Economic Outlook and the Euro Crisis September 2012Dan McLaughlin

Chief Economist

Presentation to:Nasscom BPO Summit 2012

Date:05.09.2012

Classification:Green

Classification: Green 2

Global growth slows and US outperforms Europe...

Global Growth (%)

-6

-4

-2

0

2

4

6

07q1 07q3 08q1 08q3 09q1 09q3 10q1 10q3 11q1 11q3 12q1

World US Euro

Classification: Green 3

…and IMF has revised down outlook for next year…

2011 2012 2013

World 3.9% 3.5% 3.9%

US 1.7% 2.0% 2.3%

UK 0.7% 0.2%(looks too high now)

1.4%

Euro 1.5% -0.3% 0.7%

Classification: Green 4

What’s wrong in the euro area?...

Few very competitive economies and many uncompetitive Wide divergence in growth outlook across economies Sharp rise in sovereign debt Current recession exacerbating negative debt dynamics Fiscal retrenchment dampening demand Many banks need capital, imposing debt burden on State Fragmentation of monetary policy Euro has fallen but not far enough

Classification: Green 5

Policy makers have responded…

ECB adds over €1,000bn in 3-year funds to banks

ECB cuts repo rate to 0.75% and may cut again

ECB cuts deposit rate to zero ECB will buy sovereign bonds

conditional on EFSF/ESM buying

ECB will not (so far) buy bonds by printing money (QE)

Tighter rules and surveillance on fiscal policy in member states

Pledge to run balanced budgets

EFSF set up as ‘firewall’ Permanent support fund (ESM) Direct support for banks Euro-wide bank regulator Euro-wide deposit insurance? Mutualisation of debt?

BUT German Constitutional court decision needed on ESM

Classification: Green 6

Some euro members adjusting better than others…

Change in Unit Labour Costs (2009-2012, %)

-20

-15

-10

-5

0

5

10

15

Germany Italy Euro Area Portugal Spain Ireland

Classification: Green 7

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