CS-All together now, let’s ease-2012-02-16

8/2/2019 CS-All together now, lets ease-2012-02-16

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ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER

IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.

All together now, lets ease

Global Economy: Monthly Review

Stronger than expected economic data continue to support our outlook that

global growth will pick up modestly in 2012 relative to last years second half.

Reflecting more positive recent developments, we now expect the global

economy to expand at a 3.5% rate in 2012, one-tenth higher than our December

estimate. We also expect the growth divergence among major economies to

narrow gradually over the year.

Risks appear more balanced now, due in no small measure to the ECBs 3-year

long-term refinancing operations, which reduced financial stress and the risk of

a systemic panic in global financial markets.The recovery from the Great Recession has come in fits and starts. Rapid

improvements in cyclical momentum have been followed by abrupt declines.

One source of those shocks may have been the behavior of monetary policy.

Specifically, its possible that a shift from a concerted and steady expansion of

central banks balance sheets in 2009 to discussion, and occasional implemen-

tation of exit strategies in 2010-11, contributed to the volatility of the recovery.

The current prospect marks a major shift. Rather than contemplating or

implementing exit strategies from unconventional policy measures, the major

central banks are contemplating or implementing entry points to further

unconventional easing measures and balance sheet increases. The massive

expansion of central bank liquidity should better prevent, and insulate the real

economy from, financial shocks. If thats the case, the current upswing in

cyclical momentum may prove more sustained than previous speed-ups.

Exhibit 1: G3+ central bank balance sheet, with Credit Suisse forecast

Combined balance sheets of the Federal Reserve, ECB, BoJ, BoE and SNB; in $trn; exchange rates at2008-11 averages

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

2007 2008 2009 2010 2011 2012

CS forecast

Source: Credit Suisse, Thomson Reuters Datastream

16 February 2012

Economics Research

http://www.credit-suisse.com/researchandanalytics

Research Analysts

Neal Soss

+1 212 325 3335

[email protected]

Neville Hill

+44 20 7888 1334

[email protected]

Henry Mo

+1 212 538 0327

[email protected]

MONTHLY REVIEW:

Global economy 1-8

US 9-11

Japan 12-13

Euro Area & UK 14-15

Switzerland 16

Scandinavia 17

Canada 18

Australia 19-21

New Zealand 22

Non-Japan Asia 23-24

EMEA 25-27

Latam ex-Brazil 28-29

Brazil 30-31

Summary Forecast Tables 32-37


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16 February 2012

All together now, lets ease 2

All together now, lets ease

Stronger than expected economic data continue to support our outlook that global

growth will pick up modestly in 2012 relative to last years second half.

In our last forecast review, we cited risks around that forecast as being tilted to thedownside (see 2012 Global Outlook: Piecing Together or Falling to Pieces, December 1,2011). Specifically, we commented that Europe was experiencing a large upward shock tothe demand for liquid cash balances, manifested in the urge to shed noncash assetsincluding sovereign bonds. Remember that companies were hoarding cash and were slowto hire; banks were slow to lend; households were slow to spend. Consequently, theduration and intensity of the euro recession rested on the willingness of the ECB to satisfythat heightened money demand. Risks appear more balanced now, due in no smallmeasure to the ECBs three-year long-term refinancing operations, which reducedfinancial stress and the risk of a systemic panic in global financial markets.

Reflecting more positive recent developments, we now expect the global economy

to expand at a 3.5% rate in 2012, one-tenth higher than our December estimate. Theslightly higher growth estimate largely reflects a less severe outlook for the euro area,which more than offsets some softening in the emerging market outlook. For reference,January consensus expectations for 2012 global GDP growth moved down further to

3.4%

1

(Exhibit 2). The IMF also revised down its 2012 forecast to 3.3% last month. As tothe 2013 growth outlook, our forecast is for a rebound to 4.2% real GDP growth.

In the near term, we expect global growth to pick up in the first half of this year, to a 3.4%annualized rate following a relatively poor 2.6% annualized expansion in Q4 last year. Thepace of expansion should accelerate further in the second half of this year (3.9%),supported by a faster recovery in the euro area (Exhibit 3).

Exhibit 2: CS forecast history of 2012 global GDPgrowth

Exhibit 3: Global GDP growth vs. composite PMIoutput index

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

Dec10 Feb11 Apr11 Jun11 Aug11 Oct11 Dec11 Feb12

CS estimates

Consensus estimates

30

35

40

45

50

55

60

65

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

-7

-5

-3

-1

1

3

5

7

Global Composite PMI Output, lhs

Global GDP, q/q%, ann., rhs

CS Fcst.

Jan12: 54.6

Source: Consensus Economics, Thomson Reuters DataStream, Credit Suisse Source: Markit Economics, Thomson Reuters DataStream, Credit Suisse

The propsective improvement in euro zone growth is concentrated in the core countries.The periphery will remain in depression, in our view (Exhibit 4). Specifically, we have raised

our growth forecasts for Germany, France, the Netherlands and Austria, but have cut our

forecasts further for the troubled euro area countries such as Spain, Portugal and Greece.

While the euro area continues to lurch unsteadily towards fiscal union, the divergence of

growth within the euro area is likely to lead to further economic, political, fiscal and financial

stresses. As such, the euro area remains a major cause for concern this year.

1 County and regional consensus forecasts are taken from the Consensus Economics survey. The global aggregates are weightedby GDP valued at purchasing power parities (PPPs) as a share of world GDP.
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Growth divergence is also emerging within Non-Japan Asia. Specifically, we expect

continued growth moderation in both China and India, the regions two largest economies,

while growth momentum is likely to pick up in Southeast Asian countries (Exhibit 5). To be

sure, the slowdown in both China and India largely reflects choices of policy. In China, weexpect growth to moderate further in the coming quarters, with further softening in theproperty sector and infrastructure investments. In India, growth will likely slow as aresult of the lagged impact of aggressive monetary tightening last year. In contrast, the

more trade-dependent economies of Southeast Asia are benefiting from the recovery inthe US economy. We recently revised up our 2012 growth forecast for Thailand, mainly

reflecting our upgrade of real fixed asset investment as well as a brighter export outlook. In

addition, we also see upside risk to our Indonesian growth outlook and maintain our

above-consensus growth forecast for Malaysia.

Exhibit 4: Euro area GDP Exhibit 5: Non-Japan Asia GDP growth

Q1 2008=100 y/y%

90

92

94

96

98

100

102

104

106

08 09 10 11 12 13

Core

Periphery

Fcst.

4

6

8

10

12

14

07 08 09 10 11 12

-2

0

2

4

6

8

10Chindia, Left ASEAN, Right

Fcst.

Source: Thomson Reuters DataStream, Credit Suisse; Core euro area includes Belgium,Germany, France, Netherlands, Austria and Finland. Periphery euro area includes Italy,Spain, Greece, Portugal and Ireland.

Source: Thomson Reuters DataStream, Credit Suisse; ASEAN: Indonesia, Malaysia, thePhilippines, Singapore, Thailand

More generally, we observed a pattern of diverging growth among major economies in thesecond half of 2011, with the US outperforming, China slowing to a more desired pace as

sought by the authorities, and Europe the laggard (Exhibit 6). While this de-

synchronization is likely to continue this year, we expect this growth divergence to

narrow gradually over the year.

This is consistent withthe broad-based improvement in January PMIs (Exhibit 7). The US

has been leading the improvement in business sentiment over the past few months. In

January, the US ISM Manufacturing index rose to the highest level since June 2010 with

the leading new orders index hitting a nine-month high. The PMI reports out from Europe

are also encouraging. On an aggregate level, the euro area manufacturing PMI continued

to improve to 48.8 in January from 46.9 in December. PMI surveys in the emerging

markets remain constructive. In China, both the official NBS PMI and the Markit/HSBC

PMI improved in January, further easing the anxiety about a hard landing. The Indian PMIrose sharply to 57.5 in January following an impressive 3.1 point gain in December,

supporting our view that growth will not continue to slump after the January-March quarter.

All in all, the breadth of the improvement in January PMIs underscores the resilience of the

global economy, suggesting that the growth recovery is spreading from the US to the rest

of the world2 .

2 For a complete round-up of the January manufacturing PMIs, please refer toGlobal Economics Comment: January ManufacturingPMIs: A positive tone for the new year,dated February 1, 2012.
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Exhibit 6: US, Euro Area, China growth outlook Exhibit 7: Manufacturing PMI new orders

q/q% ann. Index

-2

-1

0

1

2

3

4

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

0

2

4

6

8

10

12

US

Euro Area

China, rhs

Fcst.

20

25

30

35

40

45

5055

60

65

70

Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12

China

US

Euro Area

Source: BEA, NBS, Thomson Reuters DataStream, Credit Suisse Source: ISM, Markit Economics, NBS, Credit Suisse

On the inflation front, we expect global inflation to subside to 3.7% in 2012 from an

estimated 4.7% in 2011. On a quarterly basis, global inflation peaked at 5.0% in Q3 last

year and is expected to gradually fall back to its 2010 level by the end of this year (4Q12:

3.6%) (Exhibit 8). Inflation rates in developed and emerging markets are expected to

follow similar paths, although emerging market inflation rates are on average running a

few percentage points faster than their developed market cousins. In addition, we expect a

similar global inflation rate for the year 2013.

Exhibit 8: Global CPI Exhibit 9: Developed and emerging market CPI

y/y% y/y%

0

1

2

3

4

5

6

7

1Q03 1Q05 1Q07 1Q09 1Q11

Fcst.

-2

-1

0

1

2

3

45

6

7

1Q03 1Q05 1Q07 1Q09 1Q11 1Q13

0

1

2

3

4

5

6

78

9

10

DM

EM, rhs Fcst.

4.9

4Q12: 1.5

Source: Thomson Reuters DataStream, Credit Suisse Source: Thomson Reuters DataStream, Credit Suisse

One of the reasons that inflation in developed economies isnt as low as estimates ofsubstantial spare domestic capacity would suggest is that global output growth and

inflation in other countries are increasingly important determinants of developed market

inflation rates. A growing body of research has emerged in recent years on this global

nature of inflation.3As the chart below shows, at the global level, there doesnt appear to

be much of an output gap. Thats largely because the probable negative output gap in the

developed economies is being offset by a probable positive output gap in the emerging

3 For detailed discussions on this topic, please refer toEuropean Economics: Inflation: Think global, actlocal, published March 10, 2011.
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economies. Historically at the global level there has been a reasonably strong and

predictable relationship between the output gap and inflation in the developed economies

(Exhibit 10). The innovation in recent years is the less significant role of the developed

countries and the corresponding greater weight of the emerging markets in calculating

global output and output gaps.

Exhibit 10: Global output gap and developed market inflation

%

-3

-2

-1

0

1

2

3

4

87 89 91 93 95 97 99 01 03 05 07 09 11

-3

-2

-1

0

1

2

3Global output gap, lhs

DM inflation, deviation from 5-year moving average, rhs


From exit strategies to entry points: the new global monetary stimulus

The recovery from the Great Recession has come in fits and starts. Rapid

improvements in cyclical momentum have been followed by abrupt declines. These

speed-up and slowdown scares are likely to have become a common feature of modern

economic life, following the end of the Great Moderation. And this volatility may partly

represent a greater frequency of, and vulnerability of the economy to, monetary and

financial shocks.

One source of those shocks may have been the behavior of monetary policy. Sinceshort-term policy rates in the US and Europe effectively hit the zero bound in late

2008/early 2009 (and in Japan much earlier), central banks have exercised monetary

policy through unconventional measures such as quantitative easing (Exhibit 11). And in

the place of short-term interest rates, the active instrument has effectively become the

central banks own balance sheet.

The charts below show the development of those balance sheets since the start of the

crisis. The substantial conventional and unconventional monetary easing that followed the

Lehman collapse is evident as policy rates fell to the zero bound, and central bank balance

sheets expanded considerably. That enormous boost of monetary stimulus was one of the

reasons behind the dramatic improvement in cyclical indicators in 2009.

But, following that substantial and concerted easing of monetary policy in early

2009, policy actions by the central banks became less accommodative andcoordinated. Indeed, from late 2009 onwards, discussions of monetary policy for a time

centered on the question of exit strategies from unconventional policy measures and

swollen central bank balance sheets, rather than on further easing.

The Federal Reserve hiked its discount rate by 25bp in February 2010 in an initial step

toward policy normalization. The European Central Bank went even further, reducing the

duration of its liquidity support measures in the second half of 2010 and raising interest

rates in early 2011. In contrast, the Fed quickly reverted to an easing posture, engaging in

a second round of quantitative easing in late 2010 through mid-2011.


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Exhibit 11: Central bank policy rates Exhibit 12: Federal reserve balance sheet% $trn

0

1

2

3

4

5

6

05 06 07 08 09 10 11 12

Fcst.

ECB

BoEFed

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012

Source: Credit Suisse, Thomson Reuters Datastream Source: Credit Suisse, Thomson Reuters Datastream

Exhibit 13: ECB balance sheet Exhibit 14: Bank of Japan balance sheet trn Yen trn

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

2007 2008 2009 2010 2011 2012

90

100

110

120

130

140

150

2007 2008 2009 2010 2011 2012


Collectively, the ECBs exit strategy and the Feds continued easing of 2010-11 more or

less offset each other. Exhibit 15 shows an aggregate G3+ central bank balance sheet,

combining the balance sheets of the Fed, ECB, BoJ, BoE and SNB. The size of that

collective balance sheet peaked in the summer of 2010 and shrank until the end of thatyear, before rising again and returning to its prior peak in the spring of 2011. Exhibit 16

shows the underlying dynamics clearly: the ECBs balance sheet shrunk substantially in

the second half of 2010 while the $600bn expansion of the Feds balance sheet via QE2

began near the end of that year.


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Exhibit 15: G3+ central bank balance sheetExhibit 16: The Fed and ECBs balance sheets in2010 and 2011

Combined balance sheets of the Federal Reserve, ECB, BoJ, BoE and SNB; in$trn; exchange rates at 2008-11 averages

$trn; exchange rates at 2008-11 averages

3

4

5

6

7

8

9

2007 2008 2009 2010 2011 2012

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

Jan-10 Jul-10 Jan-11 Jul-11

Fed

ECB


Its possible that this shift from a concerted and steady expansion of central banks

balance sheets in 2009 to discussion, and occasional implementation, of exit

strategies in 2010-11, contributed to the volatility of the recovery. The withdrawal, or

threat of withdrawal of liquidity, exposed fragilities in the financial system, most

spectacularly in the sovereign debt and banking sector of Europe. And tighter liquidity

increased the vulnerability of other financial markets, and the real economy, to those

fragilities. The sharp falls in risk appetite in both early 2010 and early 2011 were

associated with an equivalent deterioration in global growth momentum.

The current prospect marks a major shift. Rather than contemplating or

implementing exit strategies from unconventional policy measures, the majorcentral banks are contemplating or implementing entry points to further

unconventional easing measures and balance sheet increases.

In the past week, the Bank of Japan and the Bank of England have both announced

further rounds of asset purchases. At the end of the month, the ECB will conduct the

second of its injections of unlimited three-year liquidity into the banking system. And some

on the Federal Reserve continue to entertain the notion of another round of quantitative

easing.

Taking the size of a central banks balance sheet as the metric, that suggests central

banks are undertaking the first concerted easing of developed market monetary policy

since 2008-09. Indeed, as Exhibit 15 shows, the aggregate G3+ central bank balance

sheet has already expanded rapidly since the autumn of last year. That was in response to

the intensification of the sovereign debt crisis in Europe.

That expansion should continue. The chart below shows our projection of the G3+ central

bank balance sheet for the rest of this year. Weve based that forecast on the announced

asset purchase programs in Japan and the UK; a conservative assumption that the next

ECB LTRO increases its balance sheet by a net 375bn; and the possibility of a further

$600bn of QE from the Fed. On that basis, the collective central bank balance sheet

should rise by 35% from the middle of last year. In dollar terms, thats a rise of close to

$3trn, a larger increase than seen in 2008-09.


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Exhibit 17: G3+ central bank balance sheet, with Credit Suisse forecast

Combined balance sheets of the Federal Reserve, ECB, BoJ, BoE and SNB; in $trn; exchange rates at 2008-11 averages

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

2007 2008 2009 2010 2011 2012

CS forecast


Central banks are in the midst of an extraordinary concerted unconventional easing of

monetary policy. An enormous quantity of liquidity is being injected into the financial

system.

But will this have a positive effect on the real economy? In terms of generating

substantially above-trend rates of GDP growth, probably not. But compared to a

counterfactual, in which such policy expansion did not take place, we think the answer is

yes. In general, it is probably better to think of what QE prevents, rather than what it

causes. As we wrote in our2012 Global Outlook, when disorderly deleveraging generates

financial fragility, the only balance sheet adequate to absorb the orphaned assets is the

central banks... The bottom line is that QE is probably a necessary component of

managing the ongoing restructuring of the global financial system.4

Indeed, the lesson of the last couple of years is that the absence or withdrawal of

central bank liquidity support tends to expose financial fragilities and those fragilities, in

turn, can disrupt the recovery. The massive expansion of central bank liquidity should

better prevent, and insulate the real economy from, financial shocks. If thats the

case, the current upswing in cyclical momentum may prove more sustained than

previous speed-ups.

Of course, these measures cannot prevent or mitigate against every financial calamity.

And Greece continues to pose a risk of a significant financial accident that could well have

implications for the real economy. But, if that risk does not materialize, then the concerted

easing by the worlds central banks could well make for a year in which speed-up and

risk on is more predominant than slow down and risk off.

4 Interested readers can also refer to Global Economy:All you need is growth,dated October 15, 2010 andUS Economics Digest: FOMC Preview: FAQs on QE2,dated October 26, 2010 for detailed discussion onthe transmission mechanisms from the Feds quantitative easing.
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US: More employment, slimmer profitsWe expect a moderate pick-up in 2012 GDP growth relative to last year, a tapering

down in the unemployment rate, quiescent core inflation, a substantial fall in YoY

headline inflation, and slimmer corporate profit gains.

In 2011, structural headwinds and a series of external shocks delivered the slowest non-

recessionary year of growth since 1947. Our forecast envisions a better outcome for2012: 2.2% growth this year (annual average), up from 1.7% in 2011.

The structural headwinds (housing depression, long-term joblessness, state and local

government cutbacks) may be losing their intensity, but are not yet close to being reversed.

As for potential shocks, the good news is that Europes debt crisis has passed from critical

to chronic; the not-so-good news is that we are increasingly wary of the prospect of higher

gasoline prices. Meanwhile, business capex, exports, and profits have been strong for a

while; growth rates are likely to moderate this year, especially for profits. And fiscal policy

is turning more restrictive.

The net of these factors leads us to expect a pick-up in real GDP growth over 2012

relative to last year, but not a particularly powerful one. Our projections are in line

with our prior forecast review. We think the distribution of risks is now tilted to the upside.

Illustratively, as a measure of cyclical risk, our recession probability model has fallen tovirtually zero from a local high of 35% in September 2011.

Labor market indicators have materially improved. Initial claims continue their grind

lower; with the labor input to producing GDP so stretched, the scope for further cuts to

workforces is limited. Job gains are accelerating overall, and broadening out by sector.

Job liquidation in structurally-impaired sectors, such as construction and manufacturing,

has given way to moderate growth. Meanwhile, non-structurally impaired sectors are

running near the peak growth rates of the 2000s business expansion.

The jury is still out on whether the employment surge will persist at the current pace. Final

demand, which leads employment, finished 2011 sluggishly. And we recall that payrolls in

February-April of last year featured three-months above +200K, better than weve been

doing lately; and that job boomlet fizzled out. Unusually warm weather in December and

January probably pulled forward hiring, especially in construction. The recent news is

genuinely good, but its too early to declare mission accomplished.

Our forecasts project a decline in the unemployment rate, to 7.9% by the end of this

year, and 7.4% next year (from the current 8.3% level). Low labor force participation

rates mask the more intractable reality of high levels of underemployment and long-term

joblessness, and the probable migration of the long-term unemployed to disability

insurance.

The credit cycle is shifting in a more favorable direction for the real economy. Aside

from mortgage debt (which continues to fall), other measures of private-sector credit are

picking up, such as commercial and industrial loan growth and consumer credit (including

non-student-loan consumer credit). The decline in mortgage rates has helped stabilize

home sales. Mortgage refinancing is up - less than it would be if widespread negativehome equity wasnt blunting refi activity - but still up. In short, credit conditions are easier,

although they are easier around a structurally tighter mean of stricter lending standards.

Easier credit terms for auto loans intersect with pent-up demand for car sales. Motor vehicle

spending as a share of GDP remains hugely depressed, even with the recent recovery; the

current auto/GDP share is still lower than any recession trough of the last 70 years.

Consumer durable spending should remain reasonably firm. Meanwhile, the large services

bloc of consumer spending remains hamstrung by weak expansion in household formation.

Services spending growth will improve as employment grows, but probably only gradually.

Neal Soss

+1 212 325 3335

[email protected]

Jay Feldman

+1 212 325 7634

[email protected]

Dana Saporta

+1 212 538 3163

[email protected]

Jonathan Basile

+1 212 538 1436

[email protected]

Henry Mo

+1 212 538 0327

[email protected]

Jill Brown

+1 212 325 1578

[email protected]

Isaac Lebwohl

+1 212 538 1906

[email protected]
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10/39

16 February 2012


For now, we expect real consumer spending to trend in the low 2% zone this year.

There is upside to that forecast if employment growth quickens and downside risk if

gasoline misbehaves.

Has housing turned the corner? The U.S. housing sector has been cheap by most

measures for some time, but excess supply, driven by a steady stream of distressed

homes, will continue to put downward pressure on home prices for the time being.

A vigorous housing recovery is probably a year or two away (at least), but homeconstruction and home sales have bottomed out, and we expect modest growth in

residential investment this year (3%). Homebuilder optimism has also visibly improved in

the survey data (NAHB), as well as in the homebuilder stocks. Among all the housing

policy considerations, a well structured buy-to-rent program to purchase and subsequently

rent out GSE-owned distressed properties by institutional investors has the best likelihood

of alleviating the looming supply glut and stabilizing prices.

Business investment growth should be solid, if somewhat slower than last year. Outright

de-capitalization occurred in many sectors during the recession. Even with a strong recovery

in recent years, net investment is still low relative to GDP, implying upside potential for

replacement demand. Corporate balance sheets remain strong. The energy exploration boom

should be supportive of non-residential structures investment. Still, overall corporate earnings

growth is slowing, and global economic activity (which business investment is closely tied to)

remains moderate this year. Last years 100% bonus depreciation gift from the federal

government has moved to 50%. All in all, we expect business investment growth at about 7%

in 2012, compared to roughly 8% in 2011.

US trading-partner GDP growth is expected to downshift in 2012, so we project a moderate

slowdown in exports (4.8% in 2012, from 6.8% in 2011). Imports are expected up about 5%, so

the trade deficit would widen slightly (2012 net exports contribution forecast: -0.3 ppt.).

Diminished low hanging fruit for profits. Lower interest expense and unit labor costs

have been the two most important drivers of profit margin expansion in recent years.

Interest rates have limited downside from here, and the unit labor costs are likely to rise

with the cyclical recovery in employment and cyclical slowdown in productivity. Profit

margins should stabilize, and profit growth will likely slow. We expect NIPA pre-tax profits

at 6% in 2012, compared to a projected 8% in 2011.The economy shows symptoms of a slowdown in potential GDP growth. The fact that

the economy has not managed a single quarter above 3% since the early stage of the

recovery is telling in itself. This may reflect structural change as much as cyclical

disappointment. One symptom of slower potential is the remarkable failure of labor force

participation rates or employment-population ratios to recover any lost ground from the

Great Recession. Cyclical unemployment is morphing into structural unemployableness.

Another symptom is the low level of net investment as a share of GDP in recent years,

which implies a diminished rate of capital deepening - a key driver of productivity growth.

Headline inflation rates in year-on-year terms should plummet over the next few

months, as this years lower oil and gasoline prices are juxtaposed against last years

spike. The sequential inflation numbers (MoM) could run faster, however, as gasoline

prices have crept up from the December lows. Core inflation momentum appears to havesubsided after last years upturn. We look for core PCE inflation at 1.6% in 2012, slightly

below the Feds new inflation goal of 2%.

Improved economic data lessen the urgency for more stimulus from the Fed, but

another round of asset purchases still appears to be under serious consideration. In

our view, policymakers will be looking to ease further (via QE3) should the economic data

enter a renewed soft patch.
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11/39

16 February 2012


As of this writing, Republicans and Democrats have tentatively agreed to extend payroll

tax relief and unemployment benefits for the rest of this year, removing a potential

negative shock to the economy for 2012. The downside to that is a 2013 expiration (the

new current law) would coincide with a pile-up of other fiscal tightening measures pre-

programmed to start next year, including the Bush tax cut expiration and the start of

budget sequestration. Current law would imply a roughly $650bn narrowing in the

federal deficit in a single year, a fiscal shock which could be too much for the economy to

bear. Policymakers will in all likelihood prevent this from occurring, but exactly what getscut and which tax rates are raised/expire will depend on who wins the 2012 elections.

Of particular interest for investors will be the fate of dividend and capital gains tax rates.

President Obamas latest budget proposed raising dividend tax rates to ordinary income

levels, a departure from his previous proposals (which capped the top rate at 20%), while

he still proposes raising the top long-term capital gains tax rate to 20% (from 15%

currently).

We project the federal budget deficit at -$1.2trn for fiscal year 2012, down slightly (but still

huge) from last years -$1.3trn. Federal debt held by the public is projected at 73% of

GDP this year, about double what it was before the recession (36% in 2007). Our

assumptions, which include a continuation of rock bottom interest rates, project a debt-

GDP ratio of more than 80% by the end of the decade. Rising interest rates would risk

an explosive path for debt dynamics (and raising rates would set monetary policy

on a collision course with fiscal sustainability).

US Economic Forecasts

2011 2012E Q4/Q4 Annual AverageQuarter-to-Quarter %

Changes at annual rates Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 10 11 12E 10 11 12E 13E

Real GDP 0.4 1.3 1.8 2.8 2.2 2.2 2.3 2.3 3.1 1.6 2.2 3.0 1.7 2.2 2.0

Consumer Spending 2.1 0.7 1.7 2.0 2.4 2.1 2.1 2.1 3.0 1.6 2.2 2.0 2.2 2.0 2.3

Residential Investment -2.5 4.2 1.2 10.9 -3.7 2.4 2.4 2.4 -6.3 3.3 0.9 -4.3 -1.4 2.3 3.0

Business Investment 2.1 10.3 15.7 1.7 7.4 5.9 7.2 6.3 11.1 7.3 6.7 4.4 8.6 7.1 4.1

Equipment & Software 8.7 6.3 16.2 5.2 7.6 7.7 7.5 7.4 16.6 9.0 7.5 14.6 10.3 8.1 5.0

Non-Res Structures -14.4 22.6 14.4 -7.2 4.9 2.4 3.7 3.5 -1.8 2.7 3.6 -15.8 4.1 3.9 5.0Total Government -5.9 -0.9 -0.1 -4.6 0.9 -0.1 -0.1 -0.1 0.1 -2.9 0.2 0.7 -2.1 -0.7 -0.3

Net Exports (contr. to GDP, %) -0.3 0.2 0.4 -0.1 -0.3 -0.3 -0.3 -0.3 -0.6 0.1 -0.3 -0.5 0.1 -0.1 -0.2

Real Exports 7.9 3.6 4.7 4.6 5.1 4.9 4.8 4.8 8.8 5.2 4.9 11.3 6.8 4.8 5.0

Real Imports 8.3 1.4 1.2 4.4 5.9 6.1 6.0 6.0 10.7 3.8 6.0 12.5 5.0 4.8 5.0

Inventories (contr. To GDP, %) 0.3 -0.3 -1.4 1.9 -0.1 0.3 0.3 0.3 0.7 0.2 0.2 1.6 -0.2 0.2 0.1

Nominal GDP 3.1 4.0 4.4 3.2 4.9 2.7 4.5 3.9 4.7 3.7 4.0 4.2 3.9 3.9 3.5

CPI (y/y%) 2.2 3.3 3.8 3.3 2.6 1.8 1.5 1.6 1.2 3.3 1.6 1.6 3.1 1.9 1.6

Core CPI (y/y%) 1.1 1.5 1.9 2.2 2.2 2.0 1.8 1.8 0.6 2.2 1.8 1.0 1.7 1.9 1.8

Core PCE (y/y%) 1.1 1.3 1.6 1.7 1.7 1.5 1.4 1.6 1.0 1.7 1.6 1.4 1.4 1.6 1.5

Corp. Profits w/CCadj and IVA (y/y%) 8.8 8.5 7.5 8.7 8.9 6.2 6.4 4.8 18.2 8.7 4.8 32.2 8.4 6.5 4.7

Industrial Production 4.9 0.6 6.3 3.1 3.5 3.2 3.4 3.4 6.3 3.7 3.4 5.3 4.2 3.5 3.0

Unemployment Rate (qtr. Avg., %) 9.0 9.0 9.1 8.7 8.3 8.1 8.0 7.9 9.6 8.7 7.9 9.6 9.0 8.1 7.6

Federal Budget Surplus/Deficit (% GDP) ... ... ... ... ... ... ... ... ... ... ... -9.0 -8.7 -7.7 -6.1

Federal Debt/GDP Ratio (%) ... ... ... ... ... ... ... ... ... ... ... 62.8 67.8 73.3 76.9

Current Account Surplus/Deficit (% GDP) ... ... ... ... ... ... ... ... ... ... ... -3.2 -3.3 -3.6 -3.7Fed Funds Rate (end of pd.,%) 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0-.25 0.-25 0-.25 0-.25 ... ...

Source: BEA, CBO, Credit Suisse estimates, Federal Reserve, Haver Analytics
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12/39

16 February 2012


Japan: No substantial rebound in GDP growthrate is anticipated for 2012Economic activity contracted again in the October-December quarter of 2011, mainly hit by

another supply-chain disruption due to the flooding in Thailand. Real GDP shrank 2.3%

qoq on an annualized basis with negative contributions from net exports and private

inventory investment being 2.6pp and 1.1pp, respectively. Final domestic private salesremained rather resilient.

Real GDP recorded negative quarterly growth rates for four quarters out of the last five

quarters. The level of real GDP remained materially lower (about 4%) than its peak

achieved in the January-March quarter of 2008. During CY2011, real GDP contracted by

0.9% while nominal GDP did so by 2.8%. Last years nominal GDP contraction was

primarily owing to shrinkage of net exports, the negative contribution of which amounted to

2.1pp.

While we continue to anticipate the economy likely to get out of a deep recessionary

situation this year, being supported by normalization of manufacturing production and re-

acceleration of post-quake reconstruction investment, we are concerned about the on-

going deterioration in terms of trade and the rising import penetration, which would limit a

rebound in GDP growth. In addition to the remaining strong yen, weakening of pricing

power by top exporters seems to have been responsible for the declining export prices at

least to some extent. A substantial rise in the ratio of import volume to real domestic

demand over the last few years in the meantime tends to suggest that so-called hollowing

out and the aging population have finally come into play, in our judgment.

Another concern relates to fiscal policy tightening starting in 2013. It remains somewhat

uncertain whether the government will succeed in finalizing the fiscal austerity plan by the

end of the current Diet session (late June), including two-stage hikes in the consumption

tax rate in spring 2014 and autumn 2015, but a majority of the general public would start to

anticipate a worsening of the disposal income environment sooner or later. This could

weigh on personal consumption into autumn, in our view.

In this context, we have decided to leave our real GDP growth forecast for CY2012 almostunchanged at +1.2% despite the weaker-than-expected result for CY2011.

At its February 14 monetary policy board meeting, the Bank of Japan announced: (1) a

10 trillion expansion of its Asset Purchase Program (with the limit to the amount of long-

term JGBs purchased to be hiked from 9 trillion to 19 trillion); and (2) a "price stability

goal" of +1%yoy CPI inflation "for the time being". The BOJ's total holdings of long-term

JGBs (including those acquired through the Asset Purchase Program) are set to increase

to around 87 trillion by the end of 2012, and will probably exceed bank notes outstanding

in circulation by October. It would, therefore, appear that the BOJ has effectively

abandoned its self-imposed "bank note rule." In terms of the long-term price stability goal,

we do not view the announcement as a meaningful change in policy guidance. Finally, we

think that there is a decent likelihood that the BOJ will decide on more easing amid

mounting political pressures to revert the yens strength. The majority of bipartisan

politicians appear to be in favor of amending the BOJ law in a direction that would limit the

central banks independence. The central bank will likely be forced to cooperate more with

the government in order to avoid any aggressive amendments of the law. Whether the on-

going and prospective monetary easing becomes a driver for an economic forecast

upgrade toward 2013 depends on the extent to which the yen weakens going forward.

Hiromichi Shirakawa

+ 81 3 4550 7117

[email protected]

Takashi Shiono+81 3 4550 7189

[email protected]
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13/39

16 February 2012


Japan Economic Forecasts2011 2012E Financial Year Calendar YearQuarter-to-Quarter %

Changes at annual rates Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 10 11E 12E 13E 10 11 12E 13E

Real GDP -6.8 -1.5 7.0 -2.3 0.9 1.8 1.5 1.7 3.1 -0.6 1.3 1.5 4.4 -0.9 1.2 1.6

Nominal GDP Growth (y/y%) -2.2 -4.0 -2.6 -2.6 -0.7 0.9 -0.6 0.3 1.1 -3.0 -0.2 0.2 2.3 -3.1 -0.7 0.2

Domestic Demand Growth -6.2 2.6 3.8 0.2 1.5 1.2 1.4 1.7 2.4 0.3 1.4 1.6 2.7 -0.1 1.5 1.6

Consumer Spending -4.4 1.3 4.2 1.2 -0.1 0.8 0.8 1.3 1.5 0.5 1.0 0.9 2.6 0.0 1.1 0.9

Private Residential Investment 6.6 -9.5 19.0 -3.1 1.9 5.8 3.6 1.3 2.3 3.7 3.4 2.8 -4.3 5.1 3.0 2.7

Capital Expenditures -2.1 -0.6 -0.1 7.9 1.5 2.5 1.8 1.5 3.5 -0.1 2.5 1.4 0.5 0.3 2.6 1.6

Inventories (contr. To GDP) -3.4 0.4 0.9 -1.1 0.5 0.1 0.1 0.1 0.8 -0.4 0.0 0.1 0.8 -0.5 0.1 0.1

Government Expenditure 1.7 3.0 1.1 1.4 1.4 1.4 1.6 1.5 2.3 1.8 1.4 3.0 2.1 2.0 1.5 2.5

Public Investment -9.5 28.9 -6.2 -9.5 7.8 4.7 3.2 6.0 -6.8 1.5 2.6 3.5 0.4 -4.0 2.4 4.7

Net Exports (contr. to GDP) -0.8 -4.1 3.1 -2.6 -0.4 0.2 0.1 0.0 0.8 -0.9 0.0 0.0 1.7 -0.8 -0.3 0.0

Real Exports Growth -1.2 -22.7 39.0 -11.9 3.0 6.0 3.8 0.6 17.2 -1.7 3.3 2.4 24.2 0.0 2.4 2.3

Real Imports Growth 4.2 1.3 14.2 4.1 5.0 4.2 2.7 0.6 12.0 5.1 4.0 2.7 11.1 5.9 4.9 2.4

Industrial Production (y/y%) -2.6 -6.8 -2.1 -2.7 2.2 8.4 5.5 6.4 5.4 -1.1 6.6 5.2 16.8 -4.9 5.6 5.6

CPI excl. fresh food (y/y%) -0.8 -0.3 0.2 -0.2 -0.3 -0.4 -0.4 -0.2 -0.9 -0.2 -0.3 0.0 -1.0 -0.3 -0.3 -0.1

CPI excl. food and energy (y/y%) -1.4 -0.9 -0.5 -1.1 -1.1 -1.1 -1.0 -0.9 -1.3 -0.9 -0.9 -0.7 -1.2 -0.9 -1.0 -0.7

Call Rate (at end of QTR) 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1 0.0-0.1

Current account bal. to GDP% 2.8 1.6 2.3 1.5 1.2 1.5 1.4 1.3 3.4 1.7 1.4 1.1 3.6 2.0 1.5 1.2

Fiscal balance to GDP % -8.5 -10.3 -11.1 -13.0

Government debt to GDP % 223.4 234 245 258

Unemployment rate % 4.7 4.6 4.4 4.5 4.3 4.4 4.4 4.4 5.0 4.4 4.4 4.5 5.1 4.5 4.4 4.5

Source: Credit Suisse estimates, Thomson Reuters DataStream
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14/39

16 February 2012


Euro Area and UK: Shorter and shallowerThe near-term prospect for euro area growth has improved, and we have revised up our

forecasts for growth. Cyclical indicators suggest that the recession we expected over the

turn of the year will be shorter and shallower than we forecast, so much so that it is

unlikely to constitute a recession at the euro area level. We now expect euro area GDP to

be unchanged in 2012, compared to our previous forecast of a 0.5% contraction. We are

only likely to see one quarter of negative growth, in Q4 2011. Given the negative shocks

affecting the euro area economy at the start of this year acute deleveraging in the

financial and public sectors such a mild outcome is a positive surprise.

That may well reflect resilience. In particular, it seems that the corporate sector has been

less vulnerable to shocks from the financial sector than was the case in 2008-09. And the

continued expansion of the global economy has also been supportive of euro area growth.

But, this is more a case of the outlook being less bad than expected, rather than it being

better. The euro area economy is unlikely to grow meaningfully until later this year. And

the improvement in the outlook largely reflects a better outlook for core countries. We have

raised our growth forecasts for Germany, France, the Netherlands and Austria but have, if

anything, cut our forecasts for the troubled euro area countries such as Spain, Portugal

and Greece further. Those countries are expected to still experience a deep recession this

year.

So the divergence of growth rates within the euro area will be considerable. Thats likely to

lead to further economic, political, fiscal and financial stresses and means the euro area

will remain a major source of financial volatility this year. Thats also likely to keep the ECB

dovish despite the improvement in the aggregate outlook. We continue to expect it to cut

rates again later this year. The euro area still has a tough year of adjustment ahead.

We have not changed our views on the UK. The latter should avoid recession and record

only one negative quarter of growth. Growth should be moderate this year, at 0.7%, but

the recovery should gain momentum towards the end of 2012 and in 2013, when we

expect GDP to grow just above 2%. Against this backdrop, we believe the Bank of

England will not announce further QE extensions, once the current program ends in April.

Christel Aranda-Hassel

+44 20 7888 1383

[email protected]

Violante di Canossa

+44 20 7883 4192

[email protected]

Neville Hill

+44 20 7888 1334

[email protected]

Axel Lang

+44 20 7883 3738

[email protected]

Giovanni Zanni

+33 1 70 39 0132

[email protected]
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15/39

16 February 2012


Euro Area Economic Forecasts

2011 2012E Q4/Q4 Ann. Avg.Quarter-to-Quarter %Changes at annual rates Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 09 10 11 12E 10 11 12E 13E

Real GDP Growth

Germany 5.5 1.1 2.4 -0.8 1.2 0.8 2.0 2.0 -2.2 3.8 2.0 1.5 3.6 3.1 1.0 2.5

France 3.7 -0.2 1.2 0.8 0.0 0.4 0.8 1.4 -0.6 1.4 1.4 0.6 1.4 1.7 0.5 1.8

Italy 0.4 1.1 -0.6 -2.8 -2.4 -2.0 -0.4 1.2 -2.9 1.6 -0.5 -0.9 1.4 0.4 -1.5 0.8Spain 1.5 0.6 0.0 -1.1 -1.2 -2.4 -2.0 0.0 -3.1 0.7 0.3 -1.4 -0.1 0.7 -1.2 0.5

Netherlands 2.8 0.4 -1.6 -2.8 -0.8 0.8 1.2 1.6 -2.2 2.0 -0.3 0.7 1.6 1.2 -0.5 1.8

Euro area GDP q/q ann 3.1 0.6 0.5 -1.3 0.0 0.1 0.7 1.5 -2.1 2.0 0.7 0.5 1.8 1.5 0.0 1.7

Consumer spending 0.1 -2.1 0.9 -0.8 0.4 -0.2 0.2 0.6 -0.4 1.1 -0.5 0.3 0.8 0.1 0.0 0.9

Government spending 0.8 -0.6 -0.3 -2.0 -1.2 -0.8 0.0 0.0 2.4 -0.1 -0.5 -0.5 0.6 0.0 -0.9 0.2

Investment 7.6 -0.4 -0.4 -3.9 -0.8 0.1 1.8 3.4 -10.1 1.3 0.6 1.1 -0.8 1.8 -0.6 3.4

Final domestic demand 1.9 -0.7 -0.2 -1.7 -0.2 -0.7 0.5 1.0 -2.6 1.5 -0.2 0.2 1.0 0.6 -0.4 1.2

Net exports (con. To GDP) 0.0 0.2 0.2 0.1 0.3 0.3 0.2 0.1 0.4 0.5 1.0 0.4 0.8 0.9 0.5 0.5

Exports 7.4 5.1 4.8 0.8 1.5 2.9 3.2 4.5 -5.3 12.0 4.5 3.0 11.3 6.8 2.7 4.5

Imports 4.4 1.9 3.2 0.0 1.2 1.2 3.0 3.8 -6.5 11.2 2.4 2.3 9.5 4.7 1.6 3.7

Inventories (con. To GDP) 0.5 0.2 0.0 0.1 0.1 0.2 -0.1 0.0 -0.8 0.7 0.1 -0.1 0.6 0.2 -0.1 0.0

CPI (y/y%) 2.5 2.8 2.7 2.9 2.4 1.9 1.7 1.5 0.9 2.2 2.7 1.5 1.6 2.7 1.9 1.6

Core CPI (y/y%) 1.1 1.6 1.3 1.6 1.5 1.3 1.3 1.4 1.1 1.0 1.6 1.5 1.0 1.4 1.4 1.6

Industrail production 6.7 4.2 3.9 -0.2 -2.2 -3.8 -2.5 1.0 -7.1 8.2 -0.2 1.0 7.4 3.6 -1.9 3.4

Government balance (% of GDP) ... ... ... ... ... ... ... ... ... ... ... ... -5.6 -4.1 -3.2 -2.4

ECB repo rate (end period) 1.00 1.25 1.50 1.00 1.00 0.75 0.75 0.75 1.00 1.00 1.00 0.75 ... ... ... ...


UK Economic Forecasts

2011 2012E Q4 to Q4 Annual AverageQuarter-to-Quarter %Changes at annual rates Q1 Q2 Q3 Q4E Q1 Q2 Q3 Q4 09 10 11E 12E 10 11E 12E 13E

Real GDP 1.7 0.0 2.3 0.2 -0.7 1.1 1.9 2.6 -0.8 1.7 1.0 1.2 2.1 0.9 0.7 2.3

Consumer spending -1.5 -1.4 0.2 0.8 1.2 1.2 1.6 1.6 -0.4 0.5 -0.5 1.4 1.2 -0.6 0.9 2.0

Government 1.9 1.5 0.8 -2.0 -1.2 -1.2 -1.2 -1.2 -0.3 0.8 0.5 -1.2 1.5 0.7 -0.9 0.0

Investment -9.2 -2.5 5.1 0.0 -3.9 4.1 8.2 8.2 -9.8 3.3 -1.8 4.0 3.1 -2.5 1.7 3.5

Domestic demand -2.7 0.2 3.2 -1.4 -0.7 0.5 1.9 2.0 -1.2 2.1 -0.2 0.9 2.9 -0.5 0.4 1.6

Inventories (contr to GDP) -0.7 0.7 2.6 -1.5 -0.6 -0.6 0.0 0.0 0.7 1.1 0.3 -0.3 1.3 0.0 -0.2 -0.2

Net exports (contr to GDP) 3.6 -1.1 -1.5 1.6 0.0 0.6 0.0 0.6 0.5 -0.2 0.6 0.3 -0.5 0.3 0.8 0.7

Export growth 5.2 -5.9 -3.0 5.3 2.0 4.1 4.1 6.1 -4.6 9.4 0.3 4.1 7.4 4.5 2.4 6.5

Import growth -6.0 -2.4 1.9 0.0 2.0 2.0 4.1 4.1 -5.9 9.7 -1.7 3.0 8.6 1.3 1.7 4.0

Industrial production (y/y%) 2.0 -0.8 -1.4 -2.5 -2.9 -1.3 -0.4 1.0 -6.0 3.3 -2.5 1.0 2.1 -0.7 -0.9 2.0

Nominal GDP growth 3.6 2.2 6.0 4.1 2.8 2.8 2.8 2.8 -0.1 4.6 4.0 2.8 4.6 3.6 3.4 5.0

CPI (y/y%) 4.1 4.4 4.7 4.7 3.5 2.9 2.6 2.2 2.1 3.4 4.7 2.2 3.3 4.5 2.8 2.5

Current account (% GDP) -2.5 -2.5 -0.9 -0.2

Govt balance (% GDP) -10.3 -9.4 -7.8 -5.8

BOE repo rate (end period) 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50



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16 February 2012


Switzerland: Indicators show tentative signs ofstabilizationOver the past few weeks, economic indicators have shown tentative signs of stabilization.

After a steady decline until November, the PMI has increased from the November low

(45.6). Following revisions due to seasonal adjustments, it remained below 50 at 47.3 in

January (down from a revised December value of 49.1, reported at 50.7 before therevision). The quarterly KOF expected business tendency survey also rebounded in

January to -12.4 from -21.1 in October. Despite the recent improvement, the leading

indicators, however, continue to point to weak economic growth in the months ahead.

Weaker demand from the Eurozone, Switzerland's main trade partner, and a still

overvalued Swiss franc are weighing on exports. We expect real GDP to expand by

merely 0.5% this year and even to contract by 1.3% q/q (annualized) in Q1 2012. Besides

export weakness, we expect investment spending to decline. We forecast exports to grow

by only 1% y/y, while we pencil in a slight contraction of -0.1% y/y of investment spending

for 2012.

There might be some volatility in construction activity due to abnormal seasonal factors as

the very cold winter weather in January and February should have a visible impact, which

should be followed by a stronger than usual pick-up in Q2. Overall, we expect construction

but also private consumption to remain more resilient. While weaker growth is likely to lead

to higher unemployment this year, the labor market remains fairly robust with the

(seasonally adjusted) unemployment rate at only 3.1% in January. Wage growth should

remain positive and "inflation" below zero for much of 2012 (overall average forecast 0.4%

y/y in 2012) supports real wage gains. Moreover, immigration is likely to remain strong,

which implies that an important driver of the consumption growth will remain in place.

Quarterly consumer confidence numbers have shown an improvement, albeit at still low

levels. Inflation below zero is more of a boost to purchasing power (as the disinflationary

effects are mainly from the imported goods) than an indication of deflation.

Interest rates in Switzerland will remain close to zero in the foreseeable future, as inflation

is not an issue at present (see above) and despite some risk for the real estate market. To

shield the economy from the impact of currency strength, the monetary policy focusremains on the exchange rate for now. EUR/CHF has been trading just slightly above the

lower bound the SNB set at 1.20 in September. Risks of real deflation materializing remain

if economic weakness would intensify strongly but improvements in European business

survey data suggest that downside risks have receded. We thus do not expect an increase

of the lower bound of EUR/CHF for now.

witzerland Economic Forecasts

2011 2012E Q4/Q4 Annual AverageQuarter-to-Quarter %Changes at annual rates Q1 Q2 Q3 Q4E Q1 Q2 Q3 Q4 09 10 11E 12E 09 10 11E 12E

Real GDP 1.6 2.0 0.9 0.0 -1.3 0.3 0.8 1.3 0.1 3.1 1.6 0.3 -1.9 2.7 1.9 0.5

Consumer Spending 0.3 0.5 0.6 0.5 3.6 -0.6 0.6 0.5 2.1 2.0 0.5 1.0 1.4 1.7 0.8 1.1

Government -1.8 6.5 2.4 5.1 -7.4 4.4 3.2 5.1 3.8 0.1 3.0 1.2 3.3 0.8 1.8 1.2

nvestment 5.3 -8.9 -3.8 20.7 -5.7 -9.7 -2.0 19.5 0.4 8.1 2.7 -0.1 -4.9 7.5 4.1 -0.1

Domestic Demand 1.2 -1.1 -0.2 6.0 -0.3 -2.2 0.3 5.3 1.9 3.2 1.4 0.8 0.1 2.9 1.7 0.9

Exports 5.9 0.8 -4.9 -1.5 10.2 0.8 -4.9 -1.5 0.0 7.5 0.0 1.0 -8.6 8.4 3.5 1.0

mports 9.6 -2.9 -0.9 17.8 -4.6 -2.9 -0.9 17.8 -1.5 7.5 5.6 2.0 -5.5 7.3 3.5 2.0

nventories (growth contrib. in bps) 1.5 -0.2 2.9 -1.1 -1.1 -0.4 2.7 -1.2 0.6 -1.3 -0.2 0.2

CPI (y/y%) 0.6 0.4 0.4 -0.2 -0.4 -0.2 0.8 1.3 -0.5 0.7 0.2 0.4

Three-Month LIBOR Target Rate 0.25 0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

ource: Credit Suisse estimates, Thomson Reuters DataStream

Maxime Botteron

Private Bank Analyst

+41 44 332 90 61

[email protected]


17/39

16 February 2012


Scandinavia: No surprises

Sweden

Following an exceptional Q3, growth is likely to contract mildly in Q4. Beyond the volatility

of the quarterly data, growth has slowed at the turn of the year and it is likely to remain

fairly subdued in the first quarter of 2012, in our view. However, we are looking for a

relatively strong rebound in economic activity and we expect growth to be just below 2%this year and a touch stronger next year. We stick to our view, that Sweden is likely to

outperform in Europe, highly geared towards core euro area economies.

The Riksbank delivered another rate cut this month. The Bank also signaled that, at 1.50%,

rates are likely to have reached the trough and should be kept on hold for the next 12

months or so. The Bank also revised down its growth forecasts and looks for growth to

average 1% this year, well below our estimates. We think there is a chance the board will

be surprised by economic activity in the next six months. Monetary and fiscal conditions

are supportive of domestic demand and export markets are likely to do better than

previously expected.

Swedish Economic Forecast

2011E 2012E 2013E Annual averageI II III IVE IE IIE IIIE IVE IE IIE IIIE IVE 09 10 11E 12E 13E

Real GDP, q/q% 0.7 1.0 1.6 -0.5 0.3 0.5 0.6 0.6 0.7 0.6 0.6 0.6 ... ... ... ... ...

y/y% 5.8 4.8 4.6 2.8 2.5 1.9 0.9 2.0 2.4 2.5 2.5 2.5 -5.1 5.3 4.5 1.8 2.5

CPI, y/y% 2.6 3.3 3.3 2.7 2.0 1.7 1.6 1.6 1.6 1.9 2.2 2.4 -0.3 1.3 3.0 1.7 2.0

Policy rate (end period) 1.50 1.75 2.00 1.75 1.50 1.50 1.50 1.50 1.50 1.75 2.00 2.25 0.25 1.25 1.75 1.50 2.25

Source: Credit Suisse, Datastream International Limited ALL RIGHTS RESERVED

Norway

Norwegian growth remained solid at the end of last year. Q4 mainland GDP increased by

0.6% on the quarter, leading to an annual growth of 2.7% in 2011, up from 1.8% in 2010.

We expect relatively robust growth to continue and we revised our growth forecast for this

year to 2.3% from 1.8% previously expected. Both domestic demand and net trade arelikely to contribute.

Given such an economic backdrop and the improved financial conditions, we expect the

Norges Bank to stay on hold for a while. The central bank surprised in December,

delivering a 50bps rate cut. This was a precautionary action, in our view, on the back of

high uncertainty around conditions abroad, particularly in the euro area. But, financial

conditions have improved significantly since then and by March 14, the next monetary

policy meeting, we should also have more clarity on the Greek issue. Finally, at 1.75%,

rates are just 50bps higher than their all-time low recorded in 2009.

Norwegian Economic Forecast

2011 2012E 2013E Annual average

I II III IV IE IIE IIIE IVE IE IIE IIIE IVE 09 10 11 12E 13EReal mainland GDP, q/q% 0.4 1.3 0.8 0.6 0.4 0.6 0.4 0.4 0.7 0.7 0.7 0.7 ... ... ... ... ...

y/y% 1.9 2.9 2.9 3.1 3.1 2.4 2.0 1.8 2.2 2.3 2.6 3.0 -1.6 1.8 2.7 2.3 2.5

CPI, y/y% 1.4 1.4 1.5 0.9 0.3 0.5 1.2 1.7 2.0 1.7 1.8 2.0 2.2 2.4 1.3 0.9 1.9

Core inflation (CPI-ATE), y/y% 0.8 1.0 1.1 1.1 1.5 1.4 1.7 1.9 1.7 1.8 1.6 1.5 2.6 1.4 1.0 1.6 1.6

Policy rate (end period) 2.00 2.25 2.25 1.75 1.75 1.75 1.75 1.75 2.00 2.25 2.50 2.75 1.75 2.00 1.75 1.75 2.75

Source: Credit Suisse, Datastream International Limited ALL RIGHTS RESERVED

Violante Di Canossa

+44 20 7883 4192

[email protected]


18/39

16 February 2012


Canada: Speed-up coming, choppinessremainsGrowth Cut Q4. We downgraded our Q4 2011 GDP estimate by half a percent (to 1.5%

from 2.0%) because of the disappointing November decline in economic activity. Signs

point to a bounce back in December, especially with strong gains reported for real exports

and real manufacturing sales.

But Raise Q1. We upgraded our Q1 2012 GDP estimate by a full one percent (to 3.2%

from 2.2%) for a few reasons. First, business surveys and leading indicators have been

pointing to a speed-up. Second, strong exports at the end of Q4 mean theres strong

momentum to start Q1. Third, auto production should surge in January based on current

output schedules from the industry. Fourth, January vehicle sales are set to post the

biggest monthly gain in a little more than 14 years, if Statistics Canadas preliminary

reading of 16% MoM (seasonally adjusted!) is accurate.

Exhibit 18: Canada Vehicle Sales (seasonally adjusted, units in K)

110

115

120

125

130

135

140

145

150

155

160

'07 '08 '09 '10 '11 '12

Jan prelim: 16% MoM!

Sources: Statistics Canada, Credit Suisse

BoC Assessing the Risks. The Europe crisis is the main risk to the BoCs outlook, so

until there is a clearer resolution, this concern should keep policymakers alert to downside

risks. However, if our near-term profile for growth were realized, it would be stronger on

average than the BoCs view (Q4 2011 2.0%, Q1 1.8%), but more so for Q1. And it would

put more weight on one of the BoCs upside risks that household expenditures could have

more momentum than currently projected.

Canada Economic Forecast

2011 2012 Q4/Q4 Annual AverageQ1 Q2 Q3 Q4E Q1E Q2E Q3E Q4E 09 10 11E 12E 10 11E 12E 13E

Real GDP (QoQ% ann.) 3.5 -0.5 3.5 1.5 3.2 2.2 2.2 2.2 -1.4 3.3 2.0 2.4 3.2 2.3 2.3 3.0

CPI (YoY%) 2.6 3.4 3.0 2.7 2.1 1.6 1.9 2.1 0.8 2.3 2.7 2.1 1.8 2.9 1.9 2.2

Core CPI (YoY%) 1.3 1.6 1.9 2.0 1.9 1.8 1.8 1.7 1.6 1.6 2.0 1.7 1.7 1.7 1.8 2.0

Unemployment Rate (avg, %) 7.7 7.5 7.2 7.4 7.5 7.4 7.3 7.2 8.4 7.7 7.4 7.2 8.0 7.5 7.4 7.0

BoC overnight rate (end-pd., %) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 0.25 1.00 1.00 1.00

Sources: Statistics Canada, Bank of Canada, Credit Suisse. E is estimated.

Jonathan Basile

+1 212 538 1436

[email protected]


19/39


20/39

16 February 2012


Exhibit 19: Growing around trend Exhibit 20: Underlying inflation contained

Now with a wide range from 3 to 4%yoy Forecast to remain comfortably within the RBAs 2-3%yoy target band

-2

0

2

4

6

96 99 02 05 08 11

-2

0

2

4

6

Annual

Quarterly

% %

RBA

(f)

Aug

Feb

SoMP

0

1

2

3

4

5

6

02 03 04 05 06 07 08 09 10 11 12 13 14

0

1

2

3

4

5

6

`

% %

Trimmed Mean %yoy

Weighted Median %yoy

average 0.6%qoqaverage 0.9%qoq

RBA

(f)

AugSoMP

Feb

SoMP

RBA target band

Source: ABS, RBA SoMP, Credit Suisse Source: ABS, RBA SoMP, Credit Suisse

Exhibit 21: Output Growth and Inflation ForecastsFebruary Statement on Monetary Policy (red numbers are downward revisions)

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14

GDP growth 2.75 3.25 3-3.5 3-3.5 3-4 3-4

CPI inflation 3.1 1.75 3 3.25 2.5 2.5-3

Underlying inflation 2.5 2.25 2.75 2.75 2.5 2.5-3

CPI inflation

excl carbon price

3.1 1.75 2.5 2.5 2.5 2.5-3

Underlying inflation

excl carbon price

2.5 2.25 2.5 2.5 2.5 2.5-3

RBA Cash Rate* 4.25 3.75 3.75 4.25 4.5 4.75

Technical assumptions include A$ at US$1.07, TWI at 78 and Tapis crude oil price at US$125 per barrel

November Statement on Monetary Policy

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

GDP growth 2.75 4 3-3.5 3-3.5 3-4

CPI inflation 3.25 2 3.25 3.25 2.5-3

Underlying inflation 2.5 2.5 2.75 2.75 2.5-3

CPI inflation

excl carbon price

3.25 2 2.5 2.5 2.5-3

Underlying inflation

excl carbon price

2.5 2.5 2.5 2.5 2.5-3

Technical assumptions include A$ at US$1.03, TWI at 76 and Tapis crude oil price at US$116 per barrel

Source: RBA SoMPs, * Credit Suisse estimate for cash rate trajectory

Bank funding: the element of monetary policy attracting most attentionPreviously defined levels of neutral policy rates are now much lower, globally, thanks to

the re-pricing of credit. Prior to the global financial crisis, the neutral rate was considered

to be around 5.5%. Now, the neutral rate is around 4.25% (a policy rate that is consistent

with lending rates in the economy around the medium-term average) (Exhibit 22)8.

Why is this important? The path for RBA policy from here will continue to adjust for any

widening/contracting in the spread between the cash rate and average lending rates, a

spread which we believe is likely to widen further in coming months/quarters.


21/39

16 February 2012


The RBAs improved outlook largely reflected the ECBs three-year LTRO, which has had

the most material impact and effectively takes funding out of the equation for the

European banking system in the period ahead.5As a result of the stabilization in financial

markets, Australian banks have been able to issue at will; but for a price. For example,

the recent issuance of covered bonds issued by the Australian banks were at markedly

wider spreads than their unsecured issuance mid year [2011].

The increase in the premium demanded by investors comes at a time when governmentguaranteed bank issuance (used during the crisis) is rolling off (Exhibit 23). Furthermore,

the trickle of offsetting Kangaroo issuance has significantly increased the cost of hedging,

with cross currency basis swap spreads widening sharply. In short, average bank funding

costs are continuing to rise, and again eating into net interest margins.

The four major banks: CBA, Westpac, NAB and ANZ, have all increased their variable

lending rates (10bp, 10bp, 9bp, and 6bps, respectively), following the RBAs decision to

keep the cash rate unchanged 4.25%. Interestingly, one of the smaller banks, Bendigo,

increased its variable rate by 15bps. So the 50bps of RBA easing delivered is now

effectively ~40bps. Importantly, this is unlikely to be a one-off, in our view.

Exhibit 22: Average Interest Rates (before hikes) Exhibit 23: Aussie Banks Bond Issuance

A$ equivalent

Source: ABS, APRA, Perpetual, RBA SoMP Source: RBA SoMP

5 http://www.rba.gov.au/speeches/2012/pdf/sp-ag-140212.pdf
http://www.rba.gov.au/speeches/2012/pdf/sp-ag-140212.pdfhttp://www.rba.gov.au/speeches/2012/pdf/sp-ag-140212.pdfhttp://www.rba.gov.au/speeches/2012/pdf/sp-ag-140212.pdfhttp://www.rba.gov.au/speeches/2012/pdf/sp-ag-140212.pdf


22/39

16 February 2012


New Zealand: Moderate recovery profileDespite the release of stronger-than-expected September quarter GDP data showing a

0.8% q/q increase, the underlying profile of NZ economic activity continues to be one of

only moderate growth. In particular, the recent strengthening in consumption expenditure

over the third quarter has been boosted by the one-off effect of hosting the Rugby World

Cup. Looking ahead, we expect consumption growth to remain reasonably subdued as

households continue to consolidate their balance sheets. Outside of activity motivated bythe Canterbury earthquake rebuild, we expect both the housing market and investment

recoveries to remain relatively subdued.

Nevertheless, underpinning the moderate forecast upturn in the pace of growth over the

year ahead is the continuation of supportive monetary policy settings, still elevated

commodity prices, together with the stimulatory impact of the Canterbury earthquake

rebuild this is estimated to add around 1 percentage point to growth over the 2012 and

2013 years. In total, we forecast growth for the calendar 2011 year of 1.6%, followed by a

moderate pick-up in growth rate to 2.6% for the calendar 2012 year. The key risks to this

recovery profile are assessed to be any further intensification of the European sovereign

debt and banking crisis, together with aftershocks to the Canterbury region potentially

further delaying the start of the reconstruction process.

Primarily reflecting euro zone tail risks, subdued inflationary pressures, the recentstrengthening in the NZ dollar helping to dampen imported inflationary pressures, together

with residual uncertainty regarding the timing of the earthquake rebuild, we expect the

RBNZ to wait until the March 2013 Monetary Policy Statement (MPS) before increasing

the Official Cash Rate (OCR) by 25bps to 2.75%.

Exhibit 24: NZ GDP and Domestic Trading Activity

-50

-40

-30

-20

-10

010

20

30

40

50

Mar-90 Sep-93 Mar-97 Sep-00 Mar-04 Sep-07 Mar-11

-4

-2

0

2

4

6

8

Domestic Activity (Experienced) - lhs GDP - rhs

Dom. Trad. Act shifted fwd 2 qtrs

Source: Statistics NZ, First NZ Capital

New Zealand Economic Forecast

2010 2011E 2012E 2013E

Real GDP (ann avg % change) 1.3 1.6 2.6 2.9

CPI (ann avg % change) 2.3 4.0 1.6 2.5

Current Account (% of GDP) -3.5 -4.3 -5.4 -5.9

Policy Rate (end-year) 3.00 2.50 2.50 3.50

Source: First NZ Capital

Chris Green

Director, Economics & Strategy

First NZ Capital

+64 9 302 5509

[email protected]
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Non-Japan Asia: Better developed world'seconomy help support growthWe maintain our view that China's economic growth is moderating, but not

collapsing. 4Q11 GDP growth was at 8.9% y/y, stronger than consensus and our

expectation. On a quarter-on-quarter seasonally adjusted basis, GDP growth stayed

resilient at 2%, with an annualized growth rat

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CS-All together now, let’s ease-2012-02-16