Global Economics Quarterly 1Q 2011

Global
ECONOMICS Macro
Global Economics
Q1 2011
Principal contributors
A mis-firing growth engine

Stephen King
Chief Economist
HSBC Bank plc
+44 20 7991 6700
stephen.king@hsbcib.com
Stephen is the HSBC Group’s Global Head of Economics and Asset Allocation research. He joined the company
in 1988, having previously worked as an economic adviser at the UK Treasury. Stephen is a regular economics Upward revisions to growth...
commentator on television and radio and has written a weekly column for The Independent, one of the UK’s leading
newspapers, since 2001. Stephen’s first book, Losing Control: the Emerging Threats to Western Prosperity is now
available from Yale University Press.
...but problems remain in the financial engine room...
Karen Ward
Senior Global Economist
HSBC Bank plc
+44 20 7991 3692 ...as the West learns more about the long-term costs of the crisis
karen.ward@hsbcib.com
Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with responsibility
for monitoring challenges facing the global economy and their implications for financial markets. Before joining
HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the Monetary Policy
Committee. She has an MSc Economics from University College London.
Global Economics
Madhur Jha
Global Economist
HSBC Bank plc
+44 20 7991 6755
madhur.jha@hsbcib.com
Madhur is HSBC’s Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA
markets. She has gained experience in emerging markets economics research from her stints as Fixed income/FX
strategist at a leading research consultancy in London and at the largest private sector bank in India, where she also
worked in FX derivative sales.
By Stephen King, Karen Ward and Madhur Jha
Disclosures and Disclaimer This report must be read with the disclosures and analyst
Q1 2011
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Macro
Global Economics abc
Q1 2011
Summary
The good news…

The global economy looks a whole lot happier than it did six months ago. Fears of a double-dip have
faded. At the start of 2011, we are raising our growth forecasts (again). For the world as a whole, we
expect growth of 3.3%. Once again, the emerging world is setting the pace, with growth of 6.4%
compared with a much more modest 2.3% for the developed world. Nevertheless, there are one or two
highlights within the developed world, most obviously a big upgrade to our numbers for the US, helped
along by the recently-announced tax changes for 2011 and 2012.
Inflation offers a mixed picture. In the developed world it is rather too low, one reason why we see no
likelihood of an early increase in interest rates. The Federal Reserve is likely to persist with its
programme of quantitative easing in 2011, desperate to prevent very low inflation from turning into
deflation. In the emerging world, the strength of economic activity has reignited inflation fears. However,
rather than accepting the need for major currency revaluations alongside significantly higher interest
rates, it seems likely that many emerging nations will choose, instead, to pursue various forms of
‘quantitative tightening’.
…and the not such good news

While this cyclical news is mostly encouraging, the structural position is a lot more disturbing. Most
Western economies are still a long way short of the paths they had been on before the crisis began so,
although growth is picking up, the pace of recovery is still disappointingly weak: the high rate of US
unemployment simply emphasises the point. The lacklustre nature of the recovery is all the more
remarkable given the scale of the policy stimulus on offer. Yet there is an obvious explanation: Western
nations are suffering from a toxic mixture of high debts and, by past standards, low incomes. The implied
de-leveraging simply reduces the effectiveness of standard macroeconomic policy.
This is leading to strains in the financial ‘engine room’ of Western growth. Is there a way of shifting the
burden of debt to somebody else to allow growth to lift off?
This process is already underway. US companies are in a relatively healthy position largely because they
have slashed costs. Their income gains have made their debts more easily digestible but only at the
expense of income losses elsewhere, most obviously in the form of the aforementioned savage increase in
US unemployment. And, as attempts to shift the burden of debt intensify, there is a mounting risk of
elevated financial uncertainty. In the Eurozone, the big problem lies in determining the relative
responsibilities of creditor and debtor nations: in the single currency area, sovereign debt is,
uncomfortably, taking the strain. Funnily enough, the same could be said about the global economy where
1
Macro
Q1 2011
the US is the major debtor and China, Russia and Saudi Arabia are major creditors. At the global level,
however, the risk lies with currency wars rather than sovereign upheavals.
For the Eurozone, the ultimate solution to the current crisis is likely to include some form of ‘Act of
Union’, a political settlement that will more clearly define the responsibilities of both creditors and
debtors and which includes more clearly-defined punishments for those which fiscally misbehave
(including, perhaps, a temporary suspension of fiscal sovereignty). This will take time, suggesting that
financial uncertainties are not going to disappear any time soon.
HSBC growth and inflation forecasts

GDP Emerging elation, Western stagnation
___________ (30 Sept 2010)_____________ ____________ Latest_____________
2010 2011 2010 2011
World 3.5 2.9 3.8 3.3
Developed 2.4 1.8 2.6 2.3
Emerging 7.2 6.2 7.4 6.4
US 2.7 2.5 2.9 3.4
UK 1.4 1.4 1.7 1.7
Eurozone 1.6 1.3 1.7 1.5
Japan 3.0 0.7 4.3 1.1
Brazil 7.5 5.1 7.8 5.1
Russia 3.8 3.5 3.2 4.8
India 8.8 8.6 9.2 8.0
China 10.0 8.9 10.0 8.9
Inflation Emerging elation, Western stagnation

___________ (30 Sept 2010)_____________ ____________ Latest_____________
2010 2011 2010 2011
World 2.3 2.2 2.4 2.5
Developed 1.3 1.2 1.4 1.4
Emerging 5.6 5.4 5.7 6.0
US 1.6 0.9 1.6 1.4
UK 3.2 2.9 3.3 3.2
Eurozone 1.6 1.6 1.6 1.8
Japan -1.1 -0.5 -1.1 -0.7
Brazil 4.9 5.4 4.9 5.4
Russia 7.0 9.5 6.9 9.5
India 10.7 5.4 11.8 7.1
China 2.9 2.5 3.3 3.9
Source: HSBC
As for the global story, although the US would like to see a weaker dollar, its foreign creditors know full
well that a weaker dollar will feel to them like a default (their holdings of Treasuries and so on would be
worth less in domestic currency terms). Put another way, the problems are similar but the solutions vary:
while the risk of default continues to plague the Eurozone, the global equivalent is a dollar meltdown as
emerging nations finally recognise that a permanent attachment to the US currency leaves them heavily
exposed to the Federal Reserve’s (ab)use of the printing press.
Attempts to shift the burden of debt are, therefore, likely to lead to greater uncertainty within financial
markets, one reason why the gold price is so elevated today. And, ultimately, these ‘quick fixes’ are likely
to make little difference to the underlying momentum of economic growth. The evidence from earlier
episodes of financial excess is that economies never return to their earlier, credit-dependent, trend levels
of economic activity. Instead, policymakers eventually have to accept the limitations of macroeconomic
policy: failure to do so will, in our view, merely increase financial instability over the long term.
2
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Q1 2011
The implications of our story for asset allocation are clear: we favour exposure in the emerging world
over the developed world, a theme that can played in a myriad of different ways. We like gold, emerging
currencies, equities with exposure to the emerging world and a variety of different commodities. And as
doubts about the ‘engine room’ linger, we are cautious on cash, credit (relative to equities) and developed
world currencies.
3
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Q1 2011
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4
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Q1 2011
Contents
Key forecasts 6 Country and Territory sections
US 42
Monetary & fiscal policy Canada 44
assumptions 7 Mexico 45
Brazil 46
A misfiring growth engine 8 Argentina 48
Looking better, but… 8 Chile 49
‘It’s the levels, stupid’ 9 Eurozone 50
A lack of clarity 11 Germany 52
The printing press is working…. 12 France 54
…in the wrong part of the world 12 Italy 56
Debt is the major problem 14 Spain 58
Pass the parcel 15 UK 60
Problems in the engine room 16 Norway 62
Back to conduits and SIVs 16 Sweden 63
A Pandora’s Box 18 Switzerland 64
Time for an ‘act of union’ 18 Hungary 65
Devaluation as an alternative to default 19 Poland 66
An impossible dream 20 Romania 67
Inflation or deflation? 22 Russia 68
Conclusions 23 Turkey 70
Egypt 72
Global economic forecasts 25 Saudi Arabia 73
GDP 26 UAE 74
Consumer prices 28 South Africa 75
Short rates 30 Japan 76
Long rates 31 Australia 78
Exchange rates vs USD 32 New Zealand 79
Exchange rate vs EUR & GBP 33 China 80
Consumer spending 34 India 82
Investment spending 35 Hong Kong SAR 84
Exports 36 Indonesia 85
Industrial production 37 Malaysia 86
Wage growth 38 Philippines 87
Budget balance 39 Singapore 88
Current account 40 South Korea 89
Taiwan 90
Thailand 91
Vietnam 92
Disclosure appendix 94
Disclaimer 95
5
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Key forecasts
Key forecasts
__________________ GDP_________________ _______________ Inflation ________________
2009 2010f 2011f 2012f 2009 2010f 2011f 2012f
World (nominal GDP weights) -2.4 3.8 3.3 3.5 1.0 2.4 2.5 2.2
World (PPP weights) -0.6 5.0 4.3 4.3 1.9 3.3 3.3 2.8
Developed -3.7 2.6 2.3 2.5 0.0 1.4 1.4 1.2
Emerging 1.9 7.4 6.4 6.2 4.8 5.7 6.0 5.5
North America -2.6 2.9 3.3 3.4 -0.3 1.7 1.5 1.1
US -2.6 2.9 3.4 3.4 -0.3 1.6 1.4 1.1
Canada -2.5 3.0 2.6 2.9 0.3 1.8 1.9 2.0
Latin America -3.4 6.6 4.8 4.4 6.3 7.2 8.2 7.7
Mexico -6.1 5.1 4.1 4.1 5.3 4.1 4.1 3.5
Brazil -0.6 7.8 5.1 4.5 4.9 4.9 5.4 4.6
Argentina -2.9 9.0 5.8 5.0 15.9 23.2 25.5 22.5
Chile -1.5 5.3 6.0 5.0 0.3 1.4 2.5 2.9
Western Europe -4.1 1.8 1.5 1.7 0.6 1.8 2.0 1.7
Eurozone -4.0 1.7 1.5 1.6 0.3 1.6 1.8 1.7
Germany -4.7 3.5 2.1 2.0 0.2 1.1 1.5 1.6
France -2.5 1.6 1.5 1.8 0.1 1.7 1.7 1.8
Italy -5.1 1.0 0.8 1.0 0.8 1.6 1.5 1.7
Spain -3.7 -0.2 0.7 1.2 -0.2 1.7 1.5 1.6
Other Western Europe -4.4 2.0 1.8 1.8 1.5 2.5 2.5 1.8
UK -5.0 1.7 1.7 1.8 2.2 3.3 3.2 1.9
Norway -1.3 -0.1 1.1 2.0 2.2 2.3 1.6 2.3
Sweden -5.3 5.1 3.4 2.5 -0.3 1.1 1.9 2.3
Switzerland -1.9 2.7 2.1 2.0 -0.5 0.7 0.9 1.5
EMEA -3.4 3.9 4.1 3.9 7.7 5.9 6.7 6.5
Czech Republic -4.1 2.1 2.0 2.3 1.0 1.4 2.2 2.4
Hungary -6.5 1.0 2.5 3.1 4.2 4.9 3.2 3.4
Poland 1.7 3.8 3.9 3.4 3.5 2.6 2.9 2.8
Russia -7.9 3.2 4.8 3.5 11.7 6.9 9.5 8.5
Turkey -4.7 7.7 4.2 4.3 6.3 8.7 7.1 6.4
Ukraine -15.1 5.5 4.0 5.1 16.0 9.5 8.7 8.0
Romania -6.9 -2.0 1.5 3.5 5.6 6.1 5.5 4.6
Egypt* 4.7 5.1 6.0 6.1 15.5 11.7 11.9 11.1
Israel 0.8 4.0 3.4 3.6 3.9 2.7 3.3 3.1
Saudi Arabia 0.1 3.6 4.4 4.8 5.1 5.4 6.5 7.0
UAE -2.9 1.7 3.3 4.1 1.3 0.7 2.1 3.3
South Africa -1.8 2.6 3.5 3.1 7.2 4.3 3.9 5.5
Asia-Pacific 0.3 6.7 4.8 5.2 0.8 2.2 2.3 2.1
Japan -6.3 4.3 1.1 2.0 -1.3 -1.1 -0.7 -0.5
Australia 1.3 2.7 3.6 4.1 1.9 2.9 3.1 3.1
New Zealand -1.7 1.6 2.8 3.5 2.1 2.3 4.0 2.3
Asia ex Japan 5.7 8.9 7.6 7.5 2.6 5.0 4.8 4.0
China 9.1 10.0 8.9 8.6 -0.7 3.3 3.9 2.9
Asia ex Japan & China 2.4 7.8 6.2 6.3 5.1 6.2 5.4 4.8
Hong Kong -2.8 7.0 5.2 4.6 0.5 2.3 4.4 4.2
India 6.8 9.2 8.0 8.2 10.9 11.8 7.1 6.1
Indonesia 4.5 6.0 6.4 6.3 4.8 5.1 6.3 5.2
Malaysia -1.7 7.1 5.1 4.9 0.6 1.8 3.0 2.2
Philippines 1.1 6.8 5.0 5.8 3.3 4.0 4.5 4.8
Singapore -1.3 14.8 5.2 5.8 0.6 2.8 3.2 2.9
South Korea 0.2 6.1 4.9 4.8 2.8 3.0 3.8 3.3
Taiwan -1.9 9.6 4.7 4.5 -0.9 1.0 2.3 2.0
Thailand -2.3 7.9 5.3 4.3 -0.8 3.3 3.8 3.1
Vietnam 5.3 6.7 7.5 7.8 7.1 9.0 9.9 9.4
Notes: Calendar year; except for * which is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain nominal GDP (USD) weights
Source: HSBC
6
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Q1 2011
Monetary & fiscal policy

assumptions
Monetary policy
Q3 2010f Q4 2010f Q1 2011f Q2 2011f Q3 2011f Q4 2011f Q1 2012f Q2 2012f
US
Targeted Fed funds 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25
Japan
Overnight call rate 0.10 0.05 0.05 0.05 0.05 0.05 0.05 0.05
Eurozone
Repo rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25
UK
Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.0
Canada
Overnight rate 1.00 1.00 1.25 1.75 2.00 2.00 2.25 2.75
Source: HSBC
Fiscal policy
Country 2010 2011
US The 2010 fiscal year ended in September with a deficit of USD1.29tn, or 8.9% of GDP. The The decision to provide additional fiscal stimulus to economic activity through tax
deficit declined modestly from USD1.42tn in 2009. The decline resulted from the reversal of cuts and increased expenditures in 2011 will lift the federal deficit by about
outlays for the TARP program of capital injections to banks in 2009. Other expenditure USD200bn compared to our last estimate. We project a USD1.41tr deficit for 2011
categories continued to rise, with defence outlays up 4.6%, for example, and Medicare up (9.4% of GDP). That’s up from our previous estimate of 7.9%. We expect the deficit
5.0%. Revenues did record a modest increase of 2.7% for the year, mostly as a result of a for 2012 will also be higher, up to 7.2% of GDP from a prior estimate of 6.5%. There
rebound in corporate tax payments linked to a strong rebound in profitability in 2010. is still little political appetite in Washington for taking action to reduce the deficit.
Japan The economic policy of the new government will proceed as planned in the initial Diet passed a 5 tn yen supplementary budget for FY2010 in November, which
budget which should raise real GDP growth by 0.3ppt in FY2010. should boost real GDP by 0.3ppts in 2011. Government is discussing a 5% cut in
corporation tax in FY2011 budget, funded through taxes on high income
households, so, if passed, the net impact would be almost neutral.
Eurozone Despite the increasingly austere budgets being delivered by countries such as Fiscal tightening in the Eurozone as a whole will begin in 2011 with even the less
Greece, Spain and Ireland, fiscal policy was roughly neutral in 2010 as a result of fiscally-challenged countries such as Germany starting to rein in spending.
the ongoing stimulus in other countries, Germany in particular. Together with the Tightening is currently expected to amount to about 1.2% of Eurozone GDP in 2011
ongoing weakness in nominal GDP growth, this implies a further deterioration in the but more aggressive tightening will be required if the debt-to-GDP ratio is to stabilise
budget deficit to about 7% of GDP. in the next three years or so.
Germany The fiscal burden arising from the recession will peak in 2010, driving the deficit to Austerity measures and the strength of the upswing should bring the budget deficit back
3.6% of GDP. However, pending liabilities resulting from the removal of assets from to 2.6% of GDP. The health insurance contributions for employees will move up to
the banking system to special purpose entities guaranteed by the government 15.5% from 14.9% of the gross wage income. This will reduce the burden for employers
should result in a surge of the debt level of GDP to 82.9% (2009: 73.4%). but also the government.
France Thanks to the recovery in GDP, the public deficit is likely to have reached 7.6% of The end of fiscal stimulus and one-off measures could reduce the public deficit in
GDP and the public debt 82.8% of GDP. The structural deficit remained high and 2011 whatever the nominal GDP growth. As a result, the public deficit could narrow
could limit the reduction in the primary deficit (excluding interest burden). to 6.2% on our forecasts and the primary deficit of 3.2% to GDP. This would amount
to a slight tightening (0.5% of GDP) but public debt is still expected to rise to 86.3%
of GDP in 2011.
Italy A number of micro measures, financed by the revenue delivered by a tax amnesty, Tough new measures amounting to EUR24bn (1.6% of GDP) are planned for 2011-
were scheduled for 2010, leaving fiscal policy roughly neutral. 12.These include a three-year public-sector pay freeze, a gradual reduction in public
sector headcount and cuts in local government spending. There are also plans for a
gradual increase in the retirement age.
UK The Comprehensive Spending Review, published in October, implies a discretionary The pace of fiscal consolidation is forecast to quicken appreciably in FY2011/12,
fiscal tightening of around 0.5ppt of GDP in fiscal year 2010/11. Although recent with the cyclically-adjusted deficit forecast to close by almost 2ppt of GDP. Tax
monthly public sector borrowing numbers have surprised on the upside, the targeted increases are expected to account for more than 40% of this fiscal effort.
GBP148.5bn deficit is on course to be achieved.
Canada The Ministry of Finance is forecasting a deficit in FY2010/11 at CAD45.4bn, in from For FY2011/12, the deficit is expected to have shrunk to just slightly less than
the previous years CAD55.6bn. Fiscal balance is expected to return by FY2015/16. CAD30bn. The MOF extended the cut off for program spending associated with
Total federal debt to GDP is expected to peak at 35% in FY2011/12, a rate roughly fiscal stimulus from end of Q1/11 to end of Q3/11. At that level, the federal deficit to
half the G7 average, before beginning to decline. GDP ratio is running at just slightly over 1%.
Source: HSBC
7
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Q1 2011
A misfiring growth engine

 Upward revisions to growth…
 ….but problems remain in the financial engine room….
 ….as the West learns more about the long-term costs of the crisis
Looking better, but… crisis, we expect Eurozone GDP to expand at a Stephen King
Chief Economist
1.5% rate in 2011 (up from 1.3% previously), HSBC Bank plc
The world economy appears to be in a better place +44 207 991 6700
helped along by continued resilience in the so-
than seemed likely in the middle of 2010, when stephen.king@hsbcib.com
called core. The main changes, however, come
fears of a US double dip were in danger of Karen Ward
through in our forecasts for the US and the UK. In Senior Global Economist
becoming all-consuming. Notwithstanding HSBC Bank plc
the US, we now expect growth of 3.4% in 2011 +44 207 991 3692
ongoing worries in the Eurozone, our latest
(up from 2.5%), pushed up by the extension of the karen.ward@hsbcib.com
forecasts show small upward revisions to the
Bush-era tax cuts while, in the UK, the economic Madhur Jha
outlook for both growth and inflation globally Global Economist
flourish in the second half of 2010 has created a HSBC Bank plc
compared to the forecasts in the forth quarter +44 207 991 6755
helpful ‘shadow effect’ to boost growth in 2011.
2010 edition of Global Economics. We now madhur.jha@hsbcib.com
We now expect growth of 1.7%, up from 1.4%
expect global growth of 3.3% in 2011, up from
last quarter.
2.9% previously, while inflation is expected to
come in at 2.5%, up from 2.2% previously. In part, the upward revisions reflect some of the
recent strength seen in the monthly economic
Not surprisingly, some of this upward revision is a
data. Relative to consensus estimates, as tracked
reflection of the very punchy numbers seen in
by HSBC’s ‘Surprise Indicators’, many countries
parts of the emerging world. Latin America stands
have delivered better-than-expected outcomes: on
out in particular, with forecast growth rates for
a GDP basis, it may be that the last quarter of
2011 now almost matching those expected in the
2010 will have seen an even more robust
fastest growing region of the world, Asia-Pacific.
performance than witnessed in the third quarter.
Strong growth and associated recent commodity
So what has driven this improvement in global
price increases have raised inflationary fears for
growth? For the emerging world, the story is quite
much of the emerging market world, especially in
clear. While domestic demand has held up very
Asia and Latin America, despite the recent
well despite the rumblings in the developed
reliance on unconventional and quantitative
world, the real surprise has come from a much
measures to rein in financial and monetary
stronger upturn in the world trade cycle, with
excesses.
emerging nations increasingly trading with each
We have also raised our projections for developed other. Undoubtedly though, they have also
world growth, albeit more modestly. Despite the benefited from a strong inventory rebound in the
ongoing concerns related to the sovereign debt developed world that has boosted their exports.
8
Macro
Q1 2011
Indeed the inventory rebuild also explains a lot of ‘It’s the levels, stupid’
the strength in GDP growth seen in the western
In August 2009, Mervyn King, Governor of the
world over the first three quarters of 2010 (chart 1).
Bank of England, highlighted that whilst the Bank
This is slightly worrying for the simple reason
was projecting growth in excess of 3%, this was
that re-stocking is unlikely to be repeated over
hardly cause for cheer given the depth of the
2011 at the rapid pace witnessed in 2010. Coupled
recession. Yet there is still too much attention
with the fading of fiscal stimulus (except in the
given to growth rates rather than to the level of
US) the spotlight will inevitably re-focus on
output. Charts 2 to 4 show the loss of output that
consumer spending. As we shall see, still elevated
has been suffered since the start of the crisis.
unemployment, low wage growth, wealth
concerns (from housing sectors) and the need to The US economy would have to grow at a real
reduce household indebtedness are likely to limit rate of approaching 7% per annum over the next
the pace of consumer recovery. couple of years to be able to get back to the level
that we would have been estimating before the
1. Inventories have been the big surprise in the US
crisis, based on trend growth forecasts. Seen in
USDbn US Index
this context, our projected US growth rates for the
150 60
100
next two years can hardly be described as stellar.
55
50 50 Indeed, as we note in the final section of this
0 piece, it seems increasingly likely that Western
45
-50
-100 40 economies have suffered permanent output losses
-150 35 as a result of the crisis.
-200 30
92 94 96 98 00 02 04 06 08 10 2. The US has a lot of catching-up to do
Stockbuilding PMI stock of purchases Index , 2007=100 US Index , 2007=100

120 120
6.9% annual
Source: Markit, Thomson Reuters Datastream
110 grow th 110
While it could be argued that growth of nearly 100 100

3.5% in the US over the next two years looks 90 90
quite attractive and suggests that recovery is well
80 80
on track, it is important to remember that this
2000 2002 2004 2006 2008 2010 2012
growth comes on the back of unprecedented
monetary and fiscal stimulus that is continually 'Trend' lev el fo GDP Actual lev el of GDP
being extended. Despite the unparalleled levels of Source: Thomson Reuters Datastream (HSBC’s estimate of trend growth at 2.7%)
stimulus, authorities in the US are still not

sufficiently convinced about the recovery to
signal even a medium-term pullback from ultra-
loose policy. Certainly, market rate expectations
have continually been lowered as expectations of
‘low rates for longer’ have become more
entrenched. Indeed, we have pushed back our
expectations of any tightening in the US to Q4
2012 from Q2 2012.
9
Macro
Q1 2011
3. Germany may have bounced but there’s a long way to go 5. In nominal terms, the US falls short of earlier expectations
Index , 2007=100 Germany Index , 2007=100 Index , 2004=100 US Nominal GDP Index , 2004=100
110 110 130 130
4.5% annual
105 grow th 105 120 120
100 100 110 110
95 95 100 100
90 90 90 90
2000 2002 2004 2006 2008 2010 2012 04 05 06 07 08 09 10
'Trend' lev el of GDP Actual lev el of GDP Nominal lev el Nominal lev el (Consensus)
Source: Thomson Reuters Datastream (HSBC’s estimate of trend growth at 1.5%) Note: 2010 actual level taken from Dec 10 Consensus forecast
Source: Consensus Economics
4. The UK may have turned a corner but the cliff is steep

6. The Eurozone has been weaker than expected
Index , 2007=100 UK Index , 2007=100
120 120 Index , 2004=100 Eurozone Nominal GDP Index , 2004=100
130 130
110 110
120 120
100 100
3.3% below 2007 110 110

90 90
peak
100 100
80 80
2000 2002 2004 2006 2008 2010 2012 90 90
04 05 06 07 08 09 10
'Trend' lev el of GDP Actual lev el of GDP
Nominal lev el Nominal lev el (Consensus)
Source: Thomson Reuters Datastream (HSBC’s estimate of trend growth at 1.8%)
Note: 2010 actual level taken from Dec 10 Consensus forecast

Source: Consensus Economics
Output in the UK is still around 3.0% below the
levels last seen in 2007 and would need to see a
growth rate of around 6.2% pa over the next two
years to get back to 'trend'. Even Germany, which 7. UK has also undershot expectations despite inflation
surprising to the upside
has outperformed its peers in Europe, would need
Index , 2004=100 UK Nominal GDP Index , 2004=100
to more than double the growth rates we’re
130 130
currently forecasting to get back to the earlier trend.
120 120
In nominal terms, the growth required becomes
110 110
even more onerous, a worrying result given that
an economy’s capacity to cope with debt depends 100 100
heavily on the level of income. Nominal output 90 90
levels have not only been well below trend but 04 05 06 07 08 09 10
have also undershot consensus expectations. Nominal lev el Nominal lev el (Consensus)
Charts 5 to 7 show that in nominal terms, output
Note: 2010 actual level taken from Dec 10 Consensus forecast
in both 2009 and 2010 was lower than consensus Source: Consensus Economics
forecasts made at the start of either year.
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Q1 2011
A lack of clarity 10. The real costs of this crisis have been huge
% US unemploy ment %
So while many of our growth forecasts have been
12 12
raised, it would be cavalier to suggest that the
10 10
world economy is now in rude health. The
8 8
emerging nations are growing too quickly and
6 6
beginning to experience an unwelcome rise in
4 4
inflation. Meanwhile, in much of the developed
2 2
world, the level of activity remains very
50 56 62 68 74 80 86 92 98 04 10
depressed, inflation is worryingly low and, in the
Unemploy ment rate
US, unemployment disturbingly high.
Source: Thomson Reuters Datastream
8. Core inflation in the US keeps falling
% Yr Core inflation % Yr
4 4
As we noted in Let Battle Commence (8 December
3 3 2010), persistent weakness in the Western world
2 2 has led to increasingly experimental stimulus
measures. Yet the response of Western economies
1 1
to these measures has, frankly, been disappointing.
0 0 As a general rule of thumb, the deeper the
00 02 04 06 08 10 recession, the stronger the recovery. On this
US Eurozone occasion, however, a remarkably-deep recession
Source: Thomson Reuters Datastream has been followed by a disappointingly flaccid
recovery, despite the ongoing provision of the
biggest policy stimulus on record.
9. The emerging nations are struggling with inflation In some parts of the Western world, the ability
% Yr Headline inflation % Yr and enthusiasm to pursue further stimulus
15 15 measures is all but lost. Most European nations
10 10 now recognise that they have been ‘living beyond
5 5 their means’ and are adopting austerity measures
0 0
of one sort or another. In the US, however,
stimulus remains the dish of the day. One minute,
-5 -5
the Federal Reserve is pursuing QE2; the next,
00 02 04 06 08 10
Congress is offering net additional tax cuts worth
China India (WPI)
an extra USD200bn over the coming two years.
Source: CEIC, Thomson Reuters Datastream
But is this stimulus working in the expected way?

Part of the problem rests with a lack of clarity
over policy intentions. If the idea of pursuing QE2
was to purchase government bonds to make sure
yields remained low, why have yields on 10 year
Treasuries risen 100bp since the programme
began? Does this increase reflect optimism about
11
Macro
Q1 2011
a future recovery? Or, instead, is it a sign of rising boomed, even while the recovery in the developed
inflationary pressures or of mounting sovereign world remains extraordinarily fragile.
risk associated with a government which is in
…in the wrong part of the world
danger of becoming fiscally incontinent?
Certainly, the medium-term trajectory for US For the emerging world, this monetary stimulus is
government debt is hardly encouraging; the not exactly welcome. Inflation is on the rise in
OECD’s latest projections suggest the ratio will China, India and other parts of Asia. Latin
reach 101.4% by 2012, putting the US well ahead American countries are also suffering from price
of France, Germany, Spain, the UK and the pressures. How should policymakers react? One
Eurozone as a whole. Our own view is that 10 seemingly-easy answer is for these countries to
year Treasury yields will ultimately fall again as raise interest rates and allow their currencies to
structural weakness in the US economy keeps appreciate, thereby allowing them to deliver
inflation very low and unemployment tighter monetary conditions than those prevailing
uncomfortably high, but there can be no doubt in the US. But there are some obvious objections.
that investors ended 2010 in a very uncertain China doesn’t want to emulate Japan’s late-1980s
frame of mind. experience, where a rising exchange rate masked
the development of huge domestic bubbles. Brazil
11. General government gross financial liabilities
doesn’t want to suffer from so-called ‘Dutch
% Nominal GDP 2009 2010f 2011f 2012f
disease’, where rising commodity prices drive the
France 87.1 92.4 97.1 100.2
Germany* 76.5 79.9 81.3 82.0 exchange rate higher, leaving manufacturing
Greece 120.2 129.2 136.8 142.2 companies gasping for air.
Ireland 72.7 104.9 112.7 115.6
Spain 62.4 72.2 78.2 79.6
United Kingdom 72.4 81.3 88.6 94.5 12. The Brazilian real goes from strength to strength
United States 84.4 92.8 98.5 101.4 $1= $1=
Euro area 86.3 91.6 94.8 96.3
Note: *Includes the debt of the Inherited Debt Fund from 1995 onwards 4.0 4.0
Source: OECD. These numbers are not always consistent with national sources
3.5 3.5
3.0 3.0
The printing press is
2.5 2.5
working….
2.0 2.0
Even worse, it may be that the attempts to kick- 1.5 1.5
start the US economy are beginning to exert 00 02 04 06 08 10
counterintuitive, perhaps even perverse, effects. Brazilian Real
Printing money is all very well but, if a nation has
Source: HSBC
excessively high debts, the obvious danger is that
the money leaks abroad rather than staying at We have outlined alternative policy options
home. That is precisely what seems to be elsewhere, most obviously in Manning the
happening now. In a repeat of the yen carry trade Barricades (2 November 2010). The key point to
seen over the last twenty years, investors are remember is that conventional monetary
easily able to borrow in dollars (or, for that tightening is not the only available option.
matter, sterling or euros) and invest in parts of the Policymakers can engage in various forms of
world which are relatively debt free and growing ‘quantitative tightening’, including fiscal restraint,
very quickly. Emerging economies have mostly raised collateral requirements on loans (Hong
12
Macro
Q1 2011
Kong), increases in reserve ratios (China, Turkey) Put another way, a shift in the balance of global
and the use of capital controls (Brazil). growth towards the emerging world will tend to
lift commodity prices. For the developed world,
Yet these policies will not change the realities of
this creates problems. If the pursuit of
today’s two-speed world. We expect the pace of
unconventional policies leads to higher
expansion in the emerging world persistently to
commodity prices as a consequence of buoyant
outstrip the debt-heavy developed world. And,
growth in the emerging world, Western real
because per capita incomes in the emerging world
incomes will be squeezed and debt problems will
are so much lower than they are in the West,
linger. After all, Western workers are hardly in a
commodity prices may rise even further: the
position to negotiate big pay increases in response
roads, railways, bridges, ports, airports, schools,
to higher commodity prices: unions are weaker
universities and hospitals that are taken for
than they once were and workers are only too
granted in the West in many cases still need to be
aware of the constant threat of outsourcing and
built in the emerging world. According to IMF
offshoring. Compared with previous recoveries,
calculations, until incomes per capita rise to
real income gains have, for the most part,
between USD15,000 and USD20,000, countries
remained very muted.
will tend to increase their demand for
commodities on a disproportionate basis. The
majority of people in emerging nations are a long
way short of these income levels.
13. Food prices have gone up 14. Gold just gets more expensive
Index , 2004=100 Index , 2004=100 Index , 2004=100 Index , 2004=100

200 200 350 350
175 175 300 300
150 150 250 250
125 125 200 200
100 100 150 150
75 75 100 100
50 50 50 50
00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11
Food Gold
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
13
Macro
Q1 2011
15. Metals prices are on the rise…. 16. Oil prices are perky again
Index , 2004=100 Index , 2004=100 Index , 2004=100 Index , 2004=100

400 400 500 500
350 350 450 450
400 400
300 300 350 350
250 250 300 300
200 200 250 250
150 150 200 200
150 150
100 100 100 100
50 50 50 50
00 01 02 03 04 05 06 07 08 09 10 11 00 01 02 03 04 05 06 07 08 09 10 11
Metals Oil
Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream
Debt is the major problem time thinking about the dynamics of the crisis. A
series of financial failures in 2007 and 2008 led to
The failure of conventional and unconventional
the financial system seizing up. Economic activity
polices to deliver a reasonable recovery in the
collapsed. For debtors, this was very bad news.
Western world either means that these policies
Debts easily taken on board in an era of rapidly-
have proved to be ineffective or, alternatively, that
rising house prices, strong real income gains and
the economic and financial headwinds have been
unlimited amounts of securitisation became so
unusually violent. In our view, the second of these
many millstones around the neck of the economic
two explanations is more compelling. Given the
recovery. It’s not the high level of debt itself
improvements in financial market conditions seen
which is a problem but, instead, its level relative
since spring 2009 – see charts 15 to 18 – there can
to the value of assets and income and therefore the
be no doubt that the earlier collapse in Keynesian
ability to service debt. Put another way, because
‘animal spirits’ has been partially reversed. Investors
the earlier increase in leverage was used primarily
are more confident than they once were: equity
for speculative property investments which then
markets have rallied and corporate bond spreads
turned sour, earlier expected gains in income have
have narrowed. Yet, despite all this, the ‘engine
simply failed to materialise: debts are high but
room’ of the financial economy is far from healthy.
incomes are low. Early in the crisis, these
To understand why, it’s worth spending a bit of
17. Loose policy has helped the bond market…. 18….and the equity market
bps bps Price index Price index

800 800 1700 1700
1500 1500
600 600
1300 1300
400 400 1100 1100
900 900
200 200
700 700
0 0 500 500
00 02 04 06 08 10 00 02 04 06 08 10
US corporate bond spreads S&P500
Source: Bloomberg Source: Thomson Reuters Datastream
14
Macro
Q1 2011
problems could be alleviated through reduction in 19. US households have reduced debt….
interest rates but having hit the zero rate bound, US household liabilities
this particular source of support is now fading. % GDP % GDP
105 105
Pass the parcel 95
85
95
85
But who is vulnerable in these circumstances? In 75 75
65 65
a game of financial ‘pass the parcel’, each debtor 55 55
has an incentive to shift the burden of debt onto 45 45
35 35
somebody else. Unlike children who hang onto
60 65 70 75 80 85 90 95 00 05 10
the prize for a little too long, each debtor wants to
Total liabilities
get rid of the ‘present’ as quickly as possible.
Source: Thomson Reuters Datastream. Expressed as four quarter moving average.
And, as with pass the parcel, the ultimate ‘prize’
remains a mystery until the very end.
The shift in burden can either be from one debtor

20…..as have companies…..
to another or from debtors to creditors. In the US,
US non-financial, non-farm business liabilities
the game of pass the parcel has been very much in
% GDP % GDP
evidence. Corporate debts remain relatively high 140 140
but, relative to corporate income, have fallen a 120 120
long way. Household debts have fallen as a share 100 100
of GDP but have made less progress relative to 80 80
household income. The difference is easy enough 60 60
40 40
to explain. Massive corporate cost cutting has
60 65 70 75 80 85 90 95 00 05 10
boosted corporate incomes at the expense of much
lower household incomes. The alleviation of Total liabilities
corporate debt pressures has, thus, only resulted in Source: Thomson Reuters Datastream. Expressed as four quarter moving average.
a continuation of debt pressures within the

household sector. And even if, in aggregate,
households and companies have deleveraged, the 21…..but government debt continues to surge…
US economy as a whole has not. Government debt
US general gov ernment liabilities
continues to rise and, in contrast to many previous % GDP % GDP
economic downswings, the US current account 100 100
90 90
remains in deficit. US non-financial debt may
80 80
have been repackaged and re-branded but it 70 70
certainly hasn’t been reduced. 60 60
50 50
40 40
60 65 70 75 80 85 90 95 00 05 10
Total liabilities
Source: Thomson Reuters Datastream. Expressed as four quarter moving average.
15
Macro
Q1 2011
22….and non-financial debt scales new heights with the fiscal truth, the same cannot be so easily
% GDP Total US non-financial liabilities % GDP said about Ireland, Portugal, Spain or Italy.
350 350
Back to conduits and SIVs
300 300
In many ways, the Eurozone is undergoing a
250 250
public sector version of the problems which hit
200 200 the interbank market in 2008. Back then, the
150 150 problems related to a loss of trust in the value of
60 65 70 75 80 85 90 95 00 05 10 the assets held off balance sheet by banks in the
Total liabilities
form of structured investment vehicles (SIVs) and
conduits. The combination of a collapse in the
value of asset-backed securities and collateralised
debt obligations and a lack of transparency
regarding SIVs and conduits led to a massive loss
Problems in the engine room
of trust between banks. Those which came under
In the absence of a strong and sustained rebound in suspicion suddenly found themselves unable to
economic activity, debt problems are likely to raise funds in the interbank market, leading to a
fester. They create the ultimate economic massive increase in the cost of borrowing which,
uncertainty because they undermine confidence in eventually, led to bankruptcy, collapse and
the operation of the financial ‘engine room’. bailout.
Economic forecasts are typically made on the basis
that the financial system ‘works’. Changes in
policy supposedly have a predictable effect on
economic growth, the amount of spare capacity in
the system and, ultimately, the rate of inflation. All
of these relationships, however, ultimately depend
on a functioning engine room. If trust in the engine
room begins to falter, all economic bets are off.
Nowhere is this problem clearer than in the

Eurozone (see, for example, Janet Henry’s
Eurozone Periphery: Austerity, Rescues and
Politics, 26 November 2010). The uncertainties
generated by the crisis are a direct result of
confusion regarding debt. The problems are not in
any way confined to, nor indeed the direct result
of, fiscal excesses. As shown in table 23, with the
exception of Greece, there is scarcely any
relationship between levels of government bond
yields and the size of either budget deficits or
debt/GDP ratios. While the Greeks were
unsurprisingly punished for being economical
16
Macro
Q1 2011
23. Some sovereigns are luckier than others….

% 2010 gov ernment debt against current 10 y ear bond %
14 14
12 12
10 10
10 year yield
8 8
6 6
4 4
2 2
0 0
40 50 60 70 80 90 100 110 120 130 140 150
Gov ernment debt (% GDP)
France Italy Spain Netherlands Belgium Austria Portugal Finland Ireland Germany Greece
Source: European Commission
24. Policymakers have only limited control over financial banking system. If that, in turn, requires the
conditions when panic sets in
government to offer more bailouts, the fiscal
% US interest rates %
6 6 consolidation will then have been in vain, with the
5 5 ‘off-balance-sheet’ debts brought onto the
4 4 government’s own balance sheet. Hacking away
3 3 at one lump of debt may simply lead to increases
2 2
in debt elsewhere. Moreover, if investors begin to
1 1
0 0
recognise this danger, they may then demand a
05 06 07 08 09 10 higher risk premium on government bonds,
Fed funds 3m interbank rate reflecting similar fears to those which plagued the
interbank market at the beginning of the financial
crisis. This kind of debt consolidation is a case of
‘one step forward, two steps back’.
Today, the equivalent of the off-balance sheet It reveals, in turn, the fundamental problem with
items held by banks a few years ago are the banks debt consolidation. In a bid to avoid default, the
themselves. And the equivalent of the banks are debt burden is passed from one group of debtors
governments which are discovering that their to another group but, in the absence of any
banks may, in some cases, need huge injections of sustained increase in income, the overall burden is
capital which, in turn, trigger substantial increases never really reduced. At that point, it becomes
in government debt. This, after all, was Ireland’s increasingly attractive for the debtors to think
experience earlier in 2010 when a seemingly- about passing the burden of adjustment onto
healthy debt/GDP ratio suddenly jumped from creditors. The incentive is certainly there: indeed,
60% to approaching 100% of GDP. Fine Gael, the Irish opposition party, has already
warned that bank senior bondholders not covered
Ireland’s experience has revealed a disturbing
by the government guarantee might be in trouble
truth about focusing on only one group of debtors.
were Fine Gael to win the Irish General Election
Fiscal consolidation is all very well but if it
due to be held in spring 2011.
prevents a decent recovery in economic activity, it
may lead to an actual (or expected) increase in
non-performing loans, thereby weakening the
17
Macro
Q1 2011
A Pandora’s Box ‘stealthy default’ – through printing money to

create higher inflation or a lower currency – no
Talk of default and restructuring has, of course,
longer exists. For Eurozone debtors, either they
increased hugely over the last few months. But in
repay their debts, they negotiate a restructuring or
the event of a default, a Pandora’s Box of
they vaguely hope that a sudden surge in
financial uncertainty would surely spring open,
economic activity provides the higher income to
unleashing all sorts of unpleasant effects. The
alleviate currently-stretched debt-income ratios.
developed world’s bond markets would have
For other debtors – most obviously the US – the
crossed a financial Rubicon, with creditors finally
printing press is still available. Whether QE2
recognising that their investments were no longer
leads to a rise in inflation or a fall in the US
safe. And in the process of rushing for the exit,
dollar, it is rightly regarded by America’s
the financial engine, already spluttering, would be
domestic and foreign creditors as the financial
in danger of failing altogether. It might not quite
equivalent of a stealth bomber.
be the Credit Anstalt1 failure of 1931 – one of the
most important episodes in the move into Great This leads to an intriguing inconsistency. Western
Depression - but financial confidence could erode policymakers mostly agree that their currencies
very quickly. should be devalued against those in the emerging
world (or, as they’d express it, that emerging
Almost all debt crises ultimately involve burden-
currencies – led by the renminbi – should be
sharing between debtors and creditors in one form
revalued against those in the emerging world).
or another. Some of these burden-sharing
While the argument seems innocuous enough, it
arrangements are explicit – restructurings and
nevertheless implies that, if successful, the US
defaults fit into this category – while some are
debtor would be delivering an implicit default to
implicit – including, most obviously, printing
its Chinese (and perhaps Russian) creditors. In the
money to raise inflation or to devalue the
Eurozone, however, it is deemed by many to be
currency. These ‘implicit defaults’ are not, of
entirely inappropriate that the debtor nations
course, defaults in the legal sense but, in
should make any attempt to shift the burden onto
economic and financial terms, they work in much
their creditors. In that sense, printing presses are
the same way. If, for example, inflation rises but
no more than instruments of deception.
the central bank refuses to raise interest rates, real
interest rates decline, the value of savings is Time for an ‘act of union’
eroded and domestic debtors gain at the expense
In the Eurozone, the obvious way forward is to
of creditors. Alternatively, if a country which has
come up with a political settlement. Monetary
borrowed in its own currency from the rest of the
unions do not work very well – and tend not to
world then chooses to devalue its currency, the
survive for very long – in the absence of some
foreign creditors would end up with burnt fingers.
kind of political and fiscal union. On some
The only real difference between the Eurozone occasions, political unions can emerge from
crisis and imbalances elsewhere in the world is financial crises. For example, the 1707 Acts of
that, for members of the Eurozone, the option of Union between England and Scotland were partly
triggered by Scotland’s desperate attempt to pick
itself up after the huge losses experienced from its
1
The Austrian Bank which collapsed in 1931 presaging the earlier, foolish, colonial investments in the so-
meltdown in global financial conditions turning a major
recession into the Great Depression. called Darién scheme, where attempts to establish
18
Macro
Q1 2011
a ‘New Caledonia’ on the Isthmus of Panama wide. Individual US States may have balanced
failed through disease, starvation and some very budget amendments but, in many cases, they
aggressive Spaniards. Indeed, in a modern, rapidly enjoy a great deal more fiscal autonomy than do
globalising, world, the Scottish elite realised that the various nations and principalities that make up
Scotland would be able to make very little the United Kingdom. For the Eurozone, it may be
progress on its own, a feeling doubtless shared by possible to have an arrangement designed to
many of the more enthusiastic integrationist preserve a great deal of national sovereignty;
European nations today. perhaps, for example, a fiscal club that allows
members to preserve their fiscal sovereignty in
Moves towards a political and fiscal union would
normal circumstances but where sovereignty
provide a neat way of sharing the burden between
might be temporarily suspended if a member
debtors and creditors within the Eurozone and,
required a bailout from a centralised European
perhaps importantly, provide acceptance that the
fund. Whether a new arrangement of this kind can
responsibility for the Eurozone’s current
easily be achieved without an initial restructuring
difficulties lies with both debtors and creditors.
is, however, a matter of some debate.
After all, if Germany chooses to run a
persistently-large current account surplus, Devaluation as an alternative
someone else needs to run an equally large deficit. to default
And, with the Eurozone’s overall balance of
Outside the Eurozone, the problem is not
payments in neither surplus nor deficit,
politically so difficult – at least not in the short-
Germany’s excess savings were inevitably
term – but the economic imbalances are very
converted into the excess borrowings of the
much the same. China, Russia and Saudi Arabia
peripheral nations. German savers contributed to
play the role of the German creditor while the US
this conversion by offering to lend to their
is the equivalent of the peripheral nations. At the
European partners at incredibly low interest rates.
global level, we’re witnessing a battle over
This was a crisis born not just from the silly
semantics linked to so-called ‘currency wars’.
investments of the borrowers but also by the
irresponsibly-generous lending by the creditors. Put simply, one country’s devaluation is another
country’s default. For the US, a falling dollar
25. Germany lent to the periphery
should support exports, raise investment in export
% GDP Current account % GDP
industries and lead to a positive multiplier effect
10 10
for the economy more broadly: put another way,
5 5
nominal income should rise relative to existing
0 0
debt levels. For the creditor nations, however, a
-5 -5
falling dollar reduces the domestic currency value
-10 -10
of holdings of Treasuries and other pieces of
-15 -15
paper originating from the US: they are worse off
00 01 02 03 04 05 06 07 08 09 10
as a consequence of the dollar’s decline.
Germany Italy Spain
It’s worth stressing, however, that the spectrum of

possible political and monetary unions is very
19
Macro
Q1 2011
Until now, of course, creditor nations have An impossible dream

reluctantly carried on buying dollar assets,
Policymakers might simply be trying to achieve
knowing that their decision to walk away from the
the unachievable: with high debts and low
dollar could lead to a major currency crisis which
incomes, there may be no available quick fix for
would only do damage to their own dollar-based
Western economies. To place this in context,
portfolios of foreign assets. One possible escape
charts 27 to 29 show the level of real output in a
route, however, is for creditor nations to
number of countries that suffered financial crises
encourage the development of their own,
in the 1990s. Whilst some of these economies
alternative, reserve currencies. A major renminbi
managed to get back to their pre-crisis growth
appreciation against the dollar would be a lot less
rate, this wasn’t enough to recoup the output
painful for the Chinese if the renminbi were
losses incurred during the recession so the level of
simultaneously to be used by other nations as an
output never got back to its past trend.
international currency for both trade and capital
movements: the cost to China of conducting trade At the beginning of this crisis, work by the IMF
and financial arrangements with nations in other suggested that the policy response played a key
parts of the world (most obviously in the role in determining whether output losses became
emerging world) would be significantly reduced permanent. The IMF argued that swift action in
as a result (for more details on the the form of monetary and fiscal policy, and efforts
internationalisation of the renminbi, see The rise to recapitalise damaged bank balance sheets,
of the redback by Qu Hongbin, Sun Junwei and could limit the long-term impact. Policymakers, to
Donna Kwok, 9 November 2010). By the same their credit, followed this advice to a T and few
token, should the US dollar become less important could fault their efforts. And yet, we are still stuck
in international transactions, the US would suffer with a very similar situation to those in Sweden
long-term costs associated with the near-term and Thailand with growth potentially back on
abuse of its reserve currency status; most track, but insufficient to catch up with the pre-
obviously, a higher cost of capital. crisis trend level of output.
All-in-all, the Western world remains on Peer beneath the surface and it may be that
economic life-support, in part because no proper policymakers are deluding themselves. If we think
resolution has been found to an evolving debt about long-term damage to either the workforce or
crisis. Although our central view remains one of the capital stock, there are worrying signs indeed.
modest sustained recovery in the West with
continued robust growth in the emerging world,
we are acutely aware of the major risks to this
view. If the financial engine breaks down – either
because of defaults or currency crises – the
fragility of the recovery will have been brutally
exposed. And the chances of this happening are
greater than zero not just because debts are high
but also, as the next section explains, because
Western incomes are still very low.
20
Macro
Q1 2011
26. The level of output never got back to trend in Sweden… 29. Investment spending is still well down on the pre-crisis peaks
Log (GDP) Sw eden 1991 Lev el of inv estment

5.8 Index , 2004=100 Index , 2004=100
130 130
120 120
110 110
5.6
100 100
90 90
80 80
5.4 70 70
1980 1984 1988 1992 1996 2000 2004 2008 04 05 06 07 08 09 10

Trend Actual UK France Germany US
Source: Thomson Reuters Datastream and HSBC calculations (trend is the average Source: Thomson Reuters Datastream
growth rate in the five years before the crisis)
The level of investment in the most highly

27. …or Thailand…
indebted economies, the UK and the US, remains
Log (GDP) Thailand 1997
6.9 well below the pre-crisis peaks (Chart 29). It’s
6.8 difficult to get reliable estimates of depreciation
6.7 but investment running at 10% below the pre-
6.6 crisis level raises the possibility that the US
6.5
capital stock is being eroded.
6.4
6.3 30. Many of the job losses are in industries that are unlikely to
recover for years
1992 1994 1996 1998 2000 2002 2004 2006 2008
Peak to % cont to Subsequent
Trend Actual trough total fall in rise
change employment
Source: Thomson Reuters Datastream and HSBC calculations (trend is the average (000s)
growth rate in the five years before the crisis)
Resources -75 -0.1% 89
Construction -1,712 -1.2% -110
28. …nor of course in Japan Manufacturing -2,135 -1.5% 94
Government 91 0.1% -241
Log (GDP) Japan 1 990 Trade and transport -1,998 -1.4% 139
Information -259 -0.2% -44
6.5
Finance -549 -0.4% -89
6.2 Professional and business -1,566 -1.1% 423
Other serv -210 -0.2% 81
5.9 Leisure -514 -0.4% 154
Educ and health 669 0.5% 404
5.6 Total -8,258 -6.0% 900
5.3 Source: Thomson Reuters Datastream and HSBC calculations
5.0
The sectoral labour market data paint a similarly
1980 1984 1988 1992 1996 2000 2004 2008
Trend Actual disconcerting view of the future (Table 31).
Clearly a large part of the hit to jobs was from the
Source: Thomson Reuters Datastream and HSBC calculations (trend is the average
growth rate in the five years before the crisis) construction sector. This sector is still shedding
jobs and with housing demand showing little signs
of life, and a significant supply overhang still
evident, it’s hard to see construction vacancies in
the near future. Manufacturing took a similar
blow, with 17% of job losses in the auto industry.
21
Macro
Q1 2011
Again it’s hard to envisage a sufficiently robust Inflation or deflation?

pick up in demand to see these workers return to
Put another way, the size of Western output gaps
work.
may be a lot smaller than is commonly assumed.
31. The US service sector is barely hiring Much of the collapse in activity over the last
Index Index couple of years may be permanent, not temporary.
60 60
But if this is true, might Western economies bump
50 50 into inflation problems relatively early in the
40 40 recovery phase, a consequence of only limited
30 30
spare capacity?
20 20 Similar arguments could have been applied to

00 01 02 03 04 05 06 07 08 09 10 Japan through the 1990s. For most of that decade,
50 no-change output was above trend, according to estimates of
PMI serv ices em ploy ment intentions
the output gap. Yet, far from experiencing
Source: Markit inflation, Japan ended up with deflation. How was
this possible?
32. For the first time in its post war history, the US looks like
it has a structural unemployment problem. Two explanations spring to mind. First, after years
% % of unemploy ed w ithout w ork for % of excess, Japan needed to improve its
50 50
more than 2 7 w eeks competitiveness. But because repatriation of
40 40 capital led to yen strength, the only way in which
30 30 competitiveness could improve was via a fall in
Japan’s domestic price level. Second, because the
20 20
output gap closed through a reduction in supply
10 10
potential (rather than an increase in demand),
0 0 there was a significant impact on expectations
67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 which led to falling asset values. As equity and
land prices fell, pricing in a weaker long-term
growth rate, so the Japanese economy succumbed
State and local governments, in a bid to repair to many years of de-leveraging.
their balance sheets are desperately shedding staff, Neither of these explanations looks particularly out
and employment intentions in the service sector of place today. The dollar hasn’t fallen very far
are far from buoyant (Chart 32). either because emerging nations don’t want to
The housing market, still stuck in a rut, is revalue or because uncertainties in the Eurozone
probably preventing households from moving have left the dollar stronger than American
state to find employment. And it may be that policymakers would ideally want to see.
workers need to retrain. In summary, for the first Improvements in US competitiveness are, in these
time in its post-war history the US looks like it circumstances, more likely to come through as a
has a structural, long-term unemployment result of exceptionally low inflation. And with the
problem (Chart 33). housing market exceptionally weak, it’s just possible
that de-leveraging still has a long way to run.
22
Macro
Q1 2011
Conclusions All the while, the extraordinary stimulus measures

are set to continue. But if interest rates remain at,
So how does the world economy look? Stronger,
or close to, zero, the implication must be that the
yes. But healthier? Maybe. With upward revisions to
Western world is still not offering a picture of
growth forecasts in both the developed and the
perfect health. That, we think, will take years to
emerging worlds, we now expect global growth to
materialise, even as the emerging nations go from
come in at 3.3% in 2011, up from our earlier 2.9%
strength to strength.
estimate. The US plays a key role in our upward
revisions but that’s hardly surprising: of the In this environment, we like gold, emerging
developed nations, it’s the only one that seems intent currencies, equities with exposure to the emerging
on borrowing more and more. For richer or poorer, world and a variety of different commodities. And
other developed nations are making strenuous as doubts about the ‘engine room’ linger, we are
attempts to tackle excessive levels of debt. cautious on cash, credit (relative to equities) and
developed world currencies. All of this is
Despite these upward revisions, levels of activity
explained in more detail in the December 2010
in the developed world remain very depressed
edition of The Allocator, by Fredrik Nerbrand.
suggesting that, in the wake of a very substantial
policy stimulus, all is not well. Contrast that with
the emerging world, where growth continues at an
exceptionally rapid pace and where policymakers
are mostly exercised about too much inflation
rather than too little growth.
In the West, the combination of high debts and

low incomes is not a good one. While default
concerns continue to circulate around the
Eurozone, Europe’s problems are really not so
different from those which apply at the global
level between the US and its creditors; China,
Russia, Saudi Arabia, amongst others. These debt
problems will not easily be resolved. Within the
Eurozone, there may be a need for an imaginative
‘Act of Union’ to underscore the responsibilities
of both debtors and creditors. At the global level,
the big fear is an eventual dollar collapse as the
US uses the printing press in an attempt to shift
the burden of its debts to its foreign creditors.
23
Macro
Q1 2011
This page has been left intentionally blank
24
Macro
Q1 2011
Global economic
forecasts
25
Macro
Q1 2011
GDP
Annual
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World (Nominal GDP weights) 2.5 3.7 3.3 3.8 3.6 1.3 -2.4 3.8 3.3 3.5
World (PPP Weights) 3.9 5.0 4.8 5.4 5.4 2.9 -0.6 5.0 4.3 4.3
Developed 1.8 2.9 2.4 2.8 2.4 0.0 -3.7 2.6 2.3 2.5
Emerging 5.7 7.0 6.7 7.7 8.0 5.6 1.9 7.4 6.4 6.2
North America 2.4 3.5 3.1 2.7 2.0 0.0 -2.6 2.9 3.3 3.4
US 2.5 3.6 3.1 2.7 1.9 0.0 -2.6 2.9 3.4 3.4
Canada 1.9 3.1 3.0 2.8 2.2 0.5 -2.5 3.0 2.6 2.9
Latin America 2.1 5.2 3.9 5.0 5.0 3.4 -3.4 6.6 4.8 4.4
Mexico 1.3 4.0 3.2 5.1 3.2 1.5 -6.1 5.1 4.1 4.1
Brazil 1.1 5.7 3.2 4.0 6.1 5.2 -0.6 7.8 5.1 4.5
Argentina 8.8 9.0 9.2 8.5 8.7 4.9 -2.9 9.0 5.8 5.0
Chile 4.0 6.0 5.6 4.6 4.6 3.7 -1.5 5.3 6.0 5.0
Western Europe 1.1 2.2 1.9 3.1 2.8 0.3 -4.1 1.8 1.5 1.7
Eurozone 0.8 1.9 1.8 3.2 2.8 0.3 -4.0 1.7 1.5 1.6
Germany -0.2 0.7 0.9 3.6 2.8 0.7 -4.7 3.5 2.1 2.0
France 1.1 2.3 2.0 2.4 2.3 0.1 -2.5 1.6 1.5 1.8
Italy 0.1 1.4 0.8 2.1 1.4 -1.3 -5.1 1.0 0.8 1.0
Spain 3.1 9.0 6.3 4.0 3.6 0.9 -3.7 -0.2 0.7 1.2
Other Western Europe 2.1 3.0 2.3 3.1 2.8 0.1 -4.4 2.0 1.8 1.8
UK 2.8 3.0 2.1 2.8 2.7 -0.1 -5.0 1.7 1.7 1.8
Norway 0.8 3.3 1.8 1.7 2.7 0.6 -1.3 -0.1 1.1 2.0
Sweden 2.5 3.7 3.1 4.6 3.4 -0.8 -5.3 5.1 3.4 2.5
Switzerland -0.2 2.5 2.6 3.6 3.6 1.9 -1.9 2.7 2.1 2.0
EMEA 5.7 6.4 5.9 6.5 6.0 4.0 -3.4 3.9 4.1 3.9
Czech Republic 3.6 4.5 6.3 6.8 6.1 2.5 -4.1 2.1 2.0 2.3
Hungary 4.2 4.2 3.4 3.7 0.8 0.6 -6.5 1.0 2.5 3.1
Poland 3.8 5.2 3.6 6.2 6.8 5.0 1.7 3.8 3.9 3.4
Russia 7.3 7.2 6.4 8.2 8.5 5.2 -7.9 3.2 4.8 3.5
Turkey 5.8 9.4 8.4 6.9 4.7 0.7 -4.7 7.7 4.2 4.3
Ukraine 9.6 12.1 2.6 7.1 7.9 2.1 -15.1 5.5 4.0 5.1
Romania 1.4 8.1 4.4 7.7 6.3 7.4 -6.9 -2.0 1.5 3.5
Non-European EMEA 5.5 5.2 5.9 5.4 4.9 4.9 -0.1 3.4 4.1 4.3
Egypt* 3.2 4.1 4.5 6.8 7.1 7.2 4.7 5.1 6.0 6.1
Israel 2.3 5.2 5.1 5.3 5.2 4.0 0.8 4.0 3.4 3.6
Saudi Arabia 7.7 5.3 5.6 3.1 3.4 4.4 0.1 3.6 4.4 4.8
UAE 11.9 7.4 10.5 9.4 5.2 7.0 -2.9 1.7 3.3 4.1
South Africa 3.0 4.6 5.3 5.6 5.5 3.7 -1.8 2.6 3.5 3.1
Asia-Pacific 4.0 5.0 4.8 5.3 6.0 3.1 0.3 6.7 4.8 5.2
Japan 1.4 2.7 1.9 2.0 2.4 -1.2 -6.3 4.3 1.1 2.0
Australia 3.3 3.7 3.2 2.5 4.6 2.6 1.3 2.7 3.6 4.1
New Zealand 4.1 4.4 3.2 1.0 2.8 -0.2 -1.7 1.6 2.8 3.5
Asia ex Japan 7.2 7.9 8.1 9.1 9.9 7.0 5.7 8.9 7.6 7.5
China 10.0 10.1 10.2 11.6 13.0 9.6 9.1 10.0 8.9 8.6
Asia ex Japan & China 5.0 6.2 6.4 7.0 7.1 4.5 2.4 7.8 6.2 6.3
India** 7.3 6.7 9.5 9.8 9.5 7.3 6.8 9.2 8.0 8.2
Asia ex Japan, China & India 4.1 5.9 5.2 5.8 6.0 3.2 0.3 7.1 5.3 5.2
Hong Kong 3.0 8.5 7.1 7.0 6.4 2.2 -2.8 7.0 5.2 4.6
Indonesia 4.8 5.0 5.7 5.5 6.3 6.0 4.5 6.0 6.4 6.3
Malaysia 5.4 7.3 5.3 5.8 6.5 4.7 -1.7 7.1 5.1 4.9
Philippines 4.9 6.4 5.0 5.3 7.1 3.7 1.1 6.8 5.0 5.8
Singapore 4.6 9.2 7.4 8.6 8.5 1.8 -1.3 14.8 5.2 5.8
South Korea 2.8 4.6 4.0 5.2 5.1 2.3 0.2 6.1 4.9 4.8
Taiwan 3.7 6.2 4.7 5.4 6.0 0.7 -1.9 9.6 4.7 4.5
Thailand 7.0 6.4 4.7 5.1 5.0 2.5 -2.3 7.9 5.3 4.3
Vietnam 7.3 7.8 8.4 8.2 8.5 6.2 5.3 6.7 7.5 7.8
Notes: * = based upon Egyptian fiscal year (July-June); ** = calendar year. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC
26
Macro
Q1 2011
Quarterly
% Quarter & % Year Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
North America
US* % Quarter 1.6 5.0 3.7 1.7 2.5 3.3 3.2 3.9 4.0 4.3
% Year -2.7 0.2 2.4 3.0 3.2 2.8 2.7 3.2 3.6 3.8
Canada* % Quarter 0.9 4.9 5.6 2.3 1 2.7 3.3 3.1 2.5 2.3
% Year -3.1 -1.1 2.1 3.4 3.4 2.9 2.3 2.5 2.9 2.8
Latin America
Mexico % Quarter 2.7 2.2 -0.1 2.3 0.7 -0.5 1.5 1.3 1.3 1.7
% Year -5.5 -2.0 4.6 7.6 5.3 3.1 4.2 3.4 3.3 5.3
Brazil % Quarter 2.6 2.1 2.3 1.8 0.5 1.6 0.8 2.5 0.9 0.5
% Year -1.8 5.0 9.3 9.2 6.7 6.3 4.8 5.5 5.9 4.8
Argentina % Quarter 2.9 1.8 3.4 2.3 0.0 1.7 1.7 1.5 1.5 1.4
% Year -2.7 1.0 8.3 12.7 7.0 7.8 6.1 4.2 6.7 6.2
Chile % Quarter 1.8 1.6 -1.5 4.3 2.0 0.9 2.0 1.8 1.7 1.6
% Year -1.4 2.1 1.6 6.6 7.0 5.8 9.5 4.8 4.6 5.4
Western Europe
Eurozone % Quarter 0.4 0.2 0.4 1.0 0.4 0.4 0.3 0.3 0.4 0.4
% Year -4.0 -2.0 0.8 2.0 1.9 2.1 2.0 1.3 1.3 1.3
Germany % Quarter 0.7 0.3 0.6 2.3 0.7 0.4 0.3 0.3 0.4 0.4
% Year -4.4 -2.0 2.1 3.9 3.9 4.0 3.8 1.8 1.5 1.5
France % Quarter 0.2 0.6 0.2 0.7 0.4 0.4 0.2 0.3 0.4 0.4
% Year -2.7 -0.5 1.1 1.6 1.8 1.6 1.7 1.3 1.4 1.4
Italy % Quarter 0.4 -0.1 0.4 0.5 0.3 0.2 0.2 0.2 0.2 0.2
% Year -4.7 -2.8 0.5 1.3 1.1 1.3 1.0 0.8 0.8 0.8
Spain % Quarter -0.3 -0.1 0.1 0.3 0.0 0.1 0.2 0.3 0.2 0.5
% Year -4.0 -3.1 -1.4 0.0 0.2 0.4 0.5 0.5 0.7 1.1
Other Western Europe
UK % Quarter -0.2 0.6 0.4 1.2 0.8 0.4 0.2 0.2 0.4 0.3
% Year -5.1 -2.7 -0.3 1.7 2.8 2.9 2.6 1.7 1.3 1.2
Norway % Year -1.0 -1.1 -0.1 0.8 -1.4 0.5 0.6 0.6 2.4 0.9
Sweden % Year -6.4 -1.6 2.8 4.5 6.8 6.4 5.3 3.9 2.2 2.3
Switzerland % Year -1.9 -0.2 1.7 3.0 3.1 2.8 2.2 2.1 2.0 2.0
EMEA
Czech Republic % Year -5.0 -2.9 1.0 3.0 2.8 1.7 1.7 1.8 2.7 1.9
Hungary % Year -7.2 -5.2 -1.1 0.6 2.2 2.5 2.9 2.8 2.3 1.9
Poland % Year 1.0 2.8 3.1 3.8 4.7 3.7 3.9 4.0 3.8 3.7
Russia % Year -8.6 -2.9 3.1 5.2 2.7 2.2 4.5 4.5 5.5 4.5
Turkey % Year -2.7 6.0 11.8 10.2 5.5 4.6 3.1 3.2 4.0 6.4
Ukraine % Year -16.0 -6.8 4.9 5.9 3.7 4.1 4.0 4.0 4.0 4.0
Romania % Year -7.6 -6.9 -3.2 -1.5 -2.2 -1.2 2.1 1.7 1.0 1.0
Israel % Year 0.1 1.7 3.5 4.1 4.1 3.9 3.7 3.5 3.4 3.3
South Africa % Year -2.2 -1.4 1.6 3.0 2.6 2.9 3.5 3.6 3.4 3.5
Asia-Pacific
Japan % Quarter -0.3 1.4 1.7 0.7 1.1 -0.6 0.2 0.4 0.4 0.6
% Year -6.3 -1.4 5.9 3.5 5.3 2.9 1.4 1.0 0.3 1.6
Australia % Quarter 0.6 0.6 0.7 1.1 0.2 0.9 0.9 1.0 1.1 1.1
% Year 0.9 2.6 2.3 3.1 2.7 2.9 3.2 3.0 4.0 4.2
New Zealand % Year -1.6 0.5 1.9 1.9 1.8 0.9 1.2 2.2 3.5 4.4
China % Year 9.1 10.7 11.9 10.3 9.6 8.9 8.2 8.8 9.0 9.3
Hong Kong % Year -2.4 2.5 8.0 6.5 6.8 6.6 0.1 4.4 7.1 8.4
India % Year 8.7 6.5 8.6 8.9 8.9 10.3 8.5 8.3 7.0 8.3
Indonesia % Year 4.2 5.4 5.7 6.2 5.8 6.5 6.1 6.3 6.4 6.8
Malaysia % Year -1.2 4.4 10.1 8.9 5.3 4.6 3.1 5.9 5.9 5.3
Philippines % Year 0.2 2.1 7.8 8.2 6.5 5.0 4.2 4.3 6.4 5.2
Singapore % Year 1.8 3.8 16.9 19.5 10.6 12.4 6.0 0.0 8.6 6.3
South Korea % Year 1.0 6.0 8.1 7.2 4.4 4.9 4.2 4.3 5.1 5.8
Taiwan % Year -1.2 9.2 13.6 12.9 9.8 3.2 1.9 0.0 7.1 9.3
Thailand % Year -2.8 5.9 12.0 9.2 6.7 3.8 2.5 6.0 6.5 6.2
Thailand % Year -2.8 5.9 12.0 9.2 6.7 3.8 2.5 6.0 6.5 6.2
Note: * = quarter-on-quarter data has been annualised
Source: HSBC
27
Macro
Q1 2011
Consumer prices
Annual
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 2.4 2.4 2.7 2.7 2.8 4.3 1.0 2.4 2.5 2.2
Developed 1.8 1.9 2.3 2.3 2.1 3.3 0.0 1.4 1.4 1.2
Emerging 4.8 4.7 4.5 4.4 5.3 8.0 4.8 5.7 6.0 5.5
North America 2.3 2.6 3.3 3.1 2.8 3.7 -0.3 1.7 1.5 1.1
US 2.3 2.7 3.4 3.2 2.9 3.8 -0.3 1.6 1.4 1.1
Canada 2.8 1.9 2.2 2.0 2.1 2.4 0.3 1.8 1.9 2.0
Latin America 8.9 5.2 5.6 4.6 4.8 7.7 6.3 7.0 8.0 7.5
Mexico 4.5 4.7 4.0 3.6 4.0 5.1 5.3 4.1 4.1 3.5
Brazil 14.7 6.6 6.9 4.2 3.6 5.7 4.9 4.9 5.4 4.6
Argentina* 13.4 4.4 9.6 10.9 12.7 24.7 15.9 23.2 25.5 22.5
Chile 2.8 1.1 3.1 3.4 4.4 7.8 0.3 1.4 2.5 2.9
Western Europe 2.0 1.9 2.1 2.2 2.1 3.3 0.6 1.8 2.0 1.7
Eurozone 2.1 2.2 2.2 2.2 2.1 3.3 0.3 1.6 1.8 1.7
Germany 1.0 1.8 1.9 1.8 2.3 2.7 0.2 1.1 1.5 1.6
France 2.2 2.3 1.9 1.9 1.6 3.2 0.1 1.7 1.7 1.8
Italy 2.8 2.3 2.2 2.2 2.0 3.5 0.8 1.6 1.5 1.7
Spain 3.1 0.3 1.6 3.6 2.8 4.1 -0.2 1.7 1.5 1.6
Other Western Europe 1.5 1.1 1.7 2.0 2.0 3.5 1.5 2.5 2.5 1.8
UK 1.4 1.3 2.0 2.3 2.3 3.6 2.2 3.3 3.2 1.9
Norway 2.5 0.5 1.5 2.3 0.7 3.8 2.2 2.3 1.6 2.3
Sweden 1.9 0.4 0.5 1.4 2.2 3.5 -0.3 1.1 1.9 2.3
Switzerland 0.6 0.8 1.2 1.1 0.7 2.4 -0.5 0.7 0.9 1.5
EMEA 7.5 6.3 6.6 6.0 7.2 10.7 7.7 5.9 6.7 6.5
Czech Republic 0.0 2.8 1.9 2.6 2.8 6.4 1.0 1.4 2.2 2.4
Hungary 4.7 6.8 3.6 3.9 8.0 6.1 4.2 4.9 3.2 3.4
Poland 0.8 3.5 2.1 1.0 2.5 4.2 3.5 2.6 2.9 2.8
Russia 13.7 10.9 12.7 9.7 9.0 14.1 11.7 6.9 9.5 8.5
Turkey 25.3 8.6 8.2 9.6 8.8 10.4 6.3 8.7 7.1 6.4
Ukraine* 5.2 9.0 10.3 9.1 12.8 25.2 16.0 9.5 8.7 8.0
Romania 4.5 11.9 9.0 6.6 4.8 7.9 5.6 6.1 5.5 4.6
Non-European EMEA 2.3 3.5 3.9 3.9 6.5 9.8 6.4 5.1 5.7 6.3
Egypt** 4.0 14.3 8.9 4.2 11.0 11.6 15.5 11.7 11.9 11.1
Israel* -1.9 1.2 2.4 -0.1 3.4 3.8 3.9 2.7 3.3 3.1
Saudi Arabia 0.6 0.3 0.4 2.3 4.1 9.9 5.1 5.4 6.5 7.0
UAE 5.1 8.0 9.8 10.0 9.0 12.0 1.3 0.7 2.1 3.3
South Africa 5.4 1.4 3.4 4.6 7.1 11.0 7.2 4.3 3.9 5.5
Asia-Pacific 1.0 1.7 1.5 1.9 2.2 4.1 0.8 2.2 2.3 2.1
Japan -0.3 -0.1 -0.1 0.1 0.0 1.5 -1.3 -1.1 -0.7 -0.5
Australia 2.8 2.4 2.7 3.5 2.4 4.3 1.9 2.9 3.1 3.1
New Zealand 1.8 2.3 3.0 3.4 2.4 4.0 2.1 2.3 4.0 2.3
Asia ex Japan 2.2 3.7 3.1 3.6 4.5 6.7 2.6 5.0 4.8 4.0
China 1.2 3.9 1.8 1.5 4.8 5.9 -0.7 3.3 3.9 2.9
India* 3.7 3.9 4.0 6.3 6.4 8.3 10.9 11.8 7.1 6.1
Hong Kong -2.6 -0.4 0.9 2.0 2.0 4.3 0.5 2.3 4.4 4.2
Indonesia 6.8 6.1 10.5 13.1 6.4 10.2 4.8 5.1 6.3 5.2
Malaysia 1.1 1.4 3.0 3.6 2.0 5.4 0.6 1.8 3.0 2.2
Philippines 3.5 6.0 7.7 6.3 2.8 9.3 3.3 4.0 4.5 4.8
Singapore 0.5 1.7 0.5 1.0 2.1 6.6 0.6 2.8 3.2 2.9
South Korea 3.5 3.6 2.8 2.2 2.5 4.7 2.8 3.0 3.8 3.3
Taiwan -0.3 1.6 2.3 0.6 1.8 3.5 -0.9 1.0 2.3 2.0
Thailand 1.8 2.8 4.5 4.6 2.2 5.5 -0.8 3.3 3.8 3.1
Vietnam 3.1 7.8 8.3 7.5 8.3 23.0 7.1 9.0 9.9 9.4
Note: * = end-year values; ** = based upon Egyptian fiscal year (July-June); We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC
28
Macro
Q1 2011
Quarterly
% Year Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
North America
US -1.6 1.4 2.4 1.8 1.2 1.2 1.3 1.6 1.5 1.1
Canada -0.9 0.8 1.6 1.4 1.8 2.3 2.2 2.0 1.9 1.7
Latin America
Mexico 5.1 4.0 4.8 4.0 3.7 4.3 3.6 4.1 4.3 3.8
Brazil 4.4 4.2 4.9 5.1 4.6 5.6 5.9 5.9 6.5 5.8
Argentina 13.9 14.1 17.9 21.5 23.6 26.1 26.2 25.6 25.6 25.1
Chile 9.3 8.6 4.8 1.8 -1.9 -3.1 -0.3 1.2 2.2 2.5
Western Europe
Eurozone -0.4 0.4 1.1 1.5 1.7 2.0 2.0 1.8 1.8 1.6
Germany -0.5 0.4 0.8 1.0 1.2 1.5 1.7 1.5 1.4 1.3
France -0.5 0.4 1.5 1.8 1.8 1.8 1.6 1.5 2.0 1.8
Italy 0.1 0.7 1.3 1.6 1.7 2.0 1.8 1.6 1.3 1.4
Spain -1.0 0.2 1.2 1.6 1.9 2.1 1.9 1.7 1.4 1.2
UK 1.5 2.1 3.3 3.4 3.1 3.3 3.6 3.3 3.2 2.7
Norway 1.7 1.4 2.9 2.6 1.9 1.9 1.2 1.2 1.9 2.1
Sweden -1.2 -0.4 1.0 1.0 1.1 1.3 1.4 1.8 2.1 2.4
Switzerland -1.0 -0.2 1.1 1.0 0.3 0.3 0.1 0.7 1.3 1.4
EMEA
Czech Republic 0.1 0.4 0.6 1.1 1.9 2.1 2.1 2.1 2.3 2.3
Hungary 5.0 5.2 6.0 5.4 3.8 4.3 3.2 2.9 3.2 3.5
Poland 3.5 3.3 3.0 2.3 2.2 2.8 2.7 2.7 3.0 3.3
Russia 10.7 8.8 6.5 5.8 7.0 8.9 9.2 10.5 9.3 9.5
Turkey 5.3 5.7 9.3 9.2 8.4 7.8 5.9 7.2 8.0 7.4
Ukraine 15.3 13.3 11.2 8.3 8.7 9.9 8.9 9.0 8.8 8.3
Romania 5.0 4.6 4.6 4.4 7.5 7.9 6.5 6.8 4.2 4.4
Egypt 15.2 11.1 11.1 11.4 10.8 11.4 12.3 13.2 11.3 10.1
Israel 2.8 3.9 3.2 2.3 1.8 2.7 3.5 3.8 3.4 3.3
South Africa 6.1 6.3 5.1 4.5 3.2 3.5 3.3 3.9 4.0 5.0
Asia-Pacific
Japan -2.3 -1.7 -1.2 -1.2 -1.1 -0.8 -0.7 -0.7 -0.7 -0.6
Australia 1.3 2.1 2.9 3.0 2.7 2.9 2.8 3.0 3.1 3.2
New Zealand 1.7 2.0 2.0 1.7 1.5 4.0 4.2 5.1 4.5 2.4
China -1.3 0.7 2.2 2.8 3.3 4.2 5.0 4.7 3.9 3.0
India 11.8 13.3 15.3 13.7 10.3 8.5 6.4 7.6 7.2 7.0
Hong Kong -0.9 1.3 1.9 2.6 2.3 2.6 3.8 4.2 4.7 4.9
Indonesia 2.8 2.6 3.7 4.4 6.2 6.2 6.4 6.5 6.2 6.0
Malaysia -2.3 -0.2 1.3 1.6 1.9 2.4 2.7 3.1 3.0 3.0
Philippines 0.3 2.9 4.3 4.2 3.8 3.9 4.4 4.6 4.6 4.7
Singapore -0.3 -0.8 0.9 3.1 3.4 3.9 3.4 3.2 3.2 3.2
South Korea 2.0 2.4 2.7 2.6 2.9 3.6 3.5 3.9 3.9 3.6
Taiwan -1.3 -1.3 1.3 1.1 0.4 1.3 1.7 2.0 2.8 2.6
Thailand -2.2 1.9 3.7 3.2 3.3 3.1 3.3 3.8 4.0 3.9
Vietnam 3.2 4.5 8.0 9.1 8.8 10.0 10.4 9.7 9.8 9.8
Source: HSBC
29
Macro
Q1 2011
Short rates
3 month money
End period 2006 2007 2008 2009 _____________ 2010 ______________ _____________ 2011 ______________
Q4 Q4 Q4 Q4 Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f
North America
US (USD) 5.3 4.7 1.4 0.3 0.3 0.5 0.3 0.3 0.3 0.3 0.3 0.3
Canada (CAD) 4.2 4.5 1.9 0.5 0.5 0.9 1.3 1.3 1.5 1.9 2.1 2.2
Latin America
Mexico (MXN) 7.2 7.3 8.2 4.6 4.6 4.7 4.6 4.4 4.6 4.6 4.6 4.7
Brazil (BRL) 12.8 11.2 13.0 8.7 9.1 10.8 10.7 10.8 11.9 12.8 12.7 12.7
Chile (CLP)* 5.0 7.1 8.5 0.5 0.4 0.7 2.8 3.5 4.3 4.5 4.5 4.5
Western Europe
Eurozone 3.7 4.6 2.9 0.7 0.6 0.7 0.8 0.9 1.0 1.0 1.0 1.2
UK (GBP) 5.3 5.9 2.8 0.6 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.9
Norway (NOK) 3.9 5.9 4.0 2.2 2.3 2.8 2.6 2.6 2.5 2.7 2.9 3.2
Sweden (SEK) 3.3 4.7 2.5 0.5 0.5 0.6 1.0 1.8 1.9 2.1 2.4 2.6
Switzerland (CHF) 2.1 2.6 0.6 0.3 0.2 0.1 0.2 0.2 0.3 0.4 0.8 0.8
EMEA
Hungary (HUF) 8.1 7.6 10.0 6.0 5.4 5.2 5.5 5.4 5.4 5.5 5.5 5.6
Poland (PLN) 4.2 5.1 5.8 4.2 3.9 4.0 3.9 4.0 4.3 4.2 4.3 4.5
Russia (RUB)* 6.5 6.3 20.6 6.6 4.2 3.4 3.3 3.7 5.5 6.5 6.5 6.5
Turkey (TRY) 17.6 16.0 15.5 7.5 7.6 7.7 7.0 6.7 6.7 6.7 6.8 6.8
Ukraine (UAH) 7.6 6.6 20.0 16.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
South Africa (ZAR) 9.2 11.3 11.4 7.1 6.5 6.6 6.1 5.7 5.7 5.7 5.8 5.8
Asia-Pacific
Japan (JPY) 0.4 0.6 0.6 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
Australia (AUD) 6.5 7.3 4.1 4.0 4.2 4.8 4.8 5.1 5.1 5.3 5.6 5.8
New Zealand (NZD) 7.7 8.9 6.0 2.8 2.7 2.9 3.2 3.2 3.2 3.5 3.7 4.0
Asia ex Japan
China (CNY) 1.8 3.3 1.7 1.7 1.7 1.7 1.9 2.1 2.3 2.3 2.3 2.3
Asia ex Japan & China
India (INR) 7 8.3 9.2 3.7 4.4 5.3 6.3 5.9 6.2 6.7 6.9 7.1
Hong Kong (HKD) 3.9 3.5 1 0.1 0.1 0.6 0.3 0.3 0.3 0.3 0.3 0.5
Indonesia (IDR) 9.5 7.8 12 6.6 6.6 6.6 6.6 7.6 7.1 7.3 7.3 7.3
Malaysia (MYR) 3.7 3.6 3.4 2.3 2.4 2.6 2.9 2.9 2.9 2.9 3.1 3.4
Philippines (PHP) 4.8 3.7 6.1 3.9 3.9 3.9 4.0 4.0 4.0 4.2 4.5 4.5
Singapore (SGD) 3.4 2.5 1.4 0.7 0.6 0.6 0.5 0.5 0.7 0.8 0.9 1.1
South Korea (KRW) 4.8 5.7 4.7 2.8 2.8 2.5 2.7 3.3 3.6 3.8 4.1 4.3
Taiwan (TWD) 1.8 2.2 1 0.5 0.5 0.7 0.7 0.7 0.7 0.7 0.9 1.0
Thailand (THB) 5.3 3.7 3.6 1.4 1.4 1.4 2.0 2.3 2.3 2.6 3.1 3.1
Note: *= 1-month money
Source: HSBC
30
Macro
Q1 2011
Long rates
10-year bond yields
End period 2006 2007 2008 2009 _______________2010 _______________ ______________ 2011 _______________
Americas
US 2.7 3.5 3.3 3.8 3.8 3.0 2.6 3.3 3.5 3.2 2.9 2.5
Canada 2.7 3.4 3.3 3.6 3.6 3.1 2.8 3.3 3.5 3.4 3.2 3.0
Chile 5.9 6.3 7.4 5.9 6.4 6.4 6.1 6.5 6.8 6.9 7.0 7.0
Western Europe
Eurozone 3.6 3.8 3.5 3.6 3.5 3.3 3.0 3.8 3.3 3.2 3.0 2.8
Germany 3.0 3.4 3.2 3.4 3.1 2.6 2.3 3.0 3.4 3.1 2.9 2.6
France 3.6 3.7 3.5 3.6 3.4 3.1 2.7 3.4 3.9 3.6 3.4 3.1
Italy 4.4 4.3 4 4.0 3.9 4.1 3.9 4.5 5.0 4.7 4.4 4.1
Spain 3.8 4.0 3.7 3.9 3.8 4.6 4.2 5.5 5.6 5.3 5.0 4.7
UK 3.2 3.7 3.7 3.9 3.9 3.3 3.2 3.7 3.7 3.4 3.1 2.8
Norway 3.8 4.2 4.1 4.1 3.7 3.2 3.1 3.7 3.7 3.8 3.9 4.0
Sweden 3.0 3.5 3.3 3.3 3.1 2.6 2.4 3.3 3.5 3.5 3.6 3.6
Switzerland 1.9 2.3 2 1.9 1.8 1.5 1.4 1.8 1.8 1.7 1.4 1.3
EMEA
Hungary 8.1 7.6 10 7.7 7.2 7.6 7.0 6.8 6.9 6.8 6.7 7.0
Poland 5.2 5.7 5.4 6.3 5.7 5.9 5.5 5.5 5.6 5.8 5.8 5.9
Russia 6.5 6.3 11.3 8.7 6.9 7.0 7.3 7.4 7.7 8.0 7.5 7.5
South Africa 7.7 8.4 7.3 3.6 3.6 4.0 4.7 2.8 2.8 3.0 3.1 3.4
Asia-Pacific
Japan 1.3 1.4 1.3 1.3 1.3 1.2 1.0 1.2 1.1 0.9 0.9 1.0
Australia 4.4 5.5 5.4 5.5 5.6 5.5 5.1 5.6 5.3 5.5 5.6 5.7
New Zealand 4.8 6.0 5.6 5.9 5.9 5.7 6.1 5.9 6.1 6.1 6.1 6.2
Asia ex Japan
India 7.6 7.8 5.3 7.7 7.8 7.6 7.9 8.1 7.8 7.9 8.0 8.1
Hong Kong 4.4 2.9 2.4 2.6 2.8 2.3 2.0 2.9 3.2 2.9 2.7 2.5
Indonesia 9.4 9.2 11.8 10.1 10.0 10.0 8.0 8.3 7.6 7.8 7.9 8.0
Philippines 6.4 6.4 7.3 7.9 7.9 7.6 6.1 6.5 6.1 6.3 6.4 6.4
Singapore 3 2.3 1.4 2.7 2.7 2.7 2.1 1.8 3.1 2.8 2.7 2.5
Source: HSBC
31
Macro
Q1 2011
Exchange rates vs USD

Exchange rates vs USD
End period 2006 2007 2008 2009 ____________ 2010 ______________ _____________2011 _____________
Americas
Canada (CAD) 1.16 0.99 1.23 1.05 1.01 1.06 1.03 1.05 1.10 1.10 1.10 1.10
Mexico (MXN) 10.80 10.92 13.69 13.10 12.36 12.84 12.60 12.25 12.10 12.00 11.80 11.80
Brazil (BRL) 2.14 1.77 2.31 1.74 1.78 1.80 1.69 1.74 1.70 1.66 1.64 1.60
Argentina (ARS) 3.06 3.15 3.45 3.80 3.88 3.93 3.97 4.10 4.15 4.20 4.25 4.30
Chile (CLP) 532 498 637 533 533 547 484 480 470 460 450 450
Western Europe
Eurozone (EUR) 1.32 1.46 1.39 1.43 1.35 1.22 1.37 1.35 1.25 1.30 1.35 1.40
UK (GBP) 1.96 1.99 1.44 1.61 1.52 1.50 1.58 1.57 1.54 1.54 1.59 1.61
Sweden (SEK) 6.84 6.46 7.91 7.14 7.20 7.78 6.73 6.74 7.12 6.69 6.37 6.14
Norway (NOK) 6.23 5.43 7.00 5.78 5.94 6.50 5.86 5.85 6.08 5.77 5.48 5.29
Switzerland (CHF) 1.22 1.13 1.06 1.03 1.05 1.08 0.98 0.96 1.02 1.00 0.99 0.97
EMEA
Czech Republic (CZK) 20.87 18.19 19.31 18.40 18.78 20.97 18.00 18.37 19.80 18.85 17.96 17.14
Hungary (HUF) 190.6 172.9 191.3 188.3 196.4 232.7 202.6 203.7 216.0 207.7 196.3 189.3
Poland (PLN) 2.90 2.46 2.96 2.86 2.85 3.38 2.91 2.89 3.08 2.92 2.78 2.64
Russia (RUB) 26.4 24.5 29.4 30.2 29.4 31.2 30.4 30.8 29.7 30.8 31.2 33.4
Turkey (TRY) 1.42 1.17 1.54 1.50 1.52 1.59 1.45 1.46 1.48 1.50 1.47 1.45
Ukraine (UAH) 5.1 5.1 7.8 8.0 7.9 7.9 8.2 8.5 8.2 8.0 8.2 8.5
Israel (ILS) 4.17 3.95 3.78 3.75 3.80 3.85 3.75 3.57 3.53 3.50 3.46 3.42
Egypt (EGP) 5.71 5.52 5.52 5.48 5.48 5.50 5.71 5.70 5.72 5.75 5.77 5.80
South Africa (ZAR) 7.05 6.83 9.25 7.36 7.34 7.67 6.97 7.15 7.10 7.10 7.20 7.20
Asia/Pacific
Japan (JPY) 119 112 91 93 93 88 84 85 90 95 95 95
Australia (AUD) 0.79 0.88 0.70 0.90 0.92 0.84 0.97 0.97 0.92 0.85 0.85 0.85
New Zealand (NZD) 0.71 0.77 0.58 0.73 0.71 0.69 0.74 0.76 0.73 0.72 0.72 0.72
China (CNY) 7.81 7.31 6.82 6.83 6.83 6.78 6.69 6.67 6.63 6.60 6.57 6.54
Hong Kong (HKD) 7.77 7.80 7.75 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80
India (INR) 44.2 39.4 48.6 46.4 44.8 46.4 44.6 43.5 43.2 42.8 42.4 42.0
Indonesia (IDR) 8996 9393 11027 9425 9090 9060 8925 8800 8750 8700 8700 8700
Malaysia (MYR) 3.53 3.31 3.46 3.42 3.26 3.24 3.09 3.00 2.97 2.94 2.91 2.88
Philippines (PHP) 49.05 41.28 47.47 46.50 45.18 46.36 43.90 41.50 40.50 39.50 38.50 37.50
Singapore (SGD) 1.53 1.44 1.43 1.41 1.40 1.40 1.31 1.27 1.26 1.25 1.24 1.23
South Korea (KRW) 930 936 1263 1166 1133 1223 1140 1130 1110 1090 1080 1070
Taiwan (TWD) 32.6 32.4 32.9 32.1 31.8 32.3 31.2 29.5 28.5 28.0 27.5 27.0
Thailand (THB) 36.05 33.72 34.90 33.33 32.32 32.39 30.37 29.00 28.00 27.00 26.00 25.00
Note: Turkish currency (until then coded TRL) shed 6 zeros of its exchange rate in January 2005
Source: HSBC
32
Macro
Q1 2011
Exchange rate vs EUR & GBP

Exchange rate vs EUR & GBP
End period 2006 2007 2008 2009 ____________ 2010 ______________ _____________2011 _____________
vs EUR
Americas
US (USD) 1.32 1.46 1.39 1.43 1.35 1.22 1.37 1.35 1.25 1.30 1.35 1.40
Canada (CAD) 1.53 1.44 1.72 1.50 1.37 1.30 1.40 1.42 1.38 1.43 1.49 1.54
Europe
UK (GBP) 0.67 0.73 0.97 0.89 0.89 0.82 0.87 0.86 0.81 0.85 0.85 0.87
Sweden (SEK) 9.02 9.45 10.99 10.24 9.74 9.53 9.19 9.10 8.90 8.70 8.60 8.60
Switzerland (CHF) 1.61 1.66 1.48 1.48 1.42 1.32 1.33 1.30 1.28 1.30 1.34 1.36
Norway (NOK) 8.21 7.94 9.73 8.29 8.03 7.97 7.99 7.90 7.60 7.50 7.40 7.40
Czech Republic (CZK) 27.5 26.6 26.8 26.4 25.4 25.7 24.6 24.8 24.8 24.5 24.3 24.0
Hungary (HUF) 251 253 266 270 266 285 277 275 270 270 265 265
Poland (PLN) 3.83 3.60 4.12 4.11 3.86 4.14 3.98 3.90 3.85 3.80 3.75 3.70
Russia (RUB) 34.78 35.88 40.84 43.39 39.73 38.21 41.51 41.58 37.13 40.04 42.12 46.76
Asia/Pacific
Japan (JPY) 157.1 163.3 126.0 133.6 126.4 108.4 114.0 114.8 112.5 123.5 128.3 133.0
Australia (AUD) 1.67 1.67 1.99 1.60 1.47 1.45 1.41 1.39 1.36 1.53 1.59 1.65
New Zealand (NZD) 1.87 1.90 2.38 1.97 1.91 1.78 1.86 1.78 1.71 1.81 1.88 1.94
Africa
South Africa (ZAR) 9.30 9.99 12.85 10.56 9.94 9.39 9.52 9.65 8.88 9.23 9.72 10.08
vs GBP
Americas
US (USD) 1.96 1.99 1.44 1.61 1.52 1.50 1.58 1.57 1.54 1.54 1.59 1.61
Canada (CAD) 2.28 1.96 1.77 1.69 1.54 1.59 1.62 1.65 1.69 1.69 1.75 1.77
Europe
Eurozone (EUR) 0.67 0.73 0.97 0.89 0.89 0.82 0.87 0.86 0.81 0.85 0.85 0.87
Sweden (SEK) 13.39 12.86 11.37 11.53 10.92 11.64 10.61 10.61 10.97 10.28 10.16 9.89
Norway (NOK) 12.19 10.81 10.07 9.33 9.00 9.73 9.23 9.21 9.36 8.86 8.74 8.51
Switzerland (CHF) 2.39 2.25 1.53 1.67 1.60 1.61 1.54 1.52 1.58 1.54 1.58 1.56
Asia/Pacific
Japan (JPY) 233 222 130 150 142 132 132 134 139 146 151 153
Australia (AUD) 2.48 2.27 2.06 1.80 1.65 1.77 1.63 1.62 1.67 1.81 1.88 1.89
New Zealand (NZD) 2.78 2.59 2.46 2.22 2.14 2.18 2.14 2.07 2.11 2.13 2.21 2.24
Africa
South Africa (ZAR) 13.80 13.60 13.29 11.89 11.14 11.47 10.99 11.25 10.94 10.90 11.48 11.60
Source: HSBC
33
Macro
Q1 2011
Consumer spending
Consumer spending
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 2.4 3.2 3.3 3.3 3.2 1.2 -0.8 2.6 2.8 3.0
Developed 2.0 2.6 2.6 2.5 2.2 0.1 -1.3 1.6 1.9 2.2
Emerging 4.1 5.9 6.9 7.1 7.6 5.9 1.2 6.1 6.0 5.9
North America 2.8 3.4 3.4 3.0 2.5 -0.1 -1.1 1.9 3.1 2.9
US 2.8 3.5 3.4 2.9 2.4 -0.3 -1.2 1.8 3.1 2.9
Canada 3.0 3.3 3.7 4.2 4.6 2.9 0.4 3.4 2.8 2.6
Latin America 1.4 5.5 5.2 5.8 5.4 3.7 -1.4 6.3 5.4 4.2
Mexico 1.4 5.6 4.8 5.6 4.0 1.9 -5.5 4.9 4.8 3.7
Brazil -0.8 3.8 4.5 5.2 6.1 5.7 4.2 6.9 5.7 4.4
Argentina 8.2 9.5 8.9 7.8 9.0 6.1 -1.6 7.5 6.0 4.9
Chile 4.2 7.2 7.4 7.1 7.0 4.6 0.9 10.9 7.1 5.8
Western Europe 1.6 1.8 1.9 2.1 1.9 0.4 -1.4 0.9 1.2 1.5
Eurozone 1.2 1.5 1.8 2.2 1.7 0.4 -1.1 0.7 1.0 1.4
Germany 0.1 -0.2 0.4 1.5 -0.2 0.6 -0.1 0.4 1.4 1.5
France 2.1 2.4 2.5 2.6 2.5 0.5 0.6 1.5 1.4 2.0
Italy 1.0 0.8 1.1 1.2 1.1 -0.8 -1.8 0.7 0.6 0.9
Spain 2.9 12.0 7.8 3.8 3.6 -0.6 -4.2 1.1 -0.2 0.9
UK 3.0 3.1 2.2 1.8 2.2 0.4 -3.3 1.0 1.3 1.8
Norway 2.5 5.1 3.9 4.8 5.3 1.4 0.2 3.4 3.0 2.8
Sweden 2.3 2.6 2.8 2.8 3.8 -0.1 -0.4 3.4 2.9 2.1
Switzerland 0.9 1.6 1.7 1.6 2.3 1.3 1.0 1.7 1.2 1.5
EMEA 5.4 8.6 8.2 8.9 9.0 7.6 -2.0 4.3 4.9 4.8
Czech Republic 6.0 2.9 2.5 5.0 4.8 3.6 -0.3 0.8 1.1 1.7
Hungary 8.0 3.1 3.3 1.9 0.2 0.4 -7.9 -1.8 1.5 2.0
Poland 2.6 4.2 2.5 5.1 4.9 5.3 2.4 3.3 3.5 2.8
Russia 7.7 12.5 12.2 12.2 14.3 10.8 -7.7 4.3 6.0 4.2
Turkey 6.6 11.0 7.9 4.6 5.5 -0.3 -2.3 6.5 3.5 3.7
Ukraine 12.6 12.2 16.6 14.4 17.1 11.8 -14.2 3.0 4.0 5.0
Romania 2.2 15.2 10.7 12.7 12.1 8.7 -9.4 -1.9 2.0 4.0
Egypt* 2.3 2.1 4.8 6.4 4.2 5.7 5.7 5.1 5.1 5.0
Israel 1.3 5.0 3.5 4.3 6.3 3.6 1.7 5.1 4.1 4.4
Saudi Arabia** 3.7 5.8 9.5 13.4 18.7 18.0 8.1 9.0 11.0 12.0
UAE** 10.5 29.1 22.5 24.0 12.0 21.4 2.0 3.5 5.2 8.0
South Africa 2.8 6.7 6.9 8.3 5.5 2.4 -3.5 1.7 2.9 2.0
Asia-Pacific 2.4 3.1 3.8 3.8 4.5 2.4 1.1 4.5 3.4 4.2
Japan 0.4 1.6 1.3 1.5 1.6 -0.7 -1.9 2.2 -0.2 1.0
Australia 3.8 5.4 3.7 3.1 5.6 1.9 1.0 2.7 3.2 3.2
New Zealand 5.9 5.4 4.7 2.2 3.9 -0.3 -0.7 1.8 1.4 2.8
Asia ex Japan 4.8 4.5 6.9 6.8 7.8 5.9 4.3 7.1 6.9 7.1
China 6.5 7.2 8.5 8.7 9.0 8.9 8.0 9.5 9.4 9.3
India 8.2 1.3 9.0 8.2 9.8 6.8 4.3 6.5 6.1 6.5
Hong Kong -1.3 7.0 3.0 5.9 8.5 2.4 -0.4 5.8 6.0 4.6
Indonesia 3.9 5.0 4.0 3.2 5.0 5.3 4.9 4.8 5.0 5.0
Malaysia 6.6 10.5 9.1 6.8 10.5 8.5 0.7 6.8 6.7 5.7
Philippines 5.3 5.9 4.8 5.5 5.8 4.7 4.1 4.8 5.3 5.6
Singapore 1.6 6.1 3.6 3.1 6.5 2.7 0.4 5.9 5.5 5.8
South Korea -0.4 0.3 4.6 4.7 5.1 1.3 0.2 4.1 3.5 4.4
Taiwan 2.9 5.2 2.9 1.5 2.1 -0.9 1.1 3.8 4.9 4.8
Thailand 6.4 6.1 4.9 3.2 1.8 2.9 -1.1 5.0 3.8 3.9
Vietnam 8.0 7.1 7.3 8.3 9.6 7.6 3.4 5.8 6.6 7.1
Note: * = based upon Egyptian financial year (July-June); ** = nominal growth. We now calculate the weighting system using chain nominal GDP (USD) weights
Source: HSBC
34
Macro
Q1 2011
Investment spending
Investment spending
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 4.3 7.4 7.9 7.3 7.2 3.6 -3.0 9.7 11.1 10.7
Developed 1.9 4.4 4.8 3.6 1.7 -3.2 -13.7 1.7 5.1 5.5
Emerging 12.4 16.5 16.4 16.6 19.5 16.2 13.8 19.2 17.2 15.6
North America 3.5 7.4 6.7 2.7 -1.3 -5.7 -17.7 4.3 9.2 9.0
US 3.2 7.3 6.5 2.3 -1.8 -6.4 -18.3 3.9 9.5 9.4
Canada 6.2 7.8 9.3 7.1 3.5 1.4 -11.8 7.4 7.5 5.9
Latin America 1.6 8.7 8.4 8.7 9.8 9.6 -11.0 12.0 12.4 9.6
Mexico 4.9 8.0 7.5 9.9 6.9 4.4 -10.1 2.4 8.1 6.9
Brazil -4.6 9.1 3.6 9.8 13.9 13.6 -10.3 22.5 15.0 10.0
Argentina 38.2 34.4 22.7 18.2 13.6 7.7 -11.7 15.2 6.2 10.6
Chile 5.7 10.0 23.9 2.3 11.2 18.6 -15.3 18.9 18.4 15.2
Western Europe 1.2 2.6 3.4 5.9 5.3 -1.4 -11.5 -0.3 2.7 3.3
Eurozone 1.3 1.9 3.4 5.7 4.6 -1.0 -11.3 -0.7 2.9 3.3
Germany -0.3 -1.3 1.1 8.7 4.9 1.8 -10.0 6.3 5.9 3.7
France 2.2 3.3 4.5 4.5 5.9 0.3 -7.0 -1.5 3.8 4.5
Italy -0.9 1.5 1.4 3.1 1.3 -4.0 -12.2 2.9 2.4 3.8
Spain 5.2 20.8 12.6 8.3 4.3 -3.9 -15.8 -7.3 -2.6 1.5
Other Western Europe 0.8 5.0 3.7 6.7 7.6 -2.5 -12.1 1.1 2.2 3.1
UK 1.2 5.1 2.3 6.7 7.9 -4.7 -15.1 1.8 0.8 3.1
Norway 0.7 10.0 12.7 11.7 12.5 2.0 -7.4 -10.2 3.9 3.2
Sweden 1.8 5.0 8.0 9.7 9.1 1.0 -16.2 5.5 8.2 6.1
Switzerland -1.2 4.5 3.8 4.7 5.1 0.5 -4.9 3.7 2.9 2.5
EMEA 7.3 11.0 11.6 14.9 22.1 8.8 -10.4 7.0 8.0 8.8
Czech Republic 0.4 3.9 1.8 6.0 10.8 -1.5 -9.2 2.2 3.0 4.6
Hungary 2.1 7.9 5.7 -3.6 1.6 0.4 -6.5 -3.9 2.8 4.1
Poland -0.1 6.4 6.5 14.9 17.2 9.6 -0.8 -2.6 8.0 4.0
Russia 13.9 12.6 10.6 18.0 21.0 10.4 -15.7 5.5 8.0 11.0
Turkey 10.0 28.4 17.4 13.3 3.1 -6.2 -19.2 24.7 6.6 2.9
Ukraine 12.2 -2.2 -0.3 18.7 24.8 1.6 -46.2 0.0 6.0 6.0
Romania 0.4 11.0 13.9 19.4 29.4 18.3 -22.3 -14.6 5.0 7.5
Egypt* -6.2 6.3 10.3 13.3 31.8 15.5 -9.1 4.2 8.0 10.0
Israel -10.7 4.0 4.0 11.3 15.3 4.4 -5.8 6.0 4.0 4.5
Saudi Arabia** 15.6 5.6 25.1 19.1 26.7 17.8 -0.1 11.0 14.0 17.0
UAE** 17.1 11.1 15.7 28.9 105.2 20.8 -15.0 3.5 6.2 8.8
South Africa 10.2 8.9 8.9 12.1 14.2 11.7 4.0 6.2 8.1 7.0
Asia-Pacific 8.3 11.3 12.4 11.2 12.9 12.1 13.0 17.2 15.7 14.5
Japan -0.5 1.4 3.1 0.5 -1.2 -3.6 -11.7 0.6 1.6 1.9
Australia 8.9 8.1 9.2 4.4 10.1 9.2 -3.3 5.6 5.3 7.3
New Zealand 10.1 13.3 6.1 -0.8 5.4 -1.1 -12.5 0.8 7.6 7.7
Asia ex Japan 16.7 19.8 19.2 18.4 20.4 19.0 22.7 21.9 19.0 17.0
China 27.7 27.6 27.2 24.5 25.8 26.1 30.5 25.0 21.5 19.0
India 9.7 20.9 15.3 14.3 15.2 4.0 7.2 15.5 14.5 12.0
Asia ex Japan, China & India 3.7 5.5 4.3 4.9 6.9 2.7 -2.3 8.2 4.9 4.8
Hong Kong 0.9 2.5 4.1 7.1 3.4 0.8 -1.8 6.7 7.5 2.0
Indonesia 0.6 14.7 10.9 2.6 9.3 11.9 3.3 8.7 10.0 10.0
Malaysia 2.7 3.1 5.0 7.5 9.4 0.7 -5.6 8.9 6.5 5.2
Philippines 3.6 1.3 -6.6 3.9 10.9 2.7 -0.4 16.2 6.8 6.5
Singapore -4.9 10.1 0.4 14.6 19.9 13.6 -3.3 5.4 5.0 7.0
South Korea 4.4 2.1 1.9 3.4 4.2 -1.9 -0.2 6.9 3.9 2.8
Taiwan -0.1 14.0 2.7 0.1 0.6 -12.4 -11.0 22.8 5.4 4.0
Thailand 12.1 13.2 10.5 3.9 1.5 1.2 -9.2 9.8 4.8 5.0
Vietnam 11.9 10.4 9.7 9.9 23.0 13.2 3.2 7.5 7.2 7.7
Source: HSBC
35
Macro
Q1 2011
Exports
Export volume growth (GDP basis)
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 5.5 11.5 9.4 11.1 8.9 5.1 -13.7 14.8 8.2 7.9
Developed 1.7 7.5 5.6 8.3 6.0 1.7 -12.7 10.7 6.3 6.8
Emerging 14.9 20.1 16.9 16.0 13.7 10.4 -15.1 20.8 10.8 9.5
North America 0.6 8.4 5.6 7.1 7.6 3.9 -10.4 10.8 7.4 8.2
US 1.6 9.5 6.7 9.0 9.3 6.0 -9.5 11.9 8.1 8.6
Canada -2.3 5.0 1.9 0.6 1.2 -4.6 -14.2 5.6 4.3 6.2
Latin America 9.2 22.0 17.9 19.4 13.0 12.5 -21.3 27.3 13.2 10.8
Mexico 2.3 14.1 14.0 16.7 8.8 7.2 -21.1 26.7 13.6 12.9
Brazil 21.1 32.0 22.6 16.5 16.6 23.2 -22.7 31.3 12.3 8.0
Argentina 14.8 16.9 16.0 16.1 20.1 25.5 -20.5 26.9 18.6 10.2
Chile 18.1 50.1 26.9 42.2 15.8 -2.2 -19.2 19.5 8.2 11.4
Western Europe 1.2 6.5 5.5 8.8 5.1 0.9 -12.2 8.9 5.9 5.9
Eurozone 1.2 6.8 5.3 8.8 6.3 0.7 -13.0 9.9 6.0 6.2
Germany 2.4 9.2 8.0 13.5 7.9 2.0 -14.3 14.7 8.1 7.0
France -1.2 3.5 3.5 5.0 2.5 -0.8 -12.2 9.5 5.3 6.4
Italy -1.5 3.6 2.0 6.5 3.9 -3.9 -19.1 7.7 5.0 5.8
Spain 3.7 21.8 14.2 6.7 6.6 -1.0 -11.6 9.2 4.4 4.3
UK 1.8 5.0 7.9 11.1 -2.6 1.0 -11.1 5.4 6.0 4.3
Norway -0.3 0.6 -0.1 -0.4 2.1 1.0 -3.9 -1.5 2.6 4.3
Sweden 4.4 10.0 6.6 9.4 5.9 1.3 -13.3 10.9 8.6 6.0
Switzerland -0.5 7.9 7.8 10.3 9.6 3.3 -8.7 8.2 3.9 6.9
EMEA 13.6 18.7 15.9 13.7 11.7 15.5 -18.2 15.0 9.5 8.3
Czech Republic 7.2 20.7 11.6 15.8 15.0 6.0 -10.8 13.6 9.7 8.4
Hungary 6.2 15.0 11.3 18.6 16.2 5.7 -9.6 14.1 9.3 9.5
Poland 14.2 12.8 9.3 14.8 9.1 5.8 -6.0 9.6 10.2 9.1
Russia 26.7 34.8 33.1 24.7 16.6 33.1 -35.5 29.6 13.6 3.7
Turkey 27.6 11.2 7.9 6.6 7.3 2.7 -5.4 3.4 8.9 8.0
Ukraine 27.2 40.8 4.8 11.2 28.1 35.9 -40.3 28.1 15.0 15.7
Romania 2.3 14.1 7.3 9.7 7.9 7.1 -4.9 18.3 8.2 10.0
Egypt* 15.2 27.4 32.3 33.4 19.3 33.3 -14.3 -5.1 9.1 12.7
Israel 10.7 18.2 4.3 6.0 9.3 5.2 -12.5 11.3 5.2 6.5
Saudi Arabia** 28.7 34.8 43.6 16.9 10.5 34.4 -38.7 19.5 8.2 9.8
UAE** 31.1 35.5 28.9 24.1 22.7 33.9 -19.7 12.7 6.1 8.7
South Africa 0.1 2.9 8.0 6.0 7.5 1.7 -16.5 10.0 11.0 12.5
Asia-Pacific 13.9 18.1 14.1 14.4 13.0 6.5 -14.1 21.7 9.8 9.4
Japan 9.2 13.9 7.0 9.7 8.4 1.6 -23.9 24.9 5.8 8.6
Australia -1.6 3.9 2.8 2.3 2.5 4.7 2.9 5.4 7.6 8.0
New Zealand 2.3 6.1 -0.4 1.7 3.9 -1.1 0.4 4.8 6.6 6.7
Asia ex Japan 16.8 20.4 17.1 16.3 14.7 7.9 -12.4 21.9 10.8 9.6
China 32.0 32.0 29.0 25.0 23.8 11.2 -17.9 29.0 16.0 10.0
Asia ex Japan & China 11.2 15.4 11.2 11.4 8.9 5.5 -8.2 17.0 6.8 9.3
India* 9.6 17.2 25.9 21.8 5.2 19.3 -6.7 10.0 10.0 10.5
Hong Kong 12.8 15.4 10.6 9.4 8.3 2.5 -10.1 17.4 12.4 13.3
Indonesia 5.9 13.5 16.6 9.4 8.5 9.5 -9.7 13.6 6.9 8.0
Malaysia 5.7 2.3 8.3 6.6 4.1 1.6 -10.4 11.7 7.0 7.9
Philippines 4.8 15.0 4.8 13.4 5.5 -2.0 -13.4 25.5 6.9 9.9
Singapore 14.2 19.1 12.4 11.2 8.9 4.1 -9.0 18.3 4.7 12.0
South Korea 14.5 19.7 7.8 11.4 12.6 6.6 -0.8 13.6 7.4 7.8
Taiwan 10.2 15.4 7.8 11.4 9.6 0.9 -8.7 24.9 6.7 7.9
Thailand 7.0 9.6 4.2 9.1 7.8 5.1 -12.5 13.9 5.6 6.3
Vietnam 20.6 31.4 22.5 22.1 22.7 29.9 -5.4 19.6 6.4 10.5
Source: HSBC
36
Macro
Q1 2011
Industrial production
Industrial production
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 4.8 6.5 5.5 6.3 6.1 1.5 -6.1 8.7 5.8 6.1
Developed 1.1 2.5 1.9 2.9 2.7 -2.7 -12.8 5.2 3.2 4.0
Emerging 9.6 11.5 9.7 10.3 10.0 6.3 1.7 12.8 8.9 8.7
North America 1.2 2.3 3.1 2.1 2.4 -3.4 -9.3 5.5 3.6 2.8
US 1.3 2.3 3.2 2.2 2.7 -3.3 -9.3 5.5 3.6 2.8
Canada 0.2 1.5 1.7 0.0 -0.5 -4.5 -9.4 5.0 3.3 2.7
Latin America 3.0 7.2 3.9 4.7 4.8 1.4 -7.1 8.5 6.1 5.0
Mexico 0.8 3.7 2.8 5.7 2.0 -0.6 -7.3 6.2 4.4 4.4
Brazil 0.1 8.3 3.1 2.8 6.0 3.1 -7.4 10.6 7.0 5.0
Argentina 16.2 10.7 8.0 8.4 7.5 1.1 -6.1 10.2 6.4 6.1
Chile 5.2 8.8 5.4 3.2 4.1 0.2 -6.7 1.0 7.0 6.0
Western Europe 0.1 2.0 0.9 3.5 3.1 -1.9 -13.8 1.4 3.3 4.2
Eurozone 0.2 2.1 1.4 4.2 3.7 -1.8 -14.9 6.7 3.6 4.8
Germany 0.2 2.5 2.9 5.8 5.9 0.0 -15.5 10.0 6.0 3.8
France -1.2 1.3 0.2 1.3 1.2 -2.7 -13.5 5.7 0.6 3.7
Italy -0.6 -0.2 -0.6 3.7 1.9 -3.8 -18.2 5.3 1.6 2.8
Spain 1.3 20.8 11.4 3.9 1.9 -7.5 -15.6 0.3 -0.7 3.2
Other Western Europe -0.3 1.5 -0.4 1.1 1.3 -2.3 -10.7 -15.4 2.5 2.3
UK -0.6 1.0 -1.3 0.1 0.1 -2.8 -10.7 -22.6 2.2 1.5
Norway -1.9 -1.2 -0.2 -2.3 -1.3 0.2 -3.6 -7.0 -1.8 3.8
Sweden 1.8 4.1 2.4 3.7 4.1 -3.7 -17.3 8.7 6.0 5.0
Switzerland 0.4 4.0 2.7 7.8 9.5 1.3 -7.9 6.5 4.1 3.9
EMEA 7.8 9.0 6.4 7.3 6.5 3.2 -11.2 9.1 5.3 5.1
European EMEA 8.8 9.0 4.0 6.7 6.4 -0.6 -11.0 9.7 5.1 4.7
Czech Republic 1.6 10.4 3.9 8.3 10.6 -1.8 -13.4 9.8 5.2 6.2
Hungary 6.4 8.3 7.0 10.9 8.3 -0.7 -17.3 10.3 8.3 8.5
Poland 8.7 12.7 4.0 12.0 9.3 2.7 -3.8 11.3 8.0 6.1
Russia 8.8 6.6 3.2 4.0 3.7 -0.9 -10.6 7.6 3.1 2.5
Turkey 8.8 9.8 5.4 7.8 6.9 -0.9 -9.6 13.2 6.2 6.0
Ukraine 15.8 12.5 3.1 6.2 10.2 -3.1 -21.9 9.8 6.0 7.0
Romania -0.2 1.6 -2.5 9.4 10.1 2.6 -4.4 3.8 4.5 5.1
Non-European EMEA 5.6 8.8 12.0 8.5 6.6 11.8 -11.8 8.0 5.7 6.2
Egypt* 2.3 1.8 4.4 5.8 7.3 8.0 3.7 5.0 6.2 6.5
Israel -0.3 6.9 3.6 8.5 4.3 6.9 -6.2 9.9 5.6 6.1
Saudi Arabia 20.2 23.9 38.0 15.4 9.6 34.8 -29.7 17.6 8.3 9.4
UAE 12.7 6.7 5.6 10.3 8.0 6.4 -4.0 2.4 2.8 3.9
South Africa -1.9 4.0 3.0 4.8 4.6 0.9 -12.5 3.8 4.2 4.4
Asia-Pacific 9.6 11.2 9.4 10.5 10.0 5.9 1.3 14.5 8.6 9.6
Japan 3.3 5.5 1.1 4.8 2.8 -3.4 -22.4 16.2 1.8 7.6
Australia 2.9 0.0 -0.9 0.5 2.1 2.6 -7.5 4.8 1.4 2.1
New Zealand 5.3 4.0 1.1 -5.1 -0.8 -2.3 -10.4 0.8 0.6 3.0
Asia ex Japan 11.5 13.1 11.7 12.3 12.0 8.2 7.1 14.6 10.4 10.4
China 16.7 16.3 15.9 16.2 16.0 12.9 12.9 15.5 13.2 12.5
India 6.6 10.8 8.8 10.4 10.4 4.9 6.6 11.4 7.0 8.5
Hong Kong -9.2 2.9 2.5 2.2 -1.5 -6.7 -8.3 3.0 4.2 3.2
Indonesia 5.3 6.4 4.6 4.6 4.7 3.7 2.1 4.8 6.0 5.0
Malaysia 8.4 11.3 5.2 6.7 2.8 1.4 -9.0 11.9 6.3 5.0
Philippines 4.2 5.0 5.3 4.2 3.3 4.2 -4.4 13.1 9.2 8.5
Singapore -30.3 13.9 9.5 11.9 5.9 -4.2 -4.2 30.9 6.0 10.9
South Korea 5.5 10.4 6.3 8.4 6.9 3.4 -0.8 16.7 8.1 8.5
Taiwan 9.1 9.3 3.8 4.7 7.8 -1.8 -8.1 24.6 9.5 10.0
Thailand 14.0 11.7 9.1 7.3 8.2 5.3 -5.1 18.3 7.8 8.6
Vietnam 19.8 17.6 25.5 16.0 11.6 11.8 7.2 12.9 14.5 15.3
Source: HSBC
37
Macro
Q1 2011
Wage growth
Wage growth
% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
World 5.7 5.7 6.4 6.5 7.1 7.1 3.0 5.4 5.3 5.1
North America 3.6 3.7 3.3 3.1 3.4 2.9 1.7 2.0 2.0 2.1
US 3.7 3.8 3.2 3.1 3.3 2.9 1.7 1.9 1.9 2.1
Canada 2.7 2.7 3.9 2.5 4.3 2.9 1.6 3.7 3.6 2.7
Latin America 7.3 6.3 10.7 9.2 9.7 11.7 8.7 10.5 10.5 8.9
Mexico 5.8 4.7 3.8 5.1 5.4 7.0 5.2 3.9 4.5 3.9
Brazil - 4.6 7.6 7.2 7.3 9.9 8.4 9.3 9.0 7.0
Argentina 12.1 11.0 26.0 19.4 20.0 23.4 17.3 26.0 25.0 22.0
Chile 3.4 2.7 6.3 3.5 4.5 5.3 4.0 4.0 3.5 0.5
Western Europe 3.0 2.8 2.8 3.0 3.4 3.7 2.3 2.0 2.0 2.1
Eurozone 2.9 2.4 2.3 2.5 3.0 3.6 2.7 1.7 1.9 2.0
Germany 2.0 1.3 1.1 1.2 1.4 2.8 2.3 1.6 1.8 2.2
France 2.4 2.5 2.8 2.8 2.7 2.9 2.2 1.8 2.0 2.2
Italy 2.2 2.8 3.1 3.0 2.2 3.5 3.1 - 2.2 2.2
Spain 5.0 2.8 3.6 3.1 4.4 5.2 4.3 1.8 1.9 2.4
UK 3.2 4.2 4.6 4.9 4.7 3.5 -0.1 2.2 1.6 1.7
Norway 4.4 4.1 3.9 4.1 6.3 5.6 4.3 3.5 3.6 4.0
Sweden - - - - - - 2.9 2.3 2.5 2.9
EMEA 11.6 13.9 17.9 17.2 18.9 19.6 6.7 9.9 10.5 10.5
European EMEA 11.7 14.1 19.3 17.5 19.7 19.7 4.2 8.9 9.6 9.7
Czech Republic 5.8 6.3 5.0 6.6 7.2 8.3 4.0 2.3 3.0 4.5
Hungary 12.1 6.2 8.7 8.2 8.0 7.6 0.6 2.2 3.0 4.1
Poland 4.7 -8.1 3.2 5.0 9.1 10.5 4.2 4.5 5.3 5.8
Russia 26.0 21.9 26.9 24.3 27.8 27.2 8.6 11.1 12.4 12.8
Turkey 22.9 11.7 12.5 11.5 9.2 8.5 2.0 9.5 8.5 7.0
Ukraine 22.8 27.6 36.7 29.2 31.9 33.7 9.8 12.5 12.7 13.0
Romania 5.8 22.6 17.0 18.8 22.0 24.6 8.8 2.3 4.4 5.1
Israel -3.0 2.5 1.0 1.6 2.1 -0.8 -2.8 1.3 2.5 2.7
South Africa 8.1 7.5 6.5 9.1 8.8 12.4 6.9 8.7 8.5 8.0
Asia-Pacific 8.6 7.9 8.8 12.3 13.4 13.1 4.7 12.4 11.9 10.9
Japan -0.8 -0.7 0.6 0.2 -1.0 -0.3 -3.9 1.0 0.5 0.5
Australia 3.6 3.6 4.0 4.2 4.0 4.2 3.6 3.3 4.1 3.9
New Zealand 2.3 2.3 2.8 3.2 3.2 3.6 2.5 1.6 2.3 2.8
Asia ex Japan 11.2 10.2 10.9 11.8 13.1 12.7 5.3 11.7 11.3 10.3
China 13.6 12.3 12.3 14.0 16.2 15.8 9.0 13.0 13.0 12.0
Hong Kong -1.4 -0.3 1.6 2.2 2.8 0.9 0.8 2.5 4.8 4.9
Indonesia 10.0 16.6 8.5 6.2 4.9 10.0 6.0 8.0 8.5 8.5
Malaysia 4.0 3.4 3.9 10.1 7.3 0.5 -5.0 2.0 4.0 4.0
Philippines 0.4 3.6 8.5 7.9 4.5 5.3 3.8 4.5 5.5 6.5
Singapore 3.6 2.6 4.3 3.5 4.1 5.0 0.3 7.6 6.0 5.0
South Korea 9.4 6.5 6.4 5.6 5.9 3.1 -0.7 6.0 6.2 6.0
Taiwan 2.6 2.9 2.8 1.4 1.8 -0.3 -9.2 8.0 3.8 2.3
Thailand 2.2 2.3 6.9 6.2 3.0 10.2 -2.5 5.1 5.0 3.4
Note: Global and regional aggregates are calculated using the World Bank's 2004 PPP weights
Source: HSBC
38
Macro
Q1 2011
Budget balance
Budget balance
% GDP 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
North America -3.1 -3.2 -2.3 -1.7 -1.1 -3.0 -9.5 -8.4 -8.7 -6.6
US -3.4 -3.5 -2.6 -1.9 -1.2 -3.2 -10.0 -8.9 -9.3 -7.1
Canada 0.7 0.7 0.8 1.0 0.7 -0.4 -3.6 -2.8 -1.8 -1.2
Latin America -2.8 -0.9 -1.1 -0.9 -0.6 -0.4 -2.6 -2.1 -2.1 -2.0
Mexico -1.3 -0.2 -0.1 0.1 0.0 -0.1 -2.3 -2.7 -2.5 -2.1
Brazil -5.2 -2.9 -3.6 -3.6 -2.8 -2.1 -3.4 -2.6 -2.5 -2.8
Argentina 0.5 2.6 1.8 1.8 1.1 1.4 -0.6 0.4 -0.8 -0.4
Chile -0.4 2.8 5.1 7.9 8.9 5.2 -4.4 -1.1 -0.1 0.2
Western Europe -2.8 -2.7 -2.2 -1.1 -0.5 -2.4 -6.7 -6.7 -5.2 -4.2
Eurozone -3.1 -3.0 -2.6 -1.4 -0.6 -2.0 -6.2 -6.5 -5.0 -4.2
Germany -4.0 -3.8 -3.3 -1.6 0.2 0.0 -3.1 -3.6 -2.6 -2.2
France -4.1 -3.6 -3.0 -2.3 -2.7 -3.3 -7.5 -7.6 -6.2 -5.2
Italy -3.5 -3.5 -4.2 -3.3 -1.5 -2.7 -5.3 -5.0 -4.4 -3.7
Spain -0.2 13.8 7.9 2.0 1.9 -4.1 -11.1 -9.3 -6.7 -5.8
Other Western Europe -1.9 -1.7 -1.0 -0.2 -0.2 -3.6 -8.3 -7.3 -5.8 -4.0
UK -2.9 -3.3 -2.9 -2.3 -2.4 -6.7 -11.1 -9.9 -8.2 -6.4
Norway 7.3 11.1 15.1 18.5 17.7 19.3 9.9 10.0 11.0 13.0
Sweden -1.2 0.6 1.9 2.2 3.5 2.2 -1.2 -0.7 -0.2 1.1
EMEA -2.2 -0.3 2.6 3.3 2.0 2.7 -6.0 -4.0 -3.5 -3.2
European EMEA -2.1 -0.5 2.0 2.2 1.5 0.7 -5.7 -4.1 -3.2 -2.8
Czech Republic -6.6 -2.9 -3.6 -2.6 -0.7 -2.7 -5.9 -5.3 -4.2 -3.9
Hungary -7.2 -6.4 -7.9 -9.3 -5.0 -3.7 -4.4 -3.8 -1.0 -3.5
Poland -6.2 -5.4 -4.1 -3.6 -1.9 -3.7 -7.2 -7.5 -6.7 -6.2
Russia 1.7 4.3 7.5 7.4 5.4 4.1 -5.9 -3.3 -2.1 -1.6
Turkey -8.8 -5.4 -1.3 -0.5 -1.6 -1.8 -5.5 -3.8 -4.4 -3.6
Ukraine 0.2 -3.3 -1.1 -0.7 -1.4 -1.3 -6.6 -5.7 -3.6 -3.1
Romania -1.5 -1.2 -1.2 -2.2 -2.5 -5.4 -8.3 -7.0 -4.5 -3.2
Non-European EMEA -2.5 0.2 3.8 5.7 3.2 7.4 -6.6 -3.7 -4.0 -4.0
Egypt* -10.4 -9.5 -9.6 -8.2 -7.3 -6.8 -6.9 -8.0 -7.6 -7.2
Israel -5.5 -3.9 -1.9 -0.9 0.0 -2.1 -5.2 -3.7 -3.9 -3.7
Saudi Arabia 4.5 11.4 18.4 21.0 12.2 31.8 -6.1 0.3 -2.2 -3.8
UAE 3.6 10.0 20.8 26.5 21.6 21.0 -12.4 1.8 2.2 3.9
South Africa -2.5 -2.1 -0.2 0.9 0.1 -0.8 -5.9 -5.2 -4.7 -4.0
Asia-Pacific -3.5 -2.6 -2.6 -1.3 -0.5 -2.1 -4.8 -4.3 -3.7 -3.1
Japan -7.7 -5.5 -6.1 -1.0 -1.4 -3.5 -10.5 -9.0 -8.0 -7.2
Australia 0.9 0.9 1.3 1.4 2.5 2.4 -2.5 -4.5 -2.8 -0.8
New Zealand 4.0 4.1 4.5 5.1 4.0 0.4 -3.5 -4.3 -3.0 -2.0
Asia ex Japan -2.7 -2.1 -1.9 -1.5 -0.4 -2.0 -3.6 -3.2 -2.8 -2.2
China -2.2 -1.3 -1.2 -1.0 0.6 -0.4 -2.2 -2.8 -2.5 -2.1
Asia ex Japan & China -3.1 -2.9 -2.7 -2.1 -1.4 -3.6 -5.0 -3.6 -3.0 -2.4
India** -4.7 -4.2 -4.3 -3.6 -2.8 -6.4 -6.9 -5.5 -4.8 -4.0
Asia ex Japan, China & India -2.0 -1.9 -1.4 -0.9 -0.4 -1.3 -3.6 -2.2 -1.7 -1.1
Hong Kong -3.2 1.7 1.0 4.0 7.7 0.1 1.6 2.5 3.1 3.1
Indonesia -1.7 -1.0 -0.5 -0.9 -1.3 -0.1 -1.6 -1.6 -1.2 -1.2
Malaysia -4.4 -4.1 -3.6 -3.3 -3.2 -4.8 -7.0 -4.5 -3.2 -2.1
Philippines -4.7 -3.8 -2.7 -1.1 -0.2 -0.9 -3.9 -3.7 -3.0 -2.5
Singapore -1.9 -0.8 -0.2 0.6 2.7 1.1 -1.4 0.5 0.7 1.2
South Korea -1.8 -2.3 -2.6 -2.8 0.5 -2.0 -4.2 -2.7 -2.0 -1.8
Taiwan -1.2 -2.2 -0.6 0.1 -0.1 -0.8 -3.4 -2.4 -1.9 -0.2
Thailand 0.3 0.0 0.3 1.2 -2.3 -1.1 -4.4 -0.5 -0.8 -0.3
Vietnam -4.9 -4.9 -4.9 -5.0 -5.0 -5.0 -8.0 -5.0 -4.8 -4.5
Note: * = based upon Egyptian financial year (July-June); ** = based upon Indian fiscal year (April-March). Global and regional aggregates are calculated using the World Banks' 2004 PPP weights
Source: HSBC
39
Macro
Q1 2011
Current account
Current account
% GDP 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
North America -4.2 -4.7 -5.3 -5.4 -4.6 -4.3 -2.7 -3.3 -3.1 -2.8
US -4.7 -5.3 -5.9 -6.0 -5.1 -4.7 -2.7 -3.3 -3.2 -3.0
Canada 1.2 2.3 1.9 1.4 0.8 0.4 -2.8 -3.2 -1.9 -0.2
Latin America 0.8 1.1 1.1 1.3 0.5 -1.0 -0.1 -1.2 -2.1 -2.7
Mexico -1.2 -0.7 -0.6 -0.5 -0.8 -1.5 -0.7 -0.7 -1.5 -1.8
Brazil 0.7 1.8 1.6 1.3 0.1 -1.7 -1.5 -2.4 -3.3 -3.7
Argentina 6.3 2.3 3.1 3.8 2.8 2.2 3.9 1.6 0.3 -0.8
Chile -1.1 2.2 1.2 4.9 4.5 -1.5 2.6 -2.1 -3.2 -4.6
Western Europe 0.6 0.9 0.4 0.2 0.3 -0.8 0.0 0.1 0.4 0.4
Eurozone 0.3 0.8 0.1 -0.1 0.1 -1.5 -0.6 -0.4 -0.0 -0.0
Germany 1.9 4.7 5.1 6.5 7.6 6.7 4.9 5.2 5.0 4.8
France 0.8 0.5 -0.5 -0.5 -1.0 -1.9 -2.0 -2.0 -1.8 -1.8
Italy -1.3 -0.9 -1.7 -2.6 -2.4 -3.6 -3.2 -3.5 -2.1 -2.0
Spain -3.5 -10.8 -10.4 -9.0 -10.0 -9.6 -5.5 -4.4 -3.5 -3.6
UK -1.6 -2.1 -2.6 -3.4 -2.6 -1.6 -1.3 -1.9 -1.8 -1.6
Norway 12.3 12.7 16.3 17.2 14.1 17.8 13.1 12.8 13.5 13.3
Sweden 6.9 6.5 6.8 8.4 9.2 8.7 7.2 6.4 6.7 6.2
Switzerland 13.3 13.4 14.0 15.1 9.1 1.7 11.9 13.2 13.3 12.3
EMEA 2.5 3.8 5.2 3.7 1.5 1.5 0.7 0.7 -0.6 -1.8
European EMEA 2.6 3.5 3.9 2.2 0.0 0.0 0.8 0.3 -1.1 -2.4
Czech Republic -6.2 -5.2 -1.3 -2.4 -3.2 -0.6 -1.0 -2.1 -2.4 -2.7
Hungary -8.7 -8.3 -7.2 -7.2 -6.5 -6.9 0.3 0.6 0.4 0.5
Poland -2.1 -3.9 -1.2 -2.7 -4.7 -4.8 -2.2 -2.6 -3.4 -3.6
Russia 8.3 10.0 11.1 9.5 5.9 6.1 4.0 4.6 3.3 1.7
Turkey -2.8 -3.7 -4.6 -6.1 -5.9 -5.7 -2.3 -5.7 -7.0 -6.9
Ukraine 5.8 10.5 3.1 -1.5 -3.7 -7.2 -1.8 -2.5 -7.6 -12.7
Romania -5.8 -8.4 -8.7 -10.4 -13.5 -11.6 -4.5 -5.6 -5.8 -6.6
Non-European EMEA 2.1 4.5 8.1 7.1 4.8 4.9 0.3 1.6 0.5 -0.4
Egypt* 2.4 4.3 3.3 1.6 1.7 0.5 -2.4 -2.0 -2.0 -1.8
Israel 1.2 2.2 3.2 5.1 2.9 0.6 3.9 3.1 2.2 2.3
Saudi Arabia 5.5 15.4 28.8 27.7 24.2 27.1 6.1 9.1 6.8 4.6
UAE 8.6 10.0 17.6 20.6 9.5 8.8 3.4 10.0 6.3 4.1
South Africa -1.3 -3.2 -3.8 -6.4 -7.3 -7.4 -4.0 -3.9 -4.2 -5.0
Asia-Pacific 3.0 2.8 3.8 5.1 5.9 4.3 3.8 2.8 2.4 2.0
Japan 3.2 3.7 3.6 3.9 4.8 3.2 2.8 3.4 3.1 3.6
Australia -5.2 -6.0 -5.7 -5.3 -6.2 -4.4 -4.2 -2.8 -2.5 -3.6
New Zealand -3.8 -5.7 -7.9 -8.3 -8.1 -8.9 -2.8 -3.0 -5.0 -3.0
Asia ex Japan 3.4 3.0 4.2 5.8 6.7 5.0 4.3 2.9 2.4 1.8
China 2.8 3.6 7.1 9.3 10.6 9.4 5.8 4.4 4.0 2.8
India** 1.5 0.1 -1.3 -1.1 -0.7 -2.6 -2.2 -3.7 -3.7 -3.5
Hong Kong 9.2 8.9 12.4 11.4 10.8 10.2 7.2 9.6 7.5 9.4
Indonesia 3.4 0.6 0.1 3.0 2.4 0.0 2.0 1.0 1.3 1.3
Malaysia 12.8 12.1 15.0 16.3 15.6 17.5 16.5 12.9 13.2 13.3
Philippines 0.9 1.1 2.0 4.5 4.8 2.2 5.5 6.2 5.8 5.2
Singapore 30.2 25.3 26.0 24.2 26.7 18.5 17.8 20.2 22.3 21.5
South Korea 2.0 4.1 1.9 0.6 0.6 -0.6 5.1 3.6 2.7 2.3
Taiwan 9.8 5.8 4.8 7.0 8.9 6.8 11.3 8.8 5.3 4.7
Thailand 5.6 1.7 -4.3 1.1 6.6 0.8 8.3 4.4 4.5 4.5
Vietnam -4.9 -2.1 -1.1 -0.3 -9.8 -13.6 -8.0 -8.8 -7.0 -5.2
Source: HSBC
40
Macro
Q1 2011
Current account
USDbn 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f
North America -510.5 -607.1 -726.6 -780.3 -712.8 -700.7 -416.5 -529.4 -521.1 -484.8
US -521.0 -630.0 -748.0 -798.4 -724.7 -707.2 -378.4 -478.3 -492.0 -482.1
Canada 10.5 22.9 21.4 18.1 11.9 6.5 -38.1 -51.1 -29.1 -2.7
Latin America 2.9 12.0 16.2 24.0 7.7 -40.0 -14.4 -55.7 -105.0 -136.7
Mexico -8.6 -5.2 -4.9 -4.8 -8.7 -16.2 -5.7 -7.3 -17.9 -22.6
Brazil 4.2 11.7 14.0 13.6 1.6 -28.3 -24.3 -50.5 -81.1 -98.1
Argentina 8.1 3.4 5.6 8.0 7.4 7.0 11.5 6.1 1.5 -4.7
Chile -0.8 2.1 1.4 7.2 7.5 -2.5 4.2 -4.1 -7.5 -11.4
Western Europe 77.1 104.5 46.0 18.7 68.0 -62.0 52.1 56.4 111.1 120.3
Eurozone 24.2 77.8 14.3 -13.0 14.8 -199.4 -70.0 -48.5 -2.3 -2.1
Germany 47.7 129.7 140.3 190.4 257.6 248.6 168.6 171.6 172.3 179.2
France 14.1 10.9 -10.1 -12.5 -26.0 -56.0 -52.4 -50.6 -49.0 -53.2
Italy -19.9 -15.9 -28.6 -49.0 -50.9 -89.5 -69.2 -72.3 -45.2 -44.8
Spain -32.0 -55.7 -81.8 -112.0 -146.5 -157.8 -82.0 -61.2 -50.0 -56.7
UK -30.2 -45.2 -58.9 -83.1 -73.2 -47.3 -31.7 -42.8 -44.8 -42.9
Norway 37.7 41.1 48.3 58.7 55.5 82.2 50.9 51.9 57.2 62.5
Sweden 22.1 23.0 23.9 34.0 43.4 43.7 29.7 28.6 31.2 32.5
Switzerland 23.3 7.7 7.5 13.7 23.3 49.1 59.4 67.2 69.8 70.3
EMEA 42.0 76.4 164.7 167.2 98.1 146.2 43.8 59.3 -4.7 -66.1
European EMEA 21.5 28.1 51.6 39.5 -1.4 9.8 21.9 7.7 -34.7 -81.2
Czech Republic -5.8 -5.7 -1.6 -3.4 -5.6 -1.3 -2.0 -4.0 -4.5 -6.3
Hungary -6.8 -8.5 -7.9 -8.1 -9.1 -10.8 0.4 0.8 0.5 0.7
Poland -4.6 -10.0 -3.7 -9.4 -20.3 -25.5 -9.6 -12.0 -17.3 -19.8
Russia 35.8 59.9 84.3 94.3 77.2 102.3 49.0 68.6 58.6 32.7
Turkey 0.0 -14.4 -22.1 -32.2 -38.3 -41.9 -13.9 -42.4 -60.3 -67.6
Ukraine 2.9 6.8 2.5 -1.6 -5.3 -12.9 -2.1 -3.3 -11.6 -20.9
Romania -3.5 -6.4 -8.6 -12.8 -23.1 -23.7 -7.3 -8.8 -9.5 -12.2
Middle East 22.7 55.2 122.3 144.1 120.1 156.8 33.7 65.6 47.5 35.1
Egypt* 1.9 3.4 2.9 1.8 2.3 0.9 -4.4 -4.3 -5.1 -5.1
Israel 1.4 2.7 4.3 7.4 4.9 1.3 7.5 6.6 5.3 6.0
Saudi Arabia 11.8 38.6 90.8 98.9 93.3 132.3 22.8 38.1 30.8 22.7
UAE 7.5 10.5 24.4 36.0 19.6 22.3 7.8 25.2 16.4 11.5
South Africa -2.2 -6.9 -9.2 -16.4 -20.7 -20.5 -11.8 -14.0 -17.5 -20.0
Asia-Pacific 267.6 299.3 359.5 486.3 665.2 595.5 547.4 540.5 514.2 468.7
Japan 135.9 171.7 166.6 172.6 213.2 157.3 142.2 188.6 160.8 184.8
Australia -28.3 -39.5 -41.6 -41.6 -58.6 -47.3 -43.7 -31.1 -34.5 -67.0
New Zealand -8.8 -12.8 -18.0 -21.1 -19.5 -23.6 -7.6 -5.9 -10.3 -6.5
Asia ex Japan 168.8 180.0 252.5 376.4 530.1 509.2 456.5 388.9 398.2 357.4
China 45.9 68.7 160.8 253.3 371.8 426.1 284.1 250.0 260.0 210.0
India** 8.8 0.8 -10.3 -9.3 -8.1 -31.0 -26.6 -56.9 -68.8 -76.0
Hong Kong 14.7 14.7 22.1 21.7 22.4 21.9 15.1 21.8 17.7 23.3
Indonesia 8.1 1.6 0.3 10.9 10.5 0.1 10.7 7.1 10.6 12.1
Malaysia 13.3 15.1 20.7 25.4 29.2 39.0 31.9 30.6 36.9 40.5
Philippines 0.7 0.9 2.0 5.3 7.1 3.6 8.8 11.8 13.7 14.5
Singapore 28.9 28.5 32.5 35.3 47.3 36.2 32.5 45.5 59.2 64.3
South Korea 11.9 28.2 15.0 5.4 5.9 -5.8 42.7 36.0 31.0 28.5
Taiwan 30.5 19.7 17.6 26.3 35.2 27.5 42.9 38.0 27.5 27.0
Thailand 8.0 2.8 -7.6 2.3 15.7 2.2 21.9 14.1 18.3 20.2
Vietnam -1.9 -1.0 -0.6 -0.2 -7.0 -10.8 -7.4 -9.0 -8.0 -7.0
Source: HSBC
41
Macro
Q1 2011
US
Stimulated unemployment to fall to acceptable levels. We do Kevin Logan
not expect the FOMC to raise the fed funds rate Chief US Economist
Just one quarter ago, it looked as if the US economy HSBC Securities (USA) Inc.
before Q4 2012 – our earlier forecast was targeted +1 212 525 3195
was in for another year of sub-par growth in 2011. kevin.r.logan@us.hsbc.com
on Q2 2012.
Since then, both the Federal Reserve and the federal Ryan Wang
government have embarked on new rounds of policy In early December, the Obama administration Economist
HSBC Securities (USA) Inc.
stimulus. The prospects for GDP growth in 2011 reached a compromise with Senate Republicans on +1 212 525 3181
ryan.wang@us.hsbc.com
have changed considerably. Instead of 2.5% growth tax reductions and spending increases for 2011 and
in the coming year, we now expect growth of 3.4%. 2012. The deal included several surprises, including
a 2% cut in payroll taxes, new investment incentives
The USD600bn expansion of the Fed’s balance sheet
for businesses and a 13-month extension of expiring
is equal to about 7% of the current M2 money
unemployment benefits. Those will add about
supply. By keeping interest rates lower than they
USD200bn to the federal deficit in 2011 and should
might be otherwise, and by lifting the prices of other
boost aggregate demand by a similar amount.
assets, the Fed’s move should stimulate the overall
growth of aggregate demand. The Fed’s new policy The stimulus from fiscal and monetary policy has
also has the effect of lifting inflation expectations changed the outlook for 2011. The unemployment
and so should limit the rise in real (inflation- rate should fall below 9% and CPI inflation, which
adjusted) interest rates caused by the ongoing we had previously anticipated dropping below 1.0%,
decline in core inflation. Policymakers have made it is now more likely to come in at 1.4%.
explicit that it may take three or four years for
% q-o-q annualised
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Consumer spending 1.8 3.1 2.9 2.8 3.5 2.7 3.2 3.5 3.4
Government consumption 1.2 1.4 1.1 4.0 0.4 0.6 1.2 1.1 1.7
Private fixed investment 3.9 9.5 9.4 1.7 6.3 10.7 10.6 11.4 13.8
Housing -2.8 2.5 6.6 -27.5 6.0 8.0 7.0 4.0 6.0
Stockbuilding (ppt contribution) 1.5 0.1 -0.1 1.3 -0.6 -0.0 0.0 -0.1 -0.2
Domestic demand 3.5 3.7 3.4 4.3 2.7 3.3 3.9 4.1 4.4
Exports 11.9 8.1 8.6 6.3 11.9 6.4 8.1 7.4 7.1
Imports 14.0 8.6 6.5 16.8 4.8 5.7 6.3 6.3 6.4
GDP (year) 2.9 3.4 3.4 3.2 2.8 2.7 3.2 3.6 3.8
GDP (% quarter annualised) - - - 2.5 3.3 3.2 3.9 4.0 4.3
Industrial production (% year) 5.5 3.6 2.8 6.6 5.3 4.3 3.5 3.1 3.5
Unemployment (%) 9.7 9.1 8.0 9.6 9.7 9.6 9.3 8.9 8.6
Consumer prices (% year) 1.6 1.4 1.1 1.2 1.2 1.3 1.6 1.5 1.1
Employment costs (% year) 1.9 1.9 2.1 1.9 1.9 1.8 1.8 1.9 2.0
Current account (USDbn) -478.3 -492.0 -482.1 -127.2 -120.1 -128.2 -122.1 -123.6 -122.5
Current account (% GDP) -3.3 -3.2 -3.0 -3.5 -3.2 -3.4 -3.2 -3.2 -3.1
Budget balance (% GDP)* -8.9 -9.3 -7.1 - - - - - -
3-month money (%) 0.3 0.3 1.0 0.3 0.3 0.3 0.3 0.3 0.3
10-year bond yield (%) 3.3 2.5 2.8 2.5 3.3 3.5 3.2 2.9 2.5
USD effective 83.7 86.3 84.8 81.1 82.2 87.1 87.3 85.9 84.8
Note: *Based on fiscal year
Source: HSBC
42
Macro
Q1 2011
Job gains in 2010 insufficient to lower unemployment Employment

 Trend growth in the US labour force is about 1% per year. With
400 400 the labour force currently close to 154m workers, about
200 200 150,000 new jobs have to be created each month just to keep
the unemployment rate from rising.
0 0
 Job growth in 2010 has fallen short of that level. Only a decline
-200 -200 in labour force participation (from 65.4% in 2009 to 64.8% in
-400 -400 2010) prevented the unemployment rate from moving higher
over the past year.
-600 -600
 The lack of adequate growth in employment was the main
-800 -800 motivation behind the move to more stimulatory monetary and
04 05 06 07 08 09 10 fiscal policies at the end of 2010.
Priv ate pay rolls, 6-month av g monthly change, '000
Minimum needed to reduce unemploy ment
Source: Bureau of Labor Statistics
Core services inflation has been trending lower Inflation

 The core measure of services inflation (excluding energy
% Yr % Yr services such as electricity) has been trending lower for the
4 4 past two years.
3 3  Rent inflation has been particularly subdued. Average rent paid
by tenants rose only 0.6% in the year through November 2010.
2 2
1 1  Goods price inflation accelerated unexpectedly in 2009 as
automobile prices rose due to the bankruptcy of two major auto
0 0 producers and the associated decline in auto production. With
production back up and running in 2010, average price inflation
-1 -1 for goods has slowed down and is slightly negative at -0.2% in
05 06 07 08 09 10 the year through November.
Core goods CPI (27% of core CPI)
Core serv ices CPI (73% of core CPI)
Source: Bureau of Labor Statistics
Budget deficit to remain elevated Budget deficit

 The US budget deficit started to climb in 2008, since revenues
12% 12% plunged sharply as the recession unfolded. The deficit surged
10% 10% further in 2009 as receipts continued to fall but expenditures
were boosted by a sizeable fiscal stimulus package.
8% 8%
 Measured on a four-quarter rolling basis as a percentage of
6% 6% GDP, the budget deficit peaked at 10.4% in Q4 2009 and
started to decline over recent quarters.
4% 4%
 The recently proposed measures to postpone scheduled tax
2% 2% increases and institute an employment tax holiday for 2011
0% 0% means that the deficit will rise over the next year, before
resuming its decline in 2012.
03 04 05 06 07 08 09 10 11 12
US budget deficit as a % of GDP Forecast
Source: Bureau of Economic Analysis
43
Macro
Q1 2011
Canada
Policy dilemma banking system. As financial institutions in other Stewart Hall
developed countries have been working down their Economist
Does the Bank of Canada leave the reins of HSBC Securities (Canada) Inc.
balance sheets, Canadian banks have been doing the +1 416 868 7523
monetary policy loose and focus on shielding stewart.hall@hsbc.ca
opposite. Year over year, total chartered bank assets
exporters from further dollar strength while risking
are up 4.5%, led by mortgage lending at 8.4%, and
consumer imbalance? Or hike rates in 2011 in an
personal lines of credit at a whopping 9.7%.
effort to curb a consumer binge on cheap credit, and
potentially sacrifice export growth and the overall But without a complementary policy at the BoC of
economic recovery? higher rates, success becomes rather uncertain.
After all, consumer behaviour is simply following
Although stagnant GDP growth has been of concern
the pricing signals for money in a low rate
because of a widening trade deficit, it is the
environment where there is a strong incentive to
accumulation of debt at the household level that
borrow and spend and few incentives to save.
most concerns us. Household credit as a percentage
of disposable income hit 148%, up from 143% the Changing this calculus requires more than
quarter before. That’s higher than the current rate administrative measures. It requires changing the
for US households – a historical first for Canadians. pricing of money. It is that calculus driving our
view of a rate hike at the end of Q1 2011.
At the federal level of government, there has been
considerable talk about using administrative
measures to curb lending. It is important to
remember that Canada has a fully functioning
% Year
2010f 2011f 2012f Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Government consumption 3.2 0.5 -0.2 2.9 1.4 1.2 0.7 0.2 -0.2
Investment 7.4 7.5 5.9 8.3 8.8 7.8 7.7 7.5 7.1
Stockbuilding (% GDP) 1.1 1.3 1.0 1.3 1.4 1.5 1.4 1.3 1.1
Domestic demand 5.4 3.6 2.4 5.7 5.4 4.7 3.8 3.2 2.7
Exports 5.6 4.3 6.2 5.9 3.4 2.4 2.6 5.7 6.4
Imports 13.5 6.6 4.2 12.8 11.3 9.6 6.1 5.6 5.2
GDP 3.0 2.6 2.9 3.4 2.9 2.3 2.5 2.9 2.8
GDP (% quarter annualised) - - - 1.0 2.7 3.3 3.1 2.5 2.3
Industrial production 5.0 3.3 2.7 8.4 6.0 4.2 2.8 2.8 3.6
CPI 1.8 1.9 2.0 1.8 2.3 2.2 2.0 1.9 1.7
Average earnings 3.7 3.6 2.7 4.1 4.7 4.4 4.1 3.3 2.7
Unemployment (%) 8.0 7.7 7.3 8.0 7.8 7.8 7.7 7.6 7.5
Current account (USDbn) -51.1 -29.1 -2.7 - - - - - -
Current account (%GDP) -3.2 -1.9 -0.2 - - - - - -
Budget balance (%GDP)* -2.8 -1.8 -1.2 - - - - - -
CAD/USD 1.05 1.10 1.10 1.03 1.05 1.10 1.10 1.10 1.10
3-month money (%) 1.2 2.5 3.4 1.2 1.2 1.9 2.2 2.2 2.5
10-year bond yield (%) 3.2 3.0 3.5 2.8 3.2 3.5 3.4 3.2 3.0
Note: *Fiscal year
Source: HSBC
44
Macro
Q1 2011
Mexico
A better perspective Such growth should see the negative output gap Sergio Martin
close by end-Q1 2011. Capacity pressures are Economist
We revise our forecast for real GDP growth in HSBC México, S.A
unlikely to be much of a problem given relatively +52 55 5721 2164
2011 to 4.1% from 3.8%. This is partly explained sergio.martinm@hsbc.com.mx
weak domestic demand. That should limit the
by the upward revision to the US outlook, given
upward pressure on core prices.
the close trade links between the US and Mexico.
However, we are raising our inflation projection
In particular, we look for a bigger bounce in both
to 3.6% from 3.2% in 2011 because of the upward
oil and non-oil exports. On the oil export side, we
trends observed in food prices lately – for corn in
expect high oil prices will be the main driver as
particular, but also for wheat. In addition, we
production levels will remain stable.
expect other commodity prices to go higher and
On the non-oil export side, competitive labour put some pressure on domestic prices.
costs, driven by a relatively weak exchange rate
As a consequence, we revise our monetary policy
and low wages, will continue to underpin
call and now expect tightening to start earlier than
Mexico’s strong performance. As a result, we
we had foreseen, in Q1 2012 instead Q4 2012,
expect exports to keep gaining market share
with increases of 50bp in Q1 2012 and other 50bp
within US imports and also believe it will
in Q2 2012. That would bring the monetary policy
continue to diversify to other markets. In
rate up to 5.5% from the 4.5% currently.
particular, the automotive industry is achieving
strong penetration in the US and other regions
(see Mexico Economics: Non-oil exports: in
full swing, 14 December 2010).
% Year
2007 2008 2009 2010f 2011f 2012f
Private consumption 4.0 1.9 -5.5 4.9 4.8 3.7
Public consumption 3.1 0.9 2.3 4.8 3.0 3.5
Gross capital formation 6.9 4.4 -10.1 2.4 8.1 6.9
GDP 3.2 1.5 -6.1 5.1 4.1 4.1
Industrial production 2.0 -0.6 -7.3 6.2 4.4 4.4
Unemployment (%) 3.4 4.3 4.8 4.2 5.3 4.9
Consumer prices 4.0 5.1 5.3 4.1 4.1 3.5
Exports 8.8 7.2 -21.1 26.7 13.6 12.9
Imports 10.1 9.5 -24.0 26.3 16.3 14.1
Current account (USDbn) -8.7 -16.2 -5.7 -7.3 -17.9 -22.6
Current account (% GDP) -0.8 -1.5 -0.7 -0.7 -1.5 -1.8
Budget balance (% GDP) 0.0 -0.1 -2.3 -2.7 -2.5 -2.1
MXN/USD 10.9 13.7 13.1 12.3 11.8 11.8
3-month money (%) 7.4 7.9 5.5 4.4 4.8 5.3
Source: HSBC
45
Macro
Q1 2011
Brazil
Growing pains We do expect Brazil’s fiscal accounts to improve in André Loes
2011, but believe that will fall short of what is Economist
We forecast Brazil’s GDP growth will reach 7.8% HSBC Bank Brasil S.A.
needed to contain inflationary pressures, +55(11)3371-8184
in 2010. Together with the expansion of investment andre.a.loes@hsbc.com.br
particularly since the incoming administration is
(projected to grow over 20% in 2010), Brazil’s Constantin Jancsó
also committed to expanding infrastructure. Economist
consumer-led boom implies a rapid increase of
HSBC Bank Brasil S.A.
domestic absorption. The burden of containing inflation may therefore +55(11)3371-8183
constantin.c.jancso@hsbc.com.br
continue to rest on monetary policy. We forecast
It has been possible to accommodate this excess Marcos Ross Fernandes
the BCB will hike rates by a total of 175bp over Economist
demand through a higher current account deficit,
three COPOM meetings, beginning in January. We HSBC Bank Brasil S.A.
but we are also seeing pressure on inflation. +55(11)3847-9787
also expect further measures to contain credit marcos.r.fernandes@hsbc.com.br
Moreover, average real wages are growing 6.5% y-
growth, similar to the recent increases in reserve
o-y, which is certainly much higher than
and capital requirements.
productivity growth. The inflation picture is
exacerbated by the recent bout of food inflation. We forecast GDP growth to fall to 5.1% in 2011.
But in our view, this will not bring IPCA inflation
The text-book response to current conditions would
back below 5% next year. Also, inflation will
be to cool demand, ideally through tighter fiscal
remain vulnerable to further commodity – and
policy rather than monetary policy, avoiding
particularly food price – shocks.
undesired upward pressure on the Brazilian real.
Our scenario implies that the current account deficit
So far, the incoming administration has signalled
will continue to widen. However, because of global
its commitment to achieving a primary fiscal
liquidity, we expect the Brazilian real to continue to
surplus of 3.1% of GDP in 2011. Importantly,
strengthen, reaching 1.60/USD by year-end.
officials promised this would be done without
resorting to the creative accounting used in 2010.
% Year
2007 2008 2009 2010f 2011f 2012f
Private consumption 6.1 5.7 4.2 6.9 5.7 4.4
Gross capital formation 13.9 13.6 -10.3 22.5 15.0 10.0
GDP 6.1 5.2 -0.6 7.8 5.1 4.5
Industrial production 6.0 3.1 -7.4 10.6 7.0 5.0
Unemployment (%) 7.4 6.8 6.8 5.7 6.0 5.6
Consumer prices 3.6 5.7 4.9 4.9 5.4 4.6
Exports 16.6 23.2 -22.7 31.3 12.3 8.0
Imports 32.0 43.6 -26.3 45.5 24.8 12.0
Current account (USDbn) 1.6 -28.3 -24.3 -50.5 -81.1 -98.1
Current account (% GDP) 0.1 -1.7 -1.5 -2.4 -3.3 -3.7
Budget balance (% GDP) -2.8 -2.1 -3.4 -2.6 -2.5 -2.8
BRL/USD 1.77 2.31 1.74 1.74 1.60 1.60
3-month money 11.7 12.7 9.6 10.8 12.5 10.4
Source: HSBC
46
Macro
Q1 2011
Inflation expectations: Up and away! It’s not just about food inflation
 Food prices were the main driver of inflation in 2010 (+9.4% in
the 12 months ending in November). Food prices caused the
% % spike in 2010 consensus inflation in H1 2010, as well as the
6.0 6.0 acceleration in headline inflation in Q4 2010.
5.5 5.5  However, the inflation story in Brazil is not only about food.
Inflation in the services sector, for example, is running at 7.3%
5.0 5.0 over a 12-month period, and apparel at 6.8%. The 12-month
headline IPCA rate, meanwhile, is at 5.6% (and we forecast it to
4.5 4.5 reach 6% by year-end) – all well above the mid-point of the
inflation target, of 4.5%.
4.0 4.0
 Core inflation is also high. In November, excluding volatile food
3.5 3.5 prices and energy, core inflation reached 5.3% (its highest since
May 2009). On a trimmed means basis, with smoothing, core
Jan-09 May -09 Sep-09 Jan-10 May -10 Sep-10 stood at 5.5% (the highest since July 2006). And the diffusion
2010 2011 12m ahead index (measuring the share of the CPI basket with positive price
variation) reached 67.2% (the highest since January).
Source: BCB
The tight labour market and the booming wages Low unemployment and wage pressure
 Labour market conditions are exceptionally tight. Headline
% % unemployment is at an all-time low (6.2% in seasonally
12 14 adjusted terms) – see chart.
11 12
 The participation rate (ratio of the labour force to the total
10 10 population) is 57.4%, just short of the all-time high of 58.2%.
9 8 The share of the employed population working informally (ie not
8 6 registered or self-employed) fell to 36% - also an all-time low.
7 4  As one would expect under these circumstances, there is
6 2 growing wage pressure. The average wage in the economy is
5 0 up by about 12.3% y-o-y, or 6.5% in real terms. Considering
that the employed population is growing at about 3.9%,
06 07 08 09 10 aggregate wages (ie the sum of all income generated in the
Unemploy ment - LHS labour market) is expanding by 10.7% y-o-y in real terms.
Agg. Wages (3m. mo. av g)
Source: IBGE
The current account goes south For now, external financing remains comfortable
 The current pace of demand growth is exerting significant
Forecast 3% pressure on imports, which are up about 30% YTD relative to
3% the same period of last year.
2% 2%  We expect Brazil’s trade balance to turn to a deficit next year
1% 1% (–USD6.2bn, from this year’s surplus of around USD15bn) for
the first time since 2001.
0% 0%
 As a result, we forecast the current account deficit to widen
-1% -1% from about 2.5% of GDP in 2010 to 3.4% of GDP in 2011.
-2% -2%  External financing conditions will likely remain comfortable over
-3% -3% 2011 considering the global liquidity conditions and strong
capital flows to Brazil.
-4% -4%
 Nonetheless, it is worth mentioning that portfolio investments –
Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 which are naturally more volatile – continue to gain importance
in the breakdown of the external financing.
Source: BCB, HSBC forecasts
47
Macro
Q1 2011
Argentina
Re-election likely basis, the current account should deteriorate at a Javier Finkman
much slower pace – as imports have a larger Economist
Higher commodity prices and good growth HSBC Bank Argentina S.A
financing cycle than exports– suggesting that there +54 11 4344 8144
prospects for 2011 increase the probability of javier.finkman@hsbc.com.ar
will be no scarcity of FX supply in 2011.
President Kirchner being re-elected. Jorge Morgenstern
Following the death of her husband, former Economist
We expect economic activity to recover in Q4 HSBC Bank Argentina S.A
President Nestor Kirchner, President Cristina +54 11 4130 9229
2010, following stagnation in Q3. Consumption jorge.morgenstern@hsbc.com.ar
Fernandez de Kirchner’s (CFK) rating improved
will continue to be the main driver of growth, in
significantly in the polls. Former presidential
our view, as exports and fixed investments are
candidates are considering running for regional
likely to decelerate.
positions, revealing the perceived strength of CFK.
Our 5.8% growth forecast for 2011 comes at the The Radical Party candidate (still to be determined)
price of high inflation. Modest dis-inflationary should be her major contender. The global
pressures should have come from slower growth in environment of cheap money and high commodity
2011 and a more expensive local currency. prices bodes well for a re-election.
However, we expect more expansionary monetary
Recently, the government began formal negotiations
and fiscal polices to keep inflation at the current 25-
with the Paris Club and requested an IMF technical
26% y-o-y level according to private sector
mission to assist with national CPI. Although this
measurements. Moreover, in 2011 inflation risks are
could be read as a sign of moderation, at this point,
tilted to the upside given that it is a presidential
we see it as a matter of necessity rather than
election year and the government might be tempted
conviction. Though a deal with the Paris Club
to inflate the economy further, as was seen in 2007.
appears likely at some point, we do not expect the
The current account surplus will continue to shrink government to address CPI credibility issues before
towards balance as import volumes growth should the October 2011 presidential elections.
offset the improvement in terms of trade. On a cash
% Year
2007 2008 2009 2010f 2011f 2012f
Consumption 9.0 6.1 -1.6 7.5 6.0 4.9

Gross fixed capital formation 13.6 7.7 -11.7 15.2 6.2 10.6
GDP 8.7 4.9 -2.9 9.0 5.8 5.0
Unemployment (%) 7.8 7.4 8.4 7.0 6.7 6.5
Consumer prices* 12.7 24.7 15.9 23.2 25.5 22.5
Exports 20.1 25.5 -20.5 26.9 18.6 10.2
Imports 30.6 28.7 -32.5 47.2 29.5 20.5
Current account (USDbn) 7.4 7.0 11.5 6.1 1.5 -4.7
Current account (% GDP) 2.8 2.2 3.9 1.6 0.3 -0.8
Budget balance (% GDP) 1.1 1.4 -0.6 0.4 -0.8 -0.4
ARS/USD 3.15 3.45 3.80 4.10 4.30 4.30
1-month money (%) 13.6 19.8 10.0 10.8 10.5 11.0
*Year-end forecast
Source: HSBC
48
Macro
Q1 2011
Chile
Strong growth, rising currency We expect the currency to strengthen in 2011, Jorge Morgenstern
prompting the Central Bank to intervene in the FX Economist
We expect the Chilean economy to grow at 6% HSBC Bank Argentina, S.A
market. This is likely to have a stabilizing effect on +54 11 4130-9229
(annualized) throughout 2011. That implies a re- jorge.morgenstern@hsbc.com.ar
USD-CLP, but it is not clear that it will send the
acceleration from the weak activity in October, but
dollar quickly higher unless local pension funds join
remaining below the post-earthquake recovery rates
in the dollar buying at some stage.
seen mid-year. Improved business and consumer
confidence, increasing labour income and a A strengthening exchange rate in 2011 should
resurgence in construction activity should support prevent headline consumer prices from rising much
next year’s growth. above the 3% y-o-y centre of the monetary policy
target. That said, we continue to see underlying
The fiscal and monetary stance is expected to remain
inflationary pressures arising from the closure of the
relatively loose. Fiscal expenditures will expand in
output gap and a remarkable decline in
line with nominal GDP, with the structural deficit
unemployment. Thus, we expect non-tradable prices,
improving just marginally. We believe monetary
which are already growing at an annual rate of 6%,
authorities will pause the hiking cycle by April with
to continue running well above overall inflation.
the policy rate at 4.25%. That is below the level that
Tradable prices should remain subdued, in our main
would be considered neutral by recent history and
scenario, but the risks of a spike in commodity
according to Central Bank models.
prices remain.
The global backdrop, while still a source of
uncertainty should remain relatively constructive for
Chile. Copper prices are likely to remain high by
historical standards.
% Year
2007 2008 2009 2010f 2011f 2012f
Private consumption 7.0 4.6 0.9 10.9 7.1 5.8

Fixed investment 11.2 18.6 -15.3 18.9 18.4 15.2
GDP 4.6 3.7 -1.5 5.3 6.0 5.0
Unemployment (%) 7.2 7.5 10.0 8.0 6.9 6.6
Consumer prices 4.4 7.8 0.3 1.4 2.5 2.9
Exports 15.8 -2.2 -19.2 19.5 8.2 11.4
Imports 22.6 30.9 -31.0 36.2 16.7 16.7
Current account (USDbn) 7.5 -2.5 4.2 -4.1 -7.5 -11.4
Current account (% GDP) 4.5 -1.5 2.6 -2.1 -3.2 -4.6
Budget balance (% GDP) 8.9 5.2 -4.4 -1.1 -0.1 0.2
CLP/USD 498.0 637.0 533.0 480.0 450.0 450.0
3-month money (%)* 6.15 7.86 0.48 3.50 4.50 5.50
Note: *End-year 90-day deposit rate
Source: HSBC
49
Macro
Q1 2011
Eurozone
Crisis management Financial Stability Facility (EFSF), which is Janet Henry
scheduled to issue some of its AAA-rated bonds in Economist
The challenges facing politicians and policymakers HSBC Bank plc
January to provide loans to Ireland, as a first step +44 20 7991 6711
in the Eurozone continue to mount. November/ janet.henry@hsbcib.com
towards this. However, as long as Eurozone leaders
December saw a renewed bout of sovereign risk Astrid Schilo
fail to convince the markets that they are moving Economist
concerns and growing contagion as investors
towards closer integration, the pressure will remain HSBC Bank plc
attempted to analyse exactly what any new EU +44 20 7991 6708
on the peripheral government bond markets. The astrid.schilo@hsbcib.com
permanent crisis resolution mechanism would be put
likelihood of one (or more) other country finding
in place to deal with countries facing severe fiscal
itself in an EU/IMF fiscal adjustment programme
difficulties. The long-term solution is a new
would therefore rise. The ECB will have a clear role
institutional framework that encompasses more
to play in ensuring financial stability: providing
fiscal integration but also a mechanism for dealing
plenty of liquidity to the banking systems and
with banking sector issues on a European-wide
continuing with its bond purchase programme,
basis. We expect some steps towards this end in
particularly during the renewed bouts of contagion
2011. A full fiscal transfer union, along the lines of
that will undoubtedly occur while a convincing
the US, is a non-starter from the German
solution from national governments and European
perspective, but there is a growing possibility that
institutions is awaited.
steps will be taken towards a greater degree of joint
bond issuance by Eurozone states. Proponents of this
policy point to the newly established European
% Year
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Government consumption 0.6 -0.4 -0.1 0.5 0.3 0.0 -0.4 -0.8 -0.6
Fixed investment -0.7 2.9 3.3 0.3 2.7 3.6 2.4 3.0 2.5
Final domestic demand 0.4 1.1 1.5 0.8 1.2 1.2 1.0 1.0 1.1
Domestic demand 1.6 1.0 1.5 2.0 2.1 1.4 0.7 0.8 1.1
Exports 9.9 6.0 6.2 11.3 10.8 9.0 5.4 5.0 4.9
Imports 10.2 5.4 6.3 11.9 11.9 8.2 4.8 4.4 4.5
GDP 1.7 1.5 1.6 1.9 2.1 2.0 1.3 1.3 1.3
GDP (% quarter) - - - 0.4 0.4 0.3 0.3 0.4 0.4
Unemployment (%) 10.0 9.8 9.6 10.0 10.0 10.0 9.9 9.8 9.7
Wages 1.7 1.9 2.0 1.7 1.9 1.8 1.8 2.0 2.0
Inflation 1.6 1.8 1.7 1.7 2.0 2.0 1.8 1.8 1.6
M3 0.8 4.4 5.8 0.8 2.7 3.8 4.4 4.6 4.7
Current account (% GDP) -0.4 -0.0 -0.0 - - - - - -
Budget balance (% GDP) -6.5 -5.0 -4.2 - - - - - -
Debt (% GDP) 84.5 88.0 90.0 - - - - - -
ECB refi rate* 1.00 1.00 1.75 1.00 1.00 1.00 1.00 1.00 1.00
3-month money (%) 0.9 1.2 2.0 0.8 0.9 1.0 1.0 1.0 1.2
10-year bond yield (%)** 3.8 2.8 2.9 3.0 3.8 3.3 3.2 3.0 2.8
USD/EUR* 1.35 1.40 1.40 1.37 1.35 1.25 1.30 1.35 1.40
Source: Source: HSBC Note. *=year-end. **weighted average of big 4
50
Macro
Q1 2011
Another burst of buying by the ECB ECB bond purchases

 The renewed contagion in November and December prompted
EUR bn ECB gov ernment debt purchases EUR bn the ECB to step up its (sterilised) purchases of peripheral
government debt and extend the unlimited three-month and
18.0 18.0
one-month liquidity until at least March/April 2011.
13.5 13.5
 With no apparent limit on the duration or magnitude of the
9.0 9.0 securities markets programme (SMP), there is much more the
ECB could find itself doing, such as starting to buy Spanish
4.5 4.5 government debt and, if ultimately necessary, outright QE.
However, the recent level of bond purchases remains well
0.0 0.0 below the May 2010 peak.
14 28 11 25 09 2306 2003 1701 15 2912 26 10  The ECB remains of the view that the underlying problem
May Jun Jul Aug Sep Oct Nov cannot be resolved by monetary intervention alone and will
ECB purchases continue to keep the pressure on governments to deliver
effective deficit reduction in order to restore confidence.
Source: Markit Economics, Eurostat, HSBC
Diverging fortunes GDP growth

 Eurozone GDP growth slowed to 0.4% q-o-q in Q3 after an
impressive 1% in Q2. However, the level of Eurozone activity
remains 3.1% below its pre-crisis level while growth in Germany has
% Yr Real GDP % Yr recovered much more quickly. There has been recent evidence of
German consumption and investment recovering but exports
6 6 continue to explain much of Germany’s growth outperformance.
4 4 For more details on economic developments, please refer to Growth
2 2 angel watching over us, Eurozone chartbook, Astrid Schilo,
0 0 15 December 2010.
-2 -2  Given HSBC’s optimism on the outlook for capital goods
-4 -4 demand in the emerging world, Germany appears set to
-6 -6 continue growing more quickly than the Eurozone but should
-8 -8 help to support demand for intermediate goods from its
Eurozone neighbours.
98 99 00 01 02 03 04 05 06 07 08 09 10
Germ any Periphery * Other Eurozone
 We continue to expect no ECB rate rises in 2011 but the
ongoing strength of Germany and some of the other countries
which are not in the 20% that make up the periphery will mean
the market could well price in earlier rate increases.
Source: Eurostat and HSBC. Note: Periphery is Spain, Greece, Portugal and Ireland
Peripheral disinflation to resume in 2011 Inflation and disinflation

 Price pressures remain subdued with inflation having remained
% Yr HICP inflation % Yr well below 2% over the past two years. Core inflation has been
5 5 sticky around 1% with VAT rises in the periphery playing a key
4 4 role preventing it from falling further.
3 3  The rise in wholesale food prices, particularly wheat, has yet to
2 2 feed through but is likely to start soon as will the recent rise in
the oil price. Combined with low base effects from last year this
1 1 implies that headline inflation will rise above 2% in early 2011.
0 0
 German inflation remains below the Eurozone average and
-1 -1
while we expect it to edge closer to the Eurozone aggregate in
-2 -2 2011-12 we forecast it to remain below 2% -- a level which will
02 03 04 05 06 07 08 09 10 not make the necessary deflationary adjustment in the
periphery either quick or easy.
Germany Periphery * Other Eurozone
Source: ECB and HSBC. Note: Weekly bond purchases which began on May 10th.2010
51
Macro
Q1 2011
Germany
The model student Despite the surging economic upswing, price Lothar Hessler
pressures are muted so far. The recent strong Economist
Growth in Q3 couldn’t catch up with the outstanding HSBC Trinkaus & Burkhardt AG
productivity gains helped to keep the price pressure +49 21 1910 2906
2.2% q-o-q from Q2, but the 0.7% increase was still lothar.hessler@hsbctrinkaus.de
in check. We do not expect a substantial upward shift
gratifying. Strong sentiment indicators – the Ifo Astrid Schilo
climate rose to a record high in Q4 – point to solid of wages and hence price before 2012, when major Economist
wage negotiations will take place. That should help to HSBC Bank plc
future growth rates. The GDP data revealed an +44 20 7991 6708
interesting trend: Domestic demand seems to be push up the Eurozone’s average inflation rate. astrid.schilo@hsbcib.com
developing as a second pillar of growth. While The upswing becomes apparent in the government’s
investment growth is driven by rising capacity thriving tax income. Still, the fiscal deficit will
utilisation and low interest rates, private consumption
exceed the 3% barrier in 2010 (e3.6%). In 2011,
also benefits from the latter and in addition from
though, it is likely to undershoot (e2.6%). The latter
improved labour market and income prospects.
is supported by some belt tightening by the
Meanwhile, demand from foreign countries is government. The debt level as a percentage of GDP
abating. While orders from non-European is about to surge from 73.4% to 82.9% in 2010. That
countries stay strong and are likely to remain so in is driven by pending liabilities resulting from the
the future, considering our positive view on EM, removal of assets from the banking system to a bad
demand from the Eurozone is waning. The bank assured by the government and the
economic concerns in the periphery are leaving its participation of Germany in the loan deal for Greece.
mark. Overall recent order figures point to ongoing
but somewhat slower growth in coming quarters.
% Year
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Investment 6.3 5.9 3.7 7.3 10.8 10.4 5.5 4.9 3.0
Machinery & equipment 9.3 9.1 5.5 11.3 16.9 13.7 10.6 7.7 5.1
Construction 4.1 2.5 1.8 4.9 6.7 7.5 0.8 1.4 0.6
Stockbuilding (% GDP) -1.1 -1.3 -1.2 -1.0 -1.4 -1.3 -1.3 -1.4 -1.3
Domestic demand 2.8 2.0 1.9 2.8 4.7 3.2 1.6 1.5 1.6
Exports 14.7 8.1 7.0 16.8 16.4 14.5 7.3 6.2 4.9
Imports 14.1 8.4 7.4 15.1 19.9 14.3 7.5 6.8 5.4
GDP 3.5 2.1 2.0 3.9 4.0 3.8 1.8 1.5 1.5
GDP (% quarter) - - - 0.7 0.4 0.3 0.3 0.4 0.4
Unemployment (%) 7.7 7.0 6.8 7.5 7.5 7.3 7.1 6.9 6.8
Producer prices 1.5 2.3 1.3 3.6 4.4 3.8 2.4 1.7 1.3
Consumer prices 1.1 1.5 1.6 1.2 1.5 1.7 1.5 1.4 1.3
Current account (EURbn) 129.7 130.0 128.0 28.1 44.0 32.0 26.0 30.0 42.0
Current account (% GDP) 5.2 5.0 4.8 4.5 7.0 5.1 4.0 4.6 6.4
3-month money (%)* 0.9 1.2 2.0 0.8 0.9 1.0 1.0 1.0 1.2
10-year bond yield (%)* 3.0 2.6 2.9 2.3 3.0 3.4 3.1 2.9 2.6
Source: HSBC. *period end
52
Macro
Q1 2011
German consumer: Multi-year highs in sentiment Consumption

 The outlook for consumption in Germany is brightening –
Index Index , 3mMA consumer sentiment as well as surveys for the retail sector
60 30 have risen to multi-year highs
45 15  The environment for a continued expansion of consumption is
30 0 good: the export-driven upswing should spill over into
15 -15 permanent industry hiring, and also push up wage growth in
0 -30
the medium term
-15 -45  The monetary stance of the ECB is loose for Germany – low
-30 -60 real interest rates are likely to support private demand further
onwards
91 93 95 97 99 01 03 05 07 09 11
 In addition, inflation should stay relatively low, not keeping
GfK income ex pectations (LHS)
down real income growth too much
ifo business climate balance, retail sector (RHS)
Source: Reuters EcoWin, HSBC
Record levels in employment intentions Labour market

 The level of employed persons rose to a record high in 2010
and appears likely to improve further
% bal, 6mth lag % Yr
15 4  So far, the recovery of the labour market has been driven by the
service sector (education and time worker) while employment in
0 2
the industrial sector was falling until recently. See “What drives
0 German jobs” by Astrid Schilo, September 2010.
-15
-2
-30  Leading indicators point to a sharp improvement of the labour
-4 market in the industrial sector. Hence the overall upswing of the
-45 -6 employment situation appears likely to carry forward into next year.
-60 -8
 According to a study of the ifo Institute, 40% of all interviewed
Jan-93 Jan-99 Jan-05 Jan-11 companies are reporting a shortage of qualified employees and
expect a further deterioration of the situation over the next
Manufacturing sector employ ment ex pectations
Manufacturing sector employ ment years – the fight for qualified workers appears set to continue.
Source: Thomson Reuters Datastream and HSBC
Wage sum showing robust increases Wages

 Higher employment and a sharp decline of short-shift workers
% Yr % Yr
were driving up the revenue of consumers recently. The latter
also helps to increase productivity and thereby keeps inflation
10 10 in check
8 8
6 6
 In comparison, compensation per hour is growing much more
moderately and the trend of the yearly change is still down. We
4 4 do not expect a broad and sharp acceleration before 2012
2 2
0 0  Upcoming wage negotiations in the retail sector (1.65mln
employees) in H1 2011 are unlikely to show significant wage
-2 -2
increases. In 2012 agreements in the public sector (1.3mln
93 95 97 99 01 03 05 07 09 11 employees) and in the metal sector (3.2mln employees) are
likely to push up wages, though.
Rev enues from income and salaries
Total economy hourly tariff w ages  The consumption recovery was also driven by a retreat of the
savings ratio in Q2 and Q3 to 11.2% since 1991: 10.8%)
Source: Reuters EcoWin, HSBC
53
Macro
Q1 2011
France
Limited upside for industrial demand growth owing to the decline in car Mathilde Lemoine
production in 2011 exports. These could decrease to EUR39bn in Economist
HSBC France
2010 from EUR50bn in 2003, possibly resulting +33 1 40 70 32 66
French GDP increased 0.4% q-o-q in Q3 2010, mathilde.lemoine@hsbc.fr
in a car sector trade deficit of EUR4bn in 2010.
following a 0.7% q-o-q rise in Q2. Despite the
Finally, car industry investment may be limited
1.8% y-o-y rise in Q3, GDP remained 1.8% lower
but it represented 21.5% of the variation in total
than its pre-crisis level.
business investment between 2000 and 2007.
Household consumption surprised on the upside,
This expected restructuring in the auto sector
climbing 0.6% q-o-q in Q3 2010 on the back of
could limit GDP growth to below its potential.
car sales. It seems that numerous special offers
But a quicker-than-expected labour market
and the prospect of the end of the scrappage
recovery could drive household consumption after
scheme on 31 December buoyed auto spending.
Q1 2011. And the persistence of a highly
This implies that household consumption could
accommodating monetary policy – justified by
slow in Q1 2011. Moreover, the adjustment in the
financial instability in the Eurozone – could offer
car industry when car scrappage ends could limit
continued support to the property market, where
the recovery in industrial production, business
sales and prices are back to pre-crisis levels.
investments and exports in 2011, first because
Moreover, the sluggish activity in peripheral euro
relocation could accelerate, pushing down car
zone countries could have a limited impact
production: France-based car production was 30%
because Greece, Ireland, Spain and Portugal
in Q1 2010 compared to 57% in 2003. Second, the
account for only 10.6% of French exports.
trade deficit could remain high in spite of global
% Year
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Government consumption 1.3 -0.6 0.4 1.2 0.5 0.2 -0.6 -1.0 -1.0
Investment -1.5 3.8 4.5 -0.4 1.4 3.5 3.4 3.9 4.4
Stockbuilding (% GDP) -0.5 0.2 0.4 -0.2 0.0 0.1 0.2 0.2 0.2
Domestic demand 1.5 2.0 2.3 2.7 2.1 2.8 2.1 1.6 1.7
Exports 9.5 5.3 6.4 11.1 10.6 6.4 4.6 4.5 5.7
Imports 8.5 6.8 7.4 13.4 11.2 9.8 6.7 4.8 6.2
GDP 1.6 1.5 1.8 1.8 1.6 1.7 1.3 1.4 1.4
GDP (% quarter) - - - 0.4 0.4 0.2 0.3 0.4 0.4
Manufacturing output 5.7 0.6 3.7 4.9 4.7 1.4 0.3 0.4 0.5
Unemployment (%) 9.9 9.9 9.9 9.9 9.9 9.9 9.9 10.0 9.9
Consumer prices 1.7 1.7 1.8 1.8 1.8 1.6 1.5 2.0 1.8
Trade account (EURbn) -50.8 -52.0 -53.0 -12.8 -12.9 -12.9 -13.0 -13.0 -13.1
3-month money (%) 0.9 1.2 2.0 0.8 0.9 1.0 1.0 1.0 1.2
10-year bond yield (%) 3.4 3.1 3.3 2.7 3.4 3.9 3.6 3.4 3.1
Source: HSBC
54
Macro
Q1 2011
Household consumption will remain robust... … producing a negative contribution from foreign trade
 The end of the scrappage scheme on 31 December 2010 will
%Yr %Yr weigh on household consumption at the beginning of 2011. It
6 20 will therefore progress less rapidly in Q1 before accelerating
15 once again.
10  74,400 jobs have been created in the market sector since Q1
3
5 2010, and this will sustain wage growth in 2011. Moreover, the
0 contracting government deficit and plans to cut structural public
0 spending could produce a stabilisation in the savings rate.
-5
-10  Following a possible 0.1% q-o-q increase in Q1 2011, household
consumption could rise by 0.5% q-o-q in each of Q2 and Q3. But
-3 -15 such vigorous spending will ensure that imports grow at a faster
90 92 94 96 98 00 02 04 06 08 10 rate than exports. According to our calculations, each
French households consumption (LHS) percentage point increase in consumption growth cuts GDP
French overall imports (LHS) growth by 0.3 percentage point via higher imports.
Sources: INSEE, HSBC
Credit is a supportive factor… … for growth in 2011

 Having bottomed out in October 2009, outstandings of private
%Yr %Yr sector credit have started expanding again, and increased
15 6 3.6% y-o-y in October 2010. This reflects an upturn in mortgage
lending, which jumped 6.8% y-o-y in October 2010.
10 3
 Outstandings of credit for business investment did not decline
5 0 at any time during the financial crisis. Even so, the growth of
new loans to companies dated over one year accelerated to
0 -3 8.3% y-o-y in October.
 Low borrowing costs will continue to bolster demand for credit,
-5 -6 especially as French households have relatively little debt. It
90 92 94 96 98 00 02 04 06 08 10 amounts to 76.9% of their gross disposable income, compared
with 146.7% for UK households according to Banque de France.
Outstanding stock of loans to French private sector (LHS)
French GDP growth (RHS)
Sources: INSEE, Banque de France, HSBC
Fiscal consolidation will have little impact on growth … but the primary deficit could stay high
in 2011...
 The government believes that its budget deficit will be reduced
2010f 2011f 2012f 2013f from 7.7% of GDP in 2010 to 6% in 2011. This is a credible
Government forecast prospect because it stems largely from the end of the stimulus
Budget deficit (% of GDP) -7.7 -6.0 -4.6 -3.0 package (0.5% of GDP) and other one-off measures. Excluding
Government debt 82.9 86.2 87.4 86.8 these measures, the deficit will be unchanged at EUR92bn in
(% of GDP) 2011 compared to 2010.
Real GDP growth (%Yr) 1.5 2.0 2.5 2.5  Steps to cut structural public spending and increase taxes will
Nominal GDP growth (%Yr) 2.2 3.7 4.25 4.25 therefore help prevent any deterioration in the structural deficit
HSBC Forecast but will not hamper growth.
Budget deficit (% of GDP) -7.6 -6.2 -5.2 -4.2  In contrast, the primary deficit will not be eliminated until 2013,
Government debt 82.8 86.9 89.3 90.4 according to government forecasts, and this means that the
(% of GDP) debt-to-GDP ratio cannot be stabilised before that date.
Real GDP growth (%Yr) 1.6 1.5 1.8 1.8
Nominal GDP growth (%Yr) 2.2 3.2 3.5 3.6
Sources: French Government and HSBC forecast
55
Macro
Q1 2011
Italy
Contagion concerns stock is so high, a period of elevated interest rates Janet Henry
will mean an even bigger primary surplus will be Economist
Italy has a long history of budget deficits, a HSBC Bank plc
required to stabilise the debt burden. Spreads have +44 20 7991 6711
government debt stock approaching 120% of GDP janet.henry@hsbcib.com
already narrowed from their peaks and
and ongoing structural problems such as
parliament’s approval of the fragile Berlusconi
demographics and lack of competitiveness. Hence
administration’s EUR25bn budget cuts in 2011-12
it was always going to be a prime target for
is encouraging. However, the government will
contagion as the sovereign concerns in the
need to continue to show convincing evidence that
periphery escalated again. The rise in Italian
it is reining in the budget deficit. The improvement
government bond spreads to a record high in
in the 2010 deficit looks to have been minimal.
December was therefore no surprise.
Italy appears unlikely to get an easy way out of its
There are some mitigating factors in Italy, such as
fiscal problems through a rapid rebound in
the low level of private-sector indebtedness and
nominal GDP growth. Growth slowed in Q3,
hence high savings, which means that much of the
although consumer spending held up a little better
government debt is bought by domestic
than we had expected, given the renewed rise in
institutions. The deficit is also smaller than in
unemployment and with the domestic austerity
many Eurozone countries, at an estimated 5% of
measures now starting to bite, growth is set to
GDP in 2010. The country has also conducted
become even more reliant on exports (and on
pension and labour market reform (see Italy trip
German demand in particular). GDP growth
notes: they’ve done some stuff right, Astrid Schilo,
appears set to remain at around 1% in 2011-12.
24 November 2010). However, because the debt
% Year
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Government consumption -0.4 -0.5 -0.4 -0.5 -0.4 -0.1 -0.7 -0.6 -0.7
Investment 2.9 2.4 3.8 5.0 4.5 3.5 2.0 1.8 2.1
Domestic demand 1.3 0.8 1.0 2.0 1.2 0.9 1.3 0.5 0.6
Exports 7.7 5.0 5.8 8.7 10.1 7.4 5.6 3.8 3.5
Imports 8.1 4.5 5.3 11.3 9.0 6.3 6.6 2.6 2.7
GDP 1.0 0.8 1.0 1.1 1.3 1.0 0.8 0.8 0.8
GDP (% quarter) - - - 0.3 0.2 0.2 0.2 0.2 0.2
Unemployment (%) 8.5 8.5 8.3 8.5 8.5 8.5 8.5 8.5 8.4
Hourly wage rate 2.2 2.2 2.2 2.1 2.2 2.2 2.2 2.2 2.2
Consumer prices 1.6 1.5 1.7 1.7 2.0 1.8 1.6 1.3 1.4
Current account (EURbn) -54.8 -34.0 -32.0 -12.3 -8.0 -10.0 -9.0 -7.0 -8.0
Budget balance (% GDP)* -5.0 -4.4 -3.7 - - - - - -
3-month money (%) 0.9 1.2 2.0 0.8 0.9 1.0 1.0 1.0 1.2
10-year bond yield (%) 4.5 4.1 4.3 3.9 4.5 5.0 4.7 4.4 4.1
Source: HSBC. Note: national measure
56
Macro
Q1 2011
Contagion effects intensifying Public finances & politics

 The latest bout of contagion briefly took Italian spreads to new
% 10-y r gov ernment bond spreads ov er German Bunds % highs in December.
3 3  With a debt-to-GDP ratio of nearly 120%, a period of elevated
interest rates will mean an even bigger primary surplus will be
required to stabilise the debt burden. Encouragingly, Italy
2 2 demonstrated in the pre-crisis years that it was capable of
running a primary surplus even in years of very weak growth.
1 1  However, there has been growing opposition to finance minister
Tremonti’s austerity measures and the markets and rating
agencies remain concerned about potential political instability.
0 0 Prime Minister Berlusconi scraped through a no- confidence
08 09 10 vote on 14 December but with a minority government he will
have to work quickly to broaden support if a spring election is to
Spain Italy be avoided.
Source: Markit Economics, Eurostat and HSBC
Slowing growth Consumption and austerity

 The slowdown in GDP growth in the third quarter (+0.3% q-o-q)
%qtr Italy Index was in line with expectations but the mix was actually a little
1 115 better with consumption surprising on the upside despite the
renewed rise in unemployment.
0.5 110
0  The recent rebound in consumer confidence is also somewhat
105 unexpected given the growing concerns about the impact of the
-0.5
100 austerity measures.
-1
95  Consumption will be most affected by the three-year public
-1.5
sector pay freeze (and for higher earners, pay cuts), a gradual
-2 90 reduction in public sector headcount and cuts in local
government spending. Mr Tremonti has also not ruled out
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
further deficit-cutting measures if required.
Priv ate consumption (LHS)
Consumer confidence (RHS)
Source: Eurostat, European Commission and HSBC
Growth to remain export-dependent Industrial production and exports

 The latest PMI data have been encouraging but the available
% Yr Index industrial data still lead us to believe that GDP will have slowed
12 62 further in Q4 with stocks in particular playing a less supportive role.
8 58
4 54  Growth in 2011-2012 will be heavily dependent on exports.
0 50 Italy’s low level of competitiveness remains a structural
-4 46
-8 42 constraint but in cyclical upturn external demand is the most
-12 38 important factor so the growing evidence of rebalancing in
-16 34 Italy’s most important export destination (Germany) are
-20 30 particularly encouraging.
-24 26
-28 22
98 99 00 01 02 03 04 05 06 07 08 09 10
Industrial production (LHS)
Manufacturing PMI (RHS)
Source: Markit, Eurostat and HSBC
57
Macro
Q1 2011
Spain
Ongoing concerns continues to intensify the need for, and delivery Madhur Jha
of, austerity measures in Spain, leading to a Economist
Spain managed to beat our expectation of mild HSBC Bank plc
persistent drag from public spending. Labour +44 20 7991 6755
contraction in Q3, with the economy stagnating madhur.jha@hsbcib.com
markets remain weak and the withdrawal of extra
over the quarter. However, there was little to cheer
unemployment benefits and cuts in public- sector
about. The detail of the GDP release was quite
pay will only put more pressure on consumer
shocking, with domestic demand shaving 1.5 ppts
spending. Housing market weakness and low
off quarterly growth, led by a contraction in
productivity concerns are well flagged. The one
consumption (related to the VAT rise in July).
silver lining seems to be a tentative reacceleration
Investment spending also turned sharply lower,
in the world trade cycle. This together with soggy
partly in response to fiscal austerity. The
import growth should provide the main boost to
contraction in domestic demand was fully offset
growth over the coming quarters.
by a positive contribution from net exports. But
even here, the story was less one of export growth Spain has done well so far in meeting fiscal
and more of a sharp drop in imports (-5.0% q-o-q), consolidation targets and has recently announced
reflecting again the weakness of domestic demand. more measures. The pressure on Spain to deliver
fiscal austerity is likely to persist, as will calls for
The macro picture is unlikely to change. The
transparency in the banking sector, especially
sovereign crisis that has gripped the Eurozone
regarding asset quality.
% Year
Consumer spending 1.1 -0.2 0.9 1.4 1.0 -0.1 -1.3 -0.0 0.7
Government consumption -0.2 -1.4 -0.6 -0.1 -0.4 -0.9 -1.9 -1.8 -1.1
Investment -7.3 -2.6 1.5 -6.6 -5.7 -4.6 -4.3 -1.5 -0.0
Domestic demand -1.2 -1.1 0.9 -0.7 -1.2 -1.6 -2.3 -0.8 0.5
Exports 9.2 4.4 4.3 8.7 7.3 4.0 3.8 5.0 4.9
Imports 4.4 -1.5 2.8 3.9 2.1 -2.2 -5.3 0.3 1.6
GDP -0.2 0.7 1.2 0.2 0.4 0.5 0.5 0.7 1.1
GDP (% quarter) - - - 0.0 0.1 0.2 0.3 0.2 0.5
Industrial production 0.3 -0.7 3.2 -0.1 -1.3 -1.8 -2.4 -0.4 1.8
Unemployment (%) 20.2 20.8 19.9 20.5 20.8 21.0 20.8 20.7 20.5
Consumer prices 1.7 1.5 1.6 1.9 2.1 1.9 1.7 1.4 1.2
Trade account (EURbn) -48.8 -34.9 -11.6 -13.1 -9.5 -8.0 -9.0 -8.2 -9.7
Current account (EURbn) -46.2 -37.7 -40.5 -8.5 -7.9 -10.6 -9.4 -8.7 -9.0
3-month money (%)* 0.9 1.2 2.0 0.8 0.9 1.0 1.0 1.0 1.2
10-year bond yield (%)* 5.5 4.7 4.9 4.2 5.5 5.6 5.3 5.0 4.7
Source: HSBC estimates. *period-end
58
Macro
Q1 2011
Net exports will prove to be ... … the main support to overall growth
 A positive contribution from net exports offset the drag that
% Yr Contribution to y -o-y GDP grow th % Yr emanated from domestic demand in Q3 2010.
10 10
 This was, however, largely a reflection of weak import growth,
5 5 with exports growing only mildly.
 Looking ahead, we expect sluggish domestic demand to
0 0 constrain import growth over the next few quarters as well, but
at the same time, recent signs of reacceleration in the global
-5 -5 trade cycle are expected to benefit Spain. This is also being
-10 -10 suggested by the export order index of the Spanish
manufacturing PMI which has begun to rise again.
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Net exports Domestic Demand
Consumption exp.
Source: HSBC and Datastream
Fiscal consolidation will get tougher… … as expenditure cuts are more difficult
 Fiscal consolidation has largely come through higher revenues,
EURbn Central gov ernment finances EURbn while expenditure has moderated only slightly.
200 200  Under pressure to do more on the fiscal front, the government
150 has recently announced additional measures, including the
150 part-privatisation of airports, higher tobacco taxes and the
100 withdrawal of some additional benefits.
100
50  However, so far the deficit reduction has come largely through
50 revenue-side measures, which will be more difficult to replicate
0
0 over the coming quarters. Expenditure-side cuts are politically
-50 more sensitive and concerns will persist about the regional
-100 -50 authorities sticking to austerity targets.
Rev enue Ex penditure Cash balance  At the same time, growth assumptions for fiscal targets are
ambitious and could be problematic on the revenue side as
Jan - Oct 2009 Jan - Oc t 2010 well, especially if the world trade cycle begins to falter again.
Source: Instituo Nacional de Estadística and HSBC
Employment levels are beginning to stabilise… … but PMIs suggest further labour shedding ahead
 Total employment levels are beginning to stabilise in Spain.
%Yr Spain: Total employ ment %Yr Most of this improvement has come through gains in temporary
15 15 employment, but permanent employment has started to recover
10 10 as well, albeit only modestly.
5 5  On a sectoral basis, employment levels have improved in both
0 0 services and industry and even the pace of decline in the
-5 -5 construction sector has moderated rapidly.
-10 -10
-15 -15  However, recent PMI indicators continue to suggest modest
labour shedding both in the industry and services sectors and
-20 -20
this could intensify over the coming months on the back of
-25 -25
greater fiscal austerity.
06 07 08 09 10
Total Permanent Temporary contracts
Source: HSBC and INE
59
Macro
Q1 2011
UK
Back to basics While the unusually strong contribution of the Stuart Green
construction sector accounted for a sizeable chunk Economist
Institutional factors, whether relating to political, HSBC Bank plc
of the upside surprise to growth seen during the +44 20 7991 6718
constitutional or fiscal matters, have proved to be stuart1.green@hsbcib.com
middle part of 2010, the trend of consumer price
very influential during the course of 2010, although
inflation has been rather more clear-cut, with a
some of these risks – the threat of a sovereign
string of upside surprises being recorded over the
downgrade in particular – thankfully failed to
year. Of the past 12 inflation readings, eight have
materialise over the year. How the recovery absorbs
proved higher than the consensus expectation, and
the looming fiscal consolidation, and the potential
inflation is expected to move even higher during the
for any Eurozone fallout to affect the UK, will of
first half of 2011, due in large part to the January
course be key issues for the economy in 2011. But
VAT hike. Policymakers will remain alert to the
the underlying performance of the economy should
prospect of what the majority still regard to be a
now receive greater attention, and much attention
temporary spike in inflation becoming more widely
will be focussed on the ability of net exports to
embedded across the price level, most notably
compensate for the expected subdued path of
through higher pay settlements. But pay growth
domestic demand. Our caution towards this issue,
remains benign at present, again questioning the
and the belief that labour market conditions may
strength of the rebound in employment, and we
appear artificially strong at present, form the basis of
believe that a further year of interest rate stability is
our below-consensus GDP forecast for 2011, and the
the most likely prospect for 2011.
expectation for only a modest acceleration in 2012.
% Year
Government consumption 2.0 0.4 -1.8 2.8 2.3 1.8 0.7 -0.0 -0.7
Investment 1.8 0.8 3.1 2.8 4.5 1.8 0.5 0.3 0.6
Stockbuilding (%GDP) 1.2 0.2 0.0 1.4 1.2 0.5 0.1 0.0 0.0
Domestic demand 2.5 1.2 1.2 3.5 3.1 2.1 1.1 0.9 0.8
Exports 5.4 6.0 4.3 7.6 5.6 7.6 6.4 5.4 4.7
Imports 7.9 3.8 2.4 9.9 6.2 5.2 3.6 3.4 3.0
GDP growth 1.7 1.7 1.8 2.8 2.9 2.6 1.7 1.3 1.2
GDP % Quarter - - - 0.8 0.4 0.2 0.2 0.4 0.3
Manufacturing output 3.6 2.2 1.5 1.1 0.3 0.4 0.4 0.4 0.3
Unemployment rate end-year 7.9 8.3 8.5 7.9 8.1 8.2 8.2 8.3 8.4
RPI 4.6 3.8 2.6 4.7 4.7 4.7 3.9 3.6 2.9
CPI, average 3.3 3.2 1.9 3.1 3.3 3.6 3.3 3.2 2.7
Current account (%GDP) -1.9 -1.8 -1.6 - - - - - -
PSNB (%GDP) -9.9 -8.2 -6.4 - - - - - -
USD/GBP** 1.57 1.61 1.61 1.58 1.57 1.54 1.54 1.59 1.61
GBP/EUR** 0.86 0.87 0.87 0.87 0.86 0.81 0.85 0.85 0.87
Base rate (%)** 0.50 0.50 2.00 0.50 0.50 0.50 0.50 0.50 0.50
10-year bond yield*** 3.70 2.80 3.10 3.20 3.70 3.70 3.40 3.10 2.80
Source: HSBC. Note: *Public borrowing numbers are shown in fiscal years (2009 is FY09/10, 2010 is FY10/11, 2011 is FY2011/12), **end of period, ***End period estimates.
60
Macro
Q1 2011
Headline employment growth proved resilient… …but breakdown of gains is less impressive
 Although the movements of GDP and the labour market are
Three-month change in employ ment, 000's rarely synchronised, the durability and rebound of employment
300 witnessed over the past two years have proved exceptional
compared with other post-war recessions. While falling house
200 prices and household de-leveraging have featured, such factors
100 would have proved much worse had the path of employment
0 followed that of GDP more closely.
-100  But the concentration of employment growth within part-time
-200 jobs and self-employment, together with the unusually low level
of real wage growth, suggests the labour market is providing
-300 only modest support to consumption at present, and lead
2008 2009 2010 indicators of labour demand paint a fairly uninspiring picture.
Overall, we believe employment growth will slow appreciably
Full-time employ ed Part-time employ ed
during the course of 2011, and we expect average earnings
Self-employ ed Unpaid/supported growth to remain well contained.
Source: ONS and HSBC
Net trade finally delivered in Q3 2010… …but contribution expected to disappoint

 Net trade finally made a positive contribution to GDP growth
Relativ e ex port / import performance* during the third quarter of 2010, but the return seen to date
115 115 from the roughly 25% depreciation in the trade-weighted value
of sterling is undoubtedly meagre and, in all likelihood, a source
110 110 of substantial disappointment among policymakers.
105 105  The key question for policy, however, relates to whether the
positive contribution seen in Q3 2010 is the beginning of a
100 100 sustained boost net trade, or simply the product of weak import
growth during the quarter, which the October 2010 trade data
95 95 now suggest has reaccelerated.
90 90  We do not doubt the ability for some positive effect to come from
net trade in 2011, but believe that the breakdown of UK export
-6 0 +6 +12 +18 +24 +30 +36 destinations and a desire among exporters to protect profit
Aug-07 Sep-92 margins are likely to make any such contribution relatively minor.
Note: Chart shows relative growth of underlying export and import volumes in the
months following the sterling depreciations of August 2007 and September 1992. Any
figure above 100 implies export out-performance.
Inflation is beginning to rise again… …and is likely to spike higher still in early 2011
 Headline CPI inflation has edged up again over recent months
and in November rose from 3.2% to 3.3% - the highest level
% % since May.
6 6
5 5  Recent announcements of gas price increases, January’s VAT
4 4 rise from 17.5% to 20% and the likelihood of further food price
3 3 increases will combine to see inflation move even higher over
2 2 the coming months. We currently expect a peak in headline CPI
inflation of 3.7% in February 2011.
1 1
0 0  The strength of inflation since the start of the year has
-1 -1 consistently been dismissed as only temporary by the majority
of MPC members. However, there are worrying signs that
01 02 03 04 05 06 07 08 09 10 inflation is becoming more broad-based, as none of the
Positiv es contribution 12 major CPI sub-components are currently making a negative
Negativ es contribution contribution. Clothing prices, for example, are making an
CPI inflationary impact for the first time since comparable data were
first available in 1997.
61
Macro
Q1 2011
Norway
Robust consumption investment to pick up, as indicated by rising Janet Henry
housing starts, order intakes and oil prices. Economist
GDP for the total economy fell 1.6% q-o-q in Q3 HSBC Bank plc
+44 20 7991 6711
while the Q2 GDP figure was also revised Net exports have remained a drag on growth as janet.henry@hsbcib.com
downwards (from 0.1% to -0.2%). A slowdown in exports have been even weaker than imports but Urvashi Nangia
oil and gas extraction was the prime cause for this the export performance is expected to brighten Associate, Bangalore
slide. Stripping out the oil economy, mainland modestly over the next year.
GDP grew by 0.9% q-o-q in Q3 after 0.5% in Q2.
Norges Bank was one of the first Western central
Based on the recent rise in oil prices and assuming
banks to start raising rates in October 2009, but the
a pick-up in investment, we continue to expect a
policy rate has now been on hold at 2% since the
period of moderate growth ahead.
last increase in May. Price pressures are still low,
Private consumption displayed renewed strength with core inflation registering around 1%. The risks
(+1.3% q-o-q) in Q3 and the strong consumer from escalating house prices have also subsided.
confidence continues to be reflected in rising With growth expected to be moderate and price
retail sales numbers. Given the decline in pressures to remain low, rates are forecast to be on
unemployment, we expect consumption to remain hold until mid-2011, after which we expect modest
solid in the coming quarters too. further tightening to resume. In an environment
where the markets are likely to remain troubled by
In contrast, oil investment slipped by almost 17%
sovereign risk in the developed world, Norway’s
in Q3 with the result that overall investment fell
budget surplus and oil producer status suggest that
by almost 7% q-o-q, almost totally reversing the
the NOK is likely to appreciate in 2011.
Q2 rebound. We expect residential and petroleum
% Year
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Investment -10.2 3.9 3.2 -7.4 -11.1 5.5 -1.1 7.1 4.6
Domestic demand 3.9 1.6 1.9 4.2 5.2 4.5 -0.0 1.5 0.7
Exports -1.5 2.6 4.3 -4.5 -3.3 -2.1 3.4 5.3 4.0
Imports 9.4 4.6 5.0 10.2 8.0 7.5 2.7 3.8 4.5
GDP** -0.1 1.1 2.0 -1.4 0.5 0.6 0.6 2.4 0.9
GDP (% quarter) - - - -1.6 1.8 0.6 -0.2 0.2 0.3
Industrial production -7.0 -1.8 3.8 -10.2 -9.8 -8.2 -4.8 3.3 3.5
Unemployment (%) 3.6 3.5 3.4 3.5 3.4 3.6 3.7 3.5 3.3
Consumer prices 2.3 1.6 2.3 1.9 1.9 1.2 1.2 1.9 2.1
Budget balance (% GDP) 10.0 11.0 13.0 - - - - - -
NOK/EUR 7.90 7.40 7.40 7.99 7.90 7.60 7.50 7.40 7.40
3-month money (%)* 2. 6 3.2 4.2 2.6 2.6 2.5 2.7 2.9 3.2
10-year bond yield (%)* 3.7 4.0 4.4 3.1 3.7 3.7 3.8 3.9 4.0
Source: HSBC. *period-end
62
Macro
Q1 2011
Sweden
The star performer SEK15bn (0.4% of GDP) in 2011 to support the Janet Henry
ongoing recovery. In addition, tax cuts and job Economist
Sweden experienced another strong quarter in Q3, HSBC Bank plc
creation initiatives have pushed consumer +44 20 7991 6711
with q-o-q GDP growth of 2.1% after an upwardly janet.henry@hsbcib.com
confidence to new highs. Consumers are feeling
revised 2.0% q-o-q in Q2. This was driven by Urvashi Nangia
richer too, as house prices have slowly started
quarterly increases of 1.4% in private consumption Associate, Bangalore
increasing again. Rising retail sales and improving
and 3.2% in investment. We now expect growth to
labour markets are expected to support private
be 5.1% in 2010 and 3.4% in 2011 (vs 4.1% and
consumption growth close to 3% in 2011.
2.9% earlier). The real risk to growth comes from
the turning world trade cycle. New export orders, The very strong rebound in growth follows a deep
PMI and OECD lead indicators point to slowing recession in 2009. Hence, capacity utilisation and
exports in the near future. Exports have so far wage growth remain low and headline inflation is
remained well supported but the impact of the fiscal expected to stay below the Riksbank’s target of 2%
austerity measures in Europe (Sweden’s main in 2011. Nonetheless, the Riksbank has continued
trading region) along with further currency normalising monetary policy, delivering a fourth
appreciation are other factors to be wary of consecutive 25bp rate rise in December to lift the
Sweden’s growth figures, solid public finances and a policy rate to 1.25%. Looking at the strong growth
stable banking system stand in sharp contrast to the outlook, we expect the central bank to raise rates
further, to 2.25% by end-2011.
backdrop of the Eurozone sovereign debt crisis.
Fiscal policy remains supportive, with the
government promising additional measures of
% Year
Investment 5.5 8.2 6.1 8.0 8.3 9.6 8.8 7.3 7.2
Stockbuilding (%GDP) 0.6 0.5 0.8 1.1 0.8 0.6 0.6 0.5 0.4
Domestic demand 5.5 3.3 2.1 7.3 6.2 4.7 3.9 2.4 2.4
Exports 10.9 8.6 6.0 12.5 14.6 13.3 8.7 6.9 6.0
Imports 12.6 9.1 5.8 14.5 15.2 13.0 9.4 7.8 6.7
GDP growth 5.1 3.4 2.5 6.8 6.4 5.3 3.9 2.2 2.3
GDP (% quarter, sa) - - - 2.1 0.5 0.6 0.7 0.5 0.6
Unemployment rate end-year 8.5 8.1 7.2 7.7 7.9 8.2 8.5 8.1 7.6
CPI, average 1.1 1.9 2.3 1.1 1.3 1.4 1.8 2.1 2.4
Current account (%GDP) 6.4 6.7 6.2 6.2 5.5 7.4 6.9 6.7 6.1
Budget balance (% GDP) -0.7 -0.2 1.1 - - - - - -
State debt (% GDP) 40.0 39.0 38.0 - - - - - -
SEK/USD 6.74 6.14 6.14 6.73 6.74 7.12 6.69 6.37 6.14
SEK/ EUR 9.10 8.60 8.60 9.19 9.10 8.90 8.70 8.60 8.60
3-month money (%)* 1.8 2.6 3.5 1.0 1.8 1.9 2.1 2.4 2.6
10-year bond yield* 3.3 3.6 4.0 2.4 3.3 3.5 3.5 3.6 3.6
Source: HSBC. *period-end
63
Macro
Q1 2011
Switzerland
CHF remains a key variable downside, the Eurozone crisis could spread and Astrid Schilo
lead to global contagion. Overheating fears in the Economist
Switzerland’s output gap has more or less closed. HSBC Bank plc
emerging world would also go in the same +44 20 7991 6708
With rates still hovering close to 0%, an astrid.schilo@hsbcib.com
direction.
inconsistency has opened up. The explanation for
this is twofold: 1) the Swiss franc is still at record The SNB has chosen to focus on the Swiss franc. A
highs; 2) there is no imminent inflation threat. We strong currency can import deflation – and indeed,
believe the SNB will have to start normalising imported goods and services inflation is currently
rates in the second half of 2011. running at -0.4% y-o-y (November). Domestic
inflation, which has traditionally tended to be the
The Swiss economy kept expanding at a healthy
SNB’s reference, is at 0.5% y-o-y (November). M3
rate of 0.7 q-o-q in the third quarter. While we
growth is still running at a healthy 6.4% y-o-y (3m
expect softer readings in the fourth and first
moving average), reflecting the absence of apparent
quarters, we believe the Swiss economy should
credit constraints in the banking system. We are
generate a healthy growth rate of 2.1% in 2011.
more optimistic on growth in 2011 than the SNB
Economic growth should continue to be fairly
(“some 1.5%”), and think its dovish assessment is a
well balanced between the domestic and foreign
way of verbal intervention against the CHF. Overall,
side, though an ongoing recovery in global trade
our current judgement is that the SNB may let the
is a necessary condition for Switzerland. The risks
economy grow a bit more before reverting to
to Swiss growth are rather well balanced in both
monetary tightening in Q3 of 2011.
directions: on the positive side, global growth
may come in higher than we think. On the
% Year
Government consumption 0.0 0.6 0.4 -0.2 -0.7 0.6 0.9 0.5 0.3
Investment 3.7 2.9 2.5 3.1 2.7 3.5 2.2 2.7 3.0
Stockbuilding (% GDP) -1.0 -0.1 -0.1 0.3 0.0 0.0 -0.1 -0.1 -0.1
Exports 8.2 3.9 6.9 3.9 4.0 1.8 1.9 6.8 5.4
Imports 7.7 5.4 7.1 7.6 8.2 6.8 3.5 6.1 5.2
GDP 2.7 2.1 2.0 3.1 2.8 2.2 2.1 2.0 2.0
GDP (% quarter) - - - 0.7 0.4 0.3 0.6 0.6 0.5
Unemployment (%) 3.9 3.4 2.8 3.8 5.0 3.6 3.4 3.3 3.1
Consumer prices 0.7 0.9 1.5 0.3 0.3 0.1 0.7 1.3 1.4
Current account (EURbn) 50.8 52.7 50.2 13.4 12.1 12.4 13.6 14.1 12.6
CHF/USD 0.96 0.97 0.97 1.02 0.96 0.98 0.99 1.01 1.02
CHF/EUR 1.30 1.36 1.36 1.30 1.30 1.32 1.34 1.36 1.38
3-month money (%)* 0.25 0.83 1.50 0.18 0.20 0.25 0.42 0.75 0.83
10-year bond yield (%)* 1.8 1.3 1.7 1.4 1.8 1.8 1.7 1.4 1.3
Source: HSBC estimates. *period-end
64
Macro
Q1 2011
Hungary
Short-term gain, long-term push the 2011 balance into surplus. But the question Dr. Murat Ulgen
of how the deficit will be kept on a downward path
pain? Economist
HSBC Turkey
after the majority of crisis taxes expire in 2012
+90 212 376 4619
The Hungarian economy posted a tentative recovery remains unclear, as the government has not muratulgen@hsbc.com.tr
in 2010, driven primarily by foreign demand. announced any other structural reforms or
Household consumption growth turned positive only meaningful spending cuts.
in Q3, after seven consecutive quarters of
contraction. Private consumption growth should be The NBH, Fiscal Council, IMF and market analysts
subdued as households continue to de-lever mostly have suggested that sector-specific tax schemes
FX-denominated debt. We also expect wage growth could discourage private investment and create
to be limited throughout the forecast period since inflationary pressures, while elimination of the
public employment will be reduced by only about private pillar could undermine confidence in the
4% in 2011, leaving little room for an upward wage pension system. Moody’s also took note and
adjustment in the following years. downgraded Hungary by two notches to Baa3,
adding that the changes to the pension system raised
After winning a constitutional majority in April and questions about long-term fiscal sustainability.
a landslide victory in October’s local elections, the
Fidesz government announced a series of On 29 November, NBH surprised markets with a
unorthodox fiscal measures to reduce the budget 25bp rate hike to 5.50% and a hawkish tone. Even
deficit to 3.8% of GDP in 2010 and to 2.9% in 2011. though the MPC pointed to cost-side inflationary
‘Crisis’ taxes on the banking, telecom, energy and pressures as the main reason behind the rate
retail sectors, and the re-channelling of private decision, the move appeared to be, at least in part, a
pension contributions into the state-run pillar should response to government policies and the associated
bring the 2010 deficit down to the target level. increase in risk premium. The lack of longer-term
Parliament recently adopted a proposal to dismantle measures on fiscal sustainability and the frosty
the private pillar entirely, so one-off revenues from relations between the government and NBH make us
pensioners returning to the state system could even cautious about Hungary’s economic prospects.
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 0.2 0.4 -7.9 -1.8 1.5 2.0
Government consumption -7.3 1.0 -0.1 -0.1 1.2 2.1
Fixed investment 1.6 0.4 -6.5 -3.9 2.8 4.1
Exports 16.2 5.7 -9.6 14.1 9.3 9.5
Imports 13.3 5.8 -14.6 12.5 8.4 8.9
GDP 0.8 0.6 -6.5 1.0 2.5 3.1
Unemployment* 8.0 8.5 10.7 11.1 11.3 10.6
Consumer prices*** 8.0 6.1 4.2 4.9 3.2 3.4
Current account (% GDP) -6.5 -6.9 0.3 0.6 0.4 0.5
Budget balance (% GDP)** -5.0 -3.7 -4.4 -3.8 -1.0 -3.5
HUF/USD 172.9 191.3 188.3 203.7 189.3 192.6
HUF/EUR 252.8 265.9 270.2 275.0 265.0 260.0
3-month money (%) 7.5 9.7 6.0 5.4 5.6 5.6
10-year yield (%) 6.9 8.3 7.7 6.8 7.0 7.0
Source: HSBC estimates. Note: * = year-end ** = fiscal year *** = year average
65
Macro
Q1 2011
Poland
Growth in high gear, by CEE momentum. Widening trade and current account
Dr. Murat Ulgen
standards deficits remain medium-term risks, together with a Economist
HSBC Turkey
fairly large fiscal gap.
+90 212 376 4619
Preliminary Q3 GDP estimates provide further muratulgen@hsbc.com.tr
Despite strong growth, core inflation (excluding
evidence of Poland’s impressive recovery within
food and energy prices) remained unchanged at
CEE. The economy grew 4.2% in unadjusted annual
1.2% y-o-y between July and October. Headline
terms in the July-September period, with household
inflation has been running a touch higher; it rose
consumption adding 2.1ppt to headline growth.
above the NBP’s target level of 2.5% in November.
Inventory accumulation and fixed investment also
contributed positively in the quarter, with GFCF Recent comments by members suggest the MPC is
split over the timing, pace and magnitude of
turning positive after contracting in Q1 and Q2.
tightening required. On the one hand, strong
Three consecutive quarters of accelerating growth in
growth, rising cost-side inflationary pressures and
private spending suggest domestic demand remains
relatively loose fiscal policy arguably call for sooner
strong, while restocking and construction in
(albeit limited) tightening. On the other hand,
anticipation of the 2012 European Football
Championships could provide an additional boost in benign core inflation, an uncertain European
outlook and the risk of capital inflows causing rapid
Q4 and early 2011.
PLN appreciation support keeping rates unchanged
The outlook for foreign demand is less buoyant. in the near term. After the revival of sovereign debt
Manufacturing and export growth appears to have worries in Europe, we now expect the MPC to keep
lost a bit of momentum: gross value added in rates unchanged at the 22 December meeting, but
industry rose only 0.2% in seasonally adjusted another hike in the reserve requirement ratio looks
sequential terms in Q3, while export growth was likely. We expect data-dependent tightening to
down 2.0% q-o-q. Germany buys a quarter of begin in early 2011, and see rates at 4.50 % at the
Poland’s exports, so its outperformance could end of the second quarter.
provide some support, but import growth could
outpace export growth as domestic demand gains
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 4.9 5.3 2.4 3.3 3.5 2.8
Government consumption 3.5 7.1 2.4 3.6 2.2 2.0
Exports 9.1 5.8 -6.0 9.6 10.2 9.1
Imports 13.7 6.2 -13.2 10.7 12.0 10.3
GDP 6.8 5.0 1.7 3.8 3.9 3.4
Unemployment (%)* 11.2 9.5 12.1 11.5 10.9 9.5
Consumer prices** 2.5 4.2 3.5 2.6 2.9 2.8
PLN/USD 2.46 2.96 2.86 2.89 2.64 2.67
PLN/EUR 3.60 4.12 4.11 3.90 3.70 3.60
3-month money (%) 5.6 6.1 3.9 4.0 4.5 5.1
10-year bond yield (%) 5.9 5.7 6.2 5.5 5.9 6.0
Source: HSBC estimates. Note: * = year-end ** = year average
66
Macro
Q1 2011
Romania
Not quite there yet public pay law, which sets declining balance annual Dr Murat Ulgen
limits for the wage bill, has been delayed. Economist
Romania has remained in recession in 2010, after HSBC Turkey
+90 212 376 4619
its economy contracted by 6.9% in 2009. Growth Consumer price inflation jumped from 4.4% y-o-y in
muratulgen@hsbc.com.tr
turned positive in the second quarter (+0.3% in June to 7.2% in July after the VAT hike became
sequential terms), but fell back into negative effective. Inflation is expected to be near 8.0% at
territory in the third. Real GDP in 2010 is 2010 year-end, then slowly approach the NBR’s
expected, on our forecasts, to decline by 2.0%, target band of 3% +/-1% in the next two years.
mainly on the back of domestic demand weakness.
The NBR will adopt a lower inflation target of 2.5%
Next year, household consumption should turn
(again in a +/-1% band) from 2013 onwards,
positive while fixed investment, which plummeted
possibly in an effort to anchor expectations and
c15% this year, looks likely to be the main driver
reaffirm its commitment to adopting the Euro.
of growth in 2011. After such a sharp contraction
Whether the target can be achieved depends on the
in 2009 and 2010, however, some productive
extent of structural reform and fiscal consolidation,
capacity is likely to be permanently lost.
along with effective use of EU funds. An efficient
In early 2009, Romania received a multilateral loan political process will be of utmost importance, but
package worth EUR20bn, conditional on the government struggled with two no-confidence
implementing a fiscal austerity programme and votes and a cabinet reshuffle in 2010. Public support
structural reforms. In line with this, the 2011 draft for the ruling PDL-UDMR is also low, as
budget is ambitious and aims to reduce the deficit to Romanians rally against the austerity measures.
GDP ratio from 6.8% in 2010 to 4.4% in 2011 with a
The precarious political backdrop could drive the
combination of spending cuts (reducing wages and
risk premium higher. This, coupled with above-
employment in the public sector) and revenue-side
target inflation, suggests the NBR is likely to
measures (a 5ppts VAT hike to 24%). The cabinet
remain on hold until Q4 2011, even though the
recently approved the 2011 budget and sent it to
economy could benefit from more monetary
Parliament for debate, but the adoption of the unitary
stimulus in the near term.
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 12.1 8.7 -9.4 -1.9 2.0 4.0
Exports 7.9 7.1 -4.9 18.3 8.2 10.0
Imports 28.2 5.5 -20.2 13.8 9.3 11.1
GDP 6.3 7.4 -6.9 -2.0 1.5 3.5
Unemployment (%)* 4.1 4.4 7.8 7.5 7.3 7.1
Consumer prices 4.8 7.9 5.6 6.1 5.5 4.6
RON/USD* 22.91 2.90 3.00 3.15 2.89 2.89
RON/EUR* 33.50 4.03 4.30 4.25 4.05 4.05
3-month money (%)* 8.0 14.7 10.4 7.0 7.1 8.0
Source: HSBC estimates. Note: * = year-end, ** = General government balance (ESA 96) *** = year-average
67
Macro
Q1 2011
Russia
Oil prices: angel and demon More robust economic growth and faster inflation Alexander Morozov
would probably leave the central bank no choice Economist
Economic growth has picked up after a summer HSBC Bank (RR), Moscow
but to moderately tighten monetary policy, hiking +7 495 783 8855
pause that brought y-o-y GDP growth down to alexander.morozov@hsbc.com
policy rates and increasing reserve requirements.
2.7% in Q3, but the pattern of growth appears
At the same time, budget revenues would exceed
unstable. Consumer demand growth has
expectations in the higher oil price and economic
moderated and external demand weakened in Q4,
growth environment. That would help to reduce
while growth of fixed investment has been robust.
the budget deficit more significantly in 2011 and
Economic growth should get a boost from the
cut the government borrowing program. We
recent rise in crude oil prices to cUSD90/bbl for
consider it a positive factor for the Russian
Brent. If sustained, it would accelerate Russian
sovereign bond market.
GDP growth to 4.8% in 2011e.
Finally, the more robust economic dynamics to be
Besides stimulating economic growth, higher oil
propelled by higher oil prices are likely to curtail
prices should improve the balance of payments,
the political appetite for structural reform,
making the size and trend of the current account
especially since 2011 is a parliamentary election
surplus similar to this year’s. We expect that
year in Russia. As has repeatedly happened with
would augment appreciation pressures on the
rising oil prices before, once prices stabilise,
rouble in H1 2011, especially in Q1.
Russia will again face a challenge to deliver a
Inflation is likely to remain the key concern in successful structural story in order to sustain
2011, and higher oil prices will add to inflationary economic growth of 5% per year.
pressures and expectations through higher costs
and stronger demand. That should curb growth of
household real incomes, since nominal income
growth would be responding to faster inflation
with some time lag.
% Year
2007 2008 2009 2010f 2011f 2012f
GDP 8.5 5.2 -7.9 3.2 4.8 3.5
Consumer prices 9.0 14.1 11.7 6.9 9.5 8.5
Current account (USDbn) 77.2 102.3 49.0 68.6 58.6 32.7
Current account (% GDP) 5.9 6.1 4.0 4.6 3.3 1.7
Foreign exchange reserves 477.9 427.1 439.5 493.8 549.9 553.2
(USDbn)
Overall fiscal balance (% GDP) 5.4 4.1 -5.9 -3.3 -2.1 -1.6
RUB/USD 24.5 29.4 30.2 30.8 33.4 35.2
1-month money (%) 6.3 20.6 6.6 3.7 6.5 5.5
Source: HSBC
68
Macro
Q1 2011
Easing consumer demand growth Moderate, yet unstable economic growth

 After peaking in July, the recovery in consumer demand has
% Yr % Yr started losing momentum. Real wage growth was hit by the
30 20 moderation in nominal wage growth and by accelerating
inflation.
15 10
 Retail sales growth has moderated, too, as consumer
0 0 confidence worsened in Q3. But a stronger base effect and
increasing retail lending by banks has meant the trend in retail
-15 -10 sales is better than real wages and incomes.
-30 -20  Fixed investment continues to improve, with growth
07 08 09 10 accelerating to 10% y-o-y recently. Since fixed investment is a
lagging growth indicator, improvement in consumer demand
Real w ages (LHS) appears critical for sustaining GDP growth. The recent surge in
Fix ed inv estment (LHS) crude oil prices should make that happen.
Retail trade (RHS)
Source: Rosstat
Inflationary pressures intensified considerably Inflation to keep accelerating
 HSBC Russia Composite PMI Price indexes continue to rise

Index HSBC Composite PMI Index and have recently reached levels exceeding their historic
75 10 averages. Input and output price growth has accelerated in both
70 8 manufacturing and services, indicating a broad-based rise in
65 6 inflationary pressures.
60 4  Energy and food prices push inflationary pressures up. Supply
55 2 constraints in transportation and other commercial
50 0 infrastructure add to the pressures.
45 -2  While companies had been trying to absorb cost pressures
05 06 07 08 09 10 internally, they now report increasing ability to pass rising costs
onto their consumers. All in all, it points to a high inflation
Input minus Output Prices Index (RHS) environment in the near term.
Input Prices Index (LHS)
Output Prices Index (LHS)
Source: HSBC/Markit
Inflation prompts policy tightening In a hawkish mood, yet behind the curve
 Headline CPI growth exceeded the CBR’s refinance rate in
% % Yr November. The authorities started expressing their concern
16 16
about inflation and shifted to a more hawkish language. The
14 14 CBR is no longer ruling out a rate hike.
12 12
 However, we think the immediate CBR plan is to raise deposit
10 10 rates and narrow the spread between repo and deposit rates to
8 8 reduce interest rate volatility.
6 6  At the same time, the CBR remains optimistic about inflation in
4 4 2011, hoping it will moderate significantly. With that view in
mind, the authorities would probably stay behind the curve, as
05 05 06 06 07 07 08 08 09 09 10 10 they did in 2007, hiking other key rates only when inflation
accelerates a few months from now and raising policy rates
Refinance rate (LHS) Headline CPI (RHS)
only moderately.
Core CPI (RHS)
Source: CBR, Rosstat
69
Macro
Q1 2011
Turkey
Fast but unbalanced growth USD42.4bn (or 5.7% of GDP) at year-end, up Dr. Murat Ulgen
from USD14.3bn (2.3% of GDP) in 2009. Economist
Turkey’s impressive recovery in 2010 occurred HSBC Turkey
Financing a large current account deficit this past +90 212 376 4619
against a unique background defined by three muratulgen@hsbc.com.tr
year was easy: ample liquidity and emerging
factors. First, the country’s risk perception has
market outperformance attracted more than
shown remarkable improvement since the 2008
enough short-term capital inflows into deficit
crisis. The political backdrop is stable, with a
countries. But if Turkey continues to grow
strong, single-party government in office. Opinion
asymmetrically (with domestic demand outpacing
polls also suggest that the ruling AKP is highly
foreign demand), the current account deficit will
likely to win next year’s elections in June,
continue to widen, leaving the country exposed to
removing a lot of future uncertainty. Second, the
the whims of short-term capital flows. These are
well-capitalised banking sector is a very strong
not the ingredients of sustainable growth.
engine for growth. And finally, both financial
markets and consumers have benefited from the Inflationary pressures are also brewing. While
combination of low real rates and a resilient to there may be some moderation due to correcting
strong currency. As yield-seeking capital flows food prices and favourable base effects in the
poured into emerging markets, the TRY rallied in short term, a rapidly closing output gap and rising
real terms. This in turn fuelled domestic global commodity prices are giving off early
consumption and import growth, but took a toll on warning signs. Against such a backdrop, the
export performance. monetary-fiscal mix appears loose, with risks of
overheating later next year.
The widening trade and current account deficits
are possibly the most important medium-term
risks. The external deficit widened at an
unprecedented rate in 2010: we expect it to reach
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 5.5 -0.3 -2.3 6.5 3.5 3.7
Fixed investment 3.1 -6.2 -19.2 24.7 6.6 2.9
Domestic demand 5.0 -1.5 -5.2 9.5 4.3 3.5
Exports 7.3 2.7 -5.4 3.4 8.9 8.0
Imports 10.7 -4.1 -14.4 18.7 12.1 11.9
GDP 4.7 0.7 -4.7 7.7 4.2 4.3
Consumer Prices 8.8 10.4 6.3 8.7 7.1 6.4
Producer Prices 6.4 12.7 1.4 8.4 6.5 6.0
Budget deficit (% GDP) -1.6 -1.8 -5.5 -3.8 -4.4 -3.6
TRY/USD** 1.17 1.54 1.50 1.46 1.45 1.35
3-month money (%)*** 16.0 15.5 7.5 6.7 6.8 8.0
Source: HSBC estimates. Note: * = year average; ** = starting in January 2005, when the Turkish currency (until then coded TRL) shed 6 zeros off its exchange rate. ***=average
70
Macro
Q1 2011
Imports surge with strong domestic demand… …but export growth has been lacklustre
 The CBRT has stated that it is wary of destabilising capital inflows
% Yr, 6mMA % Yr, 6mMA and rapid currency appreciation in the event of a rate hike.
50 50  While this is a legitimate concern, loose monetary policy also
40 40 has domestic consequences. Turkey’s strong banking sector
30 30
20 20 and historically low real interest rates continue to boost
10 10 domestic demand. This is evident in loan volumes, durable
0 0 goods sales, and double-digit import growth since the beginning
-10 -10 of this year.
-20 -20
-30 -30  Export growth, on the other hand, remains subdued. Despite
-40 -40 increased trade with its eastern neighbours in the last few
-50 -50 years, Europe remains Turkey’s most important trade partner,
00 01 02 03 04 05 06 07 08 09 10 buying c45% of all goods.
Ex ports Imports
Source: Turkstat and HSBC
Current account deficit is widening fast… …and is financed by short-term flows

 The CBRT forecasts the current account deficit to reach 5.7%
USDbn, 12mMA USDbn, 12mMA of GDP in 2010, up from 2.3% in 2009.
10 10  Total FDI flows in 2010 are expected to be around USD5.0bn,
0 0 financing less than one-fifth of the annual deficit.
-10 -10  The current account gap is financed by short-term flows such
as portfolio inflows, non-resident deposits and drawdown in
-20 -20 local banks’ offshore reserves. These funds are unpredictable
and susceptible to turns in global sentiment, with the potential
-30 -30 to cause volatility in financial markets as well as in economic
-40 -40 activity.
01 02 03 04 05 06 07 08 09 10
Current account balance
Source: CBRT
Turkey’s policy mix is loose… … while the rate cycle is beginning to turn in EMEA
 In October 2010, the CBRT outlined its base case scenario in
% % GDP its inflation report, and postponed tightening until Q4 2011.
12 4.5 Then, in early December, the bank stated that further rate cuts
may also be considered as an alternative (without updating its
8 3.0 base-case scenario).
4 1.5  The fiscal performance has been commendable so far this year,
0 0.0 with much stronger-than-expected growth boosting tax
revenues. It remains to be seen if this continues next year
-4 -1.5 ahead of the June 2011 general election.
-8 -3.0  The rate cycle in the EMEA region is beginning to turn towards
Jan-07 Jan-08 Jan-09 Jan-10 (monetary) tightening, while the monetary-fiscal mix still remains
loose in Turkey (with monetary policy the looser of the two).
Primary balance (RHS)
Real rate (ex -post) (LHS)
Source: Turkstat, Treasury
71
Macro
Q1 2011
Egypt
Political shadow lengthening has fallen to four-year lows in recent weeks and Simon Williams
has shown uncharacteristic volatility – a trend we Economist
Egypt’s economic outlook remains positive and HSBC Bank Middle East
suspect reflects the closer relationship with global Limited, Dubai
we continue to expect acceleration in the pace of +971 4423 6925
risk appetite that has come with the growing
expansion over the forecast period. Although simon.williams@hsbc.com
volume of foreign portfolio flows into the
growth in fiscal 2010 was marked down from
economy. However, record high CBE FX reserves
initial estimates, the final figure stands at over
and a resilient current account position suggest
5%, comfortably ahead of the regional average.
that currency market instability is unlikely to
Encouragingly, the downward adjustment was become threatening.
also driven by cuts to the estimated value of net
The political environment is a more serious
exports rather than domestic demand, which we
concern, given unresolved questions over the
see as the mainstay of Egypt’s economic story.
successor to long-serving president Hosni
Early data on tourism and trade flows also suggest
Mubarak and uncertainties over whether he will
that net exports should have gained some speed in
run for re-election in 2011. Although we expect
the first half of 2010/11. Moreover, employment
the transition to be managed successfully, the
has maintained momentum into the new fiscal
issue will continue to impede investment and slow
year, suggesting ongoing support for private
reform until it has been settled. Heightened
consumption.
market concerns also inevitably bring with them
Our concerns over inflation have risen over the the risk that the transition could trigger capital
past quarter as successive data releases have outflows should it occur before a successor has
offered evidence of double-digit headline inflation been appointed.
feeding through into core readings. We expect the
CBE to respond by beginning to reverse policy
rate cuts introduced during 2009. The currency
% Year
2007 2008 2009 2010f 2011f 2012f
Exports 19.3 33.3 -14.3 -5.1 9.1 12.7
Imports 25.8 37.8 -4.6 -2.7 12.8 15.0
GDP 7.1 7.2 4.7 5.1 6.0 6.1
Consumer prices 11.0 11.6 15.5 11.7 11.9 11.1
Current account balance (USDbn) 2.3 0.9 -4.4 -4.3 -5.1 -5.1
Current account (% GDP) 1.7 0.5 -2.4 -2.0 -2.0 -1.8
EGP/USD 5.52 5.52 5.48 5.70 5.80 5.80
3-month money (%) 9.6 10.2 9.5 8.8 9.3 9.5
Note: Fiscal year ending June 30th
Source: CBE, HSBC
72
Macro
Q1 2011
Saudi Arabia
Just one piece missing budget to shift back into deficit. The shortfalls will Simon Williams
be modest, however, and funding challenges are Economist
Our confidence in the near- and medium-term HSBC Bank Middle East
unlikely to be large enough to influence spending Limited, Dubai
outlook for Saudi Arabia has been reinforced by +971 4423 6925
decisions, provided oil does not fall below USD70/b
newly available economic data series, all of which simon.williams@hsbc.com
for a sustained period.
point to positive rates of growth. The first intra-year
GDP ever made available in the kingdom suggest Some two years after the squeeze began, however,
the non-oil economy continued to gain speed in the credit growth remains weak and continues to
first half of the year. HSBC PMI surveys for Saudi contract in real terms. Far-reaching balance sheet
Arabia are also encouraging, showing strong gains adjustment across the kingdom’s banks suggests the
in both current output and new orders throughout sector is now better prepared to resume lending to
Q3 2010 and into Q4 of the year. Employment the private sector than in the past and we look for
growth also appears to have remained strong. funding to improve in 2011. However, the credit
market has already been tighter for significantly
The public sector remains the dominant driver of
longer than we had expected, and we remain
growth. Revised data show that a 35% y-o-y
concerned that the sector could continue to
increase in capital spending pushed overall
disappoint. Continued weak private-sector bank
expenditure upward even more rapidly than initially
funding could be offset by the acceleration of plans
reported last year. The expansionary fiscal stance
to develop the local bond market and by increased
has persisted throughout this year, and the
participation in global capital markets. However,
government’s ambitious, multi-year, infrastructure-
this would take time to take effect, and for now
focused development strategy suggests expenditure
weak domestic credit extension would hold back the
will remain robust throughout the forecast period.
pace and breadth of overall economic growth.
Based on an assumed average oil price of USD80-
USD85/b over the coming two years, we expect the
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending* 18.7 18.0 8.1 9.0 11.0 12.0

Government consumption* 3.5 7.1 1.0 7.8 10.0 13.0
Fixed investment* 26.7 17.8 -0.1 11.0 14.0 17.0
Stocks* -18.0 243.4 -56.7 -5.0 -5.0 -5.0
Exports* 10.5 34.4 -38.7 19.5 8.2 9.8
Imports* 29.3 23.5 -14.1 16.0 15.0 15.0
GDP 3.4 4.4 0.1 3.6 4.4 4.8
Consumer prices 4.1 9.9 5.1 5.4 6.5 7.0
Current account balance (USDbn) 93.3 132.3 22.8 38.1 30.8 22.7
Current account balance (% GDP) 24.2 27.1 6.1 9.1 6.8 4.6
Budget balance (% GDP) 12.2 31.8 -6.1 0.3 -2.2 -3.8
SAR/USD 3.75 3.75 3.75 3.75 3.75 3.75
3-month money (%)** 4.0 3.0 0.8 0.7 0.8 1.0
Note: *Nominal growth, **End year
Source: HSBC
73
Macro
Q1 2011
UAE
One year on Dubai, but the loss of momentum has been Simon Williams
palpable in Abu Dhabi and the UAE’s smaller Economist
Twelve months after a call for a payment HSBC Bank Middle East
emirates. Limited, Dubai
standstill from one of its large government-owned +971 4423 6925
conglomerates brought Dubai’s debt problems to Nevertheless, we see clear signs of life. Core simon.williams@hsbc.com
a head, economic activity in the UAE remains elements of the Abu Dhabi’s capital-intensive
subdued. We estimate that growth is likely to have infrastructure and industrial projects continue to
run at least two percentage points below the have strong government support as well as access
regional average this year and expect growth to to funding and will offer support to growth.
remain five percentage points short of boom-time Dubai’s large export-orientated service sector is
levels over the forecast period. Only by end-2011 being boosted by regional and Asian demand.
is economic activity likely to have returned to its Despite the pain caused by falling real estate
2008 level, ensuring that spare capacity keeps prices, lower costs are enhancing competitiveness
prices weak and margins under pressure. in what remains one of the world’s few liberal,
tax-free economies.
Notwithstanding recent bond issues by
government entities, access to international capital The distress of the past year has forced Dubai in
markets remains more difficult and more costly particular, but also the UAE in general, to address
than in the past. Domestic credit growth is still decisively excesses and vulnerabilities that had
weak as local banks continue to digest the full built up in earlier years. We see clear evidence of
impact of the downturn in growth. Despite high greater control over spending and borrowing by
oil prices, public spending has also been muted as government entities, while ongoing debt
governments have come to terms with the costs of restructuring operations have begun to spread
supporting government firms and key financial repayment obligations, laying the grounds for
entities. The brunt of the downturn has fallen on more sustainable growth in the years ahead.
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending* 12.0 21.4 2.0 3.5 5.2 8.0

Government consumption* 31.0 14.0 7.0 4.0 5.5 7.3
Fixed investment* 105.2 20.8 -15.0 3.5 6.2 8.8
Stocks* 10.8 105.5 9.0 1.5 2.7 3.8
Exports* 22.7 33.9 -19.7 12.7 6.1 8.7
Imports* 50.0 33.4 -14.9 6.0 9.0 10.0
GDP 5.2 7.0 -2.9 1.7 3.3 4.1
Consumer prices 9.0 12.0 1.3 0.7 2.1 3.3
Current account balance (USDbn) 19.6 22.3 7.8 25.2 16.4 11.5
Current account balance (% GDP) 9.5 8.8 3.4 10.0 6.3 4.1
Budget balance (% GDP) 21.6 21.0 -12.4 1.8 2.2 3.9
AED/USD 3.67 3.67 3.67 3.67 3.67 3.67
3-month money (%)** 4.6 4.2 1.9 2.2 1.7 1.9
Note: *Nominal growth. **End year
Source: HSBC
74
Macro
Q1 2011
South Africa
Where’s the bottom for repo? key upside risks to inflation, on the other hand, Dr. Murat Ulgen
stem from rising global commodity prices, large Economist
South Africa’s economic recovery is still impeded HSBC Bank
administered price increases (especially in +90 212 376 4619
by large household debt (nearly 80% of disposable muratulgen@hsbc.com.tr
electricity) and considerable real wage increase in
income) and a chronic unemployment rate (c25%).
the public sector and parastatal companies.
Private-sector investments have also been subdued
Separately, South Africa’s prudent fiscal policy
due to global uncertainties and a poor household
and outperformance of the fiscal targets for the
spending outlook, while an appreciating South
past two years argue for even more room for
African rand in real terms and a clouded outlook
monetary policy to stimulate the economy.
for its key trading partners, Europe and the US,
have also curbed foreign demand. Activity remains Meanwhile, many emerging-market central banks,
sluggish and consumer inflation cruises around the even in the laggard emerging Europe, have either
lower end of the South African Reserve Bank’s started to hike or turned more hawkish recently
(SARB) 3.0%-6.0% target band. due to incipient inflationary pressures. This would
pose further challenges to the SARB if it wants to
This backdrop explains why the SARB is one of
move in the other direction.
the few emerging-market central banks that is still
in an easing mode. The 50bps rate cut in November Overall, we expect South Africa’s policy rate to be
brought the repo rate to a nearly four-decade low of stable next year. A sluggish recovery and a
5.5%. The SARB says limited room is left for stronger rand could necessitate continuation of
further cuts. But headline inflation appears to be current accommodative monetary policy, keeping
bottoming out at low levels, and buoyant global the risks to the downside.
demand for precious metals could lead to further
upward pressure on the rand. This could lead
SARB to consider further monetary loosening. The
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 5.5 2.4 -3.5 1.7 2.9 2.0
Fixed investment 14.2 11.7 4.0 6.2 8.1 7.0
Exports 7.5 1.7 -16.5 10.0 11.0 12.5
Imports 10.0 2.2 -18.5 13.5 16.5 16.0
GDP 5.5 3.7 -1.8 2.6 3.5 3.1
Consumer prices 7.1 11.0 7.2 4.3 3.9 5.5
ZAR/USD 6.83 9.25 7.36 7.15 7.20 7.20
3-month money (%)* 11.3 11.4 7.1 5.7 5.8 6.5
10-year bond yield (%)* 8.4 7.3 9.0 7.8 8.1 9.2
Note: *Index 1995=100 (end year)
Source: HSBC
75
Macro
Q1 2011
Japan
Upgrading growth forecasts pick-ups of PMIs in many countries and by the new Seiji Shiraishi
fiscal packages in the U.S..So we now expect Economist
We have raised our real GDP growth forecast for HSBC Securities (Japan)
acceleration in exports from Q2 2011 onwards. Limited
2010 to 4.3% from 3.0% and for 2011 to 1.1% from +81 3 5203 3802
0.7%. This upward revision is partly a statistical Still, the pace of increase in capex is expected to seiji.shiraishi@hsbc.com.jp
issue. Latest data show that in 2009 Japanese GDP remain moderate through the forecasting period, and
fell by more (revised to -6.3% from -5.2%) and unemployment looks set to stay around 5% in 2010
therefore returning to a more ‘normal’ level of and to decline only slightly in 2011. Thus, private
activity has seen a bigger bounce. It also reflects a domestic demand will not drive growth, which will,
better outlook for Japan’s trading partners and a instead, be supported by exports.
more stimulatory fiscal budget for FY2010.
The continued negative output gap will be a
However, we still expect a sizable negative q-o-q persistent source of downward pressure on prices.
growth for Q4 2010 and sluggish growth in Q1 And the base year change in CPI from 2005 to 2010,
2011. This is payback after government subsidies on scheduled in summer 2011, should depress CPI by a
ecological cars and home appliances, which fuelled a further 0.5ppts. We expect core CPI will fall by
significant surge in demand in the first three quarters 1.1% in 2010 and by 0.7% in 2011, and that the
of the year. But external conditions are expected to Bank of Japan will not hike base rates through 2012.
turn positive for Japan, as indicated by the recent
% Year
Consumer spending 2.2 -0.2 1.0 2.7 0.9 0.3 -0.2 -1.2 0.3
Investment 0.6 1.6 1.9 3.4 2.5 2.5 2.1 1.7 1.9
Private non-residential 2.0 2.3 3.9 6.6 4.7 3.8 1.6 1.3 2.5
Private residential -7.0 3.6 2.5 -1.3 3.3 2.5 4.3 4.1 3.6
Public -1.5 -1.9 -6.2 -4.6 -7.5 -4.1 -0.2 -1.7 -1.7
Stockbuilding (% GDP) -0.3 0.0 0.1 -0.3 -0.1 -0.0 0.0 0.0 0.1
Domestic demand 2.6 0.8 1.3 3.8 2.3 1.5 1.2 0.3 1.0
Exports 24.9 5.8 8.6 21.5 16.0 8.2 4.5 4.0 6.6
Imports 10.2 4.8 5.7 11.7 11.4 8.4 4.9 2.7 3.4
GDP 4.3 1.1 2.0 5.3 2.9 1.4 1.0 0.3 1.6
GDP (% quarter) - - - 1.1 -0.6 0.2 0.4 0.4 0.6
Industrial production (% year) 16.2 1.8 7.6 13.4 5.9 4.1 0.7 -1.7 4.0
Unemployment rate 5.1 5.1 4.8 5.1 5.2 5.2 5.2 5.1 5.0
Wholesale prices -0.2 1.1 1.5 -0.1 0.9 0.8 0.9 1.1 1.7
CPI -1.1 -0.7 -0.5 -1.1 -0.8 -0.7 -0.7 -0.7 -0.6
M2+CDs 2.8 2.5 2.5 2.8 2.7 2.6 2.5 2.5 2.5
Current account (JPYtrn) 16.4 15.1 17.6 3.7 4.1 3.3 3.1 3.9 4.7
JPY/USD 85.0 95.0 95.0 83.5 85.0 90.0 95.0 95.0 95.0
3-month money (%) 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Benchmark bond (%) 1.2 1.0 1.2 0.9 1.2 1.1 0.9 0.9 1.0
Source: HSBC
76
Macro
Q1 2011
Government subsidies boosted durable goods …but most likely at the expense of growth in 2011
spending in 2010…
 New car sales y-o-y plunged more than 30.7% in November as
JPYtrn JPYtrn government subsidies on ecological autos expired.
55 55
 Government incentives for the purchase of ecological consumer
50 50 appliances were halved in December and will be phased out next
45 45 March. Sales of these goods will weaken substantially in H1
40 40 2011.
35 35
 We expect real private consumption to contract 1.2% q-o-q in Q4
30 30 10, be flat in Q1 11, and to contract 0.2% in Q2 11.
25 25
20 20
00/1Q
00/4Q
01/3Q
02/2Q
03/1Q
03/4Q
04/3Q
05/2Q
06/1Q
06/4Q
07/3Q
08/2Q
09/1Q
09/4Q
10/3Q
00-07 trend Real durable goods consumption
Source: Cabinet Office and HSBC
Capex recovery slowest ever … … due to uncertainties and low growth expectations
 From the final quarter of 2009 through the third quarter of 2010,
cy clical trough=100 cy clical trough=100 private fixed investment grew q-o-q. However, the pace of this
150 150 growth has been modest, from an historical perspective.
140 140  Corporate capital investment was smaller than depreciation cost
130 130 for seven consecutive quarters through the third quarter of 2010.
120 120  We believe this cautious approach to investment reflects great
110 110 uncertainty about the future and a decline in the expected growth
100 100 of domestic demand. We expect the ratio of corporate capital
90 90 expenditure to cash flow to continue to decline through 2011.
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
quarters
93/4Q 99/1Q 02/1Q
09/1Q 86/4Q
Source: Cabinet Office
CPI base year change to add further deflationary …prolonging zero rate policy
pressure…
 CPI base year will be changed from 2005 to 2010, at around next
% Yr ppt summer. This should push down CPI y-o-y deflation rates by 0.4
3 0.6 to 0.5pts, given the recent differentials between CPI y-o-y and
2 0.4 Laspeyres’ Chain Index y-o-y
1 0.2  We expect core CPI to decline by 0.7% y-o-y in 2011 and by
0.2% in 2012, pricing in the base year effects
0 0
 Next rate hike will take place in 2013 or later, as it will be difficult
-1 -0.2
for the BoJ to expect nearly 1% inflation for FY2013 in 2012.
-2 Differential (RHS) -0.4
-3 -0.6
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Core CPI Laspey res' Chain Index
Source: MIC
77
Macro
Q1 2011
Australia
Still upbeat Over the next couple of years, we expect that the Paul Bloxham
business investment share of GDP will rise Economist
Despite some softer household spending indicators HSBC Bank Australia Limited
substantially as a result of a boost to the resources +612 92 552 635
recently, we remain bullish on the Australian paulbloxham@hsbc.com.au
sector and, to allow this to happen, household
economy. This is because the main game for
spending needs to grow at only a modest pace.
Australia is not what is happening in household
activity, but the effect that the large rise in The elevated level of the exchange rate will help to
commodity prices is having on investment in the facilitate this structural transition as it slows some
resources sector. This game is largely being played parts of the economy, but interest rates will also need
in the outback, where massive projects to extract and to rise to keep demand and inflation in check. We
export high-priced commodities to an insatiable forecast inflation to be a little above the Reserve
emerging Asia are under construction. Bank’s target band by late 2011, and interest rates to
rise by 100bps over the next 15 months.
Recent data confirm that the next phase of the
mining boom has already begun and – as a result of
the rising terms of trade – nominal income growth in
the economy has also been strong, at around 10%
over the past year. Employment has been growing
strongly, and at 5.25%, unemployment is almost
back at its natural rate.
% Year
Investment 5.6 5.3 7.3 7.1 2.3 3.1 5.3 5.8 7.0
Stockbuilding (% GDP) 0.2 -0.2 0.0 -0.2 0.0 0.0 0.0 0.0 0.0
Domestic demand 3.9 3.4 4.1 4.3 2.6 2.6 3.2 3.7 4.0
Exports 5.4 7.6 8.0 4.2 5.2 8.3 4.2 9.4 8.6
Imports 12.8 7.4 8.2 12.9 7.5 7.9 5.7 8.3 7.7
GDP 2.7 3.6 4.1 2.7 2.9 3.2 3.0 4.0 4.2
GDP (% quarter) - - - 0.2 0.9 0.9 1.0 1.1 1.1
CPI 2.9 3.1 3.1 2.7 2.9 2.8 3.0 3.1 3.2
Unemployment 5.2 4.6 4.6 5.2 5.0 4.8 4.6 4.6 4.5
USD/AUD 0.97 0.85 0.85 0.97 0.97 0.92 0.85 0.85 0.85
3-month money (%) 4.9 6.0 6.0 4.9 4.9 5.4 5.6 5.9 6.0
10-year bond (%) 5.6 5.7 6.0 5.0 5.6 5.3 5.5 5.6 5.7
Source: HSBC
78
Macro
Q1 2011
New Zealand
Slow recovery Headline inflation will rise substantially in Q4 of Paul Bloxham
this year as a result of the recent increase in the Economist
Demand has remained weak in New Zealand, but HSBC Bank Australia Limited
GST. However, that is expected to have little +612 92 552 635
the economy is still expected to pick up solidly paulbloxham@hsbc.com.au
impact on inflation expectations due to weak
next year.
domestic demand, with the high exchange rate
Weak growth partly reflects the effect of the also containing inflationary pressures.
earthquake, but demand was already weaker than
We continue to expect the RBNZ to resume its
expected. Households and businesses remain
tightening cycle in Q2 2011 and to raise rates at a
cautious in their spending, in part reflecting the
modest pace over the rest of the forecast horizon
disappointingly modest improvement in the labour
as growth recovers.
market. In addition, the strong New Zealand
dollar is constraining growth in the economy and
weakening business sentiment.
Nonetheless, the outlook remains positive. Rising

dairy and meat prices have driven up the terms of
trade, and that is expected to feed through into
incomes. Rebuilding after the earthquake is also
expected to be substantial and is expected to boost
investment significantly in 2011.
% Year
2010f 2011f 2012f Q3 10 Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f
Investment 0.8 7.6 7.7 1.7 2.5 4.8 2.8 10.1 12.8
Domestic demand 2.2 2.6 4.0 2.6 -0.2 0.4 1.8 3.7 4.6
Exports 4.8 6.6 6.7 4.7 6.2 6.6 6.8 6.0 6.8
Imports 7.2 6.3 8.2 9.0 4.3 4.6 5.8 6.9 7.7
GDP 1.6 2.8 3.5 1.8 0.9 1.2 2.2 3.5 4.4
GDP (% quarter) - - - 0.1 0.1 0.8 1.2 1.4 1.0
Industrial production 0.8 0.6 3.0 2.0 -2.7 -3.2 1.4 2.0 2.3
Consumer prices 2.3 4.0 2.3 1.5 4.0 4.2 5.1 4.5 2.4
Unemployment 6.5 6.4 6.0 6.4 6.6 6.5 6.4 6.4 6.3
NZD/USD 0.8 0.7 0.7 0.7 0.8 0.7 0.7 0.7 0.7
3-month money (%) 3.5 4.1 4.7 3.3 3.5 3.5 3.6 3.9 4.1
10-year bond (%) 6.1 6.2 6.2 5.3 6.1 6.1 6.1 6.1 6.2
Source: HSBC
79
Macro
Q1 2011
China
Inflation's the word external growth momentum. All this has led us to Qu Hongbin
raise our 2011 CPI forecast to 3.9% y-o-y, from the Economist
Beijing has for a while been trying to strike a The Hongkong and Shanghai
previous 3.4% y-o-y. Banking Corporation Limited
balance between inflation and growth. But times (HK)
We expect quantitative tightening to remain the +852 2822 2025
have changed with both inflation and growth hongbinqu@hsbc.com.hk
figures surprising to the upside. Beijing now can primary and most effective toolkit for checking
fight inflation single-mindedly. Indeed, both CPI inflation and countering inflows attributed to QE2.
and PPI accelerated in November, beating Beijing is likely to slow credit growth to below 16%
consensus forecasts by a wide margin. At 5.1% and money supply growth to around 16% for next
y-o-y in November, CPI hit the highest level in year (from the current over 19%). Moreover, there's
28 months. The producer price index (PPI) also still room for multiple reserve ratio hikes in the
rebounded further to an above-consensus 6.1% coming quarters, even after 2010's sixth reserve ratio
y-o-y in November, printing the highest reading in hike took the ratio to an all-time high.
five months.
We also expect Beijing to raise interest rates 75bp in
The breakdown suggests acceleration in producer the next six months to anchor inflation expectations.
goods prices and a notable pick-up in consumer But exchange rate appreciation is unlikely to be used
goods prices which is consistent with the rise in the as a main policy tool to check inflation, not least
input prices components of the HSBC China because China’s demand has already made it a price
manufacturing PMI readings. These in turn reflect the setter in global commodities market.
recent rally in international commodities prices that
can partly be attributed to Fed’s QE2. Meanwhile,
industrial production, exports and fixed-asset
investment have posted upside surprises, too,
underlining the strength of both domestic and
% Year
2007 2008 2009 2010f 2011f 2012f

Fixed asset investment 25.8 26.1 30.5 25.0 21.5 19.0
Exports 23.8 11.2 -17.9 29.0 16.0 10.0
Imports 17.8 8.5 -16.3 34.0 15.0 11.0
GDP 13.0 9.6 9.1 10.0 8.9 8.6
Industrial production* 16.0 12.9 12.9 15.5 13.2 12.5
CPI 4.8 5.9 -0.7 3.3 3.9 2.9
CNY/USD 7.31 6.85 6.83 6.67 6.54 6.54
1-year time deposit (%) 6.80 2.25 2.25 2.75 3.25 3.25
1-year lending (%) 7.47 5.31 5.31 5.81 6.31 6.31
Note: *Excluding small enterprises
Source: HSBC
80
Macro
Q1 2011
CPI is mainly driven by food prices… …and likely to stay high in H1 2011
 Inflationary pressure is on the rise and forecasters were caught
(% Yr, 3mma) (% Yr, 3mma) out again by another upside surprise in both producer and
25 25 consumer prices in recent months
20 20
 November CPI hit a 28-month high at 5.1% y-o-y, mainly driven
15 15 by the 11.7% y-o-y increase in food prices and the pick-up in non-
10 10 food prices
5 5  PPI rebounded further to 6.1% y-o-y in November from 5% y-o-y
0 0 in October, mainly driven by the rally in international commodities
-5 -5 prices against the Fed’s QE2
-10 -10  We expect CPI at around 3.9% for 2011 with peak around in Q1
98 99 00 01 02 03 04 05 06 07 08 09 10 11
CPI Non-food CPI Food CPI
Source: CEIC, HSBC
Industrial production picked up in November… …despite the energy-efficient measures
 Industrial production growth picked up to 13.3% y-o-y in

% Yr, 3mma Index November, higher than consensus forecast of 13% and the dip of
25 60 13.1% y-o-y in October
20 55  The growth of heavy industries rose to 13.6% y-o-y from 13.2% y-

o-y in October, while growth of light industries moderated to
15 50 12.7% y-o-y from 12.9% y-o-y in October.
10 45  This improvement is consistent with the upbeat manufacturing
PMIs and IP growth should be resilient despite the ongoing
5 40 energy-efficient measures toward the year-end
0 35
05 06 07 08 09 10
IP (LHS) HSBC China manufacturing PMI (RHS)
Source: CEIC, Markit, HSBC
Credit growth overshooting target… …and investment growth also picked up

 Despite two reserve ratio hikes in Nov, new bank lending
% Yr, 3mma % Yr, 3mma continued to surprise on the upside at RMB564bn, or almost
70 35 exhausting the RMB7.5trn annual loan quota
60 30
 As a result, loan growth picked up to 19.8% y-o-y from 19.3%
50 25 previously and broad money supply growth rebounded to 19.5%
40 20 from 19.3% y-o-y previously, above the 17% year-end target
30 15  Strong credit growth and speedy year-end fiscal spending also
20 10 lead to a rebound in investment growth in November
10 5  We expect Beijing to step up quantitative tightening by setting a
0 0 lower credit growth target next year to check inflation and counter
QE2
98 99 00 01 02 03 04 05 06 07 08 09 10
Monthly FAI (LHS) Loans (RHS)
Source: CEIC, HSBC
81
Macro
Q1 2011
India
Taming inflation to decelerate to a downwardly revised 8.1% y-o-y Leif Eskesen
Economist
in 2011/12. The Hongkong and Shanghai
India’s economy is still performing strongly, with Banking Corporation Limited
Q3 GDP growth of 8.9% y-o-y, matching the 2½- However, the rapid return to potential and the still (Singapore)
+6562390840
year high set in the previous quarter. Growth was robust growth expected in the quarters ahead will leifeskesen@hsbc.com.sg
led by private consumption (9.3% y-o-y), propped add to demand-led price pressures, and rising Prithviraj Srinivas
up by favourable labour market conditions, and inflation is a risk to the outlook. These pressures Associate, Bangalore
exports also turned in a strong if slightly lower are already reflected in the sticky WPI inflation
number (9.7% y-o-y). Investment growth held up readings, including the high level of core
well (11.1% y-o-y), but slowed after the steep rise inflation, and the uptrend in HSBC’s PMI sub-
in the previous quarter (19% y-o-y). indices for input prices. Moreover, a growing
number of companies are reporting that they are
High-frequency indicators point to solid growth
operating above optimal levels and are having
during the remainder of the fiscal year. Industrial
difficulty finding skilled labour. HSBC’s PMI
production grew a strong 10.8% y-o-y in October
sub-indices for the backlog of works also reflect
and picked up pace on a sequential basis.
tight capacity constraints.
Moreover, HSBC’s PMI indices for
manufacturing and services suggest strong growth While the gradual withdrawal of fiscal stimulus
in the quarters ahead. We have, therefore, raised will continue next year, monetary policy remains
our growth forecast to 9.1% y-o-y for 2010/11 highly accommodative and more rate hikes will,
from 8.8% y-o-y previously. consequently, be needed to tame inflation. The
Reserve Bank of India is not agnostic about the
The cyclical recovery is now entering a more
inflation risks and is expected to resume tightening
mature stage as the economy has reached its
early next year after its self-imposed pause. We
potential, leading to the imposition of a natural
expect another 125bp of rate hikes in 2011, starting
speed limit. Moreover, the continued withdrawal
with 25bp in the first quarter.
of macroeconomic stimuli means less impetus
from this front. Growth is, consequently, expected
% Year
2007 2008 2009 2010f 2011f 2012f
GDP* 9.5 7.3 6.8 9.2 8.0 8.2
GDP (Financial year)** 9.2 6.7 7.4 9.1 8.1 8.1
Consumer prices** 6.4 8.3 10.9 11.8 7.1 6.1
Current account (% GDP)** -0.7 -2.6 -2.2 -3.7 -3.7 -3.5
Broad money supply** 21.9 20.4 19.1 16.0 15.0 19.0
INR/USD 39.4 48.6 46.4 43.5 42.0 42.0
3-month money (%) 7.17 7.65 3.70 5.28 6.54 7.23
10-year bond yield (%) 7.81 5.30 7.74 8.10 8.10 8.10
Note: *Calendar year, **Based upon Indian fiscal year (April-March)
Source: HSBC
82
Macro
Q1 2011
GDP growth has surprised on the upside… …but is expected to slow somewhat in 2011/12
 Following the boost to growth from the good monsoons in
% Yr % Yr 2010/11, the agriculture sector is expected to grow at a more
25 25 normal pace in 2011/12.
20 20  Industrial production is also expected to see slower growth after
15 15 the rapid rebound in 2010/11, but solid domestic demand,
10 10 including the impact of capex to ease capacity constraints, will
5 5 limit the slowdown. Ongoing investments in infrastructure will
0 0 provide support as well.
-5 -5  Service sector growth will ease, too, but only marginally. Support
-10 -10 will come from private consumption, propped up by favourable
-15 -15 labour market conditions, and the currently still accommodative
monetary policy settings.
98 99 00 01 02 03 04 05 06 07 08 09 10
Agriculture Serv ices Industry
Source: CEIC, HSBC
Headline inflation has come down… …but remains sticky

 While the favourable monsoons in 2010 have brought headline
% Yr % Yr rates lower in recent months, the decline in food prices has not
20 20 been as rapid as expected as both structural and cyclical factors
15 15 have kept up prices, in particular, those of protein-rich foods.
10 10  Moreover, the economy has already reached its potential, and

demand-driven inflation pressures are therefore expected to
5 5 become more prevalent in the coming months as growth will
remain quite strong despite the slowdown.
0 0
-5 -5  The rising demand-led pressures are already evident in the
elevated level of core inflation. Moreover, rising input prices, as
05 06 07 08 09 10 11 evidenced by HSBC’s PMI sub-indices for both the manufacturing
WPI and services sector, also reflect the underlying inflation pressures.
WPI:Core
WPI: Food, Energy & Mineral ore
Source: CEIC, HSBC
Monetary policy has been tightened… …but remains highly accommodative

 The RBI has been one of the most active central banks this year
% % in terms of hiking rates and reserve requirements.
15 15
 However, monetary policy still remains highly accommodative,
10 10 with policy rates well below neutral levels and negative in real
terms.
5 5
 The loose monetary conditions are also adding to the emerging
0 0 demand-led price pressures.
-5 -5  Further policy rate hikes are therefore needed to tame inflation
-10 -10 and bring monetary policy into neutral gear.
01 02 03 04 05 06 07 08 09 10 11  RBI is expected to hike rates throughout 2011, not calling it quits

until the repo rate hits 7.5%.
Nominal policy rate Real policy rate
Source: CEIC, HSBC
83
Macro
Q1 2011
Hong Kong SAR

Success at a cost a smoother ride. But growth comes at the cost of Donna Kwok
inflation. Hong Kong policy makers face a problem Economist
Hong Kong’s economic recovery has been helped by The Hongkong and Shanghai
they can’t side-step, with consumer prices about to Banking Corporation Limited
loose monetary conditions in the US and by Chinese (HK)
catch up with last year’s asset-price jump, another +852 2996 6621
tourists, investors and businesses. So strong were
wave of inflationary foreign capital set to ride in, US donnahjkwok@hsbc.com.hk
these sources of support that GDP growth enjoyed a
dollar weakness, low interest rates and higher global
second wind, accelerating again in Q3. A third wind
food prices. Inflationary pressures created by QE1
is highly unlikely, however, given a shifting base
are only just starting to trickle through, and now
effect and slowing Chinese growth. We expect Hong
QE2 has already fired up asset prices again.
Kong’s growth to gravitate gradually back towards
trend from Q4 onwards. With other Asian central banks erecting barricades to
deflect the impending tide of foreign capital, Hong
Hong Kong remains vulnerable to a renewed
Kong’s economy – with its more laissez-faire
US/EU-led global slowdown or major global
policies – stands exposed. Hence the heavier hand
financial market disruptions. Global restocking
with the government’s latest measures to cool
jump-started a recovery in Hong Kong’s services-
property prices. This should prevent the economy
driven economy and domestic businesses and
from going into overdrive in 2011.
households proved hardy during a turbulent 2010,
allowing domestic demand to put down its own
roots, enough to sustain job creation and positive real
wage growth. With Chinese growth moderating but
still healthy and with US interest rates likely to
remain low for at least another year, 2011 should be
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.8 0.5 1.7 1.9 1.1 0.3
Domestic demand 7.9 1.6 0.9 6.0 4.9 2.8
Exports 8.3 2.5 -10.1 17.4 12.4 13.3
Imports 9.1 2.3 -8.8 17.3 12.6 12.9
GDP 6.4 2.2 -2.8 7.0 5.2 4.6
Industrial production -1.5 -6.7 -8.3 3.0 4.2 3.2
Unemployment (%) 3.4 4.1 5.1 4.0 4.2 4.1
Retail sales 12.8 10.6 0.6 18.4 11.0 7.5
Consumer prices 2.0 4.3 0.5 2.3 4.4 4.2
Goods & services balance (% GDP) 22.4 21.9 15.1 17.0 18.4 23.0
Budget balance (% GDP) 7.7 0.1 1.6 2.5 3.1 3.1
HKD/USD 7.80 7.75 7.80 7.80 7.80 7.80
3-month money (%) 4.33 2.36 0.45 0.34 0.35 0.65
Prime rate (%) 7.563 5.313 5.000 5.000 5.000 5.500
Source: HSBC, CEIC
84
Macro
Q1 2011
Indonesia
Still awaiting rate hikes the form of monetary tightening would be the best Wellian Wiranto
way to shepherd Indonesia into the big league. Economist
The resilience of Indonesia’s economy during the The Hongkong and Shanghai
Banking Corporation Limited,
financial crisis rested primarily on the private With growth comfortably robust, it is a matter of (Singapore)
consumption of its 240 million people. We see time before demand-pull price pressures start to set +65 6230 2879
wellianwiranto@hsbc.com.sg
little indication that key pillar of support will fail in more visibly. Moreover, as the sudden spike in
any time soon, partly because employment food prices in the middle and last months of 2010
prospects remain favourable. remind us, Indonesia’s inflation trajectory remains
beholden to unexpected factors such as natural
Another engine of growth comes from investment.
disasters and weather anomalies. Changes to
Foreign direct investment during the first nine
administrative prices would not help, either.
months of 2010 surpassed that in all of 2009, for
example. It’s true the country poses significant Recent policy pronouncements suggest BI would
challenges, ranging from poor infrastructure to red be comfortable raising the policy rate only if that
tape and rigid labour laws. But it appears that its move is coupled with macro-prudential measures
relatively cheap labour force, market size and that would help counter some of its concerns about
abundant natural resources are being appreciated attracting capital inflows. Lengthening the
more keenly. Still, to capture and sustain these minimum holding period for central bank bills to
inflows, the government will have to show both its three months has always looked plausible.
readiness and capacity to deliver on its promises.
On the monetary policy front, we expect Bank

Indonesia (BI) to start tightening its policy rate in
January 2011. It may have doggedly kept it
unchanged for the whole of 2010, but prudence in
% Year
2007 2008 2009 2010f 2011f 2012f
Government consumption 3.9 10.4 15.7 -1.5 8.0 7.0
Stockbuilding (% GDP) -0.0 0.1 -0.0 0.2 0.2 0.1
Domestic demand 4.1 7.6 5.3 5.4 6.6 6.6
Exports 14.0 18.3 -14.4 24.9 8.7 11.0
Imports 15.4 36.9 -27.7 34.1 11.0 13.0
GDP 6.3 6.0 4.5 6.0 6.4 6.3
Industrial production 4.7 3.7 2.1 4.8 6.0 5.0
Unemployment (%) 9.1 8.4 7.9 7.5 7.2 6.6
Consumer prices 6.4 10.2 4.8 5.1 6.3 5.2
IDR/USD 9393 11027 9425 8800 8700 8700
3-month money (%) 8.1 9.3 7.9 6.7 7.3 7.3
Source: HSBC
85
Macro
Q1 2011
Malaysia
Resting easy for now On the monetary policy front, Bank Negara Wellian Wiranto
Malaysia (BNM) stands out as one of the few Asian Economist
Malaysia has recovered well. Exports staged a quick The Hongkong and Shanghai
central banks not only to tighten, but to do so early Banking Corporation Limited
rebound, helped by inventory restocking and the (Singapore)
on during the up-cycle. Starting in March 2010, its
increasing importance of intra-Asian trade. While +65 6230 2879
normalization drive had nudged up the policy rate wellianwiranto@hsbc.com.sg
lingering global uncertainties make it unlikely we
from the record-low 2.0% to 2.75% by July. Namrata Mittal
will see further bumper growth rates, we do not Associate, Bangalore
expect any severe slump. Since then, the central bank has been able to pause
fairly comfortably. Inflation remains tame in the
The domestic-oriented parts of the economy have
country. The space BNM has created for itself with
performed rather well too. Private consumption
its normalization drive should allow the central bank
continued to support growth, adding a nice
to pause during the first half of 2011, before
complement to exports.
resuming its normalization drive. Essentially, having
Government spending, in general, has also played a moved early to nip any potential inflationary
smoothing role. Unexpectedly low spending in the pressures in the bud, BNM can focus more readily
third quarter of 2010 turned out to be the primary on risks to growth over the near term.
culprit behind the downside surprise, but we do not
expect the drag to persist for too long. In fact, the
budget for 2011 remains broadly expansionary.
On the other hand, while investment activities are

moving along quite nicely, they are not yet
expanding as much as the government would like to
see, although that is definitely not for lack of effort.
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) -0.2 -0.8 -2.7 1.7 1.2 1.1
Domestic demand 9.4 6.0 -2.7 11.8 5.2 4.9
Exports 5.5 8.4 -14.4 14.3 7.5 8.2
Imports 6.5 3.5 -14.4 18.7 7.5 8.3
GDP 6.5 4.7 -1.7 7.1 5.1 4.9
Unemployment (%) 3.2 3.3 3.7 3.3 3.2 3.1
Consumer prices 2.0 5.4 0.6 1.8 3.0 2.2
MYR/USD 3.3 3.5 3.4 3.0 2.9 2.9
3-month interbank rate (%) 3.6 3.6 2.3 2.5 2.9 3.3
Source: HSBC
86
Macro
Q1 2011
Philippines
A smooth ride currency, national debt is projected to decline to Sherman Chan
Economist
55.6% of GDP by the end of 2010 (vs 57.6% in The Hongkong and Shanghai
A broad-based recovery is under way in the Banking Corporation Limited
2009). The positive fiscal trend should continue
Philippines, with private demand resilient and (HK)
through 2011, with the fiscal deficit projected to + 852 2996 6975
exports rising at a record pace. Although the shermanwkchan@hsbc.com.hk
narrow further to 3% of GDP.
economy cooled in Q3 after a sharp cutback in Anuja Kar
public spending (and sizeable statistical Another bright spot: the country’s external position Associate, Bangalore
discrepancy), underlying fundamentals remain solid. remains on a firm footing, buoyed by rising reserves
Steady remittance flows, booming business process and steady growth in equity flows. That said, the
outsourcing and a gradual structural improvement in economy remains vulnerable to rising capital inflows
the domestic labour market are expected to sustain and ensuing appreciation pressures on the peso. The
private consumption, while public-private former may fuel asset inflation; the latter could hurt
partnership (PPP) projects and loose monetary export competitiveness. These are strong enough
conditions are likely to boost investment. reasons for the central bank to keep the policy rate
unchanged until Q2, especially with inflation
Meanwhile, the government is making progress on
expected to stay within the BSP’s target band.
its plan to consolidate public finances. Taking into
account the fiscal performance during the first three It should be a broadly smooth ride for the country in
quarters, we look for a smaller fiscal deficit than the near term, given the wide range of support
previously expected (3.7% of GDP in 2010 vis-à-vis factors. We have upwardly revised our 2010 GDP
4.3%), thanks to a significant drop in expenditure, growth forecast to 6.8% (vs 5.9% previously), while
the government’s efforts to strengthen tax 2011 growth is now projected at 5% (vs 4.7%
collections, and the cyclical gain in revenues. previously).
Moreover, with strong growth and an appreciating
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.8 0.7 -0.3 -0.8 -0.6 -0.6
Domestic demand 7.0 4.0 3.7 6.7 5.4 5.7
Exports 6.4 -2.5 -22.1 21.9 7.5 11.3
Imports 8.7 5.6 -24.0 18.8 11.9 12.7
GDP 7.1 3.7 1.1 6.8 5.0 5.8
Unemployment (%)* 7.4 7.7 7.5 7.6 7.1 7.3
Consumer prices 2.8 9.3 3.3 4.0 4.5 4.8
PHP/USD 41.3 47.5 46.5 41.5 37.5 37.5
3-month money (%) 3.7 6.1 3.9 5.0 5.3 5.5
Source: HSBC
87
Macro
Q1 2011
Singapore
Staying within the speed limit owing to the smaller contribution from net exports Leif Eskesen
and a drawdown in inventories as the global Economist
Since the business cycle trough in the first quarter of The Hongkong and Shanghai
restocking cycle is coming to an end. These factors Banking Corporation Limited
2009, the economy has bounced back, delivering (Singapore)
are expected to reverse in 2012 with the recovery in +65 6239 0840
impressive sequential growth rates averaging
global growth. This will also lift private domestic leifeskesen@hsbc.com.hk
slightly above 20% q-o-q (SAAR) until the second
demand and raise GDP growth to an estimated 5.8% Prithviraj Srinivas
quarter of 2010. However, the pace slowed Associate
in 2012. Bangalore
somewhat in third quarter, when GDP growth
slipped to 18.7% q-o-q SAAR, reflecting a base Despite the expected decline in the growth rate, the
effect, the lull in global trade during the summer, Monetary Authority of Singapore cannot take its foot
and scheduled production shutdowns in the off the brake. Inflation has been creeping up and is
pharmaceutical sector owing to changes in the expected to remain high for the next few months
product mix. since capacity should stay tight even as growth
slows to a more sustainable pace. The continued
Growth is expected to return to positive territory in
withdrawal of fiscal stimulus should help.
the quarters ahead, but the expansion will occur at a
more sustainable speed. In the fourth quarter of Capital inflows will continue to complicate policy
2010, we expect sequential growth to come in making, but Singapore does not belong to the camp
slightly above zero as exports recover from the of countries likely to slap on orthodox capital
summer lull and more pharmaceutical production controls. While the macro-prudential measures
facilities come back on stream. This is expected to have helped cool property markets, more measures
take full-year growth to 14.8% y-o-y for 2010. Next may be needed to ward off the threat of a bubble.
year, growth is projected to slow to 5.2% (raised
from our previous estimate of 4.7%) y-o-y, mostly
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) -2.7 2.2 -1.7 0.2 -0.2 0.4
Domestic demand 7.8 14.7 -4.9 8.6 4.4 6.7
Exports 13.5 15.1 -18.6 27.3 15.0 17.8
Imports 11.3 22.5 -20.0 25.9 14.6 19.1
GDP 8.5 1.8 -1.3 14.8 5.2 5.8
Unemployment (%) 1.8 2.7 2.3 2.0 2.1 2.1
Consumer prices 2.1 6.6 0.6 2.8 3.2 2.9
Budget balance (% GDP) 2.7 1.1 -1.4 0.5 0.7 1.2
SGD/USD 1.44 1.43 1.41 1.27 1.23 1.23
3-month money (%) 2.38 0.96 0.68 0.50 1.10 1.20
Prime rate (%) 2.38 0.96 0.68 0.50 1.10 1.20
Source: HSBC
88
Macro
Q1 2011
South Korea
Growth still strong, rates up consumer confidence hovering near a multi-year Song Yi Kim
high. Job growth remains robust enough to Economist
The Korean economy has proven resilient to The Hongkong and Shanghai
alleviate worries about job security. Meanwhile, Banking Corporation Limited
external shocks throughout 2010. The growth rate (HK)
record-high capacity utilisation rates will also +852 2822 4870
rebounded in early 2009 and has been maintained.
help sustain investment spending. songyikim@hsbc.com.hk
The exports-led recovery has spread to domestic
demand. All of this points to above-trend growth for The economy is running almost at full capacity. A
the next two years, and we forecast growth rates of further sharp increase in either internal or external
4.9% and 4.8% for 2011 and 2012, respectively, demand, could raise inflationary pressures.
after an estimated 6.1% expansion in 2010. Headline inflation is already forecast to be above
the central bank’s target band next summer.
The global recession has been relatively kind to
Therefore, the government’s policy goal for next
Korean exporters, who, boosted by a cheap
year is to contain inflationary pressures while
currency, managed to increase market share. With
maintaining growth. To control prices, the Bank
weak Western demand amid the financial crisis,
of Korea is poised for further tightening. For
emerging markets such as China, Southeast Asia
2011, we continue to pencil in a total of 100bp in
and Latin America have become more important
rate hikes and another 50bp hike over 2012, partly
to Korean shipments. The global market share of
reflecting the unease among officials about
leading companies has been increasing for autos
keeping interest rates at a record low.
and IT hardware. But the real surprise in Korea is
not the rebound in exports. Rather, domestic
demand, especially household consumption, has
remained buoyant with wages picking up and
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.8 1.3 -2.5 -0.7 0.1 0.2
Domestic demand 4.5 1.4 0.8 6.8 4.8 4.0
Exports 14.2 14.2 -13.7 27.9 10.3 10.6
Imports 15.4 21.8 -25.7 32.9 12.6 11.8
GDP 5.1 2.3 0.2 6.1 4.9 4.8
Unemployment (%) 3.1 3.3 4.0 3.3 3.2 3.1
Retail sales 4.4 0.0 12.8 7.0 8.0 9.0
Consumer prices 2.5 4.7 2.8 3.0 3.8 3.3
Current account (% GDP) 0.6 -0.6 5.1 3.6 2.7 2.3
KRW/USD 936 1263 1166 1130 1070 1070
3-month CD yield (%) 11.7 11.7 11.7 11.7 11.7 11.7
5-year treasury yield* 5.6 4.3 4.3 3.8 4.0 4.7
Source: HSBC
89
Macro
Q1 2011
Taiwan
Still a high beta economy That Taiwan’s labour market is recovering is Donna Kwok
certain. Since peaking last year, unemployment has Economist
Taiwan’s internal growth drivers have started The Hongkong and Shanghai
declined to a near two-year low. Real wage growth Banking Corporation Limited,
rotating into position, but the economy remains a (HK)
has risen since February, helping to keep local + 852 2996 6621
high beta economy that’s heavily exposed to the
commercial sales growth in the black. But much of donnahjkwok@hsbc.com.hk
global tech cycle.
the recovery to date has depended on global
Western manufacturers have recovered from their manufacturer restocking, which won’t last forever.
summer lull, but new problems in Europe are
The Taipei authorities know this, hence their
likely to linger, making 2011 uncertain for
preference for a weak currency; something which
Taiwan’s exporters. US growth should become
should buy their exporters and the economy more
more supportive, with shipments across the
time and cushioning. With CPI pressures still too
Pacific holding up well so far. With China still
low to merit policy attention, property prices now
growing at 8% to 9%, we expect Taiwan to
seemingly under control, and more foreign capital
expand by an above-consensus 4.7% in 2011.
headed towards Asia after QE2, we do not expect
A stronger-than-expected fourth quarter of exports monetary conditions to be tightened in a hurry.
growth bought more time for Taiwan’s labour
market and domestic demand recoveries to
consolidate. But to protect itself from any drop in
Western demand – especially if the close
relationship between Taiwan’s exports and lead
indicators such as the US ISM and Taiwan PMI
play out – domestic growth drivers need to step up.
% Year
2007 2008 2009 2010f 2011f 2012f
Consumer spending 2.1 -0.9 1.1 3.8 4.9 4.8
Stockbuilding (% GDP) 0.1 1.2 -1.3 0.8 -0.2 0.7
Domestic demand 1.4 -2.4 -3.6 9.5 3.4 5.2
Exports 10.1 3.4 -20.2 31.7 8.2 15.7
Imports 8.2 9.4 -26.9 38.8 10.2 18.4
GDP 6.0 0.7 -1.9 9.6 4.7 4.5
Unemployment (%) 3.9 5.1 5.8 4.9 4.5 4.3
Consumer prices 1.8 3.5 -0.9 1.0 2.3 2.0
TWD/USD 32.4 32.9 32.1 29.5 27.0 27.0
3-month CD (%) 2.2 1.0 0.5 0.7 1.0 2.0
Policy rate (%) 5.500 5.500 5.500 5.500 5.500 5.500
Source: HSBC, CEIC
90
Macro
Q1 2011
Thailand
The overhang remains In addition, the immunity the economy has shown so Wellian Wiranto
far to political unrest cannot be taken for granted. Economist
Thailand’s domestic political risk reappeared in The Hongkong and Shanghai
With the ruling party due to call an election in 2011 Banking Corporation Limited,
April and May, a reminder the issue will remain a (Singapore)
and no fundamental solution to the underlying
burden for some time to come. However, the +65 6230 2879
tensions, politics will remain a wildcard. wellianwiranto@hsbc.com.sg
economy proved immune to the April-May fallout.
Tushar Arora
In particular, private consumption did not suffer Against that backdrop, the Bank of Thailand may Associate, Bangalore
much. Consumer confidence rebounded, helped by increasingly lean towards the side of caution. It may
robust employment and subdued prices. now take a wait-and-see position to give itself time
to see how the situation unfolds both on the global
Foreign direct investors did not make a rush for the
and domestic fronts. We expect it will stay put until
exits. In fact, more recent news indicates investors
mid 2011, but may then need to resume tightening to
are more inclined to expand their facilities than to
keep inflation in check.
pull out. That is particularly so in the auto industry,
where Thailand can pride itself on such merits as
good infrastructure and reliable supply chain.
Overall, we are not too concerned about the

economic performance. Nonetheless, as a trade-
dependent economy, Thailand can still be affected
by the global gyrations. Judging by the description
of the central bank governor, the outlook is both
complex and dynamic, influenced by a multitude of
factors that can change quickly.
% Year
2007 2008 2009 2010f 2011f 2012f
Stockbuilding (% GDP) 0.0 1.6 -2.4 0.8 1.0 0.9
Domestic demand 2.4 4.3 -6.9 10.5 4.5 4.1
Exports 7.8 5.1 -12.5 13.9 5.6 6.3
Imports 4.4 8.9 -21.5 20.7 4.1 6.7
GDP 5.0 2.5 -2.3 7.9 5.3 4.3
Unemployment (%) 1.4 1.4 1.5 1.1 1.0 1.1
Consumer prices 2.2 5.5 -0.8 3.3 3.8 3.1
THB/USD 33.7 34.9 33.3 29.0 25.0 25.0
3-month interbank rate (%) 4.0 3.6 1.5 1.7 3.1 3.1
Source: HSBC
91
Macro
Q1 2011
Vietnam
Stay tuned for the Congress prices set to pick up and food price inflation Sherman Chan
already strong, CPI growth is forecast to stay Economist
Vietnam’s outlook remains positive, despite some The Hong Kong and Shanghai
high. That said, if the government proactively Banking Corporation Limited,
long-standing economic concerns. We expect (HK)
strives to maintain economic stability, a slight
GDP growth to accelerate from an estimated 6.7% + 852 2996 6975
easing of inflation towards the end of 2011 shermanwkchan@hsbc.com.hk
for 2010 to 7.5% for 2011. We believe the
cannot be ruled out, though the official target of
industrial and service sectors will remain the key
7% would still seem far from reach.
growth engines, while the agricultural sector will
continue to expand at a modest pace. Recent policy changes have sent mixed signals
to the market. The 100bp rate hike in early
Domestic demand will play the lead role in
November was a step in the right direction
2011, as export growth is set to moderate after a
towards controlling inflation and import
stellar performance in 2010. With import
demand, but the authorities are again holding
demand likely to stay firm, the trade gap is
back from further policy tightening. After the
unlikely to be closed in 2011. In particular, the
five-yearly National Congress, which will be
trade deficit with China may even widen in
held in January, we should have more visibility
coming months, thereby cooling demand for
on Vietnam’s policy outlook. But until then, the
Vietnam’s exports.
somewhat unclear fiscal and monetary policy
Solid domestic demand coupled with strong stance will continue to keep cautious investors
tourist arrivals should keep retail sales buoyant on the sidelines. Similarly, the domestic
at home, providing much-needed support to currency, which has been under depreciation
both manufacturing and service sectors. pressures, is unlikely to rebound until existing
However, inflationary pressures may also economic challenges are ironed out and
intensify through 2011. With global commodity confidence is restored.
% Year
2007 2008 2009f 2010f 2011f 2012f
Exports - Goods 22.7 29.9 -5.4 19.6 6.4 10.5
Imports - Goods 41.2 28.5 -15.1 21.8 5.6 8.0
GDP 8.5 6.2 5.3 6.7 7.5 7.8
Industrial production 11.6 11.8 7.2 12.9 14.5 15.3
Unemployment (%) 4.6 4.7 5.4 5.3 4.9 4.8
Consumer prices 8.3 23.0 7.1 9.0 9.9 9.4
VND/USD 16217 16900 18200 19800 20000 20000
Short-term lending rate (%)* - - - - - -
5-year interest rate (%)* 8.73 10.00 11.70 11.00 11.50 11.50
Note: *End year
Source: HSBC
92
Macro
Q1 2011
Notes
93
Macro
Q1 2011
Disclosure appendix
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accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related
to the specific recommendation(s) or view(s) contained therein.
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94
Macro
Q1 2011
Disclaimer
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[287096]
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abc
Global Economics Research Team

Global Emerging Europe, Middle East and Africa
Stephen King Alexander Morozov
Global Head of Economics +7 495 783 8855 alexander.morozov@hsbc.com
+44 20 7991 6700 stephen.king@hsbcib.com
Murat Ulgen
Karen Ward +90 212 376 4619 muratulgen@hsbc.com.tr
Simon Williams
+44 20 7991 3692 karen.ward@hsbcib.com
+971 4 507 7614 simon.williams@hsbc.com
Madhur Jha
Liz Martins
+44 20 7991 6755 madhur.jha@hsbcib.com
+971 4 423 6928 liz.martins@hsbc.com
Europe
Latin America
Janet Henry
Argentina
Chief European Economist
Javier Finkman
+44 20 7991 6711 janet.henry@hsbcib.com
Chief Economist, South America ex-Brazil
Astrid Schilo +54 11 4344 8144 javier.finkman@hsbc.com.ar
+44 20 7991 6708 astrid.schilo@hsbcib.com
Ramiro D Blazquez
Germany Senior Economist
Lothar Hessler +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar
+49 21 1910 2906 lothar.hessler@hsbctrinkaus.de
Jorge Morgenstern
France Economist
Mathilde Lemoine +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar
+33 1 4070 3266 mathilde.lemoine@hsbc.fr
Brazil
United Kingdom Andre Loes
Stuart Green Chief Economist
+44 20 7991 6718 stuart1.green@hsbcib.com +55 11 3371 8184 andre.a.loes@hsbc.com.br
Andrew Grantham Constantin Jancso

+44 20 7991 2170 andrew.grantham@hsbcib.com Senior Economist
+55 11 3371 8183 constantin.c.jancso@hsbc.com.br
North America
Marcos Fernandes
Kevin Logan +55 11 6847 9787 marcos.r.fernandes@hsbc.com.br
+1 212 525 3195 kevin.r.logan@us.hsbc.com
Mexico
Ryan Wang Sergio Martin
+1 212 525 3181 ryan.wang@us.hsbc.com Chief Economist
+52 55 5721 2164 sergio.martinm@hsbc.com.mx
Stewart Hall
+1 416 868 7523 stewart_hall@hsbc.ca Central America
Lorena Dominguez
Asia Pacific Economist
Qu Hongbin +52 55 5721 2172 lorena.dominguez@hsbc.com.mx
Managing Director, Co-head Asian Economics Research
and Chief Economist Greater China
+852 2822 2025 hongbinqu@hsbc.com.hk
Frederic Neumann
Managing Director, Co-head Asian Economics Research
+852 2822 4556 fredericneumann@hsbc.com.hk
Leif Eskesen
Chief Economist, India & ASEAN
+65 6239 0840 leifeskesen@hsbc.com.sg
Paul Bloxham
Chief Economist, Australia and New Zealand
+61 2925 52635 paulbloxham@hsbc.com.au
Song Yi Kim
+852 2822 4870 songyikim@hsbc.com.hk
Donna Kwok
+852 2996 6621 donnahjkwok@hsbc.com.hk
Sherman Chan
+852 2996 6975 shermanwkchan@hsbc.com.hk
Wellian Wiranto
+65 6230 2879 wellianwiranto@hsbc.com.sg
Seiji Shiraishi
+81 3 5203 3802 seiji.shiraishi@hsbc.co.jp
Yukiko Tani
+81 3 5203 3827 yukiko.tani@hsbc.co.jp
Sun Junwei
Associate
Sophia Ma
Associate
Global
ECONOMICS Macro
Global Economics
Q1 2011
Principal contributors

Stephen King
Chief Economist
HSBC Bank plc
+44 20 7991 6700
stephen.king@hsbcib.com
Stephen is the HSBC Group’s Global Head of Economics and Asset Allocation research. He joined the company
in 1988, having previously worked as an economic adviser at the UK Treasury. Stephen is a regular economics Upward revisions to growth...
commentator on television and radio and has written a weekly column for The Independent, one of the UK’s leading
newspapers, since 2001. Stephen’s first book, Losing Control: the Emerging Threats to Western Prosperity is now
available from Yale University Press.
...but problems remain in the financial engine room...
Karen Ward
HSBC Bank plc
+44 20 7991 3692 ...as the West learns more about the long-term costs of the crisis
karen.ward@hsbcib.com
Karen joined HSBC in 2006 as UK economist. In 2010 she was appointed Senior Global Economist with responsibility
for monitoring challenges facing the global economy and their implications for financial markets. Before joining
HSBC in 2006 Karen worked at the Bank of England where she provided supporting analysis for the Monetary Policy
Committee. She has an MSc Economics from University College London.
Global Economics
Madhur Jha
Global Economist
HSBC Bank plc
+44 20 7991 6755
madhur.jha@hsbcib.com
Madhur is HSBC’s Global Economist. She joined HSBC London in 2007 as an ABS generalist to cover the EMEA
markets. She has gained experience in emerging markets economics research from her stints as Fixed income/FX
strategist at a leading research consultancy in London and at the largest private sector bank in India, where she also
worked in FX derivative sales.
By Stephen King, Karen Ward and Madhur Jha
Disclosures and Disclaimer This report must be read with the disclosures and analyst
Q1 2011
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Global Economics Quarterly 1Q 2011

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Global

A mis-firing growth engine

By Stephen King, Karen Ward and Madhur Jha

The good news…

…and the not such good news

HSBC growth and inflation forecasts

Inflation Emerging elation, Western stagnation

This page has been left intentionally blank

Monetary & fiscal policy

A misfiring growth engine

Stockbuilding PMI stock of purchases Index , 2007=100 US Index , 2007=100

While it could be argued that growth of nearly 100 100

stimulus, authorities in the US are still not

4. The UK may have turned a corner but the cliff is steep

3.3% below 2007 110 110

Note: 2010 actual level taken from Dec 10 Consensus forecast

forecasts made at the start of either year.

But is this stimulus working in the expected way?

Index , 2004=100 Index , 2004=100 Index , 2004=100 Index , 2004=100

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Index , 2004=100 Index , 2004=100 Index , 2004=100 Index , 2004=100

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

bps bps Price index Price index

US corporate bond spreads S&P500

Source: Bloomberg Source: Thomson Reuters Datastream

The shift in burden can either be from one debtor

a continuation of debt pressures within the

Source: Thomson Reuters Datastream. Expressed as four quarter moving average.

Nowhere is this problem clearer than in the

23. Some sovereigns are luckier than others….

Source: European Commission

A Pandora’s Box ‘stealthy default’ – through printing money to

Source: Thomson Reuters Datastream

It’s worth stressing, however, that the spectrum of

Until now, of course, creditor nations have An impossible dream

Log (GDP) Sw eden 1991 Lev el of inv estment

1980 1984 1988 1992 1996 2000 2004 2008 04 05 06 07 08 09 10

The level of investment in the most highly

Again it’s hard to envisage a sufficiently robust Inflation or deflation?

20 20 Similar arguments could have been applied to

Conclusions All the while, the extraordinary stimulus measures

In the West, the combination of high debts and

This page has been left intentionally blank

Exchange rates vs USD

Exchange rate vs EUR & GBP

Job gains in 2010 insufficient to lower unemployment Employment

Source: Bureau of Labor Statistics

Core services inflation has been trending lower Inflation

Source: Bureau of Labor Statistics

Budget deficit to remain elevated Budget deficit

Source: Bureau of Economic Analysis

Source: BCB, HSBC forecasts

Consumption 9.0 6.1 -1.6 7.5 6.0 4.9

Private consumption 7.0 4.6 0.9 10.9 7.1 5.8

Another burst of buying by the ECB ECB bond purchases

Source: Markit Economics, Eurostat, HSBC

Diverging fortunes GDP growth

Peripheral disinflation to resume in 2011 Inflation and disinflation

German consumer: Multi-year highs in sentiment Consumption

Source: Reuters EcoWin, HSBC

Record levels in employment intentions Labour market

Source: Thomson Reuters Datastream and HSBC

Wage sum showing robust increases Wages

Source: Reuters EcoWin, HSBC