Global Economics q4

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MacroGlobal Economics

Q4 2010

Emerging elation, Western stagnation

High debts and excessively low inflation...

...point to Western stagnation...

...with the debt-lite emerging nations in the driving seat of global growth

Disclosures and Disclaimer This report must be read with the disclosures and analystcertifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

By Stephen King, Karen Ward and Madhur Jha

ECONOMICSGlobal


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MacroGlobal EconomicsQ4 2010

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Emerging boom, western headacheFor those whove turned a blind eye to Japans ongoing difficulties, the challenge now facing western

policymakers may seem unfamiliar. The West is suffering not from recession but, instead, from ongoing

stagnation. All the talk about double-dips misses this crucial point. Despite the massive economic

stimulus in recent years, the level of economic activity remains disturbingly depressed. As a result, there

is no prospect of any monetary tightening in the foreseeable future. Indeed, the debate has now returned

to the prospect of further easing. That, in turn, creates a challenge for the far-more-buoyant emerging

nations, where policymakers will have to work out what to do with the massive capital inflows triggered

by very low interest rates in the West.

HSBC growth and inflation forecasts

GDP ____Wrestling with debt (2 July 2010) ____ ______________ Latest _______________ 2010 2011 2010 2011

World 3.5 3.0 3.5 2.9Developed 2.4 1.9 2.4 1.8Emerging 6.9 6.2 7.2 6.2US 3.1 2.6 2.7 2.5UK 1.2 1.9 1.4 1.4Eurozone 1.2 1.3 1.6 1.3Japan 3.0 1.0 3.0 0.7Brazil 7.2 5.1 7.5 5.1Russia 4.7 3.0 3.8 3.5India 8.8 8.6 8.8 8.6China 10.0 8.9 10.0 8.9

Inflation ____Wrestling with debt (2 July 2010) ____ ______________ Latest _______________2010 2011 2010 2011

World 2.3 2.2 2.3 2.2Developed 1.2 1.2 1.3 1.2Emerging 5.6 5.4 5.6 5.4US 1.4 1.1 1.6 0.9UK 3.0 3.4 3.2 2.9Eurozone 1.5 1.4 1.6 1.6Japan -1.0 -0.4 -1.1 -0.5Brazil 5.3 5.1 4.9 5.4Russia 6.4 9.9 7.0 9.5India 10.2 4.7 10.7 5.4China 3.1 2.5 2.9 2.5

Source: HSBC

Summary


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The lack of any decent economic response in the western world reflects the unusual nature of the economicchallenges facing policymakers. This is proving to be more a nominal rather than real economic crisis. With

interest rates at zero, further declines in inflation will lead to undesirable increases in real interest rates. For

debtors, life threatens to become a lot less comfortable. The rational response to excessively low inflation at

the household or corporate level is to repay debt with even greater urgency. The consequent loss of demand,

however, will increase the risks of outright deflation, making a sustained recovery even less likely.

The absence of inflation is the key reason why policymakers continue to emphasise the fragile nature of economic recovery and why unconventional policies remain at the top of the agenda. Central bankers need

to persuade the public that (i) they have the tools to avoid deflation and (ii) the tools will be used. However,

should the public remain intent on repaying debt, its difficult to see quantitative easing and the othersources of monetary magic achieving a great deal. The western world is falling into a Japan-lite trap.

Let battle commenceIn all the hype about unconventional policies, a crucial part of the deleveraging story is oft-forgotten.

This is ultimately a battle between creditors, debtors and different interest groups within society. In

Europe, the battle is between Mediterranean debtors and Northern European creditors. Globally, theres a

huge gulf between the interests of American debtors (who demand a renminbi appreciation) and Chinese

creditors (who worry about a dollar depreciation). And, within the US, companies have only been able to

cope with debts by slashing costs, thereby shifting the burden of economic adjustment onto households.

The political aspects of this story cannot be underestimated. It may be that high US unemployment stemsfrom the trigger happy hire and fire approach of the US corporate sector, but it is politically convenient toblame the US labour markets difficulties on foreign powers. China is now seen in parts of Washington as

public enemy number one, a perception which can only increase the chances of a protectionist nightmare

unfolding in the coming months. Meanwhile, although US companies are now awash with cash, few seem

intent on converting that cash into productive investment. Surviving is now more important than thriving.

We need to think in levels - it will require much stronger growth than we are forecasting to get the US economy back on its previous path

6000

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Nominal GDP Trend

USDbn USDbn

Source: Thomson Reuters Datastream, HSBC calculationsTrend is proxied by the average growth between 1997 and 2007.


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Oh to be debt-freeWhile the western world is struggling to cope with the multi-year hangover stemming from its earlier

excesses, the emerging world remains very buoyant, seemingly able to decouple from the Wests

economic traumas. Having borrowed far too much in the 1990s, most emerging nations have now learnt

their lesson. Absent the need for aggressive deleveraging, emerging nations are revelling in a world of

strong supply-side growth prospects and a very low global cost of capital. Moreover, the spread of

deflation pressures in the western world appears to have limited the rise of inflation pressures in the

emerging world.

Is this too good to be true? In a word, yes. The challenge for emerging nations lies in preventing

economic success from turning into an uncontrollable boom. We examine some of the options availableto emerging nation policymakers, ranging from currency appreciation through to the widening use of capital controls. None of the options is perfect but at least policymakers are aware of the dangers and

keen to avoid a repeat of the errors made in the 1990s.

Betting on the emerging worldWith the West suffering from Japanese-style stagnation, emerging nations appear to offer by far the best

prospects for economic growth in the years ahead, a conclusion very much reflected in our forecasts. But

while we are enthusiastic about emerging nation equities, there are other way to take advantage of the

growing discrepancy between the west and the rest. Chinas dominant position in commodities suggests

energy, metals and food prices are more likely to rise than fall in the years ahead. Pressure on realexchange rates should lead to continued out-performance from emerging currencies. Western companies

either outsourcing to cut costs or investing in emerging consumer demand should also stand to benefit in

the years ahead. All the while, however, the risks cannot be ignored: excessive inflation, asset price

bubbles and western protectionism could all upset the emerging market applecart, even if only on atemporary basis.


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Key forecasts 6

Monetary & fiscal policyassumptions 7

Emerging elation, Westernstagnation 8 Economics upended 8 Bernankes closer to the helicopters but will it help? 11 Sharing the pain 12 The recent US recession in context 13 This isnt making deleveraging easy 15 An emerging inflation problem? 16 Headline inflation has been below expectations in the East 18 Excess liquidity may find its way into asset prices again 19

Conclusions 21

Global economic forecasts 23 GDP 24 Consumer prices 26 Short rates 28Long rates 29Exchange rates vs USD 30 Exchange rate vs EUR & GBP 31 Consumer spending 32 Investment spending 33 Exports 34 Industrial production 35 Wage growth 36 Budget balance 37 Current account 38

Country and territory sectionsUS 40 Canada 42 Mexico 43 Brazil 44 Argentina 46 Chile 47 Eurozone 48 Germany 50 France 52 Italy 54 Spain 56 UK 58 Norway 60 Sweden 61 Switzerland 62 Hungary 63 Poland 64 Romania 65 Russia 66 Turkey 68 Egypt 70 Saudi Arabia 71 UAE 72 South Africa 73 Japan 74 Australia 76 New Zealand 77 China 78 India 80 Hong Kong 82 Indonesia 83 Malaysia 84 Philippines 85 Singapore 86 South Korea 87 Taiwan 88 Thailand 89 Vietnam 90

Disclosure appendix 94 Disclaimer 95

Contents


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Key forecastsKey forecasts

__________________ GDP________________ _______________ Inflation________________2009 2010f 2011f 2012f 2009 2010f 2011f 2012f

World (nominal GDP weights) -2.2 3.5 2.9 3.3 1.0 2.3 2.2 2.2World (PPP weights) -0.5 4.8 4.0 4.2 1.9 3.2 2.8 2.8Developed -3.5 2.4 1.8 2.3 0.0 1.3 1.2 1.2

Emerging 1.9 7.2 6.2 6.2 4.7 5.6 5.4 5.3North America -2.6 2.8 2.4 3.2 -0.3 1.6 1.0 1.1

US -2.6 2.7 2.5 3.2 -0.3 1.6 0.9 1.1Canada -2.5 3.1 2.1 2.3 0.3 1.7 1.6 2.0

Latin America -3.4 6.0 4.5 4.6 6.2 7.7 7.6 6.9Mexico -6.5 4.3 3.8 4.5 5.3 4.2 4.0 3.4Brazil -0.2 7.5 5.1 4.5 4.9 4.9 5.4 4.6Argentina -2.7 7.8 4.5 5.0 14.8 26.5 21.7 18.7Chile -1.5 5.0 5.5 4.5 0.3 1.6 3.3 3.2

Western Europe -4.1 1.6 1.3 1.6 0.6 1.8 1.8 1.7Eurozone -4.0 1.6 1.3 1.6 0.3 1.6 1.6 1.7

Germany -4.7 3.3 1.9 1.8 0.2 1.1 1.2 1.3France -2.5 1.6 1.5 1.8 0.1 1.8 1.8 1.6Italy -5.1 1.0 0.7 1.0 0.8 1.6 1.9 1.7Spain -3.7 -0.4 0.6 1.5 -0.2 1.6 1.5 1.7

Other Western Europe -4.3 1.7 1.5 1.8 1.5 2.4 2.3 1.8UK -4.9 1.4 1.4 1.8 2.2 3.2 2.9 1.8Norway -1.3 0.5 1.4 2.1 2.2 2.3 1.7 2.5Sweden -5.1 4.0 2.9 2.5 -0.3 1.1 2.1 2.5Switzerland -1.9 2.9 1.7 1.8 -0.5 0.7 0.7 1.5

EMEA -3.4 3.8 3.8 3.8 7.4 5.9 6.8 6.7Czech Republic -4.0 2.1 2.7 2.8 1.0 1.5 2.4 2.4Hungary -6.2 1.0 2.7 3.0 4.2 4.8 3.2 3.4Poland 1.8 3.2 3.9 3.4 3.5 2.5 2.9 3.3Russia -7.9 3.8 3.5 3.0 11.7 7.0 9.5 8.5Turkey -4.7 6.8 3.9 4.3 6.3 8.7 7.7 7.0Ukraine -15.1 5.5 4.0 5.1 16.0 8.5 8.4 9.0Romania -7.1 -2.2 0.1 2.2 5.6 6.0 5.5 4.6Egypt* 4.7 5.1 6.0 6.1 10.0 10.7 10.4 11.0Israel 0.7 3.9 3.4 3.6 3.9 2.3 3.0 2.7Saudi Arabia 0.1 3.6 4.4 4.8 5.1 5.5 6.6 7.0UAE -2.9 2.0 3.9 4.5 1.8 1.0 2.7 4.0South Africa -1.8 2.6 3.5 3.1 7.2 4.7 5.5 6.0

Asia-Pacific 0.7 6.1 4.7 5.0 0.8 2.0 1.8 2.0Japan -5.2 3.0 0.7 1.5 -1.3 -1.1 -0.5 -0.4Australia 1.2 3.4 4.1 3.9 1.8 3.0 3.1 2.9New Zealand -0.5 1.4 2.6 3.7 2.1 2.3 4.0 2.3

Asia ex Japan 5.7 8.8 7.6 7.4 2.6 4.6 3.7 3.8China 9.1 10.0 8.9 8.6 -0.7 2.9 2.5 2.2

Asia ex Japan & China 2.4 7.4 6.1 6.1 5.1 5.8 4.4 4.9Hong Kong -2.8 5.4 4.7 4.5 0.6 2.4 2.9 3.3India 6.7 8.8 8.6 8.0 10.9 10.7 5.4 7.1Indonesia 4.5 6.1 6.4 6.3 4.8 5.2 6.0 5.2Malaysia -1.7 7.3 5.2 5.0 0.6 1.9 2.7 2.2Philippines 1.1 5.9 4.6 5.6 3.3 4.2 4.5 4.7Singapore -1.3 13.2 4.6 6.0 0.6 2.2 2.7 2.8South Korea 0.2 6.0 4.0 4.6 2.8 2.7 2.9 3.0

Taiwan -1.9 7.3 4.9 3.8 -0.9 1.2 1.6 1.6Thailand -2.2 7.9 5.3 4.1 -0.8 3.5 3.6 3.0Vietnam 5.3 7.0 7.5 7.8 7.1 8.7 8.5 8.0

Notes: Calendar year; except for * w hich is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain n ominal GDP (USD) weightsSource: HSBC


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Monetary policy

Q1 2010 Q2 2010 Q3 2010f Q4 2010f Q1 2011f Q2 2011f Q3 2011f Q4 2011fUSTargeted Fed funds 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25JapanOvernight call rate 0.10 0.10 0.10 0.00 0.00 0.00 0.00 0.00EurozoneRepo rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00UKBank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50CanadaOvernight rate 0.25 0.50 1.00 1.00 1.25 1.75 2.00 2.00

Source: HSBC.

Fiscal policy

Country 2010 2011US The 2010 fiscal year ends in September. The deficit for the year is likely to be USD1.30tn,

only slightly lower than the USD1.42tn recorded in 2009. The deterioration in federalfinances has been split almost evenly between an increase in expenditures and a shortfallin revenues. In 2007, prior to the recession, expenditures were running at about 20% ofGDP while revenues were close to 19%. In the current fiscal year, expenditures are closeto 24% of GDP while revenues have dropped to 15%.

Public resistance to fiscal stimulus programs that might increase the federal budgetdeficit has grown steadily in the past year. Still, there is little political appetite fortaking action to reduce the deficit. Tax increases are widely resisted while programspending cuts are opposed by the parties that would be directly affected. We expecta deficit of about USD1.2tn for fiscal year 2011. That should amount to about 7.8%of GDP, down only modestly from the 9.0% expected for 2010.

Japan The economic policy of the new government will proceed as planned in the ini tialbudget which should raise real GDP growth by 0.3ppt in FY2010. Kan declared thathe intends to make a supplementary budget against the downside risks of theeconomy, but scale and contents are still uncertain.

Given the new strategies for economic growth and fiscal consolidation by Kans newadministration, we expect the impact of these strategies would be almost neutral in2011 as the expected spending would be mainly financed by cutting other spendingor by increasing taxes.

Eurozone Despite the increasingly austere budgets being delivered by countries such asGreece, Spain and Ireland, fiscal policy will be roughly neutral in 2010 as a result ofthe ongoing stimulus in other countries, Germany in particular. Together with theongoing weakness in nominal GDP growth, this implies a further deterioration in thebudget deficit to about 7% of GDP.

Fiscal tightening in the Eurozone as a whole will begin in 2011 with even the lessfiscally-challenged countries such as Germany s tarting to rein in spending.Tightening is currently expected to amount to about 1% of Eurozone GDP in 2011but more aggressive tightening will be required if the debt-to-GDP ratio is to stabilisein the next four years or so.

Germany The fiscal burden arising from the recent recess ion will peak in 2010, driving thedeficit to 3.9% of GDP. The structural defici t of the federal government should bearound 3.5% in 2010 (2011: 2.9%); this development is in line with new establishedGerman debt break rule.

No major tax reform/ tax relief will take place due to the need for a continued fiscalconsolidation. Approved austerity measures and the strength of the upswing shouldscale the budget deficit back to 3.2% of GDP. The economic burden following from theconsolidation measures for 2011 will not exceed 0.5% of GDP.

France Our upward revision to GDP raises our forecast of fiscal revenues, and job creationcould limit the rise in unemployment benefits. Therefore the public deficit could besmaller than expected at 7.7% of GDP ( 8.6% initially forecasted). Public debt couldreach 82.4% of GDP incl. the part of grand loan planned for 2010, ie EUR5bn.

Our upward revision to inflation raises nominal GDP and the government is planningto reduce the tax credit of EUR10bn. As a result, the public deficit could narrow to6.1%. But the public debt should continue to rise to 86% in 2011 after 82.4% in2010. Announcements about a public spending decl ine could not be enough tostabilize the debt-to-GDP ratio before 2013.

Italy A number of micro measures, financed by the revenue delivered by a tax amnesty,are scheduled for 2010, but fiscal policy will be roughly neutral.

Tough new measures amounting to EUR24bn (1.6% of GDP) are planned for 2011-12.These include a three-year public-sector pay freeze, a gradual reduction in publicsector headcount and cuts in local government spending. There are also plans for agradual increase in the retirement age.

UK Taking into account the plans inherited by the new government and those outlined inthe 22 June emergency budget, a fiscal tightening of close to half a percentage pointof GDP will be implemented in the current fiscal year. The most visible measure willbe a hike in the rate of VAT to 20% in January 2011.

The pace of fiscal consolidation will quicken appreciably in FY2012 with an overalltightening of GBP41bn being implemented, helping net borrowing fall to anestimated 7.5% of GDP from the expected 10 per cent in the previous year. Taxincreases are expected to account for more than 40% of this fiscal effort.

Canada Canadas Ministry of Finance is on track for a CAD49.2bn deficit for FY2010/11 inline with projections laid out in the March budget for 2010 and down from theCAD54bn projected for FY2009/10. We expect to see fi scal balance return byFY2014/15.

For FY2011/12, the deficit is expected to have shrunk to just slightly less thanCAD28bn.The MOF expects the debt-to-GDP ratio to peak at slightly more than 35%in FY2011 and decline to 32% by FY2015. Overall, Canadas debt-to-GDP ratio isrunning at half the average of the G7 nations.

Source: HSBC

Monetary & fiscal policyassumptions


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Economics upendedIts not just time for unconventional policies. The

moment has arrived for unconventional thinking.

Standard economic theory suggests changes ineconomic policy lead to changes in real economic

activity employment, retail sales, investment and

so on within the space of a year or so. Then,

after a further 12 months, changes in the real

economy begin to have an impact on inflation.

1. Core inflation is trending lower in the US and Germany

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US Germany

%Yr Core inflation %Yr

Note:West Germany prior to 1997.Source: Thomson Reuters Datastream

For the Western world, this chain of events is

being turned upside down. With policy rates at

zero, further declines in inflation (Chart 1), by

driving up real interest rates, will have seriousconsequences for real economic activity.

Households and companies will be incentivised torepay debt with even greater enthusiasm.

Accelerated deleveraging will, in turn, constrain

economic activity, thereby pushing inflation down

even more. The process then repeats itself.

In the US and much of Europe, inflation is nowtoo low. Indeed, the Federal Reserve confirmed

as much following the Federal Open Markets

Committee Meeting on 21 September, saying that

Measures of underlying inflation are currently at

levels somewhat below those the Committee

judges most consistent, over the longer run, with

its mandate to promote maximum employment and

price stability.

Admittedly, the UK is an exception to this overall

trend, in our view a reflection of the lagged impact

of sterlings 2008 collapse in pushing up domestic

prices. For the most part, however, central bankers

are confronted with similar challenges. Against a

background of high debts, acute deleveraging and

incipient deflation, how can they help generate asustained economic recovery?

This challenge is remarkably reminiscent of the

problems facing the Japanese economy over the

last twenty years. After years of denial, western

policymakers are finally accepting that their

economies are showing Japanese-style symptoms.

James Bullard, President of the St Louis Federal

Reserve, for example, has admitted that the US is

at risk of settling into a low growth, low inflation

Emerging elation, Western stagnation

High debts and excessively low inflation point to Western stagnation with debt-lite emerging nations in the driving seat of global growth

Stephen KingEconomistHSBC Bank Plc+44 207 991 [email protected]

Karen WardEconomistHSBC Bank Plc +44 207 991 [email protected]

Madhur JhaEconomistHSBC Bank Plc +44 207 991 [email protected]


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and low interest rate steady state akin to Japansmulti-year economic stagnation. 1

This is all the more surprising given the scale of

the policy stimulus on offer over the last three

years. Unlike the Japanese, who were slow to

stimulate their economy at the beginning of their

stagnation, western policymakers have deliveredmassive interest rate cuts, huge increases in

government borrowing and increasingly

unconventional monetary measures. Yet, despiteall their efforts, the outcome has been

disappointing, at least when benchmarked against

post-war economic cycles.

Typically, deep recessions are followed by steep

recoveries while mild recessions are followed by

shallow recoveries. By any standards, the

2008/09 recession was remarkably steep. The

subsequent recovery has, unfortunately, been veryshallow. Put another way, the level of economic

activity in the western world remains very

depressed, despite all the stimulus measures

provided in recent years.

The most obvious explanation for the failure of

western economies to achieve lift-off after the

Great Recession is that debt levels are still too

high. An easy way to demonstrate this is toconsider the much better response of many of the

emerging economies during this crisis. Their

rebounds have been much more dynamic, largelybecause they havent been encumbered by the

debt problems of old. Indeed, its almost as if the

economic world has been turned upside down: the

scourge of excessive borrowing, once considered

to be the preserve of the emerging nations, is now

very much a problem for the western world. This

reversal of fortune is reflected in our forecasts: forthe emerging world, growth is buoyant and

1 Seven Faces of The Peril , James Bullard, Federal

Reserve Bank of St. Louis Review September-October Issue.

inflation a little too high whereas, for thedeveloped world, the rebound is disappointing and

inflation worryingly low.

These divergent trends create varying policy

challenges. Keeping a lid on the effects of

excessive capital inflows will occupy the minds of

policymakers in the emerging world while, in thedeveloped world, policymakers will have to work

out how to engineer a period of deleveraging

without succumbing to deflation. It wont be easy.Well look at the challenges facing emerging

nations a little later. For now, well focus on the

ongoing problems in the developed world. These

are as much political as they are economic,

because both creditors and debtors have reasons to

worry. And it is these concerns which, arguably,

are contributing to heightened risk aversion in

financial markets, reflected most obviously in theextraordinarily-elevated price of gold and the yen.

2. Deficits are extraordinary

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% GDP Gov ernment bala nces in 2010 % GDP

Source: OECD


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3. though for countries in peripheral Europe this reflectsfunding pressures that are forcing extreme fiscal tightening

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% GDP Primary balances in 2010 % GDP

Note: Calculated from underlying primary balance and underlying balance data.Primary balance is deficit excluding interest paymentsSource: OECD

4. Its still yet to be seen whether fiscal cuts do significantlyimprove debt-to-GDP ratios (or simply declines in GDP)

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Source: OECD

The pressures vary depending on reserve currency

status and access to a monetary printing press.

For example, both the US and Greece have

terrible fiscal positions but only Greece is underimmediate pressure to deliver swingeing budget

cuts, largely because creditors know that, in the

absence of cuts, the alternative is a default (Charts

2-4). Should Greece deliver the cuts required to

stabilise its government debt/GDP ratio in the

years ahead, the burden of adjustment will mostlyhave fallen on domestic debtors rather than

(mostly foreign) creditors.

And what is true of Greece is also a problem formany other European nations. With funding costs

for parts of the periphery now back above the

levels seen at the height of the sovereign crisisearlier in the year, governments may be forced into

even greater fiscal tightening if only to repay the

now-higher interest on existing government debt.

5. Problems in the European periphery have resurfaced

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Ireland SpainPortugal ItalyGreece (RHS)

% %5y r gov ernment bond yields

Source: Reuters

Unfortunately as Janet Henry, our Chief European

Economist, notes in Eurozone periphery: And now

for the hard part (21 September 2010), life is

about to get significantly tougher for Ireland andthe Mediterranean countries. This years big

deficit reductions in Portugal, Greece, Ireland and

Spain have been achieved mostly by cutting

capital spending. The more politically challenging

cuts are those which impinge on public sector

staff. And all of this is yet to come. Moreover, astheir economies weaken, theres a growing chance

that inflation in the periphery will sink to still

lower rates, reducing nominal GDP and, thus,

boosting ratios of deficits and debt to GDP.

Meanwhile, despite the fact that the government

bond yields in parts of the Eurozone periphery are

back near previous peaks, purchases of

government debt by the ECB have dwindled.

It might simply be that the ECB is so fearful of imminent inflation that is does not deem such

intervention consistent with meeting its inflation

target. More likely, however, is that the ECB

recognises the increasingly political nature of

such actions (how can a monetary authority easily

decide how much of each countrys bonds to


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buy?). The European Financial Stability Fund(EFSF) is nearly up and running to support

governments short of funds, allowing the

eurozone politicians to decide who has access and

importantly on what conditions. But this is likely

to involve considerable political wrangling,

adding to uncertainty in financial markets.

Of course the other consequence of the ECBs

unwillingness to utilise the printing press

aggressively is euro strength. By limiting thesupply of euros, the risk of renewed euro

appreciation against a tarnished dollar cannot be

ruled out. Unfortunately, as peripheral bond

yields return to crisis levels, European economies

no longer have the safety valve of a falling

currency to encourage their growth prospects.

The ECB appears reluctant to alter its stance. This

may eventually have to change, following Japansrecent experience. With economic prospects

looking as stagnant as ever; the upward march in

the yen against the dollar has become too much to

bear, forcing the Ministry of Finance to intervene.

In these circumstances, the world is at risk of

descending into a beggar-thy-neighbour

outbreak of currency wars (a risk referred to by

Guido Mantega, Brazils finance minister as

reported by the Financial Times on 28 September).

Bernankes closer to the

helicopters but will it help?But what about the US? Relative to individual

eurozone nations, theres a much wider range of available options.

The minutes from the latest Fed meeting suggest

that certain members of the Federal Reserve are

growing impatient with the lack of vigour so far

demonstrated by the recovery and by the

persistence of disinflationary pressures. Whereas

previously they had indicated that things wouldhave to get materially worse for further action, it

seems now they could be willing to take furtheraction merely if things dont get any better.

As yet it is unclear what form a new dose of QE

will take. But whilst this may provide some short

term support to financial markets, a more worthy

question is whether QE2 will solve the

economys fundamental problems. Our view isthat by pushing treasury and mortgage rates

lower, QE2 would merely ease the burden of

deleveraging, rather than curing the underlyingailment. If your mortgage is a little cheaper each

month, it helps you pay off that debt, but its still

going to take some time.

One way around this discussed in Stephen

Kings recent An Unconventional Truth

(September 2010) is for central banks to shift

away from inflation targeting towards price level

targeting. By doing so, central banks wouldeffectively promise to raise interest rates only

when inflation had moved above target following

a period of excessively low inflation (thereby

implying that real interest rates would fall in the

future, encouraging more longer term borrowing

today). But, as King admits, there are two

problems with this approach. First, most central

bankers are reluctant to make such a step.

Second, the benefits of persistently-low interest

rates have an irritating habit of leaking abroad.

Of course one of the other effects of quantitativeeasing in the US is that by increasing money supply,

the burden of adjustment is shifted from US

domestic debtors to foreign creditors via a much

weaker dollar. While the US is happy to talk about

the need for a stronger renminbi on trade grounds,

its probably more accurate to think instead about a

weaker dollar on quasi-default grounds. 2 A

2 Interested readers should look at Stephen Kings article in the

Financial Times on 20 September 2010, Beijing is right to

ignore the currency pleas along with follow-up letters from


13/98

12


ab c

weaker dollar makes foreign creditors to the USworse off for the simple reason that they will mostly

have lent to the US in dollars and not in their own

currency. If quantitative easing is to work without

raising domestic inflation in the US, it will have to

perform its magic through the currency. Turning on

the printing press is, therefore, an attempt to shift the

burden of adjustment from domestic US debtors to

foreign creditors. It works both by making thecreditors worse off (the renminbi value of assets

denominated in dollars goes down) and byimproving conditions for domestic debtors (a weaker

dollar should lift US nominal GDP and, thus, raise

the denominator in the key deficit and debt ratios.)

The political narrative accompanying this story is

simple enough. Both the Administration and

Congress argue that China and others are unfairlyusing undervalued exchange rates to deliver

mercantilist objectives. This unfair competition, the

US argues, is leading to the loss of American jobs.Thus the US has every right to demand the

revaluation of the renminbi. Should the Chinese not

play ball, the US could then be justified in shifting

relative prices via the imposition of tariffs.

Its a beguiling message, at least from the

perspective of a domestic US electorate, but is it

really accurate? Is it really the case that the loss

of American jobs in recent years which has beenon a truly enormous scale is due to the

manipulation by others of their exchange rates?

Dr John Williamson (22 September) and Stephen King

(24 September)

Sharing the painTaking a closer look at the recent US experience

shows that the rise in unemployment has little to

do with exchange rates and much more to do with

the aggressive behaviour of US companies during

this latest economic downswing. In Japan,

companies bore the brunt of the economicadjustment. Their high debts led to persistent

deleveraging, starving Japan of the investment

that might have triggered a stronger economic

revival. US companies, in contrast, have coped

with their debts relatively easily, largely because

they have used the recession to slash costs and,

thus, boost their margins. Their gains, however,

have been matched by losses for American

households. Like Japan, the US will have to

deliver plenty of deleveraging but, in the yearsahead, the adjustment will come

disproportionately from the household sector,

creating a febrile environment for protectionistsentiment up and down the country.

Charts 6 to 11 compare the recent downturn to

previous US recessions. What is striking about

this recession is not just the scale of the downturn

but, as we have already noted, the lack of asubsequent rebound. The age old rule of the

deeper the drop the greater the rebound simply

hasnt proved true.

Looking at nominal activity the picture is evenmore extraordinary. For the first time in more than

fifty years, nominal GDP contracted and has only

now managed to claw back to the level seen

almost two years ago (Chart 12).

And whilst corporate profits fell sharply in thedownturn they have staged a remarkable recovery

having risen by 65% since the trough in 2008

(Chart 13).


14/98

13


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The recent US recession in context6. GDP has not only fallen by more than a normal recession, the recovery has also been weaker

90

95

100

105

110

115

120

T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T +11 T+12 T +13 T+14 T +15 T+1690

95

100

105

110

115

120

53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q301Q1 07Q4

Index , T=100 Index , T=100Real GDP

Source: Thomson Reuters Datastream, ECRI, HSBC

7. In nominal termsthe position is dismal

8090

100110

120130140150

T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T +11 T+12 T +13 T+14 T +15 T +16

8090100110

120130140150

53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q301Q1 07Q4

Index , T=100 Index , T=100Nominal GDP


8. And yet profits have staged a remarkable recovery

60

80

100

120

140

160

180

T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T+15 T+16

60

80

100

120

140

160

180

57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3 01Q1 07Q4

Index , T=100 Index, T=100Real corporate profits



15/98

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ab c

9. But this has been at the expense of household sector jobs

90

95

100

105

110

T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T +11 T+12 T +13 T+14 T +15 T +1690

95

100

105

110

53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q301Q1 07Q4

Index , T=100 Index , T=100Employ ment


10. and income

80

90

100

110

120

T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T+11 T+12 T+13 T+14 T +15 T +16

80

90

100

110

120

57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q3 01Q1 07Q4

Index, T=100 Index , T=100Real household income


11. And firms have been trying to squeeze as much as possible out of their current workforce.

95

100

105

110

115

120

T-4 T-3 T-2 T-1 T T+1 T +2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T +11 T +12 T+13 T+14 T+15 T +16

95

100

105

110

115

120

53Q3 57Q3 60Q2 69Q4 73Q4 80Q1 81Q3 90Q301Q1 07Q4

Index, T=100 Index, T=100Labour productiv ity



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The rise in corporate profits has only been achievedby pushing the burden of the downturn onto the

household sector. US corporates have been bearing

down on pay and aggressive in job shedding. With

precious little rehiring, total nominal household

income is still 2% below that seen in 2008. Its no

wonder households are still feeling miserable.

While business confidence has rebounded in 2010,

consumer confidence remains close to rock bottom.Indeed, the gap between the ISM survey and

consumer confidence is the biggest on record,emphasising the extent to which the crisis has had a

much bigger effect on the household sector than on

the corporate sector (Chart 12).

12. An unusual gap has opened between household andcorporate sentiment

20304050

607080

67 71 75 79 83 87 91 95 99 03 07 11

0

4080

120

160

ISM manufacturing (LHS)US consumer confidence (RHS)

Index Index

Source: Thomson Reuters Datastream

13. Corporates have grabbed a larger slice of the piebutarent spending

5

7

9

11

1315

51 55 59 63 67 71 75 79 83 87 91 95 99 03 07 11

10

12

14

16

1820

Profit s hare Inv estm ent s pending

% %


From an overall growth perspective (if not from apolitical perspective) this doesnt matter so long

as corporates go out and spend. The problem is

that whilst there has been some recovery in

corporate spending, it hasnt been enough to

offset the drag from the consumer. The profit

share of GDP has risen but investment spending

has not (Chart 13). Corporates seem far more

intent on repaying debt. Given the murky outlook for consumer demand, and the failure of fiscal

stimulus to deliver a decent economic recovery,who can blame them? Yet if the marginal

propensity to invest is low, the redistribution of

income from the household to the corporate sector

is not going to help the US economy to rebound.

This isnt making deleveragingeasyDepressed incomes are only hindering households

as they try to repay debt to mend their battered

balance sheets, leaving consumer spending

unusually weak. Its the classic fallacy of

composition: if all corporates try to be cautious

and prudent at once, unless exports fill the gap,

demand will fall making such efforts futile. We

are thus in danger of a vicious cycle developing

whereby household and corporate prudence leadsto a stagnant economy.

14. German workers have done a better job of maintainingtheir share of the pie

38

40

42

44

46

48

00 01 02 03 04 05 06 07 08 09 10

20

22

24

26

28

Labour share Profit share

Germany% %



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Looking across the Atlantic we see an entirelydifferent picture. In Germany, workers have

managed to claw back their share of GDP to pre-

crisis levels (Chart 14). By contrast, the corporate

sector has lost out. Why have we seen such

contrasting behaviour between corporate

behaviour in the US and Germany? Astrid

Schilos latest piece What drives German jobs?

(29 September 2010) suggests that there are twomain reasons why German corporates have been

hoarding labour. The first is that firms, for anumber of years, had been complaining about

skills shortages making them reluctant to let go of

staff on the basis that should activity pick up, it

might be hard to rehire. The second is that

government support, through what was know as

the short-shift scheme, helped companies to bear

the cost through the downturn. And so in contrast

to the US, we saw a sharp fall in productivity asfirms (on the whole) kept hold of staff. This

protected the household sectors share of income

considerably more than in the US.

For the western economies as a whole, debt

remains a serious problem. At the very least,

deleveraging will rule out interest rate increases

for the foreseeable future. Most of the debt

adjustments seen so far are the equivalent of re-arranging the chairs on the deck of the Titanic: in

the US, companies have benefited at the expense

of households while, in Germany, workers havebenefited at the expense of government and,

hence, taxpayers and recipients of public services.

The re-distributional aspects of the crisis deliver

political problems but in no way do they provide

economic solutions.

An emerging inflation problem?Despite all the signs of deleveraging, the amplified

hum of the printing press has led some to include

that an inflationary disaster awaits some way downthe road. Yet, in the developed world, the opposite

seems true. Putting VAT aside, core inflation rates

are trending ever lower, hardly surprising given

large amounts of spare capacity.

However, attention also needs to be paid to more

buoyant developments in the emerging worldwhere strong rebounds in economic activity

(Charts 15 and 16) suggest that output gaps which

emerged as a result of the 2008 downswing havelargely been closed out. In Decoupling Revisited

(14 September 2010), Frederic Neumann, Pablo

Goldberg, and Song Yi Kim highlight why the

emerging markets have bounced back, and why

they expect activity to remain buoyant.

15. GDP growth in emerging markets... 16. ...has broadly been better than market expectations

-3

-2

-1

0

1

2

-3

-2

-1

0

1

2

Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

Difference between actual and consensus GDP forecasts

Malaysia% pts % pts

-3-2-101234

-3-2-101234

Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

Difference between actual and consensus GDP forecasts

Philippines

Source: Bloomberg, HSBC Source: Bloomberg, HSBC


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Despite the closure of output gaps, however,inflation in the emerging markets has been

relatively well behaved certainly when compared

to consensus expectations (see charts 17 to 23).

With a few notable exceptions like India, the

emerging world at present appears to be enjoying

a goldilocks scenario of high growth and

benign inflation.

Much of this reflects the passing of the global

growth baton from the US to China. Strong Chinesedemand for commodities has kept prices relatively

elevated notwithstanding the problems in the

western world. As a consequence, many of the

worlds major commodity producers have,

unusually, emerged relatively unscathed. Whether

its Brazil, South Africa, the Middle East or

Australia, the western recession has done littledamage to their terms of trade, allowing decent

growth rates to be maintained. Meanwhile, despite

remarkably low interest rates, inflation hasnt pickedup as quickly as had been feared, largely because the

Wests problems have limited inflationary pressures

virtually everywhere in the world.

Earlier in the year, it was commonly thought that

loose monetary conditions in the West would lead to

excessive inflation in the emerging world. The

argument was partly based on the idea that, over

time, real exchange rates in the emerging worldshould rise, a reflection of their economic success

and, hence, their enhanced buying power over the

worlds scarce resources. If nominal exchange rates

were fixed against the dollar, the only way in which

real exchange rates would be able to shift was via

relatively high inflation in the emerging world,

which would increase the buying power of emerging

nations over goods and services priced in dollars.

The argument rested on the idea that the West wasable to set its own inflation rate and that inflation

rates in the emerging world would be, as a

consequence, far too high. But, for the emerging

world, this now seems to be too pessimistic a

conclusion. The adjustment in real exchange rates is

taking place less because of excessively elevated

inflation in the emerging world and more because

inflation in the developed world is too low. Therelative adjustment is roughly the same, but more of

the heavy lifting is being done by the deflation-prone western nations.


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Headline inflation has been below expectations in the East17. Inflation has come in weaker than expected in the US 18. and also across some countries in the Latam space

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Difference between actual and consensus forecast

US headline inflation% pts % pts

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

-0.2

-0.15

-0.1

-0.05

0

0.05

0.1

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10Difference between actual and consensus forecast

Mexico headline inflation% pts % pts


19. as well as the main African economies 20. such as South Africa and Egypt

-0.6-0.4-0.2

00.20.40.60.8

-0.6-0.4-0.200.20.40.60.8



South Africa headline inflation% pts % pts

-4-3-2-1012

345

-4-3-2-1012

345

Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10

Difference between actual and consensus

Egypt headline inflation% pts % pts


21. With the main exception of India, inflation in Asia 22. has also surprised largely to the downside

-0.8-0.6-0.4-0.2

00.20.40.60.8

-0.8-0.6-0.4-0.200.20.40.60.8



South Korea headline inflation% pts % pts

-1

-0.5

0

0.5

1

1.5

-1

-0.5

0

0.5

1

1.5



Philippines headline inflation% pts % pts



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Nevertheless, with robust growth, capacityconstraints and labour market shortages, wage

settlements have come in well ahead of the

prevailing inflation rate in many countries (for

example, minimum wage settlements in China are

averaging around 15%, much higher than the

3.0% average inflation). Might this be a

harbinger of higher future inflation?

One reason for faster wage growth is continuedand rapid increases in productivity per employee

in the emerging world. In countries such as China

output per worker is rising rapidly enough to

offset the increase in compensation levels. People

are being paid more because they are producing

more (Chart 24).

24. Productivity gains per employee have been muchstronger in the developing world than in the west

100

150

200

250

300

350

2000 2002 2004 2006 2008100

150

200

250

300

350

China United States

United Kingdom Korea

Index, 2000=100 Index, 2000=100

Source: Thomson Reuters Datastream, HSBC

Excess liquidity may find itsway into asset prices againBut its also possible that traditional inflation

metrics are not fully capturing the underlying

inflation dynamics in emerging nations.

Focussing only on CPI/WPI metrics could be

misleading as inflationary pressures are starting toshow up in other places, in particular asset prices.

25. Stock markets have performed better in the EM world

405060708090

100110120

J a n - 0

8

M a r - 0 8

M a y - 0 8

J u l - 0 8

S e p - 0

8

N o v - 0 8

J a n - 0

9

M a r - 0 9

M a y - 0 9

J u l - 0 9

S e p - 0

9

N o v - 0 9

J a n - 1

0

M a r - 1 0

M a y - 1

0

J u l - 1 0

405060708090100110120

Japan US India Korea

Index, Jan 08=100 Index, Jan 08=100


23. Core inflation remains soft in the emerging world

-2

0

2

4

6

8

10

85 87 89 91 93 95 97 99 01 03 05 07 09-2

0

2

4

6

8

10

South Korea Taiwan Thailand

% Yr % YrCore inflation



21/98

20


ab c

26. As have corporate bonds

70

80

90

100

110

120

05 05 06 06 07 07 08 08 09 09 10 10

70

80

90

100

110

120

EM DM

Corporate Bond IndexesIndex Index


27. And there are fears of property bubbles in Asia

70

80

90

100

110

120

130

0 5

0 6

0 7

0 8

0 9

1 0

70

80

90

100

110

120

130

USA China Korea

Index, 2005=100 Index, 2005=100House prices


Equity and corporate bond markets and house

prices are still reasonably buoyant to accelerate in

the emerging world (see Charts 25-27). Partly,this can be attributed to growing wealth and

access to credit in the emerging world, on the

back of huge supply-side improvements andlegitimate financial reforms. However, in the face

of near-zero interest rates in the developing

markets, QE-induced excess liquidity has found

its way into the emerging world. While some

emerging market countries such as China are

becoming more concerned about the dangers of

credit driven asset bubbles (restrictions on thehousing sector are already in place in China), the

search for better returns on behalf of fund

managers all over the world continues to have thepotential to fuel further credit expansions in

emerging nations.

In other words, whilst deflationary pressures inthe West are clearly inhibiting consumer prices

across the globe, excess liquidity appears to be

finding its way into asset prices.

In the last edition of Global Economics ( Wrestlingwith debt ) we argued that loose monetary

conditions in the western world might simply fuela credit boom in the emerging world as investors

hunted for yield. While this flow of capital will

certainly help growth prospects in the emergingworld in the near future, we know from yen carry

trade effects over the last 20 years that low

interest rates in one part of the world can fuel

asset and credit booms in other parts of the world.

In the 1990s, cheap capital fuelled the Mexican

boom, the Asian boom and the TMT bubble.

Over the last decade, cheap capital helped fuelhousing bubbles in the US, the UK and Spain.

What should emerging nations do today to stop

them suffering the same fate?

There are five options:

1 Allow currencies to appreciate, thereby

severing the link with the US dollar once

and for all and allowing some independence

in domestic monetary policy. The problem

with this, however, is that currencyappreciation may lead to even greater hot

money inflows, leading to bigger domestic

financial distortion.

2 Tighten fiscal policy to offset the effects of

loose monetary conditions. This is easier said

than done: fiscal policy, being so politically-

charged, has never been a good way of

stabilising cyclical economic pressures.

3 Impose counter-cyclical capital ratios on

financial institutions to stop them lending

too much during periods of low interest rates.

Although promising, its not obvious howsuch policies might work in reality. At what

point should ratios be changed?


22/98

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4 Increase collateral terms for domesticborrowers. Even if banks are happy to lend a

lot, these policies will prevent borrowers from

taking full advantage.

5 Impose capital and exchange controls to

prevent excessive capital inflows. In

contrast to the late-1990s, the IMF and otherinternational bodies now accept that controls

are not wholly negative, partly because of the

relative success of China and Malaysia overthe last decade or so.

None of these are ideal but, in an uncertain world,

some mixture of these approaches will increasingly

be adopted as countries seek to prevent another

outbreak of the capital market instability which has

proved so devastating to different parts of the world

over the last twenty years.

ConclusionsDebt, deleveraging and deflation will be therecurrent themes in the western world in the

months ahead. Having borrowed too much,

western nations are in danger of being caught in a

Japan-lite trap. Policy may be loose, but it is not

being very effective. The best that central bankerswill be able to do is to commit to low short-term

interest rates for a very long period of time

probably years rather than months.

Success will ultimately rest not on the occasionaluptick in the real economy but, instead, on the

return to health of the nominal economy. That

means an end to the disinflationary process which

has proved so corrosive to recovery prospects.

Inflation needs to move back up again. In the

meantime, we expect bond yields to decline

further, notwithstanding poor fiscal positions.

The incentive to shift the burden of adjustment

onto other countries is strong, not just because of a

desire to boost exports via currency weakness but

also because of the geographical distribution of

debtors and creditors. One likely casualty of this

process is the US dollar which we expect to softenfurther in the months ahead. The euro will also

come under pressure from time to time, not helped

by the problems in the periphery. Amid all this

uncertainty, the gold price is likely to remain high.

Should the Federal Reserve resort to quantitative

easing later in the year, it is difficult to avoid theconclusion that risky assets would, for a while,

perform relatively well. However, Japans

experience with QE earlier in the decade suggeststhat any benefits might fade as renewed

scepticism about economic recovery returns: with

heavy deleveraging, we expect inflation to remain

too low in the years ahead.

Most of the good news is focused on the emerging

nations. There are plenty of ways of exploiting

this story through currency appreciation,

commodity investments, investments in westerncompanies with heavy or growing emerging

market exposure. But it will be important to keep

a watchful eye on inflation developments, whether

in goods, labour or asset markets, for signs that

capital inflow from abroad might be threatening

economic and financial stability.

And, finally, the relative success of the emerging

world and the failure of the developed world willonly serve to heighten protectionist sentiment.

Many investors focus only on market

developments. Today, more than ever, they willalso need to focus on political reality. Some of

the biggest financial risks come not from market

failures but, instead, from the growing political

pressures between the old and new superpowers.


23/98

22


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24/98

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ab c

Global economicforecasts


25/98

24


ab c

Annual

% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

World (Nominal GDP weights) 2.5 3.7 3.2 3.7 3.6 1.3 -2.2 3.5 2.9 3.3World (PPP weights) 3.9 5.0 4.6 5.3 5.4 2.9 -0.5 4.8 4.0 4.2Developed 1.8 2.9 2.4 2.7 2.3 0.0 -3.5 2.4 1.8 2.3Emerging 5.7 7.0 6.5 7.6 7.9 5.6 1.9 7.2 6.2 6.2

North America 2.4 3.5 3.1 2.7 2.0 0.0 -2.6 2.8 2.4 3.2

US 2.5 3.6 3.1 2.7 1.9 0.0 -2.6 2.7 2.5 3.2Canada 1.9 3.1 3.0 2.8 2.2 0.5 -2.5 3.1 2.1 2.3Latin America 2.1 5.2 3.9 5.0 5.0 3.4 -3.4 6.0 4.5 4.6

Mexico 1.4 4.0 3.2 5.1 3.2 1.5 -6.5 4.3 3.8 4.5Brazil 1.1 5.7 3.2 4.0 6.1 5.1 -0.2 7.5 5.1 4.5Argentina 8.8 9.0 9.2 8.5 8.7 4.9 -2.7 7.8 4.5 5.0Chile 3.9 6.0 5.6 4.6 4.7 3.7 -1.5 5.0 5.5 4.5

Western Europe 1.1 2.1 1.9 2.9 2.7 0.3 -4.1 1.6 1.3 1.6Eurozone 0.8 1.8 1.7 2.9 2.6 0.3 -4.0 1.6 1.3 1.6

Germany -0.2 0.7 0.9 3.6 2.8 0.7 -4.7 3.3 1.9 1.8France 1.1 2.3 2.0 2.4 2.3 0.1 -2.5 1.6 1.5 1.8Italy 0.1 1.4 0.8 2.1 1.4 -1.3 -5.1 1.0 0.7 1.0Spain 3.1 3.3 3.6 4.0 3.6 0.9 -3.7 -0.4 0.6 1.5

Other Western Europe 2.1 3.0 2.3 3.0 2.8 0.1 -4.3 1.7 1.5 1.8UK 2.8 3.0 2.2 2.8 2.7 -0.1 -4.9 1.4 1.4 1.8

Norway 0.8 3.3 1.8 1.7 2.7 0.6 -1.3 0.5 1.4 2.1Sweden 2.5 3.7 3.1 4.6 3.4 -0.6 -5.1 4.0 2.9 2.5Switzerland -0.2 2.5 2.6 3.6 3.6 1.9 -1.9 2.9 1.7 1.8

EMEA 5.6 6.4 5.9 6.3 5.9 4.1 -3.4 3.8 3.8 3.8Czech Republic 3.6 4.3 6.4 7.0 6.1 2.3 -4.0 2.1 2.7 2.8Hungary 4.2 4.6 4.1 3.8 1.0 0.4 -6.2 1.0 2.7 3.0Poland 3.8 5.4 3.4 6.2 6.8 5.0 1.8 3.2 3.9 3.4Russia 7.3 7.2 6.4 7.7 8.1 5.6 -7.9 3.8 3.5 3.0Turkey 5.3 9.4 8.4 6.9 4.7 0.7 -4.7 6.8 3.9 4.3Ukraine 9.6 12.1 2.6 7.1 7.9 2.1 -15.1 5.5 4.0 5.1Romania 5.3 8.5 4.1 7.9 6.2 7.1 -7.1 -2.2 0.1 2.2

Non-European EMEA 4.7 4.9 5.6 5.5 5.3 4.9 0.2 3.5 4.3 4.3Egypt* 3.2 4.1 4.5 6.8 7.1 7.2 4.7 5.1 6.0 6.1Israel 2.3 5.2 5.1 5.3 5.2 4.0 0.7 3.9 3.4 3.6Saudi Arabia 7.7 5.3 5.6 3.1 3.4 4.4 0.1 3.6 4.4 4.8UAE 11.9 7.4 10.5 9.4 5.2 7.0 -2.9 2.0 3.9 4.5

South Africa 3.0 4.6 5.3 5.6 5.5 3.7 -1.8 2.6 3.5 3.1Asia/Pacific 4.0 5.0 4.6 5.3 6.0 3.0 0.7 6.1 4.7 5.0

Japan 1.5 2.7 1.9 2.0 2.3 -1.2 -5.2 3.0 0.7 1.5Australia 3.2 3.6 3.2 2.6 4.8 2.2 1.2 3.4 4.1 3.9New Zealand 4.4 4.0 3.2 2.3 3.3 -0.6 -0.5 1.4 2.6 3.7

Asia-ex-Japan 7.2 7.9 7.7 9.1 9.9 7.0 5.7 8.8 7.6 7.4China 10.0 10.1 10.4 11.6 13.0 9.6 9.1 10.0 8.9 8.6

Asia ex-Japan & China 5.0 6.2 5.5 7.0 7.0 4.5 2.4 7.4 6.1 6.1Hong Kong 3.0 8.5 7.1 7.0 6.4 2.2 -2.8 5.4 4.7 4.5India** 7.3 6.7 6.2 9.8 9.5 7.5 6.7 8.8 8.6 8.0Indonesia 4.8 5.0 5.7 5.5 6.3 6.0 4.5 6.1 6.4 6.3Malaysia 5.4 7.3 5.3 5.8 6.5 4.7 -1.7 7.3 5.2 5.0Philippines 4.9 6.4 5.0 5.3 7.1 3.7 1.1 5.9 4.6 5.6Singapore 4.6 9.2 7.4 8.6 8.5 1.8 -1.3 13.2 4.6 6.0South Korea 2.8 4.6 4.0 5.2 5.1 2.3 0.2 6.0 4.0 4.6

Taiwan 3.7 6.2 4.7 5.4 6.0 0.7 -1.9 7.3 4.9 3.8Thailand 7.0 6.4 4.7 5.1 4.9 2.5 -2.2 7.9 5.3 4.1Vietnam 7.3 7.8 8.4 8.2 8.5 6.3 5.3 7.0 7.5 7.8

Notes: * = based upon Egyptian fiscal year (July-June); ** = calendar year. We now calculate the weighting system using chain nominal GDP (USD) weightsSource: HSBC

GDP


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Quarterly

% Quarter & % Year Q3 09 Q4 09 Q1 10 Q2 10f Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f

North AmericaUS* % Quarter 1.6 5.0 3.7 1.6 2.5 1.8 2.5 2.7 3.2 2.9

% Year -2.7 0.2 2.4 3.0 3.2 2.4 2.1 2.4 2.5 2.8Canada* % Quarter 0.9 4.9 5.8 2.0 2.2 1.9 2.6 1.9 1.7 2.0

% Year -3.1 -1.1 2.2 3.4 3.7 3.0 2.2 2.2 2.0 2.1Latin America

Mexico % Quarter 2.5 2.4 -0.6 3.2 -1.6 1.0 1.8 2.0 -0.8 1.0 %Year -6.1 -2.3 4.3 7.6 3.0 2.4 4.2 3.6 4.0 3.5

Brazil % Quarter 2.1 2.4 2.7 1.2 0.3 1.4 2.1 1.7 0.3 1.9 % Year -1.2 4.3 9.0 8.8 6.8 5.8 4.2 4.7 5.3 6.1

Argentina % Quarter 2.2 1.7 2.5 2.1 1.3 1.1 0.9 0.9 1.1 1.2 % Year -2.5 1.4 7.5 9.9 6.8 7.1 5.4 4.1 4.2 4.2

Chile % Quarter 1.8 1.6 -1.5 4.3 1.9 1.4 1.4 1.3 1.3 1.5 % Year -1.4 2.1 1.5 6.5 5.8 6.2 9.6 4.4 4.1 4.2Western Europe

Eurozone % Quarter 0.4 0.2 0.3 1.0 0.4 0.2 0.2 0.3 0.4 0.4 % Year -4.0 -2.0 0.8 1.9 1.9 1.9 1.8 1.1 1.0 1.3

Germany % Quarter 0.7 0.3 0.5 2.2 1.0 0.1 0.2 0.4 0.4 0.4 % Year -4.4 -2.0 2.0 3.7 4.0 3.7 3.5 1.6 1.1 1.4

France % Quarter 0.3 0.6 0.2 0.6 0.4 0.4 0.2 0.3 0.5 0.5 % Year -2.7 -0.5 1.2 1.7 1.9 1.7 1.7 1.3 1.5 1.5

Italy % Quarter 0.4 -0.1 0.4 0.5 0.3 0.1 0.1 0.2 0.2 0.2 % Year -4.7 -2.8 0.5 1.3 1.1 1.3 0.9 0.6 0.5 0.6

Spain % Quarter -0.3 -0.2 0.1 0.2 -0.2 -0.2 0.1 0.4 0.5 0.6 % Year -3.9 -3.0 -1.3 -0.1 0.0 -0.1 -0.2 0.1 0.7 1.6Other Western Europe

UK % Quarter -0.3 0.4 0.3 1.2 0.2 0.1 0.3 0.4 0.4 0.5 % Year -5.3 -2.9 -0.2 1.7 2.2 2.0 1.8 1.0 1.2 1.6

Norway % Year -1.1 -1.1 -0.4 0.9 0.7 0.9 1.0 1.4 1.6 1.8Sweden % Year -5.9 -1.5 2.8 4.5 4.6 4.2 3.4 2.2 2.5 3.4Switzerland % Year -1.9 -0.1 1.9 3.4 3.2 3.0 2.2 1.7 1.5 1.5

EMEACzech Republic % Year -5.0 -2.9 1.0 3.0 2.8 1.7 1.9 2.4 2.9 3.5Hungary % Year -7.1 -4.0 0.1 1.0 1.7 1.2 1.4 2.2 3.2 3.7Poland % Year 1.8 3.3 3.0 3.5 3.2 3.0 3.2 3.6 4.0 4.7Russia % Year -8.6 -2.9 3.1 5.2 4.0 3.0 3.5 3.0 3.5 2.5Turkey % Year -2.9 6.0 11.7 10.3 4.2 2.5 2.5 2.4 4.0 6.5Ukraine % Year -16.0 -6.8 4.8 7.0 7.0 4.1 4.0 4.0 4.0 4.0Romania % Year -6.5 -2.6 -0.5 -3.1 -2.5 -3.1 -2.0 1.6 2.2 3.0Israel % Year 0.1 1.6 3.2 4.1 4.0 3.7 3.5 3.2 3.2 3.4South Africa %Year -2.2 -1.4 1.6 3.0 3.1 2.7 3.5 3.6 3.4 3.5

Asia/Pacific

Japan % Quarter -0.1 0.9 1.2 0.4 0.5 -0.2 0.3 0.1 0.2 0.2 % Year -5.2 -1.0 4.7 2.4 3.0 1.9 1.0 0.7 0.4 0.9

Australia % Quarter 0.3 1.1 0.5 0.3 0.9 0.8 1.1 1.2 0.9 1.0% Year 0.9 2.8 2.7 2.2 3.9 3.7 4.1 4.1 4.0 4.2

New Zealand % Year -0.5 1.1 2.5 2.1 1.9 1.3 0.4 0.6 1.7 3.5China % Year 9.1 10.7 11.9 10.5 9.5 8.9 8.2 8.8 9.0 9.3Hong Kong % Year -2.4 2.5 8.0 6.5 4.1 3.3 5.0 2.3 7.0 4.5India % Year 8.6 6.5 8.6 8.8 8.2 9.7 8.9 9.0 8.5 8.1Indonesia % Year 4.2 5.4 5.7 6.2 6.0 6.5 6.2 6.2 6.3 6.8Malaysia % Year -1.2 4.4 10.1 8.9 6.2 4.6 3.5 5.6 6.2 5.3Philippines % Year 0.2 2.1 7.8 7.9 5.1 3.2 3.9 4.0 5.2 5.1Singapore % Year 1.8 3.8 16.9 18.8 8.2 9.4 7.4 2.2 5.2 3.8South Korea % Year 1.0 6.0 8.1 7.2 4.6 4.6 3.7 3.3 3.8 5.2Taiwan % Year -1.0 9.1 13.7 12.5 4.0 0.8 2.0 2.5 6.7 8.1Thailand % Year -2.7 5.9 12.0 9.1 7.1 3.8 2.5 6.0 6.5 6.2

Note: * = quarter-on-quarter data has been annualised; ** = based up[on Egyptian fiscal year (July June)Source: HSBC


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Consumer pricesAnnual

% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

World 2.3 2.5 2.7 2.8 2.8 4.3 1.0 2.3 2.2 2.2

Developed 1.8 1.9 2.3 2.3 2.1 3.3 0.0 1.3 1.2 1.2Emerging 4.6 4.6 4.5 4.5 5.4 8.1 4.7 5.6 5.4 5.3

North America 2.3 2.6 3.3 3.1 2.8 3.7 -0.3 1.6 1.0 1.1

US 2.3 2.7 3.4 3.2 2.9 3.8 -0.3 1.6 0.9 1.1Canada 2.7 1.9 2.2 2.0 2.1 2.4 0.3 1.7 1.6 2.0

Latin America 7.8 5.3 5.8 4.5 5.6 7.6 6.2 7.7 7.6 6.9Mexico 4.5 4.7 4.0 3.6 4.0 5.1 5.3 4.2 4.0 3.4Brazil 14.7 6.6 6.9 4.2 3.6 5.7 4.9 4.9 5.4 4.6Argentina* 3.7 6.1 12.3 9.8 20.1 22.9 14.8 26.5 21.7 18.7Chile 1.1 1.1 3.2 3.4 4.4 7.8 0.3 1.6 3.3 3.2

Western Europe 2.0 1.9 2.1 2.1 2.1 3.3 0.6 1.8 1.8 1.7Eurozone 2.1 2.2 2.2 2.2 2.1 3.3 0.3 1.6 1.6 1.7Germany 1.0 1.8 1.9 1.8 2.3 2.7 0.2 1.1 1.2 1.3France 2.2 2.3 1.9 1.9 1.6 3.2 0.1 1.8 1.8 1.6Italy 2.8 2.3 2.2 2.2 2.0 3.5 0.8 1.6 1.9 1.7Spain 3.1 3.1 3.4 3.6 2.8 4.1 -0.2 1.6 1.5 1.7

Other Western Europe 1.5 1.1 1.7 2.0 2.0 3.5 1.5 2.4 2.3 1.8UK 1.4 1.3 2.0 2.3 2.3 3.6 2.2 3.2 2.9 1.8

Norway 2.5 0.5 1.5 2.3 0.7 3.8 2.2 2.3 1.7 2.5Sweden 1.9 0.4 0.5 1.4 2.2 3.5 -0.3 1.1 2.1 2.5Switzerland 0.6 0.8 1.2 1.1 0.7 2.4 -0.5 0.7 0.7 1.5

EMEA 7.4 6.0 6.4 6.2 7.2 11.2 7.4 5.9 6.8 6.7Czech Republic 0.0 2.8 1.9 2.6 2.8 6.4 1.0 1.5 2.4 2.4Hungary 4.7 6.8 3.6 3.9 7.9 6.1 4.2 4.8 3.2 3.4Poland 0.8 3.5 2.1 1.0 2.5 4.2 3.5 2.5 2.9 3.3Russia 13.7 10.9 12.7 9.7 9.0 14.1 11.7 7.0 9.5 8.5Turkey 25.3 8.6 8.2 9.6 8.8 10.4 6.3 8.7 7.7 7.0Ukraine* 5.2 9.0 10.3 9.1 12.8 25.2 16.0 8.5 8.4 9.0Romania 15.3 11.9 9.0 6.6 4.8 7.9 5.6 6.0 5.5 4.6

Non-European EMEA 2.1 2.9 3.2 4.4 6.4 11.3 5.7 5.0 5.9 6.4Egypt** 4.0 10.6 4.7 7.3 8.5 20.2 10.0 10.7 10.4 11.0Israel* -1.9 1.2 2.4 -0.1 3.4 3.8 3.9 2.3 3.0 2.7Saudi Arabia 0.6 0.3 0.4 2.3 4.1 9.9 5.1 5.5 6.6 7.0UAE 3.1 7.0 9.0 10.5 11.1 13.5 1.8 1.0 2.7 4.0South Africa 5.4 1.4 3.4 4.6 7.1 11.0 7.2 4.7 5.5 6.0

Asia/Pacific 1.0 1.8 1.4 2.0 2.2 4.1 0.8 2.0 1.8 2.0Japan -0.2 0.0 -0.3 0.2 0.0 1.5 -1.3 -1.1 -0.5 -0.4Australia 2.8 2.3 2.7 3.5 2.3 4.3 1.8 3.0 3.1 2.9New Zealand 1.8 2.3 3.0 3.4 2.4 4.0 2.1 2.3 4.0 2.3

Asia-ex-Japan 2.2 3.7 3.1 3.6 4.5 6.7 2.6 4.6 3.7 3.8China 1.2 3.9 1.8 1.5 4.8 5.9 -0.7 2.9 2.5 2.2

Asia ex-Japan & China 3.0 3.6 4.2 5.2 4.2 7.3 5.1 5.8 4.4 4.9Hong Kong -2.5 -0.4 0.9 2.0 2.1 4.3 0.6 2.4 2.9 3.3India* 3.7 3.9 4.0 6.3 6.4 8.3 10.9 10.7 5.4 7.1Indonesia 6.7 6.1 10.5 13.1 6.4 10.2 4.8 5.2 6.0 5.2Malaysia 1.1 1.5 3.0 3.6 2.0 5.4 0.6 1.9 2.7 2.2Philippines 3.5 6.0 7.7 6.3 2.8 9.3 3.3 4.2 4.5 4.7Singapore 0.5 1.7 0.5 1.0 2.1 6.6 0.6 2.2 2.7 2.8South Korea 3.4 3.6 2.8 2.2 2.5 4.7 2.8 2.7 2.9 3.0

Taiwan -0.3 1.6 2.3 0.6 1.8 3.5 -0.9 1.2 1.6 1.6Thailand 1.8 2.8 4.5 4.6 2.2 5.5 -0.8 3.5 3.6 3.0Vietnam 3.1 7.8 8.3 7.5 8.3 23.0 7.1 8.7 8.5 8.0

Note: * = end-year values. We now calculate the weighting system using chain nominal GDP (USD) weightsSource: HSBC


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Quarterly

% Year Q3 09 Q4 09 Q1 10 Q2 10 Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f

North AmericaUS -1.6 1.4 2.4 1.8 1.2 0.8 0.7 1.1 1.0 1.0Canada -0.9 0.8 1.6 1.4 1.8 1.9 1.8 1.6 1.5 1.7

Latin AmericaMexico -3.6 -0.4 4.8 4.0 3.7 4.3 3.5 4.1 4.4 3.8Brazil 4.3 4.3 5.2 4.8 4.7 5.3 5.0 5.5 5.8 5.0Argentina 13.5 14.8 20.0 22.5 24.4 26.5 23.8 23.5 23.4 21.7Chile -2.3 -2.6 0.3 1.2 2.2 3.8 3.7 3.8 3.3 3.4

Western EuropeEurozone -0.4 0.4 1.1 1.5 1.7 2.0 1.9 1.6 1.6 1.4Germany -0.5 0.4 0.8 1.0 1.2 1.3 1.4 1.3 1.2 1.1France -0.5 0.4 1.5 1.8 1.8 2.0 1.8 1.7 2.1 1.8

Italy 0.1 0.7 1.3 1.6 1.8 1.9 2.2 1.9 1.8 1.7Spain -1.0 0.2 1.2 1.6 1.8 1.6 1.7 1.5 1.2 1.5Other Western Europe

UK 1.5 2.1 3.2 3.4 3.1 3.0 3.3 3.0 2.8 2.5Norway 1.7 1.4 2.9 2.6 1.9 1.9 1.6 1.6 1.7 2.0Sweden -1.2 -0.4 1.0 1.0 1.1 1.3 1.5 2.0 2.3 2.5Switzerland -1.0 -0.2 1.1 1.0 0.4 0.2 -0.1 0.5 1.1 1.3

EMEACzech Republic 0.1 0.4 0.6 1.1 2.0 2.2 2.1 2.3 2.6 2.8Hungary 5.0 5.1 6.0 5.4 4.0 4.0 3.2 2.9 3.2 3.5Poland 3.5 3.3 3.0 2.3 2.1 2.4 2.7 2.7 3.0 3.3Russia 11.4 9.2 7.2 5.9 6.4 8.0 9.1 9.9 9.9 9.4Turkey 5.3 6.5 9.6 8.4 9.5 8.1 6.4 8.1 8.1 7.4Ukraine 15.3 13.3 11.2 9.0 6.9 6.9 7.0 7.9 9.1 9.8Romania 4.6 4.6 4.4 7.5 7.6 6.5 6.8 4.2 4.4 4.3Egypt 12.1 9.9 10.8 13.2 12.2 10.7 9.3 10.9 10.5 10.4Israel 2.8 3.9 3.2 3.0 2.2 2.3 3.3 3.4 3.2 3.0South Africa 6.1 6.3 5.1 4.5 4.5 4.7 5.5 6.0 6.0 5.5

Asia/PacificJapan -2.3 -1.7 -1.2 -1.2 -1.0 -0.8 -0.5 -0.4 -0.7 -0.6Australia 1.3 2.1 2.9 3.0 3.0 3.2 3.1 3.2 3.1 3.1New Zealand 1.7 2.0 2.0 1.9 1.8 1.4 3.9 4.1 4.9 4.5China -1.3 0.7 2.2 2.8 3.3 3.2 2.9 2.8 2.4 2.1Hong Kong 2.6 1.3 1.9 2.6 2.1 3.0 2.5 3.0 3.0 3.0India 11.8 13.3 15.3 13.7 8.7 5.8 3.7 5.0 6.0 7.0Indonesia 2.8 2.6 3.7 4.4 6.3 6.3 6.4 6.1 5.7 5.7Malaysia -2.3 -0.2 1.3 1.6 2.2 2.4 2.7 2.8 2.6 2.6Philippines 0.3 2.9 4.3 4.2 4.0 4.2 4.4 4.6 4.6 4.5Singapore -0.3 -0.8 0.9 3.1 2.2 2.8 2.8 2.3 3.0 2.8South Korea 2.0 2.4 2.7 2.6 2.5 2.9 2.8 2.9 3.0 2.9Taiwan -1.3 -1.3 1.3 1.1 0.9 1.6 1.4 1.8 1.6 1.6Thailand -2.2 1.9 3.7 3.2 3.5 3.6 3.6 3.7 3.7 3.5Vietnam 3.2 4.5 8.0 9.1 8.7 8.8 8.7 8.5 8.4 8.3

Source: HSBC


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3 month money

End period 2006 2007 2008 2009 ____________ 2010______________ _____________2011 _____________Q4 Q4 Q4 Q4 Q1 Q2 Q3f Q4f Q1f Q2f Q3f Q4f

North AmericaUS (USD) 5.3 4.7 1.4 0.3 0.3 0.5 0.3 0.3 0.3 0.3 0.3 0.4Canada (CAD) 4.2 4.5 1.9 0.5 0.4 0.8 1.2 1.3 1.9 2.2 2.2 2.5

Latin America

Mexico (MXN) 7.2 7.3 8.2 4.6 4.6 4.5 4.6 4.6 4.8 4.8 5.0 5.2Brazil (BRL) 12.8 11.2 13.0 8.7 9.1 10.8 10.7 10.8 11.9 12.8 12.7 12.7Argentina (ARS)* 7.1 10.0 17.1 10.4 9.1 9.1 9.2 9.5 9.6 9.7 9.7 9.6Chile (CLP)* 5.0 7.1 8.5 1.8 1.2 1.9 4.0 5.0 5.8 6.5 7.0 7.0

Western EuropeEurozone 3.7 4.6 2.9 0.7 0.6 0.7 0.8 1.0 1.0 1.0 1.0 1.2Other Western Europe

UK (GBP) 5.3 5.9 2.8 0.6 0.6 0.7 0.7 0.7 0.7 0.7 0.7 0.9Sweden (SEK) 3.3 4.7 2.5 0.5 0.5 0.6 1.0 1.4 1.6 1.9 2.1 2.4Switzerland (CHF) 2.1 2.6 0.6 0.3 0.2 0.1 0.2 0.3 0.3 0.4 0.8 0.8Norway (NOK) 3.9 5.9 4.0 2.2 2.3 2.8 2.6 2.7 2.8 2.9 3.2 3.4

EMEAHungary (HUF) 8.1 7.6 10.0 6.2 5.5 5.3 5.4 5.4 5.4 5.4 5.6 6.2Poland (PLN) 4.2 5.1 5.8 4.2 4.0 3.8 3.7 3.7 4.3 4.2 4.8 4.7Russia (RUB)* 6.5 6.3 20.6 6.6 4.2 3.4 4.0 7.0 7.5 8.0 8.0 7.8Turkey (TRY) 17.6 16.0 15.5 7.5 7.6 7.7 7.5 7.5 7.8 8.1 8.5 9.0Ukraine (UAH) 7.6 6.6 20.0 16.1 8.0 5.6 5.5 9.0 8.0 7.0 7.0 9.0South Africa (ZAR) 9.2 11.3 11.4 7.1 6.5 6.6 6.6 6.6 6.6 6.6 6.6 6.6

Asia/PacificJapan (JPY) 0.4 0.6 0.6 0.3 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.3Australia (AUD) 6.5 7.3 4.1 4.1 4.4 4.9 4.9 5.1 5.4 5.6 5.9 6.0New Zealand (NZD) 7.7 8.9 6.0 3.0 2.8 3.3 3.3 3.5 3.5 3.6 3.9 4.1

Asia-ex-JapanChina (CNY) 1.8 3.3 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7

Asia ex-Japan & ChinaHong Kong (HKD) 3.9 3.5 1.0 0.1 0.1 0.6 0.3 0.3 0.3 0.3 0.3 0.5India (INR) 7.0 8.3 9.2 5.1 4.6 5.5 6.3 6.2 6.0 6.4 6.8 7.0Indonesia (IDR) 9.5 7.8 12.0 6.6 6.6 6.6 7.0 7.6 7.1 7.3 7.3 7.3Malaysia (MYR) 3.7 3.6 3.4 2.3 2.6 2.8 2.9 2.9 2.9 2.9 2.9 2.9Philippines (PHP) 4.8 3.7 6.1 3.9 3.9 3.9 4.5 5.0 5.3 5.3 5.3 5.3Singapore (SGD) 3.4 2.5 1.4 0.7 0.7 0.6 0.4 0.7 0.8 0.8 0.9 1.0South Korea (KRW) 4.8 5.7 4.7 2.8 2.8 2.5 3.1 3.3 3.6 3.8 3.8 4.1Taiwan (TWD) 1.8 2.2 1.0 0.5 0.5 0.7 0.7 0.7 0.7 0.7 0.9 1.0Thailand (THB) 5.3 3.7 3.6 1.4 1.4 1.4 1.7 2.2 2.3 2.3 2.3 2.3

Note: * = 1-month moneySource: HSBC

Short rates


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10-year bond yields

End period Q4 06 Q4 07 Q4 08 Q4 09 Q1 10 Q2 10 Q3 10f Q4 10f Q1 11f Q2 11f Q3 11f Q4 11f

AmericasUS 2.7 3.5 3.3 3.8 3.8 2.9 2.6 2.3 2.0 2.0 2.2 2.5Canada 2.7 3.4 3.3 3.6 3.6 3.1 2.8 2.7 2.5 2.5 2.7 3.0Chile 5.9 6.3 7.4 5.9 6.4 6.4 6.1 6.5 6.8 6.9 7.0 7.0

Western Europe

Eurozone 3.6 3.8 3.5 3.6 3.5 3.3 3.0 2.9 2.7 2.6 2.7 2.9Germany 3.0 3.4 3.2 3.4 3.1 2.6 2.3 2.1 1.9 1.8 2.0 2.2France 3.6 3.7 3.5 3.6 3.4 3.1 2.7 2.5 2.4 2.4 2.5 2.6Italy 4.4 4.3 4.0 4.0 3.9 4.1 3.9 3.7 3.6 3.5 3.6 3.7Spain 3.8 4.0 3.7 3.9 3.8 4.6 4.2 4.2 3.8 3.7 3.8 3.9

Other Western EuropeUK 3.2 3.7 3.7 4.1 3.9 3.3 3.2 2.7 2.5 2.3 2.5 2.8Sweden 3.0 3.5 3.3 3.3 3.1 2.6 2.4 2.4 2.3 2.4 2.7 3.0Switzerland 1.9 2.3 2.0 1.9 1.8 1.5 1.4 1.4 1.5 1.7 1.8 2.0Norway 3.8 4.2 4.1 4.1 3.7 3.2 3.1 3.2 3.4 3.5 3.7 3.8

EMEAHungary 8.1 7.6 10.0 7.9 6.9 7.7 7.0 6.8 6.6 6.5 6.6 7.0Poland 5.2 5.7 5.4 6.3 5.5 5.9 5.5 5.4 5.8 5.7 6.1 5.8

Russia 6.5 6.3 11.3 8.7 6.9 7.0 7.3 7.4 7.9 8.2 7.7 7.7South Africa 7.7 8.4 7.3 9.0 8.3 8.3 8.3 8.4 8.5 8.5 8.6 8.6

Asia/Pacific Japan 1.3 1.4 1.3 1.3 1.4 1.1 1.0 1.0 0.9 0.9 0.9 1.0 Australia 4.4 5.5 5.4 5.7 5.8 5.1 5.1 5.2 5.3 5.5 5.6 5.7

New Zealand 4.8 6.0 5.6 6.0 5.9 5.5 6.1 6.1 6.1 6.1 6.1 6.2Asia-ex-Japan

Hong Kong 4.4 2.9 2.4 2.6 2.8 2.3 2.0 1.7 1.4 1.6 1.8 1.8India 7.6 7.8 5.3 7.7 7.8 7.8 8.0 8.1 8.3 8.4 8.5 8.4Indonesia* 9.4 9.2 11.8 8.9 8.3 7.7 7.4 7.7 8.0 8.2 8.4 8.4Philippines 6.4 6.4 7.3 7.9 7.9 7.6 6.4 6.5 6.7 6.9 7.0 7.0Singapore* 3.0 2.3 1.4 1.3 1.3 0.8 0.6 0.7 0.7 0.7 0.7 0.7

Note: * = 5-year bond yieldSource: HSBC

Long rates


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ab c

Exchange rates vs USD


AmericasCanada (CAD) 1.16 0.99 1.23 1.05 1.01 1.06 1.05 1.10 1.10 1.10 1.10 1.10

Mexico (MXN) 10.80 10.92 13.69 13.10 12.36 12.94 12.45 12.25 12.25 12.25 12.50 12.50Brazil (BRL) 2.14 1.77 2.31 1.74 1.78 1.80 1.70 1.74 1.78 1.82 1.85 1.90Argentina (ARS) 3.06 3.15 3.45 3.80 3.88 3.93 3.97 4.10 4.15 4.20 4.25 4.30Chile (CLP) 532 498 637 533 533 546 520 505 495 480 480 480

Western EuropeEurozone (EUR) 1.32 1.46 1.39 1.43 1.35 1.22 1.27 1.35 1.35 1.35 1.35 1.35

Other Western EuropeUK (GBP) 1.96 1.99 1.44 1.61 1.52 1.50 1.53 1.62 1.65 1.65 1.65 1.65Sweden (SEK) 6.84 6.46 7.91 7.14 7.20 7.78 7.48 6.96 6.96 6.96 6.96 6.96Norway (NOK) 6.23 5.43 7.00 5.78 5.94 6.50 6.06 5.63 5.56 5.56 5.56 5.56Switzerland (CHF) 1.22 1.13 1.06 1.03 1.05 1.08 1.02 0.96 0.98 0.99 1.01 1.02

EMEACzech Republic (CZK) 20.87 18.19 19.31 18.40 18.78 20.97 19.69 18.37 18.33 18.15 17.96 17.78Hungary (HUF) 190.6 172.9 191.3 188.3 196.4 232.7 224.4 203.7 200.0 200.0 196.3 196.3Poland (PLN) 2.90 2.46 2.96 2.86 2.85 3.38 3.15 2.89 2.85 2.81 2.78 2.74Russia (RUB) 26.4 24.5 29.4 30.2 29.4 30.1 30.7 30.8 29.7 30.8 31.2 33.4Turkey (TRY) 1.42 1.17 1.54 1.50 1.52 1.58 1.54 1.52 1.55 1.58 1.53 1.54Ukraine (UAH) 5.1 5.1 7.8 8.0 7.9 7.9 8.2 8.5 8.2 8.0 8.2 8.5Israel (ILS) 4.17 3.95 3.78 3.75 3.80 3.85 3.75 3.68 3.62 3.58 3.55 3.52Egypt (EGP) 5.71 5.52 5.52 5.48 5.50 5.55 5.55 5.60 5.60 5.60 5.55 5.50

South Africa (ZAR) 7.05 6.83 9.25 7.36 7.34 7.67 7.50 7.45 7.45 7.40 7.50 7.50Asia/Pacific

Japan (JPY) 119 112 91 93 93 88 85 90 95 95 95 95Australia (AUD) 0.79 0.88 0.70 0.90 0.92 0.84 0.89 0.85 0.85 0.85 0.85 0.85New Zealand (NZD) 0.71 0.77 0.58 0.73 0.71 0.69 0.69 0.72 0.72 0.72 0.72 0.72China (CNY) 7.81 7.31 6.82 6.83 6.83 6.80 6.72 6.67 6.63 6.60 6.57 6.54Hong Kong (HKD) 7.77 7.80 7.75 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80India (INR) 44.2 39.4 48.6 46.4 44.8 47.0 46.0 45.5 45.0 44.5 44.0 43.5Indonesia (IDR) 8996 9393 11027 9425 9090 9200 8900 8800 8750 8700 8700 8700Malaysia (MYR) 3.53 3.31 3.46 3.42 3.26 3.30 3.10 3.05 3.00 2.99 2.98 2.97Philippines (PHP) 49.05 41.28 47.47 46.50 45.18 46.50 44.00 43.00 42.50 42.00 41.50 41.00

Singapore (SGD) 1.53 1.44 1.43 1.41 1.40 1.41 1.34 1.32 1.30 1.29 1.28 1.27South Korea (KRW) 930 936 1263 1166 1133 1250 1150 1130 1110 1090 1080 1080Taiwan (TWD) 32.6 32.4 32.9 32.1 31.8 32.0 31.5 31.0 30.5 30.0 30.0 29.5Thailand (THB) 36.05 33.72 34.90 33.33 32.32 32.50 31.50 31.00 31.00 30.50 30.50 30.00Vietnam (VND) 16050 16217 16900 18200 19050 19000 19600 19800 19800 19800 19800 19800

Note: Turkish currency (until then coded TRL) shed 6 zeros of its exchange rate in January 2005Source: HSBC

Exchange rates vs USD


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Exchange rate vs EUR & GBP


vs EURAmericas

US (USD) 1.32 1.46 1.39 1.43 1.35 1.22 1.27 1.35 1.35 1.35 1.35 1.35Canada (CAD) 1.53 1.44 1.72 1.50 1.37 1.30 1.33 1.49 1.49 1.49 1.49 1.49

EuropeUK (GBP) 0.67 0.73 0.97 0.89 0.89 0.82 0.83 0.83 0.82 0.82 0.82 0.82Sweden (SEK) 9.02 9.45 10.99 10.24 9.74 9.53 9.50 9.40 9.40 9.40 9.40 9.40Switzerland (CHF) 1.61 1.66 1.48 1.48 1.42 1.32 1.30 1.30 1.32 1.34 1.36 1.38Norway (NOK) 8.21 7.94 9.73 8.29 8.03 7.97 7.70 7.60 7.50 7.50 7.50 7.50Czech Republic (CZK) 27.5 26.6 26.8 26.4 25.4 25.7 25.0 24.8 24.8 24.5 24.3 24.0Hungary (HUF) 251 253 266 270 266 285 285 275 270 270 265 265Poland (PLN) 3.83 3.60 4.12 4.11 3.86 4.14 4.00 3.90 3.85 3.80 3.75 3.70Russia (RUB) 34.78 35.88 40.84 43.39 39.73 36.87 38.99 41.58 40.10 41.58 42.12 45.09

Asia/PacificJapan (JPY) 157.1 163.3 126.0 133.6 126.4 108.4 108.0 121.5 128.3 128.3 128.3 128.3Australia (AUD) 1.67 1.67 1.99 1.60 1.47 1.45 1.43 1.59 1.59 1.59 1.59 1.59New Zealand (NZD) 1.87 1.90 2.38 1.97 1.91 1.78 1.84 1.88 1.88 1.88 1.88 1.88

AfricaSouth Africa (ZAR) 9.30 9.99 12.85 10.56 9.94 9.39 9.53 10.06 10.06 9.99 10.13 10.13

vs GBPAmericas

US (USD) 1.96 1.99 1.44 1.61 1.52 1.50 1.53 1.62 1.65 1.65 1.65 1.65Canada (CAD) 2.28 1.96 1.77 1.69 1.54 1.59 1.60 1.78 1.81 1.81 1.81 1.81

EuropeEurozone (EUR) 0.67 0.73 0.97 0.89 0.89 0.82 0.83 0.83 0.82 0.82 0.82 0.82

Sweden (SEK) 13.39 12.86 11.37 11.53 10.92 11.64 11.41 11.29 11.49 11.49 11.49 11.49Norway (NOK) 12.19 10.81 10.07 9.33 9.00 9.73 9.25 9.13 9.16 9.16 9.16 9.16Switzerland (CHF) 2.39 2.25 1.53 1.67 1.60 1.61 1.56 1.56 1.61 1.64 1.66 1.69

Asia/PacificJapan (JPY) 233 222 130 150 142 132 130 146 157 157 157 157Australia (AUD) 2.48 2.27 2.06 1.80 1.65 1.77 1.71 1.91 1.94 1.94 1.94 1.94New Zealand (NZD) 2.78 2.59 2.46 2.22 2.14 2.18 2.21 2.25 2.29 2.29 2.29 2.29

AfricaSouth Africa (ZAR) 13.80 13.60 13.29 11.89 11.14 11.47 11.44 12.08 12.29 12.21 12.37 12.37

Source: HSBC

Exchange rate vs EUR & GBP


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Consumer spending

% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

World 2.4 3.2 3.3 3.3 3.2 1.2 -0.7 2.4 2.4 2.8Developed 2.1 2.7 2.5 2.4 2.2 0.1 -1.2 1.4 1.4 1.9Emerging 4.4 5.8 6.8 7.1 7.5 6.0 1.2 6.0 5.7 6.2

North America 2.8 3.4 3.4 3.0 2.5 -0.1 -1.1 1.6 2.2 2.5US 2.8 3.5 3.4 2.9 2.4 -0.3 -1.2 1.5 2.2 2.5Canada 3.0 3.3 3.7 4.2 4.6 2.9 0.4 3.4 2.5 2.3

Latin America 1.8 5.5 5.2 5.8 5.4 4.2 -1.5 5.7 4.1 5.4Mexico 2.2 5.6 4.8 5.6 4.0 1.9 -6.1 3.7 2.8 6.3Brazil -0.8 3.8 4.5 5.2 6.1 7.0 4.1 6.7 5.2 4.4Argentina 8.2 9.5 8.9 7.8 9.0 6.5 0.5 8.7 4.6 5.0Chile 4.7 7.2 7.4 7.1 7.0 4.6 0.9 9.9 7.1 5.8

Western Europe 1.6 1.9 1.8 1.9 1.8 0.4 -1.4 0.9 1.0 1.3Eurozone 1.2 1.5 1.6 1.8 1.5 0.4 -1.1 0.7 0.8 1.1Germany 0.1 -0.2 0.4 1.5 -0.2 0.6 -0.1 -0.1 0.7 0.9France 2.1 2.4 2.5 2.6 2.5 0.5 0.6 1.3 1.4 2.0Italy 1.0 0.8 1.2 1.3 1.1 -0.8 -1.7 0.5 0.4 0.8Spain 2.9 4.2 4.2 3.8 3.7 -0.6 -4.2 1.5 0.7 0.9

Other Western Europe 2.5 3.1 2.4 2.2 2.5 0.5 -2.5 1.4 1.5 1.9UK 3.0 3.1 2.2 1.8 2.2 0.4 -3.3 1.1 1.5 1.9Norway 2.5 5.1 3.9 4.8 5.3 1.4 0.3 2.4 2.4 2.6

Sweden 2.3 2.6 2.8 2.8 3.8 -0.2 -0.8 3.2 2.4 2.3Switzerland 0.9 1.6 1.7 1.6 2.3 1.3 1.0 1.6 1.1 1.5EMEA 5.9 8.4 8.1 8.6 8.8 7.6 -2.0 4.2 4.4 4.8

Czech Republic 6.0 2.9 2.5 5.0 4.8 3.6 -0.3 0.9 1.3 1.9Hungary 8.0 3.1 3.4 1.9 -1.6 -0.6 -6.7 -2.5 1.8 2.6Poland 2.6 4.0 2.7 5.0 4.9 5.9 2.3 2.3 3.3 2.8Russia 7.5 12.1 11.8 11.3 13.7 10.8 -7.7 5.0 4.3 3.8Turkey 10.2 11.0 7.9 4.6 5.5 -0.3 -2.2 5.9 3.5 3.7Ukraine 12.6 12.2 16.6 14.4 17.1 11.8 -14.2 3.0 2.0 5.0Romania 8.3 15.9 10.0 12.8 11.6 9.1 -10.8 -3.3 0.0 2.0

Non-European EMEA 3.5 8.1 8.6 11.0 9.4 10.3 2.5 4.7 6.0 7.0Egypt* 2.3 2.1 4.8 6.4 4.2 5.7 4.5 4.6 4.8 5.0Israel 1.3 5.0 3.5 4.3 6.3 3.6 1.5 4.5 4.1 4.3Saudi Arabia** 3.7 5.8 9.5 13.4 18.7 18.0 8.1 9.0 11.0 12.0UAE** 10.5 29.1 22.5 24.0 12.0 21.4 2.0 3.0 5.2 8.7South Africa 2.8 6.2 6.1 8.3 5.5 2.4 -3.1 1.7 2.9 2.0

Asia/Pacific 2.4 3.1 3.7 3.8 4.5 2.4 1.6 4.5 3.5 4.1Japan 0.4 1.6 1.3 1.5 1.6 -0.6 -1.0 1.9 -0.4 0.7Australia 3.7 5.4 3.7 3.0 5.1 1.9 1.6 3.5 4.1 3.7New Zealand 5.9 5.4 4.7 2.2 3.9 -0.3 -0.6 1.8 1.3 3.0

Asia-ex-Japan 4.7 4.5 6.9 6.8 7.8 5.9 4.3 7.2 7.0 7.2China 6.5 7.2 8.5 8.7 9.0 8.9 8.0 9.5 9.4 9.3

Asia ex-Japan & China 3.8 3.1 6.0 5.7 7.1 4.1 2.0 5.7 5.4 5.7Hong Kong -1.3 7.0 3.0 5.9 8.5 2.4 -0.4 5.0 4.0 4.1India 8.1 1.3 9.0 8.2 9.8 6.8 4.3 7.0 6.5 6.5Indonesia 3.9 5.0 4.0 3.2 5.0 5.3 4.9 4.7 5.0 5.0Malaysia 6.6 10.5 9.1 6.8 10.5 8.5 0.7 6.8 6.7 5.7Philippines 5.3 5.9 4.8 5.5 5.8 4.7 4.1 5.1 5.3 5.6Singapore 1.6 6.1 3.6 3.1 6.5 2.7 0.4 6.1 6.0 5.9South Korea -0.4 0.3 4.6 4.7 5.1 1.3 0.2 4.1 3.5 4.5Taiwan 2.9 5.2 2.9 1.5 2.1 -0.6 1.4 2.5 4.9 5.0

Thailand 6.4 6.1 4.9 3.2 1.7 2.7 -1.1 5.0 3.6 3.8Vietnam 8.0 7.1 7.3 8.3 9.6 7.6 3.4 5.7 6.6 7.8

Note: * = based upon Egyptian financial year (July-June). We now calculate the weighting system using chain nominal GDP (USD) weightsSource: HSBC

Consumer spending


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Investment spending

% Year 2003 2004 2005 2006 2007 2008 2009 2010f 2011f 2012f

World 4.3 7.5 7.9 7.4 7.1 3.6 -3.2 9.9 10.1 10.2Developed 1.9 4.5 4.8 3.6 1.5 -3.1 -14.0 1.9 4.5 4.7Emerging 12.4 16.8 16.4 16.8 19.5 16.1 13.8 19.5 15.9 15.2

North America 3.5 7.4 6.7 2.7 -1.3 -5.7 -17.7 4.6 7.5 7.8US 3.2 7.3 6.5 2.3 -1.8 -6.4 -18.3 4.3 7.5 8.3Canada 6.2 7.8 9.3 7.1 3.5 1.4 -11.8 7.3 7.2 3.9

Latin America 1.1 10.6 8.6 10.2 10.2 8.7 -10.4 11.8 9.6 9.5Mexico 0.4 8.0 7.5 9.9 6.9 4.4 -10.1 3.5 7.5 7.9Brazil -4.6 9.1 3.6 9.8 13.9 13.4 -9.9 22.0 13.0 10.0Argentina 38.2 34.4 22.7 18.2 13.6 9.1 -10.2 11.8 1.9 10.5Chile 5.7 10.0 23.9 2.3 11.2 18.6 -15.3 18.7 18.1 15.0

Western Europe 1.2 2.8 3.4 5.8 5.0 -1.5 -11.5 0.2 3.2 2.8Eurozone 1.3 2.0 3.1 5.3 4.1 -1.1 -11.3 -0.1 3.6 2.8Germany -0.3 -1.3 1.1 8.7 4.9 1.8 -10.0 5.7 5.1 2.6France 2.2 3.3 4.5 4.5 5.9 0.3 -7.0 -1.6 4.4 4.2Italy -0.9 1.5 1.4 3.1 1.3 -4.0 -12.2 2.1 1.8 2.9Spain 5.2 5.2 6.5 8.3 4.2 -4.3 -15.8 -6.2 0.0 2.4

Other Western Europe 0.7 5.3 4.2 7.6 7.6 -2.9 -12.0 1.3 1.9 2.9UK 1.1 5.1 2.4 6.4 7.8 -5.0 -15.0 1.3 0.2 3.1Norway 0.7 10.1 12.7 11.7 12.5 2.0 -9.1 -3.0 6.6 3.4

Sweden 1.8 5.0 8.0 9.7 9.1 1.3 -15.9 4.0 6.6 4.1Switzerland -1.2 4.5 3.8 4.7 5.1 0.5 -4.9 3.1 2.9 2.3EMEA 7.6 11.0 11.6 14.9 22.2 8.7 -10.4 5.4 7.3 8.2

Czech Republic 0.4 3.9 1.8 6.0 10.8 -1.5 -9.2 -2.7 4.2 4.6Hungary 2.1 7.9 5.7 -3.6 1.6 0.4 -6.5 -1.5 2.8 4.1Poland -0.1 6.4 6.3 14.9 17.6 8.2 -0.8 -1.2 7.3 4.2Russia 12.8 12.6 10.6 18.0 21.1 10.6 -15.7 3.0 5.5 7.0Turkey 14.2 28.4 17.4 13.3 3.1 -6.2 -19.1 13.6 4.7 3.0Ukraine 12.2 -2.2 -0.3 18.7 24.8 1.6 -46.2 0.0 6.0 6.0Romania 8.7 11.0 15.3 19.9 28.9 19.3 -25

Global Economics q4

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