Global Economics Weekly Cautious Improvement

8/3/2019 Global Economics Weekly Cautious Improvement

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ECONOMICS RESEARCH 3 February 201

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 50

Global Forecasts

Global Synthesis

Global Rates and Inflation

Global Markets Watch

United StatesOutlook GDP Tracking: Q4 GDP tracking 2.9%;Q1 starts on a strong note 9Data Preview & Review

Euro Area

Outlook InFocus: Tough negotiations ahead of the next EU summit 1InFocus: Sweden Heads up fornegative data in February 1Data Preview & Review

United KingdomOutlook Data Preview & Review

JapanOutlook Data Preview & Review

Emerging AsiaAsia Outlook InFocus: Thailand Worst likely over,rates on hold from here 28Data Preview & Review

EEMEAOutlook Data Preview & Review

Latin AmericaOutlook Data Preview & Review

Country Snapshots 40

Global Weekly Calendar 4

GLOBAL ECONOMICS WEEKLY

Cautious improvement Global confidence is showing further signs of improvement, with a broad-based

improvement in new orders (especially in India and the US) as financial marketheadwinds have abated and the US labour market gets more traction.

Euro area government and bank debt has continued to rally significantly inresponse to recent political developments and the impact of the 3Y LTRO,unwinding the previous tightening in financing conditions.

However, the euro areas path to recovery remains fragile, particularly given the

challenge of putting Greek public finances on an unambiguously solvent path. We still expect further easing measures from the BoE (Thursday) and (later) from

the ECB; while the relentless rise of the yen could trigger BoJ intervention.

Developed Economies

United States: Unanchored fiscal expectations 7The CBOs semi-annual projections released this week underscore the uncertain fiscaloutlook, as federal debt projections ranged from 62% to 94% of GDP in 2022.

Euro area: Positive momentum from financial markets, so far 12Substantial declines in peripheral and bank yields underline the significance of thethree-year LTROs.

UK: The incredible shrinking money supply 20Money and credit in the economy continued to shrink in December. The additional50bn of QE we expect in February is unlikely to halt the slide.

Japan: A solid outlook at least through FY12 23IP looks solid with transport equipment leading the way. In FY 13, however, the currentstimulus will have run its course and taxes will be raised to finance it.

Emerging Markets

Emerging Asia: A rebound in activity from February 26With Chinas PMI surprising to the upside and improvement in the US ISM new orders

index, we expect activity in Asia to rebound from February after a temporary pause.

EEMEA: Some signs of growth stabilising 32Growth in EEMEA has been more constructive recently. At the same time, EEMEAinflation shifted slightly higher during Q4.

Latin America: The always changing political framework 36Primaries in Mexico and Venezuela should benefit the government candidate in Mexicoand the opposition one in Venezuela.


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Barclays Capital | Global Economics Weekly

3 February 2012 2

GLOBAL FORECASTS

3Q11 4Q11 1Q12 2Q12 3Q12 2011 2012 2013 3Q11 4Q11 1Q12 2Q12 2011 2012 2013Global 3.4 2.9 3.0 3.2 3.9 3.6 3.2 3.8 4.1 3.8 3.2 2.8 3.8 2.9 3.0

Developed 2.0 0.7 1.1 1.5 2.1 1.3 1.4 1.9 2.9 2.7 2.2 1.7 2.6 1.9 1.9Emerging 5.1 5.5 5.3 5.4 6.1 6.3 5.5 6.1 6.6 6.1 5.4 5.1 6.4 5.3 5.4

BRIC 6.5 8.1 6.3 6.2 7.2 7.4 6.8 7.2 7.2 5.9 4.7 4.2 6.7 4.4 5.1America 2.0 2.6 2.7 3.0 3.2 2.5 2.7 2.8 4.6 4.3 3.8 3.2 4.2 3.6 3.8

United States 1.8 2.8 2.5 2.5 3.0 1.7 2.5 2.5 3.8 3.3 2.7 1.9 3.2 2.2 2.7Canada 3.5 2.5 2.5 2.5 2.0 2.4 2.3 1.7 3.0 3.0 2.7 1.8 3.0 2.1 2.0Latin America 2.1 2.2 3.4 4.5 4.0 4.4 3.5 3.9 8.4 8.5 8.4 8.7 8.3 8.8 8.7

Argentina -1.2 2.5 4.5 4.0 0.0 8.3 2.8 3.5 22.6 22.9 24.1 25.4 23.5 26.1 28.4Brazil -0.4 1.6 3.4 5.5 5.2 3.0 3.3 4.1 7.1 6.7 6.0 5.4 6.6 5.6 5.6Chile 2.6 1.2 2.9 4.7 6.8 6.0 3.7 5.0 3.1 4.0 3.8 3.3 3.3 3.5 3.1Colombia 2.0 10.0 4.5 6.0 1.9 5.5 5.4 4.5 3.5 4.0 3.9 4.5 3.4 4.1 3.6Mexico 5.5 0.6 2.0 3.2 3.4 3.9 2.8 3.3 3.4 3.5 3.8 4.4 3.4 4.2 3.8Peru 5.2 5.0 6.1 5.9 6.5 7.0 5.8 6.0 2.8 3.3 3.8 4.0 2.6 3.9 3.2Venezuela 4.9 1.9 4.7 2.9 4.6 4.2 4.9 2.2 25.8 27.6 28.2 31.4 26.2 32.0 30.7

Asia/Pacific 5.9 4.8 5.7 5.6 6.8 5.7 5.7 6.2 4.0 3.2 2.6 2.2 3.5 2.3 2.8 Japan 5.6 -1.1 0.6 2.3 3.7 -0.9 1.6 2.0 0.2 -0.1 -0.1 -0.3 -0.2 -0.3 0.1Australia 3.9 2.4 1.6 2.4 2.8 1.9 2.6 2.8 3.5 3.1 2.1 1.9 3.4 2.1 2.5Emerging Asia 6.0 6.3 7.1 6.5 7.7 7.4 6.8 7.4 6.1 5.0 4.1 3.6 5.6 3.8 4.2

China 8.5 9.0 7.0 7.4 8.7 9.2 8.1 8.4 6.3 4.6 3.7 2.9 5.4 3.2 4.5Hong Kong 0.3 -1.2 2.0 8.2 8.2 4.8 3.0 3.9 6.4 5.4 4.0 3.3 5.2 3.5 3.5India 4.8 7.2 9.5 6.1 7.2 7.1 7.1 7.8 9.6 8.7 7.3 7.1 9.4 7.1 6.1Indonesia 5.6 7.6 4.3 6.3 6.4 6.5 6.2 6.6 4.7 4.2 4.2 4.8 5.4 4.8 5.1South Korea 3.3 1.4 4.1 4.1 4.9 3.6 3.5 4.5 4.3 4.0 3.2 3.1 4.0 3.1 2.5Malaysia 3.8 2.0 6.3 6.0 7.0 4.9 5.0 6.5 3.4 3.3 2.9 2.6 3.2 2.6 2.0Philippines 0.1 8.6 6.0 0.3 2.9 3.8 4.2 4.6 4.5 5.0 3.8 3.3 4.5 3.5 3.7Singapore 1.5 -4.8 3.7 3.7 13.3 4.8 3.0 5.3 5.5 5.6 4.5 4.0 5.3 3.3 1.9Taiwan -1.2 -0.8 3.2 5.7 6.6 4.1 3.0 5.5 1.3 1.4 1.8 1.4 1.4 1.7 1.9Thailand 2.1 -12.0 16.0 8.0 8.0 2.1 4.5 5.5 4.1 4.0 3.4 2.3 3.8 3.1 2.6

Europe and Africa 2.0 0.7 -0.1 0.6 1.1 2.3 0.7 1.9 3.5 3.7 3.1 2.8 3.5 2.8 2.3Euro area 0.5 -1.3 -0.7 -0.2 0.2 1.5 -0.3 0.9 2.7 2.9 2.6 2.2 2.7 2.2 1.7Belgium -0.5 -1.0 -0.5 0.3 0.7 1.9 -0.1 1.0 3.6 3.4 3.3 2.8 3.5 2.9 1.8France 1.2 -0.7 -0.4 0.1 0.4 1.6 0.0 1.0 2.3 2.6 2.5 2.1 2.3 2.1 1.9Germany 2.0 -0.9 0.4 0.7 0.8 3.0 0.5 1.4 2.6 2.6 2.2 1.9 2.5 1.9 1.7Greece -2.4 -4.0 -3.7 -3.7 -3.7 -6.0 -3.5 -2.0 2.1 2.6 2.0 2.1 3.1 2.1 1.5Ireland -7.5 -2.9 -0.5 3.3 4.8 0.6 0.2 2.6 1.1 1.5 1.2 0.9 1.2 1.0 0.5Italy -0.6 -2.2 -1.1 -0.3 0.5 0.3 -0.7 0.7 2.7 3.7 3.3 2.9 2.9 2.6 1.9Netherlands -1.0 -1.3 -0.8 0.5 1.0 1.4 -0.2 1.3 2.9 2.7 2.5 2.1 2.5 2.1 1.9Portugal -2.3 -6.4 -5.9 -2.1 -1.6 -1.5 -3.7 -2.0 3.1 3.8 3.1 2.6 3.6 2.7 1.3Spain 0.0 -1.2 -2.5 -3.1 -2.7 0.7 -1.8 0.0 2.9 2.7 1.9 1.6 3.1 1.8 1.5

United Kingdom 2.3 -0.8 0.4 1.0 1.7 0.9 0.8 2.3 4.7 4.7 3.3 2.9 4.5 2.8 2.0Switzerland 0.8 0.0 0.4 0.4 0.8 2.0 0.5 1.1 0.3 0.1 -0.5 -0.2 0.3 0.0 0.5EM Europe & Afr ica 5.0 6.0 0.9 2.0 2.6 4.6 3.0 3.9 6.2 6.3 5.3 5.1 6.4 5.3 5.0

Czech Repub. 0.0 -1.4 -0.2 1.1 2.3 1.7 0.5 1.5 1.8 1.9 2.7 3.3 1.9 3.1 2.0Hungary 1.0 -1.4 -0.8 1.4 0.9 1.3 0.0 1.5 3.3 3.9 4.6 4.7 3.8 4.6 3.0Poland 2.9 2.0 1.5 1.7 2.5 4.1 2.3 3.2 4.0 4.1 3.6 3.1 4.1 3.2 3.0Russia 7.1 12.0 0.6 2.3 3.1 4.3 4.3 4.5 8.3 6.9 4.0 4.2 8.6 4.8 5.7Turkey 5.9 1.5 0.4 1.1 1.4 7.9 1.8 4.1 6.4 9.2 9.9 9.0 6.5 9.0 6.9Israel 3.4 2.8 2.0 2.3 2.2 4.8 2.5 3.3 3.2 2.7 2.7 2.2 3.5 2.2 2.2South Africa 1.4 1.5 3.1 3.7 3.9 3.0 2.8 3.8 5.4 6.2 6.6 6.6 5.0 6.6 5.7

Consumer prices% annual chg

Real GDP% over previous period, saar

Consumer prices% over a year ago

Real GDP% annual chg

Note: Arrows appear next to numbers if current forecasts differ from that of the previous week by 0.5pp or more for quarterly annualized GDP, by 0.2pp or more forannual GDP and by 0.2pp or more for Inflation. Weights used for real GDP are based on IMF PPP-based GDP (2008-2010 average). Weights used for consumer pricesare based on IMF nominal GDP (2008-2010 average). Source: Barclays Capital


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3 February 2012 3

GLOBAL SYNTHESIS

Cautious improvementEvidence has emerged in recent weeks of an improvement in business confidence. Our

global manufacturing confidence aggregate has moved up to signal a modest expansion inglobal industrial activity, having previously been consistent with a flat trend (Figure 1).Historically, there has been some tendency for the US manufacturing sector to lead otherregions (Figure 2), a pattern which appears to be getting repeated this time, with USconfidence already rising above its average (in contrast to the situation mostly elsewhere).METI indices suggest that Japanese industrial production, which fell 0.4% q/q in Q4 (in partbecause of the Thai floods), should recover by around 4% in Q1, implying upside potentialto our projection for Q1 GDP. Composite PMI data for January are consistent with positiveGDP in Q1 also for Germany, the US and the UK, while the Indian PMI recovered strongly.Meanwhile, the relatively early Chinese New Year helps to explain the relatively soft Chineseconfidence data. That said, there have been much more mixed signals from the retail sector,with stronger US and Japanese auto sales in January but weaker registrations in the euro

area (where retail sales also slumped by 0.7% q/q in Q4 11).

Following a dovish FOMC statement, Fed Chairman Bernanke subsequently made no secretof his dissatisfaction with the pace of US economic recovery even though the gradient of decline in the US unemployment rate has been steeper than in the previous two cycles(Figure 3). We estimate that there is still a non-negligible chance of a third round of large-scale asset purchases, despite the more-positive non-farm payroll data and our assumptionthat the payroll tax cut expiry (due at month-end) will, most likely, be extended to year-end .

Recent EU developments have been critical in turning around financial market sentiment.These include Tuesdays summit (despite some unresolved issues see Euro Infocus) aswell as the 3Y LTRO, which in turn is helping activity in the real economy stabilise. Two-year yields in Italy and Spain have more than halved from their November highs (with theItalian yield now at 3.11% and the Spanish at 2.35%). Our aggregate of (GDP-weighted)euro area senior bank debt yields has dropped from a high of 5.93% at end-November to3.7% (see Euro Outlook, Figure 1).

Figure 1: Global manufacturing confidence turns up Figure 2: US manufacturing leads the way (again)

-20 -15 -10

-5 0

5 10 15

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-4

-3

-2

-1

0

1

2

Global industrial production, LHS Global manufacturing confidence (BarCap), RHSNew orders less fin. goods inventories (BarCap), RHS

6m/6m change, saar normalised diffusion balanceNov-Dec

est.

Tentativesigns of improve

ment

-4

-3

-2

-1

0

1

2

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Euro area PMI manufacturingUS ISM (manufacturing)Rest of World PMI (BarCap aggregate)

normalised diffusion balance

Source: Markit, Haver, Barclays Capital (aggregations of PMIs and ISM) Source: Markit, Haver, Barclays Capital

Julian Callow

+44 (0)20 7773 1369 [email protected]

The Fed has been dissatisfied with the pace of recovery

Italian and Spanish short-term yields have more than halved

from their November highs


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3 February 2012 4

Banks in Italy and particularly Spain were at the forefront in participating in Januaryssovereign auctions. The first 3Y LTRO helps banks meet their Q1 liquidity needs: out of the650bn of euro area bank debt redemptions this year, around 220bn falls due in Q1.Meanwhile, banks managed to issue around 40bn of debt in Q1, while the net increase inbank liquidity after the 3Y LTRO is in a range of 100~150bn. We believe that several factorsare likely to deter banks from very aggressive bidding in the second 3Y LTRO (which we

look to be up to 350bn): 1) balance sheet encumbrance (our credit analysts estimate thataround 4.5trn of European bank assets are encumbered as either covered bonds or byEurosystem see Global banks: the implications of 0% recovery ); 2) reduced carryopportunity; and 3) potential perceived stigma from Eurosystem borrowings.

In contrast to the declines in the US unemployment, euro area unemployment continues togrind higher, reaching a new EMU-high of 10.4% in December. With the region likely to bein a mild recession/stagnant growth episode, as fiscal consolidation (which we expect to be1.7% of GDP this year) intensifies, we expect the jobless rate to continue to rise, reaching anew peak of 11.4% in Q1 13, with the Spanish rate reaching 26% (Figure 3). In turn thisimplies that the ECB balance sheet, already at 29% of GDP, will continue to expandsignificantly (Figure 4), not least via the second 3Y LTRO. With UK unemployment also

having moved onto an upwards trajectory, moving from 7.8% at end-2010 to 8.4% lastOctober, and set to reach nearly 9.0% by year-end, we expect the MPC also to announce onThursday additional easing, via a 50bn expansion in asset purchases.

While it continues to digest the potential implications of the LTROs, the ECB seems unlikely toalter interest rates (at its forthcoming meeting). A key debate will be over whether it shouldwrite down its Greek debt holdings (said to be 40~50bn, in addition to the 205bn of privately-held debt under the PSI). Pressure for ECB participation has increased because of theemergence of a funding gap estimated at 15bn in the proposed 130bn second troikaprogramme. We expect the ECB ultimately to reach an agreement with governments toprotect against losses. We continue to expect that the Greek government will need to insertretroactive collective action clauses in domestically-issued debt, and that these will be

triggered, therefore triggering CDS. While we think that markets can absorb this, nonethelessthere are significant risks ahead, and so we consider it important still to boost the 500bn limiton EFSF/ESM funds. Meanwhile, despite the stronger-looking Japanese outlook, the ongoingyen appreciation implies a growing risk of FX intervention.

Figure 3: Unemployment rates diverge (%) Figure 4: Central bank assets (% GDP)

3

6

9

12

15

18

21

24

27

95 97 99 01 03 05 07 09 11 13

SpainEuro areaFranceUKItalyUSGermany Japan

0

5

10

15

20

25

30

35

90 92 94 96 98 00 02 04 06 08 10 12

BoJEurosystemEurosystem: securities only (memo)Bundesbank (% German GDP, memo)FedBoE

Source: Haver Analytics, Barclays Capital Source: Haver Analytics, Barclays Capital

ECB LTROs have helped toencourage stronger local bank participation in sovereign debt

auctions, as well as around 40bn of euro bank debt

issuance in January

Euro area and UK unemployment continues to move higher,

implying further easing is likely (we look for a further 50bn of

asset purchases to beannounced by the MPC on

Thursday)

Key issue for the ECB: whether towrite down Greek debt exposure
https://live.barcap.com/go/publications/content?contentPubID=FC1788054https://live.barcap.com/go/publications/content?contentPubID=FC1788054


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3 February 2012 5

GLOBAL RATES AND INFLATIONCentral Bank ratesOfficial rate Next move

% per annum (unless stated) Current date level Last move expected 1Q 12 2Q 12 3Q 12 4Q 12AdvancedFed funds rate 0-0.25 Easing: 17 Sep 07 5.25 Dec 08 (-75-100) Beyond 2013 0-0.25 0-0.25 0-0.25 0-0.25

BoJ overnight rate 0.10 Easing: 30 Oct 08 0.50 Oct 10 (0-10) Q2 15 (+20) 0-0.10 0-0.10 0-0.10 0-0.10

ECB main refinancing rate 1.00 Easing: 03 Nov 11 1.50 Dec 11 (-25) Mar 12 (-50) 0.50 0.50 0.50 0.50

BOE bank rate 0.50 Easing: 6 Dec 07 5.75 Mar 09 (-50) Aug 13 (+25) 0.50 0.50 0.50 0.50

RBA cash rate 4.25 Easing: 1 Nov 11 4.75 Dec 11 (-25) Q1 12 (-25) 4.00 3.50 3.50 3.50

RBNZ cash rate 2.50 Easing: 10 Mar 11 3.00 Mar 11 (-50) Q2 12 (+25) 2.50 2.75 3.00 3.25

Swiss National Bank 0-0.25 Easing: 8 Oct 08 2.75 Aug 11 (-25) Q2 12 (+25) 0-0.25 0.25 0.25 0.25

Norges Bank 1.75 Tightening: 29 Oct 09 1.25 Dec 11 (-50) Q1 13 (+25) 1.75 1.75 1.75 1.75

Riksbank 1.75 Tightening: 6 July 10 0.25 Dec 11 (-25) Q1 12 (-25) 1.50 1.50 1.50 1.50

Bank of Canada 1.00 Tightening: 1 June 10 0.25 Sep 10 (+25) Q1 13 (+25) 1.00 1.00 1.00 1.00

EmergingChina: Working capital rate 6.56 Tightening: 19 Oct 10 5.31 Jul 11 (+25) Beyond Q4 12 6.56 6.56 6.56 6.56

Hong Kong: Base rate 0.50 Easing: 19 Sep 07 6.75 Dec 08 (-100) Beyond Q4 12 0.50 0.50 0.50 0.50

India: Repo rate 8.50 Tightening: 19 Mar 10 4.75 Oct 11 (+25) Q2 12 (-25) 8.50 8.25 8.00 7.75

Korea: Base rate 3.25 Tightening: 9 Jul 10 2.25 Jun 11(+25) Beyond Q4 12 3.25 3.25 3.25 3.25

Poland: 2w repo rate 4.50 Tightening: 19 Jan 11 3.50 Jun 11 (+25) Mar 12 (-25) 4.25 3.75 3.75 3.75

Russia: Refi rate 8.00 Easing: 23 Dec 11 8.25 Dec 11 (-25) Mar 12 (-25) 7.75 7.50 7.50 7.50

South Africa: Repo rate 5.50 Easing: 11 Dec 08 12.00 Nov 10 (-50) Nov 12 (+50) 5.50 5.50 5.50 6.00

Turkey: 1wk repo rate 5.75 Easing: 20 Nov 08 16.75 Aug 11 (-50) Beyond Q4 12 5.75 5.75 5.75 5.75

Brazil: SELIC rate 10.50 Easing: 31 Aug 11 12.50 Jan 12 (-50) Mar 12 (-50) 10.00 9.50 9.50 9.50

Chile: Monetary policy rate 5.00 Easing: 12 January 12 5.25 Jan 12 (-25) Feb 12 (-25) 4.50 4.25 4.25 4.25

Mexico: Overnight rate 4.50 Easing: 16 Jan 09 8.25 Jul 09 (-25) Q1 12 (-25) 4.25 4.00 4.00 4.00

Start of cycle Forecasts as at end of

Note: Rates as of COB 2 February 2012. Source: Barclays Capital

Key CPI projections

HICPnsa y y nsa y y y y nsa y y y y nsa y y nsa y y nsa y y

Jan 11 220.2 1.6 229.0 5.1 4.0 110.11 2.19 2.3 120.32 1.69 306.15 2.5 99.4 -0.8Feb 11 221.3 2.1 231.3 5.5 4.4 110.57 2.28 2.4 120.90 1.61 308.02 2.5 99.4 -0.8Mar 11 223.5 2.7 232.5 5.3 4.0 112.11 2.77 2.7 121.90 1.94 310.11 2.9 99.7 -0.7Apr 11 224.9 3.2 234.4 5.2 4.5 112.75 2.89 2.8 122.32 2.02 311.44 3.3 100.0 -0.3May 11 226.0 3.6 235.2 5.2 4.5 112.74 2.76 2.7 122.40 1.97 312.02 3.3 100.1 -0.2

Jun 11 225.7 3.6 235.2 5.0 4.2 112.75 2.78 2.7 122.49 2.06 311.28 3.1 99.8 -0.3 Jul 11 225.9 3.6 234.7 5.0 4.4 112.03 2.49 2.5 121.94 1.89 311.13 3.3 99.8 0.1Aug 11 226.5 3.8 236.1 5.2 4.5 112.23 2.46 2.5 122.59 2.18 311.22 3.4 99.9 0.2Sep 11 226.9 3.9 237.9 5.6 5.2 113.08 3.02 3.0 122.49 2.18 313.41 3.2 99.9 0.2Oct 11 226.4 3.5 238.0 5.4 5.0 113.44 2.98 3.0 122.73 2.25 313.42 2.9 99.8 -0.2Nov 11 226.2 3.4 238.5 5.2 4.8 113.54 2.97 3.0 123.00 2.42 314.16 2.8 99.6 -0.2Dec 11 225.7 3.0 239.4 4.8 4.2 113.91 2.69 2.7 123.51 2.40 314.78 2.3 99.6 -0.1

Jan 12 226.7 2.9 238.6 4.2 3.6 112.98 2.61 2.7 123.12 2.33 313.63 2.4 99.2 -0.2Feb 12 227.6 2.8 240.0 3.8 3.2 113.38 2.54 2.6 123.60 2.23 314.86 2.2 99.3 -0.1Mar 12 228.4 2.2 240.7 3.5 3.2 114.75 2.35 2.4 124.39 2.04 315.74 1.8 99.6 -0.1Apr 12 229.3 2.0 242.0 3.2 2.7 115.17 2.15 2.2 124.60 1.86 316.61 1.7 99.8 -0.2

May 12 229.6 1.6 243.2 3.4 2.9 115.22 2.20 2.2 124.70 1.88 317.02 1.6 99.8 -0.3Jun 12 230.3 2.0 243.7 3.6 3.2 115.20 2.17 2.2 124.72 1.82 317.22 1.9 99.5 -0.3Jul 12 230.4 2.0 243.4 3.7 2.9 114.36 2.08 2.1 124.10 1.77 316.39 1.7 99.4 -0.4

Aug 12 231.0 2.0 244.3 3.5 2.7 114.59 2.10 2.1 124.68 1.70 316.84 1.8 99.5 -0.4Sep 12 231.6 2.1 245.2 3.1 2.3 115.28 1.95 2.0 124.63 1.75 319.12 1.8 99.6 -0.3Oct 12 231.5 2.3 245.7 3.3 2.3 115.59 1.90 1.9 125.00 1.85 320.32 2.2 99.4 -0.4Nov 12 231.6 2.4 246.2 3.2 2.3 115.54 1.76 1.8 125.00 1.63 320.68 2.1 99.3 -0.3Dec 12 231.8 2.7 247.1 3.2 2.2 115.83 1.69 1.7 125.45 1.57 321.48 2.1 99.3 -0.32011 3.2 5.2 4.5 2.7 2.7 2.1 3.0 -0.22012 2.2 3.5 2.8 2.1 2.2 1.9 1.9 -0.32013 2.7 3.3 2.0 1.6 1.7 1.9 2.4 0.1

US UK Euro area FranceCPI HICPxRPI CPI

SwedenCPI ex tobacco

JapanCPI CPI ex perishibles

Note: Shaded values indicate actual data. R indicates revision to front-month forecast. Source: Barclays Capital


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3 February 2012 6

GLOBAL MARKETS WATCHGlobal Equities

Rates, Credit and Commodities Global FX

1-week

Index (% chng) Local Curr USD

Global Weighted Avg. 1.9 -4.4 -9.6

Developed Weighted Avg. 0.7 -9.9 -9.7

Emerging Weighted Avg. 2.4 -1.9 -9.6

BRIC Weighted Avg. 2.2 -9.0 -11.4

United States S&P 500 0.5 5.4 5.4

Euro area FTSE Euro 100 0.6 -5.0 -6.7

Japan Nikkei 225 0.3 -13.2 -7.2

UK FTSE 100 0.0 -1.8 -0.5

Emerging Asia Weighted Avg. 1.4 -11.5 -12.6

China Shanghai Comp. -0.3 -17.6 -13.7

India NIFTY 2.2 -14.1 -13.9

Korea KOSPI 1.4 -3.3 -1.8

EMEA Weighted Avg. 3.8 -7.8 -19.1

Russia MICEX 1.8 -8.6 -7.4

Turkey ISE 5.4 -9.0 -20.1

South Africa JALSH 0.9 7.0 -7.2

Latin America Weighted Avg. 2.0 4.2 -3.8

Brazil Bovespa 2.6 -6.8 -10.0

Mexico IPC 1.3 -2.2 -20.1

% chng from 12/31/2010

Note: Updated as of COB 2 February 2012. Weighted averages calculated usingIMF share of world GDP. EM Asia includes China, India, HK, Indonesia, Korea,Malaysia, Singapore, Taiwan, Thailand and Vietnam. EMEA includes Russia,Czech Republic, Hungary, Poland, Romania, Turkey, Ukraine and South Africa.LatAm includes Brazil, Argentina, Chile, Colombia, Mexico, Peru and Venezuela.Source: Bloomberg, Barclays Capital

Key USD Exchange Rates

85

90

95

100

105

110

Feb-11 May-11 Aug-11 Nov-11 Feb-12

Index: February 2, 2011=100

USD/JPY

USD/EUR

USD/GBP

US Treasury Yields

0

2

4

6

%

3m 2yr 5yr 10yr 30yr

Jul 1, 2007

Jan 1, 2010

February 2, 2012

Source: Bloomberg, Barclays Capital

1 week 3 months 12 monthsLatest ago ago ago

Rates

2 year Treasury 0.22 0.21 0.23 0.66

10 year Treasury 1.82 1.93 1.99 3.48

30 year Treasury 3.00 3.09 3.01 4.62

Overnight LIBOR 0.14 0.14 0.14 0.24

3-month LIBOR 0.53 0.55 0.43 0.31

Spread 3M LIBOR over 3M OIS 0.42 0.46 0.35 0.15

Credit

Barclays Global Aggregate 89.6 94.4 101.4 59.7

Barclays US Aggregate 77.3 79.0 82.8 53.8

Barclays EM Aggregate 427.7 433.5 430.8 292.5

Barclays US Credit 189.2 195.8 193.4 139.5Barclays US Corporate IG 204.7 211.9 208.1 149.4

Commodities

CRB/Reuters Commodities Index 500.4 496.7 506.8 558.3

WTI 99.40 100.39 93.00 85.19

Gold 1759.5 1720.7 1738.6 1335.3

Barclays Metals Total Return Index 170.2 170.2 169.6 154.8

Barclays Agri. Total Return Index 150.5 150.5 160.2 194.0Note: Updated as of COB 2 February 2012. Barclays indices expressed in option-adjusted spreads. Source: Bloomberg, Barclays Capital

1-week 3-month 12-monthSpot % Chg. % Chg. % Chg.

G7 Rates

DXY Dollar Index 78.98 -0.5 2.6 2.4

EUR/USD 1.31 0.3 -4.4 -4.8

USD/JPY 76.22 -1.6 -2.3 -6.5

GBP/USD 1.58 0.7 -0.9 -2.4

USD/CHF 0.92 -0.4 3.7 -2.5

USD/CAD 1.00 -0.2 -1.4 1.2

USD/AUD 0.92 -0.4 3.7 -2.5

USD/NZD 1.20 -1.4 -5.0 -7.2

Selected EM Rates

USD/KRW 1118 -0.3 -0.3 1.5USD/CNY 6.30 -0.1 -0.9 -4.3

USD/BRL 1.72 -1.7 -1.5 3.1

USD/RUB 30.18 -0.2 -1.6 2.5

USD/INR 49 -1.9 -0.1 7.7

USD/TRY 1.76 -2.0 -1.2 11.5

USD/MXN 12.80 -1.5 -5.4 6.6Note: Updated as of COB 2 February 2012. DXY Dollar Index consists of EUR(57.6%), JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).Source: Bloomberg, Barclays Capital


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3 February 2012 7

OUTLOOK: UNITED STATES

Unanchored fiscal expectations The CBOs semi-annual projections released this week underscore the uncertain fiscal

outlook, as federal debt projections ranged from 62% to 94% of GDP in 2022. Current law dictates about $500bn in fiscal tightening to start in 2013. We do expect

some tightening, but anticipate Congress will extend or roll back most provisions.

Despite substantial near- and long-term fiscal uncertainty, the economy continues tomake progress, as auto sales and the labor market have been steadily improving.

As the FOMC has made efforts to clearly communicate its monetary policy objectives and anchorlonger-term expectations, exactly the opposite is happening on the fiscal policy side. This weeksrelease of the Congressional Budget Offices fiscal and economic projections underscores themounting uncertainty regarding both the near- and longer-term fiscal outlook. Projected deficitsunder the CBO baseline shrink rapidly and then stabilize later in the decade at only a few percent

of GDP (Figure 1). Of course, baseline is a bit of a misnomer: baseline projections are based oncurrent law, which is likely to be altered. Current law stipulates that at the end of this year the taxcuts originally enacted in 2001 and 2003 expire and the automatic spending cuts that weredesigned during the debt ceiling debate last August are set to begin. If the 2pp payroll tax cut setto expire at the end of February is extended until the end of this year, as we expect, then it toowill be set to expire at years end. The full extent of fiscal tightening at the start of 2013, if allowedto occur, would be about $500bn, which is about 3-3.5% of GDP. Such sharp restraint would beunprecedented and likely push the economy to the cusp of recession, so we anticipate Congresswill ultimately act to repeal most of the tightening though, we expect they will make us sweat.

In terms of our forecasts, we are assuming that the income tax rates currently in effect willbe extended at least to the end of 2013. Nonetheless, we do expect some fiscal tightening.

In particular, we are assuming Congress will allow the payroll tax cut to expire at the end of this year and also wring out some further spending cuts. In all, we expect the fiscal restraintto slow GDP growth by about 1pp in Q1 13, then 0.5pp in Q2 and Q3. The bulk of theslowing reflects weaker consumption growth, which we forecast will downshift from 3% inQ4 12 to 2% in Q1 13 due to the reversion of the payroll tax rate back to its 2010 level.

Figure 1: Deficit projections differ markedly acrossscenarios

Figure 2: as do debt projections

-12-10

-8-6-4-2024

Jan-70 Jan-80 Jan-90 Jan-00 Jan-10 Jan-20

Federal deficit or surplus, CBO current-law baseline

Federal deficit or surplus, CBO alternative fiscal scenario

% of GDP f/c

0

20

40

60

80

100

Jan-90 Jan-00 Jan-10 Jan-20

Debt held by the public, CBO current-law baseline

Debt held by the public, CBO alternative fiscal scenario

% of GDPf/c

Source: Congressional Budget Office Source: Congressional Budget Office

Troy Davig

+1 212 526 [email protected]

Over the next year, income and payroll tax rates are set to

move higher

and automatic spending cutsare set to begin

The combined fiscal tighteningin Q1 2013 could be about

$500bn

Except for the payroll tax cut and some spending cuts, we

expect most fiscal tighteningwill be postponed


8/53


3 February 2012 8

The fiscal inflection pointThe CBO produces an alternative fiscal scenario that assumes policy maintains many of thecurrent tax and spending policies. Thus, the alternative scenario is more closely aligned with ourassumptions. In this case, the fiscal profile appreciably worsens. Figure 2 shows that debt in thehands of the public would increase from its current level of about 68% of GDP to 94% in 2022compared to the current-law baseline, where debt falls to 62%. Under both scenarios, however,deficits are projected to decline over the next few years, partly reflecting a cyclical recovery.

In the near term, Figure 3 illustrates the extent to which the CBO is expecting the current-lawfiscal tightening to slow growth in 2013. In 2014 and beyond, however, the CBO foresees rapidgrowth to close an estimated 5.6% current output gap. As we have previously noted ( US output gap mi sperceptions , 14 November 2011), the CBOs output gap estimates are larger than ours,so we see significant risk that growth could disappoint relative to CBO projections, with adverseimplications for the federal deficit. For example, under our smaller output gap, the extent of above-trend growth needed to close the gap is notably less than the 4-5% growth over 2014-15upon which the CBO is basing its fiscal projections. Also, we judge that markets may becomemore concerned about the fiscal outlook when the deficit stops showing cyclical improvementand starts deteriorating due to demographic forces. The CBO places this fiscal inflection pointat 2015 in terms of the absolute size of the deficit. However, if growth disappoints relative to CBOforecasts, which we view as highly likely, then deficits could begin growing sooner.

Enduring policy uncertainty, for nowDespite the uncertain fiscal outlook, the economy continues to progress at a moderate pace.Perhaps most encouraging this week was the strong pace of employment growth and autosales, which outpaced even the most optimistic forecasts. Payrolls increased by 243k, whichpushed the three-month average for headline payroll growth to 201k a pace sufficient topersistently pull down the unemployment rate. For autos, outside of one month during thecash for clunkers incentive program, Figure 4 shows the 14.1mn units sold in January isthe fastest pace of sales since before the recession. Thus, given that labor market

improvements appear to be translating into stronger demand, we anticipate growth inoverall activity to gently accelerate through the remainder of this year. However, the risk of a sharp fiscal tightening at the turn of 2013 is likely to remain in place until late in the year.

CBO debt projections rangefrom 62% to 94% of GDP

in 2022

We expect GDP growth todisappoint relative to CBO

forecasts, especially after 2013

The date when deficits start growing due to demographic

factors is approaching

Figure 3: CBO growth forecasts exceed consensus Figure 4: Despite fiscal uncertainty, auto sales progress

0

1

2

3

45

6

7

8

Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21

CBO real GDP forecast: August 2012CBO real GDP forecast: January 2012

Blue Chip Consensus: Real GDPAdministration: 2012 budget real GDP

% chg, y/y % chg

8

10

12

14

16

18

20

22

Jul-99 Jul-02 Jul-05 Jul-08 Jul-11

Total Light Vehicle Retail Sales

units, mns

Source: Congressional Budget Office, Blue Chip Consensus, Office of Management and Budget

Source: Autodata, NBER, Haver Analytics

Despite the fiscal uncertainty,auto sales and employment

have been making steady gains
https://live.barcap.com/go/publications/content?contentPubID=FC1766356https://live.barcap.com/go/publications/content?contentPubID=FC1766356https://live.barcap.com/go/publications/content?contentPubID=FC1766356https://live.barcap.com/go/publications/content?contentPubID=FC1766356https://live.barcap.com/go/publications/content?contentPubID=FC1766356


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3 February 2012 9

GDP TRACKING: UNITED STATES

Q4 GDP tracking 2.9%; Q1 starts on a strong note The first estimate of Q4 GDP growth came in at 2.8%. Following the December

construction spending report, our tracking estimate stands at 2.9%. Meanwhile, a sharpincrease in auto sales in January suggests a solid start to Q1 activity.

The first estimate of Q4 GDP growth was 2.8%, with a significant boost from inventoryaccumulation, partly offset by declines in structures investment and government(particularly defence) spending (Figure 2).

This weeks construction report revealed stronger growth in the private non-residentialcomponent in December than the BEA had assumed, suggesting less of a decline instructures investment during the quarter (Figure 3).

Meanwhile, the January vehicle sales report provided the first look at activity in Q1. Salesrose to 14.2mn, the highest since the cash-for-clunkers program boosted sales in

summer 2009. Our Q1 GDP tracking estimate stands at 2.6%.

Peter Newland


Figure 1: GDP tracking*

Release date Indicator Period Q4 tracking

Q1 tracking

27-Jan GDP Q4-1st 2.830-Jan Personal spending December 2.81-Feb Construction spending December 2.9

1-Feb Vehicle sales January 2.9 2.63-Feb Factory orders December9-Feb Wholesale inventories December

10-Feb Trade December

14-Feb Retail sales January14-Feb Business inventories December

16-Feb Housing starts JanuarySource: Barclays Capital

Figure 2: GDP growth contributions Figure 3: Structures investment and non-res construction

Q3 3 rd estimate Q4 1 st estimate

% q/q(saar)

Cont.(pp)

% q/q(saar)

Cont.(pp)

Real GDP 1.8 2.8

Consumption 1.7 1.2 2.0 1.4

Govt. spending -0.1 0.0 -4.6 -0.9Res. investment 1.2 0.0 10.9 0.3E&S investment 16.2 1.3 5.2 0.4Structures 14.4 0.3 -7.2 -0.2Net exports, $bn -403 0.4 -406 -0.1Ch inventories, $bn -2.0 -1.4 56.0 1.8 -50

-40-30-20-10

0

1020304050

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12-40

-30

-20

-100

10

20

30

40Non-residential construction (lhs)

Real structures investment (rhs)

% 3m/3m (saar) % q/q

Source: BEA, Barclays Capital Source: BEA, Census Bureau, Barclays Capital

*Our GDP tracking estimate is distinct from our published GDP forecast. It reflects the mechanical aggregation of monthly activity data that directly feed into the BEAsGDP calculation.


10/53


3 February 2012 10

DATA REVIEW & PREVIEW: UNITED STATESDean Maki, Michael Gapen, Troy Davig, Peter Newland, Cooper Howes

Review of last weeks data releases

Main indicators Period Previous BarCap Actual Comments

Personal income, % m/m Dec 0.1 0.3 0.5 Strongest gain since February 2011Personal spending, % m/m Dec 0.1 0.0 0.0 In line with our forecast

PCE price index, % m/m (y/y) Dec 0.0 (2.6 R) 0.1 (2.3) (0.1) 2.4 Above FOMCs new longer-run goal of 2%

Core PCE price index, % m/m (y/y) Dec 0.1 (1.7) 0.1 (1.7) 0.2 (1.8) Slightly higher than we and consensus had forecast

Employment cost index, % q/q Q4 0.3 0.4 0.4 Reflected gains in both wages and benefits

S&P/Case-Shiller 20-city HPI, % m/m (y/y) Nov -0.7 (-3.4) R -0.5 (-2.9) -0.7 (-3.7) Elevated inventories will likely continue to weigh onhome prices in high-foreclosure areas

Chicago PMI, index Jan 62.5 62.0 60.2 Consistent with solid output growth despite decline

Consumer confidence, index Jan 64.8 R 68.5 61.1 Sharp rise in December was likely overstated, but weperceive confidence as being on a positive trend

Construction spending, % m/m Dec 0.4 R 0.8 1.5 Spending has increased in four of past five months

ISM manufacturing, index Jan 53.1 R 54.5 54.1 Increase in new orders encouraging

Vehicle sales, mn saar Jan 13.5 R 13.2 14.1 Continued momentum from Q4 vehicle sales

Non-farm productivity, % q/q Q4-p 1.9 R 1.6 0.7 Employee hours increased at fastest pace since 2010

Unit Labor Cost, % q/q Q4-p -2.1 R 0.4 1.2 Larger-than-expected increase

Non-farm payrolls, chg, thous Jan 203 R 150 243 Also included 57k upward revision for November

Private non-farm payrolls, chg, thous Jan 220 R 170 257 Strongest gain since April

Unemployment rate, % Jan 8.5 8.4 8.3 Third consecutive month with a 0.2pp decline

Average hourly earnings, % m/m (y/y) Jan 0.1 (2.1) R 0.2 0.2 (1.9) Consistent with our expectations

Average weekly hours Jan 34.5 R 34.4 34.5 Remained flat after upward revision to December

Preview of the next week

Monday 6 February Period Prev 2 Prev 1 Latest Forecast Consensus

8:55 St. Louis Fed President Bullard (FOMC non-voter) speaks in Chicago12:15 Dallas Fed President Fisher (FOMC non-voter) speaks in Washington

Tuesday 7 February Period Prev 2 Prev 1 Latest Forecast Consensus

15:00 Consumer credit, chg, $ bn Dec 7.5 6.0 20.4 10.0 7.0

Consumer credit: We look for consumer credit to expand by $10.0bn in December, which would be significantly smaller than the$20.3bn in November. Student loans have recently been the major driving force behind growth of non-revolving credit, and weexpect this trend to continue.

Wednesday 8 February Period Prev 2 Prev 1 Latest Forecast Consensus

10:40 San Francisco Fed President Williams (FOMC voter) speaks in California

Thursday 9 February Period Prev 2 Prev 1 Latest Forecast Consensus

8:30 Initial jobless claims, k (4wma) 4-Feb 355 (380) 379 (378) 367 (376) 355 (364) 370 (368)

10:00 Wholesale inventories, % m/m Dec 0.0 1.2 0.1 0.3 0.5


11/53


3 February 2012 11

Friday 10 February Period Prev 2 Prev 1 Latest Forecast Consensus

8:30 Trade balance, $ bn Dec -44.2 -43.3 -47.8 -48.5 -48.6

9:55 Michigan consumer sentiment - p, index Feb 64.1 69.9 75.0 73.5 75.0

12:50 Cleveland Fed President Pianalto (FOMC voter) speaks in Cleveland

14:00 Treasury budget balance, $ bn Jan -63.5 ('09) -42.6 ('10) -49.8 ('11) -45.0 -65.0

Trade balance: We have penciled in a small widening in the nominal trade deficit in December, to $48.5bn from $47.8bn, as wellas in the real goods trade deficit to $48.5bn from $47.5bn. The latter would be broadly consistent with that assumed by the BEAin the initial estimate of Q4 GDP. Any significant surprise in December, or revision to October or November, would affect our Q4GDP tracking estimate. Timely indicators have generally been consistent with a further widening of the trade deficit forexample, the import index of the manufacturing ISM rose more sharply than the export index in December (although the formerfell somewhat in January).

Consumer sentiment: We look for the University of Michigans index of consumer sentiment to drop to 73.5 in the preliminaryFebruary release from 75.0 in the final January release. This would be the eleventh time in the past 12 years that consumerconfidence has decreased in February. We expect gas prices, which have been grinding higher off their recent lows, to offsetgains in equity markets.

Treasury budget balance: We expect the January federal budget deficit to be $45bn, bringing the deficit to $367bn for the firstfour months of the current fiscal year.


12/53


3 February 2012 12

OUTLOOK: EURO AREA

Positive momentum from financial markets, so far Substantial declines in peripheral and bank yields underline the significance of the

three-year LTROs. Our euro area PMI-based GDP indicator signals flat activity for Q1, though we warn

that downside risks remain as fiscal policy tightens.

Greek debt restructuring remains the elephant in the room.

Flushed with the success of the December three-year LTRO, and in anticipation of strongdemand at the second LTRO (29 February), markets have recorded stronger risk appetite. Inparticular, as discussed in the Global Synthesis, a sharp rally in the bond markets (which hasseen two-year yields more than halve from their November highs) has substantially lowereddownside risk to the euro area economy (Figure 1). This already appears to be picked up bysome improvement in business confidence: our PMI-based GDP indicator is signalling

unchanged GDP for Q1, therefore pointing to a slightly better outturn than in our projection(-0.2% q/q, after -0.3% in Q4; Figure 2).

Financial market confidence has also been helped by relatively smooth progress atMondays EU Summit, which resulted in the signing of a new treaty to introduce theEuropean Stabilisation Mechanism this July. There are still issues to be decided by the 1March summit, in particular, the degree to which there will be centralised and independentoversight (such as by the European Court of Justice) of national fiscal legislation (a keydemand of Germany). As well, it is possible that the potential election of Francois Hollande,the Socialist candidate, in the French presidential election (second round on 6 May) couldcomplicate implementation of the fiscal compact, although we expect that he would bemore sympathetic towards the tougher fiscal regime if elected.

Given the recent improvement in financial market sentiment, there could be further modestupside potential in business confidence readings during the months ahead. However, it isimportant to observe that not all indicators are moving in a positive direction.

Figure 1: Peripheral bond markets rally (%) Figure 2: Euro area GDP vs. PMI-based indicator (% q/q)

2

3

4

5

6

7

8

Feb-11 May-11 Aug-11 Nov-11 Feb-12

BTPS 4.750% Sep 21SPGB 5.500% Apr 21BTPS 3.750% Dec 13SPGB 4.250% Jan 14Banking senior (Euro aggregate)*

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan-10 Jan-11 Jan-12

Real GDP, % q/q

BarCap PMI-basedGDP indicator

Q1 estimatebased on Jan PMI

Q1 GDP f.c

Q4GDP

Q4 estimatebased on DecPMI

Source: Barclays Capital * GDP weighted for Austria, Belgium, Finland, France,Germany, Italy, NL and Spain

Source: Markit, Haver Analytics, Barclays Capital

Julian Callow

+44 (0)20 7773 1369 [email protected]

Sharp rally in peripheral and bank debt markets is helping the

economy to stabilise, withbusiness confidence consistent

with flat GDP in Q1

Relatively smooth progress at the EU summit, but still some

unanswered questions

Some further upside potential for business confidence


13/53


3 February 2012 13

In particular, the fiscal headwind remains severe. We estimate that the consolidation thisyear (defined in terms of the change in the structural budget balance) is likely to be about1.7% of GDP, considerably stronger than in 2011 (1.3%) Figure 3. It is the highlyintensified pace of anticipated fiscal consolidation in Spain (now +4.3% in 2012) which ledus last week to lower our Spanish GDP projection. As well, the pace of fiscal consolidation inItaly this year (+3.0% according to the BdI) indicates significant downside risks to our Italian

GDP projection for 2012. Additionally, while financing conditions have improved, they arestill relatively tight given the extremely weak position of the economy (for example, we lookfor euro area nominal GDP growth this year to have grown only about 1.5%). As well, thelatest survey of bank loan officers revealed that, outside of Germany, there is a pronouncedtightening in lending conditions (Figure 4) and a significant reduction in loan demand.

So far there is relatively little hard data to form much perspective on activity in Q1, butthere was significant deterioration in auto registrations in January (which followeddisappointing retail sales in December retail sales fell by 0.7% q/q in Q4, the worstquarterly drop since Q1 09). Externally, the environment is mixed, as is apparent in weakermomentum for German exports and export orders. While demand in the US appears to befirming very gradually, demand out of Asia has been slowing, particularly for capital goods,

which are the key motor of euro area exports.

Moreover, the spectre of Greek debt restructuring continues to overshadow confidence. ThePSI is likely to be of the form of a 50% write-down in notional principle by private sectorholders, together with a debt swap that will entail much reduced coupon payments,equivalent to a reduction in NPV of about 70%. However, such restructuring (of about200bn of the 350bn in total Greek debt) is unlikely to bring down Greeces debt/GDPratio sufficiently to assuage concerns (projections suggest the best that can be hoped for isa ratio of about 120% by 2020). As such, markets are likely to remain of the view that thepublic sector will ultimately also have to bear some write-down of its Greek exposure. Whilethe ECB has been resistant to writing down its own exposure to Greek debt, we expect it toultimately receive some form of protection by euro area governments for it to be able to

engage, once the PSI is undertaken, in a write-down that would generate the 15bn of financing that is currently identified as a shortfall.

A severe fiscal headwind, now estimated at 1.7% of GDP in

2012, with consolidation around 3% for Italy and over 4%

for Spain

Weakness apparent inconsumption, bank lending and

external orders

Spectre of Greek debt restructuring overshadows

confidence

Figure 3: Change in structural budget balance as % GDP Figure 4: Bank loan officer surveys (diffusion balance)

pp 2010 2011 2012 2013weight in euro area

Austria 0.4 0.3 0.2 0.2 3.1%Belgium 0.6 -0.3 0.7 0.8 3.8%Finland -0.8 0.0 0.6 0.2 1.9%France 0.9 1.2 1.6 1.7 21.4%Germany -1.7 2.2 0.4 0.4 26.8%Greece 6.0 5.0 3.6 1.7 2.6%Ireland 0.9 0.6 1.3 1.5 1.8%Italy 0.8 0.7 3.0 1.6 16.9%NL 1.1 0.1 0.9 0.3 6.4%Portugal -0.8 6.0 4.2 1.0 1.8%Spain 2.8 1.0 4.3 1.4 11.7%Others ... ... ... ... 1.8%Euro area 0.4 1.3 1.7 1.0 100.0% Japan 0.5 -0.6 0.2 -0.4 ...Sweden -0.5 -0.6 0.3 0.6 ...UK (FY) 1.8 2.1 1.1 1.5 ...US 0.4 0.6 0.2 0.9 ...OECD 0.4 0.7 0.7 0.8 ...

-40

-20

0

20

40

60

80

100

90 92 94 96 98 00 02 04 06 08 10 12

ECB survey (loan conditions to enterprises)

Fed survey (C&I loans to large firms)

tighter credit

standards overpast 3m

-40

-20

0

20

40

60

80

100

90 92 94 96 98 00 02 04 06 08 10 12

ECB survey (loan conditions to enterprises)

Fed survey (C&I loans to large firms)

tighter credit

standards overpast 3m

Source: OECD estimates, Barclays Capital Source: Haver Analytics, Barclays Capital


14/53


3 February 2012 14

IN FOCUS: EURO AREA

Tough negotiations ahead of the next EU summit The lack of measurable progress on important issues at the latest EU Summit was

disappointing. Agreeing to Germanys push for maximum ECJ involvement in enforcing the new fiscal rule will require firm commitment to a further rise in EFSF/ESM funds.

EU leaders are gradually putting in place the building blocks of closer fiscal and economicunion. As we broadly anticipated in Euro Themes - The next round of EU summits -

Assessing the prospects, 6 January 2012, the treaty for the new European StabilityMechanism (ESM) was finalised while an assessment of the ESM/EFSF resources remainsscheduled for March when the next EU Summit takes place. The ESM will be established on1 July. Euro area member states announced that the treaty on stability, coordination andgovernance in the Economic and Monetary Union (EMU) had been finalised. However, theystill left open the crucial issue of what the procedure is to bring cases of treaty non-compliance to the European Court of Justice (ECJ). Germany in particular has been pushing

for a strong role for the ECJ. For Greece, euro area leaders noted progress made in the PSInegotiations and urged all the countrys political parties to commit irrevocably to the newEU/IMF programme. They emphasised the latest positive reviews of the Irish andPortuguese programmes and reiterated that they stood ready to provide support toprogramme countries until they have regained market access, on the condition theysuccessfully implemented their programmes. Moreover, they welcomed the measuresagreed by Italy and Spain to reduce their public deficits and boost growth andcompetitiveness and called on them to strengthen their efforts on fiscal consolidation andstructural reform. On the Summits official topic - a strategy for growth and jobs - littlenews emerged. European Council President Van Rompuy noted that available Europeanfunds should be steered towards setting up apprenticeship schemes, helping youngbusiness starters, and improving access to credit for small and medium enterprises.

Our viewsThe lack of measurable progress on important and contentious issues at the EU Summitwas disappointing. Discussions of the Greek programme and PSI may have taken up moretime than expected. Talks must have been particularly tense around how to mobiliseadditional funds for Greece to cover its financing gap, which appears to have risen byanother EUR15bn since December. EU and IMF officials continue to push for maximumprivate sector debt relief for Greece. However, there is also significant pressure on the ECBto take a haircut on the Greek bonds on its balance sheet, at least to reflect the fact thatthey were purchased far below par. In view of the Greek governments poor track record of implementing agreed reforms and fiscal targets, there is growing and widespread resistanceto additional official funding support. Against this backdrop, the German government

proposed a special EU commissioner to oversee Greece's budget with powers to intervene infiscal policy. But such heavy-handed and ad hoc intrusion into national sovereignty facedfierce objections from Greece and others, including France. Chancellor Merkel played downthis proposal but insisted on stricter monitoring of the Greek programme. However, she leftopen the question of how this should be achieved in practise. EU leaders may meet againshortly to focus on the new Greek programme. We continue to believe that a new EU/IMFprogramme for Greece will be agreed before March, while a disorderly Greek exit from theeuro area remains a tail risk (for our detailed views, see Greece Focus: At a crossroads,again! and A Greek decision tree ).

Thomas Harjes


The new European Stability Mechanism (ESM) was

finalised

and will help to finance programme countries until they

have regained market access...

if they successfully implement their programmes

but a disorderly Greek exit from the euro area remains a tail

risk

A new EU/IMF programme for Greece will likely be agreed

before March

Greek PSI talks yet to be finalised
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3 February 2012 15

The fact that heads of government did not decide on the crucial issue about the ECJsinvolvement in cases of non-compliance with the treaty is difficult to square with theirannouncement that the treaty had been finalised. This lack of agreement may be related tocontinuing German resistance to discussing an increase in the EFSF/ESM ceiling before March.Agreement of other member states to the German-led push for maximum involvement of theECJ in enforcing the new, strict fiscal rule will require a firm commitment to further increase

EFSF/ESM funds as a quid pro quo. This may be achieved by adding uncommitted EFSFresources (about EUR250bn) to the new ESMs EUR440bn, as recently suggested by IMF Chief Lagarde, and could also induce non euro area countries to add again to IMF resources.Ratification of the new fiscal treaty may be a lengthy process as well, and the fact thatPresident Sarkozy does not intend to present it to the French national assembly before theelections adds more uncertainty. However, we believe that Francois Hollande, if elected FrenchPresident in April, would likely support ratification of the treaty (see, French presidential elections: Socialist candidate F. Hollande details his programme ). Nevertheless, the actualincrease in the ESM ceiling could be made conditional on the new fiscal treaty coming intoeffect, which would require ratification by at least 12 contracting states.

The significant fiscal consolidation implied by the new treaty for most member states over

the medium term requires a robust growth performance fostered by structural reforms thatmake labour and product markets more flexible, open and competitive. However, thesereforms are likely to have some negative impact on growth in the very short run. For a casein point, take Germany's dismal growth performance during 2003-05 following thesubstantial labour market reforms that are now, with a lag of several years, paying off handsomely. Therefore, the pressure for more joint liability and Eurobonds will likely rise andItalian Prime Minister Mario Monti has been increasingly vocal about expecting moresolidarity from Italy's euro area partners to support his decisive and timely implementationof tough reforms and fiscal measures. While it still appears possible that Italy and Spain maynot need any outside financial assistance after all, other programme countries may needassistance in the long run, possibly requiring a common debt redemption fund, a role theESM could play eventually. Such further moves towards fiscal union in the EU, or at least inthe euro area, will require progress on several other thorny issues, including harmonisationof national legislation to prepare the ground for a common tax that could safeguardcommon debt redemption. Moreover, such reforms would also pave the way for commonfinancial sector regulation and supervision and a common bank resolution regime. Therecent crisis has been a forceful reminder that the lack of these common institutions hasblown out of proportion the problems of few and relatively small banks, at least from theperspective of the euro area as an aggregate. All this could make Europe's economy muchstronger and its institutions more crisis-resilient, an outcome against which current equityand debt market valuations in the euro area look attractive for long-term investors. It wouldbe a grave mistake if complacency settled in just as market conditions and especially thepublic debt funding conditions for Italy and Spain are starting to improve gradually.

The next key dates are 25-26 February, when G20 Finance Ministers and Central BankGovernors meet, and 2 March, the date of the next formal EU Summit where the new fiscaltreaty should be signed and a commitment to a further increase in Europes firewall couldbe announced.

Germany continues to push for astrong role for the ECJ in enforcing

the new, strict fiscal rule

but this may require a firmcommitment to further increase

EFSF/ESM funds

Fiscal consolidation and

structural reforms are needed inmany states

but will weigh on growth inthe short run

requiring more solidarity fromthe economically stronger states

Together, this could makeEurope much stronger and more

crisis-resilient

and make current equity and debt market valuations in the

euro area look attractive
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3 February 2012 16

IN FOCUS: NORDICS

Sweden: Heads up for negative data in FebruaryNext week we expect a further drop in December production data to validate a slump in

economic activity in Q4. Although survey data have started to show signs of stabilisation, monthly hard data will become worse before getting better, in our view.

Next week the final important Q4 11 data sets will be available as the December service(Monday, 6) and industrial (Friday, 10) production numbers will be released. Swedish dataturned sharply negative at the end of 2011, clearly indicating a decisive contraction in Q4 11 GDPafter the hefty 1.6% q/q gain in Q3 11. Indeed, we currently see downside risks to ourpreliminary -0.8% q/q estimate, but we will await the realised numbers before finalising ourestimate going into the 29 February Q4 release. While Q4 is history, its data is all that is availableright now. However, in Q1 12, sentiment data have continued to strengthen, validating our viewof a stabilisation and relatively flattish GDP growth in the beginning of the year.

Taking last weeks December demand side data and the NIER business survey into account,we get a picture of sharp changes in the Swedish economy from Q3 11 to Q1 12. While theDecember retail sales numbers surprised on the upside, Mondays production data willenable us to make a broader assessment of the service sector as retail sales only count for8% of production value. Indeed, in H2 11 there was a clear trend of gradually weakeningproduction in sectors closely related to households; meanwhile business-to-businessactivity proved more resilient to the overall decelerating trend.

Our main indicator for the monthly service production numbers is the employment plans inthe sector published in the NIER survey (Figure 1). Although, this has indicated a stabilisationduring the past four months, the bottom in service production is not yet reached, in our view.Hence, we expect a further decline in the December production numbers (-1.1% m/m), butthat they will be still positive compared with December 2010 (1.8% y/y).

Turning focus to the industrial sector, last weeks December trade data continued to show adecisive weakening in net trade in Q4, in particular due to falling exports, leaving the3m/3m change +0.8%, compared with the +1.5% historic average. When assessing Swedishindustrial production, one has to take trade data, and in particular export growth, into

Marcus Widen

+44 (0)20 3134 [email protected]

Mikael Nilsson+44 (0)20 7773 6057

[email protected]

Demand side data and

sentiment suggest erraticeconomic activity Q3 11

to Q1 12

Service production isapproaching the bottom

Figure 1: Lower but close to bottom in service production Figure 2: Industrial production falling in December

-10

-8

-6-4

-2

0

2

46

8

10

01 02 03 04 05 06 07 08 09 10 11 12-40

-30

-20

-10

0

10

20

30

40

Service Product ion Employment plans (RHS)

y/y Points

-25

-20

-15

-10

-5

05

10

15

20

25

01 02 03 04 05 06 07 08 09 10 11 12-25

-20

-15

-10

-5

05

10

15

20

25

Export Industrial production, sa (RHS)

y/y y/y

Source: Reuters Ecowin, Barclays Capital Source: Reuters Ecowin, Barclays Capital


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3 February 2012 17

account (Figure 2). Indeed, given the rapid fall in exports, we expect a further decline inDecember industrial production numbers (-3.9% m/m and -1.5% y/y), pushing backmonthly production data to levels not seen since Q3 10. Perhaps more interesting given theerratic nature of monthly IP numbers, our estimate would mean a -2.9% q/q decline in Q411, but +1.3% compared with Q4 10. In addition, in our view it is worth noting that themanufacturing sectors assessment of current production numbers was still declining in

the January NIER Survey.

During the course of 2011 the service sector (c.44% of GDP) has been the main driver of Swedish y/y GDP growth, and we expect this relative strength compared to industrialproduction (c.18% of GDP) to continue. All in all, economic activity in Q4 11 is looking quitegloomy both from the demand and the production side and it is evident that there willbe a substantial drop in Q4 11 GDP. We hold on to our preliminary estimate of -0.8% q/qGDP for now, but see clear downside risks to this estimate going into next weeks data, inparticular on the industrial production component in GDP. As always, uncertainty becomesgreater with large quarterly changes, e.g., creating problems adjusting for seasonality,assessing the demand side contribution from changes in inventories but also balancingbetween the demand and production side of the economy.

While the Swedish outlook for Q4 remains very gloomy, we would emphasis that, in ouropinion, we have already seen some indications of stabilisation, suggesting that productionshould bottom out soon and that a significant contraction in the Swedish economy is likely tobe a temporary stage before reassuming (albeit very weak) growth.

In our view, the stabilisation followed by the quite decisive recovery in January Swedish PMIis indicating that manufacturing sector sentiment is approaching a turning point andstarting a mild recovery; hence we expect exports to start to recover in the latter part of H1 12 ( Figure 3). Sweden is a small open economy and emerging signs of a stabilisation inthe global industrial sector is also obviously encouraging ( January global manufacturingconfidence: Stabilisation is on course for 2012, 1 February) . In addition, the NIER Januarysurvey showed improved confidence in both construction and household sectors (Figure 4).Although sentiment in all sectors except construction is still well below historic averages,this, in our opinion, points out that the economic activity is not in a free fall, but ratherdemonstrates an encouraging wait-and-see start of the new year.

Falling export suggestscontinued fall in industrial

production

Clear downside risk to our -0.8%q/q Q4 11 GDP estimate

Figure 3: PMI indicates a turning point in confidence Figure 4: Some positive signs of turning point in sentiment

-50

-40

-30

-20

-10

0

10

20

00 01 02 03 04 05 06 07 08 09 10 11 1230

35

40

4550

55

60

65

70

Manufacturing Confidence s. a. PMI, s. a.

Points Points

-20-10

0

10

20

30Household (20%)

Manufacturing

(40%)

Construction (5%)Retail (5%)

Service (30%)

Average Janary December

Points

Source: Reuters Ecowin, Barclays Capital Source: Reuters Ecowin, Barclays Capital

Recent signs of stabilization and recovery in the PMI an

encouraging start of the year
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3 February 2012 18

DATA REVIEW & PREVIEW: EURO AREA Julian Callow, Marion Laboure, Fabio Fois, Francois Cabau, Thorsten Polleit, Thomas Harjes, Marcus Widen, Fabrice Montagne



Spain: Preliminary GDP, % q/q Q4 0.0 -0.4 -0.3 Recession is about to startE17: Final consumer confidence, index Jan -20.6 P -20.6 -20.7 Stabilisation in economic sentiment

France: Hhsld consum. goods, % m/m (y/y) Dec 0.1(-1.9) R

0.4(-1.4)

-0.7(-3.1)

Unexpectedly slumps; Q4 private consumption forecastunchanged at -0.1% q/q

E17: Unemployment rate, % Dec 10.4 R 10.4 10.4 Further deterioration is expected

E17: Flash HICP, % y/y Jan 2.7 2.7 2.7 Remained at 2.7% for the second straight month

E17: Final composite PMI, index Jan 50.4 P 50.4 50.4 Early signs of upside risks to our Q1 baseline scenario.Recession could be avoided

E17: Retail sales, % m/m (y/y) Dec -0.4(-1.5)

-0.4 -0.4(-1.6)

Ongoing consumer demand deterioration; privateconsumption forecast still expected at 0.0% q/q

Preview of week ahead

Saturday 4 February

- Germany: Chancellor Merkel visits china, Beijing (Final Day)

- Sweden: Central Bank Governer Ingves speaks in Hong Kong (to 05/02)

Sunday 5 February

- Finland: Presidential elections (second round)

Monday 6 February Period Prev 2 Prev 1 Latest Forecast Consensus

10:20 E17: ECB Vice President Constncio participates in a panel on where next for reserve currencies? in London

14:00 Neth: Central Bank President Knot answers questions at Dutch student event in Amsterdam

17:00 E17: European Council President Rompuy speaks on EUROPE in 2012: The Road Ahead in Berlin

08:30 Sweden: Service production, % m/m (y/y) Dec 0.4 (5.1) -0.6 (2.8) 0.1 (2.6) -1.1 (1.8) -

11:00 Germany: Factory orders, %m/m (y/y) Dec -4.6 (2.2) 5.0 (5.2) -4.8 (-4.3) 2.0 (0.5) R 1.0 (-0.8)

Germany Factory orders: We expect some improvement in factory orders from low levels, following a brighter business outlookrevealed in recent surveys.

Sweden Service production: Although employment plans in the service sector have shown some signs of stabilisation, in ourview, the bottom in service production has not yet been reached. Hence, we expect a further decline in the December serviceproduction numbers, printing -1.1% m/m and 1.8% y/y.


18:00 Germany: Chancellor Merkel speaks on Europes future in Berlin

10:45 Swi: Central Bank Chairman Jordan speaks at Swiss-American Chamber of Commerce in Geneva

12:10 E17: European Financial Stability Facility Chief Executive Regling speaks on The sovereign debt crisis in London

07:45 France: Trade balance, bn Dec -6.0 -5.6 -4.4 -5.1 -5.4

09:00 Norway: Manufacturing production, % m/m (y/y) Dec 0.8 (1.8) -0.8 (0.7) 0.2 (0.4) - -

11:00 Germany: Industrial production, % m/m (y/y) Dec -2.8 (5.4) 0.8 (4.2) -0.6 (3.6) 0.2 (4.4) 0.0 (4.1)

Germany Industrial production: We expect a slight positive uptick in December industrial production, following a brighterbusiness outlook revealed in recent surveys.


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3 February 2012 19


06:45 Swi: Unemployment rate (adj), % Jan 3.0 3.0 3.1 3.1 3.1

07:00 Germany: Trade Balance sa, bn Dec 17.3 11.5 16.2 12.5 14.4

07:30 France: BdF industrial business sentiment, index Jan 96 95 96 - -

07:45 France: Budget, year-to date, bn Dec -92.7 -99.4 -97.2 - -

08:00 Spain: Industrial production (wda), % y/y Dec -1.4 -4.2 -7.0 - -7.5


12:45 E17: ECB Interest rate announcement, % Feb 1.25 1.00 1.00 1.00 1.00

13:30 E17: ECB Press Conference

07:45 France: Industrial investment survey Q4 15 14 11 - -

08:30 Neth: HICP, % m/m (y/y) Jan 0.0 (2.8) -0.2 (2.7) -0.5 (2.5) -0.1 (2.4) -

Euro area ECB Interest rate announcement: Amid some signs which the ECB appears to view as representing stabilisation inthe euro area economy, we do not expect an interest rate change at its meeting. The main preoccupation of the GoverningCouncil is likely to concern the scope for participation in a write-down of its holdings of Greek debt subsequent to private sectorinvolvement. On this, it appears that the ECB is likely to be seeking some form of indemnification from the losses from euro areagovernments. The Council is also likely to approve a new framework to enable, for certain countries, the submission of additionalbank loans as collateral with national central banks. We view this measure as in part a move to allow banks to better use their

balance sheets, and is likely to be intended to assist in particular banks from southern Europe (and France) to have more flexibilityin the collateral that can be used in the 3y LTROs in particular.

Friday 10 February Period Prev 2 Prev 1 Latest Forecast Consensus

- Global: EU-India Summit in New Delhi

- Spain: Government presents labour, budget stability and financial sector reforms in Madrid

06:00 Estonia: Preliminary GDP, % q/q Q4 3.0 1.7 1.2 0.4 -

07:00 Germany: Final HICP, % m/m (y/y) Jan 0.0 (2.8) 0.7 (2.3) -0.5 (2.3) P -0.5 (2.3) -0.5 (2.3)

07:00 Germany: Final CPI, % m/m (y/y) Jan 0.0 (2.4) 0.7 (2.1) -0.4 (2.0) P -0.4 (2.0) -0.4 (2.0)

07:45 France: Industrial production, % m/m (y/y) Dec -2.2 (0.9) 0.1 (1.7) 1.1 (0.9) -0.7(-0.4) -0.8 (-0.6)

08:15 Swi: CPI, % m/m (y/y) Jan -0.1 (-0.1) -0.2 (-0.5) -0.2 (-0.7) -0.3 (-0.6) -0.3 (-0.8)

08:30 Sweden: Industrial production, % m/m (y/y) Dec 1.3 (4.6) 0.3 (4.5) -1.9 (0.2) -3.9 (-1.5) -

09:00 Norway: CPI, % m/m (y/y) Jan -0.1 (1.4) 0.0 (1.2) 0.1 (0.2) -0.5 (0.2) -

09:00 Italy: Industrial production, % m/m (y/y) Dec -4.7 (-2.7) -0.9 (-4.1) 0.3 (-4.1) - -0.5 (-4.1)

10:00 Portugal: HICP, % m/m (y/y) Jan 0.9 (4.0) -0.1 (3.8) 0.1 (3.5) 0.3 (3.3) -

06:00 Estonia: Preliminary GDP, % q/q Q4 3.0 1.7 1.2 0.4 -

France Industrial production: Below long-term average business surveys and mild weather at year-end point toward a slightcontraction in French industrial production in December. All in all, industrial production will finish the year more or less where itstarted it. Both components, manufacturing and energy, have also been stable over the year. Looking ahead, recovery in businesssurveys pave the way for somewhat stronger production figures.

Sweden Industrial production: Given the rapid fall in December exports, we expect the ongoing decline in industrial productionto continue with -3.9% m/m and -1.5% y/y, the first negative y/y number since the beginning of 2010.

Norway CPI inflation: We expect the always extra uncertain January CPI print to decrease 0.5% m/m, the same as last year.Hence we expect the inflation rate to print 0.2% y/y. For the underlying inflation excluding energy and taxes (CPI-ATE) we expecta -0.5% m/m, much lower than last year. Hence, we expect CPI-ATE to increase 1.4% y/y up from 1.0% y/y in December andslightly lower than the Norges Banks latest forecast of 1.5% y/y.


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3 February 2012 20

OUTLOOK: UNITED KINGDOM

The incredible shrinking money supply Money and credit in the economy continued to shrink in December. The additional

50bn of QE we expect in February is unlikely to halt the slide. The shrinkage of money and credit aggregates suggests that fears about the potential

inflationary effect of QE are overdone.

The January PMIs suggest Q4 may have been a trough for the economy and growth inQ1 could be stronger than our current forecast.

Money and credit aggregates continued to shrink in December. Broad money (M4) fell by1.4% m/m, the largest monthly decline on record, down 2.5% from a year earlier. M4lending rose marginally on the month, but was down 3.1% compared with December 2010.Recent declines in money and credit aggregates have been unprecedented. However, we donot think that they presage deflation or depression. Rather, they reflect a widespread

process of deleveraging that still has some way to run.

Overall lending has been broadly negative since 2010 (Figure 1). However, most of the fall isaccounted for by lending to other financial corporations (OFCs); net lending to private non-financial corporations (PNFCs) and households (HHs) has been essentially zero. A similarpattern emerges when M4 growth is decomposed: most of the decline is attributable to fallsin holdings by OFCs. Breaking M4 down by its main components, the decline is mainlyattributable to falls in wholesale bank funding. By contrast, retail deposits have continued togrow, albeit at a reduced pace.

The fall in the money supply largely reflects the financial deleveraging in the wake of thecredit boom, financial crisis and recession. Banks are cutting their reliance on wholesalefunding and shrinking their balance sheets. This has implications for the velocity of circulation (defined as the ratio of nominal income to broad money), which measures theamount of economic activity supported by a given volume of money. Just as the creditboom saw an expansion in banks balance sheets and the money supply in relation tonominal income and thus led to a prolonged decline in the velocity of circulation so the

Chris Crowe

+44 (0)20 7773 [email protected]

Money and credit aggregatescontinue to shrink

Figure 1: M4 lending Figure 2: Velocity and wholesale funding

-3

-2

-1

0

1

2

3

4

5

6

98 00 02 04 06 08 10

% 3m/3m OFCs PNFCs HHs Total

0.6

0.7

0.8

0.9

1.0

1.1

1.2

98 99 00 01 02 03 04 05 06 07 08 09 10 11

0.25

0.3

0.35

0.4

0.45

0.5

M4 Velocity (lhs)

Wholesale funding/M4 (rhs, i nverted)

Source: Haver Analytics, Barclays Capital Source: Haver Analytics, Barclays Capital

reflecting the unwinding of the unsustainable build-up in

leverage during the credit boom

As part of this process, thevelocity of circulation is increasing


21/53


3 February 2012 21

reversal of these trends has led to a turnaround in velocity (Figure 2), which seems set tocontinue. As a result, we think it unlikely that the shrinking money supply presages deflationor a fall back into a deep recession.

We expect the MPC to vote for 50bn in additional QE at its meeting next week. A decliningmoney supply might be thought to offer prima facie evidence for pumping more money into

the economy, and Governor King has advocated QE on this basis. However, QE appears tohave had a fairly limited effect on broad money growth and credit creation. Money supplygrowth declined precipitously during the period that QE was initially rolled out in 2009-10,and additional asset purchases since October 2011 have coincided with further contractionsin the money supply (Figure 3). It seems unlikely that the effect was zero: by boosting assetprices and depressing yields, it is plausible that QE raised lending relative to an even moremoribund counterfactual. However, instability in the velocity of circulation and theapparently limited effect of QE on broad money growth means that the link between QE andnominal income is weaker than textbook monetarist arithmetic would suggest.

If the MPC does embrace additional QE next week, we expect it to cite a continuing worrythat inflation is likely to fall below the 2% target over the medium term, chiefly as a result of below-trend output growth and a resultant increase in the margin of spare capacity. Thisweeks data have left our expectations for near-term growth broadly unchanged. JanuarysGfK consumer confidence index improved to -29 from -33, suggesting that consumersentiment may have reached its trough. We expect the consumption outlook to strengthenover the course of the year.

Meanwhile, Januarys services PMI survey was significantly stronger than expected, whilethe manufacturing survey was also unexpectedly upbeat. The services PMI strengthened to56.0 from 54.0, suggesting that the services sectors covered by the survey are growing atthe most rapid pace since March 2010. The business expectations index showed the largestincrease on record. Meanwhile the manufacturing PMI strengthened to 52.1, suggestingthat manufacturing output grew last month after declining in Q4. Taken together, if Januarys PMI readings were unchanged for the rest of the quarter, our PMI-based estimateof Q1 GDP growth would imply fairly significant upside risks to our current forecast of 0.1%q/q growth (Figure 4). However, we would want to see some official production data andmore survey information for the quarter before revisiting our forecast.

Figure 3: Cumulative changes over 12 months Figure 4: GDP and PMI-based estimate

-100

-50

0

50

100

150

200

250

300

99 00 01 02 03 04 05 06 07 08 09 10 11

bn M4 Asset purchases

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

92 94 96 98 00 02 04 06 08 10 12

% q/q

GDP

Estimate based on composite PMI

BarCap Q1 forecast

Source: Haver Analytics, BoE, Barclays Capital Source: Haver Analytics, Markit, Barclays Capital

The effect of QE on the money supply is less significant than

one might have thought

Other data this week suggested that Q4 may have represented a

trough for the economy

The January PMIs point toupside risks to our current Q1

GDP forecast


22/53


3 February 2012 22

DATA REVIEW & PREVIEW: UNITED KINGDOMBlerina Urui



GfK consumer confidence, index Jan -33 -32 -29 Consumer optimism improvedConsumer credit, bn Dec 0.4 0.5 -0.4

Mortgage approvals, k Dec 52.6 R 54.7 52.9

Mortgage lending, bn Dec 0.6 0.8 0.7

M4 money supply, % m/m (y/y) Dec -0.5 (-2.5) R - -1.4 (-2.5)

The December data continued to indicateweak lending flows, a picture that hasbeen broadly the same since the onset of the financial crisis

Nationwide house price Index, % m/m (y/y) Jan -0.2 (1.0) 0.0 (1.4) -0.2 (0.6) Housing market remained subdued

Manufacturing PMI, index Jan 49.7 R 51.0 52.1 Stronger activity than expected

Construction PMI Jan 53.2 52.5 51.4 Construction activity slowed

Services PMI Jan 54.0 53.0 56.0 Services sector belies recessionary fears

Preview of week ahead

Monday 6 February Period Prev 2 Prev 1 Latest Forecast ConsensusThere are no data releases scheduled


00:01 BRC total sales, % y/y Jan 1.5 0.7 - -


00:01 UK: BRC shop price index Jan 2.1 2.0 1.7 - -


09:30 Industrial output, % m/m (y/y) Dec 0.0 (-1.5) -1.0 (-2.0) -0.6 (-3.1) 0.0 (-3.3) 0.2 (-3.1)

09:30 Manufacturing output, % m/m (y/y) Dec 0.0 (1.3) -0.9 (0.1) -0.2 (-0.6) -0.1 (0.0) 0.3 (0.4)

09:30 Visible trade balance, bn Dec -10.2 -7.9 -8.7 -8.4 -8.6

12:00 BoE asset purchase decision Feb 275 275 275 325 325

12:00 BoE Bank rate decision, % Feb 0.50 0.50 0.50 0.50 0.50

Industrial production: We expect a marginal fall in manufacturing production of 0.1% m/m in December from -0.2%previously, consistent with survey indicators suggesting that manufacturing output fell at the end of last year, although at aslower pace. We forecast industrial production to have been flat after falling by 0.6% previously.

Visible trade: We forecast the goods trade deficit to have narrowed slightly to 8.4bn from 8.7bn previously, mainly as aresult of improved trading with non-EU partners, while we expect demand for UK exports from the euro area to remain weak.

BoE monetary policy decision: We expect the MPC to announce another round of asset purchases of 50bn at its Februarymeeting, bringing the total amount of QE to 325bn. We expect the MPC to leave Bank Rate unchanged at 0.5%.

Friday 10 February Period Prev 2 Prev 1 Latest Forecast Consensus09:30 PPI Input prices, % m/m (y/y) Jan -0.8 (14.3) 0.3 (13.6) -0.6 (8.7) -0.1 (6.1) 0.4 (6.6)

09:30 PPI Output prices, % m/m (y/y) Jan 0.0 (5.7) 0.2 (5.4) -0.2 (4.8) 0.1 (3.7) 0.1 (3.7)

09:30 PPI Core output prices, % m/m (y/y) Jan -0.1 (3.3) -0.1 (3.1) -0.1 (3.0) 0.0 (2.2) 0.1 (2.3)

Producer prices: We expect input prices to have eased further in January by 0.1% m/m from -0.6% previously, in line withfalling raw material costs. We forecast output prices to have increased by 0.1% m/m from -0.2% previously and core outputprices to have been flat from -0.1% previously.

06 10 February Period Prev 2 Prev 1 Latest Forecast Consensus

08:00 Halifax house prices, % m/m (3m/y) Dec 1.2 (-1.8) -1.0 (-1.0) -0.9 (-1.3) - -


23/53


3 February 2012 23

OUTLOOK: JAPAN

A solid outlook at least through FY12 IP bounced back from the Thai floods, and forecast indices suggest this will not be a

one-off. The domestic inventory and fiscal cycles, and overseas demand should help. Transport equipment could lead the way, buoyed by policy supports. Production and

sales figures in the sector suggest an upside risk to our GDP forecast for Q1.

We maintain our outlook for solid growth through FY 12. In FY 13, however, thecurrent stimulus will have run its course and taxes will be raised to finance it.

Industrial production bounced back in December, even more than expected, asmanufacturers of transport equipment, info-communications equipment and electronicparts and devices made up for earlier disruptions caused by flooding in Thailand (Figure 1).To an extent, that would seem to suggest the latest uptick was a one-off. Yet it can also beviewed as part of a broader catch-up phase from a much bigger special factor: the Great

East Japan Earthquake.

That disaster took an even larger toll on the manufacturing sectors supply chain, whichhelps to explain why inventories remain relatively low from a macroeconomic perspective.At the very least, current levels suggests inventory adjustment is unlikely to push Japan intoa recession. In our view, GDP growth could even draw support from restocking.

That, of course, requires an outlook for demand. On this front, we expect the post-earthquake reconstruction to lead the way. In some areas, such as public fixed investment,we estimate that growth was already positive in Q4 11, but expect much faster growth fromQ2 12 as the third supplementary budget is deployed. The Cabinet Office estimates that thisbudget alone will boost real GDP by about 1.7% (public works: 0.9%; private capex: 0.4%;government consumption: 0.3%; private consumption and housing investment: 0.2%).

Overseas demand should also support production, even if exports weigh on GDP growth innet terms due to robust imports reflecting demand for LNG as a substitute for nuclearpower and the above-mentioned reconstruction demand. Our index of globalmanufacturing confidence increased for a second consecutive month in January, and thegap between the indices for new orders and finished goods inventories, a leading indicator,logged its largest monthly gain since October 2010. For Japan in particular, the recovery inthe US is already helping and we expect a further boost from China, Japans top exportpartner, as the political cycle puts that nations turnaround on a firmer footing (real growthtends to pick up in the year of the Communist Party Congress while nominal growthaccelerates in the following year). Our China economists currently expect fiscal andmonetary stimulus to add around 1-2pp to the nations real GDP growth in 2012.

In addition to the headline strength in this weeks IP data, METI forecast indices pointed tofurther gains in both January (2.5% m/m) and February (1.2%). In this light, we expectproduction, which contracted 0.4% q/q in Q4 11, to grow 3.8% q/q in Q1 12, 2.1% in Q2 12and 2.7% in Q3 12. Our forecast for production in Q1, together with a firm trend in auto sales,suggests upside risk to our GDP projection for that period. Given the volatility of IP data,however, we first need to check recent figures against trade data (data for the first two-thirdsof January will be released next week; data for the full month come out 20 February).

Kyohei Morita


Yuichiro Nagai+81 3 4530 1064

[email protected]

James Barber, CFA+81 3 4530 1542

[email protected]

IP bounces back, but should continue to recover, supported

by low inventories

and domestic and overseasdemand

An upside risk to our Q1 GDP forecast?


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3 February 2012 24

The IP data for February were encouraging, not just because of the overall forecast, but alsobecause it reflected projections for higher output in a broad range of industries. Even withthe decline forecast for transport equipment, one of the industries that has bounced backfrom the cutbacks caused by the Thai floods, overall production was projected to rise.

Indeed, the picture for transport equipment itself looks bright. In January, new auto sales

(new passenger vehicle registrations and minicar sales) jumped a seasonally adjusted14.2% m/m after a 3.5% gain in December. Assuming flat readings in February and March,sales would be up 16.9% q/q in Q1, an acceleration from Q4 (8.0%) and a boost to overallconsumption. For now, we continue to expect GDP-based private consumption to increase0.1% q/q in Q1 after the 0.3% gain in Q4.

To the extent that such sales support the production of transport equipment, this is goodnews for the manufacturing sector as a whole because output here spurs demand in abroad range of other industries. According to the Input-Output Tables, one unit of output intransport equipment induces nearly three units of output in all industries combined.

But how long can auto sales and production remain strong? The Eco Car subsidies, revivedas part of the FY 11 fourth supplementary budget (passed in January), are a key factor in the2012 outlook for auto sales in particular and consumption in general. As these subsidieshave a budget only about half the size of the 2009 version and do not include

Global Economics Weekly Cautious Improvement

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