Global Economic Outlook:

Bottoming Out Now,

Recovery by June 2009

Economics Research and Analytics

January 2009
Executive Summary

1. Indicators point to a bottom

2. “Fear Index” is reaching a low-point

3. Rebound to start in June due to massive global response

4. Sustainability of up-swing driven by performance of emerging nations

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Origin of Crisis
The Genesis: Sub Prime Story

Sub Prime Model: Actions

Sub Prime Model • Banks disperse risk of defaults
• Banks lend more
• New markets established for
Home Buyer retail mortgages
• New market created for CDS
Payments
(total CDS market estimated by
Loan

Defaults BIS to be $57 trillion)

• Lax norms for housing credit as
a result of low interest rates

Bank

Sub Prime Model: Consequences

Payments
Mortgages
are traded

Loss Due to • Repercussions of defaults in

Defaults mortgage market
• Falling house prices
• Prime borrowers start to default
• Write-downs by holders of
Mortgage Market mortgages and other
Loan remains in instruments
Mortgages not in •
the banks books Resulting credit crunch in the
banks books
economy

* Note: CDS: Credit Default Swaps

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Genesis: From Financial Sector to Real Sector

Defaults Lack of Trust in Financial Institutions

Sub-Prime Mortgages Financial Institutions

Losses
Lack of Capital Suspension of
for Companies Interbank Lending
Tightening Credit Markets
$

$
Banks Slow Lending Down
$
Lack of Lending for
Small Business

Slower Growth
Consumers Reduce Spending $ Lack of Retail
Credit

$
Economy Slows Down/Contracts

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Internationalization of the Crisis

European Banks Lose European Banks

Money on Sub Prime Withdraw Investments
Mortgages in Eastern Europe
Unwinding of Yen Carry
Trade and FII
Withdrawals
Lower Exports From
Asia
Due to Lower American
Oil Prices Drop on and European Demand
Slower growth in
Europe and USA

Withdrawal of FII Inflows:

Currency Depreciation

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How Fear Drove the Recession – Fear is Now Bottoming Out

“The only thing we have

to fear is fear itself.”
-- Franklin Roosevelt

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Bottoming Out Now
 Employment Creation Hits Bottom; Due for an Upswing

Beginning of great moderation; Current employment levels the lowest

macroeconomic policies smooth of the Great Moderation Era,
business cycles suggesting bottom-out

• Non-Farm Payroll growth indicates increase in non-agricultural employment

• During the Era of Great Moderation, the business cycle was longer and smoother, and recessions
were typically shallower than pre-1984.

Employment creation is currently at the lowest level of the Great Moderation Era
(i.e., 1984 onwards); job creation will be positive for the foreseeable future,
given the massive global fiscal stimulus.

9
 Has Industrial Production Bottomed-Out?

Lowest since oil shock; that said, recent months’

output indicates recovery

Recovery in industrial production despite lower

automotive growth rates

• Increased output – despite the overhang of a recession – illustrates the robust underlying
conditions in American manufacturing

Industrial output showing a rebound from recent lows, suggesting the

recovery of underlying fundamentals.

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Consumers Are Continuing to Buy

• The decline in retail sales is not as steep as in the 2006 or 2001 recessions.
Recovering consumer confidence should lead to positive growth in the near future.

Consumers activity, aided by the fiscal stimulus, will boost industrial

production and ultimately aid recovery.

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 The Good, The Bad, and the Ugly

The Good
• “Fear Index” has peaked, indicating bottom-out
• Non-Farm Payroll growth has hit historic lows
• Industrial production has recovered and is much higher than during previous recessions
• Widely accepted that real estate is bottoming out now as well

The Bad
• Credit markets still remain tight
• Interest rates are at historic lows, but lending has not restarted
• Crisis has “gone global”

The Ugly
• Potential collapse of US automotive industry (though recent events indicate recovery to come soon)
• Clarity on the extent of sub prime losses and other securitized losses (no recent losses,
suggesting the worst news is behind us)

The crisis is reaching a bottom

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Global Economy to Rebound by June 2009
Mega Drivers for Rebound

• Positive economic news around the world; unprecedented focus

worldwide on addressing the economic situation
• Fastest government response in history, primarily driven by massive
government fiscal stimulus package
• New US Government/Obama’s economic growth plan focuses on
creating employment through investments in infrastructure, renewable
energy, broadband, and medical technology; infrastructure alone will
create 2 million jobs
• Decline in commodity and oil prices leading to a tax break stimulus
• Easing of inflationary and liquidity pressures
• Strong demand from emerging nations will be a factor in reviving the
global economy
• Smart money is coming back to the market, with stock exchanges at
historic low P/E ratios
• “Fear fatigue” and rebound in confidence

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 Global Response: Massive Government Stimulus

UK: 250 billion pound bailout Russia

USA:
$700 Billion bailout rapid
interest rate cuts
$23 billion support for top
3 auto companies;
plan to create 2.5 million
jobs by 2011
Brazil
Support to real, infrastructure development
under PDP (more than $64billion injected
to financial system)
Germany: $700 billion relief package
Belgium & Switzerland: Capital infusion
ECB Interest rate cuts
France $50 billion stimulus package
China: Interest rate cuts and $586
billion stimulus (infrastructure,
rural)
India: Interest rate cuts $4 billion
stimulus package (infrastructure,
exports, textiles)
Support for ruble; $20
billion stimulus package
Japan:
Interest rate cuts, 447
billion yen stimulus
package
South Korea:
Interest rate cuts and
efforts to keep currency
stable, $11 billion
stimulus package

Global Response
• Governments infusing capital into financial institutions
• Globally coordinated interest rate cuts
• IMF offers bridge loan to meet foreign exchange requirements
• Discussions, coordinated efforts (G20 summit)

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Global Response – Stimulus Packages

Country Stimulus Package and Policy Changes

USA Job and growth fund- $25 billion

2.5 million jobs by 2011: 82.5% of losses (i.e., 1.6 million jobs) to be recovered within 6 months
Every $1 billion spent on roads will create approximately 35,000 jobs
Public buildings, schools, roads, energy efficiency, broadband and medical technology will be
primary sources for employment growth in 2009

UK: 250 billion pound bailout

Germany: $700 billion relief package
Belgium & Switzerland: Capital Infusion
European Union Spain $14 billion infusion, 300 000 jobs to be added by next year
EU Interest rate cuts permanent; reduced VAT for labor-intensive units;
$250 billion (i.e., stability and growth pact). Job creation sources include energy efficiency,
transportation, infrastructure, broadband connectivity, construction, automobiles

Japan: Interest rate cuts

Japan and South Korea: Interest rate cuts; battling to stabilize currency
South Korea

China: Interest rate cuts and $700 billion bailout; close to $88 billion for railway
infrastructure with focus on 10 sectors including infrastructure, technological innovation,
Healthcare, and low-income housing
Emerging Markets
India: Interest rate and tax cuts totaling $4 billion in the next four months (March 2009);
sector focus is on apparel, infrastructure, other export-oriented sectors

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 Easing of Inflationary and Liquidity Pressures

12.0
Inflationary Pressures: Easing Worldwide
10.0

8.0
% Y.on Y

6.0
Increase in Real Income
4.0

2.0

0.0
2002 2003 2004 2005 2006 2007 2008 2009F
- 2.0
USA Japan
EuroArea LatinAmerica
Advancedeconomies

Ensuring Liquidity

% Policy Rate Reduction

Y Leading to
Addition in Liquidity
on
Y

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Decline in Commodity and Oil Prices

300

250 Commodity and energy prices have declined sharply in recent

200 months. Oil prices have declined from $147 to $40 and will be a
Index 2005=100

150
key stimulus for the 2009 rebound.
100

50

0
1980M 1 1982M 1 1984M 1 1986M 1 1988M 1 1990M 1 1992M 1 1994M 1 1996M 1 1998M 1 2000M 1 2002M 1 2004M 1 2006M 1 2008M 2

In d u s tr ial In pu ts Pr ice Ind e x A g r icu ltu r al Raw M ate r ials In d e x M e tals Pr ice In d e x Fu e l/En e r gy In d e x

300
250
200
Index

150
100
50
0
92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
n-

n-

n-

n-

n-

n-
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja
Com m odity Fue l (e ne rgy) Inde x, 2005 = 100, include s Cr ude oil (pe trole um ), Natur al Gas , and Coal Price
Indice s

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 Emerging Markets - China
20
18
Industrial Output China (2008)
16 China is Structurally Vulnerable
Growth Rate (%)

14 to External Environment
12
10 • Export-driven economy
17.8
815.4 15.7 16.0 16.0 14.7 • Dependent on foreign capital
6 12.8 11.4
4 8.2 inflows
2 • High level of migration –
0
imperative to maintain high
ch

r
ly
ne
ril

ay

st

er
ry

be
growth momentum

Ju
Ap

gu

ob
ua

ar

Ju

em
M

Au

ct
br

O
•

pt
US is main destination for
Fe

Se
Month (Year 2008)
China’s exports
Source: National Institute of Statistics

Steps to Combat Crisis Current Scenario

• Announced a $586 billion bailout. • Small and medium manufacturers
• Focus on developing infrastructure to create struggling to access credit
jobs and revive economy • Falling real estate prices could adversely
• Government easing lending to stem fall in affect the banking sector
home prices • Facing struggling domestic demand,
• Coordinated interest rate cuts to boost China’s recovery will depend upon access
liquidity to an alternative market for its exports-
namely India

China’s present hard landing is expected to recover by the middle of 2009, when domestic
consumption in China recovers as a result of effective use of stimulus package and growth
in alternative market for its exports (i.e., India).

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 Emerging Markets - India
Industrial Output India (2008)
September 4.80 Key Issues: Rupee; Real Estate
Months (Year 2008)

August 1.42

July 7.37 • Real estate boom for past few

June 5.53 years, with prices now cooling
May 4.37 off
April 6.22 • Rupee has depreciated
March 5.47 considerably against the dollar,
February 9.52 leading to loss of corporate
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 profits
Growth Rate %(YoY)

Source: CSO

Steps to Combat Crisis Current Scenario

• Comprehensive cut in excise duties to
facilitate consumption across the board • Fall in consumption: especially consumer
• Easing of norms for foreign investments in durables
local economy. • Increase in outsourcing activity (due to off-
• Small manufactures received sops manage shoring by US and European companies
rising costs. seeking to cut costs)
• Exports, automotive, textiles industries have
received stimulus

India is set to record lower but nonetheless significant growth of 7% in 2008. Public
spending, investments in infrastructure and third wave of IT boom in India will make the
economy even more buoyant by June 2009.

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 World Economy - Composition and Growth

60.00

50.00 Developing Econom ies

Advanced Econom ies
40.00
$ Trillion

30.00

20.00

10.00

0.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Advanced Economies accounted for 67 percent of world GDP in 2007 and Developing Economies 33
percent in 2007. In terms of contribution to growth, the share of emerging countries has been increasing with
major contributors being China, India, Russia, Brazil. These are also fastest expanding economies (Russia
is now an exception) with large public sector contributions. Stimulus plans to result in more employment and
growth.

A quarter of growth was driven by these emerging markets; contributions from these economies will play a
key role in global economic growth and recovery.

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 Road to Recovery

Increasing capacity utilization

Increasing Demand for
Increasing Government Capital Goods
US/European Stimulus Output Stabilizes-Aided by
Consumption

and expansion
Package Capital Goods
and Infrastructure Increasing
Consumption

$ Resumption of Corporate Stemming

$
Job Losses
Lending
Credit Market
Stabilize $
Boom in Asia $
Chinese Stimulus

$
Consumer Spending Gets Back on Track

Restarting of
Retail Credit
$
Asian Stimulus
Recovery/End of Trough

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