E

1st

EUURROOPPEEAANN IINNDDUUSSTTRRYY MMOONNIITTOORR 2009 Second Half Issue

October 2009

[OVERVIEW: Sentiment improving but reality of recovery will be tough in most industries] Signs of recovery are finally emerging in Europe, which has been suffering a serious recession triggered by the financial crisis. Sentiment has turned positive because of improved consumer confidence, a recovery in equity and raw material prices and better economic indicators. However, there is a gap between sentiment and the real economy as the latter has seen no clear improvement and most industries have continued to contract.

Car sales have recovered thanks to scrappage incentives, but they will inevitably fall again after the incentives end. Although car production has recovered after substantial production cuts in H1 2009, further damage to the automotive supply chain is inevitable. Housing and construction are suffering severely, though civil engineering is relatively stable thanks to public works. Machine tool orders remain low because of stagnating capital investments caused by excess capacity.

Output growth in the raw material industry remains negative. However, the commodity market rebounded in H1 2009, although it remains far below its peak. Optimism about economic recovery and a surplus of in-flowing funds are considered the main drivers of improvements in prices. Therefore, the market could dip again due to disappointments, depending on the recovery in the industries which use raw materials.

In the service sector, non-discretionary goods and service industries including retail and utilities are relatively unaffected and appear to be out of the worst, while demand for discretionary goods and services such as airlines and hotels has not stopped falling.

The current consensus is that the European economy will bottom out towards the end of 2009, with prospects of the recovery starting 2010. However, there are fears of a double dip due to stimulus packages running out of steam, and a straight line recovery is unlikely. Demand in Europe is not strong enough for a self sustained recovery, so the recovery in Europe is affected by China and the US. Thus, the medium-term outlook for European industry remains unclear, although it is over the worst and there are some positive signs for recovery arising.

Table of Contents

Industry Indicator Latest Date Page

1. UK Car Registrations August 2009 2. Western European Car Registrations August 2009

2 Automobiles

3. UK Passenger Car Production July 2009 Engineering 4. Garman Machine Tool Orders June 2009

3

Electronics 5. European PC Shipments June 2009 6. European Crude Steel Production June 2009

4 Steel

7. European Steel Product Prices August 2009 Petrochemicals 8. European Ethylene Prices August 2009

5

9. UK Retail Sales Volumes July 2009 Retail

10. Eurozone Retail Sales Volumes June 2009 6

Aviation 11. European Air Passenger Traffic June 2009 Hotel 12. UK Hotel Occupancy Levels / RevPAR July 2009

7

13. Western European Mobile ARPU June 2009 Telecoms

14. EMEA Mobile Penetration June 2009 8

Electricity 15. Western European Electricity Prices Sep 2009 Media 16. UK Advertising Expenditure March 2009

9

17. UK C.London Office Vacancy Rate / Rents June 2009 Offices / Housing

18. UK House Prices / Mortgage Approvals July 2009 10

Appendix 1 UK Macroeconomic Indicators 11

Appendix 2 Eurozone Macroeconomic Indicators 12

Appendix 3 Main Commodity Prices and Indices, Main FX Rates 13

Note: The "FORECAST" period added in this edition is a short-term outlook (about 6 months to

1 year).This bulletin is issued semi-annually.

1

1. UK Car Registrations Forecast: Negative growth in 2009

0

100

200

300

400

500

02 03 04 05 06 07 08 09-40

-30

-20

-10

0

10

20

30

Registrations (LHS) 6 months moving average (Grow th rate) (RHS)Grow th rate (YoY) (RHS)

(Unit: '000, %)(Source: SMMT)

New car registrations in UK declined by 21.5% yoy to 1.15m in first 8 months. The economic downturn has suppressed both private and corporate demand, with company cars witnessing a decline of 28.2% yoy.

However, the government introduced a scrappage scheme in May, and as private demand recovered, new car registrations posted their first year on year positive growth in July (+2.4%).

In addition to the effect of the scrappage scheme, a last minute rise in demand is expected before the temporary reduction of VAT ends at the beginning of January 2010, which should help UK car registrations to a steady recovery in H2 2009. Nonetheless, it will be difficult to make up the steep decline of H1 2009, and annual sales are likely to drop below 2m units for the first time since 1996.

The knock-on effect of the higher sales in H2 2009 will be a fall in sales in early 2010, with the result that overall UK new car registrations will decline slightly next year.

2. Western European Car Registrations Forecast: Registrations in WE return to yoy decline

0

300

600

900

1,200

1,500

1,800

2,100

01 02 03 04 05 06 07 08 09-30

-25

-20

-15

-10

-5

0

5

10

15

Registrations (LHS)6 months moving average (Grow th rate) (RHS)Grow th rate (YoY) (RHS)

(Source: ACEA) (Unit: '000, %)

Due to the effect of scrappage schemes, new car registrations in Western Europe in June recorded their first positive growth, of 4.6% yoy, since April 2008. However, due to sluggish sales since the beginning of the year, overall registrations declined by 8.1% to 9.57m units in first 8 months.

Germany (+26.8%) recorded its highest ever new car registrations in the year to August, at 2.67m units, and France (+1.1%) also posted positive growth as both markets were buoyed by the scrappage schemes.

The smaller cars benefited most from the scrappage schemes so carmakers such as VW, Fiat and Hyundai increased market share, while premium carmakers such as BMW and Daimler were suffered weak sales.

Although it seems that the economy in Europe has bottomed out, the unemployment situation continues to deteriorate and consumer spending is expected to remain weak for a while.

The scrappage schemes are expected to have positive effects this year, although Germany, which had most successful scheme, has already exhausted its fund for 2m units, and when other countries’ schemes end, a backlash is expected. As a result, new car registrations in Western Europe are likely to revert to a year to year decline once again.

2

3. UK Passenger Car Production Forecast: Low production continues in UK

0

25

50

75

100

125

150

175

02 03 04 05 06 07 08 09-60

-50

-40

-30

-20

-10

0

10

20

30

40

Production (LHS)6 months moving average (Grow th rate) (RHS)Grow th Rate (YoY) (RHS)

(Source: SMMT) (Unit: '000, %)

UK car production decreased by 48.1% yoy or 0.57m units in the first 7 months.

In H1 2009, production decreased by half as Honda closed its plant for four months from February to May, while other carmaker adjusted production by shortening production lines and reducing working times. As the inventories were adjusted and output levels gradually increased, new car production recovered to a 19% yoy decline in July.

About 80% of new cars produced in the UK are exported, mostly to Europe, where the market is shifting towards smaller cars. Although Honda will start production of its Jazz, medium-sized cars and SUVs are still the mainstay of UK production, and consequently a substantial recovery is unrealistic this year.

Passenger car production in H1 2010 may exceed that of 2009, due to the effect of the production adjustment in early 2009. Nonetheless, as a backlash is expected following the end of the scrappage schemes, UK passenger car production will likely to stay at low level for a while.

4. Garman Machine Tool Orders Forecast: Orders are unlikely to recover strongly

40

60

80

100

120

140

160

02 03 04 05 06 07 08 09-80

-60

-40

-20

0

20

40Orders (3m moving average)YoY Grow th Rate (RHS)

(Source: VDMA) (Unit: Index (2005=100), %)

Orders of German machine tools accelerated their downward trend which has been ongoing since H2 2008 due to the deterioration of world economy, resuling in a fall by over 60% yoy in H1 2009.

Domestic demand, which comprises 40% of the total, decreased by over 70% yoy, affected by the production cut in the automotive and machinery industries, its main customers. Overseas demand, which makes up 60% of the total, also decreased by over 60 % yoy due to capex cuts in Europe, which account for 60% of exports, and in the US, mainly in the automotive industry as in Germany, though orders from China remained relatively robust.

The yoy growth rate will bottom out and improve gradually towards the end of 2009 as the decline in orders ceases. But no recovery in orders will be realised unless demand in Europe including Germany, together comprising over 70% of the total, improves, even if orders from emerging countries remains robust. Many companies in the automotive industry are still cautious about new capex, although orders from other industries such as energy and railways are expected to increase. It is likely that overall orders will remain weak for the time being and no strong recovery is to be expected for now.

3

5. European PC Shipments Forecast: PC shipments sustain double-digit decline in H2 2009

0

5

10

15

20

25

30

35

02 03 04 05 06 07 08 09-15

-10

-5

0

5

10

15

20

25

30Shipments(LHS)4Q Moving Average(Shipments)(LHS)Grow th Rate(YoY)(RHS)

(Unit: mil,%)(Source: Gartner Group)

European PC shipments had fallen below those of the previous year for the first time in 7 years due to sluggish demand in Western Europe and a steep decline in Eastern Europe.

In Western Europe, where PC shipments had maintained double-digit growth until Q3 2008, PC shipments fell sharply from the beginning of 2009, resulting in a decrease to the same level as the previous year. In Eastern Europe, where demand had been strong, PC shipments decreased by 35.7% yoy in Q1 2009 due to the economic downturn.

Demand for mobile PCs, which had been the main driver of growth, fell turned negative and decreased steeply in Eastern Europe, and slowed dramatically in Western Europe where low-priced PCs saw stronger growth. Demand for desktop PCs remained in double-digit decline in Western Europe and also fell in Eastern Europe.

It is unlikely that consumer spending will recover toward Christmas as a further rise in unemployment rates is expected. It will take a long time for companies to restart their IT investment as the recovery of economy in Europe is expected to take longer than in other regions. Thus PC shipments in Europe are likely to remain in double-digit decline for the remainder of 2009.

6. European Crude Steel Production Forecast: Steel output to remain low but stable in H2 2009

8

10

12

14

16

18

20

04 05 06 07 08 09-60

-50

-40

-30

-20

-10

0

10

20

EU27 Steel Production(LHS)

EU27 YoY grow th (RHS)

(Source: WSA) (Unit: mil tonnes, %)

Steel production in the EU remained low during H1 2009, falling 49% yoy in April. A dramatic drop in domestic and export demand for capital goods and cars, and a sharp slowdown in construction activity were exacerbated by severe destocking, tight credit and dismal confidence levels combining to lead EU steel production almost to halve in recent months.

However, the situation has improved slightly since. A timid though probably temporary recovery of steel demand from the automotive sector, driven mostly by governmental scrappage schemes, as well as the start of the restocking process lifted steel production in the EU during summer months.

Steel output is expected to rise slightly in H2 2009, driven by the incipient restocking process and higher demand from end-user sectors compared to the beginning of the year. Still, European steel production will remain below historic levels.

The construction sector, the biggest steel consumer, remains weak in a majority of European countries despite government stimulus packages as private sector investments remain low. Demand from the automotive industry will not be affected too severely by the end of scrappage scheme in Germany as continuing schemes in other countries will be able to partly offset its negative impact.

4

7. European Steel Product Prices Forecast: Price recovery should continue but uncertainty will grow further

300

400

500

600

700

800

900

04 05 06 07 08 09

EU Cold RollEU Wire Rod

(Source: Metal Bulletin(EU cfr)) (Unit: EUR/tonne)

After a steep fall at the end of 2008 and beginning of 2009, European steel prices stabilised in Q2 2009. Cold Roll prices reached EUR520/tonne in August after falling below EUR400/tonne in spring while Wire Rod prices stayed around EUR350/tonne.

Prices for flat products such as Cold Roll were lifted by higher demand from the automotive industry as scrappage schemes across Europe temporarily boosted new cars sales. However, long products, such as Wire Rod, are still suffering from the weak European construction sector, though downward pressure on their prices has stopped.

Currently European steel prices lag behind international markets, protecting Europe from import pressure from China, where economic recovery is ahead of other regions, resulting in a tighter supply-demand balance. In addition, the current uncertainty over the economic recovery benefits European steelmakers as their customers prefer to buy local steel rather than imports with longer delivery times. All this leaves room for further rises in steel prices.

However, if the Chinese recovery runs out of steam and domestic steel prices fall, downward pressure on the European steel market from imports from China will increase significantly. As a result, the steel market is expected to remain uncertain.

8. European Ethylene Prices Forecast: Ethylene prices to stay around US$1,000/tonne in H2 2009

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

05 06 07 08 09

EthyleneNaphthaEthylene-Naphtha Spreads

(Source: Factset) (Unit: US$/tonne)

The price of ethylene increased to US$935/tonne at the beginning of August, a strong improvement from its lowest point of US$525/tonne at the end of 2008 and beginning of 2009, but still only half of the US$1,825/tonne peak price in summer 2008.

Increases in the underlying price of naphtha, ethylene’s raw material, tightening supply and better-then-expected demand were the key reasons for the price recovery.

However, demand from key end-user sectors such as automotives, construction and consumer products remains weak, providing little fundamental support for ethylene prices at the moment.

The tight supply of ethylene in recent also improved ethylene-naphtha spreads, which achieved their absolute minimum in June. Still the spreads remain well below their average level.

European ethylene prices will depend on the recovery in cracker capacity as end-user demand will remain below 2008 levels. Currently European crackers are operating at around 85-90% of capacity, with a number of major ones closed for maintenance. As a result, ethylene prices are likely to stay at their current level until the end of the year barring any significant problems in supply capacity.

5

9. UK Retail Sales Volumes Forecast: Retail sales growth to slow

-10

-8

-6

-4

-2

0

2

4

6

8

10

02 03 04 05 06 07 08 09-10

-5

0

5

10

15

Total * (LHS)Food * (LHS)Household goods * (LHS)Consumer confidence index (RHS)

(Unit: %)(Source: ONS)

*YoY growth (3m moving average)

Growth in retail volumes has seen an improvement in June and July after falling negative in February and May this year. Overall, sales in the year to July grew by 1.2% compared to the same period on 2008.

Sales at textiles and non-specialised stores held up well, expanding by 8.9% and 3.3% respectively over the first 7 months. Demand for clothing and footwear has been driven by younger consumers which have been less affected by falling asset prices and high utility costs. Furthermore, retailers have been embarking on significant discounting practices in order to attract consumers resulting in inflated volumes.

On the downside, food sales stagnated, growing by just 0.1%, as food price inflation continued to be high, putting pressure on volumes. Household goods performed worst, with volumes falling by 6%, mainly due to low activity in the housing sector.

Although there is some positive evidence related to economic recovery in the UK, the economy remains volatile and consumer confidence remains poor. As a result, the outlook for retail growth is cautious, with growth expected to slow further, particularly compared to high levels seen last Christmas.

10. Eurozone Retail Sales Volumes Forecast: Retail sales growth to remain negative

-6

-4

-2

0

2

4

6

8

02 03 04 05 06 07 08 09-40

-35

-30

-25

-20

-15

-10

-5

0

Total * (LHS)Food * (LHS)Household goods * (LHS)Consumer confidence index (RHS)

(Source: Eurostat) (Unit: %)

*YoY growth (3m moving average)

Retail sales in the eurozone in H1 2009 contracted by 2.6% on the same period in 2008, as consumer confidence continued to fall due to poor economic performance. February saw the sharpest fall, with subsequent months seeing the rate of decline slowing.

Spain has continued to suffer the most rapid yoy declines in volumes, while Germany’s performance has deteriorated since 2008 after sales were held up by government stimuli. France has returned to positive growth in recent months, but it is not yet clear whether this growth is due to short term demand drivers, such as favourable weather conditions and substantial discounting, or a sustainable recovery in demand.

Electrical goods and furniture volumes have fallen rapidly, due in part to the weak housing market, with yoy contractions ranging between -4.6% and -6.5% during 2009. Other retail sectors have been volatile, with no clear evidence of a rebound in demand.

Economic sentiment is reported to be improving in some countries and we expect the situation in the eurozone to begin to bottom out over the next 6 months. However, the return to growth may be slow as consumers remain cautious, while the possibility of a bout of deleveraging remains a concern.

6

11. European Air Passenger Traffic Forecast: Traffic growth to continue falling

-20

-15

-10

-5

0

5

10

15

20

01 02 03 04 05 06 07 08 09

OtherMiddle EastAsiaNorth AmericaEuropeRPK YoY Grow th

(Source: AEA) (Unit: %)

(*Columns denote contribution)

Traffic over H1 2009 was 7.4% below the same period in 2008 due to fewer leisure and business travellers and passengers trading down to low cost airlines and short haul as opposed to long haul services. February and March were particularly weak with March seeing the sharpest decline since 2001 (-10.8%).

All routes except the Middle East saw contractions over H1 2009, with domestic flights continuing to perform worst (-20%). Asia Pacific and North Atlantic routes also fared poorly, both contracting by 7.3% over the period, mainly due to cutbacks in business travel as the major developed regions remained in recession. Despite actions by airlines to reduce capacity by 5.7% over the period, load factors fell by 1.4 percentage points as demand fell more rapidly. As a result, and due to the particularly large decline in premium traffic which contributes disproportionately to airline profits, flag carrier profitability fell sharply, with most of Europe’s majors falling into the red.

Demand is expected to remain low, resulting in negative traffic growth for the full year of 2009. However, declines are expected to slow over the remainder of the year, due to lower comparables as well as the bottoming out of the economy in some of Europe’s major states.

12. UK Hotel Occupancy Levels / RevPAR Forecast: Occupancy rates improve, RevPAR under pressure

-15

-10

-5

0

5

10

02 03 04 05 06 07 08 09

RevPAR (% YoY) (3 month moving average)Occupancy level (YoY) (3 month moving average)

(Unit: %)(Source: TRI Hospitality Consulting)

The UK occupancy rate for the 7 months to July fell by 4 percentage points yoy due to declines outside London and, to a lesser degree, in London. Total revenue per available room (TRevPAR) fell by 11% due to continued poor demand across the UK and falling average room rates.

The number of overseas visitors to the UK in the first half of the year fell by almost 9% over 2008; February alone saw a drop of 27% yoy. Despite the relative strength of the dollar visitor numbers from North America have continued to fall yoy and are an average of 20% down compared to last year. Visitors from Europe and other regions also showed negative growth in the period with average visitor numbers dropping by 6.4% and 12% respectively. June witnessed the first month of positive yoy growth with the number of visitors from Europe rising by 13.1%.

In the coming month’s occupancy rates are forecast to hold steady or improve slightly, hoteliers will have to hold average room rates at their current levels to maintain TRevPAR. It may be too early in the cycle for hoteliers to increase average room rates whilst maintaining occupancy rates."

7

13. Western European Mobile ARPU Forecast: Operators continue to suffer ARPU declines due to tariff cuts and competition

10

15

20

25

30

35

40

05 06 07 08 0910

15

20

25

30

FranceSpainItalyGermanyUK (RHS, GBP)

(Source: Informa) (Unit: EUR, GBP)

(*Figures are blended ARPU in each country)

The majority of operators in Western Europe experienced a decline in average revenue per user (ARPU) due to aggressive competition and tariff cuts. Voice revenues, accounting for the majority of operators’ income, fell after the termination rate (interconnection charges between operators) for both received and made calls was capped in 2008, which the increase in Internet browsing revenues, now exceeding 20% of total ARPU on average, was not sufficient to offset.

In the UK where competition has been intense due to the number of players in the market, the introduction of new technology has not added significant value to the operators’ services, instead leading only to price competition. While the competitive environment has not changed significantly in Germany, Spain and Italy, regulatory pressure has negatively impacted on ARPU there. France demonstrated the greatest resilience in sustaining ARPU due to the majority of subscribers being tied in in postpaid plans.

From July 1st, the EU’s new roaming tariffs came into force. As a result, operators’ roaming revenue is starting to be hit in Q3 2009, in addition to the intensifying competition. Thus, operators will continue to suffer revenue loss unless the market starts to consolidate.

14. EMEA Mobile Penetration Forecast: Penetration rate will grow in Middle East and Africa, data user to increase in Europe

0%

20%

40%

60%

80%

100%

120%

140%

02 03 04 05 06 07 08 09

Europe: Western Europe: EasternMiddle East AfricaWORLD

(Unit: %)(Source: Informa)

In the mature European market take up of new value added services such as mobile data and bundled products is recording the strongest growth. The number of 3G customers has increased rapidly, with almost 20% of mobile subscribers in both Western and Eastern Europe having access to mobile broadband services. As penetration rates increase, European telecom operators continue to invest in their networks to add capacity and deploy advanced wireless broadband data services. Consequently, data services remain a key driver of growth in the region.

Having peaked in 2007, growth in the Middle Eastern market is beginning to slow in the face of the global economic crisis resulting in fewer jobs, visitors and expatriate moves to the region, as well as the market approaching maturity. Africa still maintains strong demand growth – mainly voice – but challenges such as poor basic infrastructure and regulatory issues for new market entrants are holding back the growth.

Data services in Europe will counteract market deceleration. In the Middle East and Africa, where there is substantial room for growth, weak consumer spending and the low ARPU potential of untapped subscribers will hold back operators’ future revenue growth.

8

15. Western European Electricity Prices Forecast: Prices are expected to rise slowly

0

20

40

60

80

100

120

140

05 06 07 08 09

UK Germany France

(Source: Bloomberg) (Unit: EUR/MWh)

(Day-ahead peak load)

Western European electricity prices plummeted from H2 2008, reflecting falling gas prices, due to the region’s high dependence on gas-fired power stations for peak-load power, and exacerbated by the sharp drop in industrial output in the region amid economic turmoil. Furthermore, falling oil and gas prices had had a knock-on effect on coal prices, with coal a major source of baseload electricity in the region, thus weakening power prices as a whole.

Prices bottomed out in April 2009, and have recovered slightly since, as the price of gas has started to rise again following the lead of oil. Also, with industrial output stabilizing, a sense of normality has returned to the electricity market.

We expect to see a further recovery in electricity prices in the latter stages of 2009. On the one hand, demand should strengthen, both on account of the advent of winter, when consumption traditionally rises, and as the bottoming out of the economy spurs greater industrial activity, leading to a greater firming of prices. Also, as gas prices lag up to 6 months behind oil prices, they still have some way to go to reflect current oil prices, thus pushing up electricity prices.

We therefore expect peak electricity prices to return to a range between EUR50-60/MWh over the winter.

16. UK Advertising Expenditure Forecast: Declines in adspend are inevitable as industry sectors tighten marketing budgets

0

1,000

2,000

3,000

4,000

02 03 04 05 06 07 08 09-25

-20

-15

-10

-5

0

5

10

15

OtherInternetNew spapersTelevisionNon-internet Grow th Rate (YoY)(RHS)Total Grow th Rate (YoY)(RHS)

(Unit: GBP Million, %)(Source: WARC)

UK adspend fell by 16% yoy in Q1 2009, the biggest annual drop on record since 1983. With the exception of the internet, all media types experienced falls as the economic climate deteriorated, with the print media and radio being particularly badly affected. TV was relatively unharmed due to evidence that consumers are watching more television rather than going out.

With the exception of the government, charity and education sectors, where the spend was at a record level, all the major product categories were either flat or declined in Q1 2009. Ad budgets in the finance sector have continued to be affected by the global banking crisis, spend levels having fallen 21% yoy in Q1 2009.

As many industry sectors will continue to tighten their marketing budgets, declines in adspend are inevitable. The outlook is gloomiest for newspapers, with radio and magazines also grappling with double-digit declines. Television is expected to perform relatively well due to its vastly reduced prices leading to increase volumes. In contrast, the internet’s share of advertising continues to grow, to date reaching 24% of all spending, though this growth will not be enough to compensate for the overall decline.

9

17. UK Central London Office Vacancy Rate / Rents

Forecast: Office rents fall persists due to weak demand

0

5

10

15

20

01 02 03 04 05 06 07 08 0920

30

40

50

60

70

80

90

100

110

120City Vacancy Rate (LHS)West End Vacancy Rate (LHS)City Prime Rent (RHS)West End Prime Rent (RHS)

(Source: Jones Lang LaSalle) (Unit: %, GBP/sq.ft .)

The recession being prolonged in the UK, unemployment reached 7.8% in Q2 2009, and London office space availability rose in both the City and West End. Take-up was severely constrained: Q1 saw the lowest quarterly volume on record, though it improved in Q2, fuelled by a few large transactions in the City. Despite improved take-up, lease levels remain low as most of the new leases are for existing tenants relocating for cheaper rents.

More developments have been completed H12009 in the central London, reaching the year’s peak of the development cycle. Reflecting the increase in supply and weakening demand, City rents fell 28% yoy to Q2 2009, West End rents 31.8%.

While the speed of correction in the occupational markets has yet to be determined, office supply is likely to exceed demand even though development completions are expected to tail off sharply over the next two years. As falls in rents will persist through 2009 and 2010, the pace of decline will gradually slow. However, office rents are showing no signs of recovery with the labour market remaining volatile.

18. UK House Prices / Mortgage Approvals Forecast: Recent price increase is only temporary, further decline is expected

-30%

-20%

-10%

0%

10%

20%

30%

03 04 05 06 07 08 0920

40

60

80

100

120

140

Halifax (YoY, LHS)Mortgage approval (RHS)

(Source: Halifax / Bank of England) (Unit: %, '000)

House prices which fell sharply during 2008 have started to show signs of recovery since Q2 2009. The demand for housing has picked up; estate agents reported the number of house viewings to have risen driven by the combination of a pick up in confidence and a slight improvement in the availability of credit, as seen the mortgage approvals increasing 29% in H1 2009 compared with H2 2008. In contrast to the increase in demand, the supply of housing for sale remains muted. Whereas housing construction has stalled, potential vendors are delaying their decision to sell as a result of the dramatic falls in house prices over the 12 months to December 2008.

Thus, the shortage of properties in the market has led to the recent temporary house price rise, at least on a month-by-month basis.

Recent price increases do not signal the beginning of a consistent upward trend in house prices. Over the next few months the demand and supply imbalance is expected to shift: the unemployment rate remains high and mortgage rates will start to creep up in anticipation of rises in interest rates. As a result, demand may weaken just as the supply of residential properties on the market begins to increase, leading to a further decline in house prices.

10

Appendix 1 (UK Macroeconomic Indicators)

GDP Industrial Production

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

01 02 03 04 05 06 07 08 09(Unit: QoQ %)(Source: Eurostat)

(*Seasonally adjusted)-16-14-12-10-8-6-4-20246

01 02 03 04 05 06 07 08 09

All productionManufacturing

(Source: ONS) (Unit: YoY %)

(*Seasonally adjusted)

Business Insolvencies Total Unemployment / Unemployment rate

0

1,000

2,000

3,000

4,000

5,000

6,000

01 02 03 04 05 06 07 08 09-30-20-1001020

3040506070

Number (RHS)Grow th rate (YoY) (LHS)

(Source: ONS) (Unit: number, % )

(*England & Wales)600

800

1,000

1,200

1,400

1,600

01 02 03 04 05 06 07 08 090.00.51.0

1.52.02.53.03.5

4.04.55.0

Actual (LHS)Unemployment Rate

(Source: ONS) (Unit: '000, % )

(*Seasonally adjusted)

RPI / CPI PMI

-2

-1

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08 09

RPICPI

(Source: ONS) (Unit: YoY %)

30

35

40

45

50

55

60

06-3 06-9 07-3 07-9 08-3 08-9 09-3(Anything above 50 indicates expansion,

below 50 indicates contraction. )(Source: Markit)

11

Appendix 2 (Eurozone Macroeconomic Indicators)

GDP Industrial Production

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

01 02 03 04 05 06 07 08 09(Unit: QoQ %)(Source: Eurostat)

(*Seasonally adjusted)-30

-25

-20

-15

-10

-5

0

5

10

15

01 02 03 04 05 06 07 08 09

Eurozone France Germany

(Source: Eurostat) (Unit: YoY %)

(*Workday adjusted, excluding constructiion)

Construction Production Index Unemployment Rates

-4

-3

-2

-1

0

1

2

3

4

01 02 03 04 05 06 07 08 09

EurozoneFranceGermanySpain

(Source: Eurostat) (Unit: QoQ %)

(*Seasonally adjusted, quarterly moving average)5

6

7

8

9

10

01 02 03 04 05 06 07 08 09(Unit: %)(Source: Eurostat)

(*Seasonally adjusted)

Consumer Price Index PMI

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

01 02 03 04 05 06 07 08 09

All ItemsAll Items Excluding Energy

(Source: Eurostat) (Unit: YoY % )

30

35

40

45

50

55

60

06-4 06-10 07-4 07-10 08-4 08-10 09-4(Anything above 50 indicates expansion,

below 50 indicates contraction. )(Source: Markit)

12

Appendix 3 (Main Commodity Prices and Indices, Main Foreign Exchange Rates)

Crude Oil (Brent) Prices UK Gas Prices

0

20

40

60

80

100

120

140

160

01 02 03 04 05 06 07 08 09(Source: Bloomberg; CO1) (Unit: USD/barrel)

(*Generic 1st 'CO' future, montly average)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

04 05 06 07 08 09(Source: Bloomberg; NBPGQTR1) (Unit: GBP/Therm)

(*First Quarter Natural Gas Forward Price, montly average)

CRB Index London Gold prices

0

100

200

300

400

500

01 02 03 04 05 06 07 08 09

(Source: Bloomberg; CRY) (1967=100)

(*Reuters / Jefferies CRB Index, montly average)200

300

400

500

600

700

800

900

1,000

1,100

01 02 03 04 05 06 07 08 09(Source: Bloomberg; GOLDLNPM) (Unit: USD/ounce)

(*London Gold Market Fixing Ltd PM Fix Price, montly average)

Copper Prices Aluminium Prices

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

01 02 03 04 05 06 07 08 09

(Source: Bloomberg; LMCADY) (Unit: USD/MT)

(*LME copper spot, montly average)0

500

1,000

1,500

2,000

2,500

3,000

3,500

01 02 03 04 05 06 07 08 09

(Source: Bloomberg; LMAHDY) (Unit: USD/MT)

(*LME alminium spot, montly average)

13

CRB Food Price Index Cotton Prices

150

200

250

300

350

400

450

500

550

01 02 03 04 05 06 07 08 09

FoodstuffFat and Oil

(Source: Bloomberg; CRB FOOD, CRB FTOL)

(*CRB spot price index, montly average, 1967=100)

(1967=100)

0

10

20

30

40

50

60

70

80

90

01 02 03 04 05 06 07 08 09(Source: Bloomberg; COTLOOKA) (Unit: USd/lb)

(*Cotlook Ltd Raw Cotton A Index, montly average)

Cocoa Prices GBP/EUR

0

500

1,000

1,500

2,000

2,500

3,000

3,500

01 02 03 04 05 06 07 08 09(Source: Bloomberg; JMCXCCPI) (Unit: USD)

(*JP Morgan Cocoa Price Index,montly average)

1

1.1

1.2

1.3

1.4

1.5

1.6

06 07 08 09

(EUR)

Weak Pound

Strong Pound

(*Montly average)

(Source: Bloomberg)

EUR/USD, GBP/USD EUR/JPY, GBP/JPY

1

1.2

1.4

1.6

1.8

2

2.2

06 07 08 09

EUR/USD GBP/USD

Strong Dollar

Weak Dollar

(*Montly average)

(Source: Bloomberg)

(USD)

100

120

140

160

180

200

220

240

260

06 07 08 09

EUR/JPY GBP/JPY

(JPY)

Strong Yen

Weak Yen

(*Montly average)

(Source: Bloomberg)

14

[BTMU EMEA Network]

Tehran

Abu Dhabi

Istanbul

Cairo

Dubai

Prague

Hamburg

Warsaw

Luxembourg

MunichVienna

Amsterdam

Branch・overseas-affiliated company

Sub-Branch

Representative　Office

Moscow

St Petersburg

Warsaw

Prague

Vienna

MilanGeneva

Berlin

HamburgBirmingham

London

Paris

LisbonMadrid

Barcelona

Luxembourg

Amsterdam

Brussels

Tehran

Istanbul

Cairo

Abu Dhabi

DubaiBahrain

Doha

Munich

DusseldorfFrankfurt

Almaty

Johannesburg

Vladivostock

The Bank of Tokyo-Mitsubishi UFJ, Ltd., London Branch (“BTMU”) is based in England at Ropemaker Place, 25 Ropemaker St., London EC2Y 9AN, and is authorised and regulated in the UK by The Financial Services Authority (“FSA”) (FSA number 139189) and in Japan by the Japanese Financial Services Agency. This report shall not be construed as solicitation to take any action such as purchasing/selling/investing in financial market products. In taking any action, each reader is requested to act on the basis of his or her own judgment. This report is based on information believed to be reliable, but we do not guarantee, and do not accept any liability whatsoever for, its accuracy and we accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this report. The contents of the report may be revised without advance notice. Also, this report is a literary work protected by copyright. No part of this report may be reproduced in any form without express statement of its source.

The Bank of Tokyo-Mitsubishi UFJ, Ltd. retains copyright to this report and no part of this report may be reproduced or re-distributed without the written permission of The Bank of Tokyo-Mitsubishi UFJ, Ltd. The Bank of Tokyo-Mitsubishi UFJ, Ltd. expressly prohibits the re-distribution of this report to Retail Customers, via the internet or otherwise and The Bank of Tokyo-Mitsubishi UFJ, Ltd., its subsidiaries or affiliates accept no liability whatsoever to any third parties resulting from such re-distribution.

Publisher：BTMU Corporate Research Division (London) Ropemaker Place, 25 Ropemaker St, London EC2Y 9AN UK Enquiry to enquiry_crd@uk.mufg.jp

15