Global Economic Outlook: Bottoming Out Now,

Recovery by June 2009

Economics Research and Analytics

January 2009

2

Executive Summary

1. Indicators point to a bottom

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

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

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

Origin of Crisis

4

The Genesis: Sub Prime Story

Home Buyer

Mortgage Market

Paym

ents

Loan

Loan remains inthe banks books

Bank

Mortgages

are traded

Paym

ents

Mortgages not inbanks books

Sub Prime Model

Defaults

Loss Due to Defaults

Sub Prime Model: Actions• Banks disperse risk of defaults• Banks lend more• New markets established for

retail mortgages • New market created for CDS

(total CDS market estimated by BIS to be $57 trillion)

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

Sub Prime Model: Consequences• Repercussions of defaults in

mortgage market • Falling house prices• Prime borrowers start to default• Write-downs by holders of

mortgages and other instruments

• Resulting credit crunch in the economy

* Note: CDS: Credit Default Swaps

5

Genesis: From Financial Sector to Real Sector

Defaults Lack of Trust in Financial Institutions

Tightening Credit Markets

Banks Slow Lending Down

Slower Growth

Financial InstitutionsLosses

Lack of Lending forSmall Business

Lack of RetailCredit

Consumers Reduce Spending

Economy Slows Down/Contracts

Sub-Prime Mortgages

$

Lack of Capitalfor Companies

Suspension of Interbank Lending

$

$

$

$

6

Internationalization of the Crisis

Withdrawal of FII Inflows: Currency Depreciation

Lower Exports From Asia

Due to Lower American and European Demand

Unwinding of Yen Carry Trade and FII Withdrawals

European Banks Withdraw Investments

in Eastern Europe

European Banks Lose Money on Sub Prime

Mortgages

Oil Prices Drop on Slower growth in Europe and USA

7

How Fear Drove the Recession – Fear is Now Bottoming Out

“The only thing we have to fear is fear itself.”

-- Franklin Roosevelt

Bottoming Out Now

9

Employment Creation Hits Bottom; Due for an Upswing

Beginning of great moderation;macroeconomic policies smooth business cycles

Current employment levels the lowest of the Great Moderation Era, 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.

10

Has Industrial Production Bottomed-Out?

Recovery in industrial production despite lowerautomotive growth rates

Lowest since oil shock; that said, recent months’ output indicates recovery

• 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.

11

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.

12

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

Global Economy to Rebound by June 2009

14

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

15

Global Response: Massive Government Stimulus

China: Interest rate cuts and $586 billion stimulus (infrastructure, rural)India: Interest rate cuts $4 billion stimulus package (infrastructure, exports, textiles)

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)

BrazilSupport to real, infrastructure development under PDP (more than $64billion injected to financial system)

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

UK: 250 billion pound bailoutGermany: $700 billion relief packageBelgium & Switzerland: Capital infusionECB Interest rate cutsFrance $50 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

RussiaSupport for ruble; $20 billion stimulus package

16

Global Response – Stimulus Packages

Country Stimulus Package and Policy Changes

Job and growth fund- $25 billion2.5 million jobs by 2011: 82.5% of losses (i.e., 1.6 million jobs) to be recovered within 6 monthsEvery $1 billion spent on roads will create approximately 35,000 jobsPublic buildings, schools, roads, energy efficiency, broadband and medical technology will be primary sources for employment growth in 2009

European Union

USA

UK: 250 billion pound bailoutGermany: $700 billion relief packageBelgium & Switzerland: Capital InfusionSpain $14 billion infusion, 300 000 jobs to be added by next yearEU 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 South Korea: Interest rate cuts; battling to stabilize currencyJapan and

South Korea

Emerging Markets

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

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

17

Easing of Inflationary and Liquidity Pressures

- 2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2002 2003 2004 2005 2006 2007 2008 2009 F

% Y

.on Y

USA JapanEuro Area Latin AmericaAdvanced economies

Increase in Real Income

Inflationary Pressures: Easing Worldwide

Policy Rate Reduction Leading to

Addition in Liquidity

Ensuring Liquidity

% Y

onY

18

0

50

100

150

200

250

300

1980M1 1982M1 1984M1 1986M1 1988M1 1990M1 1992M1 1994M1 1996M1 1998M1 2000M1 2002M1 2004M1 2006M1 2008M2

Inde

x 2

005=

100

Industrial Inputs Price Index Agricultural Raw Materials Index Metals Price Index Fuel/Energy Index

Decline in Commodity and Oil Prices

Commodity Fuel (energy) Index, 2005 = 100, includes Crude oil (petroleum), Natural Gas, and Coal Price Indices

050

100150200250300

Ind

ex

Commodity and energy prices have declined sharply in recent months. Oil prices have declined from $147 to $40 and will be a key stimulus for the 2009 rebound.

19

Emerging Markets - China

China is Structurally Vulnerable to External Environment

• Export-driven economy• Dependent on foreign capital

inflows • High level of migration –

imperative to maintain high growth momentum

• US is main destination for China’s exports

15.417.8

15.7 16.0 16.0 14.7 12.8 11.48.2

02468

101214161820

Febr

uary

March

April

MayJ u

ne J uly

Augu

st

Sept

embe

r

Octobe

r

Month (Year 2008)

Gro

wth

Rat

e (%

)

Steps to Combat Crisis• Announced a $586 billion bailout.• Focus on developing infrastructure to create

jobs and revive economy • Government easing lending to stem fall in

home prices • Coordinated interest rate cuts to boost

liquidity

Current Scenario• Small and medium manufacturers

struggling to access credit• Falling real estate prices could adversely

affect the banking sector • Facing struggling domestic demand,

China’s recovery will depend upon access 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).

Source: National Institute of Statistics

Industrial Output China (2008)

20

Emerging Markets - India

Key Issues: Rupee; Real Estate

• Real estate boom for past few years, with prices now cooling off

• Rupee has depreciated considerably against the dollar, leading to loss of corporate profits

4.80

1.42

7.37

5.53

4.37

6.22

5.47

9.52

0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00

February

March

April

May

June

July

August

September

Month

s (

Year

2008)

Growth Rate % (YoY)

Steps to Combat Crisis• Comprehensive cut in excise duties to

facilitate consumption across the board• Easing of norms for foreign investments in

local economy. • Small manufactures received sops manage

rising costs.• Exports, automotive, textiles industries have

received stimulus

Current Scenario

• Fall in consumption: especially consumer durables

• Increase in outsourcing activity (due to off- shoring by US and European companies seeking to cut costs)

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.

Source: CSO

Industrial Output India (2008)

21

World Economy - Composition and Growth

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.

0.00

10.00

20.00

30.00

40.00

50.00

60.00

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

$ T

rilli

on

Developing Economies

Advanced Economies

22

Road to Recovery

Increasing Government Consumption

Resumption of Corporate Lending In

cre

asi

ng

ca

pa

city

util

iza

tion

a

nd

exp

an

sio

nUS/European StimulusPackage

Output Stabilizes-Aided byCapital Goods

and Infrastructure

Credit MarketStabilize

IncreasingConsumption

StemmingJob Losses

Boom in Asia

Chinese Stimulus

Asian Stimulus

Restarting ofRetail Credit

Consumer Spending Gets Back on Track

Recovery/End of Trough

Increasing Demand for Capital Goods

$

$

$

$

$

$$

23

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