Global

Macro

29 June 2009

Global Markets Research

World Outlook Recovery ahead
For the first time since the beginning of the downturn we have revised up our forecasts for economic growth. We now expect global growth to rise to 2.5% in 2010 compared to 2.0% envisaged in our previous World Outlook from 30 March 2009. The upward revision is due entirely to better prospects for industrial countries, where growth next year is now seen reaching 1.0% compared to 0.3% before. Most of the upward revision to global growth in 2010 results from a stronger outlook for investment growth (which has risen to 2.0% from 0.1%) and export growth (up to 4.1% from -2.2% before). The improved prospects for exports and investment reflect greater confidence in the effectiveness of authorities’ efforts to restore stability in the financial sector. In our view the global economic and financial crisis has had two key drivers: (1) the breakdown of the global growth model of the past decade or so, which led to unsustainable international current account imbalances; and (2) the financial crisis, which ensued when the inability of debtors to repay their creditors became evident. As a result, we can expect to see lower trend growth and higher economic volatility, the opposite of what the world economy experienced during the era of the Great Moderation. Economic Forecast Summary
GDP growth, % 2008 G7 --US --Japan --Euroland EM Asia --China --India EMEA --Russia Latam --Brazil Industrial countries 0.6 1.1 -0.7 0.6 6.8 9.0 7.3 4.3 5.6 4.4 5.4 0.7 2009F -3.9 -2.8 -7.0 -4.3 4.2 7.5 5.5 -3.3 -4.4 -2.3 -1.0 -3.8 2010F 1.0 1.2 0.3 0.8 5.8 7.2 6.0 2.9 1.8 3.0 4.0 1.0 4.5 2.5 2008 3.2 3.8 1.4 3.3 6.5 5.9 8.7 12.6 13.3 8.8 4.6 3.3 7.8 5.2 CPI inflation, % 2009F -0.1 -0.5 -0.8 0.3 1.3 0.0 3.5 9.3 11.2 6.3 4.2 0.0 3.6 1.5 2010F 0.8 0.8 -0.5 0.9 2.9 2.0 5.1 8.5 10.3 6.6 4.2 0.8 4.5 2.4

Economics
Editors
Peter Hooper (+1) 212 250-7352
peter.hooper@db.com

Thomas Mayer (+44) 20 754-72884 tom.mayer@db.com

Production editors
Mark Wall (+44) 20 754-52087 mark.wall@db.com Torsten Slok (+1) 212 250-2155 torsten.slok@db.com

Contributors
Stefan Bielmeier (+49) 69 910-31789 stefan.bielmeier@db.com Michael Biggs (27) 11 775-7265 michael.biggs@db.com George Buckley (+44) 20 754-51372 george.buckley@db.com Michael Lewis (+44) 20 754-52166
michael.lewis@db.com

Yaroslav Lissovolik (+7) 495 797-5000 yaroslav.lissovolik@db.com Mikihiro Matsuoka (+81) 3 5156-6768 mikihiro.matsuoka@db.com

Tony Meer Gustavo Canonero (+61) 2 8258-1688 (1) 212 250-7530 gustavo.canonero@db.com adam.boyton@db.com John Clinkard (416) 682-8221 john.clinkard@db.com Gillian Edgeworth (+44) 20 754-74900 gillian.edgeworth@db.com Peter Garber (+1) 212 250-5466 peter.garber@db.com Darren Gibbs (+64) 9 351-1376
darren.gibbs@db.com

Joseph LaVorgna (+1) 212 250-7329 joseph.lavorgna@db.com Torsten Slok (+1) 212 250-2155 torsten.slok@db.com Michael Spencer (+852 ) 2203-8303 michael.spencer@db.com Mark Wall (+44) 20 754-52087

mark.wall@db.com
Thomas Mayer (+44) 20 754-72884

Caroline Grady (+44) 20 754-59913
caroline.grady@db.com

tom.mayer@db.com
Peter Hooper (+1) 212 250-7352
peter.hooper@db.com

EM countries 5.8 1.4 Global 2.9 -1.5 Source: DB Global Markets Research

Arend Kapteyn (+44) 20 754-71930 arend.kapteyn@db.com Adam Sieminski (+1) 202 662-1624 adam.sieminski@db.com

Carl Riccadonna (+1) 212 250 0186 carl.riccadonna@db.cm

Economics

Deutsche Bank AG/London All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 106/05/2009

29 June 2009

World Outlook

Table of Contents

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

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Deutsche Bank AG/London

29 June 2009

World Outlook

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

0.7 5.8 2.9

-3.8 1.4 -1.5

1.0 4.5 2.5

3.3 7.8 5.2

0.0 3.6 1.5

0.8 4.5 2.4

Source: DB Global Markets Research

Bottom-up view: a better 2010
For the first time since the onset of the downturn we have revised up our forecasts for economic growth. We now expect global growth to rise to 2.5% in 2010 compared to 2.0% envisaged in our World Outlook from 30 March 2010 (Table 1). The upward revision is due entirely to better prospects for industrial countries, where growth next year is now seen to reach 1.0% compared to 0.3% before. The most dramatic revision has occurred in Japan
Deutsche Bank AG/London

Most of the upward revision to global growth in 2010 results from improved expectations for investment growth (up to 2.0% from 0.1% previously) and export growth (up to 4.1% from -2.2%). Private consumption growth has been left unchanged and government consumption growth was reduced marginally (Table 2). The improved prospects for exports and investment reflect greater confidence in the effectiveness of the authorities’ efforts to restore stability in the financial sector. Actions taken and commitments made to shore up financial institutions have removed the risk of a major systemic failure, and the aggressiveness of macro policy measures have slowed the descent of and begun to stabilize activity. The upward adjustment of investment growth is driven by revisions in industrial countries; forecasts of investment in emerging market countries have changed little on balance (Tables 3 and 4). Exports have been revised up in both regions, reflecting the improved expectations for global trade.
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29 June 2009

World Outlook

2. Key global aggregates
(% yoy, unless stated) GDP Private consumption Investment Gov’t consumption Exports CPI Fiscal balance, % of GDP
2004 4.9 4.6 8.9 3.4 13.7 3.6 2005 4.5 4.2 7.6 3.2 9.9 3.4 2006 5.0 4.6 7.4 3.6 11.2 3.3 2007 4.9 4.6 5.7 3.8 9.0 3.7 2008 2.9 2.9 1.4 5.1 4.8 5.2 2009 F -1.5 0.1 -9.7 3.9 -13.7 1.5 2010 F 2.5 2.1 2.0 4.2 4.1 2.4

-2.8 -2.2 -0.5 Source: DB Global Markets Research

-0.7

-2.3

-7.3

-6.0

and (2) the financial crisis, which resulted when it became evident that a growing number of debtors (beginning with US sub-prime mortgage borrowers) would likely go into default. The failure of the global growth model is likely to depress global trend growth for a number of years to come; while the lingering effects of the financial crisis could introduce greater volatility around this lower growth trend. The outcome spells an unwinding of the favorable trends that developed during the era of the Great Moderation. Instead of high growth with low economic volatility we’ll probably see relatively low trend growth with high economic volatility. In addition, while economic slack will keep inflation quite subdued in the near term, the mounting fiscal debt that is being incurred to deal with the crisis poses a significant upside risk to inflation in the longer term. Collapse of the global growth engine Over the past decade, until the crisis intensified last fall, real net exports of the US, UK, Canada and Australia moved steadily and strongly from balanced or surplus positions into deficit as the expansion of these countries’ imports outstripped that of their exports by a substantial margin. Import growth was driven by strong domestic demand, which was in turn supported by increasing household and business leverage. New borrowing by the US non-financial private sector increased from 2% of GDP in the early 1990s to 16% of GDP in 2006. This pushed non-financial private sector debt levels up from 160% of GDP to 220% over the same period, and US net debt to the rest of the world soared (Chart 1). Chart 1. US borrowing spree coming to an end

3. Key aggregates in industrial countries
(% yoy, unless stated) GDP Private consumption Investment Gov’t consumption Exports CPI Fiscal balance, % of GDP
2004 2.9 2.7 6.1 1.8 8.6 2.0 2005 2.4 2.4 5.2 1.2 6.1 2.3 2006 2.8 2.5 3.7 1.7 8.5 2.4 2007 2.4 2.2 0.4 2.1 6.3 2.2 2008 0.7 0.5 -3.6 2.4 3.0 3.3 2009 F -3.8 -1.2 -16.4 2.0 -15.6 0.0 2010 F 1.0 0.4 -0.8 3.0 3.0 0.8

-3.4 -2.8 -1.6 Source: DB Global Markets Research

-1.1

-2.8

-9.1

-7.1

4. Key aggregates in emerging market countries
(% yoy, unless stated) GDP Private consumption Investment Gov’t consumption Exports CPI Fiscal balance, % of GDP
2004 7.6 7.1 12.7 5.6 20.5 5.6 2005 7.2 6.5 10.8 6.0 15.0 4.7 2006 7.9 7.4 12.4 6.1 14.6 4.4 2007 8.2 7.8 12.7 6.1 12.6 5.7 2008 5.8 6.1 8.0 8.6 7.2 7.8 2009 F 1.4 1.8 -0.8 6.4 -11.4 3.6 2010 F 4.5 4.3 5.6 5.7 5.4 4.5

3000 2500 2000 1500 1000 500 0 -500

USD bn US net foreign liabilities

1980
-0.2 -1.6 -4.9 -4.5

1984

1988

1992

1996

2000

2004

2008

-2.1 -1.3 1.0 Source: DB Global Markets Research

Source: IMF, IFS, DB Global Markets Research

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

29 June 2009

World Outlook

and with credit growth now restrained, the underlying trend in real domestic demand growth will be significantly lower in these countries going forward. The new world we are likely to see will have smaller international current account imbalances as investors will be more risk averse and less inclined to distribute capital around the world to fund imbalances. This means that countries will have to better align their savings with their investment. The consumer countries of the past will have to save more in the future as the asset market downturns have destroyed household wealth. Other countries that could eventually boost consumption to offset this increased saving are unlikely to fill the new void in global consumption for some time. Improvement of social security systems would go a long way to reduce excessive household savings in EM countries (as it reduces the need to have cash under the mattress for medical emergencies and old age), but the development of such social security systems will take many years. Higher private saving in the industrial countries will for a time be offset by greater government dissaving. But as fiscal support comes to an end, a trend toward slower consumption growth in the previous engine of growth countries that is not offset by higher consumption growth elsewhere will mean slower growth of aggregate demand globally. Barring an unforeseen surge in new technologies and investment opportunities, prospects for a supply-side driven pickup in trend growth seems unlikely as well. Indeed, the lingering effects of both an increase in protectionism spawned by the severe global downturn and substantial increases in both taxation and regulatory oversight of business are likely to be further depressants to the supply side of economic activity. It seems therefore likely, that global trend growth will fall below the levels reached in recent decades. In the 1980s, global trend growth rose to about 3% on the back of supply-side reforms, including tax reduction, de-regulation, and privatisation. It then rose further in the 1990s and the first half of the current decade to almost 4%, spurred by globalisation and rapid technical progress (ICT revolution). With these factors not improving further and with supplyside policies (taxes, regulation, and protection) moving in a less supportive direction, global trend growth could fall below the average attained even in the 1980s in the nearterm future. In line with the OECD’s recent estimates, we would tentatively put US trend growth at around 2%, Japan at 1%, Europe at 1.5%, and EM at 4%, which would move the global total to as low as 2-1/2%.

Chart 2. Lower global trend growth and different growth drivers in the future
6 5 4 3 2 1 0 -1 -2 -3 Global GDP IC ontr.(pp) EM contr. (pp) trend GDP 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Source: IMF, DB Global Markets Research

% yoy

Forecast

The financial crisis and economic volatility The deep freeze in the financial sector has pushed the economy into a state of dynamic instability. As credit dried up, activity stalled, like an engine running out of oil. The powerful policy response—and notably the partial revival of the credit markets—has imparted a positive impulse to activity that is now running its course and could lead to higher growth in most industrial countries as 2010 wears on. However, when this impulse has run out and headwinds in the form of higher capital market rates and commodity prices (induced by the initial rebound) come up, growth could well falter again. This could happen as soon as late 2010, for example, at which time the US fiscal impulse would also be turning negative. The slow-down could trigger a new impulse, and so on (see Chart 3 below). Chart 3. How to think about “recovery”: a diminishing sine wave
Q 2 2010 GDP grow th

Q 2 2011 Q 1 2009

Source: DB Global Markets Research

Exit challenges will increase volatility. The volatility in growth will be reinforced by the sheer magnitude of the recent policy measures. In the US, the expected federal budget deficit of 12% of GDP in 2009 is at least double any deficit seen since WWII. Policy interest rates have reached their lowest level in recent history, and assets held on the balance sheet of the
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Deutsche Bank AG/London

29 June 2009

World Outlook

Federal Reserve have more than doubled since last September. Stimulus of this magnitude is unprecedented, and the process of removing it without upsetting economic activity will be challenging to say the least. The uncertainties surrounding the exit strategies for these unprecedented monetary and fiscal measures in the US (as well as those in other countries), heighten the chances that policy makers will move either too soon or too late or fluctuate between positions that are too contractionary and too expansionary. Post exit policy risk: inflation Once the economy is eventually back on track, albeit a slower one, lower trend growth will pose a problem for the public and the private sector as well as for monetary policy. For the public sector, low trend growth means sluggish tax revenue growth at a time when expenditure is boosted by rising debt service payments and mounting medical expenses and pension support for retiring baby boomers. Rising levels of public debt will also put upward pressure on real government yields, which will exacerbate the debt problem both by raising debt service costs and by slowing growth and further reducing tax revenues. Political pressures on central banks will intensify to hold interest rates lower, especially those like the Fed with dual mandates. Placed between a rock and a hard place, they will be forced to chose between allowing rates to rise and both exacerbating the debt problem and missing their employment objectives or holding rates lower and in effect monetizing the debt and missing their inflation objectives. For a time they may well hold firm to their inflation objectives, arguing that in the long run that will be best for employment as well, but the political pressure to do otherwise will build if the debt problem is not addressed in other ways. And some degree of inflation to deal with the debt may become inevitable. It is even possible that inflation could become a problem before full exit has been achieved. Expectations of monetization of the debt in the longer term could telescope the problem forward to current inflation as the economy is recovering even before all slack has been eliminated. How high could inflation go in the longer-term? Probably not very high. Central banks will make every effort to limit the increase, even if they have had to give in for a time to political pressure and employment objectives. History of the US and UK in the 19th and early 20th century suggests that even large public debt burdens resulting from major wars were alleviated (in real terms) by elevated single digit inflation rates over periods of several years. Living with such inflation for a time need not seriously impair the credibility of a central banks if that credibility has been well established. In the 1970s and 1980s the Bundesbank had an inflation target of 2% and was widely seen as one of the toughest and most successful central banks of the world. That west German inflation averaged 3.3%--1 ¼% above target—between
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1975 (when the Bundesbank adopted monetary targeting) and 1989 (when the Berlin Wall fell) did not diminish its reputation. The Fed, however, will need to be more wary. It has enjoyed substantial success and enhancement of its credibility since the 1980s. But it well remembers the high cost to the economy during the early 1980s associated with the establishment of that credibility. The Fed had to drive the economy onto a deep recession to deal with the double-digit inflation that had resulted from a decade of giving in to political pressure in the wake of the fiscal excesses of the 1960s and the supply shocks of the 1970s

Peter Hooper, (1) 212 250-7352 Thomas Mayer, (44) 20 754-72884

Deutsche Bank AG/London

29 June 2009

World Outlook

Geopolitics: The Dollar and Its Rivals
Suggestions that the global system might be better off replacing the dollar as the principal reserve and trading currency are not new. We can remember 1995 when the yen hit 80 and the yen and DM were regarded as candidates to dethrone the dollar. Japan was not anxious to accept the appreciation that this role implied, but the euro was born in 1999 as the first plausible competitor to the dollar. By 2004, there were constant stories that central banks were dumping the dollar and diversifying to its principal competitor, the euro, although these stories were premature. Five years later, we have moved on from the scenario of the dollar’s being replaced via diversification into the euro. Those countries most anxious for a successor to the dollar have leapfrogged the euro as the potential rival. Instead, they have launched proposals to develop the SDR as a currency or even to explore a commodity currency. If they come to fruition, recent efforts to move away from the US dollar as the dominant reserve currency have both geopolitical and economic implications. Once the dollar is just one of several competing reserve currencies, it will become possible readily to discard it if it is again financially mismanaged or used to extract excessive geopolitical advantage. It is worth considering how likely some of these proposed alternatives are and the impact that each of them may have. First, what are the geopolitical advantages of having the key reserve currency? Second, what are some of the motivations for moving away from the dollar? Third, what are some of the proposals to provide important alternatives? Fourth, are such alternatives viable threats to the role of the dollar? There is really no science of what drives a transition from one dominant reserve currency to another. We have only one empirical observation—the transition from sterling to the dollar from approximately 1920 through 1950—so any number of factors can individually explain such a shift. Characteristics of the real economy may be necessary conditions. These include the relative size of GDP, the size, openness and liquidity of financial markets and the ability of foreigners to access such liquidity, the stability of the currency’s real value, and the trustworthiness of the legal system. All these factors seem necessary for a currency to be used as one of the several subsidiary reserve currencies, but they do not single out the one that will be dominant. Based on the single transition that we have observed, whoever has the dominant global navy is also perfectly correlated with who has the dominant reserve currency.
Deutsche Bank AG/London

Geopolitical Advantages of Providing the Dominant Reserve Currency There are several advantages. First, if the bulk of international transactions pass through a particular currency, it can be used as a financial weapon. Payments in dollars can and have been blocked and seized by the US as they pass through the dollar payment system. Banks providing services to proscribed clients under attack can be ruined, as Bank Delta Asia found out. Foreign exchange and other assets can be seized by the dominant currency government in case of conflict, as happened to Iran. This has been done many times by the US government without having much impact on the subsequent demand for the dollar as a reserve currency. A country under such attack can keep its payments and assets in other currencies, and then bear the costs and inconvenience of having to undertake extra currency transactions via agents and not having the proper currency in which to cover currency risk, but these are nuisance costs. Second, the supplier of the dominant reserve currency can extract resources from other countries via sudden inflation. This forces other countries to replenish their real holdings of the reserve currency to cover their real needs. If expected, however, the resulting yield differential should cover this cost. This is a problem especially for a country that fixes its exchange rate against the dominant currency, and it was regarded as especially acute at the collapse of the Bretton Woods regime in 1971. Third, the dominant reserve country, via intermediation, can acquire control of longer term assets in other countries financed by the short term reserve claims of the countries themselves through the national balance sheet. These latter two possibilities are what President de Gaulle complained about during the 1960s. Fourth, if its currency is widely acceptable, perhaps the dominant reserve country can get more resources during wartime, although this has more to do with creditworthiness, geographical position and probability of victory than with providing a reserve. Fifth, the dominant reserve country is less subject to currency crisis emanating from abroad, since it prices a large fraction of its international liabilities in its own currency. The reverse of this coin is that the dominant reserve country can trigger a financial crisis in a country that denominates its domestic or cross-border debt in the reserve currency by cutting off access to credit and even the payment system, as happened to Panama in 1988.

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World Outlook

Motivations of Some Countries that Want to Change China and Russia are the most important countries that have suggested finding a replacement for the role of the dollar. Others such as Iran that have suffered from the conscious geopolitical sting of the dollar have also sought alternatives. The stated motivations of officials in China and Russia have revolved partly around a perceived inability of the US or any other country alone to supply smoothly the growing demand for reserves. They also revolve around the recent financial instabilities associated with the dollar system. Among these are the crash of the US financial system, the subsequent safe haven runs into the dollar out of emerging market economies, and the potential for inflation or lack of creditworthiness of the dollar stemming from US fiscal policy. Unstated motivations include a desire to find a way to keep their export surpluses flowing into industrial economies in the face of a secular shift in consumer demand. Another motivation for many is to subtract a key underpinning to US geopolitical power during what may be only a temporary window of opportunity. What Are the Alternatives to the Dollar? The Euro Even before its birth, planners of the euro system considered it a potential rival to the dollar as an international currency, particularly for official reserves. Although it has been highly successful as an international currency, it has shifted only marginally the share of the dollar in official reserves. From a low point of 54% in 1987, the share of the dollar rose to 59% in 1997 and to 64% in 2007. The euro’s share was 20% in 2003 and was 26% in 2007. Of course, these shares fluctuate with the exchange rate, but in many central banks’ exchange management, there has been an increased share of the euro in new purchases. Nevertheless, the surge in official reserve holdings in the last six years has still meant an enormous dollar acquisition. Given its status as dominant reserve currency in waiting, it is noteworthy that those countries most dissatisfied with the dollar have not as a group shifted their holdings substantially to the euro, with Russia an exception. In particular, they are not boosting the euro as the primary alternative. This may be because no one currency is large enough to accommodate the enormous global demand for reserves without disruption. It may also be that, however maligned the inflationist tendencies of the Fed, the euro is the reserve currency whose internal cohesion has been frequently questioned during this crisis and whose possible disintegration arises regularly in public discussion. Therefore, moving from the dollar to the euro may be the leap from the frying pan to the fire.

The SDR The search for an alternative to the dollar has spotlighted the SDR, either as a usable reserve currency or, more practically, as a way to channel guaranteed lending to other emerging market countries through IMF-issued, SDR-denominated bonds. In this way, surplus countries can still pump out savings to very high risk borrowers— who may be the only ones remaining—but with multilateral guarantees. They can then maintain current account surpluses and the export driven growth policy. At the same time, political leverage can be acquired over the upcoming quota and voting reapportionment at the IMF. This use of the SDR lies partly within the post-1973 Fund financial role of intermediating between the financially strong countries and the financially weak developing countries during an adjustment program. But it is also heavily influenced by a desire to shift the SDR back to its late 1960s macroeconomic roots of supplying a currency to satisfy official demands for reserves. The Fund would be a vehicle to channel and finance large scale macro balance of payments surpluses as in the old days, not just a way to help finance small, macroeconomically weightless economies fallen on hard times. The return of this motivation has coincided with a sudden surge in the resources allocated to the Fund in the form of SDR allocations, bilateral loans and the sale of SDR bonds. As it now stands, the SDR itself is simply a unit of account based on a basket of fixed amounts of dollars, yen, sterling, and euros and used for Fund accounting purposes and to define member financial claims and borrowing obligations. A country’s SDR allocation is an unconditional, low cost line of credit from the other members, not actual reserves. A country may draw on its line in exigent situations, generally in a balance of payments crisis, when its reserves are being drained, but it is not limited to this purpose. The country’s SDRs are then allocated by the Fund to other members in exchange for an equivalent value amount of some or all of the component reserve currencies, which the country can then spend. Other things equal, an increased credit line would substitute for precautionary official reserves and reduce any prior desire to accumulate more through current account surpluses. But other things are not equal. The magnitude of the current crisis has proved that the larger the reserve holdings the better. A larger SDR allocation may only offset somewhat but not quench a general desire to accumulate more reserves coming out of the crisis. The Fund’s programs usually provide a conditional credit that can be funded via member quotas, through loans to the New Agreements to Borrow or General Agreements to Borrow facilities, or now through IMF bonds and bilateral commitments. The recent $100 billion bilateral loan from Japan and the $108 billion about to be
Deutsche Bank AG/London

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29 June 2009

World Outlook

authorized by the US will also be denominated as SDR obligations, when drawn. However, the funds will be delivered by the lending countries only when drawn as specific programs require funding and disbursement of the underlying currencies—the IMF keeps no liquidity on hand for this purpose. Thus, the currencies supplied by the lenders are themselves being demanded by the creditors of the borrowing countries. Any serious impacts on exchange rates between reserve currencies that constitute the SDR basket depend on the size of the program and the currencies that a country’s creditors are demanding vs. those that the Fund is delivering. The story is exactly the same for lending to the Fund via bonds, as China, Brazil, and Russia want to do. The bonds will be issued by the Fund only as the funds are needed for program lending. Again, they may come in as dollars from the lending countries. They will go out in the same way to the borrowers, with both ends denominated at the Fund in SDR equivalent values. The lenders get to diversify the currency denomination of their reserves—at the cost of acquiring an illiquid bond. Or they may be making a vague buy-in of larger quotas and voting power at the Fund in some future negotiation. Again, the impact on exchange rates among the basket currencies depends on which currencies are desired by the creditors who are running out of the borrowing countries. Private SDR Finally, there is a possibility that all this activity in the official SDR is simply a precursor to developing a fullfledged SDR that the private sector may use. This would involve the establishment of bank deposits and private paper denominated in SDR, a clearing and settlement system, and a formula for overnight inter-bank interest rates. In the private ecu, the precursor to the euro, we have a recent example for how such a system would work. However, the ecu was always envisioned as ultimately being exchanged into the euro or whatever the single currency was to be called, so there was a mechanism for basing its value on a real demand for money. Unless someone were to guarantee the conversion of private SDRs to the basket, this would not be true of the “SDR system”. Also, it should be remembered that “private ecu”, short term ecu denominated paper actually issued by various national governments, were counted among official reserves. Such paper constituted twenty percent of the official reserves of the UK and Italy. When the ERM crisis came in 1992, attempts to sell ecu paper to support their currencies caused a collapse of liquidity in the ecu market, which made them useless. The lesson is that abstract, artificial currencies provide only illusory reserves. Some Diversification Issues In the last round of serious discussion about reserve diversification in early 2004, we explained what happens if
Deutsche Bank AG/London

a country that fixes an undervalued exchange rate against the dollar attempts to diversify its reserves. 1 Our conclusion was that the central bank can indeed diversify its reserves away from the dollar in the sense of increasing the share of other currencies in its holdings. But it does so at the price of appreciating its own currency against the dollar. This happens because the now excess supply of dollars tends to depreciate the dollar against all currencies including its own. If it does not want to abandon the policy of fixing its dollar exchange rate, it will have to intervene to buy up some of the dollars it just delivered to the market. Diversification can be had at the price of holding even more reserves. This also results when a country diversifies indirectly by, for example, buying an SDR bond for dollars. The dollars are disbursed and spent by the recipient country. At old exchange rates, the markets have an excess of dollars, so the dollar tends to depreciate against all currencies. So the country must buy back some of the dollars and expand reserves still more to keep its peg intact. The effect should be less pronounced than a direct diversification because, as stated above, the SDR bond will be purchased only in the midst of a crisis for a member country in which the private sector is demanding to acquire some of the crisis country’s reserves A Commodity Basket Currency Finally, there have been suggestions of fixing the value of a currency unit against a commodity basket and pricing goods against this currency. This is entirely possible, but there is a reason that commodity currencies were abandoned forty years ago. Such a currency, being a subbasket of the general price index with its own volatile cyclical properties, would have a pro-cyclical real value. In boom times, when the relative price of commodities rise dramatically because of their increased scarcity and price inelasticity, the money price of all other goods has to fall—i.e. there is a general deflation. In depressed times, when the demand and relative price of commodities collapse, there will likely be a general inflation. Maybe, the world will split into this sort of hard currency bloc and industrial country floaters, but it is hard to envision. This would be good news for producers of commodities that are in the basket. If there is a hard peg, the need to warehouse stocks of the basket for delivery would create an extra real demand for the commodities, and the commodities in the basket would have their nominal volatility eliminated. The bad news is that such a standard inevitably would be run, as anyone who has analyzed the dynamics of a commodity standard knows. Alternatively, it may not be a hard peg but simply a guideline like the more general inflation targeting schemes now vaguely or

“Asian Reserve Diversification: Does It Threaten the Pegs?” Deutsche Bank, Global Markets Research, Feruary 2004. Page 9

1

29 June 2009

World Outlook

explicitly embraced by many countries. Then there is no need to warehouse commodities, but the system is just as likely to be met with skepticism in a major crisis as the inflation targeting guidelines have been in this one. Ekaterinberg Conference The mid-June meeting of the BRICs at Ekaterinberg includes some discussion of their attitude to the future role of the dollar. Of course, China and Russia have recently been the most vocal in proposing possible innovations in the international monetary system. An increased use of their own currencies in trade with each other appears to be the direction in which these countries are moving for now. This would mean pricing in rubles,

renminbi, or reals for exports and payment in these currencies. For this to happen, of course, currencies and financial facilities would have to be made readily available to traders within the group. One could interpret this as a process of elimination of controls, especially for the renminbi, in which case the renminbi itself can gradually be prepared to serve as an international currency. However, with fewer controls, China may lose the ability to keep the currency undervalued, which can undermine its export driven development policy and its surpluses. Peter Garber, (1) 212 250-5466

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Deutsche Bank AG/London

29 June 2009

World Outlook

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

1500 1400 1300 1200 1100 1000 900 800 700 600

Jun-08

Source: Deutsche Bank

Oil prices & the role of the US dollar We believe the weakening US dollar has also played a role in boosting crude oil price. Figure 2 shows the relationship between the US dollar and crude oil prices. According to the IMF, over the past 20 years, commodity prices have generally been negatively correlated with the US dollar, and this is particularly true for oil and gold. Figure 2: Oil & the US Dollar
1.6 EUR/ USD USD/ barrel 160 140 1.5 Stronger US dollar 120 100 80 EUR/ USD (lhs) WTI oil price (rhs) 1.2 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09
Source: Bloomberg, Deutsche Bank

1.4 1.3

60 40 20

We find that since August 2008, oil prices have become strongly positively correlated with the performance of the US stock market. Based on the historical correlation, we estimate that for every 50 point move in the S&P 500 index it is worth about a USD7/bbl move in the WTI crude
Deutsche Bank AG/London

The IMF identified a number of channels through which a fall in the nominal effective value of the USD can raise commodity prices

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29 June 2009

World Outlook

Purchasing power and costs because industrial metals, bulk materials and grains are most often priced in USD terms. Asset plays because a falling USD reduces returns on dollar-denominated financial assets in foreign currencies, making commodities attractive as an investment class Monetary policy because a sinking dollar results in monetary easing outside the US, and this, in turn, results in demand stimulus.

Although Deutsche Bank believes that the near-term prospects for the US dollar are for more weakening and EURUSD rising to 1.50, our one-year view calls for this weakness to be partly reversed. Oil prices & the role of investors However what may prove to be the most important factor driving crude oil prices could be investor flows. We believe that the collapse in commodity prices during the second half of last year has provided investors with a new opportunity to gain exposure to commodities. As shown in Figure 3, we find that Assets under Management (AUM) of Powershares ETF/ETN commodity products registered for sale in the United States have risen to a new all time high over the past month. Indeed total AUM on the Powershares ETF/ETN platform is greater now than it was at the peak of 2008 when the crude oil price was trading above USD140/bbl. Although this represents only a small share of total AUM in commodity ETFs it may provide a proxy for overall fund flows into the complex Figure 3: Commodities ETF & ETN investments
9 8 7 6 5 4 3 2 1 0 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Assets under management for commodity ETFs/ETNs (USD bn)

infrastructure spending, which has boosted commodity demand. Second the tightening in credit conditions over the past two years has also led to a significant reduction in capital expenditure for mining and oil exploration companies. We estimate that in the absence of new investment and given depletion rates for existing oil wells the global oil production base will fall from 86mmb/d to 75mmb/d by 2015. We believe this has only enhanced the upside price risks for crude oil heading into the next decade. Finally the expansion of the Fed’s balance sheet and the surge in government borrowing has raised concerns about higher inflation ahead. We believe this has enhanced the appeal of commodities as a distinct asset class given their inflation protection properties. Conclusion We believe the run-up in commodity price returns may require more convincing evidence of positive growth returning in the US. Indeed we believe events today are reminiscent of early 2008. At that time, we likened commodities to the Greek Sirens as commodities were singing an alluring melody to global investors given the poor performance of traditional asset classes. We fear that if demand falters in China or does not recover strongly in the US, the rapid inflows into commodity ETFs could quickly reverse. Figure 4: DB oil and gas price deck (internal only)
WTI (USD/bbl) Q1 2009 Q2 2009 Q3 2009 Q4 2009 2009E 2010E 2011E 43.3 61.0 75.0 75.0 63.6 55.0 80.0 Brent (USD/bbl) 45.7 60.0 75.0 75.0 63.9 55.0 80.0 US Gas (USD/mmBtu) 4.47 3.80 4.00 4.75 4.25 6.00 8.00

Source: Bloomberg, Deutsche Bank (this price deck become public on June 26, 2009

Michael Lewis, (44) 20 7545-2166 Adam Sieminski, (1) 202 250 2928

*

We track AUM of Powershares products registered for sales in the United States Source: Bloomberg (Data as of End May 2009)

We believe the financial crisis has introduced some compelling reasons for the increasing appeal of commodities over the medium term. First, aggressive fiscal action has included a significant increase in

Page 12

Deutsche Bank AG/London

29 June 2009

World Outlook

US: Robust recovery remains elusive
The strong recovery in equity and credit markets, which has led to an improvement in various measures of consumer and business sentiment—evident from consumer confidence, purchasing manager, homebuilder and small business surveys—has taken sharp downside risks out of the outlook. The bankruptcies within the motor vehicle industry also proceeded without much disruption. Since March, two important catalysts for the improvement in sentiment have been more aggressive quantitative easing by the Fed and the successful resolution of financial stress tests. These tests restored market confidence, which had begun to discount large swaths of financial sector nationalization. While troubled assets still remain on bank balance sheets, the tests allowed banks to raise significant amounts of capital—there has even been some early repayment of government funds. In light of the dramatic shift in market psychology, further dramatic tightening in credit conditions is highly unlikely, hence second half growth prospects have improved over the last few months. We had been looking for the economy to shrink throughout the year, albeit at a significantly slower pace. Instead, we now expect the economy to bottom out next quarter and for real GDP to register a positive increase by Q4. However, the economy will remain fundamentally soft for the foreseeable future. The labor market has not yet bottomed, household buying power is negligible and consumers are highly leveraged with little access to credit. Consequently, we do not expect the ensuing economic recovery to be robust. In fact, we are projecting the mildest recovery in the post-WWII era. In this environment, economic slack will remain ample. While we are not projecting deflation, we see inflation risks as minimal given the amount of spare capacity in the economy. 1. Job losses in the current cycle have been substantial
% chg. Cumulative change in nonfarm payrolls from the 4 3 2 1 0 -1 -2 -3 -4 -5 * number of months since recession began 0 4 8 12 16 20 24 28 32 36 start of recession average of post-WWII recessions 1974-75 recession 1981-82 recession Current recession % chg. 4 3 2 1 0 -1 -2 -3 -4 -5

Sources: DB Global Markets Research

2. Temporary employment trend points to further layoffs
% yoy 20 10 0 -10 -20 -30 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Employees on nonfarm payrolls Temporary help services, 6m lead (lhs) Total nonfarm payrolls (rhs) % yoy 4 2 0 -2 -4 -6

Sources: DB Global Markets Research

Macro-economic activity & inflation forecasts
E c o n o m ic a c tiv ity ( % q o q , sa ar) GDP P r iva t e c on s u m pt ion In ve s t m en t G ov’t c on s u m pt ion E xport s Im por t s C on t r ibu t ion (pp): S t oc ks N e t t r a de In du s t r ia l pr oduc t ion U n e m ploy m e n t r a t e, % P ric es & w a g es ( % yo y ) CP I C or e C P I P r odu c e r pr ic e s C om pe n s a t ion pe r em pl. P r odu c t ivit y 8 .1 -0 .2 1 .7 -2 .2 4 .1 1 .9 9 .1 -0 .8 1 .6 -4 .2 4 .6 1 .5 9 .6 -1 .6 1 .2 -5 .7 3 .9 1 .5 1 0.0 0.8 1.3 -0.7 3.4 2.0 10 .2 1 .4 1 .1 0 .3 2 .7 1 .6 1 0 .4 1 .0 1 .0 -0 .7 2 .2 0 .6 1 0 .1 0 .3 0 .9 -2 .0 1 .7 -0 .4 1 0.0 0.4 0.8 -1.7 1.2 -1.2 Q 1F -5 .5 1 .4 -48 .9 -3 .1 -30 .6 -36 .4 -2 .1 2 .3 2 00 9 Q 2F Q 3F -2 .0 0 .0 -1 .8 0 .0 -5 .8 -3 .8 4 .1 5 .7 -8 .0 -6 .0 -5 .0 0 .0 1 .6 0 .7 -0 .2 -0 .7 Q 4F 1.0 0.7 1.2 5.9 -1.0 5.0 0.7 -0.8 Q 1F 1 .1 1 .0 0 .1 4 .8 3 .0 6 .0 0 .7 -0 .5 2 01 0 Q 2F Q 3F 1 .8 2 .3 1 .3 1 .8 7 .4 8 .3 2 .2 2 .2 5 .0 6 .0 6 .0 7 .0 0 .2 0 .4 -0 .3 -0 .3 Q 4F 2.8 2.0 1 0.2 2.8 7.0 8.0 0.4 -0.4 2 00 8 % yo y 1 .1 0 .2 -6 .7 2 .9 6 .2 -3 .5 0 .1 -0 .5 -0 .5 5 .8 3 .8 2 .3 6 .4 3 .7 2 .8 2 00 9 F % yo y -2 .8 -1 .2 -2 1 .3 2 .2 -1 4 .4 -1 5 .2 -0 .1 0 .6 -7 .6 9 .2 -0 .5 1 .4 -3 .2 4 .0 1 .7 20 1 0 F % yo y 1.2 0.9 2.4 4.1 1.3 4.6 0.6 -0.5 -0.4 1 0.2 0.8 1.0 -1.0 2.0 0.2

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London

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29 June 2009

World Outlook

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

Continued unemployment insurance claims (lhs) Unemployment rate (rhs)

% 10 9 8 7 6 5 4 3

4. The lack of buying power is dampening spending
Chg. yoy, USD bln 3000 2000 1000 0 -1000 -2000 1983 1988 1993 1998 2003 2008 Chg. yoy, USD bln Household buying power (lhs) Nominal consumption (rhs) 600 400 200 0 -200 -400

Sources: DB Global Markets Research

5. Weak consumer spending means weak GDP
74 72 70 68 66 64 62 60 1960 1966 1972 1978 1984 1990 1996 2002 2008
Sources: DB Global Markets Research

%

Ratio of PCE to GDP

%

74 72 70 68 66 64 62 60

Page 14

Deutsche Bank AG/London

29 June 2009

World Outlook

US: Robust recovery remains elusive
Deleveraging is the operative word. We believe the need for households to deleverage is apparent from the ratio of household liquid assets to total household liabilities. Liquid assets are defined as the sum of bank deposits, credit market instruments, mutual fund shares and corporate equities. These instruments are considered to be liquid since they can easily and quickly be converted to cash. As shown in the chart, the cushion between assets and liabilities is shrinking, suggesting households are more financially stressed than ever before. All else being equal, this is negative for the path of consumer spending, which now accounts for a record high 72% of expenditures-based output. While we do not know where the tipping point is for households, the current trend in the liquid assets to liabilities ratio cannot persist indefinitely or else all US households would effectively become insolvent. The ratio of liquid assets to liabilities was relatively constant from 1980 to 1996, averaging 2.2 times liquid assets to liabilities. At the 2000 equity market peak, liquid assets were nearly three times the size of liabilities. When the stock market collapsed, the ratio plunged, stabilizing at 1.7 in 2003. It edged higher before peaking in Q1 2007 and has been in freefall since, with liquid assets down $4.6 trillion and liabilities up $0.6 trillion over this period. By Q4 2008, liquid assets were only 1.4 times liabilities. We do not yet have official data for Q1, but we estimate the ratio fell further because equities account for slightly more than 40% of liquid assets. With stock prices down nearly 12% last quarter relative to the end of Q4 2009, we estimate that liquid assets—holding all of the remaining components constant at their Q4 2008 values—declined to just 1.3 times total liabilities. An important question is what it would take to restore equilibrium in the household sector. Expect deleveraging to be slow and ongoing. We estimate equilibrium in the ratio is around 2.2 times liquid assets to liabilities, the average in the ratio over the entire period, spanning 1980 to 2008. Basically, an elevated ratio from 1997 to 2001 is offset by a depressed ratio from 2002 to 2008. Assuming that household liabilities are constant over the next four quarters, household liquid assets would have to increase by $11 trillion over the next year to produce a 2.2 ratio. If half of this increase comes from equities, we would need to see roughly a 63% increase in stock prices from their 2008 yearend value, which would translate into approximately 1470 on the S&P 500 index. If, however, we assume that household liabilities decline 6% this year, which is pretty aggressive since it is 10 times the decline seen in 2008 (the only annual decline on record), household liquid assets would have to increase $9 trillion over the next year. If half of this increase comes from equities, we would need to see roughly a 51% increase in stock prices from their 2008 yearend value, which would translate into approximately 1365 on the S&P 500 index.
Deutsche Bank AG/London

6. The savings rate is likely to continue to rise
% 14 12 10 8 6 4 2 0 -2 1952 1959 1966 1973 1980 1987 1994 2001 2008
Sources: DB Global Markets Research

Ratio Personal savings rate (lhs) Household net wealth to income ratio ( inverted axis,rhs) 3.5 4.0 4.5 5.0 5.5 6.0 6.5

7. Household balance sheets remain under pressure
3.0 2.6 2.2 1.8 1.4 1980 Liquid Assets = deposits,credit market instruments, mutual fund shares and corporate equities 1984 1988 1992 1996 2000 2004 2008 1.4 Ratio Liquid assets to liabilities Ratio 3.0 2.6 2.2 1.8

Sources: DB Global Markets Research

8. There is little evidence of an inventory snapback
Hours 42.0 41.5 41.0 40.5 40.0 39.5 39.0 1988 1992 1996 2000 2004 2008 Average weekly hours: manufacturing (lhs) Real change in private inventories (rhs) USD bln 120 80 40 0 -40 -80 -120

Sources: DB Global Markets Research

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World Outlook

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

1969 1974 1979 1984 1989 1994 1999 2004 2009
Sources: DB Global Markets Research

10. The slowdown in credit growth needs to reverse
Diff. yoy, USD bln 4500 3750 3000 2250 1500 750 0 1953 1960 1967 1974 1981 1988 1995 2002 2009
Sources: DB Global Markets Research

Credit market debt Diff. yoy, USD bln All sectors minus government 4500 3750 3000 2250 1500 750 0

External balances & financial forecasts
2008 Fiscal balance, % of GDP Trade balance, USD bn Trade balance, % of GDP Current account, USD bn Current account, % of GDP -3.2 -696 -4.9 -706 -4.7 2009F -13.4 -374 -2.6 -381 -3.5 2010F -7.6 -441 -3.0 -450 -3.0 Financial forecasts Official 3M rate 10Y yield USD per EUR JPY per USD USD per GBP Current 0.25 0.60 3.55 1.41 96 1.65 3M 0.25 0.60 4.00 1.30 100 1.44 6M 0.25 0.60 4.00 1.20 105 1.33 12M 0.25 0.60 3.50 1.18 103 1.42

Source: DB Global Markets Research, as of June 26

Joseph A. LaVorgna, (1) 212 250-7329 Carl J. Riccadonna, (1) 212 250-0186

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Deutsche Bank AG/London

29 June 2009

World Outlook

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

Leading index: DBCLI-ECONOMY (rhs) Industrial production (lhs) 94 96 98 00 02

Sources: METI, DB Global Markets Research

2. Production and investment could diverge
120 110 100 90 80 70 60 50 40 30 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Sources: Ministry of Economy, Trade and Industries, Cabinet Office, DB Global Markets Research

CY2005=100

Forecast

Industrial production Real private capital investment

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

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London

Page 17

29 June 2009

World Outlook

Japan: Initially V-shaped production recovery
Export-led recovery tends to slow in the 2nd year • Comparisons of initial phases of the past production recovery shows that recoveries remain V-shaped in the 2nd year when led by robust domestic demand (1970s80s), but the speed of expansion slows when led by external demand (1990s-2000s). • We expect the economy to follow another export-led recovery, no matter how fragile. Government stimulus packages • We estimate that JPY6trn (1.2% of GDP) would be additions to GDP from the government packages. • A JPY2trn cash handout, rebates on the purchase of environment-friendly consumer electronics, and tax cuts on auto purchases are likely to be more than fully offset by inventory drawdown in Q2. • Effects of fiscal stimulus wear off after nine months. • GDP growth, unlike production, is likely to remain largely flat QoQ through Q2 2010. Limited monetary policy responses • The Bank of Japan introduced i) higher monthly outright purchases of JGBs (JPY1.8trn), ii) subscription of subordinated loans of commercial banks (max JPY1trn), iii) purchases of corporate bonds (max JPY1trn), CP and ABCP (max JPY3trn), and equities (max JPY1trn). But their total assets have expanded only by 3% of GDP since Sep-08, the smallest among major central banks. • We expect no additional easing measures. Risks & political time table • JPY depreciation and strong overseas recovery would result in better recovery in Japan. • Lower House election in Q3 2009 could change the ruling parties. 3. Industrial production in past economic recoveries
:

125 120 115 110 105 100 95

Trough month of production = 100 Mar-75 Jul-77 Oct-82 Aug-86 Jan-94 Aug-98 Nov-01

1970s - 80s

1990s and later

months; t = 0 at trough month of production -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24

Sources: METI, DB Global Markets Research

4. Falling potential growth lowers investment-GDP ratio
% % of nominal potential GDP Nominal private capital investment (lhs) 6 24 22 20 18 16 14 12 10 70 75 80 85 90 95 00 05 Potential growth (rhs) 5 4 3 2 1 0

External balances & financial forecasts
M2 + CD growth, % Fiscal balance, % of GDP Public debt, % of GDP Trade balance, USD bn Trade balance, % of GDP Current account, USD bn Current account, % of GDP Financial forecasts Official 3M rate 10Y yield JPY per USD JPY per EUR 2007 1.6 -2.0 163.3 106.7 2.4 211.0 4.8 Current 0.10 0.55 1.40 96 134 2008 2.1 -4.4 170.5 38.9 0.8 156.8 3.2 3M 0.10 0.70 1.60 100 130 2009F 2.6 -6.6 187.8 32.7 0.7 123.1 2.6 6M 0.00 0.70 1.50 105 126 2010F 2.5 -7.6 0.0 104.5 2.2 205.7 4.4 12M 0.00 0.70 1.40 103 121

Sources: Cabinet Office, DB Global Markets Research

5. Unemployment rate and GDP gap
7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 01 02 03 04 05 06 07 08 09 10 11 12 % Unemployment rate (lhs) Forecast GDP gap (rhs) % -12 -10 -8 -6 -4 -2 0 2

Sources: National authorities, DB Global Markets Research, as of June 26

Note: GDP gap = (Actual GDP – potential GDP)/potential GDP (%) Sources: BoJ, Ministry of Internal Affairs and Communication, DB Global Markets Research

Mikihiro Matsuoka, (81) 3 5156-6768
Page 18 Deutsche Bank AG/London

29 June 2009

World Outlook

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

Consumption Investment Net trade

Government Stocks GDP

Sources: Eurostat, DB Global Markets Research

2. Declining employment and weak income will weigh
% yoy 10 8 6 4 2 0 -2 -4 Compensation of employees (lhs) Compensation per employee (lhs) Employment (rhs) % yoy 3 2 1 0 -1 -2 -3 -4

Forecast

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Sources: Eurostat, DB Global Markets Research

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

Sources: Eurostat, DB Global Markets Research

Deutsche Bank AG/London

Page 19

29 June 2009

World Outlook

Euroland: Constrained Expectations
Inflation: Headline HICP inflation slowed to a record low of 0.0% yoy in May. A period of negative inflation will begin in June care of energy price base effects before base effects and newly rising commodity prices push headline inflation back into positive territory later this year. We expect headline to hover around 1% throughout 2010 as non-core inflation balances out core disinflation. The increase in spare capacity is a downside risk to inflation. The risk of prolonged weakness in private consumer demand is a risk, as is the inertia in wage inflation as it resets lower over time. Fiscal: Public debt levels are escalating due to a combination of the economic crisis and the increasing direct costs of the financial crisis. The weak medium-term economic outlook will make debt consolidation impossible for the moment. Hence, room for discretionary stimulus is all but exhausted. With public balance sheets under so much strain, governments are coy about doing more to support frail banking sectors despite the fact it might be a price worth paying (c.f. the UK’s recovery). This risks encumbering bank balance sheets, and growth prospects, for longer. The Stability and Growth Pact needs to be flexible enough to allow adequate support for financial sectors in the short term while remaining credible enough to achieve consolidation in the medium-term. Monetary: At 1% the refi rate has probably reached the floor. The ECB believes the full benefit of its policy stance (1% refi rates, a full-allotment tender regime, including a new 12-month tender, and EUR60bn of covered bond purchases) will feed through with a lag. There is a risk the ECB cuts rates once more (possibly September). Given our doubts about the sustainability of the emerging near-term growth impulse, we do not see the ECB under pressure to exit its accommodative policy stance within the next 18 months. 3. Net new credit continues to decline
Monthly flow of bank credit, EUR bn (sa) 200 Total private sector credit 150 100 50 0 -50 2006 2007 2008 2009 Loans adj. for securitisation

Sources: ECB, DB Global Markets Research

4. Public deficit and debt levels are escalating quickly
% of GDP 1 0 -1 -2 -3 -4 -5 -6 -7 -8 1999 2001 2003 2005 2007 2009 General govt balance (lhs) Gross govt debt (rhs) Forecast % of GDP 90 85 80 75 70 65 60

Sources: European Commission, DB Global Markets Research

External balances & financial forecasts
M3 growth, % yoy eop Fiscal balance, % of GDP Public debt, % of GDP Trade balance, EUR bn Trade balance, % of GDP Current account, EUR bn Current account, % of GDP Financial forecasts Official 3M rate 10Y yield USD per EUR JPY per EUR GBP per EUR 2007 11.6 -0.6 66.3 12.1 0.1 11.1 0.1 Current 1.00 1.14 3.42 1.41 134 0.85 2008 7.5 -1.9 69.6 -42.9 -0.5 -93.5 -1.0 3M 1.00 1.30 3.25 1.30 130 0.90 2009F 3.6 -5.7 79.7 -69.3 -0.8 -97.4 -1.1 6M 1.00 1.20 3.00 1.20 126 0.90 2010F 4.0 -6.7 85.8 -38.1 -0.4 -55.3 -0.6 12M 1.00 1.20 3.00 1.18 121 0.83
Sources: Bloomberg, DB Global Markets Research

5. ECB under no duress to exit accommodative policy
3-month EURIBOR, % 6 5 4 3 2 1 0 -1 -2 1999 2001 2003 2005 2007 2009 Actual Taylor Rate Implied Forecast

Sources: DB Global Markets Research, as of June 26

Mark Wall, (44) 20 7545-2087
Page 20 Deutsche Bank AG/London

29 June 2009

World Outlook

Germany: Export dependence has become a drag
• German GDP fell by 3.8% qoq in Q1 and the data reveals that the German economy has been in recession for 4 quarters in a row now. Both net exports and domestic demand subtracted from GDP growth in Q1. Domestic demand was mainly dampened by capital spending, while private consumption made a slightly positive contribution to GDP growth. World trade has shrunk considerably during the global economic crisis, and this development left its traces on German GDP growth. • In recent months sentiment indicators such as the Ifo index or ZEW index have risen strongly. We believe that this increase was mostly driven by the very favourable development of leading indicators in Germany’s important exports markets and by expectations that global fiscal stimuli will spur foreign demand for German products. However, so far growth stimulus programmes abroad do not seem to have supported world trade. The impulses from foreign demand for the German economy remain weak. Accordingly, export growth and production stabilised at a low level, but did not recover in recent months. The recovery in world trade looks set to be relatively soft in the next few months, thus giving only moderate stimulus to the German export sector. We forecast a small pick-up in export growth in H2 2009. However, in 2009 as a whole exports are likely to shrink by 16% yoy. In turn, weak export growth should dampen capital spending, which is why we expect machinery and equipment spending to drop in 2009. This unfavourable development in GDP growth should lead to a strong rise in unemployment. However, in H1 2009 unemployment is likely to rise only moderately, as in this period short-time work will continue to rise strongly, offsetting the pressure on the labour market. Nevertheless, the strong slowdown should finally lead to a rise in unemployment in H2 2009 and in 2010. The rise in unemployment and lackluster wage growth is likely to curb private consumption in the next few quarters. However, in H1 private consumption looks set to be supported by the scrapping scheme for old cars. So private consumption is unlikely to decline much in 2009, even though the savings ratio is likely to rise as well. We believe that the recession in Germany will peter out by the end of 2009 due to a stabilisation and minor pick-up in foreign demand. For 2010 we expect a small rise in GDP growth. However, the growth dynamic should remain low and be driven by exports. The fiscal deficit is likely to rise sharply, mainly due to the automatic stabilisers, but also as a result of the growth stimulus package. Inflation is unlikely to be a hot topic in the next 2 years. In the short term, however, an unexpectedly strong rise in oil prices could be a risk for inflation. Still, the huge negative output gap should keep a lid on inflation. Stefan Bielmeier, (49) 69 910-31789
Page 21 Deutsche Bank AG/London

1. Real economy indicator stabilized at a very low level
130 120 110 100 90 80 70 2002 2003 2004 2005 2006 2007 2008 2009 2010 2005 = 100 German production (industry) German order intake

:

Sources: Bundesamt, DB Global Markets Research

2. German GDP remains weak
6 4 2 0 -2 -4 -6 -8 2000 2002 2004 2006 2008 2010 qoq (rhs) yoy (lhs) % Forecast % 3 2 1 0 -1 -2 -3 -4

Sources: Bundesamt, DB Global Markets Research

Deutsche Bank Forecasts: Germany
(% yoy, unless stated) GDP - Private consumption - Investment - Government consumption - Exports - Imports - Net trade contribution, pp Industrial production Unemployment rate, % HICP Compensation per employee Fiscal balance, % of GDP CA balance, % of GDP 2007 2.6 -0.3 4.6 2.2 7.7 5.2 1.2 5.9 9.0 2.3 1.2 -0.2 7.9 2008 2009F 2010F 1.0 -6.0 0.4 -0.1 0.0 0.2 3.6 -11.7 -0.2 1.8 0.6 0.6 2.2 -16.0 5.0 3.9 -9.1 4.6 -0.4 -3.1 0.4 0.0 -16.0 1.4 7.8 8.4 10.4 2.8 0.2 0.6 1.9 0.9 0.9 -0.1 -4.8 -6.5 6.2 3.4 4.6

Sources: National authorities, DB Global Markets Research

29 June 2009

World Outlook

Other EMU economies
• Growth: All euro area member states contracted in Q1. Germany contracted the most (3.8% qoq), France and Greece the least (1.2%). Despite the ‘credit’ shock, it was by-and-large the export-sensitive economies (Germany, Italy, Netherlands, Finland) that suffered the most in the two quarters following the Lehman bankruptcy. Looking ahead, the more credit-exposed economies (especially the peripherals like Ireland, Spain and Greece) are likely to suffer longer recessions, whereas the less credit-sensitive but competitive, export-sensitive economies like Germany and Finland stand the greatest chance of rebounding quickly if the global economy starts to pick-up. In short, divergence is likely to be a theme in the euro area. Our composite vulnerability index—which combines credit, fiscal, trade and Eastern Europe risk factors—puts Greece, Belgium, Ireland and Austria at the most vulnerable end of the economic risk spectrum and Germany, Finland, Portugal and the Netherlands at the least vulnerable end. Inflation: There is also a core vs. periphery story within inflation. One-third of member states are already recording outright deflation, but the initial countries to deflate and the ones with the strongest deflation are in the periphery (Ireland, Spain and Portugal). This reflects greater sensitivity to energy prices, but also weaker demand. A particular threat to the peripherals is the mixture of debt and deflation. This raises the real value of debt and compounds the deleveraging burden. Compounding the pressure further, Germany is restraining labour costs more than its EMU peers, thus increasing the competitive adjustment burden—the need for prices and costs to decline—that the peripherals must endure. Fiscal: The economic and financial crises are taking their toll on fiscal positions, both deficits and debt levels. The European Commission has already initiated Excessive Deficit Procedures against Ireland, Spain, Greece and France on the basis of 3%+ deficits to GDP ratios for 2008. On the basis of forecasts for 2009, the majority of countries will face corrective procedures as the average deficit heads to 5.7% of GDP. Assuming a slow return to trend GDP growth over the next 4-5 years, even without additional direct financial rescue costs government debt levels will rise dramatically. In 2009, 4 countries (Greece, Italy, Belgium and almost France) have a debt-to-GDP ratio of 80% or more, a level where AAA-ratings are questioned. In 2015, 8 countries (those 4 plus Portugal, Germany, Austria and Ireland) could have 80%+ debt. This is not automatic downgrade territory, but the ratings of the less wealthy, less diversified, and less flexible economies could come under pressure. 1. Peripherals looking at prolonged recessions
:
8 6 4 2 0 -2 -4 -6 -8 -10 Real GDP, % yoy 2007 2009 2008 2010

Portugal
-5 .0 0 .8 -2 .5 -5 .6 -3 .6 -0 .4 -7 .0 -7 .9 -4 .0 1 .4 6 .0 -3 .5 -3 .2 0 .2 -2 .0 -5 .0 -3 .4 0 .5 2 .5 -4 .0 -4 .7 1 .7 1 .5 -0 .5 -1 .2 1 .4 -11 .0 -7 .2 -4 .0 -0 .7 -9 .0 -6 .3 -8 .5 -1 .3 -2 .0 -13 .4

Finland

Greece

France

Ireland

Belgium

Source: DB Global Markets Research

Deutsche Bank Forecasts: Other EMU economies
(% y o y , u n le ss s ta te d ) F ra n ce GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P Ita ly GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P GDP H IC P C A b a l., % G D P F is c a l ba l., % G D P 2 0 07 2.3 1.6 -2 .8 -2 .7 1 .5 2 .0 -1 .8 -1 .5 3 .7 2 .8 -1 0 .1 2 .2 3 .5 1 .6 9 .8 0 .3 2 .6 1 .8 2 .4 -0 .2 3 .0 2 .2 3 .3 -0 .5 4 .1 1 .6 4 .0 5 .2 4 .0 3 .0 -1 4 .0 -3 .6 1 .9 2 .4 -9 .7 -2 .6 6 .0 2 .9 -5 .4 0 .2 20 0 8 2 0 0 9F 2 01 0 F 0 .3 -2 .6 1 .2 3 .2 0 .0 0 .6 -3 .5 -4 .0 -4 .0 -3 .4 -6 .1 -7 .2 -1.0 3.5 -2.7 -2.8 1.2 4.2 -1 0.0 -3.8 2.1 2.2 7.0 1.0 1.0 4.5 -1.5 -1.2 1.7 3.2 3.0 -0.4 0.7 3.9 2.0 4.2 2.9 4.2 -1 3.0 -5.0 0.0 2.7 -1 2.0 -2.6 -2.3 3.1 -5.0 -7.1 1 .1 1 .2 -2 .5 -5 .6 -1 .2 0 .7 -6 .0 -9 .5 1 .6 1 .0 5 .0 -4 .3 1 .3 1 .2 -1 .5 -6 .0 0 .6 1 .2 2 .0 -5 .0 1 .8 1 .1 1 .0 -1 .7 -1 .0 2 .1 -8 .0 -8 .7 -0 .4 0 .5 -7 .0 -7 .3 -2 .0 -0 .3 -1 .0 -1 4 .2

S p a in

N e th e rla n d s

B e lg iu m

A u stria

F in la n d

G re e c e

P o rtu g a l

Ire la n d

Mark Wall, (44) 20 7545 2087

Sources: National authorities, DB Global Markets Research

Page 22

Deutsche Bank AG/London

Netherlands

Austria

Spain

Italy

29 June 2009

World Outlook

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

Sources: DB Global Markets Research and ONS

2. The end is in sight, but will the recovery be durable?
Probability 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0 1 2 3 Probability of remaining in recession beyond a certain number of quarters Full sample Financial crises (high fiscal response) Financial crises

Quarters 4 5 6 7 8 9 10

Sources: DB Global Markets Research and IMF

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

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/Lond

Page 23

29 June 2009

World Outlook

UK: Debt and unemployment to rise well after end of recession
• The labour market should continue to suffer over the coming quarters, however. Unemployment lags growth by six months, and if we are correct in our view that growth will not return back to trend then further job shedding looks likely – albeit at a diminishing pace. Still, unemployment has not risen as much yet as in the early 1980s and 1990s. One reason for this might be increased labour market flexibility, with a larger number of employees accepting lower earnings and working fewer hours in return for keeping their jobs. We forecast the unemployment rate (on the household survey measure) to rise to 10% over the coming year. The public finances continue to weaken – the budget deficit is forecast by the Treasury to rise to around 12% of GDP this year and next, before moving very slowly towards balance by 2018. Little information about how the government believes this recovery might happen have been provided, and we are unlikely to see any detailed plans in advance of the general election – to be held before June 2010. In the aftermath we can expect the government to outline clearer plans for a long-run consolidation of the public finances, which will probably mean lower spending and public sector job losses. We forecast CPI inflation to fall to below 1% in the near-term, before rising back towards 2% by the start of next year as higher VAT is reintroduced. From that point, inflation may move sideways as downward pressures from a negative output gap are outweighed by the positive impact from sterling’s decline since the start of 2007 (notwithstanding its recent recovery) and the significant amount of policy stimulus currently being provided by the central bank and the government. We expect the BoE to leave interest rates where they are and continue with its programme of quantitative easing (GBP125bn, which will be completed at the end of July). We see the first hike in rates in about a year’s time, although the risks are that the Bank moves more quickly than this to withdraw some of the stimulus.
2007 12.7 -2.4 -89.8 -6.4 -40.3 -2.9 Current 0.50 1.20 3.72 1.65 0.85 2008 12.6 -6.0 -92.9 -6.4 -24.5 -1.7 3M 0.50 1.20 3.90 1.44 0.90 2009F 14.0 -12.5 -84.5 -6.0 -27.0 -2.8 6M 0.50 1.20 4.00 1.33 0.90 2010F 6.0 -12.0 -84.1 -5.8 -22.6 -2.2 12M 0.50 1.30 4.30 1.42 0.83
Sources: DB Global Markets Research, ONS and Bank of England

3. Unemployment lags the economic cycle
:
Chg. yoy, thous. -600 -400 -200 0 200 400 600 800 1000 1981 1985 Claimant count (inverted, lhs) GDP (rhs) 1989 1993 1997 2001 2005 2009 Forecast % yoy 6 5 4 3 2 1 0 -1 -2 -3 -4 -5

Sources: DB Global Markets Research and ONS

4. The budget deficit takes a long time to decline
% of GDP Budget deficit (with government forecasts) 14 Forecast 12 10 8 6 4 2 0 -2 -4 1955-56 1965-66 1975-76 1985-86 1995-96 2005-06

Sources: DB Global Markets Research, ONS and HM Treasury

5. Inflation is not falling as quickly as we thought
% yoy 5 CPI inflation outturns 4 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 Forecast Target and BoE forecasts since 2004 (latest forecast is solid grey line)

External balances & financial forecasts
M4 growth, % Fiscal balance, % of GDP, FY Trade balance, GBP bn Trade balance, % of GDP Current account, GBP bn Current account, % of GDP Financial forecasts Official 3M rate 10Y yield USD per GBP GBP per EUR

Sources: DB Global Markets Research, as of June 26

George Buckley, (44) 20 7545-1372
Page 24 Deutsche Bank AG/London

29 June 2009

World Outlook

Sweden: Turning the corner, but recovery threatened by Baltic loans
• The financial and economic crisis has hit Sweden hard, with GDP down close to 6.5% since its peak at the start of 2008. Exports and manufacturing have fallen sharply, while consumption too has been a drag on spending. Government spending has been the only positive (helped by discretionary policy easing), having grown by just over 2% in real terms over the past year. The unemployment rate has hit 9%, a wide margin of spare capacity has opened up and, as a result, core inflation is trending downwards. There are positive signs from the surveys, however, with the PMI having turned upwards notably over the past three months, and both consumer and business confidence having turned the corner. Still, we see Sweden performing the worst of the Nordic economies this year, with next year’s recovery being threatened by the exposure of two large Swedish banks to non-performing loans in the Baltic region. With the pressure off the currency the central bank has trimmed official interest rates by more than the ECB over the past few months to bring the differential back to close to 50bps – where it is expected to remain going forward. GDP has fallen by almost 4% from its peak, although at time of writing the Q1 GDP figures (expected to be weak) had not yet been published. Consumption remains weak, with retail sales having contracted (on an annual basis) now for the past year. Encouragingly, however, production is growing again and surveys are indicating growth in new orders once more. We forecast a 3.5% contraction in GDP this year (the risks may be on the downside given the uncertainties over the Q1 outturn) followed by a lacklustre recovery in 2010. Inflation should fall to 1% and below over the next four quarters as result of spare capacity.

Deutsche Bank Forecasts:
(% yoy, unless stated) GDP UND1X (core inflation) Fiscal balance, % of GDP CA balance, % of GDP Official rates 3M deposit rate 10Y yield SEK per EUR 2007 2.7 2.2 3.4 8.6 Current 0.50 0.91 3.46 11.00 2008 2009F 2010F -0.4 -5.0 1.5 3.5 -0.5 1.0 4.3 -3.0 -5.0 7.8 6.5 7.0 3M 6M 12M 0.50 0.85 3.25 10.35 0.50 1.00 3.00 9.75 0.50 1.25 3.00 9.50

Denmark: Consumer downturn to give way to lacklustre recovery

Deutsche Bank Forecasts:
(% yoy, unless stated) GDP HICP Fiscal balance, % of GDP CA balance, % of GDP Official rate 3M deposit rate 10Y yield DKK per EUR 2007 1.6 1.7 4.9 0.7 Current 1.55 2.22 3.86 7.45 2008 2009F 2010F -1.1 -3.5 0.9 3.4 1.0 1.5 2.9 -1.0 -4.0 2.0 0.8 0.2 3M 6M 12M 1.50 1.80 3.70 7.46 1.50 1.70 3.45 7.46 1.50 1.70 3.45 7.46

Sweden: Recovery on its way, but how durable?
Index 65 60 55 50 45 40 35 30 25 PMI (latest reading is average of Apr & May) (lhs) GDP (rhs) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Sources: National Institutes, DB Global Markets Research

Denmark: Consumers have suffered
% yoy 6 4 2 0 -2 -4 -6 -8

15 10 5 0 -5 -10

% yoy

Danish retail sales

1998

2000

2002

2004

2006

2008

Deutsche Bank AG/London

Page 25

29 June 2009

World Outlook

Norway: Shallower recession and stubborn inflation to prevent further rate cuts
• The Norwegian economy has performed better than its neighbours recently, with the downturn in the economy having been limited by continued contributions to growth from the offshore sector. But even mainland GDP has fallen less sharply than in Sweden or Denmark, by a total of 1.7% from its peak. Moreover, inflation remains around the 3% mark, and unemployment is not rising particularly quickly. That said, the survey evidence remains on the weak side, with the latest Business Tendency Survey falling even further below the levels it reached back in the early 1990s (when the economy experienced a more modest recession). The central bank expects to keep policy rates close to the 1% mark over the next year, following its decision to cut rates to 1.25% at its most recent meeting. We forecast rates to remain at their current level as signs of economic recovery continue to emerge. At its latest meeting the SNB left interest rates on hold (a target rate of 0.25%) and continued with its unconventional policy of a) buying CHF private sector bonds and b) intervening to prevent CHF appreciation. The economy has not contracted by as much as has been the case elsewhere (down 1.6% versus a 4.9% fall in the euro area, for example), despite the strength of the currency, the economy’s reliance on the financial sector and the significant exposure to trade (exports are worth 50% of total Swiss GDP). However, the surveys have remained particularly weak, with the headline PMI still below 40 at the time of writing. Moreover, core inflation has fallen below 1% and is on a downward trajectory, while headline inflation is likely to print negative in 2009 as a result of lower commodity prices and the robust currency. Expect monetary policy to remain highly expansionary and unconventional for some time to come.
GDP growth, % yoy Forecast

Deutsche Bank Forecasts:
(% yoy, unless stated) GDP CPIATE (core inflation) Fiscal balance, % of GDP CA balance, % of GDP 2007 3.2 0.7 13.9 16.0 Current Official rates 3M deposit rate 10Y yield NOK per EUR 1.25 1.95 4.20 9.05 2008 2009F 2010F 2.1 -1.2 1.0 3.8 1.5 1.5 15.9 13.0 9.0 19.5 9.0 6.0 3M 1.25 1.80 4.05 8.54 6M 1.25 1.85 3.90 8.00 12M 1.25 2.10 4.00 8.00

Switzerland: A prolonged road to recovery with core deflation risks

Deutsche Bank Forecasts:
(% yoy, unless stated) GDP Consumer prices Fiscal balance, % of GDP CA balance, % of GDP 2007 3.3 0.7 0.8 10.0 Current Official rates 3M Libor 10Y yield CHF per EUR 0.25 0.33 2.34 1.53 2008 2009F 2010F 1.6 -2.3 0.0 2.4 -0.7 0.7 1.2 -1.5 -3.0 9.3 7.0 5.0 3M 0.25 0.40 2.15 1.54 6M 0.25 0.40 2.00 1.56 12M 0.25 0.50 2.00 1.56

Norway: Best European performer outside EMU
8 6 4 2 0 -2 -4 -6 1994 1997 2000 2003 2006 2009 Sweden Denmark Norway Switzerland

Switzerland: CPI falls in 2009, but not ‘deflation’
CPI inflation, % yoy 3 Forecast 2

1 0 -1 1994 1998 2002 2006 2010

Sources: National Institutes, DB Global Markets Research

George Buckley, (44) 20 7545-1372
Page 26 Deutsche Bank AG/London

29 June 2009

World Outlook

CE3 countries: Sustainable recovery still some time away
Czech Republic: Is the worst behind us? • Czech has enjoyed its fair share of green shoots over recent months. Since January the manufacturing PMI has recovered 9 points while the EC’s survey of economic sentiment has also turned. Nonetheless the economy continues to contract and operates well below potential. Capacity utilization has fallen 16.1 points from its peak in Q2-08 to 74.3, its lowest level since Q2-93. • With the output gap to potentially widen to in excess of 5% of GDP by end-2010, inflation in yoy terms below target (1.3% versus a target of 3% and 2% for 2009 and 2010 respectively) and core inflation negative (-1.3% yoy), the CNB is unlikely to have to tighten monetary policy over the coming quarters. On fiscal policy automatic stabilizers are at work with the deficit to breach the Maastricht 3% threshold for the first time in 4 years in 2009. • Czech’s banking sector is the only of the new EU countries that holds excess deposits over loans. To date this has not provided it with much protection. Indeed more so than elsewhere in the region foreign banks have withdrawn funds (EUR2.3bn over the past 3 quarters). Looking forward, however, a more favourable liquidity position, the potential for further repatriation of capital by locals back onshore (over the past 3 quarters EUR6.2bn), a lower private sector credit stock and a much more limited amount of FX debt should see lending resume earlier than in its peers. • Given a modest C/A deficit and lower levels of external indebtedness than its peers, CZK should outperform the rest of the CE3 currencies though we continue to favour gradual weakness. Hungary: Fundamental vulnerabilities remain • The combination of fiscal tightening, a collapse in credit extension and a sharp slump in external demand means that Q1 is very unlikely to mark the bottom for real economic activity. Should our forecast for GDP prove on the mark, Hungary will face its sharpest contraction since at least 1992. • Government adherence to the IMF programme to date has been impressive and newly appointed PM Bajnai appears keen to adhere to fiscal consolidation. This has facilitated smooth reviews of the IMF/EC programme to date, helping to boost FX reserves from EUR16.1bn last September to EUR24.3bn in May. By end-June the government will have drawn EUR14bn of its EUR20bn programme and used EUR8bn. CE3 PMIs have recovered but still point to contraction
:

Index 60 55 50 45 40 35 30 2002 2003 2004 2005 2006 2007 2008 Poland Hungary Czech

Index 60 55 50 45 40 35 30 2009

Sources: DB Global Markets Research, Reuters

Deutsche Bank Forecasts: Czech Republic
(% yoy, unless stated) GDP - Private consumption - Investment - Government consumption - Exports - Imports - Net trade contribution, pp Industrial production Unemployment rate, % Consumer prices Compensation per empl. Fiscal balance, % of GDP CA balance, % of GDP 3M deposit rate 10Y yield CZK per EUR
% of GDP

2007 6.0 5.2 6.7 0.4 14.9 14.2 0.7 9.1 6.6 2.8 9.3 -1.0 -3.2 Current 1.86 5.23 26.0

2008 2009F 2010F 3.7 -3.4 1.7 2.9 -2.8 1.1 3.1 -12.0 1.8 0.9 2.5 1.0 6.9 -15.0 4.2 4.6 -16.4 3.8 2.3 1.0 0.5 0.8 -4.5 2.4 5.4 7.3 8.3 6.4 1.4 1.0 8.5 5.0 4.5 -1.2 -4.8 -4.4 -3.5 -0.2 -0.4 3M 1.50 5.25 27.2 6M 1.20 5.25 27.8 12M 1.20 5.50 27.4
% GDP 6 4 2 0 -2

Our credit impulse indicator: credit is a drag on growth
6 4 2 0 -2 -4 -6 2005 2006 2007 2008 2009 Poland Hungary Czech

-4 -6

Sources: National central banks, DB Global Markets Research

Deutsche Bank AG/London

Page 27

29 June 2009

World Outlook

CE3 countries: Sustainable recovery still some time away
A combination of factors continues to prevent the NBH from easing rates further. Having hiked by 300bp last October, the NBH cut rates by 100bp over Nov-Dec. By February, however, HUF weakness prompted renewed discussions of rate hikes, damaging central bank credibility. That the government has been unable to sell a meaningful amount of debt to the market since last September also suggests investor sentiment remains weak. This, combined with higher inflation due to local food prices, higher global energy prices and a VAT hike scheduled for July, could prove sufficient to keep the NBH on hold over the coming months. • From a longer perspective, Hungary faces a number of challenges ahead. Public sector debt will near 85% of GDP by year-end while gross external debt stood at 112% of GDP at the end of last year and is rising. Meanwhile the IMF estimates potential GDP growth of just over 2%. As a result any meaningful reduction is these debt levels will prove at best a multi-year process. In the meantime financing of both the public and private sector will remain vulnerable to another downturn in the global economy and risk appetite. Poland: Muddling through • A lower level of trade openness and a wider fiscal deficit has helped to soften the downturn for Poland relative to its peers. Though we are concerned that it will be revised downwards, GDP in neither Q4 last year nor Q1 this year, showed contraction. • That economic activity is weak is reinforced by the contraction in the C/A deficit. Compared with a deficit of EUR6.3bn over the first 4 months of 2008, Poland registered a C/A surplus of EUR0.1bn over Jan-Apr 2009. In part this reflects higher EU inflows but also a narrowing of the trade and incomes balance. FDI flows YTD are only 1/3 of those for the same period in 2008. New bank and corporate inflows have also dropped, though at this point outflows appear limited. • Inflation has proved sticky and above target for most of this year. We are not concerned about underlying inflation pressures however. YTD CPI has increased 3.3% but food, housing and transport accounted for 2.9pp of the rise (though less than 60% of the CPI basket). The jobs market is weakening and wages have shown signs of adjusting downwards. While a bout of food and energy inflation means that the rate cutting cycle is nearing an end, we doubt that the NBP will find room to hike rates over the next 4 quarters. • Instead the local authorities could be better advised to draw off the USD20.6bn flexible credit lending facility arranged with the IMF to support lending to local corporates and/or help finance the fiscal deficit. This would help not only support PLN but also ease the crowding out of the private sector. Gillian Edgeworth, (44) 20 7547-4900
Page 28

Deutsche Bank Forecasts: Hungary
(% yoy, unless stated) GDP - Private consumption - Investment - Government consumption - Exports - Imports - Net trade contribution, pp Industrial production Unemployment rate, % Consumer prices Compensation per empl. Fiscal balance, % of GDP CA balance, % of GDP 3M deposit rate 10Y yield HUF per EUR
1 Jan-08 = 100 115 105 95 PLN 85 75 Jan 08 May 08 Sep 08 Jan 09 May 09 HUF CZK 75 85

2007 1.1 -1.8 1.5 -2.2 15.9 13.1 1.1 8.2 7.3 8.0 8.0 -4.9 -6.4 Current 11.30 10.21 276

2008 2009F 2010F 0.5 -6.0 0.8 -0.4 -5.2 0.5 0.8 -12.0 0.1 -2.1 -1.8 -0.5 4.6 -15.0 3.5 4.0 -17.7 3.3 0.9 2.1 0.4 -0.8 -10.0 2.5 7.8 10.0 12.0 6.1 5.1 5.8 7.8 2.0 3.5 -3.4 -3.8 -3.2 -8.4 -1.6 -1.4 3M 9.60 9.75 295 6M 8.20 9.25 315 12M 7.80 9.00 298

Nominal effective exchange rate performance
1 Jan-08 = 100 115 105 95

Deutsche Bank Forecasts: Poland
(% yoy, unless stated) GDP - Private consumption - Investment - Government consumption - Exports - Imports - Net trade contribution, pp Industrial production Unemployment rate, % Consumer prices Compensation per empl. Fiscal balance, % of GDP CA balance, % of GDP 3M deposit rate 10Y yield PLN per EUR 2007 6.7 5.0 17.6 3.7 9.1 13.6 -2.0 9.7 12.7 2.5 9.1 -1.9 -4.7 Current 4.20 6.35 4.50 2008 2009F 2010F 4.8 -1.4 1.0 5.4 -0.9 0.9 7.9 -10.4 2.0 0.0 1.5 0.5 5.8 -12.0 2.8 6.2 -13.6 2.7 -0.4 1.4 -0.1 2.9 -9.5 2.3 9.8 11.1 13.4 4.2 3.4 2.5 10.6 4.5 5.0 -3.9 -6.9 -5.4 -5.4 -1.5 -2.2 3M 4.00 6.75 4.70 6M 3.70 6.60 4.75 12M 3.60 6.80 4.54

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London

29 June 2009

World Outlook

Peripheral dollar bloc: Recession themes persist
Economic outlook • CAN: Canada is showing some signs of improvement. Existing home sales are up, as is consumer spending and investor confidence. A Q3-2009 turnaround remains likely, driven by monetary and fiscal stimulus. • AUS: The exceptionally stimulatory monetary and fiscal stance in Australia is beginning to show signs of traction. Housing market activity especially has picked up and public final demand will strengthen in H2-2009. • NZ: The economy likely contracted for a 6th quarter in Q2. But indicators suggest a return to growth by the end of the year with the easing of monetary and fiscal policy boosting confidence and housing market activity. Monetary policy • CAN: A very large output gap indicated by high unemployment and very low inflation will likely cause the BoC to leave rates at record lows into the first quarter of 2010. The probability of QE is low. • AUS: Recent commentary from the RBA has reiterated a clear easing bias. Despite signs of traction in domestic activity, we expect the cash rate to move lower towards the end of this year. • NZ: The RBNZ left the OCR at 2.5% but retains an easing bias. Provided that the dataflow continues to improve, we think it is most likely that the OCR will remain at current levels until mid 2010. Peripheral $-bloc currencies Notwithstanding the rallies in AUD and NZD since our last Outlook, the global data remains at levels that continue to suggest medium-term headwinds for both currencies. Accordingly, we expect to see both currencies come under renewed pressure at some point in coming months. The recent rise in oil prices looks overplayed and we anticipate any correction to be reflected in a weaker CAD.

Deutsche Bank Forecasts: Peripheral $-bloc
Current Official overnight cash rate Canada Australia New Zealand 10Y yield Canada Australia New Zealand Exchange rate (vs USD) Canada Australia New Zealand 0.25 3.00 2.50 3.43 5.62 6.02 1.15 0.81 0.65 3M 0.25 3.00 2.50 4.00 5.75 6.25 1.20 0.74 0.60 6M 0.25 2.75 2.50 3.50 5.00 5.50 1.25 0.68 0.56 12M 0.75 2.50 3.00 3.50 5.00 5.50 1.23 0.68 0.56

Source: DB Global Markets Research, as of June

Australia’s GDP forecast to outperform
8 6 4 2 0 -2 -4 New Zealand Canada Australia % yoy GDP in the Dollar Bloc Forecast

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Sources: DB Global Markets Research, ABS, Statistics New Zealand, Statistics Canada

Macro-economic activity & inflation forecasts
Q 1F CA N A D A A c t iv it y ( % q o q , s a a r ) GDP U n e m p lo y m e n t r a t e , % P r ic e s ( % y o y ) CPI A U S T R A L IA A c t iv it y ( % q o q , s a a r ) GDP D o m e s t ic d e m a n d N e t t r a d e c o n t r ib u t io n ( p p ) U n e m p lo y m e n t r a t e , % P r ic e s ( % y o y ) CPI C ore C P I N E W Z E A LA N D A c t iv it y ( % q o q , s a a r ) GDP D o m e s t ic d e m a n d U n e m p lo y m e n t r a t e , % P r ic e s ( % y o y ) CPI 2009 Q 2F Q 3F Q 4F Q 1F 2010 Q 2F Q 3F Q 4F 2008 % yo y 2009F % yo y 20010F % yo y

-5 .4 7 .8 1 .2

-0 .6 8 .4 -0 .1

2 .0 9 .0 -0 .3

2 .6 9 .0 1 .7

2 .8 9 .0 2 .6

3 .0 8 .8 2 .5

4 .6 8 .5 2 .3

3 .6 8 .2 2 .3

0 .4 6 .1 2 .4

-1 .7 8 .5 0 .6

2 .8 8 .6 2 .4

1 .5 -4 .1 8 .7 5 .3 2 .5 2 .8

-0 .3 -1 .9 1 .4 5 .6 1 .2 1 .3

-0 .4 -1 .9 -0 .2 6 .3 0 .7 0 .7

2 .1 3 .6 -0 .2 7 .0 1 .3 0 .5

0 .9 4 .9 -0 .9 7 .5 1 .8 0 .8

1 .2 1 .1 -1 .3 7 .9 1 .9 1 .1

2 .1 0 .0 -0 .2 8 .0 1 .8 0 .9

3 .8 4 .3 -1 .1 7 .8 1 .7 0 .7

2 .4 4 .4 -1 .5 4 .3 4 .4 4 .0

0 .2 -0 .9 3 .4 6 .0 1 .4 1 .3

1 .3 2 .0 -0 .6 7 .8 1 .8 0 .8

-3 .5 -3 .3 5 .0 3 .0

-1 .6 -7 .1 5 .8 2 .0

1 .4 -2 .3 6 .6 1 .2

2 .7 1 .7 7 .3 2 .0

3 .5 2 .6 7 .5 2 .1

3 .6 2 .9 7 .4 1 .6

3 .5 3 .1 7 .4 1 .7

3 .5 3 .3 7 .3 2 .2

0 .3 -0 .7 4 .2 4 .0

-1 .8 -2 .6 6 .2 2 .0

2 .8 1 .4 7 .4 1 .9

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London

Page 29

29 June 2009

World Outlook

Peripheral dollar bloc: Recession themes persist
Canada • After contracting more in Q1-2009 than it has since Q11990, the Canadian economy will likely continue to shrink into the second half of this year. As has been the case for the past several quarters, this further contraction in overall GDP will be caused by the persisting effects of weak U.S. demand for Canadian exports and it is likely to occur despite a gradual strengthening of domestic demand. • Early in the second half of the year, growth in Canada should turn positive in response to an increase in U.S. exports, the effect of unprecedented monetary and fiscal stimulus, rising commodity prices and a strengthening of consumer and investor confidence and a further easing of lending conditions. • Against this background of weak growth and very low, probably negative inflation, the Bank of Canada will probably leave its overnight rate at 0.25% into 2010. Australia • Since our last Outlook the exceptionally stimulatory monetary and fiscal policy stance has underpinned a recovery in housing activity and supported a rise in household consumption. • Over the second half of this year, we expect public investment to increase, offsetting continued weakness in private business investment and also a likely retracement from the cash bonus-induced surge in household consumption. • Against this backdrop, the themes we have been detailing for some time remain relevant: a rolling recession, from the household to the corporate sector with sharply contracting national income due to the global recession-induced slump in the terms of trade. • The outlook for inflation in this environment is subdued and should provide the RBA with sufficient scope to maintain its easing bias for the foreseeable future. New Zealand • Information available since our last Outlook has made us more confident that the economy will emerge from recession over the second half of this year, especially if global economic and financial conditions stabilize. • Business spending will likely continue to contract in the near-term. But a combination of substantial monetary and fiscal policy easing and rising migrant inflows should lift household spending over coming months. House sales have lifted significantly of late, buoyed by low mortgage rates, and house prices appear to be stabilizing. We expect residential construction to increase before long whilst retail spending also seems likely to begin growing modestly over coming months. • The key downside risks to the economy remain around the global outlook and the risk that markets pre-empt the recovery. NZD strength would be a concern. Canada: Terms of trade have weakened sharply
:
130 125 120 115 110 105 100 2004 2005 2006 2007 2008 2009 2010 Index Canada - Terms of trade

Sources: DB Global Markets Research, Statistics Canada

Australia: Household spending has responded to cash bonus payments to households
19.5 19.3 19.1 18.9 18.7 18.5 18.3 18.1 17.9 Jan-08 May-08 Sep-08 Jan-09 May-09 USD bn Retail as reported Additional monthly retail expenditure Retail + Counter factual Recent retail as reported Rudd-Drop 1 announced mid-October Retail if previous trend had persisted Value of retail turnover

Sources: DB Global Markets Research, ABS

New Zealand: House sales are picking up, construction will follow
2500 2300 2100 1900 1700 1500 1300 1100 900 700 1992 1996 2000 2004 2008 Building consents, ex apartments (lhs) House sales (rhs) 2000 10000 8000 6000 4000 level level 12000

Sources: DB Global Markets Research, Statistics New Zealand

Darren Gibbs, (649) 351 1376; Tony Meer, (612) 8258 1688; John Clinkard, (416) 682 8221
Page 30 Deutsche Bank AG/London

29 June 2009

World Outlook

Asia (ex Japan): Stimulus supports China and India, but for how long?
A precipitous decline in activity, but recovery in sight • Growth in Asian GDP slowed from 7% in Q3 2008 to 3% in Q1 2009, the largest decline in growth over two quarters in 20 years. We think Q1 likely was the trough of this recession for the region as a whole, although some economies may see further downside to yoy growth in Q2 before recovery begins. But our 2010 forecasts are still generally well below pre-recession potential growth rate estimates. Vigorous policy response supports China and India… • China, relatively unscathed by the Asian crisis (its exports/GDP ratio has almost doubled from 20% to 36% since 1998), has seen GDP growth slow from 9% to 6.1% over the past two quarters. In India (where exports are only 23% of GDP), GDP growth slowed from 7.8% to 5.8%, a much better outcome than we had expected. In both countries, fiscal and monetary stimulus has been employed aggressively to support activity in the face of this external shock. • In China, the government responded to the decline in exports late last year by unveiling an RMB4tn (over two years) infrastructure investment program in November. In Q1 2009, government expenditures rose 35% yoy, the fastest growth in more than 12 years. Bank lending accelerated sharply, rising 27% yoy in Q1 – the fastest growth in credit in 15 years. In India, during the six months to March 2009, government expenditures rose 45% yoy, the fastest in at least 10 years. The contribution of government consumption to GDP growth during those two quarters averaged 3.6ppts – more than half the reported growth rate of GDP. The RBI has cut the repo rate by 425bps and the CRR by 400bps since October, although this has not prevented credit growth slowing from 25% yoy in Q4 to 15% recently. ….but will it be sustained? • In China, though, reminiscent of the “stop-go” policies of the past, the stimulus was abruptly removed in Q2. While yoy credit growth continued to rise, net new lending was only RMB1.3tn in April and May combined, just half the average increase in each of the previous three months, on average. Government expenditure growth slowed to 19.5%. With fiscal revenues falling 7% ytd versus a budgeted 8% annual increase, concerns about fiscal sustainability have apparently convinced policymakers to scale back fiscal stimulus. Similarly, concerns about a potential deterioration in asset quality amid break-neck loan growth have apparently triggered at least a temporary tightening of credit conditions. 1. Asia-8 and G-2 GDP growth
:

% yoy 10 8 6 4 2 0 -2 -4 -6

Asia-8 (lhs)

G-2 (rhs)

% yoy 6 4 2 0 -2 -4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Sources: DB Global Markets Research. Notes: G-2 is US and EU; Asia-8 is HK, Indonesia, Malaysia, the Philippines, Singapore, S. Korea, Taiwan and Thailand.

2. Asian exports and the ISM index
% yoy, 3mma 40 30 20 10 0 -10 -20 -30 1993 1995 1997 1999 2001 2003 2005 2007 2009 Exports (lhs) ISM (-3) (rhs) 3mma 65 60 55 50 45 40 35 30

Source: DB Global Markets Research

Deutsche Bank Forecasts: Asia (ex. Japan)
(% yoy, unless stated) Real GDP growth - Private consumption - Investment - Government consumption - Exports - Imports Industrial production CPI CA balance, % of GDP Real GDP growth Asia ex China and India 2007 9.6 7.9 11.9 7.0 15.0 12.2 12.6 4.4 7.2 5.9 2008 6.8 6.4 7.7 11.5 9.3 13.8 7.5 6.5 5.6 2.9 2009F 4.2 3.9 4.5 8.3 -12.1 -14.3 2.6 1.3 4.4 -2.3 2010F 5.8 5.1 6.0 6.9 6.5 4.7 7.0 2.9 3.9 3.2

Sources: National authorities and DB Global Markets Research

Deutsche Bank AG/London

Page 31

29 June 2009

World Outlook

Asia (ex Japan): Asia-8 simply following the G-2 lead
• In India, with the combined central and state government deficits likely to top 10% of GDP, we expect the government will gradually ease back its spending to prevent a further widening of the deficit. Monetary policy settings are accommodative, and we think strengthening private demand can more than offset the withdrawal of fiscal stimulus. While in India we see GDP growth slowing in Q2 but recovering thereafter as private demand improves, in China we see the opposite. Powerful stimulus in Q1 will likely lead to an even stronger qoq GDP growth rate in Q2. But by year-end, the withdrawal of stimulus will, we think lead growth sharply lower. By mid-2010 we expect growth to be again in the 6% - 6.5% range. As in India, we do not expect there to be further fiscal stimulus beyond what has already been planned and there is not much room for further monetary easing.

Deutsche Bank Forecasts
(% yoy, unless stated) China GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP GDP CPI CA bal., % GDP Fiscal bal., % GDP 2007 11.9 4.8 9.5 0.7 6.4 2.0 12.3 7.5 9.4 5.4 -1.0 -6.1 6.3 6.0 2.4 -1.2 6.3 2.0 15.6 -3.2 7.2 2.8 4.3 0.3 7.8 2.1 23.4 11.8 5.1 2.7 0.6 3.8 5.7 1.8 8.3 -0.3 4.9 2.2 6.4 -1.1 2008 2009F 2010F 9.0 5.9 7.2 -0.4 2.4 4.3 14.2 0.1 7.3 8.7 -3.2 -10.8 6.1 9.8 0.1 -0.1 4.6 5.4 17.5 -4.8 3.7 9.3 2.8 -1.2 1.1 6.5 14.9 9.4 2.2 4.7 -0.7 1.2 0.1 3.5 6.7 -2.0 2.6 5.5 -0.1 -0.4 7.5 0.0 5.6 -4.0 -4.5 0.5 15.5 -5.6 5.5 3.5 -1.5 -10.4 4.0 5.0 0.4 -1.7 -5.0 0.9 14.8 -8.0 2.0 4.0 0.9 -0.7 -7.5 -0.7 14.8 3.4 -2.6 2.6 2.6 -5.3 -4.9 -1.0 8.6 -5.8 -5.8 0.3 5.9 -5.8 7.2 2.0 5.2 -4.6 2.5 -1.5 17.7 -4.9 6.0 5.1 -1.4 -9.8 4.0 5.7 0.1 -1.5 3.0 2.3 18.7 -7.4 3.5 4.0 0.0 -2.5 4.0 -1.1 16.6 3.0 2.8 2.8 1.0 -3.7 3.0 1.5 7.9 -4.9 3.3 3.2 6.1 -6.8

Hong Kong

India

Indonesia

Asia-8 following the G-2 closely • Asia ex-China and India (“Asia-8”) has, as a group, essentially tracked the US and EU economies (“G-2”) down as our first chart shows. Based on our forecasts for the US and Europe, we should expect Asia-8 GDP growth to fall a little in Q2, rise back to the Q1 level in Q3 and then rise sharply in Q4. As has been the case over the past decade, GDP growth in the Asia-8 economies will likely rise more quickly over the next year than growth in the G-2. But this is in no sense an “Asia-led” or “domestic-demand-led” recovery: it is simply the consequence of tremendous operational leverage with respect to the G-2 business cycle. • As our second chart shows, while aggregate exports in Asia have tentatively bottomed out – the USD value of exports has stopped falling but is not rising either and the yoy growth rate has almost imperceptibly improved in May – the ISM suggests a significant improvement in the data lies ahead. While the ISM was actually negatively correlated with Asian exports during 200507, it was for many years a reliable leading indicator and we think it reasonable that growth in Asian exports and industrial output will improve from here as the G-2 economies stabilize and then begin to grow. • South Korea has been a notable outlier in this group, seemingly because of last year’s KRW depreciation which has supported a complete recovery of export volumes and attracted a surge in tourism receipts. • We caution, however, that even in South Korea actual and disguised unemployment in Asia are rising and we would not be surprised to see consumption growth – which began slowing in early 2008, long before exports did – remain weak until well after the turn in exports.

Malaysia

Philippines

Singapore

Korea

Taiwan

Thailand

Sources: CEIC and DB Global Markets Research

Michael Spencer, (852) 2203-8305

Page 32

Deutsche Bank AG/London

29 June 2009

World Outlook

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

Sources: Global Markets Research

2. CPI inflation, YoY
32 % yoy 28 24 20 16 12 8 4 0 ARG BRA CHI COL ECU MEX PEN VEN 2007 2008 2009F 2010F

Sources: Global Markets Research

Deutsche Bank Forecasts: Latin America
(% yoy, unless stated) Real GDP growth - Private consumption - Investment Trade balance, USD bn - Exports, USD bn - Imports, USD bn Inflation Industrial production Unemployment, % Fiscal balance, % of GDP CA balance, % of GDP 2007 5.4 6.7 13.3 93.4 696.9 603.5 6.3 6.8 7.3 -0.2 0.8 2008 4.4 5.2 12.3 86.8 801.2 714.4 8.8 4.4 7.0 -0.8 -0.4 2009F -2.3 -1.4 -8.3 24.3 616.9 592.6 6.3 -4.7 8.4 -0.8 -1.3 2010F 3.0 2.7 5.4 21.9 673.1 651.2 6.6 3.8 7.7 -0.6 -1.2

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London

Page 33

29 June 2009

World Outlook

Latin America: Safe but recovering unevenly
Basic economic fundamentals remain strong •In general, the region remains relatively solid. After years of current account surpluses and floating FX regimes, Latin America has reduced currency mismatches in their balance sheet, with the public sector becoming a net creditor of the rest of the world in countries such as Brazil, Chile, Mexico, Peru, Venezuela and Colombia. Even in the countries where FDI has been strong, like Chile, Colombia, Peru, and Mexico, direct foreign participation has represented half of total growth financing in recent years. Therefore, FDI reduction will hit harder LatAm than overall credit rationing, although the indirect effect of increasing credit costs will certainly not be negligible and indiscriminate short term external rationing remain a serious risk. In the meantime, leverage levels have remained relatively low given prudent monetary policies and incipient capital market structures. •Although commodities dependence remains a source of vulnerability (around 60% of regional exports come from commodities), current international positions appear adequate to withstand a further decline in commodity prices or a prolonged continuation of current credit rationing in international markets. The ability to access IMF or Fed funding creates an additional layer of support, but also of further credit differentiation in the region, favoring the strongest economies, like Brazil; Chile; Mexico; Peru; and to a lesser extent Colombia. Thus, based on robust external positions plus the additional funding available from multilateral sources, we do not see these economies facing serious rationing of foreign credit. The less market friendly economies in the region may find it different. •Fiscal situations have also improved markedly helping to withstand the expected sharp reduction in public revenues this year. Furthermore, relatively healthy local financial institutions (for the reasons explained above) have avoided massive fiscal shocks arising from banks or companies bail out. Indeed, despite negative spillover effects on debt dynamics from weak economic growth and wide sovereign spreads, average public debt ratios in Latin America are projected to remain stable or decline over the next decade. Countercyclical policies to help this time around •Improved economic fundamentals and strong antiinflationary institutions have allowed regional Central Bank to behave counter-cyclically. This is the very first time monetary policy easing could be contemporaneous with weakening exchange rates in the region, also reflecting the improved balance sheet position of the different countries. Based on our calculations, monetary easing has still some more room to go in countries like Brazil, Chile, Colombia, Mexico, and Peru despite aggressive rates cut already. This notwithstanding, local currencies are expected to stabilize or appreciate in the remainder of the year, or after significant currency depreciation since the onset of the global crisis. Gustavo Cañonero, (1) 212 250-7530
Page 34 Deutsche Bank AG/London

3. Current account, % GDP
15 12 9 6 3 0 -3 -6 ARG BRA CHI COL ECU MEX PEN VEN % GDP 2007 2008 2009F 2010F

Sources: National authorities, DB Global Markets Research

Deutsche Bank Forecasts
(% yoy, unless stated) Argentina GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP 2007 8.7 11.1 3.3 5.4 4.5 0.3 5.1 7.8 4.5 6.8 5.7 -4.0 2.6 3.3 4.2 3.2 3.8 -0.9 8.4 3.9 1.8 8.4 22.5 7.4 2008 2009F 2010F 6.7 22.6 2.7 5.4 4.6 -1.8 4.6 7.1 -3.1 3.5 7.7 -2.5 5.3 8.8 1.3 1.8 6.5 -1.8 9.3 6.7 -3.5 4.5 30.9 13.9 -2.5 17.0 1.8 -1.0 4.2 -0.8 -0.5 0.1 -0.4 0.0 4.3 -4.6 -3.5 1.8 -3.9 -6.0 4.2 -2.2 3.8 3.0 -3.5 -0.3 24.0 0.3 1.5 16.6 2.5 4.0 4.2 -1.9 2.9 2.4 2.7 2.5 4.4 -3.6 0.5 3.5 0.2 2.0 3.4 -2.3 5.5 3.0 -2.8 3.0 30.0 1.8

Brazil

Chile

Colombia

Ecuador

Mexico

Peru

Venezuela

Sources: National authorities, DB Global Markets Research

29 June 2009

World Outlook

EMEA: Tentative signs of recovery
Russia: IP decline persists • Russia’s official statistical agency recently revised its estimate for the contraction in Q1 2009 GDP from 9.5% to 9.8%. The size of the revision is not too significant but it is indicative of the severity of the decline at the beginning of this year. The downturn in the real sector persisted in Q2 2009, with April figures on fixed investment growth (-16.2% yoy) and industrial production (-16.9% yoy) disappointing on the downside. Household spending slowed down further (5.3% yoy growth in April), though overall it stayed more resilient than other segments of the economy, particularly given the significant increase in unemployment. The latter increased from 10% in March to 10.2% in April (ILO definition), though the increase in the number of unemployed by 0.2m in April is the lowest since mid-2008. Furthermore, in May the government reported notable decreases in registered unemployment. • While real sector performance continues to disappoint, Russia’s inflation started to decline appreciably since March. In May it reached 0.6%, which puts the 12month inflation rate at 12.3%, which in turn compares with the 14% registered at the end of March. The main factors accounting for the deceleration in inflation are the stronger rouble as well as the compression in demand. We continue to expect a further deceleration in inflation in Q3 2009, with a significant possibility of deflation taking place during that period. Our forecast for 2009 CPI inflation is 11.2%. The notable reduction in inflation is providing more scope for the monetary authorities to lower interest rates. On June 5th the CBR undertook yet another interest rate reduction of 50 basis points with respect to the refinancing rate (the third such step so far this year), which brought the refinancing rate to 11.5%. Finally, on the exchange rate front, in May the rouble continued to strengthen significantly, mostly on the back of higher oil prices and increased capital inflows. In the past month concerns over excessive rouble strength have intensified, with Alexey Kudrin Russia’s Finance Minister declaring that the Rb/$30 level was seen as close to critical, with further rouble appreciation beyond this level seen as undesirable. Turkey: Taking a harder than expected hit • While the external financing gap seems to be declining on the back of rapid adjustment in the current account deficit, the fiscal gap is growing and has become the prominent concern for economic recovery. The government has responded to the collapse in growth with fiscal stimulus (temporary tax cuts, increasing transfer payments and employment in the public sector) and the CBT has cut policy rates by a cumulative 800bps bringing the ex-ante real interest rate down to an unprecedented level below 2.5%. Russia: Inflation is slowing down
:

20 % yoy 18 16 14 12 10 8 6 2002 2003 2004 2005 2006 2007 2008 2009 2010 12.3% CPI

Sources: Rosstat, DB Global Markets Research

Turkey: Openness and IP in selected EM
4 0 -4 -8 -12 -16 -20 -24 0 Taiwan 50 100 150 openness excluding commodities (% GDP) Turkey South Korea Czech Rep R2 R2=0.35 Malaysia IP (yoy Aug-Mar 08/ 09 over 07/ 08) Argentina

Sources: DB Global Markets Research

Deutsche Bank Forecasts: EMEA
(% yoy, unless stated) Real GDP growth - Private consumption - Investment Trade balance, USD bn - Exports, USD bn - Imports, USD bn CPI Industrial production Unemployment, % Fiscal balance, % of GDP CA balance, % of GDP Real GDP growth EMEA incl. CE-4 countries 2007
6.8 10.0 17.2 33.4 767 734 10.5 6.0 8.7 1.3 -0.2 6.6

2008
4.3 7.4 7.1 70.6 981 910 12.6 1.7 9.0 0.2 0.2 4.2

2009F
-3.3 -1.6 -8.1 -26.7 746 772 9.3 -5.8 11.1 -5.8 -2.2 -3.2

2010F
2.9 3.9 5.2 -33.1 806 839 8.5 2.0 10.5 -4.0 -3.0 2.5

Sources: National authorities, DB Global Markets Research

Deutsche Bank AG/London

Page 35

29 June 2009

World Outlook

EMEA: Tentative signs of recovery
• While confidence indices and PMI numbers indicate a mild pick up in economic activity, these numbers show more of a gradual normalization than a shift to sustainable recovery, which requires improvement in bank lending among other factors. The Treasury’s domestic debt rollover ratio has been running at well over 100% leading to a deeper liquidity crunch to which the CBT has responded by stepping up its funding of the banks effectively monetizing debt. And yet, credit spreads remain high, banks are unwilling to lend, corporates are de-leveraging as they scale down their production and SME loans are contracting rapidly. A partially government sponsored credit guarantee scheme is expected to ease access for the latter. • Turkey is underperforming the EM universe in growth performance, as contraction in industrial production (ytd avg at 21% yoy) seems to be as severe as in those economies with greater exposure to the collapse in global trade and banking sector troubles. This may be attributed to the sharp drop in confidence in Q4’08 and Q1’09, which may have been affected by local elections but also to the lack of a coordinated policy response and IMF financing. Growth in Q1’09 will be in double-digit negative territory and downside risks to our -4.4% full year growth forecast have increased significantly. South Africa: Global weakness hurts SA production • Manufacturing and mining output in SA have collapsed in the face of global weakness, and this has started to feed through into private sector demand. GDP fell more than anticipated (-6.4% qoq annualised) in Q1. The Q1 number was biased downwards by measurement issues in the mining sector, and we expect a sharp rebound in this sector in Q2. • Inflation has fallen more slowly than expected due to stubbornly high core inflation. We continue to expect inflation to fall within the target band in Q3 2009 due to the stronger ZAR and favorable base effects from oil, but an increase back towards 7.0% is likely thereafter as the base effects turn negative. Inflation expectations remain stubbornly high, and the weaker labour market does not appear to have fed through into more subdued wage growth. • Further upside risks to inflation stem from the currency. In our view the currency is stronger than fair value at present, and we expect the still-wide current account deficit to put pressure on the currency through the year. We expect a $/ZAR rate of 9.50 by year end. • While there are significant risks that the SARB cuts rates further, we would view such a move as illadvised. To the extent that rate cuts support domestic demand growth, they will feed through into imports and put further pressure on the BoP. EMEA Research, (44) 20 7547-1930
Page 36 Deutsche Bank AG/London

Deutsche Bank Forecasts
(% yoy, unless stated) Egypt* GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP GDP CPI CA bal., % GDP 2007 7.1 6.9 1.7 5.4 3.4 2.7 8.5 18.6 -7.9 6.0 6.6 -13.8 8.1 11.9 5.9 5.0 9.0 -7.0 4.5 8.4 -5.8 7.9 16.6 -4.2 2008 2009F 2010F 7.2 18.3 0.5 4.0 3.8 1.1 3.2 9.7 6.1 7.1 6.3 -12.1 5.6 13.3 5.9 3.0 9.8 -8.0 0.6 10.1 -5.7 2.1 22.3 -5.1 2.9 9.6 -0.5 -1.1 2.1 3.2 -2.2 6.4 -7.4 -3.9 4.6 -5.8 -4.4 11.2 -0.9 0.2 5.5 -7.5 -4.4 6.2 -2.2 -5.8 15.8 -0.2 5.4 8.4 -1.7 2.0 1.9 2.3 3.3 4.0 -4.1 3.5 3.4 -4.8 1.8 10.3 -2.1 3.0 5.0 -7.0 4.1 6.5 -3.5 2.2 13.3 -1.8

Israel

Kazakhstan

Romania

Russia

South Africa

Turkey

Ukraine

* Fiscal years ending 30 June for GDP and CA **1998 GDP series Sources: National authorities, DB Global Markets Research

29 June 2009

World Outlook

Key Economic Indicators
US Japan Euroland Germany France Italy Spain Netherlands Belgium Austria Finland Greece Portugal Ireland Other Industrial Countries United Kingdom Denmark Norway Sweden Switzerland Czech Republic Hungary Poland Canada Australia New Zealand Emerging Europe/ Africa Egypt Israel Kasakhstan Romania Russia Turkey Ukraine South Africa Asia (ex-Japan) China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Latin America Argentina Brazil Chile Colombia Mexico Venezuela EM countries World QUARTERLY GDP Q1 2008 US Japan Euroland United Kingdom Dollar Bloc Canada Australia New Zealand 0.9 1.5 2.8 1.2 -0.7 3.1 -1.2 Q2 2008 2.8 -2.2 -1.0 -0.1 0.3 1.4 -0.9 Q3 2008 -0.5 -2.9 -1.4 -2.8 0.4 0.9 -1.8 Q4 2008 -6.3 -13.5 -6.8 -6.1 -3.7 -2.2 -3.6 (% qoq annualised) Q1 2009 Q2 2009F Q3 2009F Q4 2009F -5.5 -14.2 -9.7 -7.3 -5.4 1.5 -3.5 -2.0 -2.5 -2.7 -2.1 -0.6 -0.3 -1.6 0.0 0.5 0.8 0.8 2.0 -0.4 1.4 1.0 3.1 1.3 1.9 2.6 2.1 2.7 Q1 2010F Q2 2010F Q3 2010F Q4 2010F 1.1 -0.4 1.2 1.6 2.8 0.9 3.5 1.8 -1.5 1.5 1.4 3.0 1.2 3.6 2.3 0.3 0.5 1.4 4.6 2.1 3.5 2.8 2.2 -0.1 1.4 3.6 3.8 3.5 Growth of real GDP (% yoy) 2007 2008 2009F 2010F 2.0 1.1 -2.8 1.2 2.3 2.7 2.6 2.3 1.5 3.7 3.5 2.6 3.0 4.1 4.0 1.9 6.0 3.0 1.6 3.2 2.7 3.3 6.0 1.1 6.7 2.5 4.0 3.2 7.1 5.4 8.5 6.0 8.1 4.5 7.9 5.0 11.9 6.4 9.4 6.3 5.1 6.3 7.2 7.8 5.7 4.9 8.7 5.4 5.1 6.8 3.2 8.4 8.2 4.9 -0.7 0.6 1.0 0.3 -1.0 1.2 2.1 1.0 1.7 0.7 2.9 0.0 -2.3 0.7 -1.1 2.1 -0.4 1.6 3.7 0.5 4.8 0.4 2.4 0.3 7.2 4.0 3.2 7.1 5.6 0.6 2.1 3.0 9.0 2.4 7.3 6.1 2.2 4.6 3.7 1.1 0.1 2.6 6.7 5.4 4.6 3.5 1.8 4.5 5.8 2.9 -7.0 -4.3 -6.0 -2.6 -5.0 -3.6 -4.0 -3.2 -3.4 -4.7 -1.2 -4.0 -8.5 -3.6 -3.5 -1.2 -5.0 -2.3 -3.4 -6.0 -1.4 -1.7 0.2 -1.8 2.9 -1.1 -2.2 -3.9 -4.4 -4.4 -5.8 0.2 7.5 -4.5 5.5 4.0 -2.6 -5.0 2.0 -7.5 -4.9 -5.8 -2.5 -1.0 -0.5 0.0 -6.0 -0.3 1.4 -1.5 0.3 0.8 0.4 1.2 1.1 -1.2 1.6 1.3 0.6 1.8 -1.0 -0.4 -2.0 1.2 0.9 1.0 1.5 0.0 1.7 0.8 1.0 2.8 1.3 2.8 5.4 2.0 3.3 3.5 1.8 4.1 2.2 3.0 7.2 2.5 6.0 4.0 2.8 3.0 3.5 4.0 3.0 3.3 1.5 4.0 2.9 2.5 2.0 3.0 4.5 2.5 2007 2.9 0.0 2.1 2.3 1.6 2.0 2.8 1.6 1.8 2.2 1.6 3.0 2.4 2.9 2.3 1.7 0.7 2.2 0.7 2.8 8.0 2.5 2.1 2.3 2.4 6.9 3.4 18.6 6.6 11.9 8.4 16.6 9.0 4.8 2.0 5.4 6.0 2.7 2.0 2.8 2.1 1.8 2.2 11.1 4.5 7.8 5.7 3.8 22.5 5.7 3.6 Inflation, CPI (% yoy) 2008 2009F 3.8 -0.5 1.4 3.3 2.8 3.2 3.5 4.2 2.2 4.5 3.2 3.9 4.2 2.7 3.1 3.6 3.4 3.8 3.5 2.4 6.4 6.1 4.2 2.4 4.4 4.0 18.3 3.8 9.7 6.3 13.3 10.1 22.3 9.8 5.9 4.3 8.7 9.8 4.7 5.4 9.3 6.5 3.5 5.5 22.6 4.6 7.1 7.7 6.5 30.9 7.8 5.2 -0.8 0.3 0.2 0.0 0.8 -0.4 1.4 0.2 0.5 1.7 1.4 -0.7 -1.3 1.9 1.0 1.5 -0.5 -0.7 1.4 5.1 3.4 0.6 1.4 2.0 9.6 2.1 6.4 4.6 11.2 6.2 15.8 5.5 0.0 0.5 3.5 5.0 2.6 0.9 4.0 -0.7 -1.0 0.3 17.0 4.2 0.1 4.3 4.2 24.0 3.6 1.5 2010F 0.8 -0.5 0.9 0.6 0.6 1.2 0.7 1.0 1.2 1.2 1.1 2.1 0.5 -0.3 1.8 1.5 1.5 1.0 0.7 1.0 5.8 2.5 2.4 1.8 1.9 8.4 1.9 4.0 3.4 10.3 6.5 13.3 5.0 2.0 -1.5 5.1 5.7 2.8 2.3 4.0 -1.1 1.5 3.2 16.6 4.2 2.4 4.4 3.4 30.0 4.5 2.4 Current Account (% of GDP) 2007 2008 2009F 2010F -5.3 -4.7 -3.5 -3.0 4.8 0.1 7.9 -2.8 -1.8 -10.1 9.8 2.4 3.3 4.0 -14.0 -9.7 -5.4 -2.9 0.7 16.0 8.6 10.0 -3.2 -6.4 -4.7 1.0 -6.2 -8.2 1.7 2.7 -7.9 -13.8 5.9 -5.8 -4.2 -7.0 9.5 12.3 -1.0 2.4 0.6 15.6 4.3 23.4 8.3 6.4 3.3 0.3 4.5 -4.0 -0.9 7.4 3.2 -1.0 6.2 -3.5 -2.7 -10.0 7.0 -1.5 3.0 2.0 -13.0 -12.0 -5.0 -1.7 2.0 19.5 7.8 9.3 -3.5 -8.4 -5.4 0.5 -4.3 -8.8 0.5 1.1 6.1 -12.1 5.9 -5.7 -5.1 -8.0 7.2 14.2 -3.2 0.1 -0.7 17.5 2.8 14.9 6.7 -0.1 2.7 -1.8 -3.1 -2.5 -1.8 13.9 2.6 -1.1 3.4 -4.0 -2.5 -7.0 6.0 -2.0 2.5 1.5 -11.0 -9.0 -2.0 -2.8 0.8 9.0 6.5 7.0 -0.2 -1.6 -1.5 -2.6 -3.6 -6.2 -0.5 3.2 -7.4 -5.8 -0.9 -2.2 -0.2 -7.5 5.6 15.5 -1.5 0.4 41.0 14.8 0.9 14.8 8.6 5.9 1.8 -0.8 -0.4 -4.6 -2.2 0.3 4.4 -0.6 4.6 -4.0 -2.5 -6.0 5.0 -1.5 2.0 1.0 -8.0 -7.0 -1.0 -2.2 0.2 6.0 7.0 5.0 -0.4 -1.4 -2.2 -2.2 -4.2 -5.4 -1.7 2.3 -4.1 -4.8 -2.1 -3.5 -1.8 -7.0 5.2 17.7 -1.4 0.1 1.6 18.7 0.0 16.6 7.9 6.1 2.5 -1.9 2.7 -3.6 -2.3 1.8

Sources: Deutsche Bank Global Markets Research, National Statistical Authorities

Page 37

Deutsche Bank AG/London

29 June 2009

World Outlook

Interest Rates
(End of Period)
Current 0.60 0.55 1.14 3M rate 3M 0.60 0.70 1.30 1.20 1.80 1.80 0.85 0.40 1.50 9.60 4.00 n.a. 3.16 2.80 6M 0.60 0.70 1.20 1.20 1.70 1.85 1.00 0.40 1.20 8.20 3.70 n.a. 2.75 2.80 12M 0.60 0.70 1.20 1.30 1.70 2.10 1.25 0.50 1.20 7.80 3.60 n.a. 2.75 3.50 Current 3.55 1.40 3.42 3.72 3.86 4.20 3.46 2.34 5.23 10.21 6.35 3.43 5.62 6.02 10Y rate 3M 4.00 1.60 3.25 3.90 3.70 4.05 3.25 2.15 5.25 9.75 6.75 4.25 5.75 6.25 6M 4.00 1.50 3.00 4.00 3.45 3.90 3.00 2.00 5.25 9.25 6.60 5.00 5.00 5.50 12M 3.50 1.40 3.00 4.30 3.45 4.00 3.00 2.00 5.50 9.00 6.80 5.50 5.00 5.50 Current 0.25 0.10 1.00 0.50 1.55 1.25 0.50 0.25 1.50 9.50 3.50 0.25 3.00 2.50 Official rate 3M 0.25 0.10 1.00 0.50 1.50 1.25 0.50 0.25 1.25 9.50 3.50 0.25 3.00 2.50 6M 0.25 0.00 1.00 0.50 1.50 1.25 0.50 0.25 1.00 9.50 3.25 0.25 2.75 2.50 12M 0.25 0.00 1.00 0.50 1.50 1.25 0.50 0.25 1.00 9.50 3.25 0.75 2.50 3.00

US Japan Euroland

Other Industrial Countries United Kingdom 1.20 Denmark 2.22 Norway 1.95 Sweden 0.91 Switzerland 0.33 Czech Republic 1.86 Hungary 11.30 Poland 4.20 Canada Australia New Zealand 0.33 3.00 3.13

EMERGING MARKETS SHORT-TERM RATES Current 3M Emerging Europe Romania 10.09 n.a. Russia 11.94 n.a. Turkey^ 11.60 17.30 Ukraine 9.20 n.a. South Africa 7.50 9.10 Asia (ex-Japan) China* Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Latin America Argentina Brazil ^^ Chile Colombia Mexico 2.25 0.31 4.69 7.50 2.41 2.16 4.52 0.56 0.15 1.40 14.63 9.25 0.78 5.47 n.a. 2.25 0.80 3.20 n.a. 2.60 2.10 4.40 0.90 0.60 1.20 n.a. 8.80 n.a. 5.10 n.a.

6M n.a. n.a. 16.00 n.a. 9.10 2.25 0.95 3.60 n.a. 2.60 2.20 4.45 1.10 0.60 1.00 n.a. 9.00 n.a. 5.10 n.a.

12M n.a. n.a. 15.50 n.a. 9.10 1.98 1.10 4.15 n.a. 2.80 2.50 4.70 1.20 0.74 1.25 n.a. 9.00 n.a. 5.10 n.a.

*Short term rate is 1Y deposit rate; Sources: Deutsche Bank Global Markets Research, Bloomberg, Datastream; as of June 26
^ 6M rate; ^^Short term rate is Selic (overnight) rate target

Page 38

Deutsche Bank AG/London

29 June 2009

World Outlook

Exchange Rates (End of Period)
(End of Period)
FX Rate (vs. US Dollar) Current US Japan Euroland 96 1.41 100 1.30 1.44 5.74 6.57 7.96 1.54 20.9 227 3.62 1.20 0.74 0.60 4.39 3.21 33.2 1.70 8.60 9.00 6.84 7.77 47.00 10,100 1,260 3.60 48.00 1.49 33.00 34.50 3.95 1.90 560 2,200 13.70 105 1.20 1.33 6.22 6.67 8.13 1.56 23.2 263 3.96 1.25 0.68 0.56 4.50 3.46 33.6 1.60 8.70 9.50 6.84 7.80 46.10 10,000 1,200 3.58 47.50 1.51 32.50 34.00 4.13 1.90 570 2,300 13.80 103 1.18 1.42 6.32 6.78 8.05 1.56 23.2 253 3.85 1.23 0.68 0.56 4.35 3.46 34.2 1.75 9.20 9.50 6.77 7.80 45.00 9,800 1,150 3.50 46.25 1.50 32.00 33.30 4.40 1.95 580 2,400 14.00 0.85 7.45 9.05 11.00 1.53 26.0 276 4.50 1.62 1.75 2.18 5.58 4.21 43.82 2.17 10.77 11.23 9.62 10.91 67.96 14,389 1,808 4.97 67.93 2.05 46.33 47.92 5.33 2.73 748 3,051 18.56 0.90 7.46 8.54 10.35 1.54 27.2 295 4.70 1.56 1.76 2.17 5.70 4.17 43.2 2.21 11.18 11.70 8.89 10.10 61.10 13,130 1,638 4.68 62.40 1.94 42.90 44.85 5.14 2.47 728 2,860 17.81 0.90 7.46 8.00 9.75 1.56 27.8 315 4.75 1.50 1.76 2.14 5.40 4.15 40.3 1.92 10.44 11.40 8.21 9.36 55.32 12,000 1,440 4.30 57.00 1.81 39.00 40.80 4.96 2.28 684 2,760 16.56 0.83 7.46 8.00 9.50 1.56 27.4 298 4.54 1.45 1.74 2.11 5.13 4.09 40.4 2.07 10.86 11.21 7.99 9.20 53.10 11,564 1,357 4.13 54.58 1.77 37.76 39.29 5.19 2.30 684 2,832 16.52 14.0 12.4 2.0 0.01 0.07 27.1 2.0 65.8 2.9 2.8 14.6 12.9 2.1 0.01 0.08 27.8 2.1 67.1 3.0 2.9 15.4 13.5 2.3 0.01 0.09 29.3 2.2 69.5 3.2 3.1 15.1 13.1 2.3 0.01 0.09 29.3 2.2 68.3 3.2 3.1 3M 6M 12M Current 1.41 134 FX Rate (vs. Euro) 3M 1.30 130 6M 1.20 126 12M 1.18 121 134 158 18.1 14.9 12.3 88.1 5.2 0.5 30.0 83.5 77.2 61.8 130 144 17.4 15.2 12.6 64.9 4.8 0.4 27.7 83.3 74.0 60.0 126 140 16.9 15.8 12.9 67.3 4.5 0.4 26.5 84.0 71.4 58.8 121 146 16.2 15.1 12.7 65.7 4.4 0.4 26.6 83.3 69.7 57.4 Current 96 FX Rate (vs. Y en) 3M 100 6M 105 12M 103

Other Industrial Countries United Kingdom 1.65 Denmark 5.29 Norway 6.43 Sweden 7.81 Switzerland 1.09 Czech Republic 18.5 Hungary 196 Poland 3.20 Canada Australia New Zealand Emerging Europe Israel Romania Russia Turkey Ukraine South Africa Asia (ex-Japan) China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Latin America Argentina Brazil Chile Colombia Mexico 1.15 0.81 0.65 3.96 2.99 31.1 1.54 7.65 7.98 6.83 7.75 48.27 10,220 1,284 3.53 48.25 1.45 32.91 34.04 3.79 1.94 531 2,167 13.19

Sources: Deutsche Bank Global Markets Research, Bloomberg, Datastream; as of June 26

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Contacts
Name
David Folkerts-Landau Peter Garber Michael Lewis Adam Sieminski United States Peter Hooper Joe LaVorgna Torsten Slok Carl Riccadonna Dollar-Bloc Tony Meer Philip O'Donaghoe Darren Gibbs John Clinkard Japan Mikihiro Matsuoka Seiji Adachi Europe Thomas Mayer George Buckley Mark Wall Stefan Bielmeier Markus Heider Gillian Edgeworth Emerging Markets Europe Marcel Cassard Arend Kapteyn Yaroslav Lissovolik Michael Biggs Caroline Grady EM Latin America Gustavo Cañonero Jose Carlos de Faria Fernando Losada Felipe Hernandez Andres Orlandi EM Asia Michael Spencer Jun Ma Sanjeev Sanyal Taimur Baig Juliana Lee

Title
Global Head of Research Global Strategist Global Head of Commodities Research Chief Energy Economist Co-head of Global Economics Chief US Economist Senior Economist Senior US Economist Chief Economist, Australia Senior Economist, Australia Chief Economist, New Zealand Chief Economist, Canada Chief Economist, Japan Senior Economist, Japan Co-head of Global Economics Chief UK Economist Chief Euro Area Economist Head of Economic Research Bureau Frankfurt Senior European Economist Economist, CE4 Global Head, EM Research Chief Economist, EMEA Senior Economist, EMEA Senior Economist, EMEA & Global Economist, EMEA Head of Economic Research, LA & EMEA Senior Economist, LA Senior Economist, LA Economist, LA Economist, LA Chief Economist and Head of GMR, Asia Chief Economist, Greater China Chief Economist, South Asia Senior Economist, Asia Senior Economist, Asia

Telephone
+44 20 754 55502 +1 212 250 5466 +44 20 754-52166 +1 202 662-1624 +1 212 250 7352 +1 212 250 7329 +1 212 250 2155 +1 212 250 0186 +61 2 8258 1688 +61 2 8258 1606 +64 9 351 1376 +41 6 682 8470 +81 3 5156 6768 +81 3 5156-6320 +44 20 754 72884 +44 20 754 51372 +44 20 754 52087 +49 69 910 31789 +44 20 754 52167 +44 20 754 74900 +44 20 754 55507 +44 20 7547 1930 +7 495 967 1319 +27 11775 7265 +44 20 754 59913 +1 212 250-7530 +55 11 5189 5185 +1 212 250-3162 +57 315 846-3061 +1 212 250 2975 +852 2203 8305 +852 2203 8308 +65 6423 5925 +65 6423 8681 +852 2203 8312

Email
david.folkerts-landau@db.com peter.garber@db.com michael.lewis@db.com adam.sieminski@db.com peter.hooper@db.com joseph.lavorgna@db.com torsten.slok@db.com carl.riccadonna@db.com tony.meer@db.com philip.odonaghoe@db.com darren.gibbs@db.com john.clinkard@db.com mikihiro.matsuoka@db.com seiji.adachi@db.com tom.mayer@db.com george.buckley@db.com mark.wall@db.com stefan.bielmeier@db.com markus.heider@db.com gillian.edgeworth@db.com marcel.cassard@db.com arend.kapteyn@db.com yaroslav.lissovolik@db.com michael.biggs@db.com caroline.grady@db.com gustavo.canonero@db.com jose.faria@db.com fernando.losada@db.com felipe.hernandez@db.com andres.orlandi@db.com michael.spencer@db.com jun.ma@db.com sanjeev.sanyal@db.com taimur.baig@db.com juliana.lee@db.com

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Appendix 1
Important Disclosures Additional information available upon request
For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Thomas Mayer

Deutsche Bank debt rating key CreditBuy (“C-B”): The total return of the Reference Credit Instrument (bond or CDS) is expected to outperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditHold (“C-H”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to perform in line with the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditSell (“C-S”): The credit spread of the Reference Credit Instrument (bond or CDS) is expected to underperform the credit spread of bonds / CDS of other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating. Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst.

Deutsche Bank AG/London

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Regulatory Disclosures 1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name – Deutsche Securities Inc. Registration number – Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. This report is not meant to solicit the purchase of specific financial instruments or related services. We may charge commissions and fees for certain categories of investment advice, products and services. Recommended investment strategies, products and services carry the risk of losses to principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value. Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank may engage in transactions in a manner inconsistent with the views discussed herein. New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

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David Folkerts-Landau
Managing Director Global Head of Research Stuart Parkinson Chief Operating Officer Guy Ashton Global Head Company Research Asia-Pacific Michael Spencer Regional Head Marcel Cassard Global Head Fixed Income Strategies and Economics Americas Steve Pollard Regional Head

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