STATE OF THE GLOBAL ECONOMY THE OUTLOOK FOR 2011 AND BEYOND

Edinburgh

14 June 2011

Trevor WilliamsChief EconomistLloyds Bank Corporate Markets

2

Summary of global growth forecasts

GDP % Yr 2009 2010 2011 2012

World -0.8 4.6 4.2 4.5

Developed Economies -3.4 2.6 2.2 2.7

US -2.6 2.7 2.7 3.2

UK -4.9 1.4 1.5 2.3

Japan -6.3 4.2 -0.3 2.3

Eurozone -4.0 1.7 2.1 1.8

Emerging economies (E10) 3.1 6.5 6.9 7.3

China 9.2 10.3 9.4 9.1

Brazil -0.7 7.6 5.1 5.4

India 6.8 8.8 8.0 9.0

Russia -7.9 3.5 4.7 5.2

Source: Lloyds Bank Corporate Markets

3

GLOBAL WORST CASE SCENARIO

0

50

100

150

200

250

300

2007 2009 2011 2013

US$ per barrel

Saudi Arabia oil supply disruption

Base case

forecast

-3

-2

-1

0

1

2

3

4

5

6

7

2006 2008 2010 2012 2014

%, YoY

Saudi oil disruption

forecast

Base Forecast

Brent crude oil prices surge to US $250 per barrel as Saudi Arabia is impacted…

…World GDP growth slows markedly

Source: LBCM

4

• Global imbalances projected to widen

• US housing market deteriorates

• Commodity price shock

• Policy mistake – tighten too fast

• China inflation takes off

OTHER RISKS TO THE GLOBAL OUTLOOK

Just when you thought it was safe to get back in the water

5

Top 10 Countries 2005 - 2010

1 Qatar 15.7

2 Angola 13.1

3 China 11.2

4 India 8.6

5 Mynamar 8.5

6 Sudan 8.0

7 UAE 7.2

8 Vietnam 7.2

9 Singapore 6.5

10 Nigeria 6.4

Top 10 Countries 2010 - 2015

1 China 9.1

2 Qatar 9.5

3 India 8.3

4 Uganda 7.0

5 Singapore 6.2

6 Vietnam 6.7

7 Sudan 6.4

8 Nigeria 6.5

9 UAE 6.4

10 Turkey 6.4

Top 10 Countries 2010 - 2020

1 Qatar 9.5

2 China 8.7

3 India 8.0

4 Vietnam 6.6

5 Uganda 6.1

6 Turkey 6.0

8 UAE 6.0

9 Indonesia 5.7

10 Singapore 5.4

10 Thailand 5.2

Regions 2005-10 2010-15

BRICS 8.6 7.7

Middle East 5.6 4.7

Emerging Asia 4.6 5.7

Africa 4.5 5.0

Eastern Europe 3.7 4.1

Latin America 4.0 4.5

G7 1.0 2.7

Source: LBCM

China 9.1%

Brazil 5.1%

India 8.3%

Russia 4.3%

Mexico 4.6%

Korea 4.5Turkey 6.4%

Poland 4.0%

Indonesia 6.1%

South Africa 4.0%

China 9.4%

Brazil 5.1%

India 8.0%

Russia 4.7%

Mexico 4.6%

Korea 4.5Turkey 6.4%

Poland 4.0%

Indonesia 6.1%

South Africa 4.0%

Australia 3.3%

…BUT OUTLOOK STILL LOOKS GOOD…

6Source: OECD, LBCM

ADVANCED ECONOMIES RECOVERING BUT SLOWLY…

2007 2008

90

92

94

96

98

100

102

104

Euro zone

Japan

UK

US

Rebased, 2007 = 100

2009 2010

7

CRISIS IN THE EURO AREA PERIPHERY NOT OVER

Source: DataStream

Spread over 10yr Bunds

2006 2007 2008 2009 2010

-2

0

2

4

6

8

10

12

14

Greece

Spain

Portugal

Ireland

8

GLOBAL CONSEQUENCES OF EURO AREA CRISIS

Risks – Euro crisis could have global consequences

World: Bank exposures to peripherals

0 100 200 300 400 500 600

Germany

France

UK

Italy

Japan

US

ROW

Government debt

Banks

Private & Other

US$ billion

Source: Oxford Economics & BIS

9Source: OECD, LBCM

WORLD WOULD BE IMPACTED BY SUCH AN EVENT

Economic growth

-3

-2

-1

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Eurozone debt crisis

Greek default

Eurozone muddles through

% year

forecast

• International channels of impact of a default:− Contagion & Confidence – risk

appetite, capital flows− Bondholder losses − Bond yields− Wider interbank spreads − Wider lending spreads − Induced fiscal tightening

10

EUROPE: GOOD RECOVERY IN ‘CORE’

-8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012

% increase in year, economic growth

Euro zone

Germany

France

forecast

Source: LBCM

11

EUROPE: WEAK RECOVERY IN ‘PERIPHERAL’

-8

-6

-4

-2

0

2

4

6

2005 2006 2007 2008 2009 2010 2011 2012

% increase in year, economic growth

Greece

Portugal

Italy

forecast

Spain

Source: LBCM

12

RISING INFLATION IN CORE

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2005 2006 2007 2008 2009 2010 2011 2012

% increase in year, CPI inflation

Euro zone

Germany

France

forecast

Source: LBCM

13

FALLING INFLATION IN ‘PERIPHERY’

-2

-1

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

% increase in year, CPI inflation

Greece

Portugal

Italy

forecast

Spain

Source: LBCM

14

The UK economic outlook

GDP % Yr 2009 2010 2011 2012

GDP -4.9 1.4 1.5 2.3

Interest rates (%, end yr)

Bank Rate 0.50 0.50 0.75 2.00

3m (offer) 0.61 0.76 1.40 3.20

5yr swap rate (mid) 3.39 2.63 2.9 4.1

FX rates (end year)

£:$ 1.61 1.55 1.50 1.47

£:€ 1.13 1.17 1.18 1.18

€:$ 1.43 1.34 1.20 1.25

Source: LBCM

15Source: LBCM

UK ECONOMY HAS BEEN FLAT IN THE LAST SIX MONTHS

Q4 2010 Q1 2011

-0.5-0.3

0.4

-1.8

-0.5

0.90.5

-0.6

1.0

-4.4

1.7

0.4

-5

-4

-3

-2

-1

0

1

2

3

GDP Consumer spending

Government spending

Net trade StocksBusiness investment

% change in quarter

16

Household debt remains uncomfortably high

0

20

40

60

80

100

120

140

160

180

1997 1999 2001 2003 2005 2007 20090

2

4

6

8

10

12

14

16

Household debt %disposable income (LHS)

Household borrowing%yr (RHS)

% disp income %yr

HOUSEHOLDS ARE UNDER PRESSURE

Source: ONS/LBCM

17

Lloyds Barometer suggests that economic recovery to be modest in Q2

THE LLOYDS BUSINESS BAROMETER IS GLOOMY

Source: Lloyds Bank Corporate Markets

-80

-60

-40

-20

0

20

40

60

80

Jan

06

Jul 0

6

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Jul 1

0

Jan

11

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

% bal.

GDP (RHS)

% q/q

Lloyds Business Barometer (econ. Prospects)

(LHS 3m lead)GDP (RHS)

18

AND BROAD MONEY SUPPLY GROWTH IS STILL WEAK

…so bank rate may remain on hold for some months yet

Source: Lloyds Bank Corporate Markets

% increase in year

2002 2003 2005 2006 2007 2008 2009 2010

-5

0

5

10

15

20

0

1

2

3

4

5

6

M4 growth (LHS)

UK Bank Rate (RHS)

%

20112001 2004

19

Exporters and supporting services lead the way

Source: Lloyds Bank Corporate Markets

Consumer or government servicing lag

WHERE IS GROWTH COMING FROM?

Bottom 10 growth sectors2011F 2012F

Energy -1.6% -1.4%Construction 0.2% 1.0%

Commercial services 0.4% 1.9%Food & drug retailing 0.4% 2.1%Retailing 0.4% 2.1%

Household & personal products 0.5% 3.3%Consumer durables & apparel 1.0% 0.3%

Utilities 1.7% 1.8%Insurance 1.6% 3.3%

Hotels, restaurants & leisure 1.7% 2.3%

Top 10 growth sectors2011F 2012F

Technology Hardware & equipment 7.4% 4.1%Materials 6.2% 3.9%Capital Goods 6.1% 3.0%

Pharmaceuticals & biotechnology 5.2% 5.0%Software & services 4.3% 4.6%Business Services 3.8% 4.2%

Telecommunication services 3.2% 3.5%Media 3.1% 1.9%

Semi-conductor and semiconductor equipment 2.7% 6.7%Banks & diversified financials 1.7% 4.2%

20

INTEREST RATE RESPONSES DIFFERENT

Source: DataStream/LBCM

Official interest rate, %

2004 2005 2006 2007 2008 2009 2010

0

1

2

3

4

5

6

US

UK

ECB

2011

0

2

4

6

8

10

12

14

16

Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

forecastBrazil

RussiaIndia

China

%

ECB raising rates Emergers raising rates

21

CURRENCIES STILL VOLATILE

£:$ (nominal)£:$ (inflation adjusted 2006)

£:€ (nominal)£:€ (inflation adjusted 2006)

1

1.2

1.4

1.6

1.8

2

2.2

201120102009200820072006

Source: LBCM

22

ARE MARKETS SETTLED?

Credit conditions improved but suggest risks Equities have recovered but are volatile

Source: Lloyds Corporate Markets

0

10

20

30

40

50

60

70

80

90

Jan

06

Ma

y 0

6

Se

pt

06

Jan

07

Ma

y 0

7

Se

pt0

7

Jan

08

Ma

y 0

8

Se

pt

08

Jan

09

Ma

y 0

9

Se

pt

09

Jan

10

Ma

y 1

0

Se

pt

10

Jan

11

Ma

y 1

1

0

50

100

150

200

250

Itraxx (RHS)

VIX (LHS)

2006=100

2006 2007 2008 2009 2010

40

50

60

70

80

90

100

110

120

130

140

150

DOW JONES

FTSE 100

NIKKEI 225

DAX 30

2011

23

WHAT ABOUTTHE PROSPECTS FOR

GLOBAL WEALTH?

24

Share of world GDP in constant prices

0

10

20

30

40

50

60

70

80

1500 1870 1980 2000

%

China US

Western Europe

India

SHIFT IN POWER BACK TO THE EAST

Source: Oxford Economics/Maddison

25

…and as people become richer, the demand for retail banking services will increase

2001 2002 2003 2004 2005 20060

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000$

Real Per Capita GDP 2001 - 2006

BrazilChina India

RussiaUSA

UK

Source: LBCM

Forecasted Per Capita GDP 2005 - 2030

20100

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Per Capita $PPP

2005 20302020

STILL HUGE SCOPE FOR CATCH UP

Per capita GDP, as a indicator of personal wealth, is expected to continue to grow...

26

WHAT DOES THIS MEAN FOR RETAIL BANKING?

As shown in this slide for the emerging markets giants relative to some developed economies

Source: Pricewaterhouse Coopers

50000

40000

30000

20000

10000

02004 2009 2014 2019 2024 2029 2034 2039 2044 2049

Domestic credit ($2004bn)

US

Japan

China

Germany

India

UK

27

Dependency ratio

0

10

20

30

40

50

60

2005 2008 2011 2014 2017 2020

%

Japan

EU

Russia

India

China

Brazil

Source: United Nations

DEPENDENCY RATIOS RELATIVELY LOW

28

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Index (2006=100, quarterly averages)

Singapore

China(Luxury residential)

Hong Kong

Emerging Asia: Residential property prices

Source: Oxford Economics

‘BUBBLE’ IN ASSET PRICES IN ASIA

29

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