
fuelling a rapid rise in inflation expectations. Any delay in doing so could be
Source: Bloomberg, Calyon particularly negative for the USD. In the meantime, the policy of QE itself will
be perceived as USD negative.
Mitul Kotecha 6
mitul.kotecha@hk.calyon.com
+852 2848 9809
Interest Rates: When will the scales tip?

For around two quarters, there is little chance of a significant repricing of the bond market. But there are
incredibly large cash flows shifting through the financial market, so by the end of Q2 bond markets are likely to be
increasingly jittery. Quantitative easing may involve buying shorter-maturity bonds in the exit strategy. Sovereign
spreads must now take into account the off-balance-sheet liabilities.
10Y US yields versus 10Y Entering the digital world

JGBs There are immense forces at work in the global bond markets at the moment.
%
Think of a set of scales with one dish filled with global depression,
9 6 quantitative easing by the US and others, and near-zero official rates. In
8 the other we could load in one of the biggest accelerations in
5
7 government borrowing ever witnessed and enormous fiscal and
6 4
5
monetary easing.
3
4 If the economy shows signs of responding to the massive fiscal and monetary
3 2
easing, there will be virtually nobody available to buy the glut of government
2
1
1 bonds that is hitting the market.
0 0
If we assume that the near-zero rates, quantitative easing and fiscal stimuli
Dec-92 Dec-98 Dec-04
do not work by end-2010, we might expect 10Y Treasury yields to be at
T-note JGB (rhs)
similar levels to those seen in Japan in the late 1990s, ie, 0.5%. If the plan is
Source: Bloomberg, Calyon successful, then the sustaining buyers of bonds from the equity markets will
be turning back to the now-revitalised equity markets. There would then be
no buyers to step into the gap. Bond mutual funds are in severe decline,
particularly but not exclusively in Italy and Germany. Central banks and
30Y Fannie mortgage bonds sovereign wealth funds? These have built up huge reserves by buying a
weakened USD or reinvesting burgeoning oil revenues, which is no longer
have tumbled
the case these days. Banks? These have been reducing the number of
bp government bonds they have held for a number of years – in Europe this has
7.0 been since 2005.
6.5
Perhaps the only friends for bonds will be the insurance and pension funds,
6.0 who will be more aware of volatility in the cover ratios. Yet, buying from this
5.5 sector will be insufficient. Estimates of US government issuance in the fiscal
5.0 year to September 2009 are subject to huge uncertainties but are in the
4.5 region of USD1.5-2.0trn. In the depths of the 2002-03 recession we thought
4.0 we understood big funding needs but they were only USD400bn per year.
3.5 Thus, we have a run rate of around four times this. In addition, there are huge
3.0 government-guaranteed bond programmes and if risk reverses we would
Nov-05 Nov-06 Nov-07 Nov-08 expect a rush of corporate issuance too.
Source: Bloomberg, Calyon Our economic scenario depicts slow success for the government and central
bank actions that beget rate hikes in 2010. Bond markets look forward and
we think that the data in the US, although poor, will be swinging from
around -6.0% QoQ growth in Q4 this year to -0.2% QoQ annualised in
Q3 next year. Around H2 we are expecting a swing in sentiment from
depression minded to growth optimism.
Normally, long bond yields would move six to nine months in advance of the
first hike and the move would be massive. Yet, in the background the Fed will
be buying bonds as part of its quantitative easing strategy. In a way, it will be
defending these low yields and will be forced to buy increasingly large
amounts. So why do we forecast that 10Y Treasury yields will rise?
Firstly, we think that the Fed will not wish to target long yields during the exit
strategy from QE and, secondly, if it wishes to add cash to the system it can
do so with shorter-dated bonds.
Secondly, the true objective of the Fed is not to reduce Treasury yields but
mortgage rates and if the markets suspect that the worst is behind it, then the
Treasury-note to mortgage bond spreads will be declining. In our scenario,
this is mostly because Treasury yields will be rising. Yet, even the Fed will
not worry too much if mortgage rates start rising slightly since having held
David Keeble 7
+44 20 7214 6244
them at all-time low levels for six to nine months anyone who could refinance
Italian Sovereign and Banks'
their mortgage would have done so. The marginal benefits of continuing to
5Y CDS hold mortgage rates so low will quickly diminish.
250 bp Thus, the general thrust of our bond forecast is that 10Y yields stay at
200 currently low levels for a while as the final central bank rate cuts filter through
150 and the Fed starts printing money. Let us say that for two quarters we think
100
that there is a low chance of a significant swing in sentiment. Yet thereafter
we will be watching carefully for a sudden and fairly significant jump in yields.
50
0
European sovereign yields
Sep-08 Oct-08 Nov-08 Dec-08 The most popular trade that we can detect right now is one where a trader
Italy 5Y CDs
buys a bond in a systemically important bank (or equivalent CDS position)
Unicredito 5Y CDS
Intesa 5Y CDS and sells the bond of the sovereign that would support the bank should it fail.
Mediobanca 5Y CDS Since it is very difficult to keep a short position in a sovereign bond because
of the state of the repo market, then generally the trader will buy CDS
Source: Bloomberg
protection instead of shorting the sovereign. Given the relatively small size of
the sovereign CDS market, this can lead to quite large swings in the prices of
these instruments. The idea is that if the systemically important bank gets
Spanish Sovereign and Banks' into trouble, the European Commission is quite happy to allow state
5Y CDS intervention and so the spreads between these instruments ultimately
collapse as the government takes on additional risks and the bank is
180 bp
160 supported.
140
Since October the realisation that big banks will not be allowed to go bust has
120
100 meant that sovereign CDS and that sovereign’s banks are trading at very
80 similar levels. Thus, sovereign CDS trade like banks and sovereign bonds
60 have seen massive widening as they follow the sovereign CDS wider.
40
20 The big widening movement has now concluded since the sovereign CDS
0 levels have achieved the levels of their banks. In fact, in some instances such
Sep-08 Oct-08 Nov-08 Dec-08 as Spain, Italy and Portugal the sovereign CDS is trading wider than some of
Spanish 5Y CDs Santander their banks. Further widening for the sovereign CDS is going to be limited to
BBVA
the movements in the bank CDS spreads rather than playing catch-up as
Source: Bloomberg well.
The future of banks and sovereigns are now the same and, in a risk-averse
environment, the supposition of the market has been that the sovereigns
French Sovereign and Banks' should trade to the banks’ levels rather than the other way round. We believe
5Y CDS that, over the course of 2009, the stability of the financial system will be
demonstrated and that all spreads will tighten.
180 bp
160 Yet, sovereign spreads will take a long time to tighten back in. Effectively, it
140 has been proven that a country’s banking sector is a huge off-balance sheet
120
liability, which may need to be consolidated in troubled times. Even if the
100
80
governments end up making money on their bank support cash, this is a new
60 and salient feature of a sovereign credit. In future, sovereign analysts will
40 need to look at the average credit rating of the nations’ banks, the size of the
20 banking sector and levels of concentration (since non-systemically important
0 banks could be swallowed by bigger rivals). Sovereigns with highly
Sep-08 Nov-08 concentrated banking industries like the UK will need to pay a premium to
French 5Y CDs SocGen
Credit Agricole BNP issue debt.
Source: Bloomberg
David Keeble 8
+44 20 7214 6244
Energy: Will OPEC be able to defend USD70/bl oil?

Oil prices have fallen sharply since the summer peak, as demand weakness and new supply have put prices
under significant pressure. In the face of this declining demand, OPEC is cutting production to defend prices.
Dtd Brent (USD/bl) Oil product demand has been severely impacted, first by record-high price
levels and subsequently through a sharp drop in economic activity. OECD
150 demand has been posting spectacular declines. The latest hard data for the
130 US indicates a 13% YoY drop in oil demand in September. Non-OECD
demand is also showing signs of a decline: Thailand, for example, recently
110 reported oil demand in October as down by 12% YoY. Global demand is
90 expected to remain mediocre. In 2009 we expect world product demand to
post slow growth, roughly +500kbd, as the deteriorating economic
70 environment takes over from record-high prices to contain oil demand. We are
50 expecting a decline of 100kbd in OECD demand in 2009 after a large drop of
1.32Mbd in 2008 and a moderate increase of 560kbd in non-OECD demand
30
in 2009 after a 1.4Mbd increase in 2008. OPEC will therefore have to adjust
its production to refinery demand in order to balance world crude oil markets
and achieve a price range of between USD70/bl and USD80/bl. At its 24
Source: Platts
October meeting the Organisation decided to cut oil production by 1.5Mbd
Christophe Barret and agreed on further cuts of 2.2Mbd at its 17 December meeting. With oil
christophe.barret@uk.calyon.com prices below USD50/bl and huge contango (forward prices higher than prompt
+44 20 7214 6537 prices), it is likely that the organisation will decide on further cuts. OPEC
policy appears able to support prices on two conditions: (1) the Organisation
broadly respects its new quotas; and (2) demand reacts positively to the
current drop in oil prices. Under these assumptions, oil prices should reach
the USD70-80/bl price band defended by OPEC in the second half of 2009.
Metals: Producers cutting as demand collapses

Industrial metals remain under pressure from a weak demand outlook amid global recession and chronic
oversupply, evidenced by rapidly rising inventories. Although we expect metals prices to remain weak there is
some scope for a rebound as order books strengthen and further production cuts emerge. Gold and silver have
performed relatively better.
Announced production cuts The weak outlook for demand on the back of deepening global recession has
been exacerbated by the credit crisis, prompting banks to cut financing to
30 consumers and corporations. Amid heightened uncertainty over the economic
Cuts as % of Global Production
25 outlook end-users report order cancellations running typically at 20-30% and

up to 90% in extreme instances. When cancellation is not an option, orders
20
and deliveries are being postponed. The scale of demand destruction
15 coupled with destocking is such that inventories are rising rapidly.
10 Announced production cuts to date have yet to match the slump in demand
and are more advanced in some metals than others. Although underlying
5
demand is very weak it is much weaker than the current level of economic
0 activity warrants and we expect orders to recover somewhat in H109. This
Cu Al Ni Zn Pb Sn should see metals prices bottoming out bolstered by more production cuts to
come.
Source: Calyon
Re-weighting of the DJ-AIG commodity index in early January is likely to
result in the buying of copper, zinc, nickel and silver futures contracts and the
selling of aluminium and gold futures; influencing prices accordingly.
Gold and silver are likely to be underpinned by safe-haven buying but rallies
Robin Bhar will be capped by a stronger USD, weaker oil prices and ongoing financial de-
robin.bhar@uk.calyon.com leveraging.
+44 20 7214 7404
9
US: The recession deepens

Economic growth nosedived in Q4. Consumer wealth destruction (stocks and houses), a deteriorating job market,
and tight credit have led to a significant decline in household spending. Business investment is suffering from
weak domestic demand coupled with a global slowdown. Monetary and fiscal policymakers have responded
aggressively but the downturn will intensify before policy measures gain traction.
Household wealth has We look for the recession to result in a 2.3% decline in real GDP in 2009
declined (USDbn) and a sub-par recovery near 2% in 2010. We forecast a 21-month
recession that will be the longest since the Second World War. The
22000
Households/Nonprof Org:Assets
10000
uncertainty surrounding the outlook is much larger than normal as the
magnitude and timing of the impact of unconventional monetary policies
21500 9500
remain unknown. Moreover, our assumptions on the size, type and timing of
21000 9000 an expected fiscal stimulus plan from the Obama Administration may change
20500 8500 as detailed legislation is proposed.
20000 8000
From the beginning of the recession in Q407 through the most recent
19500 7500
figures for Q308, household net worth has declined by over USD7trn, as
19000 7000 the value of homes and equity portfolios has fallen sharply. The negative
Q106 Q406 Q307 Q208 ‘wealth effect’ on consumption is amplified by the need to increase
Total Owner-occupied Real Estate (NSA)
precautionary savings, given a rising unemployment rate and more restrictive
Equity Shares* (NSA) rhs
* at Mkt Value Directly Held
access to credit. The decline in aggregate demand sets up a negative
feedback loop, leading to more lay-offs and a further drop in demand. We see
Source: FRB
the unemployment rate rising to 8.5% in 2009. One positive element for
consumer spending is the rise in real disposable income, reflecting recent
sharp declines in gasoline prices.
Credit conditions tighten
further Business investment spending remains quite sensitive to the cyclical
Net % of domestic banks reporting tightening downturn in output and the increase in the cost of credit. Overall goods
standards for C & I loans (led 2 qtrs) inventories have been effectively managed during the downturn and there is
6 -40 no need for additional production cuts to trim bloated inventories. However,
forecasts
-20 automotive vehicle assemblies will likely come in below initial plans, given
4
0 extremely weak sales and a troubled industry trying to find a viable
2 20 restructuring plan. Spending on non-residential structures is weakening and
0 40 residential investment will continue to decline through much of the year,
60 necessitated by the need to reduce the inventory overhang of new homes on
-2 the market. Home prices are expected to decline further during the next six to
80
-4 100 nine months, leaving many homeowners financially stressed with negative
Q390 Q194 Q397 Q101 Q304 Q108 home equity. We believe that part of the government bank rescue plan will
GDP growth (%YoY) include more aggressive deal-making with stressed mortgage holders to
% Tightening Credit for C&I Loans (rhs-inv)
avoid preventable defaults and foreclosures. The Fed will offer additional
Grey shading = recession
support to the sector with large purchases of GSE MBS debt, which has
Source: S&P, FHFA helped lower mortgage interest rates, promoting both new purchases and
refinancing. The initiatives are not a solution to the housing crisis but they
Deflation risk? help keep the healing process moving forward.
US Inflation Performance
The severe economic slowdown has become a global affair and the US
6
net export position is expected to make only a modest improvement in 2009
5 Forecast
as both exports and imports move lower. The drop in global demand has
4
contributed to a reversal of commodity prices. WTI oil prices fell from
% chge YoY
3
USD140/bbl to the mid-USD40s. The CPI inflation rate will turn negative on a
2 YoY basis by the spring of 2009 and remain so for two quarters or so, largely
1 due to swings in energy prices. Increased slack in labour and product
0 markets will push core inflation measures below 1.0%. The risk of a more
-1 sustained period of deflation has risen. Irving Fisher’s work emphasised the
-2 potential transmission links between “violent financial crises, which lead to
04 05 06 07 08 09 10 ‘fire sales’ of assets and falling asset prices, with general declines in
CPI All Items aggregate demand and the price level”. However, as we discuss in the
CPI Ex-Food and Energy
special feature on the response of policymakers, the measures contemplated
Source: BLS, Calyon are expected to stabilise the financial markets and, in conjunction with a
significant fiscal stimulus (USD800bn over two years), lead the economy
back to positive growth late in 2009 with modest inflation.
Mike Carey 10
michael.carey@us.calyon.com
+1 212 261 7134
US Focus: US policymakers: ‘whatever it takes’

The Fed is using quantitative easing measures that seek to lower long-term interest rates, hoping that the
additional surplus of reserves will induce banks to make additional loans and counter any deflationary pressures
that would increase real interest rates. The aggressive monetary stimulus is expected to be paired with a large
multi-year fiscal stimulus programme. Their combined effect will likely return the economy to growth by late 2009.
New policy tools: quantitative easing

The dismal flow of data argues for easier monetary conditions from the Fed,
but the nature of the future easing is evolving as the Fed launches
unconventional policy measures. Below we discuss the unconventional
options open to the Fed as the fed funds target approaches zero.
Traditional policy
Fed fund’s target rate
approaching zero The FOMC nominally continues to maintain a fed funds rate target range. But
the funds rate target is now near zero. Fed Chairman Bernanke recently
6.0 noted that “the scope for using conventional interest rate policies to
support the economy is obviously limited”. i In Fed analysis this is often
5.0 referred to as the ‘lower-bound’ issue because nominal interest rates
4.0 generally do not fall below zero, on the assumption that holding cash is
Forecast
costless. What unconventional policies can a central bank make to stimulate

3.0 the economy faced with this situation?
2.0 Unconventional policies
1.0 The following strategies could be followed to stimulate the economy when
0.0 faced with the ‘lower-bound’ issue. Essentially, the central bank would
06 07 08 09 conduct policies tending to lower long-term interest rates. Let us consider
strategies that might accomplish that and assess their effectiveness in
Source: FRB increasing aggregate demand.
ZIRP
One option is for the policymaker to make a credible public commitment to
keep short-term rates low for a sustained period. For example, in the
Japanese experience, the zero interest rate policy (ZIRP) was to remain in
place as long as consumer prices (core CPI) were declining (deflation). If the
commitment is viewed as credible by market participants, the expectation of
continued low short rates well into the future should help lower
medium- and longer-term interest rates as they represent averages of
current and expected future short-term rates, plus a term premium. The
ZIRP may have contributed to the decline in long-term Japanese rates.
However, the Fed has not emphasised this type of approach in its policy
analysis. Although it expects to keep the fed funds target low for some time.
Instead, the current Fed chairman wrote an article on the subject several
years ago in which he opined that, in order to stimulate demand faced with a
policy target rate near zero, “the Fed should increase its asset purchases or,
possibly, expand the menu of assets that it buys”.
Balance sheet composition
One strategy to stimulate the economy involves altering the
composition (as opposed to the size) of assets on the central bank’s
balance sheet with the intent of lowering key long-term interest rates.
For example, the Fed could purchase longer-term agency securities on the
open market in quantities large enough to lower yields while selling shorter-
dated T-bills. Something analogous was attempted in the early 1960s but in a
different economic context. The Fed’s ‘Operation Twist’ was intended to help
on two fronts by stimulating domestic investment with lower long-term interest
rates while at the same time raising short-term rates to attract foreign capital
to reduce the US balance-of-payments deficit. While the yield curve flattened
gradually during the period that Operation Twist was in place (between 1961
and 1966), researchers found that the spread narrowing was mostly due to
Mike Carey 11
+1 212 261 7134
regulatory changes and financial market product innovations rather than the
Fed’s operations. ii
The Fed’s balance sheet can also be used to allow policymakers, under
Fed’s balance sheet (USDbn) exigent circumstances, to provide backstop liquidity directly to
ABCP & MMFF
borrowers or investors in key credit markets. This is the case with the
USDbn
TAF Commercial Paper funding facility and the new Term Asset-Backed
2,250
Other credit extensions Securities Loan Facility, which funds ABCP of consumer loans for autos,
2,000 Other Fed Assets credit card receivables, student loans, small business loans.
1,750 Primary Dealer Credit
Misc. We believe that changing the composition of the Fed’s balance sheet is
1,500
Gold Stock unlikely to provide a significant boost to the economy. However, in
1,250 Repo conjunction with an expansion of the Fed’s balance sheet, the stimulative
1,000 T-Bills effect could be significant, as we discuss below.
750
Balance sheet expansion
500
250
The Fed began to expand its balance sheet in September 2008 from just
under USD900bn in September to over USD2.2trn currently (as indicated in
0
the chart on the left), and recent policy commitments could push it to
USD3trn relatively soon.
Source: Fed, Crédit Agricole The Fed’s purchases could potentially influence asset prices, as discussed
above. For example, the Fed’s recent commitment to purchase large
quantities (USD500bn) of GSE-issued mortgage backed securities (MBS)
was met with a decline in mortgage interest rates. The Fed can continue to
expand its balance sheet by essentially creating money (liabilities)
matching newly purchased securities (assets).
Excess reserves of depository The result of this process raises the level of reserves in the banking system
institutions NSA, (USDm) beyond the amount required to the keep the short-term policy rate at its
target. This is indicated by the surge in excess reserves held by depository
600,000 institutions (see chart). We refer to this kind of policy as ‘quantitative easing’.
500,000
The idea is that the additional surplus of bank reserves may induce the
banking system to make additional loans to households and private
400,000 sector firms.
300,000 The second effect is to counter any deflationary pressures that
naturally arise during a severe economic downturn with a financial
200,000
crisis (deleveraging). Irving Fisher’s work emphasised the potential
100,000 transmission links between “violent financial crises, which lead to ‘fire sales’
of assets and falling asset prices, with general declines in aggregate demand
0
Jan-2007 Jul-2007 Jan-2008 Jul-2008
and the price level”. iii As quantitative easing policies can create inflation
expectations, they work to counter the increase in real interest rates
Source: Federal Reserve Board/Haver associated with deflation. Hence, these unconventional policies are expected
Analytics to help stabilise the banking system and capital markets and act as an
important line of defence against deflationary shocks.
Operational complexities
Quantitative easing is not as easy to implement as traditional monetary
policy. It is difficult to calibrate the impact of expanding the Fed’s
balance sheet or altering its composition and hence policymakers face
uncertainty in the size and timing of the economy's response to policy
actions. The resulting uncertainty could easily lead to a fair amount of error
correction by policymakers along the way.
From an operational standpoint, the Fed will need to explain to the markets
what it is doing and what will guide policymakers as they seek to make
adjustments to policy. We suspect that the fed funds interest rate target has
lost its policy significance as the Fed shifts to unconventional policies. Will
the Fed aim for a long-term Treasury target and purchase “whatever it
takes” until the targeted yield is reached? Ben Bernanke has opined
elsewhere that he could see circumstances where the Fed would announce
“explicit ceilings for yields on longer-maturity Treasury debt”. iv But in the
current context Treasury yields are already near historic lows and it is yields
on spread products, such as mortgages, that the Fed would like to see
lowered.
Mike Carey 12
+1 212 261 7134
The Fed appears to be in the process of codifying how these unconventional

policies may work and we look for increased communication with market
participants on these issues.
Fed expansion will have to be
cut back Exit strategy and inflation
1,500,000 8,000 The longer-term exit strategy for the Fed from pursuing such policies will
1,400,000 7,800
have an impact on interest rate expectations. The increased provision of
liquidity and expansion of the Fed’s balance sheet will eventually have
1,300,000 7,600
to be cut back to a more sustainable level in order to avoid inflation in
1,200,000 7,400
the long run (always a monetary phenomenon) and ultimately allow a
1,100,000 7,200
normalisation of short-term interest rates. Bernanke has stated that “the
1,000,000 7,000 FOMC will ensure that that is done in a timely way”. That is not likely to
900,000 6,800 assure market participants, in our view, and the Fed will likely offer some
800,000 6,600 operational guideposts for the removal of the exceptional easing policies put
Jan-07 Jul-07 Jan-08 Jul-08 in place before too long. One possibility is that the Fed may mop up the extra
Adjusted Monetary Base (NSA, USDmn) liquidity sloshing through the system by issuing its own debt, if Congress
Money Stock: M2 (SA, USDbn) (rhs)
approves, to drain reserves from the system. The exit strategy will be key for
Source: Federal Reserve Board, Haver the outlook for inflation and longer-term interest rates.
Analytics
Over the near term, the Fed will seek to offset the deflationary impulse from
the economic downturn and asset price declines. A period of transitory
deflation (like transitory inflation) is not overly troubling for policymakers and
we see declining top-line inflation figures for some months as past oil price
increases are unwound. However, when core inflation rises back into the
Fed’s inflation comfort zone of 1-2%, then the Fed will need to begin to pare
Transitory period of deflation back its balance sheet, and its sale of assets could put upward pressure on
bond yields. A similar effect would occur if inflation expectations were to start
6 US Inflation Performance
ratcheting higher.
5 Forecast
4 Will it work?
% chge YoY
3
We believe that the Fed through aggressive expansion of its balance sheet
2
and novel liquidity provision facilities and guarantees will likely be able to
1
effectively lower spreads for longer-dated debt, particularly mortgage debt.
0 The latter will help many homeowners refinance their mortgages, reducing
-1 non-discretionary monthly outlays. The lower rates will also work with lower
-2 home prices to support a stabilisation in the housing market.
04 05 06 07 08 09 10
CPI All Items However, lowering the cost of financing may be like ‘pushing on a
CPI Ex-Food and Energy string’ if lenders are unwilling to lend due to their own capital
Source: BLS, Calyon constraints. That is why it may take some time for banks to recover their
lending appetite even under optimum conditions. However, we must consider
the Fed’s conduct of monetary policy in the context of other, likely
aggressive, fiscal and regulatory policies that will enhance the boost to the
economy during the current deepening recession.
Ballooning deficit (USDm)
Massive fiscal stimulus ahead
300,000
With the US economy possibly facing the most severe economic recession
200,000
since the 1930s, an aggressive fiscal policy response is needed. In fiscal
100,000
year 2008, the federal government ran a budget deficit of USD407bn (2.9%
0 of GDP). This year the budget deficit could surpass USD1trn (7.3% of
-100,000 GDP) as the new administration launches a multi-year fiscal stimulus
-200,000 package to avert a prolonged recession. The tax-rebate fiscal stimulus that
-300,000 boosted economic activity in Q208 was targeted, timely and temporary. The
-400,000 one-off rebate was seen as limiting the impact on the burgeoning budget
-500,000 deficit. In the current situation, a huge increase in the deficit is not perceived
98 99 00 01 02 03 04 05 06 07 08
as a problem as the alternative is too frightening. Indeed, the multi-year
Federal Surplus or Deficit {-} (Fiscal Year) nature of the programme we expect is important for stimulating activity. For
example, firms contemplating bidding on government-sponsored
Source: Office of Management and infrastructure building projects will feel much more comfortable with any
Budget/Haver Analytics capital goods expenditures they may have to make if it is known that the
project(s) will continue over a reasonable period of time. The run-up in the
deficit will not be without risks but the risks of not doing enough, resulting in a
protracted, deflationary recession, would be too damaging.
Mike Carey 13
+1 212 261 7134
What to spend on?

The goal of the fiscal stimulus plan is ultimately to maintain consumer
incomes so that households will continue to spend. Hence, income support
programmes such as unemployment insurance will be prolonged for
the duration of the economic downturn. Another part of the programme is
likely to include increased aid to the state and local governments in order to
prevent them from cutting back on services and employment during a period
Prolonged economic downturn of declining state tax revenue due to the recession. These types of
Peak to programme will have an effect relatively quickly after announcement.
Trough % Change in
Duration Change in Unemployment The second theme in the Obama Administration’s fiscal stimulus discussions
Recession (in Mths) Output Rate (%)
1949 11 -1.69 3.2
revolves around infrastructure spending. This fits in nicely with the new
1953 10 -1.97 3.1 administration’s plans for upgrading the nation’s infrastructure, making it
1958 8 -3.18 3.2 more efficient and ‘green’ while at the same time creating jobs. Mr Obama
1960 10 -0.54 1.6 announced that his administration “will create millions of jobs by
1970 11 -0.17 2.2
1974 16 -3.10 3.5
making the single largest new investment in our national infrastructure
1980 6 -2.18 1.4 since the creation of the federal highway system in the 1950s”. v This
1982 16 -2.63 3.3 includes modernising and upgrading schools, making sure that classrooms
1990 8 -1.26 0.9
2001 8 0.35 1.3
are equipped with computers, etc.
Average 10.4 -1.64 2.4
2008 (F'cast) 21 -2.08 3.70
Projects that involve retrofitting existing buildings or repaving existing roads
and bridges have an advantage over new projects in that they can be
Source: NBER, BEA, BLS, Calyon
implemented relatively quickly. New projects often run into legal reviews and
can take years. The projects are likely to have ‘Buy American’ stipulations to
try and avoid the impact of stimulus spending leaking into imports.
How much?
At this stage, we do not have enough detail to make more than a guess about
the magnitude of the promised sizeable stimulus plan. In our forecast, we
make the assumption that the fiscal stimulus package is likely to be passed
soon after President-elect Obama takes office on 20 January. We believe
that spending and tax cuts providing a stimulus near USD450bn in
CY09, with another USD350bn taking place during 2010, are likely.
Just as the Fed will have to eventually reverse much of its quantitative easing
at some point, so will the federal government deficit have to be reduced
further down the road. That is not likely to be on the cards until the second
half of the Obama term.
Summary
Policymakers are confronted with a global recession and a global
deleveraging process that has damaged the financial sector. Historically, the
two make for a very noxious cocktail. One of the lessons of the Great
Depression was that policymakers did not respond aggressively enough to
the situation. Mr Bernanke has recognised this danger and has pushed the
Fed’s response well beyond what one could have imagined six months ago.
We believe that the monetary policies pursued will help stabilise the financial
sector and provide fertile soil for growth. But alone they are unlikely to
contain the recession and massive fiscal spending will be needed to pull the
economy out of what we expect to be the longest recession in the post-1945
period.
We believe that the economy will return to growth in the last quarter of 2009,
followed by a sub-par recovery in 2010. The uncertainty surrounding the
outlook is much larger than normal as the magnitude and timing of the impact
of unconventional monetary polices remain uncertain and we have only a
sketch of the fiscal stimulus plan that we have attempted to incorporate into
our forecasts.
i
See Federal Reserve Bank of San Francisco website posting 12 November 2008, and Ben Bernanke, Federal Reserve Policies in the
Financial Crisis. December 2008 speech at the Greater Austin Chamber of Commerce.
ii
Adam M. Zaretsky, To Boldly Go Where We Have Gone Before.
iii
Ben Bernanke. Deflation: Making Sure "It" Doesn't Happen Here, 2002
iv
Bernanke , 2002
v
Obama Press Conference, December 2008
Mike Carey 14
+1 212 261 7134
Eurozone: A clear recession

The Eurozone officially entered recession in Q308 (-0.2% QoQ). GDP looks set to shrink by an average 0.8% in
2009. Growth should stay below potential in 2010, at 1.1%.
EMU: credit standards The Eurozone entered a technical recession in Q308 as GDP contracted
(expected in 3 months) 0.2% QoQ. This poor performance is largely due to the fall-off in investment.
Household consumption stagnated and foreign trade made a negative
Balance of opinion
70
contribution to growth. In geographic terms, with the exception of France,
60 activity fell in all the big economies in Q308.
50 For year-end 2008 we are forecasting further significant shrinkage in
40 Tightening activity. The downturn in the investment cycle is set to continue. This is
30
because the pace of the falls in confidence surveys will have amplified in all
20
sectors. Industrial capacity utilisation rates will continue to fall. In addition, the
10
recession in manufacturing will be confirmed. Also, despite inflation ebbing,
0
-10 03 04 05 06 07 08
private consumption should remain weak as household confidence is at a
-20
record low.
Residential Large firms
SMEs In our central projection, we are not forecasting any sustainable
Source: ECB, Crédit Agricole
recovery in business and consumer confidence before the end of H109.
The global environment will remain vulnerable in the wake of a US recession
that looks set to be long and deep. The Eurozone is thus headed for a
period of recession in 2009, with GDP shrinking by around 0.8% over
EMU: components of GDP
the full year. The expected tightening of financing conditions, in connection
growth with the deepening of the financial crisis, will have an adverse impact on the
YoY, %
credit trend on the supply side and subsequently on overall demand. As a
8 result, businesses are likely to revise their investment plans downwards.
6
Forecasts Households’ demand for loans should also slow. They will adopt a wait-and-
see stance in view of the ongoing corrections to housing markets in Spain,
4
France, and to a certain extent Italy, and of an increase in the unemployment
2 rate (8.4% by end-2009) fuelled by the activity slowdown.
0
We are expecting a slight pick-up in activity in 2010 on the strength of a
-2
gradual normalisation of the global environment. Growth will
-4 nevertheless remain below potential at 1.1%.
99 00 01 02 03 04 05 06 07 08 09 10
investment GDP The co-ordinated rate cuts on 8 October marked the start of a global
consumption
monetary easing cycle. For the ECB, it was also the opportunity for a
Source: Eurostat, Crédit Agricole spectacular U-turn after it hiked rates this summer and after maintaining a
hawkish bias until then. The worsening of the financial crisis and its rapid
spread to the real economy eventually forced the ECB to cut the minimum bid
ECB: evolution of 2009 rate by 175bp, from 4.25% to 2.50% in the space of two months – an
exceptionally rapid response by ECB standards. The about-turn is above all
projections justified by the alleviation of the upside risk to price stability in
% response to falling commodity prices and shrinking activity. The rapid
2.6
3 2.4 fall in inflation, from 4% in July to 2.1% in November, effectively gives the
2.1 2.1 ECB some additional room for manoeuvre, allowing it to activate the
2 1.4 monetary lever and to try and soften the effects of the crisis. The crisis, on
1.8 1.8 the other hand, is accentuating the slowdown in inflation and reducing the
1 1.5 risk of excessive wage settlements. Our macroeconomic forecasts would
1.1
justify even lower interest rates in 2009. Inflation in particular should dip
0
under the 1% threshold in the spring, which will put upward pressure
date of the forecast on real interest rates. In order to keep real interest rates close to zero
-1 -0.5
and monetary conditions accommodative, the ECB could bring its rate
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
2009 GDP 2009 inflation (HICP)
down to 1.50% in Q209.
Frederik Ducrozet 15
frederik.ducrozet@credit-agricole-sa.fr
+ 33 1 43 23 18 89
Eurozone focus: The European recovery plan

The worsening of the financial crisis and its spread to the real economy are proving challenging for European
governments, which are being forced to act to halt falls in activity. The European recovery plan proposes support
measures in a co-ordinated framework.
EMU: public deficits Faced with the marked weakening of their economies and a gloomy short-
term outlook, European governments have decided to supplement the
3.0
%GDP initiatives carried out in the framework of their support for their banking
2.0 systems and their monetary policy initiatives since the crisis was triggered.
1.0 The toolbox at their disposal offers a wide range of measures designed to
0.0 achieve the goals of relaunching demand, propping up crisis-hit sectors,
-1.0 helping economic agents in difficulty, and strengthening and improving long-
-2.0 term potential GDP growth.
-3.0
-4.0 The logic of recovery plans
-5.0 Involving a range of strategies, such plans combine emergency short-term
96 97 98 99 00 01 02 03 04 05 06 07 08
measures to cushion the cyclical trough, along with recovery programmes
Ger. Fr. Sp. Euro zone It. that take a longer-term view.
Source: Eurostat, Crédit Agricole Supply-side policies are thus designed to meet long-term goals. They
seek to increase the economy’s potential GDP growth, generally via
structural reforms designed to boost an economy’s productivity and degree of
competitiveness. They notably involve investing in infrastructure, innovation,
EMU: public debts new technologies, education and training, research & development, and
flexibility on the labour and goods and services markets.
140 %GDP
Demand-side policies are for their part meant to be contra-cyclical,
120
above and beyond the action of the automatic stabilisers 1 . Their role is to
100 cushion the cyclical downturn and to rapidly foster the conditions for a
recovery. Direct employment policies, tax breaks, moves designed to
80
influence demand – consumption incentives or income support – all form part
60 of this approach. While these are quick fixes, their cost is far from negligible
40
since they lead to a deterioration in the public finances in countries which use
this type of lever (higher spending, lower tax pressures, higher cost of debt).
20
95 97 99 01 03 05 07 From this arsenal, states therefore choose the actions that seem most suited
France EMU Germany Italy Spain to their economic situation and/or the economic change objectives of their
economic system (manufacturing specialisations, social contract, growth
Source: Eurostat, Crédit Agricole model, etc).
A co-ordinated framework for national initiatives
When faced with the same kind of shocks that jeopardise European
EMU: GDP growth growth, states’ ability to act collectively is a guarantee of the
effectiveness of any recovery plan. Following several weeks of discussions
6.0 YoY % and unilateral announcements of plans, Europe is now seeking to go down
5.0
4.0
Forecasts the co-operation path. A co-ordinated recovery plan based on the solidarity
3.0 principle and designed to exploit synergies and avoid the development of
2.0 negative external effects among states was presented by the European
1.0 Commission on 26 November and approved by the European Council on 11
0.0 and 12 December.
-1.0
-2.0 This plan includes a EUR200bn fiscal stimulus package (1.5% of EU
97 98 99 00 01 02 03 04 05 06 07 08 09 10 GDP) to relaunch demand, restore confidence and limit the social cost
EMU Germany of the recession, in a framework of eased Stability and Growth Pact
France Italy
Spain
rules. The national measures represent 1.2% of GDP. The EU funding
amounts to EUR30bn over two years via loans from the European Investment
Source: Eurostat, Crédit Agricole bank (EIB). This stimulus must be targeted and temporary in order to
maximise its effectiveness and not adversely affect the long-term
1
These help to smooth the economic activity cycle and hence cushion fluctuations in activity generated by business-climate-related events
Olivier Bizimana / Frederik Ducrozet 16
olivier.bizimana@credit-agricole-sa.fr / frederik.ducrozet@credit-agricole-sa.fr
+33 1 43 23 67 55 / + 33 1 43 23 18 89
sustainability of the public finances 2 . Its co-ordination will deliver individual

benefits to Member States 3 . The recommendations involve initiatives such as
a temporary cut in VAT (generally designed to stimulate consumption and
labour-intensive services to create jobs), lower payroll taxes on low-paid jobs,
increases in social security benefits, soft loans and credit guarantees for
businesses, or the extension of the European Social Fund, etc.
The second component proposes measures designed to boost long-
term competitiveness and growth potential as part of the Lisbon
Strategy. The idea is to step up investment in education, R&D and
innovation (to create a knowledge-based economy), in the environment (to
develop energy-efficiency and clean technologies), and in infrastructure
investment and European interconnections through the cohesion policy and
structural funds.
At the end of the day, although the hope is that the inspiration is joint,
the modus operandi is strictly at the discretion of each state. The idea
is not to draw up a global recovery plan, but to implement support
measures according to national priorities in a framework that is
designed to be co-ordinated.
2
States which implement contra-cyclical measures will need to present an adjusted stability and convergence programme, while those whose
deficit exceeds the 3% of GDP threshold will need to reverse the trend and balance their public finances by 2011.
3
For example, relaunching demand in one Member State also boosts demand for imports and hence activity and exports in the other countries
in the region.
+33 1 43 23 67 55 / + 33 1 43 23 18 89
France: Growth pinned down by external shocks

The French economy will be in recession in 2009, with a 0.6% fall in GDP. We forecast a sluggish recovery in
2010 (1.2%). Our projection is shrouded in considerable uncertainty, as France’s economic recession is due
mainly to external causes.
France: credit standards The French economy has not yet officially slid into recession (0.1%
(expected in 3 months) QoQ growth in Q3 after -0.3% QoQ in Q2), but all the leading indicators
are signalling a pronounced fall in activity, on a scale comparable to the
Balance of opinion recession of 1993. Industry confidence surveys are signalling a deep
80% 80%
recession from Q4, corroborated by early activity data showing a collapse in
60% 60% manufacturing output in October (-2.7% MoM) as a result of falling
Tightening
40% 40% automotive production. In view of the difficulties of this sector, the fall-off in
20% 20% manufacturing activity seems likely to continue over the coming quarters. In
0% 0% addition, leading indicators in the service and construction sectors suggest a
further fall-off in activity. Finally, despite the fall in inflation, private
-20% -20%
consumption should be virtually stagnant since household morale is at a
-40% -40%
record low. We are thus forecasting that activity will shrink by around 0.5%
03 04 05 06 07 08
QoQ at end-2008. This fall could be exacerbated by inventory downsizing,
Large firms SMEs
Residential notably in industry, where large-scale production shutdowns are scheduled,
especially in the automotive sector.
Source: BDF, Crédit Agricole
The considerable uncertainty created by the deepening financial crisis
and increases in contingent risks to the global economy means that it is
relatively unlikely that we will see confidence pick up, and hence
French growth recover, any time soon. On the whole, in 2009, the
France: growth forecasts French economy will be in recession, with a drop in GDP of 0.6%.
YoY, %
10
Apart from the fall in confidence, the relative tightening of lending
8 Forecasts conditions, notably linked to bank refinancing problems, will adversely
6 impact agent spending. In addition, with the further deterioration in the
4 labour market (unemployment is forecast at 8.2% by end-2009), the rate of
2 increase in income from activity seems likely to slow. If we go by behaviour
0 observed during previous phases of marked slowdown, ie, in 1993 and to a
-2 lesser degree 2001, one may think that households should be able to dip into
-4 their savings in order to sustain a certain level of spending. Purchasing power
97 98 99 00 01 02 03 04 05 06 07 08 09 10 should also be boosted by the fall in inflation, forecast at 1.6% in 2009 after
Household consumption 2.9% in 2008. All in all, household consumption should slow but not collapse
GDP
Gross fixed capital formation and should show some growth next year (+0.7% after 1% in 2008).
Source: Insee, Crédit Agricole In view of the more restrictive financing conditions, businesses are also likely
to cut expenditure, especially as the outlook for demand, both domestic and
external, will be unfavourable. Business investment should thus see a
marked fall in 2009 of 3.2% after a rise of 1.8% in 2008. The fall-off in
France: investment forecasts household investment also seems likely to continue, at -4.2% after -2.3% in
(Gross fixed capital formation) 2008, partly as a result of the ongoing correction in the housing market.
YoY, %
Lastly, exports will suffer from the global slowdown. We are forecasting a
gradual improvement in the economy during 2010 as most of the negative
Forecasts factors dissipate. GDP growth should come in at 1.2%.
9
Our central projection is nevertheless shrouded in considerable
4 uncertainty, mainly due to the fact that the French recession is being
triggered by external shocks. The first uncertainty has to do with the length
-1 and depth of the US recession and its contagion effects on a global level. At
the domestic level, the scale of the expected corrections in the investment
-6
sphere is the main unknown, with a clearly identified downside risk. Also,
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Households
while some of the different measures in the French recovery plan (assistance
Non-financial enterprises
for corporate cash flow and support for housing and construction) will in the
short run help to cushion the cyclical trough, their effectiveness is contingent
Source: Insee, Crédit Agricole on the state of the global economic and financial situation.

+33 1 43 23 67 55 / + 33 1 43 23 18 89
Germany: Taking it on the chin

Germany edged into recession in Q3 as GDP contracted by a stronger-than-expected 0.5% QoQ. Support
measures in addition to the fiscal stimulus announced by the government seem essential if they are to limit the
scale of this recessionary episode.
Germany: long-period IFO In 2008, the German economy showed us two diametrically opposed
(West Germany before 1990, recessions in faces. In H1, GDP growth was higher than potential at an annualised
grey) quarterly rate of 1.9%. But in H2 it fell to an average of -2%. The gap reflects
points the speed and ferocity of the ongoing economic downturn. After showing real
115 1.0 resilience to shocks including surging oil prices, a strong EUR and tensions
0.9 on the financial markets, all the leading indicators since the summer have
0.8 plunged. The worsening of the crisis since September has accelerated the
105
0.7
0.6
pace of the downturn, which has finally materialised in ‘hard’ data (output,
95 0.5 exports, investment), notably in the industrial sector.
0.4
0.3 Looking beyond the volatility of Germany’s national accounts, it looks
85
0.2 as if external demand and domestic demand are slowing
0.1 simultaneously, notably due to the virtually automatic link between exports
75 0.0
and investment. Exports fell by 0.4% QoQ in Q3, while the trade surplus fell
70 75 80 85 90 95 00 05
IFO index expectations (rhs) by EUR10.9bn compared with the previous quarter – a drop of 20% – and
this trend seems likely to worsen in the short term. Eastern Europe in
Source: Destatis, Cesifo, Crédit Agricole particular, which takes around 15% of German exports, is among the
emerging areas hardest hit by the economic and financial crisis. In total, the
negative contribution to growth of the external balance came out at -1.8% in
Q3 due to a sharp rebound in imports, itself related to the fact that
EMU: credit standards for businesses have built up substantial inventories. What we are staring at over
corporates the coming quarters, however, is a massive inventory run-down.
(in 3 months) The Q3 data also bears out the weakness of domestic demand.
net % Consumption and investment grew moderately during the quarter, but
80 80 in both cases this was no more than a technical rebound. Household
>0 tightening of consumption, for example, is still falling 0.8% YoY and household confidence
60 60
credit standards
40 40
is still at an all-time low, accentuating the preference for savings in the short
term. Not even the continued fall in the numbers of unemployed, the rebound
20 20 in wages and the slowdown in the rate of inflation have helped household
0 0 spending to rebound as we had hoped.
-20 -20 Uncertainty remains exceptionally high, in terms of both the scale of the
<0 easing of
-40 credit standards -40 recession and the timing of the recovery. The drastic downward revisions
03 04 05 06 07 08 to our growth forecasts reflect the dizzying fall in the leading indicators
EMU France Germany over the recent period. The expectations component of the IFO index, for
example, is back at the same level as at the time of the 1973 oil shock. New
orders addressed to industry have collapsed since the start of the year, which
should continue to have an adverse impact on output and investment. And
businesses could be weakened by the tightening of lending standards,
whereas this had been less pronounced in Germany up until Q3.
EMU: public deficits
All in all, activity is unlikely to rebound significantly before next summer and
%GDP
2.0 GDP growth should therefore be negative in 2009. The rapid easing of the
ECB’s monetary policy is not likely to produce any visible effects for several
F'cst
1.0
quarters. For its part, the government announced an economic recovery plan
0.0 in early November, targeted at propping up investment via an easing of
-1.0 depreciation rules, which is supposed to generate EUR50bn of additional
spending. Other measures are being implemented in the ailing construction
-2.0
and automotive sectors, notably designed to safeguard a million jobs. Nor
-3.0 can we rule out the possibility of additional economic support measures early
-4.0 in 2009, aimed particularly at the most exposed households. The severity of
99 00 01 02 03 04 05 06 07 08 09 the recession will also largely depend on the scale of the overall fiscal
Germany Eurozone stimulus and the speed at which it is implemented. In the medium term,
though, rebalancing growth in Germany will only be possible through
Source: Eurostat, Crédit Agricole
measures aimed at supporting domestic demand on a sustainable basis.
Frederik Ducrozet 19
frederik.ducrozet@credit-agricole-sa.fr
+33 1 43 23 18 89
Japan: Facing turbulence

After growing robustly, by 2.2% in 2007, the Japanese economy has started to face, and will likely continue to
face, significantly tough economic conditions with demand both at home and abroad deteriorating sharply.
Without the main engines for economic growth, the outlook for Japanese economic growth is indeed gloomy.
GDP will stay below zero After growing robustly, by 2.2% in 2007, the Japanese economy has
(%QoQ) faced significantly tougher economic conditions in 2008, with negative
real GDP growth for two straight quarters. We expect the negative growth
1.5 3 rate to continue into Q408 and Q109, down 0.5% and down 0.3% QoQ,
1.0 2 respectively. Our forecast, as such, shows Q108 as the only quarter posting
0.5 1 a positive growth rate and the overall economic growth for 2008 will remain
0.0 0 flat. Weaker business activity will be followed by negative growth, -1.1% for
-0.5 -1 2009. Faced with a global financial crisis and a considerably higher
-1.0 -2 dependency on external demand, the Japanese economy will experience a
-1.5 -3 sharp decline in capex and exports, both of which have been the economic
-2.0 -4 growth drivers of the current expansionary phase.
-2.5 -5
Q108 Q308 Q109 Q309 The weak economic activity expected in the periods ahead is strongly
Real GDP Consumption anticipated by sentiment indicators. Prior to the actual deterioration of real
Capex Exports (RHS) economic activities, sentiment indicators have been factoring in the weak
economic conditions, as shown by the BOJ’s Tankan Survey, with large
Source: Cabinet Office, Calyon manufacturers’ business conditions’ DI moving into negative territory for the
first time since Q203. Based on the experiences of the Japanese financial
crisis in the late 1990s, where deflationary pressure took its toll on economic
activities, it should be of no surprise that the major sentiment indicator could
Correlation between Tankan move down to around -25 in the forthcoming survey, suggesting even more
and GDP intensification of the present economic downturn in the periods ahead.
30 4 Overall, the structure of Japanese economic growth since the start of the
20 latest expansionary phase has shown that Japanese firms have had strong
10 2
demand for capex on the back of stronger foreign demand. With the present
0
-10
0 financial crisis taking its toll on foreign demand, the Japanese economy will
-20 lose a major source of economic growth so the recovery in foreign demand is
-2
-30 key. However, an important observation based on past downturn
-40 -4 experience is that, while capex is significantly affected by the business
-50
cycle, household consumption, in relative terms, tends to remain
-60 -6
stable. In the context of the present crisis, this experience should mean that
95969798 9900010203 04050607 08
Large Mnu. Business conditions DI (LHS)
the Japanese economy will experience only a modest adjustment in labour
Real GDP (%YOY, RHS)
market conditions and, more importantly, the recent significant appreciation
of JPY should translate into improvements in terms of trade, which will
Source: The BOJ, Cabinet Office eventually deliver more positive factors to the economy.
With the Japanese economy no longer immune to the global financial
crisis, the policy mix – both fiscal and monetary – will be even more
important. On the one hand, however, we cannot expect much from fiscal
Since crisis in September
policy, as seen by the recent political gridlock. PM Taro Aso presented a
(%） much anticipated JPY26.9trn second fiscal stimulus package but he has not
1.7 14,000 presented the supplementary budget plan to the Diet yet. Recent confusion in
1.6 13,000
the Diet sessions has brought further uncertainty to the plan’s
1.5 12,000
11,000
implementation.
1.4
10,000 Given the political turmoil, there should be increasing pressure on the
1.3
9,000
1.2 monetary policy side to be responsive to economic deterioration.
8,000
1.1 7,000 Although the BOJ Governor, Masaaki Shirakawa, appears reluctant to cut
1.0 6,000 interest rates further, the intensification of the financial crisis and its
1-Sep 1-Oct 1-Nov 1-Dec significantly negative impact on the real economy should mean that the BOJ
10y JGB yield (LHS) will need to take further steps in addition to the recent 20bp cut . In particular
Nikkei stock price index (RHS) it has become more necessary to cut interest rates to ease growing pressure
to appreciate JPY to USD in the FX market after the Fed moved to a zero
Source: The BOJ, Nikkei
interest rate policy. We assume the BOJ will cut its rate in December and
then cut again to hit a zero interest rate before end-March 2009.
Susumu Kato 20
susumu.kato@jp.calyon.com
+81 3 4580 5336
Japan Focus: Challenges for Japan’s banking

system
Japan, the world’s second-biggest economic power, has not escaped recession. In view of this, the banking
system is having to face numerous challenges. To ensure the sector’s continued stability, the central bank and
the government have intervened.
Corporate lending conditions With the slowdown in global growth the external engine driving the Japanese
in Japan economy is flagging, taking the Japanese economy back into recession.
big companies Japanese banking system facing numerous challenges

better conditions
% medium-sized businesses
50 smal-sized businesses Less affected by the subprime crisis than their US and European peers,
40 with losses limited to JPY800bn between April 2007 and September 2008,
30 Japan’s banks have not been spared the effects of the crisis. They have
also announced that they will be tapping the market to step up their
20
equity capital base as the falls on the financial markets are affecting their
credit tigthening
10
balance sheets due to banks’ large equity stakes in Japanese companies.
0 Several factors help us to better understand recent developments in the
-10 sector. The upturn in lending that began in 2006 has remained weak (up
T1 00
T3 00
T1 01
T3 01
T1 02
T3 02
T1 03
T3 03
T1 04
T3 04
T1 05
T3 05
T1 06
T3 06
T1 07
T3 07
T1
1.6% over 12 months in September 2008), despite a liquid banking system

and monetary and financial conditions more stable than those in the rest of
the world at the present time. This volume effect is exacerbated by a negative
Source: BOJ, Crédit Agricole price effect that has persisted since 2002. Also, according to the BoJ’s
Tankan survey and the Senior Loan Officer Survey, lending conditions seem
less accommodative right now, but not restrictive. Initially limited to the
construction sector, the tightening currently seems to be spreading to other
Loans outstanding sectors, notably retail and services.
YoY The Japanese banking system has been largely restructured, but the rise in
8% the cost of risk is very real right now in the balance sheets of leading banks.
6%
4%
There has been a considerable reduction in the amount of doubtful loans:
2% from over JPY30trn in 1999 to around JPY11trn in March 2008, while the
0% ratio of non-performing loans stood at around 2.5% in March. The recent rise
-2% in risk goes hand in hand with the increase in corporate defaults (up 34%
-4%
-6%
over the 12 months to September 2008) and in banks’ exposure to the
Total construction sector (30% of all defaults originate here) and property
-8%
corporations
-10% small enterprises developers. These two sectors account for 18% of total bank lending.
-12% Individuals
01 02 03 04 05 06 07 Consequently, bank results, although still positive overall, have fallen sharply.
The biggest institutions have just revised their annual results forecasts
Source: BOJ, Crédit Agricole downwards. Japanese banks currently have to take up a number of
challenges: they have to continue financing the economy at the same time
as they curb the rise in the cost of risk, and improve their profitability and
capital ratios in an environment of sharply falling stock markets.
Japan: bad loans Support measures to safeguard the stability of the banking system
JPYtrn City Banks, Even if the Japanese authorities’ room for manoeuvre when it comes to
Credit Banks à
50
long terme and propping up the economy is very limited, the central bank (the BoJ) and the
45 government have gone into action to cushion the growth downturn and
Trust Banks
40 Regional Bank,
35 1&2
limit its retroactive impact on bank balance sheets.
30
As early as mid-September, the BoJ made massive liquidity injections into
25
20 the interbank market. On 31 October, it finally cut its key rate by 20bp, to
15 0.30%. At the same time, it announced that it would be paying interest on
10 banks’ compulsory reserves at a rate of 0.10%. On 2 December, it
5 announced a raft of new temporary measures to make borrowing easier for
0
businesses.
99 01 03 05 07
On the budgetary policy front, an initial recovery plan in the shape of
Source: FSA, Crédit Agricole JPY1.8trn (EUR14bn) in public spending was voted in early October. The
wraps were taken off a second recovery plan at the end of October for a
further JPY5trn in public spending, or scarcely 1% of GDP, for a total fiscal
Sandrine Boyadjian / Gwenaelle.Flandrin 21
sandrine.boyadjian@credit-agricole-sa.fr / gwenaelle.flandrinlemaire@credit-agricole-sa.fr
+33 1 43 23 65 42 / +33 1 43 23 65 39
stimulus package of JPY26.9trn. But, faced with the worsening economic

situation, Prime Minister Taro Aso said on 12 December that a new recovery
plan was needed. This is worth JPY23trn (EUR192bn). But the details of this
extension are as yet unclear, notably as regards total public spending.
All these measures reflect the anxieties of the BoJ and the government,
faced with the scale and speed at which the international crisis has spread to
Japan’s economy, along with a desire to avoid any further deterioration in
financial conditions. These recovery plans, if they are finally approved by
the Parliament, are unlikely to have more than a limited impact on the
economy, however. Which means that bank profitability will still be on the
downside and the increased cost of risk will have a significant impact on bank
balance sheets in the coming quarters.
Sandrine Boyadjian / Gwenaelle.Flandrin 22

sandrine.boyadjian@credit-agricole-sa.fr / gwenaelle.flandrinlemaire@credit-agricole-sa.fr
+33 1 43 23 65 42 / +33 1 43 23 65 39
UK: Back to the early 1990s

The UK is headed into a recession that puts the risk of deflation centre stage. In view of this risk, the BoE has
decided to cut its key rate aggressively, a move which, in our view, could continue in the months ahead.
UK: GDP growth and real rates Recording a drop in real GDP of 0.5% QoQ in Q3, the worst economic
performance since 1990, the economy has officially moved into
% recession. Since the start of the year the UK has been hit by several major
10 shocks making this outcome inevitable. The country is not only having to deal
8 with the global financial crisis and its effects, but it is also embroiled in a
Forecasts
6
4
major housing crisis, with house prices falling 18% since peaking in August
2 2007, and a manufacturing recession that has triggered a sharp rise in
0 unemployment. Confidence measures among businesses (notably PMI
-2 indexes) and households have collapsed in recent months, tumbling to their
-4 lowest levels since 1990-92 and even 1979-81. This suggests that the
-6 recession will deepen over the coming quarters. Q3’s negative growth figure
80828486 88909294969800 02040608 10 seems likely to be the first in a long series: GDP looks set to fall by a further
GDP YoY
Real BoE rates 0.7% QoQ in Q408 and by 1.4% over 2009 as a whole.
Source: BoE, Crédit Agricole Consumption was the first component to slow due to the fall in real
household income, as a result of rising energy and food prices, and the
negative wealth effects of the sharp fall in house prices. While it is true that
the rapid drop in inflation in 2009 should help ease pressure on incomes, the
UK: inflation forecasts probable rise in unemployment to over 8%, combined with tighter lending
conditions and further house price falls, heralds a fall in household spending
% YoY
6 Forecasts of around 1% over the full year. However, it is investment that is likely to
5
have the greatest negative impact on growth next year with expectations
4
of a shrinking of around 7% – a correction similar to that of 1993 – for two
main reasons. Firstly, because businesses are expecting demand to fall.
3
Normally, GBP’s current depreciation would have raised hopes that the
2
deterioration in domestic demand would be offset by higher external demand.
1
But the benefits of a fall of 20% or more in the real effective exchange rate
0 since early 2007 should be limited as the UK’s main trading partners have
-1 also moved into recession. Secondly, investment is likely to fall in 2009
01 02 03 04 05 06 07 08 09 10 due to the financing difficulties faced by firms, as shown by the tightening
CPI Core CPI
of lending conditions, widening corporate spreads and falling stock prices.
Source: ONS, Crédit Agricole
Inflation, for its part, has begun to fall after peaking at 5.2% in September.
Currently, the disinflation phenomenon is linked mainly to the drastic fall in
the energy component, which seems likely to pick up speed in the months
ahead as gas and electricity prices fall by at least 15%. Above and beyond
UK: capacity utilisation rate deflating energy prices, however, we should also see a slowdown in core
8 inflation. This is not only because in the short term retailers will be forced to
85 cut their prices to avoid a collapse in demand, but also because in the
7 medium term the recession could lead to excess capacity and ultimately to
83
6 deflationary pressures. By next summer, therefore, inflation could briefly
81 stray into negative territory, reviving the threat of deflation.
5
79 November’s historic 150bp rate cut shows that the BoE is fully aware of
4
this risk. In fact, it continued its monetary easing in December with a further
77 3 cut of 100bp, taking the key rate to 2%, its lowest level since 1951. Not only
75 2
has the BoE’s nominal rate never fallen below this level since the Bank was
founded in 1694, but it is also the first time since 1980 that it has moved into
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
CUR BoE rate (rhs) negative territory in real terms. If the BoE wants to keep its real rate at this
level in order to jump-start activity, it will be forced to lower its key rate
Source: Crédit Agricole
well below 2%, given the sharp decline in inflation that we are likely to
see next year. In our view it could lower its key rate by an additional
150bp in Q1. ZIRP and quantitative easing cannot be ruled out to keep the
economy from falling into a deflationary spiral. But this outcome is less likely
than in the US, however, since GBP does not have the USD’s reserve
currency status and could therefore seriously suffer from such a policy, which
could be prejudicial to the economy in the event of a collapse of the currency.
Gregory Claeys / Daragh Maher 23

gregory.claeys@credit-agricole-sa.fr / daragh.maher@uk.calyon.com
+ 33 1 57 72 03 29 / + 44 20 7214 7469
Sweden: Historic rate cut

The Swedish economy has moved into recession. The Riksbank has responded by slashing its key rate by 275bp
since October, a trend that should continue over the coming months.
Sweden: GDP and surveys After a very poor H108, with a downward revision of Q1 performance to 0%
and to -0.1% in Q2, economic activity in Sweden shrank by 0.1% for the
YoY % second consecutive quarter in Q3, which means the country is officially
67 6 in recession. Consumption and exports have continued to slow down and
62
5 investment has lost a little more of its momentum, but it is once again the
57
4 reduction in inventories that has severely impacted growth. Moreover, the
3 collapse in the confidence indicators for households and businesses
52
2 suggests even more negative growth rates over the coming quarters
47
1
42
and a 0.8% contraction in GDP over 2009 as a whole.
0
37 -1 Since October, the Riksbank has responded aggressively to this
32 -2 deterioration in the economic climate by cutting its key rate by 275bp,
00 01 02 03 04 05 06 07 08 taking it to 2%. In December, the Riksbank even decided to cut the rate by
PMI GDP (RHS) 175bp in one go. It explains the sheer scale of the move by the rapid,
unexpected deterioration in activity and employment since October and by
Source: SCB, Crédit Agricole the current lack of effectiveness of rate cuts in view of the upheavals on the
money markets. By making this grand gesture, the Riksbank reckons that this
will be enough to avoid too deep and prolonged a recession (as shown, in
fact, by its fairly optimistic 2.2% growth forecast for 2010). It therefore plans
to leave its rate at the current level throughout 2009 before progressively
lifting it towards a more neutral level. That said, as it admits at the end of its
press release, the future direction of monetary policy will largely depend on
future macroeconomic data. In our view, it is highly likely that the
Riksbank will be disappointed again by the future data and that it will
once again have to revise its economic activity outlook downwards,
notably for 2010, forcing it to cut its key rate two more times by 50bp, to
as low as 1% by Q209.
Norway: Norges Bank changes course radically

Economic activity entered a period of sharp slowdown in the second half of 2008. This forced the Norges Bank to
change course and it has cut its key rate by 275bp since October. The downtrend should continue over the
coming months.
Norway: GDP and business In the wake of other European countries, the Norwegian economy has
slowed sharply since early 2008. In falling from 5.7% YoY in Q407 to just
survey 1.5% in Q308, mainland GDP growth has fallen to its lowest level since 2003.
% YoY % In quarterly terms, Q3 growth is still positive, at 0.2%, but the large downward
8 20 revision in Q2 from 1% QoQ to 0.5% sends a seriously negative message for
7 the quarters ahead. As underscored by flagging retail sales, the drop in
15
6
5 10 domestic demand, which is partly related to falling house prices, should take
4 growth into negative territory in the coming quarters (as is also suggested by
5
3 surveys among businesses, see chart) taking it towards 0.8% in FY09.
2 0
1 Since October, the Norges Bank has cut its key rate by 275bp, to 3%. The
-5
0 press releases published after the meetings show that the bank has totally
-1 -10
changed its mind since September. Previously, press releases concentrated
94 96 98 00 02 04 06 08
GDP mainland
only on inflation (which peaked at 5.5% YoY in October) and possible
Business Survey (rhs) second-round effects. The recent ones underline the rapid drop in inflation
(which fell to 3.2% YoY in November) and the weakening of the growth
Source: Statistics Norway, Crédit Agricole prospects for the Norwegian economy due to the current financial crisis, and
the upheaval in the money markets. What should we expect of the Norges
Bank right now? Its December update of the Monetary Policy Report
signalled that we should expect a cut in its key rate to 2% by Q309.
Nevertheless, given that in recent months the Norwegian economy has
performed worse than expected by the Norges Bank, we are forecasting
deeper and faster cuts than those announced by the central bank.
Gregory Claeys 24
gregory.claeys@credit-agricole-sa.fr
++ 33 1 57 72 03 29
Australia: Verging on recession

Australian GDP slowed sharply in the third quarter of 2008. Faced with this economic deterioration, a fiscal
stimulus was put in place. The central bank has drastically cut its target rate, with the New Zealand central bank
following suit.
Australia: GDP The Australian economy is verging on recession. In the third quarter of 2008
Australian GDP growth slowed sharply, to 0.1% QoQ, compared with
QoQ % 1.4% in the second quarter. Excluding the agricultural sector, however,
2.5
GDP shrank by 0.3%. Once again, growth is being slowed by weak private
2.0
consumption, which rose by 0.2% QoQ, after falling by 0.5%. Australian
1.5 households are being forced to restore their financial equilibrium and to do
1.0 that they are restricting their consumer spending. In the third quarter, the
0.5 savings rate stood at 3.9% of disposable income, compared with 1.3% in the
0.0 second quarter. The authorities responded rapidly.
-0.5
An AUD10.4bn fiscal stimulus package is to be put in place. The Royal
-1.0
Bank of Australia has continued to cut its key rate aggressively, to 4.25% in
97 98 99 00 01 02 03 04 05 06 07 08
early December – its lowest since 2001. This support for demand should help
GDP Private consumption
growth to pick up from the second half of 2009.
Source: ABS, Crédit Agricole
The New Zealand central bank (RBNZ) has also sharply eased its
monetary policy to prop up the economy, cutting its key rate by 325bp
Sandrine Boyadjian since July 2008. At 5% in December, New Zealand monetary policy is seen
sandrine.boyadjian@credit-agricole-sa.fr as ‘expansionary’ by the authorities. Despite this, the RNBZ could be forced
+33 1 43 23 65 42 to do even more in early 2009 to cushion the cyclical trough.
Canada: Dragged into recession

Three months ago, the most probable option seemed to be monetary status quo. But that was before downside
risks to growth and a rapid drop in inflation materialised. Monetary easing looks set to continue, in addition to the
300bp already conceded.
Canada: Monetary policy & At first sight, Canada does not meet the technical criterion for a recession (ie,
GDP growth two consecutive quarters of shrinking GDP). In fact, only the first quarter has
so far shown negative growth (an annualised -0.6%). In Q2 growth came out
% YoY, % at 0.6% and in Q3 at 1.3%. The strong performance in Q3 is notably at a time
5.0 5.0 when GDP was falling in most other industrialised countries. It was generated
4.5
4.0 by higher domestic demand and a positive contribution from foreign trade.
4.0
3.5 The growth slowdown YoY, however, is rather substantial. Above all, for the
3.0
3.0 Bank of Canada (BoC), the country is being dragged into recession by
2.5 2.0 the “considerable deterioration” in the outlook for global growth.
2.0 Canada is also suffering from less favourable terms of trade, while the
1.0
1.5
worsening of the domestic economic climate is visible in unemployment data.
1.0 0.0
03 04 05 06 07 08
On the price front, inflation is heading back towards the BoC’s 2% (±1%)
Overnight rate target target at a rate of knots.
GDP growth (2 quarters leading, rhs) Many countries are faced with similar difficulties and central banks have
Source: Statistics Canada, BoC, Crédit recently all opted to cut key rates aggressively. The BoC has done likewise,
Agricole opting for a 75bp cut on 9 December, taking its key rate to 1.50% from a high
of 4.50% in mid-2007. This is already the lowest level since 1958, and the
BoC looks set to take it lower still. We are expecting further easing of 50bp in
Hélène Baudchon
helene.baudchon@credit-agricole-sa.fr
early 2009.
+33 1 43 23 27 61
25
EM currency outlook: weaker, but smoother

Emerging markets will slow strongly in 2009 (particularly in H1). Despite lower interest rates, we expect EM GDP
growth to weaken from 7.8% and 6.4% in 2007 and 2008, to 3.7% in 2009. Currencies should remain under
pressure, but their depreciation should become smoother, and large self-centric markets should stabilise first.
Trade openness ratio Economic growth facing a three-fold shock

Average of Exports and Imports of Goods We expect EM GDP growth to slow strongly, from 7.8% and 6.4% in
and Services as % of GDP
2007 and 2008, respectively, to 3.7% in 2009, under the impact of three
BRL 16
ARS 23 different factors. The first and most obvious one is export deceleration. Until
INR 24 recently, strong growth rates observed within the EM world have allowed
RUB 28
TRY 29
export growth to remain afloat thanks to ‘intra-emerging-market trade’. This is
ZAR 29 likely over now. As the slowdown intensifies in Russia, India, China and
IDR 34 Brazil, and as G3 economies go deeper into recession in H109, EM export
MXN 36
CNY 36 volume growth is likely to disappear. Asian economies (which are on average
PLN 41 among the most open to trade) should be the most impacted, followed by
PHP 42
SAR 45 Eastern European economies (see chart). Secondly, the sharp correction in
KRW 48 commodity prices will hit commodity exporters quite strongly (be it oil
TWD 62
HUF 75 exporters like Middle East countries or Russia, metal exporters like some
CZK 80 Latam countries, South Africa or Ukraine, or soft commodity exporters). The
THB 82
VND 84 bottom line is that the commodity price correction will favour a convergence
MYR 103 of EM and G3 growth, on the downside.
HKD 214
SGD 237 Deleveraging: not a short-term phenomenon
0 50 100
Thirdly, even when the period of intense financial stress ends (look for VIX
Source: Moody’s, Calyon durably below 40 and for the 3M TED spread back to 100-150) the global
deleveraging will likely continue. Looking at the past, during the two most
Private capital flows to EM
recent episodes of global slowdown/financial distress (post-Asian crisis and
900 300% post-2001 US recession), private capital flows to emerging markets were
Dotcom bubble+US recession 250% halved for a period of two years (see chart). This time it is likely to be worse
700 -45% in 2 years
? 200% as the current crisis is rooted in the US and European financial systems.
500
150% Even when risk appetite gradually returns (equity flows), emerging markets
300 100% will likely find it much more difficult to finance growth with external
50%
credit than in the past few years.
100
0% Currency outlook: weaker, but smoother
-100
-50%
Asian+Russian crisis Our outlook for EM currencies is two-step. The combination of lower
-300 -59% in 2 years -100%
92 94 96 98 00 02 04 06 08
economic growth and a more challenging balance of payment backdrop
should favour further currency depreciation in emerging markets,
YoY % change during the first period (see chart). We forecast that the emerging markets
Total private flows to EMs (RHS) we cover will in 2009 post a current account surplus twice as small as the
2008 surplus (and three times smaller than in 2007). We expect almost all of
Source: IIF, Calyon
the emerging currencies to continue their depreciation vs the USD in the
Our FX forecasts coming months. That said, we do not look for a collapse similar to the one
seen in September-November to be replicated in the coming months. Indeed,
135 in our view, currencies will gradually move from ’panic moments‘ (before the
130 bail out of Citigroup) to a more gradual depreciation, when the peak of the
125
panic is behind us, but the market still prices in the more fundamental impact
120 2 of a global slowdown. As a second step, we expect a gradual recovery of
115
110
most EM currencies, which is consistent with our global scenario (lower risk
105 aversion, end of the US and EU recession in H209). We also suspect that the
1
100 huge corrections seen on equity markets may fuel appetite for emerging
95 100 = 10-Dec markets. In particular, those large economies benefiting from more self-
90 centric dynamics may rebound ahead of other emerging markets. We would
05 06 07 08 09 10 place Brazil, India and Indonesia among the most credible candidates.
Asia (11) Latam (3)
Europe+ SAf (7) EUR
Source: Calyon
Sébastien Barbé 26
sebastien.barbe@hk.calyon.com
+852 28 48 98 02
Russia: A hard winter

The short-term future of the Russian economy is becoming murkier. Everything hangs on the price of oil, as well
as on the government’s ability to restore confidence. In the meantime, exchange rate risk is rising and a sharp fall
in the rouble (which would plunge the economy into recession) cannot be excluded.
Russia: oil price and growth To counter the global crisis the Kremlin has put over USD220bn on the
table. At first sight, the stimulus plan ought to have been sufficient to restore
USD % calm as the external debt of banks and corporates amounts to around
150 10.0 USD100bn. Yet capital outflows have been massive. Confidence seems to
130 9.0 have been lost. Russia is doubtless paying the price of its special
110
8.0
characteristics: the TNK-BP and Mechel affairs at the start of the year; this
90 summer’s conflict in Georgia; the current drop in oil prices; memories of
7.0 1998. Because of all this, Russia’s foreign currency reserves have fallen from
70
50 6.0 USD597bn in early August to USD437bn in early December, and the central
30 5.0 bank has been forced to allow the rouble to depreciate on seven occasions
Jan-05 Dec-05 Nov-06 Oct-07 Sep-08 since 10 November, for a total depreciation of 7-8%.
Brent price (bbl) The short-term outlook is getting gloomier. GDP growth decelerated to
GDP growth YoY (rhs)
6.2% (YoY) in Q3, its lowest rate in three years, and there is currently no
Source: ICIS Pricing, State Statistical Office doubt that the pace of economic activity is set to slow sharply over the
coming months. It is still difficult, however, to say exactly how gloomy
things will get. The very uncertain trend in oil prices will in this respect be
decisive, as will the uncertain fate of the RUB, which cannot be simply tied to
the price of oil, since confidence in the government and institutional policy
among investors and the population at large is also in question. With a per-
barrel oil price at USD70-80 over the year, Russia can still expect to post
growth of 2-3% in 2009; but at USD50 or less (given also that on this
Sylvain Laclias assumption foreign exchange risk can only rise and with it the risk of bank
sylvain.laclias@credit-agricole-sa.fr and corporate defaults), it should get ready for stagnation at best.
+ +33 1 43 23 65 55
CE: Can Central Europe avoid recession in 2009?

The Central European economies are decelerating sharply as a result of a deepening recession in the Eurozone,
their key trade partner. Furthermore, the region’s heavy reliance on automobile exports makes it highly vulnerable
to a protracted weakness in the sector.
Central and Eastern Europe: Among the EU’s new Member States, Latvia and Estonia are already in
real GDP in 2008 (%ch YoY) recession and will be joined next year by Lithuania, Hungary and
possibly Slovenia. The remaining countries in CE have yet to experience
Q1 Q2 Q3
real GDP shrinkage but a sharp slowdown in growth is underway with a risk
Poland 6.1 5.8 4.8
of stagnation as 2009 unfolds. During Q308 real economic growth in the
Czech Republic 5.1 4.6 4.7 region decelerated versus the previous quarter, as shown in the table.
Slovakia 7.6 7.6 7.1
Hungary 1.7 2.0 0.8 Faced with intensifying headwinds, central banks switched their policy
Romania 8.2 9.3 9.1 focus and began cutting interest rates against a backdrop of falling
Bulgaria 7.0 7.1 6.8 inflation. The easing moves have been more aggressive in Czech Republic,
Source: National Statistical Institutes
Slovakia (for technical reasons), Hungary (albeit from a very high level) and
more cautious in Poland. Romania stands out but the burden of adjustment
has fallen entirely on its central bank as it faces the risk of a hard landing
from an overheating economy.
Another adjustment variable comes in the form of currency depreciation for
countries with floating exchange rate regimes. Apart from SKK (+11.3%),
replaced by the EUR on 1 January, and CZK (+0.3%), all other currencies
have depreciated against EUR in 2008: -14.1% for PLN, -10.6% for RON and
Christopher Kwiecinski -5.0% for HUF. International investors have been overweighting the region in
christopher.kwiecinski@credit-agricole-sa.fr their portfolios.
+ +33 1 43 23 61 10
27
Asia: Gloomy times ahead

Asia will face a huge shock in the coming months. The sharp exports deceleration will add to the already
weakening domestic demand. Proactive policies will help only to partly buffer the slowdown. Even China’s growth
will be its weakest in 19 years.
Asian growth: down The financial crisis, which mutated into an economic crisis, is now spreading
throughout the world. Given its strong exposure to exports, Asia will be
14% particularly strongly impacted. Asian economies have already faced signs of
12%
a downturn in economic activity as shown by GDP growth in Q308 (see
chart). We expect emerging Asian GDP growth to decelerate from an
10%
estimated 7.3% in 2008 to 4.8% in 2009 (before recovering partly in 2010 to
8% 6.4%). In Asia 9 (excluding China and India), the deceleration will be more
6% dramatic: from 4.1% YoY in 2007 to only 1.3% YoY in 2009 (3.6% in 2010).
4% The worsening of the recession in the G3 economies will lead to a more
2% SARS outbreak severe slowdown in exports than initially expected. The most open
0% economies are the most vulnerable (including Singapore, Hong Kong,
01 02 03 04 05 06 07 08 Malaysia, Taiwan). The collapse of exports in Korea and Taiwan (where
November data is already available) suggests a dramatic intensification
Asia 9 YoY GDP growth
China YoY GDP growth
of the export shock (at best similar to 2001) and a sharp adjustment of
India YoY GDP growth intra-regional trade.
Domestic demand in Asia is also showing signs of weakness. Private
Source: CEIC, Calyon
investment is decelerating due to the tightening of credit conditions since the
beginning of 2008. Retail sales have indicated a shift downwards recently.
Consumer and business confidence have declined, thus indicating a
Asian exports collapsing bleak outlook for 2009. Deteriorating job markets across the region will add
50% to pressure on private consumption. As a whole, both external and domestic
40%
contributions to GDP growth will slow significantly. In 2009, we are
30%
forecasting negative growth for Singapore, Taiwan, Hong Kong and zero
20%
growth for Malaysia. India, which is less open relative to its neighbours,
10%
appears to be more protected from the crisis.
0% Due to increased integration in the world economy, China is also showing
-10% clear signs of strain. Not only are exports doomed to strongly decelerate in
-20% the coming months but domestic demand has also slowed down (as reflected
-30% in the drop in vehicle sales (-10.6% YoY in November vs +18% YoY on
99 00 01 02 03 04 05 06 07 08 average over the past five years) and it should continue on this trend in 2009.
Exports YoY change (the whole The increased number of bankruptcies since the beginning of this year, which
emerging Asia) has led to the destruction of jobs, could further depress consumption and
Exports YoY change (Korea and
Taiwan)
intensify social tensions. Lower property prices are also capping the
confidence of owners. All kinds of production indices (be it PMIs, energy
Source: Bloomberg, Calyon production, production of metals) point to a sustained slowdown in H109.
Since September, both expansionary monetary and fiscal policies are
being implemented to cushion the economic slowdown. Clearly, the
Government debt (% of GDP)
priority is now given to growth. The monetary policy easing has been
100 particularly aggressive in China, India and Korea. The central banks of India
90 and Korea have also been very active in easing liquidity conditions for
80 corporates and banks.
70
60 In addition, Asian economies can rely on three buffers to weather the storm.
50 Firstly, the downward trend in commodity prices should release pressure on
40
imported inflation, on the budget and the oil bill (hence limit to some extent
30
20
the deterioration of trade balances). Secondly, Asian countries have also
10 accumulated large amounts of foreign exchange reserves which they can use
0 if need be. Finally, most of these countries have quite substantial fiscal
MYR
INR
IDR
CNY
SGD
VND
PHP
THB
KRW
TWD
leeway (except India and Philippines). China, Malaysia, Korea and Thailand
have recently announced stimulus plans to fuel domestic demand. This may
Source: Moody’s, Credit Agricole
help, but it will not be enough to avoid a strong slowdown.
Sébastien Barbé / Cynthia Kalasopatan 28

sebastien.barbe@hk.calyon.com / cynthia.kalasopatan@credit-agricole-sa.fr
+852 28 48 98 02 / +33 1 43 23 49 27
Latin America: Caught up in the crisis

Ongoing slowdown looks set to accelerate in 2009. Like the rest of the world, the region has been hit by shrinking
demand from industrialised countries and has only limited capacity to mobilise domestic resources to sustain its
economy.
Latin America: consumer In 2008, while some Latin American countries – Uruguay, Peru, Brazil – have
undershot their past growth trend rates, several have already seen a
confidence indicators significant slowdown. In the past few weeks, however, we have seen
140 increasing negative signals, even in the most dynamic countries. In 2009 the
slowdown will spread, with far more homogenous growth rates. We
120 forecast growth of between 1.7% and 3.0% for six of the nine main countries.
The three exceptions will be Argentina (1.0%), Mexico (0.0%) and Peru
100 (4.5%), countries where uncertainty is greatest. Argentina because soy, the
economy’s ‘engine’, will no longer be driving the country’s growth (early
80 December 53% price fall from July peak). Falling prices will reduce tax
receipts and hence the Argentine state’s ability to support the economy, at a
60 time of widespread distrust in the financial markets. Mexico is one of the
01 02 03 04 05 06 07 08 leading examples of collateral damage from the looming recession in the US.
Argentina Brazil
Mexico Chile
Mexico’s exports (82% to the US) are set to plummet (we forecast a 1.5%
drop in volume) and, even if domestic demand holds up better, it seems
Source: Datastream, Crédit Agricole unlikely that it could generate positive growth. Moreover, Mexico’s current
account deficit, which was modest in 2008, looks set to widen significantly, to
as much as 3.4% of GDP or USD30bn, although funding it should not be a
problem. Peru is a perplexing case. While it should have been hit by falling
Share of US in exports, 2007 metals prices (gold, copper and zinc account for over 50% of its exports, and
copper prices have fallen by two-thirds since early July 2008), there have still
90
not been any tangible signs of a slowdown: bank lending to the economy
80
continues to grow, the construction boom continues unabated and the
70
government has just announced a fiscal stimulus package worth around 2%
60
of GDP against a backdrop of social unrest unprecedented in the region.
50
40
In Brazil, we are expecting a very marked slowdown in 2009, to 2.3%
30
compared with 5.7% and 5.1% in 2007 and 2008, respectively. The country
20
has been resilient but the first signs emerged in November with a sharp drop
10
in car sales (down 26%) and energy consumption. Brazil’s sensitivity to the
0
international crisis may seem surprising in the case of such a relatively
closed economy, where the ratio of exports to GDP is less than 15%. Brazil
MEX
CHI
COL
ARG
EQU
PER
URU
VEN
BRE
has undoubtedly been hit by falling commodity export prices and even more
so by capital flight. But the main factor in the slowdown seems domestic,
Source: Datastream, Crédit Agricole
namely a loss of confidence among economic agents faced with a raft of bad
news, including a falling currency and stock exchange, and losses at a
number of major corporates: consumers have stopped buying, businesses
are cutting back on production and banks are becoming reluctant to lend.
Price of regional exports
Overall, even if the fundamentals in most countries (ie, Brazil, Mexico,
(2000=100)
Colombia, Chile, Peru, and Uruguay) are healthy, in 2009 we forecast as
600 significant a slowdown in Latin America as in other regions, from 4.1% to
500
1.3%, even though Central and Eastern European imbalances were more
marked. Several factors are contributing to this downbeat view. First off, there
400
is a genuine sensitivity to falling global demand as regards volumes and
300 prices for commodities in Chile, Peru, Venezuela, Argentina, Ecuador, and
200 the US market in Mexico. Secondly, the authorities’ response to the crisis has
100
thus far been muted: measures to stimulate economic activity in Brazil are
very modest compared with the ‘recovery’ or ‘support’ packages launched in
0
China or Russia. True, they are limited by fiscal situations that are less
00 01 02 03 04 05 06 07 08
Soya Coffee
comfortable than those elsewhere, whereas the continuing perceived threat
Copper Oil of inflation is dissuading them from cutting interest rates. Lastly, perhaps
there is a less rational factor, ie, the idea that crises hit Latin America harder
Source: Datastream, Crédit Agricole than elsewhere. Yet the restructuring of their economies since the early part
of this decade is very real, and the return to a more upbeat environment
should lead to a growth rebound in 2010.
Jean-Louis Martin 29
jean-louis.martin@credit-agricole-sa.fr
+33 1 43 23 65 58
South Africa: Sharp growth slowdown in 08 and 09

Jacob Zuma, the new President of the ANC, seems likely to become the new President of South Africa in 2009. He will
begin his mandate at a time when growth is down.
South Africa: GDP Following four consecutive years of growth in excess of 5%, the global crisis
has affected South Africa with a much lower growth rate as of 2008. It is now
(rn %)
unlikely to top 4%, while the 2009 figure will not pass the 2.5% threshold. We
6 will probably have to wait until 2010 for signs of a slight recovery, therefore,
5 when the country hosts the soccer World Cup, which is likely to give a fillip to
tourism and services in general.
4
3
In addition to weak growth and its impact on employment (the unemployment
rate is still around 20% of the workforce), two indicators need to be
2 watched very closely: inflation and the current account deficit. Price
1 increases are likely to again seriously overshoot central bank targets in 2008,
with particularly strong upward pressure on food and energy prices. As
0
2005 2006 2007 2008 2009 2010
regards the current account balance, the marked slowdown in global demand
and lower commodity prices have widened the deficit, which should come in
Source: Crédit Agricole at over 8% of GDP in 2008.
We are expecting a rate cut in Q109, perhaps even before then, aimed at
Francis Nicollas supporting activity.
francis.nicollas@credit-agricole-sa.fr The uncertain business climate and the gloomy economic outlook are
+33 1 43 23 65 48
also undermining the ZAR, which lost 40% against USD in October.
Middle East: Oil wealth to dry up in 2009

Falling oil prices will slash both GCC revenues and growth in 2009. While public spending may make it possible to
sustain acceptable growth levels, oil price stabilisation is a prerequisite for a return of confidence.
Per barrel oil price to balance GCC country oil revenues are sharply down. Current account surpluses,
the budget in 2009 which seem likely to reach a record level of close to USD300bn in 2008, could
amount to less than USD50bn in 2009, as they are simultaneously hit by
USD lower oil prices and output levels. GCC countries, which have seen their
80 public spending rocket close to USD300bn this year, could well find
themselves in a budgetary hard place if they do not curb their spending.
60
Oman and Bahrain would be the worst affected, as the per-barrel oil price that
40
would balance their budgets is close to USD70.
Yet, on the contrary, Saudi Arabia and the UAE have announced a 20%
20
increase in their spending. Their goal is to limit the economic slowdown and, if
the fiscal stimulus is confirmed, GCC countries are likely to see only a modest
0
slowdown in 2009, with a GDP growth rate close to 3%, compared with over
Kuwait
Qatar
Arabia
Bahrain
UAE
Oman
Saudi
5% in 2008. Although the GCC countries have the resources to fund this
stimulus, they will also depend on the level at which oil prices stabilise:
Source: FC energy, IIF the rapid fall in prices is causing uncertainties that could prompt them to
greater caution. For the time being, the GCC is taking a punt that the
recession will be short-lived in the industrialised countries, with a rebound in
Riadh El-Hafdhi late 2009. If this scenario is thwarted, growth could slow further.
riadh.el-hafdhi@credit-agricole-sa.fr
+33 1 57 72 33 35
30
Exchange rate forecasts

18-Dec Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
US$ Exchange rate
Industrialised countries
Euro EUR/USD 1.44 1.30 1.35 1.40 1.45 1.47 1.49 1.52 1.52
Japan USD/JPY 89 90 94 96 100 104 108 110 112
United Kingdom GBP/USD 1.53 1.43 1.47 1.56 1.65 1.71 1.75 1.81 1.83
Switzerland USD/CHF 1.06 1.21 1.19 1.17 1.16 1.15 1.13 1.13 1.14
Canada USD/CAD 1.20 1.28 1.23 1.20 1.18 1.16 1.15 1.14 1.14
Australia AUD/USD 0.71 0.62 0.62 0.64 0.66 0.68 0.69 0.70 0.70
New Zealand NZD/USD 0.60 0.51 0.53 0.55 0.57 0.58 0.59 0.60 0.61
Asia
China USD/CNY 6.83 7.00 7.10 7.00 6.90 6.80 6.70 6.60 6.50
Hong Kong USD/HKD 7.75 7.82 7.82 7.82 7.80 7.80 7.80 7.80 7.80
India USD/INR 46.95 53.00 51.00 48.00 47.00 46.00 45.00 44.00 43.00
Indonesia USD/IDR 11075 13000 12500 11500 10500 10250 10000 9750 9500
Malaysia USD/MYR 3.46 3.80 3.90 3.90 3.80 3.76 3.73 3.69 3.65
Philippines USD/PHP 46.7 53.0 55.0 55.0 54.0 53.0 51.5 50.0 49.0
Singapore USD/SGD 1.43 1.60 1.65 1.65 1.62 1.60 1.58 1.56 1.54
South Korea USD/KRW 1291 1600 1450 1350 1300 1290 1275 1260 1250
Taiwan USD/TWD 32.5 35.0 35.5 35.5 34.5 34.0 33.5 32.5 32.0
Thailand USD/THB 34.4 38.0 39.0 39.0 38.0 37.5 37.0 36.5 36.0
Vietnam USD/VND 16986 17300 17500 17500 17300 17100 16900 16700 16500
Latin America
Argentina USD/ARS 3.41 3.50 3.60 3.70 3.80 3.90 3.90 4.00 4.00
Brazil USD/BRL 2.36 2.55 2.45 2.30 2.27 2.22 2.18 2.14 2.10
Mexico USD/MXN 13.23 13.50 13.50 13.30 13.00 12.75 12.50 12.25 12.00
Africa
South Africa USD/ZAR 9.58 11.00 10.80 10.50 10.00 9.80 9.60 9.50 9.40
Emerging Europe
Poland USD/PLN 2.84 2.77 2.63 2.50 2.38 2.31 2.21 2.17 2.11
Russia USD/RUB 27.36 30.50 31.00 30.30 29.10 28.50 28.20 27.80 27.50
Turkey USD/TRY 1.50 1.70 1.60 1.55 1.50 1.47 1.45 1.42 1.40
Euro Cross rates

Industrialised countries
Japan EUR/JPY 129 117 127 134 145 153 161 167 170
United Kingdom EUR/GBP 0.942 0.910 0.920 0.900 0.880 0.860 0.850 0.840 0.830
Switzerland EUR/CHF 1.54 1.57 1.61 1.64 1.68 1.69 1.69 1.71 1.74
Sweden EUR/SEK 10.90 10.70 10.20 9.80 9.40 9.60 9.90 9.80 9.60
Norway EUR/NOK 9.75 9.30 8.60 8.00 7.80 7.80 7.80 7.60 7.60
Central Europe
Czech Rep. EUR/CZK 26.51 24.00 23.75 23.50 23.50 23.20 23.00 22.90 22.80
Hungary EUR/HUF 267 262 260 252 250 248 248 240 240
Poland EUR/PLN 4.10 3.60 3.55 3.50 3.45 3.40 3.30 3.30 3.20
Romania EUR/RON 3.95 3.90 3.90 3.90 3.85 3.90 3.95 4.00 4.05
Sources: Bloomberg, Calyon
31
Interest rate forecasts – developed markets

USA
Fed funds 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.50 1.00 1.50
3 month 1.53 1.20 1.15 1.10 1.00 1.40 2.00 2.50 3.00
2Y year 0.67 0.70 0.75 1.00 2.50 3.00 3.25 3.75 4.00
10 year 2.07 2.50 2.75 3.00 4.20 4.50 4.50 4.60 4.70
Japan
Call 0.24 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.50
3 month 0.94 0.60 0.50 0.30 0.30 0.30 0.30 0.50 0.80
2Y year 0.46 0.60 0.65 0.70 0.75 0.75 0.95 1.00 1.00
10 year 1.27 1.30 1.30 1.40 1.50 1.50 1.65 1.65 1.65
Eurozone
Repo 2.50 2.00 1.50 1.50 1.50 1.50 1.50 1.50 2.00
3 month 3.11 2.60 2.40 2.35 2.25 2.20 2.35 2.60 3.00
2Y year 1.87 1.75 1.80 1.90 2.00 2.50 2.75 3.00 3.50
10 year (Ger) 2.98 2.90 3.10 3.25 3.75 3.80 4.00 4.20 4.30
United Kingdom
Base rate 2.00 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.75
3 month 3.01 2.00 1.90 1.80 1.70 1.60 1.70 1.90 2.25
2Y year 1.24 1.50 1.60 1.65 1.80 2.25 2.50 2.75 3.00
10 year 3.16 3.50 3.70 3.80 4.00 4.10 4.30 4.40 4.50
Sweden
Repo 2.00 1.50 1.00 1.00 1.00 1.00 1.00 1.50 2.00
3 month 2.49 2.20 1.60 1.60 1.50 1.40 1.80 2.20 2.80
10 year 2.50 2.80 2.90 3.00 3.50 3.70 4.00 4.30 4.50
Norway
Deposit 3.00 2.00 1.50 1.50 1.50 1.50 1.50 2.00 2.50
3 month 3.80 2.70 2.50 2.40 3.50 3.40 3.70 4.10 4.50
10 year 3.71 4.00 4.20 4.20 4.70 5.00 5.30 5.60 5.75
Switzerland
3 month 0.75 0.00 0.00 0.00 0.00 0.00 0.00 0.25 0.75
10 year 2.15 2.20 2.30 2.40 2.60 2.70 2.80 3.00 3.20
Canada
Overnight Target 1.50 1.00 1.00 1.00 1.00 1.00 1.50 2.00 2.50
3 month 2.20 2.40 2.30 2.20 2.10 2.30 2.80 3.30 3.80
10 year 2.81 3.10 3.20 3.30 4.10 4.30 4.40 4.50 4.60
Australia
Cash Target 4.25 3.75 3.50 3.50 3.50 3.50 4.00 4.50 4.50
3 month 4.50 4.50 4.40 4.30 4.30 4.40 4.70 5.20 5.70
10 year 4.05 4.30 4.40 4.50 4.90 5.10 5.40 5.70 6.00
New Zealand
Official Cash Rate 5.00 4.50 4.00 4.00 4.00 4.00 4.25 4.25 4.50
3 month 5.75 6.00 5.90 5.80 5.80 5.90 6.20 6.70 7.20
10 year 4.99 5.70 5.70 5.70 5.70 6.00 6.40 6.90 7.30
Sources: Bloomberg, Calyon
32
Interest rate forecasts – emerging markets

Asia
China 1Y lending rate 5.58 4.50 3.96 3.96 3.96 4.50 4.77 5.04 5.31
Hong Kong Base rate 0.50 1.00 1.00 1.00 1.00 1.50 2.00 2.50 3.00
India Repo rate 6.50 6.50 6.50 6.50 6.50 6.50 6.75 7.00 7.00
Indonesia BI rate 9.25 9.00 8.50 8.00 8.00 8.00 8.00 8.00 8.00
Korea Call rate 3.00 2.00 2.00 2.00 2.00 2.00 2.25 2.75 3.25
Malaysia OPR 3.25 2.75 2.50 2.50 2.50 2.50 2.75 3.00 3.00
Philippines Repo rate 6.00 5.75 5.50 5.50 5.50 5.50 5.75 6.00 6.00
Singapore Interbank 3M 0.92 0.80 0.90 0.90 0.90 1.40 1.90 2.40 2.90
Taiwan Redisc 2.00 2.00 2.00 2.00 2.00 2.00 2.25 2.50 2.50
Thailand Repo 2.75 1.50 1.50 1.50 1.50 1.50 2.00 2.50 2.75
Vietnam Prime rate 8.50 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00
Latin America
Argentina 3M deposit 18.41 15.00 14.00 12.00 10.00 10.00 10.00 10.00 10.00
Brazil Overnight/Selic 13.66 13.75 13.75 13.50 13.25 13.00 12.75 12.50 12.50
Mexico Overnight rate 8.15 8.25 8.00 7.50 7.50 7.50 7.50 7.75 8.00
Emerging Europe
Czech Rep. 14D repo 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Hungary 2W repo 10.50 10.00 9.00 8.00 7.00 7.00 6.75 6.50 6.50
Poland 7D repo 5.75 5.00 4.75 4.75 4.75 4.50 4.25 4.00 3.75
Slovakia 2W repo 2.50 NA NA NA NA NA NA NA NA
Romania 2W repo 10.25 9.75 9.25 9.00 9.00 8.75 8.50 8.25 8.00
Russia Refinancing rate 13.00 16.00 16.00 14.00 12.00 11.00 10.50 10.50 10.50
Turkey Overnight 16.25 15.75 15.25 14.75 14.00 14.00 14.00 14.00 14.00
Africa & Middle East

South Africa Repo 11.50 11.50 11.00 10.50 10.00 9.50 9.00 9.00 9.00
33
Economic forecasts
(1)
Real GDP (YoY, %) CPI (YoY, %) Current Account (% GDP)
08 09 10 08 09 10 08 09 10
USA 1.1 -2.3 2.1 3.9 -0.6 1.3 -5.0 -4.6 -4.7
JAPAN 0.0 -1.1 0.7 1.5 0.5 0.9 3.6 3.1 2.5
EUROZONE 1.0 -0.8 1.1 3.3 1.4 1.8 -0.5 -0.2 0.0
Germany 1.3 -1.0 1.1 2.8 1.0 1.1 7.0 5.5 5.0
France 0.9 -0.6 1.2 2.9 1.6 1.9 -1.7 -1.6 -1.7
Italy -0.4 -1.0 0.8 3.6 2.1 2.0 -2.6 -2.2 -2.6
Spain 1.2 -1.2 0.1 4.2 1.8 2.7 -9.7 -7.4 -6.4
Netherlands 2.1 -0.3 1.0 2.2 1.3 1.2 7.2 6.7 6.4
Belgium 1.5 -0.2 1.2 4.5 2.0 1.6 -3.2 -2.5 -2.7
United Kingdom 0.8 -1.4 0.9 3.6 1.3 1.4 -1.9 -1.5 -2.0
Norway 2.5 0.8 1.5 3.2 3.0 2.8 16.2 13.8 14.0
Sweden 0.6 -0.8 1.2 3.8 1.4 1.8 7.0 6.2 7.0
Switzerland 1.6 -1.0 0.6 2.7 0.5 0.8 11.0 8.0 9.0
Canada 0.5 -0.9 2.1 2.6 0.8 1.0 0.7 -1.1 -1.4
Australia 2.2 0.6 1.6 4.2 2.4 2.2 -4.4 -4.9 -5.5
New Zealand 0.4 -0.4 2.2 3.9 2.1 2.0 -9.4 -7.0 -6.8
Asia 7.3 4.8 6.4 7.3 3.5 3.7 5.1 3.3 3.7
China 9.3 6.5 8.0 6.3 2.0 2.5 10.0 7.0 7.0
Hong Kong 3.5 -1.0 3.0 4.6 1.5 2.5 9.5 8.5 9.0
India (2) 7.0 5.5 6.5 9.4 6.0 5.5 -2.5 -2.5 -2.5
Indonesia 5.7 4.5 5.0 10.4 7.5 8.0 1.0 0.0 1.0
Korea 4.0 1.5 2.5 4.7 2.5 2.0 -0.5 -1.0 1.0
Malaysia 5.2 0.0 3.5 5.6 4.5 4.0 13.0 9.0 11.0
Philippines 4.3 2.5 4.0 9.5 5.5 5.0 1.5 0.5 1.5
Singapore 2.9 -1.0 3.5 6.5 3.5 2.5 21.0 17.0 20.0
Taiwan 3.6 -1.0 4.5 3.9 0.5 2.0 7.0 5.0 5.0
Thailand 3.9 1.0 3.5 6.3 1.5 2.5 3.8 2.0 3.0
Vietnam 6.2 4.0 5.0 23.1 16.0 9.0 -9.0 -5.0 -5.0
Latin America 4.1 1.3 3.2 8.9 7.3 5.7 -0.9 -2.2 -1.3
Argentina 6.0 1.0 2.0 24.0 17.7 12.0 2.7 0.0 1.0
Brazil 5.1 2.3 4.0 6.6 5.9 5.0 -1.8 -2.2 -1.8
Mexico 1.6 0.0 2.5 5.0 4.4 3.7 -1.5 -3.4 -1.8
Emerging Europe 5.0 1.5 3.1 10.4 7.9 6.5 -0.1 -1.9 -1.9
Czech Republic 4.3 2.0 3.0 6.7 3.6 2.2 -3.5 -4.5 -3.5
Hungary 1.5 -0.5 0.0 6.5 4.0 3.0 -4.5 -4.3 -3.0
Poland 5.3 3.0 3.5 4.0 3.5 2.5 -4.9 -5.0 -4.5
Russia 6.3 1.0 3.5 13.9 11.0 9.0 5.0 1.0 0.5
Slovakia 6.5 2.5 3.0 3.7 4.3 3.5 -4.5 -5.0 -5.0
Turkey 2.4 1.5 2.5 11.0 7.5 7.0 -5.3 -4.0 -4.0
Africa & Middle East 6.0 3.0 4.9 11.2 6.3 5.8 9.5 1.3 2.5
Algeria 5.0 3.8 5.5 3.6 3.3 3.5 21.7 12.0 11.0
Egypt 6.9 5.0 5.0 17.1 9.0 5.0 0.1 1.0 1.0
Kuwait 6.4 2.5 5.5 11.7 7.0 7.0 42.0 19.0 23.5
Lebanon 4.0 3.0 4.0 4.2 12.0 3.0 -18.1 -1.0 -4.5
Morocco 6.0 3.5 4.5 4.5 3.0 3.0 -2.0 1.0 0.5
Qatar 11.8 10.0 15.0 15.2 9.0 9.0 26.0 10.0 21.0
Saudi Arabia 6.0 2.0 4.5 9.5 4.5 4.0 30.0 4.0 5.0
South Africa 3.5 2.5 3.5 11.3 6.3 6.5 -7.7 -8.1 -6.0
United Arab Emirates 7.9 2.0 5.5 14.5 9.0 8.5 16.0 3.5 5.0
Tunisia 4.8 4.0 4.5 4.5 3.8 3.0 -2.5 -2.5 -2.3
Total 3.2 0.7 3.1 5.4 2.4 2.8 0.8 -0.2 0.0
Industrialised countries 0.9 -1.4 1.5 3.3 0.5 1.4 -1.6 -1.5 -1.6
Emerging countries 6.4 3.7 5.4 8.3 4.9 4.5 4.0 1.7 2.1
(1) For India: wholesale prices; for China, retail price index; for Brazil: IPCA; for Norway: CPI-ATE; for Sweden: UND1X
(2) For India: Fiscal year ending in March.
Source: Calyon
34
Economic forecasts – quarterly breakdown

Real GDP growth, % 2008 2009 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
USA (annualised) 0.9 2.8 -0.5 -6.0 -4.0 -1.6 -0.2 1.5 2.7 3.4 3.6 3.5
JAPAN 0.6 -1.0 -0.5 -0.5 -0.3 0.0 0.0 0.2 0.2 0.2 0.3 0.3
EUROZONE 0.7 -0.2 -0.2 -0.5 -0.3 0.0 0.1 0.2 0.3 0.4 0.4 0.4
Germany 1.4 -0.4 -0.5 -0.5 -0.3 0.0 0.2 0.2 0.3 0.4 0.3 0.4
France 0.4 -0.3 0.1 -0.5 -0.3 0.0 0.1 0.2 0.4 0.4 0.4 0.4
Italy 0.5 -0.4 -0.5 -0.5 -0.3 0.0 0.1 0.1 0.2 0.2 0.3 0.3
Spain 0.3 0.1 -0.2 -0.5 -0.4 -0.3 -0.2 0.1 0.1 0.2 0.3 0.3
United Kingdom 0.3 0.0 -0.5 -0.7 -0.6 -0.2 0.2 0.3 0.2 0.2 0.3 0.4
Consumer prices, YoY % 2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
USA 4.2 4.3 5.3 1.8 0.3 -0.8 -2.1 0.3 1.2 1.3 1.4 1.5
JAPAN 1.0 1.4 2.4 1.4 0.8 0.5 0.0 0.7 1.1 1.1 0.8 0.7
EUROZONE 3.4 3.6 3.8 2.4 1.8 1.2 0.9 1.8 1.9 1.8 1.7 1.7
Germany 3.1 3.0 3.3 1.8 1.3 0.9 0.4 1.2 1.3 1.2 1.1 1.0
France 2.9 3.3 3.3 2.2 1.7 1.4 1.4 1.8 2.1 1.9 1.7 1.7
Italy 3.3 3.8 4.1 3.2 2.6 1.9 1.8 2.0 2.1 2.0 2.0 2.0
Spain 4.5 4.7 5.0 2.7 2.0 1.5 1.3 2.6 2.8 2.6 2.7 2.6
United Kingdom 2.4 3.4 4.8 3.9 3.0 1.5 0.4 0.5 0.9 1.4 1.6 1.8
Unemployment rate, % 2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
USA 4.9 5.3 6.0 6.7 7.6 8.2 8.5 8.5 8.3 8.2 7.9 7.5
JAPAN 3.8 4.0 4.1 4.0 4.2 4.5 4.3 4.1 4.1 4.2 4.0 4.0
EUROZONE 7.2 7.4 7.5 7.7 7.8 7.9 8.2 8.4 8.4 8.5 8.6 8.7
Germany 8.1 7.9 7.7 7.7 7.8 7.9 8.2 8.4 8.4 8.5 8.6 8.7
France 7.2 7.2 7.3 7.5 7.7 7.9 7.9 8.2 8.3 8.4 8.4 8.5
Italy 6.6 6.8 7.0 7.2 7.4 7.6 7.8 8.0 8.1 8.2 8.2 8.3
Spain 9.4 10.5 11.5 11.8 12.2 12.5 12.6 12.7 13.0 13.2 13.0 12.9
United Kingdom 5.5 5.7 5.8 6.3 6.8 7.4 7.8 8.0 8.2 8.2 8.0 7.8
Source: Calyon
35
Commodities forecasts
Supply, demand and price forecasts: energy (Mbd)
2006 2007 1Q08 2Q08 3Q08 4Q08 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010
Demand
OECD 49.6 49.2 48.9 47.2 46.4 47.8 47.6 48.5 46.5 46.9 48.0 47.5 48.1 46.4 47.2 48.3 47.5
Non-OECD 35.5 36.9 38.0 38.8 38.6 38.0 38.3 38.4 39.2 38.9 39.0 38.9 39.2 39.7 39.7 39.7 39.6
Total Demand 85.1 86.1 86.9 86.1 85.0 85.7 85.9 86.9 85.7 85.8 87.0 86.4 87.3 86.1 87.0 88.0 87.1
Supply
Non OPEC 51.1 50.0 49.9 49.7 48.9 49.8 49.6 50.5 50.1 49.6 50.1 50.1 50.6 50.5 49.7 50.2 50.3
OPEC Crude 29.7 30.7 32.4 32.2 32.4 31.4 32.1 29.7 29.9 30.2 30.5 30.1 30.7 30.8 30.8 30.8 30.8
OPEC NGLs 4.6 4.8 4.8 4.8 4.9 5.1 4.9 5.2 5.4 5.6 5.9 5.5 5.9 5.9 5.9 5.9 5.9
Total Supply 85.4 85.5 87.0 86.8 86.3 86.3 86.6 85.5 85.4 85.5 86.5 85.7 87.2 87.1 86.4 86.9 86.9
Annual Variation
Total OECD -0.26 -0.39 -0.91 -1.00 -2.51 -2.08 -1.63 -0.37 -0.75 0.54 0.25 -0.08 -0.39 -0.06 0.33 0.26 0.04
Total Non-OECD 1.36 1.35 1.57 1.94 1.73 0.65 1.47 0.45 0.33 0.32 1.00 0.53 0.77 0.54 0.79 0.75 0.71
Total Demand 1.11 0.96 0.65 0.94 -0.78 -1.43 -0.16 0.08 -0.42 0.87 1.25 0.45 0.38 0.48 1.13 1.01 0.75
Total Non-OPEC 0.69 -1.02 -0.58 -0.44 -0.70 -0.11 -0.46 0.65 0.33 0.65 0.27 0.48 0.14 0.39 0.14 0.13 0.20
OPEC Crude -0.03 0.95 2.08 2.07 1.79 -0.12 1.45 -2.65 -2.31 -2.18 -0.89 -2.01 0.95 0.91 0.61 0.31 0.69
OPEC NGLs 0.13 0.18 0.01 0.00 0.11 0.21 0.08 0.47 0.66 0.71 0.75 0.65 0.62 0.42 0.21 0.00 0.31
Total Supply 0.79 0.11 1.52 1.63 1.20 -0.02 1.08 -1.53 -1.32 -0.81 0.13 -0.88 1.70 1.71 0.96 0.44 1.20
Implied Stocks Var 0.30 -0.55 0.15 0.67 1.31 0.62 0.69 -1.46 -0.23 -0.37 -0.50 -0.64 -0.14 1.00 -0.53 -1.07 -0.19
1Q08 2Q08 3Q08 4Q08 2008 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010
WTI, USD/bl 98 124 118 60 100 62 68 70 75 69 75 75 70 75 74
Brent, USD/bl 97 121 115 57 98 60 66 68 73 67 73 73 68 73 72
Source: Calyon
Price forecasts: metals

2008 2009 2010
Q4 Year Q1 Q2 Q3 Q4 Year Long-term Prices
Aluminium (US$/t) 2,000 2,614 1,800 1,900 1,900 2,000 1,900 2,000 2,650 (120c/lb)
% chg* -10.0% -3.1% -22.2% -26.3% -42.1% -35.0% -31.6%
Copper (US$/t) 4,300 7,051 3,700 4,000 3,500 4,500 3,925 4,500 4,960 (225c/lb)
% chg* -16.3% -2.6% -35.1% -50.0% -100.0% -77.8% -60.6%
Nickel (US$/t) 11,000 21,137 11,000 12,000 12,000 13,000 12,000 13,000 15,432 (700c/lb)
% chg* -9.1% -2.5% -18.2% -16.7% -16.7% -15.4% -16.7%
Zinc (US$/t) 1,250 1,891 1,200 1,300 1,250 1,250 1,250 1,300 1,764 (80c/lb)
% chg* 0.0% -1.1% -8.3% -15.4% -8.0% 6.8% -6.3%
Lead (US$/t) 1,450 2,142 1,500 1,400 1,400 1,600 1,475 1,500 1,323 (60c/lb)
% chg* 3.4% 0.1% 0.0% -14.3% 0.0% 0.0% -3.4%
Tin (US$/t) 14,000 18,736 13,000 14,000 14,000 15,000 14,000 15,000 15,000 (680c/lb)
% chg* 0.0% -0.7% 0.0% 0.0% 0.0% 0.0% 0.0%
Gold (US$/oz) 750 860 725 675 730 750 720 750 650
% chg* -20.0% -1.7% -24.1% -28.9% -16.4% -4.0% -18.1%
Silver (US$/oz) 12 16 10 8 14 16 12 13 7
% chg* -41.7% -6.3% -80.0% -100.0% 0.0% 25.0% -25.0%
Platinum (US$/oz) 900 1,500 900 1,000 1,100 1,200 1,050 1,100 1,200
% chg* -11.1% -6.7% -16.7% -20.0% -27.3% -29.2% -28.6%
Palladium (US$/oz) 225 350 250 280 300 320 288 300 300
% chg* -55.6% -8.6% -52.0% -25.0% 0.0% 15.6% -11.1%
Source: Calyon, 17 November 2008
36
Certification
The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not
receive any compensation for providing a specific recommendation or view in this report.
Sébastien Barbé, Christophe Barret, Hélène Baudchon, Robin Bhar, Olivier Bizimana, Sandrine Boyadjian, Sandrine Boyadjian, Mike Carey, Gregory
Claeys, Frederik Ducrozet, Riadh El-Hafdhi, Gwenaelle Flandrin, Hervé Goulletquer, Isabelle Job, Cynthia Kalasopatan, David Keeble, Mitul Kotecha,
Christopher Kwiecinski, Sylvain Laclias, Jean-Louis Martin, Francis Nicollas
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Testing The Limits of Stimulus Policies: Fixed Income Markets Research

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Fixed Income Markets Research

Testing the limits of stimulus policies

www.calyon.com / Bloomberg CAIR

Editorial: The old, the crisis and the new

2010 should be the year of emergence from a long period of global

Monetary Policy: Anti-deflation front

CUR BoE rate (rhs)

plus systemic liquidity and financing problems and general dysfunctions in

Exchange rates: USD on the precipice

Interest Rates: When will the scales tip?

10Y US yields versus 10Y Entering the digital world

Energy: Will OPEC be able to defend USD70/bl oil?

Metals: Producers cutting as demand collapses

25 outlook end-users report order cancellations running typically at 20-30% and

US: The recession deepens

US Focus: US policymakers: ‘whatever it takes’

New policy tools: quantitative easing

costless. What unconventional policies can a central bank make to stimulate

The Fed appears to be in the process of codifying how these unconventional

What to spend on?

Eurozone: A clear recession

Source: ECB, Crédit Agricole

Eurozone focus: The European recovery plan

sustainability of the public finances 2 . Its co-ordination will deliver individual

France: Growth pinned down by external shocks

Olivier Bizimana / Frederik Ducrozet 18

Germany: Taking it on the chin

Japan: Facing turbulence

Japan Focus: Challenges for Japan’s banking

big companies Japanese banking system facing numerous challenges

1.6% over 12 months in September 2008), despite a liquid banking system

stimulus package of JPY26.9trn. But, faced with the worsening economic

Sandrine Boyadjian / Gwenaelle.Flandrin 22

UK: Back to the early 1990s

Gregory Claeys / Daragh Maher 23

Sweden: Historic rate cut

Norway: Norges Bank changes course radically

Australia: Verging on recession

Canada: Dragged into recession

EM currency outlook: weaker, but smoother

Trade openness ratio Economic growth facing a three-fold shock

Russia: A hard winter

CE: Can Central Europe avoid recession in 2009?

Asia: Gloomy times ahead

Sébastien Barbé / Cynthia Kalasopatan 28

Latin America: Caught up in the crisis

South Africa: Sharp growth slowdown in 08 and 09

Middle East: Oil wealth to dry up in 2009

Exchange rate forecasts

Euro Cross rates

Sources: Bloomberg, Calyon

Interest rate forecasts – developed markets

Interest rate forecasts – emerging markets

18-Dec Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Africa & Middle East

Economic forecasts – quarterly breakdown

Consumer prices, YoY % 2008 2009 2010

Unemployment rate, % 2008 2009 2010